We operate our United States and Canadian PBM and non-PBM businesses out of leased facilities throughout the United States and Canada.
We derive our revenues primarily from the sale of PBM services in the United States and Canada. When we independently have a contractual obligation to pay our network pharmacy providers for benefits provided to our clients' members, we include the total payments from these clients as revenue, and payments to the network pharmacy provider as cost of revenue (the "Gross Basis") (See Footnote 1). These transactions require us to assume credit risk. If we merely administer clients' network pharmacy contracts in which we do not assume credit risks, we record only our administrative or dispensing fees as revenue (the "Net Basis").
Management services provided to drug manufacturers include various services relating to administration of manufacturer rebate programs. Revenues relating to these services are recognized as earned based upon detailed drug utilization data. Rebates payable to customers in accordance with the applicable contracts are excluded from revenues. We estimate fees receivable from pharmaceutical manufacturers on a quarterly basis converting total prescriptions dispensed to estimated rebatable scripts (i.e., those prescriptions with respect to which we are contractually entitled to submit claims for rebates) multiplied by the contractually agreed manufacturer rebate amount. Estimated fees receivable from pharmaceutical manufacturers are recorded when we determine them to be realizable, and realization is not dependent upon future pharmaceutical sales. Estimates are revised once the actual rebatable scripts are calculated and rebates are billed to the manufacturer.
Mail pharmacy services revenues and mail pharmacy services prescriptions filled increased $758,457,000, or 42.5% and 5,310,000, or 35.0%, respectively, during 2001 over 2000. These increases are primarily due to increased membership and utilization by existing members. Revenues for mail pharmacy services increased $638,834,000, or 55.7%, in 2000 over 1999 as a result of the growth in mail pharmacy claims processed of 4,575,000, or 43.1% in 2000 over 1999. These increases are primarily due to the addition of new members with high mail utilization rates, the cross selling of mail pharmacy services and increased utilization by existing members. The average revenue per mail pharmacy claim increased 5.6% in 2001 over 2000 and 8.8% in 2000 over 1999 primarily due to higher drug ingredient costs.
(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 $16,331, $11,781 and $9,216 for the years ended 2001, 2000 and 1999, respectively.
Selling, general and administrative expenses, excluding depreciation and amortization, increased $23,018,000, or 8.5%, in 2001 over 2000 and $40,378,000 or 17.4%, in 2000 over 1999. The increases in 2001 and 2000 are primarily due to expenditures required to expand operational and administrative support functions in order to enhance management of the pharmacy benefit. The increase in 2000 is also due to the inclusion of DPS for a full twelve months during 2000 versus nine months of 1999. As a percentage of total revenues, selling, general and administrative expenses, excluding depreciation and amortization, for 2001 decreased to 3.2% from 3.9% in 2000 and 5.3% in 1999.
o During the second quarter of 1999, we incurred a $9,400,000 charge for 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, with completion delayed until the first quarter of 2001. Included in the charge were anticipated cash expenditures of approximately $4,779,000 for lease termination fees and rent on unoccupied space to be paid through April 2001 and anticipated non-cash charges of approximately $2,276,000 for the write-down of leasehold improvements and furniture and fixtures. The charge does not include any costs associated with the physical relocation of the employees.
o During December 1999, we recorded a pre-tax restructuring charge of $2,633,000 associated with the outsourcing of our computer operations to Electronic Data Systems Corporation. The principal actions of the plan included cash expenditures of approximately $2,148,000 for the transition of 51 employees to the outsourcer and the elimination of contractual obligations of ValueRx, which had no future economic benefit to us, and non-cash charges of approximately $485,000 due to the reduction in the carrying value of certain capitalized software to its net realizable value. This plan was completed during the second quarter of 2000 when remaining cash payments were made.
o Also in December 1999, we recorded a pre-tax restructuring charge of $969,000 associated with restructuring our PPS majority-owned subsidiary and the purchase of the remaining PPS common stock from management. The charge consisted of cash expenditures of $559,000 relating to stock compensation expense and $410,000 of severance payments to 9 employees. This plan was completed in January 2000.
