-----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, SPC3RQ1mNPoFkGkpuQotkhKYKFXU69Bn1PQa/0+6qYO0SVQ7NKEdhZ2Pwl0ml6Cp xNOIn5dTYPAlaEIbelQacA== 0000885721-01-500023.txt : 20020410 0000885721-01-500023.hdr.sgml : 20020410 ACCESSION NUMBER: 0000885721-01-500023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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: 1784345 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 sept2001-10q.txt 3RD 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 September 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 October 31, 2001: 79,172,701 Shares - -------------------------------------------------------------------------------- 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 16 Item 3. Quantitative and Qualitative Disclosures About Market Risks 22 Part II Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds - (Not Applicable) Item 3. Defaults Upon Senior Securities - (Not Applicable) Item 4. Submission of Matters to a Vote of Security Holders -(Not Applicable) Item 5. Other Information - (Not Applicable) Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 Index to Exhibits 26 2
PART I. FINANCIAL INFORMATION - ------------------------------------------------------------------------------------------------------------------------ ITEM 1. FINANCIAL STATEMENTS EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31, (in thousands, except share data) 2001 2000 Assets Current assets: Cash and cash equivalents $ 104,820 $ 53,204 Receivables, net 831,921 802,790 Inventories 109,243 110,053 Other current assets 26,121 32,122 ---------------- ---------------- Total current assets 1,072,105 998,169 Property and equipment, net 154,869 147,709 Goodwill, net 951,273 967,017 Other intangible assets, net 164,274 157,094 Other assets 17,777 6,655 ---------------- ---------------- Total assets $ 2,360,298 $ 2,276,644 ================ ================ Liabilities and Stockholders' Equity Current liabilities: Claims and rebates payable $ 831,605 $ 878,622 Other current liabilities 290,388 237,322 ---------------- ---------------- Total current liabilities 1,121,993 1,115,944 Long-term debt 346,199 396,441 Other liabilities 76,329 59,015 ---------------- ---------------- Total liabilities 1,544,521 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 79,260,000 and 39,044,000 shares issued and outstanding, respectively 792 390 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 488,142 441,387 Unearned compensation under employee compensation plans (19,116) (13,676) Accumulated other comprehensive income (4,914) (97) Retained earnings 377,928 287,414 ---------------- ---------------- 842,832 715,418 Common Stock in treasury at cost, 570,000 and 270,000 shares, respectively (27,055) (10,174) ---------------- ---------------- Total stockholders' equity 815,777 705,244 ---------------- ---------------- Total liabilities and stockholders' equity $ 2,360,298 $ 2,276,644 ================ ================ See accompanying Notes to Consolidated Financial Statements
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EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, (in thousands, except per share data) 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- Revenues: Revenues $ 2,349,770 $ 1,732,151 $ 6,612,372 $ 4,854,942 Other revenues - 4,338 - 10,423 ---------------- ---------------- ---------------- ---------------- 2,349,770 1,736,489 6,612,372 4,865,365 Cost and expenses: Cost of revenues 2,205,472 1,603,650 6,172,736 4,462,677 Selling, general and administrative 84,067 82,687 266,610 253,479 ---------------- ---------------- ---------------- ---------------- 2,289,539 1,686,337 6,439,346 4,716,156 ---------------- ---------------- ---------------- ---------------- Operating income 60,231 50,152 173,026 149,209 ---------------- ---------------- ---------------- ---------------- Other income (expense): Undistributed loss from joint venture (435) - (1,093) - Write-off of marketable securities - - - (155,500) Interest income 1,837 2,774 5,521 6,201 Interest expense (8,417) (10,861) (26,190) (38,245) ---------------- ---------------- ---------------- ---------------- (7,015) (8,087) (21,762) (187,544) ---------------- ---------------- ---------------- ---------------- Income (loss) before income taxes 53,216 42,065 151,264 (38,335) Provision (benefit) for income taxes 20,653 17,292 60,378 (10,363) ---------------- ---------------- ---------------- ---------------- Income (loss) before extraordinary items 32,563 24,773 90,886 (27,972) Extraordinary items, net of taxes (372) (898) (372) (898) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 32,191 $ 23,875 $ 90,514 $ (28,870) ================ ================ ================ ================ Basic earnings (loss) per share: Before extraordinary items $ 0.41 $ 0.32 $ 1.16 $ (0.37) Extraordinary items - (0.01) - (0.01) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 0.41 $ 0.31 $ 1.16 $ (0.38) ================ ================ ================ ================ Weighted average number of common shares outstanding during the period - Basic EPS 78,382 76,662 77,978 76,326 ================ ================ ================ ================ Diluted earnings (loss) per share: Before extraordinary items $ 0.40 $ 0.31 $ 1.13 $ (0.37) Extraordinary items - (0.01) - (0.01) ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 0.40 $ 0.30 $ 1.13 $ (0.38) ================ ================ ================ ================ Weighted average number of common shares outstanding during the period - Diluted EPS 80,612 78,580 80,156 76,326 ================ ================ ================ ================ See accompanying Notes to Consolidated Financial Statements
