-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sky+JbuI0m9V/EauiQ2MqUpHpL4ZuTSc6DwE1aSzGLAiN81Mu+HMnlPXQPBp+dhT wZ0cgWr6mRfns8QekdGeuw== 0000885721-99-000029.txt : 19990517 0000885721-99-000029.hdr.sgml : 19990517 ACCESSION NUMBER: 0000885721-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPRESS SCRIPTS INC CENTRAL INDEX KEY: 0000885721 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 431420563 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20199 FILM NUMBER: 99621176 BUSINESS ADDRESS: STREET 1: 14000 RIVERPORT DR CITY: MARYLAND STATE: MO ZIP: 63043 BUSINESS PHONE: 3147701666 MAIL ADDRESS: STREET 1: 14000 RIVERPORT DRIVE CITY: MARYLAND HEIGHTS STATE: MO ZIP: 63043 10-Q 1 FIRST QUARTER 1999 REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________. Commission File Number: 0-20199 EXPRESS SCRIPTS, INC. (Exact name of registrant as specified in its charter) Delaware 43-1420563 (State of Incorporation) (I.R.S. employer identification no.) 14000 Riverport Dr., Maryland Heights, Missouri 63043 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 770-1666 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Common stock outstanding as of April 30, 1999: 18,232,160 Shares Class A 15,020,000 Shares Class B EXPRESS SCRIPTS, INC. INDEX Page Number Part I Financial Information 3 Item 1. Financial Statements (unaudited) a) Consolidated Balance Sheet 3 b) Consolidated Statement of Operations 4 c) Consolidated Statement of Changes in Stockholders' Equity 5 d) Consolidated Statement of Cash Flows 6 e) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risks - 19 Part II Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds - (Not Applicable) Item 3. Defaults Upon Senior Securities - (Not Applicable) Item 4. Submission of Matters to a Vote of Security Holders - (Not Applicable) Item 5. Other Information - (Not Applicable) Item 6. Exhibits and Reports on Form 8-K 20 Signatures 22 Index to Exhibits 23 PART I. FINANCIAL INFORMATION Item 1. Financial Statements
EXPRESS SCRIPTS, INC. Unaudited Consolidated Balance Sheet March 31, December 31, (in thousands, except share data) 1999 1998 - -------------------------------- -------------- ---------------- Assets Current assets: Cash and cash equivalents $ 115,838 $ 122,589 Receivables, less allowance for doubtful accounts of $14,883 and $17,806, respectively 446,453 433,006 Inventories 55,234 55,634 Deferred taxes 41,841 41,011 Prepaid expenses 3,761 4,667 -------------- ---------------- Total current assets 663,127 656,907 Property and equipment, less accumulated depreciation and amortization 73,346 77,499 Goodwill, less accumulated amortization 268,081 282,163 Other assets 92,396 78,892 -------------- ---------------- Total assets $ 1,096,950 $ 1,095,461 ============== ================ Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 54,000 $ 54,000 Claims and rebates payable 331,525 338,251 Accounts payable 65,715 60,247 Accrued expenses 71,666 86,798 -------------- ---------------- Total current liabilities 522,906 539,296 Long-term debt 306,000 306,000 Other liabilities 502 471 -------------- ---------------- Total liabilities 829,408 845,767 -------------- ---------------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, and no shares issued Class A Common Stock, $.01 par value, 75,000,000 shares authorized, 18,707,000 and 18,610,000 shares issued, respectively 187 186 Class B Common Stock, $.01 par value, 22,000,000 shares authorized, 15,020,000 shares issued 150 150 Additional paid-in capital 114,391 110,099 Accumulated other comprehensive income (62) (74) Retained earnings 159,865 146,322 -------------- ---------------- 274,531 256,683 Class A Common Stock in treasury at cost, 475,000 shares (6,989) (6,989) -------------- ---------------- Total stockholders' equity 267,542 249,694 -------------- ---------------- Total liabilities and stockholders' equity $ 1,096,950 $ 1,095,461 ============== ================
See accompanying notes to consolidated financial statements.
EXPRESS SCRIPTS, INC. Unaudited Consolidated Statement of Operations Three Months Ended March 31, (in thousands, except per share data) 1999 1998 - ------------------------------------- ----------------- ----------------- Net revenues $899,087 $371,362 ----------------- ----------------- Cost and expenses: Cost of revenues 823,647 338,492 Selling, general & administrative 46,440 18,826 ----------------- ----------------- 870,087 357,318 ----------------- ----------------- Operating income 29,000 14,044 ----------------- ----------------- Interest income (expense): Interest income 1,393 2,138 Interest expense (6,222) (14) ----------------- ----------------- (4,829) 2,124 ----------------- ----------------- Income before income taxes 24,171 16,168 Provision for income taxes 10,628 6,290 ----------------- ----------------- Net income $ 13,543 $ 9,878 ================= ================= Basic earnings per share $ 0.41 $ 0.30 ================= ================= Weighted average number of common shares out- standing during the period - Basic EPS 33,211 33,053 ================= ================= Diluted earnings per share $ 0.40 $ 0.29 ================= ================= Weighted average number of common shares out- standing during the period - Diluted EPS 34,154 33,579 ================= =================
See accompanying notes to consolidated financial statements.
EXPRESS SCRIPTS, INC. Unaudited Consolidated Statement of Changes in Stockholders' Equity Number of Shares Amount --------- ---------- --------------------------------------------------------------------- Accumulated Class A Class B Class A Class B Additional Other Common Common Common Common Paid-in Comprehensive Retained Treasury (in thousands) Stock Stock Stock Stock Capital Income Earnings Stock Total - ---------------------------- ------------------- ---------------------------------------------------------------------------------- Balance at December 31, 1998 18,610 15,020 $ 186 $ 150 $ 110,099 $ (74) $146,322 $(6,989) $249,694 ------------------- ---------------------------------------------------------------------------------- Comprehensive income: Net income 13,543 13,543 Other comprehensive income, Foreign currency translation adjustment - - - - - 12 - - 12 ------------------- ---------------------------------------------------------------------------------- Comprehensive income - - - - 12 13,543 - 13,555 Exercise of stock options 97 1 2,721 2,722 Tax benefit relating to employee stock options - - - - 1,571 - - - 1,571 =================== ================================================================================== Balance at March 31, 1999 18,707 15,020 $ 187 $ 150 $ 114,391 $ (62) $159,865 $(6,989) $267,542 =================== ==================================================================================
See accompanying notes to consolidated financial statements.
EXPRESS SCRIPTS, INC. Unaudited Consolidated Statement of Cash Flows Three Months Ended March 31, (in thousands) 1999 1998 - -------------- ----------------- ----------------- Cash flows from operating activities: Net income $13,543 $ 9,878 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,685 2,396 Deferred income taxes 1,545 (362) Bad debt expense 1,592 942 Tax benefit relating to employee stock options 1,571 662 Net changes in operating assets and liabilities (30,744) 10,706 ----------------- ----------------- Net cash (used in) provided by operating activities (3,809) 24,222 ----------------- ----------------- Net cash (used in) provided by operating activities (3,808) 24,222 ----------------- ----------------- Cash flows from investing activities: Purchases of property and equipment (5,677) (3,176) Short-term investments - (1,334) ----------------- ----------------- Net cash (used in) investing activities (5,677) (4,510) ----------------- ----------------- Cash flows from financing activities: Other, net 2,722 683 ----------------- ----------------- Net cash provided by financing activities 2,722 683 ----------------- ----------------- Effect of foreign currency translation adjustment 12 6 ----------------- ----------------- Net (decrease) increase in cash and cash equivalents (6,751) 20,401 Cash and cash equivalents at beginning of period 122,589 64,155 ----------------- ----------------- Cash and cash equivalents at end of period $115,838 $84,556 ================= =================
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 the opinion of the Company, the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading when read in conjunction with the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the Year Ended December 31, 1998, as filed with the Securities and Exchange Commission on March 29, 1999. In the opinion of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Unaudited Consolidated Balance Sheet at March 31, 1999, the Unaudited Consolidated Statement of Operations for the three months ended March 31, 1999, and 1998, the Unaudited Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 1999, and the Unaudited Consolidated Statement of Cash Flows for the three months ended March 31, 1999, and 1998. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. Note 2 - Earnings Per Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The only difference between the number of weighted average shares used in the basic and diluted calculation for all years is stock options and stock warrants granted by the Company using the "treasury stock" method. Note 3 - Acquisition On April 1, 1998 the Company acquired all of the outstanding capital stock of Value Health, Inc. and Managed Prescriptions Network, Inc. (collectively, the "Acquired Entities") from Columbia/HCA Healthcare Corporation ("Columbia") for approximately $460 million in cash (which includes transactions costs and executive management severance costs of approximately $15 million), approximately $360 million of which was obtained through a five-year bank credit facility (see Note 4) and the remainder from the Company's cash balances and short-term investments. At closing, the Acquired Entities owned various subsidiaries that now or formerly conducted a PBM business, commonly known as "ValueRx." The acquisition has been accounted for using the purchase method of accounting and the results of operations of the Acquired Entities have been included in the consolidated financial statements and PBM segment since April 1, 1998. The purchase price has been allocated based on the estimated fair values of net assets acquired at the date of the acquisition. The excess of purchase price over tangible net assets acquired has been allocated to other intangible assets consisting of customer contracts and non-compete agreements in the amount of $57,653,000 which are being amortized using the straight-line method over the estimated useful lives of 2 to 20 years and are included in other assets, and goodwill in the amount of $278,113,000 which is being amortized using the straight-line method over the estimated useful life of 30 years. In conjunction with the acquisition, the Acquired Entities and their subsidiaries retained the following liabilities:
(in thousands) - ----------------------------------------------------------------- Fair value of assets acquired $ 659,166 Cash paid for the capital stock (460,137) ======================= Liabilities retained $ 199,029 =======================
The following unaudited pro forma information presents a summary of combined results of operations of the Company and the Acquired Entities as if the acquisition had occurred at the beginning of the period presented, along with certain pro forma adjustments to give effect to amortization of goodwill, other intangible assets, interest expense on acquisition debt and other adjustments. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates. Included in the pro forma information are integration costs incurred by the Company that are being reported within selling, general and administrative expenses in the statement of operations.
