Effective April 30, 2008, the Company, through a wholly-owned subsidiary, acquired all of the outstanding shares of NMHC, based in Port Washington, New York, which provided PBM services. The results of operations of the acquired business are included from the date of acquisition. The Company issued 11.1 million shares of its common stock in connection with the acquisition.
On May 16, 2012, the Company completed its public offering of 12.0 million of its common shares at a price to the public of $45.30 per share. The net proceeds to the Company from the offering were approximately $519.1 million, after deducting the underwriting discounts and commissions and offering expenses. The Company used the net proceeds from the offering to pay a portion of the cash component of the Merger consideration and to pay certain related fees and expenses and used the balance for general corporate purposes.
In addition, numerous factors could cause actual results with respect to the merger with Catalyst Health Solutions, Inc. ("Catalyst" or the "Merger") to differ materially from those in the forward-looking statements, including, without limitation, the possibility that the expected efficiencies and cost savings from the Merger will not be realized, or will not be realized within the expected time period; the risk that the Company's and Catalyst businesses will not be integrated successfully; disruption from the Merger making it more difficult to maintain business and operational relationships; the risk of customer attrition; and the impact on the availability of funds for other business purposes due to our debt service obligations and funds required to integrate Catalyst.
On April 17, 2012, the Company entered into a definitive merger agreement (the "Merger Agreement") to combine the Company and Catalyst in a cash and stock merger transaction (the "Merger"). The Merger was completed on July 2, 2012, following the approval by shareholders of the Company and Catalyst. For financial reporting and accounting purposes, the Company was the acquirer of Catalyst. The consolidated financial statements included in Item 8 of this Annual Report on Form 10-K reflect the results of operations of Catalyst since the acquisition date.
Additionally, following the completion of the Merger, the Company unveiled a new name and brand for the combined company, Catamaran Corporation. In conjunction with the name change, the Company's common shares began trading under the ticker symbols "CTRX" on the NASDAQ Stock Market and "CCT" on the Toronto Stock Exchange.
Under the Company’s customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, the Company does not include participant co-payments paid to non-Company owned pharmacies in revenue or cost of revenue. During 2012, 2011 and 2010, pharmacies, excluding the Company's internally owned mail and specialty locations, collected approximately $1.8 billion, $0.7 billion, and $0.4 billion, respectively, in co-payments from the participants. If we had included these co-payments collected at non-Company owned pharmacies in our reported revenue and direct expenses, our operating and net income would not have been affected.
Profitability of the HCIT business depends primarily on revenue derived from transaction processing services, software license sales, hardware sales, maintenance, and professional services. Recurring revenue remains a cornerstone of the Company’s business model and consists of transaction processing services and maintenance. Growth in revenue from recurring sources has been driven primarily by growth in the
The Company’s operating expenses primarily consist of cost of revenue, selling, general and administrative (“SG&A”) costs, depreciation, and amortization. Cost of revenue includes the costs of drugs dispensed as well as costs related to the products and services provided to customers and costs associated with the operation and maintenance of the transaction processing centers. These costs include salaries and related expenses for professional services personnel, transaction processing centers’ personnel, customer support personnel and depreciation expense related to data center operations. SG&A costs relate to selling expenses, commissions, marketing, network administration and administrative costs, including legal, accounting, investor relations and corporate development costs. Depreciation expense relates to the depreciation of property and equipment used by the Company. Amortization expense relates to definite-lived intangible assets from business acquisitions.
The complicated environment in which the Company operates presents it with opportunities, challenges, and risks. The Company’s clients are paramount to its success; the retention of existing and winning of new clients and members poses the greatest opportunity, and the loss thereof represents an ongoing risk. The preservation of the Company’s relationships with pharmaceutical manufacturers and the Company's network of participating pharmacies is very important to the execution of its business strategies. The Company’s future success will hinge on its ability to drive volume at its mail and specialty pharmacies and increase generic dispensing rates in light of the significant brand-name drug patent expirations expected to occur over the next several years. The Company’s ability to continue to provide innovative and competitive clinical and other services to clients and patients, including the Company’s active participation in the Medicare Part D benefit and the rapidly growing specialty pharmacy industry, also will play an important part in the Company’s future success.
The Company operates in a competitive environment where clients and other payors seek to control the growth in the cost of providing prescription drug benefits. The Company’s business model is designed to reduce the level of drug cost. The Company helps manage drug cost primarily through its programs designed to maximize the substitution of expensive brand drugs with equivalent but much lower cost generic drugs, obtaining competitive discounts from suppliers, securing rebates from pharmaceutical manufacturers and third party rebate administrators, securing discounts from retail pharmacies, applying the Company’s sophisticated clinical programs, and efficiently administering prescriptions dispensed through the Company’s mail and specialty pharmacies.
Various aspects of the Company’s business are governed by federal and state laws and regulations. Because sanctions may be imposed for violations of these laws, compliance is a significant operational requirement. The Company believes it is in substantial compliance with all existing legal requirements material to the operation of its business. There are, however, significant uncertainties involving the application of many of these legal requirements to its business. In addition, there are numerous proposed health care laws and regulations at the federal and state levels, many of which could adversely affect the Company’s business, results of operations and financial condition. The Company is unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its business or the health care industry in general, or what effect any such legislation or regulations might have on it. The Company also cannot provide any assurance
that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws or regulations that could have a material adverse effect on its business or financial performance.
Flexible, customized and independent services: The Company believes a key differentiator between itself and its competitors is not only the Company's ability to provide innovative PBM services, but also to deliver these services on an à la carte basis. The Catamaran suite offers the flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer control, solutions tailored to the Company's customers’ specific requirements, and flexible pricing. The market for the Company's products is divided between large customers that have the sophisticated technology infrastructure and staff required to operate a 24-hour data center and other customers that are not able or willing to operate these sophisticated systems.
Leading technology and platform: The Company’s technology is robust, scalable, and web-enabled. The platform is able to instantly cross-check multiple processes, such as reviewing claim eligibility, adverse drug reaction and properly calculating member, pharmacy and payor payments. The Company’s technology is built on flexible, database-driven rule sets and broad functionality applicable for most any type of business. The Company believes it has one of the most comprehensive claims processing platforms in the market.
The Company’s technology platform allows it to provide more comprehensive PBM services by offering customers a selection of services to choose from to meet their unique needs versus requiring them to accept a one-size-fits-all solution. The Company believes this à la carte offering is a key differentiator from its competitors.
Selected trends and highlights for the year ended December 31, 2012 compared to the same period in 2011
Operating income increased $76.4 million, or 54.4%, in 2012 to $217.0 million as compared to $140.6 million in 2011. The increase is largely attributable to the recent Merger with Catalyst, as well as organic growth as a result of the successful implementation of new customer contracts in 2012. Partially offsetting the growth in operating income during 2012 were Merger related expenses totaling $44.2 million and additional amortization expense of $104.8 million resulting from the identified intangible assets recorded due to the 2012 acquisitions.