During 1999, we recognized a one-time non-cash gain of $182,930,000 related to the sale of the assets of YourPharmacy.com, Inc. in exchange for a 19.9% ownership interest in PlanetRx.
During 2000, we recorded a $165,207,000 ($103,089,000 net of tax) non-cash impairment charge on our investment in PlanetRx common stock as the loss in value was deemed to be other than temporary. Any unrealized loss associated with recording our investment in PlanetRx at current market value previously recorded in stockholders' equity was written off to the current period earnings, in addition to any additional charges necessary to write-off our investment in accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Additionally, during 2000, we made charitable donations of 200,000 shares of our PlanetRx common stock (after giving effect to the December 4, 2000 8-for-1 reverse stock split) and realized selling, general and administrative expense related to the donation of approximately $713,000. Therefore, our ownership of PlanetRx as of December 31, 2001 consisted of approximately 1,096,000 common shares, or 17.8%, of PlanetRx common shares outstanding (after giving effect to the December 4, 2000 8-for-1 reverse stock split) which are carried at no value.
Our effective tax rate decreased to 39.9% for 2001 from 40.9% in 2000, excluding the $62,118,000 tax benefit from the write-off of marketable securities and the $574,000 in tax expense from the ordinary gain on the restructuring of our swaps in 2000, both discussed under "--Other Income (Expense)". This decrease is due primarily to lower taxes paid in several states as well as a decrease in non-deductible goodwill as a percentage of taxable income. Excluding the one-time gain (see "--Other (Expense) Income, Net") and non-recurring items (see "--Cost and Expenses") in 1999, our effective tax rate would have been 43.7% for 1999. The decrease in 2000 from 1999 is primarily due to the reduction in the non-deductible goodwill and customer contract amortization expense associated with the ValueRx acquisition as a percentage of income before income taxes. The goodwill and customer contract amortization for the DPS acquisition is deductible for income tax purposes due to the filing of an Internal Revenue Code ss.338(h)(10) election.
Our net income increased $133,826,000 in 2001 from a loss of $9,126,000 in 2000, which decreased $159,344,000, or 106.1% from 1999. Net income for 2000 and 1999 were affected by the following one-time items:
o A non-cash impairment charge during the second and fourth quarters of 2000 totaling $165,207,000 ($103,089,000 net of tax) relating to our PlanetRx investment (see "--Other Income (Expense), Net")
o An extraordinary loss on the early retirement of debt due to the write-off of deferred financing fees during the third and fourth quarters of 2000 totaling $1,790,000 ($1,105,000 net of tax) discussed in "--Liquidity and Capital Resources"
o An ordinary gain in the amount of $1,500,000 ($926,000 net of tax) on the restructuring of our interest rate swap agreements related to the early retirement of debt in the third quarter of 2000 (see "--Market Risk")
o Non-recurring charges discussed in "--Cost and Expenses" totaling $30,221,000 ($18,188,000 net of tax)
o One-time gain of $182,930,000 ($112,037,000 net of tax) discussed in "--Other Income (Expense), Net"
Excluding these one-time items above related to 2000 and 1999, and assuming no anti-dilution using the potentially dilutive common shares of 1,674,000 for 2000, basic and diluted earnings per share before extraordinary items increased 30.1% and 28.9% in 2001 over 2000 and 36.6% and 37.5% in 2000 over 1999, respectively.
As a percent of accounts receivables, our allowance for doubtful accounts was 2.7% and 2.8% at December 31, 2001 and 2000, respectively.