Three Months Ended March 31, (in thousands, except per share data) 1998 - --------------------------------------------------------------------- Net revenues $781,290 Net income 9,900 Basic earnings per share 0.30 Diluted earnings per share 0.29
Note 4 - Financing On April 1, 1998, the Company executed a $440 million credit facility with a bank syndicate led by Bankers Trust Company, consisting of a $360 million term loan facility and an $80 million revolving loan facility. The credit facility expires on April 15, 2003 and is guaranteed by the Company's domestic subsidiaries other than Practice Patterns Science, Inc. ("PPS"), and Great Plains Reinsurance Company ("Great Plains") and secured by pledges of 100% (or, in the case of foreign subsidiaries, 65%) of the capital stock of the Company's subsidiaries other than PPS and Great Plains. The provisions of this term loan require quarterly interest payments and, beginning in April 1999, semi-annual principal payments. The interest rate is based on a spread ("Credit Rate Spread") over several London Interbank Offered Rates ("LIBOR") or base rate options, depending upon the Company's ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt ("Leverage Ratio"). At March 31, 1999, the interest rate was 5.84375%, representing a credit rate spread of 0.75% over the three-month LIBOR rate. The credit facility contains covenants that limit the indebtedness the Company may incur and the amount of annual capital expenditures. The covenants also establish a minimum interest coverage ratio, a maximum leverage ratio, and a minimum consolidated net worth. At March 31, 1999, the Company was in compliance with all covenants. In addition, the Company is required to pay an annual fee depending on the leverage ratio, payable in quarterly installments, on the unused portion of the revolving loan. The commitment fee was 22.5 basis points at March 31, 1999. There were no borrowings at March 31, 1999 under the revolving loan facility. The carrying amount of the Company's term loan facility approximates fair value. In conjunction with the Company's policy to manage interest rate risk, the Company entered into an interest rate swap agreement ("swap") with The First National Bank of Chicago, a subsidiary of Bank One Corporation, on April 3, 1998. At March 31, 1999, the swap had a notional principal amount of $360 million. Under the terms of the swap, the Company agrees to receive a floating rate of interest on the amount of the term loan facility based on a three-month LIBOR rate in exchange for payment of a fixed rate of interest of 5.88% per annum. The notional principal amount of the swap amortizes in equal amounts with the principal balance of the term loan facility. As a result, the Company has, in effect, converted its variable rate term debt to fixed rate debt at 5.88% per annum for the entire term of the term loan facility, plus the Credit Rate Spread. Note 5 - Restructuring During the second quarter of 1998, the Company recorded a pre-tax restructuring charge of $1,651,000 ($1,002,000 after taxes or $0.03 per basic and diluted earnings per share) associated with the Company closing the non-PBM service operations of its wholly-owned subsidiary, PhyNet, Inc., and transferring certain functions of its Express Scripts Vision Corporation to another vision care provider.
Balance at Balance at December 31, Utilized March 31, (in thousands) 1998 Cash Noncash 1999 - ---------------------------------------------------------------------------------------------------------------------- Write-down of long-lived assets $531 $ - $(195) $336 Employee transition costs for 61 employees 232 - - 232 ======================================================================= $763 $ - $(195) $568 =======================================================================
The restructuring charge includes tangible assets to be disposed of being written down to their net realizable value, less cost of disposal. Management expects recovery to approximate its cost of disposal. Considerable management judgment is necessary to estimate fair value; accordingly, actual results could vary from such estimates. The Company anticipates completing the remainder of the restructuring actions by the end of the third quarter of 1999. Note 6 - Segment Reporting The Company is organized on the basis of services offered and has determined that it has two reportable segments: PBM services and non-PBM services. The Company manages the pharmacy benefit within an operating segment which encompasses a fully-integrated PBM service. The remaining three operating service lines (IVTx, Specialty Distribution and Vision) have been aggregated into a non-PBM reporting segment. The following table presents information about the reportable segments for the three months ended March 31:
(in thousands) PBM Non-PBM Total - ----------------------------------------------------------------------------------------------- 1999 Net revenues $ 884,435 $ 14,652 $ 899,087 Income before income taxes 22,660 1,511 24,171 1998 Net revenues $ 358,924 $ 12,438 $ 371,362 Income before income taxes 15,038 1,130 16,168
Note 7 - Subsequent Events On April 1, 1999 the Company completed its acquisition of Diversified Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto Rico) Inc. (collectively, "DPS"), from SmithKline Beecham Corporation and SmithKline Beecham InterCredit BV (collectively, "SB") for approximately $700 million in cash, such amount being subject to adjustment based upon the amount of working capital of DPS at closing. The acquisition will be accounted for under the purchase method of accounting. The Company will file an Internal Revenue Code ss.338(h)(10) election, making amortization expense of certain intangible assets, including goodwill, tax deductible. The Company used approximately $48 million of its own cash and financed the remainder of the purchase price and related acquisition costs through a $1.05 billion credit facility with a bank syndicate led by Credit Suisse First Boston and Bankers Trust Company, and a $150 million senior subordinated bridge credit facility from Credit Suisse First Boston and Bankers Trust Company. The Company also used a portion of the proceeds from the $1.05 billion credit facility to retire the $360 million principal balance outstanding on its $440 million credit facility (see Note 4). As a result of the retirement of the $360 million balance outstanding on its $440 million credit facility, the Company will write-off the remaining deferred financing fees at March 31, 1999 of $3,250,000, or approximately $1,950,000 net of tax, as an extraordinary item during the second quarter of 1999. The $1.05 billion credit facility consists of a $300 million revolving facility, a $285 million term facility ("Term A"), and a $465 million term facility ("Term B"). The revolving facility and the Term A facility are for a period of six years. The Term B facility is for a period of eight years. The provisions of this loan require quarterly interest payments and, beginning in March 2000, annual principal payments. The interest rate is based on a spread (the "Base Rate Margin") over several LIBOR or base rate options, depending upon the Company's ratio of debt to EBITDA. However, the initial margin is fixed at 275 basis points for the revolving facility and Term A facility and 350 basis points for the Term B facility for the first two quarters. The credit facility contains covenants that limit the indebtedness the Company may incur and the amount of annual capital expenditures. The covenants also establish a minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed charge coverage ratio. In addition, the Company is required to pay an annual fee of 50 basis points, payable in quarterly installments, on the unused portion of the revolving facility. The following represents the schedule of current maturities for the Term A and Term B facilities (in thousands): Year Ended December 31, 1999 $ - 2000 4,650 2001 47,400 2002 61,650 2003 61,650 Thereafter 574,650 ----------------------- $ 750,000 ======================= In March 1999, the Company filed a registration statement for an equity offering of 4.5 million shares of our Class A common stock. The proceeds from the equity offering will be used to repay the $150 million senior subordinated bridge credit facility and a portion of the Term B facility. Upon the repayment of a portion of the Term B facility, the Company will write-off a pro-rata portion of the deferred financing fees as an extraordinary item. Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Information included in this Quarterly Report on Form 10-Q, and information that may be contained in other filings by us with the Securities and Exchange Commission (the "Commission") and releases issued or statements made by us, contain or may contain forward-looking statements, including but not limited to statements of our plans, objectives, expectations or intentions, including as to Year 2000 issues. Such forward-looking statements necessarily involve risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. Factors that might cause such a difference to occur include, but are not limited to: - risks associated with the consummation and financing of acquisitions, including the ability to successfully integrate the operations of the acquired businesses with our existing operations, client retention issues, and risks inherent in the acquired entities' operations - risks associated with obtaining financing and capital - risks associated with our ability to manage growth - competition, including price competition, competition in the bidding and proposal process and our ability to consummate contract negotiations with prospective clients - the possible termination of contracts with certain key clients or providers; (vi) the possible termination of contracts with certain key pharmaceutical manufacturers, changes in pricing, discount, rebate or other practices of pharmaceutical manufacturers - adverse results in litigation - adverse results in regulatory matters, the adoption of adverse legislation or regulations, more aggressive enforcement of existing legislation or regulations, or a change in the interpretation of existing legislation or regulations - developments in the healthcare industry, including the impact of increases in healthcare costs, changes in drug utilization patterns and introductions of new drugs - risks associated with the "Year 2000" issue - dependence on key members of management - our relationship with New York Life Insurance Company, which possesses voting control of us - other risks described from time to time in our filings with the Commission. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview During the first quarter of 1999, we continued to execute our growth strategy of generating sales to new clients, expanding the services provided to existing clients, developing new products and services for sale to existing clients and pharmaceutical manufacturers and selectively pursuing strategic acquisitions and alliances. On April 1, 1998, we consummated our first major acquisition by acquiring "ValueRx", the prescription benefit management ("PBM") operations of Columbia/HCA Healthcare Corporation ("Columbia"), for approximately $460 million in cash, which includes transaction costs and executive management severance costs of approximately $6.7 million and $8.3 million, respectively. Consequently, our operating results include those of ValueRx from April 1, 1998. The net assets acquired have been recorded at their estimated fair value, resulting in $278,113,000 of goodwill that is being amortized over 30 years. On April 1, 1999, we acquired Diversified Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto Rico) Inc. (collectively "DPS") from SmithKline Beecham Corporation ("SmithKline Beecham") and SmithKline Beecham InterCredit BV for approximately $700 million in cash, such amount being subject to adjustment based upon the amount of DPS's working capital at closing. Both acquisitions will be accounted for under the purchase method of accounting. The acquisition of ValueRx contributed substantially to increasing membership to approximately 23 million lives as of March 31, 1999 from approximately 12 million lives as of March 31, 1998. Our membership approximately doubled based on the acquisition of DPS and we have one of the largest managed care membership bases of any PBM. Although membership counts are based on our electronic eligibility data file, they involve some estimates, extrapolations and approximations. For example, some plan designs allow for family coverage under one identification number, and we make assumptions about the average number of persons per family in calculating our total membership. Because these assumptions may vary between PBMs, membership counts may not be comparable between us and our competitors. However, we believe our membership count provides a reasonable estimation of the population we serve, and can be used as one measure of our growth. The acquisitions also increased the scale of our business, expanded our client base, increased our penetration of PBM markets and expanded our product and service offerings. We primarily derive our revenues from the sale of PBM services in the United States and Canada. Our PBM net revenues generally include administrative fees, dispensing fees and ingredient costs of pharmaceuticals dispensed from retail pharmacies included in one of our networks or from one of our mail pharmacies. We then record the associated costs in cost of revenues. Where we only administer the contracts between our clients and the clients' retail pharmacy networks, we record as net revenues only the administrative fees we receive from our activities. We also derive PBM net revenues from the sale of informed decision counseling services through our Express Health LineSM division and the sale of medical information management services, which include provider profiling, formulary management support services and outcomes assessments, through our Practice Patterns Science, Inc. subsidiary. Non-PBM net revenues are derived from: (1) the sale of pharmaceuticals for and the provision of infusion therapy services through our IVTx, Inc. subsidiary, (2) administrative fees received for members using our vision program through our alliance with Cole Managed Vision ("Cole"), a subsidiary of Cole National Corporation, and (3) administrative fees received from drug manufacturers for the dispensing or distribution of pharmaceuticals through our Specialty Distribution division.
