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 June 30, 2000.
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.)
13900 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 July 31, 2000: 22,941,221 Shares Class A
15,020,000 Shares Class B
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 12
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 20
Item 5. Other Information - (Not Applicable)
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Balance Sheet
<CAPTION>
June 30, December 31,
(in thousands, except share data) 2000 1999
<S> <C> <C>
---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 99,835 $ 132,630
Receivables, net 845,699 783,086
Inventories 75,984 113,248
Other current assets 34,224 37,391
---------------- ----------------
Total current assets 1,055,742 1,066,355
Investment in marketable securities 10,270 150,365
Property and equipment, net 112,319 97,573
Goodwill, net 984,785 982,496
Other intangible assets, net 163,538 183,420
Other assets 10,226 7,102
---------------- ----------------
Total assets $ 2,336,880 $ 2,487,311
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 855,839 $ 850,630
Current portion of long-term debt 42,750 -
Other current liabilities 258,296 249,728
---------------- ----------------
Total current liabilities 1,156,885 1,100,358
Long-term debt 517,908 635,873
Other liabilities 32,823 51,598
---------------- ----------------
Total liabilities 1,707,616 1,787,829
---------------- ----------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, and no
shares issued and outstanding
Class A Common Stock, $0.01 par value, 150,000,000 shares authorized,
24,002,000 and 23,981,000 shares issued and outstanding, respectively 240 240
Class B Common Stock, $0.01 par value, 31,000,000 shares authorized,
15,020,000 shares issued and outstanding 150 150
Additional paid-in capital 421,507 418,921
Accumulated other comprehensive income (57) (9,521)
Retained earnings 243,795 296,540
---------------- ----------------
665,635 706,330
Class A Common Stock in treasury at cost, 1,202,000 and 465,000
shares, respectively (36,371) (6,848)
---------------- ----------------
Total stockholders' equity 629,264 699,482
---------------- ----------------
Total liabilities and stockholders' equity $ 2,336,880 $ 2,487,311
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Operations
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
---------------- ---------------- ---------------- ----------------
Revenues:
Revenues $ 1,650,251 $ 996,749 $ 3,122,791 $ 1,895,836
Other revenues 3,116 - 6,085 -
---------------- ---------------- ---------------- ----------------
1,653,367 996,749 3,128,876 1,895,836
Cost and expenses:
Cost of revenues 1,515,964 869,989 2,859,027 1,693,636
Selling, general and administrative 87,421 81,897 170,792 128,337
Non-recurring - 9,400 - 9,400
---------------- ---------------- ---------------- ----------------
1,603,385 961,286 3,029,819 1,831,373
---------------- ---------------- ---------------- ----------------
Operating income 49,982 35,463 99,057 64,463
---------------- ---------------- ---------------- ----------------
Other income (expense):
Write-down of marketable securities (155,500) - (155,500) -
Interest income 2,046 1,444 3,427 2,837
Interest expense (13,183) (23,231) (27,384) (29,453)
---------------- ---------------- ---------------- ----------------
(166,637) (21,787) (179,457) (26,616)
---------------- ---------------- ---------------- ----------------
(Loss) income before income taxes (116,655) 13,676 (80,400) 37,847
(Benefit) provision for income taxes (42,478) 6,658 (27,655) 17,286
---------------- ---------------- ---------------- ----------------
(Loss) income before extraordinary item (74,177) 7,018 (52,745) 20,561
Extraordinary item, net of taxes of $4,144 - (6,597) - (6,597)
---------------- ---------------- ---------------- ----------------
Net (loss) income $ (74,177) $ 421 $ (52,745) $ 13,964
================ ================ ================ ================
Basic (loss) earnings per share:
Before extraordinary item $ (1.96) $ 0.20 $ (1.39) $ 0.61
Extraordinary item - (0.19) - (0.19)
---------------- ---------------- ---------------- ----------------
Net (loss) income $ (1.96) $ 0.01 $ (1.39) $ 0.42
================ ================ ================ ================
Weighted average number of common shares
outstanding during the period - Basic EPS 37,812 34,055 38,068 33,633
================ ================ ================ ================
Diluted (loss) earnings per share
Before extraordinary item $ (1.93) $ 0.20 $ (1.36) $ 0.59
Extraordinary item - (0.19) - (0.19)
---------------- ---------------- ---------------- ----------------
Net (loss) income $ (1.93) $ 0.01 $ (1.36) $ 0.40
================ ================ ================ ================
Weighted average number of common shares
outstanding during the period - Diluted EPS 38,507 34,952 38,751 34,553
================ ================ ================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Changes in Stockholders' Equity
<CAPTION>
Number of Shares Amount
------------------ --------------------------------------------------------------------------------
Accumulated
Class A Class B Class A Class B Additional Other
Common Common Common Common Paid-in Comprehensive Retained Treasury
(in thousands) Stock Stock Stock Stock Capital Income Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------ --------------------------------------------------------------------------------
Balance at December 31, 1999 23,981 15,020 $ 240 $ 150 $418,921 $ (9,521) $296,540 $(6,848) $699,482
------------------ --------------------------------------------------------------------------------
Comprehensive income:
Net loss - - - - - - (52,745) - (52,745)
Other comprehensive
income,
Foreign currency
translation
adjustment - - - - - (91) - - (91)
Recognition of prior
period
unrealized losses on
investments - - - - - 9,555 - - 9,555
------------------- ---------------------------------------------------------------------------------
Comprehensive (loss) income - - - - - 9,464 (52,745) - (43,281)
Repurchase of Class A
Common Stock - - - - - - - (30,247) (30,247)
Common stock issued under
employee plans 21 - - - 780 - - - 780
Exercise of stock options - - - - 913 - - 724 1,637
Tax benefit relating to
employee stock options - - - - 893 - - - 893
------------------- ---------------------------------------------------------------------------------
Balance at June 30, 2000 24,002 15,020 $ 240 $ 150 $421,507 $ (57) $243,795 $(36,371) $629,264
=================== =================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Cash Flows
<CAPTION>
Six Months Ended
June 30,
(in thousands) 2000 1999
<S> <C> <C>
---------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (52,745) $ 13,964
Adjustment to reconcile net (loss) income to net cash provided
by operating activities
Depreciation and amortization 43,865 30,081
Deferred income taxes (44,473) 4,429
Bad debt expense 7,291 2,223
Tax benefit relating to employee stock options 893 1,764
Write-down of marketable securities 155,500 -
Non-recurring charges, net of cash - 3,700
Extraordinary loss on early retirement of debt - 10,741
Net changes in operating assets and liabilities,
net of changes resulting from acquisition (12,304) (14,486)
---------------- ----------------
Net cash provided by operating activities 98,027 52,416
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (26,514) (16,178)
Acquisition, net of cash acquired - (717,886)
Other, net (1,000) -
---------------- ----------------
Net cash (used in) investing activities (27,514) (734,064)
---------------- ----------------
Cash flows from financing activities:
Repayment of long-term debt (75,069) (924,770)
Proceeds from long-term debt - 1,288,815
Repurchase of Class A Common Stock (30,247) -
Net proceeds from issuance of common stock - 299,312
Financing fees paid - (25,258)
Other, net 2,099 3,207
---------------- ----------------
Net cash (used in) provided by financing activities (103,217) 641,306
---------------- ----------------
Effects of foreign currency translation adjustment (91) 36
---------------- ----------------
Net decrease in cash and cash equivalents (32,795) (40,306)
Cash and cash equivalents at beginning of period 132,630 122,589
---------------- ----------------
Cash and cash equivalents at end of period $ 99,835 $ 82,283
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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 our opinion, 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 our Annual Report on Form 10-K for the Year Ended
December 31, 1999, as filed with the Securities and Exchange Commission on March
29, 2000.