Strong operational results and strong attention to cash management yielded cash flow from operations of $249.7 million in 2012, an increase of $155.1 million from 2011.
In January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran, in exchange for $250 million in cash, subject to certain customary post-closing adjustments. HealthTran was an existing HCIT customer and utilizes one of the Company's platforms for its claims adjudication services.
In December 2012, the Company expanded the size of its board of directors from seven to nine and appointed Betsy Holden and Karen Katen to Catamaran’s Board of Directors, effective December 10, 2012.
On September 6, 2012, the Company announced that its board of directors had declared a nominal dividend on the issued and outstanding common shares of the Company to effect a two-for-one stock split. Shareholders of record at the close of business on September 20, 2012 were issued one additional common share for each share owned as of that date. The additional common shares were distributed on October 1, 2012. All share and per share data presented in this report have been adjusted to reflect this stock split.
In July 2012, the Company announced that two new directors, Harry M. Kraemer and Steven B. Epstein, would join the Catamaran board following the completion of the Merger. Mr. Kraemer joined the Catamaran Board in July 2012 and Mr. Epstein joined the Catamaran Board in August 2012. In addition, Curtis J. Thorne and Philip R. Reddon tendered their resignations as Catamaran directors in July 2012.
Concurrent with the consummation of the Merger on July 2, 2012, the Company executed a $1.8 billion credit agreement consisting of (i) a five-year senior secured term loan facility in the amount of $1.1 billion (the “Term A Facility”) and (ii) a five-year senior secured revolving credit facility in the amount of $700 million (the “Revolving Facility,” and, together with the Term A Facility, the “2012 Credit Agreement”). In July 2012, the Company borrowed $1.4 billion under the 2012 Credit Agreement and utilized the proceeds to partially finance the aggregate cash consideration payable to Catalyst stockholders in the Merger, repay and discharge existing indebtedness of the Company and Catalyst and pay related transaction fees and expenses. All obligations of the Company with respect to the 2012 Credit Agreement are guaranteed by certain of its material direct and indirect subsidiaries. Refer to Note 9 - Long - Term Liabilities in the notes to the consolidated financial statements for more information regarding the 2012 Credit Agreement.
the underwriting discounts and commissions and offering expenses. The Company used the net proceeds from the offering to pay a portion of the cash component of the Catalyst Merger consideration and to pay certain related fees and expenses and used the balance for general corporate purposes.
Revenue increased $5.0 billion, or 99.8%, to $9.9 billion during 2012 from $5.0 billion in 2011, primarily due to the recent Merger with Catalyst, which was completed on July 2, 2012 and contributed $3.2 billion in additional revenue for the year ended December 31, 2012, as well as additional revenues from organic growth as a result of the implementations of new customer contracts in 2012. As a result of the increased business, the Company's adjusted prescription claim volume increased 116.9% to 198.9 million from 91.7 million during 2011.
Cost of revenue increased $4.5 billion, or 97.3%, to $9.2 billion in 2012 from $4.7 billion in 2011, primarily due to the increased adjusted claim counts due to the reasons noted in the revenue discussion above. As a percentage of revenue, cost of revenue was 92.6% and 93.8% for the years ended December 31, 2012 and 2011, respectively. Increasing the utilization of generics and increased volumes at the Company's owned mail and specialty pharmacies helped yield a lower cost as a percentage of revenue during 2012. The increased scale as a result of recent acquisitions has also aided in lowering costs of goods sold as a percentage of revenue. The Company continues to focus on increasing generic utilization, mail and specialty penetration and improved pricing as a result of increased scale in order to lower our costs of good sold.
During 2011, cost of revenue increased $2.9 billion, or 169.0%, to $4.7 billion as compared to $1.7 billion in 2010. The increase in cost was consistent with the increased revenue during 2011, which was driven by the increased revenue from the PBM segment as a result of the implementation of the HeathSpring contract, new customer starts in 2011 as well as additional services sold to existing customers.
Depreciation expense relates to property and equipment used in all areas of the Company except for those depreciable assets directly related to the generation of revenue, which is included in the cost of revenue in the consolidated statements of operations. Depreciation expense increased $10.0 million to $16.7 million for the year ended December 31, 2012 from $6.7 million for the same period in 2011, driven by additional depreciation from the assets acquired in the Merger with Catalyst and the acquisition of HealthTran, along with new asset purchases in 2012 to support the continued growth in the Company's business. Depreciation expense will continue to increase in 2013 as a result of a full year of depreciation of Catalyst assets, along with an increase due to new asset purchases in 2012.
Depreciation expense for the year ended December 31, 2011 increased $0.7 million from $6.0 million in 2010 as a result of new asset purchases made during 2011.
Amortization expense for the year ended December 31, 2012 increased $113.7 million to $130.1 million compared to $16.4 million for the year ended December 31, 2011. The increase in amortization expense was driven mainly by the amortization of the intangible assets acquired in the recent Merger with Catalyst as well as the acquisition of HealthTran. Amortization expense also increased due to an $8 million adjustment to the useful life to the trade name intangible asset the Company carried from its acquisition of Medfusion in 2010. The adjustment to the useful life was triggered as a result of the Company re-branding its specialty business as BriovaRx in October 2012 and ceasing the use of the Medfusion name.
The Company recognized income tax expense of $69.3 million for the year ended December 31, 2012, representing an effective tax rate of 36.4%, compared to $46.5 million, representing an effective tax rate of 33.6%, for the same period in 2011. The effective tax rate increased during the current year due to certain costs that were not deductible and other taxes triggered as a result of the Catalyst Merger.
Revenue increased $3.0 billion, or 163.9%, for the year ended December 31, 2011 as compared to 2010 due to new customer starts during 2011, lead by the implementation of the HealthSpring contract on January 1, 2011.
For the year ended December 31, 2011, compared to 2010, cost of revenue increased $2.9 billion, or 173.7%. The increase was in line with the increase in PBM revenues during this period. As a percentage of revenue, cost of revenue was 94.7% and 91.3% for the years ended December 31, 2011 and 2010, respectively. The increase in the cost of revenue as a percentage of revenue was due to lower margins earned on new customer starts in 2011.
During the year ended December 31, 2011, gross profit increased $96.9 million, or 60.7%, compared to gross profit in 2010. This growth was primarily due to expansion of the customer base, including HealthSpring in 2011 compared to 2010. Gross profit percentage was 5.3% and 8.7% for the years ended December 31, 2011 and 2010. Gross profit percentage decreased during 2011 as compared to 2010 due to newer business being added at lower margins, driven by the implementation of the HealthSpring contract in 2011, which carries a significantly lower gross profit percentage than the Company's historical book of business.
