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 September 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 November 9, 2000: 38,596,891 Shares Class A
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 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 23
Part II Other Information
Item 1. Legal Proceedings - (Not Applicable)
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 24
Signatures 25
Index to Exhibits 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Balance Sheet
<CAPTION>
September 30, December 31,
(in thousands, except share data) 2000 1999
----------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,182 $ 132,630
Receivables, net 768,110 783,086
Inventories 71,141 113,248
Other current assets 26,227 37,391
----------------- ----------------
Total current assets 887,660 1,066,355
Investment in marketable securities 4,493 150,365
Property and equipment, net 122,494 97,573
Goodwill, net 975,855 982,496
Other intangible assets, net 159,314 183,420
Other assets 6,912 7,102
----------------- ----------------
Total assets $ 2,156,728 $ 2,487,311
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Claims and rebates payable $ 798,087 $ 850,630
Other current liabilities 224,397 249,728
----------------- ----------------
Total current liabilities 1,022,484 1,100,358
Long-term debt 426,523 635,873
Other liabilities 39,544 51,598
----------------- ----------------
Total liabilities 1,488,551 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,
24,246,000 and 23,981,000 shares issued and outstanding, respectively 242 240
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 446,626 418,921
Unearned compensation under employee compensation plans (14,566) -
Accumulated other comprehensive income (3,723) (9,521)
Retained earnings 267,670 296,540
----------------- ----------------
696,399 706,330
Class A Common Stock in treasury at cost, 744,000 and 465,000
shares, respectively (28,222) (6,848)
----------------- ----------------
Total stockholders' equity 668,177 699,482
----------------- ----------------
Total liabilities and stockholders' equity $ 2,156,728 $ 2,487,311
================= ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Operations
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 2000 1999 2000 1999
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Revenues $ 1,732,151 $ 1,083,496 $ 4,854,942 $ 2,979,332
Other revenues 4,338 - 10,423 -
--------------- ---------------- ---------------- ----------------
1,736,489 1,083,496 4,865,365 2,979,332
--------------- ---------------- ---------------- ----------------
Cost and expenses:
Cost of revenues 1,603,650 958,987 4,462,677 2,652,623
Selling, general and administrative 82,687 78,761 253,479 207,098
Non-recurring - - - 9,400
--------------- ---------------- ---------------- ----------------
1,686,337 1,037,748 4,716,156 2,869,121
--------------- ---------------- ---------------- ----------------
Operating income 50,152 45,748 149,209 110,211
--------------- ---------------- ---------------- ----------------
Other income (expense):
Write-down of marketable securities - - (155,500) -
Interest income 2,774 1,065 6,201 3,902
Interest expense (10,861) (15,794) (38,245) (45,247)
--------------- ---------------- ---------------- ----------------
(8,087) (14,729) (187,544) (41,345)
--------------- ---------------- ---------------- ----------------
Income (loss) before income taxes 42,065 31,019 (38,335) 68,866
Provision for (benefit from) income taxes 17,292 13,471 (10,363) 30,757
--------------- ---------------- ---------------- ----------------
Income (loss) before extraordinary item 24,773 17,548 (27,972) 38,109
Extraordinary item, net of taxes (898) (553) (898) (7,150)
--------------- ---------------- ---------------- ----------------
Net income (loss) $ 23,875 $ 16,995 $ (28,870) $ 30,959
=============== ================ ================ ================
Basic earnings (loss) per share:
Before extraordinary item $ 0.64 $ 0.46 $ (0.74) $ 1.08
Extraordinary item (0.02) (0.02) (0.02) (0.20)
--------------- ---------------- ---------------- ----------------
Net income (loss) $ 0.62 $ 0.44 $ (0.76) $ 0.88
=============== ================ ================ ================
Weighted average number of common shares
outstanding during the period - Basic EPS 38,331 38,480 38,163 35,274
=============== ================ ================ ================
Diluted earnings (loss) per share
Before extraordinary item $ 0.63 $ 0.45 $ (0.72) $ 1.06
Extraordinary item (0.02) (0.02) (0.02) (0.20)
--------------- ---------------- ---------------- ----------------
Net income (loss) $ 0.61 $ 0.43 $ (0.74) $ 0.86
=============== ================ ================ ================
Weighted average number of common shares
outstanding during the period - Diluted EPS 39,290 39,354 38,920 36,148
=============== ================ ================ ================
</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
--------------- ----------------------------------------------------------------------------------
Unearned
Compensation
Under Accumulated
Class A Class B Class A Class B Additional Employee Other
Common Common Common Common Paid-in Compensation Comprehensive Retained Treasury
(in thousands) Stock Stock Stock Stock Capital Plans Income Earnings Stock Total
--------------------------------------------- ------------------------------------------------------------------------------------
<S> <C> <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 - - - - - - - (28,870) - (28,870)
Other comprehensive
income,
Foreign currency
translation adjustment - - - - - - (152) - - (152)
Unrealized loss on
investment, net of tax
benefit of $2,172 - - - - - - (3,605) - - (3,605)
Recognition of prior
period unrealized
losses on investments - - - - - - 9,555 - - 9,555
---------------- ------------------------------------------------------------------------------------
Comprehensive income (loss) - - - - - - 5,798 (28,870) - (23,072)
Repurchase of Class A
Common Stock - - - - - - - (30,247) (30,247)
Common stock issued under
employee plans 265 - 2 - 16,803 (15,128) - - - 1,677
Amortization of unearned
compensation under
employee plans - - - - - 562 - - - 562
Exercise of stock options - - - - 1,171 - - - 8,873 10,044