In our opinion, 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 June 30, 2000, the Unaudited Consolidated Statements of Operations for
the three months and six months ended June 30, 2000, and 1999, the Unaudited
Consolidated Statement of Changes in Stockholders' Equity for the six months
ended June 30, 2000, and the Unaudited Consolidated Statements of Cash Flows for
the six months ended June 30, 2000, and 1999. Operating results for the three
months and six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
Note 2 - Receivables
As of June 30, 2000 and December 31, 1999, unbilled receivables were
$450,711,000 and $416,740,000, respectively. Unbilled receivables are billed to
clients typically within 30 days based on the contractual billing schedule
agreed upon with the client. As of June 30, 2000 and December 31, 1999, we have
allowances for doubtful accounts of $21,766,000 and $17,281,000, respectively.
Note 3 - Earnings Per Share
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed in the same manner as basic earnings per share but adds the number of
additional common shares that would have been outstanding for the period if the
dilutive potential common shares had been issued. The difference between the
number of weighted average shares used in the basic and diluted calculation for
all years are outstanding stock options and stock warrants and any unvested
shares and shares issuable pursuant to employee elected deferral under the
executive deferred compensation plan, all calculated under the "treasury stock"
method in accordance with Financial Accounting Standards Board Statement No.
128, "Earnings Per Share".
Note 4 - Acquisition
On April 1, 1999, we completed our 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 $715
million, which includes a purchase price adjustment for closing working capital
and transaction costs. We filed an Internal Revenue Code ss.338(h)(10) election,
making amortization expense of intangible assets, including goodwill, tax
deductible. We used approximately $48 million of our own cash and financed the
remainder of the purchase price and related acquisition costs.
The acquisition has been accounted for using the purchase method of
accounting. The results of operations of DPS have been included in the
consolidated financial statements and pharmacy benefit management ("PBM")
segment since April 1, 1999. 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 in the amount of
$129,500,000 which are being amortized using the straight-line method over the
estimated useful lives of 1 to 20 years and goodwill in the amount of
$754,236,000 which is being amortized using the straight-line method over the
estimated useful life of 30 years. In conjunction with the acquisition, DPS
retained the following liabilities:
(in thousands)
-------------------------------------------------------------
Fair value of assets acquired $ 1,028,848
Cash paid for the capital stock (714,678)
-----------------------
Liabilities retained $ 314,170
=======================
The following unaudited pro forma information presents a summary of our
combined results of operations and those of DPS 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 date,
nor is it an indication of trends in future results.
Six Months Ended June
30,
(in thousands, except per share data) 1999
-----------------------------------------------------------------------
Total revenues $ 1,961,202
Income before extraordinary loss 4,143
Extraordinary (loss) (6,597)
-----------------------
Net income (loss) (2,454)
Basic earnings per share
Before extraordinary loss 0.12
Extraordinary (loss) (0.20)
-----------------------
Net income (loss) (0.08)
Diluted earnings per share
Before extraordinary loss 0.12
Extraordinary (loss) (0.19)
-----------------------
Net income (loss) (0.07)
Note 5 - Marketable Securities
All investments not included in a money market fund are accounted for
under Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Available-for-sale
securities are reported at fair value, which is based upon quoted market prices,
with unrealized gains and losses, net of tax, reported as a component of other
comprehensive income in stockholders' equity until realized. Unrealized losses
are charged against income when a decline in fair value is determined to be
other than temporary.
We recorded a non-cash impairment charge related to our investment in
PlanetRx.com, Inc. ("PlanetRx") common stock during the second quarter of 2000
as the loss in value was deemed to be other than temporary. Therefore, any
unrealized losses associated with recording our investment in PlanetRx at
current market value that we had recorded in stockholders' equity were written
off to the current period earnings, in addition to any additional charges
necessary to write-down the value of our investment. At June 30, 2000 and
December 31, 1999, available-for-sale securities totaled $10,270,000 and
$150,365,000, respectively, with unrealized losses, net of taxes of $97,032,000,
including $9,555,000 previously recognized in other comprehensive income,
respectively. The unrealized losses were previously considered to be temporary,
thus were reported as a component of other comprehensive income in stockholders'
equity. These investments consist of shares of PlanetRx common stock.
Note 6 - Financing
Our Senior Notes are unconditionally and joint and severally guaranteed
by our wholly-owned domestic subsidiaries other than Practice Patterns Sciences,
Inc., Great Plains Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY
IPA, Inc., and Diversified Pharmaceutical Services (Puerto Rico), Inc. Separate
financial statements of the Guarantors are not presented as we have determined
them not to be material to investors. Therefore, the following condensed
consolidating financial information has been prepared using the equity method of
accounting in accordance with the requirements for presentation of such
information. We believe that this information, presented in lieu of complete
financial statements for each of the guarantor subsidiaries, provides sufficient
detail to allow investors to determine the nature of the assets held by, and the
operations of, each of the consolidating groups. As of January 1, 2000, we
undertook an internal corporate reorganization to eliminate various entities
whose existence was deemed to be no longer necessary, including, among others,
ValueRx Pharmacy Program, Inc. ("ValueRx"), and to create several new entities
to house certain activities, including Express Scripts Specialty Distribution
Services, Inc. ("SDS") and ESI Mail Pharmacy Service, Inc. ("ESI MPS").
Consequently, the assets, liabilities and operations of ValueRx are incorporated
into those of the issuer, Express Scripts, Inc. and the assets, liabilities and
operations of SDS and ESI MPS are incorporated into those of the Guarantors for
2000.