Total HCIT revenue increased $38.8 million, or 33.4% to $155.0 million for the year ended December 31, 2012 as compared to $116.3 million in 2011. The increase was primarily due to an increase in revenues earned from transaction processing as a result of increased volume or rates from existing customers and additional revenues earned from Catalyst and HealthTran customers included in the HCIT segment. These increases in revenue were slightly offset by a decrease in transaction processing revenues as a result of the Merger with Catalyst due to Catalyst being a former HCIT customer. There is no net profit impact of this lost revenue stream on the Company's consolidated results.
HCIT revenue increased $9.5 million or 8.9% to $116.3 million for the year ended December 31, 2011 as compared to $106.8 million in 2010. Revenues increased mainly due to an increase in transaction processing revenues. Transaction processing revenue consists of claims processing and generally increases as a result of the launch of new contracts as well as increased volumes of services provided to existing customers.
Cost of revenue increased $2.4 million or 3.7% to $65.7 million for the year ended December 31, 2012 as compared to $63.3 million for the year ended December 31, 2011. Cost of revenue increased $11.0 million or 20.9% to $63.3 million for the year ended December 31, 2011 as compared to $52.4 million for the same period in 2010. Cost of revenue includes the direct support costs for the HCIT business as well as depreciation expense of $3.5 million, $2.7 million and $2.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. In addition, cost of revenue includes stock-based compensation expense of $0.7 million for the years ended December 31, 2012, 2011and 2010. Cost of revenue increased during 2012 as compared to 2011 mainly due to costs associated with HealthTran and Catalyst customers as a result of the Company's recent acquisitions. The Company's HCIT costs do not always follow a linear change in accordance with revenue changes. Most of the increased revenues of 2012 were related to transaction processing, which often do not incur cost increases when volumes rise due to the scalability of the Company's systems.
Gross profit increased $36.4 million, or 68.8%, to $89.3 million for the year ended December 31, 2012 as compared to $52.9 million for the year ended December 31, 2011. Gross profit percentage was 57.6% for the year ended December 31, 2012, as compared to 45.5% for the same period in 2011. The increases in gross profit and gross profit percentage are attributable to the mix of the Company's HCIT revenue moving to more transaction processing as a percentage of total revenues. This reduced the percentage of revenues attributable to professional services, which carry the lowest gross profit percentage in the Company's HCIT segment due to the direct labor costs associated with professional services.
The Company reports its financial results in accordance with GAAP, but Company management also evaluates and makes operating decisions using EBITDA and Adjusted EPS. The Company's management believes that these measures provide useful supplemental information regarding the performance of business operations and facilitates comparisons to its historical operating results. The Company also uses this information internally for forecasting and budgeting as it believes that the measures are indicative of the Company's core operating performance. Note however, that these items are performance measures only, and do not provide any measure of the Company's cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliations of EBITDA and Adjusted EPS that are included below.
The following is a reconciliation of the Company's reported net income to EBITDA for the years ended December 31, 2012, 2011 and 2010.
EBITDA increased $196.3 million for the year ended December 31, 2012 compared to 2011, primarily due to the Merger as well as an organic increase in sales within the PBM segment from new customer contract implementations. This was partially offset by Merger-related costs, including transaction and integration expenses, as well as increased costs incurred to support the Company's business growth.
Adjusted EPS adds back the impact of all amortization of intangible assets, net of tax. Amortization of intangible assets arises from the acquisition of intangible assets in connection with the Company's business acquisitions. The Company excludes amortization of intangible assets from non-GAAP Adjusted EPS because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of the Company's business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets. Investors should note that the use of these intangible assets contributes to revenue in the period presented as well as future periods and should also note that such expenses will recur in future periods. Below is a reconciliation of the Company's reported net income to Non-GAAP net income and the related Adjusted EPS for the years ended December 31, 2012 , 2011 and 2010.
Adjusted EPS for the year ended December 31, 2011 was $0.82 as compared to $0.55 in 2010. Increased gross profit from an increased customer base within the PBM segment was the main driver of the Adjusted EPS increase in 2011 over 2010.
The Company’s sources of liquidity have primarily consisted of cash provided by operating activities, proceeds from its public offerings, proceeds from credit facilities and stock option exercises. On July 2, 2012, the Company completed the Merger with Catalyst. To complete the Merger, the Company issued approximately 66.8 million shares of its common stock, and paid $1.4 billion in cash to Catalyst shareholders. To raise the capital required to complete the Merger, the Company entered into the 2012 Credit Agreement in, as discussed previously, and in May 2012, issued 12.0 million of its common shares in a public offering. The Company utilized $1.4 billion of the available $1.8 billion under the 2012 Credit Agreement in July 2012 to partially finance the aggregate cash consideration payable to Catalyst stockholders in the Merger, repay and discharge existing indebtedness of the Company and Catalyst and pay related transaction fees and expenses. Concurrently, the Company terminated its credit agreement it entered into in December 2011 with JPMorgan Chase Bank, N.A. ("JPMCB") and the other lenders named therein (the "2011 Credit Agreement") after repaying its outstanding balance in July 2012. As a result of the borrowings from the 2012 Credit Agreement in July 2012, the Company incurred a significant increase in its interest expense during the year ended December 31, 2012 and expects this expense and the related payments to continue throughout the term of the 2012 Credit Agreement. In conjunction with the Merger, the Company assumed approximately $312 million in debt from Catalyst. The Company repaid this outstanding debt in July 2012. Additionally, during the year ended December 31, 2012, the Company repaid $200 million of its revolving debt. As of December 31, 2012, the Company had approximately $1.2 billion of outstanding debt under its 2012 Credit Agreement and $600 million of available borrowing capacity thereunder. Refer to Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for more information regarding the 2012 Credit Agreement and termination of the 2011 Credit Agreement.
At December 31, 2012 and 2011, the Company had cash and cash equivalents totaling $370.8 million and $341.4 million, respectively. As disclosed previously, the Company completed its acquisition of HealthTran in January 2012 and disbursed approximately $246.4 million, net of cash acquired, from cash on hand and borrowings from a draw on the Company's 2011 Credit Agreement. In July 2012, the Company disbursed approximately $1.4 billion from cash on hand and proceeds from the Company's 2012 Credit Agreement to complete the Merger, and additionally disbursed $617.0 million from cash on hand and proceeds from the Company's 2012 Credit Agreement to repay the outstanding
balance on the 2011 Credit Agreement and the outstanding Catalyst debt assumed by the Company in the Merger, as well as a portion of the outstanding balance on the 2012 Credit Agreement. The Company believes that its cash on hand, together with cash generated from operating activities, and the amount available under its 2012 Credit Agreement, will be sufficient to support planned operations for the foreseeable future.
At December 31, 2012, cash and cash equivalents consist of cash on hand, deposits in banks and bank term deposits with original maturities of 90 days or less.
