Our existing facilities consist of approximately 1,100,000 square feet, of which we own 150,400 square feet and lease the remainder. The following table sets forth information with respect to our principal facilities.
The results of operations of PCS for the period commencing October 2, 2000, the date of our acquisition of PCS, are reflected in the financial statements of AdvancePCS after that date. Historical revenues and cost of revenues for AdvancePCS and PCS have been reclassified to reflect adoption of consistent revenue recognition policies.
Historical revenues for PCS have been reclassified to reflect adoption of consistent revenue recognition policies with AdvancePCS. Prior to giving effect to this reclassification, PCS’s historical revenues were $547,425, $840,704 and $1,264,694 in the years ended December 31, 1997 and 1998 and February 26, 2000, respectively.
Includes asset impairment charge of $2.3 billion recognized by Eli Lilly and Company subsequent to its acquisition of PCS.
EBITDA consists of operating income plus depreciation and amortization. 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. 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 EBITDA may not be consistent with calculations of EBITDA used by other companies. EBITDA excludes asset impairment and other non-recurring charges
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 more than $21 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.
Over the past few years, the PBM industry has undergone significant consolidation. We believe such consolidation has principally been driven by the significant benefits of size and scale, including:
cost-saving opportunities to leverage a fixed-cost infrastructure over greater prescription claim volume, resulting in greater pricing flexibility; and
increased negotiating leverage with pharmaceutical manufacturers and retail pharmacies, resulting in greater ability to obtain lower drug costs for health plan sponsors.
We believe PBMs that effectively capture these benefits will be positioned to strengthen their relationships with plan members, physicians and health plan sponsors and improve their competitive position.
Effective March 31, 1999, we completed the acquisition of Foundation Health Pharmaceutical Services for $70 million in cash and warrants to purchase 400,000 shares of our Class A common stock. We valued such warrants at fair market value based upon the Black-Scholes valuation model. The acquisition of Foundation Health Pharmaceutical Services was accounted for using the purchase method of accounting. The purchase price was allocated to goodwill, certain customer contracts and other intangible assets.
We anticipate being able to generate synergies as a result of the PCS acquisition by:
Consolidating and renegotiating existing contracts with pharmaceutical manufacturers. A significant portion of our and PCS’s contracts with manufacturers allow for increasingly favorable terms as volume increases. We have reviewed overlapping contracts and plan to migrate combined volume to the contract with the best terms. PBM contracts with manufacturers are generally not long-term in nature, and we expect to be able to negotiate more favorable terms that reflect our increased purchasing power.
Re-contracting with our retail pharmacy network. Historically, PCS had not aggressively negotiated its contracts with retail pharmacies due to its ownership history, as discussed in “Results of Operations - PCS.” We believe we can increase profitability by renegotiating our contract terms with retailers in our network that reflect the independence, as well as the increased scale of our combined company.
Generating corporate overhead and information technology efficiencies. Our combination with PCS puts us in a position to realize significant cost savings by generating corporate overhead and information technology efficiencies. We expect cost savings to result from consolidation of corporate fixed costs and the utilization of best practices from both companies. For example, we intend to relocate selected information systems to PCS’s facilities in an effort to consolidate overhead and maximize efficiencies in this area.
Pursuing cross-selling opportunities with pharmaceutical manufacturers and health plan sponsors. Our acquisition of PCS provides us with a wider range of complementary products and services to sell to a larger customer base. For example, we have historically offered outcomes research to our customers, which we will now be able to cross-sell to traditional PCS customers. Likewise, PCS offers certain clinical programs and services that we have not previously provided to our customers.
We have successfully completed most of the steps in integrating PCS that are necessary for us to operate as a single, combined company. Our combined organizational and management reporting structure has been rolled out and implemented at all levels of the organization. We have completed the integration of the operational components of the call centers and mail pharmacies. We have successfully completed an interface to all of our call centers and our mail service pharmacies so clients can be supported by any combination of these facilities. In addition, we have completed the evaluation of vendor contracts, are reviewing and finalizing improved terms with our pharmaceutical wholesalers, technology vendors and others, and have completed the relocation of selected information systems to PCS facilities. By the end of the quarter ending September 30, 2001, we expect to have completed the remaining steps in integrating PCS’s operations, including the rollout of an interface between our data processing platforms, and a combination of other technology systems.
We group the revenues from all of our health improvement service offerings into three categories: data, mail, and clinical services.
Some of our other customers have established their own pharmacy networks. Under contracts with these customers, we are not at risk for retail pharmacy payment obligations. Thus, we record only our claims processing fees as revenues and do not include prescription costs in revenues or 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 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 acts 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.
In addition, the historical financial statements of AdvancePCS have been revised to reflect a change in recognition of clinical and other service revenues. We receive funds from pharmaceutical manufacturers for formulary rebate programs that we administer on behalf of our health plan sponsors. We record revenues in the amount of the administration fees we charge for our services (i.e. net reporting) and include the cost of such services in cost of revenues. Previously, we recognized the entire amount of the rebate, including our administration fee, in revenues and the portion of the rebate paid to our client in cost of revenues (i.e. gross reporting). This revision resulted in lower revenues and an equal decrease in cost of revenues. This change had no effect on gross profit or operating income.
