8-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bfc92+d1OV4ZbxKU8FjRx61oekGsqfCM0wMOZNZQw4Jggd8KwX65RmRP2++eNHl6 oJaeODuWIiReppIv7u4OSw== 0000950123-09-010296.txt : 20090602 0000950123-09-010296.hdr.sgml : 20090602 20090602064831 ACCESSION NUMBER: 0000950123-09-010296 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20090602 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20090602 DATE AS OF CHANGE: 20090602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXPRESS SCRIPTS INC CENTRAL INDEX KEY: 0000885721 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 431420563 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20199 FILM NUMBER: 09866682 BUSINESS ADDRESS: STREET 1: ONE EXPRESS WAY CITY: ST LOUIS STATE: MO ZIP: 63121 BUSINESS PHONE: 3149960900 MAIL ADDRESS: STREET 1: ONE EXPRESS WAY CITY: ST LOUIS STATE: MO ZIP: 63121 8-K 1 c51648e8vk.htm FORM 8-K 8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): June 2, 2009

EXPRESS SCRIPTS, INC.

(Exact Name of Registrant as Specified in its Charter)


DELAWARE	0-20199	43-1420563
(State or Other Jurisdiction of	(Commission File Number)	(I.R.S. Employer
Incorporation or Organization		Identification No.)

One Express Way, St. Louis, MO		63121
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number including area code: 314-996-0900

No change since last report
(Former Name or Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS


Item 8.01 Other Events
Item 9.01 Financial Statements and Exhibits
SIGNATURE
EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLP
EX-99.1: UNAUDITED PRO FORMA FINANCIAL STATEMENTS
EX-99.2: UPDATES TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K
EX-99.3: UPDATES TO THE COMPANY'S QUARTERLY REPORT
EX-99.4: AUDITED COMBINED FINANCIAL STATEMENTS
EX-99.5: UNAUDITED COMBINED FINANCIAL STATEMENTS

Item 8.01 Other Events

Pro Forma Financial Information

Furnished as Exhibit 99.1 and incorporated herein by reference are the unaudited pro forma condensed combined financial statements of the Company for the year ended December 31, 2008 and as of and for the three months ended March 31, 2009. The pro forma financial statements give pro forma effect to the pending acquisition of the pharmacy benefit management business of Wellpoint, Inc. (the “PBM Business”) and certain proposed financing transactions. The pro forma financial statements are derived from the historical financial statements of the Company and the PBM Business. The pro forma financial statements, which have been prepared in connection with the proposed financing transactions, are preliminary and reflect a number of assumptions, including, among others, that the acquisition and the proposed financing transactions will be consummated. There can be no assurance that any of such transactions will be consummated or that the actual terms of such transactions will not differ materially from the Company’s current expectations. The Company intends to file revised pro forma financial statements following the completion of the acquisition and such revised pro forma financial statements will update and replace the preliminary pro forma financial statements filed herewith.

Consolidating Guarantor Financial Information

The Company expects that certain of its 100% owned domestic subsidiaries will jointly and severally and fully and unconditionally guarantee the Company’s obligations under the indenture governing the debt securities that the Company intends to issue in connection with certain proposed financing transactions. Set forth in Note 16 to the Company’s audited consolidated financial statements attached hereto as Exhibit 99.2 and incorporated herein by reference, the Company has included condensed consolidating financial information for the fiscal years 2008, 2007 and 2006. Set forth in Note 10 to the Company’s unaudited consolidated financial statements attached hereto as Exhibit 99.3 and incorporated herein by reference, the Company has included condensed consolidating financial information for the three months ended March 31, 2009 and 2008.

Revised Segment Information

As previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2009, during the first quarter of 2009, the Company changed its reportable segments from Pharmacy Benefit Management (“PBM”) and Specialty Ancillary Services (“SAAS”) to PBM and Emerging Markets. The Specialty Pharmacy operations, which were previously in the Company’s SAAS segment, have been operationally integrated with the Company’s PBM operations in order to maximize its growth and improve efficiency. The Company has replaced the following items that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 to reflect the new reportable segments:

	•		Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and

	•		Item 8: “Financial Statements and Supplementary Data.”

The adjusted segment information constitutes a reclassification and has no impact on reported net income or earnings per share for any period. The adjusted disclosures referenced above are set forth in Exhibit 99.2 and incorporated herein by reference.

Historical Financial Statements of the Pharmacy Benefit Management Business of WellPoint, Inc.

Attached hereto as Exhibit 99.4 and incorporated herein by reference are the audited combined financial statements of the PBM Business as of and for the years ended December 31, 2008, 2007 and 2006 with the report of the independent registered public accounting firm.

Set forth in Exhibit 99.5 and incorporated herein by reference are the unaudited combined financial statements of the PBM Business as of and for the three months ended March 31, 2009 and 2008.

Item 9.01 Financial Statements and Exhibits

(c)

Exhibits:

	23.1		Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm

	99.1		Unaudited Pro Forma Condensed Combined Financial Statements of the Company

	99.2		Updates to the Company’s Annual Report on Form 10-K as of December 31, 2008

			Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

			Part II, Item 8. Consolidated Financial Statements and Supplementary Data Part IV, Item 15. Schedule II Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2008, 2007 and 2006

	99.3		Updates to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2009

			Part I, Item 1. Financial Statements (unaudited)

	99.4		Audited Combined Financial Statements of the Pharmacy Benefit Management Business of WellPoint, Inc. as of and for the Years Ended December 31, 2008, 2007 and 2006

	99.5		Unaudited Combined Financial Statements of the Pharmacy Benefit Management Business of WellPoint, Inc. as of and for the Three Months Ended March 31, 2009 and 2008

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	EXPRESS SCRIPTS, INC. (Registrant)
Date: June 2, 2009	By:	/s/ Keith J. Ebling
		Keith J. Ebling
		Executive Vice President and General Counsel

EX-23.1 2 c51648exv23w1.htm EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLP EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-156092, 333-136616, 333-110573, 333-43336, 333-80255, 333-72441, 333-69855, 333-48779, 333-48767, 333-48765, 333-27983, 333-04291, 33-64094, 33-64278 and 33-93106) of Express Scripts, Inc. of our report dated February 24, 2009, except with respect to our opinion on the consolidated financial statements insofar as it relates to the change in reportable segments as discussed in Notes 1 and 14 and the condensed consolidating financial information included in Note 16, as to which the date is June 1, 2009, relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K dated June 2, 2009.

/s/ PricewaterhouseCoopers LLP

St. Louis, Missouri
June 2, 2009

EX-99.1 3 c51648exv99w1.htm EX-99.1: UNAUDITED PRO FORMA FINANCIAL STATEMENTS EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined statement of operations for fiscal 2008 and the three months ended March 31, 2009 give effect to the acquisition of the Pharmacy Benefit Management Business (the “PBM business”) of WellPoint, Inc. (“WellPoint”) (the “acquisition”) and related financing transactions, including the equity offering and the debt offering (collectively, the “transactions”) as if they had occurred on the first day of the earliest period presented. The unaudited pro forma condensed combined balance sheet as of March 31, 2009 gives effect to the transactions as if they had occurred on March 31, 2009.

The pro forma adjustments are preliminary and have been made solely for purposes of developing the pro forma financial information for illustrative purposes necessary to comply with the requirements of the SEC. The actual results reported in periods following the transactions may differ significantly from that reflected in these pro forma financial statements for a number of reasons, including but not limited to, differences between the assumptions used to prepare these pro forma financial statements and actual amounts, cost savings from operating efficiencies, differences resulting from the new PBM agreement, potential synergies, and the impact of the incremental costs incurred in integrating the PBM business. In addition, no adjustments have been made for non-recurring items related to the transactions or the transition services agreement. As a result, the pro forma information does not purport to be indicative of what the financial condition or results of operations would have been had the transactions been completed on the applicable dates of this pro forma financial information. The pro forma financial statements are based upon the historical financial statements of Express Scripts and the PBM business and do not purport to project the future financial condition and results of operations after giving effect to the transactions.

We have agreed to enter into a transition services agreement with WellPoint at the closing of the acquisition, pursuant to which WellPoint will provide certain services, such as information technology services, human resources services, existing procurement vendor services, finance services, real estate services and print mail services (and including services provided by third parties) to us in order to facilitate the transactions contemplated by the acquisition agreement and the migration of the PBM business from WellPoint to us in accordance with the PBM agreement. We believe that the costs associated with the transition services agreement will not be materially different from the costs of the administrative services that WellPoint currently provides to the PBM business which are included within the PBM business’ historical financial statements. As such, no pro forma adjustment has been made for the transition services agreement.

No pro forma adjustments have been included with respect to the new PBM agreement. We do not believe appropriate assumptions could be made to estimate an accurate pro forma adjustment for the new PBM agreement. We will have new pricing agreements with WellPoint, the supply chain contracts will be different and we expect to achieve substantial economies of scale. Accordingly, we would expect that had the PBM agreement been in effect during the periods presented, our pro forma operating income would have been higher than that reflected in the pro forma financial statements.

The pro forma adjustments and related assumptions are described in the accompanying notes presented on the following pages. The pro forma adjustments are based on assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities of the PBM business based on preliminary estimates of fair value. The final purchase price and the allocation thereof will differ from that reflected in the pro forma financial statements after final valuation procedures are performed and amounts are finalized following the completion of the transactions.

In addition, the unaudited pro forma condensed combined financial information does not reflect any cost savings from operating efficiencies, synergies or other restructurings that could result from the acquisition or the new PBM agreement.

The following unaudited pro forma condensed combined financial information is derived from the historical financial statements of Express Scripts, Inc. and the PBM business and has been prepared to illustrate the effects of the acquisition of the PBM business by Express Scripts, the receipt of $1.4 billion of proceeds from the equity offering, as well as from the $2.5 billion debt offering. The pro forma financial information should be read in conjunction with the historical financial statements and the accompanying notes of Express Scripts and the PBM

business included in the Current Report on Form 8-K filed with the SEC on June 2, 2009, and the Quarterly Report on Form 10-Q of Express Scripts for the quarter ended March 31, 2009, filed with the SEC on April 29, 2009.

Unaudited Pro Forma Condensed Combined Balance Sheet
March 31, 2009


	Express			PBM		Pro Forma				Pro Forma
(in millions)	Scripts			Business		Adjustments				Combined

Assets
Current assets:
Cash and cash equivalents	$	725.0		$	6.7	$	(706.7	)	(A)(B)	$	25.0
Restricted cash and investments		6.1			—		—				6.1
Receivables, net		1,200.8			828.3		—				2,029.1
Related party receivable		—			519.1		518.7		(E)		1,037.8
Inventories		180.1			61.1		—				241.2
Deferred taxes		120.3			20.1		(20.1	)	(B)		120.3
Prepaid expenses and other current assets		24.5			2.1		—				26.6

Total current assets		2,256.8			1,437.4		(208.1	)			3,486.1
Property and equipment, net		219.6			59.1		(19.5	)	(C)		259.2
Goodwill		2,880.9			165.1		2,370.5		(D)		5,416.5
Other intangible assets, net		323.0			127.6		1,457.4		(D)		1,908.0
Other assets		28.4			0.5		—				28.9

Total assets	$	5,708.7		$	1,789.7	$	3,600.3			$	11,098.7


Liabilities and stockholders’ equity
Current liabilities:
Claims and rebates payable	$	1,365.4		$	808.9	$	518.7		(E)	$	2,693.0
Accounts payable		490.9			—		—				490.9
Accrued expenses		489.9			218.2		(149.3	)	(B)		558.8
Current maturities of long-term debt		520.1			—		167.0		(A)		687.1
Current liabilities of discontinued operations		4.9			—		—				4.9

Total current liabilities		2,871.2			1,027.1		536.4				4,434.7
Long-term debt		1,160.3			—		2,500.0		(A)		3,660.3
Other liabilities		377.2			57.0		(53.5	)	(B)		380.7

Total liabilities		4,408.7			1,084.1		2,982.9				8,475.7


Stockholders’ equity:
Preferred stock		—			—		—				—
Common stock		3.2			—		0.2		(F)		3.4
Additional paid-in capital		645.7			—		1,427.8		(F)		2,073.5
Accumulated other comprehensive income		4.9			—		—				4.9
Retained earnings		3,575.4			705.6		(810.6	)	(F)		3,470.4

		4,229.2			705.6		617.4				5,552.2
Common stock in treasury at cost		(2,929.2	)		—		—				(2,929.2	)

Total stockholders’ equity		1,300.0			705.6		617.4				2,623.0

Total liabilities and stockholders’ equity	$	5,708.7		$	1,789.7	$	3,600.3			$	11,098.7

See accompanying notes to the unaudited pro forma condensed combined financial statements

Unaudited Pro Forma Condensed Combined Statement of Operations
For the Fiscal Year Ended December 31, 2008


	Express			PBM		Pro Forma					Pro Forma
(in millions, except per share data)	Scripts			Business		Adjustments					Combined

Revenues	$	21,978.0		$	17,178.1	$	(1,254.0	)	(G	)	$	37,902.1
Cost of revenues		19,937.1			16,408.1		(1,179.9	)	(H	)		35,165.3

Gross profit		2,040.9			770.0		(74.1	)				2,736.8
Selling, general and administrative		760.4			417.8		25.4		(I	)		1,203.6

Operating income		1,280.5			352.2		(99.5	)				1,533.2

Other (expense) income:
Non-operating charges, net		(2.0	)		—		—					(2.0	)
Undistributed loss from joint venture		(0.3	)		—		—					(0.3	)
Interest income		13.0			—		1.3		(G	)		14.3
Interest expense		(77.6	)		—		(200.6	)	(J	)		(278.2	)

		(66.9	)		—		(199.3	)				(266.2	)

Income before income taxes		1,213.6			352.2		(298.8	)				1,267.0
Provision (benefit) for income taxes		434.0			124.9		(99.0	)	(K	)		459.9

Net income from continuing operations	$	779.6		$	227.3	$	(199.8	)			$	807.1


Weighted average number of common shares outstanding during the period:
Basic:		248.9			—		23.0		(L	)		271.9
Diluted:		251.8			—		23.0		(L	)		274.8

Basic earnings per share from continuing operations:	$	3.13		$	—	$	—				$	2.97

Diluted earnings per share from continuing operations:	$	3.10		$	—	$	—				$	2.94

See accompanying notes to the unaudited pro forma condensed combined financial statements

Unaudited Pro Forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 2009


	Express			PBM		Pro Forma					Pro Forma
(in millions, except per share data)	Scripts			Business		Adjustments					Combined

Revenues	$	5,422.8		$	4,317.4	$	(339.3	)	(G	)	$	9,400.9
Cost of revenues		4,888.7			4,107.2		(319.8	)	(H	)		8,676.1

Gross profit		534.1			210.2		(19.5	)				724.8
Selling, general and administrative		178.6			110.6		4.6		(I	)		293.8

Operating income		355.5			99.6		(24.1	)				431.0

Other (expense) income:
Interest income		0.9			—		0.1		(G	)		1.0
Interest expense		(17.1	)		—		(50.2	)	(J	)		(67.3	)

		(16.2	)		—		(50.1	)				(66.3	)

Income before income taxes		339.3			99.6		(74.2	)				364.7
Provision for income taxes		124.6			33.2		(21.4	)	(K	)		136.4

Net income from continuing operations	$	214.7		$	66.4	$	(52.8	)			$	228.3


Weighted average number of common shares outstanding during the period:
Basic:		247.6			—		23.0		(L	)		270.6
Diluted:		249.3			—		23.0		(L	)		272.3

Basic earnings per share from continuing operations:	$	0.87		$	—	$	—				$	0.84

Diluted earnings per share from continuing operations:	$	0.86		$	—	$	—				$	0.84

See accompanying notes to the unaudited pro forma condensed combined financial statements

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Note 1 — Basis of Presentation

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting under existing U.S. GAAP standards and are based on our historical consolidated financial statements and financial statements of the PBM business for fiscal 2008 and as of and for the three months ended March 31, 2009.

The unaudited pro forma condensed combined statement of operations for fiscal 2008 and for the three months ended March 31, 2009 give effect to the pending acquisition as if it had occurred on the first day of the earliest period presented. The unaudited pro forma condensed combined balance sheet as of March 31, 2009 gives effect to the acquisition as if it had occurred on March 31, 2009.

We prepared the unaudited pro forma condensed combined financial information using the acquisition method of accounting, which is based on Statement of Financial Accounting Standard (“SFAS”) No. 141R, “Business Combinations” (“FAS 141R”). FAS 141R uses the fair value concepts defined in SFAS No. 157, “Fair Value Measurements” (“FAS 157”). We have adopted both FAS 141R and FAS 157 as required.

FAS 141R requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. In addition, FAS 141R establishes that the consideration transferred be measured at the closing date of the acquisition at the then-current market price. Our intent is to use the proceeds from the equity offering and the debt offering to pay cash to WellPoint as consideration for the acquisition. If the offerings, together with our cash on hand and additional borrowings under our existing credit facility, do not yield sufficient proceeds to cover the purchase price we may need to issue shares to WellPoint for a portion of the consideration. In that situation, the per share equity component issued as consideration would likely be different from the fair market value of the shares at the closing date of the acquisition because of the formula used to determine the equity component. The transaction fees for the acquisition will be expensed as incurred under FAS 141R and are estimated to be $39 million. The transaction fees have been excluded from the unaudited pro forma condensed combined statement of operations as they are non-recurring and are reflected as borrowings under the credit facility revolver and as an adjustment to retained earnings on the unaudited pro forma condensed combined balance sheet.

FAS 157 defines the term ‘fair value’ and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of inputs used to develop the fair value measures. Fair value is defined in FAS 157 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, we may be required to record assets that we do not intend to use or sell (defensive assets) and/or to value assets at fair value measurements that do not reflect our intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

The assumptions and related pro forma adjustments described below have been developed based on assumptions and adjustments, including assumptions relating to the consideration paid and the allocation thereof to the assets acquired and liabilities assumed from WellPoint based on preliminary estimates of fair value. The final purchase price allocation will differ from that reflected in the pro forma financial statements after final valuation procedures are performed and amounts are finalized following the completion of the transactions.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to represent what our actual consolidated results of operations or consolidated financial position would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of our future consolidated results of operations or financial position.

The unaudited pro forma condensed combined financial statements do not reflect any cost savings from operating efficiencies, synergies or other restructurings that could result from the acquisition or any adjustment for the new PBM agreement.

Note 2 — Preliminary Purchase Price

We have entered into the acquisition agreement with WellPoint to acquire the PBM business. The purchase price for the acquisition is estimated as follows, subject to a working capital adjustment (in millions):


Estimated Purchase Price:
Minimum cash to be paid to WellPoint	$	3,275
Additional cash (or value of shares of our common stock to be issued to WellPoint)		1,400


Total Purchase Price	$	4,675

In connection with the acquisition, we have entered into a debt commitment letter with a syndicate of commercial banks to provide up to $2.5 billion in financing for the acquisition under the committed credit facility. We do not currently plan to borrow funds under the committed credit facility.

We intend to use the proceeds from the equity offering to cover the additional $1.4 billion of the purchase price in lieu of issuing shares of our common stock to WellPoint. If the equity offering or an alternative financing transaction is not completed, we will issue common stock to WellPoint, the value to be based on the average closing price of our common stock over the 60 days preceding the closing of the acquisition. If common stock is issued to WellPoint as consideration, the purchase price will change based on the difference in stock price at close (date at which fair value of securities is measured under FAS 141R) and the average closing price over the 60 days preceding the closing of the acquisition. A 10% difference in stock price would change the purchase price by approximately $140 million with a corresponding change to goodwill.

Note 3 — Preliminary Purchase Price Allocation

We will allocate the purchase price paid by us to the fair value of the PBM business assets acquired and liabilities assumed. The pro forma purchase price allocation below has been developed based on preliminary estimates of fair value using the historical financial statements of the PBM business as of March 31, 2009. In addition, the allocation of the purchase price to acquired intangible assets is based on preliminary fair value estimates and subject to the final management analyses, with the assistance of valuation advisors, at the completion of the acquisition. The intangible assets are comprised of customer contracts and relationships with a weighted average useful life of 15 years, which is consistent with the estimated benefit period. The residual amount of the purchase price after preliminary allocation to identifiable intangibles has been allocated to goodwill. The actual amounts recorded when the acquisition is complete may differ materially from the pro forma amounts presented as follows (in millions):


Tangible assets acquired:
Current assets	$	1,410.6
Property and equipment, net (See Note 4(C))		39.6
Other non-current assets		0.5

Total tangible assets acquired		1,450.7
Value assigned to identifiable intangible assets acquired		1,570.0
Liabilities assumed		(881.3	)

Total assets acquired in excess of liabilities assumed		2,139.4

Goodwill		2,535.6

Total purchase price	$	4,675.0

Tangible assets acquired, as used in the calculation above, excludes the PBM business’ cash and cash equivalents and deferred tax assets prior to the acquisition but includes related parties receivables because it will be paid in accordance with the acquisition agreement. Liabilities assumed, as used in the calculation above, primarily include rebates and claims payable and exclude the PBM business’ income taxes payable to WellPoint and deferred tax liabilities as these will not be paid in accordance with the acquisition agreement.

We have determined that goodwill arising from the acquisition will be deductible for tax purposes. Express Scripts and WellPoint have agreed to make an election under Section 338(h)(10) of the Internal Revenue Code with respect to the acquisition of NextRx, Inc. and NextRx Services, Inc. We estimate the net present value of future cash savings to us from the deduction to be between $800 million and $1.2 billion depending upon the discount factor and tax rate assumed.

Note 4 — Unaudited Pro Forma Adjustments

Unaudited Pro Forma Condensed Combined Balance Sheet

(A) Adjustment reflects the use of $700.0 million of cash on hand to fund a portion of the acquisition consideration. If the underwriters of the equity offering elect to exercise their over-allotment option in full, the amount of cash on hand to be used as consideration for the acquisition will be reduced by $220.0 million.

Sources and uses of funds to finance the PBM business acquisition are as follows (in millions):


Sources of funds:
Cash on hand	$	700.0
Additional borrowings from revolver under existing credit facility		167.0
Net proceeds of the debt offering⁽¹⁾		2,485.0
Net proceeds of the equity offering⁽²⁾		1,428.0


Total Sources of Funds	$	4,780.0


Uses of funds:
Payment to WellPoint	$	4,675.0
Transaction costs⁽³⁾		105.0


Total Uses of Funds	$	4,780.0


(1)		Net proceeds of the debt offering are calculated based on $2.5 billion of gross proceeds less $15 million of anticipated financing costs. These financing costs will be amortized over an estimated weighted average period of 6.8 years.

(2)		Net proceeds of the equity offering are calculated based on $1.47 billion of gross proceeds less $45 million of estimated issuance costs which will be offset against the proceeds. These costs are reflected as a reduction of equity.

(3)		In accordance with FAS 141R, the costs related to the acquisition will be expensed as they are incurred. These include $39 million primarily related to legal, banker, accounting and filing fees and $66 million related to financing costs for the committed credit facility. As we do not anticipate drawing on the committed credit facility, we anticipate the commitment will be terminated at the closing of the acquisition and thus the fees related to such committed credit facility will be written off at that time.

(B)

Elimination of the PBM business’ assets and liabilities not acquired

These adjustments eliminate the PBM business’ assets and liabilities which are not being acquired and are not disclosed elsewhere in these notes. As of March 31, 2009, these were comprised of the PBM business’ cash and cash equivalents of $6.7 million, current deferred tax assets of $20.1 million, income taxes payable of $149.3 million and non-current deferred tax liability of $53.5 million.

(C) Property, plant and equipment

Adjustment includes the fair value estimate of the property, plant and equipment being acquired of $39.6 million and removal of certain PBM business assets which are not being acquired.

(D) Goodwill and Intangibles

The net adjustment to goodwill includes the elimination of the PBM business’ pre-acquisition goodwill balances and is calculated as follows (in millions):


Purchase price allocation to goodwill (Note 3)	$	2,535.6
Elimination of pre-acquisition PBM business goodwill:		(165.1	)


Total adjustment to goodwill	$	2,370.5

The net adjustment to other intangible assets, net, is calculated as follows (in millions):


New intangibles recorded:
Value assigned to customer contracts and relationships acquired	$	1,570.0
Debt issuance costs		15.0
Elimination of pre-acquisition intangibles:
PBM business pre-acquisition other intangibles		(127.6	)


Total adjustment to other intangible assets, net	$	1,457.4

See Note 3 for the estimated purchase price allocation.

(E) Claims and rebates payable

This reflects a conforming accounting adjustment for a difference in the PBM business’ contractual arrangements with the retail pharmacies from the contractual arrangements we have with retail pharmacies. The corresponding offset was recorded as a related party receivable.

(F) Equity adjustments

The historical stockholders’ equity of the PBM business will be eliminated upon the completion of the acquisition. Our total stockholders’ equity after giving effect to the acquisition will be increased over the pre-acquisition amounts by the fair value of any common stock issued in connection with the purchase price. We intend to issue approximately 23 million shares of our common stock in the equity offering. The gross proceeds are estimated to be $1.47 billion ($1.69 billion if the underwriters’ over-allotment option is exercised in full) using a share price of $64.05, which represents the last sale price of our common stock on NASDAQ on May 29, 2009. A 10% increase or decrease in the number of shares issued will change the proceeds by approximately $150 million. The calculation of the pro forma adjustments to common stock and additional paid-in capital, or APIC, is as follows (in millions):


			Additional
	Common		paid-in
	Stock		capital
Par value of common stock to be issued	$	0.2	$	—
APIC impact of shares issued		—		1,472.8
Estimated issuance fees (See Note (A))		—		(45.0	)


Total pro forma adjustment	$	0.2	$	1,427.8

The following is a summary of the adjustment to retained earnings (in millions):


	Retained
	Earnings
Elimination of the PBM business parent company’s net investment	$	(705.6	)
Acquisition related transaction fees (See Note (A))		(39.0	)
Write-off of committed credit facility fees (See Note (A))		(66.0	)


Total pro forma adjustment	$	(810.6	)

Unaudited Pro Forma Condensed Combined Statements of Operations

(G) Revenues

A reclassification adjustment was made for the PBM business’ rebates and administrative fees payable to clients to conform to our presentation of these amounts. These were presented as cost of revenues within the PBM business’ historical financials. The total reclassification, which reduces revenues, was $339.2 million for the three months ended March 31, 2009 and $1,252.7 million for fiscal 2008. In addition, a reclassification of the PBM business’ investment income from revenues to interest income was made to conform to our presentation. The total investment income reclassification was $0.1 million for the three months ended March 31, 2009 and $1.3 million for fiscal 2008.