Selected balance sheet highlights at December 31, 2012 are as follows:
Accounts receivable represent trade accounts receivable from our customers. Accounts receivable increased $485.4 million to $725.8 million at December 31, 2012 from $240.4 million at December 31, 2011, driven by increases in revenue of $5.0 billion during the year ended December 31, 2012, largely attributable to the Merger with Catalyst, the integration of HealthTran customers on January 1, 2012, as well as the implementation of new customer contracts. The accounts receivable balance is impacted by changes in revenues, as well as the timing of collections, and is continually monitored by the Company to ensure timely collections and to assess the need for any changes to the allowance for doubtful accounts.
Rebates receivable of $302.5 million relate to billed and unbilled PBM receivables from pharmaceutical manufacturers and third party administrators in connection with the administration of the rebate program where the Company is the principal contracting party. The receivable and related payables are based on estimates, which are subject to final settlement. Rebates receivable increased $268.6 million to $302.5 million from $33.8 million at December 31, 2011. The increase in the rebate receivable balance was mostly attributable to the Merger with Catalyst, as well as the timing of receipts from pharmaceutical manufacturers and third party administrators. The Company does not process rebates for all PBM customers and accordingly the rebates receivable balance does not always fluctuate proportionately with changes in revenues and prescription claim volumes.
As of December 31, 2012, goodwill and other intangible assets were $4.5 billion and $1.2 billion, respectively, increasing $4.2 billion and $1.1 billion, respectively, from December 31, 2011 to December 31, 2012. Goodwill and other intangible assets increased primarily as a result of the Merger with Catalyst. Please refer to Note 7 - Goodwill and Other Intangibles Assets for future amortization expense as of December 31, 2012.
Accounts payable predominantly relates to amounts owed to retail pharmacies for prescription drug costs and dispensing fees in connection with prescriptions dispensed by the retail pharmacies to the members of the Company’s customers when the Company is the principal contracting party with the pharmacy. As of December 31, 2012, the accounts payable balance has increased $425.4 million to $644.8 million from $219.4 million at December 31, 2011, due to increased prescription claim transactions driven by the Merger with Catalyst, the acquisition of HealthTran and new customer contracts implemented in 2012.
Accrued liabilities are mainly comprised of customer deposits, salaries and wages payables, contingent consideration and other accrued liabilities related to operating expenses of the Company. Accrued liabilities have increased to $254.8 million at December 31, 2012 from $66.7 million at December 31, 2011. The increase was driven primarily by liabilities assumed from the Merger with Catalyst, the HealthTran acquisition, contingent consideration that became a current liability in the first quarter of 2012, as well as increased operating expenses of the Company.
For the year ended December 31, 2012, the Company generated $249.7 million of cash through its operations. Cash provided by operating activities increased by $155.1 million compared to the same period in 2011. Cash from operating activities has increased during this
For the year ended December 31, 2012, the Company generated $1.4 billion of cash from financing activities, which consisted primarily of the Company's $1.4 billion draw on the 2012 Credit Agreement to finance the Merger as well as the issuance of 12.0 million common shares in May 2012, which resulted in net proceeds of $519.1 million. Offsetting these proceeds was $18.8 million in fees the Company paid to lenders related to the 2012 Credit Agreement executed in July 2012, the repayment of $617.0 million of debt related to the Company's and Catalyst's previous debt agreements in place prior to the Merger, and a portion of the Company's 2012 Credit Agreement.
If sources of liquidity are not available or if it cannot generate sufficient cash flow from operations during the next twelve months, the Company might be required to obtain additional funds through operating improvements, capital markets transactions, asset sales or financing from third parties or a combination thereof. The Company cannot provide assurance that these additional sources of funds will be available or, if available, will have reasonable terms.
The interest payments are calculated based on the Company's senior secured term loan borrowings that carry an annual interest rate of 2.52% on $500 million which has been fixed through the Company's interest rate swap agreements and the Company's rate of 2.25% on the remaining $600 million of its senior secured term loan borrowings outstanding as of December 31, 2012. The interest rate applicable to the Company's senior secured term loan borrowings may fluctuate in the future based on changes in the LIBOR rate. These amounts do not include interest payment obligations on the remaining $100 million borrowed under the Revolving Credit Facility due to the uncertainty of when payments will be made. See Note 9 - Long-Term Liabilities in the notes to the consolidated financial statements for further information on the terms of the Company's long-term debt obligations. The current rate on the Company's Revolving Credit Facility is 2.25%.
As of January 31, 2013, the Company had 205,473,502 common shares outstanding, 1,384,820 options outstanding, 1,571,504 restricted stock units (“RSUs”) outstanding and 485,160 warrants outstanding. The options and warrants are exercisable on a one-for-one basis into common shares. The outstanding RSUs are subject to time-based and performance-based vesting restrictions. The number of outstanding RSUs as of January 31, 2013 assumes the associated performance targets will be met at the maximum level for the performance-based RSUs. Once vested, RSUs convert on a one-for-one basis into common shares.
The following table provides summary quarterly results (unaudited) for the eight quarters prior to and including the quarter ended December 31, 2012 (in thousands except share and per share data):
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, purchase price allocation in connection with acquisitions, the carrying amount of property and equipment, the value of intangible assets acquired and related amortization periods, impairment of goodwill, rebates, contingencies, the valuation allowances for receivables and future income taxes and accruals for income tax uncertainties. Actual results could differ from those estimates. Note 2 - Significant Accounting Policies to the Company’s 2012 consolidated financial statements includes a Summary of Significant Accounting Policies. The understanding of the accounting policies used to prepare the consolidated financial statements is important to understanding the Company’s results of operations and financial condition.
the Company’s revenue recognition include principal versus agent considerations for PBM contracts, arrangements with multiple elements, and professional service revenues under long-term contracts for HCIT contracts.
The Company administers rebate programs through which it receives rebates and administrative fees from pharmaceutical manufacturers and third party administrators that are shared with customers. The Company recognizes rebates when the Company is entitled to them, and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers, third party administrators, and from administrative fees are recorded as a reduction of cost of sales. Rebates owed to the Company’s customers are recorded as a reduction of revenue. The Company determines the amount of rebates to record based on the number and types of claims submitted, the rebate program terms with its customers, the Company’s rebate contracts, and any additional information that becomes available. The amount of rebates ultimately earned by the Company, or paid to its customers, is contingent upon several factors, including validation of claims data submitted by the Company, and may require adjustments in future periods to the amounts originally estimated. Historically, adjustments to the Company’s original rebate estimates have not been significant.
Goodwill and intangible assets are impacted by the Company’s fair value measurements at initial recording. Beginning in 2009, the Company applied the revised business combination guidance as issued by the Financial Accounting Standards Board (“FASB”). Measurements of goodwill and purchased intangible assets are based on models derived from a market participant point of view. Along with the methodology used to measure assets and liabilities acquired, the new guidance also impacts the types of assets and liabilities required to be measured and recognized. Management’s conclusions about the composition of relevant market participants, the types of assets and liabilities required to be
measured, and the methodology used to measure the assets and liabilities will all have a significant impact on the purchase price allocation for business combinations.
