SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
_____________.
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1420563
(State of Incorporation) (I.R.S. employer
identification no.)
14000 Riverport Dr., Maryland Heights, Missouri 63043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 770-1666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Common stock outstanding as of April 30, 1999: 18,232,160 Shares Class A
15,020,000 Shares Class B
<PAGE>
EXPRESS SCRIPTS, INC.
INDEX
Page Number
Part I Financial Information 3
Item 1. Financial Statements (unaudited)
a) Consolidated Balance Sheet 3
b) Consolidated Statement of Operations 4
c) Consolidated Statement of Changes
in Stockholders' Equity 5
d) Consolidated Statement of Cash Flows 6
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risks - 19
Part II Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds -
(Not Applicable)
Item 3. Defaults Upon Senior Securities -
(Not Applicable)
Item 4. Submission of Matters to a Vote of
Security Holders - (Not Applicable)
Item 5. Other Information - (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
Index to Exhibits 23
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Balance Sheet
March 31, December 31,
(in thousands, except share data) 1999 1998
- -------------------------------- -------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 115,838 $ 122,589
Receivables, less allowance for doubtful
accounts of $14,883 and $17,806, respectively 446,453 433,006
Inventories 55,234 55,634
Deferred taxes 41,841 41,011
Prepaid expenses 3,761 4,667
-------------- ----------------
Total current assets 663,127 656,907
Property and equipment, less accumulated depreciation and amortization 73,346 77,499
Goodwill, less accumulated amortization 268,081 282,163
Other assets 92,396 78,892
-------------- ----------------
Total assets $ 1,096,950 $ 1,095,461
============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 54,000 $ 54,000
Claims and rebates payable 331,525 338,251
Accounts payable 65,715 60,247
Accrued expenses 71,666 86,798
-------------- ----------------
Total current liabilities 522,906 539,296
Long-term debt 306,000 306,000
Other liabilities 502 471
-------------- ----------------
Total liabilities 829,408 845,767
-------------- ----------------
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,
18,707,000 and 18,610,000 shares issued, respectively 187 186
Class B Common Stock, $.01 par value, 22,000,000 shares authorized,
15,020,000 shares issued 150 150
Additional paid-in capital 114,391 110,099
Accumulated other comprehensive income (62) (74)
Retained earnings 159,865 146,322
-------------- ----------------
274,531 256,683
Class A Common Stock in treasury at cost, 475,000 shares (6,989) (6,989)
-------------- ----------------
Total stockholders' equity 267,542 249,694
-------------- ----------------
Total liabilities and stockholders' equity $ 1,096,950 $ 1,095,461
============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Operations
Three Months Ended
March 31,
(in thousands, except per share data) 1999 1998
- ------------------------------------- ----------------- -----------------
<S> <C> <C>
Net revenues $899,087 $371,362
----------------- -----------------
Cost and expenses:
Cost of revenues 823,647 338,492
Selling, general & administrative 46,440 18,826
----------------- -----------------
870,087 357,318
----------------- -----------------
Operating income 29,000 14,044
----------------- -----------------
Interest income (expense):
Interest income 1,393 2,138
Interest expense (6,222) (14)
----------------- -----------------
(4,829) 2,124
----------------- -----------------
Income before income taxes 24,171 16,168
Provision for income taxes 10,628 6,290
----------------- -----------------
Net income $ 13,543 $ 9,878
================= =================
Basic earnings per share $ 0.41 $ 0.30
================= =================
Weighted average number of common shares out-
standing during the period - Basic EPS 33,211 33,053
================= =================
Diluted earnings per share $ 0.40 $ 0.29
================= =================
Weighted average number of common shares out-
standing during the period - Diluted EPS 34,154 33,579
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
Number of Shares Amount
--------- ---------- ---------------------------------------------------------------------
Accumulated
Class A Class B Class A Class B Additional Other
Common Common Common Common Paid-in Comprehensive Retained Treasury
(in thousands) Stock Stock Stock Stock Capital Income Earnings Stock Total
- ---------------------------- ------------------- ----------------------------------------------------------------------------------
<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.
<PAGE>
<TABLE>
<CAPTION>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Cash Flows
Three Months Ended
March 31,
(in thousands) 1999 1998
- -------------- ----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $13,543 $ 9,878
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,685 2,396
Deferred income taxes 1,545 (362)
Bad debt expense 1,592 942
Tax benefit relating to employee stock options 1,571 662
Net changes in operating assets and liabilities (30,744) 10,706
----------------- -----------------
Net cash (used in) provided by operating activities (3,809) 24,222
----------------- -----------------
Net cash (used in) provided by operating activities (3,808) 24,222
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (5,677) (3,176)
Short-term investments - (1,334)
----------------- -----------------
Net cash (used in) investing activities (5,677) (4,510)
----------------- -----------------
Cash flows from financing activities:
Other, net 2,722 683
----------------- -----------------
Net cash provided by financing activities 2,722 683
----------------- -----------------
Effect of foreign currency translation adjustment 12 6
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (6,751) 20,401
Cash and cash equivalents at beginning of period 122,589 64,155
----------------- -----------------
Cash and cash equivalents at end of period $115,838 $84,556
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
EXPRESS SCRIPTS, INC.
NOTES TO UNAUDITED CONSOLIDATED 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 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, 1999, and 1998, 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, 1999, and 1998. 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.
Note 2 - 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.
Note 3 - 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 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,
(in thousands, except per share data) 1998
- ---------------------------------------------------------------------
<S> <C>
Net revenues $781,290
Net income 9,900
Basic earnings per share 0.30
Diluted earnings per share 0.29
</TABLE>
Note 4 - 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 ("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.
Note 5 - 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 Balance at
December 31, Utilized March 31,
(in thousands) 1998 Cash Noncash 1999
- ----------------------------------------------------------------------------------------------------------------------
<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.
Note 6 - 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 operating segment
which encompasses a fully-integrated PBM service. The remaining three operating
service lines (IVTx, Specialty Distribution and Vision) have been aggregated
into a non-PBM reporting segment.
The following table presents information about the reportable segments for
the three months ended March 31:
<TABLE>
<CAPTION>
(in thousands) PBM Non-PBM Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Net revenues $ 884,435 $ 14,652 $ 899,087
Income before income taxes 22,660 1,511 24,171
1998
Net revenues $ 358,924 $ 12,438 $ 371,362
Income before income taxes 15,038 1,130 16,168
</TABLE>
Note 7 - 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 ss.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 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 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):
Year Ended December 31,
1999 $ -
2000 4,650
2001 47,400
2002 61,650
2003 61,650
Thereafter 574,650
-----------------------
$ 750,000
=======================
In March 1999, the Company filed a registration statement for an equity
offering of 4.5 million shares of our Class A common stock. The proceeds from
the equity offering will be used to repay the $150 million senior subordinated
bridge credit facility and a portion of the Term B facility. Upon the repayment
of a portion of the Term B facility, the Company will write-off a pro-rata
portion of the deferred financing fees as an extraordinary item.
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Information included in this Quarterly Report on Form 10-Q, and information
that may be contained in other filings by us with the Securities and Exchange
Commission (the "Commission") and releases issued or statements made by us,
contain or may contain forward-looking statements, including but not limited to
statements of our plans, objectives, expectations or intentions, including as to
Year 2000 issues. Such forward-looking statements necessarily involve risks and
uncertainties. Our actual results may differ significantly from those projected
or suggested in any forward-looking statements. Factors that might cause such a
difference to occur include, but are not limited to:
- risks associated with the consummation and financing of acquisitions,
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 obtaining financing and capital
- risks associated with our ability to manage growth
- competition, including price competition, competition in the bidding and
proposal process and our ability to consummate
contract negotiations with prospective clients
- the possible termination of contracts with certain key clients or
providers; (vi) the possible termination of contracts with certain
key pharmaceutical manufacturers, changes in pricing, discount,
rebate or other practices of pharmaceutical manufacturers
- adverse results in litigation
- adverse results in regulatory matters, the adoption of adverse
legislation or regulations, more aggressive enforcement of
existing legislation or regulations, or a change in the
interpretation of existing legislation or regulations
- developments in the healthcare industry, including the impact of
increases in healthcare costs, changes in drug utilization
patterns and introductions of new drugs
- risks associated with the "Year 2000" issue
- dependence on key members of management
- our relationship with New York Life Insurance Company, which possesses
voting control of us
- other risks described from time to time in our filings with the
Commission.
We do not undertake any obligation to release publicly any revisions to
such forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
During the first quarter of 1999, we continued to execute our growth
strategy of generating sales to new clients, expanding the services provided to
existing clients, developing new products and services for sale to existing
clients and pharmaceutical manufacturers and selectively pursuing strategic
acquisitions and alliances. On April 1, 1998, we consummated our first major
acquisition by acquiring "ValueRx", the prescription benefit management ("PBM")
operations of Columbia/HCA Healthcare Corporation ("Columbia"), for
approximately $460 million in cash, which includes transaction costs and
executive management severance costs of approximately $6.7 million and $8.3
million, respectively. Consequently, our operating results include those of
ValueRx from April 1, 1998. The net assets acquired have been recorded at their
estimated fair value, resulting in $278,113,000 of goodwill that is being
amortized over 30 years. On April 1, 1999, we acquired Diversified
Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto
Rico) Inc. (collectively "DPS") from SmithKline Beecham Corporation ("SmithKline
Beecham") and SmithKline Beecham InterCredit BV for approximately $700 million
in cash, such amount being subject to adjustment based upon the amount of DPS's
working capital at closing. Both acquisitions will be accounted for under the
purchase method of accounting.
The acquisition of ValueRx contributed substantially to increasing
membership to approximately 23 million lives as of March 31, 1999 from
approximately 12 million lives as of March 31, 1998. Our membership
approximately doubled based on the acquisition of DPS and we have one of the
largest managed care membership bases of any PBM. Although membership counts are
based on our electronic eligibility data file, they involve some estimates,
extrapolations and approximations. For example, some plan designs allow for
family coverage under one identification number, and we make assumptions about
the average number of persons per family in calculating our total membership.
Because these assumptions may vary between PBMs, membership counts may not be
comparable between us and our competitors. However, we believe our membership
count provides a reasonable estimation of the population we serve, and can be
used as one measure of our growth. The acquisitions also increased the scale of
our business, expanded our client base, increased our penetration of PBM markets
and expanded our product and service offerings.