Our capital expenditures in 2001 decreased $22,932,000, or 28.6%, from 2000 and increased $43,260,000, or 117.1%, in 2000 over 1999. The decrease in 2001 reflects the completion of various projects in 2000 including the renovation of our St. Louis operations facilities, enhancement of services provided to our clients and activities related to the integration of acquired companies. The increase in 2000 over 1999 is due primarily to the projects discussed above. We will continue to invest in technology that will provide efficiencies in operations, manage growth and enhance service levels. We expect to fund anticipated capital expenditures primarily out of operating cash flow or, to the extent necessary, with working capital borrowings under our $150 million revolving credit facility, discussed below. We believe our capital expenditures for 2002 will approximate the level in 2001, excluding the impact of the NPA acquisition.
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, 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 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 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 was amortized using the straight-line method over the estimated useful life of 30 years.
will be accounted for under the provisions of FAS 141, and FAS 142. The purchase price will be funded with cash on hand, up to $100 million of borrowings on our revolving credit facility, a $350,000 million new tack-on Term B loan and the issuance of approximately 552,000 shares of our common stock. We will file an Internal Revenue Code ss.338(h)(10) election, making amortization expense of intangible assets, including goodwill, tax deductible.
In September 2000, we sold our Albuquerque, New Mexico property and building for $7,806,000. These assets were then leased back from the purchaser for a term of ten years with the option to extend the term up to an additional ten years. The resulting lease is being accounted for as an operating lease, and the resulting deferred gain of $4,136,000 is being amortized over the ten-year life of the lease.
We have a credit facility with a commercial bank syndicate consisting of $105 million of Term A loans and a $150 million revolving credit facility. As a result of the prepayment of our Term A loans noted above, we recorded an extraordinary charge during 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 capital stock of each of our existing and subsequently acquired domestic subsidiaries, excluding ValueRx of Michigan, Inc., Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico), Inc., and 65% of the stock of our Canadian subsidiaries have been pledged as collateral for the credit facility.
We regularly review potential acquisitions and affiliation opportunities. We believe that available cash resources, bank financing or the issuance of additional common stock could be used to finance future acquisitions or affiliations. However, there can be no assurance we will make acquisitions or affiliations in 2002 or thereafter, other than our previously announced acquisitions of Phoenix and NPA.
FAS 142 requires that 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 or when events or circumstances occur indicating that goodwill might be impaired. In accordance with the implementation provisions of FAS 142, we expect to complete our first impairment test under FAS 142 by the end of the second quarter of 2002, and we do not anticipate incurring an impairment charge. 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 $151,111,000, or $1.94 per basic share and $1.89 per diluted share; $17,687,000, or $0.23 per basic and diluted share; and $178,480,000, or $2.47 per basis share and $2.41 per diluted share; for the years ended December 31, 2001, 2000 and 1999, respectively.
rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. We do not believe implementation of FAS 144 will have a significant impact on our consolidated financial position, consolidated results of operations and/or our consolidated cash flows.
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 substantially all price increases from our clients under the terms of our agreements, although under selected arrangements in which we have performance measurements tied to drug costs, 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 date, changes in pharmaceutical prices have not had a significant adverse affect on us.
Effective January 1, 2001, we adopted FAS 133 as amended, 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 Consolidated Balance Sheet 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 $3,589,000, net of taxes, in the accompanying Unaudited Consolidated Statement of Changes in Stockholders' Equity due to a cumulative effect of change in accounting principle of $612,000 as of January 1, 2001, and additional deferred losses recorded during 2001 of $2,977,000.
in which the related interest payments being hedged are recorded in income. The loss associated with the ineffective portion of this agreement is immediately recognized in income. For the year ended December 31, 2001, the loss on the ineffective portion of our swap agreement was not material to the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP St. Louis, Missouri February 1, 2002, except as to paragraphs 2,3, and 4 of Note 2 which are as of February 25, 2002
Basis of presentation. The consolidated financial statements include our accounts and those of all our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in affiliated companies, 20% to 50% owned, are carried at equity. Certain amounts in prior years have been reclassified to conform with the 2001 classifications. The preparation of the consolidated financial statements conforms to generally accepted accounting principles in the U.S., and requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates and assumptions.
