<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1999
REGISTRATION NO. 333-83133
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXPRESS SCRIPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8099 43-1420563
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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13900 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.
13900 RIVERPORT DRIVE
MARYLAND HEIGHTS, MISSOURI 63043
(314) 770-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
VINCENT PAGANO, JR., ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
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. [ ]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), OF THE SECURITIES ACT
MAY DETERMINE.
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<PAGE> 2
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING
ZIP CODE, AND
STATE OR OTHER I.R.S. TELEPHONE NUMBER,
EXACT NAME OF REGISTRANT JURISDICTION OF EMPLOYER INCLUDING AREA CODE, OF
GUARANTOR AS SPECIFIED IN ITS INCORPORATION OR IDENTIFICATION REGISTRANT GUARANTOR'S
CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ----------------------------- ---------------- -------------- ---------------------------
<S> <C> <C> <C>
Diversified Pharmaceutical Minnesota 41-1627938 13900 Riverport Drive
Services, Inc. Maryland Heights,
Missouri 63043
(314) 770-1666
ESI/VRx Sales Development Co. Delaware 43-1832983 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
Express Scripts Vision Delaware 43-1752714 13900 Riverport Drive
Corporation Maryland Heights,
Missouri 63043
(314) 770-1666
IVTx, Inc. Delaware 43-1794690 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
Managed Prescription Network, Delaware 61-1259835 13900 Riverport Drive
Inc. Maryland Heights,
Missouri 63043
(314) 770-1666
Value Health, Inc. Delaware 06-1194838 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
MHI, Inc. Nevada 43-1855987 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
ValueRx, Inc. Delaware 54-1468668 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
Health Care Services, Inc. Pennsylvania 85-0376128 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
ValueRx Pharmacy Program, Michigan 38-2574885 13900 Riverport Drive
Inc. Maryland Heights,
Missouri 63043
(314) 770-1666
YourPharmacy.com, Inc. Delaware 43-1842584 13900 Riverport Drive
Maryland Heights,
Missouri 63043
(314) 770-1666
</TABLE>
<PAGE> 3
PROSPECTUS
$250,000,000
EXPRESS SCRIPTS, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
9 5/8% SENIOR NOTES DUE 2009 FOR
9 5/8% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER
- - We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of exchange notes that are
freely tradeable.
- - You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
- - The exchange offer expires at 5:00 p.m., New York City time, on September 8,
1999, unless extended. We do not currently intend to extend the expiration
date.
- - The exchange of outstanding notes for exchange notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
- - We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
- - The exchange notes are being offered in order to satisfy certain of our
obligations under the registration rights agreement entered into in connection
with the placement of the outstanding notes.
- - The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes will be freely tradeable.
RESALES OF EXCHANGE NOTES
- - The exchange notes may be sold in the over-the-counter market, in negotiated
transactions or through a combination of such methods. The exchange notes will
be eligible for trading in The Portal(SM) Market.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 9
OF THIS PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of exchange notes
received in exchange for outstanding notes where such outstanding notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities.
We have agreed that, for a period of 180 days after the consummation of the
exchange offer, we will make this prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
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.
The date of this prospectus is August 4, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................. 1
EXPRESS SCRIPTS..................... 8
RISK FACTORS........................ 9
USE OF PROCEEDS..................... 18
SELECTED FINANCIAL AND OPERATING
DATA.............................. 19
UNAUDITED CONSOLIDATED CONDENSED PRO
FORMA FINANCIAL DATA.............. 21
THE EXCHANGE OFFER.................. 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE NOTES............ 42
MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS......... 83
PLAN OF DISTRIBUTION................ 83
FORWARD-LOOKING STATEMENTS.......... 84
WHERE YOU CAN FIND MORE
INFORMATION....................... 85
LEGAL MATTERS....................... 86
EXPERTS............................. 86
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 INFORMATION THAT IS DIFFERENT. 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.
-------------------------
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and may not contain all of the information you may consider important. You
should read this entire prospectus carefully. You should also keep in mind the
following points as you read this prospectus:
- - Unless the context otherwise indicates, references in this document to
"Express Scripts," "we," "us" and "our" 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
- - Information regarding our relative size is based on estimates of our
management in light of their experience in the industry
- - Membership counts may not be comparable between us and Diversified
Pharmaceutical Services, or between us and our competitors, although we
believe they provide a reasonable estimation of the population we serve
SUMMARY OF TERMS OF THE EXCHANGE OFFER
On June 16, 1999, we completed the private offering of the outstanding
notes. References to "notes" in this prospectus are references to both the
outstanding notes and the exchange notes.
Express Scripts and the guarantors entered into a registration rights
agreement with the initial purchasers in the private offering in which Express
Scripts and the guarantors agreed to deliver to you this prospectus and Express
Scripts agreed to complete the exchange offer within 220 days after the date of
original issuance of the outstanding notes. You are entitled to exchange in the
exchange offer your outstanding notes for exchange notes which are identical in
all material respects to the outstanding notes except that:
- the exchange notes have been registered under the Securities Act
- the exchange notes are not entitled to certain registration rights which
are applicable to the outstanding notes under the registration rights
agreement
- certain contingent interest rate provisions are no longer applicable
The Exchange Offer.............. We are offering to exchange up to $250
million aggregate principal amount of
exchange notes for up to $250 million
aggregate principal amount of outstanding
notes. Outstanding notes may be exchanged
only in integral multiples of $1,000.
Resales......................... Based on an interpretation by the staff of
the SEC set forth in no-action letters
issued to third parties, we believe that the
exchange notes issued pursuant to the
exchange offer in exchange for outstanding
notes may be offered for resale, resold and
otherwise transferred by you (unless you are
an "affiliate" of Express Scripts within the
meaning of Rule 405 under the Securities
Act) without compliance with the
registration and prospectus delivery
provisions of the Securities Act, provided
1
<PAGE> 6
that you are acquiring the exchange notes in
the ordinary course of your business and
that you have not engaged in, do not intend
to engage in, and have no arrangement or
understanding with any person to participate
in, a distribution of the exchange notes.
Each participating broker-dealer that
receives exchange notes for its own account
pursuant to the exchange offer in exchange
for outstanding notes that were acquired as
a result of market-making or other trading
activity must acknowledge that it will
deliver a prospectus in connection with any
resale of the exchange notes. See "Plan of
Distribution."
Any holder of outstanding notes who
- is an affiliate of Express Scripts
- does not acquire exchange notes in the
ordinary course of its business
- tenders in the exchange offer with the
intention to participate, or for the
purpose of participating, in a
distribution of exchange notes
cannot rely on the position of the staff of
the SEC enunciated in Exxon Capital Holdings
Corporation, Morgan Stanley & Co.
Incorporated or similar no-action letters
and, in the absence of an exemption
therefrom, must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with the resale
of the exchange notes.
Expiration Date; Withdrawal of
Tenders....................... The exchange offer will expire at 5:00 p.m.,
New York City time, on September 8, 1999, or
such later date and time to which Express
Scripts extends it. We do not currently
intend to extend the expiration date. A
tender of outstanding notes pursuant to the
exchange offer may be withdrawn at any time
prior to the expiration date. Any
outstanding notes not accepted for exchange
for any reason will be returned without
expense to the tendering holder promptly
after the expiration or termination of the
exchange offer.
Certain Conditions to the
Exchange Offer.................. The exchange offer is subject to customary
conditions, which we may waive. Please read
the section captioned "The Exchange
Offer -- Certain Conditions to the Exchange
Offer" of this prospectus for
2
<PAGE> 7
more information regarding the conditions to
the exchange offer.
Procedures for Tendering
Outstanding Notes............. If you wish to accept the exchange offer,
you must complete, sign and date the
accompanying letter of transmittal, or a
facsimile of the letter of transmittal,
according to the instructions contained in
this prospectus and the letter of
transmittal. You must also mail or otherwise
deliver the letter of transmittal, or a
facsimile of the letter of transmittal,
together with the outstanding notes and any
other required documents, to the exchange
agent at the address set forth on the cover
page of the letter of transmittal. If you
hold outstanding notes through The
Depository Trust Company and wish to
participate in the exchange offer, you must
comply with the Automated Tender Offer
Program procedures of DTC, by which you will
agree to be bound by the letter of
transmittal. By signing, or agreeing to be
bound by, the letter of transmittal, you
will represent to us that, among other
things:
- any exchange notes that you receive will
be acquired in the ordinary course of your
business
- you have no arrangement or understanding
with any person or entity to participate
in a distribution of the exchange notes
- if you are a broker-dealer that will
receive exchange notes for your own
account in exchange for outstanding notes
that were acquired as a result of
market-making activities, that you will
deliver a prospectus, as required by law,
in connection with any resale of such
exchange notes
- you are not an "affiliate," as defined in
Rule 405 of the Securities Act, of Express
Scripts or, if you are an affiliate, you
will comply with any applicable
registration and prospectus delivery
requirements of the Securities Act
Special Procedures for
Beneficial Owners............... If you are a beneficial owner of outstanding
notes which are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee, and you wish to
tender such outstanding notes in the
exchange offer, you should contact such
registered holder promptly and instruct such
registered holder to tender on your behalf.
If you wish to tender on your own behalf,
you must, prior to completing and executing
the letter of trans-
3
<PAGE> 8
mittal and delivering your outstanding
notes, either make appropriate arrangements
to register ownership of the outstanding
notes in your name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time and may not be
able to be completed prior to the expiration
date.
Guaranteed Delivery
Procedures...................... If you wish to tender your outstanding notes
and your outstanding notes are not
immediately available or you cannot deliver
your outstanding notes, the letter of
transmittal or any other documents required
by the letter of transmittal or comply with
the applicable procedures under DTC's
Automated Tender Offer Program prior to the
expiration date, you must tender your
outstanding notes according to the
guaranteed delivery procedures set forth in
this prospectus under "The Exchange Offer --
Guaranteed Delivery Procedures."
Effect on Holders of Outstanding
Notes......................... As a result of the making of, and upon
acceptance for exchange of all validly
tendered outstanding notes pursuant to the
terms of the exchange offer, we will have
fulfilled a covenant contained in the
registration rights agreement and,
accordingly, we will not be obligated to pay
liquidated damages as described in the
registration rights agreement. If you are a
holder of outstanding notes and you do not
tender your outstanding notes in the
exchange offer, you will continue to hold
such outstanding notes and you will be
entitled to all the rights and limitations
applicable to the outstanding notes in the
indenture, except for any rights under the
registration rights agreement that by their
terms terminate upon the consummation of the
exchange offer.
To the extent that outstanding notes are
tendered and accepted in the exchange offer,
the trading market for outstanding notes
could be adversely affected.
Consequences of Failure to
Exchange........................ All untendered outstanding notes will
continue to be subject to the restrictions
on transfer provided for in the outstanding
notes and in the indenture. In general, the
outstanding notes may not be offered or
sold, unless registered under the Securities
Act, except pursuant to an exemption from,
or in a transaction not subject to, the
Securities Act and applicable state
securities laws. Other than in connection
with the exchange offer, we do not
4
<PAGE> 9
currently anticipate that we will register
the outstanding notes under the Securities
Act.
Certain U.S. Federal Income Tax
Considerations................ The exchange of outstanding notes for
exchange notes in the exchange offer will
not be a taxable event for U.S. federal
income tax purposes. See "Material United
States Federal Income Tax Considerations."
Use of Proceeds................. We will not receive any cash proceeds from
the issuance of exchange notes pursuant to
the exchange offer.
Exchange Agent.................. Bankers Trust Company is the exchange agent
for the exchange offer. The address and
telephone number of the exchange agent are
set forth in the section captioned "Exchange
Offer -- Exchange Agent" of this prospectus.
5
<PAGE> 10
SUMMARY OF TERMS OF THE NOTES
Issuer.......................... Express Scripts, Inc.
Securities Offered.............. $250 million aggregate principal amount of
9 5/8% Senior Notes Due 2009.
Maturity........................ June 15, 2009.
Interest Rate................... 9 5/8% per year.
Interest Payment Dates.......... June 15 and December 15 of each year,
commencing December 15, 1999.
Ranking......................... The notes are senior unsecured obligations
and have the same right of payment as all
our existing and future senior unsecured
indebtedness. The notes are effectively
subordinated to all our existing and future
secured indebtedness to the extent of the
assets securing that indebtedness.
Guarantees...................... Certain of our existing and future domestic
subsidiaries have guaranteed the notes with
senior unsecured guarantees of payment.
These guarantees are effectively
subordinated to all of those subsidiaries'
existing and future secured indebtedness to
the extent of the assets securing that
indebtedness.
Optional Redemption............. We cannot redeem the notes until June 15,
2004, except as described immediately below.
Thereafter, we can redeem some or all of the
notes at the redemption prices listed under
the heading "Description of the
Notes -- Optional Redemption" in this
prospectus, plus accrued interest.
Optional Redemption After Public
Equity Offerings.............. At any time (which may be more than once)
before June 15, 2002, we can choose to
redeem up to 35% of the original principal
amount of the notes (including the original
principal amount of any additional notes)
with money that we raise in public equity
offerings, as long as:
- we pay to holders of the notes a
redemption price of 109.625% of the
principal amount of the notes we redeem,
plus accrued interest
- we redeem the notes within 120 days of
completing the public equity offering
- at least 65% of the original principal
amount of notes (including the original
principal amount of any additional notes)
issued remains outstanding afterwards
Change of Control Offer......... If we go through a change of control, we
must give holders of the notes the
opportunity to sell to us their notes at a
purchase price of 101% of their principal
amount, plus accrued interest, unless we
have previously provided to the trustee
under the indenture governing the notes an
irrevocable notice of redemption to redeem
all outstanding notes at a time when
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<PAGE> 11
such redemption is permitted under the
indenture. See "Description of the
Notes -- Change of Control".
Certain Covenants............... The indenture governing the notes contains
covenants that limit our ability and that of
our subsidiaries to:
- incur additional indebtedness
- pay dividends or distributions on, or
redeem or repurchase, our capital stock
- make investments
- issue or sell capital stock of
subsidiaries
- engage in transactions with affiliates
- create liens on our assets
- transfer or sell assets
- restrict dividend or other payments to us
- consolidate, merge or transfer all or
substantially all of our assets and the
assets of subsidiaries
- engage in unrelated businesses
These covenants are subject to important
exceptions and qualifications, which are
described under "Description of the
Notes -- Covenants."
After the notes receive an investment grade
rating by both S&P and Moody's, we and our
subsidiaries will no longer be required to
comply with some of these covenants. See
"Description of the Notes -- Covenant
Removal."
Exchange Offer; Registration
Rights.......................... Under a registration rights agreement we
executed as part of this offering, we have
agreed to:
- file a registration statement within 60
days after the issue date of the notes
enabling the holders of the notes to
exchange the notes for publicly registered
notes with identical terms
- use our reasonable best efforts to cause
the registration statement to become
effective within 180 days after the issue
date of the notes
- consummate the exchange offer no later
than 220 days after the date of original
issuance of the outstanding notes
- use our reasonable best efforts to file a
shelf registration statement for the
resale of the notes if we cannot effect an
exchange offer within the time periods
listed above and in some other
circumstances
We will pay additional interest on the notes
if we do not comply with our obligations
under the registration rights agreement. See
"Description of the Notes -- Registered
Exchange Offer; Registration Rights."
7
<PAGE> 12
EXPRESS SCRIPTS
We are the largest pharmacy benefit management company, commonly referred
to as a PBM, independent of pharmaceutical manufacturer or drug store ownership
in North America. PBMs coordinate the distribution of outpatient pharmaceuticals
through a combination of benefit management services, including retail drug card
programs and mail pharmacy services. We provide these services for health care
payors. 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.
We are the third largest PBM in North America in terms of total members,
and we have one of the largest managed care membership bases of any PBM. 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. In
April 1998, we acquired ValueRx, and in April 1999, we acquired Diversified
Pharmaceutical Services, or DPS. These acquisitions added to the scale of our
membership base, broadened our product offerings and enhanced our clinical
capabilities, systems and technologies. On a pro forma basis including our
recent debt and equity offerings, our net revenues and EBITDA for the twelve
month period ending March 31, 1999 would have been approximately $3.6 billion
and $241.7 million, respectively.
As of March 31, 1999, after giving effect to the DPS acquisition, we would
have served approximately 47 million members, including 10 million members under
DPS's contract with United HealthCare which will terminate without renewal on
May 31, 2000. Besides United HealthCare, 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.
Our PBM services are primarily delivered through networks of retail
pharmacies that are under non-exclusive 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.
------------------------
We were incorporated in Missouri in 1986 and reincorporated in Delaware in
1992. Our principal executive offices are located at 13900 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)", "Express Therapeutics(R)", "IVTx(R)",
"PERx(R)", "PERxCare(R)", "PERxComp(R)", "PTE(R)", "ValueRx(R)" and "Value
Health, Inc.(R)". We also acquired several additional trademarks through our
acquisition of DPS.
8
<PAGE> 13
RISK FACTORS
In addition to the other information in this prospectus, the following
factors may be important to you.
IF YOU DO NOT PARTICIPATE IN THE EXCHANGE OFFER, YOU WILL CONTINUE TO BE SUBJECT
TO TRANSFER RESTRICTIONS
If you do not exchange your outstanding notes in the exchange offer, you
will continue to be subject to restrictions on transfer of your outstanding
notes. We did not register the outstanding notes under the federal or any state
securities laws, and we do not intend to register them following the exchange
offer. As a result, the outstanding notes may only be transferred in limited
circumstances under the securities laws. In addition, to the extent outstanding
notes are tendered and accepted in the exchange offer, the trading market, if
any, for the outstanding notes would be adversely affected. As a result, after
the exchange offer, you may have difficulty selling your outstanding notes.
YOU MUST FOLLOW THE EXCHANGE OFFER PROCEDURES CAREFULLY IN ORDER TO RECEIVE THE
EXCHANGE NOTES
If you do not follow the procedures described herein, you will not receive
exchange notes. The exchange notes will be issued to you in exchange for your
outstanding notes only after timely receipt by the exchange agent of:
- your outstanding notes and either:
- a properly completed and executed letter of transmittal and all other
required documentation or
- a book-entry delivery by transmittal of an agent's message through DTC
If you want to tender your outstanding notes in exchange for exchange
notes, you should allow sufficient time to ensure timely delivery. No one is
under any duty to give you notification of defects or irregularities with
respect to tenders of outstanding notes for exchange. For additional
information, please refer to the sections captioned "The Exchange Offer" and
"Plan of Distribution" in this prospectus.
FAILURE TO INTEGRATE VALUERX AND DPS COULD ADVERSELY AFFECT OUR BUSINESS
Our acquisitions of ValueRx and DPS have significantly increased our
membership base and the complexity of our operations. In light of both
acquisitions, we have developed and 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, some significant integration challenges remain,
including the
9
<PAGE> 14
complete integration of our information technology systems. We cannot provide
any assurance that our integration plan for ValueRx 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 specific financial targets, including for revenues, earnings before
interest, taxes, depreciation and amortization, and cash flow, when deciding to
purchase ValueRx and DPS, and we cannot provide any assurance that we will be
able to achieve our targets. 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.
OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS COULD IMPEDE OUR OPERATIONS AND
FLEXIBILITY
We have substantial leverage, which means that the amount of our
outstanding debt will be large compared to the net book value of our assets, and
we will have substantial repayment obligations and interest expense. As of March
31, 1999, on a pro forma basis including our recent debt and equity offerings,
we would have had total consolidated debt of approximately $749 million (before
giving effect to the repayment of $25 million of our indebtedness with available
cash). We and our subsidiaries may incur additional indebtedness in the future.
Our level of debt and the limitations imposed on us by our debt agreements
could have important consequences to you, including the following:
- we will have to use a substantial portion of our cash flow from
operations for debt service rather than for our operations
- we may not be able to obtain additional debt financing for future working
capital, capital expenditures or other corporate purposes
- some of the debt under our $1.05 billion credit facility may be at a
variable interest rate, making us vulnerable to increases in interest
rates
- we could be less able to take advantage of significant business
opportunities, such as acquisition opportunities, and react to changes in
market or industry conditions
- we could be more vulnerable to general adverse economic and industry
conditions
- we may be disadvantaged compared to competitors with less leverage
Furthermore, our ability to satisfy our obligations, including our debt
service requirements, will be dependent upon our future performance. Factors
which could affect our future performance include, without limitation,
prevailing economic conditions and financial, business and other factors, many
of which are beyond our control and which affect our business and operations.
For more details, see "Description of the Notes."
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<PAGE> 15
THE NOTES ARE EFFECTIVELY SUBORDINATED TO ALL OUR SECURED INDEBTEDNESS
The notes and the guarantees are effectively subordinated to all our
existing and future secured indebtedness to the extent of the value of the
assets securing that indebtedness. In connection with our acquisitions of
ValueRx and DPS, we incurred approximately $890 million of indebtedness which is
secured by the stock or other equity interests of each of our existing and
subsequently acquired domestic subsidiaries, excluding Practice Patterns
Science, Great Plains Reinsurance, ValueRx of Michigan, Diversified NY IPA and
Diversified Pharmaceutical Services (Puerto Rico). This indebtedness is
currently funded under our $1.05 billion credit facility with a bank syndicate
led by Credit Suisse First Boston and Bankers Trust Company. At March 31, 1999,
on a pro forma basis including our recent debt and equity offerings, the
aggregate amount of our and our subsidiaries' secured indebtedness, excluding
trade payables, which the notes and the guarantees would have been effectively
subordinated to was $500 million (before giving effect to the repayment of
approximately $25 million of our indebtedness with available cash). If we are
unable to meet our obligations under the credit facility, these creditors could
exercise their rights as a secured party and take possession of the pledged
capital stock of these subsidiaries. This would materially adversely affect our
results of operations and financial condition. We and our subsidiaries may incur
additional indebtedness in the future, subject to limitations contained in the
instruments governing our and our subsidiaries existing indebtedness. This
indebtedness may be secured.
FAILURE TO MANAGE AND MAINTAIN INTERNAL GROWTH COULD ADVERSELY AFFECT
OUR BUSINESS
We have experienced rapid internal growth over the past several years. Our
ability to effectively manage and maintain this internal growth will require
that we continue to improve our financial and management information systems as
well as identify and retain key personnel. We can provide no assurance that we
will successfully meet these requirements or that we will have access to
sufficient capital to do so. Our internal growth is also dependent upon our
ability to attract new clients and achieve growth in the membership base of our
existing clients. If we are unable to continue our client and membership growth,
our results of operations and financial position could be materially adversely
affected.
COMPETITION IN THE PBM INDUSTRY COULD REDUCE OUR CLIENT MEMBERSHIP AND OUR
PROFIT MARGINS
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, is owned by Merck &
Co., a pharmaceutical manufacturer. Another major competitor, PCS, is owned by
Rite-Aid, a large retail pharmacy chain. Both of these competitors may possess
purchasing or other advantages over us by virtue of their ownership, and could
succeed in taking away some of our clients. Consolidation in the PBM industry
may also lead to increased competition among a smaller number of large PBM
companies. We also face competition from Internet-based providers of
pharmaceuticals such as Drugstore.com and PlanetRx.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
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<PAGE> 16
larger portion of the formulary fees and related revenues received from drug
manufacturers with clients. Increased price competition could reduce our profit
margins and have a material adverse effect on our results of operations.
FAILURE TO RETAIN KEY CLIENTS AND NETWORK PHARMACIES COULD ADVERSELY AFFECT
OUR BUSINESS AND LIMIT OUR ACCESS TO RETAIL PHARMACIES
We currently provide PBM services to approximately 8,500 clients, including
several large clients. 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 this case, our client may not renew its PBM contract with us.
With the completion of our acquisition of DPS, United HealthCare became our
largest client. With approximately 10 million members, United HealthCare
accounts for approximately 22% of our membership base. DPS's contract with
United HealthCare will expire on May 31, 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, if we are unable to reduce our costs on a basis
commensurate with our expectations and manage the transition of this large
client to another provider both efficiently and effectively, the termination of
this contract may 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 selected areas of the United States. Our contracts with retail
pharmacies, which are non-exclusive, 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 members' access to retail pharmacies and
our business could be significantly impaired. In addition, Rite-Aid 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 these pharmacy chains and on our business and results of
operations.
LOSS OF RELATIONSHIPS WITH PHARMACEUTICAL MANUFACTURERS AND CHANGES IN THE
REGULATION OF DISCOUNTS AND REBATES PROVIDED TO US BY PHARMACEUTICAL
MANUFACTURERS COULD DECREASE OUR PROFITS
We maintain contractual relationships with numerous pharmaceutical
manufacturers which provide us with:
- discounts at the time we purchase the drugs to be dispensed from our mail
pharmacies
- rebates based upon sales of drugs from our mail pharmacies and through
pharmacies in our retail networks
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<PAGE> 17
- administrative fees based upon the development and maintenance of
formularies which include the particular manufacturer's products
These fees are all commonly referred to as formulary fees or formulary
management fees.
We also provide various services for, or services which are funded wholly
or partially by, pharmaceutical manufacturers. These services include:
- compliance programs, which involve instruction and counseling of patients
concerning the importance of compliance with the drug treatment regimen
prescribed by their physician
- therapy management programs, which involve education of patients having
specific diseases, such as asthma and diabetes, concerning the management
of their condition
- market research programs in which we provide information to manufacturers
concerning drug utilization patterns
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 operating results could be materially
adversely affected. In addition, formulary fee 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 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 other formulary
fees. Although we expect new drugs with patent protection to be introduced in
the future, we can provide no assurance these drugs will capture a significant
share of the market such that our incentive payment revenues will not be
reduced.
PENDING AND FUTURE LITIGATION COULD MATERIALLY AFFECT OUR RELATIONSHIPS WITH
PHARMACEUTICAL MANUFACTURERS OR SUBJECT US TO SIGNIFICANT MONETARY DAMAGES
Since 1993, over 100 separate lawsuits have been filed by retail pharmacies
against drug manufacturers, wholesalers and PBMs challenging brand name drug
pricing practices under various state and federal antitrust laws. Some of these
lawsuits were consolidated into a nationwide class action, while others remained
as individual suits. The class action defendants have either settled the claims
against them or have had the claims dismissed. Several of the individual suits
are ongoing. We are not a party to any of these proceedings, and to date we do
not believe any of the related 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
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<PAGE> 18
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 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.
LIMITATIONS ON REPURCHASES OF NOTES UPON A CHANGE IN CONTROL
The indenture provides that, upon the occurrence of a change in control, we
will be required to make an offer to purchase all of the notes at a price in
cash equal to 101% of their aggregate principal amount, plus accrued and unpaid
interest, if any, to the date of purchase unless we have provided to the trustee
under the indenture governing the notes an irrevocable notice of redemption to
redeem all of the outstanding notes at a time when such redemption is permitted
under the indenture. Events involving a change in control could result in
acceleration of our $1.05 billion credit facility or in acceleration of, or a
similar repurchase obligation with respect to, other indebtedness of ours. We
cannot be sure that in the event of a change in control we would have sufficient
funds to purchase all notes tendered.
Our failure to purchase notes would result in a default under the indenture
and, pursuant to cross-default provisions under our $1.05 billion credit
facility, a default under the credit facility as well, which would permit the
trustee under the indenture or the holders of at least 25% in principal amount
of the outstanding notes, or the lenders under our $1.05 billion credit
facility, to declare the respective principal and accrued but unpaid interest to
be due and payable.
Likewise, the failure to repay the indebtedness under our $1.05 billion
credit facility, if accelerated, would also constitute an event of default under
the indenture, which could result in an acceleration of the notes. In the event
of a change of control, we cannot be sure that we would have the ability to
refinance our $1.05 billion credit facility or have sufficient assets to satisfy
all of our obligations under our $1.05 billion credit facility and the notes.
The provisions relating to a change in control included in the indenture may
increase the difficulty of a potential acquirer obtaining control of us. For
more details, see "Description of the Notes -- Change of Control."
CHANGES IN STATE AND FEDERAL REGULATIONS COULD RESTRICT OUR ABILITY TO CONDUCT
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:
- health care fraud and abuse laws and regulations, which prohibit illegal
referral and other payments
- Employee Retirement Income Security Act of 1974 and related regulations,
which regulate many health care plans
- mail pharmacy laws and regulations
- privacy and confidentiality laws and regulations
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- proposed comprehensive state PBM regulatory legislation
- consumer protection laws and regulations
- pharmacy network access laws, including "any willing provider" and "due
process" legislation, that regulate aspects of our pharmacy network
contracts
- legislation imposing benefit plan design restrictions, which limit how
our clients can design their drug benefit plans
- various licensure laws, such as managed care and third party
administrator licensure laws
- drug pricing legislation, including "most favored nation" pricing and
"unitary pricing" legislation
- Medicare prescription drug coverage proposals
- other Medicare and Medicaid reimbursement regulations
- potential regulation of the PBM industry by the U.S. Food and Drug
Administration
We believe we are operating our business in substantial compliance with all
existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and we cannot provide any assurance
that a regulatory agency charged with enforcement of any of these laws or
regulations will not interpret them differently or, if there is an enforcement
action brought against us, that our interpretation would prevail. In addition,
there are numerous proposed health care laws and regulations at the federal and
state levels, many of which could materially affect our ability to conduct our
business or adversely affect our 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 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.
