UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number: 0-31014
CATALYST HEALTH SOLUTIONS, INC.
(Exact name of registrant as specified in its
charter)
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Delaware
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52-2181356
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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800 King Farm Boulevard, Rockville, Maryland 20850
(Address of principal executive offices, zip code)
(301) 548-2900
(Registrant’s phone number, including area code)
HealthExtras, Inc.
(Former name,
former address and former fiscal year, if changed since last report)
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
(See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
As of October 31, 2008 there were 43,531,243 shares outstanding of the Registrant’s $0.01 par value common stock.
CATALYST HEALTH SOLUTIONS, INC.
and Subsidiaries
Third Quarter 2008 Form 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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ITEM 1.
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Financial Statements
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CATALYST HEALTH SOLUTIONS, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
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September 30,
2008
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December 31,
2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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52,602
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$
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80,973
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Short-term investments
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—
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43,600
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Accounts receivable, net of allowances of $1,477 and $1,043 at September 30, 2008 and December 31, 2007,
respectively
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260,269
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222,711
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Income taxes receivable
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2,414
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2,960
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Deferred income taxes
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803
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200
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Inventory, net of allowances of $21 and $25 at September 30, 2008 and December 31, 2007, respectively
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7,528
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360
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Other current assets
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9,815
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5,022
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Total current assets
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333,431
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355,826
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Property and equipment, net of accumulated depreciation of $12,990 and $9,538 at September 30, 2008 and December 31, 2007,
respectively
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19,569
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12,979
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Intangible assets, net
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50,382
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32,336
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Goodwill
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256,931
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149,413
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Investments
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13,175
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—
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Other assets
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800
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876
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Total assets
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$
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674,288
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$
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551,430
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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289,457
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$
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229,715
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Short-term debt
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10,000
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—
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Accrued expenses and other current liabilities
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8,863
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8,715
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Total current liabilities
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308,320
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238,430
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Deferred rent expense
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3,291
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1,840
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Deferred income taxes
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13,160
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10,880
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Total liabilities
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324,771
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251,150
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Commitments and contingencies
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Stockholders’ equity:
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Preferred stock, $0.01 par value, 5,000 shares authorized, none issued
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—
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—
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Common stock, $0.01 par value, 100,000 shares authorized, 43,526 and 42,639 shares issued at September 30, 2008 and December 31,
2007, respectively
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435
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426
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Additional paid-in capital
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207,231
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192,941
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Treasury stock, at cost, 133 shares and 88 shares at September 30, 2008 and December 31, 2007, respectively
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(3,642
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)
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(2,366
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Retained earnings
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145,493
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109,279
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Total stockholders’ equity
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349,517
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300,280
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Total liabilities and stockholders’ equity
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$
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674,288
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$
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551,430
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The accompanying notes are an integral part of these consolidated financial statements.
1
CATALYST HEALTH SOLUTIONS, INC.
and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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For the three months
ended September 30,
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For the nine months
ended September 30,
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2008
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2007
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2008
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2007
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Revenue (excludes member co-payments of $193,334, $164,792, $557,924 and $464,223 for the three and nine months ended September 30, 2008
and 2007, respectively)
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$
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653,033
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$
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498,393
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$
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1,855,979
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$
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1,325,769
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Direct expenses
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615,378
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471,212
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1,753,005
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1,244,513
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Selling, general and administrative expenses
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18,168
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12,874
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48,457
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40,265
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Total operating expenses
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633,546
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484,086
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1,801,462
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1,284,778
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Operating income
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19,487
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14,307
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54,517
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40,991
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Interest income
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863
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1,826
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3,935
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4,614
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Interest expense
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(163
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(36
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(235
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(125
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Other income
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1
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—
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2
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1
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Income before minority interest and income taxes
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20,188
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16,097
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58,219
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45,481
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Minority interest
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—
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—
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—
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31
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Income before income taxes
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20,188
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16,097
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58,219
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45,450
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Income tax expense
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7,591
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6,346
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22,005
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17,791
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Net income
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$
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12,597
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$
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9,751
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$
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36,214
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$
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27,659
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Net income per share, basic
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$
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0.30
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$
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0.23
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$
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0.85
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$
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0.67
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Net income per share, diluted
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$
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0.29
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$
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0.23
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$
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0.83
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$
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0.64
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Weighted average shares of common stock outstanding, basic
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42,633
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41,724
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42,420
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41,372
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Weighted average shares of common stock outstanding, diluted
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43,716
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43,122
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43,535
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42,926
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The accompanying notes are an integral part of these consolidated financial statements.
2
CATALYST HEALTH SOLUTIONS, INC.