Results Of Operations Net Revenues Three Months Ended March 31, (in thousands) 1999 % Increase 1998 - ----------------------------------------------------------------------- PBM $884,435 146.4% $358,924 Non-PBM 14,652 17.8% 12,438 =========================================== Net revenues $899,087 142.1% $371,362 ===========================================
Total net revenues for the first quarter of 1999 increased $527,725,000, or 142.1%, compared to the first quarter of 1998. The increase is primarily due to the acquisition of ValueRx and also due to our continuing ability to attract new clients as well as additional members from existing clients. The majority of the increase in net revenues was derived from our PBM services. Network pharmacy claims processed increased 89.3% in the first quarter of 1999 over 1998 and the average net revenue per network pharmacy claim increased 36.0% in the first quarter of 1999 over 1998. The significant increase in network pharmacy claims processed of 89.3% and average net revenue per network pharmacy claim of 36.0% in the first quarter of 1999 over 1998 caused net revenues for our network pharmacy claims services to increase $393,914,000, or 157.4%. The increase in average net revenue per network pharmacy claim is due to two factors: (1) a larger number of clients using retail pharmacy networks established by us, rather than retail pharmacy networks established by our clients, which results in us recording dispensing fees and ingredient costs in net revenues and cost of revenues, respectively, and (2) higher drug ingredient costs resulting from price increases for existing drugs, new drugs introduced into the marketplace and changes in therapeutic mix and dosage. These increases were partially offset by lower pricing offered by us in response to continued competitive pressures. The number of clients using retail pharmacy networks established by us increased significantly beginning in the second quarter of 1998 due to the acquisition of ValueRx, as substantially all ValueRx clients used retail pharmacy networks established by ValueRx. As a result of this shift, gross margin percentages are reduced but the dollar amount of the gross profit is not significantly affected. Mail pharmacy claims processed increased 113.2% in the first quarter of 1999 over 1998 and the average net revenue per mail pharmacy claim increased 3.8% in the first quarter of 1999 over 1998. The significant increase in mail pharmacy claims processed, primarily due to the ValueRx acquisition, resulted in net revenues for our mail pharmacy services increasing $127,480,000, or 121.2%. Net revenues from our non-PBM services increased 17.8% in the first quarter of 1999 over 1998. The increase was primarily due to a change in product mix sold, which resulted in higher drug ingredient costs. This increase was partially offset by the reduction in net revenues from our managed vision business.
Cost and Expenses Three Months Ended March 31, (in thousands) 1999 % Increase 1998 - ----------------------------------------------------------------------------------------------------- PBM $812,093 146.8% $329,017 Percentage of PBM net revenues 91.8% 91.7% Non-PBM 11,554 21.9% 9,475 Percentage of non-PBM net revenues 78.9% 76.2% ------------------------------------------- Cost of revenues 823,647 143.3% 338,492 Percentage of net revenues 91.6% 91.1% Selling, general and administrative 40,218 125.4% 17,843 Percentage of net revenues 4.5% 4.8% Depreciation and amortization (1) 6,222 533.0% 983 Percentage of net revenues 0.7% 0.3% =========================================== Total cost and expenses $870,087 143.5% $357,318 =========================================== Percentage of net revenues 96.8% 96.2% (1) Represents depreciation and amortization expense included in selling, general and administrative expenses on our Statement of Operations. Cost of revenues, above, includes depreciation and amortization expense on property, plant and equipment.
Our cost of revenues for PBM services as a percentage of PBM net revenues slightly increased during the first quarter of 1999 over 1998. Cost of revenues for our pharmacy network claims and mail pharmacy claims increased 158.8% and 120.5%, respectively. The decrease in gross margin percentage for the first quarter of 1999 over 1998 is primarily due to the shift toward pharmacy networks established by us, as opposed to those established by our clients. The pharmacy network shift continued due to the acquisition of ValueRx, as the ValueRx clients primarily used retail pharmacy networks established by ValueRx. This decrease was partially offset by operating efficiencies achieved in our mail pharmacies during the first quarter of 1999 and revenues generated from integrated PBM services, such as medical and drug data analysis, that provide higher gross margins. Cost of revenues for non-PBM services increased as a percentage of non-PBM net revenues from the first quarter of 1998 primarily due to the continued change in the product mix sold resulting in additional costs of approximately $720,000. This change was offset by our development of new business that generated higher gross margins of approximately $120,000 and the reduction of overhead costs, as a percentage of non-PBM net revenues, due to the change in product mix sold. Selling, general and administrative expenses, excluding depreciation and amortization, increased $22,375,000, or 125.4%, for the first quarter of 1999 compared to 1998. The increase is primarily due to our acquisition of ValueRx, costs incurred during the integration of ValueRx and costs required to expand the operational and administrative support functions to enhance management of the pharmacy benefit. As a percentage of net revenues, selling, general and administrative expenses, excluding depreciation and amortization, for the first quarter of 1999 decreased to 4.5% from 4.8% in 1998. The decrease in the percentage of net revenues is primarily attributed to our recording of higher net revenues due to the shift towards pharmacy networks established by us, as opposed to those established by our clients, as discussed in "--Net Revenues." As part of our overall plan to achieve operating economies, we are integrating ValueRx into our historical business. To date, we have substantially met our integration goals by combining existing contracts and contracting procedures related to both suppliers and providers, integrating financial reporting systems, reducing the number of ValueRx computer systems, consolidating financial operations, consolidating organizational structure and employee benefits and implementing a new sales and marketing program for enhanced PBM services. Except for some new systems development costs, we are expensing integration costs as incurred. During the first quarter of 1999, we capitalized $1,080,678 in new systems development costs and we expensed $1,587,000 in incremental integration costs. Depreciation and amortization substantially increased during the first quarter of 1999 over 1998 due to the acquisition of ValueRx. During the first quarter of 1999, we recorded amortization expense for goodwill and other intangible assets of $3,860,000. The remaining increase during the first quarter of 1999 is primarily due to the inclusion of depreciation and amortization expense associated with the property and equipment acquired with ValueRx and due to expansion of our operations and enhancement of our information systems to better manage the pharmacy benefit.
Interest Income (Expense), Net Three Months Ended March 31, (in thousands) 1999 % 1998 Increase/ (decrease) - ------------------------------------------------------------------------------ Interest income $ 1,393 (34.8)% $ 2,138 Percentage of net revenues 0.2% 0.6% Interest expense (6,222) nm (14) Percentage of net revenues (0.7)% nm ========================================= Interest income (expense), net $(4,829) 327.4% $ 2,124 ========================================= Percentage of net revenues (0.5)% 0.6%
nm = not meaningful. The significant increase in interest expense is due to our financing of the ValueRx acquisition with $360 million in borrowings; see "Liquidity and Capital Resources." Interest income decreased during the first quarter of 1999 over 1998 due to our investment of cash balances and short-term investments at higher interest rates in 1998 than those received in 1999.
Provision for Income Taxes Three Months Ended March 31, (in thousands) 1999 % Increase 1998 - -------------------------------------------------------------------------------- Provision for income taxes $ 10,628 69.0% $6,290 Effective tax rate 44.0% 38.9%
Our effective tax rate increased in the first quarter of 1999 over 1998 due to the non-deductible goodwill and customer contracts amortization expense resulting from the ValueRx acquisition. We expect that our effective tax rate will gradually decline toward the statutory rate as our operating growth continues.
Net Income and Earnings Per Share Three Months Ended March 31, (in thousands) 1999 % Increase 1998 - -------------------------------------------------------------------------------- Net income $13,543 37.1% $ 9,878 Percentage of net renue 1.5% 2.7% Basic earnings per share $ 0.41 36.7% $ 0.30 Weighted average shares outstanding 33,211 33,053 Diluted earnings per share $ 0.40 37.9% $ 0.29 Weighted average shares outstanding 34,154 33,579
Our net income increased $3,665,000, or 37.1%, in the first quarter of 1999 over 1998. On October 12, 1998, we announced a two-for-one stock split of our Class A and Class B common stock for stockholders of record on October 20, 1998, effective October 30, 1998. The split was effected in the form of a dividend by issuance of one additional share of Class A common stock for each share of Class A common stock outstanding and one additional share of Class B common stock for each share of Class B common stock outstanding. The earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share have been adjusted for the stock split.
Liquidity and Capital Resources. Three Months Ended March 31, (in thousands) 1999 % Decrease 1998 - -------------------------------------------------------------------------------- Net cash (used in) provided by operations $(3,809) (115.7%) $24,222
During the first quarter of 1999, we used $3,809,000 in net cash for our operations. The decrease over the first quarter of 1998 is primarily due to the payment of certain accruals from December 31, 1998. Management expects to primarily fund our future debt service, integration costs, Year 2000 costs, internet business development costs and other normal operating cash needs primarily with operating cash flow or, to the extent necessary, with working capital borrowings under our $1.05 billion credit facility. Our capital expenditures in the first quarter of 1999 increased $2,501,000, or 78.7% over the first quarter of 1998 primarily due to our concerted effort to invest in information technology to enhance the services provided to our clients. We expect to continue investing in technology that will provide efficiencies in operations, manage growth and enhance the services provided to our clients. We expect to fund future anticipated capital expenditures primarily with operating cash flow or, to the extent necessary, from working capital borrowings under our $1.05 billion credit facility. On April 1, 1999, we entered into a $1.05 billion credit facility with a bank syndicate led by Credit Suisse First Boston and Bankers Trust Company consisting of $750 million in term loans, including $285 million of Term A loans and $465 million of Term B loans, and a $300 million revolving credit facility. The agreement became effective on April 1, 1999. The Term A loans and the revolving credit facility will mature on March 31, 2005 and the Term B loans will mature on March 31, 2007. Approximately $940 million in borrowings from this new facility were used to consummate the DPS acquisition, refinance our $440 million credit facility, of which $360 million was outstanding, and other indebtedness and pay related fees and expenses. The credit facility is secured by the capital stock of each of our existing and subsequently acquired domestic subsidiaries, excluding Practice Patterns Science, Great Plains Reinsurance, ValueRx of Michigan, Diversified NY IPA and Diversified Pharmaceutical Services (Puerto Rico), and 65% of the stock of our foreign subsidiaries. The credit facility requires us to pay interest quarterly on an interest rate spread based on several LIBOR or base rate options. Using a LIBOR spread, the Term A loans and the revolving loan require a spread of 2.75%, resulting in an interest rate, including the spread, at May 1, 1999, of 7.625%. The Term B loans require a LIBOR spread of 3.5%, resulting in an interest rate, including the spread, at May 1, 1999, of 8.375%. Beginning in March 2001, we are required to make annual principal payments on the Term A loans of $42,750,000 in 2001, $57,000,000 in 2002 and 2003, $62,700,000 in 2004 and $65,550,000 in 2005. The Term B loans require annual principal payments of $4,650,000 beginning in March 2000 until 2005, $111,600,000 in 2006 and $325,500,000 in 2007. The credit facility contains covenants that limit the indebtedness we may incur and the amount of annual capital expenditures. The covenants also establish a minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed charge coverage ratio. In addition, we are required to pay an annual fee of 0.5%, payable in quarterly installments, on the unused portion of the revolving loan. At March 31, 1999 and December 31, 1998, we were in compliance with all covenants associated with the $440 million credit facility. As a result of refinancing our $440 million credit facility, we will write-off the remaining deferred financing fees at March 31, 1999 of $3,250,000, or approximately $1,950,000 net of tax, as an extraordinary item during the second quarter of 1999. To alleviate interest rate volatility, we entered into an interest rate swap arrangement for a notional principal amount of $360 million, effective April 3, 1998, with the First National Bank of Chicago, a subsidiary of Bank One Corporation. Under the terms of the swap, we agreed to receive a floating rate