Accounts receivable. As of December 31, 2001 and 2000, unbilled receivables were $435,708,000 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. As of December 31, 2001 and 2000, we have an allowance for doubtful accounts of $24,157,000 and $22,677,000, respectively.
Available-for-sale securities are reported at fair value, which is based upon quoted market prices, with unrealized gains and losses, net of tax, reported as a component of other comprehensive income in stockholders' equity until recognized. Unrealized losses are recognized as expense when a decline in fair value is determined to be other than temporary. At December 31, 2001 and 2000, our investment in PlanetRx was the only available-for-sale security we held. During 2000, we recorded a non-cash impairment charge to write-off the value of our investment (see Note 2).
Goodwill. Goodwill has been amortized on a straight-line basis over periods from 10 to 30 years. The amount reported is net of accumulated amortization of $106,979,000 and $71,348,000 at December 31, 2001 and 2000, respectively. Amortization expense, included in selling, general and administrative expenses, was $35,631,000, $35,031,000 and $28,203,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Impairment of long lived assets. We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including goodwill, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. In our opinion no such impairment existed as of December 31, 2001 or 2000 (see Note 11).
Management services provided to drug manufacturers include administration of manufacturer rebate programs. Revenues relating to these services are recognized as earned based upon detailed drug utilization data. Rebates received on behalf of customers in accordance with the applicable contracts are excluded from revenues. Fees receivable from pharmaceutical manufacturers are calculated by converting total prescriptions dispensed to rebatable scripts (i.e., those prescriptions with respect to which we are contractually entitled to submit claims for rebates) multiplied by the contractually agreed manufacturer rebate amount. Fees receivable from pharmaceutical manufacturers are recorded when we determine them to be realizable, and realization is not dependent upon future pharmaceutical sales.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. ("SAB") 101, "Revenue Recognition in Financial Statements" and EITF 99-19 was issued in July 2000. SAB 101 and EITF 99-19 summarize certain views in applying generally accepted accounting principles to revenue recognition in financial statements. We adopted SAB 101 and EITF 99-19 during 2000 and their adoption did not have a material affect on our financial statements.
Cost of revenues. Cost of revenues includes product costs, network pharmacy claims payments and other direct costs associated with dispensing prescriptions, including shipping and handling.
hedges, and unrealized losses on available-for-sale securities. We have displayed comprehensive income within the Statement of Changes in Stockholders' Equity.
During October 2001, the Financial Accounting Standards Board issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". FAS 144 requires that long -lived assets to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, FAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. We do not believe implementation of FAS 144 will have a significant impact on our consolidated financial position, consolidated results of operations and/or our consolidated cash flows.
To fund the acquisition of NPA we are amending our existing credit facility to add a $350 million Term B loan. The Term B loan will have a maturity of six years and will amortize 1% in years one through four, 25% in year five and 71% in year six. Interest will be payable quarterly on an interest rate spread based on several London Interbank Offered Rates ("LIBOR") or base rate options. The anticipated interest rate spread for LIBOR borrowings will be 225 basis points. The Term B loan will be secured on the same basis as our existing credit facility. In addition, we are requesting in the amendment to adjust certain covenants, relating to restricted junior payments and asset sales, and to provide for a future accounts receivable facility.
The following unaudited pro forma information presents a summary of our combined results of operations and those of DPS as if the acquisition had occurred at the beginning of the period presented, along with certain pro forma adjustments to give effect to amortization of goodwill, other intangible assets, interest expense on acquisition debt and other adjustments. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date, nor is it an indication of trends in future results.