and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For the nine months
ended September 30,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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36,214
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$
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27,659
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation expense
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3,452
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2,626
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Amortization of intangibles and other assets
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3,693
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3,200
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Allowances on accounts receivable
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(15
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)
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1,127
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Deferred income taxes
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(603
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)
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147
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Equity based compensation charges
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4,097
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3,997
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Minority interest
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—
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31
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Changes in assets and liabilities, net of effects from acquisitions:
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Accounts receivable
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(16,564
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)
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(42,917
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Income taxes receivable
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546
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(3,879
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)
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Inventory
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(441
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)
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43
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Other assets
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(3,264
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)
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342
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Accounts payable, accrued expenses, and other liabilities
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44,319
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39,198
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Net cash provided by operating activities
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71,434
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31,574
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Cash flows from investing activities:
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Purchases of property and equipment
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(7,117
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)
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(2,644
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Business acquisitions and related payments, net of cash acquired
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(142,040
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)
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(34,054
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Acquisition of remaining minority interest
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—
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(1,279
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)
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Payment received on note receivable
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—
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1,000
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Changes in restricted cash
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—
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1,000
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Purchases of investments
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(6,825
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)
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(68,300
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)
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Sales and maturities of investments
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37,250
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69,750
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Net cash used in investing activities
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(118,732
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(34,527
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Cash flows from financing activities:
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Borrowings under revolving credit line
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25,000
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—
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Repayments of revolving credit line
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(15,000
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—
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Proceeds from exercise of stock options
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4,483
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6,154
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Excess tax benefits due to option exercises and restricted stock vesting
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5,418
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7,773
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Proceeds from shares issued under employee stock purchase plan
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302
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340
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Purchases of treasury stock
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(1,276
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)
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(889
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)
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Net cash provided by financing activities
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18,927
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13,378
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Net decrease in cash and cash equivalents
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(28,371
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)
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10,425
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Cash and cash equivalents at the beginning of period
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80,973
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49,501
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Cash and cash equivalents at the end of period
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$
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52,602
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$
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59,926
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Supplemental disclosure:
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Cash paid for interest
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$
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132
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$
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85
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Cash paid for taxes
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$
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16,651
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$
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13,750
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The accompanying notes are an integral part of these consolidated financial statements.
3
CATALYST HEALTH SOLUTIONS, INC.
and Subsidiaries
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited
consolidated financial statements have been prepared by Catalyst Health Solutions, Inc. (the “Company”, “we” or “us”), a Delaware corporation, in accordance with accounting principles generally accepted in the United
States for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal
recurring adjustments and accruals, necessary for a fair statement of the consolidated balance sheets, statements of operations and statements of cash flows for the periods presented. Operating results for the three and nine months ended
September 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Certain information and footnote disclosures normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that
date, but does not include all of the disclosures required by accounting principles generally accepted in the United States. Certain reclassifications were made to the prior year amounts to conform to current year presentation. These consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC
on February 29, 2008.
Inventory consists of prescription drugs and medical supplies that are stated at the lower of cost or market
determined by the first-in, first-out method.
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2.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In April 2008,
the FASB issued FASB Staff Position (FSP) FAS 142-3,
Determination of the Useful Life of Intangible Assets
. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangibles
. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The guidance for
determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of,
and subsequent to, the effective date. We do not expect the adoption of FSP FAS 142-3 will have a material impact on our financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(“SFAS No. 141 (R)”). SFAS
No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any controlling interest in the
acquiree at the acquisition date fair value. SFAS No. 141(R) will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, pre-acquisition contingencies and
transaction costs. In addition, any changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) also includes a substantial number of new
disclosure requirements. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 with early application prohibited. We will adopt SFAS No. 141(R) beginning in the first quarter of fiscal 2009 and will change
our accounting treatment for business combinations on a prospective basis.
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3.
|
FAIR VALUE MEASUREMENTS
|
In September 2006, the
FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal
4
years. In February 2008, the FASB approved a Financial Staff Position that deferred the effective date of SFAS No. 157 by one year for certain
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
As
of January 1, 2008, we adopted SFAS No. 157, with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities. Nonrecurring nonfinancial assets and liabilities for which we have not
applied the provisions of SFAS No. 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, and those initially measured at fair value in a
business combination. Our limited adoption of SFAS No. 157, as amended, did not have a material impact on our financial condition, results of operations or cash flows. Our evaluation of this standard is ongoing, and we have not yet determined
the impact of the deferred portion of this standard on our financial condition, results of operations or cash flows.
On October 10,
2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
. FSP No. 157-3 clarifies the application of FAS 157 in a market that is not active and provides
factors to take into consideration when determining the fair value of an asset in an inactive market. FSP No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. This FSP did not have
a material impact on our financial condition, results of operations or cash flows.
The following table details the fair value measurements
within the fair value hierarchy of our financial assets (in thousands):
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Fair Value Measurements at Reporting Date Using
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September 30,
2008
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Quoted Prices in
Active Markets Using
Identical Assets
(Level 1)
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Significant Other
Observable Inputs
(Level 2)
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Significant
Unobservable Inputs
(Level
3)
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Money market funds
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$
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40,829
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$
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40,829
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|
—
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$
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—
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Available for sale investments
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13,175
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|
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—
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—
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13,175
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|
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Total assets measured at fair value
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$
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54,004
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$
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40,829
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—
|
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$
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13,175
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In the second quarter of 2008, we reclassified our investments related to auction rate securities
(ARS) to the Level 3 category of the fair value hierarchy due to the continued lack of a market resulting in unobservable inputs associated with these securities. Previously, such investments, which are classified as non-current, were included in
the Level 2 category. Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates from 7 to 35 day intervals to provide short-term liquidity. Beginning in February 2008,
auctions for certain of these securities began to fail, which in some cases has resulted in higher interest rates being earned on some of these securities. We are unlikely to be able to access these funds until future auctions for these ARS are
successful, or until we sell the securities in a secondary market which currently is not fully active, although there have been instances of redemptions at par by issuers and sales at successful auctions. As such, these investments currently lack
short-term liquidity and therefore continue to be classified as non-current on our September 30, 2008 balance sheet.
For each of our
ARS, we evaluated the risks related to the structure, collateral and liquidity of the investments as well as the forecasted probability of issuer default, auction failure and a successful auction or redemption at par for each future auction period.
Using a discount model, the weighted average cash flow for each auction period was discounted back to the present value for each security. Based on this methodology, we determined the fair values of our ARS investments approximate their par values.
Although we have some uncertainty with regard to the short-term liquidity of these securities, we continue to believe the par value represents the fair value of these investments. This belief is further based on the consideration these securities
have redemption features which call for redemption at 100% of par value; the underlying securities carry AAA/Aaa credit ratings; and the ARS are either federally guaranteed or required to maintain an asset coverage amount of at least 200% in
accordance with the Investment Company Act of 1940. We continue to monitor the market for auction rate securities and consider the impact, if any, on the fair market value of our investments.
