In addition, we have several other facilities throughout the United States that we use for sales offices, clinics, data services and other corporate purposes. We believe our facilities are adequate to meet our requirements for the foreseeable future.
Adjusted EBITDA consists of operating income plus depreciation, amortization and non-recurring and impairment expenses. Adjusted EBITDA excludes merger costs, asset impairment, loss from joint ventures and other non-recurring and impairment expenses. Adjusted EBITDA does not represent funds available for our discretionary use and is not intended to represent cash flow from operations as measured under generally accepted accounting principles. Adjusted EBITDA should not be considered as an alternative to net income or net cash used in operating activities, but may be useful to investors as an indication of operating performance. Our calculations of adjusted EBITDA may not be consistent with calculations of adjusted EBITDA used by other companies.
We are a leading provider of health improvement services in the United States. As the largest PBM based on number of lives covered, we currently serve more than 75 million health plan members and manage approximately $28 billion in prescription drug spending on an annualized basis on behalf of our health plan sponsors. In addition, we offer a wide range of other health improvement products and services, such as prescription discount cards for the uninsured and under-insured, web-based programs, disease management, clinical trials and outcomes studies. Our mission is to improve the quality of care delivered to health plan members while helping health plan sponsors reduce overall costs.
The historical PCS amounts have been reclassified to reflect the change in presentation of data services revenues. In cases in which we have assumed an independent obligation to pay our network pharmacy providers and act as a principal in the transaction, we include payments from our plan sponsors for these benefits as revenues and payments to our pharmacy providers as cost of revenues (i.e. gross reporting). Historically, PCS recorded only claims processing fees as revenues (i.e. net reporting). The change results in higher revenues and an equal increase in cost of revenues. This change had no effect on gross profit or operating income.
Revenues from the dispensing of pharmaceuticals from our mail service pharmacy are recognized when each prescription is shipped. Revenues from sales of prescription drugs by pharmacies in our nationwide network and claims processing fees are recognized when the claims are adjudicated. At the point-of-sale, the pharmacy claims are adjudicated using our on-line claims processing system. When we independently contract to pay our network pharmacy providers, we assume credit risk and act as a principal in the transaction, therefore, we include payments from plan sponsors for these benefits as revenues and payments to its pharmacy providers as cost of revenues (i.e. gross reporting) in accordance with EITF 99-19 “Reporting Gross Revenue as a Principle vs Net as an Agent.” If we are only administering plan sponsors’ network pharmacy contracts, the Company records the claims processing fees as revenue (i.e. net reporting). If we had reported our data services revenues using net reporting, revenues and cost of revenues would have decreased by $1.5 billion, $5.9 billion and $10.8 billion, respectively, for the fiscal years ended March 31, 2000, 2001 and 2002.
Cost of revenues includes product costs, pharmacy claims payments made to our retail network pharmacies and other direct costs associated with the provision of customer services and the sale and/or dispensing of prescriptions including our call center operations. Rebate amounts paid to plan sponsors, collected from pharmaceutical manufacturers, are excluded from cost of revenues.
Selling, general and administrative expenses reflect the costs of operations dedicated to generating new sales and maintaining existing client relationships. These expenses also include costs relating to certain corporate functions including executive oversight, accounting, treasury, tax, legal, public affairs, human resources, procurement and other services.
Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. We have made significant estimates of the purchase price, fair market value of the assets acquired and liabilities assumed in our acquisitions, clinical service revenues and costs, reserves for uncollectable accounts and contract losses and the value of our various investments. We continually evaluate the appropriateness of the amounts recorded and revise these estimates regularly. Actual results could differ from those estimates.
Under SFAS 142 assembled workforce is not a recognized intangible asset and accordingly has been reclassified as goodwill. In addition, the trade name is deemed to have an indefinite life as it is expected to generate cash flows indefinitely. Accordingly, the trade name is no longer amortized. The effect of the adoption of SFAS 142 is summarized in the following table:
Effective August 1, 2001 we completed the acquisition of 100% of the equity of Dresing-Lierman, Inc. and its wholly owned subsidiary, TheraCom Inc. (collectively, TheraCom), a specialty pharmacy and distribution company located in Bethesda, Maryland. The aggregate purchase price paid was 1.3 million shares of our Class A common stock. An additional 384,006 shares of Class A common stock were placed in escrow, subject to release upon achievement of future financial performance. In addition, we paid $10.6 million to eliminate TheraCom’s outstanding indebtedness. The acquisition was accounted for using the purchase method of accounting. The excess of the purchase price paid over the net identifiable assets and liabilities of TheraCom, $39.1 million, was recorded as goodwill. We also recognized $4.7 million in intangible
customer contracts. The portion of the purchase price allocated to the net identifiable assets and goodwill is preliminary and subject to revision following the results of an appraisal and further identification of intangible assets.