Sale of assets. On June 12, 2001, 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 October 13, 1999, the transactions described in the Contribution Agreement were consummated, YPC received 10,369,990 unregistered shares, or 19.9%, of the common equity of PlanetRx, and PlanetRx assumed options granted to YPC employees which converted into options to purchase approximately 1.8 million shares of PlanetRx common stock. In connection with the IPO, we also executed a 180 day lock-up agreement that prevented us from selling our shares until April 10, 2000. The consummation of the transaction occurred immediately preceding the closing of PlanetRx's IPO of common stock. Based on the IPO price of $16 per share, YPC received consideration valued at $165,920,000. We recorded a one-time gain during 1999 (in other income) of $182,930,000 on the transaction, and a one-time stock compensation expense during 1999 (included in non-recurring expenses) of $19,520,000 relating to the YPC employee stock options. We accounted for this investment in PlanetRx on the cost method and reported our investment on the balance sheet at fair value in accordance with FAS 115 (see Note 1).
Effective January 1, 1996, we executed a multi-year contract with The Manufacturers Life Insurance Company ("Manulife"), to provide PBM services in Canada. Under the terms of the agreement, we are the exclusive third-party provider of PBM services to Manulife's Canadian clients. We are required to issue shares of our common stock as an advance discount to Manulife based upon achievement of certain volumes of Manulife pharmacy claims we process during years four through six of the agreement. Based on the claims processed through 2001, Manulife has earned 101,000 shares of our common stock to be issued during 2002. These shares have been included as outstanding in the basic and diluted earnings per share computation as if they were issued on December 31, 2001. In addition, as of December 31, 2001 we have recorded an advance discount (included in other intangible assets) of $4.7 million to be amortized against revenue over the period of the contract.
The agreement with Manulife provides Manulife with the option to terminate upon the occurrence of certain specific events. If Manulife has not exercised the early termination option at the end of the tenth year of the agreement, we will issue at that time a ten-year warrant to purchase up to approximately 237,000 additional shares of our Common Stock exercisable at 85% of the then market price. The actual number of shares for which such warrant is to be issued is based on the volume of Manulife pharmacy claims we process in year ten. The agreement also includes similar provisions under which the Company would have issued a warrant to Manulife at the end of year six of the agreement, however, Manulife did not meet the claim volume necessary during year six to earn this warrant. .
December 31, (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Term A loans due March 31, 2005 with an interest rate of 3.37% and 7.52% at December 31, 2001 and 2000, and a deferred interest rate swap gain of $648 and $847 at December 31, 2001 and 2000 $ 105,648 $ 155,847 9.625% Senior Notes due June 15, 2009, net of an unamortized discount of $941 and $1,024, and an unamortized interest rate lock of $1,527 and $1,733 240,471 240,594 ----------------- ------------------ $ 346,119 $ 396,441 ================= ==================
We have a credit facility with a commercial bank syndicate which consists of $105 million of Term A loans and a $150 million revolving credit facility. During 2001, we utilized $50 million of our own internally generated cash to prepay a portion of our Term A loans. As a result of the prepayment, we recorded an extraordinary charge during 2001 for the deferred financing fees in the amount of $602,000 ($372,000 net of tax). The prepayment on the Term A loans eliminated the scheduled principal payments for fiscal year 2003, and a portion of the scheduled principal payment for fiscal year 2004. The capital stock of each of our existing and subsequently acquired domestic subsidiaries, excluding PPS, Great Plains Reinsurance Co., ValueRx of Michigan, Inc., Diversified NY IPA, Inc. and Diversified Pharmaceutical Services (Puerto Rico), Inc., and 65% of the stock of our foreign subsidiaries have been pledged as collateral for the credit facility.
The credit facility requires us to pay interest quarterly on an interest rate spread based on several LIBOR or base rate options. To alleviate interest rate volatility, we have entered into interest rate swap arrangements (see Note 6), which are discussed below. The credit facility contains covenants that limit the indebtedness we may incur, dividends paid and the amount of annual capital expenditures. The covenants also establish a minimum interest coverage ratio, a maximum leverage ratio, and a minimum fixed charge coverage ratio. In addition, we are required to pay an annual fee of 0.25%, payable in quarterly installments, on the unused portion of the revolving credit facility ($150 million at December 31, 2001). At December 31, 2001, we are in compliance with all covenants associated with the credit facility. In conjunction with the NPA acquisition, we are amending our credit facility to add a $350 million Term B loan and adjusting certain covenants (see Note 2)
In June 1999, we issued $250 million of 9.625% Senior Notes due 2009, which require interest to be paid semi-annually on June 15 and December 15. The Senior Notes are callable at specified prepayment premiums 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. During the second quarter of 2000, we repurchased $10,115,000 of our Senior Notes on the open market for $10,150,000, which includes $385,000 of accrued interest.