Revenues from the dispensing of pharmaceuticals from the Company’s mail service pharmacies are recognized when each prescription is shipped. Revenues from the sales of prescription drugs by pharmacies in the Company’s nationwide network and claims processing fees are recognized when the claims are adjudicated. At the point of sale, the pharmacy claims are adjudicated using the Company’s on-line claims processing system.
When the Company independently contracts to pay its network pharmacy providers, it assumes credit risk and acts as a principal in the transaction, the Company includes 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 Principal vs Net as an Agent.” If the Company is only administering plan sponsors' network pharmacy contracts, the Company records the claims processing fees as revenue (i.e. net reporting). Clinical services fees received from the plan sponsors or pharmaceutical manufacturers are recognized in revenues as earned in accordance with the contractual agreements. Certain of the clinical service revenues are based on estimates, which are subject to final settlement with the contract party. These estimates are reviewed and revised as settled. Rebates received from pharmaceutical manufacturers on behalf of plan sponsors are excluded from revenues. Revenues from certain disease management and health benefit management products are reimbursed at predetermined contractual rates based on the achievement of certain milestones.
Revenues. Our revenues for fiscal year 2001 increased by $5.2 billion, or 283%, compared to revenues for fiscal year 2000. The increase in revenues was primarily the result of our acquisition of PCS on October 2, 2000. Approximately $4.5 billion, or 86%, of the increase in revenues was attributable to data services and a 232% increase in the number of pharmacy claims processed during the period. Claims processed increased from 81 million in fiscal year 2000 to 269 million for fiscal year 2001. The addition of PCS added approximately 160 million claims for the period. Approximately 10% of the increase was attributable to additional sales of our mail pharmacy services, resulting from a 239% increase in the number of mail prescriptions dispensed. Mail pharmacy prescriptions dispensed increased from 1.7 million in fiscal year 2000 to 5.7 million for fiscal year 2001. The addition of PCS’s two mail pharmacies accounted for approximately 91% of the increase. 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.
Merger costs. Net income for fiscal year 2001 reflected a pre-tax charge of $1.2 million ($926,000 after taxes, or $0.03 per share) relating to merger costs incurred in connection with the merger with FFI.
Income taxes. For fiscal year 2001 our effective tax rate was approximately 52%. For fiscal year 2000 our recorded 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.
Diluted net income per share. We reported diluted net income per share of $0.63 per share for fiscal year 2001 compared to $0.75 per share for the same period in fiscal year 2000. The weighted average shares outstanding were 27.7 million and 36.2 million for fiscal years 2000 and 2001, respectively. The decrease in diluted net income per share resulted from additional interest expense and goodwill and other intangibles amortization in connection with the PCS acquisition. In addition, securities convertible into common stock were issued in connection with the PCS acquisition resulting in an increase in weighted average shares outstanding.
Our revenues from data services increased $1.0 billion, or 180.9%, compared to the prior year. The increase resulted from the addition of new contracts including the service agreement with FHS and an increase in the use of our services by existing customers. The increase in new members resulted in an increase in pharmacy claims processed from 50.6 million in fiscal year 1999 to 81.2 million in fiscal year 2000, a 60.5% increase. Virtually all of the new fiscal year 2000 customer contracts, including FHS, use our pharmacy network, which has shifted a larger percentage of our total revenues to data services. Revenues from mail services increased $56.8 million, or 44.6%, compared to the prior year. This increase resulted primarily from the new members added during fiscal year 2000. The increase in new members resulted in an increase in mail prescriptions dispensed from 1.3 million in fiscal year 1999 to 1.7 million in fiscal year 2000, a 29.9% increase. Revenues from clinical and other services increased $16.4 million, or 21.8%, compared to the prior year. The increase resulted primarily from the new members added and the additional claims processed during fiscal year 2000 compared to the prior year.
Gross profit. Our gross profit for fiscal year 2000 increased by $34.5 million, or 84.3%, compared to the prior fiscal year. This increase primarily resulted from the additional costs associated with our claims processing growth and the new customers, including FHS that are using our retail pharmacy network. As a percentage of revenues, gross profit was 4.1% in fiscal year 2000 compared to 5.4% in fiscal year 1999.
Pro Forma Fiscal Year 2001 Compared to Pro Forma Fiscal Year 2000
Gross profit. Our gross profit for fiscal year 2001 increased by $57.1 million, or 20%, compared to the same period in fiscal year 2000 on a pro forma basis. This increase was attributable primarily to the additional revenue and gross profit generated by the improvement in operations at the two PCS mail facilities. The improvement resulted from an overall decrease in headcount in the mail facilities and the call centers despite a 10% growth in prescriptions filled. As a percentage of revenues, gross profit was approximately 3.0% in fiscal year 2001, compared to 2.8% in the same period in fiscal year 2000.