The annual qualitative assessment for goodwill is impacted by management’s assessment of reporting units, allocation of the consolidated Company’s assets and liabilities to each reporting unit, management’s estimate of future operating results, and a selection of peers to establish a comparable market group. The annual impairment test completed for 2012 did not indicate any impairment of the Company’s two reporting units, and did not reveal that an impairment would be reasonably likely in the near future.
As noted above, long-lived assets are only required to be tested for impairment when events or circumstances indicate that the net carrying amount of the asset may not be recoverable. Assessing whether an impairment test is necessary requires management to monitor results of the business that utilize the long-lived assets, as well as outside market forces that may impact the future recoverability of the long-lived assets. No events or other circumstances occurred in 2012 that caused management to conclude any of its long-lived tangible assets may not be recoverable. In October 2012, the Company launched its new specialty brand BriovaRx, formerly known as Medfusion and Ascend, delivering personalized, holistic care to patients with complex chronic and conditions to improve health outcomes. As a result of the re-branding of the specialty business, the Company concluded that the useful life of the intangible asset that the Company recorded for the MedfusionRx trade name should be reduced since the name would no longer be used by the Company, which was the asset's highest and best use. Before adjusting the useful life of the asset, the Company considered whether the asset had any value as a defensible asset which would extend its useful life. The Company determined that the MedfusionRx trade name had an insignificant value as a defensible asset, and the asset's useful life should be shortened due to the name change of the business. As a result, the Company recorded an additional $8.0 million in amortization expense during 2012.
In assessing the valuation of the allowance for doubtful accounts, management reviews the collectability of accounts receivable in aggregate and on an individual account-basis. Delinquency is assessed based primarily on contractual terms, and management’s judgment is used as the basis for allowances required. Management reviews the accounts receivable on an individual customer-basis to determine if events such as subsequent collections, discussions with management of the debtor companies, or other activities lead to the conclusion to either increase or decrease the calculated allowance. Factors considered when reviewing accounts receivable in the aggregate include the overall age of receivables, macro-economic issues impacting classes of customers and recent collection trends. The conclusions and estimates made are further impacted by changes in economic and market conditions as well as changes to the customers’ financial condition. Changes in estimates for the allowance of doubtful accounts have not had a significant impact on the results of the Company during 2012, 2011, or 2010.
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Benefits from tax positions are recognized in the consolidated financial
We have audited the accompanying consolidated balance sheets of Catamaran Corporation and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We have audited Catamaran Corporation’s (the Company) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
In our opinion, Catamaran Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In July 2012, following the completion of its merger (the “Merger”) with Catalyst Health Solutions, Inc. (“Catalyst”), SXC Health Solutions Corp. unveiled a new name and brand for the combined company. The new name, Catamaran Corporation, reflects the union of two of the industry's fastest-growing PBM companies. The Company trades on the Nasdaq Stock Market under the ticker symbol "CTRX" and on the Toronto Stock Exchange under ticker symbol “CCT.”
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include its wholly-owned subsidiaries as well as non-controlled entities. All significant inter-company transactions and balances have been eliminated in consolidation. Amounts in the consolidated financial statements are expressed in U.S. dollars, except where otherwise indicated. Certain reclassifications have been made to conform the prior years’ consolidated financial statements to the current year’s presentation.
When non-software elements are not considered essential to the functionality of the software and significant customization of the software is not required, the entire arrangement fee is allocated to each element in the arrangement based on the respective VSOE of fair value of each element. VSOE of fair value used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar volumes to a customer of similar size and nature on a stand-alone basis. As the Company has not sold many licenses over the past several years, VSOE of fair value for licenses is not always established. VSOE used in determining revenue for consulting is based on the standard daily rates for the type of services being provided multiplied by the estimated time to complete the task. VSOE used in determining the fair value of maintenance and technical support is based on the annual renewal rates. The revenue allocable to the consulting services is recognized as the services are performed. In instances where VSOE exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method of allocation of the arrangement fees for revenue recognition purposes. The Company has used the residual method of revenue recognition to determine the amount of revenue to be applied to any software licenses that contain multiple elements for the periods covered in this Annual Report as VSOE of fair value of the software licenses was not available. If VSOE of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or VSOE can be established.
Restricted cash balances at December 31, 2012 are restricted as to use and relate primarily to minimum cash balances required in accordance with various state statutes, contractual terms with customers and other customer restrictions related to the Company’s PBM business.
The Company applies the fair value accounting guidance for measuring its financial and non-financial assets and liabilities. Currently, none of the Company’s non-financial assets are required to be carried at fair value. The Company would apply the fair value accounting guidance to non-financial assets and liabilities in the event that a non-financial asset or liability was impaired, or, if non-financial assets and liabilities were purchased in a business acquisition.
Long-lived assets or asset groups held and used, including P&E and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its previously estimated useful life. Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value. During each of the years ended December 31, 2012, 2011 and 2010, no events or circumstances occurred that indicated that the carrying amounts of the long-lived assets may not be recoverable.
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated to the Company’s reporting unit that is expected to benefit from the business combination as of the date of the business combination. As of December 31, 2012, the amount of goodwill carried at the HCIT and PBM segments were $19.7 million and $4.5 billion, respectively.
The qualitative assessment performed by the Company considered the current operating results of the Company's reporting units, future expectations of each reporting unit, industry and competitor performance and other recent events that may impact each reporting unit. The Company then assessed whether, in light of the evidence gathered, it was more likely than not that a reporting unit's fair value was less than its carrying amount. As noted above, the Company concluded that it was not more likely than not that a reporting unit's fair value was less than its carrying value. If in the future the Company's qualitative assessment indicates that a reporting unit's fair value may be below its carrying value, the Company would prepare a quantitative test to determine whether an impairment existed, and the amount of such impairment.
Research costs are expensed as incurred. Costs related to development of software are expensed as incurred unless such costs meet the criteria for capitalization and amortization. The Company has not capitalized any software development costs incurred during 2012, 2011, or 2010.
On September 6, 2012, the Company announced that its board of directors had declared a nominal dividend on the issued and outstanding common shares of the Company to effect a two-for-one stock split. Shareholders of record at the close of business on September 20, 2012 were issued one additional common share for each share owned as of that date. The additional common shares were distributed on October 1, 2012.
All share and per share data presented in these consolidated financial statements have been adjusted to reflect the stock splits noted above.