of interest on a portion of our term loans based on a three-month LIBOR rate in exchange for payment of a fixed rate of interest of 5.88% per annum. The notional amount of the swap amortizes, beginning in April 1999, in semi-annual installments of $27 million, increasing to $36 million in April 2000, to $45 million in April 2001 and to $48 million in April 2002. As a result, we have, in effect, converted $360 million of our variable rate term debt to fixed rate debt at 5.88% for the entire term of the term loans plus the credit rate spread. In order to assist our funding of the DPS acquisition, we obtained a $150 million senior subordinated bridge credit facility from Credit Suisse First Boston Corporation and Bankers Trust Company. The facility became effective on April 1, 1999 and matures on March 31, 2000 unless converted into a term loan. The facility requires us to make quarterly interest payments on a spread over several LIBOR or base rate options. The facility requires us to pay an initial spread of 5%, resulting in an interest rate, including the spread, at May 1, 1999, of 9.97%, and increasing 0.5% every quarter. In March 1999, we filed a registration statement, which has not yet become effective, to sell 4.5 million shares of our Class A common stock. The proceeds from this offering will be used to repay the $150 million senior subordinated bridge credit facility and a portion of the Term B loans under the $1.05 billion credit facility. As a result of the partial repayment of the Term B loans, we will write-off approximately $3,200,000, $1,900,000 net of tax, of the Term B deferred financing fees as an extraordinary item. As of March 31, 1999, we had repurchased a total of 475,000 shares of our Class A Common Stock under the open-market stock repurchase program announced by us on October 25, 1996, although no repurchases occurred during the first quarter of 1999. Our Board of Directors approved the repurchase of up to 1,700,000 shares, and placed no limit on the duration of the program. Future purchases, if any, will be in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions, subject to restrictions on stock repurchases contained in our $1.05 billion credit facility. We have reviewed and currently intend to continue reviewing potential acquisitions and affiliation opportunities. We believe that available cash resources, bank financing or the issuance of additional common stock could be used to finance such acquisitions or affiliations. However, there can be no assurance we will make other acquisitions or affiliations in 1999 or thereafter. Other Matters On March 29, 1999, we announced our plans to launch two Internet sites, YourPharmacy.com and DrugDigest.org. YourPharmacy.com will serve as an online drug store and offer both prescription and over-the-counter medications, vitamins, herbs and health and beauty aids. DrugDigest.org will provide fact-based information on a variety of medications, vitamins and herbs. Both sites are expected to be operational during the second quarter of 1999. By allowing us to communicate more effectively and efficiently with our existing members, we believe that we will be able to reduce our operating costs by utilizing on-line communication as opposed to more expensive call center operations and paper-based correspondence. We also plan to increase the utilization of our existing mail pharmacies, which processed over 7.4 million prescriptions in 1998 and 2.2 million prescriptions during the first quarter of 1999, to distribute prescription medications ordered through our Internet e-commerce site. In addition, we believe that sales of both pharmaceutical and non-pharmaceutical products to the non-member general public will help us attract new clients. Furthermore, based on our clinical capabilities, information databasing and established expertise in managing prescription drug usage, we believe DrugDigest.org will be a comprehensive and credible source of information on prescription and non-prescription medications. To date we have funded the development of the Internet sites through operating cash flows and have expensed these amounts as incurred. We expect to continue funding the development and operation of these sites with operating cash flows or with working capital borrowings under our $1.05 billion credit facility. Under the purchase agreement with SmithKline Beecham relating to our acquisition of DPS, SmithKline Beecham is obligated to dissolve a joint venture relationship in a company known as Diversified Prescription Delivery ("DPD"), which provides mail pharmacy services, including services for some clients of DPS. SmithKline Beecham has executed a letter of intent to acquire the 50% interest in DPD that it does not currently own. Following the acquisition of this 50% interest, SmithKline Beecham will transfer ownership of DPD to us or to another company that we control. We will not pay SmithKline Beecham any additional amounts beyond what we have already paid to acquire DPS. Consummation of this transaction is subject to conditions, including preparation of formal contract documents and the approval of regulatory authorities. In June 1998, Statement of Financial Accounting Standards Statement 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133") was issued. FAS 133 requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. In addition, FAS 133 specifies the accounting for changes in the fair value of a derivative based on the intended use of the derivative and the resulting designation. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, and will be applicable to our first quarter of fiscal year 2000. Our present interest rate swap (see "--Liquidity and Capital Resources") would be considered a cash flow hedge. Accordingly, the change in the fair value of the swap would be reported on the balance sheet as an asset or liability. The corresponding unrealized gain or loss representing the effective portion of the hedge will be initially recognized in stockholders' equity and other comprehensive income and subsequently any changes in unrealized gain or loss from the initial measurement date will be recognized in earnings concurrent with the interest expense on our underlying variable rate debt. If we had adopted FAS 133 as of March 31, 1999, we would record the unrealized loss of $4,086,000 as a liability and reduction in stockholders' equity and other comprehensive income. Year 2000 Our operations rely heavily on computers and other information systems technologies. In 1995, we began addressing the "Year 2000" issue, which refers to the inability of certain computer systems to properly recognize calendar dates beyond December 31, 1999. This arises as a result of systems having been programmed with two digits rather than four digits to define the applicable year in order to conserve computer storage space, reduce the complexity of calculations and produce better performance. The two-digit system may cause computers to interpret the year "00" as "1900" rather than as "2000", which may cause system failures or produce incorrect results when dealing with date-sensitive information beyond 1999. We formed a Year 2000 task force to address this issue. The task force has performed a self-assessment and developed a compliance plan that addresses: (i) internally developed application software, (ii) vendor developed application software, (iii) operating system software, (iv) utility software, (v) vendor/trading partner-supplied files, (vi) externally provided data or transactions, (vii) non-information technology devices that are material to our business, and (viii) adherence to applicable industry standards. Our plan covers both the traditional Express Scripts and ValueRx systems. Progress in each area is monitored and management reports are given periodically. We have various applications and operating systems that are considered critical to our operations. Approximately 90% of these systems have been successfully tested by us in an integrated environment for Year 2000 compliance. The remaining systems will be modified to be compliant by the end of the third quarter of 1999, or information residing on such systems will be integrated into a Year 2000 compliant operating system. Testing of the applications and operating systems includes the adjudication process, the eligibility process, the billing and remittance process, the communication process and the reporting process, including financial reporting. In addition, since 1995, all new internally developed software has been developed to be Year 2000 compliant and will be fully tested during the remainder of 1999. We are participating in a joint effort with other PBMs, retail pharmacy chains, transaction routing companies and adjudication software vendors to test Year 2000 compliance in the industry. The joint effort is called the "Y2K Provider & Vendor Testing Coalition" and is being facilitated by The National Health Information Network. The coalition has the support of major U.S. retail pharmacies, including American Stores, CVS, Eckerd, Rite-Aid, Wal-Mart and Walgreens. The inclusion of transaction routing vendors and software companies could permit up to 95% of our pharmacy network to be tested (although there can be no assurance that all parties who are invited to participate will actually participate). The program will allocate the retail pharmacy chains and software vendors among the various PBMs who will be required to test the vendors' and pharmacy chains' Year 2000 compliance. The testing is expected to be completed early in the third quarter of 1999. We have sent out approximately 1,500 letters to critical vendor/trading partners requesting a status report regarding their Year 2000 compliance. We have received responses from approximately 30% of these third parties, with the majority of the vendor/trading partners responding that they are currently addressing the Year 2000 issue and expect to be compliant. We are formulating a list of vendor/trading partners that have not responded in order to send second requests. We have also contacted several hundred clients and several thousand pharmacies whose computer systems appear to us not to be Year 2000 compliant in an effort to increase awareness of the problem and minimize or eliminate any disruption in data transfer activity between any of these parties and us. We have developed date windowing logic, which forces an entry into the century field of a computer application if one is not provided by the user, which we believe will address many issues concerning retail pharmacies and clients with noncompliant systems. Due to our contracts typically extending over several years and our receipt of member eligibility information from clients that reflect dates beyond the Year 2000, we have been receiving information that would identify certain Year 2000 issues for several years. Any problems we have encountered to date have been rectified by the client or, if necessary, by us using our windowing logic. There can be no assurance, however, that all of these problems that may be encountered in the future can be rectified with the windowing logic. In addressing the Year 2000 issue, we have and will continue to incur internal staff costs as well as external consulting and other expenses related to infrastructure enhancements. To date, we have incurred approximately $3,700,000 addressing the Year 2000 issue. We anticipate spending an additional $500,000 to $750,000 during the remainder of 1999 addressing the Year 2000 issue. All expenditures are being expensed as incurred. To date, these costs have not had a material adverse effect on our results of operations or financial condition, and are not expected to have a material adverse effect on our future results of operations or financial condition. In connection with our acquisition of DPS, we performed certain Year 2000 due diligence and received representations that DPS had implemented a Year 2000 plan for upgrading its computer systems and communicated with its vendors/trading partners regarding their respective Year 2000 compliance. Based on our due diligence and the representations we received, we believe DPS's critical applications and operating systems have been successfully tested for Year 2000 compliance. We plan to continue to review DPS's state of readiness and assess whether additional steps are necessary. We believe that, with appropriate modifications to existing computer systems, updates by vendors and trading partners and conversion to new software in the ordinary course of our business, the Year 2000 issue is not likely to pose significant operational problems for us. However, if the above-described conversions are not completed in a proper and timely manner by all affected parties, or if our logic for communicating with noncompliant systems is ineffective, the Year 2000 issue could result in material adverse operational and financial consequences to us. There can be no assurance that our efforts, including those relating to the DPS's systems, or those of our vendors and trading partners, who are beyond our control, will be successful in addressing the Year 2000 issue. We are in the process of formalizing our contingency plans, which include DPS, to address potential Year 2000-related risks, including risks of vendor/trading partner noncompliance, as well as noncompliance of any of our critical operations, and are expected to be substantially completed by the end of the second quarter of 1999. However, the formalization of the contingency plans is an ongoing process as we complete our testing and receive updates from vendor/trading partners. In addition, there can be no assurance that our contingency plans will successfully address all potential circumstances or consequences. Impact of Inflation Changes in prices charged by manufacturers and wholesalers for pharmaceuticals affect our net revenues and cost of revenues. To date we have been able to recover price increases from our clients under the terms of our agreements, although under selected arrangements in which we have performance measurements on drug costs with our clients, we could be adversely affected by inflation in drug costs if the result is an overall increase in the cost of the drug plan to the client. To