Based on our cash and cash equivalents balance of $52.6 million, our available $40.0 million revolving credit facility, and our positive operating
cash flows, we do not anticipate a lack of liquidity associated with our ARS to adversely affect our ability to
5
conduct business or have a material impact on our liquidity, financial condition, results of operations or cash flows. Moreover, we believe we have the
ability to hold the securities until liquidity returns to the market, other secondary markets develop, or the securities mature. There can be no assurances, however, that market conditions will not deteriorate which could result in an impairment
charge in the future.
The following table reflects the activity for our major classes of assets measured at fair value using Level 3
inputs (in thousands):
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Available for sale
investments
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Balance, January 1, 2008
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$
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—
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Transfers from Level 2
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14,375
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Redemptions and sales during the period
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(825
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)
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Balance, June 30, 2008
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13,550
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Redemptions and sales during the period
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(375
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)
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Balance, September 30, 2008
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$
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13,175
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On January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
(“SFAS No. 159”). We have not elected to use fair value measurements on any assets or liabilities under SFAS 159.
Acquisition of Immediate Pharmaceutical
Services, Inc.
On August 5, 2008, we acquired Immediate Pharmaceutical Services, Inc. (“IPS”) from Discount Drug Mart,
Inc. IPS operates a fully-integrated prescription mail service fulfillment center located outside of Cleveland, Ohio. The IPS acquisition provides us with a platform for building our mail service capability and will provide our clients with an
in-house mail service option. Total consideration for the acquisition of IPS consisted of cash payments of $40.0 million and $0.9 million in transaction costs. Goodwill related to this acquisition is expected to be non-deductible for tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The
acquisition was accounted for as a purchase, and accordingly, the results of IPS operations are included in our consolidated financial statements since the date of acquisition. The allocation of the purchase price to the net assets acquired will be
finalized upon management’s completion of its valuation. Consequently, the allocation of purchase price to intangible assets is subject to adjustment. Amounts are in thousands.
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Description
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At August 5, 2008
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Current assets, including cash of $682
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$
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17,376
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Other assets
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1,055
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Intangible assets (primarily customer contracts with an estimated useful life of 12 years)
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6,000
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Goodwill
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23,857
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Total assets acquired
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48,288
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Liabilities assumed
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(7,415
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)
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Net assets acquired
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$
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40,873
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Unaudited pro forma financial information has not been included because of the immateriality of
the IPS business combination.
Acquisition of HospiScript
On May 16, 2008, we acquired HospiScript Services, LLC and Concept Pharmaceuticals, LLC, a related party to HospiScript Services through common ownership (collectively, “HospiScript”). HospiScript
provides pharmacy medication therapy management services to the hospice industry.
6
Total consideration for the acquisition of HospiScript consisted of cash payments of $102.7 million and
$0.4 million in subsequent related transaction costs. Additionally, the acquisition provides for possible contingent consideration payments through 2010 of up to $8.1 million subject to specified operating performance standards. Contingent
consideration earned, if any, would be accounted for as additional goodwill. Goodwill related to this acquisition is expected to be deductible for tax purposes.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The acquisition was accounted for as a purchase, and accordingly, the results of
HospiScript operations are included in our consolidated financial statements since the date of acquisition. The allocation of the purchase price to the net assets acquired will be finalized upon management’s completion of its valuation.
Consequently, the allocation of purchase price to intangible assets is subject to adjustment. Amounts are in thousands.
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Description
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At May 16, 2008
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Current assets, including cash of $1,232
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$
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13,870
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Other assets
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1,870
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Intangible assets (primarily customer contracts with an estimated useful life of 12 years)
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15,567
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Goodwill
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83,661
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Total assets acquired
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114,968
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Liabilities assumed
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(11,887
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)
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Net assets acquired
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$
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103,081
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The following table sets forth certain unaudited pro forma financial data assuming the acquisition
of HospiScript had been completed as of the beginning of the periods presented, after giving effect to purchase accounting adjustments. The pro forma financial information is not necessarily indicative of the results of operations as they would have
been had the transaction been effected on the assumed date, nor is it necessarily an indication of trends in future results. Amounts are in thousands, except for per share data.
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For the three months
ended September 30,
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For the nine months
ended September 30,
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2007
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2008
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2007
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Revenue
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$
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501,967
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$
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1,862,460
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$
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1,334,550
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Net income
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10,606
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37,811
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29,751
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Net income per share, basic
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$
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0.25
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$
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0.89
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$
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0.72
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Net income per share, diluted
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$
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0.25
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$
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0.87
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$
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0.69
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Weighted average shares, basic
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41,724
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42,420
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41,372
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Weighted average shares, diluted
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43,122
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43,535
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42,926
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5.
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GOODWILL AND INTANGIBLE ASSETS
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The changes in
goodwill for the nine months ended September 30, 2008 are as follows (in thousands):
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2008
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Balance as of January 1, 2008
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$
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149,413
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Goodwill acquired in acquisitions
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107,518
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Balance as of September 30, 2008
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$
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256,931
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Goodwill represents the excess of the purchase price over the estimated fair value of the net
assets of acquired businesses. We performed our annual goodwill impairment testing at December 31, 2007 and concluded that no impairment of goodwill existed.