(H) Cost of revenues

As noted above in section (G) Revenues, an adjustment was made to reclassify the PBM business’ rebates and administrative fees payable to clients to conform to our presentation. Also, an adjustment was made to reclassify the PBM business’ direct costs associated with dispensing prescriptions to conform to our presentation. The prescription dispensing expenses were classified as general and administrative expenses in the PBM business’ historical financial statements. The calculation of the pro forma adjustments to cost of revenues is as follows (in millions):


	Three Months
	Ended			Fiscal Year Ended
	March 31, 2009			December 31, 2008
Reclassification of rebates and administrative fees payable to clients	$	(339.2	)	$	(1,252.7	)
Reclassification of direct costs associated with dispensing prescriptions		18.5			69.3
Depreciation expense (See (I) Amortization of intangible assets and depreciation expense)		0.9			3.5


Net adjustment to cost of revenues	$	(319.8	)	$	(1,179.9	)

(I) Selling, general and administrative expense

Amortization of intangible assets

Adjustments have been included to record the estimated net increase in amortization expense for other intangible assets. The incremental amortization expense was calculated using a preliminary weighted average estimated useful life of 15 years, which is consistent with the estimated benefit period, to amortize the preliminary estimated value of $1,570 million assigned to customer contracts and relationships. A 10% change in the amount allocated to identifiable intangible assets would increase or decrease annual amortization expense by approximately $10 million. An increase or decrease in the estimated useful life would increase or decrease annual amortization expense by approximately $7 million. The calculation of the incremental amortization expense is as follows (in millions):


	Three Months
	Ended			Fiscal Year Ended
	March 31, 2009			December 31, 2008
Estimated amortization expense for identifiable intangible assets acquired	$	27.3		$	109.0
Less: amortization expense recorded by the PBM business		(2.0	)		(8.2	)


Incremental amortization expense	$	25.3		$	100.8

The amount allocated to identifiable intangible assets and the estimated useful lives are based on preliminary fair value estimates under the guidance of FAS 141R and FAS 157. The purchase price allocation for identifiable intangible assets is preliminary and was made only for the purpose of presenting the pro forma combined financial information.

In accordance with FAS 141R and FAS 157, we will finalize the analysis of the fair value of the assets acquired and liabilities assumed resulting from the acquisition for purpose of allocating the purchase price. It is possible that the final valuation of identifiable intangible assets could be materially different from our estimates.

Depreciation expense

The change in depreciation expense is a result of adjusting the acquired property and equipment to an estimated fair value of $39.6 million based on estimated remaining useful lives ranging from 1 to 2 years for computer software, 4 to 10 years for furniture, equipment and leasehold improvements and 38 years for a building. There are certain PBM business assets that we are not acquiring from WellPoint. These assets and associated depreciation are excluded from the adjusted pro forma financial statements. The calculation of the depreciation expense is as follows (in millions):


				Fiscal Year
	Three Months			Ended
	Ended			December 31,
	March 31, 2009			2008
Cost of revenues depreciation expense	$	0.9		$	3.5


Selling, general and administrative depreciation expense*		0.6			2.4
Less: depreciation expense recorded by the PBM business		(2.8	)		(8.5	)

Net depreciation adjustment to selling, general and administrative	$	(2.2	)	$	(6.1	)


*		Summary of adjustment to selling, general and administrative expense


				Fiscal Year
	Three Months			Ended
	Ended			December 31,
	March 31, 2009			2008
Incremental amortization expense	$	25.3		$	100.8
Depreciation adjustment		(2.2	)		(6.1	)
Reclassification of direct costs associated with dispensing prescriptions to Cost of revenues (See Note (H) Cost of revenues)		(18.5	)		(69.3	)

Net adjustment to selling, general and administrative expense	$	4.6		$	25.4

(J) Interest Expense

The interest expense adjustment included in the unaudited pro forma condensed combined statement of operations reflects the additional interest expense, using an estimated weighted average interest rate of 7.8% for the notes issued in the debt offering as well as the amortization of the related deferred financing fees. For purposes of estimating the weighted average interest rate we have made certain assumptions regarding the maturity date of each series of notes offered and the relative portion of the aggregate principal amount allocated to each series. The actual weighted average interest rate, may differ from the estimated rate due to changes in market conditions or differences between the actual terms of the notes offering and our assumptions. We expect to incur $15 million of deferred financing fees with an amortization period of 6.8 years, in connection with the notes. As reflected in the table below, for each 1/8% deviation between our assumed weighted average interest rate and the actual weighted average interest rate, interest expense related to the notes would increase or decrease, as applicable, by approximately $0.8 million for the three months ended March 31, 2009 and $3.3 million for the fiscal year ended December 31, 2008, respectively.

We intend to draw upon our current credit facility revolver for the portion of the purchase price that is not funded through other sources. We estimate the interest on the revolver to be 2.0% using a six month LIBOR rate as of May 29, 2009, plus a margin of 75 basis points.

The adjustment to interest expense is calculated as follows (in millions):


	Three Months Ended		Fiscal Year Ended
	March 31, 2009		December 31, 2008
Interest expense on the notes assuming a 7.8% weighted average rate	$	48.8	$	195.0
Incremental interest on revolver draw at 2.0%		0.8		3.4
Amortization of deferred financing fees recorded in connection with the notes		0.6		2.2

Adjustment amount	$	50.2	$	200.6

Impact of 1/8% change in weighted average interest rates	$	0.8	$	3.3

(K) Income taxes

Adjustments reflect the income tax effect of the pro forma combined income tax provision of 37.4% for the three months ended March 31, 2009 and 36.3% for the fiscal year ended December 31, 2008, based on applicable federal and state statutory tax rates. The fiscal year ended December 31, 2008 tax rate reflects our non-recurring net tax benefits of $7.7 million.

(L) Basic and diluted shares

Reflects the pro forma total number of shares outstanding giving effect to the equity offering (assuming no exercise of the underwriters’ over-allotment option).

EX-99.2 4 c51648exv99w2.htm EX-99.2: UPDATES TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K EX-99.2

Exhibit 99.2

EXPLANATORY NOTE

This Exhibit 99.2 contains adjustments to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “Annual Report”) to reflect a change in the Company’s reportable segments during the first quarter of 2009. The consolidated financial statements included in this Exhibit 99.2 also includes condensed consolidating financial information (see Note 16) and a description of the Company’s pending acquisition of the pharmacy benefit management business of WellPoint, Inc. (see Note 17). Except as indicated in this paragraph, there have been no changes to the financial information set forth in the Company’s Annual Report.

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

As one of the largest full-service pharmacy benefit management (“PBM”) companies in North America, we provide health care management and administration services on behalf of our clients, which include health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans, and government health programs. During the first quarter of 2009, we changed our reportable segments to Pharmacy Benefit Management (“PBM”) and Emerging Markets (“EM”). Segment disclosures for 2008, 2007 and 2006 have been reclassified to reflect the new structure. Under the new structure, our integrated PBM services include network claims processing, home delivery services, patient care and direct specialty home delivery to patients, benefit design consultation, drug utilization review, formulary management, drug data analysis services, distribution of injectable drugs to patient homes and physicians offices, bio-pharma services, and fulfillment of prescriptions to low-income patients through manufacturer-sponsored patient assistance programs and company-sponsored generic patient assistance programs.

Through our EM segment, we provide services including distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of sample units to physicians and verification of practitioner licensure; fertility services to providers and patients; and healthcare administration and implementation of consumer-directed healthcare solutions.

Revenue generated by our segments can be classified as either tangible product revenue or service revenue. We earn tangible product revenue from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks and from dispensing prescription drugs from our home delivery and specialty pharmacies. Service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, market research programs, medication counseling services, certain specialty distribution services, and sample fulfillment and accountability services. Tangible product revenue generated by our PBM and EM segments represented 98.7% of revenues for the year ended December 31, 2008 as compared to 98.6% for both years ended December 31, 2007 and 2006.

RECENT DEVELOPMENTS

On July 22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC - Medical Services Company (“MSC”), a privately held PBM, for a purchase price of $251.0 million, which includes a purchase price adjustment for working capital and transaction costs. MSC is a leader in providing PBM services to clients providing workers’ compensation benefits. The transaction was accounted for under the provisions of Financial Accounting Standards (“FAS”) 141, “Business Combinations.” The purchase price was funded through internally generated cash and temporary borrowings under our revolving credit facility. This acquisition is reported as part of our PBM segment and did not have a material effect on our consolidated financial statements (see Note 3).

On June 30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc. (“IP”), our infusion pharmacy line of business, for $27.5 million and recorded a pre-tax gain of approximately $7.4 million. The gain is included in net loss from discontinued operations, net of tax in the consolidated statement of income for the year ended

December 31, 2008. IP was identified as available for sale during the fourth quarter of 2007 as we considered it non-core to our future operations. We recorded a charge of $34.0 million in the fourth quarter of 2007, the majority of which reflects the IP goodwill and intangible asset impairment losses and the subsequent write-down of IP assets to fair market value.

On April 4, 2008, we completed the sale of Custom Medical Products, Inc. (“CMP”) and recorded a pre-tax loss of approximately $1.3 million which is included in net loss from discontinued operations, net of tax in the consolidated statement of income for the year ended December 31, 2008.

EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS

Our results in 2008 reflect the successful execution of our business model which emphasizes the alignment of our financial interests with those of our clients through greater use of generics, home delivery and specialty pharmacy. In 2008, we benefited from higher generic utilization (66.1% in 2008 compared to 61.8% in 2007) and better management of ingredient costs through actions such as renegotiation of supplier contracts and increased competition among generic manufacturers. While we believe we are well positioned from a business and financial perspective, we are subject to the current adverse economic environment. These conditions could affect our business in a number of direct and indirect ways. In 2008, claims volume remained relatively constant which we believe is attributable to the expected loss of discount card programs and other low margin clients and decreased utilization due to the current economic environment.

We believe the positive trends we saw in 2008, including increased generic usage and lower drug purchasing costs, should continue to offset the negative impact of various marketplace forces affecting pricing and plan structure, among other factors, and thus continue to generate improvements in our results of operations in the future.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates and assumptions are based upon a combination of historical information and various other assumptions believed to be reasonable under the particular circumstances. Actual results may differ from our estimates. Certain of the accounting policies which most impact our consolidated financial statements and that require our management to make difficult, subjective or complex judgments are described below. This should be read in conjunction with Note 1, “Summary of significant accounting policies” and with the other notes to the consolidated financial statements.

REBATE ACCOUNTING

ACCOUNTING POLICY

We administer a rebate program through which we receive rebates and administrative fees from pharmaceutical manufacturers. The portion of rebates payable to clients is estimated based on historical and/or anticipated sharing percentages. These estimates are adjusted to actual when amounts are paid to clients.

FACTORS AFFECTING ESTIMATE

The factors that could impact our estimates of rebates, rebates receivable and rebates payable are as follows:

•		Differences between estimated aggregate allocation percentages and actual rebate allocation percentages calculated on a client-by-client basis;

•		Drug patent expirations; and

•		Changes in drug utilization patterns.

Historically, adjustments to our original estimates have been relatively immaterial.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

ACCOUNTING POLICY

We provide an allowance for doubtful accounts equal to estimated uncollectible receivables. This estimate is based on the current status of each customer’s receivable balance.

FACTORS AFFECTING ESTIMATE

We record allowances for doubtful accounts based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. Our estimate could be impacted by changes in economic and market conditions as well as changes to our customers’ financial condition.

SELF-INSURANCE RESERVES

ACCOUNTING POLICY

We accrue self-insurance reserves based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage which are probable and estimable. Reserves are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience. The majority of these claims are legal claims and our liability estimate is primarily related to the cost to defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts are probable and estimable, in compliance FAS No. 5, “Accounting for Contingencies” (“FAS 5”). Under FAS 5, if the range of possible loss is broad, and no amount within the range is more likely than any other, the liability accrual is based on the lower end of the range.

FACTORS AFFECTING ESTIMATE

Self-insurance reserves are based on management’s estimates of the costs to defend legal claims. We do not have significant experience with certain of these types of cases. As such, differences between actual costs and management’s estimates could be significant. Actuaries do not have a significant history with the PBM industry. Therefore, changes to assumptions used in the development of these reserves can affect net income in a given period. In addition, changes in the legal environment and the number and nature of claims could impact our estimate. The self insurance reserves and changes in those estimates have not been material to the financial statements for the periods presented herein.

ASSET IMPAIRMENT

ACCOUNTING POLICY

Goodwill is evaluated for impairment annually or when events or circumstances occur indicating that goodwill might be impaired in accordance with FAS 142, “Goodwill and Other Intangible Assets.” In addition, we evaluate whether events or circumstances have occurred that may indicate an impairment in goodwill. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business.

No impairment existed for any of our reporting units at December 31, 2008 or 2007, except for the $7.0 million impairment charges recorded for IP in the net loss from discontinued operations for 2007 (see Note 8). As noted above, IP was classified as a discontinued operation during the fourth quarter of 2007.

Other intangible assets include, but are not limited to, customer contracts and relationships, non-compete agreements, deferred financing fees, trade names and certain advance discounts paid to clients under contractual agreements. Other intangible assets, excluding customer contracts, customer relationships and trade names, are recorded at cost. Customer contracts and relationships are valued based on discounted cash flows over the expected life of the intangible asset. Excluding trade names which have an indefinite life, other intangible assets are amortized on a straight-line basis, which approximates the pattern of benefit, over periods from one to 20 years (see Note 8).

In connection with our evaluation of IP as a discontinued operation, we wrote-off intangible assets with a net book value of $0.4 million (gross carrying value of $0.7 million net of accumulated amortization of $0.3 million), consisting of contractual relationships.

FACTORS AFFECTING ESTIMATE

The fair values of reporting units or asset groups are measured based on market prices, when available. When market prices are not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach. The income approach uses cash flow projections which requires inputs and assumptions that reflect current market conditions as well as management judgment. We base our fair values on projected financial information which we believe to be reasonable. However, actual results may differ from those projections, and those differences may be material.

The key assumptions included in our income approach, include, but are not limited to: earnings growth rates, discount rates and inflation rates. Assessment of these factors could be impacted by internal factors and/or external economic conditions. We performed various sensitivity analyses on the key assumptions which did not indicate any potential impairment.

OTHER ACCOUNTING POLICIES

We consider the following information about revenue recognition policies important for an understanding of our results of operations:

	•		Revenues from dispensing prescriptions from our home delivery and specialty pharmacies are recorded when prescriptions are shipped. These revenues include the co-payment received from members of the health plans we serve. At the time of shipment, we have performed substantially all of our obligations under the customer contracts and do not experience a significant level of reshipments.

	•		Revenues from the sale of prescription drugs by retail pharmacies are recognized when the claim is processed. When we independently have a contractual obligation to pay our network pharmacy providers for benefits provided to our clients’ member, we act as a principal in the arrangement and we include the total prescription price (ingredient cost plus dispensing fee) we have contracted with these clients as revenue, including member co-payments to pharmacies.

	•		When we merely administer a client’s network pharmacy contracts to which we are not a party and under which we do not assume credit risk, we earn an administrative fee for collecting payments from the client and remitting the corresponding amount to the pharmacies in the client’s network. In these transactions, drug ingredient cost is not included in our revenues or in our cost of revenues.

	•		Gross rebates and administrative fees earned for the administration of our rebate programs, performed in conjunction with claim processing services provided to clients, are recorded as a reduction of cost of revenue and the portion of the rebate payable to customers is treated as a reduction of revenue.

	•		When we earn rebates and administrative fees in conjunction with formulary management services, but do not process the underlying claims, we record rebates received from manufacturers, net of the portion payable to customers, in revenue.

	•		We distribute pharmaceuticals in connection with our management of patient assistance programs and earn a fee from the manufacturer for administrative and pharmacy services for the delivery of certain drugs free of charge to doctors for their low income patients.

	•		We earn a fee for the distribution of consigned pharmaceuticals requiring special handling or packaging where we have been selected by the pharmaceutical manufacturer as part of a limited distribution network.

	•		Discounts and contractual allowances related to our specialty revenues are estimated based on historical collections over a recent period for the sales that are recorded at gross amounts. The percentage is applied to the applicable accounts receivable balance that contains gross amounts for each period. Any differences between the estimates and actual collections are reflected in operations in the year payment is received. Differences may result in the amount and timing of revenues for any period if actual performance varies from estimates. Allowances for returns are estimated based on historical return trends. The discounts, contractual allowances, allowances for returns and any differences between estimates and actual amounts do not have a material effect on our consolidated financial statements.

	•		EM product revenues include revenues earned through the distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of sample units to physicians and verification of practitioner licensure and fertility services to providers and patients.

	•		EM service revenues include revenues earned through product support to pharmaceutical manufacturers

and medical device companies, revenues derived from our group purchasing organization, administrative fees for the verification of practitioner licensure, the distribution of consigned drug samples to doctors based on orders received from pharmaceutical sales representatives and healthcare administration and implementation of consumer-directed healthcare solutions.

RESULTS OF OPERATIONS

We changed our reportable segments to PBM and EM during the first quarter of 2009 (see Note 14). We maintain a PBM segment, consisting of our domestic and Canadian PBM operations, and specialty pharmacy operations, and an EM segment, which consists of distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of sample units to physicians and verification of practitioner licensure, fertility services to providers and patients, and healthcare administration and implementation of consumer-directed healthcare solutions. All segment information and disclosures have been reclassified for all periods presented to reflect the new segment structure.

PBM OPERATING INCOME


	Year Ended December 31,
(in millions)	2008⁽¹⁾		2007⁽²⁾		2006

Product revenue
Network revenues⁽³⁾	$	13,039.9	$	13,023.3	$	12,810.1
Home delivery and specialty revenues		7,225.7		6,996.1		6,938.0
Other revenues		54.9		37.1		59.7
Service revenues		250.4		241.4		239.8

Total PBM revenues		20,570.9		20,297.9		20,047.6
Cost of PBM revenues⁽³⁾		18,595.1		18,592.9		18,645.0

PBM gross profit		1,975.8		1,705.0		1,402.6
PBM SG&A expenses		708.7		645.4		605.9

PBM operating income	$	1,267.1	$	1,059.6	$	796.7


Network		379.6		379.9		390.3
Home delivery and specialty		41.9		41.9		42.2
Other		2.8		3.1		3.8

Total PBM claims		424.3		424.9		436.3

Total adjusted PBM claims⁽⁴⁾		505.9		506.5		518.6


(1)		Includes the acquisition of MSC effective July 22, 2008.

(2)		Includes the acquisition of CYC effective October 10, 2007.

(3)		Includes retail pharmacy co-payments of $3,153.6, $3,554.5 and $4,012.7 for the years ended December 31, 2008, 2007, and 2006, respectively.

(4)		PBM adjusted claims represent network claims, specialty claims and mail claims, which are multiplied by 3, as mail claims are typically 90 day claims and network and specialty claims are generally 30 day claims.

PBM RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008 vs. 2007

Network revenues increased $16.6 million, or 0.1%, in 2008 over 2007. Price inflation drove the increase, which was partially offset by changes in mix of generic versus brand claims. As our generic penetration rate increased to 67.3% of network claims as compared to 63.2% in 2007, our revenues correspondingly decreased. In addition, there was an $8.9 million decrease due to lower network claims volume.

The $229.6 million, or 3.3%, increase in home delivery and specialty revenues in 2008 from 2007 is primarily due to increased cross-selling of specialty services partially offset by the impact of higher generic penetration for home delivery. Our generic penetration rate increased to 56.6% of total home delivery claims in 2008 as compared to 50.5% in 2007.

Home delivery generic fill rate is lower than the retail generic fill rate as fewer generic substitutions are available among maintenance medications (e.g., therapies for chronic conditions) commonly dispensed from home delivery pharmacies compared to acute medications which are primarily dispensed by pharmacies in our retail networks.

Cost of PBM revenues remained relatively constant in 2008 when compared to the same period of 2007 due to the following reasons:

	•		Better management of ingredient costs resulting from renegotiation of certain supplier contracts.

	•		An increase in the aggregate generic fill rate.

	•		Offset by ingredient cost inflation in our specialty line of business.

PBM gross profit increased $270.8 million, or 15.9%, in 2008 over 2007. Client cost savings from the increase in the aggregate generic fill rate and better management of ingredient costs resulting from renegotiation of certain supplier contracts were only partially offset by margin pressures arising from the current competitive environment.

Selling, general and administrative expense (“SG&A”) for the PBM segment increased $63.3 million, or 9.8%, in 2008 over 2007. The increase is due to investments for productivity improvement and growth as well as charges we incurred for the data security incident and a charge incurred for internally developed software.

PBM operating income increased $207.5 million, or 19.6%, in 2008 over 2007, based on the various factors described above.

PBM RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 vs. 2006

Network revenues increased $213.2 million, or 1.7%, in 2007 from 2006. There are two primary components to our change in network revenues, changes in volume and changes in price. Approximately $555.5 million of the increase in network pharmacy revenues is attributable to changes in price. This increase was offset by a $342.3 million decrease due to lower claim volumes

Additionally, the generic penetration rate affects our average revenue per network claim. As the penetration rate increased to 63.2% of total network claims in 2007 as compared to 59.1% in 2006, it offset the upward trend in price caused by inflation as generic drugs are less expensive than brand drugs.

The $58.1 million, or 0.8%, increase in home delivery and specialty revenues in 2007 over 2006 is primarily due to increased cross-selling of specialty services partially offset by the impact of higher generic penetration on average revenue per home delivery claim and lower claim volumes. Our generic penetration rate increased to 50.5% of total home delivery claims in 2007 as compared to 45.7% in 2006.

Cost of PBM revenues decreased 52.1 million or 0.3%, in 2007 when compared to 2006 as a result of better management of ingredient costs resulting from renegotiation of certain supplier contracts and the increase in the aggregate generic fill rate, as discussed above. The decrease was offset by ingredient cost inflation.

Our PBM gross profit increased $302.4 million, or 21.6%, in 2007 over 2006. Client cost savings from the increase in the aggregate generic fill rate and better management of ingredient costs resulting from renegotiation of certain supplier contracts were only partially offset by lower network claims volume and margin pressures arising

from the current competitive environment.

SG&A for our PBM segment increased $39.5 million, or 6.5%, in 2007 as compared to 2006 primarily as a result of the following factors:

	•		Increased spending consisting of increases in management incentive compensation in addition to the effect of inflation.

	•		Increase of $8.1 million related to our new headquarters.

	•		Increased legal expenses of $6.0 million due to changes in the status of existing cases.

	•		These increases were offset by a $16.3 million decrease in professional fees, primarily due to a reduction of IT contractors and consultants.

PBM operating income increased $262.9 million, or 33.0%, in 2007 over 2006, based on the various factors described above.

EM OPERATING INCOME


	Year Ended December 31,
(in millions)	2008		2007		2006

Product revenues	$	1,361.2	$	1,471.5	$	1,459.2
Service revenues		45.9		54.6		55.8

Total EM revenues		1,407.1		1,526.1		1,515.0
Cost of EM revenues		1,342.0		1,472.3		1,448.7

EM gross profit		65.1		53.8		66.3
EM SG&A expenses		51.7		52.6		37.2

EM operating income	$	13.4	$	1.2	$	29.1

EM RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008 vs. 2007

EM revenues decreased $119.0 million, or 7.8%, in 2008 over 2007. This is primarily due to decreased revenues in our Specialty Distribution line of business due to the expected reduction in sales of drugs which had a negative impact on gross profit.

As a result of the decrease in revenue, EM cost of revenues decreased by $130.3 million, or 8.9%, in 2008 over 2007. The larger decrease in cost of revenues resulted in an increase in gross profit of $11.3 million, or 21.0%, in 2008 from 2007. The increase in gross profit is attributable to the changes in mix as higher margin therapies replaced sales of lower margin drugs across multiple EM business units.

SG&A for our EM segment decreased $0.9 million, or 1.7%, in 2008 from 2007. The decrease is primarily caused by a charge of $16.5 million to bad debt expense in 2007 in our Specialty Distribution line of business related to the insolvency of a client. The decrease was offset by the bad debt expense, severance charges, and site closure costs incurred by the Specialty Distribution line of business in the first quarter of 2008 as well as increased management compensation during 2008 in line with improved financial results.

EM income from continuing operations increased $12.2 million in 2008 from 2007 based on the factors described above.

EM RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 vs. 2006

EM revenues increased $11.1 million, or 0.7%, in 2007 over 2006. The increase in revenues is due to sales of new drugs which became available for distribution through our Specialty Distribution business in late 2006, the full effect of which was not realized until 2007.

The increase in revenues was more than offset by an increase in EM cost of revenues of $23.6 million, or 1.6%, in 2007 over 2006, which resulted in a $12.5 million, or 18.9%, decrease in EM gross profit. The decrease in gross profit is attributable to changes in mix as sales of newer, low margin therapies replaced sales of higher margin drugs and inventory write-offs of $8.3 million in the fourth quarter of 2007; the majority of which related to a write-off of flu vaccine inventory in our Specialty Distribution line of business due to an overstock of inventory resulting from a mild flu season.

SG&A for our EM segment increased $15.4 million, or 41.4%, in 2007 from 2006. This is primarily caused by an increase in bad debt expense in 2007 over 2006, the majority of which is related to a $13.5 million non-recurring charge to bad debt expense in the third quarter of 2007 in our Specialty Distribution line of business related to the insolvency of a client, as well as $1.2 million of additional reserves taken in the fourth quarter of 2007 in order to adequately balance collection risk in our Specialty Distribution line of business.

EM income from continuing operations decreased $27.9 million, or 95.9%, in 2007 from 2006 based on the factors described above.

OTHER (EXPENSE) INCOME, NET

Net interest expense decreased $31.6 million, or 32.8%, in 2008 as compared to 2007, due to lower interest rates and less debt outstanding. Net interest expense increased $14.2 million, or 17.3%, in 2007 as compared to 2006, resulting from the increased borrowings under our credit facility (see “Liquidity and Capital Resources—Bank Credit Facility”).

The non-operating charge of $2.0 million during the year ended December 31, 2008 represents an unrealized loss on shares held in the Reserve Primary Fund (see Note 2).

On December 18, 2006, we announced a proposal to acquire all of the outstanding shares of Caremark Rx, Inc. (“Caremark”) common stock. On March 16, 2007, Caremark shareholders approved a merger agreement with CVS Corporation (“CVS”) and we subsequently withdrew our proposal to acquire Caremark. We incurred legal and other professional fees (which do not include internal costs) of $27.2 million as a result of the proposed acquisition. These expenses were partially offset by a $4.4 million special dividend paid by CVS/Caremark Corporation (“CVS/ Caremark”) on Caremark stock we owned prior to the CVS/Caremark merger and by a non-operating gain of $4.2 million resulting from the sale of our shares of CVS/Caremark stock in the second quarter of 2007. We recognized net non-operating charges in 2007 of $18.6 million.

PROVISION FOR INCOME TAXES

Our effective tax rate decreased to 35.8% for the year ended December 31, 2008, as compared to 36.4% for the year ended December 31, 2007. Our 2008 effective rate reflects non-recurring net tax benefits of $7.7 million attributable to lapses in the applicable statutes of limitations, favorable audit resolutions, and changes in our unrecognized tax benefits. Our 2007 effective rate reflects a nondeductible penalty of $10.5 million relating to the settlement of a legal matter. Our 2006 effective rate reflects non-recurring net tax benefits of $7.3 million mainly related to the impact of changes in state effective rates on deferred tax assets and liabilities.

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

Net loss from discontinued operations, net of tax, decreased $29.2 million from 2007 to 2008. This decrease is primarily due to charges recorded in the fourth quarter of 2007 of $34.0 million from IP goodwill and intangible asset impairment losses and the write-down of IP assets to fair market value (see “Critical Accounting Policies—Asset Impairment”) and non-recurring charges of $2.0 million relating to the closure of six IP pharmacy sites. In addition, a pre-tax gain on sale of IP of $7.4 million offset by a pre-tax loss on sale of CMP for $1.3 million during the year ended December 31, 2008.

