-----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, ThPFwkveatcnd8TVHrQWHcX8fc4DRHwSL1COSC0v2lX7tvOVXsNyJtJDgfj60fdF Kc5PBsttAWOLck/ikZ6yUQ== 0000885721-01-500013.txt : 20010815 0000885721-01-500013.hdr.sgml : 20010815 ACCESSION NUMBER: 0000885721-01-500013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPRESS SCRIPTS INC CENTRAL INDEX KEY: 0000885721 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 431420563 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20199 FILM NUMBER: 1707750 BUSINESS ADDRESS: STREET 1: 13900 REIVERPORT DRIVE CITY: MARYLAND HEIGHTS STATE: MO ZIP: 63043 BUSINESS PHONE: 3147701666 MAIL ADDRESS: STREET 1: 13900 REIVERPORT DRIVE CITY: MARYLAND HEIGHTS STATE: MO ZIP: 63043 10-Q 1 june01.txt 2ND QTR - 2001 - -------------------------------------------------------------------------------- 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 X For the quarterly period ended June 30, 2001. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________. Commission File Number: 0-20199 EXPRESS SCRIPTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1420563 (State of Incorporation) (I.R.S. employer identification no.) 13900 RIVERPORT DR., MARYLAND HEIGHTS, MISSOURI 63043 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 770-1666 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Common stock outstanding as of July 31, 2001: 79,006,940 Shares Class A - -------------------------------------------------------------------------------- EXPRESS SCRIPTS, INC. INDEX Page Number Part I Financial Information 3 Item 1. Financial Statements (unaudited) a) Consolidated Balance Sheet 3 b) Consolidated Statement of Operations 4 c) Consolidated Statement of Changes in Stockholders' Equity 5 d) Consolidated Statement of Cash Flows 6 e) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risks 20 Part II Other Information Item 1. Legal Proceedings 21 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 22 Item 5. Other Information - (Not Applicable) Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Index to Exhibits 25 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31, (in thousands, except share data) 2001 2000 ---------------- ---------------- Assets Current assets: Cash and cash equivalents $ 120,943 $ 53,204 Receivables, net 832,052 802,790 Inventories 97,951 110,053 Other current assets 26,823 32,122 ---------------- ---------------- Total current assets 1,077,769 998,169 Property and equipment, net 145,914 147,709 Goodwill, net 960,625 967,017 Other intangible assets, net 156,490 157,094 Other assets 16,726 6,655 ---------------- ---------------- Total assets $ 2,357,524 $ 2,276,644 ================ ================ Liabilities and Stockholders' Equity Current liabilities: Claims and rebates payable $ 846,338 $ 878,622 Other current liabilities 252,678 237,322 ---------------- ---------------- Total current liabilities 1,099,016 1,115,944 Long-term debt 396,279 396,441 Other liabilities 67,759 59,015 ---------------- ---------------- Total liabilities 1,563,054 1,571,400 ---------------- ---------------- Stockholders' equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized, and no shares issued and outstanding - - Common Stock, $0.01 par value, 181,000,000 and 150,000,000 shares authorized, respectively, and 78,748,000 and 39,044,000 shares issued and outstanding, respectively 787 390 Class B Common Stock, $0.01 par value, no shares and 31,000,000 shares authorized, respectively, and no shares issued and outstanding - - Additional paid-in capital 472,397 441,387 Unearned compensation under employee compensation plans (22,568) (13,676) Accumulated other comprehensive income (1,883) (97) Retained earnings 345,737 287,414 ---------------- ---------------- 794,470 715,418 Common Stock in treasury at cost, no shares and 270,000 shares, respectively - (10,174) ---------------- ---------------- Total stockholders' equity 794,470 705,244 ---------------- ---------------- Total liabilities and stockholders' equity $ 2,357,524 $ 2,276,644 ================ ================
See accompanying Notes to Consolidated Financial Statements 3 EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (in thousands, except per share data) 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- Revenues: Revenues $ 2,206,192 $ 1,650,251 $ 4,262,602 $ 3,122,791 Other revenues - 3,116 - 6,085 ---------------- ---------------- ---------------- ---------------- 2,206,192 1,653,367 4,262,602 3,128,876 Cost and expenses: Cost of revenues 2,055,977 1,515,964 3,967,264 2,859,027 Selling, general and administrative 92,521 87,421 182,543 170,792 ---------------- ---------------- ---------------- ---------------- 2,148,498 1,603,385 4,149,807 3,029,819 ---------------- ---------------- ---------------- ---------------- Operating income 57,694 49,982 112,795 99,057 ---------------- ---------------- ---------------- ---------------- Other income (expense): Write-off of marketable securities - (155,500) - (155,500) Undistributed loss from joint venture (658) - (658) - Interest income 2,274 2,046 3,684 3,427 Interest expense (8,629) (13,183) (17,773) (27,384) ---------------- ---------------- ---------------- ---------------- (7,013) (166,637) (14,747) (179,457) ---------------- ---------------- ---------------- ---------------- Income (loss) before income taxes 50,681 (116,655) 98,048 (80,400) Provision (benefit) for income taxes 20,437 (42,478) 39,725 (27,655) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 30,244 $ (74,177) $ 58,323 $ (52,745) ================ ================ ================ ================ Basic earnings (loss) per share $ 0.39 $ (0.98) $ 0.75 $ (0.69) ================ ================ ================ ================ Weighted average number of common shares outstanding during the period - Basic EPS 78,010 75,625 77,777 76,137 ================ ================ ================ ================ Diluted earnings (loss) per share $ 0.38 $ (0.98) $ 0.73 $ (0.69) ================ ================ ================ ================ Weighted average number of common shares outstanding during the period - Diluted EPS 80,128 75,625 79,909 76,137 ================ ================ ================ ================
See accompanying Notes to Consolidated Financial Statements 4 EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Number of Amount Shares --------- ---------------------------------------------------------- Unearned Compensation Accumulated Additional Under Employee Other Common Common Paid-in Compensation Comprehensive (in thousands) Stock Stock Capital Plans Income - ------------------------------------------------- ----------------------------------------------------------- Balance at December 31, 2000 39,044 $ 390 $ 441,387 $ (13,676) $ (97) --------- ----------------------------------------------------------- Comprehensive income: Net income - - - - - Other comprehensive income, Foreign currency translation adjustment - - - - 70 Cumulative effect of change in accounting for derivative financial instruments, net of taxes - - - - (612) Realized and unrealized losses on derivative financial instruments, net of taxes - - - - (1,244) --------- ------------------------------------------------------------ Comprehensive income - - - - (1,786) Stock split in form of stock dividend 39,292 393 (393) - - Common stock issued under employee plans 115 1 14,640 (13,967) - Amortization of unearned compensation under employee plans - - - 5,075 - Exercise of stock options 297 3 4,516 - - Tax benefit relating to employee stock options - - 12,247 - - --------- ------------------------------------------------------------ Balance at June 30, 2001 78,748 $ 787 $ 472,397 $ (22,568) $ (1,883) ========= ============================================================
Retained Treasury (in thousands) Earnings Stock Total ----------------------------------------------------------------------------- Balance at December 31, 2000 $287,414 $ (10,174) $ 705,244 -------------------------------------- Comprehensive income: Net income 58,323 - 58,323 Other comprehensive income Foreign currency translation adjustment - - 70 Cumulative effect of change in accounting for derivative financial instruments, net of - - (612) taxes Realized and unrealized losses on derivative financial instruments, net of taxes - - (1,244) -------------------------------------- Comprehensive income 58,323 - 56,537 Stock split in form of stock - - - dividend Common stock issued under employee plans - - 674 Amortization of unearned compensation under employee plans - - 5,075 Exercise of stock options - 10,174 14,693 Tax benefit relating to employee stock options - - 12,247 -------------------------------------- Balance at June 30, 2001 $345,737 $ - $ 794,470 ====================================== See accompanying Notes to Consolidated Financial Statements 5 EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, (in thousands) 2001 2000 ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ 58,323 $ (52,745) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38,200 42,475 Write-off of marketable securities - 155,500 Non-cash adjustments to net income 42,446 (34,899) Net changes in operating assets and liabilities (43,425) (12,304) ---------------- ---------------- Net cash provided by operating activities 95,544 98,027 ---------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (18,963) (26,514) Acquisition of CAPSS and investment in RxHub (18,499) - Other (5,708) (1,000) ---------------- ---------------- Net cash (used in) investing activities (43,170) (27,514) ---------------- ---------------- Cash flows from financing activities: Repayment of long-term debt - (75,069) Repurchase of Class A Common Stock - (30,247) Proceeds from employee stock plans 15,367 2,099 ---------------- ---------------- Net cash provided by (used in) financing activities 15,367 (103,217) ---------------- ---------------- Effect of foreign currency translation adjustment (2) (91) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 67,739 (32,795) Cash and cash equivalents at beginning of period 53,204 132,630 ---------------- ---------------- Cash and cash equivalents at end of period $ 120,943 $ 99,835 ================ ================ See accompanying Notes to Consolidated Financial Statements
6 EXPRESS SCRIPTS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies - --------------------------------------------------- Financial statement note disclosures, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted in this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in our opinion, the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading when read in conjunction with the notes to consolidated financial statements included in our Annual Report on Form 10-K for the Year Ended December 31, 2000 as filed with the Securities and Exchange Commission on February 28, 2001. In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Unaudited Consolidated Balance Sheet at June 30, 2001, the Unaudited Consolidated Statement of Operations for the three months and six months ended June 30, 2001 and 2000, the Unaudited Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2001, and the Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2001 and 2000. Operating results for the three months and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. Note 2 - Receivables - -------------------- Included in accounts receivable, net as of June 30, 2001 and December 31, 2000, are allowances for doubtful accounts of $27,855,000 and $22,677,000, respectfully. As of June 30, 2001 and December 31, 2000, unbilled receivables were $416,380,000 and $394,205,000, respectively. Unbilled receivables are billed to clients typically within 30 days based on the contractual billing schedule agreed upon with the client. Note 3 - Earnings Per Share (reflecting the two-for-one stock split effective - ----------------------------------------------------------------------------- June 22, 2001) - -------------- Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The difference between the number of weighted average shares used in the basic and diluted calculation for all periods are outstanding stock options and stock warrants (1,953,000 and 1,366,000 for the six months ended June 30, 2001 and 2000, respectively), any unvested shares and shares issuable pursuant to employee elected deferral under the executive deferred compensation plan (16,000 for the six months ended June 30, 2001) and restricted stock we have issued (163,000 for the six months ended June 30, 2001), all calculated under the "treasury stock" method in accordance with Financial Accounting Standards Board Statement No. ("FAS") 128, "Earnings Per Share". Due to the net loss in 2000, all potentially dilutive common shares (1,391,000 and 1,366,000 for the three months and six months ended June 30, 2000, respectively) have been excluded as they are anti-dilutive. Note 4 - Changes in Business - ---------------------------- On June 12, 2001, we announced that we entered into an agreement with Option Care, Inc. to sell our Express Scripts Infusion Services branch offices for an amount approximating book value of the assets. In addition, we discontinued all of our remaining acute home infusion services revenue generating activities. The sale to Option Care, Inc. did not have a material effect on our financial statements for the three months or six months ended June 30, 2001. On February 22, 2001, we announced that we entered into an agreement with AdvancePCS and Merck-Medco, L.L.C. to form RxHub, LLC ("RxHub"). RxHub will be an electronic exchange enabling physicians who use electronic prescribing technology to link to pharmacies, pharmacy benefit management ("PBM") companies and health plans. The company is designed to operate as a utility for the conduit of information among all parties 7 engaging in electronic prescribing. We own one-third of the equity of RxHub (as do each of the other two founders) and have committed to invest up to $20 million over the next five years with approximately $6 million committed for 2001. We have recorded our investment in RxHub under the equity method of accounting, which requires our percentage interest in RxHub's results to be recorded in our Consolidated Statement of Operations. Our percentage of RxHub's loss for the three months and six months ended June 30, 2001 is $658,000 ($407,000 net of tax) and has been recorded in other income (expense) in our Consolidated Statement of Operations. On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed its acquisition of Centre d'autorisation et de paiement des services de sante, Inc. ("CAPSS"), a leading Quebec-based PBM, for approximately CAN$25.9 million (approximately US$16.9 million). The transaction, which has been accounted for under the purchase method of accounting, was funded with our operating cash flow. The results of operations of CAPSS have been included in the consolidated financial statements and PBM segment since March 1, 2001. The purchase price has been preliminarily allocated based upon the estimated fair value of net assets acquired at the date of the acquisition. The excess of purchase price over tangible net assets acquired has been preliminarily allocated to intangible assets consisting of customer contracts in the amount of US$5,149,000 which are being amortized using the straight-line methods over the estimated useful life of 20 years and are included in other intangible assets, and goodwill in the amount of US$11,351,000 which is being amortized using the straight-line method over the estimated useful life of 30 years. Pro forma information, as if CAPSS had been acquired as of the beginning of the year, is not being presented as the inclusion of CAPSS financial data would not have a material impact to our consolidated financial statements. Note 5 - Derivative Financial Instruments - ----------------------------------------- Effective January 1, 2001, we adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 133 requires all derivative financial instruments, such as interest rate swaps, to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. The adoption of FAS 133 did not have a material effect on our financial statements, but did reduce other comprehensive income in 2001 by $612,000, net of taxes, in the accompanying Unaudited Consolidated Statement of Changes in Stockholders' Equity due to a cumulative effect of change in accounting principle. We use interest rate swap agreements from separate financial institutions to manage our interest rate risk on future interest payments. We have entered into two interest rate swaps that have fixed the interest rate as of June 30, 2001 for approximately $100 million of our variable rate debt under our credit facility. Under our first interest rate swap agreement, we agree to receive a floating rate of interest on the notional principal amount of approximately $47 million based upon a three month LIBOR rate in exchange for payment of a fixed rate of 5.88% per annum. This swap matures in October 2001. Under our second interest rate swap agreement, we agree to receive a floating rate of interest on the notional principal amount of approximately $53 million based upon a three month LIBOR rate in exchange for payment of a fixed rate of 6.25% per annum. The notional principal amount will increase to approximately $98 million in October 2001 and $100 million in April 2002. Beginning in April 2003, the notional principal amount will reduce to $60 million and in April 2004 the notional principal amount will reduce to $20 million until maturing in April 2005. Our present interest rate swap agreements are cash flow hedges as they agree to pay fixed-rates of interest, which are hedging against changes in the amount of future cash flows associated with variable interest obligations. Accordingly, the fair value of our swap agreements is reported on the balance sheet in other liabilities ($3,006,000 pre-tax at June 30, 2001) and the related gains or losses on these agreements are deferred in shareholders' equity as a component of other comprehensive income (a $1,244,000, net of taxes, reduction at June 30, 2001). These deferred gains or losses are then recognized as an adjustment to interest expense over the same period in which the related interest payments being hedged are recorded in income. If any of these agreements are determined to have hedge ineffectiveness, the gains or losses associated with the ineffective portion of these agreements are immediately recognized in income. For the six months ended June 30, 2001, the gains and losses on the ineffective portion of our swap agreements was not material to the consolidated financial statements. 8 Note 6 - Common Stock - --------------------- In May 2001, we announced a two-for-one stock split of our Class A Common Stock for stockholders of record on June 8, 2001, effective June 22, 2001. The split was effected in the form of a dividend by issuance of one share of Class A Common Stock for each share of Class A 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. Also in May 2001, the Stockholders approved an Amended and Restated Certificate of Incorporation. Among the changes to the Certificate of Incorporation was an amendment, which consolidated and renamed our classes of Common Stock. Prior to the amendment we had 181,000,000 authorized shares of Common Stock consisting of 150,000,000 shares of Class A Common Stock and 31,000,000 shares of Class B Common Stock, and no shares of the Class B Common Stock were outstanding. Pursuant to the Amended and Restated Certificate of Incorporation, the Class B Common Stock was eliminated and each share of Class A Common Stock was renamed as "Common Stock." As a result, we now have 181,000,000 shares of Common Stock authorized. Note 7 - Marketable Securities - ------------------------------ All investments not included in a money market fund are accounted for under FAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Available-for-sale securities are reported at fair value, which is based upon quoted market prices, with unrealized gains and losses, net of tax, reported as a component of other comprehensive income in stockholders' equity until realized. Unrealized losses are charged against income when a decline in fair value is determined to be other than temporary. We recorded a $155,500,000 ($97,032,000 net of tax) non-cash impairment charge related to our investment in PlanetRx.com, Inc. ("PlanetRx") common stock during the second quarter of 2000 as the loss in value was deemed to be other than temporary. Therefore, any unrealized losses associated with recording our investment in PlanetRx at current market value that we had recorded in stockholders' equity were written off to the current period earnings, in addition to any additional charges necessary to write-down the value of our investment. Note 8 - Restructuring - ---------------------- During the second quarter of 1999, we recorded a pre-tax restructuring charge of $9,400,000 associated with the consolidation of our Plymouth, Minnesota facility into our Bloomington, Minnesota facility. In December 1999 and September 2000, the associated accrual was reduced by $2,301,000 and $44,000, primarily as a result of subleasing a portion of the unoccupied space. The consolidation plan included the relocation of all employees at the Plymouth facility to the Bloomington facility that began in August 1999, and was completed in April 2001. Included in the restructuring charge was anticipated cash expenditures of approximately $4,779,000 for lease termination fees and rent on unoccupied space and anticipated non-cash charges of approximately $2,276,000 for the write-down of leasehold improvements and furniture and fixtures. The restructuring charge did not include any costs associated with the physical relocation of the employees. BALANCE AT BALANCE AT DECEMBER 31, 2001 2001 JUNE 30, (in thousands) 2000 ADDITIONS USAGE 2001 - -------------------------------------------------------------------------------- Non-cash - -------- Write-down of long-lived assets $ 28 $ - $ 28 $ - Cash - ---- Termination fees and rent 127 - 127 - ----------------------------------------------------- $ 155 $ - $ 155 $ - ===================================================== Note 9 - Condensed Consolidating Financial Statements - ----------------------------------------------------- Our Senior Notes are unconditionally and jointly and severally guaranteed by our wholly-owned domestic subsidiaries other than Practice Patterns Science, Inc., Great Plains Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and Diversified Pharmaceutical Services (Puerto Rico), Inc. Separate financial statements 9 of the Guarantors are not presented as we have determined them not to be material to investors. Therefore, the following condensed consolidating financial information has been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. We believe that this information, presented in lieu of complete financial statements for each of the guarantor subsidiaries, provides sufficient detail to allow investors to determine the nature of the assets held by, and the operations of, each of the consolidating groups. As of January 1, 2000, we undertook an internal corporate reorganization to eliminate various entities whose existence was deemed to be no longer necessary, including, among others, ValueRx, and to create several new entities to conduct certain activities, including Express Scripts Specialty Distribution Services ("SDS") and ESI Mail Pharmacy Service, Inc. ("ESI MPS") Consequently, the assets, liabilities and operations of ValueRx are incorporated into those of the issuer, Express Scripts, Inc. and the assets, liabilities and operations of SDS and ESI MPS are incorporated into those of the Guarantors for 2000 forward.