date, changes in pharmaceutical prices have not had a significant adverse affect on us. Market Risk To alleviate interest rate volatility, we entered into an interest rate swap arrangement for a notional principal amount of $360 million effective April 3, 1998, with First National Bank of Chicago, a subsidiary of Bank One Corporation. Under the swap arrangement, we agreed to receive a floating rate of interest on an amount equal to a portion of the outstanding principal balance of our term loans based on a three-month LIBOR rate in exchange for payment of a fixed rate of interest of 5.88% per annum on such amount. The weighted average variable rate received by us for the period January 1, 1999 to March 31, 1999, was 5.08%. The notional amount of the swap amortizes, beginning in April 1999, in semi-annual installments of $27 million, increasing to $36 million in April 2000, to $45 million in April 2001 and to $48 million in April 2002. The swap expires on April 3, 2003. At March 31, 1999, the fair value of the swap was ($4,086,000). Interest rate risk is monitored on the basis of changes in the fair value and a sensitivity analysis is used to determine the impact interest rate changes will have on the fair value of the interest rate swap, measuring the change in the net present value arising from the change in the interest rate. The fair value of the swap is then determined by calculating the present value of all cash-flows expected to arise thereunder, with future interest rate levels implied from prevailing mid-market yields for money-market instruments, interest rate futures and/or prevailing mid-market swap rates. Anticipated cash-flows are then discounted on the assumption of a continuously compounding zero-coupon yield curve. A 10 basis point decline in interest rates at March 31, 1998, would have caused the fair value of the swap to decrease by an additional $674,000, resulting in a fair value of ($4,760,000). Item 3. Quantitative and Qualitative Disclosures About Market Risk Response to this item is included in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk" above. PART II. OTHER INFORMATION Item 1. Legal Proceedings As discussed in detail in our Annual Report on Form 10-K for the period ended December 31, 1998, filed with the Securities and Exchange Commission on March 29, 1999 ("1998 10-K"), we acquired all of the outstanding capital stock of Value Health, Inc., a Delaware corporation ("VHI"), and Managed Prescription Network, Inc., a Delaware corporation ("MPN") from Columbia HCA/HealthCare Corporation ("Columbia") and its affiliates on April 1, 1998 (the "Acquisition"). VHI, MPN and/or their subsidiaries (collectively, the "Acquired Entities"), were party to various legal proceedings, investigations or claims at the time of the Acquisition. The effect of these actions on our future financial results is not subject to reasonable estimation because considerable uncertainty exists about the outcomes. Nevertheless, in the our opinion, the ultimate liabilities resulting from any of these lawsuits, investigations or claims now pending will not materially affect our consolidated financial position, results of operations or cash flows. A brief update of the most notable of the proceedings follows: As discussed in detail in our 1998 10-K, VHI and several of its subsidiaries are party to two securities litigation matters, Bash, et al. v. Value Health, Inc., et al., No. 3:97cv2711 (JCH) (D.Conn.), and Freedman, et al. v. Value Health, Inc., et al., No. 3:95 CV 2038 (JCH) (D.Conn). The two lawsuits, filed in 1995, allege that VHI and certain other defendants made false or misleading statements to the public in connection with VHI's acquisition of Diagnostek, Inc. in 1995, and in connection with one of VHI's contracts. The Bash lawsuit also alleges false or misleading statements by Diagnostek and certain of its former officers and directors concerning its financial condition prior to the merger with VHI. Neither complaint specifies the amount of damages sought. On April 24, 1998, the two lawsuits were consolidated. On February 18, 1999, the court granted plaintiffs' motions for class certification and certified a class consisting of (i) all persons who purchased or otherwise acquired shares of VHI during the period from April 3, 1995, through and including November 7, 1995, including those who acquired shares issued in connection with the Diagnostek merger; and (ii) all persons who purchased or otherwise acquired shares of Diagnostek during the period from March 27, 1995, through and including July 28, 1995. Fact discovery in the consolidated lawsuit is complete. The parties are awaiting an order from the court regarding the scheduling of expert discovery and dispositive motions. In connection with the Acquisition, Columbia has agreed to defend and hold us and our affiliates (including VHI) harmless from and against any liability that may arise in connection with either of the foregoing proceedings. Consequently, we do not believe we will incur any material liability in connection with the foregoing matters. In August 1997, the U.S. Department of Labor requested information from DPS concerning its contractual relationships with employer group health plans governed by ERISA. DPS provided the requested information to the U.S. Department of Labor, and exchanged correspondence with the U.S. Department of Labor on this matter until August 1998. Since that time, no additional information requests or other correspondence has been received. However, the U.S. Department of Labor has given no indication as to its disposition of this matter, and we cannot provide any assurance as to the ultimate outcome of this matter or what effect, if any, it will have on our business as a result of our acquisition of DPS. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Index to Exhibits on page 22. (b) Reports on Form 8-K. (i) On February 18, 1999, the Company filed a Current Report on Form 8-K regarding a press release issued on behalf of the Company announcing that the Company had entered into a Stock Purchase Agreement with SmithKline Beecham Corporation and one of its affiliates for the acquisition of Diversified Pharmaceutical Services, Inc. and Diversified Pharmaceutical Services (Puerto Rico), Inc. (ii) On February 24, 1999, the Company filed a Current Report on Form 8-K regarding a press release issued on behalf of the Company concerning its year-end 1998 financial performance. (iii) On March 25, 1999, the Company filed a Current Report on Form 8-K regarding a press release issued on behalf of the Company announcing that it had filed a registration statement with the Securities and Exchange Commission for an offering of approximately 4,500,000 primary shares, or $350 million, of its Class A Common Stock. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXPRESS SCRIPTS, INC. (Registrant) Date: May 13, 1999 By:/s/ Barrett A. Toan --------------------------------------- Barrett A. Toan, President and Chief Executive Officer Date: May 13, 1999 By:/s/ George Paz --------------------------------------- George Paz, Senior Vice President and Chief Financial Officer INDEX TO EXHIBITS (Express Scripts, Inc. - Commission File Number 0-20199) Exhibit Number Exhibit 2.1 Stock Purchase Agreement by and among SmithKline Beecham Corporation, SmithKline Beecham InterCredit BV and Express Scripts, Inc., dated as of February 9, 1999, and certain related Schedules, incorporated by reference to Exhibit No. 2.1 to the Company's Current Report on Form 8-K filed February 18, 1999. 3.1 Certificate of Incorporation, incorporated by reference to Exhibit No. 3.1 to the Company's Registration Statement on Form S-1 filed June 9, 1992 (No.33-46974) (the "Registration Statement"). 3.2 Certificate of Amendment of the Certificate of Incorporation of the Company, incorporated by reference to Exhibit No. 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ending June 30, 1994. 3.3 Certificate of Amendment of the Certificate of Incorporation of the Company, incorporated by reference to Exhibit No. 3.3 to the Company's Annual Report on Form 10-K for the year ending December 31, 1998. 3.4 Second Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ending September 30, 1998. 4.1 Form of Certificate for Class A Common Stock, incorporated by reference to Exhibit No. 4.1 to the Registration Statement. 10.1* Employment Agreement effective as of April 1, 1999, between Barrett A. Toan and the Company 27.1* Financial Data Schedule (provided for the information of the U.S. Securities and Exchange Commission only). * Filed herein. EX-10.1 2 EMPLOYMENT AGREEMENT BARRETT TOAN/EXPRESS SCRIPTS EXHIBIT 10.1 EMPLOYMENT AGREEMENT between BARRETT A. TOAN and EXPRESS SCRIPTS, INC. EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") between Barrett A. Toan ("You" or "Your") and Express Scripts, Inc. (the "Company") replaces Your employment agreement dated April 30, 1992 (as amended January 1, 1996). This Agreement is intended to create mutual obligations, and Your voluntary acceptance affirms the Company's and Your commitment to carry out its obligations in accordance with the following terms and conditions. 1. Employment and Assignment; Diligent and Faithful Performance of Duties. The Company agrees to employ You as President, Chief Executive Officer, and a member of the Board of Directors of the Company (the "Board"). In consideration of employment by the Company, You agree to discharge faithfully, diligently, and to the best of Your ability, the responsibilities of the position You hold during Your employment. All of the duties and services to be performed by You will be at all times subject to the authority of the Board and the Executive Committee of the Board. During the term of Your employment excluding any periods of vacation, sick leave or disability to which You are entitled, You agree to devote Your full working time, attention, and energy to the business and affairs of the Company; provided that it shall not be a violation of this Agreement for You to (a) serve on corporate, civic or charitable boards or committees, (b) deliver lectures, fulfill speaking engagements or teach at educational institutions or (c) manage personal investments, so long as such activities are consistent with the policies of the Company as of the date hereof and do not significantly interfere with the performance of Your duties in accordance with this Agreement. 2. Term of Agreement. The term of this Agreement will commence on April 1, 1999 and will continue through March 31, 2002. On April 1st of each year (hereinafter the "Anniversary Date"), commencing with April 1, 2001 and on each subsequent April 1st thereafter, this Agreement will be renewed for a new term of one (1) year unless You will attain age 65 prior to completion of the additional year, in which case the Agreement shall terminate on the last day of the month in which You attain age 65. The term of renewal shall commence on such Anniversary Date unless either the Company or You notifies the other party in writing no less than thirty (30) days prior to such Anniversary Date that (a) it does not intend to renew this Agreement or (b) that the Agreement is to be terminated pursuant to paragraph 7F. Accordingly, unless such notification is received prior to the Anniversary Date, renewal of this Agreement will be automatic. 3. Compensation and Benefits. A. Base Salary. During Your employment under this Agreement, You will be paid a base salary ("Annual Base Salary") at the rate of $650,000 per year and You will be eligible for periodic review by the Board for merit increases, provided that any such increase shall not serve to limit or reduce any other obligation to You under this Agreement. The term "Annual Base Salary" as used in this Agreement shall refer to the Annual Base Salary as increased and Your Annual Base Salary shall not be reduced after any such increase without Your express written consent. B. Annual Incentive Compensation. You will be eligible to participate in the Company's annual bonus plan established for senior executives by the Board (the "Annual Bonus Plan"). The size of Your bonus opportunity and the terms of Your participation shall be determined based on the terms and conditions of the Annual Bonus Plan. Your award (the "Annual Bonus") will be based upon Your performance in relation to the financial and non-financial objectives to be set by the Board at its sole discretion pursuant to the terms of any Annual Bonus Plan. The Annual Bonus Plan currently establishes a minimum of one hundred percent (100%) of Annual Base Salary for the bonus award if targeted performance measures are satisfied (the "Target Bonus"). The Company retains the right to modify or replace the Annual Bonus Plan and the performance measures thereunder, provided that the amended and successor plans will provide the opportunity to earn a payout of a minimum of one hundred percent (100%) of Annual Base Salary upon achieving targeted performance measures. C. Stock and Stock Options. (i) Eligibility and Grants Under Option Plan. You will be eligible to participate in the Company's employee stock option plan (the "Option Plan") as previously adopted by the Board and as it may be amended from time to time or any replacement or successor of such plan. Under the Option Plan, at the sole discretion of the Board, You will receive annual grants of options to buy Class A shares of the Company's common stock, based on Your performance and the performance of the Company, as determined by the Compensation Committee of the Board. (ii) Initial Grant of Option. You will also receive a one-time grant of options (the "Initial Grant") to purchase 70,000 Class A shares of the Company's common stock at the Fair Market Value (as defined in the Company's option plans) per share on or about May 26, 1999 which shall vest 20% per year beginning on the first anniversary of the date of grant. (iii) Vesting. Notwithstanding any provision to the contrary in the Option Plan, any options granted under the Option Plan (including any and all options granted prior to the date hereof or pursuant to the Initial Grant in this Agreement) and any and all Restricted Shares acquired by you pursuant to any exercise of such options, shall fully vest