7
The following table sets forth the components of intangible assets (in thousands):
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September 30, 2008
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December 31, 2007
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Amortization period
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Customer contracts
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$
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57,709
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$
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36,296
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11–20 years
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Non-compete agreements
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411
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374
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2 – 3 years
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Other PBM contracts
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5,829
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7,591
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5 months –20 years
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Total intangible assets
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63,949
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44,261
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Accumulated amortization
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(13,567
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)
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(11,925
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$
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50,382
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$
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32,336
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Customer contracts represent the estimated fair value of customer contracts held at the dates of
acquisition. This estimated fair value and the weighted average useful-lives are based on income-method valuation calculations. Other pharmacy benefit management (“PBM”) contracts allow us to provide PBM services, which are amortized over
the future cash flow, based on management’s best estimate. During the first quarter of 2008, we wrote-off approximately $2.0 million of fully amortized intangible assets. There was no income statement impact for this adjustment.
The estimated aggregate amortization expense of existing intangible assets for the years ending December 31, 2008, 2009, 2010, 2011 and 2012, is
$5.1 million, $5.2 million, $4.8 million, $4.3 million and $4.3 million, respectively.
In September 2006, we entered into
a new $50.0 million revolving credit facility with our primary commercial bank. The facility is for a three-year term expiring September 2009 and bears interest at LIBOR plus a variable margin based on our ratio of funded debt to earnings before
interest, taxes, depreciation and amortization expense (“EBITDA”), payable in arrears on the first day of each month. The credit facility is collateralized by all of our assets. The facility contains affirmative and negative covenants
including those related to indebtedness and EBITDA.
As of September 30, 2008, our net borrowings under the credit facility were $10.0
million, consisting of a drawing under the credit facility during the three months ended September 30, 2008 of $25.0 million and repayments of $15.0 million. Interest expense related to the drawings on this credit facility was approximately
$132 thousand for the three months ended September 30, 2008.
Stock Options
A summary of our stock option activity for the nine months ended September 30, 2008 is as follows (in thousands, except for weighted average exercise
price):
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Options
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Weighted-Average
Exercise Price
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Outstanding at December 31, 2007
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2,035
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$
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7.34
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Granted
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—
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—
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Exercised
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(641
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)
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7.00
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Forfeited or expired
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(7
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)
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10.31
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Outstanding at September 30, 2008
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1,387
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7.49
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Exercisable at September 30, 2008
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1,387
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7.49
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The aggregate intrinsic value of exercisable stock options at September 30, 2008 was
approximately $25.8 million with a weighted average remaining life of 4.1 years. The total intrinsic value of stock options exercised during the nine months ended September 30, 2008 was approximately $15.0 million.
8
Restricted Stock Awards
A summary of our restricted share activity for the nine months ended September 30, 2008 is as follows (in thousands, except for fair market value):
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Shares
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Fair Market
Value
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Non-vested shares outstanding at December 31, 2007
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463
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$
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25.83
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Granted
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263
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|
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29.07
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Vested
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(130
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)
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25.46
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Forfeited or expired
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(30
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)
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30.67
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Non-vested shares outstanding at September 30, 2008
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566
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27.16
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As of September 30, 2008, the total remaining unrecognized compensation cost related to
non-vested restricted shares was approximately $11.9 million with a weighted average period over which it is expected to be recognized of 2.6 years.
Treasury Stock
Recipients of restricted stock grants are provided the opportunity to sell a portion of those shares to the
Company at the time the shares vest, in order to pay their withholding tax obligations. We account for these share purchases as treasury stock transactions using the cost method. Approximately 19,200 and 44,700 shares were purchased at a
cost of approximately $0.6 million and $1.3 million for the three and nine months ended September 30, 2008.
Employee Stock Purchase Plan
Effective January 1, 2007, the employee stock purchase plan (“ESPP”) was modified, allowing eligible employees to
purchase shares of the Company’s common stock each quarter at 95% of the market value on the last day of the quarter. The ESPP, as modified, is not considered compensatory under the provisions of SFAS No. 123(R) and therefore no portion of
the costs related to ESPP purchases is included in the Company’s stock-based compensation expense.
The effective income tax rates were
37.6% and 39.4% during the three months ended September 30, 2008 and 2007, respectively, and 37.8% and 39.1% during the nine months ended September 30, 2008 and 2007, respectively. These rates represent the combined federal and state
income tax rates adjusted as necessary based on the particular jurisdictions where we operate. The effective tax rates in 2008 were lower than in the comparable periods in 2007 primarily due to a decrease in our overall mix of state income tax rates
as well as additional interest income earned on federally tax exempt investments.
Basic net income per common
share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that
could occur (using the treasury stock method) if stock options, restricted stock awards and warrants to issue common stock were exercised.
9
The following represents a reconciliation of the number of shares used in the basic and diluted net
income per share computations (amounts in thousands, except per share data):
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Three months ended
September 30,
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Nine months ended
September 30,
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|
|
2008
|
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2007
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2008
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|
2007
|
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Net income available to common stockholders
|
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$
|
12,597
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$
|
9,751
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$
|
36,214
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$
|
27,659
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Calculation of shares:
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Weighted average common shares outstanding, basic
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42,633
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|
|
41,724
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|
|
42,420
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|
|
41,372
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Dilutive effect of stock options, restricted stock awards and warrants
|
|
|
1,083
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|
|
1,398
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|
|
1,115
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|
|
1,554
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average common shares outstanding, diluted
|
|
|
43,716
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|
|
43,122
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|
|
43,535
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|
|
42,926
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|
|
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|
|
|
|
|
|
|
|
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Net income per common share, basic
|
|
$
|
0.30
|
|
$
|
0.23
|
|
$
|
0.85
|
|
$
|
0.67
|
|
Net income per common share, diluted
|
|
$
|
0.29
|
|
$
|
0.23
|
|
$
|
0.83
|
|
$
|
0.64
|
During all periods presented, all options and warrants were included in the computation of diluted
net income per share because the exercise prices were less than the average market price of our common shares.
