24,500 354,800 53,800 52,000 20,700 45,300 23,200 112,000 93,800 38,400 48,300
The following tables also present selected historical statement of operations and supplemental data of PCS for the periods and dates indicated. The selected statement of operations data of PCS are derived from the consolidated financial statements and accompanying notes of PCS, which have been audited by Ernst & Young LLP. Prior to January 23, 1999, PCS was a wholly owned subsidiary of Eli Lilly and Company, or Eli Lilly, and its financial results for 1997 and 1998 were consolidated with those of Eli Lilly using a fiscal year ending December 31. On January 23, 1999, PCS was acquired by Rite Aid and its financial results for 1999 were consolidated with those of Rite Aid using a fiscal year ended February 26, 2000.
You should read the information contained in this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the historical consolidated financial statements and related notes of each of AdvancePCS and 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 merger costs, asset impairment and other non-recurring charges.
Effective October 2, 2000, we completed the acquisition of PCS for an aggregate purchase price of approximately $1.0 billion, of which we paid Rite Aid, the seller, $675 million in cash, and issued to Rite Aid $200 million in senior subordinated notes and $125 million in our convertible preferred stock. The cash portion of the purchase price was financed with the proceeds of an $825 million senior secured credit facility and $150 million in equity financing committed by JLL. In connection with the equity financing, we issued to JLL 65,854 shares of Series A-1 preferred stock for an aggregate purchase price of $65,854,000, six shares of Series B convertible preferred stock and 4,207,000 shares of our Class A common stock for an aggregate purchase price of $84,146,000. On December 8, 2000, the six shares of Series B convertible preferred stock and the 4,207,000 shares of Class A common stock automatically converted into 4,207,300 shares of Class B-1 common stock. In connection with the senior subordinated notes, we issued to Rite Aid warrants to purchase 780,000 shares of Class A common stock. The senior subordinated notes were fully redeemed on March 13, 2001. The warrants terminated upon repayment of the senior subordinated notes. The acquisition of PCS was accounted for using the purchase method of accounting. The excess of the purchase price paid over the net identifiable assets and liabilities of PCS was recorded as goodwill.
Effective July 5, 2000, we completed a merger with FFI. We issued 3.5 million shares of our Class A common stock in exchange for all of the outstanding shares of FFI. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests. The historical financial results have been restated in accordance with APB No. 16 to reflect the merger as though FFI had always been a part of AdvancePCS.
Rationalizing and gaining economies of scale in our mail service operations. Volume is an important component of profitability in the mail service business from both a fixed cost and purchasing power perspective. We are consolidating the operations of our Richardson, Texas mail service pharmacy into our larger facilities in Fort Worth, Texas and Birmingham, Alabama. Through this consolidation and resulting increased capacity utilization, we expect to realize significant cost savings. In addition, we recently entered into a new contract with a wholesale pharmaceutical supplier for our mail facilities with more favorable terms that reflect our increased purchasing power.
Through our data services operations we process prescription claims on behalf of our health plan sponsor customers. When a member of one of our health plan sponsors presents a prescription or health plan identification card to a retail pharmacist in our network, the pharmacist accesses our online system to receive information regarding eligibility, patient history, health plan formulary listings, and negotiated price. The member generally pays a co-pay to the retail pharmacy and the pharmacist fills the prescription. On behalf of our health plan sponsors, during each billing cycle, our systems electronically aggregate pharmacy benefit claims, which include prescription costs plus our claims processing fees. Once we receive payments from health plan sponsors, we remit the amounts owed by those health plan sponsors to the retail pharmacies and keep the claims processing fees.
We have established a nationwide network of over 56,000 retail pharmacies, each of which pay an access fee to be included in our network. Our contracts with most of our health plan sponsors provide for member access to our retail pharmacy network. Under these contracts, we have an independent obligation to pay network retail pharmacies for the drugs dispensed, meaning we have assumed this risk. We are a principal in the transaction; therefore, we record the aggregate pharmacy benefit claim payments from our health plan sponsors as revenues, and include prescription costs to be paid to retail pharmacies in cost of revenues.
We derive mail services revenues from the sale of pharmaceuticals to members of our customers’ health plans. These revenues include the cost of the pharmaceuticals plus a dispensing fee. Our cost of revenues includes product costs and other direct costs associated with the dispensing of prescription drugs.
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.