On July 2, 2012, the Company completed its previously announced Merger with Catalyst, a full-service PBM. Each share of Catalyst common stock outstanding immediately prior to the effective time of the Merger (other than shares owned by the Company or Catalyst or any of their respective wholly-owned subsidiaries) was converted in the Merger into the right to receive 1.3212 (0.6606 prior to split adjustment) of a Company common share and $28.00 in cash. This resulted in the Company issuing approximately 66.8 million common shares, issuing 0.5 million warrants, and paying $1.4 billion in cash to Catalyst stockholders to complete the Merger. The results of Catalyst have been included in the Company's results since July 2, 2012. The consolidated statement of operations for the year ended December 31, 2012 includes Catalyst's total revenues of $3.2 billion following consummation of the Merger.
All of the assets and liabilities recorded for the Merger are included within the Company's PBM segment. Goodwill is non-amortizing for financial statement purposes. Goodwill of $525 million related to the Catalyst Merger is tax deductible. The goodwill recognized by the Company represents many of the synergies and business growth opportunities that the Company anticipates may be realized from the Merger. The synergies include improved pricing from the Company's suppliers due to the increased volume of prescription drug purchases, pull through opportunities of the combined companies' mail and specialty service offerings, and a more efficient leveraging of resources to achieve operating profits.
The following summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed at the acquisition date and are subject to change as the valuation processes are not complete. Final determination of the fair values may result in further adjustments to the amounts presented below (in thousands):
During the year ended December 31, 2012, the Company recognized $86.0 million of amortization expense from intangible assets acquired in the Catalyst Merger. Amortization associated with the Catalyst Merger in 2013 is expected to be $166.1 million. The estimated fair value of the customer relationship intangible asset is $1.2 billion with a useful life of 9 years. The intangible asset acquired will not have any residual value at the end of the amortization period. There were no in-process research and development assets acquired.
In January 2012, the Company completed the acquisition of all of the outstanding equity interests of HealthTran LLC (“HealthTran”), a full-service PBM, in exchange for $250.0 million in cash, subject to certain customary post-closing adjustments, in each case upon the terms and subject to the conditions contained in the HealthTran purchase agreement. HealthTran was an existing HCIT client and utilizes a Company platform for its claims adjudication services. The acquisition provides the opportunity to create new revenues from HealthTran's customer base and generate cost savings through purchasing and SG&A synergies. Costs related to the HealthTran acquisition of $0.9 million were included in SG&A expenses for the year ended December 31, 2011. The results of HealthTran have been included in the Company's results since January 1, 2012.
During the year ended December 31, 2012, the Company recognized $18.8 million of amortization expense from intangible assets acquired in the HealthTran acquisition. Amortization associated with the HealthTran acquisition in 2013 is expected to be $14.6 million.
None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.
The PTRX and SaveDirectRx acquisitions were accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisitions have been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair value due to the short-term nature of their maturities. Fair values for acquired amortized intangible assets were determined as follows: customer lists are valued using an excess earnings model based on expected future revenues derived from the customers acquired, non-compete agreements were valued using discounted cash flow models based on expected future results of PTRX and SaveDirectRx, trademarks/tradenames were valued using a royalty savings model based on future projected revenues of PTRX and SaveDirectRx, and applicable market royalty rates and licenses utilized a replacement cost approach. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The assets and liabilities recorded for PTRX and SaveDirectRx were recorded in the PBM segment. Goodwill is non-amortizing for financial statement purposes and $25.0 million of the goodwill balance generated from the PTRX and SaveDirectRx acquisitions is tax deductible.
The goodwill recognized by the Company represents many of the synergies and business growth opportunities that may be realized from these acquisitions. The opportunity to bring Catamaran's full suite of PBM services to PTRX and SaveDirectRx clients is a significant driver of the goodwill created. In addition, there are cost saving opportunities through adding PTRX and SaveDirectRx into the Company's pharmacy and purchasing networks.
The following summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed at the acquisition date and are subject to change (in thousands):
On December 28, 2010, the Company, completed the acquisition of MedfusionRx, L.L.C. and certain affiliated entities and certain assets of Medtown South, L.L.C (collectively, "MedfusionRx"), a specialty pharmacy provider with significant expertise in providing clinical services to patients with complex chronic conditions. The purchase price for MedfusionRx was $101.5 million in cash, subject to a customary post-closing working capital adjustment, and an opportunity for the former owners of MedfusionRx to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year, in each case based upon the terms and subject to the conditions contained in the Purchase Agreement. MedfusionRx's results of operations from the date of acquisition through December 31, 2010 were not material to the Company’s results of operations for 2011.
The MedfusionRx purchase agreement includes contingent purchase price consideration in the form of an earn-out payment of up to $5.5 million contingent upon the MedfusionRx book of business meeting or exceeding certain gross profit targets for the year ended December 31, 2012. The $4.9 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The Company utilized a probability weighted discounted cash flow method, with expected future performance of MedfusionRx, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration.
As the fair value measurement for the contingent consideration is based on inputs not observed in the market, the measurement is classified as a Level 3 measurement as defined by the fair value measurements guidance.
addition of specialty pharmacy locations and expands the Company's product offerings. Further, the Company expects to drive cost savings due to the increased volume of prescription drug purchases of the combined entities which should yield improved pricing from the Company's suppliers.
During the year ended December 31, 2012, the Company recognized $12.9 million of amortization expense from intangible assets acquired. Amortization for 2013 is expected to be $2.8 million.
(a) In October 2012, the Company launched its new specialty brand, BriovaRx, formerly known as Medfusion and Ascend. As a result of the re-branding of the specialty business, the Company concluded that the useful life of the intangible asset that the Company recorded for the MedfusionRx trade name should be reduced since the name would no longer be used by the Company, which was the asset's highest and best use. As a result, the Company recorded an additional $8.0 million in amortization expense during 2012.
On June 1, 2011, the Company completed the acquisition of substantially all of the assets of MedMetrics Health Partners, Inc. (“MedMetrics”), the full-service PBM subsidiary of Public Sector Partners, Inc., which is affiliated with a major medical school. MedMetrics' results of operations are included in the 2011 consolidated statements of operations commencing June 1, 2011. Prior to the acquisition, MedMetrics was a customer of the Company and its associated revenue was accounted for in the PBM segment. Due to the previous contractual relationship between the Company and MedMetrics, there were pre-existing transactions between the two entities which resulted in approximately $10.6 million in accounts receivable due to the Company from MedMetrics for PBM services provided as of the acquisition date. No gain or loss was generated from the subsequent settlement of these pre-existing balances.
Unaudited pro forma results of operations are as follows (dollars in thousands, except share and per share amounts):
Catalyst entered into a purchase agreement on December 16, 2011, and made an initial capital contribution of $5.0 million to Script Relief LLC ("Script Relief"), a Delaware limited liability company, in exchange for a 19.9% ownership interest. On March 1, 2012, Catalyst made an additional $5.0 million capital contribution to Script Relief due to its achievement of certain milestones, thereby increasing Catalyst's ownership interest to 47.0%. Script Relief operates a direct to consumer pharmacy benefit business, including discount card offerings and associated activities. The Company evaluated this transaction and determined that Script Relief is a variable interest entity with Catamaran being the primary beneficiary, as the Company's underlying PBM and pharmacy contracts represent Script Relief's key business operations and the Company has the power to direct these activities. As a result, Script Relief is consolidated in the Company's consolidated financial statements with the amounts attributable to the non-controlling interests disclosed. The assets and liabilities of Script Relief were recorded at fair value as of the date of the Merger with Catalyst. The carrying amount of the assets and liabilities, and the impact of the operating results of this consolidated variable interest entity are not material to our consolidated financial statements.