We primarily derive our revenues from the sale of PBM services in the
United States and Canada. Our PBM net revenues generally include administrative
fees, dispensing fees and ingredient costs of pharmaceuticals dispensed from
retail pharmacies included in one of our networks or from one of our mail
pharmacies. We then record the associated costs in cost of revenues. Where we
only administer the contracts between our clients and the clients' retail
pharmacy networks, we record as net revenues only the administrative fees we
receive from our activities. We also derive PBM net revenues from the sale of
informed decision counseling services through our Express Health LineSM division
and the sale of medical information management services, which include provider
profiling, formulary management support services and outcomes assessments,
through our Practice Patterns Science, Inc. subsidiary. Non-PBM net revenues are
derived from: (1) the sale of pharmaceuticals for and the provision of infusion
therapy services through our IVTx, Inc. subsidiary, (2) administrative fees
received for members using our vision program through our alliance with Cole
Managed Vision ("Cole"), a subsidiary of Cole National Corporation, and (3)
administrative fees received from drug manufacturers for the dispensing or
distribution of pharmaceuticals through our Specialty Distribution division.
<TABLE>
<CAPTION>
Results Of Operations
Net Revenues
Three Months Ended March 31,
(in thousands) 1999 % Increase 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C>
PBM $884,435 146.4% $358,924
Non-PBM 14,652 17.8% 12,438
===========================================
Net revenues $899,087 142.1% $371,362
===========================================
</TABLE>
Total net revenues for the first quarter of 1999 increased $527,725,000, or
142.1%, compared to the first quarter of 1998. The increase is primarily due to
the acquisition of ValueRx and also due to our continuing ability to attract new
clients as well as additional members from existing clients.
The majority of the increase in net revenues was derived from our PBM
services. Network pharmacy claims processed increased 89.3% in the first quarter
of 1999 over 1998 and the average net revenue per network pharmacy claim
increased 36.0% in the first quarter of 1999 over 1998. The significant increase
in network pharmacy claims processed of 89.3% and average net revenue per
network pharmacy claim of 36.0% in the first quarter of 1999 over 1998 caused
net revenues for our network pharmacy claims services to increase $393,914,000,
or 157.4%. The increase in average net revenue per network pharmacy claim is due
to two factors: (1) a larger number of clients using retail pharmacy networks
established by us, rather than retail pharmacy networks established by our
clients, which results in us recording dispensing fees and ingredient costs in
net revenues and cost of revenues, respectively, and (2) higher drug ingredient
costs resulting from price increases for existing drugs, new drugs introduced
into the marketplace and changes in therapeutic mix and dosage. These increases
were partially offset by lower pricing offered by us in response to continued
competitive pressures.
The number of clients using retail pharmacy networks established by us
increased significantly beginning in the second quarter of 1998 due to the
acquisition of ValueRx, as substantially all ValueRx clients used retail
pharmacy networks established by ValueRx. As a result of this shift, gross
margin percentages are reduced but the dollar amount of the gross profit is not
significantly affected.
Mail pharmacy claims processed increased 113.2% in the first quarter of
1999 over 1998 and the average net revenue per mail pharmacy claim increased
3.8% in the first quarter of 1999 over 1998. The significant increase in mail
pharmacy claims processed, primarily due to the ValueRx acquisition, resulted in
net revenues for our mail pharmacy services increasing $127,480,000, or 121.2%.
Net revenues from our non-PBM services increased 17.8% in the first quarter
of 1999 over 1998. The increase was primarily due to a change in product mix
sold, which resulted in higher drug ingredient costs. This increase was
partially offset by the reduction in net revenues from our managed vision
business.
<TABLE>
<CAPTION>
Cost and Expenses
Three Months Ended March 31,
(in thousands) 1999 % Increase 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PBM $812,093 146.8% $329,017
Percentage of PBM net revenues 91.8% 91.7%
Non-PBM 11,554 21.9% 9,475
Percentage of non-PBM net revenues 78.9% 76.2%
-------------------------------------------
Cost of revenues 823,647 143.3% 338,492
Percentage of net revenues 91.6% 91.1%
Selling, general and administrative 40,218 125.4% 17,843
Percentage of net revenues 4.5% 4.8%
Depreciation and amortization (1) 6,222 533.0% 983
Percentage of net revenues 0.7% 0.3%
===========================================
Total cost and expenses $870,087 143.5% $357,318
===========================================
Percentage of net revenues 96.8% 96.2%
<FN>
(1) Represents depreciation and amortization expense included in selling,
general and administrative expenses on our Statement of Operations. Cost of
revenues, above, includes depreciation and amortization expense on property,
plant and equipment.
</FN>
</TABLE>
Our cost of revenues for PBM services as a percentage of PBM net revenues
slightly increased during the first quarter of 1999 over 1998. Cost of revenues
for our pharmacy network claims and mail pharmacy claims increased 158.8% and
120.5%, respectively. The decrease in gross margin percentage for the first
quarter of 1999 over 1998 is primarily due to the shift toward pharmacy networks
established by us, as opposed to those established by our clients. The pharmacy
network shift continued due to the acquisition of ValueRx, as the ValueRx
clients primarily used retail pharmacy networks established by ValueRx. This
decrease was partially offset by operating efficiencies achieved in our mail
pharmacies during the first quarter of 1999 and revenues generated from
integrated PBM services, such as medical and drug data analysis, that provide
higher gross margins.
Cost of revenues for non-PBM services increased as a percentage of non-PBM
net revenues from the first quarter of 1998 primarily due to the continued
change in the product mix sold resulting in additional costs of approximately
$720,000. This change was offset by our development of new business that
generated higher gross margins of approximately $120,000 and the reduction of
overhead costs, as a percentage of non-PBM net revenues, due to the change in
product mix sold.
Selling, general and administrative expenses, excluding depreciation and
amortization, increased $22,375,000, or 125.4%, for the first quarter of 1999
compared to 1998. The increase is primarily due to our acquisition of ValueRx,
costs incurred during the integration of ValueRx and costs required to expand
the operational and administrative support functions to enhance management of
the pharmacy benefit. As a percentage of net revenues, selling, general and
administrative expenses, excluding depreciation and amortization, for the first
quarter of 1999 decreased to 4.5% from 4.8% in 1998. The decrease in the
percentage of net revenues is primarily attributed to our recording of higher
net revenues due to the shift towards pharmacy networks established by us, as
opposed to those established by our clients, as discussed in "--Net Revenues."
As part of our overall plan to achieve operating economies, we are
integrating ValueRx into our historical business. To date, we have substantially
met our integration goals by combining existing contracts and contracting
procedures related to both suppliers and providers, integrating financial
reporting systems, reducing the number of ValueRx computer systems,
consolidating financial operations, consolidating organizational structure and
employee benefits and implementing a new sales and marketing program for
enhanced PBM services. Except for some new systems development costs, we are
expensing integration costs as incurred. During the first quarter of 1999, we
capitalized $1,080,678 in new systems development costs and we expensed
$1,587,000 in incremental integration costs.
Depreciation and amortization substantially increased during the first
quarter of 1999 over 1998 due to the acquisition of ValueRx. During the first
quarter of 1999, we recorded amortization expense for goodwill and other
intangible assets of $3,860,000. The remaining increase during the first quarter
of 1999 is primarily due to the inclusion of depreciation and amortization
expense associated with the property and equipment acquired with ValueRx and due
to expansion of our operations and enhancement of our information systems to
better manage the pharmacy benefit.
<TABLE>
<CAPTION>
Interest Income (Expense), Net
Three Months Ended March 31,
(in thousands) 1999 % 1998
Increase/
(decrease)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 1,393 (34.8)% $ 2,138
Percentage of net revenues 0.2% 0.6%
Interest expense (6,222) nm (14)
Percentage of net revenues (0.7)% nm
=========================================
Interest income (expense), net $(4,829) 327.4% $ 2,124
=========================================
Percentage of net revenues (0.5)% 0.6%
</TABLE>
nm = not meaningful.
The significant increase in interest expense is due to our financing of the
ValueRx acquisition with $360 million in borrowings; see "Liquidity and Capital
Resources." Interest income decreased during the first quarter of 1999 over 1998
due to our investment of cash balances and short-term investments at higher
interest rates in 1998 than those received in 1999.
<TABLE>
<CAPTION>
Provision for Income Taxes
Three Months Ended March 31,
(in thousands) 1999 % Increase 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes $ 10,628 69.0% $6,290
Effective tax rate 44.0% 38.9%
</TABLE>
Our effective tax rate increased in the first quarter of 1999 over 1998 due
to the non-deductible goodwill and customer contracts amortization expense
resulting from the ValueRx acquisition. We expect that our effective tax rate
will gradually decline toward the statutory rate as our operating growth
continues.
<TABLE>
<CAPTION>
Net Income and Earnings Per Share
Three Months Ended March 31,
(in thousands) 1999 % Increase 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $13,543 37.1% $ 9,878
Percentage of net renue 1.5% 2.7%
Basic earnings per share $ 0.41 36.7% $ 0.30
Weighted average shares outstanding 33,211 33,053
Diluted earnings per share $ 0.40 37.9% $ 0.29
Weighted average shares outstanding 34,154 33,579
</TABLE>
Our net income increased $3,665,000, or 37.1%, in the first quarter of 1999
over 1998. On October 12, 1998, we announced a two-for-one stock split of our
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.
<TABLE>
<CAPTION>
Liquidity and Capital Resources.
Three Months Ended March 31,
(in thousands) 1999 % Decrease 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash (used in) provided by
operations $(3,809) (115.7%) $24,222
</TABLE>
During the first quarter of 1999, we used $3,809,000 in net cash for our
operations. The decrease over the first quarter of 1998 is primarily due to the
payment of certain accruals from December 31, 1998. Management expects to
primarily fund our future debt service, integration costs, Year 2000 costs,
internet business development costs and other normal operating cash needs
primarily with operating cash flow or, to the extent necessary, with working
capital borrowings under our $1.05 billion credit facility.