Non-recurring and impairment charges. Net income for the year ended March 31, 2001 reflected a non-recurring charge of $11,129,000 ($6,789,000 after taxes, or $0.19 per diluted share) representing facility closure costs related to the combination of PCS and Advance facilities. The Company’s mail facility in Richardson, Texas will be closed and operations moved to the Fort Worth and Birmingham facilities. In addition, the charges include severance costs for certain management employees that were terminated or resigned following and as a result of the acquisition with PCS. All of these severance costs to management employees were paid prior to March 31, 2001. We expect to consolidate certain additional operations in connection with the integration of PCS, which will result in additional non-recurring charges consisting primarily of facility closure and severance costs in the year ended March 31, 2002. We anticipate these additional charges will be approximately $3 to $4 million.
Historically, we have been able to fund our operations and continued growth through cash flow from operations. In fiscal years 1999, 2000, and 2001 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.
In conjunction with our acquisition of PCS, we obtained an $825 million senior secured credit facility that includes a $175.0 million revolving credit facility, $100 million interim revolving credit facility and two term notes totaling $550.0 million. Our $150 million Term A note accrues interest at LIBOR plus 2.75%, with escalating quarterly principal payments, and is due on September 30, 2005. Our $400 million Term B note accrues interest at LIBOR plus 3.5%, with quarterly principal payments of $1 million until December 31, 2006 and payments of $94.5 million thereafter on each of December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007. Our revolving credit facilities accrue interest at LIBOR plus 2.75%. These percentages may be lower based upon our total leverage. The revolving credit facility expires on October 2, 2005. As of March 31, 2001, $95 million was outstanding under this revolving credit facility. We intend to refinance the $100 million interim revolving credit facility with a collateralized accounts receivable facility in fiscal year 2002. The senior secured credit facility contains covenants that are typical for this type of document. The senior secured credit facility has been unconditionally guaranteed, jointly and severally, by all of our subsidiaries. In addition, the senior secured credit facility is secured by a first priority lien on the stock of our subsidiaries and substantially all of our assets and the assets of our subsidiaries. Each subsidiary is 100% owned. There are no restrictions on the ability of the subsidiary guarantors to pay dividends or make loans or advances to the parent. We also issued to Rite Aid $125 million in convertible preferred stock substantially all of which was subsequently converted into Class A common stock and sold by Rite Aid. In addition, we issued $150 million in 4,207,300 shares of common stock and 65,854 shares of convertible preferred stock to JLL. Also, we issued to Rite Aid $200 million in senior subordinated notes. In March 2001, the Company issued $200 million in 8 1/2 % Senior Notes Due 2008 (“Senior Notes”). The proceeds from this offering were used to retire the $200 million senior subordinated notes due 2010 that were issued to Rite Aid in connection with the PCS acquisition. The Senior Notes contain covenants that are typical for this type of debt. The Senior Notes have been unconditionally guaranteed, jointly and severally, by all of our subsidiaries, which are all 100% owned. There are no restrictions on the ability of the guarantors to pay dividends, make loans or advances to the parent.
In June 1998, Financial Accounting Standards Board issued SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”. SFAS 133 requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and measured at fair value. In addition, SFAS 133 specifies the accounting for changes in the fair value of a derivative based on the intended use of the derivative and the resulting designation. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective beginning in fiscal year March 31, 2002. We have entered into interest rate protection agreements that have fixed the LIBOR rate as of November 7, 2000 at 6.60% for $400 million of our variable rate debt under our credit facility. The notional amount drops to $300 million in October 2001 and to $200 million in October 2002. We will declare these agreements hedges in accordance with SFAS 133, as amended, and will recognize the fair value of these financial instruments on the balance sheet effective April 1, 2001 upon adoption of SFAS 133. These instruments will be marked to market at each reporting date with the adjustment recognized as a component of other comprehensive income (loss) in stockholders’ equity. The fair value of our interest rate swaps, a liability of $12,566,000 at March 31, 2001, was based upon quoted market prices. Under SFAS 133, we will record a transition liability of $12,565,000 and a charge to other comprehensive income (loss) as of April 1, 2001.
In March 2000, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25”. FIN 44 is intended to clarify the application of APB No. 25 by providing guidance regarding among other issues: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000 but certain provisions covered specific events occurring after December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission staff issued SAB 101 “Revenue Recognition in Financial Statements.” SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. In addition, the EITF issued a consensus in EITF 99-19 “Reporting Gross Revenue as a Principal vs.
In 1999, the FASB issued an exposure draft for a proposed statement on business combinations and intangible assets (“new rules”). This exposure draft, among other things, eliminates pooling of interest business combinations, eliminates the amortization of goodwill and starts assessing goodwill on the impairment approach. Non-calendar year-end companies that have new fiscal years beginning after March 15, 2001, but before December 15, 2001, have a choice for date of adoption of the new rules. March 31 year end companies that issue first quarter financial statements before the new rules are issued will not be eligible for this choice. During the first year of application of the new rules, companies will test for goodwill impairment at the transaction date. Management expects to adopt the new rules upon their final issuance prior to the release of the Company’s fiscal 2002 first quarter financial statements.