The following table sets forth the components of long-term debt (in thousands) as of December 31, 2012. At December 31, 2011, the Company did not have any outstanding long-term debt.
LIBOR borrowings. The applicable margin, in each case, will be adjusted from time to time based on the Company’s consolidated leverage ratio for the previous fiscal quarter. During an event of default, default interest is payable at a rate that is 2.00% higher than the rate otherwise applicable.
The 2012 Credit Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to: incur additional indebtedness; create liens; make investments, loans, advances or guarantees; sell or transfer assets; pay dividends and distributions or repurchase its own capital stock; prepay certain indebtedness; engage in mergers, acquisitions or consolidations (subject to exceptions for certain permitted acquisitions); change its lines of business or enter into new lines of business; engage in certain transactions with affiliates; enter into agreements restricting the ability to grant liens in favor of the collateral agent for the benefit of the secured parties; engage in sale and leaseback transactions; or enter into swap, forward, future or derivative transaction or option or similar agreements. In addition, the 2012 Credit Agreement includes various (i) customary affirmative covenants and other reporting requirements and (ii) customary events of default, including, without limitation, payment defaults, violation of covenants, material inaccuracy of representations or warranties, cross-defaults to other material agreements evidencing indebtedness, bankruptcy events, certain ERISA events, material judgments, invalidity of guarantees or security documents and change of control. Drawings under the Revolving Facility are subject to certain conditions precedent, including material accuracy of representations and warranties and absence of default.
The carrying value of the Company's debt at December 31, 2012 approximates its fair value.
On May 16, 2012, the Company completed a public offering of 12.0 million of its common shares at a price to the public of $45.30 per share. The net proceeds to the Company from the offering were approximately $519.1 million, after deducting the underwriting discounts and commissions and offering expenses. The Company used part of the net proceeds from the offering to pay a portion of the cash component
Effective on March 11, 2009, the Board of Directors of the Company adopted the Catamaran Corporation Long-Term Incentive Plan (“LTIP”), which was approved by the shareholders of the Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP provides for the grant of stock option awards, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other stock-based awards to eligible persons, including executive officers and directors of the Company. The purpose of the LTIP is to advance the interests of the Company by attracting and retaining high caliber employees and other key individuals who perform services for the Company, a subsidiary or an affiliate; align the interests of the Company’s shareholders and recipients of awards under the LTIP by increasing the proprietary interest of such recipients in the Company’s growth and success; and motivate award recipients to act in the best long-term interest of the Company and its shareholders. The LTIP replaced the previous stock option plan, and no further grants or awards will be issued under the previous stock option plan. The maximum common shares of the Company allowed to be issued under the LTIP was increased by 3.6 million on May 11, 2011, after the Company’s shareholders approved an amendment to the LTIP at the Annual and Special Meeting of Shareholders of the Company. In July 2012, the maximum common shares of the Company allowed to be issued under the Catamaran Corporation LTIP was increased by 5.0 million. Any full-value awards (i.e., any awards other than stock options or stock appreciation rights) granted under the LTIP are counted against this share limit as 1.79 shares for every one share granted. There were 6,592,661 stock-based awards available for grant under the LTIP as of December 31, 2012.
The following table summarizes certain information about the Canadian dollar stock options outstanding at December 31, 2012 in Canadian dollars:
The aggregate intrinsic value and remaining contractual term of exercisable stock options at December 31, 2012 was approximately $2.0 million (Cdn.$2.0 million ) and 1 year, respectively.
As of the year ended December 31, 2012 there was no unrecognized compensation cost related to Canadian dollar stock options as all options were fully vested. The total fair value of Canadian stock options which vested during the year ended December 31, 2010 was as follows (in thousands):
The following table summarizes activity related to stock options denominated in U.S. dollars for the year ended December 31, 2012. The Company began issuing these stock options subsequent to May 2007:
The following table summarizes certain information about the U.S. dollar stock options outstanding at December 31, 2012:
The aggregate intrinsic value and remaining contractual term of exercisable stock options at December 31, 2012 was $14.4 million and 2.76 years, respectively. The aggregate intrinsic value and remaining contractual term of all vested options and options that are expected to vest are $36.6 million and 4.5 years, respectively. The intrinsic value of options exercised during 2012, 2011 and 2010 was $45.8 million, $23.3 million, and $17.5 million, respectively. The total fair value of stock options which vested during the years ended December 31, 2012, 2011, and 2010 was approximately $2.8 million, $2.5 million, and $2.3 million, respectively.
As of December 31, 2012, there was $7.8 million of unrecognized compensation cost related to U.S. dollar stock options which is expected to be recognized over a weighted-average period of 2.66 years.
During the first quarter of 2009, the ESPP was amended so that the common shares available for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of the Company in the open market. Prior to the amendment in 2009, the common shares available for purchase under the ESPP were drawn from either authorized but previously un-issued common shares or from reacquired common shares, including those purchased by the Company in the open market. During 2012, 2011, and 2010, the Company delivered 14,697, 13,544, and 14,144 common shares, respectively, under the ESPP.
The total intrinsic value of RSUs that vested during the year under the LTIP plan was $18.0 million. There were no RSUs that vested during the year under the Catalyst Plans. At December 31, 2012, there was $22.0 million and $9.5 million unrecognized compensation cost related to RSUs which is expected to be recognized over a weighted-average period of 2.35 and 3.34 years under the LTIP and Catalyst Plans, respectively. The following table summarizes the information about RSUs for the year ended December 31, 2012 under the plans:
For the years ended December 31, 2012, 2011, and 2010, the Company recorded stock-based compensation expense of $17.7 million, $9.4 million, and $5.9 million, respectively.
The Company allocated stock-based compensation costs to the same statement of operations line item as the cash compensation to those employees. Accordingly, the allocation of the compensation costs is as follows for the years ended December 31, 2012, 2011, and 2010 (in thousands):
The Black-Scholes-Merton option-pricing model was used to estimate the fair value of the options at grant date for the years ended December 31, 2012, 2011, and 2010, based on the following assumptions:
At December 31, 2012, the Company had gross deferred tax assets (“DTAs”) totaling $61.3 million compared to $20.5 million at December 31, 2011. Of the $61.3 million, $5.0 million of DTAs related to its Canadian operations compared to $4.0 million at December 31, 2011. The Company also had deferred tax liabilities which increased to $363.2 million at December 31, 2012 from $25.1 million at December 31, 2011 primarily as a result of the Catalyst Merger.