Tax benefit relating to
employee stock options - - - - 9,731 - - - - 9,731
----------------- ------------------------------------------------------------------------------------
Balance at September 30,
2000 24,246 15,020 $ 242 $ 150 $446,626 $(14,566) $ (3,723) $267,670 $(28,222) $668,177
================= ====================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<TABLE>
EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Cash Flows
<CAPTION>
Nine Months Ended
September 30,
(in thousands) 2000 1999
---------------- ----------------
<S> <C> <C>
Net (loss) income $ (28,870) $ 30,959
Adjustment to reconcile net (loss) income to net cash provided
by operating activities
Depreciation and amortization 61,356 50,756
Deferred income taxes (45,657) 9,494
Bad debt expense 9,405 3,005
Tax benefit relating to employee stock options 9,731 2,689
Write-down of marketable securities 155,500 -
Non-recurring charges, net of cash - 5,762
Extraordinary item 1,454 11,642
Net changes in operating assets and liabilities,
net of changes resulting from acquisition (5,750) (25,690)
---------------- ----------------
Net cash provided by operating activities 157,169 88,617
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (46,976) (25,924)
Proceeds from sale of property and equipment 8,831 -
Acquisition, net of cash acquired - (718,416)
Other, net (966) -
---------------- ----------------
Net cash (used in) investing activities (39,111) (744,340)
---------------- ----------------
Cash flows from financing activities:
Repayment of long-term debt (210,069) (975,000)
Proceeds from long-term debt - 1,288,815
Repurchase of Class A Common Stock (30,247) -
Net proceeds from issuance of common stock - 299,381
Financing fees paid - (25,437)
Other, net 11,963 5,781
---------------- ----------------
Net cash (used in) provided by financing activities (228,353) 593,540
---------------- ----------------
Effects of foreign currency translation adjustment (153) 48
---------------- ----------------
Net decrease in cash and cash equivalents (110,448) (62,135)
Cash and cash equivalents at beginning of period 132,630 122,589
---------------- ----------------
Cash and cash equivalents at end of period $ 22,182 $ 60,454
================ ================
</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 September 30, 2000, the Unaudited Consolidated Statements of Operations
for the three months and nine months ended September 30, 2000, and 1999, the
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the nine
months ended September 30, 2000, and the Unaudited Consolidated Statements of
Cash Flows for the nine months ended September 30, 2000, and 1999. Operating
results for the three months and nine months ended September 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 September 30, 2000 and December 31, 1999, unbilled receivables were
$387,561,000 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 September 30, 2000 and December 31, 1999, we
have allowances for doubtful accounts of $22,035,000 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 periods are outstanding stock options and stock warrants (959,000 and
757,000 shares for the three and nine months ended of September 30, 2000) and
any unvested shares and shares issuable pursuant to employee elected deferral
under the executive deferred compensation plan (there were no shares for the
three and nine months ended of September 30, 2000), all calculated under the
"treasury stock" method in accordance with Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share".
Note 4 - Acquisition
The shareholders of Centre d'autorisation et de paiement des services de
sante, a leading Quebec-based PBM commonly referred to as CAPSS, accepted the
offer made by our Canadian subsidiary, ESI Canada, Inc., to acquire all of the
outstanding shares of CAPSS, subject to regulatory approval and satisfaction of
certain conditions, for approximately CDN$25 million (approximately US$16.5
million). The transaction, which is expected to close by year-end, will add
approximately 1.5 million lives to ESI Canada's membership base. The transaction
is not expected to be dilutive to earnings in 2001 and is expected to be
slightly accretive in 2002.
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.
Nine Months Ended
September 30,
(in thousands, except per share data) 1999
--------------------------------------------------------------------------
Total revenues $ 3,044,698
Income before extraordinary item 39,164
Extraordinary item (7,150)
----------------------
Net income $ 32,014
======================
Basic earnings per share
Before extraordinary item $ 1.11
Extraordinary item (0.20)
----------------------
Net income $ 0.91
======================
Diluted earnings per share
Before extraordinary item $ 1.08
Extraordinary item (0.20)
----------------------
Net income $ 0.88
======================
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 recognized. Unrealized losses
are recognized as expense 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. In the third quarter of
2000, we have written down the value of our investment in PlanetRx an additional
$3,605,000 (after tax) as an unrealized loss recognized in stockholders' equity
as a component of comprehensive income, as the current unrealized loss is
considered to be temporary. At September 30, 2000 and December 31, 1999,
available-for-sale securities totaled $4,493,000 and $150,365,000, respectively.
As of September 30, 2000, we have recorded a total unrealized loss of
$99,732,000, net of taxes, and a realized loss of $905,000, net of taxes.
Note 6 - Financing
During the third quarter of 2000, we repaid the remaining $35,000,000
outstanding on our revolving credit facility and prepaid $100,000,000 of our
Term A loans, which were applied against the scheduled principal payments for
fiscal years 2001, 2002 and a portion of the scheduled principal payment for
fiscal year 2003. Beginning in March 2003, we are required to make annual
principal payments on the Term A loans of $56,750,000 in 2003, $62,700,000 in
2004 and $65,660,000 in 2005. As a result of the prepayment on the Term A loans,
we recognized an $898,000, net of tax, extraordinary loss from the write-off of
deferred financing fees.