<TABLE>
<CAPTION>
Express Non-
(in thousands) Scripts, Inc. Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
As of June 30, 2000
Current assets $ 788,685 $ 261,850 $ 5,207 $ - $ 1,055,742
Property and equipment, net 93,840 15,981 2,498 - 112,319
Investments in subsidiaries 725,696 - 2,261 (727,957) -
Investments in marketable securities - 10,270 - - 10,270
Intercompany (46,693) 47,862 (1,169) - -
Goodwill, net 255,979 723,648 5,158 - 984,785
Other intangible assets, net 59,658 103,849 31 - 163,538
Other assets 76,057 (58,840) (6,991) - 10,226
-------------------------------------------------------------------------------
Total assets $ 1,953,222 $ 1,104,620 $ 6,995 $ (727,957) $ 2,336,880
===============================================================================
Current liabilities $ 781,393 $ 370,042 $ 5,450 $ - $ 1,156,885
Long-term debt 517,908 - - - 517,908
Other liabilities 92,850 (54,188) (5,839) - 32,823
Stockholders' equity 561,071 788,766 7,384 (727,957) 629,264
-------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,953,222 $ 1,104,620 $ 6,995 $ (727,957) $ 2,336,880
===============================================================================
As of December 31, 1999
Current assets $ 549,374 $ 509,702 $ 7,279 $ - $ 1,066,355
Property and equipment, net 39,036 55,776 2,761 - 97,573
Investments in subsidiaries 725,468 - 2,261 (727,729) -
Investments in marketable securities - 150,365 - 150,365
Intercompany 463,438 (463,241) (197) - -
Goodwill, net 168 976,759 5,569 - 982,496
Other intangible assets, net 22,458 160,901 61 - 183,420
Other assets 13,179 7,037 (12,967) (147) 7,102
-------------------------------------------------------------------------------
Total assets $ 1,813,121 $ 1,397,299 $ 4,767 $ (727,876) $ 2,487,311
===============================================================================
Current liabilities $ 527,312 $ 563,457 $ 9,589 $ - $ 1,100,358
Long-term debt 635,873 - - - 635,873
Other liabilities 83,365 (19,488) (12,279) - 51,598
Stockholders' equity 566,571 853,330 7,457 (727,876) 699,482
-------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,813,121 $ 1,397,299 $ 4,767 $ (727,876) $ 2,487,311
===============================================================================
Three months ended June 30, 2000
Total revenues $ 1,025,659 $ 625,470 $ 2,238 $ - $ 1,653,367
Operating expenses 1,005,965 595,204 2,216 - 1,603,385
-------------------------------------------------------------------------------
Operating income 19,694 30,266 22 - 49,982
Write-down of marketable securities - (155,500) - - (155,500)
Interest (expense) income, net (11,139) (1) 3 - (11,137)
-------------------------------------------------------------------------------
Income (loss) before tax effect 8,555 (125,235) 25 - (116,655)
Income tax provision (benefit) 3,541 (46,029) 10 - (42,478)
-------------------------------------------------------------------------------
Net income (loss) $ 5,014 $ (79,206) $ 15 $ - $ (74,177)
===============================================================================
Three months ended June 30, 1999
Total revenues $ 513,958 $ 471,276 $ 11,515 $ - $ 996,749
Operating expenses 485,009 465,058 11,219 - 961,286
-------------------------------------------------------------------------------
Operating income 28,949 6,218 296 - 35,463
Interest income (expense), net (21,984) 145 52 - (21,787)
-------------------------------------------------------------------------------
Income before tax effect 6,965 6,363 348 - 13,676
Income tax provision 3,115 3,378 165 - 6,658
-------------------------------------------------------------------------------
Income before extraordinary loss 3,850 2,985 183 - 7,018
Extraordinary loss 6,597 - - - 6,597
-------------------------------------------------------------------------------
Net income (loss) $ (2,747) $ 2,985 $ 183 $ - $ 421
===============================================================================
Six months ended June 30, 2000
Total revenues $ 1,932,511 $ 1,192,412 $ 3,953 $ - $ 3,128,876
Operating expenses 1,887,134 1,138,206 4,479 - 3,029,819
-------------------------------------------------------------------------------
Operating income (loss) 45,377 54,206 (526) - 99,057
Write-down of marketable securities - (155,500) - - (155,500)
Interest (expense) income, net (23,955) (3) 1 - (23,957)
-------------------------------------------------------------------------------
Income (loss) before tax effect 21,422 (101,297) (525) - (80,400)
Income tax provision (benefit) 9,260 (36,733) (182) - (27,655)
-------------------------------------------------------------------------------
Net income (loss) $ 12,162 $ (64,564) $ (343) $ - $ (52,745)
===============================================================================
Six months ended June 30, 1999
Total revenues $ 1,007,503 $ 873,154 $ 15,179 $ - $ 1,895,836
Operating expenses 951,365 865,756 14,252 - 1,831,373
-------------------------------------------------------------------------------
Operating income 56,138 7,398 927 - 64,463
Interest income (expense), net (26,923) 211 96 - (26,616)
-------------------------------------------------------------------------------
Income before tax effect 29,215 7,609 1,023 - 37,847
Income tax provision 11,566 5,272 448 - 17,286
-------------------------------------------------------------------------------
Income before extraordinary loss 17,649 2,337 575 - 20,561
Extraordinary loss 6,597 - - - 6,597
-------------------------------------------------------------------------------
Net income (loss) $ 11,052 $ 2,337 $ 575 $ - $ 13,964
===============================================================================
</TABLE>
Note 7 - Restructuring
During the second quarter of 1999, we recorded a pre-tax restructuring
charge of $9,400,000 associated with the consolidation of our Plymouth,
Minnesota facility into our Bloomington, Minnesota facility. In December 1999,
the associated accrual was reduced by $2,301,000, primarily as a result of
subleasing a portion of the unoccupied space. The consolidation plan includes
the relocation of all employees at the Plymouth facility to the Bloomington
facility that began in August 1999 and will end in the third quarter of 2000.
Included in the restructuring charge are anticipated cash expenditures of
approximately $4,823,000 for lease termination fees and rent on unoccupied space
(which payments will continue through April 2001, when the lease expires) and
anticipated non-cash charges of approximately $2,276,000 for the write-down of
leasehold improvements and furniture and fixtures. The restructuring charge does
not include any costs associated with the physical relocation of the employees.
During December 1999, we recorded a pre-tax restructuring charge of
$2,633,000 associated with the outsourcing of our computer operations to
Electronic Data Systems Corporation. The principal actions of the plan included
cash expenditures of approximately $2,148,000 for the transition of 51 employees
to the outsourcer and the elimination of contractual obligations of ValueRx,
which had no future economic benefit to us, and non-cash charges of
approximately $485,000 due to the reduction in the carrying value of certain
capitalized software to its net realizable value. This plan was completed during
the second quarter of 2000 when remaining cash payments were made.