EFFORTS TO REDUCE HEALTH CARE COSTS AND ALTER HEALTH CARE FINANCING PRACTICES
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
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<PAGE> 20
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 SUCCESSFULLY 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 computer systems to properly recognize calendar dates
beyond December 31, 1999.
We believe that with appropriate modifications to our existing computer
systems, updates by our vendors and trading partners and conversion to new
software in the ordinary course of our business, the year 2000 issue will not
pose material operational problems for us. However, if the conversions are not
completed in a proper and timely manner by all affected parties, or if our logic
for communicating with noncompliant systems is ineffective, the year 2000 issue
could result in material adverse operational and financial consequences to us.
We cannot provide any assurance that our efforts, or those of our vendors and
trading partners, 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 these partners' year 2000 compliance, we cannot predict
whether this 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 or 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 our 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. We and Mr. Toan are
parties to an employment agreement which currently extends to March 31, 2002,
and which automatically extends for an additional one year on April 1, 2001, and
on each April 1 thereafter unless either party gives notice of termination at
least 30 days prior to such April 1. As of the date hereof, neither we nor Mr.
Toan has given this notice.
NEW YORK LIFE INSURANCE COMPANY CAN CONTROL OUR BUSINESS AND LIMIT OUR
ABILITY TO ENTER INTO SELECTED BUSINESS TRANSACTIONS
We have two classes of authorized common stock: Class A and Class B common
stock. Our Class B common stock is entirely owned by NYLIFE HealthCare, an
indirect subsidiary of New York Life Insurance Company. 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 our recent equity
offering, NYLIFE HealthCare will have approximately 86.9% of the combined voting
power 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. In addition, NYLIFE HealthCare could sell all of our common
stock held by it in a negotiated transaction and such sale would not
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<PAGE> 21
constitute a Change of Control under the indenture governing the notes. Without
regard to the votes of our public stockholders, NYLIFE HealthCare can:
- elect or remove all 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 us
- determine the amount and timing of dividends paid to itself and holders
of our Class A common stock
- except in limited circumstances, control our management and operations
and decide all matters submitted for a stockholder vote
Our Class B common stock will automatically convert into the same number of
shares of our Class A common stock upon transfer by NYLIFE HealthCare to any
entity other than New York Life or an affiliate of New York Life or otherwise at
the option of NYLIFE HealthCare. We cannot assure you, however, that our Class B
common stock would automatically convert into our Class A common stock if New
York Life were to transfer the stock of NYLIFE HealthCare to someone who is not
an affiliate of New York Life.
THERE IS NO PUBLIC MARKET FOR THE NOTES
The notes are a new issue of securities for which there is currently no
trading market. As a result, we cannot assure you that a market will develop for
the notes or that you will be able to sell your notes. If a market were to
exist, the notes might trade at prices higher or lower than their initial
offering price. The trading price would depend on many factors, such as
prevailing interest rates and the market for similar securities, general
economic conditions and our financial condition, performance and prospects.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial fluctuation in the prices of these
securities. The market for the notes may be subject to these disruptions, which
could have an adverse effect on your investment. You should be aware that you
may be required to bear the financial risk of an investment in the notes for an
indefinite period of time. We do not intend to apply for listing or quotation of
the notes; however, the notes are eligible for trading in The Portal(SM) Market.
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USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
private offering of the outstanding notes. We will not receive any cash proceeds
from the issuance of the exchange notes. In consideration for issuing the
exchange notes as contemplated in this prospectus, we will receive in exchange a
like principal amount of outstanding notes, the terms of which are identical in
all material respects to the exchange notes. The outstanding notes surrendered
in exchange for the exchange notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the exchange notes will not result in any
change in our capitalization.
We used the net proceeds from the private offering of the outstanding notes
to repay a portion of the Term B borrowings under our $1.05 billion credit
facility used by us to finance the acquisition of DPS. At the time of such
repayment, such borrowings bore interest at a rate of 8.42% per annum.
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SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth our selected financial and operating data
for the five years ended December 31, 1998 and three months ended March 31, 1998
and 1999. The financial data, excluding the selected data, for the fiscal years
ended December 31, 1996, 1997 and 1998 have been derived from our consolidated
financial statements included in this prospectus 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 our consolidated financial statements not included
in this prospectus which have been audited by PricewaterhouseCoopers LLP. The
financial data, excluding the selected data, for the three months ended March
31, 1998 and 1999 have been derived from our unaudited consolidated financial
statements included in this prospectus.
The data set forth below should be read in conjunction with the report of
PricewaterhouseCoopers LLP and our consolidated financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998(2) 1998 1999
-------- ---------- ---------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $384,504 $ 544,460 $ 773,615 $1,230,634 $2,824,872 $371,362 $ 899,087
Costs and expenses:
Cost of revenues......................... 338,151 478,283 684,882 1,119,167 2,584,997 338,492 823,647
Selling, general and administrative...... 25,882 37,300 49,103 62,617 148,990 18,826 46,440
Corporate restructuring.................. -- -- -- -- 1,651 -- --
-------- ---------- ---------- ---------- ---------- -------- ----------
364,033 515,583 733,985 1,181,784 2,735,638 357,318 870,087
-------- ---------- ---------- ---------- ---------- -------- ----------
Operating income........................... 20,471 28,877 39,630 48,850 89,234 14,044 29,000
Interest income (expense), net............. 305 757 3,450 5,856 (12,994) 2,124 (4,829)
-------- ---------- ---------- ---------- ---------- -------- ----------
Income before income taxes................. 20,776 29,634 43,080 54,706 76,240 16,168 24,171
Provision for income taxes................. 8,053 11,307 16,932 21,277 33,566 6,290 10,628
-------- ---------- ---------- ---------- ---------- -------- ----------
Net income................................. $ 12,723 $ 18,327 $ 26,148 $ 33,429 $ 42,674 $ 9,878 $ 13,543
======== ========== ========== ========== ========== ======== ==========
Earnings per share(1):
Basic.................................... $ 0.43 $ 0.62 $ 0.81 $ 1.02 $ 1.29 $ 0.30 $ 0.41
Diluted.................................. $ 0.42 $ 0.60 $ 0.80 $ 1.01 $ 1.27 $ 0.29 $ 0.40
Weighted average shares outstanding(1):
Basic.................................... 29,588 29,560 32,160 32,713 33,105 33,053 33,211
Diluted.................................. 30,293 30,545 32,700 33,122 33,698 33,579 34,154
BALANCE SHEET DATA:
Cash....................................... $ 5,742 $ 11,506 $ 25,211 $ 64,155 $ 122,589 $ 84,556 $ 115,838
Working capital............................ 38,082 58,653 128,259 166,062 117,611 175,232 140,221
Total assets............................... 108,922 164,088 300,425 402,508 1,095,461 414,744 1,096,950
Short-term debt.......................... -- -- -- -- 54,000 -- 54,000
Long-term debt, less current
maturities............................. -- -- -- -- 306,000 -- 306,000
Total debt................................. -- -- -- -- 360,000 -- 360,000
Stockholders' equity....................... 52,485 77,379 164,090 203,701 249,694 214,930 267,542
SELECTED DATA:
Pharmacy benefit covered lives............. 6,000 8,000 10,000 13,000 23,000 12,000 23,000
Drug spending(3)........................... $716,000 $1,172,000 $1,636,000 $2,486,000 $4,495,000 $678,000 $1,450,000
Pharmacy network claims processed.......... 26,323 42,871 57,838 73,164 113,177 19,028 36,028
Mail pharmacy prescriptions filled......... 1,594 2,129 2,770 3,899 7,426 1,069 2,279
EBITDA(4).................................. $ 23,795 $ 33,258 $ 46,337 $ 59,320 $ 115,667 $ 16,440 $ 37,487
Cash flows provided by operating
activities............................... $ 9,741 $ 11,500 $ 29,863 $ 52,503 $ 126,574 $ 24,222 $ (3,808)
Cash flows used in investing activities.... $ (6,348) $ (8,047) $ (64,808) $ (16,567) $ (426,052) $ (4,510) $ (5,677)
Cash flows provided by financial
activities............................... $ 314 $ 2,311 $ 48,652 $ 3,033 $ 357,959 $ 683 $ 2,722
Ratio of earnings to fixed charges (5)..... 41.7x 42.6x 57.8x 56.7x 4.5x 78.7x 4.4x
</TABLE>
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- -------------------------
(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, related
to our managed vision business. Excluding this restructuring charge, our
basic and diluted earnings per share would have been $1.32 and $1.30,
respectively.
(3) Drug spending is a measure of the gross aggregate dollar value of drug
expenditures of all programs managed by us. The difference between drug
spending and revenue reported by us is the combined effect of excluding from
reported revenues:
- the drug ingredient cost for those clients that have established their own
pharmacy networks
- the expenditures for drugs for companies on formulary-only programs
managed by us
- the co-pay portion of drug expenditures that are the responsibility of
members of health plans serviced by us
Therefore, drug spending provides a common basis to compare the drug
expenditures managed by a company given differences in revenue recognition.
(4) EBITDA is earnings before interest, taxes, depreciation and amortization, or
operating income plus depreciation and amortization. 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.
(5) The ratio of earnings to fixed charges is calculated by dividing income
(loss) before income taxes plus fixed charges, which consist of interest
expense, capitalized interest, amortization of deferred financing fees and
the portions of rental expenses representative of the interest expense
component by fixed charges. The pro forma ratio earnings to fixed charges
for the three months ended March 31, 1999, for the three months ended March
31, 1998, and the year ended December 31, 1998 is 3.0x, 2.2x and 2.3x,
respectively.
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UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
The following unaudited consolidated condensed pro forma statement of
operations combines the historical statement of operations of us, Value Health,
Inc., Managed Prescription Network, Inc., together comprising the business known
as ValueRx, and DPS for the year ended December 31, 1998, for the three months
ended March 31, 1998, and the three months ended March 31, 1999. On April 1,
1998, we consummated the acquisition of ValueRx. Therefore, the financial
information of ValueRx is included in our 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 our recent debt and equity
offerings and the use of the net proceeds from these offerings, and the use of
$25 million of our cash to repay some of our indebtedness, all as if these
events had occurred on January 1, 1998. Any cost savings we 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 us and DPS as of March 31,
1999. The unaudited consolidated condensed pro forma balance sheet has been
prepared to reflect the acquisition of DPS and the related financings, including
our recent debt and equity offerings and the use of the net proceeds from these
offerings, and the use of $25 million of our cash to repay some of our
indebtedness, all as if these events had occurred on March 31, 1999.
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 our preliminary determination based
upon available information and assumptions which we consider reasonable under
the circumstances. The unaudited consolidated condensed pro forma data is not
necessarily indicative of our future results of operations or the results of
operations as they might have been had the acquisitions and the related
financings, including our recent debt and equity offerings and the use of the
net proceeds from these offerings, been effective on the first day of the period
presented. The unaudited consolidated condensed pro forma financial data should
be read in conjunction with our separate historical consolidated financial
statements and notes included in this prospectus, the separate historical
consolidated financial statements and notes of ValueRx included in our Current
Report on Form 8-K/A dated June 12, 1998, the separate unaudited combined
condensed financial statements and notes for ValueRx for the three months ended
March 31, 1998 included in this prospectus and the separate historical financial
statements and notes of DPS included in our Current Report on Form 8-K/A dated
June 14, 1999.
When reading the historical consolidated financial statements of us and
DPS, a notable difference exists with respect to the revenue recognition for
each of the companies. A substantial portion of our net revenues include
administrative fees, dispensing fees and the drug ingredient costs, as most
clients use one of our pharmacy networks. Where we only administer the contracts
between our clients and our clients' retail pharmacy networks, we record as net
revenues only the administrative fees we receive from our 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.
21
<PAGE> 26
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
DPS OFFERINGS
EXPRESS PRO FORMA ACQUISITION PRO FORMA PRO FORMA
SCRIPTS DPS ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
-------- ------- ----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................... $899,087 $65,366(2) $ -- $964,453 $ -- $964,453
Cost and expenses:
Cost of revenues............................. 823,647(1) -- -- 823,647 -- 823,647(1)
Selling, general and administrative.......... 46,440(1) 57,409 (10,401)(3) 90,578 -- 90,578(1)
(1,890)(4)
(980)(5)
-------- ------- --------- -------- ------- --------
870,087 57,409 (13,271) 914,225 -- 914,225
-------- ------- --------- -------- ------- --------
Operating income............................... 29,000 7,957 13,271 50,228 -- 50,228
Other income (expense)......................... -- 433 359(6) 792 -- 792
Interest income................................ 1,393 -- (541)(7) 852 -- 852
Interest expense............................... (6,222) -- (17,134)(8) (23,356) 6,525(10) (16,831)
-------- ------- --------- -------- ------- --------
Income (loss) before income taxes.............. 24,171 8,390 (4,045) 28,516 6,525 35,041
Provision (benefit) for income taxes........... 10,628 3,096 (1,618)(9) 12,106 2,610(11) 14,716
-------- ------- --------- -------- ------- --------
Net income..................................... $ 13,543 $ 5,294 $ (2,427) $ 16,410 $ 3,915 $ 20,325
======== ======= ========= ======== ======= ========
Basic earnings per share....................... $ 0.41 $ 0.53
======== ========
Diluted earnings per share..................... $ 0.40 $ 0.52
======== ========
Weighted average number of common shares
outstanding during the period-Basic EPS...... 33,211 5,175(12) 38,386
======== ======= ========
Weighted average number of common shares
outstanding during the period-Diluted EPS.... 34,154 5,175(12) 39,329
======== ======= ========
OTHER DATA:
EBITDA (13).................................... $ 37,487 $20,837 $ 10,401(3) $ 68,725 $ -- $ 68,725
</TABLE>
- -------------------------
(1) Cost of revenues and selling, general and administrative expense include
$2,265 and $6,222 of depreciation and amortization, respectively, for us
during the first quarter of 1999. The pro forma consolidated cost of
revenues and selling, general and administrative expense include $2,265 and
$16,232 of depreciation and amortization, respectively.
(2) Net revenues for DPS include revenues from SmithKline Beecham. Subsequent
to our acquisition of DPS, revenues are anticipated to be consistent with
historical revenues as DPS's existing contract with SmithKline Beecham
remains in place.
(3) Adjustment reflects the elimination of management fees paid to United
HealthCare of $10,401 which under the DPS purchase agreement is to be
reimbursed to us by SmithKline Beecham.
(4) Adjustment reflects the net decrease in the first quarter of 1999 of
depreciation and amortization expense to $260 from $2,150 recorded by DPS
resulting from the allocation of the purchase price to the assets acquired
at their fair market value and to conform estimated and useful lives.
Furniture, equipment and internal use software are being depreciated by us
using the straight-line method over estimated useful lives of 5 to 8 years.
(5) Adjustment reflects the net decrease in the first quarter of 1999 of
amortization expense for goodwill and other intangible assets. DPS's
goodwill and other intangible assets amortization expense of $10,730 has
been reversed, and our goodwill and other intangible assets, consisting of
customer contracts, amortization of $9,750 has been included. Goodwill is
being amortized using the straight-line method over the
22
<PAGE> 27
estimated useful life of 30 years. We have preliminarily assigned an
estimated fair value to other intangible assets and are amortizing them
using the straight-line method over the estimated useful lives of 1 to 20
years. We anticipate spending an estimated $10 million to $20 million in
non-recurring costs during the first twelve months subsequent to our
acquisition of DPS relating to the integration of DPS's operations. These
non-recurring costs have not been reflected in the unaudited consolidated
condensed pro forma statement of operations.
(6) Adjustment reflects the elimination of DPS's $359 equity loss in its joint
venture. SmithKline Beecham retained the equity interest in the joint
venture.
(7) Adjustment reflects the decrease in interest income resulting from
expending $48,081 of cash to consummate the acquisition of DPS. The
adjustment was calculated using a current interest rate of 4.5% earned by
us on our cash balances.
(8) Adjustment reflects the following:
- the elimination of $5,508 in actual interest expense, exclusive of the
impact of our hedge on variable rate interest, incurred during the first
quarter of 1999 on $360,000 of debt outstanding under our $440,000
credit facility, which has been replaced with the $1,050,000 credit
facility
- the addition of $21,677 in interest expense from borrowings of $890,000
under the $1,050,000 credit facility and $150,000 under the senior
subordinated bridge credit facility, assuming interest rates on the
$1,050,000 credit facility of 7.67% for the revolving facility and the
Term A facility and 8.42% for the Term B facility, and a rate of 9.97%
on the senior subordinated bridge credit facility, based on the actual
rates incurred by us at consummation of the $1,050,000 credit facility
and $150,000 senior subordinated bridge facility
- the addition of $921 in deferred financing fees amortization and $44 in
annual administrative fees; these 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 $1,050,000 credit
facility
(9) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(10) Adjustment reflects the following:
- the elimination of the interest expense impact of $6,436 from the
retirement of the $150,000 senior subordinated bridge credit facility,
at an interest rate in effect at consummation of 9.97%, and the
retirement of $414,770 of the term loan borrowings under the $1,050,000
credit facility, at the actual interest rate at consummation of 8.42%,
using the net proceeds from our sale of 5,175 shares of Class A common
stock, including the underwriters' over-allotments, offered pursuant to
our equity offering, the net proceeds of our senior notes offering at an
interest rate of 9.625% on the senior notes and the use of $25 million
of our cash.
- the elimination of the deferred financing fees amortization expense of
$234 associated with the retirement of the term loan borrowings under
our $1,050,000 credit facility
- the addition of the amortization of $145 from the $5,813 in senior note
deferred financing fees
(11) Adjustment reflects the tax effect of the interest expense adjustment at
the combined federal and state statutory 40% tax rate.
(12) Adjustment reflects the addition for the full period of the 5,175 shares of
Class A common stock, including the underwriters' over-allotments, in our
equity offering at an offering price of $61 per share.
(13) EBITDA is earnings before interest, taxes, depreciation and amortization,
or operating income plus depreciation and amortization. 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.
23
<PAGE> 28
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------
VALUERX DPS
EXPRESS PRO FORMA VALUERX PRO FORMA
SCRIPTS, INC. VALUERX(1) ADJUSTMENTS PRO FORMA DPS ADJUSTMENTS
------------- ---------- ----------- --------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............... $371,362 $409,928 $ -- $781,290 $47,650(7) $ --
Cost and expenses:
Cost of revenues.......... 338,492(2) 375,295 -- 713,787 -- --
Selling, general and
administrative.......... 18,826(2) 27,628 (3,606)(3) 42,848 55,045 (7,675)(8)
(1,028)(9)
(8,689)(10)
-------- -------- ------- -------- ------- --------
357,318 402,923 (3,606) 756,635 55,045 (17,392)
-------- -------- ------- -------- ------- --------
Operating income........... 14,044 7,005 3,606 24,655 (7,395) 17,392
Other income (expense)..... -- -- -- -- 714 431(11)
Interest income............ 2,138 56 (1,261)(4) 933 -- (541)(12)
Interest expense........... (14) -- (7,007)(5) (7,021) -- (15,635)(13)
-------- -------- ------- -------- ------- --------
Income (loss) before income
taxes..................... 16,168 7,061 (4,662) 18,567 (6,681) 1,647
Provision (benefit) for
income taxes.............. 6,290 3,665 (1,865)(6) 8,090 (2,338) 659(14)
-------- -------- ------- -------- ------- --------
Net income................. $ 9,878 $ 3,396 $(2,797) $ 10,477 $(4,343) $ 988
======== ======== ======= ======== ======= ========
Basic earnings per share... $ 0.30
========
Diluted earnings per
share..................... $ 0.29
========
Weighted average number of
common shares outstanding
during the period -- Basic
EPS....................... 33,053
========
Weighted average number of
common shares outstanding
during the
period -- Diluted EPS..... 33,579
========
OTHER DATA:
EBITDA(18)................. $ 16,440 $ 15,816 $ -- $ 32,256 $12,332 $ 7,675(8)
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------
VALUERX OFFERINGS
AND DPS PRO FORMA PRO FORMA
PRO FORMA ADJUSTMENTS CONSOLIDATED
--------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues............... $828,940 $ -- $828,940
Cost and expenses:
Cost of revenues.......... 713,787 -- 713,787(2)
Selling, general and
administrative.......... 80,501 -- 80,501(2)
-------- ------ --------
794,288 -- 794,288
-------- ------ --------
Operating income........... 34,652 -- 34,652
Other income (expense)..... 1,145 -- 1,145
Interest income............ 392 -- 392
Interest expense........... (22,656) 6,525(15) (16,131)
-------- ------ --------
Income (loss) before income
taxes..................... 13,533 6,525 20,058
Provision (benefit) for
income taxes.............. 6,411 2,610(16) 9,021
-------- ------ --------
Net income................. $ 7,122 $3,915 $ 11,037
======== ====== ========
Basic earnings per share... $ 0.29
========
Diluted earnings per
share..................... $ 0.28
========
Weighted average number of
common shares outstanding
during the period -- Basic
EPS....................... 5,175(17) 38,228
====== ========
Weighted average number of
common shares outstanding
during the
period -- Diluted EPS..... 5,175(17) 38,754
====== ========
OTHER DATA:
EBITDA(18)................. $ 52,263 $ -- $ 52,263
</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
$1,413 and $983 of depreciation and amortization, respectively, for us
during the first quarter of 1998. The pro forma consolidated cost of
revenues and selling, general and administrative expense include $1,413 and
$16,198 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 our allocation of the ValueRx purchase price and conforming estimated
useful lives. ValueRx depreciation and amortization expense of $8,811 has
been eliminated and $5,205 has been added based on the fair value of
property and equipment, goodwill, and
24
<PAGE> 29
other intangible assets. The fair value of property and equipment ($33,756)
is being depreciated using the straight-line method over 3 to 20 years.
Goodwill ($289,863) and other intangible assets, consisting of non-compete
agreements ($9,130) and customer contracts ($48,523), 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 our
expending $100,908 of our short-term investments and cash equivalents to
consummate the acquisition of ValueRx. The adjustment was calculated using
the average interest rate (5.0%) earned by us on our investments during the
quarter prior to the ValueRx acquisition.
(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 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 tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(7) Net revenues for DPS include revenues from SmithKline Beecham. Subsequent
to our acquisition of DPS, revenues are anticipated to be consistent with
historical revenues as DPS's existing contract with SmithKline Beecham
remains in place.
(8) Adjustment reflects the elimination of management fees paid to United
HealthCare of $7,675, which under the DPS purchase agreement is to be
reimbursed to us by SmithKline Beecham.
(9) Adjustment reflects the net decrease in the 1998 depreciation and
amortization expense to $260 from $1,288 recorded by DPS resulting from the
allocation of the purchase price to the assets acquired at their fair
market value and to conform estimated and useful lives. Furniture,
equipment and internal use software are being depreciated by us using the
straight-line method over estimated useful lives of 5 to 8 years.
(10) Adjustment 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 $18,439 has been reversed, and our goodwill
and other intangible assets, consisting of customer contracts, amortization
of $9,750 has been included. Goodwill is being amortized using the
straight-line method over the estimated useful life of 30 years. We have
preliminarily assigned an estimated fair value to other intangible assets
and are amortizing them using the straight-line method over the estimated
useful lives of 1 to 20 years. We anticipate spending an estimated $10
million to $20 million in non-recurring costs during the first twelve
months subsequent to our acquisition of DPS relating to the integration of
DPS's operations. These non-recurring costs have not been reflected in the
unaudited consolidated condensed pro forma statement of operations.
(11) Adjustment reflects the elimination of DPS's $431 equity loss in its joint
venture. SmithKline Beecham retained the equity interest in the joint
venture.
(12) Adjustment reflects the decrease in interest income for the first quarter
of 1998 resulting from expending $48,081 of cash to consummate the
acquisition of DPS. The adjustment was calculated using a current interest
rate of 4.5% earned by us on our cash balances.
(13) Adjustment reflects the following:
- the elimination of $7,007 in first quarter of 1998 interest expense
relating to the ValueRx acquisition, exclusive of the impact of our
hedge on variable rate interest, incurred during the first quarter of
1998 on $360,000 of debt outstanding under our $440,000 credit facility,
which has been replaced with the $1,050,000 credit facility
25
<PAGE> 30
- the addition of $21,677 in interest expense from borrowings of $890,000
under the $1,050,000 credit facility and $150,000 under the senior
subordinated bridge credit facility, assuming interest rates on the
$1,050,000 credit facility of 7.67% for the revolving facility and the
Term A facility and 8.42% for the Term B facility, and a rate of 9.97%
on the senior subordinated bridge credit facility, based on the actual
rates incurred by us at consummation of the $1,050,000 credit facility
and $150,000 senior subordinated bridge credit facility
- the addition of $921 in deferred financing fees amortization and $44 in
annual administrative fees; these 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 $1,050,000 credit
facility
(14) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(15) Adjustment reflects the following:
- the elimination of the interest expense impact of $6,436 from the
retirement of the $150,000 senior subordinated bridge credit facility, at
an interest rate in effect at consummation of 9.97%, and the retirement
of $414,770 of the term loan borrowings under the $1,050,000 credit
facility, at the actual interest rate at consummation of 8.42%, using the
net proceeds from our sale of 5,175 shares of Class A common stock,
including the underwriters' over-allotments, offered pursuant to our
equity offering, the net proceeds of our senior notes offering at an
interest rate of 9.625% on the senior notes and the use of $25 million of
our cash
- the elimination of the deferred financing fees amortization expense of
$234 associated with the retirement of the term loan borrowings under our
$1,050,000 credit facility
- the addition of the amortization of $145 from the $5,813 in senior note
deferred financing fees
(16) Adjustment reflects the tax effect of the interest expense adjustment at
the combined federal and state statutory 40% tax rate.
(17) Adjustment reflects the addition for the full period of the 5,175 shares of
Class A common stock, including the underwriters' over-allotments, in our
equity offering at an offering price of $61 per share.
(18) EBITDA is earnings before interest, taxes, depreciation and amortization,
or operating income plus depreciation and amortization. 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.
26
<PAGE> 31
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
VALUERX
EXPRESS PRO FORMA VALUERX
SCRIPTS, INC. VALUERX(1) ADJUSTMENTS PRO FORMA DPS
------------- ---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues........... $2,824,872 $409,928 $ -- $3,234,800 $ 214,849(7)
Cost and expenses:
Cost of revenues...... 2,584,997(2) 375,295 -- 2,960,292 548
Selling, general and
administrative...... 148,990(2) 27,628 (3,606)(3) 173,012 234,477
Corporate
restructuring....... 1,651 -- -- 1,651 --
Write down of
assets.............. -- -- -- -- 1,092,184
---------- -------- ------- ---------- -----------
2,735,638 402,923 (3,606) 3,134,955 1,327,209
---------- -------- ------- ---------- -----------
Operating income
(loss)................ 89,234 7,005 3,606 99,845 (1,112,360)
Other income (net)..... -- -- -- -- 1,308
Interest income........ 7,236 56 (1,261)(4) 6,031 --
Interest expense....... (20,230) -- (7,007)(5) (27,237) --
---------- -------- ------- ---------- -----------
Income (loss) before
income taxes.......... 76,240 7,061 (4,662) 78,639 (1,111,052)
Provision (benefit) for
income taxes.......... 33,566 3,665 (1,865)(6) 35,366 (388,825)
---------- -------- ------- ---------- -----------
Net income (loss)...... $ 42,674 $ 3,396 $(2,797) $ 43,273 $ (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
==========
Weighted average number
of common shares
outstanding during the
period -- Diluted..... 33,698
==========
OTHER DATA:
EBITDA(19)............. $ 115,667 $ 15,816 $ -- $ 131,483 $ 59,965
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
DPS VALUERX OFFERINGS
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...... (33,837)(8) 337,141 -- 337,141(2)
(1,688)(9)
(34,823)(10)
Corporate
restructuring....... -- 1,651 -- 1,651
Write down of
assets.............. -- 1,092,184 -- 1,092,184
-------- ----------- ------- -----------
(70,348) 4,391,816 -- 4,391,816
-------- ----------- ------- -----------
Operating income
(loss)................ 70,348 (942,167) -- (942,167)
Other income (net)..... 1,924(11) 3,232 -- 3,232
Interest income........ (2,164)(12) 3,867 -- 3,867
Interest expense....... (65,282)(13) (92,519) 27,226(15) (65,293)
-------- ----------- ------- -----------
Income (loss) before
income taxes.......... 4,826 (1,027,587) 27,226 (1,000,361)
Provision (benefit) for
income taxes.......... 1,930(14) (351,529) 10,890(16) (340,639)
-------- ----------- ------- -----------
Net income (loss)...... $ 2,896 $ (676,058) $16,336 $ (659,722)(17)
======== =========== ======= ===========
Basic earnings per
share................. $ (17.23)
===========
Diluted earnings per
share................. $ (16.97)
===========
Weighted average number
of common shares
outstanding during the
period -- Basic....... 5,175(18) 38,280
======= ===========
Weighted average number
of common shares
outstanding during the
period -- Diluted..... 5,175(18) 38,873
======= ===========
OTHER DATA:
EBITDA(19)............. $ 33,837(8) $ 225,285 $ -- $ 225,285
</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 us
in 1998. The pro forma consolidated cost of revenues and selling, general
and administrative expense include $7,559 and $67,709 of depreciation and
amortization, respectively.