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EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Number Amount of Shares --------- -------------------------------------------------------------------------------- Unearned Compensation Accumulated Additional Under Employee Other Common Common Paid-in Compensation Comprehensive Retained Treasury (in thousands) Stock Stock Capital Plans Income Earnings Stock Total - --------------------------------------------- ------------------------------------------------------------------------------------ Balance at December 31, 2000 39,044 $390 $ 441,387 $(13,676) $ (97) $287,414 $ (10,174) $ 705,244 ------ ----------------------------------------------------------------------------------- Net income - - - - - 90,514 - 90,514 Other comprehensive income, Foreign currency translation adjustment - - - - (915) - - (915) Cumulative effect of change in accounting for derivative financial instruments, net of taxes - - - - (612) - - (612) Realized and unrealized losses on derivative financial instruments, net of taxes - - - - (3,290) - - (3,290) -------------------------------------------------------------------------------------------- Comprehensive (loss) income - - - - (4,817) 90,514 - 85,697 Stock split in form of stock dividend 39,292 393 (393) - - - - - Treasury stock acquired - - - - - - (27,055) (27,055) Common stock issued under employee plans 129 1 15,137 (13,673) - - - 1,465 Amortization of unearned compensation under employee plans - - - 8,233 - - - 8,233 Exercise of stock options 795 8 12,016 - - - 10,174 22,198 Tax benefit relating to employee stock options - - 19,995 - - - - 19,995 -------------------------------------------------------------------------------------------- Balance at September 30, 2001 79,260 $792 $ 488,142 $(19,116) $(4,914) $377,928 $ (27,055) $ 815,777 ============================================================================================ See accompanying Notes to Consolidated Financial Statements
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EXPRESS SCRIPTS, INC. UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, (in thousands) 2001 2000 --------- --------- Cash flows from operating activities: Net income (loss) $ 90,514 $ (28,870) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 58,838 59,631 Write-off of marketable securities - 155,500 Non-cash adjustments to net income (loss) 54,182 (23,342) Net changes in operating assets and liabilities (35,482) (5,750) --------- --------- Net cash provided by operating activities 168,052 157,169 --------- --------- Cash flows from investing activities: Purchases of property and equipment (36,830) (46,976) Proceeds from the sale of property and equipment 844 8,831 Acquisition, net of cash acquired and investment in joint venture (19,582) - Other (7,234) (966) --------- --------- Net cash used in investing activities (62,802) (39,111) --------- --------- Cash flows from financing activities: Repayment of long-term debt (50,000) (210,069) Treasury stock acquired (27,055) (30,247) Proceeds from employee stock plans 23,663 11,963 --------- --------- Net cash used in financing activities (53,392) (228,353) --------- --------- Effect of foreign currency translation adjustment (242) (153) --------- --------- Net increase (decrease) in cash and cash equivalents 51,616 (110,448) Cash and cash equivalents at beginning of period 53,204 132,630 --------- --------- Cash and cash equivalents at end of period $ 104,820 $ 22,182 ========= ========= 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 September 30, 2001, the Unaudited Consolidated Statement of Operations for the three months and nine months ended September 30, 2001 and 2000, the Unaudited Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 2001, and the Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 2001 and 2000. Operating results for the three months and nine months ended September 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 September 30, 2001 and December 31, 2000, are allowance for doubtful accounts of $25,254,000 and $22,677,000, respectfully. As of September 30, 2001 and December 31, 2000, unbilled receivables were $410,706,000 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 (1,971,000 and 1,515,000 for the nine months ended September 30, 2001 and 2000, respectively), any unvested shares and shares issuable pursuant to employee elected deferral under the executive deferred compensation plan (20,000 for the nine months ended September 30, 2001) and restricted stock we have issued (187,000 for the nine months ended September 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 (1,515,000 for the nine months ended September 30, 2000) 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. 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$26.8 million (approximately US$17.5 million), which includes a purchase price adjustment for closing working capital. The transaction, which has been accounted for under the purchase method of accounting, 7 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$11,655,000 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. 