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10.
|
COMMITMENTS AND CONTINGENCIES
|
In the ordinary
course of our business, we are sometimes required to provide financial guarantees related to certain customer contracts. These financial guarantees may include performance bonds, standby letters of credit or other performance guarantees. These
financial guarantees represent obligations to make payments to customers if we fail to fulfill an obligation under a contractual arrangement with that customer. We have had no history of significant claims, nor are we aware of circumstances that
would require us to perform under these arrangements. We believe that the resolution of any claim that might arise in the future, either individually or in the aggregate, would not have a material adverse effect on our financial condition, results
of operations or cash flows.
SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
, establishes standards for the way that public enterprises report information about operating segments in financial statements. We have determined that we operate in only one
segment – the pharmacy benefits management, or PBM, segment. Accordingly, no segment disclosures have been included in the notes to the consolidated financial statements.
10
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This Quarterly Report on Form 10-Q may contain certain forward-looking statements, including without limitation, statements concerning Catalyst Health
Solutions, Inc.’s operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “expect,” “anticipate,” “will,” “could,” “would,” “should,” “may,”
“plan,” “estimate,” “intend,” “predict,” “potential,” “continue,” and the negatives of these words and other similar expressions generally identify forward-looking
statements. These forward-looking statements may include statements addressing our operations and our financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which, among other things,
speak only as of their dates. These forward-looking statements are based largely on Catalyst Health Solutions, Inc.’s current expectations and are subject to a number of risks and uncertainties. Factors we have identified that may
materially affect our results are discussed in our Annual Report on Form 10-K, including the documents incorporated by reference, for the year ended December 31, 2007, particularly under Item 1A, “Risk Factors”, and in our other
filings with the Securities and Exchange Commission. In addition, other important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in Catalyst Health Solutions, Inc.’s
business or growth strategy or an inability to execute its strategy, including due to changes in its industry or the economy generally. In light of these risks and uncertainties, there can be no assurances that the results referred to in the
forward-looking statements will, in fact, occur. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and
consider the various disclosures made in this report, in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our
business.
OVERVIEW
The Company
Catalyst Health Solutions, Inc. (formerly HealthExtras, Inc.) is a full-service pharmacy benefit management, or PBM, company. We
operate primarily under the brand name Catalyst Rx. Our clients include self-insured employers, including state and local governments, managed care organizations, third-party administrators, referred to as TPAs, unions, and individuals who contract
with us to administer the prescription drug component of their overall health benefit programs
We provide our clients access to a
contracted, non-exclusive national network of approximately 61,000 pharmacies. We provide our clients’ members with timely and accurate benefit adjudication, while controlling pharmacy spending trends through customized plan designs, clinical
programs, physician orientation programs, and member education. We use an electronic point-of-sale system of eligibility verification and plan design information, and offer access to rebate arrangements for certain branded pharmaceuticals. When a
member of one of our clients presents a prescription or health plan identification card to a retail pharmacist in our network, the system provides the pharmacist with access to online information regarding eligibility, patient history, health plan
formulary listings, and contractual reimbursement rates. The member generally pays a co-payment to the retail pharmacy and the pharmacist fills the prescription. We electronically aggregate pharmacy benefit claims, which include prescription costs
plus our claims processing fees for consolidated billing and payment. We receive payments from clients, make payments of amounts owed to the retail pharmacies pursuant to our negotiated rates, and retain the difference (except where we have entered
into pass-through pricing arrangements with clients), including claims processing fees.
Pharmacy benefit claim payments from our clients
are recorded as revenue, and prescription costs to be paid to pharmacies are recorded as direct expenses. Under our network contracts, we generally have an independent obligation to pay pharmacies for the drugs dispensed and, accordingly, have
assumed that risk independent of our clients. When we administer pharmacy reimbursement contracts and do not assume a credit risk, we record only our administrative or processing fees as revenue. Rebates earned under arrangements with manufacturers
are recorded as a reduction of direct expenses. The portion of manufacturer rebates due to clients is recorded as a reduction of revenue.
11
Beginning with the first quarter of 2008, we no longer present supplemental benefits as a separate
reportable operating segment because it no longer constitutes a reportable segment under SFAS No. 131,
Segment Reporting
. Consequently, the PBM segment is our only reportable operating segment.
For the three months ended September 30, 2008, our revenue increased by 31% to $653.0 million from $498.4 million for the same period in 2007. Total
claims processed increased to 13.0 million for the three months ended September 30, 2008, from 10.7 million during the same period in 2007. For the nine months ended September 30, 2008, our revenue increased by 40% to
approximately $1,856.0 million from $1,325.8 million for the same period in 2007. Total claims processed increased to 38.3 million for the nine months ended September 30, 2008, from 30.0 million during the same period in 2007. Our
increase in revenue in 2008 to date has been primarily due to our initiation of services with several new PBM clients as well as our recent business acquisitions. In particular, we commenced providing PBM services to the states of Maryland and Ohio
effective July 1, 2007, and we began providing PBM services to Puerto Rico’s MCS Commercial business and MCS Medicare Part D business on December 1, 2007 and January 1, 2008, respectively. Together these contracts were
responsible for over 2.1 million and 6.6 million claims during the three months and nine months ended September 30, 2008, respectively. Our recent business acquisitions have contributed over 1.1 million claims during the nine
months ended September 30, 2008.
Member co-payments to pharmacies are not recorded as revenue or direct expenses. We incur no
obligations for co-payments to pharmacies and have never made such payments. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payments from the members. If we had included co-payments in reported revenue and direct
expenses, it would have resulted in an increase in our reported revenue and direct expenses of $193.3 million and $164.8 million for the three months ended September 30, 2008 and 2007, respectively. Revenue and direct expenses for the nine
months ended September 30, 2008 and 2007 would have increased by $557.9 million and $464.2 million, respectively. Our operating and net income, consolidated balance sheets and statements of cash flows would not have been affected.