Also in December 1999, we recorded a pre-tax restructuring charge of
$969,000 associated with restructuring our Practice Patterns Science, Inc.
("PPS") majority-owned subsidiary and the purchase of the remaining PPS Common
Stock from management. The charge consisted of cash expenditures of $559,000
relating to stock compensation expense and $410,000 of severance payments to 9
employees. This plan was completed in January 2000.
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 2000 2000 June 30,
(in thousands) 1999 Additions Usage 2000
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
Non-cash
Write-down of long-lived assets $ 28 $ - $ - $ 28
Cash
Employee transition costs 1,592 - 1,592 -
Stock compensation 559 - 559 -
Termination fees and rent 1,338 - 946 392
------------------------------------------------------------
$ 3,517 $ - $ 3,097 $ 420
============================================================
</TABLE>
All of the restructuring charges which include tangible assets to be
disposed of are written down to their net realizable value, less cost of
disposal. We expect recovery to approximate its cost of disposal. Considerable
management judgment is necessary to estimate fair value; accordingly, actual
results could vary from such estimates.
Note 8 - Common Stock
As of June 30, 2000, we have repurchased a total of 1,265,000 shares of
our Class A Common Stock under the stock repurchase program that we announced on
October 25, 1996, of which, 790,000 shares were repurchased during the six
months ended June 30, 2000. Approximately 63,000 shares have been utilized for
stock option exercises through June 30, 2000. Our Board of Directors approved
the repurchase of up to 2,500,000 shares, and placed no limit on the duration of
the program. Additional purchases, if any, will be made 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 bank
credit facility and the Indenture under which our Senior Notes were issued.
Note 9 - Segment Reporting
We are organized on the basis of services offered and have determined
that we have two reportable segments: PBM services and non-PBM services. We
manage the pharmacy benefit within an operating segment that encompasses a
fully-integrated PBM service. The remaining two operating service lines (IVTx
and Specialty Distribution) have been aggregated into a non-PBM reporting
segment.
<TABLE>
The following tables present information about the reportable segments:
<CAPTION>
(in thousands) PBM Non-PBM Total
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------
Three months ended June 30, 2000
Total revenues $ 1,630,519 $ 22,848 $ 1,653,367
(Loss) income before income taxes (121,659) 5,004 (116,655)
Three months ended June 30, 1999
Total revenues $ 981,478 $ 15,271 $ 996,749
Income before income taxes 11,470 2,206 13,676
Six months ended June 30, 2000
Total revenues $ 3,084,760 $ 44,116 $ 3,128,876
(Loss) income before income taxes (90,595) 10,195 (80,400)
Six months ended June 30, 1999
Total revenues $ 1,865,914 $ 29,922 $ 1,895,836
Income before income taxes 34,957 2,890 37,847
</TABLE>
Included in PBM income before income taxes for the three and six months
ended June 30, 2000 is the non-cash write-down of $155,500,000 ($97,032,000 net
of tax) of our investment in PlanetRx (see Note 5).
PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
In this Item 2, "we," "us," "our" and the "Company" refer to Express
Scripts, Inc. and its subsidiaries, unless the context indicates otherwise.
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 ("SEC") 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. 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:
o risks associated with the loss of the United HealthCare contract
o risks associated with the completion of our Internet strategy
o risks associated with acquisitions, including the ability to
successfully integrate the operations of acquired businesses with
our existing operations, client retention issues, and risks
inherent in the acquired entities operations
o risks associated with our leverage and debt service obligations, as well
as risks associated with obtaining new capital
o risks associated with our ability to manage and maintain internal growth
o competition, including price competition, competition in the bidding and
proposal process and our ability to consummate contract negotiations
with prospective clients
o the possible termination of contracts with certain key clients or
providers
o the possible loss of relationships with pharmaceutical manufacturers,
or changes in pricing, discount, rebate or other
practices of pharmaceutical manufacturers
o adverse results in litigation
o adverse results in regulatory matters, the adoption of adverse
legislation or regulations, more aggressive enforcement of
existing legislation or regulations (including, without
limitation, as a result of an investigation of certain of our
competitors currently being conducted by the Department of Justice
out of its Philadelphia office), or a change in the interpretation
of existing legislation or regulations
o developments in the healthcare industry, including the impact of
increases in health care costs, changes in drug utilization
patterns and introductions of new drugs
o dependence on key members of management
o our relationship with New York Life Insurance Company, which possesses
voting control of us
o other risks described from time to time in our filings with the SEC
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 six months of 2000 we continued to execute our growth
strategy by increasing our membership to approximately 40.5 million members as
of July 1, 2000 compared with 36 million members as of July 1, 1999 (excluding
approximately 8.3 million and 9.5 million, respectively, members served under
the United HealthCare ("UHC") contract that expired in May 2000, for which we
have implemented a transition plan to transfer these members to the new
provider). Additionally, we continue to develop new products and services for
sale to existing clients and pharmaceutical manufacturers and expand the
services provided to existing clients. During the first six months of 2000,
approximately 2.3 million members began utilizing expanded services that provide
for more advanced formulary management and the addition of mail or network
services where only one of these services had been previously utilized. We have
one of the largest managed care membership bases of any pharmacy benefit
management ("PBM") company. Although our membership counts are based on
eligibility data provided by our clients, they necessarily involve some
estimates, extrapolations and approximations. For example, some plan designs
allow for family coverage under a single identification number, and we make
assumptions about the average number of persons per family in calculating the
membership covered by such plans. Because these assumptions may vary between
PBMs, membership counts may not be comparable between our competitors and us.
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.
As previously disclosed, 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
$715 million, which includes a purchase price adjustment for closing working
capital and transaction costs. Consequently, our operating results include those
of DPS from April 1, 1999. The net assets acquired from DPS have been recorded
at their estimated fair value, resulting in $754,236,000 of goodwill that is
being amortized over 30 years. This acquisition has been accounted for under the
purchase method of accounting.
We derive our revenues primarily from the sale of PBM services in the
United States and Canada. Our PBM 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, and the associated costs are recorded in cost of revenues (the
"Gross Basis"). Where we only administer the contracts between our clients and
the clients' retail pharmacy networks, as is the case for most of the customer
contracts with DPS, we record as revenues only the administrative fee we receive
from our activities (the "Net Basis"). We also derive PBM 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
the development of data warehouses to combine medical claims and prescription
drug claims), disease management support services and quality and outcomes
assessments through our Health Management Services ("HMS") division and Practice
Patterns Science, Inc. ("PPS") subsidiary.