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 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 nine months ended September 30, 2001 is $435,000 ($272,000 net of tax) and $1,093,000 ($679,000 net of tax), respectively, and has been recorded in other income (expense) in our Unaudited Consolidated Statement of Operations. 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 September 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 matured 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 increased to approximately $98 million in October 2001 and will increase to $100 million in October 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 ($6,291,000 pre-tax at September 30, 2001) and the related gains or losses on these agreements are deferred in shareholders' equity as a component of other comprehensive income (a $3,902,000, net of taxes, reduction at September 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 nine months ended September 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. As of September 30, 2001, we have repurchased a total of 3,100,000 shares of our 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, of which, 570,000 shares were repurchased during the nine months ended September 30, 2001. Approximately 2,530,000 shares have been reissued in connection with employee compensation plans through September 30, 2001. 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 purchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions, subject to restrictions on stock repurchases contained in our bank credit facility and the Indenture under which our Senior Notes were issued. NOTE 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 - FINANCING During the third quarter of 2001, we prepaid $50 million of our Term A loans. 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. As a result of the prepayment on the Term A loans, we recognized a $372,000, net of tax, extraordinary loss from the write-off of deferred financing fees. 9 NOTE 9 - 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 SEPTEMBER 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 10 - 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 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. During 2001 and 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"), ESI Mail Pharmacy Service, Inc. ("ESI MPS"), Express Access Pharmacy, Inc. ("EAP") and ESI Resources, Inc. ("ERI"). 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, ESI MPS, EAP and ERI are incorporated into those of the Guarantors. 10
CONDENSED CONSOLIDATING BALANCE SHEET - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON-GUARANTORS (IN THOUSANDS) SCRIPTS, INC. GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- AS OF SEPTEMBER 30, 2001 Current assets $ 877,123 $ 189,469 $ 5,513 $ - $ 1,072,105 Property and equipment, net 123,482 29,882 1,505 - 154,869 Investments in subsidiaries 1,209,885 753,821 4,821 (1,968,527) - Intercompany 387,578 (374,022) (13,556) - - Goodwill, net 243,878 692,185 15,210 - 951,273 Other intangible assets, net 50,818 108,616 4,840 - 164,274 Other assets 91,821 (76,878) 2,834 - 17,777 ---------------------------------------------------------------------------------- Total assets $ 2,984,585 $ 1,323,073 $ 21,167 $ (1,968,527) $ 2,360,298 ================================================================================== Current liabilities $ 506,722 $ 600,142 $ 15,129 $ - $ 1,121,993 Long-term debt 346,199 - - - 346,199 Other liabilities 133,711 (55,431) (1,951) - 76,329 Stockholders' equity 1,997,953 778,362 7,989 (1,968,527) 815,777 ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,984,585 $ 1,323,073 $ 21,167 $ (1,968,527) $ 2,360,298 ================================================================================== 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 ==================================================================================
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON-GUARANTORS (IN THOUSANDS) SCRIPTS, INC. GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 Total revenues $ 1,417,020 $ 928,906 $ 3,844 $ - $ 2,349,770 Operating expenses 1,365,739 920,940 2,860 - 2,289,539 ---------------------------------------------------------------------------------- Operating income 51,281 7,966 984 - 60,231 Undistributed loss from joint venture (435) - - - (435) Interest expense, net (5,810) (9) (761) - (6,580) ---------------------------------------------------------------------------------- Income before tax effect 45,036 7,957 223 - 53,216 Income tax provision (benefit) 17,999 3,106 (452) - 20,653 ---------------------------------------------------------------------------------- Income before extraordinary item 27,037 4,851 675 - 32,563 Extraordinary item, net of tax (372) - - - (372) ---------------------------------------------------------------------------------- Net income $ 26,665 $ 4,851 $ 675 $ - $ 32,191 ================================================================================== THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues $ 1,088,832 $ 644,464 $ 3,193 $ - $ 1,736,489 Operating expenses 1,069,419 613,596 3,322 - 1,686,337 ---------------------------------------------------------------------------------- Operating income (loss) 19,413 30,868 (129) - 50,152 Interest (expense) income, net (8,091) (7) 11 - (8,087) ---------------------------------------------------------------------------------- Income (loss) before tax effect 11,322 30,861 (118) - 42,065 Income tax provision (benefit) 6,111 11,205 (24) - 17,292 ---------------------------------------------------------------------------------- Income (loss) before extraordinary item 5,211 19,656 (94) - 24,773 Extraordinary item, net of tax (898) - - - (898) ---------------------------------------------------------------------------------- Net income (loss) $ 4,313 $ 19,656 $ (94) $ - $ 23,875 ================================================================================== NINE MONTHS ENDED SEPTEMBER 30, 2001 Total revenues $ 4,060,446 $ 2,539,145 $ 12,781 $ - $ 6,612,372 Operating expenses 3,921,949 2,507,136 10,261 - 6,439,346 ---------------------------------------------------------------------------------- Operating income 138,497 32,009 2,520 - 173,026 Undistributed loss from joint venture (1,093) - - - (1,093) Interest expense, net (19,977) (14) (678) - (20,669) ---------------------------------------------------------------------------------- Income before tax effect 117,427 31,995 1,842 - 151,264 Income tax provision 48,062 12,130 186 - 60,378 ---------------------------------------------------------------------------------- Income before extraordinary item 69,365 19,865 1,656 - 90,886 Extraordinary item, net of tax (372) - - - (372) ---------------------------------------------------------------------------------- Net income $ 68,993 $ 19,865 $ 1,656 $ - $ 90,514 ================================================================================== NINE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues $ 3,021,343 $ 1,835,376 $ 8,646 $ - $ 4,865,365 Operating expenses 2,956,552 1,750,303 9,301 - 4,716,156 ---------------------------------------------------------------------------------- Operating income (loss) 64,791 85,073 (655) - 149,209 Write-off of marketable securities - (155,500) - - (155,500) Interest (expense) income, net (32,046) (10) 12 - (32,044) ---------------------------------------------------------------------------------- Income (loss) before tax effect 32,745 (70,437) (643) - (38,335) Income tax provision (benefit) 16,669 (26,850) (182) - (10,363) ---------------------------------------------------------------------------------- Income (loss) before extraordinary item 16,076 (43,587) (461) - (27,972) Extraordinary item, net of tax (898) - - - (898) ---------------------------------------------------------------------------------- Net income (loss) $ 15,178 $ (43,587) $ (461) $ - $ (28,870) ==================================================================================
12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON-GUARANTORS (IN THOUSANDS) SCRIPTS, INC. GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2001 Net cash (used in) provided by operating activities $ (59,168) $ 212,991 $ 14,376 $ (147) $ 168,052 ---------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (27,241) (9,466) (123) - (36,830) Acquisitions and joint venture (3,182) - (16,400) - (19,582) Other (6,862) 810 (338) - (6,390) ---------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (37,285) (8,656) (16,861) - (62,802) ---------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (50,000) - - - (50,000) Treasury stock acquired (27,055) - - - (27,055) Proceeds from employee stock plans 23,663 - - - 23,663 Net transactions with parent 202,443 (207,810) 5,220 147 - ---------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 149,051 (207,810) 5,220 147 (53,392) ---------------------------------------------------------------------------------- Effect of foreign currency translation adjustment - - (242) - (242) ---------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 52,598 (3,475) 2,493 - 51,616 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 $ 200,909 $ (101,994) $ 5,905 $ - $ 104,820 ================================================================================== 13 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------------- EXPRESS NON-GUARANTORS (IN THOUSANDS) SCRIPTS, INC. GUARANTORS ELIMINATIONS CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2000 Net cash (used in) provided by operating activities $ (378,344) $ 539,044 $ (3,384) $ (147) $ 157,169 ---------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (79,381) 32,528 (123) - (46,976) Proceeds from the sale of equipment 8,831 - - - 8,831 Other (966) - - - (966) ---------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (71,516) 32,528 (123) - (39,111) ---------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (210,069) - - - (210,069) Treasury stock acquired (30,247) - - - (30,247) Proceeds from employee stock plans 11,963 - - - 11,963 Net transactions with parent 753,399 (755,888) 2,342 147 - ---------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 525,046 (755,888) 2,342 147 (228,353) ---------------------------------------------------------------------------------- Effect of foreign currency translation adjustment - - (153) - (153) ---------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 75,186 (184,316) (1,318) - (110,448) Cash and cash equivalents at beginning of the period 123,722 4,198 4,710 - 132,630 Cash and cash equivalents at end of the period ---------------------------------------------------------------------------------- $ 198,908 $ (180,118) $ 3,392 $ - $ 22,182 ==================================================================================