We purchased PCS Holding Corporation, or PCS, on October 2, 2000 and have included this business in our consolidated results of operations since that time. We made changes in our revenue recognition presentation to conform the different policies used by us and PCS. These changes are reflected in all periods presented. These changes are as follows:
In December 1999, the Securities & Exchange Commission staff issued Staff Accounting Bulletin (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 Emerging Issues Task Force (EITF) issued a consensus in EITF 99-19 “Reporting Gross Revenue as a Principal vs. Net as an agent. The EITF also has issued EITF 00-22 “Accounting for ... Other Volume Based Sales Incentive Offers.” This pronouncement provides accounting guidance for certain volume rebate programs. SAB 101 and the EITFs were effective in our fourth fiscal quarter of 2001. In connection with our recent acquisitions and the issuance of these pronouncements, we have evaluated certain aspects of SAB 101 and the EITFs, including gross versus net reporting of data and clinical revenues. Net reporting of these revenues has no effect on gross profit or operating income. If we had reported our data services revenues using net reporting, revenues and cost of revenues would have decreased by $503 million, $1.5 billion, and $5.9 billion respectively, for the fiscal years ended March 31, 1999, 2000, and 2001.
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 $88.9 million, or 229%, 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.
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 an impairment related to the integration of the mail facility and AdvancePCS mail facilities. Our 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 future non-recurring charges consisting primarily of facility closure, software abandonment, and severance costs in the year ended March 31, 2002. We anticipate these additional charges will be approximately $3 to $4 million.
Revenues. Our revenues for fiscal year 2000 increased by $1.1 billion, or 142.2%, compared to revenues for fiscal year 1999. The number of individuals we managed continued to increase in fiscal year 2000 as we obtained new customers including our largest customer at that time, Foundation Health Systems, Inc., or FHS, whose service agreement began April 1, 1999. In addition, our current customers continued to increase their membership and utilization levels. New customer contracts resulted from increased marketing efforts and the expansion of our sales and marketing department. Contracts with new customers in fiscal year 2000 generally included all pharmacy benefit management products we offer, including claims processing, mail and clinical and other services.
Selling, general and administrative expenses. Our selling, general, and administrative expense for fiscal year 2000 increased by $17.8 million, or 84.7%, compared to fiscal year 1999. This increase was primarily the result of our acquisition of Foundation Health Pharmaceutical Services, Inc., or FHPS, in March 1999 and the related amortization expense associated with the intangible assets acquired. In addition, further expansion in management, sales and marketing contributed to the increase. In spite of the increase, selling, general and administrative expenses as a percentage of revenues decreased from 2.8% in fiscal year 1999 to 2.1% in fiscal year 2000 as the result of greater economies of scale and due to the increase in revenues associated with our claims processing services. Additional revenues generated by customers using our network pharmacy providers typically do not result in an increase in selling, general, and administrative expenses.
Interest income and interest expense. Our interest expense, net of interest income was $2,879,000 for fiscal year 2000. We incurred no interest expense for fiscal year 1999, since we had no outstanding indebtedness until March 31, 1999 and had $2.9 million of interest income. Interest expense increased as a result of the acquisition of FHPS on March 31, 1999 and the related bank borrowings throughout fiscal year 2000
Income taxes. In fiscal years 2000 and 1999, our income tax expense approximated an effective tax rate of 38%.
Diluted net income per share. We reported diluted net income per share of $0.75 per share for fiscal year 2000 compared to $0.53 per share for the same period in fiscal year 1999. The weighted average shares outstanding were 27.7 million and 26.9 million for fiscal years 2000 and 1999, respectively.
The following table sets forth certain unaudited pro forma financial data assuming the PCS acquisition occurred on April 1 of the periods presented. Historical revenues for AdvancePCS and PCS have been revised to reflect adoption of consistent revenue recognition policies as described in “- Changes in Revenue Recognition.”
Selling, general and administrative expenses. Our pro forma selling, general and administrative expenses for fiscal year 2001 increased by $29.6 million, or 15%, compared to the same period in fiscal year 2000. This increase resulted from increased support to cover the increased revenues. Also, losses of approximately $7 million were incurred in connection with performance-based contracts in fiscal year 2001. In addition, we incurred expenses for severance and retention costs related to executive employment agreements in fiscal year 2001.
Operating income. Our operating income increased by $16.3 million, or 18%, for fiscal year 2001 compared to the same period in fiscal year 2000 on a pro forma basis. The increase resulted from the factors mentioned above as revenues improved and PCS’s headcount and costs declined.
As of March 31, 2001, we had a working capital deficit of $299.4 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 $92.3 million for fiscal year 2001 resulting primarily from net income and also due to the timing of receivables and payables resulting from our continued growth. During fiscal year 2001, we used cash of $41.2 million, or $44.5 million on a pro forma basis, for purchases of property, plant and equipment associated with the growth and expansion of our systems and facilities.
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 successfully continue our expansion, acquisition and alliance plans, we may be required to seek additional debt or equity financing in order to achieve these plans.
Net as an Agent.” SAB 101 and the EITF were effective in our fourth fiscal quarter of 2001. The adoption of SAB 101 and EITF 99-19 had no material effect on our statement of operations.