Net loss from discontinued operations, net of tax, increased $31.7 million from 2006 to 2007, primarily due to fourth quarter 2007 charges discussed above.

NET INCOME AND EARNINGS PER SHARE

Net income increased $208.3 million, or 36.7%, for the year ended December 31, 2008 over 2007 and increased $93.4 million, or 19.7% for the year ended December 31, 2007 over 2006.

On May 23, 2007, we announced a two-for-one stock split for stockholders of record on June 8, 2007, effective June 22, 2007. On May 24, 2005, we announced a two-for-one stock split for stockholders of record on June 10, 2005, effective June 24, 2005. Both splits were affected in the form of a dividend by issuance of one additional share of common stock for each share of common stock outstanding. The earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share for each respective period have been adjusted for both stock splits.

Basic and diluted earnings per share increased 43.1% and 43.3%, respectively, for the year ended December 31, 2008 over 2007 and 28.2% and 28.7%, respectively, for the year ended December 31, 2007 over 2006. These increases are primarily due to improved operating results, as well as the decrease in the basic and

diluted weighted average number of common shares, relating to the repurchase of 7.2 million and 23.1 million shares in the years ended December 31, 2008 and 2007, respectively (see “—Stock Repurchase Program”).

LIQUIDITY AND CAPITAL RESOURCES

OPERATING CASH FLOW AND CAPITAL EXPENDITURES

In 2008, net cash provided by continuing operations increased $247.5 million to $1,095.6 million. Changes in operating cash flows from continuing operations in 2008 were positively impacted by the following factors:

	•		Net income from continuing operations increased $179.1 million in 2008 over 2007.

	•		The deferred tax provision from continuing operations increased $29.7 million 2008 over 2007, reflecting changes in the deferred tax provision caused by the first quarter 2007 implementation of Financial Accounting Standards Board Interpretation Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”.

	•		Changes in working capital from continuing operations resulted in a cash inflow of $93.5 million compared to $77.2 million. The change was driven by an increase in net cash inflow in claims and rebates payable year over year due to the timing of invoices and payments. This was significantly offset by decreases in inventory due to large purchases of inventory at discounted rates and accounts receivable due to the timing of collections.

In 2008, cash flows from discontinued operations increased $28.2 million from cash used of $20.8 million in 2007 to cash provided of $7.4 million in 2008. This was primarily due to the sale of IP in 2008 and the collection of accounts receivable which is expected to continue for the near future.

In 2007, net cash provided by operations from continuing operations increased $174.6 million to $848.1 million. Changes in operating cash flows from continuing operations in 2007 were positively impacted by the following factors:

	•		Net income from continuing operations increased $125.1 million in 2007 over 2006.

	•		Inventory balances from continuing operations decreased by approximately $25.3 million primarily due to a large purchase of generic inventory at a discounted rate made in 2006, as well as improved inventory management.

	•		The impact on continuing operations accounts receivable of overall improvements in days outstanding.

	•		Smaller payouts of management incentive bonuses in 2007 as compared to 2006.

In 2007, cash flows used by discontinued operations increased $5.9 million to $20.8 million.

As a percent of accounts receivable, our allowance for doubtful accounts for continuing operations was 6.2% and 6.0% at December 31, 2008 and 2007, respectively. This increase is primarily due to additional reserves for receivables from our clients’ members.

Our capital expenditures increased $10.8 million, or 14.4%, in 2008 as compared to 2007, and increased $8.4 million, or 12.6%, in 2007 as compared to 2006. We intend to continue to invest in infrastructure and technology which we believe will provide efficiencies in operations and facilitate growth and enhance the service we provide to our clients. We expect future capital expenditures will be funded primarily from operating cash flow or, to the extent necessary, with borrowings under our revolving credit facility, discussed below.

STOCK REPURCHASE PROGRAM (reflecting the two-for-one stock split effective June 22, 2007)

We have a stock repurchase program, originally announced on October 25, 1996. On July 22, 2008, our Board of Directors authorized total increases in the program of 15.0 million shares. Treasury shares are carried at first in, first out cost. There is no limit on the duration of the program. During 2008, we repurchased 7.2 million shares for $494.4 million, leaving 21.0 million shares remaining under the program. Current year repurchases were funded through internally generated cash. Additional share repurchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions.

ACQUISITIONS AND RELATED TRANSACTIONS

On July 22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC, a privately held PBM, for a purchase price of $251.0 million, which includes a purchase price adjustment for working capital and transaction costs. MSC is a leader in providing PBM services to clients providing workers’ compensation benefits. The transaction was accounted for under the provisions of FAS 141, “Business Combinations.” The purchase price was funded through internally generated cash and temporary borrowings under our revolving credit facility. This acquisition is reported as part of our PBM segment and did not have a material effect on our consolidated financial statements.

We are one of the founders of RxHub, an electronic exchange enabling physicians who use electronic prescribing technology to link to pharmacies, PBM companies, and health plans. On July 1, 2008, the merger of RxHub and SureScripts was announced. The new organization will enable physicians to securely access health information when caring for their patients through a fast and efficient health exchange. We have retained one-sixth ownership in the merged company. Due to the decreased ownership percentage, the investment is being recorded using the cost method, under which dividends are the basis of recognition of earnings from an investment. This change did not have a material effect on our consolidated financial statements.

On October 10, 2007, we purchased Connect Your Care, LLC (“CYC”), a leading provider of consumer directed healthcare technology solutions to the employer, health plan and financial services markets. The purchase price was funded through internally generated cash. The purchase agreement includes an earnout provision, payable after three years based on the performance of the business. This acquisition is reported as part of our PBM segment, and did not have a material effect on our consolidated financial statements.

We regularly review potential acquisitions and affiliation opportunities. We believe available cash resources, bank financing or the issuance of additional common stock could be used to finance future acquisitions or affiliations. There can be no assurance we will make new acquisitions or establish new affiliations in 2009 or thereafter.

BANK CREDIT FACILITY

At December 31, 2008, our credit facility includes $960.0 million of Term A loans, $800.0 million of Term-1 loans and a $600.0 million revolving credit facility. The revolving credit facility (none of which was outstanding as of December 31, 2008) is available for general corporate purposes. During 2008, we made scheduled payments of $260.0 million on our Term A loan. The maturity date of our credit facility is October 14, 2010.

Our credit facility requires us to pay interest periodically on the London Interbank Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin over LIBOR ranges from 0.50% to 1.125%, depending on our consolidated leverage ratio or our credit rating. Under our credit facility we are required to pay commitment fees on the unused portion of the $600.0 million revolving credit facility. The commitment fee will range from 0.10% to 0.25% depending on our consolidated leverage ratio or our credit rating.

At December 31, 2008, the weighted average interest rate on the facility was 3.7%. Our credit facility contains covenants which limit the indebtedness we may incur, the common shares we may repurchase, and dividends we may pay. The repurchase and dividend covenant applies if certain leverage thresholds are exceeded. The covenants also include a minimum interest coverage ratio and a maximum leverage ratio. At December 31, 2008, we believe we are in compliance with all covenants associated with our credit facility.

CREDIT MARKET CONDITIONS

As of December 31, 2008, we had $530.7 million of cash on hand which is above historical levels. We consistently generate positive cash flow from operations and typically do not rely on external sources of capital to meet our routine operating needs, including required payments of debt under our credit agreements. As a result, we do not expect material adverse financial consequences due to the recent credit market conditions.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table sets forth our schedule of current maturities of our long-term debt as of December 31, 2008, and future minimum lease payments due under noncancellable operating leases of our continuing operations (in millions):


	Payments Due by Period as of December 31, 2008
Contractual obligations	Total		2009		2010 – 2011		2012 – 2013		After 2014

Long-term debt ⁽¹⁾	$	1,760.3	$	420.0	$	1,340.1	$	0.2	$	0.0
Future minimum lease payments ⁽²⁾		183.7		31.9		54.4		44.9		52.5
Purchase commitments⁽³⁾		62.1		33.7		25.6		2.0		0.8

Total contractual cash obligations	$	2,006.1	$	485.6	$	1,420.1	$	47.1	$	53.3


(1)		These payments exclude the interest expense on our credit facility, which requires us to pay interest on LIBOR plus a margin. Our interest payments fluctuate with changes in LIBOR and in the margin over LIBOR we are required to pay (see “—Bank Credit Facility”).

(2)		In July 2004, we entered into a capital lease with the Camden County Joint Development Authority in association with the development of our Patient Care Contact Center in St. Marys, Georgia. At December 31, 2008, our lease obligation is $9.1 million. In accordance with FIN 39, “Offsetting of Amounts Related to Certain Contracts”, our lease obligation has been offset against $9.1 million of industrial revenue bonds issued to us by the Camden County Joint Development Authority.

(3)		These amounts consist of required future purchase commitments for materials, supplies, services and fixed assets in the normal course of business. We do not expect potential payments under these provisions to materially affect results of operations or financial condition. This conclusion is based upon reasonably likely outcomes derived by reference to historical experience and current business plans.

The gross liability for uncertain tax positions under FIN 48 is $40.4 million and $28.4 million as of December 31, 2008 and 2007, respectively. We do not expect a significant payment related to these obligations to be made within the next twelve months. We are not able to provide a reasonable reliable estimate of the timing of future payments relating to the non-current FIN 48 obligations.

OTHER MATTERS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. This standard does not expand the use of fair value to any new circumstances. FAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On February 6, 2008 the FASB approved the Financial Staff Position that will defer the effective date of FAS 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Our partial adoption of FAS 157 for financial assets and liabilities as of January 1, 2008 did not have a material impact on our consolidated financial position, results of operations or cash flows (see Note 2).

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“FAS 159”). Under FAS 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. Eligible

items include, but are not limited to, accounts and loans receivable, equity method investments, accounts payable, guarantees, issued debt and firm commitments. If elected, FAS 159 is effective for fiscal years beginning after November 15, 2007. Currently, we have not elected to account for any of our eligible items using the fair value option under FAS 159.

In December 2007, the FASB issued FAS 141R, “Business Combinations,” and FAS 160, “Business Combinations and Noncontrolling Interests” “FAS 141R” and “FAS 160,” respectively). FAS 141R and FAS 160 are effective for fiscal years beginning after December 15, 2008. FAS 141R changes the definitions of a business and a business combination, and will result in more transactions recorded as business combinations. Certain acquired contingencies will be recorded initially at fair value on the acquisition date, transaction and restructuring costs generally will be expensed as incurred and in partial acquisitions companies generally will record 100 percent of the assets and liabilities at fair value, including goodwill. We do not expect these pronouncements to have an effect on our financial statements unless we enter into a business combination subsequent to the effective date.

IMPACT OF INFLATION

Changes in prices charged by manufacturers and wholesalers for pharmaceuticals affect our revenues and cost of revenues. Most of our contracts provide that we bill clients based on a generally recognized price index for pharmaceuticals.

Item 8 — Consolidated Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Express Scripts, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Express Scripts, Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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 these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Annual Report on Form 10-K for the year ended December 31, 2008. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

The Company changed the manner in which it accounts for member co-payments to retail pharmacies for the year ended December 31, 2008. The Company’s current revenue recognition policy regarding member co-payments to retail pharmacies is described in Note 1. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions for the year ended December 31, 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Annual Report on Form 10-K for the year ended December 31, 2008, management has excluded Medical Services Company from its assessment of internal control over financial reporting as of December 31, 2008 because it was acquired by the Company in a purchase business combination during 2008. We have also excluded Medical Services Company from our audit of internal control over financial reporting. Medical Services Company is a wholly-owned subsidiary whose total assets and total revenues represent 4.9% and 0.4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

/s/ PricewaterhouseCoopers LLP

St. Louis, Missouri

February 24, 2009, except with respect to our opinion on the consolidated financial statements insofar as it relates to the change in reportable segments as described in Notes 1 and 14 and the condensed consolidating financial information included in Note 16, as to which the date is June 1, 2009

EXPRESS SCRIPTS, INC.
CONSOLIDATED BALANCE SHEET


	December 31,
(in millions, except share data)	2008			2007

Assets:
Current assets:
Cash and cash equivalents	$	530.7		$	434.7
Restricted cash and investments		4.8			2.2
Receivables, net		1,155.9			1,184.6
Inventories		203.0			166.1
Deferred taxes		118.2			121.1
Prepaid expenses and other current assets		31.2			18.7
Current assets of discontinued operations		—			40.4

Total current assets		2,043.8			1,967.8
Property and equipment, net		222.2			215.5
Goodwill		2,881.1			2,695.3
Other intangible assets, net		332.6			342.0
Other assets		29.5			30.2
Non-current assets of discontinued operations		—			5.6

Total assets	$	5,509.2		$	5,256.4


Liabilities and stockholders’ equity
Current liabilities:
Claims and rebates payable	$	1,380.7		$	1,258.9
Accounts payable		496.4			517.3
Accrued expenses		420.5			432.5
Current maturities of long-term debt		420.0			260.1
Current liabilities of discontinued operations		4.1			6.2

Total current liabilities		2,721.7			2,475.0
Long-term debt		1,340.3			1,760.3
Other liabilities		369.0			324.7

Total liabilities		4,431.0			4,560.0


Commitments and contingencies (Note 13)

Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized, $0.01 par value per share; and no shares issued and outstanding		—			—
Common stock, 1,000,000,000 shares authorized, $0.01 par value; shares issued: 318,958,000 and 318,886,000, respectively; shares outstanding: 247,649,000 and 252,371,000, respectively		3.2			3.2
Additional paid-in capital		640.8			564.5
Accumulated other comprehensive income		6.2			20.9
Retained earnings		3,361.0			2,584.9

		4,011.2			3,173.5
Common stock in treasury at cost, 71,309,000 and 66,515,000 shares, respectively		(2,933.0	)		(2,477.1	)

Total stockholders’ equity		1,078.2			696.4

Total liabilities and stockholders’ equity	$	5,509.2		$	5,256.4

See accompanying Notes to Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS


	Year Ended December 31,
(in millions, except per share data)	2008			2007			2006

Revenues ¹	$	21,978.0		$	21,824.0		$	21,562.6
Cost of revenues ¹		19,937.1			20,065.2			20,093.7

Gross profit		2,040.9			1,758.8			1,468.9
Selling, general and administrative		760.4			698.0			643.1

Operating income		1,280.5			1,060.8			825.8

Other (expense) income:
Non-operating charges, net		(2.0	)		(18.6	)		—
Undistributed loss from joint venture		(0.3	)		(1.3	)		(1.6	)
Interest income		13.0			12.2			13.7
Interest expense		(77.6	)		(108.4	)		(95.7	)

		(66.9	)		(116.1	)		(83.6	)

Income before income taxes		1,213.6			944.7			742.2
Provision for income taxes		434.0			344.2			266.8

Net income from continuing operations		779.6			600.5			475.4
Net loss from discontinued operations, net of tax		(3.5	)		(32.7	)		(1.0	)

Net income	$	776.1		$	567.8		$	474.4


Weighted average number of common shares outstanding during the period:
Basic:		248.9			260.4			279.6
Diluted:		251.8			264.0			284.0

Basic earnings (loss) per share:
Continuing operations	$	3.13		$	2.31		$	1.70
Discontinued operations		(0.01	)		(0.13	)		—
Net earnings		3.12			2.18			1.70

Diluted earnings (loss) per share:
Continuing operations	$	3.10		$	2.27		$	1.67
Discontinued operations		(0.01	)		(0.12	)		—
Net earnings		3.08			2.15			1.67


¹		Includes retail pharmacy co-payments of $3,153.6, $3,554.5 and $4,012.7 for the years ended December 31, 2008, 2007, and 2006, respectively.

See accompanying Notes to Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


				Amount
	Number								Unearned
	of								Compensation			Accumulated
	Shares					Additional			Under Employee			Other
	Common			Common		Paid-in			Compensation			Comprehensive			Retained			Treasury
(in millions)	Stock			Stock		Capital			Plans			Income			Earnings			Stock			Total

Balance at December 31, 2005		159.5		$	1.6	$	473.5		$	(5.8	)	$	9.8		$	1,542.9		$	(557.2	)	$	1,464.8

Comprehensive income:
Net income		—			—		—			—			—			474.4			—			474.4
Other comprehensive income,
Foreign currency translation adjustment		—			—		—			—			0.1			—			—			0.1
Realized and unrealized gain on available for sale securities; net of taxes		—			—		—			—			2.0			—			—			2.0

Comprehensive income		—			—		—			—			2.1			474.4			—			476.5
Reclassification of unearned compensation upon adoption of FAS 123R		—			—		(5.8	)		5.8			—			—			—			—
Treasury stock acquired		—			—		—			—			—			—			(906.8	)		(906.8	)
Common stock issued under employee plans, net of forfeitures and stock redeemed for taxes		(0.1	)		—		(7.5	)		—			—			—			5.6			(1.9	)
Amortization of unearned compensation under employee plans		—			—		27.6			—			—			—			—			27.6
Exercise of stock options		—			—		(22.9	)		—			—			—			57.2			34.3
Tax benefit relating to employee stock compensation		—			—		30.4			—			—			—			—			30.4

Balance at December 31, 2006		159.4			1.6		495.3			—			11.9			2,017.3			(1,401.2	)		1,124.9

Comprehensive income:
Net income		—			—		—			—			—			567.8			—			567.8
Other comprehensive income,
Foreign currency translation adjustment		—			—		—			—			11.0			—			—			11.0
Realized and unrealized gain on available for sale securities; net of taxes		—			—		—			—			(2.0	)		—			—			(2.0	)

Comprehensive income		—			—		—			—			9.0			567.8			—			576.8
Stock split in form of dividend		159.4			1.6		(1.6	)		—			—			—			—			—
Treasury stock acquired		—			—		—			—			—			—			(1,140.3	)		(1,140.3	)
Common stock issued under employee plans, net of forfeitures and stock redeemed for taxes		0.1			—		1.5			—			—			—			3.1			4.6
Amortization of unearned compensation under employee plans		—			—		31.6			—			—			—			—			31.6
Exercise of stock options		—			—		(11.7	)		—			—			—			61.3			49.6
Tax benefit relating to employee stock compensation		—			—		49.4			—			—			—			—			49.4
Cumulative effect of adoption of FIN 48		—			—		—			—			—			(0.2	)		—			(0.2	)

Balance at December 31, 2007		318.9			3.2		564.5			—			20.9			2,584.9			(2,477.1	)		696.4

Comprehensive income:
Net income		—			—		—			—			—			776.1			—			776.1
Other comprehensive income,
Foreign currency translation adjustment		—			—		—			—			(14.7	)		—			—			(14.7	)

Comprehensive income		—			—		—			—			(14.7	)		776.1			—			761.4
Treasury stock acquired		—			—		—			—			—			—			(494.4	)		(494.4	)
Common stock issued under employee plans, net of forfeitures and stock redeemed for taxes		—			—		0.6			—			—			—			4.0			4.6
Amortization of unearned compensation under employee plans		—			—		40.3			—			—			—			—			40.3
Exercise of stock options		—			—		(6.8	)		—			—			—			34.5			27.7
Tax benefit relating to employee stock compensation		—			—		42.2			—			—			—			—			42.2

Balance at December 31, 2008		318.9		$	3.2	$	640.8		$	—		$	6.2		$	3,361.0		$	(2,933.0	)	$	1,078.2

See accompanying Notes to Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS


	Year Ended December 31,
(in millions)	2008			2007			2006

Cash flows from operating activities:
Net income	$	776.1		$	567.8		$	474.4
Net loss from discontinued operations, net of tax		3.5			32.7			1.0

Net income from continuing operations		779.6			600.5			475.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		97.7			97.5			99.8
Deferred income taxes		33.8			4.1			7.6
Bad debt expense		30.1			36.7			13.5
Employee stock-based compensation expense		40.2			31.6			27.6
Other, net		20.7			0.5			(0.1	)
Changes in operating assets and liabilities, net of changes resulting from acquisitions:
Receivables		21.9			71.6			35.7
Inventories		(38.0	)		25.3			77.4
Other current and non-current assets		5.4			6.9			44.5
Claims and rebates payable		113.0			(16.8	)		(104.2	)
Other current and non-current liabilities		(8.8	)		(9.8	)		(3.7	)

Net cash provided by operating activities—continuing operations		1,095.6			848.1			673.5
Net cash provided by (used in) operating activities—discontinued operations		7.4			(20.8	)		(14.9	)

Net cash flows provided by operating activities		1,103.0			827.3			658.6


Cash flows from investing activities:
Purchases of property and equipment		(85.8	)		(75.0	)		(66.6	)
Acquisitions, net of cash acquired, and investment in joint venture		(251.5	)		(14.3	)		0.1
Sale (purchase) of marketable securities		—			34.2			(31.5	)
Short term investment transferred from cash		(49.3	)		—			—
Cash received from short term investment		38.9			—			—
Proceeds from the sale of business		27.7			—			—
Other		(0.6	)		(0.7	)		(2.8	)

Net cash used in investing activities—continuing operations		(320.6	)		(55.8	)		(100.8	)
Net cash used in investing activities—discontinued operations		—			(2.5	)		(0.2	)

Net cash used in investing activities		(320.6	)		(58.3	)		(101.0	)


Cash flows from financing activities:
Proceeds from long-term debt		—			800.0			—
Repayment of long-term debt		(260.0	)		(180.1	)		(110.1	)
Proceeds from (repayments of) revolving credit line, net		—			(50.0	)		50.0
Tax benefit relating to employee stock-based compensation		42.1			49.4			30.4
Treasury stock acquired		(494.4	)		(1,140.3	)		(906.8	)
Deferred financing fees		—			(1.5	)		(0.4	)
Net proceeds from employee stock plans		31.9			52.8			32.2

Net cash used in financing activities		(680.4	)		(469.7	)		(904.7	)


Effect of foreign currency translation adjustment		(6.0	)		4.4			0.2


Net increase (decrease) in cash and cash equivalents		96.0			303.7			(346.9	)
Cash and cash equivalents at beginning of year		434.7			131.0			477.9

Cash and cash equivalents at end of year	$	530.7		$	434.7		$	131.0


Supplemental data:
Cash paid during the year for:
Income tax payments, net of refunds	$	342.4		$	279.2		$	192.9
Interest		72.9			112.2			96.9

See accompanying Notes to Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of significant accounting policies

Organization and operations. We are one of the largest full-service pharmacy benefit management (“PBM”) companies in North America, providing health care management and administration services on behalf of clients that include health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs. During the first quarter of 2009, we changed our reportable segments to Pharmacy Benefit Manager (“PBM”) and Emerging Markets (“EM”). Segment disclosures for 2008, 2007 and 2006 have been reclassified to reflect the new structure where appropriate. Under the new structure, our integrated PBM services include network claims processing, home delivery services, patient care and direct specialty home delivery to patients, benefit design consultation, drug utilization review, formulary management, drug data analysis services, distribution of injectable drugs to patient homes and physicians offices, bio-pharma services, and fulfillment of prescriptions to low-income patients through manufacturer-sponsored patient assistance programs and company-sponsored generic patient assistance programs. Through our EM segment, we provide services including distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of sample units to physicians and verification of practitioner licensure; fertility services to providers and patients; and healthcare administration and implementation of consumer-directed healthcare solutions.

As noted above, we report segments on the basis of services offered and have determined we have two reportable segments: PBM and EM. Our domestic and Canadian PBM operating segments have similar characteristics and as such have been aggregated into a single PBM reporting segment. Our EM segment services including distribution of pharmaceuticals and medical supplies to providers and clinics, distribution of sample units to physicians and verification of practitioner licensure; fertility services to providers and patients; and healthcare administration and implementation of consumer-directed healthcare solutions.

Basis of presentation. The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in affiliated companies, 20% to 50% owned, are accounted for under the equity method. Certain amounts in prior years have been reclassified to conform with the current year presentation. The preparation of the consolidated financial statements conforms to generally accepted accounting principles in the United States, and requires us to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates and assumptions.

Discontinued operations. On June 30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc. (“IP”), our infusion pharmacy line of business, for $27.5 million and recorded a pre-tax gain of approximately $7.4 million. The gain is included in net loss from discontinued operations, net of tax in the consolidated statement of income for the year ended December 31, 2008. IP was identified as available for sale during the fourth quarter of 2007 as we considered it non-core to our future operations.

Cash and cash equivalents. Cash and cash equivalents include cash on hand and investments with original maturities of three months or less. We have banking relationships resulting in certain cash disbursement accounts being maintained by banks not holding our cash concentration accounts. As a result, cash disbursement accounts carrying negative book balances of $254.3 million and $231.6 million (representing outstanding checks not yet presented for payment) have been reclassified to claims and rebates payable, accounts payable and accrued expenses at December 31, 2008 and 2007, respectively. This reclassification restores balances to cash and current liabilities for liabilities to our vendors which have not been settled. No overdraft or unsecured short-term loan exists in relation to these negative balances.

We have restricted cash and cash equivalents in the amount of $4.8 million and $2.2 million at December 31, 2008 and 2007, respectively. These amounts consist of investments and cash which include participants’ health savings accounts as well as employers’ pre-funding amounts.

Accounts receivable. Based on our revenue recognition policies discussed below, certain claims at the end of a period are unbilled. Revenue and unbilled receivables for those claims are estimated each period based on the amount to be paid to network pharmacies and historical gross margin. Estimates are adjusted to actual at the time of billing. Historically, adjustments to our original estimates have been immaterial. As of December 31, 2008 and 2007, unbilled receivables for continuing operations were $561.9 million and $592.9 million, respectively. Unbilled receivables are billed to clients typically within 30 days based on the contractual billing schedule agreed upon with the client.

We provide an allowance for doubtful accounts equal to estimated uncollectible receivables. This estimate is based on the current status of each customer’s receivable balance as well as current economic and market conditions. Receivables are written off against the allowance only upon determination such amounts are not recoverable and all collection attempts have failed. As of December 31, 2008 and 2007, we have an allowance for doubtful accounts for continuing operations of $76.8 million and $75.4 million, respectively.

Inventories. Inventories consist of prescription drugs and medical supplies which are stated at the lower of first-in first-out cost or market.

Property and equipment. Property and equipment is carried at cost and is depreciated using the straight-line method over estimated useful lives of seven years for furniture and three to five years for equipment and purchased computer software. Leasehold improvements are amortized on a straight-line basis over the remaining term of the lease or the useful life of the asset, if shorter. Expenditures for repairs, maintenance and renewals are charged to income as incurred. Expenditures that improve an asset or extend its estimated useful life are capitalized. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income.

Research and development expenditures relating to the development of software for internal purposes are charged to expense until technological feasibility is established in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Thereafter, the remaining software production costs up to the date placed into production are capitalized and included as property and equipment. Amortization of the capitalized amounts commences on the date placed into production, and is computed on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product but not more than five years. Reductions, if any, in the carrying value of capitalized software costs to net realizable value are expensed. With respect to capitalized software costs, we recorded amortization expense of $21.3 million in 2008, $18.2 million in 2007 and $17.4 million in 2006.