14 NOTE 11 - 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 SEPTEMBER 30, 2001 Total revenues $ 2,335,537 $14,233 $ 2,349,770 Income before income taxes 50,751 2,465 53,216 THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues $ 1,715,008 $21,481 $ 1,736,489 Income before income taxes 38,350 3,715 42,065 NINE MONTHS ENDED SEPTEMBER 30, 2001 Total revenues $ 6,557,236 $55,136 $ 6,612,372 Income before income taxes 146,009 5,255 151,264 NINE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues $ 4,799,768 $65,597 $ 4,865,365 (Loss) income before income taxes (52,245) 13,910 (38,335) Included in PBM loss before taxes for the nine months ended September 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 12 - NEW ACCOUNTING GUIDANCE 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 items would have been $39,107,000 or $0.49 per diluted share and $31,259,000, or $0.40 per diluted share, for the three months ended September 30, 2001 and 2000, respectively and $110,511,000, or $1.38 per diluted share and $(8,746,000), or $(0.11) per diluted share, for the nine months ended September 30, 2001 and 2000, respectively. 15 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 resultingfrom 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 increase in credit risk relative to our clients due to adverse economic trends 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 and ingredient costs of pharmaceuticals dispensed from retail pharmacies related to a new sample card program under our Express Scripts Specialty Distribution Services subsidiary ("SDS"). Additionally, the associated costs for this sample card program are recorded in cost of revenues. 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 16 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. As a result of winding down our operations, we expect to continue to incur some operating expenses throughout the remainder of 2001, but we generated revenues for Infusion Services only through June 12, 2001. During 2001, we increased our membership to approximately 47.5 million members as of October 1, 2001 compared to approximately 41.5 million members as of October 1, 2000, representing a 14.5% increase. The membership count excludes 500,000 members at October 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 October 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"). 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 we serve.
RESULTS OF OPERATIONS REVENUES THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ INCREASE/ (IN THOUSANDS) 2001 DECREASE 2000 2001 DECREASE 2000 - --------------------------------------------------------------------------------------------------------------------------- PBM Gross Basis revenues $ 2,322,575 39.5% $ 1,664,532 $ 6,513,216 41.2% $ 4,613,581 PBM Net Basis revenues 12,962 -71.9% 46,138 44,020 -75.0% 175,764 Other revenues - nm 4,338 - nm 10,423 ------------------------------------------- ------------------------------------------- Total PBM revenues 2,335,537 36.2% 1,715,008 6,557,236 36.6% 4,799,768 Non-PBM revenues 14,233 -33.7% 21,481 55,136 -15.9% 65,597 ------------------------------------------- ------------------------------------------- Total revenues $ 2,349,770 35.3% $ 1,736,489 $ 6,612,372 35.9% $ 4,865,365 =========================================== =========================================== nm = not meaningful
Revenues for network pharmacy claims increased $423,837,000, or 34.2%, and $1,220,878,000, or 35.1%, respectively, during the three months and nine months ended September 30, 2001 over 2000. Network pharmacy claims processed increased 21.6% to 70,373,000 during the third quarter of 2001 over 2000 and 22.1% to 214,029,000 during the nine months ended September 30, 2001 over 2000 (excluding the 14,452,000 and 56,180,000 claims processed for UHC during the three months and nine months ended September 30, 2000, respectively). These increases are due to a higher mix of clients utilizing retail pharmacy networks contracted by us, increased membership, higher drug ingredient costs resulting from price increases for existing drugs and new drugs introduced into the marketplace, and increased member utilization. The average revenue per network pharmacy claim increased 37.8% to $23.64 and 46.1% to $21.97 over the three months and nine months ended September 30, 2000 due to the termination of the UHC contract and a higher mix of clients utilizing retail pharmacy networks contracted by us versus retail pharmacy networks contracted by the client. 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. Revenues for mail pharmacy services and mail pharmacy claims processed increased $199,839,000, or 43.9%, and 1,498,000, or 38.4%, respectively for the third quarter of 2001 over 2000 and $545,775,000, or 43.0%, and 3,657,000, or 32.9%, respectively for the nine months ended September 30, 2001 over 2000. These increases are primarily due to increased membership and utilization by existing members. For the three months and nine months ended September 30, 2001, the average revenue per mail pharmacy claim increased 4.0% and 7.6% over 2000 primarily due to higher drug ingredient costs as stated above. The decrease in revenue for non-PBM services in the third quarter of 2001 and the nine months ended September 30, 2001 is primarily due to our sale of our Infusion Services subsidiary on June 12, 2001. 17