Non-PBM revenues are derived from:
o The sale of pharmaceuticals for and the provision of infusion therapy
services through our subsidiary IVTx, Inc., doing
business as Express Scripts Infusion Services
o Administrative fees received from drug manufacturers for the
dispensing or distribution of their pharmaceuticals requiring
special handling or packaging through our Express Scripts
Specialty Distribution Services ("SDS") subsidiary
RESULTS OF OPERATIONS
<TABLE>
REVENUES
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2000 Increase 1999 2000 Increase 1999
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
PBM Gross Basis revenues $ 1,562,322 70.9% $ 914,082 $ 2,949,049 64.5% $ 1,792,336
PBM Net Basis revenues 65,081 -3.4% 67,396 129,626 76.2% 73,578
Other revenues 3,116 nm - 6,085 nm -
------------------------------------------- -------------------------------------------
Total PBM revenues $ 1,630,519 66.1% $ 981,478 $ 3,084,760 65.3% $ 1,865,914
Non-PBM revenues 22,848 49.6% 15,271 44,116 47.4% 29,922
------------------------------------------- -------------------------------------------
Total revenues $ 1,653,367 65.9% $ 996,749 $ 3,128,876 65.0% $ 1,895,836
=========================================== ===========================================
nm = not meaningful
</TABLE>
Our growth in PBM Gross Basis revenues during the second quarter of
2000 and the six months ended June 30, 2000 over 1999 is primarily due to a
combination of the following factors: the conversion of historical Express
Scripts and DPS clients to our retail pharmacy networks; higher drug ingredient
costs resulting from price increases for existing drugs and new drugs introduced
into the marketplace; increased membership; higher utilization; and the
conversion of certain clients to a manufacturer rebate program in which we
derive an administrative fee for our services, which is recorded in revenue,
from a formulary management program whereby amounts received from pharmaceutical
manufacturers are recorded as a reduction of cost of revenues. The increase in
revenues for the six months ended June 30, 2000 is also due to DPS revenues
being reported for all of 2000 compared to only one quarter in 1999.
Network pharmacy claims revenue and network pharmacy claims processed
increased $464,804,000, or 63.9%, and 2,719,000, or 3.6%, respectively, during
the second quarter of 2000 over 1999 and $869,357,000, or 63.4% and 46,709,000,
or 41.5%, respectively, for the six months ended June 30, 2000 over 1999. The
average revenue per network pharmacy claim increased 58.2% over the second
quarter of 1999 primarily as a result of the increased rate of historical
Express Scripts and DPS clients moving from retail pharmacy networks contracted
by the clients to one administered by us and higher drug ingredient costs. As
previously discussed under "--Overview", we record the associated revenues for
clients utilizing our retail pharmacy networks on the Gross Basis, therefore
this shift to our retail pharmacy networks results in increased Gross Basis
revenues. The average revenue per network pharmacy claim increased 15.5% for the
first six months of 2000 over 1999 also as a result of additional clients moving
to one of our retail pharmacy networks, but the percentage change impact is
diluted compared to the second quarter due to the three additional months of DPS
claims in the first six months of 2000 over 1999.
Mail pharmacy services revenues and mail pharmacy claims processed
increased $179,958,000, or 74.4% and 1,396,000, or 60.6%, respectively, for the
second quarter of 2000 over 1999 and $340,351,000, or 71.7% and 2,633,000, or
57.4%, respectively, for the six months ended June 30, 2000 over 1999. These
increases are primarily due to the addition of new members with high mail
utilization rates as well as increased utilization by existing members. For the
three months and six months ended June 30, 2000 the average revenue per mail
pharmacy claim increased 8.5% and 9.1% over the three months and six months
ended June 30, 1999 primarily due to higher drug ingredient costs, as discussed
above.
Other revenue increased $3,116,000 and $6,085,000 for the second
quarter and the six months ended June 30, 2000 over 1999 due to fees received
under our agreement with PlanetRx.com, Inc. ("PlanetRx"). Effective July 5, 2000
we restructured our agreement with PlanetRx in exchange for a one-time cash
payment of $8,000,000. Approximately $3,700,000 of the payment represents
amounts earned through the second quarter of 2000, the remainder represents a
fee for the termination of the prior contract. After this payment, no additional
cash payments will be paid to us under the restructured agreement. Additionally,
we will retain our ownership of approximately 10.3 million common shares, or
19.8%, of PlanetRx.
The increase in revenue for non-PBM services during 2000 compared to
1999 is primarily due to additional volume within SDS resulting from a new
contract that took effect during the fourth quarter of 1999.
<TABLE>
COST AND EXPENSES
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2000 Increase 1999 2000 Increase 1999
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
PBM $ 1,501,446 75.0% $ 857,941 $ 2,830,310 69.5% $ 1,670,033
Percentage of total PBM revenues 92.1% 87.4% 91.8% 89.5%
Non-PBM 14,518 20.5% 12,048 28,717 21.7% 23,603
Percentage of non-PBM revenues 63.5% 78.9% 65.1% 78.9%
---------------------------------------- ----------------------------------------
Cost of revenues 1,515,964 74.3% 869,989 2,859,027 68.8% 1,693,636
Percentage of total revenues 91.7% 87.3% 91.4% 89.3%
Selling, general and administrative 69,015 8.6% 63,539 133,396 28.6% 103,757
Percentage of total revenues 4.2% 6.4% 4.3% 5.5%
Depreciation and amortization(1) 18,406 0.3% 18,358 37,396 52.1% 24,580
Percentage of total revenues 1.1% 1.8% 1.2% 1.3%
Non-recurring expenses - nm 9,400 - nm 9,400
Percentage of total revenues 0.0% 0.9% 0.0% 0.5%
---------------------------------------- ----------------------------------------
Total cost and expenses $ 1,603,385 66.8% $ 961,286 $ 3,029,819 65.4% $ 1,831,373
======================================== ========================================
Percentage of total revenues 97.0% 96.4% 96.8% 96.6%
<FN>
(1) Represents depreciation and amortization expense included in selling,
general and administrative expenses on our Statement of Operations. Cost of
revenues, above, also includes depreciation and amortization expense on property
and equipment of $2,502 and $2,216 for the three months ended June 30, 2000 and
1999, respectively and $5,079 and $4,481 for the six months ended June 30, 2000
and 1999, respectively.
nm = not meaningful
</FN>
</TABLE>
Cost of revenues for PBM services as a percentage of total PBM revenues
has increased for the second quarter and the six months ended June 30, 2000 over
1999. This increase is primarily due to converting both historical Express
Scripts and DPS clients from pharmacy networks contracted by the client to one
contracted by us, for which we record the drug ingredient cost in cost of
revenue (see further discussion under "--Overview"), and the establishment of a
contract reserve due to pricing issues with a particular client agreement. These
increases in cost of revenues were partially offset by increases in amounts
received from pharmaceutical manufacturers for our formulary management programs
during the first half of 2000.