not later than upon Change of Control (as that term is defined in subparagraph vi of this paragraph 3(C)); termination by the Company without Cause (as defined in subparagraph A of paragraph 7); termination by You for Good Reason (as defined in subparagraph C of paragraph 7); Your death or Disability (as defined in subparagraph E of paragraph 7). (iv) Stock Options Upon Termination. If Your employment is terminated by the Company for Cause or by You without Good Reason, You shall forfeit any options that have not yet been exercised not less than thirty (30) days after such termination. Notwithstanding any provision to the contrary in the Option Plan, if the Company terminates You without Cause, You terminate employment for Good Reason, You die or Your employment is terminated by the Company because of a Disability, or in the event of a Change of Control, all of Your options shall become fully exercisable immediately upon such event and shall remain exercisable until the earlier of (i) eighteen (18) months from the date of Your termination of employment or (ii) the expiration date of the option (determined without regard to Your termination of employment) and all restricted shares previously acquired by you upon the exercise of any options shall vest upon such event. (v) Put Right. Notwithstanding any provision in the Option Plan to the contrary, you shall have the right, from time to time, within the twelve (12) month period following Your termination by the Company without Cause or Your termination for Good Reason or Your termination upon death or Disability, to tender to the Company shares of common stock equal to the greater of (a) the number of shares subject to options granted to You by the Company in the calendar year preceding such termination (adjusted to reflect any stock split occurring after such grant) or (b) 70,000 shares (adjusted to reflect any stock split occurring after the effective date hereof), and the Company hereby agrees, to the extent not prohibited by applicable law, to pay You an amount equal to the Fair Market Value of such shares as of the date the Employee makes such tender to the Company. For purposes of this Agreement, "Fair Market Value" means the closing price, regular way, of the security as reported on the consolidated transaction reporting system applicable to such security, or if no such reported sale of the security occurred on such date, the next preceding date on which there was a reported sale or if the security is not listed on a national securities exchange, or the NASDAQ National Market, the fair market value of the security determined in good faith by the Board of the Company. Notwithstanding any other provision of this Agreement, this subsection (v) shall not become effective until such time as the Company's accountants shall advise the Company that this provision will not require the Company to use "variable plan accounting" or similar "mark-to-market" accounting to reflect its obligations under this subsection. (vi) Change of Control. For purposes of this Agreement, "Change of Control" means: (a) except as provided in subsection (d) below a "person" or "group" (as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (excluding, for this purpose, the Company or any subsidiary or any employee benefit plan of the Company, New York Life Insurance Company, any affiliate or subsidiary) becomes (effective upon the closing of the transaction) the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities representing fifty percent (50%) (provided that if NYLIFE Healthcare Management Inc. or any affiliate thereof sells all or substantially all of the securities of the Company that it holds either directly or indirectly as of the effective date hereof to a nonaffiliate, thereafter such percentage shall be reduced to twenty percent (20%)) or more of the combined voting power in the election of directors of the then-outstanding securities of the Company or any successor of the Company. (b) when individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person who becomes a director subsequent to the date hereof whose election or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rules 14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of this definition, considered as though such person were a member of the Incumbent Board; (c) approval by the stockholders of the Company, and consummation of, the liquidation of the Company or any sale or disposition, or series of related sales or dispositions, of all or substantially all of the assets or earning power of the Company; or (d) approval by the stockholders of the Company and consummation of any merger or consolidation or statutory share exchange to which the Company is a party and as a result of which the persons who were stockholders of the Company immediately prior to the effective date of the merger or consolidation or statutory share exchange shall have beneficial ownership of less than fifty percent (50%) (provided that, if NYLIFE Healthcare Management, Inc. sells all or substantially all of the Company's securities that it holds either directly or indirectly as of the effective date hereof to a nonaffiliate, thereafter such percentage shall be increased to eighty percent (80%); provided that if You, in Your capacity as a director, do not vote against the proposed merger, consolidation or share exchange transaction, such percentage shall be fifty percent (50%)) of the combined voting power in the election of directors of the surviving corporation following the effective date of such merger or consolidation or statutory share exchange. Notwithstanding the foregoing, a "Change of Control" shall not include the sale or other transfer of beneficial ownership of Class B Common Stock of the Company by NYLIFE Healthcare Management, Inc. to (or any acquisition of such beneficial ownership by) an affiliate thereof, including, without limitation, New York Life Insurance Company or any holding company formed by any such affiliate D. Other Benefits. You will be eligible to participate in and shall receive all benefits under welfare and other employee benefit plans, practices, policies and programs as well as any fringe benefits provided by the Company and applicable to other Company executives generally. E. Vacation. As President & Chief Executive Officer, You shall be entitled to receive vacation time of five (5) weeks per year. 4. Non-Solicitation. You agree that, for a period of two (2) years following the cessation of Your employment with the Company, You will not, directly or indirectly, (a) solicit, divert or take any client, customer or supplies from the Company; (b) employ, hire, engage or be affiliated with any employee or other person connected with the Company at the time of such termination or during any part of the twelve (12) months preceding said termination; (c) induce any person connected with or employed by the Company to leave the employ of the Company or (d) solicit the employment of any such person on Your own behalf or on behalf of any other business enterprise. 5. Non-Competition. You agree that, during the term of this Agreement and for a period of two (2) years following the cessation of Your employment with the Company, You will not, directly or indirectly, own, manage, operate, join, control or participate in or be connected with as an officer, employee, consultant, partner, shareholder (except stock interests of less than five percent (5%)) or otherwise, any business, individual, partnership, form or corporation, which, directly is or will be engaged wholly or primarily in the business of manufacturing, purchasing, selling, supplying or otherwise dealing in the United States in any product or service manufactured, purchased, sold, supplied, provided or dealt with by the Company, or which is or will be, directly in competition with the business of the Company in the United States. 6. Non-Disclosure of Information and Non-Disparagement. You acknowledge that the identity of the clients and customers of the Company, the prices, terms and conditions at or upon which the Company sells its products or provides its services and other confidential information relating to the business, financial and other affairs of the Company (including, without limitation, any idea, product, creative or conceptual business or marketing plan, strategy or other material developed for the Company by You) are valuable, special unique assets of the Company and that such information, if disclosed to others, may result in loss of business or other irreparable and consequential damage to the Company. You will hold in fiduciary capacity, for the benefit of the Company, all information, knowledge and data relating to or concerned with the Company's operations, sales, business and affairs and shall not, at any time during the term of this Agreement or thereafter, disclose or divulge any such information, knowledge or data to any person, firm, corporation, association or other entity, for any reason whatsoever. Notwithstanding the foregoing, the provisions of this paragraph 6 shall not apply to information generally known to the public or the trade, information available in trade or other publications, nor to the release of information deemed by the Board to be in the best interests of the Company. The Company agrees that it will not disparage You in any way and You also agree that You will not disparage the Company, its parent companies, its subsidiaries, or its or their current or former officers, directors, and employees in any way; further, neither You nor the Company will make or solicit any comments, statements, or the like to the media or to others that may be considered derogatory or detrimental to the good name or business reputation of any of the aforementioned entities or individuals. 7. Termination of Employment. A. Termination for Cause. If Your employment under this Agreement is terminated for Cause (as defined herein) by the Company, the Company's liability for Annual Base Salary, Annual Bonus, and all other benefits pursuant to paragraph 3, shall cease upon the date of such notice; provided, that the Company shall pay You no later than the next payroll cycle all Annual Base Salary earned and unpaid as of such date and Your Annual Bonus that has accrued pursuant to the terms of the Annual Bonus Plan or such other plans as may be applicable, but remains unpaid as of the date of such termination. For purposes of this Agreement, "Cause" shall mean: (i) Your indictment (or equivalent legal proceeding under applicable law) or conviction for committing any felony or Your commission of any other crime involving fraud, misappropriation, dishonesty or moral turpitude, (ii) material breach of Your duties and responsibilities (other than on account of Disability) under this Agreement; provided that material breach shall not be considered to occur unless it continues to the expiration of the ten (10) day period following the date You receive written warning from the Board setting forth the reasons for its determination of material breach; and provided further that for purposes of clause (ii), Cause shall not include any one or more of the following: (a) bad judgment, (b) negligence (unless You fail to cure such negligence after receiving the written notice and opportunity to cure described in this paragraph 7(A) above and such negligence has a material and adverse effect on the Company), (c) any act or omission that You believed in good faith to have been in or not opposed to the interest of the Company (without Your intent to gain therefrom, directly or indirectly, a profit to which You were not legally entitled) (unless You fail to cure such act or omission after receiving written notice and the opportunity to cure described in this paragraph 7(A) above and such act or omission has a material and adverse effect on the Company), or (d) any act or omission with respect to which notice of termination of employment is given more than twelve (12) months after the earliest date on which the Board (excluding members who were party to the act or omission), knew or should have known of such act or omission. No termination of employment for Cause shall be valid unless, no fewer than seven (7) days prior to the date of such termination, the Company provides You with written notice of its intent to consider termination for Cause, including a detailed description of the specific reasons which form the basis for such consideration. Thereafter, for a period of not less than 14 days after the date notice of termination is provided, You shall have the opportunity to appear before the Board to present arguments on Your own behalf. Following such presentation to the Board, You shall be terminated for Cause only if (a) seventy-five percent (75%) of the members of the Board (excepting You and any other member of the Board involved in the events leading the Board to terminate You for Cause) determine that Your actions constituted Cause and that Your employment should accordingly be terminated for Cause; and (b) the Board provides You with a written determination setting forth the basis of such termination of employment. B. Termination without Cause. Your employment under this Agreement may be terminated by the Company for any reason not included in subparagraph A of this paragraph 7, or for no reason, by giving You written notice. In such event Your termination of employment will be effective as of the date specified in such notice, and the Company shall, as liquidated damages, or severance pay, or both, (i) pay You an amount equal to three (3) times the Annual Base Salary being paid to You immediately prior to the termination date, (ii) pay You an amount equal to three (3) times the greater of (a) the Annual Bonus for the calendar year immediately preceding the termination date or (b) the Target Bonus for the calendar year of termination, (iii) pay You any and all amounts accrued, but unpaid as of the date of such termination, (iv) continue all of the Your employee life and health benefits covered by subparagraph D of paragraph 3 on the same terms and conditions as if You remained employed by the Company (with the exception of long-term disability insurance coverage, which shall cease immediately upon termination) until the