COSTS AND EXPENSES THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ INCREASE/ (IN THOUSANDS) 2001 DECREASE 2000 2001 DECREASE 2000 - --------------------------------------------------------------------------------------------------------------------------- PBM $ 2,196,345 38.3% $ 1,588,135 $ 6,134,406 38.8% $ 4,418,445 Percentage of total PBM revenues 94.0% 92.6% 93.6% 92.1% Non-PBM 9,127 -41.2% 15,515 38,330 -13.3% 44,232 Percentage of non-PBM revenues 64.1% 72.2% 69.5% 67.4% --------------------------------------- ---------------------------------------- Cost of revenues 2,205,472 37.5% 1,603,650 6,172,736 38.3% 4,462,677 Percentage of total revenues 93.9% 92.4% 93.4% 91.7% Selling, general and administrative 67,935 -0.4% 68,206 219,329 8.8% 201,602 Percentage of total revenues 2.9% 3.9% 3.3% 4.1% Depreciation and amortization(1) 16,132 11.4% 14,481 47,281 -8.9% 51,877 Percentage of total revenues 0.7% 0.8% 0.7% 1.1% ---------------------------------------- ---------------------------------------- Total cost and expenses $ 2,289,539 35.8% $ 1,686,337 $ 6,439,346 36.5% $ 4,716,156 ======================================== ======================================== Percentage of total revenues 97.4% 97.1% 97.4% 96.9%
(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 $4,506 and $2,675 for the three months ended September 30, 2001 and 2000, respectively and $11,557 and $7,754 for the nine months ended September 30, 2001 and 2000, respectively. Our cost of revenues for PBM services as a percentage of total PBM revenues increased slightly in the third quarter of 2001 and for the nine months ended September 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 decreased as a percentage of non-PBM revenues for the three months ended September 30, 2001 from 2000 due to the discontinuation of our acute home infusion services during the second quarter of 2001, which was less profitable than our SDS business. Cost of revenues for non-PBM services increased as a percentage of non-PBM revenues for the nine months ended September 30, 2001 from 2000 primarily due to the decrease in our Infusion Services subsidiary revenues (discussed above) and additional expenses involved in the wind-down of our acute home infusion services during the second quarter of 2001. Selling, general and administrative expenses, excluding depreciation and amortization, decreased $271,000, or 0.4%, in the third quarter of 2001 over 2000 and increased $17,727,000, or 8.8%, for the nine months ended September 30, 2001 over 2000. The increase for the nine months ended September 30, 2001 is primarily due to expenditures required to expand operational and administrative support functions in order to enhance management of the pharmacy benefit. As a percentage of total revenue, selling, general and administrative expenses have decreased to 2.9% and 3.3% for the three months and nine months ended September 30, 2001, respectively. Depreciation and amortization increased slightly for the third quarter of 2001 over 2000 as a result of completing and placing into service capitalized projects. Depreciation and amortization decreased for the nine months ended September 30, 2001 from 2000 primarily due to amortization of the UHC customer contract intangible asset, which fully amortized during 2000. 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. 18 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 nine months ended September 30, 2001 is $435,000 ($272,000 net of tax) and $1,093,000 ($679,000 net of tax), respectively, and has been recorded in other income (expense) in our Unaudited Consolidated Statement of Operations. The $1,507,000, or 18.6%, decrease in net interest expense for the third quarter of 2001 over 2000 and $11,375,000, or 35.5%, decrease in net interest expense for the nine months ended September 30, 2001 over 2000 is due to the reduction in debt of $80 million since October 1, 2000. 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 to 38.8% for the third quarter of 2001 and 39.9% for the nine months ended September 30, 2001 from 41.1% and 41.1%, 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)". These decreases are due primarily to lower taxes paid in several states as well as a decrease in non-deductible goodwill as a percentage of taxable income. NET INCOME AND EARNINGS PER SHARE Our net income before extraordinary items increased $7,790,000, or 31.4%, and $21,826,000, or 31.6%, for the three months and nine months ended September 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 of 1,515,000 for the nine months ended September 30, 2000, basic and diluted earnings per share before extraordinary items increased 28.1% and 29.0% for the third quarter of 2001 over 2000, and 28.9% and 27.0% for the nine months ended September 30, 2001 over 2000. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2001, net cash provided by operations increased $10,883,000 to $168,052,000 from $157,169,000 in 2000. This increase is primarily due to timing of payments on our accounts payable and collection of our receivables. Our allowance for doubtful accounts has increased $2,577,000, or 11.4%, to $25,254,000 at September 30, 2001 from $22,677,000 at December 31, 2000 primarily due to increased reserves for Infusion Services. Our capital expenditures for the nine months ended September 30, 2001 decreased $10,146,000, or 21.6%, 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 see growth in our expenditures during the fourth quarter of 2001 and into 2002. Any future anticipated capital expenditures will be funded primarily with operating cash flow or, to the extent necessary, with working capital borrowings under our revolving credit facility, discussed below. 