27
<PAGE> 32
(3) Adjustment reflects the net decrease in depreciation and amortization of
property and equipment and intangible assets, including goodwill resulting
from our allocation of the ValueRx purchase price and conforming estimated
useful lives. ValueRx depreciation and amortization expense of $8,811 has
been eliminated and $5,205 has been added based on the fair value of
property and equipment, goodwill, and other intangible assets. The fair
value of property and equipment ($33,756) is being depreciated using the
straight-line method over 3 to 20 years. Goodwill ($289,863) and other
intangible assets, consisting of non-compete agreements ($9,130) and
customer contracts ($48,523), 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 our
expending $100,908 of our short-term investments and cash equivalents to
consummate the acquisition of ValueRx. The adjustment was calculated using
the average interest rate (5.0%) earned by us on our investments during the
quarter prior to the ValueRx acquisition.
(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 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 tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(7) Net revenues for DPS include revenues from SmithKline Beecham. Subsequent
to our acquisition of DPS, revenues are anticipated to be consistent with
historical revenues as DPS's existing contract with SmithKline Beecham
remains in place.
(8) Adjustment reflects the elimination of management fees paid to United
HealthCare of $33,837, which under the DPS purchase agreement is to be
reimbursed to us by SmithKline Beecham.
(9) Adjustment 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 estimated and useful lives. Furniture,
equipment and internal use software are being depreciated by us using the
straight-line method over estimated useful lives of 5 to 8 years.
(10) Adjustment 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 our goodwill
and other intangible assets, consisting of customer contracts, amortization
of $38,935 has been included. Goodwill is being amortized using the
straight-line method over the estimated useful life of 30 years. We have
preliminarily assigned an estimated fair value to other intangible assets
and are amortizing them using the straight-line method over the estimated
useful lives of 1 to 20 years. We anticipate spending an estimated $10
million to $20 million in non-recurring costs during the first twelve
months subsequent to our acquisition of DPS relating to the integration of
DPS's operations. These non-recurring costs have not been reflected in the
unaudited consolidated condensed pro forma statement of operations.
(11) Adjustment reflects the elimination of DPS's $1,924 equity loss in its
joint venture. SmithKline Beecham retained the equity interest in the joint
venture.
(12) Adjustment reflects the decrease in interest income resulting from
expending $48,081 of cash to consummate the acquisition of DPS. The
adjustment was calculated using a current interest rate of 4.5% earned by
us on our cash balances.
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<PAGE> 33
(13) Adjustment reflects the following:
- the elimination of $26,413 in actual interest expense, exclusive of the
impact of our hedge on variable rate interest, incurred during fiscal
1998 on $360,000 of debt outstanding under our $440,000 credit facility,
which has been replaced with the $1,050,000 credit facility
- the addition of $87,832 in interest expense from borrowings of $890,000
under the $1,050,000 credit facility and $150,000 under the senior
subordinated bridge credit facility, assuming interest rates on the
$1,050,000 credit facility of 7.67% for the revolving facility and the
Term A facility and 8.42% for the Term B facility, and an average rate
of 10.72% on the senior subordinated bridge credit facility, based on
the actual rates incurred by us at consummation of the $1,050,000 credit
facility and $150,000 senior subordinated bridge facility. The interest
rate on the senior subordinated bridge facility loan increases 0.5%
every quarter starting at 9.97% and increasing to 11.47%
- the addition of $3,688 in deferred financing fees amortization and $175
in annual administrative fees; these 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 $1,050,000 credit
facility
(14) Adjustment reflects the tax effect of the pro forma adjustments at the
combined federal and state statutory rate of 40%.
(15) Adjustment reflects the following:
- the elimination of the interest expense impact of $26,871 from the
retirement of the $150,000 senior subordinated bridge credit facility,
at an interest rate in effect at consummation of 9.97%, and the
retirement of $414,770 of the term loan borrowings under the $1,050,000
credit facility, at the actual interest rate at consummation of 8.42%,
using the net proceeds from our sale of 5,175 shares of Class A common
stock, including the underwriters' over-allotments, offered pursuant to
our equity offering, the net proceeds of our senior notes offering at an
interest rate of 9.625% on the senior notes and the use of $25 million
of our cash
- the elimination of the deferred financing fees amortization expense of
$936 associated with the retirement of the term loan borrowings under
our $1,050,000 credit facility
- the addition of the amortization of $581 from the $5,813 in senior note
deferred financing fees
(16) Adjustment reflects the tax effect of the interest expense adjustment at
the combined federal and state statutory 40% tax rate.
(17) The write-down of assets on DPS's books of $1,092,184 relates to the
impairment of goodwill. If the acquisition of DPS had occurred on January
1, 1998, goodwill on DPS's books would have been eliminated. Therefore, the
impairment charge for goodwill would not have existed. Net income excluding
this impairment charge would have been $50,198, or $1.31 per basic share
and $1.29 per diluted share.
(18) Adjustment reflects the addition for a full year of our offering of 5,175
shares of Class A common stock, including the underwriters'
over-allotments, in our equity offering at an offering price of $61 per
share.
(19) EBITDA is earnings before interest, taxes, depreciation and amortization,
or operating income plus depreciation and amortization. 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.
29
<PAGE> 34
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------------------------------------------------
ACQUISITION OFFERINGS
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............................... $ 115,838 $ -- $ (48,081)(1) $ 67,757 $ (25,000)(11) $ 42,757
Accounts receivable................ 446,453 120,884 -- 567,337 -- 567,337
Intercompany receivable............ -- -- -- -- -- --
Other current assets............... 100,836 2,904 (1,880)(2) 101,860 -- 101,860
---------- ---------- ----------- ---------- --------- ----------
Total current assets............. 663,127 123,788 (49,961) 736,954 (25,000) 711,954
Property and equipment, net.......... 73,346 27,894 (19,602)(3) 81,638 -- 81,638
Goodwill, net........................ 268,081 542,184 185,148(4) 995,413 -- 995,413
Deferred income taxes................ -- 427,278 (427,278)(2) -- -- --
Other assets......................... 92,396 279,583 (131,040)(5) 240,939 (1,679)(9) 239,260
---------- ---------- ----------- ---------- --------- ----------
Total assets..................... $1,096,950 $1,400,727 $ (442,733) $2,054,944 $ (26,679) $2,028,265
========== ========== =========== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term
debt............................. $ 54,000 $ -- $ (49,350)(6) $ 4,650 $ (4,148)(11) $ 502
Claims and rebates payable......... 331,525 232,666 -- 564,191 -- 564,191
Accounts payable................... 65,715 -- -- 65,715 -- 65,715
Accrued expenses................... 71,666 35,609 11,619(7) 118,894 (2,997)(10) 115,897
---------- ---------- ----------- ---------- --------- ----------
Total current liabilities........ 522,906 268,275 (37,731) 753,450 (7,145) 746,305
Credit facility:
Revolving debt..................... -- -- 140,000(6) 140,000 -- 140,000
Term debt.......................... 306,000 -- 439,350(6) 745,350 (410,622)(11) 334,728
Senior notes, net of unamortized
discount of $1,185................. -- -- -- -- 248,815(11) 248,815
Senior subordinated bridge credit
facility........................... -- -- 150,000(6) 150,000 (150,000)(11) --
---------- ---------- ----------- ---------- --------- ----------
Total long-term debt............. 306,000 -- 729,350 1,035,350 (311,807) 723,543
Other long-term liabilities.......... 502 50 -- 552 -- 552
---------- ---------- ----------- ---------- --------- ----------
Total liabilities................ 829,408 268,325 691,619 1,789,352 (318,952) 1,470,400
Stockholders' equity................. 267,542 1,132,402 (1,134,352)(8) 265,592 292,273(11) 557,865
---------- ---------- ----------- ---------- --------- ----------
Total liabilities and
stockholders' equity........... $1,096,950 $1,400,727 $ (442,733) $2,054,944 $ (26,679) $2,028,265
========== ========== =========== ========== ========= ==========
</TABLE>
- -------------------------
(1) Adjustment reflects the use of $48,081 of our cash balances to fund the
purchase of DPS.
(2) Adjustment reflects the elimination of the historical deferred tax assets
of DPS. As part of its acquisition, we will file an Internal Revenue Code
sec. 338(h)(10) election. Accordingly, at March 31, 1999, 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 fair value assigned to DPS property and equipment.
(4) Adjustment reflects the excess of the purchase price of DPS over the
estimated fair market value of the identified assets acquired. The purchase
price of $700 million, plus an estimated $25 million in
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<PAGE> 35
transaction costs, plus the assumption and incurrence of liabilities
totalling $284,325 was preliminarily allocated in the following manner:
<TABLE>
<S> <C>
Current assets.............................................. $121,908
Property and equipment...................................... 8,292
Deferred financing fees..................................... 19,483
Customer contracts.......................................... 132,310
Goodwill.................................................... 727,332
Liabilities................................................. 284,325
</TABLE>
We anticipate assessing the value of all long-lived assets acquired when
events or circumstances have occurred that indicate the remaining estimated
useful life of long-lived assets may warrant revision or that the remaining
balance of an asset may not be recoverable.
(5) Adjustment reflects the following:
- elimination of the unamortized deferred financing fees in the amount of
$3,250 related to the extinguishment of our $440,000 credit facility
- elimination of other intangible assets of DPS in the amount of $279,583
These eliminations were offset by $19,483 paid in deferred financing fees
related to the $1,050,000 credit facility used to finance the DPS
acquisition and the preliminary allocation of fair value to customer
contracts in the amount of $132,310. We are in the process of establishing
fair values for all identifiable assets and will adjust the fair value
allocated to customer contracts accordingly when complete.
(6) Adjustment reflects borrowings of $890,000 under our $1,050,000 credit
facility and $150,000 under the senior subordinated bridge credit facility
to finance the acquisition of DPS and which refinanced our existing
outstanding debt of $360,000 under our $440,000 credit facility. The
$1,050,000 credit facility consists of a $300,000 revolving credit
facility, of which $140,000 has been borrowed, and a $750,000 term
facility.
(7) Adjustment reflects the reduction of taxes payable by $1,300 for the
write-off of deferred financing fees, and the payment of accrued interest
of $5,063 associated with the repayment of the $440,000 credit facility.
These amounts were offset by accruals of $1,982 for transaction costs and
an estimated $16,000 for other liabilities associated with the purchase of
DPS, such as facility consolidation and employee transition costs, that we
are presently identifying and evaluating.
(8) Adjustment reflects the elimination of the DPS pre-acquisition equity
balances and the write-off of our unamortized deferred financing fees of
approximately $1,950, net of tax, from our $440,000 credit facility as an
extraordinary item. After the write-off of the unamortized deferred
financing fees, net income after extraordinary items for the three months
ended March 31, 1999 would have been $18,375, or $0.48 per basic share and
$0.47 per diluted share.
(9) Adjustment reflects the elimination of our unamortized deferred financing
fees related to the extinguishment of $414,770 borrowed under the
$1,050,000 credit facility and the $150,000 senior subordinated bridge
credit facility offset by $5,813 in deferred financing fees for this
offering.
(10) Adjustment reflects the reduction in taxes payable as a result of the
write-off of deferred financing fees related to the extinguishment of
$414,770 borrowed under our $1,050,000 credit facility.
(11) Adjustment reflects the net proceeds received from our sale of 5,175 shares
of Class A common stock, including the underwriters' over-allotments, at an
offering price of $61 per share and from our senior notes offering. The
proceeds from our equity offering and our senior notes offering, along with
approximately $25 million of our cash, will be used to repay the $150,000
senior subordinated bridge credit facility and $414,770 of the term loans
under the $1,050,000 credit facility. The proceeds are offset by the
write-off of approximately $4,495, net of tax, of the deferred financing
fees from the $1,050,000 credit facility as an extraordinary item. After
the write-off of $4,495 and $1,950, see (7) above, in unamortized deferred
financing fees, net income after extraordinary items for the three months
ended March 31, 1999 would have been $13,880, or $0.36 per basic share and
$0.35 per diluted share. In July 1999, we repaid an additional $50,230 of
the term loans through use of our own cash. As a result, we will record an
additional extraordinary charge of approximately $557, net of tax, for the
write-off of deferred financing fees.
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<PAGE> 36
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We have entered into a registration rights agreement with the initial
purchasers of the outstanding notes in which we agreed, under certain
circumstances, to file a registration statement relating to an offer to exchange
the outstanding notes for exchange notes. We also agreed to use our reasonable
best efforts to cause such offer to be consummated no later than 220 days after
the original issue of the outstanding notes. The exchange notes will have terms
substantially identical to the outstanding notes except that the exchange notes
will not contain terms with respect to transfer restrictions, registration
rights and liquidated damages for failure to observe certain obligations in the
registration rights agreement. The outstanding notes were issued on June 16,
1999.
Under the circumstances set forth below, we will use our reasonable best
efforts to cause the SEC to declare effective a shelf registration statement
with respect to the resale of the outstanding notes and keep the statement
effective for up to two years after the effective date of the shelf registration
statement. These circumstances include:
- if any changes in law, SEC rules or regulations or applicable
interpretations thereof by the staff of the SEC do not permit us to
effect the exchange offer as contemplated by the registration rights
agreement
- if any outstanding notes validly tendered in the exchange offer are not
exchanged for exchange notes no later than 220 days after the original
issue of the outstanding notes
- if any initial purchaser of the outstanding notes so requests (but only
with respect to any outstanding notes not eligible to be exchanged for
exchange notes in the exchange offer)
- if any holder of the outstanding notes notifies us that it is not
permitted to participate in the exchange offer or would not receive fully
tradable exchange notes pursuant to the exchange offer
If we fail to comply with certain obligations under the registration rights
agreement, we will be required to pay liquidated damages to holders of the
outstanding notes. Please read "Description of the Notes -- Registered Exchange
Offer; Registration Rights" for more details regarding the registration rights
agreement.
Each holder of outstanding notes that wishes to exchange such outstanding
notes for transferable exchange notes in the exchange offer will be required to
make the following representations:
- any exchange notes will be acquired in the ordinary course of its
business
- such holder has no arrangement with any person to participate in the
distribution of the exchange notes
- such holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of Express Scripts or if it is an affiliate, that it will
comply with applicable registration and prospectus delivery requirements
of the Securities Act
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
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<PAGE> 37
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to unrelated third parties, we believe that exchange notes issued under
the exchange offer in exchange for outstanding notes may be offered for resale,
resold and otherwise transferred by any exchange note holder without compliance
with the registration and prospectus delivery provisions of the Securities Act,
if:
- such holder is not an "affiliate" of Express Scripts within the meaning
of Rule 405 under the Securities Act
- such exchange notes are acquired in the ordinary course of the holder's
business
- the holder does not intend to participate in the distribution of such
exchange notes
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- cannot rely on the position of the staff of the SEC enunciated in Exxon
Capital Holdings Corporation or similar interpretive letters
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction
This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the outstanding
notes as a result of market-making activities or other trading activities may
participate in the exchange offer. Each broker-dealer that receives exchange
notes for its own account in exchange for outstanding notes, where such
outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
Please read "Plan of Distribution" for more details regarding the transfer of
exchange notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn prior to the expiration date. We will
issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes surrendered under the exchange offer.
Outstanding notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes will be substantially identical to
the form and terms of the outstanding notes except the exchange notes will be
registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any liquidated damages upon our failure to
fulfill our obligations under the registration rights agreement to file, and
cause to be effective, a registration statement. The exchange notes will
evidence the same debt as the outstanding notes. The exchange notes will be
issued under and entitled to the benefits of the same indenture that authorized
the issuance of the outstanding notes. Consequently, both series will be treated
as a single class of debt securities under that indenture. For a description of
the indenture, see "Description of the Notes."
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $250 million aggregate principal amount
of the outstanding notes are outstanding. This prospectus and the letter of
transmittal are being
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<PAGE> 38
sent to all registered holders of outstanding notes. There will be no fixed
record date for determining registered holders of outstanding notes entitled to
participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement, the applicable requirements of the
Securities Act and the Exchange Act and the rules and regulations of the SEC.
Outstanding notes that are not tendered for exchange in the exchange offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits such holders have under the indenture relating to the
outstanding notes and the registration rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the exchange notes from us and delivering
exchange notes to such holders. Subject to the terms of the registration rights
agreement, we expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any outstanding notes not previously
accepted for exchange, upon the occurrence of any of the conditions specified
below under "--Certain Conditions to the Exchange Offer."
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the exchange offer. It is
important that you read "--Fees and Expenses" below for more details regarding
fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on
September 8, 1999, unless in our sole discretion, we extend it.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
- to delay accepting for exchange any outstanding notes
- to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "--Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of such
delay, extension or termination to the exchange agent
- subject to the terms of the registration rights agreement, to amend the
terms of the exchange offer in any manner
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of outstanding notes. If we amend the exchange offer in a
manner that we determine to constitute a material change, we will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of outstanding notes of such amendment.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we
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<PAGE> 39
shall have no obligation to publish, advertise, or otherwise communicate any
such public announcement, other than by making a timely release to a financial
news service.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for, any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange if in our reasonable judgment:
- the exchange notes to be received will not be tradeable by the holder,
without restriction under the Securities Act or the Exchange Act and
without material restrictions under the blue sky or securities laws of
substantially all of the states of the United States
- the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us
- the representations described under "--Purpose and Effect of the Exchange
Offer," "--Procedures for Tendering" and "Plan of Distribution"
- such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
us an appropriate form for registration of the exchange notes under the
Securities Act
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any outstanding notes by giving oral or written notice of
such extension to their holders. During any such extensions, all outstanding
notes previously tendered will remain subject to the exchange offer, and we may
accept them for exchange. We will return any outstanding notes that we do not
accept for exchange for any reason without expense to their tendering holder as
promptly as practicable after the expiration or termination of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the outstanding notes
as promptly as practicable. In the case of any extension, such notice will be
issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration date.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances that may give rise to them or waive them in whole or in
part at any or at various times in our sole discretion. If we fail at any time
to exercise any of the foregoing rights, this failure will not constitute a
waiver of such right. Each such right will be deemed an ongoing right that we
may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any such outstanding
notes, if at such time any
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<PAGE> 40
stop order will be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender such outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to
the expiration date or
- comply with DTC's Automated Tender Offer Program procedures described
below
In addition, either:
- the exchange agent must receive outstanding notes along with the letter
of transmittal or
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message or
- the holder must comply with the guaranteed delivery procedures described
below
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If such beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the letter of transmittal
and delivering its outstanding notes either:
- make appropriate arrangements to register ownership of the outstanding
notes in such owner's name or
- obtain a properly completed bond power from the registered holder of
outstanding notes
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the
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<PAGE> 41
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or another
"eligible institution" within the meaning of Rule 17Ad-15 under the Exchange
Act, unless the outstanding notes tendered pursuant thereto are tendered:
- by a registered holder who has not competed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
- for the account of an eligible institution
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed on the outstanding notes, such
outstanding notes must be endorsed or accompanied by a properly completed bond
power. The bond power must be signed by the registered holder as the registered
holder's name appears on the outstanding notes and an eligible institution must
guarantee the signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the outstanding notes to the exchange
agent in accordance with its procedures for transfer. DTC will then send an
agent's message to the exchange agent. The term "agent's message" means a
message transmitted by DTC, received by the exchange agent and forming part of
the book-entry confirmation, to the effect that:
- DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering outstanding notes that
are the subject of such book-entry confirmation
- such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery)
- the agreement may be enforced against such participant
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt), acceptance of tendered
outstanding notes and withdrawal of tendered outstanding notes. Our
determination will be final and binding. We reserve the absolute right to reject
any outstanding notes not properly tendered or any outstanding notes the
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular outstanding notes. Our interpretation of the terms and
conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of outstanding notes must
be cured within such time as we shall determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of outstanding
notes, neither Express Scripts, the exchange agent nor any other person will
incur any liability for failure to give such notification. Tenders of
outstanding notes will not
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<PAGE> 42
be deemed made until such defects or irregularities have been cured or waived.
Any outstanding notes received by the exchange agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned to the exchange agent without cost to the tendering
holder, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
In all cases, we will issue exchange notes for outstanding notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
- outstanding notes or a timely book-entry confirmation of such outstanding
notes into the exchange agent's account at DTC
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message
By signing the letter of transmittal, each tendering holder of outstanding
notes will represent to us that, among other things:
- any exchange notes that the holder receives will be acquired in the
ordinary course of its business
- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes
- if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange notes
- if the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for outstanding notes that were acquired as a
result of market-making activities, that it will deliver a prospectus, as
required by law, in connection with any resale of such exchange notes
- the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of Express Scripts or, if the holder is an affiliate, it
will comply with any applicable registration and prospectus delivery
requirements of the Securities Act
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus; and any financial institution participating
in DTC's system may make book-entry delivery of outstanding notes by causing DTC
to transfer such outstanding notes into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. Holders of outstanding notes who
are unable to deliver confirmation of the book-entry tender of their outstanding
notes into the exchange agent's account at DTC or all other documents required
by the letter of transmittal to the exchange agent on or prior to the expiration
date must tender their outstanding notes according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver their outstanding
notes, the letter of
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<PAGE> 43
transmittal or any other required documents to the exchange agent or comply with
the applicable procedures under DTC's Automated Tender Offer Program prior to
the expiration date may tender if:
- the tender is made through an eligible institution
- prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery:
- setting forth the name and address of the holder, the registered
number(s) of such outstanding notes and the principal amount of
outstanding notes tendered
- stating that the tender is being made thereby
- guaranteeing that, within three (3) New York Stock Exchange trading
days after the expiration date, the letter of transmittal (or
facsimile thereof) together with the outstanding notes or a book-entry
confirmation, and any other documents required by the letter of
transmittal, will be deposited by the eligible institution with the
exchange agent
- the exchange agent receives such properly completed and executed letter
of transmittal (or facsimile thereof), as well as all tendered
outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within three (3) New York State Exchange trading days after
the expiration date
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of outstanding
notes may withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice (which may be by
telegram, telex, facsimile transmission or letter) of withdrawal at one
of the addresses set forth below under "--Exchange Agent" or
- holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system
Any such notice of withdrawal must:
- specify the name of the person who tendered the outstanding notes to be
withdrawn
- identify the outstanding notes to be withdrawn (including the principal
amount of such outstanding notes)
- where certificates for outstanding notes have been transmitted, specify
the name in which such outstanding notes were registered, if different
from that of the withdrawing holder
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:
- the serial numbers of the particular certificates to be withdrawn
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution
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<PAGE> 44
If outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn
outstanding notes and otherwise comply with the procedures of such facility. We
will determine all questions as to the validity, form and eligibility (including
time of receipt) of such notices, and our determination shall be final and
binding on all parties. We will deem any outstanding notes so withdrawn not to
have been validly tendered for exchange for purposes of the exchange offer. Any
outstanding notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder (or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, such outstanding notes will be credited to an account maintained with DTC
for outstanding notes) as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn outstanding
notes may be retendered by following one of the procedures described under
"--Procedures for Tendering" above at any time on or prior to the expiration
date.
EXCHANGE AGENT
Bankers Trust Company has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
<TABLE>
<S> <C> <C>
By Overnight Mail or Courier: By Hand: By Mail:
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Corporate Trust & Agency Group Corporate Trust & Agency Group Reorganization Unit
Reorganization Unit Attn: Reorganization Department P.O. Box 292737
648 Grassmere Park Road Receipt & Delivery Window Nashville, TN 37229-2737
Nashville, TN 37211 123 Washington Street, 1st
Floor
New York, NY 10006
By Facsimile Transmission:
(615) 835-3701
Confirm by Telephone:
(615) 835-3572
Information:
(800) 735-7777
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
40
<PAGE> 45
We will pay the cash expenses to be incurred in connection with the
exchange offer. The expenses are estimated in the aggregate to be approximately
$230,000. They include:
- SEC registration fees
- fees and expenses of the exchange agent and trustee
- accounting and legal fees and printing costs
- related fees and expenses
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes (whether imposed on the registered holder
or any other person) if:
- certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered or
- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer
If satisfactory evidence of payment of such taxes is not submitted with the
letter of transmittal, the amount of such transfer taxes will be billed to that
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes under the exchange offer will remain subject to the
restrictions on transfer of such outstanding notes:
- as set forth in the legend printed on the notes as a consequence of the
issuance of the outstanding notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws
- otherwise set forth in the offering circular distributed in connection
with the private offering of the outstanding notes
In general, you may not offer or sell the outstanding notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the outstanding notes under the Securities Act. Based on
interpretations of the SEC staff, exchange notes issued pursuant to the exchange
offer may be offered for resale, resold or otherwise transferred by their
holders (other than any such holder that is our "affiliate" within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that the
holders acquired the exchange notes in the ordinary course of the holders'
business and the holders have no arrangement or understanding with respect to
the distribution of the exchange notes to be acquired in the exchange offer. Any
holder who tenders in the exchange offer for the purpose of participating in a
distribution of the exchange notes:
- could not rely on the applicable interpretations of the SEC
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction
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<PAGE> 46
ACCOUNTING TREATMENT
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes, which is the aggregate principal amount
as reflected in our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in connection with
the exchange offer. We will record the expenses of the exchange offer as
incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that are
not tendered in the exchange offer or to file a registration statement to permit
resales of any untendered outstanding notes.
DESCRIPTION OF THE NOTES
GENERAL
The form and terms of the exchange notes and the outstanding notes are
identical in all material respects, except that the registration rights and
related liquidated damages provisions, and the transfer restrictions applicable
to the outstanding notes, do not apply to the exchange notes. All references to
"Notes" in this section are references to both the outstanding notes and the
exchange notes, unless otherwise specified.
Express Scripts issued the outstanding 9 5/8% Senior Notes due 2009 (the
"Outstanding Notes") under an Indenture (the "Indenture"), among itself, the
Guarantors and Bankers Trust Company, as trustee (the "Trustee"). The terms of
the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture
Act").
Certain terms used in this description are defined under the caption
" -- Certain Definitions." In this description, the word "Company" refers only
to Express Scripts and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, and not this
description, define your rights as holders of these Notes. You may request
copies of these agreements at our address set forth under "Express Scripts."
BRIEF DESCRIPTION OF THESE NOTES
These Notes:
- are senior unsecured obligations of the Company
- are guaranteed on a senior unsecured basis by each of the Guarantors
- rank equally with all other senior unsecured Indebtedness of the Company
and the Guarantors
- rank senior in right of payment to all subordinated Indebtedness of the
Company and the Guarantors
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<PAGE> 47
- are effectively subordinated to the Company's and the Guarantors' secured
Indebtedness, to the extent of the value of the assets securing such
Indebtedness
- will entitle you to the benefits of the Registration Rights Agreement
PRINCIPAL, MATURITY AND INTEREST
The Company issued the Outstanding Notes initially with an aggregate
principal amount of $250 million. The Company issued the Outstanding Notes in
denominations of $1,000 and any integral multiple of $1,000. The Notes will
mature on June 15, 2009.
Subject to our compliance with the covenant described under the caption
"-- Limitation on Indebtedness," we are permitted to issue more Notes under the
Indenture in a principal amount of $250 million (the "Additional Notes").
Interest on these Notes will accrue at the rate of 9 5/8% per annum and
will be payable semiannually in arrears on June 15 and December 15, commencing
on December 15, 1999. The Company will make each interest payment to the holders
of record of these Notes on the immediately preceding June 1 and December 1.
Interest on these Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to June 15, 2004. On and after June 15, 2004, we will be
entitled at our option to redeem all or a portion of these Notes upon not less
than 30 nor more than 60 days' notice at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the 12-month period beginning on June 15 in the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004................................................ 104.8125%
2005................................................ 103.2083
2006................................................ 101.6042
2007 and thereafter................................. 100.0000%
</TABLE>
In addition, before June 15, 2002, we may at our option on one or more
occasions redeem up to 35% of the original principal amount of Notes (including
the original principal amount of any Additional Notes) at a redemption price of
109.625% of the principal amount thereof, plus accrued and unpaid interest to
the redemption date, with the net cash proceeds from one or more Public Equity
Offerings; provided that
(1) at least 65% of the aggregate principal amount of Notes originally
issued (including the original principal amount of any Additional
Notes) pursuant to the Indenture remains outstanding immediately after
the occurrence of each such redemption (other than Notes held, directly
or indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 120 days after the date of the
related Public Equity Offering.