Marketable securities. All investments not included as cash and cash equivalents are accounted for under Financial Accounting Standards Board Statement No. (“FAS”) 115, “Accounting for Certain Investments in Debt and Equity Securities.” Management determines the appropriate classification of our marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. All marketable securities at December 31, 2008 and 2007 were recorded in other non-current assets on our consolidated balance sheet (see Note 2).

Securities bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are reported at fair value, which is based upon quoted market prices, with unrealized holding gains and losses included in earnings. We held trading securities, consisting primarily of mutual funds, totaling $12.8 million and $20.9 million at December 31, 2008 and 2007, respectively. We maintain our trading securities to offset changes in certain liabilities related to our deferred compensation plan discussed in Note 12. Net (loss) gain recognized on the trading portfolio were ($5.2) million, $1.9 million, and $2.7 million in 2008, 2007, and 2006, respectively.

Securities not classified as trading or held-to-maturity securities are classified as available-for-sale securities. Available-for-sale securities are reported at fair value, which is based upon quoted market prices, with unrealized holding gains and losses reported through other comprehensive income, net of applicable taxes. At December 31, 2006, we held available-for-sale securities with a value of $33.4 million, consisting primarily of common stock of Caremark Rx, Inc. (“Caremark”). In 2006, we recorded unrealized gains on our available-for-sale securities of $3.4 million ($2.0 million, net of tax) in other comprehensive income. We sold these shares for a non-operating gain of $4.2 million in the second quarter of 2007.

Impairment of long lived assets. We evaluate whether events and circumstances have occurred which

indicate the remaining estimated useful life of long lived assets, including other intangible assets, may warrant revision or the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business (see Note 4 and Note 8).

Goodwill. Goodwill is evaluated for impairment annually or when events or circumstances occur indicating goodwill might be impaired in accordance with FAS 142, “Goodwill and Other Intangible Assets.” In addition, we evaluate whether events or circumstances have occurred which may indicate an impairment in goodwill. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business.

Other intangible assets. Other intangible assets include, but are not limited to, customer contracts and relationships, non-compete agreements, deferred financing fees, trade names and certain advance discounts paid to clients under contractual agreements. Other intangible assets, excluding customer contracts, customer relationships and trade names, are recorded at cost. Customer contracts and relationships are valued based on discounted cash flows over the expected life of the intangible asset. Excluding trade names which have an indefinite life, other intangible assets are amortized on a straight-line basis, which approximates the pattern of benefit, over periods from 1 to 20 years (see Note 8).

The amount of other intangibles assets reported for our continuing operations is net of accumulated amortization of $195.5 million and $205.5 million at December 31, 2008 and 2007, respectively. Amortization expense for our continuing operations for customer-related intangibles and non-compete agreements included in selling, general and administrative expenses was $33.7 million for the years ended December 31, 2008 and 2007 and $34.0 million for the year ended 2006, respectively. Amortization expense for our continuing operations for deferred financing fees included in interest expense was $2.4 million, $2.2 million and $1.9 million in 2008, 2007 and 2006, respectively. Amortization expense for our continuing operations for advance discounts paid to customers is recorded against revenue and was $0.6 million, $2.8 million and $5.2 million in 2008, 2007 and 2006, respectively.

In connection with our evaluation of IP as a discontinued operation during 2007, we wrote-off intangible assets with a net book value of $0.4 million (gross carrying value of $0.7 million net of accumulated amortization of $0.3 million), consisting of contractual relationships, in the net loss from discontinued operations.

Self-insurance reserves. We maintain insurance coverage for claims that arise in the normal course of business. Where insurance coverage is not available, or, in our judgment, is not cost-effective, we maintain self-insurance reserves to reduce our exposure to future legal costs, settlements and judgments. Self-insured losses are accrued based upon estimates of the aggregate liability for the costs of uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and our historical experience (see Note 13). It is not possible to predict with certainty the outcome of these claims, and we can give no assurances any losses, in excess of our insurance and any self-insurance reserves, will not be material.

Fair value of financial instruments. The carrying value of cash and cash equivalents, accounts receivable, claims and rebates payable, and accounts payable approximated fair values due to the short-term maturities of these instruments. The fair value, which approximates the carrying value, of our bank credit facility was estimated using either quoted market prices or the current rates offered to us for debt with similar maturity (see Note 2).

Revenue recognition. Revenues from our PBM segment are earned by dispensing prescriptions from our home delivery and specialty pharmacies, processing claims for prescriptions filled by retail pharmacies in our networks, and by providing services to drug manufacturers, including administration of discount programs (see also “Rebate accounting” below).

Revenues from dispensing prescriptions from our home delivery pharmacies are recorded when

prescriptions are shipped. At the time of shipment, our earnings process is complete: the obligation of our customer to pay for the drugs is fixed, and, due to the nature of the product, the member may not return the drugs nor receive a refund.

Revenues from our specialty line of business are from providing medications/pharmaceuticals for diseases that rely upon high-cost injectible, infused, oral, or inhaled drugs which have sensitive handling and storage needs and bio-pharmaceutical services including marketing, reimbursement and customized logistics solutions. Specialty revenues earned by our PBM segment are recognized at the point of shipment. At the time of shipment, we have performed substantially all of our obligations under our customer contracts and do not experience a significant level of reshipments. Appropriate reserves are recorded for discounts and contractual allowances which are estimated based on historical collections over a recent period. Any differences between our estimates and actual collections are reflected in operations in the period in which payment is received. Differences may result in the amount and timing of our revenues for any period if actual performance varies from our estimates. Allowances for returns are estimated based on historical return trends.

Revenues from our PBM segment are also derived from the distribution of pharmaceuticals requiring special handling or packaging where we have been selected by the pharmaceutical manufacturer as part of a limited distribution network and the distribution of pharmaceuticals through Patient Assistance Programs where we receive a fee from the pharmaceutical manufacturer for administrative and pharmacy services for the delivery of certain drugs free of charge to doctors for their low-income patients. These revenues include administrative fees received from these programs.

Revenues related to the distribution of prescription drugs by retail pharmacies in our networks consist of the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, including the portion to be settled directly by the member (co-payment), plus any associated administrative fees. These revenues are recognized when the claim is processed. When we independently have a contractual obligation to pay our network pharmacy providers for benefits provided to our clients’ members, we act as a principal in the arrangement and we include the total prescription price as revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent.” Although we generally do not have credit risk with respect to retail co-payments, the primary indicators of gross treatment are present. When a prescription is presented by a member to a retail pharmacy within our network, we are solely responsible for confirming member eligibility, performing drug utilization review, reviewing for drug-to-drug interactions, performing clinical intervention, which may involve a call to the member’s physician, communicating plan provisions to the pharmacy, directing payment to the pharmacy and billing the client for the amount they are contractually obligated to pay us for the prescription dispensed, as specified within our client contracts. We also provide benefit design and formulary consultation services to clients. We have separately negotiated contractual relationships with our clients and with network pharmacies, and under our contracts with pharmacies we assume the credit risk of our clients’ ability to pay for drugs dispensed by these pharmacies to clients’ members. Our clients are not obligated to pay the pharmacies as we are primarily obligated to pay retail pharmacies in our network the contractually agreed upon amount for the prescription dispensed, as specified within our provider contracts. These factors indicate we are a principal as defined by EITF 99-19 and, as such, we record the total prescription price contracted with clients in revenue.

If we merely administer a client’s network pharmacy contracts to which we are not a party and under which we do not assume credit risk, we record only our administrative fees as revenue. For these clients, we earn an administrative fee for collecting payments from the client and remitting the corresponding amount to the pharmacies in the client’s network. In these transactions we act as a conduit for the client. Because we are not the principal in these transactions, drug ingredient cost is not included in our revenues or in our cost of revenues.

In retail pharmacy transactions, amounts paid to pharmacies and amounts charged to clients are always exclusive of the applicable co-payment. Retail pharmacy co-payments, which we instructed retail pharmacies to collect from members, of $3.2 billion, $3.6 billion and $4.0 billion for the years ended December 31, 2008, 2007, and 2006, respectively, are included in revenues and cost of revenues. We changed our accounting policy for member co-payments during the third quarter of 2008 to include member co-payments to retail pharmacies in revenue and cost of revenue. Retail pharmacy co-payments decreased in the years ended December 31, 2008, 2007, and 2006 as compared to prior periods due to the expected loss of discount card programs and other low margin clients. Additionally, the decrease is due to the increase in generic utilization.

We bill our clients based upon the billing schedules established in client contracts. At the end of a period, any unbilled revenues related to the sale of prescription drugs that have been adjudicated with retail pharmacies are estimated based on the amount we will pay to the pharmacies and historical gross margin. Those amounts due from

our clients are recorded as revenue as they are contractually due to us for past transactions. Adjustments are made to these estimated revenues to reflect actual billings at the time clients are billed; historically, these adjustments have not been material.

Revenues from our EM segment are earned from the distribution of pharmaceuticals and medical supplies to providers and clinics and fertility services to providers and patients. These revenues are recognized at the point of shipment. At the time of shipment, we have performed substantially all of our obligations under our customer contracts and do not experience a significant level of reshipments. Appropriate reserves are recorded for discounts and contractual allowances which are estimated based on historical collections over a recent period. Any differences between our estimates and actual collections are reflected in operations in the period in which payment is received. Differences may result in the amount and timing of our revenues for any period if actual performance varies from our estimates. Allowances for returns are estimated based on historical return trends.

Revenues from our EM segment also are derived from sample fulfillment and sample accountability services. Revenues include administrative fees received from these programs as well as fees for verification of practitioner licensure. We also administer sample card programs for certain manufacturers and include the ingredient costs of those drug samples dispensed from retail pharmacies in EM revenues, and the associated costs for these sample card programs in cost of revenues. Because manufacturers are independently obligated to pay us and we have an independent contractual obligation to pay our network pharmacy providers for free samples dispensed to patients under sample card programs, we include the total payments from these manufacturers (including ingredient costs) as revenue, and payments to the network pharmacy provider as cost of revenue. These transactions require us to assume credit risk.

Rebate accounting. We administer a rebate program through which we receive rebates and administrative fees from pharmaceutical manufacturers. Rebates and administration fees earned for the administration of this program, performed in conjunction with claim processing and home delivery services provided to clients, are recorded as a reduction of cost of revenue and the portion of the rebate and administration fees payable to customers is treated as a reduction of revenue. The portion of rebates and administration fees payable to clients is estimated based on historical and/or anticipated sharing percentages. These estimates are adjusted to actual when amounts are paid to clients. We record rebates and administrative fees receivable from the manufacturer and payable to clients when the prescriptions covered under contractual agreements with the manufacturers are dispensed; these amounts are not dependent upon future pharmaceutical sales. Rebates and administrative fees billed to manufacturers are determinable when the drug is dispensed. We pay all or a contractually agreed upon portion of such rebates to our clients.

Cost of revenues. Cost of revenues includes product costs, network pharmacy claims payments, co-payments, and other direct costs associated with dispensing prescriptions, including shipping and handling (see also “Revenue Recognition” and “Rebate Accounting”). We changed our accounting policy for member co-payments during the third quarter of 2008 to include member co-payments to retail pharmacies in revenue and cost of revenue.

Income taxes. Deferred tax assets and liabilities are recognized based on temporary differences between financial statement basis and tax basis of assets and liabilities using presently enacted tax rates. On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (see Note 10).

Employee stock-based compensation. On January 1, 2006, we adopted FAS 123R, “Share-Based Payment,” which replaces FAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board No. (“APB”) 25, “Accounting for Stock Issued to Employees.” We adopted FAS 123R using the modified prospective method. Under this method of adoption, prior periods are not restated. For awards granted prior to the adoption of FAS 123R, compensation cost is recognized for the unvested portion of outstanding awards based on the grant-date fair value calculated under FAS 123 for pro forma disclosures. We elected to use the short-cut method for determining the historical pool of windfall tax benefits.

Grant-date fair value of stock options and “stock-settled” stock appreciation rights (“SSRs”) are estimated using a Black-Scholes valuation model. Compensation expense is reduced based on estimated forfeitures with adjustments to actual recorded at the time of vesting. Forfeitures are estimated based on historical experience. We use an accelerated method of recognizing compensation cost for awards with graded vesting, which essentially treats the grant as three separate awards, with vesting periods of 12, 24 and 36 months for those grants that vest over three years. The majority of our stock-based awards have three-year vesting.

See Note 12 for more information regarding stock-based compensation.

Earnings per share (reflecting the two-for-one stock split effective June 22, 2007). Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The following is the reconciliation between the number of weighted average shares used in the basic and diluted earnings per share calculation for all periods (amounts are in millions):


	2008		2007		2006

Weighted average number of common shares outstanding during the period – Basic EPS⁽¹⁾		248.9		260.4		279.6
Dilutive common stock equivalents:
Outstanding stock options, SSRs, restricted stock units, and executive deferred compensation units⁽²⁾		2.9		3.6		4.4

Weighted average number of common shares outstanding during the period – Diluted EPS		251.8		264.0		284.0


(1)		The decrease in weighted average number of common shares outstanding during the period for Basic and Diluted EPS resulted from 7.2 million and 23.1 million treasury shares repurchased in the years ended December 31, 2008 and 2007, respectively.

(2)		Excludes awards of 0.4 million and 0.9 million for the year ended December 31, 2008 and 2006, respectively. These were excluded because their effect was anti-dilutive.

The above shares are all calculated under the “treasury stock” method in accordance with FAS 128, “Earnings per Share.”

Foreign currency translation. The financial statements of ESI Canada, our Canadian operations, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. The functional currency for ESI Canada is the local currency and cumulative translation adjustments (credit balances of $6.2 million and $20.9 million at December 31, 2008 and 2007, respectively) are recorded within the accumulated other comprehensive income component of stockholders’ equity.

Comprehensive income. In addition to net income, our components of comprehensive income (net of taxes) are foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. We have displayed comprehensive income within the Statement of Changes in Stockholders’ Equity.

New accounting guidance. In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“FAS 159”). Under FAS 159, a company may elect to measure eligible financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, equity method investments, accounts payable, guarantees, issued debt and firm commitments. If elected, FAS 159 is effective for fiscal years beginning after November 15, 2007. Currently, we have not elected to account for any of our eligible items using the fair value option under FAS 159.

In December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS 160, “Business Combinations and Noncontrolling Interests” (FAS 141R and FAS 160, respectively). FAS 141R and FAS 160 are effective for fiscal years beginning after December 15, 2008. FAS 141R changes the definitions of a business and a business combination, and will result in more transactions recorded as business combinations. Certain acquired contingencies will be recorded initially at fair value on the acquisition date, transaction and restructuring costs generally will be expensed as incurred and in partial acquisitions companies generally will record 100 percent of the assets and liabilities at fair value, including goodwill. We do not expect these pronouncements to have an effect on our financial statements unless we enter into a business combination subsequent to the effective date.

2. Fair value measurements

In September 2006, the FASB issued FAS 157, “Fair Value Measurements” (“FAS 157”). FAS 157

defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. This standard does not expand the use of fair value to any new circumstances. FAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On February 6, 2008, the FASB approved the Financial Staff Position which deferred the effective date of FAS 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

We adopted FAS 157 as of January 1, 2008, with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities. Our partial adoption of FAS 157 did not have a material impact on our consolidated financial position, results of operations or cash flows. Nonrecurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of FAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those assets and liabilities initially measured at fair value in a business combination.

FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

Financial assets accounted for at fair value on a recurring basis at December 31, 2008 include cash equivalents of $471.2 million, restricted cash and investments of $4.8 million and trading securities of $12.8 million (included in other assets). These assets are carried at fair value based on quoted market prices for identical securities (Level 1 inputs).

As of December 31, 2008, short-term investments, included in prepaid expenses and other current assets in the consolidated balance sheet, were carried at fair value and consisted of our investment in the Reserve Primary Fund (the “Primary Fund”), which is a money market fund. The estimated fair value of our investment in the Primary Fund was $8.4 million as of December 31, 2008. The net asset value of the Primary Fund decreased below $1 per share as a result of the Primary Fund’s valuing at zero its holdings of debt securities by Lehman Brothers Holdings, Inc., which filed for bankruptcy on September 15, 2008. Accordingly, we recognized an unrealized loss of $2.0 million in the year ended December 31, 2008, which is included in non-operating gains (charges), net in the consolidated statement of operations and reclassified the Primary Fund investment from cash and cash equivalents to prepaid expenses and other current assets in the consolidated balance sheet. We assessed the fair value of the underlying collateral for the Primary Fund through evaluation of the liquidation value of assets held by the Primary Fund, which is classified within Level 3 of the fair value hierarchy.

We have received cash distributions of $38.9 million through December 31, 2008 and received $3.3 million subsequent to year-end. We expect to receive future distributions as the Primary Funds’s assets mature or are sold. If the markets for short term securities remain illiquid, there may be further declines in the value of our remaining investments. To the extent we determine there is a further decline in fair value, we may recognize additional losses in future periods up to the aggregate amount of these investments of $8.4 million at December 31, 2008.

3. Changes in business

Acquisitions. On July 22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC – Medical Services Company (“MSC”), a privately held PBM, for a purchase price of $251.0 million, which includes a purchase price adjustment for working capital and transaction costs. MSC is a leader in providing PBM services to clients providing workers’ compensation benefits. The transaction was accounted for under the provisions of FAS 141, “Business Combinations.” The purchase price was funded through internally generated cash and temporary borrowings under the revolving credit facility. This acquisition is reported as part of our PBM segment.

internally developed software are included in other intangibles, net and property and equipment, net, respectively, in the consolidated balance sheet. In addition, the excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $208.2 million. The amounts preliminarily assigned to intangible assets and goodwill may be further adjusted pending finalization of the purchase price and asset valuation. Goodwill is not deductible for tax purposes.

4. Discontinued operations

On June 30, 2008, we completed the sale of IP, our infusion pharmacy line of business, for $27.5 million and recorded a pre-tax gain of approximately $7.4 million. The gain is included in net loss from discontinued operations, net of tax in the consolidated statement of income for the year ended December 31, 2008. Rights to certain working capital balances related to IP were not sold and are retained on the balance sheet as of December 31, 2008. For a period of time, we will continue to generate cash flows and income statement activity on assets and liabilities of discontinued operations as these working capital balances wind down, which are not expected to be material.

IP was identified as available for sale during the fourth quarter of 2007 as we considered it non-core to our future operations. In connection with the classification of IP as a discontinued operation, we recorded a charge of $34.0 million in the fourth quarter of 2007 related to impairment losses. IP was headquartered in Louisville, Kentucky and operated twelve infusion pharmacies in six states. IP offered a broad range of infused therapies in the home to patients with acute or chronic conditions.

Prior to being classified as a discontinued operation, IP was included in our former SAAS segment. The results of operations for IP are reported as discontinued operations for all periods presented in the accompanying consolidated statements of operations. Additionally, for all periods presented, assets and liabilities of the discontinued operations are segregated in the accompanying consolidated balance sheets, and cash flows of our discontinued operations are segregated in our accompanying consolidated statement of cash flows.

On April 4, 2008, we completed the sale of CMP and recorded a pre-tax loss of approximately $1.3 million which is included in net loss from discontinued operations, net of tax in the consolidated statement of operations for the year ended December 31, 2008. CMP, which assembles customer medical kits containing various types of medical supplies, was included in our former SAAS segment prior to being classified as a discontinued operation.

Certain information with respect to the discontinued operations for the year ended December 31, 2008, 2007, and 2006 is summarized as follows:


(in millions)	2008			2007			2006

Revenues	$	44.7		$	108.3		$	110.1
Net loss from discontinued operations, net of tax		(3.5	)		(32.7	)		(1.0	)
Income tax (expense) benefit from discontinued operations		(0.3	)		14.0			0.7

5. Non-operating charges, net

The non-operating charge of $2.0 million during the year ended December 31, 2008 represents an unrealized loss on shares held in the Reserve Primary Fund (See Note 2).

6. Joint venture

On July 1, 2008, the merger of RxHub and SureScripts was announced. We are one of the founders of RxHub, an electronic exchange enabling physicians who use electronic prescribing technology to link to pharmacies, PBM companies and health plans. The new organization enables physicians to securely access health information when caring for their patients through a fast and efficient health exchange. We retain one-sixth ownership in the merged company. Due to the decreased ownership percentage, the investment is recorded under the cost method, under which dividends are the basis of recognition of earnings from an investment. RxHub has not paid any dividends to date. Prior to the merger, the investment in RxHub was recorded using the equity method of accounting, which required our percentage interest in RxHub’s results to be recorded in our consolidated statement of operations. Our percentage of RxHub’s loss for 2008, 2007 and 2006 was $0.3 million, $1.3 million, and $1.6 million, respectively, and has been recorded in other (expense) income, net, in the consolidated statement of operations. Our investment in RxHub (approximately $0.8 million and $0.2 million at December 31, 2008 and 2007, respectively) is recorded in other assets in our consolidated balance sheet.

7. Property and equipment

Property and equipment of our continuing operations, at cost, consists of the following:


	December 31,
(in millions)	2008		2007

Land and buildings	$	6.3	$	6.3
Furniture		37.9		34.7
Equipment		198.8		185.1
Computer software		249.8		207.1
Leasehold improvements		51.9		50.7

		544.7		483.9
Less accumulated depreciation		322.5		268.4

	$	222.2	$	215.5

Depreciation expense for our continuing operations in 2008, 2007 and 2006 was $64.0 million, $63.8 million and $65.8 million, respectively. Internally developed software, net of accumulated depreciation, for our continuing operations was $55.5 million and $78.9 million at December 31, 2008 and 2007, respectively.

Under certain of our operating leases for facilities in which we operate home delivery and specialty pharmacies, we are required to remove improvements and equipment upon surrender of the property to the landlord and convert the facilities back to office space. Our asset retirement obligation for our continuing operations was $6.3 million and $6.0 million at December 31, 2008 and 2007, respectively.

8. Goodwill and Other Intangibles

The following is a summary of our goodwill and other intangible assets of our continuing operations (amounts in millions):


	December 31, 2008				December 31, 2007
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

Goodwill
PBM	$	2,833.7	$	107.0	$	2,648.3	$	107.4
EM		154.4		—		154.4		—

	$	2,988.1	$	107.0	$	2,802.7	$	107.4


Other intangible assets
PBM
Customer contracts	$	432.2	$	159.5	$	405.0	$	133.4
Other ⁽¹⁾		21.1		13.0		67.7		56.0

		453.3		172.5		472.7		189.4

EM
Customer relationships		72.4		23.0		72.4		16.1
Other		2.4		—		2.4		—

		74.8		23.0		74.8		16.1

Total other intangible assets	$	528.1	$	195.5	$	547.5	$	205.5


(1)		Changes in other intangible assets are a result of the write-off of fully-amortized contractual assets.

The aggregate amount of amortization expense of other intangible assets for our continuing operations was $36.1 million, $38.8 million and $41.3 million for the year ended December 31, 2008, 2007 and 2006, respectively. The future aggregate amount of amortization expense of other intangible assets for our continuing operations is expected to be approximately $37.5 million for 2009, $35.6 million for 2010, $34.3 million for 2011, $32.4 million for 2012 and $32.3 million for 2013. The weighted average amortization period of intangible assets subject to amortization is 15 years in total, and by major intangible class is 5 to 20 years for customer-related intangibles and four years for other intangible assets.

In connection with the discontinued operations of IP (see Note 4) and pursuant to our policies for assessing impairment of goodwill and long-lived assets (see Note 1), approximately $7.0 million of goodwill was written off in the fourth quarter of 2007 and we wrote-off intangible assets with a net book value of $0.4 million (gross carrying value of $0.7 million net of accumulated amortization of $0.3 million), consisting of contractual relationships.

9. Financing

Long-term debt consists of:


	December 31,
(in millions)	2008		2007

Term A loans due October 14, 2010 with an average interest rate of 3.8% at December 31, 2008	$	960.0	$	1,220.0
Term-1 loans due October 14, 2010 with an average interest rate of 3.5% at December 31, 2008		800.0		800.0
Revolving credit facility due October 14, 2010		—		—
Other		0.3		0.4

Total debt		1,760.3		2,020.4

Less current maturities		420.0		260.1

Long-term debt	$	1,340.3	$	1,760.3

At December 31, 2008, our credit facility includes $960.0 million of Term A loans, $800.0 million of Term-1 loans and a $600.0 million revolving credit facility. The revolving credit facility (none of which was outstanding as of December 31, 2008) is available for general corporate purposes. During 2008, we made scheduled payments of $260.0 million on the Term A loan. The maturity date of the credit facility is October 14, 2010.

The credit facility requires us to pay interest periodically on the London Interbank Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin over LIBOR will range from 0.50% to 1.125%, depending on our consolidated leverage ratio or our credit rating. Under the credit facility we are required to pay commitment fees on the unused portion of the $600.0 million revolving credit facility. The commitment fee will range from 0.10% to 0.25% depending on our consolidated leverage ratio or our credit rating.

At December 31, 2008, the weighted average interest rate on the facility was 3.7%. The credit facility contains covenants which limit the indebtedness we may incur, the common shares we may repurchase, and dividends we may pay. The repurchase and dividend covenant applies if certain leverage thresholds are exceeded. The covenants also include a minimum interest coverage ratio and a maximum leverage ratio. At December 31, 2008, we believe we are in compliance with all covenants associated with our credit facility.

The following represents the schedule of current maturities for our long-term debt as of December 31, 2008 (amounts in millions):


Year Ended December 31,
2009	$	420.0
2010		1,340.0
2011		0.1
2012		0.1
2013		0.1
Thereafter		—

	$	1,760.3

10. Income taxes

Income from continuing operations before income taxes of $1,213.6 million resulted in net tax expense of $434.0 million for 2008. We consider its foreign earnings to be indefinitely reinvested and accordingly, has not recorded a provision for United States federal and state income taxes thereon. Cumulative undistributed foreign earnings for which United States taxes have not been provided are included in consolidated retained earnings in the amount of $31.5 million, $34.3 million and $23.6 million as of December 31, 2008, 2007, and 2006, respectively. Upon distribution of foreign earnings, we may be subject to United States income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes payable.

The provision (benefit) for income taxes for continuing operations consists of the following:


	Year Ended December 31,
(in millions)	2008			2007			2006

Income from continuing operations before income taxes:
United States	$	1,221.9		$	937.1		$	734.8
Foreign		(8.3	)		7.6			7.4

Total	$	1,213.6		$	944.7		$	742.2


Current provision:
Federal	$	381.1		$	320.9		$	242.6
State		18.2			15.8			14.0
Foreign		0.9			3.4			2.6

Total current provision		400.2			340.1			259.2

Deferred provision:
Federal		38.8			7.4			11.2
State		(2.1	)		(2.4	)		(3.8	)
Foreign		(2.9	)		(0.9	)		0.2

Total deferred provision		33.8			4.1			7.6

Total current and deferred provision	$	434.0		$	344.2		$	266.8

A reconciliation of the statutory federal income tax rate and the effective tax rate follows (the effect of foreign taxes on the effective tax rate for 2008, 2007, and 2006 is immaterial):


	Year Ended December 31,
	2008			2007			2006

Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State taxes, net of federal benefit		0.8			0.9			0.7
Non-deductible penalty		—			0.4			—
Other, net		—			0.1			0.2

Effective tax rate		35.8	%		36.4	%		35.9	%

Our effective tax rate decreased to 35.8% for the year ended December 31, 2008, as compared to 36.4% for the year ended December 31, 2007. Our 2008 effective rate includes discrete tax adjustments resulting in a net tax benefit of $7.7 million attributable to lapses in the applicable statutes of limitations, favorable audit resolutions, and changes in our unrecognized tax benefits. Our 2007 effective rate reflects a nondeductible penalty of $10.5 million relating to the settlement of a legal matter.