CONDENSED CONSOLIDATING BALANCE SHEET - ---------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON- (in thousands) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED - ---------------------------------------------------------------------------------------------------------------------------------- AS OF JUNE 30, 2001 Current assets $ 859,738 $ 209,911 $ 8,120 $ - $ 1,077,769 Property and equipment, net 114,585 29,633 1,696 - 145,914 Investments in subsidiaries 1,206,399 749,927 5,230 (1,961,556) - Intercompany 462,333 (450,305) (12,028) - - Goodwill, net 246,298 698,477 15,850 - 960,625 Other intangible assets, net 52,648 98,306 5,536 - 156,490 Other assets 85,680 (68,768) (186) - 16,726 --------------------------------------------------------------------------------- Total assets $ 3,027,681 $ 1,267,181 $ 24,218 $ (1,961,556) $ 2,357,524 ================================================================================= Current liabilities $ 532,655 $ 547,414 $ 18,947 $ - $ 1,099,016 Long-term debt 396,279 - - - 396,279 Other liabilities 123,399 (53,741) (1,899) - 67,759 Stockholders' equity 1,975,348 773,508 7,170 (1,961,556) 794,470 --------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 3,027,681 $ 1,267,181 $ 24,218 $ (1,961,556) $ 2,357,524 ================================================================================= AS OF DECEMBER 31, 2000 Current assets $ 755,995 $ 236,311 $ 5,863 $ - $ 998,169 Property and equipment, net 120,754 24,724 2,231 - 147,709 Investments in subsidiaries 866,561 - 2,261 (868,822) - Intercompany (219,809) 226,975 (7,166) - - Goodwill, net 251,139 711,062 4,816 - 967,017 Other intangible assets, net 55,175 101,640 279 - 157,094 Other assets 77,505 (73,162) 2,312 - 6,655 --------------------------------------------------------------------------------- Total assets $ 1,907,320 $ 1,227,550 $ 10,596 $ (868,822) $ 2,276,644 ================================================================================= Current liabilities $ 630,888 $ 478,583 $ 6,473 $ - $ 1,115,944 Long-term debt 396,441 - - - 396,441 Other liabilities 125,264 (64,514) (1,735) - 59,015 Stockholders' equity 754,727 813,481 5,858 (868,822) 705,244 --------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,907,320 $ 1,227,550 $ 10,596 $ (868,822) $ 2,276,644 =================================================================================
10
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON- (in thousands) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, 2001 Total revenues $ 1,355,327 $ 846,865 $ 4,000 $ - $ 2,206,192 Operating expenses 1,307,820 837,108 3,570 - 2,148,498 ---------------------------------------------------------------------------------- Operating income 47,507 9,757 430 - 57,694 Undistributed loss from joint venture (658) - - - (658) Interest (expense) income, net (6,396) (4) 45 - (6,355) ---------------------------------------------------------------------------------- Income before tax effect 40,453 9,753 475 - 50,681 Income tax provision 16,667 3,572 198 - 20,437 ---------------------------------------------------------------------------------- Net income $ 23,786 $ 6,181 $ 277 $ - $ 30,244 ================================================================================== THREE MONTHS ENDED JUNE 30, 2000 Total revenues $ 1,025,659 $ 624,720 $ 2,988 $ - $ 1,653,367 Operating expenses 1,005,964 594,455 2,966 - 1,603,385 ---------------------------------------------------------------------------------- Operating income 19,695 30,265 22 - 49,982 Write-off of marketable securities - (155,500) - - (155,500) Interest (expense) income, net (11,139) (1) 3 - (11,137) ---------------------------------------------------------------------------------- Income (loss) before tax effect 8,556 (125,236) 25 - (116,655) Income tax (benefit) provision (131) (42,374) 27 - (42,478) ---------------------------------------------------------------------------------- Net income (loss) $ 8,687 $ (82,862) $ (2) $ - $ (74,177) ================================================================================== SIX MONTHS ENDED JUNE 30, 2001 Total revenues $ 2,643,426 $ 1,610,239 $ 8,937 $ - $ 4,262,602 Operating expenses 2,556,210 1,586,196 7,401 - 4,149,807 ---------------------------------------------------------------------------------- Operating income 87,216 24,043 1,536 - 112,795 Undistributed loss from joint venture (658) - - - (658) Interest (expense) income, net (14,167) (5) 83 - (14,089) ---------------------------------------------------------------------------------- Income before tax effect 72,391 24,038 1,619 - 98,048 Income tax provision 30,062 9,025 638 - 39,725 ---------------------------------------------------------------------------------- Net income $ 42,329 $ 15,013 $ 981 $ - $ 58,323 ================================================================================== SIX MONTHS ENDED JUNE 30, 2000 Total revenues $ 1,932,511 $ 1,190,912 $ 5,453 $ - $ 3,128,876 Operating expenses 1,887,133 1,136,707 5,979 - 3,029,819 --------------- ---------------- ---------------- --------------- ---------------- Operating income (loss) 45,378 54,205 (526) - 99,057 Write-off of marketable securities - (155,500) - - (155,500) Interest (expense) income, net (23,955) (3) 1 - (23,957) --------------- ---------------- ---------------- --------------- ---------------- Income (loss) before tax effect 21,423 (101,298) (525) - (80,400) Income tax provision (benefit) 10,558 (38,055) (158) - (27,655) --------------- ---------------- ---------------- --------------- ---------------- Net income (loss) $ 10,865 $ (63,243) $ (367) $ - $ (52,745) ==================================================================================
11
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON- (in thousands) SCRIPTS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 2001 Net cash (used in) provided by operating activities $ (69,457) $ 148,744 $ 16,404 $ (147) $ 95,544 ----------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (11,359) (6,705) (899) - (18,963) Acquisitions and joint venture (2,192) - (16,307) - (18,499) Other 13 (6,531) 810 - (5,708) ----------------------------------------------------------------------------------- Net cash (used) in investing activities (13,538) (13,236) (16,396) - (43,170) ----------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from employee stock plans 15,367 - - - 15,367 Net transactions with parent 125,329 (127,632) 2,156 147 - ----------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 140,696 (127,632) 2,156 147 15,367 ----------------------------------------------------------------------------------- Effect of foreign currency translation adjustment - - (2) - (2) ----------------------------------------------------------------------------------- Net increase in cash and cash equivalents 57,701 7,876 2,162 - 67,739 Cash and cash equivalents at beginning of the period 148,311 (98,519) 3,412 - 53,204 Cash and cash equivalents at end ----------------------------------------------------------------------------------- of the period $ 206,012 $ (90,643) $ 5,574 $ - $ 120,943 =================================================================================== SIX MONTHS ENDED JUNE 30, 2000 Net cash (used in) provided by operating activities $ (277,145) $ 379,291 $ (3,972) $ (147) $ 98,027 ----------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (64,542) 38,084 (56) - (26,514) Other (1,000) - - - (1,000) ----------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (65,542) 38,084 (56) - (27,514) ----------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (75,069) - - - (75,069) Treasury stock acquired (30,247) - - - (30,247) Proceeds from employee stock plans 2,099 - - - 2,099 Net transactions with parent 520,478 (522,088) 1,463 147 - ----------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 417,261 (522,088) 1,463 147 (103,217) ----------------------------------------------------------------------------------- Effect of foreign currency translation adjustment - - (91) - (91) ----------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 74,574 (104,713) (2,656) - (32,795) Cash and cash equivalents at beginning of the period 123,722 4,198 4,710 - 132,630 Cash and cash equivalents at end ----------------------------------------------------------------------------------- of the period $ 198,296 $ (100,515) $ 2,054 $ - $ 99,835 ===================================================================================
12 Note 10- Segment Reporting - -------------------------- We are organized on the basis of services offered and have determined that we have two reportable segments: PBM services and non-PBM services. We manage the pharmacy benefit within an operating segment that encompasses a fully integrated PBM service. The remaining two operating service lines (SDS and Express Scripts Infusion Services) have been aggregated into a non-PBM reporting segment. The following table presents information about the reportable segments for the: (IN THOUSANDS) PBM NON-PBM TOTAL - -------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, 2001 Total revenues $ 2,187,701 $ 18,491 $ 2,206,192 Income (loss) before income taxes 50,830 (149) 50,681 THREE MONTHS ENDED JUNE 30, 2000 Total revenues $ 1,630,519 $ 22,848 $ 1,653,367 (Loss) income before income taxes (121,659) 5,004 (116,655) SIX MONTHS ENDED JUNE 30, 2001 Total revenues $ 4,221,699 $ 40,903 $ 4,262,602 Income (loss) before income taxes 95,258 2,790 98,048 SIX MONTHS ENDED JUNE 30, 2000 Total revenues $ 3,084,760 $ 44,116 $ 3,128,876 (Loss) income before income taxes (90,595) 10,195 (80,400) Included in PBM loss before taxes for the three months and six months ended June 30, 2000 is the non-cash write-off of $155,500,000 ($97,032,000 net of taxes) of our investment in PlanetRx (see Note 7). Note 11- Subsequent Event - ------------------------- During July 2001, the Financial Accounting Standards Board issued FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets". FAS 141 requires that all business combinations be accounted for using the purchase method of accounting. FAS 141 also defines acquired intangible assets and requires that a reassessment of a company's preexisting acquired intangible assets and goodwill be evaluated and adjusted to conform with that definition. We do not believe that FAS 141 will have a significant impact on our consolidated financial position, consolidated results of operations, or our consolidated cash flows once implemented. FAS 142 requires goodwill no longer be amortized under any circumstances. Instead, all goodwill (including goodwill associated with acquisitions consummated prior to the adoption of FAS 142) is to be evaluated for impairment annually in accordance with FAS 142 and when events or circumstances occur indicating that goodwill might be impaired. All goodwill impairment losses are to be presented as a separate line item in the operating section of the consolidated results of operations (unless the impairment loss is associated with a discontinued operation). FAS 142 requires the disclosure of income before extraordinary items and net income, and earnings per share for both income measures, all computed on a pro forma basis by reversing the goodwill amortized in the periods presented. Such pro forma disclosures are required in the period of adoption and thereafter until all periods presented reflect goodwill accounted for in accordance with FAS 142. Had FAS 142 been effective for 2001, our net income (loss) before extraordinary losses would have been $36,815, or $0.46 per diluted share and $(67,818), or $(0.90) per diluted share, for the three months ended June 30, 2001 and 2000, respectively and $71,339, or $0.89 per diluted share and $(40,005), or $(0.53) per diluted share, for the six months ended June 30, 2001 and 2000, respectively. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Item 2, "we," "us," "our" and the "Company" refer to Express Scripts, Inc. and its subsidiaries, unless the context indicates otherwise. Information included in this Quarterly Report on Form 10-Q, and information that may be contained in other filings by us with the Securities and Exchange Commission ("SEC") and releases issued or statements made by us, contain or may contain forward-looking statements, including but not limited to statements of our plans, objectives, expectations or intentions. Such forward-looking statements necessarily involve risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. Factors that might cause such a difference to occur include, but are not limited to: o risks associated with our ability to maintain internal growth rates, or to control operating or capital costs o continued pressure on margins resulting from client demands for enhanced service offerings and higher service levels o competition, including price competition, and our ability to consummate contract negotiations with prospective clients, as well as competition from new competitors offering services that may in whole or in part replace services that we now provide to our customers o adverse results in regulatory matters, the adoption of new legislation or regulations (including increased costs associated with compliance with new laws and regulations, such as the privacy, security and standard transactions regulations under the Health Insurance Portability and Accountability Act (HIPAA)), more aggressive enforcement of existing legislation or regulations, or a change in the interpretation of existing legislation or regulations o the possible termination of, or unfavorable modification to, contracts with key clients or providers o the possible loss of relationships with pharmaceutical manufacturers, or changes in pricing, discounts or other practices of pharmaceutical manufacturers o adverse results in litigation o risks associated with our leverage and debt service obligations o risks associated with our ability to continue to develop new products, services and delivery channels o developments in the health care industry, including the impact of increases in health care costs, changes in drug utilization and cost patterns and introductions of new drugs o risks associated with our financial commitment relating to the RxHub venture o uncertainties regarding the implementation and the ultimate terms of proposed government initiatives o other risks described from time to time in our filings with the SEC We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW We derive our revenues primarily from the sale of pharmacy benefit management ("PBM") services in the United States and Canada. Our PBM revenues generally include administrative fees, dispensing fees and ingredient costs of pharmaceuticals dispensed from retail pharmacies included in one of our networks or from one of our mail pharmacies, and the associated costs are recorded in cost of revenues (the "Gross Basis"). Where we only administer the contracts between our clients and the clients' network pharmacies, we record as revenues only the administrative fee we receive from our activities (the "Net Basis"). We also derive PBM revenues from formulary management, targeted clinical programs, workers' compensation programs and informed-decision counseling. Non-PBM revenues are derived from administrative fees received from drug manufacturers for the dispensing or distribution of pharmaceuticals requiring special handling or packaging through our Express Scripts Specialty Distribution Services subsidiary ("SDS"). Non-PBM revenues are also generated from the sale of pharmaceuticals for and the provision of infusion therapy services through our Express Scripts Infusion Services subsidiary ("Infusion Services"). On June 12, 2001, we announced that we entered into an agreement with Option Care, Inc. to sell our Express Scripts Infusion Services branch offices for an amount approximating book value of the assets. In addition, we discontinued all of our remaining acute home infusion services revenue generating 14 activities. As a result of winding down our operations, we expect to continue to incur some operating expenses throughout the remainder of 2001, but we only generated revenues for Infusion Services through June 12, 2001. As of July 1, 2001, our membership was approximately 47.0 million members compared to approximately 40.5 million members as of July 1, 2000, representing a 16.0% increase. The membership count excludes 8.3 million members at July 1, 2000 served under the United HealthCare ("UHC") contract, which terminated effective May 31, 2000. We developed a migration plan to transition the UHC members to their new provider throughout 2000. The increase in membership from July 1, 2000 is due in part to the addition of new clients and the acquisition of Quebec, Canada-based PBM, Centre d'autorisation et de paiement des services de sante, Inc. ("CAPSS"). Additionally, we continue to develop new products and services for sale to existing clients and pharmaceutical manufacturers and expand the services provided to existing clients. During the first six months of 2001, approximately 3.5 million members began utilizing expanded services that provide for more advanced formulary management and the addition of mail and network services where only one or two of these services were previously utilized. In computing the number of members we serve we make certain estimates and adjustments. We believe different PBMs use different factors in making these estimates and adjustments. We believe, however, that these numbers are a reasonable approximation of the actual number of members served by us. RESULTS OF OPERATIONS REVENUES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, Increase/ Increase/ (in thousands) 2001 Decrease 2000 2001 Decrease 2000 - --------------------------------------------------------------------------------------------------------------------------- PBM Gross Basis revenues $ 2,174,453 39.2% $ 1,562,322 $ 4,190,641 42.1% $ 2,949,049 PBM Net Basis revenues 13,248 -79.6% 65,081 31,058 -76.0% 129,626 Other revenues - nm 3,116 - nm 6,085 ------------------------------------------- ------------------------------------------- Total PBM revenues 2,187,701 34.2% 1,630,519 4,221,699 36.9% 3,084,760 Non-PBM revenues 18,491 -19.1% 22,848 40,903 -7.3% 44,116 ------------------------------------------- ------------------------------------------- Total revenues $ 2,206,192 33.4% $ 1,653,367 $ 4,262,602 36.2% $ 3,128,876 =========================================== =========================================== nm = not meaningful