In conjunction with the prepayment of the Term A loans, we restructured our
existing interest rate swap agreements, reducing the notional amounts of the
swaps to a combined $185 million as of September 30, 2000 and $100 million as of
October 16, 2000. We received $2,397,000 to restructure our swap agreements, of
which $1,500,000 ($926,000 after tax) was recognized against interest expense as
an ordinary gain related to the prepayment of debt and the remaining $897,000
has been deferred and will be amortized over the remaining term of the loans.
Under the restructured swap agreements, we have, in effect, converted
approximately $100 million of our variable rate debt to fixed rate debt until
April 2003 when the notional amount reduces to $60 million and April 2004 when
the notional amount reduces to $20 million.
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
and September 2000, the associated accrual was reduced by $2,301,000 and
$44,000, 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, with completion
delayed until the first quarter of 2001 from the previously disclosed 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 2000 Balance at
December 31, Additions/ 2000 September 30,
(in thousands) 1999 (Reversals) 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 (44) 1,072 222
-----------------------------------------------------------
$ 3,517 $ (44) $ 3,223 $ 250
===========================================================
</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
The holders of Class A Common Stock have one vote per share and the holders
of Class B Common Stock have ten votes per share. NYLife Healthcare Management,
Inc., a subsidiary of New York Life Insurance Company, owned all of our
outstanding shares of Class B Common Stock at September 30, 2000. The Class B
Common Stock automatically converts into shares of our Class A Common Stock upon
transfer to any entity other than New York Life or an affiliate of New York Life
or otherwise at the option of the holder. On November 7, 2000, NYLife Healthcare
Management, Inc. exchanged each outstanding share of Class B Common Stock for
one share of our Class A Common Stock and then immediately distributed such
shares to NYLIFE LLC, another subsidiary of New York Life. Consequently, as of
November 7, 2000, we have reacquired all of our Class B Common Stock and
currently hold them as treasury shares. Immediately following the exchange and
distribution to NYLIFE LLC, NYLIFE LLC completed the sale of 6,900,000 shares of
our Class A Common Stock to the public through a secondary offering.
Contemporaneous with this stock offering by NYLIFE LLC, the Express Scripts
Automatic Exchange Security Trust, a closed-end investment company that is not
affiliated with us, sold 3,450,000 investment units to the public. Upon maturity
of the investment units, the Trust may deliver up to 3,450,000 shares of our
Class A Common Stock owned by NYLIFE LLC to the holders of the investment units.
We will not receive any proceeds from the secondary offering or the offering by
the Trust. As a result of these transactions, as of November 7, 2000, we no
longer have any shares of Class B Common Stock outstanding.
At September 30, 2000, NYLIFE and the holders of Class A Common Stock had
control over approximately 86.5% and 13.5%, respectively, of the combined voting
power of all classes of common stock. However, as of November 7, 2000, due to
the exchange of Class B Common Stock for Class A Common Stock and the completion
of the secondary offering described above, NYLIFE LLC had approximately 21.1% of
the voting power of our Class A Common Stock, which includes the right to vote
3,450,000 Class A shares that the Trust may deliver upon exchange of the Trust
issued investment units. New York Life and its subsidiaries have agreed to vote
any shares of our Class A Common Stock prior to delivery thereof by the Trust to
the holders of the Trust investment units in the same proportion and to the same
effect as the votes cast by our other stockholders at any meeting of
stockholders, subject to two exceptions relating to election of directors and
approval of our 2000 Long-Term Inventive Plan.
In August 2000, the Board of Directors adopted the Express Scripts, Inc.
2000 Long Term Incentive Plan (the "2000 LTIP"), which provides for the grant of
various equity awards to our officers, Board of Directors and key employees
selected by the Compensation Committee of the Board of Directors. As of
September 30, 2000, 233,968 shares of Class A Common Stock have been reserved
for issuance under this plan. During the third quarter 2000, we granted 222,865
restricted shares of Class A Common Stock under the 2000 LTIP to certain of our
officers and employees. These shares are subject to various cliff-vesting
periods from three to ten years with provisions allowing for accelerated vesting
based upon specific performance criteria. Prior to vesting, these restricted
shares are subject to forfeiture to us without consideration upon termination of
employment under certain circumstances. No shares have been forfeited as of
November 9, 2000. Unearned compensation of $15,016,000 relating to the
restricted shares has been recorded as a separate component of stockholders'
equity and is being amortized to non-cash compensation expense over the
estimated vesting periods.
Subsequent to September 30, 2000, we issued 50,000 shares of restricted
stock to Mr. Toan, our President and Chief Executive Officer, under the 2000
LTIP. These shares will vest in full no later than March 31, 2005, subject to
acceleration upon certain contingencies. During fourth quarter, unearned
compensation of $3,578,000 relating to the restricted shares will be recorded as
a separate component of stockholders' equity and will be amortized to non-
cash compensation expense over the estimated vesting periods.