Our capital expenditures in the first quarter of 1999 increased $2,501,000,
or 78.7% over the first quarter of 1998 primarily due to our concerted effort to
invest in information technology to enhance the services provided to our
clients. We expect to continue investing in technology that will provide
efficiencies in operations, manage growth and enhance the services provided to
our clients. We expect to fund future anticipated capital expenditures primarily
with operating cash flow or, to the extent necessary, from working capital
borrowings under our $1.05 billion credit facility.
On April 1, 1999, we entered into a $1.05 billion credit facility with a
bank syndicate led by Credit Suisse First Boston and Bankers Trust Company
consisting of $750 million in term loans, including $285 million of Term A loans
and $465 million of Term B loans, and a $300 million revolving credit facility.
The agreement became effective on April 1, 1999. The Term A loans and the
revolving credit facility will mature on March 31, 2005 and the Term B loans
will mature on March 31, 2007. Approximately $940 million in borrowings from
this new facility were used to consummate the DPS acquisition, refinance our
$440 million credit facility, of which $360 million was outstanding, and other
indebtedness and pay related fees and expenses. The credit facility is secured
by the capital stock 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), and 65% of the stock of our foreign subsidiaries.
The credit facility requires us to pay interest quarterly on an interest
rate spread based on several LIBOR or base rate options. Using a LIBOR spread,
the Term A loans and the revolving loan require a spread of 2.75%, resulting in
an interest rate, including the spread, at May 1, 1999, of 7.625%. The Term B
loans require a LIBOR spread of 3.5%, resulting in an interest rate, including
the spread, at May 1, 1999, of 8.375%. Beginning in March 2001, we are required
to make annual principal payments on the Term A loans of $42,750,000 in 2001,
$57,000,000 in 2002 and 2003, $62,700,000 in 2004 and $65,550,000 in 2005. The
Term B loans require annual principal payments of $4,650,000 beginning in March
2000 until 2005, $111,600,000 in 2006 and $325,500,000 in 2007. The credit
facility contains covenants that limit the indebtedness we 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, we are required to pay an annual fee of 0.5%,
payable in quarterly installments, on the unused portion of the revolving loan.
At March 31, 1999 and December 31, 1998, we were in compliance with all
covenants associated with the $440 million credit facility. As a result of
refinancing our $440 million credit facility, we 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.
To alleviate interest rate volatility, we entered into an interest rate
swap arrangement for a notional principal amount of $360 million, effective
April 3, 1998, with the First National Bank of Chicago, a subsidiary of Bank One
Corporation. Under the terms of the swap, we agreed to receive a floating rate
of interest on a portion of our term loans based on a three-month LIBOR rate in
exchange for payment of a fixed rate of interest of 5.88% per annum. The
notional amount of the swap amortizes, beginning in April 1999, in semi-annual
installments of $27 million, increasing to $36 million in April 2000, to $45
million in April 2001 and to $48 million in April 2002. As a result, we have, in
effect, converted $360 million of our variable rate term debt to fixed rate debt
at 5.88% for the entire term of the term loans plus the credit rate spread.
In order to assist our funding of the DPS acquisition, we obtained a $150
million senior subordinated bridge credit facility from Credit Suisse First
Boston Corporation and Bankers Trust Company. The facility became effective on
April 1, 1999 and matures on March 31, 2000 unless converted into a term loan.
The facility requires us to make quarterly interest payments on a spread over
several LIBOR or base rate options. The facility requires us to pay an initial
spread of 5%, resulting in an interest rate, including the spread, at May 1,
1999, of 9.97%, and increasing 0.5% every quarter. In March 1999, we filed a
registration statement, which has not yet become effective, to sell 4.5 million
shares of our Class A common stock. The proceeds from this offering will be used
to repay the $150 million senior subordinated bridge credit facility and a
portion of the Term B loans under the $1.05 billion credit facility. As a result
of the partial repayment of the Term B loans, we will write-off approximately
$3,200,000, $1,900,000 net of tax, of the Term B deferred financing fees as an
extraordinary item.
As of March 31, 1999, we had repurchased a total of 475,000 shares of our
Class A Common Stock under the open-market stock repurchase program announced by
us on October 25, 1996, although no repurchases occurred during the first
quarter of 1999. Our 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 we deem
appropriate based upon prevailing market and business conditions, subject to
restrictions on stock repurchases contained in our $1.05 billion credit
facility.
We have reviewed and currently intend to continue reviewing potential
acquisitions and affiliation opportunities. We believe that available cash
resources, bank financing or the issuance of additional common stock could be
used to finance such acquisitions or affiliations. However, there can be no
assurance we will make other acquisitions or affiliations in 1999 or thereafter.
Other Matters
On March 29, 1999, we announced our plans to launch two Internet sites,
YourPharmacy.com and DrugDigest.org. YourPharmacy.com will serve as an online
drug store and offer both prescription and over-the-counter medications,
vitamins, herbs and health and beauty aids. DrugDigest.org will provide
fact-based information on a variety of medications, vitamins and herbs. Both
sites are expected to be operational during the second quarter of 1999. By
allowing us to communicate more effectively and efficiently with our existing
members, we believe that we will be able to reduce our operating costs by
utilizing on-line communication as opposed to more expensive call center
operations and paper-based correspondence. We also plan to increase the
utilization of our existing mail pharmacies, which processed over 7.4 million
prescriptions in 1998 and 2.2 million prescriptions during the first quarter of
1999, to distribute prescription medications ordered through our Internet
e-commerce site. In addition, we believe that sales of both pharmaceutical and
non-pharmaceutical products to the non-member general public will help us
attract new clients. Furthermore, based on our clinical capabilities,
information databasing and established expertise in managing prescription drug
usage, we believe DrugDigest.org will be a comprehensive and credible source of
information on prescription and non-prescription medications. To date we have
funded the development of the Internet sites through operating cash flows and
have expensed these amounts as incurred. We expect to continue funding the
development and operation of these sites with operating cash flows or with
working capital borrowings under our $1.05 billion credit facility.
Under the purchase agreement with SmithKline Beecham relating to our
acquisition of DPS, SmithKline Beecham is obligated to dissolve a joint venture
relationship in a company known as Diversified Prescription Delivery ("DPD"),
which provides mail pharmacy services, including services for some clients of
DPS. SmithKline Beecham has executed a letter of intent to acquire the 50%
interest in DPD that it does not currently own. Following the acquisition of
this 50% interest, SmithKline Beecham will transfer ownership of DPD to us or to
another company that we control. We will not pay SmithKline Beecham any
additional amounts beyond what we have already paid to acquire DPS. Consummation
of this transaction is subject to conditions, including preparation of formal
contract documents and the approval of regulatory authorities.
In June 1998, Statement of Financial Accounting Standards Statement 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133") was
issued. FAS 133 requires all derivatives to be recognized as either assets or
liabilities in the statement of financial position and measured at fair value.
In addition, FAS 133 specifies the accounting for changes in the fair value of a
derivative based on the intended use of the derivative and the resulting
designation. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, and will be applicable to our first quarter of
fiscal year 2000. Our present interest rate swap (see "--Liquidity and Capital
Resources") would be considered a cash flow hedge. Accordingly, the change in
the fair value of the swap would be reported on the balance sheet as an asset or
liability. The corresponding unrealized gain or loss representing the effective
portion of the hedge will be initially recognized in stockholders' equity and
other comprehensive income and subsequently any changes in unrealized gain or
loss from the initial measurement date will be recognized in earnings concurrent
with the interest expense on our underlying variable rate debt. If we had
adopted FAS 133 as of March 31, 1999, we would record the unrealized loss of
$4,086,000 as a liability and reduction in stockholders' equity and other
comprehensive income.
Year 2000
Our operations rely heavily on computers and other information systems
technologies. In 1995, we began addressing the "Year 2000" issue, which refers
to the inability of certain computer systems to properly recognize calendar
dates beyond December 31, 1999. This arises as a result of systems having been
programmed with two digits rather than four digits to define the applicable year
in order to conserve computer storage space, reduce the complexity of
calculations and produce better performance. The two-digit system may cause
computers to interpret the year "00" as "1900" rather than as "2000", which may
cause system failures or produce incorrect results when dealing with
date-sensitive information beyond 1999.
We formed a Year 2000 task force to address this issue. The task force has
performed a self-assessment and developed a compliance plan that addresses: (i)
internally developed application software, (ii) vendor developed application
software, (iii) operating system software, (iv) utility software, (v)
vendor/trading partner-supplied files, (vi) externally provided data or
transactions, (vii) non-information technology devices that are material to our
business, and (viii) adherence to applicable industry standards. Our plan covers
both the traditional Express Scripts and ValueRx systems. Progress in each area
is monitored and management reports are given periodically.
We have various applications and operating systems that are considered
critical to our operations. Approximately 90% of these systems have been
successfully tested by us in an integrated environment for Year 2000 compliance.
The remaining systems will be modified to be compliant by the end of the third
quarter of 1999, or information residing on such systems will be integrated into
a Year 2000 compliant operating system. Testing of the applications and
operating systems includes the adjudication process, the eligibility process,
the billing and remittance process, the communication process and the reporting
process, including financial reporting. In addition, since 1995, all new
internally developed software has been developed to be Year 2000 compliant and
will be fully tested during the remainder of 1999.
We are participating in a joint effort with other PBMs, retail pharmacy
chains, transaction routing companies and adjudication software vendors to test
Year 2000 compliance in the industry. The joint effort is called the "Y2K
Provider & Vendor Testing Coalition" and is being facilitated by The National
Health Information Network. The coalition has the support of major U.S. retail
pharmacies, including American Stores, CVS, Eckerd, Rite-Aid, Wal-Mart and
Walgreens. The inclusion of transaction routing vendors and software companies
could permit up to 95% of our pharmacy network to be tested (although there can
be no assurance that all parties who are invited to participate will actually
participate). The program will allocate the retail pharmacy chains and software
vendors among the various PBMs who will be required to test the vendors' and
pharmacy chains' Year 2000 compliance. The testing is expected to be completed
early in the third quarter of 1999.
We have sent out approximately 1,500 letters to critical vendor/trading
partners requesting a status report regarding their Year 2000 compliance. We
have received responses from approximately 30% of these third parties, with the
majority of the vendor/trading partners responding that they are currently
addressing the Year 2000 issue and expect to be compliant. We are formulating a
list of vendor/trading partners that have not responded in order to send second
requests.