The following represents the schedule of current maturities for our long-term debt, excluding the deferred interest rate swap gain of $648,000 at December 31, 2001 (in thousands):
During 2000, we received $2,397,000 to restructure an existing interest rate swap agreement in conjunction with a prepayment of the Term A loans. We recognized $1,500,000 ($926,000 net of tax) against interest expense as an ordinary gain related to the prepayment of debt and the remaining $897,000 has been deferred and is being amortized over the remaining term of the loans. Interest expense was reduced by $199,000 and $50,000 during 2001 and 2000, respectively.
During 1999, we entered into an interest rate lock related to our offering of $250 million Senior Notes. Upon issuance of the Senior Notes, we received $2,135,000, which is being amortized against interest expense over the term of the Senior Notes. Interest expense was reduced by $206,000 and $286,000 during 2001 and 2000, respectively.
Effective January 1, 2001, we adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS 137 and 138 ("FAS 133"). 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 $3,589,000, net of taxes, in the accompanying Unaudited Consolidated Statement of Changes in Stockholders' Equity due to a cumulative effect of change in accounting principle of $612,000 as of January 1, 2001, and additional deferred losses recorded during 2001 of $2,977,000.
The income tax provision consists of the following: Year Ended December 31, (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Current provision: Federal $ 57,601 $ 40,515 $ 26,933 State 6,754 5,668 4,190 Foreign (276) (538) 758 ----------------------------------------- Total current provision 64,079 45,645 31,881 ----------------------------------------- Deferred provision: Federal 18,045 (37,757) 68,627 State 1,112 (4,335) 7,590 Foreign (64) - - ----------------------------------------- Total deferred provision 19,093 (42,092) 76,217 ----------------------------------------- Total current and deferred provision $ 83,172 $ 3,553 $ 108,098 =========================================
Year Ended December 31, (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Continuing operations $ 83,172 $ 3,553 $ 108,098 Extraordinary loss on early retirement of debt (228) (685) (4,492) --------------------------------------- $ 82,944 $ 2,868 $ 103,606 =======================================
Year Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.6 3.3 3.6 Non-deductible amortization of goodwill and customer contracts 2.2 (103.6) 1.8 Other, net 0.1 (14.2) 0.3 ---------------------------------- Effective tax rate 39.9% (79.5)% 40.7% ==================================
Year Ended December 31, - ----------------------------------------------------------------- 2002 $ 13,521 2003 13,298 2004 13,361 2005 13,085 2006 11,691 Thereafter 23,960 ------------------ $ 88,916 ==================
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.
Prior to November 7, 2000, NYLife Healthcare Management, Inc., a subsidiary of New York Life Insurance Company, owned all of our outstanding shares of Class B Common Stock. On November 7, 2000, NYLife Healthcare Management, Inc. exchanged each outstanding share of Class B Common Stock for one share of our Class A Common Stock and then immediately distributed such shares to NYLIFE LLC, another subsidiary of New York Life. Consequently, on November 7, 2000, we reacquired all of our outstanding Class B Common Stock. Immediately following the exchange and distribution to NYLIFE LLC, NYLIFE LLC completed the sale of 13,800,000 shares of our Class A Common Stock to the public through a secondary offering. Contemporaneous with this stock offering, the Express Scripts Automatic Exchange Security Trust, a closed-end investment company that is not affiliated with us, sold 6,900,000 investment units to the public. Upon maturity of the investment units, the Trust may deliver up to 6,900,000 shares of our Class A Common Stock owned by NYLIFE LLC to the holders of the investment units. We did not receive any proceeds from the secondary offering or the offering by the Trust.