Cost of revenues for non-PBM services decreased as a percentage of
non-PBM revenues in 2000 from 1999 primarily due to additional volume of
business within SDS, where we record as revenue only our administrative fee for
distributing pharmaceutical manufacturers' products. SDS was also able to derive
operating cost efficiencies as a result of the increase in volume serviced under
the contract that took effect in the fourth quarter of 1999, as discussed above.
Selling, general and administrative expenses, excluding depreciation
and amortization, increased $5,476,000, or 8.6%, in the second quarter of 2000
over 1999 and $29,639,000, or 28.6%, for the first six months of 2000 over 1999.
The increase in 2000 is primarily due to costs incurred in funding our Internet
initiatives and expenditures required to expand the operational and
administrative support functions to enhance management of the pharmacy benefit.
The fees received under our agreement with PlanetRx enabled us to accelerate our
Internet initiatives in the first half of the year. The elimination of such fees
is not expected to materially impact net income for 2000 or 2001. However, as a
percentage of total revenue, selling, general and administrative expenses
decreased to 4.2% and 4.3% for the three and six months ended June 30, 2000 from
6.4% and 5.5% for the three and six months ended June 30, 1999.
Depreciation and amortization substantially increased for the six
months ended June 30, 2000 over 1999 due to the acquisition of DPS, as 1999 only
included amortization of the DPS goodwill and other intangible assets for three
months. During the first six months of 2000, we have recorded amortization
expense for goodwill and other intangible assets of $30,988,000 compared to
$20,585,000 for the six months ended June 30, 1999. The remaining increases in
2000 were primarily due to expansion of our operations and enhancement of our
information systems to better serve our clients.
During the second quarter of 1999, we recorded a pre-tax restructuring
charge of $9,400,000 associated with the consolidation of our Plymouth,
Minnesota facility into our Bloomington, Minnesota facility. In December 1999,
the associated accrual was reduced by $2,301,000, primarily as a result of
subleasing a portion of the unoccupied space. The consolidation plan includes
the relocation of all employees at the Plymouth facility to the Bloomington
facility that began in August 1999 and will end in the third quarter of 2000.
Included in the restructuring charge are anticipated cash expenditures of
approximately $4,823,000 for lease termination fees and rent on unoccupied space
(which payments will continue through April 2001, when the lease expires) and
anticipated non-cash charges of approximately $2,276,000 for the write-down of
leasehold improvements and furniture and fixtures. The restructuring charge does
not include any costs associated with the physical relocation of the employees.
OTHER INCOME (EXPENSE), NET
Our interest expense, net has decreased $10,650,000 and $2,659,000 for
the quarter ended and the six months ended June 30, 2000 compared to 1999. The
decrease is a result of utilizing the $299,381,000 proceeds from our June 1999
common stock offering to repay a portion of our credit facility, as well as
utilizing $179,131,000 of our own cash to pay-down our credit facility from June
1999 through June 30, 2000. Additionally, we have repurchased $10,115,000 of our
Senior Notes as of June of 2000 (see "--Liquidity and Capital Resources").
As previously announced, we recorded a $155,500,000 ($97,032,000 after
tax) non-cash impairment charge related to our investment in PlanetRx common
stock during the second quarter of 2000 as the loss in value was deemed to be
other than temporary. Therefore, any unrealized loss associated with recording
our investment in PlanetRx at current market value that we had recorded in
stockholders' equity was written off to the current period earnings, in addition
to any additional charges necessary to write-down the value of our investment in
accordance with Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
PROVISION FOR INCOME TAXES
For the second quarter and six months ended June 30, 2000, we had a tax
benefit of $42,478,000 and $27,655,000 due to the marketable securities
impairment write-down discussed under "--Other Income (Expense), Net". Excluding
the $58,468,000 tax benefit from the write-down in 2000 and the $9,400,000
restructuring charge in 1999, our effective tax rate would have been 41.2% and
44.6% for the quarter ended June 30, 2000 and 1999, and 41.0% and 44.3% for the
six months ended June 30, 2000 and 1999. Our effective tax rate for continuing
operations decreased from 1999 primarily due to the reduction in the
non-deductible goodwill and customer contract amortization expense associated
with the ValueRx acquisition as a percentage of income before income taxes. The
goodwill and customer contract amortization for the DPS acquisition is
deductible for income tax purposes due to the filing of an Internal Revenue Code
ss.338(h)(10) election.
NET INCOME AND EARNINGS PER SHARE
Our net income decreased $74,598,000 to a net loss of $74,177,000 for
the second quarter of 2000 from 1999 and $66,709,000 to a net loss of
$52,745,000 for the first six months of 2000 from 1999. The following items
impacted earnings:
o A non-cash impairment charge during the second quarter of 2000 in
the amount of $155,500,000 ($97,032,000 net of tax) relating to
our PlanetRx investment (see "--Other Income (Expense), Net")
o A restructuring charge during the second quarter of 1999 in the amount
of $9,400,000 ($5,773,000 net of tax) for the
Minneapolis facility consolidation (see "--Cost and Expenses")
o An extraordinary loss on the early retirement of debt during the second
quarter of 1999 in the amount of $6,597,000, net of tax.
o Assuming our equity and debt offerings in 1999 occurred on April
1, 1999, we would have realized a reduction in interest expense of
approximately $3,807,000, net of tax.
Excluding these effects on net income for 2000 and 1999 net income per
diluted share would have been $0.59 and $0.42 for the second quarter of 2000 and
1999, respectively, and $1.14 and $0.82 for the six months ended June 30, 2000
and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2000, net cash provided by operations
increased $45,611,000 to $98,027,000 from $52,416,000 in 1999. This increase is
primarily due to bringing our inventory levels back down to our normal operating
levels after increasing our inventory during the fourth quarter of 1999 by
approximately $30,000,000 for our mail pharmacies' anticipation of potentially
higher demand due to our members' Year 2000 concerns.
Days sales outstanding ("DSO") increased to 31.0 days at June 30, 2000
from 29.5 days at June 30, 1999. Gross revenues must be used to calculate the
days sales outstanding due to the impact of the Gross Basis versus the Net Basis
of recording revenues, as discussed in "--Overview" and "--Revenues." The
accounts receivable balance includes the cost of the pharmaceutical dispensed,
which may not be included in revenues, as required by generally accepted
accounting principles, based on the contractual terms embedded in client and
pharmacy contracts. The following table presents our days sales outstanding for
the periods ended:
Six Months Ended June 30,
(in thousands) 2000 1999
----------------------------------------------------------------------------
Total revenues $ 3,128,876 $ 1,895,836
Client/pharmacy pass through 1,680,688 1,324,929
---------------- ----------------
Total $ 4,809,564 $ 3,220,765
================ ================
Average monthly gross receivables $ 819,207 $ 525,057
================ ================
DSO 31.0 29.5
================ ================
Our allowance for doubtful accounts has increased $4,485,000 or 26.0%
to $21,766,000 at June 30, 2000 from $17,281,000 at December 31, 1999. As a
percentage of at risk receivables (receivables for which we have a corresponding
contractual obligation to pay the applicable retail pharmacy), the allowance for
doubtful accounts is 3.1% at June 30, 2000 compared to 2.6% at December 31,
1999.