We have also contacted several hundred clients and several thousand
pharmacies whose computer systems appear to us not to be Year 2000 compliant in
an effort to increase awareness of the problem and minimize or eliminate any
disruption in data transfer activity between any of these parties and us. We
have developed date windowing logic, which forces an entry into the century
field of a computer application if one is not provided by the user, which we
believe will address many issues concerning retail pharmacies and clients with
noncompliant systems. Due to our contracts typically extending over several
years and our receipt of member eligibility information from clients that
reflect dates beyond the Year 2000, we have been receiving information that
would identify certain Year 2000 issues for several years. Any problems we have
encountered to date have been rectified by the client or, if necessary, by us
using our windowing logic. There can be no assurance, however, that all of these
problems that may be encountered in the future can be rectified with the
windowing logic.
In addressing the Year 2000 issue, we have and will continue to incur
internal staff costs as well as external consulting and other expenses related
to infrastructure enhancements. To date, we have incurred approximately
$3,700,000 addressing the Year 2000 issue. We anticipate spending an additional
$500,000 to $750,000 during the remainder of 1999 addressing the Year 2000
issue. All expenditures are being expensed as incurred. To date, these costs
have not had a material adverse effect on our results of operations or financial
condition, and are not expected to have a material adverse effect on our future
results of operations or financial condition.
In connection with our acquisition of DPS, we performed certain Year 2000
due diligence and received representations that DPS had implemented a Year 2000
plan for upgrading its computer systems and communicated with its
vendors/trading partners regarding their respective Year 2000 compliance. Based
on our due diligence and the representations we received, we believe DPS's
critical applications and operating systems have been successfully tested for
Year 2000 compliance. We plan to continue to review DPS's state of readiness and
assess whether additional steps are necessary.
We believe that, with appropriate modifications to existing computer
systems, updates by vendors and trading partners and conversion to new software
in the ordinary course of our business, the Year 2000 issue is not likely to
pose significant operational problems for us. However, if the above-described
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. There can be no assurance that our efforts,
including those relating to the DPS's systems, or those of our vendors and
trading partners, who are beyond our control, will be successful in addressing
the Year 2000 issue.
We are in the process of formalizing our contingency plans, which include
DPS, to address potential Year 2000-related risks, including risks of
vendor/trading partner noncompliance, as well as noncompliance of any of our
critical operations, and are expected to be substantially completed by the end
of the second quarter of 1999. However, the formalization of the contingency
plans is an ongoing process as we complete our testing and receive updates from
vendor/trading partners. In addition, there can be no assurance that our
contingency plans will successfully address all potential circumstances or
consequences.
Impact of Inflation
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect our net revenues and cost of revenues. To date we have
been able to recover price increases from our clients under the terms of our
agreements, although under selected arrangements in which we have performance
measurements on drug costs with our clients, we could be adversely affected by
inflation in drug costs if the result is an overall increase in the cost of the
drug plan to the client. To date, changes in pharmaceutical prices have not had
a significant adverse affect on us.
Market Risk
To alleviate interest rate volatility, we entered into an interest rate
swap arrangement for a notional principal amount of $360 million effective April
3, 1998, with First National Bank of Chicago, a subsidiary of Bank One
Corporation. Under the swap arrangement, we agreed to receive a floating rate of
interest on an amount equal to a portion of the outstanding principal balance of
our term loans based on a three-month LIBOR rate in exchange for payment of a
fixed rate of interest of 5.88% per annum on such amount. The weighted average
variable rate received by us for the period January 1, 1999 to March 31, 1999,
was 5.08%. The notional amount of the swap amortizes, beginning in April 1999,
in semi-annual installments of $27 million, increasing to $36 million in April
2000, to $45 million in April 2001 and to $48 million in April 2002. The swap
expires on April 3, 2003. At March 31, 1999, the fair value of the swap was
($4,086,000).
Interest rate risk is monitored on the basis of changes in the fair value
and a sensitivity analysis is used to determine the impact interest rate changes
will have on the fair value of the interest rate swap, measuring the change in
the net present value arising from the change in the interest rate. The fair
value of the swap is then determined by calculating the present value of all
cash-flows expected to arise thereunder, with future interest rate levels
implied from prevailing mid-market yields for money-market instruments, interest
rate futures and/or prevailing mid-market swap rates. Anticipated cash-flows are
then discounted on the assumption of a continuously compounding zero-coupon
yield curve. A 10 basis point decline in interest rates at March 31, 1998, would
have caused the fair value of the swap to decrease by an additional $674,000,
resulting in a fair value of ($4,760,000).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Risk" above.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in detail in our Annual Report on Form 10-K for the period
ended December 31, 1998, filed with the Securities and Exchange Commission on
March 29, 1999 ("1998 10-K"), we acquired all of the outstanding capital stock
of Value Health, Inc., a Delaware corporation ("VHI"), and Managed Prescription
Network, Inc., a Delaware corporation ("MPN") from Columbia HCA/HealthCare
Corporation ("Columbia") and its affiliates on April 1, 1998 (the
"Acquisition"). VHI, MPN and/or their subsidiaries (collectively, the "Acquired
Entities"), were party to various legal proceedings, investigations or claims at
the time of the Acquisition. The effect of these actions on our future financial
results is not subject to reasonable estimation because considerable uncertainty
exists about the outcomes. Nevertheless, in the our opinion, the ultimate
liabilities resulting from any of these lawsuits, investigations or claims now
pending will not materially affect our consolidated financial position, results
of operations or cash flows. A brief update of the most notable of the
proceedings follows:
As discussed in detail in our 1998 10-K, VHI and several of its
subsidiaries are party to two securities litigation matters, Bash, et al. v.
Value Health, Inc., et al., No. 3:97cv2711 (JCH) (D.Conn.), and Freedman, et al.
v. Value Health, Inc., et al., No. 3:95 CV 2038 (JCH) (D.Conn). The two
lawsuits, filed in 1995, allege that VHI and certain other defendants made false
or misleading statements to the public in connection with VHI's acquisition of
Diagnostek, Inc. in 1995, and in connection with one of VHI's contracts. The
Bash lawsuit also alleges false or misleading statements by Diagnostek and
certain of its former officers and directors concerning its financial condition
prior to the merger with VHI. Neither complaint specifies the amount of damages
sought. On April 24, 1998, the two lawsuits were consolidated.
On February 18, 1999, the court granted plaintiffs' motions for class
certification and certified a class consisting of (i) all persons who purchased
or otherwise acquired shares of VHI during the period from April 3, 1995,
through and including November 7, 1995, including those who acquired shares
issued in connection with the Diagnostek merger; and (ii) all persons who
purchased or otherwise acquired shares of Diagnostek during the period from
March 27, 1995, through and including July 28, 1995. Fact discovery in the
consolidated lawsuit is complete. The parties are awaiting an order from the
court regarding the scheduling of expert discovery and dispositive motions.
In connection with the Acquisition, Columbia has agreed to defend and hold
us and our affiliates (including VHI) harmless from and against any liability
that may arise in connection with either of the foregoing proceedings.
Consequently, we do not believe we will incur any material liability in
connection with the foregoing matters.
In August 1997, the U.S. Department of Labor requested information from DPS
concerning its contractual relationships with employer group health plans
governed by ERISA. DPS provided the requested information to the U.S. Department
of Labor, and exchanged correspondence with the U.S. Department of Labor on this
matter until August 1998. Since that time, no additional information requests or
other correspondence has been received. However, the U.S. Department of Labor
has given no indication as to its disposition of this matter, and we cannot
provide any assurance as to the ultimate outcome of this matter or what effect,
if any, it will have on our business as a result of our acquisition of DPS.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits on page 22.
(b) Reports on Form 8-K.
(i) On February 18, 1999, the Company filed a
Current Report on Form 8-K regarding a press
release issued on behalf of the Company
announcing that the Company had entered into
a Stock Purchase Agreement with SmithKline
Beecham Corporation and one of its
affiliates for the acquisition of
Diversified Pharmaceutical Services, Inc.
and Diversified Pharmaceutical Services
(Puerto Rico), Inc.
(ii) On February 24, 1999, the Company filed a
Current Report on Form 8-K regarding a press
release issued on behalf of the Company
concerning its year-end 1998 financial
performance.
(iii) On March 25, 1999, the Company filed a
Current Report on Form 8-K regarding a press
release issued on behalf of the Company
announcing that it had filed a registration
statement with the Securities and Exchange
Commission for an offering of approximately
4,500,000 primary shares, or $350 million,
of its Class A Common Stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPRESS SCRIPTS, INC.
(Registrant)
Date: May 13, 1999 By:/s/ Barrett A. Toan
---------------------------------------
Barrett A. Toan, President and
Chief Executive Officer
Date: May 13, 1999 By:/s/ George Paz
---------------------------------------
George Paz, Senior Vice
President and Chief
Financial Officer
<PAGE>
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
Number Exhibit
2.1 Stock Purchase Agreement by and among SmithKline Beecham
Corporation, SmithKline Beecham InterCredit BV and Express
Scripts, Inc., dated as of February 9, 1999, and certain related
Schedules, incorporated by reference to Exhibit No. 2.1 to the
Company's Current Report on Form 8-K filed February 18, 1999.
3.1 Certificate of Incorporation, incorporated by reference to
Exhibit No. 3.1 to the Company's Registration Statement on
Form S-1 filed June 9, 1992 (No.33-46974) (the "Registration
Statement").
3.2 Certificate of Amendment of the Certificate of Incorporation of
the Company, incorporated by reference to Exhibit No. 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter
ending June 30, 1994.
3.3 Certificate of Amendment of the Certificate of Incorporation of
the Company, incorporated by reference to Exhibit No. 3.3 to the
Company's Annual Report on Form 10-K for the year ending
December 31, 1998.
3.4 Second Amended and Restated Bylaws, incorporated by reference to
Exhibit No. 3.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 30, 1998.
4.1 Form of Certificate for Class A Common Stock, incorporated by
reference to Exhibit No. 4.1 to the Registration Statement.
10.1* Employment Agreement effective as of April 1, 1999, between
Barrett A. Toan and the Company
27.1* Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only).
* Filed herein.
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
between
BARRETT A. TOAN
and
EXPRESS SCRIPTS, INC.