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<PAGE> 48
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note shall state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in principal amount equal to the
unredeemed portion of the original Note in the name of the holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
RANKING
GENERAL
The Notes rank equally in right of payment with all other senior unsecured
Indebtedness of the Company and the Guarantors. The Notes rank senior in right
of payment to all subordinated Indebtedness of the Company and the Guarantors.
The Notes are effectively subordinated to the Company's and the Guarantors'
secured Indebtedness to the extent of the value of the assets securing such
Indebtedness.
As of March 31, 1999, after giving effect to the issuance of the Notes and
the application of the proceeds of the Notes, the Company and the Guarantors
would have had approximately $749 million of Indebtedness on a consolidated
basis (before giving effect to the repayment of $25 million of our indebtedness
with available cash), $500 million of which would have been secured Indebtedness
under the Senior Credit Facility. The Senior Credit Facility is secured by all
of the capital stock of certain of the Company's direct and indirect domestic
subsidiaries. Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company may incur, under certain circumstances
the amount of such Indebtedness could be substantial. See "Certain
Covenants -- Limitation on Indebtedness."
LIABILITIES OF SUBSIDIARIES UNDER NOTES
Claims of creditors of the Company's Subsidiaries, other than the
Guarantors, generally have priority with respect to the assets and earnings of
such Subsidiaries over the claims of creditors of the Company, including holders
of the Notes. Accordingly, the Notes are effectively subordinated to creditors
(including trade creditors) and preferred stockholders, if any, of the Company's
Subsidiaries other than the Guarantors.
At the Issue Date, all of the Company's Restricted Subsidiaries (other than
Diversified NY IPA and Diversified Pharmaceutical Services (Puerto Rico)) were
Guarantors.
GUARANTEES
The obligations of the Company pursuant to the Notes, including the
repurchase obligation resulting from a Change of Control, are unconditionally
guaranteed, on a senior unsecured basis, by the Guarantors (each such guarantee,
a "Guarantee"). The Guarantors agree to pay, in addition to the amount stated
above, any and all expenses (including reasonable counsel fees and expenses)
incurred by the Trustee and the Holders
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<PAGE> 49
in enforcing any rights under the Guarantees. The Guarantees are limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the Guarantors, after giving effect to all of their other contingent and fixed
liabilities (including, without limitation, any guarantees under the Senior
Credit Facility), without rendering the Guarantees voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. If any Guarantee is rendered
voidable, it could be subordinated by a court to all other Indebtedness
(including guarantees and other contingent liabilities) of the relevant
Guarantor, and, depending on the amount of such Indebtedness, the Guarantor's
liability on its Guarantee could be reduced to zero.
Pursuant to the Indenture, a Guarantor may consolidate with, merge with or
into or transfer all or substantially all its assets to any other Person to the
extent described below under "Certain Covenants -- Merger and Consolidation";
provided, however, that if such other Person is not the Company, such
Guarantor's obligations under its Guarantee must be expressly assumed by such
other Person. However, upon the sale or other disposition (including by way of
consolidation or merger) of all the Capital Stock, or the sale or disposition of
all or substantially all the assets, of a Guarantor (in each case other than to
the Company or an Affiliate of the Company) permitted by the Indenture, such
Guarantor will be released and relieved from all its obligations under the
Indenture and its Guarantee and such Guarantee shall terminate; provided,
however, that if the lenders under the Senior Credit Facility release the
guarantee of YourPharmacy.com, Inc. under the Senior Credit Facility,
YourPharmacy.com, Inc. will be automatically released and relieved of all its
obligations under the Indenture and its Guarantee and such Guarantee will
terminate; provided, further, however, if at any time after such release
YourPharmacy.com, Inc. again becomes a guarantor under the Senior Credit
Facility, the Company shall cause YourPharmacy.com, Inc. to unconditionally
guarantee on a senior basis all of the Company's obligations under the Notes and
the Indenture to the same extent as it guarantees the Company's obligations
under the Senior Credit Facility.
BOOK-ENTRY; DELIVERY AND FORM
We initially issued the Outstanding Notes and will issue the Exchange Notes
in the form of one or more global notes (collectively, the "Global Note"). The
Global Note is deposited with the Trustee as custodian for DTC and registered in
the name of a nominee of DTC. Except as set forth below, the Global Note may be
transferred, in whole and not in part, only to DTC or another nominee of DTC.
You may hold your beneficial interests in the Global Note directly through DTC
if you have an account with DTC or indirectly through organizations which have
accounts with DTC.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and "a clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of institutions that have accounts with DTC ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the initial purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's
book-entry system is also available to others such as banks, brokers, dealers
and trust companies (collectively, the "indirect partici-
45
<PAGE> 50
pants") that clear through or maintain a custodial relationship with a
participant, whether directly or indirectly.
Pursuant to procedures established by DTC, upon the deposit of the Global
Note with DTC, DTC will credit, on its book-entry registration and transfer
system, the principal amount of Notes represented by such Global Note to the
accounts of participants. Ownership of beneficial interests in the Global Note
is limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the Global Note is shown on,
and the transfer of those ownership interests will be effected only through,
records maintained by DTC (with respect to participants' interests), the
participants and the indirect participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. In addition, as a beneficial owner
of an interest in the Global Note, you may not transfer that interest except in
accordance with the applicable procedures of DTC and, if applicable, Morgan
Guaranty Trust Company of New York, as operator of the Euroclear system
("Euroclear"). Except as set forth below, as an owner of a beneficial interest
in the Global Note, you are not entitled to have the Notes represented by the
Global Note registered in your name, you will not receive or be entitled to
receive physical delivery of certificated Notes and you are not considered to be
the owner or holder of any Notes under the Global Note. We understand that under
existing industry practice, in the event an owner of a beneficial interest in
the Global Note desires to take any action that DTC, as the holder of the Global
Note, is entitled to take, DTC would authorize the participants to take such
action, and the participants would authorize beneficial owners owning through
such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
We will make payments of principal of, premium, if any, and interest on the
Notes represented by the Global Note registered in the name of and held by DTC
or its nominee to DTC or its nominee, as the case may be, as the registered
owner and holder of the Global Note. Neither we, the Trustee nor any Paying
Agent have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest on the Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
DTC or its nominee. We also expect that payments by participants or indirect
participants to owners of beneficial interests in the Global Note held through
such participants or indirect participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants or indirect participants. We will not have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Note for any Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between DTC and
its participants or indirect participants or the
46
<PAGE> 51
relationship between such participants or indirect participants and the owners
of beneficial interests in the Global Note owning through such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear will be effected in the ordinary way in
accordance with its rules and operating procedures.
DTC has advised us that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the Global Note for certificated
Notes which it will distribute to its participants.
Although DTC and Euroclear are expected to follow the foregoing procedures
in order to facilitate transfers of interests in the Global Note among
participants of DTC and Euroclear, they are under no obligation to perform or
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither we nor the Trustee will have any responsibility or liability
for the performance by DTC, Euroclear or the participants or indirect
participants of their respective obligations under the rules and procedures
governing their respective operations.
DTC management is aware that some computer applications, systems and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributors
(including principal and income payments) to securityholders, book-entry
deliveries and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others, DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
CERTIFICATED SECURITIES
Subject to certain conditions, the Notes represented by the Global Note are
exchangeable for certificated Notes in definitive form of like tenor in
denominations of $1,000 and integral multiples if:
(1) DTC or any successor depository notifies us in writing that it is no
longer willing or able to act as a depositary and we are unable to
locate a qualified successor
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<PAGE> 52
within 90 days or if at any time the Depository ceases to be a clearing
agency registered under the Exchange Act;
(2) we in our discretion at any time determine not to have all the Notes
represented by the Global Note; or
(3) a default entitling the holders of the Notes to accelerate the maturity
thereof has occurred and is continuing.
Any Note that is exchangeable pursuant to the preceding paragraph is
exchangeable for certificated Notes issuable in authorized denominations and
registered in such names as DTC shall direct. Subject to the foregoing, the
Global Note is not exchangeable, except for a Global Note of the same aggregate
denomination to be registered in the name of DTC or its nominee.
Neither we nor the Trustee will be liable for any delay by the related
holder of a Global Note (a "Global Note Holder") or the Depository in
identifying the beneficial owners of the related Notes, and we and the Trustee
may conclusively rely on, and will be protected in relying on, instructions from
such Global Note Holder or of the Depository for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
SAME DAY PAYMENT
The Indenture requires us to make payments in respect of Notes (including
principal, premium, if any, and interest) by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
REGISTERED EXCHANGE OFFER; REGISTRATION RIGHTS
We and the Guarantors have agreed pursuant to a Registration Rights
Agreement that we and the Guarantors will, at our cost:
(1) within 60 days after the Issue Date, file a registration statement (the
"Exchange Offer Registration Statement") with the SEC with respect to a
registered offer (the "Registered Exchange Offer") to exchange the
Outstanding Notes for new notes (the "Exchange Notes") having terms
substantially identical in all material respects to the Outstanding
Notes and guaranteed by each of the Guarantors except that the Exchange
Notes will not contain terms with respect to transfer restrictions;
(2) use our reasonable best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities
Act within 180 days after the Issue Date;
(3) as soon as practicable after the effectiveness of the Exchange Offer
Registration Statement (the "Effectiveness Date"), to offer the
Exchange Notes in exchange for surrender of the Outstanding Notes; and
(4) to keep the Registered Exchange Offer open for not less than 30 days
(or longer if required by applicable law) after the date notice of the
Registered Exchange Offer is mailed to the holders of the Outstanding
Notes.
For each Outstanding Note surrendered to us pursuant to the Registered
Exchange Offer, we will issue to the holder of such Outstanding Note an Exchange
Note having a principal amount equal to that of the surrendered Outstanding
Note. Interest on each Exchange Note will accrue from the last interest payment
date on which interest was paid on the Outstanding Note surrendered in exchange
thereof or, if no interest has been paid
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on such Outstanding Note, from the date interest begins to accrue on such
Outstanding Note.
Under existing SEC interpretations, the Exchange Notes will be freely
transferable by holders other than our affiliates after the Registered Exchange
Offer without further registration under the Securities Act if the holder of the
Exchange Notes represents to us in the Registered Exchange Offer that it is
acquiring the Exchange Notes in the ordinary course of its business, that it has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and that it is not an affiliate of ours, as
such terms are interpreted by the SEC; provided, however, that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Registered
Exchange Offer will have a prospectus delivery requirement with respect to
resales of such Exchange Notes. The SEC has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to Exchange Notes (other than a resale of an unsold allotment from
the original sale of the Outstanding Notes) with the prospectus contained in the
Exchange Offer Registration Statement.
Under the Registration Rights Agreement, we are required to allow
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes for
180 days following the effective date of such Exchange Offer Registration
Statement (or such shorter period during which Participating Broker-Dealers are
required by law to deliver such prospectus).
In the event that applicable interpretations of the staff of the SEC do not
permit us to effect such a Registered Exchange Offer, or if for any other reason
we do not consummate the Registered Exchange Offer no later than 220 days after
the date of original issuance of the outstanding Notes, or if an initial
purchaser shall notify us within 10 business days following consummation of the
Registered Exchange Offer that Outstanding Notes held by it are not eligible to
be exchanged for Exchange Notes in the Registered Exchange Offer, or if any
holder of Outstanding Notes shall notify us that:
(1) such holder is prohibited by law or SEC policy from participating in
the Registered Exchange Offer;
(2) such holder may not resell the Exchange Notes acquired by it in the
Registered Exchange Offer to the public without delivering a prospectus
and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such
holder; or
(3) such holder is a broker-dealer and holds Outstanding Notes that are
part of an unsold allotment from the original sale of the Outstanding
Notes,
then, we and the Guarantors will, at our cost,
(1) as promptly as practicable, file a shelf registration statement (the
"Shelf Registration Statement") with the SEC covering resales of the
Notes or the Exchange Notes, as the case may be;
(2) use our reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act; and
(3) keep the Shelf Registration Statement effective until the earlier of
(a) the time when the Outstanding Notes covered by the Shelf
Registration Statement can be sold pursuant to Rule 144 without any
limitations under clauses (c), (e), (f) and (h) of Rule 144 and (b) two
years from the Issue Date.
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We will, in the event a Shelf Registration Statement is filed, among other
things, provide to each holder for whom such Shelf Registration Statement was
filed copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Outstanding Notes or the Exchange Notes, as the case
may be. A holder selling such Outstanding Notes or Exchange Notes pursuant to
the Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
We will pay additional cash interest on the Notes if:
(1) by August 15, 1999 (60 days after the Issue Date), neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has
been filed with the SEC;
(2) by January 22, 2000 (220 days after the Issue Date), neither the
Registered Exchange Offer is consummated nor the Shelf Registration
Statement is declared effective; or
(3) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to
certain exceptions),
(each such event referred to in clauses (1) through (3) above, a "Registration
Default") from and including the date on which any such Registration Default
shall occur to but excluding the date on which all Registration Defaults have
been cured.
The rate of additional interest will be at the rate of 0.25% per annum for
the first 90-day period immediately following the occurrence of such
Registration Default regardless of the number of such Registration Defaults (and
such rate will increase by an additional 0.25% per annum with respect to each
subsequent 90-day period), until all Registration Defaults have been cured, up
to a maximum additional interest rate of 0.50% per annum. We will pay such
additional interest on regular interest payment dates. Such additional interest
will be in addition to any other interest payable from time to time with respect
to the Outstanding Notes and the Exchange Notes.
All references in the Indenture, in any context, to any payment of
principal, purchase prices in connection with a purchase of Notes, and interest
or any other amount payable on or with respect to any of the Notes shall be
deemed to include payment of any additional cash interest pursuant to the
Registration Rights Agreement.
If we effect the Registered Exchange Offer, we will be entitled to close
the Registered Exchange Offer 30 days after the commencement thereof provided
that we have accepted all Outstanding Notes theretofore validly tendered in
accordance with the terms of the Registered Exchange Offer.
This summary of certain provisions of the Registration Rights Agreement is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Registration Rights Agreement, a copy of which is available from us upon
request.
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CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that we purchase all or a
part of such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase:
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) or any two or more such persons acting in concert, other
than one or more Permitted Holders, becomes the beneficial owner
(within the meaning of Rule 13d-3 of the Exchange Act), directly or
indirectly, of more than 35% of the total voting power of the then
outstanding Voting Stock of the Company and the Permitted Holders
beneficially own (within the meaning of Rule 13d-3 of the Exchange
Act), directly or indirectly, a lesser percentage of the total voting
power of the outstanding Voting Stock of the Company than such person
or persons; provided, that the acquisition of beneficial ownership of
shares of Voting Stock of the Company beneficially owned (or which
immediately prior to such acquisition were beneficially owned) by a
Permitted Holder by one or more Persons from time to time shall not
constitute a Change of Control;
(2) if the Permitted Holders do not beneficially own (within the meaning of
Rule 13d-3 under the Exchange Act), directly or indirectly, more than
50% of the total voting power of the then outstanding Voting Stock of
the Company, during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
of the Company (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders
of the Company was approved by a vote of the majority of the directors
of the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office;
(3) the adoption by the holders of Capital Stock of the Company of any plan
or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the Indenture); or
(4) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company and its
Subsidiaries, taken as a whole, to another Person (other than to a
Wholly Owned Subsidiary of the Company), and, in the case of any such
merger or consolidation, the securities of the Company that are
outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company
are changed into or exchanged for cash, securities or property, unless
pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of
the surviving corporation that represent immediately after such
transaction (a) at least 35% of the aggregate voting power of the
Voting Stock of the surviving corporation and (b) a greater percentage
of the aggregate voting power of the Voting Stock of the surviving
corporation than the percentage of the aggregate voting power of the
Voting Stock beneficially owned by any other "person" (as such term is
used in Section 13(d) and 14(d) under the Exchange Act) or any other
two or more such persons acting in concert.
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Within 30 days following any Change of Control (unless the Company shall
have provided an irrevocable redemption notice to the Trustee with respect to a
redemption of all outstanding Notes at a time when such redemption is permitted
under the Indenture), the Company shall mail a notice to each Holder with a copy
to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase;
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income,
cash flow and capitalization after giving effect to such Change of
Control);
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with the
covenant described hereunder, that a Holder must follow in order to
have its Notes purchased.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
Subject to the limitations discussed below, the Company could, in the
future, enter into certain transactions, including acquisitions, refinancings or
other recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
Restrictions on the ability of the Company and its Restricted Subsidiaries to
incur additional Indebtedness are contained in the covenant described under
"-- Limitation on Indebtedness." Such restrictions can only be waived with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged transaction.
The Senior Credit Facility contains, and future indebtedness of the Company
may contain, prohibitions on the occurrence of certain events that would
constitute a Change of Control or require such indebtedness to be repurchased
upon a Change of Control. Moreover, the exercise by the Holders of their right
to require the Company to purchase the Notes could cause a default under such
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such purchase on the Company. Finally, the Company's ability
to pay cash to the holders of the Notes following the occurrence of a Change of
Control may be limited by the Company's then existing financial resources.
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There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases. For more details, see "Risk
Factors -- Limitations on Repurchases of Notes Upon a Change of Control."
The provisions under the Indenture relating to the Company's obligation to
make an offer to purchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of our assets will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred.
CERTAIN COVENANTS
COVENANT REMOVAL. Set forth below are summaries of certain covenants
contained in the Indenture. From and after the time that (a) the Notes have
Investment Grade Ratings from both Rating Agencies and (b) there shall not exist
a Default or Event of Default under the Indenture, the Company and the
Restricted Subsidiaries will not be subject to the provisions of the Indenture
applicable to them described under "Limitation on Indebtedness" (including the
application of paragraph (a) thereof pursuant to clause (x) to the proviso to
the third sentence in the definition of "Unrestricted Subsidiary"), "Limitation
on Restricted Payments," "Limitation on Sale or Issuance of Capital Stock of
Restricted Subsidiaries," "Limitation on Sales of Assets and Subsidiary Stock,"
"Limitation on Transactions with Affiliates," "Limitation on Restrictions on
Distributions from Restricted Subsidiaries," clauses (2) and (3) of the first
paragraph and clause (2) of the fourth paragraph under "Merger and
Consolidation" and "Future Guarantors" (collectively, the "Suspended
Covenants"). In addition, the Restricted Subsidiaries shall be released from
their Guarantees at the time referred to in the preceding sentence.
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Restricted Subsidiaries may Incur Indebtedness if, on the date
of such Incurrence and after giving effect thereto, the Consolidated Coverage
Ratio exceeds 2.50 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness of the Company and the Guarantors incurred pursuant to the
Senior Credit Facility; provided, however, that, after giving effect to
any such Incurrence, the aggregate principal amount of such
Indebtedness then outstanding does not exceed (a) in the case of the
term loan facilities, $406 million at any one time outstanding and (b)
in the case of the revolving loan facility, the sum of (x) the greater
of (i) $300 million at any one time outstanding and (ii) the sum of (A)
50% of the book value of the inventory of the Company and its
Restricted Subsidiaries and (B) 75% of the book value of the accounts
receivables of the Company and its Restricted Subsidiaries and (y) any
amount permitted to be incurred pursuant to clause (a) of this
paragraph (1) but not outstanding thereunder;
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(2) Indebtedness owed to and held by the Company or any Restricted
Subsidiary; provided, however, that (i) any subsequent issuance or
transfer of any Capital Stock which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or a
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the obligor thereon and (ii) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Notes;
(3) the Notes (other than Additional Notes) and the Guarantees (other than
in respect of Additional Notes);
(4) Indebtedness of the Company or any of its Restricted Subsidiaries
outstanding on the Issue Date (other than Indebtedness described in
clause (1), (2) or (3) of this covenant) other than Indebtedness to be
repaid from the proceeds of the sale of the Notes as described in this
Offering Circular;
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) above or pursuant to clause (3) or (4) of this
covenant or this clause (5);
(6) Indebtedness under Interest Rate Agreements or Currency Agreements
directly related to Indebtedness permitted to be Incurred by the
Company pursuant to this covenant;
(7) Indebtedness of the Company or any of its Restricted Subsidiaries
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business; provided,
however, that such Indebtedness is extinguished within ten business
days of incurrence;
(8) Indebtedness of the Company or any of its Restricted Subsidiaries in
order to finance insurance premiums and other Indebtedness represented
by letters of credit for the account of the Company or such Restricted
Subsidiary, as the case may be, in order to provide security for
workers' compensation claims or payment obligations in connection with
self-insurance or similar requirements, all in the ordinary course of
business and so long as such Indebtedness is not an obligation for
money borrowed;
(9) obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with
customary industry practice in amounts and for purposes customary in
the Company's industry and so long as not an obligation for money
borrowed;
(10) Indebtedness arising from agreements of the Company or any of its
Restricted Subsidiaries providing for adjustment of purchase price,
earnout or other similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets or
a Restricted Subsidiary of the Company or any of its Restricted
Subsidiaries, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition;
provided, however, that the maximum assumable liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and its Restricted Subsidiaries in
connection with such disposition;
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(11) Capital Lease Obligations of the Company or any of its Restricted
Subsidiaries incurred pursuant to sale-leaseback transactions in the
ordinary course of business in respect of property or assets owned by
the Company or its Restricted Subsidiaries as of the Issue Date in an
aggregate principal amount not to exceed $60.0 million at any one time
outstanding under this clause (11);
(12) Purchase Money Obligations and Capital Lease Obligations of the
Company or any of its Restricted Subsidiaries in respect of property
or assets acquired or leased after the Issue Date incurred in the
ordinary course of business; and
(13) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) of the Company or any Restricted Subsidiary in an
aggregate principal amount which does not exceed $50.0 million at any
one time outstanding under this clause (13).
(c) Notwithstanding the foregoing, neither the Company nor any Restricted
Subsidiary shall Incur any Indebtedness pursuant to the foregoing paragraph (b)
if the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations unless such Indebtedness shall be subordinated to the
Notes or the Guarantees, as applicable, to at least the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (1)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (2) an item
of Indebtedness may be divided and classified in more than one of the types of
Indebtedness described above. A guarantee of Indebtedness permitted by this
covenant to be Incurred by the Company or a Restricted Subsidiary is not
considered a separate Incurrence for purposes of this covenant.
(e) Notwithstanding paragraphs (a) and (b) above, neither the Guarantors
nor the Company shall Incur any Subordinated Obligation unless such Subordinated
Obligation is expressly subordinated in right of payment to the Notes and/or the
Guarantees, as the case may be.
LIMITATION ON LIENS.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit to
exist any Lien upon or with respect to any of the assets of the Company or any
such Restricted Subsidiary, whether now owned or hereafter acquired, or on any
income or profits therefrom, other than Liens which constitute Permitted Liens
at the date such Liens are created, unless contemporaneously therewith or prior
thereto all payments due under the Indenture and the Notes are secured on an
equal and ratable basis with the obligation or liability so secured until such
time as such obligation or liability is no longer secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS.
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "Limitation
on Indebtedness"; or
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(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the Issue Date to the end of the most
recent fiscal quarter for which financial statements are available
ending prior to the date of such Restricted Payment (or, in case
such Consolidated Net Income shall be a deficit, minus 100% of such
deficit);
(B) the aggregate Net Cash Proceeds and the fair market value (as
determined in good faith by the Board of Directors of the Company)
of tangible property other than cash received by the Company from
capital contributions or the issuance or sale of its Capital Stock
(other than Disqualified Capital Stock) subsequent to the Issue Date
(other than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership plan
or to a trust established by the Company or any of its Subsidiaries
for the benefit of their employees to the extent such sale is
financed by loans from or guaranteed by the Company unless such
loans have been repaid with cash on or prior to the date of
determination);
(C) the amount by which Indebtedness of the Company or its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a
Restricted Subsidiary) is reduced on the Company's balance sheet
upon the conversion or exchange (other than by a Subsidiary of the
Company) subsequent to the Issue Date of any Indebtedness of the
Company or its Restricted Subsidiaries convertible or exchangeable
for Capital Stock (other than Disqualified Capital Stock) of the
Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or
exchange); and
(D) an amount equal to the sum of (1) the net reduction in Investments
made after the Issue Date in Unrestricted Subsidiaries and other
Persons constituting Restricted Payments, excluding Investments made
pursuant to clause (b)(7) or (b)(8) below, resulting from dividends,
repayments of loans or advances or other transfers of assets, in
each case to the Company or any Restricted Subsidiary from such
Unrestricted Subsidiaries or other Persons or received by the
Company or any Restricted Subsidiary from the disposition of any
such Investment, and (2) the portion, proportionate to the Company's
equity interest, of the fair market value of the net assets of an
Unrestricted Subsidiary or other Person at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary or
such other Person becomes a Restricted Subsidiary, but only to the
extent of Investments made in such Unrestricted Subsidiary or other
Person after the Issue Date and in any event excluding Investments
made pursuant to clause (b)(7) or (b)(8) below; provided, however,
that the foregoing sum shall not exceed the aggregate amount of
Investments made after the Issue Date and treated as Restricted
Payments by the Company or any Restricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any redemption, repurchase or other acquisition of any Capital Stock or
Subordinated Obligations of the Company made out of the proceeds of the
substantially concurrent sale of, or made by exchange for, Capital
Stock of the
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Company (other than Disqualified Capital Stock and other than Capital
Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees to the extent such
sale is financed by loans from or guaranteed by the Company unless such
loans have been repaid with cash on or prior to the date of
determination); provided, however, that the Net Cash Proceeds from such
sale shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Subordinated Obligations of the Company which is permitted to be
Incurred pursuant to the covenant described under "Limitation on
Indebtedness";
(3) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant;
(4) repurchases by the Company of its Capital Stock (i) from employees of
the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment
of such employees or pursuant to any employment agreement between the
Company and such employee, in an amount not to exceed $5 million in any
calendar year and $10 million in the aggregate, plus the aggregate cash
proceeds from any reissuance during such calendar year of its Capital
Stock by the Company to employees, officers or directors of the Company
and its Subsidiaries (without duplication of amounts included in clause
(3)(B) of paragraph (a) above) and (ii) from its Chief Executive
Officer upon death, disability or termination of employment of such
Chief Executive Officer or pursuant to any employment agreement between
the Company and such Chief Executive Officer but only up to the amount
of the Capital Stock owned by such Chief Executive Officer on the Issue
Date;
(5) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Capital Stock of the Company issued in
compliance with the terms of the Indenture to the extent such dividends
are included in the definition of "Consolidated Interest Expense";
(6) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise
price thereof;
(7) so long as no Default shall have occurred or be continuing or would
result therefrom, Investments in an aggregate amount outstanding at any
time not exceeding $25 million; and
(8) so long as no Default shall have occurred or be continuing or would
result therefrom, the making of Restricted Payments in an aggregate
amount not to exceed $50 million.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (a)(3) above, amounts expended
pursuant to clauses (3), (4), (7) and (8) (but not pursuant to clauses (1), (2),
(5) and (6)) of the immediately preceding paragraph shall be included in such
calculation.
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LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any encumbrance
or restriction on the ability of any Restricted Subsidiary to (a) pay dividends
or make any other distributions on its Capital Stock to the Company or a
Restricted Subsidiary or pay any Indebtedness owed to the Company or a
Restricted Subsidiary, (b) make any loans or advances to the Company or a
Restricted Subsidiary or (c) transfer any of its property or assets to the
Company or a Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date as in effect on the Issue Date;
(2) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration of, or to provide all or any portion of the
funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred
to in clause (1) or (2) of this covenant or this clause (3) or
contained in any amendment to an agreement referred to in clause (1) or
(2) of this covenant or this clause (3); provided, however, that the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or amendment are
no less favorable in the aggregate to the Holders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
such predecessor agreements;
(4) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the
property leased thereunder;
(5) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of
all or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(7) purchase money obligations for property acquired in the ordinary course
of business that impose restrictions of the nature described in clause
(c) above on the property so acquired;
(8) encumbrances or restrictions imposed by operation of any applicable
law, rule, regulation or order.
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LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including the value of all non-cash consideration), as determined in
good faith by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, of the shares and assets subject to
such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash equivalents;
and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be)
(A) first, to either (x) (i) prepay the Senior Credit Facility (and
permanently reduce the commitments thereunder) and/or (ii) prepay,
repay, redeem or purchase (and permanently reduce the commitments
under) any other Indebtedness (other than any Disqualified Capital
Stock) of the Company which ranks equally in right of payment with
the Notes or Indebtedness (other than Disqualified Capital Stock) of
a Restricted Subsidiary (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) in an amount not to
exceed the Other Senior Debt Pro Rata Share or (y) acquire
Additional Assets, in each case within one year from the later of
the date of such Asset Disposition or the receipt of such Net
Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A) above, to make an
offer pursuant to paragraph (b) below to the Holders to purchase
Notes pursuant to and subject to the conditions contained in the
Indenture; and
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) or (B) above, to any
other application or use not prohibited by the Indenture.
Notwithstanding the foregoing provisions of this paragraph, the Company and
the Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance with this paragraph (b) except to the extent that the
aggregate Net Available Cash from all Asset Dispositions which is not applied in
accordance with this paragraph exceeds $20 million (at which time, the entire
unutilized Net Available Cash, and not just the amount in excess of $20 million,
shall be applied pursuant to this paragraph).