earlier of three (3) years following Your termination, the date You become covered under another employer's life and health benefit(s) plan(s) or the last day of the month in which You reach age sixty-five (65), and (v) pay You an amount equal to three (3) times the amount or amounts the Company credited to Your account or contributed on Your behalf (exclusive of that portion of base salary or bonus voluntarily deferred by You) in the calendar year preceding termination (excluding the "catch-up" amounts credited or contributed in calendar year 1999) to the Express Scripts, Inc. Executive Deferred Compensation Plan, as adopted effective January 1, 1999, as it may thereafter be amended and any successor, replacement or other deferred compensation plan which may be subsequently adopted by the Company. C. Termination for Good Reason. (i) In the event You terminate for Good Reason (as defined in (ii) below), the Company shall (a) pay You an amount equal to three (3) times the Annual Base Salary being paid to You immediately prior to the termination date, (b) pay You an amount equal to three (3) times the greater of (I) the Annual Bonus for the calendar year immediately preceding such termination or (II) the Target Bonus for the calendar year of such termination, (c) pay You any and all amounts accrued, but unpaid as of the date of such termination, (d) continue all of the employee life and health benefits covered by subparagraph D of paragraph 3 on the same terms and conditions as if You remained employed by the Company (with the exception of long-term disability insurance coverage, which shall cease immediately upon termination) until the earlier of three (3) years following Your termination, the date You become covered under another employer's life and health benefit(s) plan(s) or the last day of the month in which You reach age sixty-five (65), and (e) pay You an amount equal to three (3) times the amount or amounts the Company credited to Your account or contributed on Your behalf (exclusive of that portion of base salary or bonus voluntarily deferred by You) in the calendar year preceding termination (excluding the "catch-up" amounts credited or contributed in calendar year 1999) to the Express Scripts, Inc. Executive Deferred Compensation Plan, as adopted effective January 1, 1999, as it may thereafter be amended and any successor, replacement or other deferred compensation plan which may be subsequently adopted by the Company. (ii) For purposes of this Agreement, "Good Reason" means the occurrence of any one of the following: (a) assignment of any duties materially and adversely inconsistent with Your position as specified herein, including status, offices, or responsibilities as contemplated under paragraph 1 of this Agreement, or any other action by the Company which results in a material and adverse change in such position, status, offices, titles or responsibilities, or any material and adverse change in Your reporting responsibilities, (b) failure of the shareholders to elect and to continue to elect You to the Board of Directors of the Company. (c) the failure of the Company to assign this Agreement to and require the assumption of this agreement by any successor to the Company, (d) the Company's requiring, without Your written consent, You to be based at any office or location more than 50 miles from the Company's location from which You perform Your job duties as of the date hereof, or (e) the Company's failure to substantially comply with the material provisions of this Agreement. Termination of employment for Good Reason pursuant to subparagraph (a) and (e) above, shall not be considered to occur unless the Company fails to correct the acts or omissions forming the basis thereof before the expiration of the ten (10) day period following Your written notice to the Board of Your determination of Good Reason pursuant to such subparagraphs. D. Termination upon Death. In the event of Your death during the term of this Agreement, Your employment will cease immediately and the obligation to pay Annual Base Salary shall cease as of the date of death provided that as soon as reasonably practicable thereafter the Company shall pay Your estate all Annual Bonus and Annual Base Salary amounts accrued, but unpaid at the time of death. Annual Bonus awards, if any are awarded, will be payable on a pro-rata basis to Your beneficiary, such pro-rata amount shall be determined by multiplying the Target Bonus amount under the Annual Bonus Plan for the calendar year of death by a fraction, the numerator of which shall be the number of full months of employment prior to Your death in the calendar year and the denominator of which shall be twelve (12). E. Termination for Disability. In the event of the Board's good faith determination of Your inability (despite reasonable accommodations) to perform the essential functions of Your position due to physical and/or mental disability for a period of at least three (3) consecutive months or for a period of more than six (6) months in any twelve (12) month period, it will give You written notice of non-renewal of this Agreement. As of the date of such notice, Your duties under this Agreement shall cease and Your Annual Bonus will be payable on a pro-rata basis determined by multiplying the Target Bonus for the calendar year of such termination by a fraction, the numerator of which is the full number of months of employment prior to the date the Board notifies You of Your termination and the denominator of which is twelve (12). Your Annual Base Salary shall continue until the term of this Agreement expires. F. Termination by the Expiration of this Agreement. In the event this Agreement expires following the expiration of its term as set forth in paragraph 2, except for amounts accrued but unpaid as of the date of termination which the Company shall pay You no later than the next regular payroll cycle, no further Annual Base Salary or bonus awards provided for in paragraph 3 shall be payable for any period following such termination. G. Release. Notwithstanding anything else contained in this Agreement, the Company's obligations to make payments and to provide benefits under this paragraph 7, other than the obligation to pay Annual Base Salary and Annual bonus that is accrued, but unpaid as of the date of termination as well as any other vested benefits, are expressly conditioned upon the execution of a mutual release and waiver, substantially in the form attached hereto as Exhibit A (the "Release") of any claims arising from the termination of, or arising out of, Your employment with the Company or any of its parent companies or subsidiaries except those claims arising under this Agreement with respect to the rights and obligations described in paragraph 9I hereof and any claims of indemnification for acts or omissions during Your employment. The Company shall indemnify You and hold You harmless during Your employment and after Your termination from the Company for any claims or liabilities arising out of Your employment with the Company to the full extent permitted under Section 145 of the Delaware General Corporation Law. Notwithstanding the foregoing, if the Company shall refuse to execute such mutual release, this paragraph shall not relieve the Company of its obligation to make payments and provide benefits hereunder. H. Payments in Single Lump-Sum. The Company shall pay the cash benefits, less legally mandated and/or authorized deductions, required under this paragraph 7, without interest thereon, in a single lump-sum payment payable within the thirty (30) day period following the date of termination and the date You comply with subparagraph G of this paragraph 7. I. Tax Indemnification. (1) If for any taxable year, You shall determine, based on the reasonable advice of a nationally recognized accounting firm such as one of the "Big Five Accounting Firms" that You are liable for the payment of an excise tax under Section 4999 (or any similar tax payable on account of a Change of Control or other change in ownership or control of the Company under any federal, state, local or other law) of the Internal Revenue Code of 1986 as may be amended from time to time (the "Code") with respect to any payment in the nature of compensation made by the Company or any direct or indirect subsidiary, affiliate or successor of the Company to (or for the benefit of) You, the Company shall pay to You an amount equal to X determined under the following formula: X = E x P 1 -[(FIx(1-SLI))+SLI+E+M] E= the rate at which the excise tax is assessed under Section 4999 (or other similar provision) of the Code; P= the amount with respect to which such excise tax is assessed, determined without regard to this paragraph 7(I); FI= the highest marginal rate of income tax applicable to You under the Code for the taxable year in question; SLI= the sum of the highest marginal rates of income tax applicable to You under all applicable state and local laws for the taxable year in question; and M= the highest marginal rate of Medicare tax applicable to You under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) You under the terms of this Agreement, or otherwise, and on which an excise tax under Section 4999 (or any similar tax payable on account of a Change of Control or other change in ownership or control of the Company under any federal, state, local or other law) of the Code will be assessed, the payment determined under this paragraph 7(I)(1) shall be made to You on the earlier of (I) the date the Company or any direct or indirect subsidiary or affiliate of the Company is required to withhold such tax, or (II) the date the tax is paid by You. (2) Notwithstanding anything in this paragraph 7(I) to the contrary, in the event that Your liability for the excise tax under Section 4999 of the Code (or any similar tax payable on account of a Change of Control or other change in ownership or control of the Company under any federal, state, local or other law) for a taxable year is subsequently determined to be different than the amount determined by the formula (X+P) x E, where X, P and E have the meanings provided in paragraph 7(I)(1), You or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under paragraph 7(I)(1) when increased by the amount of the payment made to You under this paragraph 7(I)(2) by the Company, or when reduced by the amount of the payment made to the Company under this paragraph 7(I)(2) by You equals the amount that should have properly been paid to You under paragraph 7(I)(1). The interest paid under this paragraph 7(I)(2) shall be determined at the rate provided under Section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to You under this paragraph 7(I), a copy of each tax return which shall contain the signature of the "Big Five" or similar accounting firm as the preparer and shall reflect a liability for an excise tax payment shall be furnished to the Company at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. 8. Merger. If the Company should consolidate, merge with, or sell all or substantially all of its assets to another entity, the Company shall assign and the other entity shall assume all obligations and duties under this Agreement; and thereafter, the term "Company" as used herein, shall mean both the Company and such assignee and this Agreement shall continue in full force and effect. 9. General Provisions. A. Subject to the provisions of paragraph 8, neither this Agreement nor any right or interest hereunder shall be assignable by either party without the prior written consent of the other party. B. Legal Fees and Expenses. (i) If You incur and pay legal or other fees, costs and expenses in negotiating and drafting this Agreement the Company shall reimburse You for such fees, costs and expenses; (ii) If You incur and pay legal or other fees, costs and expenses in an effort to establish entitlement to fees and benefits under this Agreement, the Company shall reimburse You for such fees, costs and expenses as follows; (a) You shall be initially responsible for the first fifty thousand dollars ($50,000) of such legal or other fees, costs and expenses You incur. (b) The Company shall reimburse fifty percent (50%) of the next two hundred thousand dollars ($200,000) of fees, costs and expenses that You incur and pay. Such reimbursement shall be made to You on a monthly basis within 30 days following Your written submission of a request for reimbursement together with proof that the fees, costs and expenses were incurred and that You paid such fees, costs and expenses and the $50,000 referred to in paragraph 9(B)(ii)(a), above. (c) If the Company reimburses you within 30 days following Your requests as provided in paragraph (b), above, You shall be entitled to additional reimbursement (including initial $50,000 and $100,000) if and only if You shall prevail (as defined herein) in the effort to establish entitlement benefits under this Agreement. For purposes of this subparagraph (c) the term "prevail" shall mean recovery of fees and benefit amounts (excluding any amounts received under this Section 9(B) exceeding the amount of legal fees incurred by You through the date of recovery. (d) If the Company fails to reimburse You as provided in paragraph (b) above, then the Company shall reimburse all legal and other fees and expenses (including the initial fifty thousand ($50,000) and the two-hundred thousand ($200,000) amounts paid by You pursuant to paragraphs (a) and (b) above unless, You do not prevail (after exhaustion of all available judicial remedies), and a court of competent jurisdiction decides that You had no reasonable basis for bringing an action hereunder or there was an absence of good faith for bringing an action hereunder, in which event no further reimbursement for legal fees, costs and expenses shall be due to You, and You shall repay the Company for any amounts previously paid by the Company pursuant to this Section 9.B(ii). C. This Agreement supersedes all prior and contemporaneous agreements and constitutes the entire agreement between us regarding the subject matter hereof. D. If any provisions of this Agreement shall be held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflicting of any provision with any constitution, statute, rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative, or unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that such other provision or provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provisions reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case. E. This Agreement shall be governed by the laws of the state of Missouri. Should such laws be amended as to modify this Agreement, such amendment shall be incorporated herein and be immediately effective between the parties. F. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against You or others. If the Company fails to make any payment payable hereunder within forty-five (45) days after such amounts are due, then You shall be entitled to receive interest, compounded monthly, on the unpaid amount, at a rate equal to the interest rate paid by the Company in its revolving credit agreements or if no such revolving credit agreements exist, the prime interest rate as provided in the Wall Street Journal plus three percent (3%). In no event shall You be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to You under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced, except as otherwise specifically provided herein, by any compensation earned by You as result of employment by another employer. G. All notices and other communications required or desired to be given hereunder shall be deemed given if in writing and sent by registered or certified mail, postage prepaid, or overnight delivery, to the following addresses: Executive: Barrett A. Toan 42 Portland Place St. Louis, MO 63108 with a copy to: Leslie A. Klein (which copy shall) Sonnenschein Nath & Rosenthal not constitute 8000 Sears Tower notice) Chicago, IL 60606 The Company: Express Scripts, Inc. 14000 Riverport Drive Maryland Heights, MO 63403 Attention: General Counsel & Corporate Secretary with a copy to: New York Life Insurance Company 51 Madison Avenue New York, New York 10010 Attention: General Counsel H. The Company hereby represents and warrants that this Agreement has been duly authorized in accordance with all applicable laws and the Company's charter and bylaws, and that Howard Waltman, Chairman of the Company, has been duly authorized by the Board of Directors to execute and deliver this Agreement on behalf of the Company. I. Survival of Rights and Obligations. The rights and obligations provided in paragraphs 3(C)(iv), 3(C)(v), 4, 5, 6, 7(B)(iv), 7(C)(i)(d), 7(E), 7(G), 7(I), 8, 9(A), 9(B), 9(F), 9(G) and 9(I) shall survive the termination of Your employment and/or the termination of this Agreement. J. This Agreement shall be effective as of April 1, 1999. In order to insure the enforceability by You of Sections 3(C)(iii), 3(C)(iv), 3(C)(v) and 7(I) hereof, which affect your rights in respect of certain stock options granted under the Company's employee stock option plans, the Company will submit a proposal at the next annual meeting of the shareholders of the Company, scheduled for May 26, 1999, to amend the option plans to insure the effectiveness of such provisions. If it shall subsequently be determined by the final judgment of a court of competent jurisdiction that such approval was required under the terms of the Company's employee stock option plans in order for such provisions to be given effect, such provisions shall be deemed severable and the remainder of this Agreement shall remain in full force and effect. IN WITNESS HEREOF, the parties to this Agreement have subscribed their names hereto. Date: April 28, 1999 EXPRESS SCRIPTS, INC. By: /s/ Howard L. Waltman Date: April 16, 1999 /s/ Barrett A. Toan Barrett A. Toan EXHIBIT A AGREEMENT AND MUTUAL RELEASE CONSULT WITH A LAWYER BEFORE SIGNING THIS AGREEMENT AND RELEASE. BY SIGNING THIS AGREEMENT YOU GIVE UP AND WAIVE IMPORTANT LEGAL RIGHTS. I, BARRETT A. TOAN, understand and, of my own free will, enter into this AGREEMENT AND MUTUAL RELEASE (the "AGREEMENT") with Express Scripts, Inc. (the "COMPANY") and, in consideration of the payment described in this AGREEMENT, agree as follows: 1. (a) I understand that my employment with the COMPANY was terminated effective [Date of termination]. (b) As referred to in this AGREEMENT, the COMPANY includes (i) its parents, subsidiaries, affiliates and divisions and their respective successors and assigns and (ii) their directors, officers, representatives, shareholders, agents, past and present employees and their respective heirs and personal representatives. 2. The COMPANY will pay me [Dollar amount and timing to be filled in at termination], pursuant to my [Date of Agreement] 1999 Employment Agreement, if and only if, I sign this AGREEMENT and abide by its terms. This payment will be subject to withholding for taxes. The COMPANY will begin to pay this money to me after the expiration of the seven (7) days referred to in paragraph 13. 3. Prior to signing this AGREEMENT, I had the opportunity to consult with counsel. 4. I understand that this AGREEMENT does not constitute an admission by the COMPANY or me of any: (a) violation of any statute, law or regulation; (b) breach of contract, actual or implied; or (c) commission of any tort. 5. I realize there are many laws and regulations prohibiting employment discrimination or otherwise regulating employment or claims related to employment pursuant to which I may have rights or claims. These include Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended (the "ADEA"); the Americans with Disabilities Act of 1990; the National Labor Relations Act, as amended; 42 U.S.C. ss. 1981; the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); the Civil Rights Act of 1991; the Worker Adjustment and Retraining Notification Act, as amended and Federal, State and local human rights, fair employment, and other laws. I also understand there are other statutes and laws of contract and tort otherwise relating to my employment. I intend to waive and release any rights and claims I may have under these and other laws, but I do not intend to waive or release any rights or claims that may arise under the ADEA after the date that I sign this AGREEMENT, nor any claims I may have for benefits to which I am entitled under the COMPANY's benefit plans, nor any claims I may have for indemnification for any acts or omissions during my employment with the Company. I do not intend to waive or relinquish any rights that I have under my Employment Agreement that survive my termination as provided in paragraph 9(I) of that agreement. 6. (a) In consideration of the severance benefits provided under my Employment Agreement, I, and any person acting, through, or under me, hereby release, waive, and forever discharge the COMPANY, and any, subsidiaries, affiliates, employees, officers, shareholders, successors, and assigns (if any) from any and all liability, actions, charges, causes of action, demands, damages, or claims for relief or remuneration of any kind whatsoever, whether known or unknown at this time, arising out of, or in connection with, my employment with the COMPANY (other than indemnification to which I may be entitled under the COMPANY's bylaws, policies or agreements (now or hereafter maintained) with regard to the indemnification of its executive officers or directors), any benefits to which I may be entitled under any Company sponsored benefit plans and any rights that survive my termination as provided in paragraph 9.I. of my Employment Agreement). I have not filed any charges, claims or actions against the COMPANY and will immediately withdraw with prejudice any such charges, claims and actions before signing this AGREEMENT, and will not bring any such charges, claims or actions in the future, except (i) a charge, claim or action based upon rights or claims that may arise under the ADEA after the date that I sign this AGREEMENT, (ii) a claim for breach of this AGREEMENT or breach of a provision in my Employment Agreement that survives my termination as provided in paragraph 9.I. of that agreement, or (iii) a claim for indemnity to which I may be entitled under the COMPANY's bylaws, policies or agreements, or (iv) a claim for benefits to which I may be entitled under the COMPANY's benefit plans. (b) In consideration of my promises under this AGREEMENT, the COMPANY, and any of its subsidiaries, affiliates, employees, officers, shareholders, successors, and assigns (if any), hereby releases, waives, and forever discharges me, and any person acting, through, or under me from any and all liability, actions, charges, causes of action, demands, damages, or claims for relief or remuneration of any kind whatsoever, whether known or unknown at this time, arising out of, or in connection with, my employment with the COMPANY (except that the COMPANY does not release me from any claims of intentional wrongdoing, including but not limited to, claims of fraud, theft, and/or embezzlement, or claims that survive pursuant to paragraph 9.I. of my Employment Agreement which claims survive this AGREEMENT). The COMPANY has not filed any charges, claims or actions against me and will immediately withdraw with prejudice any such charges, claims and actions before signing this AGREEMENT, and will not bring any such charges, claims or actions in the future, except (i) a claim of intentional wrongdoing such as fraud, theft, and/or embezzlement, (ii) a claim for breach of this AGREEMENT or breach of a provision in my Employment Agreement that survives my termination as provided in paragraph 9.I. of that agreement. 7. This AGREEMENT shall be deemed to have been made within the State of Missouri, and shall be interpreted and construed and enforced in accordance with the laws of the State of Missouri, except to the extent preempted by federal law. 8. I understand that this AGREEMENT may not affect the rights and responsibilities of the Equal Employment Opportunity Commission ("Commission") to enforce the ADEA or used to justify interfering with the protected right of an employee to file a charge under the ADEA or participate in an investigation or proceeding conducted by the Commission under the ADEA. 9. (a) The terms and provisions (collectively "provisions") of this AGREEMENT are severable. (b) In the event that one or more of the provisions of this AGREEMENT shall be ruled unenforceable or void, the provision(s) so affected shall be deemed amended and shall be construed so as to enable the provision(s) to be applied and enforced to the maximum lawful extent. (c) In addition to the rights of the Company pursuant to (a) and (b) above, in the event that the general release provision of this AGREEMENT shall be determined by a court of competent jurisdiction in an action that I initiate (provided that I shall be free to assert any and all claims, counterclaims, set-offs or other affirmative rights or causes of action that I may have in an action initiated by the Company to determine that the general release is void or otherwise unenforceable and this paragraph shall not apply) to be unenforceable or void, the COMPANY may elect to enforce the remainder of this AGREEMENT or cancel this AGREEMENT, and get back from me, my successors or assigns or otherwise the money described in paragraph 2 10. Unless and to the extent required by law, the COMPANY and I will not at any time talk about, write about or otherwise publicize the terms or existence of this AGREEMENT or any fact concerning its negotiation, execution or implementation except that we are allowed to consult with a lawyer and/or representatives of the Commission. The COMPANY and I will not testify or give evidence in any forum concerning my affiliation or employment with the COMPANY unless otherwise permitted by law, required by law, or requested in writing by me or an authorized official of the COMPANY. Notwithstanding the foregoing, if the COMPANY and I were requested in writing to do so by the other party, we will fully and completely cooperate with the other party in any investigation they may conduct in connection with any events which occurred while I was an employee of the COMPANY; 11. (a) The parties understand that if either breaches this AGREEMENT, in whole or in part, the other party will suffer irreparable harm for which it may have no adequate remedy at law. The parties therefore consent, without limiting any other rights that each may have, to enforcement of any provision or provisions of this AGREEMENT by means of injunctive relief. (b) This AGREEMENT shall be deemed to have been made within the County of St. Louis, State of Missouri, and shall be interpreted and construed and enforced in accordance with the laws of the State of Missouri except to the extent preempted by federal law and before the Courts of the State of Missouri, County of St. Louis. 12. (a) I was given a copy of this AGREEMENT on or about [Date of delivery]. (b) I have had the opportunity to consult with an attorney or any other advisor of my choice before signing it and was given a period of at least twenty-one (21) calendar days (that is until [Delivery date in 12(a) plus 21 days]) to consider this AGREEMENT. (d) I acknowledge that in signing this AGREEMENT, I have relied only on the promises written in this AGREEMENT and not on any other promise made by the COMPANY or any other entity or person. 13. I have seven (7) calendar days to revoke this AGREEMENT after I sign it. This AGREEMENT will not become effective or enforceable until seven (7) calendar days after the COMPANY has received my signed copy of this AGREEMENT. 14. This AGREEMENT may not be modified or changed orally. By: COMPANY's Representative BARRETT A. TOAN STATE OF ) ) :ss: COUNTY OF ) On this day of , , before me personally came BARRETT A. TOAN, and , the COMPANY's representative to me known and known to me to be the individuals described in, and who executed the foregoing AGREEMENT AND MUTUAL RELEASE, and duly acknowledged to me that they executed the same. Notary Public EX-27.1 3 FDS --
5 0000885721 Express Scripts, Inc. 1,000 U.S. Dollars 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 115,838 0 461,336 14,883 55,234 45,602 110,244,206 36,897,730 1,096,950 522,906 0 0 0 337 267,205 1,096,950 899,087 899,087 823,647 870,087 0 0 6,222 24,171 10,628 13,543 0 0 0 13,543 0.41 0.40
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