At December 31, 2001, NYLIFE LLC owned shares of our Common Stock representing approximately 20.8% of the combined voting power of all classes of our common stock, which includes the right to vote 6,900,000 Common Stock that the Trust may deliver upon exchange of the Trust issued investment units. New York Life has agreed on behalf of itself and its subsidiaries, to vote these 6,900,000 shares of our Common Stock prior to delivery thereof by the Trust to the holders of the Trust investment units in the same proportion and to the same effect as the votes cast by our other stockholders at any meeting of stockholders, subject to the following exceptions: New York Life has agreed to vote its 16,240,000 shares (which includes the above described 6,900,000 shares) in favor of the slate of nominees for directors recommended by our Board of Directors for election by stockholders (provided that, so long as New York Life is entitled to representation on the Board of Directors, such slate includes New York Life's nominees). On February 11, 2002, NYLIFE LLC completed a distribution of 11,740,000 of its shares of our Common Stock to its parent, New York Life. This distribution does not affect New York Life's rights or obligations with respect to our Common Stock as described above.
As of December 31, 2001, approximately 2,015,000 shares of our Common Stock have been reserved for issuance to organizations with which we have signed contractual agreements (see Note 3) and for employee benefit plans (see Note 10).
Employee stock purchase plan. We offer an employee stock purchase plan that qualifies under Section 423 of the Internal Revenue Code and permits all employees, excluding certain management level employees, to purchase shares of our Common Stock. Participating employees may elect to contribute up to 10% of their salary to purchase common stock at the end of each six month participation period at a purchase price equal to 85% of the fair market value of our Common Stock at the end of the participation period. During 2001 and 2000, approximately 34,000 and 64,000 shares of our Common Stock were issued under the plan, respectively. Our Common Stock reserved for future employee purchases under the plan is 383,000 at December 31, 2001.
Deferred compensation plan. We maintain a non-qualified deferred compensation plan (the "Executive Deferred Compensation Plan") that provides benefits payable to eligible key employees at retirement, termination or death. Benefit payments are funded by a combination of contributions from participants and us. Participants may elect to defer up to 50% of their base earnings and 100% of specific bonus awards. Participants become fully vested in our contributions on the third anniversary of the end of the plan year for which the contribution is credited to their account. For 2001, our contribution was equal to 6% of each qualified participant's total annual compensation, with 25% being allocated as a hypothetical investment in our Common Stock and the remaining being allocated to a variety of investment options. We have chosen to fund our liability for this plan through investing in trading securities, which primarily consists of mutual funds (see Note 1). We incurred approximately $2,090,000, $89,000
In April 1992, we adopted a stock option plan that we amended and restated in 1995 and amended in 1999, which provided for the grant of nonqualified stock options and incentive stock options to our officers and key employees selected by the Compensation Committee of the Board of Directors. In June 1994, the Board of Directors adopted the Express Scripts, Inc. 1994 Stock Option Plan, also amended and restated in 1995 and amended in 1997, 1998 and 1999. Under either plan, the exercise price of the options was not less than the fair market value of the shares at the time of grant, and the options typically vest over a five-year period from the date of grant.
Diluted earnings per share As reported $ 1.56 $ (0.12) $ 2.03 Pro forma 1.44 (0.26) 1.93
2001 2000 1999 - -------------------------------------------------------------------------------- Expected life of option 2-5 years 1-6 years 2-7 years Risk-free interest rate 1.7%-4.9% 6.0%-6.7% 4.6%-6.3% Expected volatility of stock 55% 56%-60% 59% Expected dividend yield None None None
A summary of the status of our fixed stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years ending on those dates is presented below.