19 During the first nine months of 2001, we utilized our own internally generated cash to prepay $50 million of our Term A loans (described below) and repurchase 570,000 shares of our Common Stock for $27,055,000. As of September 30, 2001, we have repurchased a total of 3,100,000 shares of our 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. As of September 30, 2001, approximately 2,530,000 shares have been 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 consisting of $105 million in Term A loans and a $150 million revolving credit facility, which was voluntarily reduced from $300 million in August 2001. As a result of the $50 million prepayment of our Term A loans noted above, we recorded an extraordinary charge during the third quarter of 2001 for the deferred financing fees in the amount of $372,000, net of tax. 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 4.71% on September 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 ($149 million at September 30, 2001). At September 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 September 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 20 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 $39,107,000, or $0.49 per diluted share and $31,259,000, or $0.40 per diluted share, for the three months ended September 30, 2001 and 2000, respectively and $110,511,000, or $1.38 per diluted share and $(8,746,000), or $(0.11) per diluted share, for the nine months ended September 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$26.8 million (approximately US$17.5 million), which includes a purchase price adjustment for closing working capital. 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$11,655,000 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. 21 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 September 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 matured 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 increased to approximately $98 million in October 2001 and will increase to $100 million in October 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 ($6,291,000 pre-tax at September 30, 2001) and the related gains or losses on these agreements are deferred in shareholders' equity as a component of comprehensive income (a $3,902,000, net of taxes, reduction at September 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 nine months ended September 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 September 30, 2001 would have caused the fair value of the swaps to change by $223,000, resulting in a liability with a fair value of $6,514,000. 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. 22 - -------------------------------------------------------------------------------- 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 and plaintiffs have filed briefs. No arguments have yet been scheduled. 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. 23 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 July 20, 2001, we filed a Current Report on Form 8-K, dated July 19, 2001, under Items 5, 7 and 9, regarding a press release we issued covering our second quarter 2001 financial performance. (ii) On July 31, 2001, we filed a Current Report on Form 8-K, dated July 25, 2001, under Item 5, regarding the declaration of a preferred share purchase right dividend by our Board of Directors. (iii)On August 17, 2001, we filed a Current Report on Form 8-K, dated August 17, 2001, under Item 9, regarding a press release issued by New York Life Insurance Company concerning a transaction New York Life Insurance Company effected in Express Scripts, Inc. stock. (iv) On September 17, 2001, we filed a Current Report on Form 8-K, dated September 17, 2001, under Item 9, regarding a press release we issued concerning our earnings estimates for the third quarter and full year 2001. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXPRESS SCRIPTS, INC. (Registrant) Date: November 12, 2001 By: /S/ Barrett A.Toan --------------------------- Barrett A. Toan, Chairman of the Board, President and Chief Executive Officer Date: November 12, 2001 By: /S/ George Paz --------------------------- George Paz, Senior Vice President and Chief Financial Officer 25 INDEX TO EXHIBITS (Express Scripts, Inc. - Commission File Number 0-20199) Exhibit NUMBER EXHIBIT 2.1a 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 Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ending June 30, 2001. 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. 10.1b Amendment No.5 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. a The Company agrees to furnish supplementally a copy of any omitted schedule to this agreement to the Commission upon request. b Filed herein. 26 EX-10 3 amend5.txt AMENDMENT 5 TO CREDIT AGREEMENT AMENDMENT NO. 5 AMENDMENT NO. 5 ("AMENDMENT NO. 5") dated as of July 31, 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. 