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary (other than Subordinated Obligations) and the release of
the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are converted by the Company or such Restricted Subsidiary into cash within 90
days of closing the transaction.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes pursuant to clause (a)(3)(B) above, the Company will be required to
purchase Notes tendered pursuant to an offer by the Company for the Notes at a
purchase price of 100% of their principal amount (without premium) plus accrued
but unpaid interest, if any, in
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accordance with the procedures (including prorating in the event of over
subscription) set forth in the Indenture.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any Affiliate of the Company (an "Affiliate Transaction") unless
the terms thereof:
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in a
comparable transaction on an arm's-length basis with a Person who is
not such an Affiliate;
(2) if such Affiliate Transaction (or series of related Affiliate
Transactions) involves an amount in excess of $5.0 million (i) are set
forth in writing and (ii) have been approved by a majority of the
members of the Board of Directors having no personal stake in such
Affiliate Transaction; and
(3) if such Affiliate Transaction (or series of related Affiliate
Transactions) involves an amount in excess of $10.0 million, have been
determined by a nationally recognized investment banking firm to be no
less favorable in any material respect to the Company or such
Restricted Subsidiary than that which would have been obtained in a
comparable transaction with an unrelated Person.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any Permitted Investment or Restricted Payment not otherwise prohibited
pursuant to the covenant described under "Limitation on Restricted
Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
entered into in the ordinary course of business and approved by the
Board of Directors of the Company;
(3) reasonable fees and compensation paid to and indemnity provided on
behalf of officers, directors, employees, agents or consultants of the
Company or any Restricted Subsidiary of the Company as determined in
good faith by the Company's Board of Directors;
(4) any Affiliate Transaction exclusively between the Company and a
Restricted Subsidiary or exclusively between Restricted Subsidiaries;
and
(5) the issuance or sale of any Capital Stock (other than Disqualified
Capital Stock) of the Company.
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LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
The Company will not sell or otherwise dispose of any Capital Stock of a
Restricted Subsidiary, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
except:
(1) to the Company or a Restricted Subsidiary;
(2) directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary;
(3) in compliance with or to the extent not restricted by the covenant
described under "-- Limitation on Sales of Assets and Subsidiary Stock"
and immediately after giving effect to such issuance or sale, such
Restricted Subsidiary either continues to be a Restricted Subsidiary or
if such Restricted Subsidiary would no longer be a Restricted
Subsidiary, then the Investment of the Company in such Person (after
giving effect to such issuance or sale) would have been permitted to be
made under the "-- Limitation on Restricted Payments" covenant as if
made on the date of such issuance or sale.
Notwithstanding the preceding paragraph, the Company may sell all the
Voting Stock of a Restricted Subsidiary as long as the Company complies with the
terms of the covenant described under "-- Limitation on Sales of Assets and
Subsidiary Stock."
MERGER AND CONSOLIDATION.
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, its assets
substantially as an entirety to, any Person, unless:
(1) either the Company shall be the surviving Person, or the resulting,
surviving or transferee Person (the "Successor Company") shall be a
corporation organized and existing under the laws of the United States
of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Notes, the Indenture and the Registration Rights Agreement;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or
any Restricted Subsidiary as a result of such transaction as having
been Incurred by such Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default shall have occurred and be
continuing; and
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "Limitation
on Indebtedness."
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but in the case of a conveyance, transfer or
lease, the Company shall not be released from the obligation to pay the
principal of and interest on the Notes.
Notwithstanding the foregoing, (1) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (2) the Company may merge with an Affiliate
incorporated for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.
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The Company will not permit any Guarantor to consolidate with or merge with
or into, or convey, transfer, lease, in one transaction or a series of
transactions, all or substantially all of its assets to, any Person unless:
(1) the resulting, surviving or transferee Person shall be a corporation
organized and existing under the laws of the jurisdiction under which
the Guarantor was organized or under the laws of the United States of
America, any State thereof or the District of Columbia, and such Person
(if not the Guarantor) shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in a form
satisfactory to the Trustee, all the obligations of the Guarantor, if
any, under its Guarantee, the Indenture and the Registration Rights
Agreement; and
(2) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been
Incurred by such Person at the time of such transaction), no Default
shall have occurred and be continuing.
The provisions of the immediately preceding clauses (1) and (2) shall not
apply to any transactions that constitute an Asset Disposition if the Company
complied with the applicable provisions of the covenant described under
"Limitation on Sales of Assets and Subsidiary Stock" above and such Asset
Disposition shall not be to an Affiliate of the Company.
Notwithstanding the foregoing, any Guarantor may merge into or transfer all
or part of its properties and assets to the Company or another Guarantor.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
FUTURE GUARANTORS
If the Company or any of its Restricted Subsidiaries transfers or causes to
be transferred, in one transaction or a series of related transactions, any
property to any domestic Restricted Subsidiary that is not the Company or a
Guarantor, or if the Company or any of its Restricted Subsidiaries shall
organize, acquire or otherwise invest in another domestic Restricted Subsidiary,
then such transferee or acquired or other Restricted Subsidiary will (1) by a
supplemental indenture executed and delivered to the Trustee, in form
satisfactory to the Trustee, unconditionally guarantee on a senior basis all of
the Company's obligations under the Notes and the Indenture; and (2) deliver to
the Trustee an officers certificate and an opinion of counsel each stating that
such supplemental indenture complies with the Indenture. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC (unless the SEC will not accept such a filing, in which case the
Company will provide such documents to the Trustee) and provide within 15 days
to the Trustee and Holders such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and
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provided at the times specified for the filing of such information, documents
and reports under such Sections. In addition, for so long as any Notes remain
outstanding, the Company will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any
beneficial owner of Notes, if not obtainable from the SEC, information of the
type that would be filed with the SEC pursuant to the foregoing provisions, upon
the request of any such holder.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due, continued
for 30 days,
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase,
upon acceleration or otherwise,
(3) the failure by the Company or any Guarantor to comply with its
obligations under "Certain Covenants -- Merger and Consolidation"
above,
(4) the failure by the Company to comply for 30 days after notice with any
of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase Notes) or under "Certain
Covenants -- Limitation on Indebtedness," "-- Limitation on Liens,"
"-- Limitation on Restricted Payments," "-- Limitation on Restrictions
on Distributions from Restricted Subsidiaries," "-- Limitation on Sales
of Assets and Subsidiary Stock," "-- Limitation on Transactions with
Affiliates" or "-- Limitation on the Sale or Issuance of Capital Stock
of Restricted Subsidiaries,"
(5) the failure by the Company to comply for 60 days after notice with its
other agreements contained in the Indenture,
(6) Indebtedness of the Company or any Restricted Subsidiary is not paid
within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $15 million
(the "cross-acceleration provision"),
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, any Guarantor or any Significant Subsidiary (the "bankruptcy
provisions"),
(8) any judgment or decree for the payment of money in excess of $15
million in the aggregate (net of any amounts with respect to which a
reputable and creditworthy insurance company has acknowledged liability
in writing) is entered against the Company, any Guarantor or any
Significant Subsidiary, remains outstanding for a period of 60 days
following entry of such judgment and is not discharged, bonded, waived
or stayed within 30 days after notice (the "judgment default
provision"), or
(9) a Guarantee ceases to be in full force and effect or is declared to be
null and void and unenforceable or the Guarantee is found to be invalid
or a Guarantor denies its liability under its Guarantee (other than by
reason of release of the Guarantor in accordance with the terms of the
Indenture).
However, a default under clause (4) or (5) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes
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notify the Company of the default and the Company or such Guarantor does not
cure such default within the time specified after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(7) above with respect to the Company) occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the outstanding Notes may
declare the principal of and accrued but unpaid interest on all the Notes to be
due and payable. Upon such a declaration, such principal and interest shall be
due and payable immediately. If an Event of Default described in clause (7)
above with respect to the Company occurs and is continuing, the principal of and
interest on all the Notes will by that very fact become and be immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration and its
consequences with respect to the Notes and their consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder of a Note may pursue
any remedy with respect to the Indenture or the Notes unless
(1) such Holder has previously given the Trustee notice that an Event of
Default is continuing,
(2) Holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy,
(3) such Holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense,
(4) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity, and
(5) the Holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its trust officers determines that withholding notice
is not opposed to the interest of the Holders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which
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would constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the Holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
Holder of an outstanding Note affected thereby, no amendment may, among other
things,
(1) reduce the amount of Notes whose Holders must consent to an amendment,
(2) reduce the rate of or change the time for payment of interest on any
Note,
(3) reduce the principal of or change the Stated Maturity of any Note,
(4) reduce the amount payable upon the redemption of any Note or change the
time at which any Note may be redeemed as described under " -- Optional
Redemption,"
(5) make any Note payable in money other than that stated in the Note,
(6) impair the right of any Holder to receive payment of principal of and
interest on such Holder's Notes on or after the due dates therefor or
to institute suit for the enforcement of any payment on or with respect
to such Holder's Notes,
(7) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions,
(8) affect the ranking of the Notes in any material respect, or
(9) release any Guarantor from any of its obligations under its Guarantee
or the Indenture other than in accordance with the terms of the
Indenture.
Without the consent of any Holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor Person of the obligations of the
Company and/or the Guarantors under the Indenture in accordance with "Certain
Covenants -- Merger and Consolidation," to provide for uncertificated Notes in
addition to or in place of certificated Notes (provided that the uncertificated
Notes are issued in registered form for purposes of Section 163(f) of the Code,
or in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add guarantees with respect to the Notes, to
secure the Notes, to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power conferred upon the Company, to make
any change that does not adversely affect the rights of any Holder or to comply
with any requirement of the SEC in connection with the qualification of the
Indenture under the Trust Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders a notice briefly describing such amendment. However,
the failure to give such notice to all Holders, or any defect therein, will not
impair or affect the validity of the amendment.
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TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges. Subject to the rules and regulations established by DTC, the Company
will not be required to transfer or exchange any Note selected for redemption or
to transfer or exchange any Note for a period of 15 days prior to a selection of
Notes to be redeemed.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), and the Guarantors may terminate their
obligations under the Guarantees, except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes. The
Company at any time may terminate its obligations under "Change of Control" and
under the covenants described under "Certain Covenants" (other than the covenant
described under " -- Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under " -- Defaults"
above and the limitations contained in clauses (2) and (3) of the first
paragraph and clause (2) of the fourth paragraph under " -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (6), (7) (with respect only to
Significant Subsidiaries) or (8) under "Defaults" above or because of the
failure of the Company to comply with clauses (2) and (3) of the first paragraph
and clause (2) of the fourth paragraph under "Certain Covenants -- Merger and
Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee U.S. dollars or U.S.
Government Obligations, or a combination thereof, for the payment of principal
of, premium, if any, and interest on the Notes to redemption or maturity, as the
case may be, and must comply with certain other conditions, including delivery
to the Trustee of an opinion of counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance and will be subject to federal income tax on the
same amounts and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when:
(1) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or
paid) have been delivered
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to the Trustee for cancellation or (b) all Notes not theretofore
delivered to the Trustee for cancellation have become due and payable
or shall become due and payable within one year and the Company has
irrevocably deposited or caused to be deposited with the Trustee an
amount in U.S. dollars sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for the principal of, premium, if any, and interest to
the date of deposit;
(2) the Company has paid or caused to be paid all other sums payable under
the Indenture by the Company; and
(3) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel each stating that all conditions precedent under
the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the SEC that such waiver is against public policy.
CONCERNING THE TRUSTEE
Bankers Trust Company is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the SEC for permission to
continue or resign.
The Holders of a majority in principal amount of the outstanding Notes have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain exceptions.
The Indenture provides that if an Event of Default occurs (and is not cured),
the Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request of any Holder of Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense and then only to the extent required
by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.
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CERTAIN DEFINITIONS
"ADDITIONAL ASSETS" means
(1) any property or assets (other than Indebtedness and Capital Stock);
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET DISPOSITION" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of business
of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted
Subsidiary.
Notwithstanding the foregoing, Asset Disposition shall not include:
(1) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Restricted Subsidiary;
(2) for purposes of the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Permitted Investment or a Restricted
Payment permitted by the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" or a disposition
specifically excepted from the definition of Restricted Payment;
(3) a transaction or series of related transactions for which the Company
or its Restricted Subsidiaries receive aggregate consideration less
than or equal to $500,000;
(4) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under
"Certain Covenants -- Merger and Consolidation";
(5) the disposition of Temporary Cash Investments;
(6) a disposition of obsolete or worn out equipment or equipment that is
no longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries and that is disposed of in each case in the
ordinary course of business;
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(7) an issuance of Capital Stock by a Restricted Subsidiary of the Company
to the Company or to a Wholly-Owned Subsidiary;
(8) a disposition of any Capital Stock of YourPharmacy.com, Inc. or any
corporation, partnership or limited liability company which is the
successor to the business conducted or contemplated to be conducted as
of the Issue Date by YourPharmacy.com, Inc.;
(9) a sale or lease-back transaction involving property owned by the
Company located at 4500 Alexander Blvd., NE in Albuquerque, New
Mexico;
(10) a sale or disposition involving property owned by the Company located
at the Company's site in Plymouth, Minnesota; or
(11) dispositions in connection with Permitted Liens.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (x) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (y) the sum of all such payments.
"BOARD OF DIRECTORS" means the Board of Directors of the Company, as
applicable, or any committee thereof duly authorized to act on behalf of such
Board.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"CODE" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of Consolidated EBITDA for the period of the
most recent four consecutive fiscal quarters ending with the most recent fiscal
quarter for which financial statements are available prior to the date of such
determination to (y) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that
(1) if the Company or any Restricted Subsidiary (x) has Incurred any
Indebtedness since the beginning of such period that remains
outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or
both, Consolidated EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to
such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period (and, if such Indebtedness is revolving
Indebtedness, the amount of Indebtedness deemed to be outstanding for
such period shall be
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the average outstanding amount of such Indebtedness during such period)
and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such
period or (y) has repaid, repurchased, defeased or otherwise discharged
any Indebtedness since the beginning of the period (including, without
limitation, Indebtedness that has been repaid, repurchased, defeased or
otherwise discharged in connection with an Asset Disposition) that is
no longer outstanding on such date of determination, or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio involves a discharge of Indebtedness (other than
Indebtedness Incurred for working capital purposes unless such
Indebtedness has been permanently repaid and has not been replaced),
Consolidated EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving effect to such discharge of such
Indebtedness, including with the proceeds of such new Indebtedness, as
if such discharge had occurred on the first day of such period;
(2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the Consolidated
EBITDA for such period shall be reduced by an amount equal to the
Consolidated EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or
increased by an amount equal to the Consolidated EBITDA (if negative)
directly attributable thereto for such period;
(3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, Consolidated
EBITDA for such period shall be calculated after giving pro forma
effect thereto as if such Investment or acquisition occurred on the
first day of such period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company
or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition, Investment or acquisition of assets
that would have required an adjustment pursuant to clause (2) or (3)
above if made by the Company or a Restricted Subsidiary during such
period, Consolidated EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition occurred on the first
day of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be made in
accordance with Article 11 of Regulation S-X promulgated under the Securities
Act. If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest on such Indebtedness shall be calculated as if
the average rate in effect during the period had been the applicable rate for
the entire period (taking into account any fixed rate established by an Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months, in which case such fixed rate shall
be used).
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"CONSOLIDATED EBITDA" means, for any period, the sum of Consolidated Net
Income plus the following to the extent deducted in calculating such
Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) provisions for taxes based on income;
(3) total depreciation expense;
(4) total amortization expense;
(5) other non-cash items incurred in the ordinary course of business
reducing Consolidated Net Income less other non-cash items increasing
Consolidated Net Income; and
(6) for any period that includes fiscal quarters ending on or prior to
March 31, 2000, retention bonuses in an aggregate amount up to $10.0
million to the extent actually paid or accrued in such period to key
employees of DPS,
all of the foregoing as determined on a consolidated basis for the Company and
its Restricted Subsidiaries in conformity with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization of, a Restricted Subsidiary of the Company shall
be added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP, whether
expensed directly or included as a component of cost of goods sold, plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Restricted Subsidiaries, without duplication,
(1) interest expense attributable to Capital Lease Obligations (which shall
be in each case deemed to accrue at an interest rate determined in good
faith by the Company to be the rate of interest implicit in each such
Capital Lease Obligation in accordance with GAAP);
(2) amortization of debt discount and debt issuance costs;
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(5) net costs associated with Interest Rate Agreements and Currency
Agreements;
(6) dividends paid or payable in respect of any Disqualified Capital Stock
of the Company (other than dividends paid in Qualified Capital Stock)
and all dividends paid or payable by Restricted Subsidiaries in respect
of any Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, in each case multiplied by a fraction, the
numerator of which is one and the denominator of which is one minus the
then current effective federal, state and local tax rate of the
Company, expressed as a decimal; and
(7) interest accruing on any Indebtedness Incurred after the Issue Date of
any other Person to the extent such Indebtedness is guaranteed by the
Company or any Restricted Subsidiary.
"CONSOLIDATED NET INCOME" means, for any period, the net income (or loss)
of the Company and its Restricted Subsidiaries on a consolidated basis for such
period taken as a
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single accounting period determined in conformity with GAAP; provided that there
shall be excluded:
(1) the income (or loss) of any Person (other than a Restricted Subsidiary
of the Company) in which any other Person (other than the Company or
any of its Restricted Subsidiaries) has a joint interest, except to the
extent of the amount of dividends or other distributions actually paid
to the Company or any of its Restricted Subsidiaries (subject to the
exclusion in clause (3) below) by such Person during such period,
(2) the income (or loss) of any Person accrued prior to the date it becomes
a Restricted Subsidiary of the Company or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or
that Person's assets are acquired by the Company or any of its
Restricted Subsidiaries,
(3) the income of any Restricted Subsidiary of the Company to the extent
that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that income is not at the time
permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary, and
(4) any after-tax gains or losses attributable to Asset Dispositions or
returned surplus assets.
"CURRENCY AGREEMENT" means in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DEPOSITORY" means The Depository Trust Company, its nominees and their
respective successors.
"DISQUALIFIED CAPITAL STOCK" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,
(2) is convertible or exchangeable for Indebtedness or Disqualified Capital
Stock (excluding Capital Stock converted or exchanged solely at the
option of the Company or a Restricted Subsidiary) or
(3) is redeemable or must be repurchased at the option of the holder
thereof, in whole or in part,
in each case on or prior to the Stated Maturity of the Notes; provided, however,
that (1) any Capital Stock that would not constitute Disqualified Capital Stock
but for provisions thereof giving holders thereof the right to require such
Person to purchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Capital Stock if the "asset sale" or "change
of control" provisions applicable to such Capital Stock are not more favorable
to the holders of such Capital Stock than the provisions described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
" -- Change of Control;" (2) only the portion of Capital Stock which so matures
or is mandatorily redeemable, is so convertible or exchangeable or is so
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redeemable at the option of the holder thereof prior to such date shall be
deemed to be Disqualified Capital Stock; and (3) if such Capital Stock is issued
to any employee or to any plan for the benefit of employees of the Company or
its Subsidiaries or by any such plan to such employees, such Capital Stock shall
not constitute Disqualified Capital Stock solely because it may be required to
be repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations or as a result of such employee's termination, death or
disability.
"DPS" means, collectively, Diversified Pharmaceutical Services, Inc. and
Diversified Pharmaceutical Services (Puerto Rico) Inc.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor statute.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants,
(2) statements and pronouncements of the Financial Accounting Standards
Board, and
(3) such other statements by such other entity as approved by a significant
segment of the accounting profession.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue
of agreements to keep-well, to take-or-pay or to maintain financial
statement conditions or otherwise) or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "guarantee"
used as a verb has a corresponding meaning. The term "guarantor" shall mean any
Person guaranteeing any obligation.
"GUARANTORS" means (1) each of the Company's domestic Restricted
Subsidiaries existing on the Issue Date (other than Practice Patterns Science,
Inc., Great Plains Reinsurance Company, ValueRx of Michigan, Inc., Diversified
NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico) Inc.) and (2)
any Person that becomes a domestic Restricted Subsidiary of the Company that
pursuant to the covenant described under "Future Guarantors" or otherwise in the
future executes a supplemental indenture in which such Restricted Subsidiary
unconditionally guarantees on a senior basis the Company's obligations under the
Notes and the Indenture; provided that any Person constituting a Guarantor as
described above shall cease to constitute a Guarantor when its respective
Guarantee is released in accordance with the terms of the Indenture.
"HOLDER" or "NOTEHOLDER" means the Person in whose name a Note is
registered on the Registrar's books.
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"INCUR" means issue, assume, guarantee, incur or otherwise become liable;
provided, however, that any Indebtedness or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary. The term "Incurrence" when used as a noun
shall have a correlative meaning. The accretion of principal of a non-interest
bearing or other discount security shall not be deemed the Incurrence of
Indebtedness.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication),
(1) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or
liable;
(2) all Capital Lease Obligations of such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property (which purchase price is due more than one
year after taking title of such property), all conditional sale
obligations of such Person and all obligations of such Person under any
title retention agreement (but excluding trade accounts payable arising
in the ordinary course of business not overdue by more than 90 days);
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through
(3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon, or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the 30th Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Capital
Stock or, with respect to any Restricted Subsidiary of such Person, any
Preferred Stock (but excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
above of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any guarantee (but only to the extent of the amount
actually guaranteed);
(7) all obligations of the type referred to in clauses (1) through (6)
above of other Persons secured by any Lien on any property or asset of
such Person (whether or not such obligation is assumed by such Person),
the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so
secured; and
(8) to the extent not otherwise included in this definition, the net
obligations of such Person under currency agreements and interest swap
agreements.
For purposes of the preceding sentence, the maximum fixed repurchase price
of any Disqualified Capital Stock that does not have a fixed repurchase price
shall be calculated
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in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; provided, however,
that if such Disqualified Capital Stock is not then permitted to be repurchased,
the repurchase price shall be the book value of such Disqualified Capital Stock.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. The principal amount of
any Indebtedness issued with original issue discount shall be the face amount of
such Indebtedness less than remaining unamortized portion of the original issue
discount of such Indebtedness at the date of determination in accordance with
GAAP.
"INTEREST RATE AGREEMENT" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the Person making the
advance or loan) or other extensions of credit (including by way of guarantee or
similar arrangement) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person; provided, that
endorsements of negotiable instruments and documents in ordinary course of
business shall not be deemed an Investment. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "Certain Covenants -- Limitation on Restricted
Payments,"
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value as
determined in good faith by the Board of Directors of the Company of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that if such designation is made in connection with the acquisition of
such Subsidiary or the assets owned by such Subsidiary, the
"Investment" in such Subsidiary shall be deemed to be the consideration
paid in connection with such acquisition; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value as determined in good faith by the
Board of Directors of the Company at the time of such transfer.
"INVESTMENT GRADE RATING" means (1) with respect to S&P, any of the rating
categories from and including AAA to and including BBB- and (2) with respect to
Moody's, any of the rating categories from and including Aaa to and including
Baa3.
"ISSUE DATE" means the date on which the Outstanding Notes were originally
issued.
"LEGAL HOLIDAY" means a Saturday, a Sunday, any day which is a holiday
under the laws of the State of New York or a day on which banking institutions
in the State of New York are authorized or required by law to close. If a
payment date is a Legal Holiday, payment shall be made on the next succeeding
day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record
shall not be affected.
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"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"MOODY'S" means Moody's Investors Service, Inc.
"NET AVAILABLE CASH" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form) in each case net of
(1) all legal, title and recording tax expenses, brokerage commissions,
underwriting discounts or commissions or sales commissions and other
reasonable fees and expenses (including, without limitation, fees and
expenses of counsel, accountants and investment bankers) related to
such Asset Disposition or converting to cash any other proceeds
received, and any relocation and severance expenses as a result
thereof, and all Federal, state, provincial, foreign and local taxes
required to be accrued or paid as a liability under GAAP, as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness or other obligations which are
secured by any assets subject to such Asset Disposition or made in
order to obtain a necessary consent to such Asset Disposition or to
comply with applicable law;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) appropriate amounts provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the property or
other assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition,
including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such
Asset Disposition.
The amounts in clauses (1) through (4) above, to the extent estimates are
necessary, shall be estimated reasonably and in good faith by the Company.
"NET CASH PROCEEDS," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"OTHER SENIOR DEBT PRO RATA SHARE" means the amount of the Net Available
Cash obtained by multiplying the amount of such Net Available Cash by a
fraction, (i) the numerator of which is the lesser of the aggregate principal
face amount or accreted value of all Indebtedness (other than the Notes,
Subordinated Obligations, Indebtedness outstanding under the Senior Credit
Facility and any other Indebtedness owed to the Company or any Subsidiary of the
Company) of the Company or the applicable Restricted Subsidiary, as the case may
be, outstanding at the time of the applicable Asset Disposition with respect to
which the Company or the applicable Restricted Subsidiary, as the case may be,
is required to use Net Available Cash to repay or make an offer to purchase and
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repay and (ii) the denominator of which is the sum of (a) the aggregate
principal amount of all Notes outstanding at the time of the applicable Asset
Disposition and (b) the lesser of the aggregate principal face amount or
accreted value of all other Indebtedness (other than Subordinated Obligations,
Indebtedness outstanding under the Senior Credit Facility and any other
Indebtedness owed to the Company or any Subsidiary of the Company) of the
Company or the applicable Restricted Subsidiary, as the case may be, outstanding
at the time of the applicable Asset Disposition with respect to which the
Company or the applicable Restricted Subsidiary, as the case may be, is required
to use the Net Available Cash to repay or to offer to purchase and repay.
"PERMITTED HOLDERS" means NYLIFE HealthCare Management, Inc., an indirect
subsidiary of New York Life Insurance Company, a mutual insurance company
organized and existing under the laws of the State of New York, and its
Affiliates.
"PERMITTED INVESTMENTS" means
(1) Investments by the Company or any Restricted Subsidiary in any Person
that is or will become immediately after such Investment a Restricted
Subsidiary or that will merge or consolidate into the Company or a
Restricted Subsidiary;
(2) Investments in cash and Temporary Cash Investments;
(3) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of business;
(4) Currency Agreements and Interest Rate Agreements entered into in the
ordinary course of the Company's or its Restricted Subsidiaries'
businesses and otherwise in compliance with the terms of the
Indenture;
(5) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(6) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset
Disposition made in compliance with the covenant described under the
heading "Limitation on Sales of Assets and Subsidiary Stock";
(7) guarantees of Indebtedness permitted to be incurred under the covenant
described under the heading "Limitation on Indebtedness";
(8) receivables owing to the Company or any Restricted Subsidiary created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances;
(9) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(10) Investments for consideration consisting exclusively of common stock
of the Company; and
(11) Investments in existence on the Issue Date.
"PERMITTED LIENS" means the following types of Liens:
(1) Liens securing Indebtedness under the Senior Credit Facility permitted
to be incurred under clause (b)(1) of the covenant described under the
heading "Limitation on Indebtedness";
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(2) Liens securing Indebtedness of a Person existing at the time that such
Person is merged into or consolidated with the Company or a Restricted
Subsidiary; provided that such Liens were not created in contemplation
of such merger or consolidation and do not extend to any assets or
property of the Company or any Restricted Subsidiary, other than the
surviving Person and its Subsidiaries;
(3) Liens on assets or property acquired by the Company or a Restricted
Subsidiary; provided that such Liens were not created in contemplation
of such acquisition and do not extend to any other assets or property
(other than proceeds of such acquired assets or property);
(4) Liens in respect of Interest Rate Agreements and Currency Agreements
described in clause (b)(6) of the "Limitation on Indebtedness"
covenant;
(5) Liens for taxes, assessments or governmental charges or claims that
either (a) are not yet delinquent or (b) are being contested in good
faith by appropriate proceedings and as to which appropriate reserves
have been established or other provisions have been made in accordance
with GAAP;
(6) statutory Liens of landlords and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's, contractors' or other Liens
imposed by law and arising in the ordinary course of business;
(7) Liens (other than any Lien imposed by the Employee Retirement Income
Security Act of 1974, as amended) incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security;
(8) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, progress
payments, government contracts and other obligations of like nature
(exclusive of obligations for the payment of borrowed money), in each
case, incurred in the ordinary course of business;
(9) attachment or judgment Liens not giving rise to a Default or Event of
Default;
(10) easements, rights-of-way, restrictions and other similar charges or
encumbrances not materially interfering with the ordinary conduct of
the business of the Company or any of its Restricted Subsidiaries;
(11) leases or subleases granted to others not materially interfering with
the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries;
(12) Liens securing Refinancing Indebtedness; provided that such Liens only
extend to the assets securing the Indebtedness being refinanced, such
refinanced Indebtedness was previously secured and such Liens do not
extend to any other assets of the Company or the assets of any of the
Company's other Subsidiaries;
(13) Liens securing Purchase Money Obligations and Capital Lease
Obligations permitted to be Incurred under the Indenture;
(14) Liens existing on the Issue Date;
(15) any contract to sell an asset provided such sale is otherwise
permitted under the Indenture;
(16) Liens on property or assets of any Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary owing to the Company or one
or more Restricted Subsidiaries of the Company;
(17) Liens securing the Notes and the Guarantees; and
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<PAGE> 83
(18) other Liens securing Indebtedness permitted to be Incurred under the
Indenture in an aggregate amount not to exceed $25 million at any time
outstanding.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PREFERRED STOCK," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
"PRINCIPAL" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"PURCHASE MONEY OBLIGATION" means any Indebtedness incurred in the ordinary
course of business by a Person to finance the cost (including the cost of
construction) of an item of assets, the amount of which Indebtedness does not
exceed the sum of (x) 100% of the lesser of such cost or the fair market value
of such assets, as determined in good faith by the Board of Directors of the
Company, and (y) reasonable fees and expenses of such Person incurred in
connection therewith, and which is incurred concurrently with (or within 270
days following) the purchase of such assets and is secured only by the assets so
purchased.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock or that is not Indebtedness that is convertible or exchangeable
into Capital Stock.