The following tables illustrate the effects on our reported revenue and direct expenses if we had included the actual member co-payments as indicated
by our claims processing system (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Reported revenue
|
|
$
|
653.0
|
|
$
|
498.4
|
|
$
|
1,856.0
|
|
$
|
1,325.8
|
|
Member co-payments
|
|
|
193.3
|
|
|
164.8
|
|
|
557.9
|
|
|
464.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
846.3
|
|
$
|
663.2
|
|
$
|
2,413.9
|
|
$
|
1,790.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported direct expenses
|
|
$
|
615.4
|
|
$
|
471.2
|
|
$
|
1,753.0
|
|
$
|
1,244.5
|
|
Member co-payments
|
|
|
193.3
|
|
|
164.8
|
|
|
557.9
|
|
|
464.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
808.7
|
|
$
|
636.0
|
|
$
|
2,310.9
|
|
$
|
1,708.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUISITIONS
Acquisition of Immediate Pharmaceutical Services, Inc.
On August 5, 2008, we acquired Immediate
Pharmaceutical Services, Inc. (“IPS”) from Discount Drug Mart, Inc. IPS operates a fully-integrated prescription mail service fulfillment center located outside of Cleveland, Ohio. The IPS acquisition provides us with a platform for
building our mail service capability and will provide our clients with an in-house mail service option.
Total consideration for the
acquisition of IPS consisted of cash payments of $40.0 million and $0.9 million in transaction costs. The acquisition of IPS resulted in goodwill of $23.9 million and intangible assets of $6.0 million. The allocation of the purchase price to the net
assets acquired will be finalized upon management’s completion of its valuation. Consequently, the allocation of purchase price to intangible assets is subject to adjustment. Goodwill related to this acquisition is expected to be non-deductible
for tax purposes.
12
Acquisition of HospiScript
On May 16, 2008, we acquired HospiScript Services, LLC and Concept Pharmaceuticals, LLC, a related party to Hospiscript through common ownership (collectively, “HospiScript”). HospiScript provides
pharmacy medication therapy management services to the hospice industry.
Total consideration for the acquisition of HospiScript consisted
of cash payments of $102.7 million and $0.4 million in subsequent related transaction costs. Additionally, the acquisition provides for possible contingent consideration payments through 2010 of up to $8.1 million subject to specified operating
performance standards. Contingent consideration earned, if any, would be accounted for as additional goodwill. Goodwill related to this acquisition is expected to be deductible for tax purposes.
The acquisition of HospiScript resulted in goodwill of $83.7 million and intangible assets of $15.6 million. The allocation of the purchase price to the
net assets acquired will be finalized upon management’s completion of its valuation. Consequently, the allocation of purchase price to intangible assets is subject to adjustment.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared to Three Months
Ended September 30, 2007
Revenue.
Revenue from operations for the three months ended September 30, 2008 and 2007 were
$653.0 million and $498.4 million, respectively. Revenue increased over the comparable period in 2007 by $154.6 million. Total claims processed increased to approximately 13.0 million for the three months ended September 30, 2008 from
approximately 10.7 million for the same period in 2007. Contributors to the increase in revenue and prescription volume were primarily due to our contracts with Puerto Rico’s MCS Commercial business and MCS Medicare Part D business, which
commenced on December 1, 2007 and January 1, 2008, respectively, as well as our acquisition of IPS and HospiScript.
Direct
Expenses.
Direct expenses for the three months ended September 30, 2008 and 2007 were $615.4 million and $471.2 million, respectively. Direct expenses increased by $144.2 million over the comparable period in 2007 primarily related to the
$154.6 million increase in overall revenue. Direct expenses for the three months ended September 30, 2008 and 2007 represented 97.1% and 97.3% of total operating expenses for the respective periods.
Gross margins, calculated as revenue less direct expense, are generally predictable based on client contract terms and vendor/supplier contracts. Other
factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at lower cost network pharmacies. None
of the foregoing factors have materially changed in 2008 in a manner that would meaningfully affect current results. Gross margins increased to $37.7 million for the three months ended September 30, 2008 from $27.2 million for the comparable
period in 2007.
Gross margin as a percentage of revenue was 5.8% and 5.5% for the three months ended September 30, 2008 and 2007,
respectively. The improvement in the composite gross margin percentage in 2008 is reflective of increased levels of generic substitution and higher network discount rates.
Selling, General and Administrative.
For the three months ended September 30, 2008, selling, general and administrative expenses increased by
approximately $5.3 million over the same period in the prior year to $18.2 million or 2.9% of operating expenses. This increase was primarily associated with our growth and the associated personnel, facility and vendor costs to serve and implement
new clients as well as incremental selling, general and administrative costs related to our acquisition of IPS and HospiScript.
Selling,
general and administrative expenses of $18.2 million for the three months ended September 30, 2008, consisted of $9.3 million in compensation and benefits, which includes $1.3 million in non-cash compensation, $1.7 million in professional fees
and technology services, $2.2 million in facility costs, $0.9 million in travel expenses, $0.9 million in insurance and other corporate expenses, $0.9 million in other, which includes $0.2 million in recruitment and temporary help, and $2.3 million
in depreciation and amortization.
13
Selling, general and administrative expenses of $12.9 million for the three months ended
September 30, 2007, consisted of $6.3 million in compensation and benefits, which includes $1.1 million in non-cash compensation, $1.3 million in professional fees and technology service costs, $1.5 million in facility costs, $0.7 million in
travel expenses, $0.6 million in insurance and other corporate expenses and $0.9 million in other expenses, which includes $0.4 million in recruitment and temporary help, and $1.6 million in depreciation and amortization.