As a result, customers that use our network will generate higher revenues than customers that use their own networks. Similarly, while a customer who uses our network may contribute the same gross profit in terms of dollars as a customer that uses its own network, gross profit as a percentage of revenue will be significantly lower for the customer using our network because of the higher level of revenue we recognize.
We have historically derived our clinical revenues primarily from formulary management and administration of rebate and volume discount programs of pharmaceutical manufacturers relating to our PBM and consumer card operations. We record revenues in the amount of the fees we charge for our services and include the cost of such services in cost of revenues. Some of these revenues are based on estimates of rebates generated for our clients that are subject to final settlement with the manufacturer. In addition, we generate clinical revenues on a fee-for-service basis on the sale of our comprehensive health improvement products and services, including disease management, clinical trials and outcomes studies.
The following table sets forth certain consolidated historical financial data of AdvancePCS. Historical revenues for AdvancePCS and PCS have been revised to reflect adoption of consistent revenue recognition policies as described above.
Revenues. Our revenues for fiscal year 2002 increased by $6.1 billion, or 87%, compared to revenues for fiscal year 2001. The increase in revenues was primarily the result of our acquisition of PCS on October 2, 2000. Approximately $5.0 billion, or 82% of the increase in revenues was attributable to data services and a 69% increase in the number of pharmacy claims processed during the period. Claims processed increased from 269 million in fiscal year 2001 to 456 million for fiscal year 2002. Approximately 14% of the increase was attributable to additional sales of our mail pharmacy services, resulting from a 95% increase in the number of mail prescriptions dispensed. Mail pharmacy prescriptions dispensed increased from 5.7 million in fiscal year 2001 to 11.0 million for fiscal year 2002. The remaining 4% of the increase in revenues resulted from an increase in clinical and other services revenues derived from formulary and disease management services as well as clinical trials.
Selling, general and administrative expenses. Our selling, general and administrative expenses for fiscal year 2002 increased by $60.3 million, or 47%, compared to the same period in fiscal year 2001. This increase is due to the acquisition of PCS and the comparison of six months of financial data in fiscal year 2001 to one full year of PCS expenses in fiscal year 2002 offset by the decrease in goodwill amortization of approximately $23.8 million as a result of the adoption of FAS 142 . Selling, general and administrative expenses as a percentage of revenues was approximately 1.4% in fiscal year 2002
compared to 1.8% in fiscal year 2001. This was due to greater economies of scale from the integration of PCS and due to the increase in revenue associated with our data services. Additional revenues generated by customers using our network pharmacy providers typically do not result in a proportional increase in selling, general and administrative expenses.
Interest income and interest expense. Interest expense, net of interest income, for fiscal year 2002 increased $15.7 million compared to the same period in fiscal year 2001. The increase resulted from the acquisition of PCS, which was partially funded by over $800 million in additional debt.
Loss from joint venture. In February 2001, we entered into an agreement with Express Scripps and Merck-Medco, to form RxHub, LLC (RxHub) to develop electronic prescribing technology. We own one third of the equity of RxHub. We have recorded our investment in RxHub under the equity method of accounting and record our percentage interest in RxHub’s results in our Consolidated Statement of Operations. Our prorata share of RxHub’s loss for fiscal year 2002 was $2.9 million.
Income taxes. For fiscal year 2002 our effective tax rate was approximately 39.5%. For fiscal year 2001 our recorded income tax expense approximated an effective tax rate of 52.8%. The difference in rates is primarily due to the amortization of non-deductible goodwill in fiscal year 2001, which is approximately $21 million. Goodwill amortization was not recorded in fiscal year 2002 due to the implementation of FAS 142.
Extraordinary loss on early retirement of debt. In connection with the bank debt repayments made in fiscal year 2002 and the securitization, we recorded an extraordinary loss, associated with the early retirement of debt. The loss was attributable to a non-cash charge to write-off a portion of the deferred financing fees related to the secured bank agreement in the amount of $5.3 million, net of tax.
Diluted net income per share. We reported diluted net income per share of $1.18 per share for fiscal year 2002 compared to $0.30 per share for the same period in fiscal year 2001. The weighted average shares outstanding were 72.4 million and 98.3 million for fiscal years 2001 and 2002, respectively. We issued securities convertible into common stock in connection with the PCS acquisition, resulting in an increase in weighted average shares outstanding. On August 23, 2001 we completed the sale of nine million shares of Class A common stock. In addition, during fiscal year 2002 we completed a two-for-one stock split effected in the form of a stock dividend of our common stock. Financial information and stock prices contained throughout the Form 10-K have been adjusted to reflect the impact of the stock split.