"RATING AGENCY" means each of (a) S&P and (b) Moody's.
"REFINANCE" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that
is equal to or less than the aggregate principal amount (or if Incurred
with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium
and defeasance costs) under the Indebtedness being Refinanced, plus the
reasonable fees and expenses related to the issuance of such
Refinancing Indebtedness;
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<PAGE> 84
provided, further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Restricted Subsidiary (other than the Company) that Refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.
"RESTRICTED PAYMENT" means, with respect to any Person,
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person),
other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Capital Stock) and dividends or
distributions payable solely to the Company or a Restricted Subsidiary,
and other than pro rata dividends or other distributions made by a
Restricted Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a
Restricted Subsidiary that is an entity other than a corporation),
(2) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of
any option to exchange any Capital Stock (other than into Capital Stock
of the Company that is not Disqualified Capital Stock),
(3) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated
Obligations (other than the purchase, repurchase or other acquisition
of Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of acquisition), or
(4) the making of any Investment in any Person (other than a Permitted
Investment), including by designating any Subsidiary as an Unrestricted
Subsidiary.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"SENIOR CREDIT FACILITY" means the Credit Agreement, dated April 1, 1999
among the Company, Credit Suisse First Boston and the other agents and lenders
named therein, and any other bank credit agreement or similar facility entered
into in the future by the Company or any Restricted Subsidiary, as any of the
same, in whole or in part, may be amended, renewed, extended, increased (but
only so long as such increase is permitted under the terms of the Indenture),
substituted, refinanced, restructured or replaced (including, without
limitation, any successive renewals, extensions, increases, substitutions,
refinancings, restructurings, replacements, supplements or other modifications
of the foregoing).
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any
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<PAGE> 85
provision providing for the repurchase of such security at the option of the
holder thereof upon the happening of any contingency unless such contingency has
occurred).
"SUBORDINATED OBLIGATION" means any Indebtedness of the Company or a
Restricted Subsidiary (whether outstanding on the Issue Date or thereafter
Incurred) which is subordinate or junior in right of payment to any other
Indebtedness of the Company or any such Restricted Subsidiary, as the case may
be.
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, limited liability company, association, joint venture or other
business entity of which more than 50% of the total voting power of shares of
stock or other ownership interests entitled (without regard to the occurrence of
any contingency) to vote in the election of the Person or Persons (whether
directors, managers, trustees or other Persons performing similar functions)
having the power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc.
"TEMPORARY CASH INVESTMENTS" means, as at any date of determination,
(i) marketable securities (a) issued or directly and unconditionally
guaranteed as to interest and principal by the United States or (b)
issued by any agency of the United States the obligations of which are
backed by the full faith and credit of the United States, in each case
maturing within one year after such date;
(ii) marketable direct obligations issued by any state of the United
States or any political subdivision of any such state or any public
instrumentality thereof, in each case maturing within one year after
such date and having, at the time of the acquisition thereof, the
highest rating obtainable from either S&P or Moody's;
(iii) commercial paper maturing no more than one year from the date of
creation thereof and having, at the time of the acquisition thereof,
a rating of at least A-1 from S&P or at least P-1 from Moody's;
(iv) certificates of deposit or bankers' acceptances maturing within one
year after such date and issued or accepted by any commercial bank
organized under the laws of the United States of America or any state
thereof or the District of Columbia that (a) is at least "adequately
capitalized" (as defined in the regulations of its primary Federal
banking regulator) and (b) has Tier 1 capital (as defined in such
regulations) of not less than $100,000,000; and
(v) shares of any money market mutual fund that (a) has at least 95% of
its assets invested continuously in the types of investments referred
to in clauses (i) and (ii) above, (b) has net assets of not less than
$500,000,000, and (c) has the highest rating obtainable from either
S&P or Moody's.
"UNRESTRICTED SUBSIDIARY" means
(1) Practice Patterns Science, Inc., Great Plains Reinsurance Company,
Value Rx of Michigan Inc. and any other Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors of the Company in the manner
provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
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<PAGE> 86
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Restricted Subsidiary of the Company; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under the covenant described under "Limitation on Restricted
Payments." The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) if such Unrestricted Subsidiary at
such time has Indebtedness, the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "Limitation on
Indebtedness" and (y) no Default shall have occurred and be continuing or would
arise therefrom. Any such designation by the Board of Directors of the Company
shall be evidenced by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including limited liability company or partnership interests) of such
Person then outstanding and normally entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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<PAGE> 87
MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS
EXCHANGE OF NOTES
The exchange of outstanding notes for exchange notes in the exchange offer
will not constitute a taxable event to holders. Consequently, no gain or loss
will be recognized by a holder upon receipt of an exchange note, the holding
period of the exchange note will include the holding period of the outstanding
note and the basis of the exchange note will be the same as the basis of the
outstanding note immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR
EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that, for a period of 180 days after the consummation of the exchange offer, we
will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the consummation of the exchange offer we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the
notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
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<PAGE> 88
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated in this prospectus 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 in
this prospectus 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-looking statements. These forward-looking
statements are subject to risks, uncertainties and assumptions, 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 the acquired businesses with our existing operations,
client retention issues and risks inherent in the acquired entities
operations
- risks associated with our ability to meet our debt obligations
- 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 key clients or providers
- the possible loss of 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 us
- 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 in this prospectus by reference. Because of these risks,
uncertainties and assumptions, you should not place undue reliance on these
forward-looking statements.
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<PAGE> 89
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC under the Exchange Act. 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 filed with the SEC. The
SEC allows us to "incorporate by reference" selected 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, 1998,
as amended by Form 10-K/A dated June 10, 1999
- Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999
- Current Reports on Form 8-K dated February 18, 1999, February 24, 1999,
March 25, 1999, April 14, 1999, May 12, 1999, May 13, 1999, May 28, 1999,
July 1, 1999, August 3, 1999 and Form 8-K/A dated June 12, 1998 and June
14, 1999
We will provide a copy of the documents we incorporate by reference, at no
cost, to any person who receives this prospectus. 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.
13900 Riverport Drive
Maryland Heights, Missouri 63043
Telephone: (314) 770-1666
IN ORDER TO ASSURE TIMELY DELIVERY, ANY REQUEST FOR COPIES OF THE INDENTURE
OR OTHER AGREEMENTS REFERRED TO IN THIS PROSPECTUS, SHOULD BE DIRECTED TO
EXPRESS SCRIPTS AT THE ADDRESS REFERRED TO ABOVE NO LATER THAN SEPTEMBER 1,
1999.
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LEGAL MATTERS
Legal matters in connection with the notes are being passed upon for us by
Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The Express Scripts, Inc. 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 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 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 included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that 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 our 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 that firm as experts in auditing and
accounting.
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INDEX TO FINANCIAL STATEMENTS
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Consolidated Balance
Sheet............................. F-3
Unaudited Consolidated Statement of
Operations........................ F-4
Unaudited Consolidated Statement of
Changes in Stockholders' Equity... F-5
Unaudited Consolidated Statement of
Cash Flows........................ F-6
Notes to Unaudited Consolidated
Financial Statements.............. F-7
</TABLE>
EXPRESS SCRIPTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants... F-15
Consolidated Balance Sheet.......... F-16
Consolidated Statement of
Operations........................ F-17
Consolidated Statement of Changes in
Stockholders' Equity.............. F-18
Consolidated Statement of Cash
Flows............................. F-19
Notes to Consolidated Financial
Statements........................ F-20
</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>
Unaudited Combined Condensed Balance
Sheet............................. F-46
Unaudited Combined Condensed State-
ment of Operations................ F-47
Unaudited Combined Condensed State-
ment of Cash Flow................. F-48
Notes to Unaudited Combined
Condensed Financial Statements.... F-49
</TABLE>
F-1
<PAGE> 92
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
F-2
<PAGE> 93
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 122,589 $ 115,838
Receivables, less allowance for doubtful accounts of
$17,806 and $14,883, respectively...................... 433,006 446,453
Inventories............................................... 55,634 55,234
Deferred taxes............................................ 41,011 41,841
Prepaid expenses.......................................... 4,667 3,761
---------- ----------
Total current assets................................... 656,907 663,127
Property and equipment, less accumulated depreciation and
amortization.............................................. 77,499 73,346
Goodwill, less accumulated amortization..................... 282,163 268,081
Other assets................................................ 78,892 92,396
---------- ----------
Total assets........................................... $1,095,461 $1,096,950
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 54,000 $ 54,000
Claims and rebates payable................................ 338,251 331,525
Accounts payable.......................................... 60,247 65,715
Accrued expenses.......................................... 86,798 71,666
---------- ----------
Total current liabilities.............................. 539,296 522,906
Long-term debt.............................................. 306,000 306,000
Other liabilities........................................... 471 502
---------- ----------
Total liabilities...................................... 845,767 829,408
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, and no shares issued
Class A Common Stock, $.01 par value, 75,000,000 shares
authorized, 18,610,000 and 18,707,000 shares issued,
respectively........................................... 186 187
Class B Common Stock, $.01 par value, 22,000,000 shares
authorized, 15,020,000 shares issued................... 150 150
Additional paid-in capital................................ 110,099 114,391
Accumulated other comprehensive income...................... (74) (62)
Retained earnings......................................... 146,322 159,865
---------- ----------
256,683 274,531
Class A Common Stock in treasury at cost, 475,000
shares................................................. (6,989) (6,989)
---------- ----------
Total stockholders' equity............................. 249,694 267,542
---------- ----------
Total liabilities and stockholders' equity............. $1,095,461 $1,096,950
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 94
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues................................................ $371,362 $899,087
-------- --------
Cost and expenses:
Cost of revenues.......................................... 338,492 823,647
Selling, general & administrative......................... 18,826 46,440
-------- --------
357,318 870,087
-------- --------
Operating income............................................ 14,044 29,000
-------- --------
Interest income (expense):
Interest income........................................... 2,138 1,393
Interest expense.......................................... (14) (6,222)
-------- --------
2,124 (4,829)
-------- --------
Income before income taxes.................................. 16,168 24,171
Provision for income taxes.................................. 6,290 10,628
-------- --------
Net income.................................................. $ 9,878 $ 13,543
======== ========
Basic earnings per share.................................... $ 0.30 $ 0.41
======== ========
Weighted average number of common shares outstanding during
the period -- Basic EPS................................... 33,053 33,211
======== ========
Diluted earnings per share.................................. $ 0.29 $ 0.40
======== ========
Weighted average number of common shares outstanding during
the period -- Diluted EPS................................. 33,579 34,154
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 95
EXPRESS SCRIPTS, INC.
UNAUDITED 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,
1998...................... 18,610 15,020 $186 $150 $110,099 $(74) $146,322 $(6,989) $249,694
------ ------ ---- ---- -------- ---- -------- ------- --------
Comprehensive income:
Net income.............. 13,543 13,543
Other comprehensive
income,
Foreign currency
translation
adjustment......... -- -- -- -- -- 12 -- -- 12
------ ------ ---- ---- -------- ---- -------- ------- --------
Comprehensive income...... -- -- -- -- -- 12 13,543 -- 13,555
Exercise of stock
options................. 97 1 2,721 2,722
Tax benefit relating to
employee stock
options................. -- -- -- -- 1,571 -- -- -- 1,571
------ ------ ---- ---- -------- ---- -------- ------- --------
Balance at March 31, 1999... 18,707 15,020 $187 $150 $114,391 $(62) $159,865 $(6,989) $267,542
====== ====== ==== ==== ======== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 96
EXPRESS SCRIPTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 9,878 $ 13,543
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 2,396 8,685
Deferred income taxes................................ (362) 1,545
Bad debt expense..................................... 942 1,592
Tax benefit relating to employee stock options....... 662 1,571
Net changes in operating assets and liabilities...... 10,706 (30,744)
------- --------
Net cash provided by (used in) operating activities....... 24,222 (3,808)
------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (3,176) (5,677)
Short-term investments.................................. (1,334) --
------- --------
Net cash (used in) investing activities................... (4,510) (5,677)
------- --------
Cash flows from financing activities:
Other, net.............................................. 683 2,722
------- --------
Net cash provided by financing activities................. 683 2,722
------- --------
Effect of foreign currency translation adjustment......... 6 12
------- --------
Net increase (decrease) in cash and cash equivalents...... 20,401 (6,751)
Cash and cash equivalents at beginning of period.......... 64,155 122,589
------- --------
Cash and cash equivalents at end of period................ $84,556 $115,838
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 97
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted in this Form 10-Q pursuant to the Rules and Regulations of the
Securities and Exchange Commission. However, in the opinion of the Company, the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading when read in conjunction with the notes to consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1998, as filed with the Securities and Exchange
Commission on March 29, 1999.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Unaudited Consolidated
Balance Sheet at March 31, 1999, the Unaudited Consolidated Statement of
Operations for the three months ended March 31, 1998, and 1999, the Unaudited
Consolidated Statement of Changes in Stockholders' Equity for the three months
ended March 31, 1999, and the Unaudited Consolidated Statement of Cash Flows for
the three months ended March 31, 1998, and 1999. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
2. RECEIVABLES
As of December 31, 1998 and March 31, 1999, unbilled receivables were
$209,334,000 and $214,941,000, respectively.
3. 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.
4. 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 4) 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
F-7
<PAGE> 98
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements and PBM segment since April 1, 1998. The purchase price has
been 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 has been 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
$278,113,000 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............................ $ 659,166
Cash paid for the capital stock.......................... (460,137)
---------
Liabilities retained................................ $ 199,029
=========
</TABLE>
The following unaudited pro forma information presents a summary of
combined results of operations of the Company and the Acquired Entities as if
the acquisition had occurred at the beginning of the period presented, along
with certain pro forma adjustments to give effect to amortization of goodwill,
other intangible assets, interest expense on acquisition debt and other
adjustments. The pro forma financial information is not necessarily indicative
of the results of operations as they would have been had the transaction been
effected on the assumed dates. Included in the pro forma information are
integration costs incurred by the Company that are being reported within
selling, general and administrative expenses in the statement of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net revenues.......................................... $781,290
Net income............................................ 9,900
Basic earnings per share.............................. 0.30
Diluted earnings per share............................ 0.29
</TABLE>
5. 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 term loan
require quarterly interest payments and, beginning in April 1999, semi-annual
principal payments. The interest rate is based on a spread ("Credit Rate
Spread") over several London Interbank Offered Rates ("LIBOR") or base rate
options, depending upon the Company's ratio of earnings before interest, taxes,
depreciation and amortization
F-8
<PAGE> 99
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("EBITDA") to debt ("Leverage Ratio"). At March 31, 1999, the interest rate was
5.84375%, 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 March 31, 1999, 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 March 31, 1999. There were no borrowings at March 31, 1999 under the
revolving loan facility. The carrying amount of the Company's term loan facility
approximates fair value.
In conjunction with 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 March 31, 1999, 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.
6. RESTRUCTURING
During the second quarter of 1998, the Company recorded a pre-tax
restructuring charge of $1,651,000 ($1,002,000 after taxes or $0.03 per basic
and diluted earnings per share) associated with the Company closing the non-PBM
service operations of its wholly-owned subsidiary, PhyNet, Inc., and
transferring certain functions of its Express Scripts Vision Corporation to
another vision care provider.
<TABLE>
<CAPTION>
BALANCE AT UTILIZED BALANCE AT
DECEMBER 31, --------------- MARCH 31,
1998 CASH NONCASH 1999
------------ ---- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Write-down of long-lived assets..... $531 $ -- $(195) $336
Employee transition costs for 61
employees......................... 232 -- -- 232
---- ---- ----- ----
$763 $ -- $(195) $568
==== ==== ===== ====
</TABLE>
The restructuring charge includes tangible assets to be disposed of being
written down to their net realizable value, less cost of disposal. Management
expects recovery to approximate its 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.
F-9
<PAGE> 100
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SEGMENT REPORTING
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. The Company manages the pharmacy benefit within an opening segment
which encompasses a fully-integrated PBM service. The remaining three operating
service lines (IVTx, Specialty Distribution and Vision) have been aggregated
into a non-PBM reporting segment.
The following table presents information about the reportable segments for
the three months ended March 31:
<TABLE>
<CAPTION>
PBM NON-PBM TOTAL
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
Net revenues......................... $358,924 $12,438 $371,362
Income before income taxes........... 15,038 1,130 16,168
1999
Net revenues......................... $884,435 $14,652 $899,087
Income before income taxes........... 22,660 1,511 24,171
</TABLE>
8. SUBSEQUENT EVENTS
On April 1, 1999 the Company completed its acquisition of Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation and
SmithKline Beecham InterCredit BV (collectively, "SB") for approximately $700
million in cash, such amount being subject to adjustment based upon the amount
of working capital of DPS at closing. The acquisition will be accounted for
under the purchase method of accounting. The Company will file an Internal
Revenue Code sec.338(h)(10) election, making amortization expense of certain
intangible assets, including goodwill, tax deductible.
The Company used approximately $48 million of its own cash and financed the
remainder of the purchase price and related acquisition costs through a $1.05
billion credit facility with 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 Company
also used a portion of the proceeds from the $1.05 billion credit facility to
retire the $360 million principal balance outstanding on its $440 million credit
facility (see Note 4). As a result of the retirement of the $360 million balance
outstanding on its $440 million credit facility, the Company will write-off the
remaining deferred financing fees at March 31, 1999 of $3,250,000, or
approximately $1,950,000 net of tax, as an extraordinary item during the second
quarter of 1999.
The $1.05 billion credit facility consists of a $300 million revolving
facility, a $285 million term facility ("Term A"), and a $465 million term
facility ("Term B"). The revolving facility and the Term A facility are for a
period of six years. The Term B facility is for a period of eight years. The
provisions of this loan require quarterly interest payments and, beginning in
March 2000, annual principal payments. The interest rate is
F-10
<PAGE> 101
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on a spread (the "Base Rate Margin") over several LIBOR or base rate
options, depending upon the Company's ratio of debt to EBITDA. However, the
initial base rate margin is fixed at 275 basis points for the revolving facility
and Term A facility and 350 basis points for the Term B facility for the first
two quarters. 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 fixed charge coverage ratio. In addition, the Company is
required to pay an annual fee of 50 basis points, payable in quarterly
installments, on the unused portion of the revolving facility.
The following represents the schedule of current maturities for the Term A
and Term B facilities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999....................................................... $ --
2000....................................................... 4,650
2001....................................................... 47,400
2002....................................................... 61,650
2003....................................................... 61,650
Thereafter................................................. 574,650
--------
$750,000
========
</TABLE>
On March 24, 1999, the Company's Board of Directors adopted, and on May 26,
1999, the Company's stockholders approved, an amendment to the Company's Amended
and Restated 1994 Stock Option Plan to, among other things, increase the number
of shares reserved for issuance under this plan. A total of 2,920,000 shares of
the Company's Class A common stock are currently reserved for issuance under
this plan, and said amount will automatically increase on January 1 of each
year, to and including January 1, 2004, by an amount equal to 1% of the
aggregate number of then outstanding shares of the Company's Class A and Class B
common stock.
On May 26, 1999, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase the number of authorized
shares of Class A common stock from 75 million to 150 million and the number of
authorized shares of Class B common stock from 22 million to 31 million.
On June 18, 1999, the Company learned that it is named as a defendant in
Allcare Health Management Systems, Inc. v. Cerner Corporation, et al. No.
499-CV-0464-Y (N.D. TX). Plaintiff commenced this action on or about June 16,
1999, alleging infringement of a patent owned by Plaintiff on a "Wellness Health
Management System" by the Company and its wholly-owned subsidiary Diversified
Pharmaceutical Services, Inc. and ten other unrelated entities. At this stage of
the litigation, neither the merits of Plaintiff's claim nor the potential
liability associated with it, if any, can be ascertained.
On June 18, 1999, SB transferred ownership of Diversified Prescription
Delivery L.L.C. ("DPD"), to the Company, pursuant to the Company's stock
purchase agreement
F-11
<PAGE> 102
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with SB for the acquisition of DPS. The acquisition will be accounted for under
the purchase method of accounting.
In June 1999, the Company completed its equity offering of 5,175,000 shares
of its Class A common stock, which includes the underwriters' over-allotments.
The Company received net proceeds of $300,393,000. The Company also completed
the sale of $250 million of 9 5/8% Senior Notes due 2009 through a private
placement, receiving net proceeds of $243,502,000. The Company used the net
proceeds from the offerings, along with approximately $25 million of its own
cash, to repay the $150 million senior subordinated bridge credit facility plus
accrued interest and $414,770,000 of the Term B facility plus accrued interest.
As a result of the retirement of a portion of the Term B facility, the Company
will write-off $7,491,000, or, approximately $4,495,000 net of tax, in deferred
financing fees as an extraordinary item during the second quarter of 1999. In
July 1999, the Company retired the Term B facility by paying the amounts
outstanding of $50,230,000 through use of its cash. As a result, we will record
an extraordinary change during the third quarter of 1999 for the write-off of
the remaining deferred financing fees in the amount of $907,000, or
approximately $557,000 net of tax.
The 9 5/8% Senior Notes are due June 15, 2009 and require semi-annual
interest payments beginning December 15, 1999. The Senior Notes are guaranteed
by the Company's domestic subsidiaries other than Practice Patterns Science,
Inc., Great Plains Reinsurance Company, ValueRx of Michigan, Inc., Diversified
NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico) Inc. The
following is a summary of financial position and results of operations of the
issuer, the guarantor subsidiaries and non-guarantor subsidiaries:
<TABLE>
<CAPTION>
EXPRESS NON-
SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Current assets.................. $463,818 $ 188,978 $ 4,111 $ -- $ 656,907
Property and equipment, net..... 27,375 46,817 3,307 77,499
Investments in subsidiaries..... 68,198 74,297 264 (142,759)
Intercompany.................... 363,455 (361,202) (2,253)
Goodwill, net................... 210 281,953 282,163
Other assets.................... 12,783 65,853 256 -- 78,892
-------- --------- ------- --------- ----------
Total assets.................. $935,839 $ 296,696 $ 5,685 $(142,759) $1,095,461
======== ========= ======= ========= ==========
Current liabilities............. $394,553 $ 141,433 $ 3,310 $ -- $ 539,296
Long-term debt.................. 306,000 306,000
Other liabilities............... 779 (251) (57) 471
Stockholders' equity............ 234,507 155,514 2,432 (142,759) 249,694
-------- --------- ------- --------- ----------
Total liabilities and
stockholders' equity........ $935,839 $ 296,696 $ 5,685 $(142,759) $1,095,461
======== ========= ======= ========= ==========
</TABLE>
F-12
<PAGE> 103
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EXPRESS NON-
SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1999
Current assets.................. $458,406 $ 197,231 $ 7,490 $ -- $ 663,127
Property and equipment, net..... 27,018 43,227 3,101 73,346
Investments in subsidiaries..... 68,198 74,297 264 (142,759)
Intercompany.................... 374,087 (371,292) (2,795)
Goodwill, net................... 199 267,882 268,081
Other assets.................... 15,700 76,451 245 -- 92,396
-------- --------- ------- --------- ----------
Total assets.................. $943,608 $ 287,796 $ 8,305 $(142,759) $1,096,950
======== ========= ======= ========= ==========
Current liabilities............. $383,686 $ 133,236 $ 5,984 $ -- $ 522,906
Long-term debt.................. 306,000 306,000
Other liabilities............... 802 (232) (68) 502
Stockholders' equity............ 253,120 154,792 2,389 (142,759) 267,542
-------- --------- ------- --------- ----------
Total liabilities and
stockholders' equity........ $943,608 $ 287,796 $ 8,305 $(142,759) $1,096,950
======== ========= ======= ========= ==========
THREE MONTHS ENDED MARCH 31, 1998
Net revenues.................... $364,970 $ 3,908 $ 2,484 $ -- $ 371,362
Operating expenses 351,065 3,783 2,470 -- 357,318
-------- --------- ------- --------- ----------
Operating income (loss)....... 13,905 125 14 -- 14,044
Interest income (expense)....... 2,102 -- 22 -- 2,124
-------- --------- ------- --------- ----------
Income (loss) before tax
provision................... 16,007 125 36 -- 16,168
Income tax provision
(benefit)..................... 6,205 48 37 -- 6,290
-------- --------- ------- --------- ----------
Net Income (loss)............. $ 9,802 $ 77 $ (1) $ -- $ 9,878
======== ========= ======= ========= ==========
THREE MONTHS ENDED MARCH 31, 1999
Net revenues.................... $493,545 $ 401,878 $ 3,664 $ -- $ 899,087
Operating expenses.............. 466,356 400,698 3,033 -- 870,087
-------- --------- ------- --------- ----------
Operating income (loss)....... 27,189 1,180 631 -- 29,000
Interest income (expense)....... (4,939) 66 44 -- (4,829)
-------- --------- ------- --------- ----------
Income (loss) before tax
provision................... 22,250 1,246 675 -- 24,171
Income tax provision
(benefit)..................... 8,451 1,894 283 -- 10,628
-------- --------- ------- --------- ----------
Net Income (loss)............. $ 13,799 $ (648) $ 392 $ -- $ 13,543
======== ========= ======= ========= ==========
</TABLE>
F-13
<PAGE> 104
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-14
<PAGE> 105
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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 12, 1999, except for Note 15, which
is as of July 15, 1999
F-15
<PAGE> 106
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-16
<PAGE> 107
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 (including $122,157,
$176,761 and $127,255, respectively,
to related parties)................... 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-17
<PAGE> 108
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-18
<PAGE> 109
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-19
<PAGE> 110
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS. Express Scripts, Inc. ("the Company") is a
leading specialty managed care company and (subsequent to its acquisition of
Value Health, Inc. and Managed Prescription Network, Inc. on April 1, 1998, see
Note 2) 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 pharmacy services, benefit design
consultation, drug utilization review, formulary management, disease management,
medical and drug data analysis services, medical information management
services, which include provider profiling and outcome assessments through its
majority-owned Practice Patterns Science, Inc. ("PPS") subsidiary, and informed
decision counseling services through its Express Health LineSM division. The
Company also provides non-PBM services which include infusion therapy services
through its wholly-owned subsidiary IVTx, Inc. ("IVTx"), distribution services
through its Specialty Distribution division, and, prior to September 1, 1998,
provided managed vision care programs through its wholly-owned subsidiary
Express Scripts Vision Corporation ("Vision").
In March 1992, the Company, originally incorporated in Missouri in 1986,
was reincorporated in Delaware and issued an aggregate of 21,000,000 shares of
Class B Common Stock to Sanus Corp. Health Systems ("Sanus") in exchange for the
outstanding shares of its common stock. Sanus at that time was an indirect
subsidiary of New York Life Insurance Company ("NYL"). In April 1992, as a
result of a reorganization, both the Company and Sanus became direct
subsidiaries of NYLIFE HealthCare Management, Inc. ("NYLIFE"). Sanus has since
changed its name to NYLCare Health Plans, Inc. ("NYLCare"). In April 1996,
NYLIFE converted 5,980,000 Class B shares to Class A Common Stock and sold those
shares in a public offering. NYLIFE continues to own all the remaining
outstanding Class B Common Stock of the Company (see Note 11).
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and all wholly-owned and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Certain amounts in prior years have been reclassified to conform with 1998
classifications. The preparation of the consolidated financial statements
conform to generally accepted accounting principles, and require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from those estimates and assumptions.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand
and temporary investments in money market funds.
SHORT-TERM INVESTMENTS. Short-term investments consisted of debt
securities with a maturity of less than one year that the Company had the
positive intent and ability to hold to maturity and are reported at amortized
cost.
F-20
<PAGE> 111
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES. Inventories consist of prescription drugs, vision supplies
and medical supplies that are stated at the lower of first-in first-out cost or
market.