<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") between Barrett A. Toan ("You" or
"Your") and Express Scripts, Inc. (the "Company") replaces Your employment
agreement dated April 30, 1992 (as amended January 1, 1996). This Agreement is
intended to create mutual obligations, and Your voluntary acceptance affirms the
Company's and Your commitment to carry out its obligations in accordance with
the following terms and conditions.
1. Employment and Assignment; Diligent and Faithful Performance of Duties.
The Company agrees to employ You as President, Chief Executive Officer, and a
member of the Board of Directors of the Company (the "Board"). In consideration
of employment by the Company, You agree to discharge faithfully, diligently, and
to the best of Your ability, the responsibilities of the position You hold
during Your employment.
All of the duties and services to be performed by You will be at all times
subject to the authority of the Board and the Executive Committee of the Board.
During the term of Your employment excluding any periods of vacation, sick leave
or disability to which You are entitled, You agree to devote Your full working
time, attention, and energy to the business and affairs of the Company; provided
that it shall not be a violation of this Agreement for You to (a) serve on
corporate, civic or charitable boards or committees, (b) deliver lectures,
fulfill speaking engagements or teach at educational institutions or (c) manage
personal investments, so long as such activities are consistent with the
policies of the Company as of the date hereof and do not significantly interfere
with the performance of Your duties in accordance with this Agreement.
2. Term of Agreement. The term of this Agreement will commence on April 1,
1999 and will continue through March 31, 2002. On April 1st of each year
(hereinafter the "Anniversary Date"), commencing with April 1, 2001 and on each
subsequent April 1st thereafter, this Agreement will be renewed for a new term
of one (1) year unless You will attain age 65 prior to completion of the
additional year, in which case the Agreement shall terminate on the last day of
the month in which You attain age 65. The term of renewal shall commence on such
Anniversary Date unless either the Company or You notifies the other party in
writing no less than thirty (30) days prior to such Anniversary Date that (a) it
does not intend to renew this Agreement or (b) that the Agreement is to be
terminated pursuant to paragraph 7F. Accordingly, unless such notification is
received prior to the Anniversary Date, renewal of this Agreement will be
automatic.
3. Compensation and Benefits.
A. Base Salary. During Your employment under this Agreement, You will be
paid a base salary ("Annual Base Salary") at the rate of $650,000 per year and
You will be eligible for periodic review by the Board for merit increases,
provided that any such increase shall not serve to limit or reduce any other
obligation to You under this Agreement. The term "Annual Base Salary" as used in
this Agreement shall refer to the Annual Base Salary as increased and Your
Annual Base Salary shall not be reduced after any such increase without Your
express written consent.
B. Annual Incentive Compensation. You will be eligible to participate in
the Company's annual bonus plan established for senior executives by the Board
(the "Annual Bonus Plan"). The size of Your bonus opportunity and the terms of
Your participation shall be determined based on the terms and conditions of the
Annual Bonus Plan. Your award (the "Annual Bonus") will be based upon Your
performance in relation to the financial and non-financial objectives to be set
by the Board at its sole discretion pursuant to the terms of any Annual Bonus
Plan. The Annual Bonus Plan currently establishes a minimum of one hundred
percent (100%) of Annual Base Salary for the bonus award if targeted performance
measures are satisfied (the "Target Bonus"). The Company retains the right to
modify or replace the Annual Bonus Plan and the performance measures thereunder,
provided that the amended and successor plans will provide the opportunity to
earn a payout of a minimum of one hundred percent (100%) of Annual Base Salary
upon achieving targeted performance measures.
C. Stock and Stock Options.
(i) Eligibility and Grants Under Option Plan. You will be eligible to
participate in the Company's employee stock option plan (the "Option Plan") as
previously adopted by the Board and as it may be amended from time to time or
any replacement or successor of such plan. Under the Option Plan, at the sole
discretion of the Board, You will receive annual grants of options to buy Class
A shares of the Company's common stock, based on Your performance and the
performance of the Company, as determined by the Compensation Committee of the
Board.
(ii) Initial Grant of Option. You will also receive a one-time grant of
options (the "Initial Grant") to purchase 70,000 Class A shares of the Company's
common stock at the Fair Market Value (as defined in the Company's option plans)
per share on or about May 26, 1999 which shall vest 20% per year beginning on
the first anniversary of the date of grant.
(iii) Vesting. Notwithstanding any provision to the contrary in the Option
Plan, any options granted under the Option Plan (including any and all options
granted prior to the date hereof or pursuant to the Initial Grant in this
Agreement) and any and all Restricted Shares acquired by you pursuant to any
exercise of such options, shall fully vest not later than upon Change of Control
(as that term is defined in subparagraph vi of this paragraph 3(C)); termination
by the Company without Cause (as defined in subparagraph A of paragraph 7);
termination by You for Good Reason (as defined in subparagraph C of paragraph
7); Your death or Disability (as defined in subparagraph E of paragraph 7).
(iv) Stock Options Upon Termination. If Your employment is terminated by
the Company for Cause or by You without Good Reason, You shall forfeit any
options that have not yet been exercised not less than thirty (30) days after
such termination. Notwithstanding any provision to the contrary in the Option
Plan, if the Company terminates You without Cause, You terminate employment for
Good Reason, You die or Your employment is terminated by the Company because of
a Disability, or in the event of a Change of Control, all of Your options shall
become fully exercisable immediately upon such event and shall remain
exercisable until the earlier of (i) eighteen (18) months from the date of Your
termination of employment or (ii) the expiration date of the option (determined
without regard to Your termination of employment) and all restricted shares
previously acquired by you upon the exercise of any options shall vest upon such
event.
(v) Put Right. Notwithstanding any provision in the Option Plan to the
contrary, you shall have the right, from time to time, within the twelve (12)
month period following Your termination by the Company without Cause or Your
termination for Good Reason or Your termination upon death or Disability, to
tender to the Company shares of common stock equal to the greater of (a) the
number of shares subject to options granted to You by the Company in the
calendar year preceding such termination (adjusted to reflect any stock split
occurring after such grant) or (b) 70,000 shares (adjusted to reflect any stock
split occurring after the effective date hereof), and the Company hereby agrees,
to the extent not prohibited by applicable law, to pay You an amount equal to
the Fair Market Value of such shares as of the date the Employee makes such
tender to the Company. For purposes of this Agreement, "Fair Market Value" means
the closing price, regular way, of the security as reported on the consolidated
transaction reporting system applicable to such security, or if no such reported
sale of the security occurred on such date, the next preceding date on which
there was a reported sale or if the security is not listed on a national
securities exchange, or the NASDAQ National Market, the fair market value of the
security determined in good faith by the Board of the Company. Notwithstanding
any other provision of this Agreement, this subsection (v) shall not become
effective until such time as the Company's accountants shall advise the Company
that this provision will not require the Company to use "variable plan
accounting" or similar "mark-to-market" accounting to reflect its obligations
under this subsection.
(vi) Change of Control. For purposes of this Agreement, "Change of Control"
means:
(a) except as provided in subsection (d) below a "person" or "group" (as
that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (excluding, for this purpose, the
Company or any subsidiary or any employee benefit plan of the Company, New York
Life Insurance Company, any affiliate or subsidiary) becomes (effective upon the
closing of the transaction) the beneficial owner (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities representing fifty
percent (50%) (provided that if NYLIFE Healthcare Management Inc. or any
affiliate thereof sells all or substantially all of the securities of the
Company that it holds either directly or indirectly as of the effective date
hereof to a nonaffiliate, thereafter such percentage shall be reduced to twenty
percent (20%)) or more of the combined voting power in the election of directors
of the then-outstanding securities of the Company or any successor of the
Company.
(b) when individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any person who becomes a director subsequent to the date
hereof whose election or nomination for election by the Company's stockholders
was approved by a vote of at least a majority of the directors then comprising
the Incumbent Board (other than an individual whose initial assumption of office
is in connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rules 14a-11
of Regulation 14A under the Exchange Act) shall be, for purposes of this
definition, considered as though such person were a member of the Incumbent
Board;
(c) approval by the stockholders of the Company, and consummation of, the
liquidation of the Company or any sale or disposition, or series of related
sales or dispositions, of all or substantially all of the assets or earning
power of the Company; or
(d) approval by the stockholders of the Company and consummation of any
merger or consolidation or statutory share exchange to which the Company is a
party and as a result of which the persons who were stockholders of the Company
immediately prior to the effective date of the merger or consolidation or
statutory share exchange shall have beneficial ownership of less than fifty
percent (50%) (provided that, if NYLIFE Healthcare Management, Inc. sells all or
substantially all of the Company's securities that it holds either directly or
indirectly as of the effective date hereof to a nonaffiliate, thereafter such
percentage shall be increased to eighty percent (80%); provided that if You, in
Your capacity as a director, do not vote against the proposed merger,
consolidation or share exchange transaction, such percentage shall be fifty
percent (50%)) of the combined voting power in the election of directors of the
surviving corporation following the effective date of such merger or
consolidation or statutory share exchange.
Notwithstanding the foregoing, a "Change of Control" shall not include the
sale or other transfer of beneficial ownership of Class B Common Stock of the
Company by NYLIFE Healthcare Management, Inc. to (or any acquisition of such
beneficial ownership by) an affiliate thereof, including, without limitation,
New York Life Insurance Company or any holding company formed by any such
affiliate
D. Other Benefits. You will be eligible to participate in and shall receive
all benefits under welfare and other employee benefit plans, practices, policies
and programs as well as any fringe benefits provided by the Company and
applicable to other Company executives generally.
E. Vacation. As President & Chief Executive Officer, You shall be entitled
to receive vacation time of five (5) weeks per year.
4. Non-Solicitation. You agree that, for a period of two (2) years
following the cessation of Your employment with the Company, You will not,
directly or indirectly, (a) solicit, divert or take any client, customer or
supplies from the Company; (b) employ, hire, engage or be affiliated with any
employee or other person connected with the Company at the time of such
termination or during any part of the twelve (12) months preceding said
termination; (c) induce any person connected with or employed by the Company to
leave the employ of the Company or (d) solicit the employment of any such person
on Your own behalf or on behalf of any other business enterprise.