The effective tax rate recognized in discontinued operations was (9.3)%, 29.7% and 41.2% as of December 31, 2008, 2007, and 2006, respectively. The corresponding net tax provision was $0.3 million in 2008 with a net tax benefit of $13.8 million and $0.7 million in 2007 and 2006, respectively. Our 2008 and 2007 effective tax rates were both unfavorably impacted by valuation allowances recorded against state net operating loss carryforwards. The 2008 effective rate also reflects the impact of changes in state effective rates on deferred tax assets and liabilities.

The deferred tax assets and deferred tax liabilities for our continuing operations recorded in our Consolidated Balance Sheet are as follows:


	December 31,
(in millions)	2008			2007

Deferred tax assets:
Allowance for doubtful accounts	$	25.0		$	27.4
Net operating loss carryforwards and other tax attributes		24.0			18.0
Deferred compensation		3.0			6.3
Restricted stock		26.0			17.2
Accrued expenses		91.2			91.0

Other		4.3			4.2
Gross deferred tax assets		173.5			164.1
Less valuation allowance		(11.7	)		(8.3	)

Net deferred tax assets		161.8			155.8


Deferred tax liabilities:
Depreciation and property differences		(29.3	)		(17.1	)
Goodwill and customer contract amortization		(323.9	)		(292.7	)
Prepaids		(1.1	)		(1.2	)
Other		(3.0	)		(2.3	)

Gross deferred tax liabilities		(357.3	)		(313.3	)


Net deferred tax liabilities	$	(195.5	)	$	(157.5	)

As of December 31, 2008, we have $20.0 million of state net operating loss carryforwards which expire between 2009 and 2028. A valuation allowance of $11.0 million exists for a portion of these deferred tax assets. The net current deferred tax asset is $118.3 million and $121.1 million, and the net long-term deferred tax liability, included in other liabilities, is $313.8 million and $278.6 million as of December 31, 2008 and 2007, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(in millions)	2008			2007

Balance at January 1	$	28.4		$	23.5
Additions for tax positions related to prior years		7.9			2.5
Reductions for tax positions related to prior years		—			(6.7	)
Additions for tax positions related to the current year		9.2			10.2
Reductions for tax positions related to the current year		—			(0.1	)
Reductions attributable to settlements with taxing authorities		(2.1	)		—
Reductions as a result of a lapse of the applicable statute of limitations		(3.0	)		(1.0	)

Balance at December 31	$	40.4		$	28.4

Included in our unrecognized tax benefits are $7.9 million of uncertain tax positions that would impact our effective tax rate if recognized. We do not expect any significant increases or decreases to our unrecognized tax benefits within 12 months of December 31, 2008.

We have accrued $0.9 million and $4.1 million of interest in our consolidated statement of operations as of December 31, 2008 and 2007, respectively, resulting in $5.0 million and $4.1 million of accrued interest in our consolidated balance sheet as of December 31, 2008 and 2007, respectively. Interest was computed on the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in our tax returns.

Our U.S. federal income tax returns for tax years 2003 and beyond remain subject to examination by the Internal Revenue Service (“IRS”). The IRS commenced an examination of our consolidated 2003 and 2004 federal income tax returns in the second quarter of 2006 that is anticipated to be concluded in 2009. Accordingly, we have agreed to extend our statute of limitations for both years to September 30, 2009. Our state income tax returns for 2003 and beyond also remain subject to examination by various state authorities with the latest statute expiring on November 15, 2012.

11. Common stock (reflecting the two-for-one stock split effective June 22, 2007)

On May 23, 2007, we announced a two-for-one stock split for stockholders of record on June 8, 2007, effective June 22, 2007. The split was affected in the form of a dividend by issuance of one additional share of common stock for each share of common stock outstanding. The earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share for each period have been adjusted for the stock split.

We have a stock repurchase program, originally announced on October 25, 1996. In 2008, our Board of Directors authorized total increases in the program of 15 million shares. Treasury shares are carried at first in, first out cost. There is no limit on the duration of the program. During 2008, we repurchased 7.2 million shares for $494.4 million, leaving 21 million shares remaining under the program. Current year repurchases were through internally generated cash. Additional share repurchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions.

Through December 31, 2008, approximately 17.1 million shares have been reissued in connection with employee compensation plans. As of December 31, 2008, approximately 15.0 million shares of our common stock have been reserved for employee benefit plans (see Note 12).

Preferred Share Purchase Rights. In July 2001 our Board of Directors adopted a stockholder rights plan which declared a dividend of one right for each outstanding share of our common stock. The rights plan will expire on July 25, 2011. The rights are currently represented by our common stock certificates. When the rights become exercisable, they will entitle each holder to purchase 1/1,000th of a share of our Series A Junior Participating Preferred Stock for an exercise price of $300 (subject to adjustment). The rights will become exercisable and will trade separately from the common stock only upon the tenth day after a public announcement that a person, entity or group (“Person”) has acquired 15% or more of our outstanding common stock (“Acquiring Person”) or ten days after the commencement or public announcement of a tender or exchange offer which would result in any Person becoming an Acquiring Person; provided that any Person who beneficially owned 15% or more of our common stock as of the date of the rights plan will not become an Acquiring Person so long as such Person does not become the beneficial owner of additional shares representing 2% or more of our outstanding shares of common stock. In the event that any Person becomes an Acquiring Person, the rights will be exercisable for our common stock with a market value (as determined under the rights plan) equal to twice the exercise price. In the event that, after any Person becomes an Acquiring Person, we engage in certain mergers, consolidations, or sales of assets representing 50% or more of our assets or earning power with an Acquiring Person (or Persons acting on behalf of or in concert with an Acquiring Person), the rights will be exercisable for common stock of the acquiring or surviving company with a market value (as determined under the rights plan) equal to twice the exercise price. The rights will not be exercisable by any Acquiring Person. The rights are redeemable at a price of $0.01 per right prior to any Person becoming an Acquiring Person.

12. Employee benefit plans and stock-based compensation plans

Retirement savings plan. We sponsor retirement savings plans under Section 401(k) of the Internal Revenue Code for all of our full-time employees. Employees may elect to enter into a written salary deferral agreement under which a maximum of 15% to 25% of their salary, subject to aggregate limits required under the Internal Revenue Code, may be contributed to the plan. We match 200% of the first 1% and 100% of the next 3% of the employees’ compensation contributed to the Plan for substantially all employees. For the years ended December 31, 2008, 2007, and 2006, we had contribution expense of approximately $19.7 million, $17.9 million and $16.6 million, respectively.

Employee stock purchase plan. We offer an employee stock purchase plan that qualifies under Section 423 of the Internal Revenue Code and permits all employees, excluding certain management level employees, to purchase shares of our common stock. Participating employees may contribute up to 10% of their salary to purchase common stock at the end of each monthly participation period at a purchase price equal to 95% of the fair market value of our common stock on the last business day of the participation period. During 2008, 2007 and 2006, approximately 118,000, 131,000 and 176,000 shares of our common stock were issued under the plan, respectively. Our common stock reserved for future employee purchases under the plan is approximately 1.5 million at December 31, 2008.

Deferred compensation plan. We maintain a non-qualified deferred compensation plan (the “Executive Deferred Compensation Plan”) that provides benefits payable to eligible key employees at retirement, termination or death. Benefit payments are funded by a combination of contributions from participants and us. Participants may elect to defer up to 50% of their base earnings and 100% of specific bonus awards. Participants become fully vested in our contributions on the third anniversary of the end of the plan year for which the contribution is credited to their account. For 2008, our contribution was equal to 6% of each qualified participant’s total annual compensation, with 25% being allocated as a hypothetical investment in our common stock and the remaining being allocated to a variety of investment options. We have chosen to fund our liability for this plan through investments in trading securities, which primarily consists of mutual funds (see Note 1). We incurred compensation expense of approximately $1.8 million, $1.1 million and $0.8 million in 2008, 2007, and 2006, respectively. At
December 31, 2008, approximately 3.0 million shares of our Common Stock have been reserved for future issuance under the plan.

Stock-based compensation plans. In August 2000, the Board of Directors adopted the Express Scripts, Inc. 2000 Long-Term Incentive Plan which was subsequently amended in February 2001 and again in December 2001 (as amended, the “2000 LTIP”), which provides for the grant of various equity awards with various terms to our officers, Board of Directors and key employees selected by the Compensation Committee of the Board of Directors. The 2000 LTIP, as then amended, was approved by our stockholders in May 2001 and, as amended, in 2006. Under the 2000 LTIP, we have issued stock options, SSRs, restricted stock and performance share awards. Awards are typically settled using treasury shares. As of December 31, 2008, approximately 10.5 million shares of our common stock are available for issuance under this plan. The maximum term of stock options, SSRs, restricted stock and performance shares granted under the 2000 LTIP is 10 years.

During 2008, we granted to certain officers and employees approximately 199,000 restricted shares of common stock and performance shares with a weighted average fair market value of $64.79. The restricted stock awards have three-year graded vesting and the performance shares cliff vest at the end of three years. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The original value of the performance share grants are subject to a multiplier of up to 2.5 based on certain performance metrics. The total number of non-vested restricted stock and performance share awards was 518,000 and 677,000 at December 31, 2008 and 2007, respectively. Unearned compensation relating to these awards is amortized to non-cash compensation expense over the estimated vesting periods. As of

December 31, 2008, 2007 and 2006, unearned compensation related to restricted stock and performance shares was $14.2 million, $13.6 million and $6.7 million, respectively. We recorded pre-tax compensation expense related to restricted stock and performance share grants of $16.3 million, $9.3 million and $6.8 million in 2008, 2007, and 2006, respectively.

During 2008, we granted to certain officers and employees approximately 1,838,000 stock options with a weighted average Black-Scholes value of $17.88 per share. The SSRs and stock options have three-year graded vesting. Due to the nature of the awards, we use the same valuation methods and accounting treatments for SSRs and stock options.

The provisions of the 2000 LTIP allow employees to use shares to cover tax withholding on stock awards. Upon vesting of restricted stock and performance shares, employees have taxable income subject to statutory withholding requirements. The number of shares issued to employees may be reduced by the number of shares having a market value equal to our minimum statutory withholding for federal, state and local tax purposes.

As a result of the Board’s adoption and stockholder approval of the 2000 LTIP, no additional awards will be granted under either of our 1992 amended and restated stock option plan (discussed below) or under our 1994 amended and restated stock option plan (discussed below). However, these plans are still in existence as there are outstanding grants under these plans.

In April 1992, we adopted a stock option plan that we amended and restated in 1995 and amended in 1999, which provided for the grant of nonqualified stock options and incentive stock options to our officers and key employees selected by the Compensation Committee of the Board of Directors. In June 1994, the Board of Directors adopted the Express Scripts, Inc. 1994 Stock Option Plan, also amended and restated in 1995 and amended in 1997, 1998 and 1999. Under either plan, the exercise price of the options was not less than the fair market value of the shares at the time of grant, and the options typically vested over a five-year period from the date of grant.

In April 1992, we also adopted a stock option plan that was amended and restated in 1995 and amended in 1996 and 1999 that provided for the grant of nonqualified stock options to purchase 48,000 shares to each director who is not an employee of ours or our affiliates. In addition, the second amendment to the plan gave each non-employee director who was serving in such capacity as of the date of the second amendment the option to purchase 2,500 additional shares. The second amendment options vested over three years. The plan provides that the options vest over a two-, three- or five-year period from the date of grant depending upon the circumstances of the grant.

The following table presents amounts related to stock-based compensation:


			Restricted Stock
	SSRs and Stock		and Performance
(in millions, except per share data)	Options		Shares

Year ended December 31, 2008
Stock-based compensation:
Expense, pre-tax	$	23.8	$	16.3
Expense, after tax		15.3		10.5
Expense per diluted share		0.06		0.04

As of December 31, 2008
Unamortized portion⁽¹⁾	$	20.6	$	14.2

Year ended December 31, 2007
Stock-based compensation:
Expense, pre-tax	$	22.3	$	9.3
Expense, after tax		14.2		5.9
Expense per diluted share		0.05		0.02

As of December 31, 2007
Unamortized portion⁽¹⁾	$	15.0	$	13.6


⁽¹⁾		We have $0.4 million of unearned compensation related to unvested shares that are part of our deferred compensation plan as of December 31, 2008 and 2007.

The weighted average remaining recognition period for SSRs and stock options is 1.6 years, and for restricted stock and performance shares is 1.6 years.

As a result of the adoption of FAS 123R, we now classify the excess tax benefit from the exercise of stock options as a financing cash inflow. For the year ended December 31, 2008, the tax benefit related to employee stock compensation was $42.1 million. Prior to the adoption of FAS 123R, the tax benefit from the exercise of stock options was classified as an inflow from operating activities and under the modified prospective method, prior periods are not restated to reflect the adoption of FAS 123R.

Prior to January 1, 2006, we accounted for stock-based compensation in accordance with APB 25, which required the use of the intrinsic value method. Accordingly, no compensation expense was recognized in prior periods for the stock options granted, since the exercise price was equal to the fair market value of the shares at the grant date. Compensation expense was recognized under APB 25 for restricted stock awards based on the fair market value of the stock on the date of grant.

The fair value of options and SSRs granted is estimated on the date of grant using a Black-Scholes multiple option-pricing model with the following weighted average assumptions:


	2008	2007	2006

Expected life of option	3-5 years	3-5 years	3-5 years
Risk-free interest rate	1.6%-3.4%	3.8%-5.2%	4.5%-5.3%
Expected volatility of stock	30%-37%	29%-31%	31%-34%
Expected dividend yield	None	None	None

The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.

A summary of the status of stock options and SSRs as of December 31, 2008, and changes during the year ended December 31, 2008 is presented below.


	2008
				Weighted-
				Average
				Exercise
(share data in millions)	Shares			Price

Outstanding at beginning of year		8.4		$	27.22
Granted		1.8			64.48
Exercised		(2.5	)		20.40
Forfeited/cancelled		(0.6	)		42.80

Outstanding at end of period		7.1			37.96


Awards exercisable at period end		3.9			25.03

Weighted-average fair value of options granted during the year	$	17.88

A summary of the status of restricted stock and performance shares as of December 31, 2008, and changes during the year ended December 31, 2008 is presented below.


	2008
				Weighted-
				Average
				Grant
				Date Fair
(share data in millions)	Shares			Value

Outstanding at beginning of year		0.5		$	38.13
Granted		0.2			64.79
Released		(0.1	)		39.98
Forfeited/Cancelled		(0.1	)		36.76

Outstanding at end of period		0.5			47.78

At December 31, 2008, the weighted-average remaining contractual lives of stock options and SSRs outstanding and stock options and SSRs exercisable were 4.3 years and 3.1 years, respectively, and the aggregate intrinsic value (the amount by which the market value of the underlying stock exceeds the exercise price of the option) of shares outstanding and shares exercisable was $138.0 million and $115.6 million, respectively. Cash proceeds, tax benefits, fair value of vested shares and intrinsic value related to total stock options exercised and restricted shares vested during the years ended December 31, 2008, 2007 and 2006 are provided in the following table:


(in millions, except per share data)	2008		2007		2006

Proceeds from stock options exercised	$	27.7	$	49.7	$	34.3
Tax benefit related to employee stock compensation		42.1		49.4		30.4
Fair value of vested restricted shares		4.3		9.3		23.1
Intrinsic value of stock options exercised		41.7		140.1		97.3

Weighted average fair value of options granted during the year	$	17.88	$	12.83	$	14.23

13. Commitments and contingencies

We have entered into noncancellable agreements to lease certain office and distribution facilities with remaining terms from one to ten years. The majority of our lease agreements include renewal options which would extend the agreements from one to five years. Rental expense under the office and distribution facilities leases, excluding the discontinued operations of IP (see Note 4), in 2008, 2007 and 2006, was $31.0 million, $31.6 million and $27.4 million, respectively. The future minimum lease payments due under noncancellable operating leases, excluding the facilities of the discontinued operations of IP (in millions):


Year Ended December 31,	Minimum lease payments

2009	$	31.9
2010		30.3
2011		24.1
2012		22.7
2013		22.2

Thereafter		52.5
	$	183.7

These payments reflect a lease agreement we signed during 2007 for an expansion of our corporate facilities. We took possession of the facility during the first quarter of 2009. The annual lease commitments for the new building are approximately $2.7 million and the term of the lease is ten and a half years.

In July 2004, we entered into a capital lease with the Camden County Joint Development Authority in association with the development of our Patient Care Contact Center in St. Mary’s, Georgia. At December 31, 2008, our lease obligation was $9.1 million. In accordance with FIN 39 “Offsetting of Amounts Related to Certain Contracts,” our lease obligation has been offset against $9.1 million of industrial bonds issued by the Camden County Joint Development Authority.

For the year ended December 31, 2008, approximately 71.1% of our pharmaceutical purchases were through one wholesaler. We believe other alternative sources are readily available. Our top five clients collectively represented 18.2%, 18.1%, and 19.6% of revenues during 2008, 2007, and 2006 respectively. None of our clients accounted for 10% or more of our consolidated revenues in fiscal years 2008, 2007 or 2006. We believe no other concentration risks exist at December 31, 2008.

We accrue self-insurance reserves based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage which are probable and estimable. Reserves are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience (see Note 1, “Self-insurance reserves”). The majority of these claims are legal claims and our liability estimate is primarily related to the cost to defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts are probable and estimable, in compliance with FAS 5, “Accounting for Contingencies.” Under FAS 5, if the range of possible loss is broad, and no amount within the range is more likely than any other, the liability accrual is based on the lower end of the range.

While we believe our services and business practices are in compliance with applicable laws, rules and regulations in all material respects, we cannot predict the outcome of these matters at this time. An unfavorable outcome in one or more of these matters could result in the imposition of judgments, monetary fines or penalties, or injunctive or administrative remedies. We can give no assurance that such judgments, fines and remedies, and future costs associated with legal matters, would not have a material adverse effect on our financial condition, our consolidated results of operations or our consolidated cash flows.

14. Segment information

During the first quarter of 2009, we changed our organizational structure with new strategic business segments: PBM and EM. Previously, we had reported segments of PBM and SAAS. Our chief operating decision maker assessed performance under this new structure during the first quarter of 2009. The specialty pharmacy operations, which were previously in our SAAS segment, have been operationally integrated with our PBM operations in order to maximize its growth and improve efficiency. Additionally, the following services which were previously in SAAS were operationally integrated into the PBM:

	•		bio-pharma services including reimbursement and customized logistics solutions and

	•		fulfillment of prescriptions to low-income patients through pharmaceutical manufacturer-sponsored and company-sponsored generic patient assistance programs.

The EM segment primarily consists of the following services:

	•		distribution of pharmaceuticals and medical supplies to providers and clinics,

	•		distribution of fertility pharmaceuticals requiring special handling or packaging,

	•		distribution of sample units to physicians and verification of practitioner licensure and

	•		healthcare account administration and implementation of consumer-directed healthcare solutions.

EM services represent opportunity for growth and aligning them together under strong leadership will benefit these key investments.

Operating income is the measure used by our chief operating decision maker to assess the performance of each of our operating segments. The following table presents information about our reportable segments, including a reconciliation of operating income from continuing operations to income before income taxes from continuing operations for the respective years ended December 31. All related segment disclosures have been reclassified in the table below and throughout the financial statements, where appropriate, to reflect the new segment structure.


(in millions)	PBM		EM		Total

2008
Product revenue:
Network revenues	$	13,039.9	$	—	$	13,039.9
Home delivery and specialty revenues		7,225.7		—		7,225.7
Other revenues		54.9		1,361.2		1,416.1
Service revenues		250.4		45.9		296.3

Total revenues		20,570.9		1,407.1		21,978.0

Depreciation and amortization expense		85.9		11.8		97.7

Operating income		1,267.1		13.4		1,280.5
Non-operating charges, net						(2.0	)
Undistributed loss from joint venture						(0.3	)
Interest income						13.0
Interest expense						(77.6	)

Income before income taxes						1,213.6

Capital expenditures		83.7		2.1		85.8


(in millions)	PBM		EM		Total

2007
Product revenue:
Network revenues	$	13,023.3	$	—	$	13,023.3
Home delivery and specialty revenues		6,996.1		—		6,996.1
Other revenues		37.1		1,471.5		1,508.6
Service revenues		241.4		54.6		296.0

Total revenues		20,297.9		1,526.1		21,824.0

Depreciation and amortization expense		87.0		10.5		97.5

Operating income		1,059.6		1.2		1,060.8
Non-operating charges, net						(18.6	)
Undistributed loss from joint venture						(1.3	)
Interest income						12.2
Interest expense						(108.4	)

Income before income taxes						944.7
Capital expenditures		71.4		3.6		75.0

2006
Product revenue:
Network revenues	$	12,810.1	$	—	$	12,810.1
Home delivery revenues		6,938.0		—		6,938.0
Other revenues		59.7		1,459.2		1,518.9
Service revenues		239.8		55.8		295.6

Total revenues		20,047.6		1,515.0		21,562.6

Depreciation and amortization expense		89.5		10.3		99.8

Operating income		796.7		29.1		825.8
Undistributed loss from joint venture						(1.6	)
Interest income						13.7
Interest expense						(95.7	)

Income before income taxes						742.2

Capital expenditures		64.4		2.2		66.6

The following table presents balance sheet information about our reportable segments, including the discontinued operations of IP and CMP (“DISC OP”), as of December 31:


(in millions)	PBM		EM		DISC OP		Total

As of December 31, 2008
Total assets	$	5,011.9	$	497.3	$	—	$	5,509.2
Investment in equity method investees		4.0		—		—		4.0

As of December 31, 2007
Total assets		4,684.0		526.4		46.0		5,256.4
Investment in equity method investees		3.6		—		—		3.6

As of December 31, 2006
Total assets		4,516.0		533.2		58.9		5,108.1
Investment in equity method investees		2.9		—		—		2.9

PBM product revenue consists of revenues from the dispensing of prescription drugs from our home delivery pharmacies and revenues from the sale of prescription drugs by retail pharmacies in our retail pharmacy, and distribution of certain specialty drugs. EM product revenues consist of distribution of certain fertility drugs and revenues from specialty distribution activities. PBM service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, market research programs and informed decision counseling services, and specialty distribution services. EM service revenue includes revenues from sample distribution, accountability services, and healthcare care administration.

Revenues earned by our Canadian PBM totaled $44.5 million, $41.8 million and $37.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. All other revenues are earned in the United States. Long-lived assets of our Canadian PBM (consisting primarily of fixed assets) totaled $10.7 million, $23.4 million and $16.2 million as of December 31, 2008, 2007 and 2006, respectively. All other long-lived assets are domiciled in the United States.

15. Quarterly financial data (unaudited)

The following is a presentation of our unaudited quarterly financial data:


	Quarters
(in millions, except per share data)	First			Second			Third⁽¹⁾			Fourth⁽¹⁾

Fiscal 2008
Total revenues ⁽³⁾	$	5,490.8		$	5,530.8		$	5,450.5		$	5,505.9
Cost of revenues ⁽³⁾		5,024.7			5,028.2			4,930.1			4,954.1

Gross profit		466.1			502.6			520.4			551.8
Selling, general and administrative		171.5			185.9			189.7			213.3

Operating income		294.6			316.7			330.7			338.5

Net income from continuing operations		178.3			191.9			203.0			206.4
Net (loss) income from discontinued operations, net of tax		(1.1	)		(1.7	)		(1.1	)		0.4

Net income	$	177.2		$	190.2		$	201.9		$	206.8

Basic earnings per share⁽⁴⁾:
Continuing operations	$	0.71		$	0.77		$	0.82		$	0.83
Discontinued operations		—			(0.01	)		—			—
Net earnings		0.70			0.76			0.82			0.84

Diluted earnings per share⁽⁴⁾:
Continuing operations	$	0.70		$	0.76		$	0.81		$	0.83
Discontinued operations		—			(0.01	)		—			—
Net earnings		0.69			0.75			0.81			0.83


	Quarters
(in millions, except per share data)	First		Second			Third			Fourth⁽²⁾

Fiscal 2007
Total revenues ⁽³⁾	$	5,443.6	$	5,468.8		$	5,358.2		$	5,553.4
Cost of revenues ⁽³⁾		5,025.0		5,031.1			4,918.1			5,091.0

Gross profit		418.6		437.7			440.1			462.4
Selling, general and administrative		166.1		174.6			174.4			182.9

Operating income		252.5		263.1			265.7			279.5

Net income from continuing operations		133.0		154.7			146.7			166.1
Net (loss) income from discontinued operations, net of tax		0.7		(2.0	)		(3.8	)		(27.6	)

Net income	$	133.7	$	152.7		$	142.9		$	138.5

Basic earnings per share⁽⁴⁾:
Continuing operations	$	0.49	$	0.59		$	0.58		$	0.66
Discontinued operations		—		(0.01	)		(0.01	)		(0.11	)
Net earnings		0.49		0.58			0.56			0.55

Diluted earnings per share⁽⁴⁾:
Continuing operations	$	0.48	$	0.58		$	0.57		$	0.65
Discontinued operations		—		(0.01	)		(0.01	)		(0.11	)
Net earnings		0.49		0.57			0.56			0.54


(1)		Includes the July 22, 2008 acquisition of MSC.

(2)		Includes the October 10, 2007 acquisition of CYC.

(3)		Includes retail pharmacy co-payments of $887.7 and $935.6 for the three months ended March 31, 2008 and 2007, respectively, $824.1 and $894.0 for the three months ended June 30, 2008 and 2007, respectively, $733.7 and $864.4 for the three months ended September 30, 2008 and 2007, respectively, and $708.1 and $860.5 for the three months ended December 31, 2008 and 2007, respectively.

(4)		Earnings per share have been restated to reflect the two-for-one stock split effective June 22, 2007.

16. Condensed consolidating financial information

We are currently party to an agreement relating to the acquisition of the pharmacy benefit management business of WellPoint, Inc. for total consideration of $4.675 billion (see Note 17). We expect to file a shelf registration statement which includes potential guarantors for any senior unsecured debt securities we may issue to finance a portion of the acquisition consideration. The debt securities, if issued, will be jointly and severally and fully and unconditionally guaranteed by our 100% owned domestic subsidiaries, other than certain regulated subsidiaries including Express Scripts Insurance Company. The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information. Effective June 30, 2008, CuraScript Infusion Pharmacy, Inc. was sold and effective April 4, 2008, Custom Medical Products, Inc. (“CMP”) was sold and are included as discontinued operations in those of the non-guarantors. Subsequent to the acquisition of Pharmacy Services Division of MSC — Medical Services Company (“MSC”) on July 22, 2008 and Connect Your Care, LLC (“CYC”) on October 10, 2007, the assets, liabilities and operations of the 100% owned domestic subsidiaries have been included in those of the guarantors. The following presents the condensed consolidating financial information separately for:

	(i)		Express Scripts, Inc. (the Parent Company), which will be the issuer of the guaranteed obligations;

	(ii)		Guarantor subsidiaries, on a combined basis, as will be specified in the indentures related to Express Scripts’ obligations under the notes;

	(iii)		Non-guarantor subsidiaries, on a combined basis;

	(iv)		Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and

	(v)		Express Scripts, Inc. and subsidiaries on a consolidated basis.