We previously announced that we anticipated our cash flow from
operations would be temporarily reduced by approximately $20,000,000 due to the
termination of the UHC contract during the third quarter of 2000. We
subsequently negotiated with UHC a revision to the previously announced
transition plan which will extend the transition period and cause the temporary
cash reduction to occur primarily during the fourth quarter of 2000 and the
first quarter of 2001. The effect of any such extension will reduce the maximum
amount of the reduction and spread the effect over a longer period of time,
thereby reducing the effect in any one quarter. We expect to fund the
termination of the UHC contract in 2000 and 2001 primarily with operating cash
flow. We will continue to utilize our operating cash flows for future debt
prepayments, stock repurchases, integration costs, Internet initiatives and
other normal operating cash needs as we deem appropriate.
Our capital expenditures for the six months ended June 30, 2000
increased $10,336,000, or 63.9%, over 1999 primarily due to integration related
activities as a result of our acquisitions, our concerted effort to invest in
our information technology to enhance the services provided to our clients and
the continued renovation of our St. Louis operations facility. We expect to
continue investing in technology that will provide efficiencies in operations,
manage growth and enhance the service provided to our clients. We expect to fund
future anticipated capital expenditures primarily with operating cash flow or,
to the extent necessary, with working capital borrowings under our $300 million
revolving credit facility, discussed below.
During the first half of 2000, we repaid $65,000,000 on our bank
revolving credit facility, repurchased $10,115,000 of our Senior Notes on the
open market and repurchased 790,000 shares of our Class A Common Stock for
$30,247,000. As of June 30, 2000, we have repurchased a total of 1,265,000
shares of our Class A Common Stock under the stock repurchase program that we
announced on October 25, 1996. Our Board of Directors approved the repurchase of
up to 2,500,000 shares, and placed no limit on the duration of the program.
Additional debt repayments or common stock repurchases, if any, will be made 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 bank credit facility and the Indenture which governs our Senior
Notes.
We have a credit facility with a bank syndicate led by Credit Suisse
First Boston and Bankers Trust Company consisting of $285 million of Term A
loans and a $300 million revolving credit facility. The Term A loans and the
revolving credit facility mature on March 31, 2005. The credit facility is
secured by the capital stock of each of our existing and subsequently acquired
domestic subsidiaries, excluding Practice Patterns Science, Inc., Great Plains
Reinsurance, ValueRx of Michigan, Inc., Diversified NY IPA, Inc. and Diversified
Pharmaceutical Services (Puerto Rico), Inc., and is also secured by 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 London Interbank Offered Rates ("LIBOR")
or base rate options. Using a LIBOR spread, the Term A loans and the revolving
loan had an interest rate of 8.77% on June 30, 2000. Effective July 2000, the
LIBOR interest rate spread has been reduced from 2% to 1.5% based upon
calculations set forth in our credit facility. To alleviate interest rate
volatility, we have entered into two separate swap arrangements, which are
discussed in "--Market Risk" below. 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
credit facility contains covenants that limit the indebtedness we may incur,
dividends paid 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 credit facility ($265 million at June 30, 2000). At June 30, 2000,
we are in compliance with all covenants associated with the credit facility.
In June 1999, we issued $250 million of 9 5/8% Senior Notes due 2009,
which require interest to be paid semi-annually on June 15 and December 15. The
Senior Notes are callable at specified rates beginning in June 2004. The Senior
Notes are unconditionally and joint and severally guaranteed by our wholly-owned
domestic subsidiaries other than PPS, Great Plains Reinsurance Co., ValueRx of
Michigan, Inc., Diversified NY IPA, Inc., and Diversified Pharmaceutical
Services (Puerto Rico), Inc. During the second quarter of 2000, we repurchased
$10,115,000 of our Senior Notes on the open market for $10,150,000, which
includes $385,000 of accrued interest.
We regularly review 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 future acquisitions
or affiliations. However, there can be no assurance we will make new
acquisitions or affiliations in 2000 or thereafter.
OTHER MATTERS
In June 1998, Financial Accounting Standards Board 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. The effective date for FAS 133 was originally effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. However, the
Financial Accounting Standards Board has deferred the effective date so that it
will begin for all fiscal quarters of fiscal years beginning after June 15,
2000, and will be applicable to our first quarter of fiscal year 2001. Our
present interest rate swaps will be considered cash flow hedges. Accordingly,
the change in the fair value of the swaps will be reported on the balance sheet
as an asset or liability. The corresponding unrealized gain or loss and any
changes in unrealized gain or loss from the initial measurement date
representing the effective portion of these hedges will be initially recognized
in stockholders' equity and other comprehensive income. If we had adopted FAS
133 as of June 30, 2000, we would have recorded the unrealized gain of
$7,645,000 as an asset and increase in stockholders' equity and other
comprehensive income.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals affect our 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
We have entered into two interest rate swaps that have fixed the
interest rate as of June 30, 2000 for $285 million, or 89.1%, of our variable
rate debt under our Credit Facility. As of June 30, 2000, both swaps are
effective, one with a notional principal amount of $270 million and a fixed rate
of interest of 5.88% per annum, plus the interest rate spread of 2.0%, which has
been reduced to 1.5% effective July 2000. This swap began amortizing in April
1999 in semi-annual installments that increased to $36 million in April 2000,
reducing the principal notional amount of the swap to $270 million. Our second
swap became effective with an initial notional principal amount of $15 million
and a fixed rate of interest of 6.25% per annum, plus the interest rate spread
of 2.0%, which has been reduced to 1.5% effective July 2000. Therefore, we have,
in effect, converted $270 million of our variable rate debt under our Credit
Facility to fixed rate debt at 5.88% per annum, plus the interest rate spread of
2.0%, and $15 million of our variable rate debt under our Credit Facility to
fixed rate debt at 6.25% per annum, plus the interest rate spread of 2.0%. The
fair value of our swaps at June 30, 2000 is $7,645,000.
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 swaps, measuring the
change in the net present value arising from the change in the interest rate.