5. Non-Competition. You agree that, during the term of this Agreement and
for a period of two (2) years following the cessation of Your employment with
the Company, You will not, directly or indirectly, own, manage, operate, join,
control or participate in or be connected with as an officer, employee,
consultant, partner, shareholder (except stock interests of less than five
percent (5%)) or otherwise, any business, individual, partnership, form or
corporation, which, directly is or will be engaged wholly or primarily in the
business of manufacturing, purchasing, selling, supplying or otherwise dealing
in the United States in any product or service manufactured, purchased, sold,
supplied, provided or dealt with by the Company, or which is or will be,
directly in competition with the business of the Company in the United States.
6. Non-Disclosure of Information and Non-Disparagement. You acknowledge
that the identity of the clients and customers of the Company, the prices, terms
and conditions at or upon which the Company sells its products or provides its
services and other confidential information relating to the business, financial
and other affairs of the Company (including, without limitation, any idea,
product, creative or conceptual business or marketing plan, strategy or other
material developed for the Company by You) are valuable, special unique assets
of the Company and that such information, if disclosed to others, may result in
loss of business or other irreparable and consequential damage to the Company.
You will hold in fiduciary capacity, for the benefit of the Company, all
information, knowledge and data relating to or concerned with the Company's
operations, sales, business and affairs and shall not, at any time during the
term of this Agreement or thereafter, disclose or divulge any such information,
knowledge or data to any person, firm, corporation, association or other entity,
for any reason whatsoever. Notwithstanding the foregoing, the provisions of this
paragraph 6 shall not apply to information generally known to the public or the
trade, information available in trade or other publications, nor to the release
of information deemed by the Board to be in the best interests of the Company.
The Company agrees that it will not disparage You in any way and You also agree
that You will not disparage the Company, its parent companies, its subsidiaries,
or its or their current or former officers, directors, and employees in any way;
further, neither You nor the Company will make or solicit any comments,
statements, or the like to the media or to others that may be considered
derogatory or detrimental to the good name or business reputation of any of the
aforementioned entities or individuals.
7. Termination of Employment.
A. Termination for Cause. If Your employment under this Agreement is
terminated for Cause (as defined herein) by the Company, the Company's liability
for Annual Base Salary, Annual Bonus, and all other benefits pursuant to
paragraph 3, shall cease upon the date of such notice; provided, that the
Company shall pay You no later than the next payroll cycle all Annual Base
Salary earned and unpaid as of such date and Your Annual Bonus that has accrued
pursuant to the terms of the Annual Bonus Plan or such other plans as may be
applicable, but remains unpaid as of the date of such termination. For purposes
of this Agreement, "Cause" shall mean: (i) Your indictment (or equivalent legal
proceeding under applicable law) or conviction for committing any felony or Your
commission of any other crime involving fraud, misappropriation, dishonesty or
moral turpitude, (ii) material breach of Your duties and responsibilities (other
than on account of Disability) under this Agreement; provided that material
breach shall not be considered to occur unless it continues to the expiration of
the ten (10) day period following the date You receive written warning from the
Board setting forth the reasons for its determination of material breach; and
provided further that for purposes of clause (ii), Cause shall not include any
one or more of the following:
(a) bad judgment,
(b) negligence (unless You fail to cure such negligence after receiving the
written notice and opportunity to cure described in this paragraph 7(A) above
and such negligence has a material and adverse effect on the Company),
(c) any act or omission that You believed in good faith to have been in or
not opposed to the interest of the Company (without Your intent to gain
therefrom, directly or indirectly, a profit to which You were not legally
entitled) (unless You fail to cure such act or omission after receiving written
notice and the opportunity to cure described in this paragraph 7(A) above and
such act or omission has a material and adverse effect on the Company), or
(d) any act or omission with respect to which notice of termination of
employment is given more than twelve (12) months after the earliest date on
which the Board (excluding members who were party to the act or omission), knew
or should have known of such act or omission.
No termination of employment for Cause shall be valid unless, no fewer than
seven (7) days prior to the date of such termination, the Company provides You
with written notice of its intent to consider termination for Cause, including a
detailed description of the specific reasons which form the basis for such
consideration. Thereafter, for a period of not less than 14 days after the date
notice of termination is provided, You shall have the opportunity to appear
before the Board to present arguments on Your own behalf. Following such
presentation to the Board, You shall be terminated for Cause only if (a)
seventy-five percent (75%) of the members of the Board (excepting You and any
other member of the Board involved in the events leading the Board to terminate
You for Cause) determine that Your actions constituted Cause and that Your
employment should accordingly be terminated for Cause; and (b) the Board
provides You with a written determination setting forth the basis of such
termination of employment.
B. Termination without Cause. Your employment under this Agreement may be
terminated by the Company for any reason not included in subparagraph A of this
paragraph 7, or for no reason, by giving You written notice. In such event Your
termination of employment will be effective as of the date specified in such
notice, and the Company shall, as liquidated damages, or severance pay, or both,
(i) pay You an amount equal to three (3) times the Annual Base Salary being paid
to You immediately prior to the termination date, (ii) pay You an amount equal
to three (3) times the greater of (a) the Annual Bonus for the calendar year
immediately preceding the termination date or (b) the Target Bonus for the
calendar year of termination, (iii) pay You any and all amounts accrued, but
unpaid as of the date of such termination, (iv) continue all of the Your
employee life and health benefits covered by subparagraph D of paragraph 3 on
the same terms and conditions as if You remained employed by the Company (with
the exception of long-term disability insurance coverage, which shall cease
immediately upon termination) until the earlier of three (3) years following
Your termination, the date You become covered under another employer's life and
health benefit(s) plan(s) or the last day of the month in which You reach age
sixty-five (65), and (v) pay You an amount equal to three (3) times the amount
or amounts the Company credited to Your account or contributed on Your behalf
(exclusive of that portion of base salary or bonus voluntarily deferred by You)
in the calendar year preceding termination (excluding the "catch-up" amounts
credited or contributed in calendar year 1999) to the Express Scripts, Inc.
Executive Deferred Compensation Plan, as adopted effective January 1, 1999, as
it may thereafter be amended and any successor, replacement or other deferred
compensation plan which may be subsequently adopted by the Company.
C. Termination for Good Reason.
(i) In the event You terminate for Good Reason (as defined in (ii) below),
the Company shall (a) pay You an amount equal to three (3) times the Annual Base
Salary being paid to You immediately prior to the termination date, (b) pay You
an amount equal to three (3) times the greater of (I) the Annual Bonus for the
calendar year immediately preceding such termination or (II) the Target Bonus
for the calendar year of such termination, (c) pay You any and all amounts
accrued, but unpaid as of the date of such termination, (d) continue all of the
employee life and health benefits covered by subparagraph D of paragraph 3 on
the same terms and conditions as if You remained employed by the Company (with
the exception of long-term disability insurance coverage, which shall cease
immediately upon termination) until the earlier of three (3) years following
Your termination, the date You become covered under another employer's life and
health benefit(s) plan(s) or the last day of the month in which You reach age
sixty-five (65), and (e) pay You an amount equal to three (3) times the amount
or amounts the Company credited to Your account or contributed on Your behalf
(exclusive of that portion of base salary or bonus voluntarily deferred by You)
in the calendar year preceding termination (excluding the "catch-up" amounts
credited or contributed in calendar year 1999) to the Express Scripts, Inc.
Executive Deferred Compensation Plan, as adopted effective January 1, 1999, as
it may thereafter be amended and any successor, replacement or other deferred
compensation plan which may be subsequently adopted by the Company.
(ii) For purposes of this Agreement, "Good Reason" means the occurrence of
any one of the following:
(a) assignment of any duties materially and adversely inconsistent with
Your position as specified herein, including status, offices, or
responsibilities as contemplated under paragraph 1 of this Agreement, or any
other action by the Company which results in a material and adverse change in
such position, status, offices, titles or responsibilities, or any material and
adverse change in Your reporting responsibilities,
(b) failure of the shareholders to elect and to continue to elect You to
the Board of Directors of the Company.
(c) the failure of the Company to assign this Agreement to and require the
assumption of this agreement by any successor to the Company,
(d) the Company's requiring, without Your written consent, You to be based
at any office or location more than 50 miles from the Company's location from
which You perform Your job duties as of the date hereof, or
(e) the Company's failure to substantially comply with the material
provisions of this Agreement.
Termination of employment for Good Reason pursuant to subparagraph (a) and
(e) above, shall not be considered to occur unless the Company fails to correct
the acts or omissions forming the basis thereof before the expiration of the ten
(10) day period following Your written notice to the Board of Your determination
of Good Reason pursuant to such subparagraphs.
D. Termination upon Death. In the event of Your death during the term of
this Agreement, Your employment will cease immediately and the obligation to pay
Annual Base Salary shall cease as of the date of death provided that as soon as
reasonably practicable thereafter the Company shall pay Your estate all Annual
Bonus and Annual Base Salary amounts accrued, but unpaid at the time of death.
Annual Bonus awards, if any are awarded, will be payable on a pro-rata basis to
Your beneficiary, such pro-rata amount shall be determined by multiplying the
Target Bonus amount under the Annual Bonus Plan for the calendar year of death
by a fraction, the numerator of which shall be the number of full months of
employment prior to Your death in the calendar year and the denominator of which
shall be twelve (12).
E. Termination for Disability. In the event of the Board's good faith
determination of Your inability (despite reasonable accommodations) to perform
the essential functions of Your position due to physical and/or mental
disability for a period of at least three (3) consecutive months or for a period
of more than six (6) months in any twelve (12) month period, it will give You
written notice of non-renewal of this Agreement. As of the date of such notice,
Your duties under this Agreement shall cease and Your Annual Bonus will be
payable on a pro-rata basis determined by multiplying the Target Bonus for the
calendar year of such termination by a fraction, the numerator of which is the
full number of months of employment prior to the date the Board notifies You of
Your termination and the denominator of which is twelve (12). Your Annual Base
Salary shall continue until the term of this Agreement expires.
F. Termination by the Expiration of this Agreement. In the event this
Agreement expires following the expiration of its term as set forth in paragraph
2, except for amounts accrued but unpaid as of the date of termination which the
Company shall pay You no later than the next regular payroll cycle, no further
Annual Base Salary or bonus awards provided for in paragraph 3 shall be payable
for any period following such termination.