Condensed Consolidating Balance Sheet


	Express					Non-
(in millions)	Scripts, Inc.			Guarantors		Guarantors			Eliminations			Consolidated

As of December 31, 2008
Cash and cash equivalents	$	488.1		$	8.9	$	33.7		$	—		$	530.7
Receivables, net		720.1			430.4		5.4			—			1,155.9
Other current assets		101.2			253.3		2.7			—			357.2

Total current assets	$	1,309.4		$	692.6	$	41.8		$	—		$	2,043.8

Property and equipment, net		164.1			53.6		4.5			—			222.2
Investments in subsidiaries		3,647.2			—		—			(3,647.2	)		—
Intercompany		(494.2	)		546.8		(52.6	)		—			—
Goodwill, net		252.5			2,607.3		21.3			—			2,881.1
Other intangible assets, net		26.6			301.9		4.1			—			332.6
Other assets		22.7			4.0		2.8			—			29.5

Total assets	$	4,928.3		$	4,206.2	$	21.9		$	(3,647.2	)	$	5,509.2


Claims and rebates payable	$	1,371.3		$	9.4	$	—		$	—		$	1,380.7
Accounts payable		445.6			47.9		2.9			—			496.4
Accrued expenses		204.6			213.8		2.1			—			420.5
Current maturities of long-term debt		420.0			—		—			—			420.0
Other current liabilities		—			—		4.1			—			4.1

Total current liabilities	$	2,441.5		$	271.1	$	9.1		$	—		$	2,721.7

Long-term debt		1,340.3			—		—			—			1,340.3
Other liabilities		68.3			300.7		—			—			369.0
Stockholders’ equity		1,078.2			3,634.4		12.8			(3,647.2	)		1,078.2

Total liabilities and stockholders’ equity	$	4,928.3		$	4,206.2	$	21.9		$	(3,647.2	)	$	5,509.2


As of December 31, 2007
Cash and cash equivalents	$	386.3		$	16.4	$	32.0		$	—		$	434.7
Receivables, net		764.8			413.6		6.2			—			1,184.6
Other current assets		99.2			207.9		41.4			—			348.5

Total current assets	$	1,250.3		$	637.9	$	79.6		$	—		$	1,967.8

Property and equipment, net		133.0			65.8		16.7			—			215.5
Investments in subsidiaries		3,390.1			—		—			(3,390.1	)		—
Intercompany		(595.9	)		691.9		(96.0	)		—			—
Goodwill, net		252.5			2,416.3		26.5			—			2,695.3
Other intangible assets, net		31.5			304.0		6.5			—			342.0
Other assets		27.9			2.3		—			—			30.2
Non-current assets of discontinued operations		—			—		5.6			—			5.6

Total assets	$	4,489.4		$	4,118.2	$	38.9		$	(3,390.1	)	$	5,256.4


Claims and rebates payable	$	1,258.9		$	—	$	—		$	—		$	1,258.9
Accounts payable		257.3			257.5		2.5			—			517.3
Accrued expenses		198.4			227.4		6.7			—			432.5
Current maturities of long-term debt		260.1			—		—			—			260.1
Other current liabilities		—			—		6.2			—			6.2

Total current liabilities	$	1,974.7		$	484.9	$	15.4		$	—		$	2,475.0

Long-term debt		1,760.3			—		—			—			1,760.3
Other liabilities		58.0			265.0		1.7			—			324.7
Stockholders’ equity		696.4			3,368.3		21.8			(3,390.1	)		696.4

Total liabilities and stockholders’ equity	$	4,489.4		$	4,118.2	$	38.9		$	(3,390.1	)	$	5,256.4

Condensed Consolidating Statement of Operations


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

Year ended December 31, 2008
Revenues	$	9,674.6		$	12,245.2		$	58.2		$	—		$	21,978.0
Operating expenses		8,865.9			11,768.3			63.3						20,697.5

Operating income (loss)		808.7			476.9			(5.1	)					1,280.5
Non-operating charges, net		(2.0	)		—			—						(2.0	)
Undistributed loss from joint venture		(0.3	)		—			—						(0.3	)
Interest (expense) income, net		(49.7	)		(13.1	)		(1.8	)					(64.6	)

Income before income taxes		756.7			463.8			(6.9	)					1,213.6
Provision for income taxes		275.4			160.0			(1.4	)					434.0

Net Income from continuing operations		481.3			303.8			(5.5	)		—			779.6
Net loss from discontinued operations, net of tax		—			—			(3.5	)					(3.5	)
Equity earnings of subsidiaries		294.8			—			—			(294.8	)		—

Net income	$	776.1		$	303.8		$	(9.0	)	$	(294.8	)	$	776.1


Year ended December 31, 2007
Revenues	$	9,382.6		$	12,390.5		$	50.9		$	—		$	21,824.0
Operating expenses		8,692.0			12,027.7			43.5						20,763.2

Operating income		690.6			362.8			7.4						1,060.8
Non-operating charges, net		(18.6	)		—			—						(18.6	)
Dividend income		4.5			(4.5	)		—						—
Undistributed loss from joint venture		(1.3	)		—			—						(1.3	)
Interest (expense) income, net		(78.8	)		(16.1	)		(1.3	)					(96.2	)

Income before income taxes		596.4			342.2			6.1						944.7
Provision for income taxes		249.4			92.8			2.0						344.2

Net Income from continuing operations		347.0			249.4			4.1			—			600.5
Net loss from discontinued operations, net of tax		—			—			(32.7	)					(32.7	)
Equity earnings of subsidiaries		220.8			—			—			(220.8	)		—

Net income	$	567.8		$	249.4		$	(28.6	)	$	(220.8	)	$	567.8


Year ended December 31, 2006
Revenues	$	8,725.8		$	12,799.8		$	37.0		$	—		$	21,562.6
Operating expenses		8,313.8			12,394.9			28.1						20,736.8

Operating income (loss)		412.0			404.9			8.9						825.8
Undistributed loss from joint venture		(1.6	)		—			—						(1.6	)
Interest (expense) income, net		(89.2	)		8.6			(1.4	)					(82.0	)

Income before income taxes		321.2			413.5			7.5						742.2
Provision for income taxes		117.3			146.7			2.8						266.8

Net Income from continuing operations		203.9			266.8			4.7			—			475.4
Net loss from discontinued operations, net of tax		—			—			(1.0	)					(1.0	)
Equity earnings of subsidiaries		270.5			—			—			(270.5	)		—

Net income	$	474.4		$	266.8		$	3.7		$	(270.5	)	$	474.4

Condensed Consolidating Statement of Cash Flows


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

Year ended December 31, 2008
Net cash (used) provided by operating activities	$	1,265.2		$	89.0		$	43.6		$	(294.8	)	$	1,103.0


Cash flows from investing activities:
Purchase of property and equipment		(66.8	)		(11.7	)		(7.3	)		—			(85.8	)
Proceeds from sale of business		27.7			—			—			—			27.7
Acquisitions and joint venture		(251.5	)		—			—			—			(251.5	)
Other		(11.0	)		—			—			—			(11.0	)

Net cash (used) provided in investing activities — continued operations		(301.6	)		(11.7	)		(7.3	)		—			(320.6	)
Net cash (used) provided in investing activities — discontinued operations		—			—			—			—			—
Net cash (used) provided in investing activities		(301.6	)		(11.7	)		(7.3	)		—			(320.6	)


Cash flows from financing activities:
Repayment of long-term debt		(260.0	)		—			—			—			(260.0	)
Treasury stock acquired		(494.4	)		—			—			—			(494.4	)
Tax benefit relating to employee stock compensation		42.1			—			—			—			42.1
Other		31.9			—			—			—			31.9
Net transactions with parent		(181.4	)		(84.8	)		(28.6	)		294.8			—

Net cash used in financing activities		(861.8	)		(84.8	)		(28.6	)		294.8			(680.4	)


Effect of foreign currency translation adjustment		—			—			(6.0	)		—			(6.0	)


Net increase (decrease) in cash and cash equivalents		101.8			(7.5	)		1.7			—			96.0
Cash and cash equivalents at beginning of year		386.3			16.4			32.0			—			434.7

Cash and cash equivalents at end of year	$	488.1		$	8.9		$	33.7		$	—		$	530.7

Condensed Consolidating Statement of Cash Flows


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

Year ended December 31, 2007
Net cash provided by operating activities	$	479.0		$	593.5		$	(24.4	)	$	(220.8	)	$	827.3


Cash flows from investing activities:
Purchase of property and equipment		(46.0	)		(26.8	)		(2.2	)		—			(75.0	)
Acquisitions and joint venture		(14.3	)		—			—			—			(14.3	)
Other		33.5			—			—			—			33.5

Net cash (used) in investing activities — continued operations		(26.8	)		(26.8	)		(2.2	)		—			(55.8	)
Net cash (used) in investing activities — discontinued operations		—			—			(2.5	)		—			(2.5	)
Net cash (used) in investing activities		(26.8	)		(26.8	)		(4.7	)		—			(58.3	)


Cash flows from financing activities:
Proceeds from long-term debt		800.0			—			—			—			800.0
Repayment of long-term debt		(180.1	)		—			—			—			(180.1	)
Repayment of revolving credit line, net		(50.0	)		—			—			—			(50.0	)
Treasury stock acquired		(1,140.3	)		—			—			—			(1,140.3	)
Tax benefit relating to employee stock compensation		49.4			—			—			—			49.4
Other		51.3			—			—			—			51.3
Net transactions with parent		302.1			(556.5	)		33.6			220.8			—

Net cash used in financing activities		(167.6	)		(556.5	)		33.6			220.8			(469.7	)


Effect of foreign currency translation adjustment		—			—			4.4			—			4.4


Net increase in cash and cash equivalents		284.6			10.2			8.9			—			303.7
Cash and cash equivalents at beginning of year		101.7			6.2			23.1			—			131.0

Cash and cash equivalents at end of year	$	386.3		$	16.4		$	32.0		$	—		$	434.7

Condensed Consolidating Statement of Cash Flows


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

Year ended December 31, 2006
Net cash (used) provided by operating activities	$	661.1		$	252.4		$	15.6		$	(270.5	)	$	658.6


Cash flows from investing activities:
Purchase of property and equipment		(40.2	)		(18.6	)		(7.8	)		—			(66.6	)
Acquisitions and joint venture		0.1			—			—			—			0.1
Other		(34.3	)		—			—			—			(34.3	)


Net cash (used) in investing activities — continued operations		(74.4	)		(18.6	)		(7.8	)		—			(100.8	)
Net cash (used) in investing activities — discontinued operations		—			—			(0.2	)		—			(0.2	)
Net cash (used) in investing activities		(74.4	)		(18.6	)		(8.0	)		—			(101.0	)


Cash flows from financing activities:
Repayment of long-term debt		(110.1	)		—			—			—			(110.1	)
Treasury stock acquired		(906.8	)		—			—			—			(906.8	)

Proceeds from revolving credit line, net		50.0			—			—			—			50.0
Tax benefit relating to employee stock compensation		30.4			—			—			—			30.4
Other		31.8			—			—			—			31.8
Net transactions with parent		25.2			(289.3	)		(6.4	)		270.5			—

Net cash used in financing activities		(879.5	)		(289.3	)		(6.4	)		270.5			(904.7	)


Effect of foreign currency translation adjustment		—			—			0.2			—			0.2


Net increase (decrease) in cash and cash equivalents		(292.8	)		(55.5	)		1.4			—			(346.9	)
Cash and cash equivalents at beginning of year		394.5			61.7			21.7			—			477.9

Cash and cash equivalents at end of year	$	101.7		$	6.2		$	23.1		$	—		$	131.0

17. Subsequent event (unaudited)

On April 9, 2009, we entered into a Stock and Interest Purchase Agreement (the “Acquisition Agreement”) with WellPoint, Inc., an Indiana corporation (“WellPoint”). The Acquisition Agreement provides that, upon the terms and subject to the conditions set forth in the Acquisition Agreement, we will purchase all of the shares and equity interests of three WellPoint subsidiaries, NextRx, Inc., NextRx Services, Inc., and NextRx, LLC, that provide pharmacy benefit management services, in exchange for total consideration of $4.675 billion composed of $3.275 billion in cash and $1.4 billion in shares of our common stock (valued based on average closing price over the 60 days preceding the closing of the acquisition). We may, in our discretion, replace all or any portion of the common stock consideration with cash. Additionally, the parties have agreed to make an election under Section 338(h)(10) of the Internal Revenue Code with respect to the transaction. We estimate the value of such election to us to be between $800 million and $1.2 billion dependent upon the discount factor and tax rate assumed. At the closing of the acquisition, we will enter into a 10-year contract with WellPoint under which we will provide pharmacy benefits management services to WellPoint and its designated affiliates. WellPoint’s NextRx subsidiaries provide PBM services to approximately 25 million Americans and manage more than 265 million adjusted prescriptions annually. We anticipate that the transaction will close in the second half of 2009. The transaction will be accounted for under the provisions of FAS 141R.

EXPRESS SCRIPTS, INC.
Schedule II — Valuation and Qualifying Accounts and Reserves of Continuing Operations
Years Ended December 31, 2008, 2007, and 2006


Col. A	Col. B		Col. C					Col. D		Col. E
(in millions)			Additions
	Balance at		Charges		Charges
	Beginning of		to Costs and		to Other					Balance at End
Description	Period		Expenses		Accounts			Deductions⁽³⁾		of Period

Allowance for Doubtful Accounts Receivable
Year Ended 12/31/06	$	51.7	$	13.5	$	10.0	⁽¹⁾	$	13.8	$	61.4
Year Ended 12/31/07	$	61.4	$	36.7	$	—		$	22.7	$	75.4
Year Ended 12/31/08	$	75.4	$	30.1	$	7.4	⁽²⁾	$	36.1	$	76.8

Valuation Allowance for Deferred Tax Assets

Year Ended 12/31/06	$	4.1	$	1.9	$	—		$	—	$	6.0
Year Ended 12/31/07	$	6.0	$	2.3	$	—		$	—	$	8.3
Year Ended 12/31/08	$	8.3	$	3.4	$	—		$	—	$	11.7


(1)		Represents the adjusting entries made to the opening balance sheet to increase Priority’s allowance for doubtful accounts receivable in 2006.

(2)		Represents the opening balance sheet for our July 22, 2008 acquisition of MSC.

(3)		Except as otherwise described, these deductions are primarily write-offs of receivable amounts, net of any recoveries.

EX-99.3 5 c51648exv99w3.htm EX-99.3: UPDATES TO THE COMPANY'S QUARTERLY REPORT EX-99.3

Exhibit 99.3

EXPLANATORY NOTE

The consolidated financial statements included in this Exhibit 99.3 reflect the inclusion of condensed consolidating financial information (see Note 10). Except as set forth in the immediately preceding sentence, there have been no changes to the financial information set forth in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPRESS SCRIPTS, INC.
Unaudited Consolidated Balance Sheet


	March 31,			December 31,
(in millions, except share data)	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	725.0		$	530.7
Restricted cash and investments		6.1			4.8
Receivables, net		1,200.8			1,155.9
Inventories		180.1			203.0
Deferred taxes		120.3			118.2
Prepaid expenses and other current assets		24.5			31.2

Total current assets		2,256.8			2,043.8
Property and equipment, net		219.6			222.2
Goodwill		2,880.9			2,881.1
Other intangible assets, net		323.0			332.6
Other assets		28.4			29.5

Total assets	$	5,708.7		$	5,509.2


Liabilities and Stockholders’ Equity
Current liabilities:
Claims and rebates payable	$	1,365.4		$	1,380.7
Accounts payable		490.9			496.4
Accrued expenses		489.9			420.5
Current maturities of long-term debt		520.1			420.0
Current liabilities of discontinued operations		4.9			4.1

Total current liabilities		2,871.2			2,721.7
Long-term debt		1,160.3			1,340.3
Other liabilities		377.2			369.0

Total liabilities		4,408.7			4,431.0


Stockholders’ Equity:
Preferred stock, 5,000,000 shares authorized, $0.01 par value per share; and no shares issued and outstanding		—			—
Common Stock, 1,000,000,000 authorized, $0.01 par value; shares issued: 318,923,000 and 318,958,000 respectively; shares outstanding: 247,829,000 and 247,649,000, respectively		3.2			3.2
Additional paid-in capital		645.7			640.8
Accumulated other comprehensive income		4.9			6.2
Retained earnings		3,575.4			3,361.0

		4,229.2			4,011.2
Common stock in treasury at cost, 71,094,000 and 71,309,000 shares, respectively		(2,929.2	)		(2,933.0	)

Total stockholders’ equity		1,300.0			1,078.2

Total liabilities and stockholders’ equity	$	5,708.7		$	5,509.2

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Operations


	Three Months Ended
	March 31,
(in millions, except per share data)	2009			2008
Revenues ¹	$	5,422.8		$	5,490.8
Cost of revenues ¹		4,888.7			5,024.7

Gross profit		534.1			466.1
Selling, general and administrative		178.6			171.5

Operating income		355.5			294.6

Other (expense) income:
Undistributed loss from joint venture		—			(0.2	)
Interest income		0.9			5.3
Interest expense		(17.1	)		(23.3	)

		(16.2	)		(18.2	)

Income before income taxes		339.3			276.4
Provision for income taxes		124.6			98.1

Net income from continuing operations		214.7			178.3
Net loss from discontinued operations, net of tax		(0.3	)		(1.1	)

Net income	$	214.4		$	177.2


Weighted average number of common shares outstanding during the period:
Basic:		247.6			252.3
Diluted:		249.3			255.7

Basic earnings per share:
Continuing operations	$	0.87		$	0.71
Discontinued operations		—			—
Net earnings		0.87			0.70

Diluted earnings per share:
Continuing operations	$	0.86		$	0.70
Discontinued operations		—			—
Net earnings		0.86			0.69


¹		Includes retail pharmacy co-payments of $822.7 million and $887.7 million for the three months ended March 31, 2009 and 2008, respectively.

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Changes in Stockholders’ Equity


	Number
	of Shares		Amount
							Accumulated
					Additional		Other
	Common		Common		Paid-in		Comprehensive			Retained		Treasury
(in millions)	Stock		Stock		Capital		Income			Earnings		Stock			Total

Balance at December 31, 2008		318.9	$	3.2	$	640.8	$	6.2		$	3,361.0	$	(2,933.0	)	$	1,078.2
Comprehensive income:
Net income		—		—		—		—			214.4		—			214.4
Other comprehensive (loss):
Foreign currency translation adjustment		—		—		—		(1.3	)		—		—			(1.3	)

Comprehensive (loss) income		—		—		—		(1.3	)		214.4		—			213.1
Treasury stock acquired		—		—		—		—			—		—			—
Changes in stockholders’ equity related to employee stock plans		—		—		4.9		—			—		3.8			8.7

Balance at March 31, 2009		318.9	$	3.2	$	645.7	$	4.9		$	3,575.4	$	(2,929.2	)	$	1,300.0

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.
Unaudited Consolidated Statement of Cash Flows


	Three Months Ended
	March 31,
(in millions)	2009			2008
Cash flows from operating activities:
Net income	$	214.4		$	177.2
Net loss from discontinued operations, net of tax		0.3			1.1

Net income from continuing operations		214.7			178.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24.6			24.5
Non-cash adjustments to net income		21.1			21.3
Changes in operating assets and liabilities:
Claims and rebates payable		(15.3	)		28.0
Other net changes in operating assets and liabilities		41.3			(3.8	)

Net cash provided by operating activities—continuing operations		286.4			248.3
Net cash (used) provided by operating activities—discontinued operations		(0.1	)		4.7

Net cash flows provided by operating activities		286.3			253.0


Cash flows from investing activities:
Purchases of property and equipment		(13.6	)		(11.7	)
Other		3.2			(0.4	)

Net cash used in investing activities—continuing operations		(10.4	)		(12.1	)


Cash flows from financing activities:
Repayment of long-term debt		(80.0	)		(60.0	)
Tax benefit relating to employee stock compensation		0.3			12.0
Treasury stock acquired		—			(121.1	)
Net (cash used) proceeds from employee stock plans		(1.4	)		6.7

Net cash used in financing activities		(81.1	)		(162.4	)


Effect of foreign currency translation adjustment		(0.5	)		(1.3	)

Net increase in cash and cash equivalents		194.3			77.2
Cash and cash equivalents at beginning of period		530.7			434.7

Cash and cash equivalents at end of period	$	725.0		$	511.9

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of significant accounting policies

Our significant accounting policies normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted from this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, we believe the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading when read in conjunction with the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 25, 2009. We changed our reportable segments to Pharmacy Benefit Management (“PBM”) and Emerging Markets (“EM”) during the first quarter of 2009 (see Note 8). For a full description of our accounting policies, refer to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

We believe the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Unaudited Consolidated Balance Sheet at March 31, 2009, the Unaudited Consolidated Statements of Operations for the three months ended

March 31, 2009 and 2008, the Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the
three months ended March 31, 2009, and the Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

New Accounting Guidance. In December 2007, the FASB issued FAS 141R, “Business Combinations” and FAS 160, “Business Combinations and Noncontrolling Interests” (“FAS 141R” and “FAS 160”, respectively). FAS 141R and FAS 160 are effective for fiscal years beginning after December 15, 2008. FAS 141R changes the definitions of a business and a business combination, and will result in more transactions recorded as business combinations. Certain acquired contingencies will be recorded initially at fair value on the acquisition date, transaction and restructuring costs generally will be expensed as incurred and in partial acquisitions, companies generally will record 100 percent of the assets and liabilities at fair value, including goodwill. In April 2009, the FASB issued Financial Staff Position (“FSP”) FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” which amends and clarifies the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This FSP is effective as of the start of the first quarter 2009. We will account for all future business combinations under the provisions of FAS 141R.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” which intends to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset. This FSP is effective for fiscal years beginning after December 15, 2008. These provisions will be applied to future intangible assets acquired.

Note 2 — Fair value measurements

In September 2006, the FASB issued FAS 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. This standard does not expand the use of fair value to any new circumstances. FAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On February 6, 2008 the FASB approved the FSP which deferred the effective date of FAS 157 until the first quarter 2009 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

In April 2009, the FASB issued three FSPs: (1) FSP FAS 157-4. “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions

That Are Not Orderly” which provides guidance on determining fair value when market activity has decreased, (2) FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” which addresses other-than-temporary impairments for debt securities; and (3) FSP FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” which discusses fair value disclosures for financial instruments in interim periods. The FSPs are effective for interim and annual periods ending after June 15, 2009. We do not believe the adoption of these FSPs will have a material impact on our financial statements.

We adopted FAS 157 as of January 1, 2008, and adopted the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities as of January 1, 2009. Our adoption of FAS 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.

Financial assets accounted for at fair value on a recurring basis at March 31, 2009 include cash equivalents of $621.1 million, restricted cash and investments of $6.1 million and trading securities of $12.2 million (included in other assets). These assets are carried at fair value based on quoted market prices for identical securities (Level 1 inputs).

As of March 31, 2009 short-term investments, included in prepaid expenses and other current assets in the unaudited consolidated balance sheet, were carried at fair value and consisted of our investment in the Reserve Primary Fund (the “Primary Fund”), which is a money market fund. The estimated fair value of our investment in the Primary Fund was $5.1 million as of March 31, 2009. The net asset value of the Primary Fund decreased below $1 per share as a result of the Primary Fund’s valuing at zero its holdings of debt securities by Lehman Brothers Holdings, Inc., which filed for bankruptcy on September 15, 2008. Accordingly, we recognized an unrealized loss of $2.0 million in the third quarter of 2008 and we reclassified the Primary Fund investment from cash and cash equivalents to prepaid expenses and other current assets in the unaudited consolidated balance sheet. We assessed the fair value of the underlying collateral for the Primary Fund through evaluation of the liquidation value of assets held by the Primary Fund, which is classified within Level 3 of the fair value hierarchy. There were no assets or liabilities classified as Level 3 prior to the third quarter of 2008.

We received cash distributions from the Primary Fund of $38.9 million during 2008, $3.3 million in the three months ended March 31, 2009 and $2.2 million subsequent to March 31, 2009. We expect to receive future distributions as the Primary Funds’s assets mature or are sold. If the markets for short-term securities remain illiquid, there may be further declines in the value of our remaining investments. To the extent we determine there is a further decline in fair value, we may recognize additional losses in future periods up to the aggregate amount of these investments of $5.1 million at March 31, 2009.

Note 3 — Discontinued operations

On June 30, 2008, we completed the sale of CuraScript Infusion Pharmacy, Inc. (“IP”), our infusion pharmacy line of business, for $27.5 million which includes an estimated pre-tax gain of approximately $7.4 million in 2008. Rights to certain working capital balances related to IP were not sold and are retained on the balance sheet as of March 31, 2009. For a period of time, we will continue to generate cash flows and income statement activity on assets and liabilities of discontinued operations as these working capital balances wind down, which are not expected to be material.

The results of operations for IP are reported as discontinued operations for all periods presented in the accompanying Unaudited Consolidated Statements of Operations. Additionally, for all periods presented, assets and liabilities of the discontinued operations are segregated in the accompanying Unaudited Consolidated Balance Sheets, and cash flows of our discontinued operations are segregated in our accompanying Unaudited Consolidated Statement of Cash Flows.

On April 4, 2008, we completed the sale of Custom Medical Products, Inc. (“CMP”) and recorded a pre-tax loss of approximately $1.3 million in the second quarter of 2008.

Certain information with respect to the discontinued operations for the three months ended March 31, 2009 and 2008 is summarized as follows:


	Three Months Ended
	March 31,
(in millions)	2009			2008

Revenues	$	—		$	25.8
Net loss from discontinued operations, net of tax		(0.3	)		(1.1	)
Income tax benefit from discontinued operations		0.2			0.4

Note 4 — Acquisition

On July 22, 2008, we completed the acquisition of the Pharmacy Services Division of MSC — Medical Services Company (“MSC”), a privately held PBM, for a purchase price of $251.0 million, which includes a purchase price adjustment for working capital and transaction costs. MSC is a leader in providing PBM services to clients providing workers’ compensation benefits. The transaction was accounted for under the provisions of FAS 141, “Business Combinations.” The purchase price was funded through internally generated cash and temporary borrowings under the revolving credit facility. This acquisition is reported as part of our PBM segment.

The purchase price has been preliminarily allocated based upon the estimated fair value of net assets acquired at the date of the acquisition. A portion of the excess of purchase price over tangible net assets acquired has been allocated to intangible assets, consisting of customer relationships in the amount of $28.9 million and internally developed software in the amount of $1.2 million, which are being amortized using a straight-line method over estimated useful lives of fifteen years and five years, respectively. The acquired customer relationships and internally developed software are included in other intangibles, net and property and equipment, net, respectively, in the consolidated balance sheet. In addition, the excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $208.5 million. The amounts preliminarily assigned to intangible assets and goodwill may be further adjusted pending finalization of the purchase price and asset valuation. Goodwill is not deductible for tax purposes.