PROPERTY AND EQUIPMENT. Property and equipment is carried at cost and is
depreciated using the straight-line method over estimated useful lives of seven
years for furniture, five years for equipment and purchased computer software
and three years for personal computers. Leasehold improvements are amortized on
a straight-line basis over the term of the lease or the useful life of the
asset, if shorter. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
SOFTWARE DEVELOPMENT COSTS. During 1997, the Company early adopted
Statement of Position No. 98-1 ("SOP 98-1"), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires the
capitalization of certain costs associated with computer software developed or
obtained for internal use. Given the limited software developed or obtained for
internal use in 1997, adoption had virtually no effect on the Company's
Consolidated Statement of Operations or its financial position. However, the
impact of SOP 98-1 on an ongoing basis will be determined by the magnitude of
computer software developed or obtained for internal use. 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.
F-21
<PAGE> 112
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER INTANGIBLE ASSETS. Other intangible assets (included in other
assets) consist of customer contracts, non-compete agreements and deferred
financing fees and are amortized on a straight-line basis over periods from 2 to
20 years. Amortization expense for customer contracts and non-compete
agreements, included in selling, general and administrative expenses, and for
deferred financing fees, included in interest expense, was $4,320,000 and
$609,000, respectively, for the year ended December 31, 1998.
CONTRACTUAL AGREEMENTS. The Company has entered into corporate alliances
with certain of its clients whereby shares of the Company's Class A Common Stock
were awarded as advance discounts to the clients. The Company accounts for these
agreements as follows:
PRIOR TO DECEMBER 15, 1995 -- For agreements consummated prior to
December 15, 1995, the stock is valued utilizing the quoted market value at
the date the agreement is consummated if the number of shares to be issued
is known. If the number of shares to be issued is contingent upon the
occurrence of future events, the stock is valued utilizing the quoted
market value at the date the contingency is satisfied and the number of
shares is determinable.
BETWEEN DECEMBER 15, 1995 AND NOVEMBER 20, 1997 -- For agreements
entered into between these dates, the Company utilizes the provisions of
Financial Accounting Standards Board Statement 123 "Accounting for
Stock-Based Compensations" ("FAS 123") which requires that all stock issued
to nonemployees be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued
instead of the intrinsic value method utilized for stock issued or to be
issued under alliances entered into prior to December 15, 1995. The Company
has adopted FAS 123 as it relates to stock issued or to be issued under the
Premier and Manulife alliances based on fair value at the date the
agreement was consummated.
SUBSEQUENT TO NOVEMBER 20, 1997 -- In November 1997, the Emerging
Issues Task Force reached a consensus that the value of equity instruments
issued for consideration other than employee services should be initially
determined on the date on which a "firm commitment" for performance first
exists by the provider of goods or services. Firm commitment is defined as
a commitment pursuant to which performance by a provider of goods or
services is probable because of sufficiently large disincentives for
nonperformance. The consensus must be applied for all new arrangements and
modifications of existing arrangements entered into from November 20, 1997.
The consensus only addresses the date upon which fair value is determined
and does not change the accounting based upon fair value as prescribed by
FAS 123. No such arrangements have been entered into by the Company
subsequent to November 20, 1997.
Shares issued on the effective date of the contractual agreement are
considered outstanding and included in basic and diluted earnings per share
computations when issued. Shares issuable upon the satisfaction of certain
conditions are considered outstanding and included in basic and dilutive
earnings per share computation when all necessary conditions have been
satisfied by the end of the period. If all necessary conditions have not
been satisfied by the end of the period, the number of shares included in
the dilutive earnings per share computation is based on the number of
F-22
<PAGE> 113
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares, if any, that would be issuable if the end of the reporting period
were the end of the contingency period and if the result would be dilutive.
The value of the shares of stock awarded as advance discounts is recorded
as a deferred cost and included in other assets. The deferred cost is
recognized in selling, general and administrative expenses over the period
of the contract.
IMPAIRMENT OF LONG LIVED ASSETS. The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long lived assets may warrant revision or that the remaining balance of an asset
may not be recoverable. The measurement of possible impairment is based on the
ability to recover the balance of assets from expected future operating cash
flows on an undiscounted basis. Impairment losses, if any, would be determined
based on the present value of the cash flows using discount rates that reflect
the inherent risk of the underlying business. In the opinion of management, no
such impairment existed as of December 31, 1997 or 1998, except for the
write-down of the long-lived assets of Express Scripts Vision Corporation (see
Note 7).
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
F-23
<PAGE> 114
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market prices or the current rates offered to the Company for debt with similar
maturity. The fair value of the swap ($7,209,000 liability at December 31, 1998)
was based on quoted market price, which reflects the present value of the
difference between estimated future fixed rate payments and future variable rate
receipts.
REVENUE RECOGNITION. Revenues from dispensing prescription and
non-prescription medical products from the Company's mail service pharmacies are
recorded upon shipment. Revenue from sales of prescription drugs by pharmacies
in the Company's nationwide network and pharmacy claims processing revenues are
recognized when the claims are processed. When the Company dispenses
pharmaceuticals to members of health benefit plans sponsored by the Company's
clients or has an independent contractual obligation to pay its network pharmacy
providers for benefits provided to members of its clients' pharmacy benefit
plans, the Company includes payments from plan sponsors for these benefits as
net revenue and ingredient costs or payments to these pharmacy providers in cost
of revenues. If the Company is only administering the plan sponsors' network
pharmacy contracts, or where the Company dispenses pharmaceuticals supplied by
one of the Company's clients, the Company records only the administrative or
dispensing fees derived from the Company's contracts with the plan sponsors as
net revenue.
Client revenue is recognized based upon actual scripts adjudicated and
therefore requires no estimation. Amounts remain unbilled for no more than 30
days based upon the contractual billing schedule agreed with the client. At
December 31, 1997 and 1998, unbilled receivables were $96,644,000 and
$209,334,000, respectively.
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. The Company estimates fees
receivable from pharmaceutical manufacturers on a quarterly basis converting
total prescriptions dispensed to estimated rebatable scripts (i.e., those
prescriptions with respect to which the Company is contractually entitled to
submit claims for rebates) multiplied by the contractually agreed manufacturer
rebate amount. Estimated fees receivable from pharmaceutical manufacturers are
recorded when determined by management to be realizable, and realization is not
dependent upon future pharmaceutical sales. Estimates are revised once the
actual rebatable scripts are calculated and rebates are billed to the
manufacturer.
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.
F-24
<PAGE> 115
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION. The financial statements of ESI Canada, Inc.
are translated into U.S. Dollars using the exchange rate at each balance sheet
date for assets and liabilities and a weighted average exchange rate for each
period for revenues, expenses, gains and losses. The functional currency for ESI
Canada, Inc. is the local currency and translation adjustments are recorded
within the other comprehensive income component of stockholders' equity.
EMPLOYEE STOCK-BASED COMPENSATION. The Company accounts for employee stock
options in accordance with Accounting Principles Board No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, the Company applies
the intrinsic value method of accounting and, therefore, does not recognize
compensation expense for options granted, because options are only granted at a
price equal to market value at the time of grant. During 1996, FAS 123 became
effective for the Company. FAS 123 prescribes the recognition of compensation
expense based on the fair value of options determined on the grant date.
However, FAS 123 grants an exception that allows companies currently applying
APB 25 to continue using that method. The Company has, therefore, elected to
continue applying the intrinsic value method under APB 25. For companies that
choose to continue applying the intrinsic value method, FAS 123 mandates certain
pro forma disclosures as if the fair value method had been utilized (see Note
12).
COMPREHENSIVE INCOME. During 1998, Statement of Financial Accounting
Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," became
effective for the Company. FAS 130 requires noncash changes in stockholders'
equity be combined with net income and reported in a new financial statement
category entitled "comprehensive income." Other than net income, the only
component of comprehensive income for the Company is the change in the foreign
currency translation adjustment. The Company has displayed comprehensive income
within the Statement of Changes in Stockholders' Equity.
SEGMENT REPORTING. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 requires that the Company report
certain information, if specific requirements are met, about operating segments
of the Company including information about services, geographic areas of
operation and major customers. The information is to be derived from the
management approach which designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. Adoption of FAS 131 did not affect
the Company's results of operations or its financial position but did affect the
disclosure of segment information (see Note 13).
2. ACQUISITION
On April 1, 1998 the Company acquired all of the outstanding capital stock
of Value Health, Inc. and Managed Prescriptions Network, Inc. (collectively, the
"Acquired Entities") from Columbia/HCA Healthcare Corporation ("Columbia") for
approximately $460 million in cash (which includes transactions costs and
executive management severance costs of approximately $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
F-25
<PAGE> 116
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
owned various subsidiaries that now or formerly conducted a PBM business,
commonly known as "ValueRx".
The acquisition has been accounted for using the purchase method of
accounting and the results of operations of the Acquired Entities have been
included in the consolidated financial statements and PBM segment since April 1,
1998. The purchase price has been preliminarily allocated based on the estimated
fair values of net assets acquired at the date of the acquisition. The excess of
purchase price over tangible net assets acquired was originally allocated to
other intangible assets consisting of customer contracts and non-compete
agreements in the amount of $57,653,000 which are being amortized using the
straight-line method over the estimated useful lives of 2 to 20 years and are
included in other assets, and goodwill in the amount of $289,863,000 which is
being amortized using the straight-line method over the estimated useful life of
30 years. In conjunction with the acquisition, the Acquired Entities and their
subsidiaries retained the following liabilities:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired............................ $ 656,488
Cash paid for the capital stock.......................... (460,137)
---------
Liabilities retained................................ $ 196,351
=========
</TABLE>
The following unaudited pro forma information presents a summary of
combined results of operations of the Company and the Acquired Entities as if
the acquisition had occurred at the beginning of the period presented, along
with certain pro forma adjustments to give effect to amortization of goodwill,
other intangible assets, interest expense on acquisition debt and other
adjustments. The pro forma financial information is not necessarily indicative
of the results of operations as they would have been had the transaction been
effected on the assumed dates. Included in the pro forma information are
integration costs incurred by the Company that are being reported within
selling, general and administrative expenses in the statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
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
F-26
<PAGE> 117
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Securities Act of 1933 ("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 using the Company's closing stock price on December 31, 1995, the
date the agreement was consummated, and are being amortized over the 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 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
F-27
<PAGE> 118
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1933 Act, these shares cannot be
traded until they have been registered under the 1933 Act and any applicable
state securities laws.
Effective January 1, 1998, Coventry renewed the agreement for a two-year
term through December 31, 1999. As part of the agreement, the Company issued
warrants as an advance discount to purchase an additional 50,000 shares of the
Company's Class A Common Stock, exercisable at 90% of the market value at the
time of renewal. During 1998, the Company expensed the advance discount which
represented 10% of the market value.
On October 13, 1992, the Company entered into a five-year arrangement with
FHP, Inc. ("FHP") pursuant to which the Company agreed to provide pharmacy
benefit services to FHP and its members. FHP is an operator of health
maintenance organizations, principally in the western United States. In February
1997, PacifiCare Health Systems, Inc. ("PacifiCare") completed the acquisition
of FHP. As a result of the merger, PacifiCare informed the Company that it would
not enter into a long-term extension of the agreement and reached an agreement
with the Company to phase-out membership starting in July 1997 and continued
through March 1998.
In accordance with the agreement, the Company commenced providing pharmacy
benefit services to FHP and its members on January 4, 1993. On the commencement
date and pursuant to the agreement, the Company issued 400,000 shares of its
Class A Common Stock as advance discounts to FHP in a private placement. These
shares were valued at $4.13 per share, the split-adjusted per share market value
of the Company's Class A shares on October 13, 1992, which was the date the
agreement was consummated and the obligations of the parties became
unconditional. No revision of the consideration for the transaction occurred
between October 13, 1992 and January 4, 1993. The cost of the shares issued to
FHP was amortized over a five-year period ending in 1997. No amortization
expense was recorded in 1998. Amortization expense was $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.
F-28
<PAGE> 119
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-29
<PAGE> 120
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-30
<PAGE> 121
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-31
<PAGE> 122
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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. Management
expects recovery to approximate its 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-32
<PAGE> 123
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-33
<PAGE> 124
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-34
<PAGE> 125
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-35
<PAGE> 126
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-36
<PAGE> 127
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>
F-37
<PAGE> 128
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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 $18.07
</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
F-38
<PAGE> 129
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating service lines (IVTx, Specialty Distribution and Vision) have been
aggregated into a non-PBM reporting segment.
The following table presents information about the reportable segments for
the years ended December 31, 1996, 1997 and 1998:
<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-39
<PAGE> 130
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 April 1, 1999, the Company completed its acquisition of Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation and
SmithKline Beecham InterCredit BV (collectively, "SB") for approximately $700
million in cash, such amount being subject to adjustment based upon the amount
of working capital of DPS at closing. The acquisition will be accounted for
under the purchase method of accounting. The Company will file an Internal
Revenue Code sec.338(h)(10) election, making amortization expense of certain
intangible assets, including goodwill, tax deductible.
The Company used approximately $48 million of its own cash and financed the
remainder of the purchase price and related acquisition costs through a $1.05
billion credit facility with 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 Company
also used a portion of the proceeds from the $1.05 billion credit facility to
retire the $360 million principal balance outstanding on its $440 million credit
facility (see Note 4). As a result of the retirement of the $360 million balance
outstanding on its $440 million credit facility, the Company will write-off the
remaining deferred financing fees at March 31, 1999 of $3,250,000, or
approximately $1,950,000 net of tax, as an extraordinary item during the second
quarter of 1999.
The $1.05 billion credit facility consists of a $300 million revolving
facility, a $285 million term facility ("Term A"), and a $465 million term
facility ("Term B"). The revolving facility and the Term A facility are for a
period of six years. The Term B facility is for a period of eight years. The
provisions of this loan require quarterly interest
F-40
<PAGE> 131
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments and, beginning in March 2000, annual principal payments. The interest
rate is based on a spread (the "Base Rate Margin") over several LIBOR or base
rate options, depending upon the Company's ratio of debt to EBITDA. However, the
initial base rate margin is fixed at 275 basis points for the revolving facility
and Term A facility and 350 basis points for the Term B facility for the first
two quarters. The credit facility contains covenants that limit the indebtedness
the Company may incur and the amounts of annual capital expenditures. The
covenants also establish a minimum interest coverage ratio, a maximum leverage
ratio, and a minimum fixed charge coverage ratio. In addition, the Company is
required to pay an annual fee of 50 basis points, payable in quarterly
installments, on the unused portion of the revolving facility.
The following represents the schedule of current maturities for the Term A
and Term B facilities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999.................................................... $ --
2000.................................................... 4,650
2001.................................................... 47,400
2002.................................................... 61,650
2003.................................................... 61,650
Thereafter.............................................. 574,650
--------
$750,000
========
</TABLE>
The following unaudited pro forma information presents a summary of
combined results of operations of the Company, the Acquired Entities and DPS as
if the acquisitions and related financing, including the equity offering, had
occurred at the beginning of the period presented, along with certain pro forma
adjustments to give effect to amortization of goodwill, other intangible assets,
interest expense on acquisition debt and other adjustments. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected on the assumed dates.
Included in the pro forma information are integration costs incurred by the
Company for the Acquired Entities that are being reported within selling,
general and administrative expenses in the statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net revenues................................ $3,449,649
Net income.................................. $ 50,198
Basic earnings per share.................... $ 1.31
Diluted earnings per share.................. $ 1.29
</TABLE>
On March 24, 1999, the Company's Board of Directors adopted, and on May 26,
1999, the Company's stockholders approved, an amendment to the Company's Amended
and Restated 1994 Stock Option Plan to, among other things, increase the number
of shares reserved for issuance under this plan. A total of 2,920,000 shares of
the Company's
F-41
<PAGE> 132
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class A common stock are currently reserved for issuance under this plan, and
said amount will automatically increase on January 1 of each year, to and
including January 1, 2004, by an amount equal to 1% of the aggregate number of
then outstanding shares of the Company's Class A and Class B common stock.
On May 26, 1999, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase the number of authorized
shares of Class A common stock from 75 million to 150 million and the number of
authorized shares of Class B common stock from 22 million to 31 million.
On June 18, 1999, the Company learned that it is named as a defendant in
Allcare Health Management Systems, Inc. v. Cerner Corporation, et al. No.
499-CV-0464-Y (N.D. TX). Plaintiff commenced this action on or about June 16,
1999, alleging infringement of a patent owned by Plaintiff on a "Wellness Health
Management System" by the Company and its wholly-owned subsidiary Diversified
Pharmaceutical Services, Inc. and ten other unrelated entities. At this stage of
the litigation, neither the merits of Plaintiff's claim nor the potential
liability associated with it, if any, can be ascertained.
On June 18, 1999, SB transferred the ownership of Diversified Prescription
Delivery L.L.C. ("DPD"), to the Company pursuant to the Company's stock purchase
agreement with SB for the acquisition of DPS. The acquisition will be accounted
for under the purchase method of accounting.
In June 1999, the Company completed its equity offering of 5,175,000 shares
of its Class A common stock, which includes the underwriters' over-allotments.
The Company received net proceeds of $300,393,000. The Company also completed
the sale of $250 million of 9 5/8% Senior Notes due 2009 through a private
placement, receiving net proceeds of $243,502,000. The Company used the net
proceeds from the offerings, along with approximately $25 million of its own
cash, to repay the $150 million senior subordinated bridge credit facility plus
accrued interest and $414,770,000 of the Term B facility plus accrued interest.
As a result of the retirement of a portion of the Term B facility, the Company
will write-off $7,491,000, or approximately $4,495,000 net of tax, in deferred
financing fees as an extraordinary item during the second quarter of 1999.
The 9 5/8% Senior Notes are due June 15, 2009 and require semi-annual
interest payments beginning December 15, 1999. The Senior Notes are guaranteed
by the Company's domestic subsidiaries other than Practice Patterns Science,
Inc., Great Plains Reinsurance Company, ValueRx of Michigan, Inc., Diversified
NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico) Inc.. The
following is a summary of
F-42
<PAGE> 133
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial position and results of operations of the issuer, the guarantor
subsidiaries and non-guarantor subsidiaries:
<TABLE>
<CAPTION>
EXPRESS NON-
SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Current assets.................. $ 360,276 $ 626 $ 3,066 $ -- $ 363,968
Property and equipment, net..... 22,732 1,640 2,449 -- 26,821
Investments in subsidiaries..... 3,865 -- 264 (4,129) --
Intercompany.................... (994) 781 213 -- --
Goodwill, net................... 251 -- -- -- 251
Other assets.................... 10,974 79 415 -- 11,468
--------- --------- --------- --------- ---------
Total assets.................. $ 397,104 $ 3,126 $ 6,407 $ (4,129) $ 402,508
========= ========= ========= ========= =========
Current liabilities............. $ 194,226 $ 76 $ 3,604 $ -- $ 197,906
Long-term debt and other
liabilities................... 901 -- -- -- 901
Stockholders' equity............ 201,977 3,050 2,803 (4,129) 203,701
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity........ $ 397,104 $ 3,126 $ 6,407 $ (4,129) $ 402,508
========= ========= ========= ========= =========
AS OF DECEMBER 31, 1998
Current assets.................. $ 463,818 $ 188,978 $ 4,111 $ -- $ 656,907
Property and equipment, net..... 27,375 46,817 3,307 -- 77,499
Investments in subsidiaries..... 68,198 74,297 264 (142,759) --
Intercompany.................... 363,455 (361,202) (2,253) -- --
Goodwill, net................... 210 281,953 -- -- 282,163
Other assets.................... 12,783 65,853 256 -- 78,892
--------- --------- --------- --------- ---------
Total assets.................. $ 935,839 $ 296,696 $ 5,685 $(142,759) $1,095,461
========= ========= ========= ========= =========
Current liabilities............. $ 394,553 $ 141,433 $ 3,310 $ -- $ 539,296
Long-term debt.................. 306,000 -- -- -- 306,000
Other liabilities............... 779 (251) (57) -- 471
Stockholders' equity............ 234,507 155,514 2,432 (142,759) 249,694
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity........ $ 935,839 $ 296,696 $ 5,685 $(142,759) $1,095,461
========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1996
Net revenues.................... $ 757,972 $ 11,454 $ 4,189 $ -- $ 773,615
Operating expenses.............. 719,210 10,115 4,660 -- 733,985
--------- --------- --------- --------- ---------
Operating income (loss)....... 38,762 1,339 (471) -- 39,630
Interest income (expense)....... 3,433 -- 17 -- 3,450
--------- --------- --------- --------- ---------
Income (loss) before tax
provision................... 42,195 1,339 (454) -- 43,080
Income tax provision
(benefit)..................... 16,562 525 (155) -- 16,932
--------- --------- --------- --------- ---------
Net income (loss)............. $ 25,633 $ 814 $ (299) $ -- $ 26,148
========= ========= ========= ========= =========
</TABLE>
F-43
<PAGE> 134
EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EXPRESS NON-
SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net revenues.................... $1,205,085 $ 16,107 $ 9,442 $ -- $1,230,634
Operating expenses.............. 1,158,490 15,031 8,263 -- 1,181,784
--------- --------- --------- --------- ---------
Operating income (loss)....... 46,595 1,076 1,179 -- 48,850
Interest income (expense)....... 5,821 -- 35 -- 5,856
--------- --------- --------- --------- ---------
Income (loss) before tax
provision................... 52,416 1,076 1,214 -- 54,706
Income tax provision
(benefit)..................... 20,352 417 508 -- 21,277
--------- --------- --------- --------- ---------
Net income (loss)............. $ 32,064 $ 659 $ 706 $ -- $ 33,429
========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998
Net revenues.................... $1,646,807 $1,167,387 $ 10,678 $ -- $2,824,872
Operating expenses.............. 1,584,731 1,139,387 11,520 -- 2,735,638
--------- --------- --------- --------- ---------
Operating income (loss)....... 62,076 28,000 (842) -- 89,234
Interest income (expense)....... (13,943) 846 103 -- (12,994)
--------- --------- --------- --------- ---------
Income (loss) before tax
provision................... 48,133 28,846 (739) -- 76,240
Income tax provision
(benefit)..................... 18,291 15,434 (159) -- 33,566
--------- --------- --------- --------- ---------
Net income (loss)............. $ 29,842 $ 13,412 $ (580) $ -- $ 42,674
========= ========= ========= ========= =========
</TABLE>
F-44
<PAGE> 135
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> 136
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> 137
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> 138
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> 139
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> 140
[EXPRESS SCRIPTS LOGO]
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
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.
II-1
<PAGE> 142
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 -- Purchase Agreement, dated June 11, 1999, among Express
Scripts, Inc. and Credit Suisse First Boston Corporation and
Deutsche Bank Securities Inc.+
4.1 -- Indenture, dated as of June 16, 1999, among Express Scripts,
Inc., Bankers Trust Company, as trustee, and the Guarantors
named therein+
4.2 -- Registration Rights Agreement, dated as of June 11, 1999,
among Express Scripts, Inc. and Credit Suisse First Boston
Corporation and Deutsche Bank Securities Inc.+
5.1 -- Opinion of Simpson Thacher & Bartlett
12.1 -- Statement re: Computation of Ratios
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Ernst & Young LLP, Minneapolis, Minnesota
23.3 -- Consent of Ernst & Young LLP, Pittsburgh, Pennsylvania
23.4 -- Consent of Simpson Thacher & Bartlett (included in Exhibit
5.1)
24.1 -- Powers of attorney+
25.1 -- Statement of eligibility and qualification under the Trust
Indenture Act of 1939 on Form T-1 of Bankers Trust Company
to act as Trustee under the Indenture
99.1 -- Form of Letter of Transmittal+
99.2 -- Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees+
99.3 -- Form of Letter to Clients+
99.4 -- Form of Notice of Guaranteed Delivery+
</TABLE>
- ------------------
+ Filed previously.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
a. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
b. To reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
c. To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
II-2
<PAGE> 143
provided, however, that the undertakings set forth in paragraphs (a) and
(b) above shall not apply if the information required to be included in
a post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Exchange Act that are incorporated by reference in this
registration statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment 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.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
4. That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's 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.
5. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent
to the effective date of the registration statement through the date of
responding to the request.
6. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has 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 the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant 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, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 144
SIGNATURES
Pursuant to the requirements of the Securities Act, we 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
August 3, 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 August 3, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer:
*
- ------------------------------------ President, Chief Executive Officer
Barrett A. Toan and Director August 3, 1999
(2) Principal Financial Officer:
*
- ------------------------------------ Senior Vice President and Chief
George Paz Financial Officer August 3, 1999
(3) Principal Accounting Officer:
*
- ------------------------------------ Vice President, Chief Accounting
Joseph W. Plum Officer and Assistant Secretary August 3, 1999
(4) Directors:
*
- ------------------------------------
Howard Atkins Director August 3, 1999
*
- ------------------------------------
Judith E. Campbell Director August 3, 1999
*
- ------------------------------------
Richard M. Kernan, Jr. Director August 3, 1999
*
- ------------------------------------
Richard A. Norling Director August 3, 1999
*
- ------------------------------------
Frederick J. Sievert Director August 3, 1999
*
- ------------------------------------
Stephen N. Steinig Director August 3, 1999
*
- ------------------------------------
Seymour Sternberg Director August 3, 1999
</TABLE>
II-4
<PAGE> 145
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
- ------------------------------------
Howard L. Waltman Chairman, Director August 3, 1999
*
- ------------------------------------
Norman Zachary Director August 3, 1999
*By: /s/ KEITH J. EBLING
- ---------------------------------
As attorney-in-fact for
the person indicated
</TABLE>
II-5
<PAGE> 146
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C> <C>
1.1 -- Purchase Agreement, dated June 11, 1999, among Express
Scripts, Inc. and Credit Suisse First Boston Corporation
and Deutsche Bank Securities Inc.+........................
4.1 -- Indenture, dated as of June 16, 1999, among Express
Scripts, Inc., Bankers Trust Company, as trustee, and the
Guarantors named therein.+................................
4.2 -- Registration Rights Agreement, dated as of June 11, 1999,
among Express Scripts, Inc. and Credit Suisse First Boston
Corporation and Deutsche Bank Securities Inc.+............
5.1 -- Opinion of Simpson Thacher & Bartlett.....................
12.1 -- Statement re: Computation of Ratios.......................
23.1 -- Consent of PricewaterhouseCoopers LLP.....................
23.2 -- Consent of Ernst & Young LLP, Minneapolis, Minnesota......
23.3 -- Consent of Ernst & Young LLP, Pittsburgh, Pennsylvania....
23.4 -- Consent of Simpson Thacher & Bartlett (included in Exhibit
5.1)......................................................
24.1 -- Powers of attorney+.......................................
25.1 -- Statement of eligibility and qualification under the Trust
Indenture Act of 1939 on Form T-1 of Bankers Trust Company
to act as Trustee under the Indenture.....................
99.1 -- Form of Letter of Transmittal+............................
99.2 -- Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees+.......................
99.3 -- Form of Letter to Clients+................................
99.4 -- Form of Notice of Guaranteed Delivery+....................
</TABLE>
- ------------------
+ Filed previously.
<PAGE> 1
EXHIBIT 5.1
[SIMPSON THACHER & BARTLETT LETTERHEAD]
August 4, 1999
Express Scripts, Inc.
13900 Riverport Drive
Maryland Heights, MO 63043
Ladies and Gentlemen:
We have acted as counsel to Express Scripts, Inc., a Delaware corporation
(the "Company"), and the subsidiaries of the Company named in Exhibit A and
Exhibit B hereto (individually, a "Guarantor" and collectively, the
"Guarantors"), in connection with the Registration Statement on Form S-4 (the
"Registration Statement") filed by the Company and the Guarantors with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended, relating to the issuance by the Company of $250,000,000
aggregate principal amount of 9 5/8% Senior Notes due 2009 (the "Exchange
Securities") and the issuance by the Guarantors of guarantees (the
"Guarantees"), with respect to the Exchange Securities. The Exchange Securities
and the Guarantees will be issued under an indenture (the "Indenture") dated as
of June 16, 1999, among the Company the Guarantors and Bankers Trust Company, as
Trustee. The Exchange Securities will be offered by the Company in exchange for
$250,000,000 aggregate principal amount of its outstanding 9 5/8% Senior Notes
due 2009 (the "Securities").
<PAGE> 2
Express Scripts, Inc. -2- August 4, 1999
We have examined the Registration Statement and the Indenture, which has
been filed with the Commission as an exhibit to the Registration Statement. We
also have examined the originals, or duplicates or certified or conformed
copies, of such records, agreements, instruments and other documents and have
made such other and further investigations as we have deemed relevant and
necessary in connection with the opinions expressed herein. As to questions of
fact material to this opinion, we have relied upon certificates of public
officials and of officers and representatives of the Company and the Guarantors.
In rendering the opinions set forth below, we have assumed the genuineness
of all signatures, the legal capacity of natural persons, the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as duplicates or certified or conformed copies,
and the authenticity of the originals of such latter documents. We also have
assumed that the Indenture is the valid and legally binding obligation of the
Trustee.