Our growth in PBM Gross Basis revenues during the second quarter of 2001 and the six months ended June 30, 2001 over 2000 is primarily due to the conversion of historical Express Scripts and Diversified Pharmaceutical Services, Inc. ("DPS") clients to our own retail pharmacy networks, higher drug ingredient costs resulting from price increases for existing drugs and new drugs introduced into the marketplace, increased member utilization and increased membership. Our decline in PBM Net Basis revenues during the first quarter of 2001 over 2000 is the result of the conversion of clients to our retail pharmacy networks, discussed previously, and the termination of the UHC contact during 2000. Revenues for network pharmacy claims increased $375,452,000, or 31.5%, and $797,041,000, or 35.6%, respectively, during the three months and six months ended June 30, 2001 over 2000. Network pharmacy claims processed increased 21.6% to 71,311,000 during the second quarter of 2001 over 2000 and 22.3% to 143,656,000 during the six months ended June 30, 2001 over 2000 (excluding the 20,578,000 and 41,728,000 claims processed for UHC during the three months and six months ended June 30, 2000, respectively). The average revenue per network pharmacy claim increased 46.0% to $21.99 and 50.2% to $21.15 over the three months and six months ended June 30, 2000 due to the increased rate of historical Express Scripts and DPS clients moving from retail pharmacy networks contracted by the clients to networks contracted by us. The increase is also due to the termination of the UHC contract. The UHC contract was recorded on the Net Basis, where only the administrative fee was recorded in revenue, thus reducing the average revenue per network pharmacy claim during 2000. As previously discussed under "--Overview", we record the associated revenues for clients utilizing our retail pharmacy networks on the Gross Basis, therefore this shift to our retail pharmacy networks results in increased Gross Basis revenues. 15 Revenues for mail pharmacy services and mail pharmacy claims processed increased $185,159,000, or 43.9%, and 1,178,000, or 31.8%, respectively for the second quarter of 2001 over 2000 and $345,937,000, or 42.4%, and 2,159,000, or 29.9%, respectively for the six months ended June 30, 2001 over 2000. These increases are primarily due to increased utilization by existing members. For the three months and six months ended June 30, 2001, the average revenue per mail pharmacy claim increased 9.1% and 9.6% over 2000 primarily due to higher drug ingredient costs as stated above. The decrease in revenue for non-PBM services in the second quarter of 2001 and the six months ended June 30, 2001 is primarily due to our Infusion Services subsidiary. Our Infusion Services revenues have significantly decreased due to our effort to reduce unprofitable business, through the sale of our Infusion Services branch offices to Option Care, Inc. during June 2001, and the discontinuation of our remaining acute home infusion services. COSTS AND EXPENSES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, Increase/ Increase/ (in thousands) 2001 Decrease 2000 2001 Decrease 2000 - --------------------------------------------------------------------------------------------------------------------------- PBM $ 2,041,293 36.0% $ 1,501,446 $ 3,938,060 39.1% $ 2,830,310 Percentage of total PBM revenues 93.3% 92.1% 93.3% 91.8% Non-PBM 14,684 1.1% 14,518 29,204 1.7% 28,717 Percentage of non-PBM revenues 79.4% 63.5% 71.4% 65.1% --------------------------------------- ---------------------------------------- Cost of revenues 2,055,977 35.6% 1,515,964 3,967,264 38.8% 2,859,027 Percentage of total revenues 93.2% 91.7% 93.1% 91.4% Selling, general and administrative 77,229 11.9% 69,015 151,394 13.5% 133,396 Percentage of total revenues 3.5% 4.2% 3.6% 4.3% Depreciation and amortization(1) 15,292 -16.9% 18,406 31,149 -16.7% 37,396 Percentage of total revenues 0.7% 1.1% 0.7% 1.2% ---------------------------------------- ---------------------------------------- Total cost and expenses $ 2,148,498 34.0% $ 1,603,385 $ 4,149,807 37.0% $ 3,029,819 ======================================== ======================================== Percentage of total revenues 97.4% 97.0% 97.4% 96.8%
(1) Represents depreciation and amortization expense included in selling, general and administrative expenses on our Statement of Operations. Cost of revenues, above, also includes depreciation and amortization expense on property and equipment of $3,907 and $2,502 for the three months ended June 30, 2001 and 2000, respectively and $7,051 and $5,079 for the six months ended June 30, 2001 and 2000, respectively. Our cost of revenues for PBM services as a percentage of total PBM revenues increased in the second quarter of 2001 and for the six months ended June 30, 2001 from 2000 primarily as a result of a larger percentage of our clients being recorded on the Gross Basis during 2001 versus those in 2000. Cost of revenues for non-PBM services increased as a percentage of non-PBM revenues for the three months and six months ended June 30, 2001 from 2000 primarily due to discontinuing our acute home infusion services revenue activities. Selling, general and administrative expenses, excluding depreciation and amortization, increased $8,214,000, or 11.9%, in the second quarter of 2001 over 2000 and $17,998,000, or 13.5%, for the six months ended June 30, 2001 over 2000. However, as a percentage of total revenue, selling, general and administrative expenses have decreased to 3.5% and 3.6% for the three months and six months ended June 30, 2001, respectively. The increase in 2001 is primarily due to expenditures required to expand the operational and administrative support functions in order to enhance management of the pharmacy benefit. Depreciation and amortization decreased for the second quarter of 2001 and for the six months ended June 30, 2001 from 2000 primarily as a result of the 2000 balance including amortization on the UHC customer contract intangible asset, which fully amortized during 2000. 16 OTHER INCOME (EXPENSE) On February 22, 2001, we announced that we entered into an agreement with AdvancePCS and Merck-Medco, L.L.C. to form RxHub, LLC ("RxHub"). RxHub will be an electronic exchange enabling physicians who use electronic prescribing technology to link to pharmacies, PBM companies and health plans. The company is designed to operate as a utility for the conduit of information among all parties engaging in electronic prescribing. We own one-third of the equity of RxHub (as do each of the other two founders) and have committed to invest up to $20 million over the next five years with approximately $6 million committed for 2001. We have recorded our investment in RxHub under the equity method of accounting, which requires our percentage interest in RxHub's results to be recorded in our Consolidated Statement of Operations. Our percentage of RxHub's loss for the three months and six months ended June 30, 2001 is $658,000 ($407,000 net of tax) and has been recorded in other income (expense) in our Consolidated Statement of Operations. The $4,782,000, or 42.9%, decrease in net interest expense for the second quarter of 2001 over 2000 and $9,868,000, or 41.2%, decrease in net interest expense for the six months ended June 30, 2001 over the 2000 is due to the reduction in debt of $165 million since July 1, 2000 and the reduction of interest rates. As previously announced, we recorded a $155,500,000 ($97,032,000 after tax) non-cash impairment charge related to our investment in PlanetRx common stock during the second quarter of 2000 as the loss in value was deemed to be other than temporary. Therefore, any unrealized loss associated with recording our investment in PlanetRx at current market value that we had recorded in stockholders' equity was written off to the current period earnings, in addition to any additional charges necessary to write-down the value of our investment in accordance with Financial Accounting Standards Board Statement No. ("FAS") 115, "Accounting for Certain Investments in Debt and Equity Securities". PROVISION FOR INCOME TAXES Our effective tax rate decreased slightly to 40.3% for the first quarter of 2001 and 40.5% for the six months ended June 30, 2001 from 41.2% and 41.0%, in 2000, respectively, excluding the $58,468,000 tax benefit from the write-off of marketable securities in June 2000, discussed under "--Other Income (Expense)". NET INCOME AND EARNINGS PER SHARE Our net income increased $7,389,000, or 32.3%, and $14,036,000, or 31.7%, for the three months and six months ended June 30, 2001 over 2000, excluding the $155,500,000 ($97,032,000 net of tax) write-off of marketable securities in June 2000, discussed under "--Other Income (Expense)". Reflecting the two-for-one stock-split effective June 22, 2001, excluding the $155,500,000 ($97,032,000 net of tax) write-off of marketable securities in June 2000, discussed under "--Other Income (Expense)" and assuming no anti-dilution using the potentially dilutive common shares in 2000, basic and diluted earnings per share increased 30.0% and 26.7% for the second quarter of 2001 over 2000, and 29.3% and 28.1% for the six months ended June 30, 2001 over 2000. LIQUIDITY AND CAPITAL RESOURCES During the first six months of 2001, net cash provided by operations decreased $2,483,000 to $95,544,000 from $98,027,000 in 2000. This decrease is primarily due to the effect of paying certain liabilities associated with the termination of the UHC contract. Our allowance for doubtful accounts has increased $5,178,000, or 22.8% to $27,855,000 at June 30, 2001 from $22,677,000 at December 31, 2000 primarily due to increased reserves for Infusion Services. Our capital expenditures for the six months ended June 30, 2001 decreased $7,551,000 or 28.5% from 2000. We will continue to invest in technology that will provide efficiencies in operations, manage growth and enhance the service provided to our clients. We expect to fund any future anticipated capital expenditures primarily 17 with operating cash flow or, to the extent necessary, with working capital borrowings under our revolving credit facility, discussed below. As of June 30, 2001, we have repurchased a total of 2,530,000 shares of our Class A Common Stock (reflecting the two-for-one stock split effective June 22, 2001) under the stock repurchase program that we announced on October 25, 1996. None of these shares remain in Treasury Stock as of June 30, 2001 as these shares were reissued in connection with employee compensation plans. Our Board of Directors approved the repurchase of up to 5,000,000 shares (reflecting the two-for-one stock split effective June 22, 2001), and placed no limit on the duration of the program. Additional common stock repurchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions, subject to restrictions on stock repurchases contained in our bank credit facility and the Indenture under which our Senior Notes were issued. We have a credit facility with a bank syndicate led by Credit Suisse First Boston and Bankers Trust Company consisting of $155 million of Term A loans and a $300 million revolving credit facility, which has been reduced to $150 million during August 2001. During July 2001, we prepaid $50 million on our Term A loans. The Term A loans and the revolving credit facility mature on March 31, 2005. The credit facility is secured by the capital stock of each of our existing and subsequently acquired domestic subsidiaries, excluding Practice Patterns Sciences ("PPS"), Great Plains Reinsurance, ValueRx of Michigan, Inc., Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico), Inc., and is also secured by 65% of the stock of our foreign subsidiaries. The credit facility requires us to pay interest quarterly on an interest rate spread based on several London Interbank Offered Rates ("LIBOR") or base rate options. Using a LIBOR spread, the Term A loans had an interest rate of 5.41% on June 30, 2001. To alleviate interest rate volatility, we have entered into two separate swap arrangements, which are discussed in "--Market Risk" below. Beginning in March 2004, we are required to make annual principal payments on the Term A loans of $39,450,000 in 2004 and $65,550,000 in 2005. The credit facility contains covenants that limit the indebtedness we may incur, dividends paid and the amount of annual capital expenditures. The covenants also establish a minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed charge coverage ratio. In addition, we are required to pay an annual fee of 0.25%, payable in quarterly installments, on the unused portion of the revolving credit facility ($300 million at June 30, 2001). At June 30, 2001, we are in compliance with all covenants associated with the credit facility. In June 1999, we issued $250 million of 9 5/8 Senior Notes due 2009, which require interest to be paid semi-annually on June 15 and December 15. As of June 30, 2001, $239,885,000 of Senior Notes remain outstanding. The Senior Notes are callable at specified rates beginning in June 2004. The Senior Notes are unconditionally and jointly and severally guaranteed by our wholly-owned domestic subsidiaries other than PPS, Great Plains Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and Diversified Pharmaceutical Services (Puerto Rico), Inc. 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 2001 or thereafter. OTHER MATTERS During July 2001, the Financial Accounting Standards Board issued FAS 141, "Business Combinations" and FAS 142, "Goodwill and Other Intangible Assets". FAS 141 requires that all business combinations be accounted for using the purchase method of accounting. FAS 141 also defines acquired intangible assets and requires that a reassessment of a company's preexisting acquired intangible assets and goodwill be evaluated and adjusted to conform with that definition. We do not believe that FAS 141 will have a significant impact on our consolidated financial position, consolidated results of operations, or our consolidated cash flows once implemented. FAS 142 requires goodwill no longer be amortized under any circumstances. Instead, all goodwill (including goodwill associated with acquisitions consummated prior to the adoption of FAS 142) is to be evaluated for impairment annually in accordance with FAS 142 and when events or circumstances occur indicating that goodwill might be impaired. All goodwill impairment losses are to be presented as a separate line item in the 18 operating section of the consolidated results of operations (unless the impairment loss is associated with a discontinued operation). FAS 142 requires the disclosure of income before extraordinary items and net income, and earnings per share for both income measures, all computed on a pro forma basis by reversing the goodwill amortized in the periods presented. Such pro forma disclosures are required in the period of adoption and thereafter until all periods presented reflect goodwill accounted for in accordance with FAS 142. Had FAS 142 been effective for 2001, our net income (loss) before extraordinary losses would have been $36,815, or $0.46 per diluted share and $(67,818), or $(0.90) per diluted share, for the three months ended June 30, 2001 and 2000, respectively and $71,339, or $0.89 per diluted share and $(40,005), or $(0.53) per diluted share, for the six months ended June 30, 2001 and 2000, respectively. In May 2001, the Stockholders approved an Amended and Restated Certificate of Incorporation. Among the changes to the Certificate of Incorporation was an amendment, which consolidated and renamed our classes of Common Stock. Prior to the amendment we had 181,000,000 authorized shares of Common Stock consisting of 150,000,000 shares of Class A Common Stock and 31,000,000 shares of Class B Common Stock, and no shares of the Class B Common Stock were outstanding. Pursuant to the Amended and Restated Certificate of Incorporation, the Class B Common Stock was eliminated and each share of Class A Common Stock was renamed as "Common Stock." As a result, we now have 181,000,000 shares of Common Stock authorized. Pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the Department of Health and Human Services ("HHS") issued final Privacy Regulations in December 2000, and final regulations on Standards for Electronic Transactions in August 2000. These regulations govern the use and disclosure of individually identifiable health information by certain entities, and establishes new standards for electronic transmission of certain types of health care data, including on-line pharmacy claims transactions. These regulations will require us to make extensive system and operational changes. We have assessed the steps necessary to comply with these regulations, each of which provides for a two-year implementation period. We have also tentatively assessed compliance requirements under HHS's proposed Security Regulations, for which a final effective date has not yet been established. We have estimated our total direct costs of initial implementation over the implementation period, and we do not currently expect these costs to be material to our results of operations, balance sheet or cash flows in any fiscal year. We have established a project management office with full-time project management staff to lead the implementation. We can give no assurances that our current estimate of the cost of implementation will prove to be accurate. During the initial stages of implementation we have discovered certain technical problems with the Standard Transaction Regulations, which, if not corrected by HHS, could have an adverse effect on our ability to conduct business operations after the effective date of these regulations, and could result in the incurrence of costs not included in our initial project cost estimates, which could be material to our financial statements. On March 1, 2001, our Canadian subsidiary, ESI Canada, Inc., completed its acquisition of Quebec, Canada-based PBM, CAPSS, for approximately CAN$25.9 million (approximately US$16.9 million). The transaction, which has been accounted for under the purchase method of accounting, was funded with our operating cash flow. The results of operations of CAPSS have been included in the consolidated financial statements and PBM segment since March 1, 2001. The purchase price has been preliminarily allocated based upon the estimated fair value of net assets acquired at the date of the acquisition. The excess of purchase price over tangible net assets acquired has been preliminarily allocated to intangible assets consisting of customer contracts in the amount of US$5,149,000 which are being amortized using the straight-line methods over the estimated useful life of 20 years and are included in other intangible assets, and goodwill in the amount of US$11,351,000 which is being amortized using the straight-line method over the estimated useful life of 30 years. IMPACT OF INFLATION Changes in prices charged by manufacturers and wholesalers for pharmaceuticals affect our revenues and cost of revenues. To date, we have been able to recover price increases from our clients under the terms of our agreements, although under selected arrangements in which we have performance measurements on drug costs with our clients we could be adversely affected by inflation in drug costs if the result is an overall increase in the cost of the drug plan to the client. To date, changes in pharmaceutical prices have not had a significant adverse affect on us. 19 MARKET RISK Effective January 1, 2001, we adopted FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 133 requires all derivative financial instruments, such as interest rate swaps, to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. The adoption of FAS 133 did not have a material effect on our financial statements, but did reduce other comprehensive income during 2001 by $612,000, net of taxes, in the accompanying