Note 5 — Earnings per share

Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed in the same manner as basic earnings per share but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The following is the reconciliation between the number of weighted average shares used in the basic and diluted EPS calculations for all periods:


	Three Months Ended
	March 31,
(in millions)	2009		2008
Weighted average number of common shares outstanding during the period — Basic EPS		247.6		252.3
Dilutive common stock equivalents:
Outstanding stock options, “stock-settled” stock appreciation rights (“SSRs”), restricted stock units, and executive deferred compensation units⁽¹⁾		1.7		3.4

Weighted average number of common shares outstanding during the period — Diluted EPS		249.3		255.7


(1)		Excludes awards of 4.4 million and 0.3 million for the three months ended March 31, 2009 and 2008, respectively. These were excluded because their effect was anti-dilutive.

The above shares are all calculated under the “treasury stock” method in accordance with FAS 128, “Earnings per Share.”

Note 6 — Stock-based compensation plans

Under our stock-based compensation plans, we have issued stock options, SSRs, restricted stock awards, restricted stock units, and performance share awards. Awards are typically settled using treasury shares. The maximum contractual term of stock options and SSRs granted under the 2000 Long Term Incentive Plan (“LTIP”) is 10 years. Due to the nature of the awards, we use the same valuation methods and accounting treatments for SSRs and stock options. During the first three months of 2009, we granted 2,323,000 stock options with a weighted average fair market value of $14.59. The SSRs and stock options have three-year graded vesting.

During the first three months of 2009, we granted to certain officers and employees approximately 270,000 restricted stock units and performance shares with a weighted average fair market value of $45.74. The restricted stock units have three-year graded vesting and the performance shares cliff vest at the end of the three years. The number of performance shares that ultimately vest is dependent upon achieving specific performance targets. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The total number of non-vested restricted stock and performance share awards was 622,000 at March 31, 2009 and 518,000 at December 31, 2008.

We recognized stock-based compensation expense of $9.6 million and $9.0 million in the three months ended March 31, 2009 and 2008, respectively. Unamortized stock-based compensation as of March 31, 2009 was $42.4 million for stock options and SSRs and $20.4 million for restricted stock and performance shares.

The fair value of options and SSRs granted is estimated on the date of grant using a Black-Scholes multiple option-pricing model with the following weighted average assumptions:


	Three Months Ended March 31,
	2009			2008

Expected life of option	3-5 years			3-5 years
Risk-free interest rate		1.3%-1.9	%		1.9%-2.9	%
Expected volatility of stock		35-39	%		30	%
Expected dividend yield	None			None

Note 7 — Contingencies

We accrue self-insurance reserves based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage. Reserves are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience. The majority of these claims are legal claims and our liability estimate is primarily related to the cost to defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts are probable and estimable, in compliance with FAS 5, “Accounting for Contingencies.” Under FAS 5, if the range of possible loss is broad, the liability accrued should be based on the lower end of the range.

Note 8 — Segment information

During the first quarter of 2009, we changed our organizational structure with new strategic business segments: PBM and EM. Previously, we had reported segments of PBM and SAAS. Our chief operating decision maker assessed performance under this new structure during the first quarter of 2009. The Specialty Pharmacy operations, which were previously in our SAAS segment, have been operationally integrated with our PBM operations in order to maximize its growth and improve efficiency. Additionally, the following services which were previously in SAAS were operationally integrated into the PBM:

	•		bio-pharma services including reimbursement and customized logistics solutions and

	•		fulfillment of prescriptions to low-income patients through pharmaceutical manufacturer-sponsored and company-sponsored generic patient assistance programs.

The EM segment primarily consists of the following services:

	•		distribution of pharmaceuticals and medical supplies to providers and clinics,

	•		distribution of fertility pharmaceuticals requiring special handling or packaging,

	•		distribution of sample units to physicians and verification of practitioner licensure and

	•		healthcare account administration and implementation of consumer-directed healthcare solutions.

EM services represent opportunity for growth and aligning them together under strong leadership will benefit these key investments.

Operating income is the measure used by our chief operating decision maker to assess the performance of each of our operating segments. The following table presents information about our reportable segments for the three months ended March 31, 2009 and 2008. The 2008 segment disclosures have been reclassified in the table below to reflect the new segment structure. The discontinued operations described in Note 3 have been excluded from the table.


*(in millions)*	PBM		EM		Total

For the three months ended March 31, 2009
Product revenue:
Network revenues⁽¹⁾	$	3,250.6	$	—	$	3,250.6
Home delivery and specialty revenues		1,781.4		—		1,781.4
Other revenues		16.4		300.0		316.4
Service revenues		64.1		10.3		74.4

Total revenues		5,112.5		310.3		5,422.8
Depreciation and amortization expense		21.4		3.2		24.6
Operating income		351.7		3.8		355.5
Interest income						0.9
Interest expense						(17.1	)

Income before income taxes						339.3
Capital expenditures		13.4		0.2		13.6


*(in millions)*	PBM		EM		Total

For the three months ended March 31, 2008
Product revenue:
Network revenues⁽¹⁾	$	3,278.5	$	—	$	3,278.5
Home delivery and specialty revenues		1,776.6		—		1,776.6
Other revenues		11.1		350.7		361.8
Service revenues		62.5		11.4		73.9

Total revenues		5,128.7		362.1		5,490.8
Depreciation and amortization expense		21.6		2.9		24.5
Operating income (loss)		294.4		0.2		294.6
Non-operating gains, net						—
Undistributed loss from joint venture						(0.2	)
Interest income						5.3
Interest expense						(23.3	)

Income before income taxes						276.4
Capital expenditures		11.1		0.6		11.7


(1)		Includes retail pharmacy co-payments of $822.7 million and $887.7 million for the three months ended March 31, 2009 and 2008, respectively.

The following table presents balance sheet information about our reportable segments. The discontinued operations did not have any assets as of March 31, 2009 and December 31, 2008.


(in millions)	PBM		EM		Total

As of March 31, 2009
Total assets	$	5,212.8	$	495.9	$	5,708.7
Investment in equity method investees		4.1		0.0		4.1

As of December 31, 2008
Total assets	$	5,011.9	$	497.3	$	5,509.2
Investment in equity method investees		4.0		0.0		4.0

PBM product revenue consists of revenues from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks, revenues from the dispensing of prescription drugs from our home delivery pharmacies, and distribution of certain specialty drugs. EM product revenues consist of distribution of certain fertility drugs and revenues from drug distribution services.

PBM service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, market research programs, informed decision counseling services, and specialty distribution services. EM service revenue includes revenues from sample distribution, accountability services, and healthcare account administration.

Revenues earned by our Canadian PBM totaled $10.8 million and $12.0 million for the three months ended March 31, 2009 and 2008, respectively. All other revenues were earned in the United States. Long-lived assets of our Canadian PBM (consisting primarily of fixed assets) totaled $10.2 million and $10.7 million as of March 31, 2009 and December 31, 2008, respectively. All other long-lived assets are domiciled in the United States.

Note 9 — Subsequent event

Note 10 — Condensed consolidating financial information

We are currently party to an agreement relating to the acquisition of the pharmacy benefit management business of WellPoint, Inc. for total consideration of $4.675 billion (see Note 9). We expect to file a shelf registration statement which includes potential guarantors for any senior unsecured debt securities we may issue to finance a portion of the acquisition consideration. The debt securities, if issued, will be jointly and severally and fully and unconditionally guaranteed by our 100% owned domestic subsidiaries, other than certain regulated subsidiaries including Express Scripts Insurance Company. The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information. Effective June 30, 2008, CuraScript Infusion Pharmacy, Inc. was sold and effective April 4, 2008, Custom Medical Products, Inc. (“CMP”) was sold and are included as discontinued operations in those of the non-guarantors. Subsequent to the acquisition of Pharmacy Services Division of MSC — Medical Services Company (“MSC”) on July 22, 2008 and Connect Your Care, LLC (“CYC”) on October 10, 2007, the assets, liabilities and operations of the 100% owned domestic subsidiaries have been included in those of the guarantors. The following presents the condensed consolidating financial information separately for:

	(i)		Express Scripts, Inc. (the Parent Company), which will be the issuer of the guaranteed obligations;

	(ii)		Guarantor subsidiaries, on a combined basis, as will be specified in the indentures related to Express Scripts’ obligations under the notes;

	(iii)		Non-guarantor subsidiaries, on a combined basis;

	(iv)		Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and

	(v)		Express Scripts, Inc. and subsidiaries on a consolidated basis.

Condensed Consolidating Balance Sheet


	Express					Non-
(in millions)	Scripts, Inc.			Guarantors		Guarantors			Eliminations			Consolidated

As of March 31, 2009
Cash and cash equivalents	$	670.2		$	20.8	$	34.0		$	—		$	725.0
Receivables, net		766.1			427.7		7.0			—			1,200.8
Other current assets		91.3			236.8		2.9			—			331.0

Total current assets	$	1,527.6		$	685.3	$	43.9		$	—		$	2,256.8

Property and equipment, net		166.9			47.8		4.9			—			219.6
Investments in subsidiaries		3,698.1			—		—			(3,698.1	)		—
Intercompany		(598.5	)		651.2		(52.7	)		—			—
Goodwill, net		252.6			2,607.5		20.8			—			2,880.9
Other intangible assets, net		25.3			293.9		3.8			—			323.0
Other assets		22.0			3.0		3.4			—			28.4

Total assets	$	5,094.0		$	4,288.7	$	24.1		$	(3,698.1	)	$	5,708.7


Claims and rebates payable	$	1,356.1		$	9.3	$	—		$	—		$	1,365.4
Accounts payable		444.2			44.4		2.3			—			490.9
Accrued expenses		244.5			243.7		1.7			—			489.9
Current maturities of long-term debt		520.1			—		—			—			520.1
Other current liabilities		—			—		4.9			—			4.9

Total current liabilities	$	2,564.9		$	297.4	$	8.9		$	—		$	2,871.2

Long-term debt		1,160.3			—		—			—			1,160.3
Other liabilities		68.8			307.3		1.1			—			377.2
Stockholders’ equity		1,300.0			3,684.0		14.1			(3,698.1	)		1,300.0

Total liabilities and stockholders’ equity	$	5,094.0		$	4,288.7	$	24.1		$	(3,698.1	)	$	5,708.7


As of December 31, 2008
Cash and cash equivalents	$	488.1		$	8.9	$	33.7		$	—		$	530.7
Receivables, net		720.1			430.4		5.4			—			1,155.9
Other current assets		101.2			253.3		2.7			—			357.2

Total current assets	$	1,309.4		$	692.6	$	41.8		$	—		$	2,043.8

Property and equipment, net		164.1			53.6		4.5			—			222.2
Investments in subsidiaries		3,647.2			—		—			(3,647.2	)		—
Intercompany		(494.2	)		546.8		(52.6	)		—			—
Goodwill, net		252.5			2,607.3		21.3			—			2,881.1
Other intangible assets, net		26.6			301.9		4.1			—			332.6
Other assets		22.7			4.0		2.8			—			29.5

Total assets	$	4,928.3		$	4,206.2	$	21.9		$	(3,647.2	)	$	5,509.2


Claims and rebates payable	$	1,371.3		$	9.4	$	—		$	—		$	1,380.7
Accounts payable		445.6			47.9		2.9			—			496.4
Accrued expenses		204.6			213.8		2.1			—			420.5
Current maturities of long-term debt		420.0			—		—			—			420.0
Other current liabilities		—			—		4.1			—			4.1

Total current liabilities	$	2,441.5		$	271.1	$	9.1		$	—		$	2,721.7

Long-term debt		1,340.3			—		—			—			1,340.3
Other liabilities		68.3			300.7		—			—			369.0
Stockholders’ equity		1,078.2			3,634.4		12.8			(3,647.2	)		1,078.2

Total liabilities and stockholders’ equity	$	4,928.3		$	4,206.2	$	21.9		$	(3,647.2	)	$	5,509.2

Condensed Consolidating Statement of Operations


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

For the three months ended March 31, 2009
Revenues	$	3,169.5		$	2,236.2		$	17.1		$	—		$	5,422.8
Operating expenses		2,901.3			2,151.8			14.2						5,067.3

Operating income		268.2			84.4			2.9						355.5
Interest (expense) income, net		(13.5	)		(2.2	)		(0.5	)					(16.2	)

Income before income taxes		254.7			82.2			2.4						339.3
Provision for income taxes		92.4			31.3			0.9						124.6

Net Income from continuing operations		162.3			50.9			1.5			—			214.7
Net loss from discontinued operations, net of tax		—			—			(0.3	)					(0.3	)
Equity in earnings of subsidiaries		52.1			—			—			(52.1	)		—

Net income	$	214.4		$	50.9		$	1.2		$	(52.1	)	$	214.4


For the three months ended March 31, 2008
Revenues	$	2,359.4		$	3,116.0		$	15.4		$	—		$	5,490.8
Operating expenses		2,229.7			2,954.2			12.3						5,196.2

Operating income		129.7			161.8			3.1						294.6
Undistributed loss from joint venture		(0.2	)		—			—						(0.2	)
Interest (expense) income, net		(12.9	)		(4.8	)		(0.3	)					(18.0	)

Income before income taxes		116.6			157.0			2.8						276.4
Provision for income taxes		42.1			55.1			0.9						98.1

Net Income from continuing operations		74.5			101.9			1.9			—			178.3
Net loss from discontinued operations, net of tax		—			—			(1.1	)					(1.1	)
Equity earnings of subsidiaries		102.7			—			—			(102.7	)		—

Net income	$	177.2		$	101.9		$	0.8		$	(102.7	)	$	177.2

Condensed Consolidating Statement of Cash Flows


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

For the three months ended March 31, 2009
Net cash (used) provided by operating activities	$	220.9		$	116.9		$	0.6		$	(52.1	)	$	286.3


Cash flows from investing activities:
Purchase of property and equipment, net		(13.6	)		0.9			(0.9	)		—			(13.6	)
Other		3.2			—			—			—			3.2

Net cash (used) provided in investing activities — continued operations		(10.4	)		0.9			(0.9	)		—			(10.4	)
Net cash (used) provided in investing activities — discontinued operations		—			—			—			—			—
Net cash (used) provided in investing activities		(10.4	)		0.9			(0.9	)		—			(10.4	)


Cash flows from financing activities:
Repayment of long-term debt		(80.0	)		—			—			—			(80.0	)
Tax benefit relating to employee stock compensation		0.3			—			—			—			0.3
Other		(1.4	)		—			—			—			(1.4	)
Net transactions with parent		52.7			(105.9	)		1.1			52.1			—

Net cash used in financing activities		(28.4	)		(105.9	)		1.1			52.1			(81.1	)


Effect of foreign currency translation adjustment		—			—			(0.5	)		—			(0.5	)


Net increase in cash and cash equivalents		182.1			11.9			0.3			—			194.3
Cash and cash equivalents at beginning of year		488.1			8.9			33.7			—			530.7

Cash and cash equivalents at end of period	$	670.2		$	20.8		$	34.0		$	—		$	725.0

Condensed Consolidating Statement of Cash Flows


	Express						Non-
(in millions)	Scripts, Inc.			Guarantors			Guarantors			Eliminations			Consolidated

For the three months ended March 31, 2008
Net cash provided by operating activities	$	220.3		$	129.7		$	5.7		$	(102.7	)	$	253.0


Cash flows from investing activities:
Purchase of property and equipment		(8.3	)		(1.0	)		(2.4	)		—			(11.7	)
Other		(0.4	)		—			—			—			(0.4	)

Net cash (used) in investing activities — continued operations		(8.7	)		(1.0	)		(2.4	)		—			(12.1	)
Net cash (used) in investing activities — discontinued operations		—			—			—			—			—
Net cash used in investing activities		(8.7	)		(1.0	)		(2.4	)		—			(12.1	)


Cash flows from financing activities:
Repayment of long-term debt		(60.0	)		—			—			—			(60.0	)
Treasury stock acquired		(121.1	)		—			—			—			(121.1	)
Tax benefit relating to employee stock compensation		12.0			—			—			—			12.0
Other		6.7			—			—			—			6.7
Net transactions with parent		33.8			(135.6	)		(0.9	)		102.7			—

Net cash used in financing activities		(128.6	)		(135.6	)		(0.9	)		102.7			(162.4	)


Effect of foreign currency translation adjustment		—			—			(1.3	)		—			(1.3	)


Net increase (decrease) in cash and cash equivalents		83.0			(6.9	)		1.1			—			77.2
Cash and cash equivalents at beginning of year		386.3			16.4			32.0			—			434.7

Cash and cash equivalents at end of period	$	469.3		$	9.5		$	33.1		$	—		$	511.9

EX-99.4 6 c51648exv99w4.htm EX-99.4: AUDITED COMBINED FINANCIAL STATEMENTS EX-99.4

Exhibit 99.4

Combined Financial Statements

Pharmacy Benefit Management Business of WellPoint, Inc.
Years Ended December 31, 2008, 2007 and 2006
With Report of Independent Registered Public Accounting Firm

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Financial Statements

Years Ended December 31, 2008, 2007 and 2006

Contents


Report of Independent Registered Public Accounting Firm			1

Audited Combined Financial Statements Combined Balance Sheets			2

Combined Statements of Income			3
Combined Statements of Cash Flows			4
Combined Statements of Parent Company’s Net Investment			5
Notes to Combined Financial Statements			6


		Ernst & Young LLP 111 Monument Circle, Suite 2600 P.O. Box 44972 Indianapolis, Indiana 46204-2094 Tel: 317 681 7000 Fax: 317 681 7216 www.ey.com

Report of Independent Registered Public Accounting Firm

The Parent Company
Pharmacy Benefit Management Business of WellPoint, Inc.

We have audited the accompanying combined balance sheets of the Pharmacy Benefit Management Business of WellPoint, Inc. (the “Company”), as of December 31, 2008, 2007 and 2006, and the related combined statements of income, cash flows and parent company’s net investment for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Pharmacy Benefit Management Business of WellPoint, Inc. at December 31, 2008, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

May 5, 2009

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Balance Sheets

(In thousands)


	December 31
	2008		2007		2006
Assets
Current assets:
Cash and cash equivalents	$	6,807	$	186,243	$	17,085
Rebates receivable, net		705,905		596,932		559,703
Other receivables, net		84,999		73,977		70,354
Drug inventories		69,173		49,904		30,035
Receivable from related parties		460,571		210,029		334,648
Deferred tax assets, net		19,767		19,507		23,307
Prepaid expenses		1,990		1,949		1,868


Total current assets		1,349,212		1,138,541		1,037,000
Property and equipment, net		56,218		39,164		17,774
Goodwill		165,072		166,195		167,793
Other intangible assets		129,560		137,762		146,617
Other noncurrent assets		593		297		286


Total assets	$	1,700,655	$	1,481,959	$	1,369,470


Liabilities and parent company’s net investment
Liabilities
Current liabilities:
Rebates payable:
Rebates payable to related parties	$	559,908	$	499,428	$	446,394
Rebates payable to unrelated parties		81,548		65,667		71,332


Total rebates payable		641,456		565,095		517,726
Claims and drugs payable		113,863		72,802		70,657
Unearned income		6,894		5,559		2,123
Unearned discounts, current portion		1,380		1,200		1,200
Income taxes payable		115,272		69,704		37,748
Other current liabilities		124,326		155,493		166,374


Total current liabilities		1,003,191		869,853		795,828
Unearned discounts		937		1,777		2,977
Deferred tax liability, net		54,787		51,759		55,300
Other noncurrent liabilities		2,593		1,696		—


Total liabilities		1,061,508		925,085		854,105

Total parent company’s net investment		639,147		556,874		515,365


Total liabilities and parent company’s net investment	$	1,700,655	$	1,481,959	$	1,369,470

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Income

(In thousands)


	Years ended December 31
	2008		2007		2006
Revenues
Retail pharmacy revenue	$	14,405,784	$	12,859,892	$	12,130,743
Mail order revenue		2,610,503		2,309,166		2,035,709
Administrative fees		160,530		136,051		126,853


Total operating revenue		17,176,817		15,305,109		14,293,305
Net investment income		1,280		3,180		9,248


Total revenues		17,178,097		15,308,289		14,302,553

Expenses
Cost of drugs		16,408,091		14,660,554		13,742,880
General and administrative expense		409,640		343,988		296,815
Amortization of other intangible assets		8,202		8,855		9,311


Total expenses		16,825,933		15,013,397		14,049,006


Income before income tax expense		352,164		294,892		253,547
Income tax expense		124,891		103,383		91,924


Net income	$	227,273	$	191,509	$	161,623

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Cash Flows

(In thousands)


	Years ended December 31
	2008			2007			2006
Operating activities
Net income	$	227,273		$	191,509		$	161,623
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		6,515			5,466			4,343
Amortization		10,174			10,912			12,069
Deferred income taxes		2,768			259			(7,160	)
Changes in operating assets and liabilities:
Accounts receivable, net		(119,995	)		(40,852	)		(119,272	)
Drug inventories		(19,269	)		(19,869	)		(8,171	)
Due from affiliates		(249,419	)		126,217			(230,239	)
Prepaid expenses and other assets		(337	)		(92	)		(1,418	)
Rebates payable		76,361			47,369			108,353
Claims payable		41,061			2,145			19,884
Unearned income		1,335			3,436			944
Unearned discounts		(660	)		(1,200	)		(1,200	)
Income taxes payable		45,568			31,956			20,580
Other liabilities		(30,270	)		(9,185	)		11,298


Net cash (used in) provided by operating activities		(8,895	)		348,071			(28,366	)

Investing activities
Purchases of property and equipment		(25,541	)		(28,913	)		(5,894	)


Net cash used in investing activities		(25,541	)		(28,913	)		(5,894	)

Financing activities
Distributions to parent company		(145,000	)		(150,000	)		(65,000	)


Net cash used in financing activities		(145,000	)		(150,000	)		(65,000	)


Net change in cash and cash equivalents		(179,436	)		169,158			(99,260	)
Cash and cash equivalents at beginning of year		186,243			17,085			116,345


Cash and cash equivalents at end of year	$	6,807		$	186,243		$	17,085

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Parent Company’s Net Investment

(In thousands)


	Total Parent
	Company’s Net
	Investment
January 1, 2006	$	418,742
Net income		161,623
Distributions to parent company		(65,000	)


December 31, 2006		515,365
Net income		191,509
Distributions to parent company		(150,000	)


December 31, 2007		556,874
Net income		227,273
Distributions to parent company		(145,000	)


December 31, 2008	$	639,147

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008

(In thousands)

1. Basis of Presentation

The Pharmacy Benefit Management business, or PBM business, of WellPoint, Inc., or WellPoint, provides integrated PBM services to affiliated WellPoint health plans as well as to unaffiliated health insurers and third-party administrators. PBM services include retail pharmacy network development and management; retail network claims processing; mail order pharmacy services; formulary development and management; distribution of specialty drugs; and rebate negotiation and management.

References to the terms “we,” “us,” “our” or the “PBM business” used throughout these notes to financial statements refer to WellPoint’s combined PBM operations.

The accompanying combined financial statements are presented on a carve-out basis and reflect the assets, liabilities, revenues and expenses that were directly attributable to the PBM business, and include the accounts of the legal entities of NextRx, LLC, NextRx, Inc. and NextRx Services, Inc., each of which is ultimately wholly owned by WellPoint and is directly wholly owned by certain of WellPoint’s consolidated subsidiaries.

The combined financial statements are prepared in conformity with U.S. generally accepted accounting principles, or GAAP. Significant intercompany accounts and transactions within the PBM business have been eliminated. Transactions between the PBM business and WellPoint have been included in the combined financial statements. Parent Company’s Net Investment represents the interest of WellPoint in the net carrying value of the assets and liabilities of the PBM business and is presented in lieu of stockholder’s equity.

On April 9, 2009, WellPoint signed a definitive agreement to sell its PBM business to Express Scripts, Inc., or Express. The accompanying combined financial statements have been prepared as a requirement of that definitive agreement, and represent the financial condition, results of operations and cash flows of our PBM business. As the PBM business represents operations of subsidiaries of WellPoint, in accordance with normal operating policies of WellPoint, certain shared services and corporate costs have been allocated to the PBM business in these combined financial statements. Accordingly, the accompanying combined financial statements may not necessarily reflect the financial condition, results of operations and cash flows of the PBM business as if it had operated as a stand-alone entity. In addition, the combined financial statements may not necessarily be indicative of future results of the PBM business.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

1. Basis of Presentation (continued)

Whenever possible, the direct costs associated with the PBM business are reflected in the combined financial statements. In addition, as discussed in the preceding paragraph, certain costs are allocated to the PBM business by WellPoint. Such allocations include employee costs of shared service personnel, WellPoint management, lease costs, share-based compensation, enterprise wide information technology and eBusiness support, public relations and actuarial services. These costs approximate the actual cost of providing these services and are allocated based on pharmacy membership or employee headcount, and management of the PBM business believes the allocations are reasonable. See Note 7, Related-Party Transactions, for further discussion of allocated costs.

2. Significant Accounting Policies

Use of Estimates

The preparation of the combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates.

Concentrations of Business Risk

We have an agreement with a primary pharmaceutical wholesaler. Under this agreement, we purchase prescription drugs for our specialty drug and mail order businesses from this wholesaler, which represented approximately 91%, 94% and 97% of our total drug purchases in 2008, 2007 and 2006, respectively.

Revenue Recognition

Revenues are earned by dispensing mail order or specialty drug prescriptions, by processing claims for prescriptions filled by network retail pharmacies, and by providing services to drug manufacturers, including administration of rebate programs and establishment of formulary drug listings. All of these activities are based on contractual arrangements. We evaluate client contracts using guidance provided by Emerging Issues Task Force No. 99-19, Reporting Gross Revenue as a Principal vs. Net as an Agent, or EITF 99-19, to determine if we act as a principal or agent in our activities with network retail pharmacies. When we have a contractual obligation to health plans or their members to pay network retail pharmacies, we act as a principal and

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

report our revenue gross to reflect the cost of the prescription drugs (including member co-payments) as well as administrative fees. Indicators of a principal relationship include separate contractual relationships with members and pharmacies, responsibility to confirm member eligibility, manage a pharmacy claim through the dispensing process and accepting credit risk for amounts due from health plans or members. An amount corresponding with the gross revenue recognized is also reported in cost of drugs.

Retail Pharmacy Revenues

Revenues from processing claims for prescription drug orders filled by network retail pharmacies are recorded gross as retail pharmacy revenue. These revenues are recognized when the prescription is filled at the pharmacy and we have processed the corresponding payment to the pharmacy. Rebates associated with our retail pharmacy services that are retained by the PBM business are recognized as a reduction of cost of drugs.

Mail Order Revenues

Revenues from dispensing mail order and specialty drug prescriptions are recorded when we ship prescription drug orders. At the time of shipment, the earnings process is complete, the obligation of our customer to pay for the drug is fixed, and, due to the nature of the product, the member may not return the drugs or receive a refund. Rebates associated with our mail order pharmacy services that are retained by the PBM business are recognized as a reduction of cost of drugs.