G. Release. Notwithstanding anything else contained in this Agreement, the
Company's obligations to make payments and to provide benefits under this
paragraph 7, other than the obligation to pay Annual Base Salary and Annual
bonus that is accrued, but unpaid as of the date of termination as well as any
other vested benefits, are expressly conditioned upon the execution of a mutual
release and waiver, substantially in the form attached hereto as Exhibit A (the
"Release") of any claims arising from the termination of, or arising out of,
Your employment with the Company or any of its parent companies or subsidiaries
except those claims arising under this Agreement with respect to the rights and
obligations described in paragraph 9I hereof and any claims of indemnification
for acts or omissions during Your employment. The Company shall indemnify You
and hold You harmless during Your employment and after Your termination from the
Company for any claims or liabilities arising out of Your employment with the
Company to the full extent permitted under Section 145 of the Delaware General
Corporation Law. Notwithstanding the foregoing, if the Company shall refuse to
execute such mutual release, this paragraph shall not relieve the Company of its
obligation to make payments and provide benefits hereunder.
H. Payments in Single Lump-Sum. The Company shall pay the cash benefits,
less legally mandated and/or authorized deductions, required under this
paragraph 7, without interest thereon, in a single lump-sum payment payable
within the thirty (30) day period following the date of termination and the date
You comply with subparagraph G of this paragraph 7.
I. Tax Indemnification.
(1) If for any taxable year, You shall determine, based on the reasonable
advice of a nationally recognized accounting firm such as one of the "Big Five
Accounting Firms" that You are liable for the payment of an excise tax under
Section 4999 (or any similar tax payable on account of a Change of Control or
other change in ownership or control of the Company under any federal, state,
local or other law) of the Internal Revenue Code of 1986 as may be amended from
time to time (the "Code") with respect to any payment in the nature of
compensation made by the Company or any direct or indirect subsidiary, affiliate
or successor of the Company to (or for the benefit of) You, the Company shall
pay to You an amount equal to X determined under the following formula:
X = E x P
1 -[(FIx(1-SLI))+SLI+E+M]
E= the rate at which the excise tax is assessed under
Section 4999 (or other similar provision) of the Code;
P= the amount with respect to which such excise tax is
assessed, determined without regard to this paragraph
7(I);
FI= the highest marginal rate of income tax applicable to
You under the Code for the taxable year in question;
SLI= the sum of the highest marginal rates of income tax
applicable to You under all applicable state and local
laws for the taxable year in question; and
M= the highest marginal rate of Medicare tax applicable to
You under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) You under the terms of this Agreement, or otherwise, and on
which an excise tax under Section 4999 (or any similar tax payable on account of
a Change of Control or other change in ownership or control of the Company under
any federal, state, local or other law) of the Code will be assessed, the
payment determined under this paragraph 7(I)(1) shall be made to You on the
earlier of (I) the date the Company or any direct or indirect subsidiary or
affiliate of the Company is required to withhold such tax, or (II) the date the
tax is paid by You.
(2) Notwithstanding anything in this paragraph 7(I) to the contrary, in the
event that Your liability for the excise tax under Section 4999 of the Code (or
any similar tax payable on account of a Change of Control or other change in
ownership or control of the Company under any federal, state, local or other
law) for a taxable year is subsequently determined to be different than the
amount determined by the formula (X+P) x E, where X, P and E have the meanings
provided in paragraph 7(I)(1), You or the Company, as the case may be, shall pay
to the other party at the time that the amount of such excise tax is finally
determined, an appropriate amount, plus interest, such that the payment made
under paragraph 7(I)(1) when increased by the amount of the payment made to You
under this paragraph 7(I)(2) by the Company, or when reduced by the amount of
the payment made to the Company under this paragraph 7(I)(2) by You equals the
amount that should have properly been paid to You under paragraph 7(I)(1). The
interest paid under this paragraph 7(I)(2) shall be determined at the rate
provided under Section 1274(b)(2)(B) of the Code. To confirm that the proper
amount, if any, was paid to You under this paragraph 7(I), a copy of each tax
return which shall contain the signature of the "Big Five" or similar accounting
firm as the preparer and shall reflect a liability for an excise tax payment
shall be furnished to the Company at least 20 days before the date on which such
return is required to be filed with the Internal Revenue Service.
8. Merger. If the Company should consolidate, merge with, or sell all or
substantially all of its assets to another entity, the Company shall assign and
the other entity shall assume all obligations and duties under this Agreement;
and thereafter, the term "Company" as used herein, shall mean both the Company
and such assignee and this Agreement shall continue in full force and effect.
9. General Provisions.
A. Subject to the provisions of paragraph 8, neither this Agreement nor any
right or interest hereunder shall be assignable by either party without the
prior written consent of the other party.
B. Legal Fees and Expenses.
(i) If You incur and pay legal or other fees, costs and expenses in
negotiating and drafting this Agreement the Company shall reimburse You for such
fees, costs and expenses;
(ii) If You incur and pay legal or other fees, costs and expenses in an
effort to establish entitlement to fees and benefits under this Agreement, the
Company shall reimburse You for such fees, costs and expenses as follows;
(a) You shall be initially responsible for the first fifty thousand dollars
($50,000) of such legal or other fees, costs and expenses You incur.
(b) The Company shall reimburse fifty percent (50%) of the next two hundred
thousand dollars ($200,000) of fees, costs and expenses that You incur and pay.
Such reimbursement shall be made to You on a monthly basis within 30 days
following Your written submission of a request for reimbursement together with
proof that the fees, costs and expenses were incurred and that You paid such
fees, costs and expenses and the $50,000 referred to in paragraph 9(B)(ii)(a),
above.
(c) If the Company reimburses you within 30 days following Your requests as
provided in paragraph (b), above, You shall be entitled to additional
reimbursement (including initial $50,000 and $100,000) if and only if You shall
prevail (as defined herein) in the effort to establish entitlement benefits
under this Agreement. For purposes of this subparagraph (c) the term "prevail"
shall mean recovery of fees and benefit amounts (excluding any amounts received
under this Section 9(B) exceeding the amount of legal fees incurred by You
through the date of recovery.
(d) If the Company fails to reimburse You as provided in paragraph (b)
above, then the Company shall reimburse all legal and other fees and expenses
(including the initial fifty thousand ($50,000) and the two-hundred thousand
($200,000) amounts paid by You pursuant to paragraphs (a) and (b) above unless,
You do not prevail (after exhaustion of all available judicial remedies), and a
court of competent jurisdiction decides that You had no reasonable basis for
bringing an action hereunder or there was an absence of good faith for bringing
an action hereunder, in which event no further reimbursement for legal fees,
costs and expenses shall be due to You, and You shall repay the Company for any
amounts previously paid by the Company pursuant to this Section 9.B(ii).
C. This Agreement supersedes all prior and contemporaneous agreements and
constitutes the entire agreement between us regarding the subject matter hereof.
D. If any provisions of this Agreement shall be held or deemed to be, or
shall in fact be, invalid, inoperative or unenforceable as applied to any
particular case in any jurisdiction or jurisdictions, or in all jurisdictions or
in all cases, because of the conflicting of any provision with any constitution,
statute, rule of public policy or for any other reason, such circumstance shall
not have the effect of rendering the provision or provisions in question
invalid, inoperative, or unenforceable in any other jurisdiction or in any other
case or circumstance or of rendering any other provision or provisions herein
contained invalid, inoperative or unenforceable to the extent that such other
provision or provisions are not themselves actually in conflict with such
constitution, statute or rule of public policy, but this Agreement shall be
reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provisions reformed so that it would be valid, operative and enforceable to the
maximum extent permitted in such jurisdiction or in such case.
E. This Agreement shall be governed by the laws of the state of Missouri.
Should such laws be amended as to modify this Agreement, such amendment shall be
incorporated herein and be immediately effective between the parties.
F. The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including without limitation, set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company may have against You or others. If the Company fails to make any payment
payable hereunder within forty-five (45) days after such amounts are due, then
You shall be entitled to receive interest, compounded monthly, on the unpaid
amount, at a rate equal to the interest rate paid by the Company in its
revolving credit agreements or if no such revolving credit agreements exist, the
prime interest rate as provided in the Wall Street Journal plus three percent
(3%). In no event shall You be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to You under any of the
provisions of this Agreement, nor shall the amount of any payment hereunder be
reduced, except as otherwise specifically provided herein, by any compensation
earned by You as result of employment by another employer.
G. All notices and other communications required or desired to be given
hereunder shall be deemed given if in writing and sent by registered or
certified mail, postage prepaid, or overnight delivery, to the following
addresses:
Executive: Barrett A. Toan
42 Portland Place
St. Louis, MO 63108
with a copy to: Leslie A. Klein
(which copy shall) Sonnenschein Nath & Rosenthal
not constitute 8000 Sears Tower
notice) Chicago, IL 60606
The Company: Express Scripts, Inc.
14000 Riverport Drive
Maryland Heights, MO 63403
Attention: General Counsel &
Corporate Secretary
with a copy to: New York Life Insurance Company
51 Madison Avenue
New York, New York 10010
Attention: General Counsel
H. The Company hereby represents and warrants that this Agreement has been
duly authorized in accordance with all applicable laws and the Company's charter
and bylaws, and that Howard Waltman, Chairman of the Company, has been duly
authorized by the Board of Directors to execute and deliver this Agreement on
behalf of the Company.
I. Survival of Rights and Obligations. The rights and obligations provided
in paragraphs 3(C)(iv), 3(C)(v), 4, 5, 6, 7(B)(iv), 7(C)(i)(d), 7(E), 7(G),
7(I), 8, 9(A), 9(B), 9(F), 9(G) and 9(I) shall survive the termination of Your
employment and/or the termination of this Agreement.
J. This Agreement shall be effective as of April 1, 1999. In order to
insure the enforceability by You of Sections 3(C)(iii), 3(C)(iv), 3(C)(v) and
7(I) hereof, which affect your rights in respect of certain stock options
granted under the Company's employee stock option plans, the Company will submit
a proposal at the next annual meeting of the shareholders of the Company,
scheduled for May 26, 1999, to amend the option plans to insure the
effectiveness of such provisions. If it shall subsequently be determined by the
final judgment of a court of competent jurisdiction that such approval was
required under the terms of the Company's employee stock option plans in order
for such provisions to be given effect, such provisions shall be deemed
severable and the remainder of this Agreement shall remain in full force and
effect.