Unaudited Consolidated Statement of Changes in Stockholders' Equity due to a cumulative effect of change in accounting principle. We use interest rate swap agreements from separate financial institutions to manage our interest rate risk on future interest payments. We have entered into two interest rate swaps that have fixed the interest rate as of June 30, 2001 for approximately $100 million of our variable rate debt under our Credit Facility. Under our first interest rate swap agreement, we agree to receive a floating rate of interest on the notional principal amount of approximately $47 million based upon a three month LIBOR rate in exchange for payment of a fixed rate of 5.88% per annum. This swap matures in October 2001. Under our second interest rate swap agreement, we agree to receive a floating rate of interest on the notional principal amount of approximately $53 million based upon a three month LIBOR rate in exchange for payment of a fixed rate of 6.25% per annum. The notional principal amount will increase to approximately $98 million in October 2001 and $100 million in April 2002. Beginning in April 2003, the notional principal amount will reduce to $60 million and in April 2004 the notional principal amount will reduce to $20 million until maturing in April 2005. Our present interest rate swap agreements are cash flow hedges as they agree to pay fixed-rates of interest, which are hedging against changes in the amount of future cash flows associated with variable interest obligations. Accordingly, the fair value of our swap agreements is reported on the balance sheet in other liabilities ($3,006,000 pre-tax at June 30, 2001) and the related gains or losses on these agreements are deferred in shareholders' equity as a component of comprehensive income (a $1,244,000, net of taxes, reduction at June 30, 2001). These deferred gains or losses are then recognized as an adjustment to interest expense over the same period in which the related interest payments being hedged are recorded in income. If any of these agreements are determined to have hedge ineffectiveness, the gains or losses associated with the ineffective portion of these agreements are immediately recognized in income. For the six months ended June 30, 2001, the gains and losses on the ineffective portion of our swap agreements were not material to the consolidated financial statements. Interest rate risk is monitored on the basis of changes in the fair value and a sensitivity analysis is used to determine the impact interest rate changes will have on the fair value of the interest rate swaps, measuring the change in the net present value arising from the change in the interest rate. The fair value of the swaps are then determined by calculating the present value of all cash flows expected to arise thereunder, with future interest rate levels implied from prevailing mid-market yields for money-market instruments, interest rate futures and/or prevailing mid-market swap rates. Anticipated cash flows are then discounted on the assumption of a continuously compounding zero-coupon yield curve. A 10 basis point decline in interest rates at June 30, 2001 would have caused the fair value of the swaps to decrease by $238,000, resulting in a liability with a fair value of $3,244,000. 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. 20 - -------------------------------------------------------------------------------- PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- As discussed in detail in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998, filed with the Securities and Exchange Commission on August 13, 1998 (the "Second Quarter 10-Q"), the Company acquired all of the outstanding capital stock of Value Health, Inc., a Delaware corporation ("VHI"), and Managed Prescription Network, Inc., a Delaware corporation ("MPN") from Columbia HCA/HealthCare Corporation (now known as HCA - The Healthcare Company; "HCA"), and its affiliates on April 1, 1998 (the "Acquisition"). VHI, MPN and/or their subsidiaries (collectively, the "Acquired Entities"), were party to various legal proceedings, investigations or claims at the time of the Acquisition. The effect of these actions on the Company's future financial results is not subject to reasonable estimation because considerable uncertainty exists about the outcomes. Nevertheless, in the opinion of management, the ultimate liabilities resulting from any such lawsuits, investigations or claims now pending will not materially affect the consolidated financial position, results of operations or cash flows of the Company. A brief update of the most notable of the proceedings follows: As discussed in detail in the Second Quarter 10-Q, the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998, filed with the Securities and Exchange Commission on November 16, 1998, the Company's Annual Report on Form 10-K/A for the year ended December 31, 1998, filed with the Securities and Exchange Commission on June 10, 1999, the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999, filed with the Securities and Exchange Commission on May 14, 1999, the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999, filed with the Securities and Exchange Commission on August 12, 1999, the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999, filed with the Securities and Exchange Commission on November 15, 1999, the Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission on March 29, 2000, the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000, filed with the Securities and Exchange Commission on May 10, 2000, and the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission on March 1, 2001, VHI and one of its subsidiaries are party to two securities litigation matters, Bash, et al. v. Value Health, Inc., et al., No. 3:97cv2711 (JCH) (D.Conn.), and Freedman, et al. v.Value Health, Inc., et al., No. 3:95 CV 2038 (JCH) (D.Conn.). The two lawsuits, filed in 1995, allege that VHI and certain other defendants made false or misleading statements to the public in connection with VHI's acquisition of Diagnostek, Inc. in 1995. The Bash lawsuit also alleges false or misleading statements by Diagnostek and certain of its former officers and directors concerning its financial condition prior to its acquisition by VHI. On April 24, 1998, the two lawsuits were consolidated. On March 20, 2001, the court granted defendants' motion for summary judgment on all claims' motions for on al claims. At the same time the court denied a motion for partial summary judgment on claims under Sections 11 and 12(2) of the Securities Act of 1933. Plaintiffs have filed a Notice of Appeal of several orders by the court, including the order with respect to the motions for summary judgement and the April 1, 1998 order regarding consolidation of the lawsuits. The court has established a schedule for the filing of briefs with respect to the appeal, although no briefs have yet been filed. In connection with the Acquisition, HCA has agreed to defend and hold the Company and its affiliates (including VHI) harmless from and against any liability that may arise in connection with either of the foregoing proceedings. Consequently, the Company does not believe it will incur any material liability in connection with the foregoing matters. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's annual meeting of stockholders was held on May 23, 2001. (b) The following persons were elected directors of the Company to serve until the next Annual Meeting of Stockholders and until their respective successors are elected and qualified: Stuart L. Bascomb Gary G. Benanav Frank J. Borelli Thomas P. Mac Mahon Seymour Sternberg Barrett A. Toan Howard L. Waltman Norman Zachary (c) The stockholder vote for each director was as follows: Votes Votes Cast for Withheld --------------- ---------------- Stuart L. Bascomb 36,191,295 590,967 Gary G. Benanav 35,197,714 1,584,548 Frank J. Borelli 35,201,023 1,581,239 Thomas P. Mac Mahon 36,068,864 713,398 Seymour Sternberg 35,202,124 1,580,138 Barrett A. Toan 35,620,593 1,161,669 Howard L. Waltman 36,067,829 714,433 Norman Zachary 36,067,520 714,742 The stockholders also voted to: (1) Approve and ratify the Express Scripts, Inc. 2000 Long-Term Incentive Plan (24,418,207 affirmative votes; 8,242,902 negative votes; 512,146 abstention votes); (2) Ratify the adoption of the Indemnification and Insurance Amendment to the Company's Bylaws (30,168,267 affirmative votes; 2,898,995 negative votes; 105,993 abstention votes); (3) Approve and ratify the Company's Amended and Restated Certificate of Incorporation (32,497,388 affirmative votes; 627,560 negative votes; 48,307 abstention votes); and (4) Ratify the appointment of PricewaterhouseCoopers LLP as the Corporation's Independent Accountants for 2001 (36,033,806 affirmative votes; 723,651 negative votes; 37,604 abstention votes). 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibits on page 20. -------- (b) Reports on Form 8-K. ------------------- (i) On April 9, 2001, we filed a Current Report on Form 8-K, dated April 6, 2001, under Item 9, concerning the Robinson-Humphry 30th Annual Institutional Conference in which David Myers, Senior Director of Investor Relations will be speaking. (ii) On April 19, 2001, we filed a Current Report on Form 8-K, dated April 18, 2000, under Items 5, 7 and 9, regarding a press release we issued concerning our first quarter 2001 financial performance. (iii)On May 24, 2001, we filed a Current Report on Form 8-K, dated May 23, 2001, under Items 5 and 7, regarding a press release we issued concerning our announcement of a two-for-one stock split for shareholders of record as of June 8, 2001 and to announce that we held our Annual Meeting of Stockholders, at which the stockholders of the Company approved each of the five proposals set forth in our Proxy Statement dated April 9, 2001. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXPRESS SCRIPTS, INC. (Registrant) Date: August 9, 2001 By: /s/ Barrett A. Toan --------------------------- Barrett A. Toan, Chairman of the Board, President and Chief Executive Officer Date: August 9, 2001 By: /s/ George Paz --------------------------- George Paz, Senior Vice President and Chief Financial Officer 24 INDEX TO EXHIBITS (Express Scripts, Inc. - Commission File Number 0-20199) Exhibit Number Exhibit - ------- ------- 2.1(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. 2.2 Asset Contribution and Reorganization Agreement dated August 31, 1999 by and among PlanetRx.com, Inc., PRX Holdings, Inc., PRX Acquisition, Corp., YourPharmacy.com, Inc., and Express Scripts, Inc. (incorporated by reference to the Exhibit No. 2.1 to PlanetRx's Registration Statement on Form S-1, as amended (Registration Number 333-82485)). 3.1(2) Amended and Restated Certificate of Incorporation of the Company. 3.2 Third Amended and Restated Bylaws, incorporated by reference to Exhibit No. 3.2 to the Company's Annual Report on Form 10-K for the year ending December 31, 2000. 4.1 Form of Certificate for Class A Common Stock, incorporated by reference to Exhibit No. 4.1 to the Company's Registration Statement on Form S-1 filed June 9, 1992 (No. 33-46974) (the "Registration Statement"). 4.2 Indenture, dated as of June 16, 1999, among the Company, Bankers Trust Company, as trustee, and Guarantors named therein, incorporated by reference to Exhibit No. 4.4 to the Company's Registration Statement on Form S-4 filed August 4, 1999 (No. 333-83133) (the "S-4 Registration Statement"). 4.3 Supplemental Indenture, dated as of October 6, 1999, to Indenture dated as of June 16, 1999, among the Company, Bankers Trust Company, as trustee, and Guarantors named therein, incorporated by reference to Exhibit No. 4.3 to the Company's Annual Report on Form 10-K for the year ending December 31, 1999. 10.1(2) Amended and Restated Express Scripts, Inc. 2000 Long Term Incentive Plan. 10.2(1),(2) Amendment No.4 Waiver and Consent to Credit Agreement dated as of April 1, 1999 among the Company, the Lenders listed therein, Credit Suisse First Boston as Lead Arranger, Administrative Agent and Collateral Agent, Bankers Trust Company as Syndication Agent, BT Alex. Brown Incorporated as Co-Arranger, The First National Bank of Chicago as Co-Documentation Agent, and Mercantile Bank, N.A. as Co-Documentation Agent, and certain related schedules. 10.3(2) Addendum to Company Pledge Agreement dated as of April 1, 1999, by the Company in favor of Credit Suisse First Boston as Collateral Agent and the Lenders listed in the Credit Agreement, in the form of Exhibit I to the Company Pledge Agreement, dated May 4, 2001. 10.4(2) Addendum to Company Pledge Agreement dated as of April 1, 1999, by the Company in favor of Credit Suisse First Boston as Collateral Agent and the Lenders listed in the Credit Agreement, in the form of Exhibit I to the Company Pledge Agreement, dated June 20, 2001. 10.5(2) Addenda to the Subsidiary Pledge Agreement dated as of April 1, 1999, in favor of Credit Suisse First Boston as Collateral Agent and the Lenders listed in the Credit Agreement, by ESI Canada Holdings, Inc., Value Health, Inc., ValueRx, Inc., each in the from of Exhibit I to the Subsidiary Pledge Agreement, adding ESI Partnership, ESI Mail Pharmacy Service, Inc. and ESI-GP Holdings as parties. (1) The Company agrees to furnish supplementally a copy of any omitted schedule to this agreement to the Commission upon request. (2) Filed herein. EX-3 3 exhibit3-1.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF EXPRESS SCRIPTS, INC. The name under which the Corporation was originally incorporated is Nyles, Inc., and the original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on March 27, 1992. 1. The current name of the Corporation is Express Scripts, Inc. 2. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 3. The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801 in the County of New Castle. The Corporation Trust Company is the Corporation's registered agent at that address. 4. The total number of shares of stock which the Corporation has authority to issue is 186,000,000 shares, of which (i) 5,000,000 shares are preferred stock, par value $0.01 per share (the "Preferred Stock"), and (ii) 181,000,000 shares are common stock, par value $0.01 per share. Upon the effectiveness of this Amended and Restated Certificate of Incorporation, without further action by the Corporation or any stockholder, (A) each outstanding share, and each treasury share, of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock") shall be automatically reclassified and changed into one share of common stock, par value $0.01 per share (the "Common Stock"), (B) the authorized Class B Common Stock, par value $0.01 per share, of which no shares are issued and outstanding, shall be eliminated and extinguished, (C) all stock option plans covering shares of Class A Common Stock shall now automatically be deemed to cover an equal number of shares of Common Stock, and (D) each outstanding warrant or option to purchase shares of Class A Common Stock shall automatically be deemed to represent a warrant or option to purchase the same number of shares of Common Stock. Holders of record of any certificates that, immediately prior to the effectiveness of this Amended and Restated Certificate of Incorporation, represented shares of Class A Common Stock, but which now, by virtue hereof, represent shares of Common Stock, shall be entitled to receive, upon surrender of such certificates, new certificates that evidence the appropriate number of shares of Common Stock. Upon consummation of the reclassification set forth herein, the holders of shares of Common Stock of the Corporation shall have all the rights accorded to them by law and this Amended and Restated Certificate of Incorporation. 4.1 Preferred Stock. 4.1.1 The Board of Directors is hereby authorized to issue the Preferred Stock in one or more series, to fix the number of shares of any such series of Preferred Stock, and to fix, through a certificate of designations filed with the Secretary of State of the State of Delaware (the "Preferred Stock Designation"), the designation of any such series as well as the powers, preferences, and rights and the qualifications, limitations, or restrictions of the Preferred Stock. 4.1.2 The authority of the Board of Directors shall include, without limitation, the power to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions, if any), the redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock , and the number of shares constituting any such unissued series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 4.2 Common Stock. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Except as otherwise provided by applicable law or in this Certificate of Incorporation or in a Preferred Stock Designation, the holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. 5. The Board of Directors shall have the power to make, alter or repeal the by-laws of the Corporation. 6. The election of the Board of Directors need not be by written ballot. 7. The Corporation shall indemnify to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware as amended from time to time each person who is or was a director or officer of the Corporation and the heirs, executors and administrators of such a person. 2 8. No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date when this provision becomes effective, except that he may be liable (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit. Neither the amendment nor repeal of this Article Eight, nor the adoption of any provision of the Certificate of Incorporation inconsistent with this Article Eight, shall eliminate or reduce the effect of this Article Eight in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article Eight, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. 9. No action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders of the Corporation to consent in writing, without a meeting, to the taking of any action is specifically denied; provided, however, that the holders of Preferred Stock may act by written consent to the extent provided in a resolution or resolutions of the Board of Directors authorizing the issuance of a particular series of Preferred Stock pursuant to Article Four of this Certificate of Incorporation. 10. The Corporation expressly elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware. 11. This Amended and Restated Certificate of Incorporation is duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Express Scripts, Inc. has caused this Amended and Restated Certificate of Incorporation to be executed by President, Chief Executive Officer and Chairman of the Board this 23rd day of May 2001 /s/ Barrett A. Toan ---------------------------------- Name: Barrett A. Toan Title: President, Chief Executive Officer and Chairman of the Board EX-10 4 exhit10-1.txt 2000 LONG-TERM INCENTIVE PLAN EXPRESS SCRIPTS, INC. 2000 LONG-TERM INCENTIVE PLAN Adopted August 9, 2000 Amended February 6, 2001 Approved by Stockholders May 23, 2001 1. PURPOSE. The purpose of this 2000 Long-Term Incentive Plan (the "Plan") is to motivate key personnel to produce a superior return to the stockholders of the Company and its Affiliates by offering such individuals an opportunity to realize stock appreciation, by facilitating stock ownership, and by rewarding them for achieving a high level of corporate performance. This Plan is also intended to facilitate recruiting and retaining key personnel of outstanding ability. 