Accounting guidance for uncertain tax positions prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2012, the Company has an accrued liability in the consolidated balance sheet of $18.8 million. As of December 31, 2011 and 2010, the Company had an accrued liability of $0.6 million. The increase is primarily the result of matters related to the Catalyst Merger. This liability related to various uncertain federal and state income tax matters, the resolution of all of which would not have a material impact on the Company’s effective tax rate.
The Company has a 401(k) savings plan that allows eligible employees to defer a percentage of their salary, not to exceed $16,500 in 2012 , 2011 and 2010. The Company matches an amount equal to 100% of the first 1% of eligible earnings and 50% of the next 2% through 6% of eligible earnings. All participant contributions are 100% vested. Employer contributions become 20% vested after one year of service and 100% vested after completion of two years of service. For 2012, 2011 and 2010, the Company’s contributions to this plan were $4.9 million, $2.3 million, and $1.7 million, respectively.
A number of lawsuits were filed by alleged Catalyst stockholders challenging our proposed merger transaction with Catalyst following our announcement on April 18, 2012 that we had entered into a definitive merger agreement with respect to the Merger. The complaints in the actions name as defendants Catalyst, Catalyst's directors, the Company and certain wholly-owned subsidiaries of the Company (collectively, “the defendants”). Five complaints were filed in two different venues: four complaints in the Court of Chancery of the State of Delaware and one in the Circuit Court for Montgomery County of the State of Maryland. The plaintiffs in the purported class action complaints generally alleged, among other things, that (i) the Catalyst directors violated their fiduciary duties in connection with their negotiation of and agreement to the merger agreement and the Merger by, among other things, agreeing to allegedly inadequate consideration and preclusive terms, (ii) the Company and certain of its wholly-owned subsidiaries allegedly aided and abetted the Catalyst directors' alleged breaches of fiduciary duties and (iii) the joint proxy statement/prospectus of the Company and Catalyst relating to the Merger allegedly included certain materially misleading disclosures and omissions. The plaintiffs sought, among other things, to enjoin the defendants from consummating the Merger and unspecified compensatory damages, together with the costs and disbursements of the action. On May 25, 2012, the Delaware Court of Chancery issued a decision and order consolidating the Delaware cases. On June 25, 2012, the defendants entered into a memorandum of understanding with respect to a settlement with the remaining parties to the action in the Court of Chancery in the State of Delaware. Without agreeing that any of the plaintiffs' claims have merit, the defendants agreed, pursuant to the terms of the memorandum of understanding, to make additional disclosures described in the Company's Current Report on Form 8-K filed June 25, 2012, which supplemented and formed part of the joint proxy statement/prospectus of the Company and Catalyst dated June 1, 2012. In July 2012, the Maryland case was voluntarily dismissed by the plaintiff in that action. On October 24, 2012, the parties to the remaining Delaware cases filed a stipulation of settlement, which is subject to approval by the
The Company manages its business in two segments: PBM and HCIT. The Company and its chief operating decision maker evaluates segment performance and allocates resources based upon revenue and gross profit. Selling, general and administrative expenses, product development, depreciation and amortization, interest and other income and interest expense are reported as corporate expenses as these are managed on a consolidated basis by the Company. The Merger with Catalyst did not change the Company's conclusion on its reporting segments.
Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, through the Company’s nationwide network of participating pharmacies and the Company's own mail and specialty pharmacies. Revenue and costs related to the sales of prescription drugs is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system. Revenue and costs primarily consists of sales of prescription drugs to customers and participants. These revenues and associated costs are recognized when the prescription drugs are shipped from the Company's pharmacy locations.
Revenues of the Company are primarily earned in the United States. The Company’s Canadian operations represented less than 1.0% of the Company’s consolidated revenue for the years ended December 31, 2012, 2011 and 2010.
During the year ended December 31, 2012, one customer accounted for 31% of total revenue. During the year ended December 31, 2011, one customer accounted for 40% of total revenue. During the year ended December 31, 2010, one customer accounted for 10% of total revenue. In 2012, 2011 and 2010, these major customers were included in the PBM segment.
In order to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rates, the Company entered into 3-year interest rate swap agreements with a total notional amount of $500 million to fix the variable LIBOR rate on the Company's term loan to 0.52%, resulting in an effective rate of 2.52% after adding the 2.00% margin per the 2012 Credit Agreement. Under the interest rate swap, the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent to fixed-rate debt with respect to the notional amount of such swap agreements. These interest rate contract derivative instruments were designated as cash flow hedges upon inception in December 2012.
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company does not enter into derivative instruments for any purpose other than hedging identified exposures. That is, the Company does not speculate using derivative instruments and has not designated any instruments as fair value hedges or hedges of the foreign currency exposure of a net investment in foreign operations.
The estimated fair value of the Company’s financial instruments has been determined based on the Company’s assessment of available market information and appropriate valuation methodologies. However, these estimates may not necessarily be indicative of the amounts that the Company could realize in a current market exchange. See Note 18 for the Company’s disclosure on the fair value of derivative instruments.
Pursuant to regulations governing one of the Company's subsidiaries, Catamaran maintains statutory deposits as required by state Medicaid authorities and other agencies of $4.7 million at December 31, 2012. These restricted investments consist primarily of U.S. Treasury notes are designated as held-to-maturity and are carried at amortized cost, which approximates fair value. The use of these funds is limited to specific purposes as required by each state, or as protection against the insolvency of capitated providers. The Company has the ability to hold these restricted investments until maturity and, as a result, the Company does not expect the value of these investments to decline significantly due to sudden changes in market interest rates. As the fair value measurement for the restricted investments are based on quoted prices for similar assets in an active market, these measurements are classified as Level 2 measurements as defined by fair value measurements guidance.
The contingent purchase price consideration liability reflects the fair values of potential future payments related to the acquisitions of SaveDirectRx, MedfusionRx and Walgreens Health Initiatives (acquired by Catalyst in 2011). The potential future payments are contingent upon the acquired entities meeting or exceeding certain revenue, gross profit or client retention targets. The measurement periods of the targets range from 2012 to 2014. As of December 31, 2012, the fair value of the contingent purchase price consideration was $49.2 million, of which, $29.9 million is classified as accrued expenses and other current liabilities in the consolidated balance sheet and $19.3 million is recorded in other long-term liabilities in our balance sheet. The contingent purchase price for Walgreens Health Initiatives has a maximum payout of $40.0 million. The maximum payout for the SaveDirectRx and MedfusionRx contingent consideration is $4.5 million and $5.5 million, respectively. In February 2013, the Company settled the Medfusion earn-out paying the former owners $5.5 million.
As the fair value measurement for the contingent consideration is based on inputs not observed in the market, these measurements are classified as Level 3 measurements as defined by fair value measurements guidance.