IN WITNESS HEREOF, the parties to this Agreement have subscribed their
names hereto.
Date: April 28, 1999 EXPRESS SCRIPTS, INC.
By: /s/ Howard L. Waltman
Date: April 16, 1999 /s/ Barrett A. Toan
Barrett A. Toan
<PAGE>
EXHIBIT A
AGREEMENT AND MUTUAL RELEASE
CONSULT WITH A LAWYER BEFORE SIGNING THIS AGREEMENT AND RELEASE. BY SIGNING
THIS AGREEMENT YOU GIVE UP AND WAIVE IMPORTANT LEGAL RIGHTS.
I, BARRETT A. TOAN, understand and, of my own free will, enter into this
AGREEMENT AND MUTUAL RELEASE (the "AGREEMENT") with Express Scripts, Inc. (the
"COMPANY") and, in consideration of the payment described in this AGREEMENT,
agree as follows:
1. (a) I understand that my employment with the COMPANY was terminated
effective [Date of termination].
(b) As referred to in this AGREEMENT, the COMPANY includes (i) its parents,
subsidiaries, affiliates and divisions and their respective successors and
assigns and (ii) their directors, officers, representatives, shareholders,
agents, past and present employees and their respective heirs and personal
representatives.
2. The COMPANY will pay me [Dollar amount and timing to be filled in at
termination], pursuant to my [Date of Agreement] 1999 Employment Agreement, if
and only if, I sign this AGREEMENT and abide by its terms. This payment will be
subject to withholding for taxes. The COMPANY will begin to pay this money to me
after the expiration of the seven (7) days referred to in paragraph 13.
3. Prior to signing this AGREEMENT, I had the opportunity to consult with
counsel.
4. I understand that this AGREEMENT does not constitute an admission by the
COMPANY or me of any: (a) violation of any statute, law or regulation; (b)
breach of contract, actual or implied; or (c) commission of any tort.
5. I realize there are many laws and regulations prohibiting employment
discrimination or otherwise regulating employment or claims related to
employment pursuant to which I may have rights or claims. These include Title
VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in
Employment Act of 1967, as amended (the "ADEA"); the Americans with Disabilities
Act of 1990; the National Labor Relations Act, as amended; 42 U.S.C. ss. 1981;
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); the
Civil Rights Act of 1991; the Worker Adjustment and Retraining Notification Act,
as amended and Federal, State and local human rights, fair employment, and other
laws. I also understand there are other statutes and laws of contract and tort
otherwise relating to my employment. I intend to waive and release any rights
and claims I may have under these and other laws, but I do not intend to waive
or release any rights or claims that may arise under the ADEA after the date
that I sign this AGREEMENT, nor any claims I may have for benefits to which I am
entitled under the COMPANY's benefit plans, nor any claims I may have for
indemnification for any acts or omissions during my employment with the Company.
I do not intend to waive or relinquish any rights that I have under my
Employment Agreement that survive my termination as provided in paragraph 9(I)
of that agreement.
6. (a) In consideration of the severance benefits provided under my
Employment Agreement, I, and any person acting, through, or under me, hereby
release, waive, and forever discharge the COMPANY, and any, subsidiaries,
affiliates, employees, officers, shareholders, successors, and assigns (if any)
from any and all liability, actions, charges, causes of action, demands,
damages, or claims for relief or remuneration of any kind whatsoever, whether
known or unknown at this time, arising out of, or in connection with, my
employment with the COMPANY (other than indemnification to which I may be
entitled under the COMPANY's bylaws, policies or agreements (now or hereafter
maintained) with regard to the indemnification of its executive officers or
directors), any benefits to which I may be entitled under any Company sponsored
benefit plans and any rights that survive my termination as provided in
paragraph 9.I. of my Employment Agreement). I have not filed any charges, claims
or actions against the COMPANY and will immediately withdraw with prejudice any
such charges, claims and actions before signing this AGREEMENT, and will not
bring any such charges, claims or actions in the future, except (i) a charge,
claim or action based upon rights or claims that may arise under the ADEA after
the date that I sign this AGREEMENT, (ii) a claim for breach of this AGREEMENT
or breach of a provision in my Employment Agreement that survives my termination
as provided in paragraph 9.I. of that agreement, or (iii) a claim for indemnity
to which I may be entitled under the COMPANY's bylaws, policies or agreements,
or (iv) a claim for benefits to which I may be entitled under the COMPANY's
benefit plans.
(b) In consideration of my promises under this AGREEMENT, the COMPANY, and
any of its subsidiaries, affiliates, employees, officers, shareholders,
successors, and assigns (if any), hereby releases, waives, and forever
discharges me, and any person acting, through, or under me from any and all
liability, actions, charges, causes of action, demands, damages, or claims for
relief or remuneration of any kind whatsoever, whether known or unknown at this
time, arising out of, or in connection with, my employment with the COMPANY
(except that the COMPANY does not release me from any claims of intentional
wrongdoing, including but not limited to, claims of fraud, theft, and/or
embezzlement, or claims that survive pursuant to paragraph 9.I. of my Employment
Agreement which claims survive this AGREEMENT). The COMPANY has not filed any
charges, claims or actions against me and will immediately withdraw with
prejudice any such charges, claims and actions before signing this AGREEMENT,
and will not bring any such charges, claims or actions in the future, except (i)
a claim of intentional wrongdoing such as fraud, theft, and/or embezzlement,
(ii) a claim for breach of this AGREEMENT or breach of a provision in my
Employment Agreement that survives my termination as provided in paragraph 9.I.
of that agreement.
7. This AGREEMENT shall be deemed to have been made within the State of
Missouri, and shall be interpreted and construed and enforced in accordance with
the laws of the State of Missouri, except to the extent preempted by federal
law.
8. I understand that this AGREEMENT may not affect the rights and
responsibilities of the Equal Employment Opportunity Commission ("Commission")
to enforce the ADEA or used to justify interfering with the protected right of
an employee to file a charge under the ADEA or participate in an investigation
or proceeding conducted by the Commission under the ADEA.
9. (a) The terms and provisions (collectively "provisions") of this
AGREEMENT are severable.
(b) In the event that one or more of the provisions of this AGREEMENT shall
be ruled unenforceable or void, the provision(s) so affected shall be deemed
amended and shall be construed so as to enable the provision(s) to be applied
and enforced to the maximum lawful extent.
(c) In addition to the rights of the Company pursuant to (a) and (b) above,
in the event that the general release provision of this AGREEMENT shall be
determined by a court of competent jurisdiction in an action that I initiate
(provided that I shall be free to assert any and all claims, counterclaims,
set-offs or other affirmative rights or causes of action that I may have in an
action initiated by the Company to determine that the general release is void or
otherwise unenforceable and this paragraph shall not apply) to be unenforceable
or void, the COMPANY may elect to enforce the remainder of this AGREEMENT or
cancel this AGREEMENT, and get back from me, my successors or assigns or
otherwise the money described in paragraph 2
10. Unless and to the extent required by law, the COMPANY and I will not at
any time talk about, write about or otherwise publicize the terms or existence
of this AGREEMENT or any fact concerning its negotiation, execution or
implementation except that we are allowed to consult with a lawyer and/or
representatives of the Commission. The COMPANY and I will not testify or give
evidence in any forum concerning my affiliation or employment with the COMPANY
unless otherwise permitted by law, required by law, or requested in writing by
me or an authorized official of the COMPANY. Notwithstanding the foregoing, if
the COMPANY and I were requested in writing to do so by the other party, we will
fully and completely cooperate with the other party in any investigation they
may conduct in connection with any events which occurred while I was an employee
of the COMPANY;
11. (a) The parties understand that if either breaches this AGREEMENT, in
whole or in part, the other party will suffer irreparable harm for which it may
have no adequate remedy at law. The parties therefore consent, without limiting
any other rights that each may have, to enforcement of any provision or
provisions of this AGREEMENT by means of injunctive relief.
(b) This AGREEMENT shall be deemed to have been made within the County of
St. Louis, State of Missouri, and shall be interpreted and construed and
enforced in accordance with the laws of the State of Missouri except to the
extent preempted by federal law and before the Courts of the State of Missouri,
County of St. Louis.
12. (a) I was given a copy of this AGREEMENT on or about [Date of
delivery].
(b) I have had the opportunity to consult with an attorney or any other
advisor of my choice before signing it and was given a period of at least
twenty-one (21) calendar days (that is until [Delivery date in 12(a) plus 21
days]) to consider this AGREEMENT.
(d) I acknowledge that in signing this AGREEMENT, I have relied only on the
promises written in this AGREEMENT and not on any other promise made by the
COMPANY or any other entity or person.
13. I have seven (7) calendar days to revoke this AGREEMENT after I sign
it. This AGREEMENT will not become effective or enforceable until seven (7)
calendar days after the COMPANY has received my signed copy of this AGREEMENT.
14. This AGREEMENT may not be modified or changed orally.
By:
COMPANY's Representative BARRETT A. TOAN
STATE OF )
) :ss:
COUNTY OF )
On this day of , , before me personally came BARRETT A. TOAN,
and , the COMPANY's representative to me known and known to me to be the
individuals described in, and who executed the foregoing AGREEMENT AND MUTUAL
RELEASE, and duly acknowledged to me that they executed the same.
Notary Public
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000885721
<NAME> Express Scripts, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 115,838
<SECURITIES> 0
<RECEIVABLES> 461,336
<ALLOWANCES> 14,883
<INVENTORY> 55,234
<CURRENT-ASSETS> 45,602
<PP&E> 110,244,206
<DEPRECIATION> 36,897,730
<TOTAL-ASSETS> 1,096,950
<CURRENT-LIABILITIES> 522,906
<BONDS> 0
0
0
<COMMON> 337
<OTHER-SE> 267,205
<TOTAL-LIABILITY-AND-EQUITY> 1,096,950
<SALES> 899,087
<TOTAL-REVENUES> 899,087
<CGS> 823,647
<TOTAL-COSTS> 870,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,222
<INCOME-PRETAX> 24,171
<INCOME-TAX> 10,628
<INCOME-CONTINUING> 13,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,543
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.40
</TABLE>