We have assumed further that (1) the Subsidiaries listed in Exhibit B
hereto (the "Non-Delaware Guarantors") have duly authorized, executed and
delivered the Indenture and (2) execution, delivery and performance by the
Non-Delaware Guarantors of the Indenture and the Guarantees do not and will not
violate the laws of the respective jurisdictions in which such Non-Delaware
Guarantors are organized (as set forth next to the name of each Non-Delaware
Guarantor in Exhibit B hereto) or any other applicable laws (excepting the laws
of the State of New York and the Federal laws of the United States).
<PAGE> 3
Express Scripts, Inc. -3- August 4, 1999
Based upon the foregoing, and subject to the qualifications and limitations
stated herein, we are of the opinion that:
1. When the Exchange Securities have been duly executed, authenticated,
issued and delivered in accordance with the provisions of the Indenture upon the
exchange, the Exchange Securities will constitute valid and legally binding
obligations of the Company enforceable against the Company in accordance with
their terms.
2. When (a) the Exchange Securities have been duly executed, authenticated,
issued and delivered in accordance with the provisions of the Indenture upon the
exchange and (b) the Guarantees have been duly issued, the Guarantees will
constitute valid and legally binding obligations of the Guarantors enforceable
against the Guarantors in accordance with their terms.
Our opinions set forth above are subject to the effects of (1) bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, (2) general equitable
principles (whether considered in a proceeding in equity or at law) and (3) an
implied covenant of good faith and fair dealing.
We are members of the Bar of the State of New York, and we do not express
any opinion herein concerning any law other than the law of the State of New
York, the Federal law of the United States and the Delaware General Corporation
Law.
<PAGE> 4
Express Scripts, Inc. -4- August 4, 1999
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to
the Registration Statement and to the use of our name under the caption Legal
Matters in the Prospectus included in the Registration Statement.
Very truly yours,
SIMPSON THACHER & BARTLETT
<PAGE> 5
EXHIBIT A
DELAWARE GUARANTORS
1. ESI/VRx Sales Development Co.
2. Express Scripts Vision Corp.
3. IVTx, Inc.
4. Managed Prescription Network, Inc.
5. Value Health, Inc.
6. ValueRx, Inc.
7. YourPharmacy.com, Inc.
<PAGE> 6
EXHIBIT B
NON-DELAWARE GUARANTORS
1. Diversified Pharmaceutical Services, Inc. (Minnesota)
2. MHI, Inc. (Nevada)
3. Health Care Services, Inc. (Pennsylvania)
4. ValueRx Pharmacy Program, Inc. (Michigan)
<PAGE> 1
Exhibit 12.1
EXPRESS SCRIPTS, INC.
STATEMENTS RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, 1994, 1995, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
(in thousands) 1994 1995 1996 1997 1998
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense (1) $ 68 $ 86 $ 59 $ 225 $20,230
Interest portion of rental expense 443 627 700 757 1,292
-------------- -------------- --------------- --------------- --------------
Total fixed charges 511 713 759 982 21,522
Earnings:
Income before income taxes and
extraordinary items (2) 20,776 29,634 43,080 54,706 76,240
============== ============== =============== =============== ==============
Total adjusted earnings $21,287 $30,347 $43,839 $55,688 $97,762
============== ============== =============== =============== ==============
Ratio of earnings to fixed charges 41.66 42.56 57.76 56.71 4.54
============== ============== =============== =============== ==============
<CAPTION>
Three Months Ended
March 31,
--------------------------------
(in thousands) 1998 1999
--------------- ---------------
<S> <C> <C>
Fixed charges:
Interest expense (1) $ 14 $ 6,222
Interest portion of rental expense 194 994
--------------- ---------------
Total fixed charges 208 7,216
Earnings:
Income before income taxes and
extraordinary items (2) 16,168 24,171
=============== ===============
Total adjusted earnings $16,376 $31,387
=============== ===============
Ratio of earnings to fixed charges 78.73 4.35
=============== ===============
</TABLE>
(1) Interest expense includes the amortization on our deferred financing fees.
(2) Income before income taxes and extraordinary items includes corporate
restructuring charges of $1,651,000 for the year ended December 31, 1998.
<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-4 of our report dated February 12, 1999, except for
Note 15, which is as of July 15, 1999, relating to the financial
statements of Express Scripts, Inc., which are included in such
Prospectus;
* the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-4 of 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;
* the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-4 of our report dated February 12,
1999, except for Note 15, which is as of July 15, 1999, relating to the
financial statements and financial statement schedule, which appears in
Express Scripts, Inc.'s Annual Report on Form 10-K/A dated June 10, 1999
for the year ended December 31, 1998;
* the incorporation by reference in the Prospectus constituting part of
this Registration Statement on Form S-4 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."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
August 4, 1999
<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 Amendment No. 1 to the Registration Statement on Form S-4 (No.333-8313)
and related Prospectus of Express Scripts, Inc.
Minneapolis, Minnesota
August 4, 1999
<PAGE> 1
EXHIBIT 23.3
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 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 Amendment No. 1 to the Registration Statement on Form S-4
(No. 333-8313)and related Prospectus of Express Scripts, Inc.
Pittsburgh, Pennsylvania
August 4, 1999
<PAGE> 1
EXHIBIT 25.1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) ___________
------------------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NY 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
---------------------------------
EXPRESS SCRIPTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 43-1420563
(State or other jurisdiction of (I.R.S. employer identification no.)
Incorporation or organization)
13900 RIVERPORT DRIVE
MARYLAND HEIGHTS, MO 63043
(314) 770-1666
(Address, including zip code, and telephone
number of principal executive offices)
9 5/8% SENIOR NOTES DUE 2009
(Title of the indenture securities)
</TABLE>
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3.-15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers
Trust Company dated August 7, 1990, Certificate
of Amendment of the Organization Certificate of
Bankers Trust Company dated June 21, 1995 -
Incorporated herein by reference to Exhibit 1
filed with Form T-1 Statement, Registration No.
33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust
Company dated March 20, 1996, incorporate by
referenced to Exhibit 1 filed with Form T-1
Statement, Registration No. 333-25843 and
Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated June
19, 1997, copy attached.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No.
33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise
corporate trust powers - Incorporated herein by
reference to Exhibit 2 filed with Form T-1
Statement, Registration No. 33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as
amended on November 18, 1997. Copy attached.
-2-
<PAGE> 3
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by
Section 321(b) of the Act. - Incorporated
herein by reference to Exhibit 4 filed with
Form T-1 Statement, Registration No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust
Company dated as of March 31, 1999. Copy
attached.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in The City of New York, and State of New York,
on the 16th day of July, 1999.
BANKERS TRUST COMPANY
By: /s/ SUSAN JOHNSON
-----------------
Susan Johnson
Assistant Vice President
-4-
<PAGE> 5
State Of New York,
BANKING DEPARTMENT
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER
SECTION 8005 OF THE BANKING LAW," dated June 19, 1997, providing for an
increase in authorized capital stock from $1,601,666,670 consisting of
100,166,667 shares with a par value of $10 each designated as Common Stock and
600 shares with a par value of $1,000,000 each designated as Series Preferred
Stock to $2,001,666,670 consisting of 100,166,667 shares with a par value of
$10 each designated as Common Stock and 1,000 shares with a par value of
$1,000,000 each designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York,
this 27TH day of June in the Year of our Lord one thousand nine hundred
and NINETY-SEVEN.
Manuel Kursky
------------------------------
Deputy Superintendent of Banks
<PAGE> 6
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a
Managing Director and an Assistant Secretary of Bankers Trust Company, do
hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of march, 1903.
3. The organization certificate as heretofore amended is hereby
amended to increase the aggregate number of shares which the corporation shall
have authority to issue and to increase the amount of its authorized capital
stock in conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter
to have is One Billion, Six Hundred and One Million, Six Hundred
Sixty-Six Thousand, Six Hundred Seventy Dollars ($1,601,666,670),
divided into One Hundred Million, One Hundred Sixty-Six Thousand,
Six Hundred Sixty-Seven (100,166,667) shares with a par value of $10
each designated as Common Stock and 600 shares with a par value of
One Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter
to have is Two Billion One Million, Six Hundred Sixty-Six Thousand,
Six Hundred Seventy Dollars ($2,001,666,670), divided into One
Hundred Million, One Hundred Sixty-Six Thousand, Six Hundred
Sixty-Seven (100,166,667) shares with a par value of $10 each
designated as Common Stock and 1000 shares with a par value of One
Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
<PAGE> 7
5. The foregoing amendment of the organization certificate was
authorized by unanimous written consent signed by the holder of all outstanding
shares entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate
this 19th day of June, 1997.
James T. Byrne, Jr.
-------------------------
James T. Byrne, Jr.
Managing Director
Lea Lahtinen
-------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an
Assistant Secretary of Bankers Trust Company, the corporation described in the
foregoing certificate; that she has read the foregoing certificate and knows the
contents thereof, and that the statements herein contained are true.
Lea Lahtinen
-------------------------
Lea Lahtinen
Sworn to before me this 19th day
of June, 1997.
Sandra L. West
-------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
<PAGE> 8
BY-LAWS
NOVEMBER 18, 1997
BANKERS TRUST COMPANY
NEW YORK
<PAGE> 9
BY-LAWS
OF
BANKERS TRUST COMPANY
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of this Company shall be held
at the office of the Company in the Borough of Manhattan, City of New York, on
the third Tuesday in January of each year, for the election of directors and
such other business as may properly come before said meeting.
SECTION 2. Special meetings of stockholders other than those regulated by
statute may be called at any time by a majority of the directors. It shall be
the duty of the Chairman of the Board, the Chief Executive Officer or the
President to call such meetings whenever requested in writing to do so by
stockholders owning a majority of the capital stock.
SECTION 3. At all meetings of stockholders, there shall be present, either in
person or by proxy, stockholders owning a majority of the capital stock of the
Company, in order to constitute a quorum, except at special elections of
directors, as provided by law, but less than a quorum shall have power to
adjourn any meeting.
SECTION 4. The Chairman of the Board or, in his absence, the Chief Executive
Officer or, in his absence, the President or, in their absence, the senior
officer present, shall preside at meetings of the stockholders and shall direct
the proceedings and the order of business. The Secretary shall act as secretary
of such meetings and record the proceedings.
ARTICLE II
DIRECTORS
SECTION 1. The affairs of the Company shall be managed and its corporate powers
exercised by a Board of Directors consisting of such number of directors, but
not less than ten nor more than twenty-five, as may from time to time be fixed
by resolution adopted by a majority of the directors then in office, or by the
stockholders. In the event of any increase in the number of directors,
additional directors may be elected within the limitations so fixed, either by
the stockholders or within the limitations imposed by law, by a majority of
directors then in office. One-third of the number of directors, as fixed from
time to time, shall constitute a quorum. Any one or more members of the Board
of Directors or any Committee thereof may participate in a meeting of the Board
of Directors or Committee thereof by means of a conference telephone or similar
communications equipment which allows all persons participating in the meeting
to hear each other at the same time. Participation by such means shall
constitute presence in person at such a meeting.
<PAGE> 10
All directors hereafter elected shall hold office until the next annual meeting
of the stockholders and until their successors are elected and have qualified.
No person who shall have attained age 72 shall be eligible to be elected or
re-elected a director. Such director may, however, remain a director of the
Company until the next annual meeting of the stockholders of Bankers Trust New
York Corporation (the Company's parent) so that such director's retirement will
coincide with the retirement date from Bankers Trust New York Corporation.
No Officer-Director who shall have attained age 65, or earlier relinquishes his
responsibilities and title, shall be eligible to serve as a director.
SECTION 2. Vacancies not exceeding one-third of the whole number of the Board
of Directors may be filled by the affirmative vote of a majority of the
directors then in office, and the directors so elected shall hold office for
the balance of the unexpired term.
SECTION 3. The Chairman of the Board shall preside at meetings of the Board of
Directors. In his absence, the Chief Executive Officer or, in his absence, such
other director as the Board of Directors from time to time may designate shall
preside at such meetings.
SECTION 4. The Board of Directors may adopt such Rules and Regulations for the
conduct of its meetings and the management of the affairs of the Company as it
may deem proper, not inconsistent with the laws of the State of New York, or
these By-Laws, and all officers and employees shall strictly adhere to, and be
bound by, such Rules and Regulations.
SECTION 5. Regular meetings of the Board of Directors shall be held from time
to time on the third Tuesday of the month. If the day appointed for holding
such regular meetings shall be a legal holiday, the regular meeting to be held
on such day shall be held on the next business day thereafter. Special meetings
of the Board of Directors may be called upon at least two day's notice whenever
it may be deemed proper by the Chairman of the Board or, the Chief Executive
Officer or, in their absence, by such other director as the Board of Directors
may have designated pursuant to Section 3 of this Article, and shall be called
upon like notice whenever any three of the directors so request in writing.
SECTION 6. The compensation of directors as such or as members of committees
shall be fixed from time to time by resolution of the Board of Directors.
<PAGE> 11
ARTICLE III
COMMITTEES
SECTION 1. There shall be an Executive Committee of the Board consisting of not
less than five directors who shall be appointed annually by the Board of
Directors. The Chairman of the Board shall preside at meetings of the Executive
Committee. In his absence, the Chief Executive Officer or, in his absence, such
other member of the Committee as the Committee from time to time may designate
shall preside at such meetings.
The Executive Committee shall possess and exercise to the extent permitted by
law all of the powers of the Board of Directors, except when the latter is in
session, and shall keep minutes of its proceedings, which shall be presented to
the Board of Directors at its next subsequent meeting. All acts done and powers
and authority conferred by the Executive Committee from time to time shall be
and be deemed to be, and may be certified as being, the act and under the
authority of the Board of Directors.
A majority of the Committee shall constitute a quorum, but the Committee may
act only by the concurrent vote of not less than one-third of its members, at
least one of whom must be a director other than an officer. Any one or more
directors, even though not members of the Executive Committee, may attend any
meeting of the Committee, and the member or members of the Committee present,
even though less than a quorum, may designate any one or more of such directors
as a substitute or substitutes for any absent member or members of the
Committee, and each such substitute or substitutes shall be counted for quorum,
voting, and all other purposes as a member or members of the Committee.
SECTION 2. There shall be an Audit Committee appointed annually by resolution
adopted by a majority of the entire Board of Directors which shall consist of
such number of directors, who are not also officers of the Company, as may from
time to time be fixed by resolution adopted by the Board of Directors. The
Chairman shall be designated by the Board of Directors, who shall also from
time to time fix a quorum for meetings of the Committee. Such Committee shall
conduct the annual directors' examinations of the Company as required by the
New York State Banking Law; shall review the reports of all examinations made
of the Company by public authorities and report thereon to the Board of
Directors; and shall report to the Board of Directors such other matters as it
deems advisable with respect to the Company, its various departments and the
conduct of its operations.
In the performance of its duties, the Audit Committee may employ or retain,
from time to time, expert assistants, independent of the officers or personnel
of the Company, to make studies of the Company's assets and liabilities as the
Committee may request and to make an examination of the accounting and auditing
methods of the Company and its system of internal protective controls to the
extent considered necessary or advisable in order to determine that the
operations of the Company, including its fiduciary departments, are being
audited by the General Auditor in such a manner as to provide prudent and
adequate protection. The Committee also may direct the General Auditor to make
such investigation as it deems necessary or advisable with respect to the
Company, its various departments and the conduct of its operations. The
Committee shall hold regular quarterly meetings and during the intervals
thereof shall meet at other times on call of the Chairman.
<PAGE> 12
SECTION 3. The Board of Directors shall have the power to appoint any other
Committees as may seem necessary, and from time to time to suspend or continue
the powers and duties of such Committees. Each Committee appointed pursuant to
this Article shall serve at the pleasure of the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. The Board of Directors shall elect from among their number a
Chairman of the Board and a Chief Executive Officer; and shall also elect a
President, and may also elect a Senior Vice Chairman, one or more Vice
Chairmen, one or more Executive Vice Presidents, one or more Senior Managing
Directors, one or more Managing Directors, one or more Senior Vice Presidents,
one or more Principals, one or more Vice Presidents, one or more General
Managers, a Secretary, a Controller, a Treasurer, a General Counsel, one or
more Associate General Counsels, a General Auditor, a General Credit Auditor,
and one or more Deputy Auditors, who need not be directors. The officers of the
corporation may also include such other officers or assistant officers as shall
from time to time be elected or appointed by the Board. The Chairman of the
Board or the Chief Executive Officer or, in their absence, the President, the
Senior Vice Chairman or any Vice Chairman, may from time to time appoint
assistant officers. All officers elected or appointed by the Board of Directors
shall hold their respective offices during the pleasure of the Board of
Directors, and all assistant officers shall hold office at the pleasure of the
Board or the Chairman of the Board or the Chief Executive Officer or, in their
absence, the President, the Senior Vice Chairman or any Vice Chairman. The
Board of Directors may require any and all officers and employees to give
security for the faithful performance of their duties.
SECTION 2. The Board of Directors shall designate the Chief Executive Officer
of the Company who may also hold the additional title of Chairman of the Board,
President, Senior Vice Chairman or Vice Chairman and such person shall have,
subject to the supervision and direction of the Board of Directors or the
Executive Committee, all of the powers vested in such Chief Executive Officer
by law or by these By-Laws, or which usually attach or pertain to such office.
The other officers shall have, subject to the supervision and direction of the
Board of Directors or the Executive Committee or the Chairman of the Board or,
the Chief Executive Officer, the powers vested by law or by these By-Laws in
them as holders of their respective offices and, in addition, shall perform
such other duties as shall be assigned to them by the Board of Directors or the
Executive Committee or the Chairman of the Board or the Chief Executive
Officer.
The General Auditor shall be responsible, through the Audit Committee, to the
Board of Directors for the determination of the program of the internal audit
function and the evaluation of the adequacy of the system of internal controls.
Subject to the Board of Directors, the General Auditor shall have and may
exercise all the powers and shall perform all the duties usual to such office
and shall have such other powers as may be prescribed or assigned to him from
time to time by the Board of Directors or vested in him by law or by these
By-Laws. He shall perform such other duties and shall make such investigations,
examinations and reports as may be prescribed or required by the Audit
Committee. The General Auditor shall have unrestricted access to all records
and premises of the Company and shall delegate such authority to his
subordinates. He shall have the duty to report to the Audit Committee on all
matters concerning the internal audit
<PAGE> 13
program and the adequacy of the system of internal controls of the Company
which he deems advisable or which the Audit Committee may request.
Additionally, the General Auditor shall have the duty of reporting
independently of all officers of the Company to the Audit Committee at least
quarterly on any matters concerning the internal audit program and the adequacy
of the system of internal controls of the Company that should be brought to the
attention of the directors except those matters responsibility for which has
been vested in the General Credit Auditor. Should the General Auditor deem any
matter to be of special immediate importance, he shall report thereon forthwith
to the Audit Committee. The General Auditor shall report to the Chief Financial
Officer only for administrative purposes.
The General Credit Auditor shall be responsible to the Chief Executive Officer
and, through the Audit Committee, to the Board of Directors for the systems of
internal credit audit, shall perform such other duties as the Chief Executive
Officer may prescribe, and shall make such examinations and reports as may be
required by the Audit Committee. The General Credit Auditor shall have
unrestricted access to all records and may delegate such authority to
subordinates.
SECTION 3. The compensation of all officers shall be fixed under such plan or
plans of position evaluation and salary administration as shall be approved
from time to time by resolution of the Board of Directors.
SECTION 4. The Board of Directors, the Executive Committee, the Chairman of the
Board, the Chief Executive Officer or any person authorized for this purpose by
the Chief Executive Officer, shall appoint or engage all other employees and
agents and fix their compensation. The employment of all such employees and
agents shall continue during the pleasure of the Board of Directors or the
Executive Committee or the Chairman of the Board or the Chief Executive Officer
or any such authorized person; and the Board of Directors, the Executive
Committee, the Chairman of the Board, the Chief Executive Officer or any such
authorized person may discharge any such employees and agents at will.
<PAGE> 14
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. The Company shall, to the fullest extent permitted by Section 7018
of the New York Banking Law, indemnify any person who is or was made, or
threatened to be made, a party to an action or proceeding, whether civil or
criminal, whether involving any actual or alleged breach of duty, neglect or
error, any accountability, or any actual or alleged misstatement, misleading
statement or other act or omission and whether brought or threatened in any
court or administrative or legislative body or agency, including an action by
or in the right of the Company to procure a judgment in its favor and an action
by or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the Company is servicing or
served in any capacity at the request of the Company by reason of the fact that
he, his testator or intestate, is or was a director or officer of the Company,
or is serving or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement, and costs, charges and expenses,
including attorneys' fees, or any appeal therein; provided, however, that no
indemnification shall be provided to any such person if a judgment or other
final adjudication adverse to the director or officer establishes that (i) his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 2. The Company may indemnify any other person to whom the Company is
permitted to provide indemnification or the advancement of expenses by
applicable law, whether pursuant to rights granted pursuant to, or provided by,
the New York Banking Law or other rights created by (i) a resolution of
stockholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these By-Laws
authorize the creation of other rights in any such manner.
SECTION 3. The Company shall, from time to time, reimburse or advance to any
person referred to in Section 1 the funds necessary for payment of expenses,
including attorneys' fees, incurred in connection with any action or proceeding
referred to in Section 1, upon receipt of a written undertaking by or on behalf
of such person to repay such amount(s) if a judgment or other final
adjudication adverse to the director or officer establishes that (i) his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 4. Any director or officer of the Company serving (i) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the Company, or (ii) any employee benefit plan of
the Company or any corporation referred to in clause (i) in any capacity shall
be deemed to be doing so at the request of the Company. In all other cases, the
provisions of this Article V will apply (i) only if the person serving another
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise so served at the specific request of the Company, evidenced by
a written communication signed by the Chairman of the Board, the Chief
Executive Officer or the
<PAGE> 15
President, and (ii) only if and to the extent that, after making such efforts
as the Chairman of the Board, the Chief Executive Officer or the President
shall deem adequate in the circumstances, such person shall be unable to obtain
indemnification from such other enterprise or its insurer.
SECTION 5. Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article V may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 6. The right to be indemnified or to the reimbursement or advancement
of expense pursuant to this Article V (i) is a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Company and the director or
officer, (ii) is intended to be retroactive and shall be available with respect
to events occurring prior to the adoption hereof, and (iii) shall continue to
exist after the rescission or restrictive modification hereof with respect to
events occurring prior thereto.
SECTION 7. If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the Company
within thirty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstance, nor an actual determination by the Company (including its Board
of Directors, independent legal counsel, or its stockholders) that the claimant
is not entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
claimant is not so entitled.
SECTION 8. A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in Section 1 shall be entitled to indemnification only as provided in Sections
1 and 3, notwithstanding any provision of the New York Banking Law to the
contrary.
<PAGE> 16
ARTICLE VI
SEAL
SECTION 1. The Board of Directors shall provide a seal for the Company, the
counterpart dies of which shall be in the charge of the Secretary of the
Company and such officers as the Chairman of the Board, the Chief Executive
Officer or the Secretary may from time to time direct in writing, to be affixed
to certificates of stock and other documents in accordance with the directions
of the Board of Directors or the Executive Committee.
SECTION 2. The Board of Directors may provide, in proper cases on a specified
occasion and for a specified transaction or transactions, for the use of a
printed or engraved facsimile seal of the Company.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Registration of transfer of shares shall only be made upon the books
of the Company by the registered holder in person, or by power of attorney,
duly executed, witnessed and filed with the Secretary or other proper officer
of the Company, on the surrender of the certificate or certificates of such
shares properly assigned for transfer.
ARTICLE VIII
CONSTRUCTION
SECTION 1. The masculine gender, when appearing in these By-Laws, shall be
deemed to include the feminine gender.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or added to by the Board of
Directors at any meeting, or by the stockholders at any annual or special
meeting, provided notice thereof has been given.
I, _____________________________________, Assistant Secretary of Bankers Trust
Company, New York, New York, hereby certify that the foregoing is a complete,
true and
<PAGE> 17
correct copy of the By-Laws of Bankers Trust Company, and that the same are in
full force and effect at this date.
-------------------------------------
ASSISTANT SECRETARY
DATED:
----------------------------------
<PAGE> 18
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS FOR MARCH 31, 1999
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
----------------
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS / / / / / / / / /
1. Cash and balances due from depository institutions (from Schedule RC-A): / / / / / / / / /
a. Noninterest-bearing balances and currency and coin (1) ................. 0081 1,695,000 1.a.
b. Interest-bearing balances (2) .......................................... 0071 1,308,000 1.b.
2. Securities: / / / / / / / / /
a. Held-to-maturity securities (from Schedule RC-B, column A) ............. 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)............ 1773 6,150,000 2.b.
3. Federal funds sold and securities purchased under agreements to resell....... 1350 29,512,000 3.
4. Loans and lease financing receivables: / / / / / / / / /
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 18,869,000 / / / / / / / / / 4.a.
b. LESS: Allowance for loan and lease losses.....................RCFD 3123 571,000 / / / / / / / / / 4.b.
c. LESS: Allocated transfer risk reserve ........................RCFD 3128 0 / / / / / / / / / 4.c.
d. Loans and leases, net of unearned income, / / / / / / / / /
allowance, and reserve (item 4.a minus 4.b and 4.c) .................... 2125 18,298,000 4.d.
5. Trading Assets (from schedule RC-D) ........................................ 3545 34,815,000 5.
6. Premises and fixed assets (including capitalized leases) .................... 2145 916,000 6.
7. Other real estate owned (from Schedule RC-M) ................................ 2150 88,000 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 883,000 8.
9. Customers' liability to this bank on acceptances outstanding ................ 2155 307,000 9.
10. Intangible assets (from Schedule RC-M) ...................................... 2143 302,000 10.
11. Other assets (from Schedule RC-F) ........................................... 2160 4,645,000 11.
12. Total assets (sum of items 1 through 11) .................................... 2170 98,919,000 12.
--------------------------
</TABLE>
- --------------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE> 19
SCHEDULE RC--CONTINUED
<TABLE>
<CAPTION>
Dollar Amounts in Thousands / / / / / / / / Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES / / / / / / / / / / /
13. Deposits: / / / / / / / / / / /
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) RCON 2200 17,829,000
(1) Noninterest-bearing(1) ............................RCON 6631 2,939,000... / / / / / / / / / / /
(2) Interest-bearing ..................................RCON 6636 14,890,000... / / / / / / / / / / /
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E / / / / / / / / / / /
part II) RCFN 2200 20,634,000
(1) Noninterest-bearing ..............................RCFN 6631 1,878,000 / / / / / / / / / / /
(2) Interest-bearing .................................RCFN 6636 18,756,000 / / / / / / / / / / /
14. Federal funds purchased and securities sold under agreements to repurchase RCFD 2800 13,513,000
15. a. Demand notes issued to the U.S. Treasury ................................................ RCON 2840 0
b. Trading liabilities (from Schedule RC-D)................................................. RCFD 3548 22,010,000
16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases): / / / / / / / / / / /
a. With a remaining maturity of one year or less ............................................... RCFD 2332 6,400,000
b. With a remaining maturity of more than one year through three years......................... A547 2,347,000
c. With a remaining maturity of more than three years............................................ A548 2,321,000
17. Not Applicable. / / / / / / / / / / /
18. Bank's liability on acceptances executed and outstanding ......................................... RCFD 2920 307,000
19. Subordinated notes and debentures (2)............................................................. RCFD 3200 438,000
20. Other liabilities (from Schedule RC-G) ........................................................... RCFD 2930 6,129,000
21. Total liabilities (sum of items 13 through 20) ................................................... RCFD 2948 91,928,000
22. Not Applicable / / / / / / / / / / /
/ / / / / / / / / / /
EQUITY CAPITAL / / / / / / / / / / /
23. Perpetual preferred stock and related surplus .................................................... RCFD 383 1,500,000
24. Common stock ..................................................................................... RCFD 3230 2,127,000
25. Surplus (exclude all surplus related to preferred stock) ......................................... RCFD 3839 541,000
26. a. Undivided profits and capital reserves ...................................................... RCFD 3632 3,291,000
b. Net unrealized holding gains (losses) on available-for-sale securities ...................... RCFD 8434 ( 59,000)
c. Accumulated net gains (losses) on cash flow hedges........................................... RCFD 4336 0
27. Cumulative foreign currency translation adjustments .............................................. RCFD 3284 (409,000)
28. Total equity capital (sum of items 23 through 27) ................................................ RCFD 3210 6,991,000
29. Total liabilities and equity capital (sum of items 21 and 28)..................................... RCFD 3300 98,919,000
</TABLE>
Memorandum
To be reported only with the March Report of Condition.
<TABLE>
<CAPTION>
1. Indicate in the box at the right the number of the statement below that best describes the Number
most comprehensive level of auditing work performed for the bank by independent external --------------
auditors as of any date during 1998 ............................................................ RCFD 6724 1
-----------------------
<S> <C>
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company external auditors
(but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards by
a certified public accounting firm (may be required by
state chartering authority)
</TABLE>
- ----------------------
(1) Including total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