As of September 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 nine
months ended September 30, 2000. Approximately 521,000 shares have been utilized
for stock option exercises through September 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 - Condensed Consolidated Financial Statements
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>
Condensed Consolidated Balance Sheet
------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of September 30, 2000
Current assets $ 769,953 $ 112,158 $ 5,549 $ - $ 887,660
Property and equipment, net 99,498 20,571 2,425 - 122,494
Investments in subsidiaries 725,696 - 2,261 (727,957) -
Investments in marketable securities - 4,493 - - 4,493
Intercompany (329,255) 331,325 (2,070) - -
Goodwill, net 253,559 717,355 4,941 - 975,855
Other intangible assets, net 56,760 102,254 300 - 159,314
Other assets 74,372 (67,412) (48) - 6,912
---------------------------------------------------------------------------------
Total assets $ 1,650,583 $ 1,220,744 $ 13,358 $ (727,957) $ 2,156,728
=================================================================================
Current liabilities $ 536,777 $ 480,610 $ 5,097 $ - $ 1,022,484
Long-term debt 426,523 - - - 426,523
Other liabilities 104,861 (66,266) 949 - 39,544
Stockholders' equity 582,422 806,400 7,312 (727,957) 668,177
---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,650,583 $ 1,220,744 $ 13,358 $ (727,957) $ 2,156,728
=================================================================================
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 (6,493) 563 (147) 7,102
---------------------------------------------------------------------------------
Total assets $ 1,813,121 $ 1,383,769 $ 18,297 $ (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 (33,018) 1,251 - 51,598
Stockholders' equity 566,571 853,330 7,457 (727,876) 699,482
---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,813,121 $ 1,383,769 $ 18,297 $ (727,876) $ 2,487,311
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Operations
------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 2000
Total revenues $ 1,088,832 $ 644,464 $ 3,193 $ - $ 1,736,489
Operating expenses 1,069,418 613,597 3,322 - 1,686,337
----------------------------------------------------------------------------------
Operating income (loss) 19,414 30,867 (129) - 50,152
Interest (expense) income, net (8,091) (7) 11 - (8,087)
----------------------------------------------------------------------------------
Income (loss) before tax effect 11,323 30,860 (118) - 42,065
Income tax provision (benefit) 4,645 12,683 (36) - 17,292
----------------------------------------------------------------------------------
Income (loss) before extraordinary
item 6,678 18,177 (82) - 24,773
Extraordinary item (898) - - - (898)
----------------------------------------------------------------------------------
Net income (loss) $ 5,780 $ 18,177 $ (82) $ - $ 23,875
==================================================================================
Three months ended
September 30, 1999
Total revenues $ 548,405 $ 522,564 $ 12,527 $ - $ 1,083,496
Operating expenses 517,497 509,031 11,220 - 1,037,748
---------------------------------------------------------------------------------
Operating income 30,908 13,533 1,307 - 45,748
Interest income (expense), net (14,759) (28) 58 - (14,729)
---------------------------------------------------------------------------------
Income before tax effect 16,149 13,505 1,365 - 31,019
Income tax provision 12,785 (237) 923 - 13,471
---------------------------------------------------------------------------------
Income before extraordinary item 3,364 13,742 442 - 17,548
Extraordinary item (553) - - - (553)
---------------------------------------------------------------------------------
Net income (loss) $ 2,811 $ 13,742 $ 442 $ - $ 16,995
=================================================================================
Nine months ended
September 30, 2000
Total revenues $ 3,021,343 $ 1,835,376 $ 8,646 $ - $ 4,865,365
Operating expenses 2,956,552 1,750,303 9,301 - 4,716,156
--------------------------------------------------------------------------------
Operating income (loss) 64,791 85,073 (655) - 149,209
Write-down of marketable securities - (155,500) - - (155,500)
Interest (expense) income, net (32,046) (10) 12 - (32,044)
--------------------------------------------------------------------------------
Income (loss) before tax effect 32,745 (70,437) (643) - (38,335)
Income tax provision (benefit) 13,372 (23,507) (228) - (10,363)
--------------------------------------------------------------------------------
Income (loss) before extraordinary
item 19,373 (46,930) (415) - (27,972)
Extraordinary item (898) - - - (898)
--------------------------------------------------------------------------------
Net income (loss) $ 18,475 $ (46,930) $ (415) $ - $ (28,870)
================================================================================
Nine months ended
September 30, 1999
Total revenues $ 1,555,908 $ 1,395,718 $ 27,706 $ - $ 2,979,332
Operating expenses 1,468,862 1,374,787 25,472 - 2,869,121
--------------------------------------------------------------------------------
Operating income 87,046 20,931 2,234 - 110,211
Interest income (expense), net (41,682) 183 154 - (41,345)
--------------------------------------------------------------------------------
Income before tax effect 45,364 21,114 2,388 - 68,866
Income tax provision 24,351 5,035 1,371 - 30,757
-------------------------------------------------------------------------------
Income before extraordinary item 21,013 16,079 1,017 - 38,109
Extraordinary item (7,150) - - - (7,150)
--------------------------------------------------------------------------------
Net income (loss) $ 13,863 $ 16,079 $ 1,017 $ - $ 30,959
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
Express
(in thousands) Scripts, Inc. Guarantors Non-Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, 2000
Net cash (used in) provided by operating
activities $ (423,018) $ 583,672 $ (3,338) $ (147) $ 157,169
Cash flows from investing activities:
Purchases of property and equipment (79,381) 32,528 (123) - (46,976)
Proceeds from sales of property and
equipment 8,831 - - - 8,831
Other (966) - - - (966)
----------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (71,516) 32,528 (123) - (39,111)
Cash flows from financing activities:
Repayment of long-term debt (210,069) - - - (210,069)
Repurchase of common stock (30,247) - - - (30,247)
Other 11,963 - - - 11,963
Net transactions with parent 798,226 (800,516) 2,143 147 -