Interest Income.
Interest income decreased to $0.9 million for the three months ended September 30, 2008 from $1.8 million for the three
months ended September 30, 2007. The decrease was primarily due to a decrease in average funds available for investment resulting from our business acquisition during the period.
Interest Expense.
Interest expense increased to $0.2 million for the three months ended September 30, 2008. The increase in interest expense
was attributable to the net drawings on our line of credit during the three months ended September 30, 2008.
Income Tax
Expense.
The effective income tax rate of 37.6% during the three months ended September 30, 2008 and 39.4% during the comparable period in 2007 represent the combined federal and state income tax rates adjusted as necessary based on the
particular jurisdictions where we operate. The effective tax rate in 2008 was lower than in the comparable period in 2007 primarily due to a decrease in our overall mix of state income tax rates as well as additional interest income earned on
federally tax exempt investments.
Net Income.
Net income for three months ended September 30, 2008 increased by approximately
$2.8 million over the same period in 2007 to $12.6 million. The increase in net income was primarily a result of increased gross margin dollars, reduced by an increase in selling, general and administrative expenses.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Revenue.
Revenue from operations for the nine months ended September 30, 2008 and 2007 were $1,856.0 million and $1,325.8 million,
respectively. Revenue increased over the comparable period in 2007 by $530.2 million. Total claims processed increased to approximately 38.3 million for the nine months ended September 30, 2008 from approximately 30.0 million for the
same period in 2007. Contributors to the increase in revenue and prescription volume were primarily due to our contracts with the State of Maryland and Ohio, which commenced on July 1, 2007, and Puerto Rico’s MCS Commercial business and
MCS Medicare Part D business, which commenced on December 1, 2007 and January 1, 2008, respectively, as well as our acquisition of IPS and HospiScript.
Direct Expenses.
Direct expenses for the nine months ended September 30, 2008 and 2007 were $1,753.0 million and $1,244.5 million, respectively. Direct expenses increased by $508.5 million over the
comparable period in 2007 primarily related to the $530.2 million increase in overall revenue. Direct expenses for the nine months ended September 30, 2008 and 2007 represented 97.3% and 96.9% of total operating expenses for the respective
periods.
Gross margins, calculated as revenue less direct expense, are generally predictable based on client contract terms and
vendor/supplier contracts. Other factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume of prescription dispensing at
lower cost network pharmacies. None of the foregoing factors have materially changed in 2008 in a manner that would meaningfully affect current results. Gross margins increased to $103.0 million for the nine months ended September 30, 2008 from
$81.3 million for the comparable period in 2007.
Gross margin as a percentage of revenue was 5.5% and 6.1% for the nine months ended
September 30, 2008 and 2007, respectively. In 2008, composite gross margin percentages were reduced by the addition of several large contracts, including the states of Maryland and Ohio and the Puerto Rico based health plans, which are more
competitively priced due to their size. These decreases were partially offset by gross margin improvements resulting from an increased level of generic substitution and higher network discount rates.
14
Selling, General and Administrative.
For the nine months ended September 30, 2008, selling,
general and administrative expenses increased by approximately $8.2 million over the same period in the prior year to $48.5 million or 2.7% of operating expenses. This increase was primarily associated with our growth and the associated personnel,
facility and vendor costs to serve and implement new clients as well as incremental selling, general and administrative costs related to our acquisition of IPS and HospiScript.
Selling, general and administrative expenses of $48.5 million for the nine months ended September 30, 2008, consisted of $25.1 million in
compensation and benefits, which includes $4.0 million in non-cash compensation, $4.1 million in professional fees and technology services, $5.9 million in facility costs, $2.5 million in travel expenses, $2.2 million in insurance and other
corporate expenses, $2.7 million in other, which includes $0.9 million in recruitment and temporary help, and $6.0 million in depreciation and amortization.
Selling, general and administrative expenses of $40.3 million for the nine months ended September 30, 2007, consisted of $20.8 million in compensation and benefits, which includes $3.8 million in non-cash
compensation, $4.2 million in professional fees and technology service costs, $4.0 million in facility costs, $2.1 million in travel expenses, $1.8 million in insurance and other corporate expenses and $0.2 in product endorsement and marketing, $2.6
million in other, which includes $1.2 million in recruitment and temporary help, and $4.6 million in depreciation and amortization.
Interest Income.
Interest income decreased to $3.9 million for the nine months ended September 30, 2008 from $4.6 million for the nine months ended September 30, 2007. The decrease was primarily due to a decrease in average
funds available for investment resulting from our business acquisition during the period.
Interest Expense.
Interest expense
increased to $0.2 million for the nine months ended September 30, 2008 from $0.1 million from the comparable period last year. The increase in interest expense was attributable to the net drawings on our line of credit during current period.
Minority Interest.
Prior to February 6, 2007, EBRx was majority owned by us and 20% owned by investors affiliated with
EBRx’s former parent. On February 6, 2007, we acquired the minority ownership interest. The minority interest for the nine months ended September 30, 2007 represents 20% of the earnings of EBRx during the period in which there was an
outstanding minority interest.
Income Tax Expense.
The effective income tax rate of 37.8% during the nine months ended
September 30, 2008 and 39.1% during the comparable period in 2007 represent the combined federal and state income tax rates adjusted as necessary based on the particular jurisdictions where we operate. The effective tax rate in 2008 was lower
than in the comparable period in 2007 primarily due to a decrease in our overall mix of state income tax rates as well as additional interest income earned on federally tax exempt investments.
Net Income.