2. DEFINITIONS. The capitalized terms used in this Plan have the meanings set forth below. (a) "Affiliate" means any corporation that is a Subsidiary of the Company and, for purposes other than the grant of Incentive Stock Options, any limited liability company, partnership, corporation, joint venture, or any other entity in which the Company or any such Subsidiary owns an equity interest. (b) "Agreement" means a written contract entered into between the Company or an Affiliate and a Participant or, in the discretion of the Committee, a written certificate issued by the Company or an Affiliate to a Participant, in either case, containing or incorporating the terms and conditions of an Award in such form (not inconsistent with this Plan) as the Committee approves from time to time, together with all amendments thereof, which amendments may be made unilaterally by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially adverse to the Participant and are not required as a matter of law. (c) "Associate" means any full-time or part-time employee (including an officer or director who is also an employee) of the Company or an Affiliate. Except with respect to grants of Incentive Stock Options, "Associate" shall also include any Non-Employee Director serving on the Company's Board of Directors. References in this Plan to "employment" and related terms (except for references to "employee" in this definition of "Associate" or in Section 7(a)(i)) shall include the providing of services as a Non-Employee Director. (d) "Award" means a grant made under this Plan in the form of Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or any Other Stock-Based Award, whether singly, in combination or in tandem. (e) "Board" means the Board of Directors of the Company. (f) "Cause" shall mean the willful failure by a Participant to perform his duties with the Company, a Parent or a Subsidiary or the willful engaging in conduct which is injurious to the Company, a Parent or any Subsidiary, monetarily or otherwise, as determined by the Committee in its sole discretion. (g) "Change in Control" shall mean any of the following: (i) Individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Board; (ii) More than 25% of the (x) combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors ("Outstanding Company Voting Securities") or (y) the then outstanding Shares of Stock ("Outstanding Company Common Stock") is directly or indirectly acquired or beneficially owned (as defined in Rule 13d-3 under the Exchange Act, or any successor rule thereto) by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), provided, however, that the following acquisitions and beneficial ownership shall not constitute Changes in Control pursuant to this paragraph 2(f)(ii); (A) any acquisition or beneficial ownership by the Company or a Subsidiary, or (B) any acquisition or beneficial ownership by any employee benefit plan (or related trust)sponsored or maintained by the Company or one of more of its Subsidiaries. (iii) Consummation of a reorganization, merger, share exchange or consolidation (a "Business Combination"), unless in each case following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or other governing body, as the case may be, of the entity resulting from such 2 Business Combination (including, without limitation, an entity that as a result of such transaction owns the Company through one or more subsidiaries); (B) no individual, entity or group (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 25% of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors or other governing body of the entity resulting from such Business Combination, except to the extent that such individual, entity or group owned more than 25% of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the Business Combination; and (C) at least a majority of the members of the board of directors or other governing body of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, approving such Business Combination. (iv) The Company shall sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions). (v) The stockholders of the Company shall approve a plan liquidate or dissolve the Company and the Company shall commence such liquidation or dissolution. (h) "Change in Control Date" shall mean, in the case of a Change in Control defined in clauses (i) through (iv) of the definition thereof, the date on which the event occurs, and in the case of a Change in Control defined in clause (v) of the definition thereof, the date on which the Company shall commence such liquidation or dissolution. (i) "Change in Control Price" shall mean the value, expressed in dollars, as of the date of receipt of the per share consideration received by the Company's stockholders whose stock is acquired in a transaction constituting a Change in Control. (j) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute. (k) "Committee" means the committee of directors appointed by the Board to administer this Plan. In the absence of a specific appointment, "Committee" shall mean the Compensation Committee of the Board. 3 (l) "Company" means Express Scripts, Inc., a Delaware corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise. (m) "Comparable Employment" shall mean employment with the Company or any successor to the Company's business following a Change in Control pursuant to which: (i) the responsibilities and duties of the Participant are substantially the same as before the Change in Control (such changes as are a necessary consequence of the fact that the securities of the Company are no longer publicly traded if the Company's securities cease to be publicly traded as a consequence of the Change in Control shall not be considered a change in responsibilities or duties), and the other terms and conditions of employment following the Change in Control do not impose on the Participant obligations materially more burdensome than those to which the Participant was subject prior to the Change in Control; (ii) the aggregate compensation (including salary, bonus and other benefit plans, including option plans) of such Participant is substantially economically equivalent to or greater than such Participant's aggregate compensation immediately prior to the Change in Control Date. In making such determination (A) there shall be taken into account all contingent or unvested compensation, under performance-based compensation plans or otherwise, with appropriate adjustment for rights of forfeiture, vesting rules and other contingencies to payment, and (B) any compensation payable by reason of the Change in Control shall be disregarded; and (iii) the Participant remains employed in the metropolitan area in which he was employed immediately preceding the Change in Control. (n) "Disability" means that the Participant has suffered physical or mental incapacity of such nature as to prevent him from engaging in or performing the principal duties of his customary employment or occupation on a continuing or sustained basis, provided that, if a Participant has entered into an employment agreement with the Company, the Committee, in its sole discretion, may determine to substitute the definition set forth in such agreement. All determinations as to the date and extent of disability of any Participant shall be made by the Committee upon the basis of such evidence as it deems necessary or desirable. (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended; "Exchange Act Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act or any successor regulation. 4 (p) "Fair Market Value" as of any date means, unless otherwise expressly provided in this Plan: (i) (A) the closing sales price of a Share on the composite tape for New York Stock Exchange ("NYSE") listed shares, or if Shares are not quoted on the composite tape for NYSE listed shares, on the Nasdaq National Market or any similar system then in use or, (B) if clause (i)(A) is not applicable, the mean between the closing "bid" and the closing "asked" quotation of a Share on the Nasdaq National Market or any similar system then in use, or (C) if the Shares are not quoted on the NYSE composite tape or the Nasdaq National Market or any similar system then in use, the closing sale price of a Share on the principal United States securities exchange registered under the Exchange Act on which the Shares are listed, in any case on the specified date, or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, or (ii) if clause (i) is not applicable, what the Committee determines in good faith to be 100% of the fair market value of a Share on that date. However, if the applicable securities exchange or system has closed for the day at the time the event occurs that triggers a determination of Fair Market Value, all references in this paragraph to the "date immediately preceding that date" shall be deemed to be references to "that date." In the case of an Incentive Stock Option, if such determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury, Fair Market Value shall be determined in accordance with said regulations. The determination of Fair Market Value shall be subject to adjustment as provided in Section 12(f) hereof. (q) "Fundamental Change" means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company. (r) "Incentive Stock Option" means any Option designated as such and granted in accordance with the requirements of Section 422 of the Code or any successor to such section. (s) "Incumbent Board" means the group of directors consisting of (i) those individuals who, as of the effective date of the Plan, constituted the Board; and (ii) any individuals who become directors subsequent to such effective date whose appointment, election or nomination for election by the stockholders of the Company was approved by a vote of at least a majority of the directors then comprising the Incumbent Board. The Incumbent Board shall exclude any individual whose initial assumption of office occurred (i) as a result of an actual or threatened election contest with respect to the 5 election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person (other than a solicitation of proxies by the Incumbent Board) or (ii) with the approval of the Incumbent Board but by reason of any agreement intended to avoid or settle a proxy contest. (t) "Non-Employee Director" means a director of the Company who is not an employee of the Company, a Parent or a Subsidiary. (u) "Non-Qualified Stock Option" means an Option other than an Incentive Stock Option. (v) "Other Stock-Based Award" means an Award of Stock or an Award based on Stock other than Options, Stock Appreciation Rights, Restricted Stock or Performance Shares. (w) "Option" means a right to purchase Stock (or, if the Committee so provides in an applicable Agreement, Restricted Stock), including both Non-Qualified Stock Options and Incentive Stock Options. (x) "Parent" means a "parent corporation," as that term is defined in Section 424(e) of the Code, or any successor provision. (y) "Participant" means an Associate to whom an Award is made. (z) "Performance Period" means the period of time as specified in an Agreement over which Performance Shares are to be earned. (aa) "Performance Shares" means a contingent award of a specified number of Performance Shares, with each Performance Share equivalent to one or more Shares or a fractional Share or a Unit expressed in terms of one or more Shares or a fractional Share, as specified in the applicable Agreement, a variable percentage of which may vest depending upon the extent of achievement of specified performance objectives during the applicable Performance Period. (bb) "Plan" means this 2000 Long-Term Incentive Plan, as amended and in effect from time to time. (cc) "Related Entity" shall mean a Parent, a Subsidiary, or any employee benefit plan (including a trust forming a part of such plan) maintained by the Company, a Parent or a Subsidiary. (dd) "Restricted Stock" means Stock granted under Section 10 hereof so long as such Stock remains subject to one or more restrictions. 6 (ee) "Retirement" shall mean, except as otherwise provided in an Agreement, termination of employment after either (i) attainment of age 65, or (ii) the normal retirement age specified in the provisions of a retirement plan maintained by the Company for its employees generally. (ff) "Senior Executive" means any Associate who is an employee of the Company and whose base salary is determined by reference to Salary Grades M3 through and including M5 (as such salary grades are in effect on the effective date of this Plan), or, if the Company modifies its salary grades after such effective date, in the most nearly comparable salary grades for senior executives of the Company under such modified system as determined by the Committee in its sole discretion. (gg) "Share" means a share of Stock. (hh) "Stock" means the Company's Class A common stock, $0.01 par value per share (as such par value may be adjusted from time to time) or any securities issued in respect thereof by the Company or any successor to the Company as a result of an event described in Section 12(f). (ii) "Stock Appreciation Right" means a right, the value of which is determined relative to appreciation in value of Shares pursuant to an Award granted under Section 8 hereof. (jj) "Subsidiary" means a "subsidiary corporation," as that term is defined in Section 424(f) of the Code, or any successor provision. (kk) "Successor" with respect to a Participant means the legal representative of an incompetent Participant and, if the Participant is deceased, the legal representative of the estate of the Participant or the person or persons who may, by bequest or inheritance, or under the terms of an Award or of forms submitted by the Participant to the Committee under Section 12(h) hereof, acquire the right to exercise an Option or Stock Appreciation Right or receive cash and/or Shares issuable in satisfaction of an Award in the event of a Participant's death. (ll) "Term" means the period during which an Option or Stock Appreciation Right may be exercised or the period during which the restrictions placed on Restricted Stock or any other Award are in effect. (mm) "Unit" means a bookkeeping entry that may be used by the Company to record and account for the grant of Stock, Stock Appreciation Rights and Performance Shares expressed in terms of Units of Stock until such time as the Award is paid, canceled, forfeited or terminated. (nn) "Vice President" means any Associate who is an employee of the Company and whose base salary is determined by reference to Salary Grades M1 through 7 and including M2 (as such salary grades are in effect on the effective date of this Plan), or, if the Company modifies its salary grades after such effective date, in the most nearly comparable salary grades for vice presidents of the Company under such modified system as determined by the Committee in its sole discretion. Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural. 3. ADMINISTRATION. (a) AUTHORITY OF COMMITTEE. The Committee shall administer this Plan or delegate its authority to do so as provided in Section 3(b) hereof. The Committee shall have exclusive power (acting alone or, to the extent the Committee deems appropriate for purposes of Exchange Act Rule 16b-3, in conjunction with the full Board), subject to the limitations contained in this Plan, to make Awards and to determine when and to whom Awards will be granted, and the form, amount and other terms and conditions of each Award, subject to the provisions of this Plan. The Committee, subject to the limitations contained in this Plan, may determine whether, to what extent and under what circumstances Awards may be settled, paid or exercised in cash, Shares or other Awards or other property, or canceled, forfeited or suspended. The Committee shall have the authority to interpret this Plan and any Award or Agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, to determine the terms and provisions of any Agreement entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. All determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive, including, without limitation, as to any adjustments pursuant to Section 12(f). A majority of the members of the Committee shall constitute a quorum for any meeting of the Committee. Notwithstanding the foregoing, in administering this Plan with respect to Awards for Non-Employee Directors, the Board shall exercise the powers of the Committee. (b) DELEGATION OF AUTHORITY. The Committee may delegate all or any part of its authority under this Plan to the Chief Executive Officer of the Company for purposes of determining Awards of Options solely to Associates who are employees who are not Vice Presidents or Senior Executives and who are not then subject to the reporting requirements of Section 16 of the Exchange Act. In delegating such authority the Committee shall specify the maximum number of shares that may be awarded to any single employee. The authority so delegated to the Chief Executive Officer may not be subdelegated. 8 4. SHARES AVAILABLE; MAXIMUM PAYOUTS. (a) SHARES AVAILABLE. The number of Shares initially available for distribution under this Plan shall be 1,350,000 Shares. Such number of Shares shall increase annually, effective as of each January 1, commencing January 1, 2002 and ending on January 1, 2004, by 700,000 Shares. Such number of Shares shall also be increased by the number of Shares made available as a result of forfeitures under the Express Scripts, Inc. Amended and Restated 1992 and 1994 Stock Option Plans and the Express Scripts, Inc. Amended and Restated 1992 Stock Option Plan for Outside Directors (the "1992 and 1994 Plans") (all of which Shares shall be subject to adjustment under Section 12(f) hereof). On and after the effective date of this Plan, no further awards may be made under the 1992 and 1994 Plans. Shares issued under this Plan may be authorized and unissued shares or issued shares held as treasury shares. (b) SHARES AGAIN AVAILABLE. Any Shares subject to an Award under this Plan which are not used because the Award expires without all Shares subject to such Award having been issued or because the terms and conditions of the Award are not met may again be used for an Award under this Plan. Any Shares that are the subject of Awards which are subsequently forfeited to the Company pursuant to the restrictions applicable to such Award may again be used for an Award under this Plan. If a Participant exercises a Stock Appreciation Right, any Shares covered by the Stock Appreciation Right in excess of the number of Shares issued (or, in the case of a settlement in cash or any other form of property, in excess of the number of Shares equal in value to the amount of such settlement, based on the Fair Market Value of such Shares on the date of such exercise) may again be used for an Award under this Plan. If, in accordance with the Plan, a Participant uses Shares to (i) pay a purchase or exercise price, including an Option exercise price, or (ii) satisfy tax withholdings, such Shares may again be used for an Award under this Plan. (c) UNEXERCISED AWARDS. Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award or any Award settled in cash in lieu of Shares (except as provided in Section 4(b) hereof) shall be available for further Awards. (d) NO FRACTIONAL SHARES. No fractional Shares may be issued under this Plan; fractional Shares will be rounded down to the nearest whole Share. 5. ELIGIBILITY. Awards may be granted under this Plan to any Associate at the discretion of the Committee. 6. GENERAL TERMS OF AWARDS. (a) AWARDS. Awards under this Plan may consist of Options (either Incentive Stock Options or Non-Qualified Stock Options), Stock Appreciation Rights, Performance Shares, Restricted Stock or Other Stock-Based Awards. Awards of Restricted Stock may, in the discretion of the Committee, provide the Participant with dividends or dividend 9 equivalents and voting rights prior to vesting (whether vesting is based on a period of time, the attainment of specified performance conditions or otherwise). (b) AMOUNT OF AWARDS. Each Agreement shall set forth the number of Shares of Restricted Stock, Stock or Performance Shares subject to such Agreement, or the number of Shares to which the Option applies or with respect to which payment upon the exercise of the Stock Appreciation Right is to be determined, as the case may be, together with such other terms and conditions applicable to the Award (not inconsistent with this Plan) as determined by the Committee in its sole discretion. (c) TERM. Each Agreement, other than those relating solely to Awards of Stock without restrictions, shall set forth the Term of the Award and any applicable Performance Period for Performance Shares, as the case may be, but in no event shall the Term of an Award or the Performance Period be longer than ten years after the date of grant. An Agreement with a Participant may permit acceleration of vesting requirements and of the expiration of the applicable Term upon such terms and conditions as shall be set forth in the Agreement, which may, but, unless otherwise specifically provided in this Plan, need not, include, without limitation, acceleration resulting from the occurrence of the Participant's death or Disability. Acceleration of the Performance Period of Performance Shares shall be subject to Section 9(b) hereof. (d) AGREEMENTS. Each Award under this Plan shall be evidenced by an Agreement setting forth the terms and conditions, as determined by the Committee, that shall apply to such Award, in addition to the terms and conditions specified in this Plan. (e) TRANSFERABILITY. Except as otherwise permitted by the Committee, during the lifetime of a Participant to whom an Award is granted, only such Participant (or such Participant's legal representative) may exercise an Option or Stock Appreciation Right or receive payment with respect to Performance Shares or any other Award. Except as otherwise permitted by the Committee, no Award of Restricted Stock (prior to the expiration of the restrictions), Options, Stock Appreciation Rights, Performance Shares or other Award (other than an award of Stock without restrictions) may be sold, assigned, transferred, exchanged, or otherwise encumbered, and any attempt to do so (including pursuant to a decree of divorce or any judicial declaration of property division) shall be of no effect. Notwithstanding the immediately preceding sentence, an Agreement may provide that an Award shall be transferable to a Successor in the event of a Participant's death. (f) TERMINATION OF EMPLOYMENT GENERALLY. Except as otherwise determined by the Committee or provided by the Committee in an applicable Agreement (which may, without limitation, in the sole discretion of the Committee, provide for an extension of the exercisability of Options and Stock Appreciation Rights beyond the periods set forth in paragraphs (i)(A) through (E) below, subject in all events to paragraph (i)(F) below), in the case of a Participant's termination of employment, the following provisions shall apply: 10 (i) Options and Stock Appreciation Rights. (A) DEATH. If a Participant's employment terminates because of his or her death, then any Option or Stock Appreciation Right that has not expired or been terminated shall become exercisable in full, and may be exercised by the Participant's Successor at any time, or from time to time, within one year after the date of the Participant's death. (B) DISABILITY. If a Participant's employment terminates because of Disability, then any Option or Stock Appreciation Right that has not expired or been terminated shall become exercisable in full, and the Participant or the Participant's Successor may exercise such Option or Stock Appreciation Right at any time, or from time to time, within one year after the date of the Participant's Disability. (C) RETIREMENT. Upon a Participant's Retirement, any Option or Stock Appreciation Right that has not expired or been terminated shall become exercisable in full, and the Participant may exercise such Option or Stock Appreciation Right at any time, or from time to time, within one year after the date of the Participant's retirement. (D) TERMINATION FOR CAUSE. Upon termination of a Participant's employment by the Company for Cause, all Awards, to the extent not previously exercised, shall immediately terminate. (E) REASONS OTHER THAN TERMINATION FOR CAUSE, DEATH, RETIREMENT OR DISABILITY. Except as provided in Sections 6(g) or (h), if a Participant's employment terminates for any reason other than death, Disability, Retirement or by the Company for Cause, then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for one month after termination of the Participant's employment, but only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Participant's termination of employment. (F) EXPIRATION OF TERM. Notwithstanding any provision of this Plan to the contrary, in no event shall an Option or a Stock Appreciation Right be exercisable after expiration of the Term of such Award. Any Option or Stock Appreciation Right that is not exercised within the periods set forth in the foregoing paragraphs (A)-(E), except as otherwise provided by the Company in the applicable Agreement, shall terminate as of the end of the periods described in such paragraphs. 11 (ii) PERFORMANCE SHARES. If a Participant's employment with the Company or any of its Affiliates terminates during a Performance Period because of death, Disability or Retirement, or under other circumstances provided by the Committee in its discretion in the applicable Agreement or otherwise, the Participant, unless the Committee shall otherwise provide in the applicable Agreement, shall be entitled to receive a number of Performance Shares (or payment therefor) at the end of the Performance Period based upon the extent to which achievement of performance targets was satisfied at the end of such period (as determined at the end of the Performance Period) and prorated for the portion of the Performance Period during which the Participant was employed by the Company or any Affiliate. Except as provided in this Section 6(f)(ii) or in the applicable Agreement, if a Participant's employment terminates with the Company or any of its Affiliates during a Performance Period, then such Participant shall not be entitled to any payment with respect to that Performance Period. (iii) RESTRICTED STOCK. Unless otherwise provided in the applicable Agreement, in case of a Participant's death, Disability or Retirement, the Participant shall be entitled to receive a number of shares of Restricted Stock under outstanding Awards that has been pro-rated for the portion of the Term of the Awards during which the Participant was employed by the Company or any Affiliate, and with respect to such Shares all restrictions shall lapse. Any shares of Restricted Stock as to which restrictions do not lapse under the preceding sentence shall terminate at the date of the Participant's termination of employment for any other reason and such shares of Restricted Stock shall be forfeited to the Company. (g) ACCELERATION OF VESTING UPON CHANGE IN CONTROL AFTER WHICH NO PUBLIC MARKET FOR COMPANY OR EXCHANGE STOCK EXISTS (i) ACCELERATION OF VESTING; LAPSE OF RESTRICTIONS. Except as may be otherwise specified in the terms of any Award, upon the occurrence of a Change in Control after which there will be no generally recognized U.S. public market for the Company's Class A Common Stock or any common stock for which the Company's Class A Common Stock is exchanged, (A) any Option or Stock Appreciation Right that has not expired or been terminated shall, to the extent not yet exercisable, become exercisable in full; and (B) the lapse of restrictions on, or the forfeiture of, any Award of Restricted Stock, Performance Shares, or Other Stock-Based Award shall be determined in accordance with Section 6(h)(ii); subject, however, to the provisions of Section 6(g)(ii) and (iii). 12 (ii) COMPANY REPURCHASE. Upon the occurrence of a Change in Control Transaction described in clause (g)(i) above, on the Change in Control Date the Company will repurchase, and each Participant shall sell to the Company, any Option, Stock Appreciation Right, Restricted Stock, Performance Shares, or Other Stock-Based Award then held by such Participant as follows: (A) Any Option or Stock Appreciation Right will be repurchased at a per share price equal to the excess (if any) of the Change in Control Price over the exercise price of the Option or the specified price of the Stock Appreciation Right, as the case may be; (B) Any Restricted Stock or Performance Shares will be repurchased at a per share price equal to the Change in Control Price; and (C) Any Other Stock-Based Award will be repurchased at a price determined by the Committee in its sole discretion to be consistent with the treatment of Options, Stock Appreciation Rights, Restricted Stock or Performance Shares. (iii) PURCHASE PRICE ESCROW. Any amount of the purchase price that may become payable to Participants with respect to Restricted Stock, Performance Shares or Other Stock-Based Awards as to which restrictions have not lapsed on the Change in Control Date shall be deposited on the Change in Control Date in escrow with one of the ten largest U.S. commercial banks (measured in terms of amount of assets), or if no such bank will consent to serve as escrow agent, then another U.S. commercial bank of recognized standing chosen by the Company. Such funds shall be invested in securities issued or fully guaranteed as to both principal and interest by the U.S. Government, or in debt obligations of U.S. corporations with a remaining term to maturity not exceeding one year and rated AA or better by Standard & Poors Corporation. Interest earned on such funds shall be allocated ratably among the Participants receiving payment of such funds or, if any amounts are forfeited by a Participant, to the Company, and shall be disbursed when such payments are made. Disbursements from the escrow shall be made as follows: (A) DISBURSEMENT ON LAPSE OF RESTRICTIONS. With the initial escrow deposit the Company shall deliver to the escrow agent a schedule for making disbursements to the Participants based on the dates when the remaining restrictions on Restricted Stock or Other Stock-Based Awards will lapse based solely on the lapse of time. Unless the escrow agent receives a notice described in the following clauses (B) or (C) the escrow agent will disburse the funds in accordance with such schedule. With respect to Performance Shares, and where applicable with respect to Restricted Stock or Other Stock-Based Awards, the Company will from time to time deliver to the escrow agent a notice when the restrictions on 13 any such Awards shall lapse (if sooner than the dates stated in the initial schedule), and the escrow agent shall disburse funds in accordance with such notice. (B) FORFEITURE. If a Participant forfeits his rights to any payments from the escrow, the Company shall give written notice thereof contemporaneously to the escrow agent and the Participant by certified or registered mail (in the case of the Participant, to the last known address of the Participant on the records of the Company), stating the reason for such forfeiture and the amount thereof. The escrow agent shall disburse the amount stated in such notice to the Company sixty (60) days after receipt thereof unless prior to such time the escrow agent receives written notice from the Participant that the Participant has commenced litigation against the Company with respect to the validity of such forfeiture. If such a notice is received, the escrow agent shall disburse such funds only upon order of a court of competent jurisdiction or upon written instructions signed by both the Company and the Participant. (C) ACCELERATION OF PAYMENTS. If a Participant or his successor in interest becomes entitled to a payment from the escrow prior to the time stated in the schedule, the Participant or such successor shall give written notice thereof contemporaneously to the escrow agent and the Company by certified or registered mail, stating the reason for such accelerated payment and the amount thereof. The escrow agent shall disburse the amount stated in such notice to the Optionee or such successor sixty (60) days after receipt thereof unless prior to such time the escrow agent receives written notice from the Company that the Company has commenced litigation against the Participant or such successor challenging the right to such acceleration of payment. If such a notice is received, the escrow agent shall disburse such funds only upon order of a court of competent jurisdiction or upon written instructions signed by both the Company and the Participant. (h) ACCELERATION OF VESTING UPON OTHER CHANGE IN CONTROL TRANSACTIONS. Except as may be otherwise specified in the terms of any Award, upon the occurrence of a Change in Control after which there remains a generally recognized U.S. public market for the Company's Class A Common Stock or for any common stock for which the Company's Class A Common Stock is exchanged, outstanding Awards shall be treated as follows: (i) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. Any Option or Stock Appreciation Right that has not expired or been terminated shall, to the extent not yet exercisable, become exercisable in full and shall remain exercisable for the remainder of the Term (except as otherwise provided in Section 6(g)(iii)). 14 (ii) RESTRICTED STOCK, PERFORMANCE SHARES AND OTHER STOCK-BASED AWARDS. (A) COMPARABLE EMPLOYMENT NOT OFFERED. If a Participant who is a Vice President or Senior Executive is not offered Comparable Employment with the Company or any successor to the Company's business on or before the Change in Control Date, then any restrictions still applicable to any Award of Restricted Shares, Performance Shares, or Other Stock-Based Award shall lapse; provided, however, that in the case of Performance Shares the Participant shall be entitled to receive a number of Performance Shares (or payment therefor) on the Change in Control Date based upon the extent to which achievement of performance targets was satisfied as of such date, as determined by the Committee in its sole discretion. (B) COMPARABLE EMPLOYMENT OFFERED AND ACCEPTED. If a Participant who is a Vice President or Senior Executive is offered and accepts Comparable Employment with the Company or any successor to the Company's business on or before the Change in Control Date, then to the extent that restrictions remain in effect with respect to each Award of Restricted Shares, Performance Shares, or Other Stock-Based Award held by a Senior Executive or a Vice President, such restrictions shall lapse with respect to one-half of such shares. If an Award provides for lapse of restrictions in two or more increments, then the portion of such Award that will vest on an accelerated basis due to the Change in Control will be one-half of each such vesting increment. (C) COMPARABLE EMPLOYMENT NOT ACCEPTED. If a Participant (other than a Non-Employee Director) is offered Comparable Employment with the Company or any successor to the Company's business on or before the Change in Control Date and declines such employment, then the provisions of subsection 6(f) shall apply to any Restricted Stock, Performance Shares or Other Stock-Based Awards held by the Participant at the Change in Control Date. (D) TERMINATION OF EMPLOYMENT AFTER CHANGE IN CONTROL DATE. If the employment of any Participant on the Change in Control Date is involuntarily terminated without Cause after the Change in Control Date, or is voluntarily terminated after the Change in Control Date by a Participant who is a Senior Executive or a Vice President due to a change in employment conditions that results in such Participant not continuing to have Comparable Employment relative to such Participant's employment immediately preceding the Change in Control Date, then, notwithstanding the provisions of this subsection (h), any restrictions still applicable to any Award of Restricted Shares, Performance Shares, or Other Stock-Based 15 Award held by such Participant that was granted prior to the Change in Control Date shall lapse; provided, however, that in the case of Performance Shares the Participant shall be entitled to receive a number of Performance Shares (or payment therefor) based upon the extent to which achievement of performance targets was satisfied as of the date of termination of employment, as determined by the Committee in its sole discretion. If no public market for the Company's Class A Common Stock (or any stock for which the Company's Class A Common Stock has been exchanged) exists at the time of termination of employment, then the Company shall repurchase, and the Participant shall sell, all or a ratable portion (as the case may be) of any such Restricted Stock, Performance Shares, or Other Stock-Based Award held by such Participant at the price provided for in the preceding subsection 6(g)(ii). This subsection 6(h)(ii)(D) shall not apply to Awards made after the Change in Control Date unless otherwise provided in such Award. (iii) NON-EMPLOYEE DIRECTORS. Any restrictions still applicable to any Award of Restricted Shares, Performance Shares, or Other Stock-Based Award held by a Non-Employee Director shall lapse. (i) RIGHTS AS STOCKHOLDER. A Participant shall have no right as a stockholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record. (j) MAXIMUM ANNUAL AWARDS PER PARTICIPANT. No Participant may receive any combination of Awards relating to more than 250,000 Shares in the aggregate in any fiscal year of the Company under this Plan (subject to adjustment under Section 12(f) hereof). 