The following table summarizes information about fixed stock options outstanding at December 31, 2001:
During December 1999, we recorded a pre-tax restructuring charge of $2,633,000 associated with the outsourcing of our computer operations to Electronic Data Systems Corporation. The principal actions of the plan included cash expenditures of approximately $2,148,000 for the transition of 51 employees to the outsourcer and the elimination of contractual obligations of ValueRx which had no future economic benefit to us, and non-cash charges of approximately $485,000 due to the reduction in the carrying value of certain capitalized software to its net realizable value. The plan was completed during the second quarter of 2000 when all cash payments were made.
Also in December 1999, we recorded a pre-tax restructuring charge of $969,000 associated with restructuring our PPS majority-owned subsidiary and the purchase of the remaining PPS common stock from management. The charge consists of cash expenditures of $559,000 relating to stock compensation expense and $410,000 of severance payments to 9 employees (of which $133,000 was paid during December 1999). This plan was completed in January 2000.
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. The following condensed consolidating financial information has been prepared 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.
(in thousands) PBM Non-PBM Total - -------------------------------------------------------------------------------- Total revenues $ 9,254,514 $ 74,268 $ 9,328,782 Depreciation and amortization expense 79,133 950 80,083 Interest income 7,120 - 7,120 Interest expense 33,403 816 34,219 Income before income taxes 192,661 15,583 208,244 Total assets 2,437,323 62,922 2,500,245 Capital expenditures 54,581 2,705 57,286 - -------------------------------------------------------------------------------- Total revenues $ 6,823,405 $ 88,044 $ 6,911,449 Depreciation and amortization expense 77,830 785 78,615 Interest income 8,430 - 8,430 Interest expense 47,898 5 47,903 Income before income taxes (19,666) 15,198 (4,468) Total assets 2,227,348 49,296 2,276,644 Capital expenditures 78,065 2,153 80,218 - -------------------------------------------------------------------------------- Total revenues $ 4,339,387 $ 65,810 $ 4,405,197 Depreciation and amortization expense 71,156 711 71,867 Interest income 5,761 1 5,762 Interest expense 60,001 9 60,010 Income before income taxes 259,182 6,284 265,466 Total assets 2,479,746 7,565 2,487,311 Capital expenditures 35,895 1,063 36,958 - --------------------------------------------------------------------------------
Basic earnings per share Before extraordinary item $ 0.36 $ 0.39 $ 0.41 $ 0.44 Extraordinary item - - - - ------------------------------------------------- Net income $ 0.36 $ 0.39 $ 0.41 $ 0.44 =================================================
Basic earnings (loss) per share: Before extraordinary item $ 0.28 $ (0.98) $ 0.32 $ 0.26 Extraordinary item - - (0.01) --------------------------------------------- Net income (loss) $ 0.28 $ (0.98) $ 0.31 $ 0.26 =============================================
Diluted earnings (loss) per share:(4) Before extraordinary item $ 0.27 $ (0.98) $ 0.31 $ 0.25 Extraordinary item - - (0.01) - --------------------------------------------- Net income (loss) $ 0.27 $ (0.98) $ 0.30 $ 0.25 ============================================= (1) Includes a non-cash write-off of $155,500 ($97,032 net of tax) on our investment in PlanetRx. Excluding this amount, our basic and diluted earnings per share would have been $0.30 each. (2) Includes an ordinary gain of $1,500 ($926 net of tax) on the restructuring of our interest rate swap agreements. Excluding this amount, our basic and diluted earnings per share before extraordinary items would have been $0.31 and $0.30, respectively. (3) Includes a non-cash write-off of $9,707 ($6,057 net of tax) on our investment in PlanetRx. Excluding this amount, our basic and diluted earnings per share would have been $0.34 and $0.33, respectively. (4) In accordance with FAS 128, basic weighted average shares were used to calculate second quarter 2000 diluted EPS as the net loss and the actual diluted weighted average shares (38,507 as of June 30, 2000) cause diluted EPS to be anti-dilutive.