Gross profit. Our gross profit for fiscal year 2001 increased by $154 million, or 204%, compared to the same period in fiscal year 2000. This increase was attributable primarily to the additional revenue and gross profit associated with the PCS acquisition. As a percentage of revenues, gross profit was approximately 3.3% in fiscal year 2001 compared to 4.1% in the
same period in fiscal year 2000. The decrease was primarily due to a substantial increase in data services revenues from the PCS acquisition, which have lower margins than other services.
Selling, general and administrative expenses. Our selling, general and administrative expenses for fiscal year 2001 increased by $89.9 million, or 230%, compared to the same period in fiscal year 2000. This increase is due to the acquisition of PCS. Approximately $26.8 million of the increase is due to additional goodwill and other intangibles amortization associated with the PCS acquisition. Selling, general and administrative expenses as a percentage of revenues was approximately 1.8% in fiscal year 2001 compared to 2.1% in the same period in fiscal year 2000.
Income taxes. For fiscal year 2001 our effective tax rate was approximately 52%. For fiscal year 2000 our income tax expense approximated an effective tax rate of 38%. The effective rate for fiscal year 2001 was higher due to the non-deductible nature of the goodwill and other intangible assets acquired in the PCS acquisition.
increase in the number of pharmacy claims processed during the period. Claims processed increased from 437 million on a pro forma basis in fiscal year 2001 to 456 million for fiscal year 2002. Approximately 23% of the increase was attributable to additional sales of our mail pharmacy services, resulting from an 19% increase in the number of mail prescriptions dispensed. The remaining 6% of the increase in revenues resulted from an increase in clinical and other services revenues derived from formulary and disease management services.
Operating income. Our operating income increased by $154.5 million, or 146%, for fiscal year 2002 compared to the same period in fiscal year 2001 on a pro forma basis. The increase resulted from the factors mentioned above as revenues improved and due to the integration and related synergies.
As of March 31, 2002, we had a working capital deficit of $236.4 million. The majority of our current obligations are not due until cash is collected from our customers. We use our excess cash balances to reduce debt under our revolving credit facility, which results in a net deficit in working capital. Our net cash provided by operating activities was $143.3 million for fiscal year 2002 resulting primarily from net income and also due to the timing of receivables and payables resulting from our continued growth. During fiscal year 2002, we used cash of $51.1 million for purchases of property and equipment associated with the growth and expansion of our systems and facilities.
Historically, we have been able to fund our operations and continued growth through cash flow from operations. In fiscal years 2000, 2001 and 2002 our operating cash flow funded our capital expenditures and our short-term excess cash was used to reduce our debt or invested in money market funds. We anticipate that cash flow from operations, combined with our current cash balances and amounts available under our credit facility, will be sufficient to meet our internal operating requirements and expansion programs, including capital expenditures, for at least the next 18 months. However, if we continue our expansion, acquisition and alliance plans, we may be required to seek additional debt or equity financing in order to achieve these plans.
In conjunction with our acquisition of PCS in fiscal year 2001, we obtained an $825 million senior secured credit facility that included a $175 million revolving credit facility, a $100 million interim revolving credit facility and two term notes totaling $550 million. Our $150 million Term A note accrued interest at LIBOR plus 2.75%, with escalating quarterly principal payments and was fully repaid in fiscal year 2002. Our $400 million Term B note accrues interest at LIBOR plus 3.25%, with quarterly principal payments of $381,000 until December 31, 2006 and payments of $36 million thereafter on each of December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007. Our revolving credit facilities accrue
In December 2001, we securitized certain of our accounts receivable pursuant to a $150 million facility (the Asset Securitization Facility). The $150 million commitment under the facility is due December 10, 2006. The Asset Securitization Facility incurs interest at the funding agent’s A-1+/P-1 commercial paper rate plus .65%. As of March 31, 2002, we had drawn $150 million under this facility. The Asset Securitization Facility is included in our debt balance as of March 31, 2002 and will continue to be reflected “on-balance sheet”. The proceeds were used to repay $150 million of our Term B debt. In addition, our $100 million interim revolving credit facility was eliminated. As of March 31, 2002 our debt consists of the following in thousands:
Additionally, we continue to evaluate the scope of modifications of our information systems needed to comply with applicable HIPAA rules. We expect that HIPAA requirements will result in additional capital expenditures over the level required for maintenance and growth of our operations though 2003, which is the scheduled deadline for HIPAA compliance. We do not expect costs associated with HIPAA to materially impact our financial condition, results of operations or cash flows.
In fiscal 2001 and 2002, the Company had an interest bearing note receivable of $500,000 and $400,000, respectively, due from an executive officer of the Company issued in conjunction with his relocation as a result of the acquisition of PCS.
In May 2002, the FASB issued SFAS No. 145 “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002.” This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, and Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company has not yet determined the impact that SFAS No. 145 will have on its financial position or results of operations.