----------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 569,873 (800,516) 2,143 147 (228,353)
Effective of foreign currency translation
adjustment (153) - - - (153)
----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 75,186 (184,316) (1,318) - (110,448)
Cash and cash equivalents at beginning of
period 123,722 4,198 4,710 - 132,630
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period
$ 198,908 $ (180,118) $ 3,392 $ - $ 22,182
==================================================================================
Nine months ended
September 30, 1999
Net cash provided by operating activities
$ 30,886 $ 54,814 $ 2,619 $ 298 $ 88,617
Cash flows from investing activities:
Purchases of property and equipment (18,797) (6,641) (486) - (25,924)
Acquisitions, net of cash acquired - (718,416) - - (718,416)
----------------------------------------------------------------------------------
Net cash (used in) investing activities (18,797) (725,057) (486) - (744,340)
Cash flows from financing activities:
Repayment of long-term debt (975,000) - - - (975,000)
Proceeds from long-term debt 1,288,815 - - - 1,288,815
Net proceeds from issuance of common
stock 299,381 - - - 299,381
Financing fees paid (25,437) - - - (25,437)
Other 5,781 - - - 5,781
Net transactions with parent (757,167) 752,721 4,744 (298) -
----------------------------------------------------------------------------------
Net cash (used in) provided by financing 593,540
activities (163,627) 752,721 4,744 -
Effective of foreign currency translation
adjustment 48 - - - 48
----------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (151,490) 82,478 6,877 - (62,135)
Cash and cash equivalents at beginning of
period 117,913 2,825 1,851 - 122,589
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period
$ (33,577) $ 85,303 $ 8,728 $ - $ 60,454
==================================================================================
</TABLE>
Note 10 - 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 an
integrated PBM service. The remaining two operating service lines (IVTx and SDS)
are aggregated into a non-PBM reporting segment. The following table presents
information about our reportable segments:
<TABLE>
<CAPTION>
(in thousands) PBM Non-PBM Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended September 30, 2000
Total revenues $ 1,715,008 $ 21,481 $ 1,736,489
Income before income taxes 38,350 3,715 42,065
Three months ended September 30, 1999
Total revenues $ 1,066,519 $ 16,977 $ 1,083,496
Income before income taxes 29,017 2,002 31,019
Nine months ended September 30, 2000
Total revenues $ 4,799,768 $ 65,597 $ 4,865,365
(Loss) income before income taxes (52,245) 13,910 (38,335)
Nine months ended September 30, 1999
Total revenues $ 2,932,422 $ 46,910 $ 2,979,332
Income before income taxes 63,974 4,892 68,866
</TABLE>
Included in PBM income before income taxes for the nine months ended
September 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).
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 managing the termination of the United HealthCare
contract
o risks associated with our ability to maintain internal growth rates
o continued pressure on margins resulting from client demands for enhanced
service offerings and higher service levels
o competition, including price competition, competition in the bidding and
proposal process and our ability to consummate contract negotiations with
prospective clients
o adverse results in regulatory, 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
o the possible termination of contracts with key clients or providers
o the possible loss of relationships with pharmaceutical manufacturers, or
changes in pricing, discount or other practices of pharmaceutical
manufacturers
o adverse results in litigation
o risks associated with our leverage and debt service obligations
o risks associated with our ability to continue to develop new products,
services and delivery channels
o developments in the healthcare industry, including the impact of increases
in health care costs, changes in drug utilization and cost patterns and
introductions of new drugs
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
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 some of the customer
contracts acquired from 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
During the first nine months of 2000 we increased our membership to
approximately 41.5 million members as of October 1, 2000 compared with 37.5
million members as of October 1, 1999. The membership counts exclude 500,000 and
9.5 million members, respectively, served under the United HealthCare ("UHC")
contract, which expired in May 31, 2000. We developed a migration plan to
transition the UHC members to their new provider throughout 2000. The migration
plan is now substantially complete. 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 nine months of 2000, approximately 3.8 million members began utilizing
expanded services that provide for more advanced formulary management and the
addition of mail or network services where only one or two 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.
RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Increase/
(in thousands) 2000 (Decrease) 1999 2000 Increase 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBM Gross Basis revenues $ 1,664,532 66.2% $ 1,001,462 $ 4,613,581 65.1% $ 2,793,787
PBM Net Basis revenues 46,138 (29.1%) 65,057 175,764 26.8% 138,635
Other revenues 4,338 nm - 10,423 nm -
------------------------------------------- -------------------------------------------
Total PBM revenues $ 1,715,008 60.8% $ 1,066,519 $ 4,799,768 63.7% $ 2,932,422
Non-PBM revenues 21,481 26.5% 16,977 65,597 39.8% 46,910
------------------------------------------- -------------------------------------------
Total revenues $ 1,736,489 60.3% $ 1,083,496 $ 4,865,365 63.3% $ 2,979,332
=========================================== ===========================================
</TABLE>
nm = not meaningful
Our growth in PBM Gross Basis revenues during the third quarter of 2000 and
the nine months ended September 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 formulary management program in
which we derive an administrative fee for our services, which is recorded in
revenue, from a program whereby amounts received from pharmaceutical
manufacturers are recorded as a reduction of cost of revenues. The increase in
revenues for the nine months ended September 30, 2000 is also due to DPS
revenues being reported for all of 2000 compared to only two quarters in 1999.
These increases were slightly offset by the reduction in Net Basis revenues
received under the UHC contract since its termination in May 2000.