7. STOCK OPTIONS. (a) TERMS OF ALL OPTIONS. (i) GRANTS. Each Option shall be granted pursuant to an Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. Only Non-Qualified Stock Options may be granted to Associates who are not employees of the Company or an Affiliate. (ii) PURCHASE PRICE. The purchase price of each Share subject to an Option shall be determined by the Committee and set forth in the applicable Agreement, but shall not be less than 100% of the Fair Market Value of a Share as of the date the Option is granted. The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise, provided that, to the extent permitted by law and in accordance with rules adopted by the Committee, Participants may simultaneously exercise Options and sell the 16 Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The purchase price may be paid in cash or, if the Committee so permits, through delivery or tender to the Company of Shares held, either actually or by attestation, by such Participant for at least six months (in each case, such Shares having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the Shares being purchased pursuant to the Option), or, if the Committee so permits, a combination thereof, unless otherwise provided in the Agreement; provided that, no Shares may be tendered in exercise of an Incentive Stock Option if such shares were acquired by the optionee through the exercise of an Incentive Stock Option unless (i) such shares have been held by the optionee for at least one year and (ii) at least two years have elapsed since such Incentive Stock Option was granted. Further, the Committee, in its discretion, may approve other methods or forms of payment of the purchase price, and establish rules and procedures therefor. (iii) NO REPRICING OF OPTIONS WITHOUT SHAREHOLDER APPROVAL. Options, once issued, may not be repriced without first obtaining the approval of the shareholders of the Company. (iv) EXERCISABILITY. Each Option shall be exercisable in whole or in part on the terms provided in the Agreement. In no event shall any Option be exercisable at any time after its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated. (b) INCENTIVE STOCK OPTIONS. In addition to the other terms and conditions applicable to all Options: (i) the aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options held by an individual first become exercisable in any calendar year (under this Plan and all other incentive stock options plans of the Company and its Affiliates) shall not exceed $100,000 (or such other limit as may be required by the Code), if such limitation is necessary to qualify the Option as an Incentive Stock Option, and to the extent an Option or Options granted to a Participant exceed such limit such Option or Options shall be treated as Non-Qualified Stock Options; (ii) an Incentive Stock Option shall not be exercisable and the Term of the Award shall not be more than ten years after the date of grant (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option; (iii) the Agreement covering an Incentive Stock Option shall contain such other terms and provisions which the Committee determines necessary to qualify such Option as an Incentive Stock Option; and 17 (iv) notwithstanding any other provision of this Plan if, at the time an Incentive Stock Option is granted, the Participant owns (after application of the rules contained in Section 424(d) of the Code, or its successor provision) Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its subsidiaries, (A) the option price for such Incentive Stock Option shall be at least 110% of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of grant and (B) such Option shall not be exercisable after the date five years from the date such Incentive Stock Option is granted. (c) OPTION GRANT FOR NON-EMPLOYEE DIRECTORS. The Board (which may delegate the determination to a Committee of the Board) may from time to time determine that each individual who is elected or appointed to the office of director as a Non-Employee Director receive an Award as compensation, in whole or in part, for such individual's services as a director. In determining the level of Awards for Non-Employee Directors, the Board may consider such factors as compensation practices of comparable companies with respect to directors, consultants' recommendations, and such other information as the Board may deem appropriate. In the absence of action by the Board each individual who is first elected or appointed to the office of director as a Non-Employee Director after adoption of this Plan shall receive (i) an Option to acquire three thousand (3,000) Shares on the date of the first meeting of the Board after such director's election or appointment, and a like grant on each anniversary of such date, and (ii) an Option to acquire four thousand (4,000) Shares on the date of the first meeting of the Board after such director's election or appointment, and a like grant each third year thereafter. These Options shall have the following terms and conditions: (i) PRICE. The purchase price for the Shares subject to such Option shall be one hundred percent (100%) of the Fair Market Value of a Share as of the date the Option is granted. (ii) TERM. The term of such Option shall be seven (7) years from the date that it is granted. (iii) VESTING. Subject to the provisions of subsections 6(g), 6(h) and the following clause (iv), such Option shall become exercisable in installments on a cumulative basis at a rate of one-third (1/3) each year, beginning on the first anniversary of the date of grant and on each successive anniversary thereafter, until the date such Option expires or is terminated. (iv) TERMINATION OF SERVICE AS NON-EMPLOYEE DIRECTOR. Except as provided in Sections 6(g), 6(h) or this subsection (iv), all outstanding Options held by a Non-Employee Director terminate immediately if such individual ceases to be a Non-Employee Director for any reason other than death or Disability, provided that, if the Optionee has attained age sixty-five (65) at the time of such 18 cessation, the portion of his outstanding Options that have not become exercisable as of such date shall terminate immediately, and the remaining portion, if any, shall remain exercisable for a period of three months following such cessation, and shall thereafter terminate. If an Optionee ceases to be a Non-Employee Director due to his death or Disability, all outstanding Options held by such Optionee shall immediately become fully exercisable to the extent not so exercisable, shall remain exercisable for a period of three months following such cessation, and shall thereafter terminate. Notwithstanding the foregoing, no provision in this subsection (iv) shall extend the exercise period of an Option beyond its original term. The Board, in its discretion, may make other Awards from time to time to Non-Employee Directors, upon such terms and conditions, consistent with the provisions of this Plan, as the Board may determine. 8. STOCK APPRECIATION RIGHTS. An Award of a Stock Appreciation Right shall entitle the Participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the Stock Appreciation Right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares as of the date of exercise of the Stock Appreciation Right over (ii) a specified price which shall not be less than 100% of the Fair Market Value of such Shares as of the date of grant of the Stock Appreciation Right (referred to in Section 12(f) as the "purchase price"). A Stock Appreciation Right may be granted in connection with a previously or contemporaneously granted Option, or independent of any Option. If issued in connection with an Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels the Option with which it is connected and exercise of the connected Option cancels the Stock Appreciation Right. Each Stock Appreciation Right may be exercisable in whole or in part on the terms provided in the applicable Agreement. No Stock Appreciation Right shall be exercisable at any time after its Term. When a Stock Appreciation Right is no longer exercisable, it shall be deemed to have lapsed or terminated. Except as otherwise provided in the applicable Agreement, upon exercise of a Stock Appreciation Right, payment to the Participant (or to his or her Successor) shall be made in the form of cash, Stock or a combination of cash and Stock (as determined by the Committee if not otherwise specified in the Award) as promptly as practicable after such exercise. The Agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or Stock) may be made in the event of the exercise of a Stock Appreciation Right. 9. PERFORMANCE SHARES. (a) INITIAL AWARD. An Award of Performance Shares shall entitle a Participant (or a Successor) to future payments based upon the achievement of performance targets established in writing by the Committee. Payment shall be made in Stock, or a combination of cash and Stock, as determined by the Committee. Such performance targets shall be determined by the Committee in its sole discretion and shall consist of one or any combination of two or more of earnings or earnings per share before income tax (profit before taxes), net earnings or net earnings per share (profit after tax), 19 inventory, total or net operating asset turnover, operating income, total stockholder return, return on equity, pre-tax and pre-interest expense return on average invested capital, which may be expressed on a current value basis, or sales growth, successful transition of the Company's clients to new claim adjudication platforms, achievement of post-merger integration, marketing, operating or workplan goals, and any such targets may relate to one or any combination of two or more of corporate, group, unit, division, Affiliate or individual performance. The Agreement may establish that a portion of the maximum amount of a Participant's Award will be paid for performance which exceeds the minimum target but falls below the maximum target applicable to such Award. The Agreement shall also provide for the timing of such payment. Following the conclusion or acceleration of each Performance Period, the Committee shall determine the extent to which (i) performance targets have been attained, (ii) any other terms and conditions with respect to an Award relating to such Performance Period have been satisfied, and (iii) payment is due with respect to a Performance Share Award. (b) ACCELERATION AND ADJUSTMENT. The applicable Agreement may permit an acceleration of the Performance Period and an adjustment of performance targets and payments with respect to some or all of the Performance Shares awarded to a Participant, upon such terms and conditions as shall be set forth in the Agreement, upon the occurrence of certain events, which may, but need not, include without limitation a Fundamental Change, the Participant's death or Disability, a change in accounting practices of the Company or its Affiliates, or, with respect to payments in Stock for Performance Share Awards, a reclassification, stock dividend, stock split or stock combination as provided in Section 12(f) hereof. (c) VALUATION. To the extent that payment of a Performance Share is made in cash, a Performance Share earned after conclusion of a Performance Period shall have a value equal to the Fair Market Value of a Share on the last day of such Performance Period. 10. RESTRICTED STOCK. Restricted Stock may be granted in the form of Shares registered in the name of the Participant but held by the Company until the restrictions on the Restricted Stock Award lapse, subject to forfeiture, as provided in the applicable Agreement. Any employment conditions, performance conditions, restrictions on transferability and the Term of the Award shall be established by the Committee in its discretion and included in the applicable Agreement. The Committee may provide in the applicable Agreement for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine, which may, but need not, include without limitation the Participant's death or Disability. The Committee, in the applicable Agreement, may, in its sole discretion, award all or any of the rights of a stockholder with respect to the Shares of Restricted Stock during the period that they remain subject to restrictions, including, without limitation, the right to vote the Shares and receive dividends. Any performance conditions to the lapse of restrictions on restricted stock shall be determined by the Committee in its sole discretion and shall be based on performance targets that consist of one or any combination of two or more of earnings or earnings per share before income tax (profit before taxes), net earnings or net 20 earnings per share (profit after tax), inventory, total or net operating asset turnover, operating income, total stockholder return, return on equity, pre-tax and pre-interest expense return on average invested capital, which may be expressed on a current value basis, sales growth, successful transition of the Company's clients to new claim adjudication platforms, or achievement of post-merger integration, marketing, operating or workplan goals, and any such targets may relate to one or any combination of two or more of corporate, group, unit, division, Affiliate or individual performance. 11. OTHER STOCK-BASED AWARDS. The Committee may from time to time grant Awards of Stock, and other Awards under this Plan (collectively herein defined as "Other Stock-Based Awards"), including without limitation those Awards pursuant to which Shares may be acquired in the future, such as Awards denominated in Stock, Stock Units, securities convertible into Stock and phantom securities. The Committee, in its sole discretion, shall determine, and provide in the applicable Agreement for, the terms and conditions of such Awards provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. The Committee may, in its sole discretion, direct the Company to issue Shares subject to restrictive legends and/or stop transfer instructions which are consistent with the terms and conditions of the Award to which such Shares relate. 12. GENERAL PROVISIONS. (a) EFFECTIVE DATE OF THIS PLAN. This Plan shall become effective as of August 9, 2000, provided that this Plan is approved and ratified by the holders of the Company's common stock in accordance with the Company's Certificate of Incorporation at a meeting of the stockholders of the Company held no later than August 8, 2001. If this Plan is not so approved, any Award granted under this Plan subject to such approval shall be cancelled and be null and void. (b) DURATION OF THIS PLAN; DATE OF GRANT. This Plan shall remain in effect until all Stock subject to it shall be distributed or all Awards have expired or lapsed, whichever is latest to occur, or this Plan is terminated pursuant to Section 12(e) hereof. No Award of an Incentive Stock Option shall be made more than ten years after the effective date provided in Section 12(a) hereof (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option. The date and time of approval by the Committee of the granting of an Award shall be considered the date and time at which such Award is made or granted, notwithstanding the date of any Agreement with respect to such Award; provided, however, that the Committee may grant Awards other than Incentive Stock Options to Associates or to persons who are about to become Associates, to be effective and deemed to be granted on the occurrence of certain specified contingencies, provided that if the Award is granted to a non-Associate who is about to become an Associate, such specified contingencies shall include, without limitation, that such person becomes an Associate. (c) RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any Agreement shall confer upon any Participant who is an employee of the Company the 21 right to continue in the employment of the Company or any Affiliate or affect any right which the Company or any Affiliate may have to terminate or modify the employment of the Participant with or without cause. (d) TAX WITHHOLDING. The Company shall withhold from any payment of cash or Stock to a Participant or other person under this Plan an amount sufficient to cover any required withholding taxes, including the Participant's social security and Medicare taxes (FICA) and federal, state and local income tax with respect to income arising from payment of the Award. The Company shall have the right to require the payment of any such taxes before issuing any Stock pursuant to the Award. In lieu of all or any part of a cash payment from a person receiving Stock under this Plan, the Committee may, in the applicable Agreement or otherwise, permit a person to cover all or any part of the required withholdings, and to cover any additional withholdings up to the amount needed to cover the person's full FICA and federal, state and local income tax with respect to income arising from payment of the Award, through a reduction of the numbers of Shares delivered to such person or a delivery or tender to the Company of Shares held by such person, in each case valued in the same manner as used in computing the withholding taxes under applicable laws. (e) AMENDMENT, MODIFICATION AND TERMINATION OF THIS PLAN. Except as provided in this Section 12(e), the Board may at any time amend, modify, terminate or suspend this Plan. Except as provided in this Section 12(e), the Committee may at any time alter or amend any or all Agreements under this Plan to the extent permitted by law and subject to the requirements of Section 2(b), in which event, as provided in Section 2(b), the term "Agreement" shall mean the Agreement as so amended. Amendments are subject to approval of the stockholders of the Company only as required by applicable law or regulation, or if the amendment increases the total number of shares available under this Plan. No termination, suspension or modification of this Plan may materially and adversely affect any right acquired by any Participant (or a Participant's legal representative) or any Successor or permitted transferee under an Award granted before the date of termination, suspension or modification, unless otherwise provided in an Agreement or otherwise or required as a matter of law. It is conclusively presumed that any adjustment for changes in capitalization provided for in Section 9(b) or 12(f) hereof does not adversely affect any right of a Participant or other person under an Award. (f) ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments in the aggregate number and type of securities available for Awards under this Plan, in the limitations on the number and type of securities that may be issued to an individual Participant, in the number and type of securities and amount of cash subject to Awards then outstanding, in the Option purchase price as to any outstanding Options, in the purchase price as to any outstanding Stock Appreciation Rights, and, subject to Section 9(b) hereof, in outstanding Performance Shares and payments with respect to outstanding Performance Shares, and comparable adjustments, if applicable, to any outstanding Other Stock-Based Award, shall be made by the Committee to give effect to 22 adjustments made in the number or type of Shares through a Fundamental Change, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, stock combination, rights offering, spin-off or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share, for which purpose one-half share shall be rounded down to the nearest whole Share. (g) OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits received by a participant under an Award shall not be deemed a part of a Participant's regular, recurring compensation for purposes of any termination, indemnity