5 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 identified certain Wholly Owned Subsidiaries that are to be transferred (or the assets of which are to be transferred), merged, amalgamated, or dissolved in one transaction or a series of transactions to or into one or more existing or to be formed Wholly Owned Subsidiaries of Company (collectively, the "Transaction"); 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 - AMENDMENTS. Section 6.8 of the Credit Agreement is hereby amended by deleting the last period of Section 6.8A and replacing the deleted period with the following proviso: "; provided however, to the extent this Section 6.8 relates to the pledge of 65% of the capital stock of Centre d'autorisation et de paiement des services de sante Inc. and 607486 Alberta Ltd., such pledge of stock shall not be required, so long as Company, prior to December 31, 2001 and pursuant to a plan duly approved by senior management of the Company, either (i) transfers such Subsidiaries or their assets to, (ii) merges, amalgamates or otherwise combines such Subsidiaries with, and/or (iii) dissolves and/or liquidates such Subsidiaries into, one or more Wholly Owned Subsidiaries of Company the shares of which are now pledged or shall be in accordance with the terms hereof." SECTION TWO- CONDITIONS TO EFFECTIVENESS. This Amendment No. 5 shall become effective as of July 31, 2001 when, and only when Administrative Agent shall have received counterparts of this Amendment No. 5 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. 5. (a) The effectiveness of this Amendment No. 5 (other than Sections Five and Seven hereof) is conditioned upon the accuracy of the representations and warranties set forth in Section Three hereof. SECTION THREE - REPRESENTATIONS AND WARRANTIES. In order to induce Lenders and Agents to enter into this Amendment No. 5, Company represents and warrants to each of Lenders and Agents that after giving effect to this Amendment No. 5, (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. 5, 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 FOUR - REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE NOTES. On and after the effectiveness of this Amendment No. 5, 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. 5. The Credit Agreement, the Notes and each of the other Credit Documents, as specifically amended by this Amendment No. 5, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. SECTION FIVE- 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. 5 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. 5 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 SIX- EXECUTION IN COUNTERPARTS. This Amendment No. 5 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 2 executed counterpart of a signature page to this Amendment No. 5 by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 5. SECTION SEVEN- GOVERNING LAW. This Amendment No. 5 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] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 5 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 4 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. EXPRESS SCRIPTS SPECIALTY DISTRIBUTION SERVICES, INC. ESI CLAIMS, INC. ESI-GP HOLDINGS, INC. ESI PARTNERSHIP EXPRESS ACCESS PHARMACY, INC. By:/s/ George Paz ---------------------------------- Name: George Paz Title: Vice President ESI RESOURCES, INC. By:/s/ Gretchen Gates Kelly ---------------------------------- Name: Gretchen Gates Kelly Title: Vice President and Secretary as one of the Requisite Lenders (please type) CREDIT SUISSE FIRST BOSTON By: /s/ William S. Lutkins ---------------------------------- Name: William S. Lutkins Title: Vice President THE BANK OF NEW YORK By: /s/ Jonathan Rollins ---------------------------------- Name: Jonathan Rollins Title: Vice President THE FUJI BANK, LIMITED By: /s/ Peter L. Chinnici ---------------------------------- Name: Peter L. Chinnici Title: Senior Vice President & Group Head BAYERISCHE HYPO-UND VEREINSBANK AG NEW YORK BRANCH By: /s/ Timothy L. Harrod ---------------------------------- Name: Timothy L. Harrod Title: Managing Director By: /s/ Elizabeth Tallmadge ---------------------------------- Name: Elizabeth Tallmadge Title: Managing Director ERSTE BANK By: /s/ Brandon A. Meyerson ---------------------------------- Name: Brandon A. Meyerson Title: Vice President By: /s/ Paul Judicke ---------------------------------- Name: Paul Judicke Title: Vice President U.S. BANK N.A. (F/K/A MERCANTILE BANK) By: /s/ Christian E. Stein III ---------------------------------- Name: Christian E. Stein III Title: Vice President BNP PARIBAS By: /s/ Brock Harris ---------------------------------- Name: Brock Harris Title: Director By: /s/ Brett Mehlman ---------------------------------- Name: Brett Mehlman Title: Director BANKERS TRUST COMPANY By: /s/ Robert R. Telesca ---------------------------------- Name: Robert R. Telesca Title: Vice President MICHIGAN NATIONAL BANK By: /s/ Teresa L. Irland ---------------------------------- Name: Teresa L. Irland Title: First Vice President UNION BANK OF CALIFORNIA, N.A. By: /s/ Hegop Jazmadarian ---------------------------------- Name: Hegop Jazmadarian Title: Vice President BANK OF MONTREAL By: /s/ Michael P. Joyce ---------------------------------- Name: Michael P. Joyce Title: Managing Director BANK LEUMI USA By: /s/ Joung Hee Hong ---------------------------------- Name: Joung Hee Hong Title: Vice President FLEET BOSTON FINANCIAL By: /s/ Robinson Alston, Jr. ---------------------------------- Name: Robinson Alston, Jr. Title: Vice President MELLON BANK, N.A. By: /s/ Louis E. Flori ---------------------------------- Name: Louis E. Flori Title: Vice President HELLER FINANCIAL, INC. By: Heller Financial Asset Management LLC, Authorized Agent By: /s/ Sheila C. Weimer ---------------------------------- Name: Sheila C. Weimer Title: Vice President BANK ONE, NA (CHICAGO) By: /s/ Suzanne Ergastolo ---------------------------------- Name: Suzanne Ergastolo Title: Vice President BANK OF AMERICA, N.A. By: /s/ Joseph L. Corah ---------------------------------- Name: Joseph L. Corah Title: Principal -----END PRIVACY-ENHANCED MESSAGE-----