Network pharmacy claims revenue increased $491,600,000, or 65.7%, and
1,360,958,000, or 64.2%, during the three months and nine months ended September
30, 2000 over 1999, respectively. Network pharmacy claims processed decreased
3,783,000, or 5.0%, to 72,307,000 and increased 42,926,000, or 22.8%, to
231,530,000 for the three months and nine months ended September 30, 2000 over
1999, respectively. The primary reason for the decline in network pharmacy
claims processed during the third quarter is the transition of UHC members to
another provider. The average revenue per network pharmacy claim increased 74.4%
to $17.15 over the third 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 contracted 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 33.7% to $15.04 for the first nine 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 third quarter due to the
three additional months of DPS claims in the first nine months of 2000 over
1999.
Mail pharmacy services revenues and mail pharmacy services claims processed
increased $148,932,000, or 48.6% and 1,061,000, or 37.3%, respectively, for the
third quarter of 2000 over 1999 and $489,283,000, or 62.6% and 3,694,000, or
49.7%, respectively, for the nine months ended September 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 nine months ended September 30, 2000 the average revenue per
mail pharmacy claim increased 8.2% and 8.6% over the three months and nine
months ended September 30, 1999 primarily due to higher drug ingredient costs,
as discussed above.
Other revenue increased $4,338,000 and $10,423,000 for the three months and
the nine months ended September 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 and was recorded in the third quarter of 2000.
No additional cash payments will be paid to us under the restructured agreement.
Additionally, as of September 30, 2000, we retained our ownership of
approximately 10.3 million common shares 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.
COST AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Increase/
(in thousands) 2000 (Decrease) 1999 2000 Increase 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBM $ 1,588,135 67.9% $ 945,907 $ 4,418,445 68.9% $ 2,615,937
Percentage of total PBM revenues 92.6% 88.7% 92.1% 89.2%
Non-PBM 15,515 18.6% 13,080 44,232 20.6% 36,686
Percentage of non-PBM revenues 72.2% 77.0% 67.4% 78.2%
---------------------------------------- ----------------------------------------
Cost of revenues 1,603,650 67.2% 958,987 4,462,677 68.2% 2,652,623
Percentage of total revenues 92.4% 88.5% 91.7% 89.0%
Selling, general and administrative 68,206 13.0% 60,367 201,602 22.8% 164,124
Percentage of total revenues 3.9% 5.6% 4.1% 5.5%
Depreciation and amortization(1) 14,481 (21.3%) 18,394 51,877 20.7% 42,974
Percentage of total revenues 0.8% 1.7% 1.1% 1.4%
Non-recurring expenses - nm - - nm 9,400
Percentage of total revenues nm nm nm 0.3%
---------------------------------------- ----------------------------------------
Total cost and expenses $ 1,686,337 62.5% $ 1,037,748 $ 4,716,156 64.4% $ 2,869,121
======================================== ========================================
Percentage of total revenues 97.1% 95.8% 96.9% 96.3%
<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 $2,675 and $2,060 for the three months ended
September 30, 2000 and 1999, respectively and $7,754 and $6,541 for the
nine months ended September 30, 2000 and 1999, respectively.
</FN>
</TABLE>
nm = not meaningful
Cost of revenues for PBM services as a percentage of total PBM revenues has
increased for the three months and the nine months ended September 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"), the establishment of a
contract reserve due to pricing issues with a particular client agreement, and
continued margin pressures due to pricing. 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 nine months
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, which represents a larger percentage of non-PBM revenues, 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 $7,839,000, or 13.0%, in the third quarter of 2000 over
1999 and $37,478,000, or 22.8%, for the first nine months of 2000 over 1999. The
increase in 2000 is primarily due to expenditures required to expand the
operational and administrative support functions to enhance management of the
pharmacy benefit. However, as a percentage of total revenue, selling, general
and administrative expenses decreased to 3.9% and 4.1% for the three and nine
months ended September 30, 2000 from 5.6% and 5.5% for the three and nine months
ended September 30, 1999.
Depreciation and amortization expense decreased for the three months ended
September 30, 2000 from 1999 primarily as a result of the UHC customer contract
intangible asset being fully amortized during the second quarter of 2000.
Depreciation and amortization substantially increased for the nine months ended
September 30, 2000 over 1999 due to the acquisition of DPS, as 1999 only
included amortization of the DPS goodwill and other intangible assets for six
months. During the first nine months of 2000, we have recorded amortization
expense for goodwill and other intangible assets of $42,294,000 compared to
$36,880,000 for the nine months ended September 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 third 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
and September 2000, the associated accrual was reduced by $2,301,000 and
$44,000, 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, with completion
delayed until the first quarter of 2001 from the previously disclosed 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 $6,642,000 and $9,301,000 for the
quarter ended and the nine months ended September 30, 2000 compared to 1999. The
decrease is a result of utilizing the $299,378,000 proceeds from our June 1999
common stock offering to repay a portion of our credit facility, as well as
utilizing $314,131,000 of our own cash to pay-down our credit facility from June
1999 through September 30, 2000. Associated with the prepayment of our loans, we
recorded an ordinary gain in interest expense of $1.5 million due to the
restructuring of our interest rate swap agreements (see "--Market Risk").