or severance pay laws and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate, unless expressly so provided by such other plan, contract or arrangement or the Committee determines that an Award or portion of an Award should be included to reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation. (h) BENEFICIARY UPON PARTICIPANT'S DEATH. To the extent that the transfer of a participant's Award at death is permitted by this Plan or under an Agreement, (i) a Participant's Award shall be transferable to the beneficiary, if any, designated on forms prescribed by and filed with the Committee and (ii) upon the death of the Participant, such beneficiary shall succeed to the rights of the Participant to the extent permitted by law and this Plan. If no such designation of a beneficiary has been made, the Participant's legal representative shall succeed to the Awards, which shall be transferable by will or pursuant to laws of descent and distribution to the extent permitted by this Plan or under an Agreement. (i) UNFUNDED PLAN. This Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under this Plan. Neither the Company, its Affiliates, the Committee, nor the Board shall be deemed to be a trustee of any amounts to be paid under this Plan nor shall anything contained in this Plan or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between the Company and/or its Affiliates, and a Participant or Successor. To the extent any person acquires a right to receive an Award under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. (j) LIMITS OF LIABILITY. (i) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and the Agreement. (ii) Except as may be required by law, neither the Company nor any member or former member of the Board or the Committee, nor any other person 23 participating (including participation pursuant to a delegation of authority under Section 3(b) hereof) in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken, or not taken, in good faith under this Plan. (iii) To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against any loss, liability, judgment, damage, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan. (k) COMPLIANCE WITH APPLICABLE LEGAL REQUIREMENTS. The Company shall not be required to issue or deliver a certificate for Shares distributable pursuant to this Plan unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges, if any, on which the Company's Shares may, at the time, be listed. (l) DEFERRALS AND SETTLEMENTS. The Committee may require or permit Participants to elect to defer the issuance of Shares or the settlement of Awards in cash under such rules and procedures as it may establish under this Plan. It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts. 13. SUBSTITUTE AWARDS. Awards may be granted under this Plan from time to time in substitution for Awards held by employees of other corporations who are about to become Associates, or whose employer is about to become a Subsidiary of the Company, as the result of a merger or consolidation of the Company or a Subsidiary of the Company with another corporation, the acquisition by the Company or a Subsidiary of the Company of all or substantially all the assets of another corporation or the acquisition by the Company or a Subsidiary of the Company of at least 50% of the issued and outstanding stock of another corporation. The terms and conditions of the substitute Awards so granted may vary from the terms and conditions set forth in this Plan to such extent as the Board at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the Awards in substitution for which they are granted, but with respect to Awards which are Incentive Stock Options, no such variation shall be permitted which affects the status of any such substitute option as an Incentive Stock Option. 14. GOVERNING LAW. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken pursuant to this Plan shall be governed by the 24 laws of Delaware, without giving effect to principles of conflicts of laws, and construed accordingly. 15. SEVERABILITY. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 16. PRIOR PLANS. Notwithstanding the adoption of this Plan by the Board and approval of this Plan by the Company's stockholders as provided by Section 12(a) hereof, the Company's 1992 and 1994 Plans, as the same may have been amended from time to time, shall remain in effect, but grants of stock options pursuant to the 1992 and 1994 Plans shall not be made after the effective date of this Plan. All grants and awards heretofore made under the 1992 and 1994 Plans shall be governed by the terms of the 1992 and 1994 Plans, respectively. 25 EX-10 5 exhibit10-2.txt AMENDMENT NO. 4 WAIVER AND CONSENT AMENDMENT NO. 4, WAIVER AND CONSENT AMENDMENT NO. 4, WAIVER AND CONSENT ("Amendment No. 4") dated as of April 27, 2001 to the Credit Agreement dated as of April 1, 1999, as amended (the "Credit Agreement"), among Express Scripts, Inc.; each of the Subsidiary Guarantors party thereto; each of the Lenders party thereto; Credit Suisse First Boston, as Lead Arranger, Administrative Agent and Collateral Agent; Bankers Trust Company, as Syndication Agent; The First National Bank of Chicago, as Co-Documentation Agent; and Mercantile Bank, N.A., as Co-Documentation Agent (capitalized terms not otherwise defined in this Amendment No. 4 have the same meaning assigned to such terms in the Credit Agreement). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Company has informed Lenders of (a) certain projects and initiatives for which Company wants the ability to make Consolidated Capital Expenditures exceeding what the Credit Agreement currently permits; (b) the anticipated pending liquidation of PlanetRx in connection with which Company wants to obtain the release of the Lien on the Pledged PlanetRx Stock, the pledge of which was made in connection with Amendment No.3; and (c) the reorganization and acquisition of certain Subsidiaries as set forth on Schedule I, attached hereto and incorporated herein by this reference (the "Subsidiary Reorganization"); and WHEREAS, pursuant to Section 10.6 of the Credit Agreement, Requisite Lenders hereby agree to amend certain provisions of the Credit Agreement and to consent to certain actions under the Credit Agreement as set forth herein. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION ONE - Amendment. Section 7.8 of the Credit Agreement is hereby amended by deleting the table set forth at the end of the first sentence and replacing it with the following table: =============================================== ============================= Maximum Consolidated Fiscal Year Capital Expenditures - ----------------------------------------------- ----------------------------- 1999 (from Closing Date to end of Fiscal Year) $50,000,000 - ----------------------------------------------- ----------------------------- - ----------------------------------------------- ----------------------------- 2000 $50,000,000 - ----------------------------------------------- ----------------------------- - ----------------------------------------------- ----------------------------- 2001 $85,000,000 - ----------------------------------------------- ----------------------------- - ----------------------------------------------- ----------------------------- 2002 $80,000,000 - ----------------------------------------------- ----------------------------- 2003 through 2005 $75,000,000 =============================================== ============================= SECTION TWO - Consent. Notwithstanding the provisions of the Credit Agreement, the Lenders hereby consent to the release of the Lien granted in favor of the Collateral Agent with respect to the Pledged PlanetRx Stock. SECTION THREE - Waiver. Notwithstanding the provisions of the Credit Agreement, subject to the conditions of Section 4 of this Amendment No. 4, the Lenders hereby waive (a) with respect to all periods prior to the effectiveness of this Amendment No.4, the application of Sections 5.1D and 6.1(xv) of the Credit Agreement, and the related provisions of the other Loan Documents solely with respect to the New Subsidiaries listed on Schedule II hereto (the "New Subsidiaries"); (b) the application of Section 6.8 of the Credit Agreement and related Loan Documents solely with respect to (i) the New Domestic Subsidiaries as it relates to the pledge of 100% of the capital stock of such Subsidiaries and the execution and delivery of counterparts of the Subsidiary Guaranty and (ii) the New Canadian Subsidiaries as it relates to the pledge of 65% of the capital stock of such Subsidiaries until the earlier to occur of (x) the liquidation of the New Canadian Subsidiaries or (y) July 31, 2001; and (c) any Default or Event of Default that may have occurred under the Credit Agreement during the period commencing June 1, 1999 and ending on the date hereof, as a result of any failure by Company or any of its Subsidiaries to comply with the provisions of the Credit Agreement and the related provisions of the Loan Documents referred to in the foregoing clause (a) and (b). SECTION FOUR - Conditions to Effectiveness. (a) This Amendment No. 4 shall become effective as of the date first above written when, and only when Administrative Agent shall have received counterparts of this Amendment No. 4 executed by Company, Subsidiary Guarantors and Requisite Lenders or, as to any of Lenders, advice satisfactory to Administrative Agent that such Lender has executed this Amendment No. 4. 2 (b) The effectiveness of this Amendment No. 4 (other than Sections Seven and Nine hereof) is conditioned upon (i) the accuracy of the representations and warranties set forth in Section Five hereof; and (ii) compliance by each of Company and the relevant Subsidiary with Section 6.8 of the Credit Agreement with respect to the New Domestic Subsidiaries. SECTION FIVE- Representations and Warranties. In order to induce Lenders and Agents to enter into this Amendment No. 4, Company represents and warrants to each of Lenders and Agents that after giving effect to this Amendment No. 4, (i) no Default or Event of Default has occurred and is continuing; and (ii) all of the representations and warranties in the Credit Agreement, after giving effect to this Amendment No. 4, are true and complete in all material respects on and as of the date hereof as if made on the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); SECTION SIX - Reference to and Effect on the Credit Agreement and the Notes. On and after the effectiveness of this Amendment No. 4, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement and each reference in each of the other Credit Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Amendment No. 4. The Credit Agreement, the Notes and each of the other Credit Documents, as specifically amended by this Amendment No. 4, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. SECTION SEVEN - Costs, Expenses and Taxes. Company agrees to pay all reasonable costs and expenses of the Agents in connection with the preparation, execution and delivery of this Amendment No. 4 and the other instruments and documents to be delivered hereunder, if any (including, without limitation, the reasonable fees and expenses of Cahill Gordon & Reindel) in accordance with the terms of Section 10.2 of the Credit Agreement. In addition, Company shall pay or reimburse any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Amendment No. 4 and the other instruments and documents to be delivered hereunder, if any, and agrees to save each Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. SECTION EIGHT - Execution in Counterparts. This Amendment No. 4 may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment No. 4 by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 4. 3 SECTION NINE - Governing Law. This Amendment No. 4 shall be governed by, and construed and enforced in accordance with, the internal laws of the State of New York (including Section 5-1401 of the General Obligations Law of the State of New York), without giving effect to any provisions thereof relating to conflicts of law. [Remainder of Page Intentionally Left Blank] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 4 to be executed by their respective officers thereunto duly authorized, as of the date first above written. EXPRESS SCRIPTS, INC. By: /s/ George Paz -------------------------------------- Name: George Paz Title: Senior Vice President and Chief Financial Officer 5 SUBSIDIARY GUARANTORS: DIVERSIFIED PHARMACEUTICAL SERVICES, INC. EXPRESS SCRIPTS SALES DEVELOPMENT CO. EXPRESS SCRIPTS VISION CORP. IVTX, INC. VALUE HEALTH, INC. ESI MAIL PHARMACY, INC. EXPRESS SCRIPTS UTILIZATION MANAGEMENT CO. EXPRES SCRIPTS SPECIALTY DISTRIBUTION SERVICES, INC. ESI CLAIMS, INC. By: /s/ George Paz -------------------------------------- Name: George Paz Title: Senior Vice President and Chief Financial Officer as one of the Requisite Lenders (please type) BANK OF AMERICA, N.A. By: /s/ Joseph L. Corah -------------------------------------- Name: Joseph L. Corah Title: Principal BANK LEUMI USA By: /s/ Joung Hee Hong -------------------------------------- Name: Joung Hee Hong Title: Vice President BANK OF MONTREAL By: /s/ Michael E. Joyce -------------------------------------- Name: Michael E. Joyce Title: Managing Director THE BANK OF NEW YORK By: /s/ Jonathan Rollins -------------------------------------- Name: Jonathan Rollins Title: Vice President BANK ONE, NA By: /s/ Suzanne Ergastolo -------------------------------------- Name: Suzanne Ergastolo Title: Vice President BANKERS TRUST COMPANY By: /s/ Mary Jo Jolly -------------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President BAYERISCHE HYPO-UND VEREINSBANK AG NEW YORK BRANCH By: /s/ Timothy L. Harrod -------------------------------------- Name: Timothy L. Harrod Title: Director By: /s/ Steven Simons -------------------------------------- Name: Steven Simons Title: Associate Director BNP PARIBAS By: /s/ Brook Harris -------------------------------------- Name: Brook Harris Title: Director By: /s/ Ro Toyoshima -------------------------------------- Name: Ro Toyoshima Title: Vice President CREDIT SUISSE FIRST BOSTON By: /s/ William S. Lutkins -------------------------------------- Name: William S. Lutkins Title: Vice President ERSTE BANK By: /s/ Brandon A. Meyerson -------------------------------------- Name: Brandon A. Meyerson Title: Vice President By: /s/ John S. Runnion -------------------------------------- Name: John S. Runnion Title: Managing Director FIRSTAR BANK N.A. By: /s/ L. Alec Blanc III -------------------------------------- Name: L. Alec Blanc III Title: Senior Vice President FLEETBOSTON FINANCIAL, INC. By: /s/ Robinson Alston, Jr. -------------------------------------- Name: Robinson Alston, Jr. Title: Vice President HELLER FINANCIAL, INC. By: /s/ K. Craig Gallahugh -------------------------------------- Name: Craig Gallahugh Title: Senior Vice President MELLON BANK, N.A. By: /s/ Louis E. Flori -------------------------------------- Name: Louis E. Flori Title: Vice President MICHIGAN NATIONAL By: /s/ Teresa L. Irland -------------------------------------- Name: Teresa L. Irland Title: First Vice President TEXTRON FINANCIAL CORPORATION By: /s/ Matthew Colgan -------------------------------------- Name: Matthew Colgan Title: Director UNION BANK OF CALIFORNIA, N.A. By: /s/ J. Scott Jessup -------------------------------------- Name: J. Scott Jessup Title: Vice President EX-10 6 exhibit10-3.txt PLEDGE AGREEMENT EXHIBIT I PLEDGE AGREEMENT This Pledge Agreement, dated May 4, 2001, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement may be attached to the Pledge Agreement dated April 1, 1999, between the undersigned and Credit Suisse First Boston, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Agreement shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all of the Secured Obligations. EXPRESS SCRIPTS, INC. By: /s/ George Paz ------------------------------------ George Paz, Senior Vice President Class of Stock Certificate Par Number of Stock Issuer Stock Nos. Value Shares - ----------------------------- ---------- ------------------ --------- --------- EX-10 7 exhibit10-4.txt PLEDGE AGREEMENT EXHIBIT I PLEDGE AGREEMENT This Pledge Agreement, dated June 20, 2001, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement may be attached to the Pledge Agreement dated April 1, 1999, between the undersigned and Credit Suisse First Boston, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Agreement shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all of the Secured Obligations. EXPRESS SCRIPTS, INC. By: /s/ George Paz ------------------------------------- George Paz, Senior Vice President Class of Stock Certificate Par Number of Stock Issuer Stock Nos. Value Shares - -------------------------------------------------------------------------------- EX-10 8 exhibit10-5.txt SUBSIDIARY PLEDGE AGREEMENT EXHIBIT I SUBSIDIARY PLEDGE AGREEMENT This Pledge Agreement, dated June 20, 2001, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement may be attached to the Pledge Agreement dated April 1, 1999, between the Pledgors party thereto and Credit Suisse First Boston, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Agreement shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all of the Secured Obligations. ESI MAIL PHARMACY SERVICE, INC. By: /s/ George Paz ------------------------------- George Paz, Vice President Class of Stock Certificate Par Number of Stock Issuer Stock Nos. Value Shares - ----------------------------- ---------- ------------------ --------- --------- EXHIBIT I SUBSIDIARY PLEDGE AGREEMENT This Pledge Agreement, dated June 20, 2001, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement may be attached to the Pledge Agreement dated April 1, 1999, between the Pledgors party thereto and Credit Suisse First Boston, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Agreement shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all of the Secured Obligations. ESI-GP HOLDINGS, INC. By: /s/ George Paz -------------------------------- George Paz, Vice President Class of Stock Certificate Par Number of Stock Issuer Stock Nos. Value Shares - ----------------------------- ---------- ------------------ --------- --------- EXHIBIT I SUBSIDIARY PLEDGE AGREEMENT This Pledge Agreement, dated June 20, 2001, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Pledge Agreement may be attached to the Pledge Agreement dated April 1, 1999, between the Pledgors party thereto and Credit Suisse First Boston, as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the Pledged Shares listed on this Pledge Agreement shall be deemed to be part of the Pledged Shares and shall become part of the Pledged Collateral and shall secure all of the Secured Obligations. ESI PARTNERSHIP EXPRES SCRIPTS, INC., General Partner By: /s/ George Paz -------------------------------------- George Paz, Senior Vice President ESI-GP HOLDINGS, INC., General Partner By: /s/ George Paz -------------------------------------- George Paz, Vice President Class of Stock Certificate Par Number of Stock Issuer Stock Nos. Value Shares - ----------------------------- ---------- ------------------ --------- --------- -----END PRIVACY-ENHANCED MESSAGE-----