Administrative Fees

We recognize administrative fees for services performed in processing a client’s pharmacy claims and for rebate retention and administration.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

Administrative fees from processing claims filled by network retail pharmacies for 2008, 2007 and 2006 were $155,244, $128,689 and $120,052, respectively. The administrative fee is earned for services rendered in the course of processing the claim, including confirming member eligibility, performing drug utilization and interaction review, performing clinical review and intervention, communicating plan provisions to the pharmacy, directing payment to the pharmacy, and billing affiliated and other health plans served. We recognize revenue and accounts receivable as claims are processed.

Administrative fees from rebate retention and administration were $5,286, $7,362 and $6,801 for 2008, 2007 and 2006, respectively. Revenues for administration of rebate programs are recorded as administrative fee revenue when prescription drug orders are dispensed and the corresponding claims are processed.

Rebates

Rebates earned and the associated receivable from drug manufacturers are estimated quarterly based on the number of prescriptions subject to rebates and the rebate per prescription. Estimated rebates and accounts receivable are adjusted to actual when the number of prescriptions subject to rebates and rebate per prescription has been determined and the billings to the drug manufacturers have been completed. Unbilled rebates are estimated and accrued at the end of each reporting period. Included in rebates receivable at December 31, 2008, 2007 and 2006, are unbilled receivables of $389,652, $319,964 and $290,078, respectively.

We record a portion of rebates earned as payable to the health plans served at the time unbilled rebates receivable are recorded. The amounts due to the health plans served are estimated based on agreed-upon sharing percentages and the estimate of rebates receivable (both billed and unbilled) from the drug manufacturers. These estimates are adjusted to actual when amounts are received from manufacturers.

Receivables

Receivables include rebates receivable and other receivables. Rebates receivable are uncollected amounts due from drug manufacturers for rebates and other administrative fees. Other receivables include amounts due from customers for mail order and specialty drug prescriptions filled and reimbursement of retail claims processed. The rebates and other receivables are recorded net of an allowance for uncollectible amounts of $48,170, $59,262 and $46,832 at

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

December 31, 2008, 2007 and 2006, respectively. The allowance for doubtful accounts is based on historical collection trends as well as management’s judgment regarding the ability to collect specific rebate accounts and the potential for rebate audit adjustments.

Intercompany Transactions

Intercompany transactions between the PBM business and WellPoint have been included in these combined financial statements, and the effect of future settlement of these intercompany transactions is reflected in the combined balance sheets as receivable from related parties.

Included in receivable from related parties at December 31, 2008, 2007 and 2006, are $239,935, $131,697 and $50,544, respectively, principally related to adjustments to revenues from affiliated health plans. These adjustments are reflected as intercompany transactions. WellPoint is required to settle this receivable in connection with provisions contained in the definitive agreement with Express.

The PBM business maintains certain cash accounts; however, the PBM business participates in WellPoint’s centralized cash management system, whereby, cash is moved between WellPoint and the PBM business to meet liquidity needs. WellPoint generally reflects payments to or from the PBM business as intercompany transactions and does not distinguish these payments as capital contributed or distributed. Similarly, since none of WellPoint’s debt at the corporate level is specifically used for the PBM business, none of WellPoint’s debt has been allocated to the PBM business’ combined balance sheets and WellPoint did not charge or allocate interest to the PBM business for the periods presented. See Note 7, Related-Party Transactions, for analysis of the intercompany transactions with related parties.

Cost of Drugs and Unearned Discounts

Cost of drugs includes the cost of pharmaceuticals dispensed through the mail order and specialty drug pharmacy, net of purchase discounts earned and the gross-up of prescriptions filled by network retail pharmacies, net of the associated rebates earned.

In June 2005, we executed a multi-year purchasing contract with our primary pharmaceutical wholesaler resulting in advance purchase discounts of $6,000. In connection with this contract, we received cash of $6,000 which represented advance purchase discounts. In addition, upon successful completion of the original agreement, we were to receive a discount of $1,500. In

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

April 2008, we executed an amended multi-year purchasing contract with the same primary pharmaceutical wholesaler. The amendment extended the term of the agreement to December 2011. Under the terms of the amended agreement, we received the agreement completion discount of $1,500, of which $825 had been earned as of the date of execution of the amended contract, while $675 was unearned. In the event that the contract is terminated by us, we would be obligated to refund a portion of the cash consideration based on the amount of time remaining on the contract. Accordingly, the advance payment of purchase discounts has been recorded as an unearned discount on the combined balance sheets and is recognized as a reduction of cost of drugs over the term of the contract. During 2008, 2007 and 2006, we amortized $1,335, $1,200 and $1,200 against cost of drugs related to the unearned discounts. The remaining unearned discount at December 31, 2008, is $1,777 and will be earned through July 2010. The remaining unearned discount on the amended contract at December 31, 2008, is $540 and will be earned through December 2011.

Cash Equivalents

Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value Measurements, or FAS 157. FAS 157 does not require any new fair value measurements; rather, it defines fair value, establishes a framework for measuring fair value in accordance with existing GAAP and expands disclosures about fair value measurements. We adopted FAS 157 on January 1, 2008. The adoption of FAS 157 did not have an impact on our financial position or operating results. Assets and liabilities recorded at fair value in the combined balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The only balance subject to FAS 157 in our combined balance sheets is cash equivalents. Money market funds that are classified as cash equivalents in our combined balance sheets are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we consider all cash equivalents as Level I inputs.

Drug Inventories

Drug inventories consist of purchased pharmaceuticals and medical supplies for use in our specialty drug and mail order business that are stated at the lower of cost (using first-in, first-out method) or market.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

Goodwill and Other Intangible Assets

We follow guidance provided by FAS No. 141, Business Combinations, or FAS 141, and FAS 142, Goodwill and Other Intangible Assets, or FAS 142. FAS 141 requires business combinations to be accounted for using the purchase method of accounting and it also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Goodwill represents the excess of the cost of acquisition over the fair value of net assets acquired. Other intangible assets represent the values assigned to subscriber bases and trademarks. Values for goodwill and other intangible assets were determined based on the relative fair value of the components of the businesses acquired.

Under FAS 142, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment at least annually. Our impairment tests require us to make assumptions and judgments regarding the estimated fair value of the underlying business, including goodwill and other intangible assets with indefinite lives.

Property and Equipment

Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives ranging from 15 to 39 years for buildings and improvements, three to seven years for furniture and equipment and three to five years for computer software.

Claims and Drugs Payable

Claims and drugs payable include amounts due to network retail pharmacies for filling prescription drug orders and are recorded as liabilities when claims are processed.

Other Liabilities

Other liabilities include $84,169, $133,032 and $127,085 at December 31, 2008, 2007 and 2006 for outstanding checks not yet presented to our bank.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

2. Significant Accounting Policies (continued)

Income Taxes

We are included in WellPoint’s consolidated federal income tax return. Pursuant to a tax-sharing agreement, or the Agreement, with WellPoint, we pay taxes to WellPoint as though we filed a separate income tax return. Also, pursuant to the Agreement, WellPoint reimburses us for tax benefits in the period in which it is able to utilize such tax benefits on its consolidated income tax return. Accordingly, amounts shown in the combined balance sheets for income taxes payable represent amounts that are payable to WellPoint.

We account for income taxes under the liability method. Under this method, deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities based on enacted tax rates.

In July 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), was issued. Among other things, FIN 48 creates a model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold, which all income tax positions must achieve before being recognized in the financial statements. In addition, FIN 48 requires expanded annual disclosures, including a rollforward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. FIN 48 was effective for us on January 1, 2007. The adoption of FIN 48 did not have an impact on our financial position or operating results.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

3. Goodwill and Other Intangible Assets

A summary of the change in the carrying amount of goodwill for 2008, 2007 and 2006 is as follows:


	Total
Balance as of January 1, 2006	$	167,793
Purchase price allocation adjustments		–


Balance as of December 31, 2006		167,793
Purchase price allocation adjustments		(1,598	)


Balance as of December 31, 2007		166,195
Purchase price allocation adjustments		(1,123	)


Balance as of December 31, 2008	$	165,072

For a period of time after the consummation of a merger or acquisition, the initial fair values allocated to net assets acquired may be subject to change as these fair value estimates are refined. Changes in these fair value estimates are recorded as adjustments to goodwill. In accordance with FAS 141, subsequent to the purchase allocation period, additional changes to fair value of net assets acquired are recorded in current operations, except for certain adjustments related to income taxes, employee termination and other exit activities, which continue to be adjusted to goodwill.

Goodwill adjustments for 2008 and 2007 included reductions of $1,123 and $1,195, respectively, for tax refunds and audit adjustments related to prior years. Goodwill adjustments in 2007 include $377 for the tax benefit on the exercise of stock options issued as part of prior acquisitions and $26 for other audit adjustments.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

3. Goodwill and Other Intangible Assets (continued)

The components of other intangible assets as of December 31 are as follows:


	2008
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
Intangible assets with finite lives:
Subscriber base	$	103,794	$	(37,234	)	$	66,560

Intangible assets with indefinite life:
Trademarks		63,000		–			63,000


Other intangible assets	$	166,794	$	(37,234	)	$	129,560


	2007
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
Intangible assets with finite lives:
Subscriber base	$	103,794	$	(29,032	)	$	74,762

Intangible assets with indefinite life:
Trademarks		63,000		–			63,000


Other intangible assets	$	166,794	$	(29,032	)	$	137,762


	2006
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Amount
Intangible assets with finite lives:
Subscriber base	$	103,794	$	(20,177	)	$	83,617

Intangible assets with indefinite life:
Trademarks		63,000		–			63,000


Other intangible assets	$	166,794	$	(20,177	)	$	146,617

Amortization expense for identifiable intangible assets during 2008, 2007 and 2006 was $8,202, $8,855 and $9,311, respectively.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

3. Goodwill and Other Intangible Assets (continued)

As required by FAS 142, we completed our annual impairment tests of existing goodwill and other intangible assets with indefinite lives during the fourth quarters of 2008, 2007 and 2006. These tests involved the use of estimates related to the fair value of the PBM business and require a significant degree of management judgment and the use of subjective assumptions. No impairments were recognized during 2008, 2007 or 2006 as a result of our annual impairment tests.

As of December 31, 2008, future amortization expense for our intangible assets with finite lives for each of the five years ending December 31 is estimated as follows: 2009, $7,866; 2010, $7,372; 2011, $6,878; 2012, $6,384; and 2013, $5,890.

4. Property and Equipment

A summary of property and equipment at December 31 is as follows:


	2008			2007			2006
Land and improvements	$	970		$	970		$	970
Building and components		7,594			7,585			7,456
Data processing equipment, furniture and other equipment		51,816			35,444			23,370
Computer software, purchased and internally developed		28,954			20,055			14,086
Leasehold improvements		12,589			11,971			1,123


		101,923			76,025			47,005
Accumulated depreciation and amortization		(45,705	)		(36,861	)		(29,231	)


Property and equipment, net	$	56,218		$	39,164		$	17,774

Depreciation expense for 2008, 2007 and 2006 was $6,515, $5,466 and $4,343, respectively. Amortization expense on computer software, both purchased and internally developed, for 2008, 2007 and 2006 was $1,972, $2,057 and $2,758. Capitalized costs related to the internal development of software of $16,559, $8,495 and $3,596 at December 31, 2008, 2007 and 2006, respectively, are reported with computer software.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

5. Operating Leases

We lease office space using noncancelable operating leases. At December 31, 2008, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:


2009	$	4,248
2010		4,980
2011		4,341
2012		3,817
2013		3,256
Thereafter		11,410


Total minimum payments required	$	32,052

Lease expense for 2008, 2007 and 2006 was $3,073, $2,757 and $226, respectively.

6. Income Taxes

The components of deferred income taxes at December 31 are as follows:


	2008			2007			2006
Deferred tax assets relating to:
Accrued expenses	$	4,028		$	2,218		$	8,058
Bad debt reserves		16,985			17,200			17,586
State income tax		3,213			3,774			3,255
Other		667			484			92


Total deferred tax assets		24,893			23,676			28,991
Valuation allowance		—			—			—


Total deferred tax assets, net of valuation allowance		24,893			23,676			28,991

Deferred tax liabilities relating to:
Depreciation and amortization		(664	)		(1,603	)		(1,327	)
Trademarks and software development		(58,733	)		(53,209	)		(58,208	)
Other		(516	)		(1,116	)		(1,449	)


Total deferred tax liabilities		(59,913	)		(55,928	)		(60,984	)


Net deferred tax liability	$	(35,020	)	$	(32,252	)	$	(31,993	)


Deferred tax asset – current	$	19,767		$	19,507		$	23,307
Deferred tax liability – noncurrent		(54,787	)		(51,759	)		(55,300	)


Net deferred tax liability	$	(35,020	)	$	(32,252	)	$	(31,993	)

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

6. Income Taxes (continued)

Components of the provision for income taxes for the years ended December 31 consist of the following:


	2008		2007		2006
Current tax expense:
Federal	$	121,793	$	100,883	$	96,455
State and local		406		2,317		4,473


Total current tax expense		122,199		103,200		100,928
Deferred tax expense (benefit)		2,692		183		(9,004	)


Total income tax expense	$	124,891	$	103,383	$	91,924

A reconciliation of income tax expense recorded in the combined statements of income and amounts computed at the statutory federal income tax rate for the years ended December 31 is as follows:


	2008					2007						2006
	Amount		Percent			Amount			Percent			Amount		Percent
Amount at statutory rate	$	123,257		35.0	%	$	103,212			35.0	%	$	88,742		35.0	%
State and local income taxes, net of federal tax benefit		891		0.3			882			0.3			2,907		1.2
Other, net		743		0.2			(711	)		(0.2	)		275		0.1


Total income tax expense	$	124,891		35.5	%	$	103,383			35.1	%	$	91,924		36.3	%

We paid cash totaling $76,395, $69,454 and $81,359 to WellPoint for federal income taxes during the years ended December 31, 2008, 2007 and 2006, respectively. At December 31, 2008, we had no unused federal tax net operating loss carryforwards.

7. Related-Party Transactions

We provide integrated PBM services to affiliated companies. We recorded revenues for PBM services provided to affiliates of $14,807,248, $13,408,972 and $12,351,408 in 2008, 2007 and 2006, respectively. This includes co-payment revenue associated with retail pharmacy revenues of $2,899,967, $2,937,585 and $2,846,510 in 2008, 2007 and 2006, respectively.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

7. Related-Party Transactions (continued)

We reimburse affiliated companies for certain administrative services provided to us as described in Note 1. Administrative expenses charged by affiliated companies were $75,356, $48,041 and $44,031 in 2008, 2007 and 2006, respectively, which is included in general and administrative expense in the combined statements of income.

PBM business associates participate in WellPoint sponsored defined benefit pension plans and postretirement benefit plans. We account for certain costs related to the defined benefit pension and post retirement benefit plans as a participant in a multi-employer plan in accordance with FAS No. 87, Employers’ Accounting for Pensions and FAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. Total costs for these plans are determined by actuarial valuation and the PBM business is allocated costs for these plans from WellPoint.

PBM business associates also participate in WellPoint sponsored defined contribution pension plans and related costs are allocated to the PBM business based on headcount.

We were allocated costs related to these employee benefits of $6,184, $6,767 and $6,482 in 2008, 2007 and 2006, respectively, which are recorded in general and administrative expenses in our combined statements of income. The PBM business will not assume any portion of the defined benefit pension or postretirement benefit plan obligations or plan assets nor will any of the WellPoint benefit plans the PBM business participates in transfer to the PBM business upon its sale.

We participate in the WellPoint Management and Key Associate Stock Plan, which provides WellPoint restricted stock and stock options to select key associates as a reward for performance and contribution. In addition, certain PBM business associates participate in WellPoint’s Employee Stock Purchase Plan, which allows for the purchase of WellPoint common stock at a discount. WellPoint accounts for all share-based compensation plans in accordance with FAS No. 123 (revised December 2004), Share-Based Payment. In 2008, 2007 and 2006, we received share-based compensation expense of $5,282, $11,588 and $11,404, respectively, via an allocation from WellPoint.

We paid distributions of $145,000, $150,000 and $65,000 to WellPoint and/or certain of its consolidated subsidiaries during the years ended December 31, 2008, 2007 and 2006, respectively.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements

December 31, 2008
(In thousands)

8. Commitments and Contingencies

We are involved in pending and threatened litigation of the character incidental to the business transacted and are, from time to time, involved as a party in various governmental and administrative proceedings. We believe that any liability that may result from any one of these actions is unlikely to have a material adverse effect on our financial position or results of operations.

EX-99.5 7 c51648exv99w5.htm EX-99.5: UNAUDITED COMBINED FINANCIAL STATEMENTS EX-99.5

Exhibit 99.5

C o m b i n e d F i n a n c i a l
S t a t e m e n t s ( U n a u d i t e d )

Pharmacy Benefit Management Business of WellPoint, Inc.
Three Months Ended March 31, 2009 and 2008

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Financial Statements

Three Months Ended March 31, 2009 and 2008
(Unaudited)

Contents


Unaudited Combined Financial Statements

Unaudited Combined Balance Sheets			1
Unaudited Combined Statements of Income			2
Unaudited Combined Statements of Cash Flows			3
Unaudited Combined Statements of Parent Company’s Net Investment			4
Notes to Unaudited Combined Financial Statements			5

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Balance Sheets
(Unaudited)

(In Thousands)


	March 31
	2009		2008

Assets
Current assets:
Cash and cash equivalents	$	6,659	$	14,602
Rebates receivable, net		749,597		674,356
Other receivables, net		78,720		101,988
Drug inventories		61,057		52,374
Receivable from related parties		519,117		300,201
Deferred tax assets, net		20,077		14,446
Prepaid expenses		2,189		1,605


Total current assets		1,437,416		1,159,572
Property and equipment, net		59,054		44,553
Goodwill		165,072		166,195
Other intangible assets		127,583		135,662
Other noncurrent assets		567		303


Total assets	$	1,789,692	$	1,506,285


Liabilities and parent company’s net investment
Liabilities
Current liabilities:
Rebates payable:
Rebates payable to related parties	$	630,103	$	530,556
Rebates payable to unrelated parties		87,895		68,911


Total rebates payable		717,998		599,467
Claims and drugs payable		90,910		65,243
Unearned income		10,796		5,899
Unearned discounts, current portion		1,380		1,365
Income taxes payable		149,341		88,669
Other current liabilities		56,680		76,467


Total current liabilities		1,027,105		837,110
Unearned discounts		592		1,312
Deferred tax liability, net		53,517		52,309
Other noncurrent liabilities		2,905		2,005


Total liabilities		1,084,119		892,736

Total parent company’s net investment		705,573		613,549


Total liabilities and parent company’s net investment	$	1,789,692	$	1,506,285

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Income
(Unaudited)

(In Thousands)


	Three Months Ended March 31
	2009		2008

Revenues
Retail pharmacy revenue	$	3,571,671	$	3,629,425
Mail order revenue		705,863		627,082
Administrative fees		39,805		37,582


Total operating revenue		4,317,339		4,294,089
Other revenue		96		599


Total revenues		4,317,435		4,294,688

Expenses
Cost of drugs		4,107,176		4,109,286
General and administrative expense		108,706		94,413
Amortization of other intangible assets		1,977		2,100


Total expenses		4,217,859		4,205,799


Income before income tax expense		99,576		88,889
Income tax expense		33,150		32,214


Net income	$	66,426	$	56,675

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Cash Flows
(Unaudited)

(In Thousands)


	Three Months Ended March 31
	2009			2008

Operating activities
Net income	$	66,426		$	56,675
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		1,774			1,528
Amortization		2,993			2,531
Deferred income taxes		(1,580	)		5,611
Changes in operating assets and liabilities:
Accounts receivable, net		(37,413	)		(105,435	)
Drug inventories		8,116			(2,470	)
Receivable from related parties		(58,546	)		(90,172	)
Prepaid expenses and other assets		(173	)		338
Rebates payable		76,542			34,372
Claims and drugs payable		(22,953	)		(7,559	)
Unearned income		3,902			340
Unearned discounts		(345	)		(300	)
Income taxes payable		34,069			18,965
Other liabilities		(67,334	)		(78,717	)


Net cash provided by (used in) operating activities		5,478			(164,293	)

Investing activities
Purchases of property and equipment		(5,626	)		(7,348	)


Net cash used in investing activities		(5,626	)		(7,348	)


Net change in cash and cash equivalents		(148	)		(171,641	)
Cash and cash equivalents at beginning of period		6,807			186,243


Cash and cash equivalents at March 31	$	6,659		$	14,602

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Combined Statements of Parent Company’s Net Investment
(Unaudited)

(In Thousands)


	Total Parent
	Company’s Net
	Investment
January 1, 2008	$	556,874
Net income		56,675


March 31, 2008	$	613,549


January 1, 2009	$	639,147
Net income		66,426


March 31, 2009	$	705,573

See accompanying notes.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements
(Unaudited)

March 31, 2009
(In Thousands)

1. Basis of Presentation

References to the terms “we,” “us,” “our” or the “PBM business” used throughout these notes to unaudited combined financial statements refer to WellPoint’s combined PBM operations.

The accompanying unaudited combined financial statements are presented on a carve-out basis and reflect the assets, liabilities, revenues and expenses that were directly attributable to the PBM business, and include the accounts of the legal entities of NextRx, LLC, NextRx, Inc. and NextRx Services, Inc., each of which is ultimately wholly owned by WellPoint and is directly wholly owned by certain of WellPoint’s consolidated subsidiaries.

The unaudited combined financial statements are prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair statement of the unaudited combined financial statements as of and for the three months ended March 31, 2009 and 2008 have been recorded. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. These unaudited combined financial statements should be read in conjunction with our audited combined financial statements for the year ended December 31, 2008. Significant intercompany accounts and transactions within the PBM business have been eliminated. Transactions between the PBM business and WellPoint have been included in the unaudited combined financial statements. Parent Company’s Net Investment represents the interest of WellPoint in the net carrying value of the assets and liabilities of the PBM business and is presented in lieu of stockholder’s equity.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements (continued)
(Unaudited)

1. Basis of Presentation (continued)

On April 9, 2009, WellPoint signed a definitive agreement to sell its PBM business to Express Scripts, Inc., or Express. The accompanying unaudited combined financial statements have been prepared as a requirement of that definitive agreement, and represent the financial condition, results of operations and cash flows of our PBM business as of and for the three months ended March 31, 2009 and 2008. As the PBM business represents operations of subsidiaries of WellPoint, in accordance with normal operating policies of WellPoint, certain shared services and corporate costs have been allocated to the PBM business in these unaudited combined financial statements. Accordingly, the accompanying unaudited combined financial statements may not necessarily reflect the financial condition, results of operations and cash flows of the PBM business as if it had operated as a stand-alone entity. In addition, the unaudited combined financial statements may not necessarily be indicative of future results of the PBM business.

Whenever possible, the direct costs associated with the PBM business are reflected in the unaudited combined financial statements. In addition, as discussed in the preceding paragraph, certain costs are allocated to the PBM business by WellPoint. Such allocations include employee costs of shared service personnel, WellPoint management, lease costs, share-based compensation, enterprise-wide information technology and eBusiness support, public relations and actuarial services. These costs approximate the actual cost of providing these services and are allocated based on pharmacy membership or employee headcount, and management of the PBM business believes the allocations are reasonable. See Note 5, Related-Party Transactions, for further discussion of allocated costs.

2. Income Taxes

During the three months ended March 31, 2009 and 2008, we recognized income tax expense of $33,150 and $32,214, respectively, which represents effective tax rates of 33.3% and 36.2%, respectively. The 290 basis point decrease in the effective tax rate in 2009 was primarily due to a third-party court decision which entitled us to a state tax refund, which we received in the first quarter of 2009.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements (continued)
(Unaudited)

3. Fair Value

Assets and liabilities recorded at fair value in the unaudited combined balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The only balance subject to Statement of Financial Accounting Standards No. 157, Fair Value Measurements, in our unaudited combined balance sheets is cash equivalents. Money market funds that are classified as cash equivalents in our unaudited combined balance sheets are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, we consider all cash equivalents as Level I inputs.

4. Other Current Liabilities

Other current liabilities include $27,623, and $52,719 at March 31, 2009 and 2008, respectively, for outstanding checks not yet presented to our bank.

5. Related-Party Transactions

We have agreements with affiliated WellPoint health plans to provide PBM products and services to the health plans’ members. The financial provisions in these agreements vary and range from reimbursements at cost to reimbursements at cost plus a profit margin. For purposes of these unaudited combined financial statements, revenues from affiliated health plans are based on internal rates that, in management’s judgment, reflect a reasonable and consistent profit margin and which have been used historically by WellPoint in its internal management and segment reporting of the PBM business. This approach increased income before income tax expense by $46,807 and $35,644 for the three months ended March 31, 2009 and 2008, respectively. These adjustments are reflected as intercompany transactions. The cumulative impact of these and other carve-out adjustments in the amount of $352,389 and $143,861 at March 31, 2009 and 2008, respectively, are recognized in receivable from related parties. WellPoint is required to settle this receivable in connection with provisions contained in the definitive agreement with Express.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements (continued)
(Unaudited)

5. Related-Party Transactions (continued)

We provide integrated PBM services to affiliated companies. We recorded revenues for PBM services provided to affiliates of $3,767,143 and $3,719,646 in the three months ended March 31, 2009 and 2008, respectively. This includes co-payment revenue associated with retail pharmacy revenues of $782,046 and $795,614 in the three months ended March 31, 2009 and 2008, respectively.

We reimburse affiliated companies for certain administrative services provided to us. Administrative expenses charged by affiliated companies were $18,113 and $18,937 in the three months ended March 31, 2009 and 2008, respectively, which are included in general and administrative expense in the unaudited combined statements of income.

PBM business associates participate in WellPoint sponsored defined benefit pension plans and postretirement benefit plans. PBM business associates also participate in WellPoint sponsored defined contribution pension plans and related costs are allocated to the PBM business based on headcount. We were allocated costs related to these employee benefits of $1,539 and $1,516 in the three months ended March 31, 2009 and 2008, respectively, which are recorded in general and administrative expenses in our unaudited combined statements of income.

The PBM business will not assume any portion of the defined benefit pension or postretirement benefit plan obligations or plan assets nor will any of the WellPoint benefit plans, which the PBM business participates in, transfer to the PBM business upon its sale.

We participate in the WellPoint Management and Key Associate Stock Plan, which provides WellPoint restricted stock and stock options to select key associates as a reward for performance and contribution. In addition, certain PBM business associates participate in WellPoint’s Employee Stock Purchase Plan, which allows for the purchase of WellPoint common stock at a discount. WellPoint accounts for all share-based compensation plans in accordance with FAS No. 123 (revised December 2004), Share-Based Payment. During the three months ended March 31, 2009 and 2008, we recorded share-based compensation expense of $812 and $1,002, respectively, via an allocation from WellPoint.

We did not pay any distributions to WellPoint and/or certain of its consolidated subsidiaries during the three months ended March 31, 2009 and 2008, respectively.

Pharmacy Benefit Management Business of WellPoint, Inc.

Notes to Combined Financial Statements (continued)
(Unaudited)

6. Commitments and Contingencies

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