Additionally, we have repurchased $10,115,000 of our Senior Notes as of
September 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
Our income taxes for the third quarter 2000 and the nine months ended
September 30, 2000 were expense of $17,292,000 and a benefit of $10,363,000,
respectively. The tax benefit is due primarily to the marketable securities
impairment write-down discussed under "--Other Income (Expense), Net". Our
effective tax rate for the quarter ended September 30, 2000 and 1999 was 41.1%
and 43.4%, respectively. 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 41.1% and 43.9% for the nine months ended
September 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 increased $6,880,000 to $23,875,000 for the third quarter of
2000 from 1999 and decreased $59,829,000 to a net loss of $28,870,000 for the
nine months ended September 30, 2000 from 1999. The following items impacted
earnings:
o An extraordinary loss on the early retirement of debt due to the write-off
of deferred financing fees during the third quarter of 2000 in the amount
of $898,000, net of tax (see "--Liquidity and Capital Resources")
o An ordinary gain in the amount of $1,500,000 ($926,000 net of tax) on the
restructuring of our interest rate swap agreements related to the early
retirement of debt during the third quarter of 2000 (see "--Market Risk")
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 and
third quarters of 1999 in the amount of $6,597,000, net of tax, and
$553,000, net of tax, respectively.
Excluding these effects on net income for 2000 and 1999 net income per
diluted share would have been $0.61 and $0.45 for the third quarter of 2000 and
1999, respectively, and $1.75 and $1.21 for the nine months ended September 30,
2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, net cash provided by operations
increased $68,552,000 to $157,169,000 from $88,617,000 in 1999. This increase is
primarily due to increased profitability, excluding the effect of writing down
the PlanetRx stock (see "--Other Income (Expense), Net"), and 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 31.2 days at September 2000
from 28.4 days at September 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:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenues $ 4,865,365 $ 2,979,332
Client/pharmacy pass through 2,345,060 2,387,485
---------------- ----------------
Total $ 7,210,425 $ 5,366,817
================ ================
Average monthly gross receivables $ 820,072 $ 558,078
================ ================
DSO 31.2 28.4
================ ================
</TABLE>
Our allowance for doubtful accounts has increased $4,754,000 or 27.5% to
$22,035,000 at September 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 3.3% at September 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
a revision to the previously announced transition plan with UHC which extended
the transition period and delayed the anticipated temporary cash reduction to
the fourth quarter of 2000 and the first quarter of 2001. As of September 30,
2000, the transition of UHC members is substantially complete. 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, technology initiatives and
other normal operating cash needs as we deem appropriate.
Our capital expenditures for the nine months ended September 30, 2000
increased $21,052,000, or 81.2%, 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 September 2000, we sold our Albuquerque, New Mexico property and
building for $7,806,000. These assets were then leased back from the purchaser
over a period of 10 years with the option to extend the terms up to an
additional 10 years. The resulting lease is being accounted for as an operating
lease, and the resulting deferred gain of $4,136,000 is being amortized over the
10 year life of the lease.
During the first nine months of 2000, we utilized our own internally
generated cash to repay $100,000,000 on our bank revolving credit facility
(described below), prepay $100,000,000 of our Term A loans (described below),
repurchase $10,115,000 of our Senior Notes on the open market and repurchase
790,000 shares of our Class A Common Stock for $30,247,000. As of September 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. As a result of the $100 million
prepayment of our Term A loans noted above, we recorded an extraordinary charge
during the third quarter of 2000 for the deferred financing fees in the amount
of $898,000, net of tax. The prepayments on the Term A loans eliminate the
scheduled principal payments for fiscal years 2001, 2002 and a portion of the
scheduled principal payment for fiscal year 2003. Beginning in March 2003, we
are required to make annual principal payments on the Term A loans of
$56,750,000 in 2003, $62,700,000 in 2004 and $65,660,000 in 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 had an interest
rate of 8.16% on September 30, 2000. Effective July 2000, the LIBOR interest
rate spread was reduced from 2% to 1.5% and effective October 2000, reduced to
1.0% 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. 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 0.375%,
payable in quarterly installments, on the unused portion of the revolving credit
facility ($300 million at September 30, 2000). At September 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
The holders of Class A Common Stock have one vote per share and the holders
of Class B Common Stock have ten votes per share. NYLife Healthcare Management,
Inc., a subsidiary of New York Life Insurance Company, owned all of our
outstanding shares of Class B Common Stock at September 30, 2000. The Class B
Common Stock automatically converts into shares of our Class A Common Stock upon
transfer to any entity other than New York Life or an affiliate of New York Life
or otherwise at the option of the holder. On November 7, 2000, NYLife Healthcare
Management, Inc. exchanged each outstanding share of Class B Common Stock for
one share of our Class A Common Stock and then immediately distributed such
shares to NYLIFE LLC, another subsidiary of New York Life. Consequently, as of
November 7, 2000, we have reacquired all of our Class B Common Stock and
currently hold them as treasury shares. Immediately following the exchange and
distribution to NYLIFE LLC, NYLIFE LLC completed the sale of 6,900,000 shares of
our Class A Common Stock to the public through a secondary offering.
Contemporaneous with this stock offering by NYLIFE LLC, the Express Scripts
Automatic Exchange Security Trust, a closed-end investment company that is not
affiliated with us, sold 3,450,000 investment units to the public. Upon maturity
of the investment units, the Trust may deliver up to 3,450,000 shares of our
Class A Common Stock owned by NYLIFE LLC to the holders of the investment units.
We will not receive any proceeds from the secondary offering or the offering by
the Trust.
At September 30, 2000, NYLIFE and the holders of Class A Common Stock had
control over approximately 86.5% and 13.5%, respectively, of the combined voting
power of all classes of common stock. However, as of November 7, 2000, due to
the exchange of Class B Common Stock for Class A Common Stock and the completion
of the secondary offering described above, NYLIFE LLC had approximately 21.1% of
the voting power of our Class A Common Stock, which includes the right to vote
3,450,000 Class A shares that the Trust may deliver upon exchange of the Trust
issued investment units. New York Life and its subsidiaries have agreed to vote
any shares of our Class A Common Stock prior to delivery thereof by the Trust to
the holders of the Trust investment units in the same proportion and to the same
effect as the votes cast by our other stockholders at any meeting of
stockholders, subject to two exceptions relating to election of directors and
approval of our 2000 Long-Term Inventive Plan.