The fair value of the swaps are 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 June 30, 2000 would
have caused the fair value of the swaps to decrease by $2,274,000, resulting in
a fair value of $5,371,000.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in detail in the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Securities and Exchange
Commission on August 13, 1998 (the "Second Quarter 10-Q"), the Company 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 (now known as HCA -
The Healthcare Company; "HCA"), 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 the Company's future
financial results is not subject to reasonable estimation because considerable
uncertainty exists about the outcomes. Nevertheless, in the opinion of
management, the ultimate liabilities resulting from any such lawsuits,
investigations or claims now pending will not materially affect the consolidated
financial position, results of operations or cash flows of the Company. A brief
update of the most notable of the proceedings follows:
As discussed in detail in the Second Quarter 10-Q, the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1998, filed with the
Securities and Exchange Commission on November 16, 1998, the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998, filed with the
Securities and Exchange Commission on June 10, 1999, the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1999, filed with the
Securities and Exchange Commission on May 14, 1999, the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1999, filed with the
Securities and Exchange Commission on August 12, 1999, the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1999, filed with the
Securities and Exchange Commission on November 15, 1999, the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 29, 2000, and the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2000, filed with
the Securities and Exchange Commission on May 10, 2000, VHI and one 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. 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 its acquisition by VHI. 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 transaction; and (ii) all persons who
purchased or otherwise acquired shares of Diagnostek during the period from
April 3, 1995, through and including July 28, 1995. Fact discovery in the
consolidated lawsuit is complete. Expert discovery is expected to be completed
and dispositive motions are expected to be filed over the next several months.
No trial date has been set.
In connection with the Acquisition, HCA has agreed to defend and hold
the Company and its affiliates (including VHI) harmless from and against any
liability that may arise in connection with either of the foregoing proceedings.
Consequently, the Company does not believe it will incur any material liability
in connection with the foregoing matters.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of stockholders was held on May 24, 2000.
(b) The following persons were elected directors of the Company to serve
until the next Annual Meeting of Stockholders and until their
respective successors are elected and qualified:
Howard I. Atkins
Stuart L. Bascomb
Gary G. Benanav
Frank J. Borelli
Judith E. Campbell
Barbara B. Hill
Richard M. Kernan, Jr.
Richard A. Norling
Frederick J. Sievert
Stephen N. Steinig
Seymour Sternberg
Barrett A. Toan
Howard L. Waltman
Gary E. Wendlandt
Norman Zachary
(c) The stockholder vote for each director was as follows:
Votes Votes
Cast For Withheld
------------------ --------------
Howard I. Atkins 171,155,099 250,753
Stuart L. Bascomb 171,155,999 249,853
Gary G. Benanav 171,155,091 250,761
Frank J. Borelli 171,155,399 250,453
Judith E. Campbell 171,154,299 251,553
Barbara B. Hill 171,155,399 250,453
Richard M. Kernan, Jr. 171,155,999 250,553
Richard A. Norling 171,154,491 249,853
Frederick J. Sievert 171,154,491 251,361
Stephen N. Steinig 171,131,158 274,694
Seymour Sternberg 169,836,358 1,569,494
Barrett A. Toan 171,155,493 250,359
Howard L. Waltman 171,154,563 251,289
Gary E. Wendlandt 171,154,499 251,353
Norman Zachary 171,153,055 252,797
The stockholders also voted to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
Company's current fiscal year (171,346,209 affirmative votes; 40,197 negative
votes; 19,446 abstention votes).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits on page 23.
--------
(b) Reports on Form 8-K.
-------------------
(i) On April 24, 2000, we filed a Current Report on Form
8-K, dated April 19, 2000 under Items 5 and 7,
regarding a press release we issued concerning our
first quarter 2000 financial performance.
(ii) On June 23, 2000, we filed a Current Report on Form
8-K, dated June 19, 2000 under Items 5 and 7,
regarding a press release we issued concerning our
restructured relationship with PlanetRx.com and an
asset impairment charge on our investment in
PlanetRx.com to be taken during the second quarter of
2000.
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: August 9, 2000 By:
/s/ Barrett A. Toan
Barrett A. Toan, President and
Chief Executive Officer
Date: August 9, 2000 By:
/s/ George Paz
George Paz, Senior Vice
President and Chief
Financial Officer
INDEX TO EXHIBITS
(Express Scripts, Inc. - Commission File Number 0-20199)
Exhibit
Number Exhibit
2.1(2) 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.
2.2 Asset Contribution and Reorganization Agreement dated August 31,
1999 by and among PlanetRx.com, Inc., PRX Holdings, Inc., PRX
Acquisition, Corp., YourPharmacy.com, Inc., and Express Scripts,
Inc. (incorporated by reference to the Exhibit No. 2.1 to
PlanetRx's Registration Statement on Form S-1, as amended
(Registration Number 333-82485)).
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit No. 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ending June 30, 1999.
3.2 Second Amended and Restated Bylaws, as amended, 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 Company's
Registration Statement on Form S-1 filed June 9, 1992
(Registration Number 33-46974).
4.2 Indenture, dated as of June 16, 1999, among the Company,
Bankers Trust Company, as trustee, and Guarantors named
therein, incorporated by reference to Exhibit No. 4.4 to the
Company's Registration Statement on Form S-4 filed August 4,
1999 (No. 333-83133).
4.3 Supplemental Indenture, dated as of October 6, 1999, to Indenture
dated as of June 16, 1999, among the Company, Bankers Trust
Company, as trustee, and Guarantors named therein, incorporated
by reference to Exhibit No. 4.3 to the Company's Annual Report on
Form 10-K for the year ending December 31, 1999.
4.4(1) Second Supplemental Indenture, dated as of July 19, 2000, to
Indenture dated as of June 16, 1999, among the Company, Bankers
Trust Company, as trustee, and Guarantors named therein.
10.1(1) Express Scripts, Inc. Executive Deferred Compensation Plan,
as amended.
10.2(3) Agreement dated June 19, 2000 by and among the Company and
PlanetRx.com, Inc., incorporated by reference to Exhibit No. 7 to
Schedule 13D dated June 19, 2000, filed June 29, 2000, by the
Company with respect to PlanetRx.com, Inc.
10.3(4) Express Scripts, Inc. 2000 Long-Term Incentive Plan,
incorporated by reference to Exhibit No. 4.3 to the Company's
Registration Statement on Form S-8, filed with the Securities and
Exchange Commission on August 9, 2000 (Registration Number
333-43336).
27.1(1) Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange
Commission only).
1 Filed herein.
2 The Company agrees to furnish supplementally a copy of any omitted schedule
to this agreement to the Commission upon request.
3 Confidential treatment was requested for certain portions of this exhibit.
4 Management contract or compensatory plan or arrangement