The shareholders of Centre d'autorisation et de paiement des services de
sante, a leading Quebec-based PBM commonly referred to as CAPSS, accepted the
offer made by our Canadian subsidiary, ESI Canada, Inc., to acquire all of the
outstanding shares of CAPSS, subject to regulatory approval and satisfaction of
certain conditions, for approximately CDN$25 million (approximately US$16.5
million). The transaction, which is expected to close by year-end, will add
approximately 1.5 million lives to ESI Canada's membership base. The transaction
is not expected to be dilutive to earnings in 2001 and is expected to be
slightly accretive in 2002.
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 September 30, 2000, we would have recorded the unrealized gain of
$1,747,000 as an asset and increase in stockholders' equity and other
comprehensive income.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain areas of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In June 2000, the SEC
issued SAB 101B to defer the effective date for implementation of SAB 101 until
the fourth quarter of fiscal 2000. We believe that the necessary adjustments to
our current revenue recognition policies in order to comply with SAB 101 will
not have a materially adverse effect on our financial statements.
The U.S. Secretary of Health and Human Services has issued proposed rules
under the Federal Health Insurance Portability and accountability Act of 1996
("HIPAA") which, when adopted, will establish standards for the use and
disclosure of personally identifiable health care information and for the system
security necessary for the maintenance and transmission of such information. We
believe we will be subject to the final regulations when issued. We believe we
will be able to comply fully with the proposed regulations, but we will incur
costs in making required changes to our information systems and in training our
employees to comply with the new regulations. We have retained a consulting firm
to assist in evaluating the extent of the work that would be required to comply
with HIPAA. Until we have completed the evaluation, we are unable to estimate
the total cost to comply with HIPAA. The costs we will incur to comply with
HIPAA will be expensed as incurred or capitalized in accordance with existing
accounting policies and funded through our operating cash flows or our revolving
credit facility.
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
In conjunction with the prepayment of the Term A loans, we restructured our
existing interest rate swap agreements, reducing the notional amounts of the
swaps to a combined $185 million as of September 30, 2000 and $100 million as of
October 16, 2000. We received $2,397,000 to restructure our swap agreements, of
which $1,500,000 ($926,000 after tax) was recognized against interest expense as
an ordinary gain related to the prepayment of debt and the remaining $897,000
has been deferred and will be amortized over the remaining term of the loans.
Our first interest rate swap agreement became effective during 1998 and has
a notional principal amount of $170 million with a fixed rate of interest of
5.88% per annum, plus the interest rate spread of 1.5% (1.0% effective October
2000) as of September 30, 2000. Under the restructured agreement, the notional
principal amount reduces to $49 million in October 2000 and will reduce to
approximately $47 million in April 2001 until maturing in October 2001.
Our second interest rate swap agreement became effective during 2000 and
has a notional principal amount of $15 million with a fixed rate of interest of
6.25% per annum, plus the interest rate spread of 1.5% (1.0% effective October
2000) as of September 30, 2000. Under the restructured agreement, the notional
principal amount increased to $51 million in October 2000, will increase to
approximately $53 million in April 2001, to approximately $98 million in October
2001 and to $100 million in April 2002. Beginning in April 2003, the notional
principal amount will be reduced to $60 million and in April 2004 will be
reduced to $20 million until maturing in April 2005.
As a result, we have, in effect, converted 100% of our variable rate debt
to fixed rate debt under our Credit Facility at September 30, 2000. Beginning in
October 2000, we will have converted approximately $100 million of our variable
rate debt to fixed rate debt until April 2003 when the notional amount reduces
to $60 million and April 2004 when the notional amount reduces to $20 million.
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 September 30, 2000
would have caused the fair value of the swaps to decrease by $424,000, resulting
in a fair value of $1,323,000.
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 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 July 21, 2000, we filed a Current Report on Form
8-K, dated July 19, 2000 under Items 5 and 7,
regarding a press release we issued concerning our
second quarter 2000 financial performance.
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: November 10, 2000 By: /s/ Barrett A. Toan
---------------------------
Barrett A. Toan, President and
Chief Executive Officer
Date: November 10, 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 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, incorporated by
reference to Exhibit No. 4.4 to the Company's Quarterly Report on Form
10-Q for the quarter ending June 30, 1999.
4.5 Stockholder and Registration Rights Agreement dated as of October
6, 2000 between the Company and New York Life Insurance Company,
incorporated by reference to Exhibit No. 4.2 to the Company's
Amendment No. 1 to the Registration Statement on Form S-3 filed
October 17, 2000 (Registration Number 333-47572).
4.6 Asset Acquisition Agreement dated October 17, 2000, between NYLIFE
Healthcare Management, Inc., the Company, NYLIFE LLC and New York Life
Insurance Company, incorporated by reference to Exhibit No. 4.3 to the
Company's Amendment No. 1 to the Registration Statement on Form S-3
filed October 17, 2000 (Registration Number 333-47572).
10.1 Amendment to the Employment Agreement between the Company and
Barrett A. Toan, incorporated by reference to Exhibit No. 10.1 to the
Company's Current Report on Form 8-K filed October 18, 2000.
27(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.