Net income for nine months ended September 30, 2008 increased by approximately $8.6 million over the same period in 2007 to $36.2
million. The increase in net income was primarily a result of increased gross margin dollars reduced by an increase in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds are usually cash flows from operating
activities. We have in the past also raised funds by borrowing on bank debt and selling equity in the capital markets to fund acquisitions; however, no assurances can be given that we will be able to raise funds in light of present credit market
conditions. During the last several years, we have generated positive cash flow from operations and anticipate similar results in 2008 and 2009. At September 30, 2008, we had available a $40.0 million revolving credit facility and our cash and
cash equivalents were $52.6 million.
At September 30, 2008, we had $13.2 million in investments consisting of Auction Rate Securities
(“ARS”). Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates from 7 to 35
15
day intervals to provide short-term liquidity. Beginning in February 2008, auctions for certain of these securities began to fail, which in some cases has
resulted in higher interest rates being earned on some of these securities. We are unlikely to be able to access these funds until future auctions for these ARS are successful, or until we sell the securities in a secondary market which currently is
not fully active, although there have been instances of redemptions at par to date by issuers and sales at successful auctions. As such, these investments currently lack short-term liquidity and are therefore classified as non-current on our
September 30, 2008 balance sheet.
For each of our ARS, we evaluated the risks related to the structure, collateral and liquidity of
the investments as well as the forecasted probability of issuer default, auction failure and a successful auction or redemption at par for each future auction period. Using a discount model, the weighted average cash flow for each auction period was
discounted back to the present value for each security. Based on this methodology, we determined the fair values of our ARS investments approximate their par values. Although we have uncertainty with regard to the short-term liquidity of these
securities, we continue to believe the par value represents the fair value of these investments. This belief is based on the considerations these securities have redemption features which call for redemption at 100% of par value; the underlying
securities carry AAA/Aaa credit ratings; and the ARS are either federally guaranteed or required to maintain an asset coverage amount of at least 200% in accordance with the Investment Company Act of 1940. We continue to monitor the market for
auction rate securities and consider its impact, if any, on the fair value of our investments. There can be no assurances, however, that market conditions will not deteriorate which could result in an impairment charge in the future.
Based on our cash and cash equivalents balance of $52.6 million, our available $40.0 million revolving credit facility, and our positive operating
cash flows, we do not anticipate a lack of liquidity associated with our ARS to adversely affect our ability to conduct business or have a material impact on our liquidity, financial condition, results of operations or cash flows. Moreover, we
believe we have the ability to hold the securities until liquidity returns to the market, other secondary markets develop, or the securities mature.
Net Cash Provided by Operating Activities.
Our operating activities generated $71.4 million of cash from operations in the nine-month period ended September 30, 2008, a $39.8 million increase from the
$31.6 million generated in the comparable prior year period. This $71.4 million in cash provided by operating activities in 2008 reflects $36.2 million in net income, plus $10.6 million in non-cash charges and $24.6 million net decrease in working
capital and other assets and liabilities. This $24.6 million change in working capital, net of effects from acquisitions, was primarily due to a $44.3 million increase in accounts payable and accrued liabilities and a $0.5 million decrease in taxes
receivable partially offset by a $16.6 million decrease in accounts receivable, a $3.3 million decrease in other assets and a $0.4 million decrease in inventory. The cash provided by operating activities in the nine-month period ended
September 30, 2007 of $31.6 million reflects net income of $27.7 million, plus $11.1 million in non-cash charges, offset by a $7.2 million net increase in working capital and other assets and liabilities. The $7.2 million net increase in
working capital was primarily due to a $3.9 million decrease in taxes payable as well as a $42.9 million decrease in accounts receivable offset by a $39.2 million increase in accounts payable.
Net Cash Used in Investing Activities.
Net cash used in investing activities for the nine months ended September 30, 2008 was $118.7 million
compared to cash used of $34.5 million in the prior year period. The cash used in the current period reflects $142.0 million related to two business acquisitions and $7.1 million in capital expenditures offset by the net sales and maturities of
$30.4 million in investments. The $34.5 million use of cash for the nine months ended September 30, 2007 consisted of $1.5 million for the net sales and maturities of investments and $2.6 million in capital expenditures. Also, the acquisition
of our remaining 20% minority ownership interest resulted in a cash payment of $30.3 million, of which $1.3 million was attributable to the minority interest and approximately $29.0 million was recorded as additional purchase price. Also, additional
contingent consideration of approximately $5.1 million related to prior business acquisitions was paid during the nine months ended September 30, 2007. The prior year period also reflects $1.0 million of cash provided upon the repayment of a
note receivable as well as $1.0 million resulting from the lifting of restrictions on certain cash deposits.
Net Cash Provided by
Financing Activities.
Net cash provided by financing activities for the nine months ended September 30, 2008 was $18.9 million compared to $13.4 million in the prior year period. In the current period, we purchased $1.3 million of treasury
stock, received proceeds of $4.5 million from the exercise of options and $0.3 million in proceeds from issuance of common stock pursuant to the employee stock purchase plan. In addition, the company received an income tax payable benefit of
16
$5.4 million from the exercise of stock options and restricted stock vesting and obtained a net $10.0 million in proceeds from drawings on our line of
credit. In the prior year period, we purchased $0.9 million of treasury stock, received proceeds of $6.2 million from the exercise of options and $0.3 million in proceeds from the issuance of common stock pursuant to the employee stock purchase
plan. In addition, we received $7.8 million in income tax benefit proceeds from the exercise of stock options and restricted stock vesting.
We anticipate continuing to generate positive operating cash flow which, combined with available cash resources, should be sufficient to meet our planned working capital, capital expenditures and operating expenses. However, there can be no
assurance that we will not require additional capital. Even if such funds are not required, we may seek additional equity or debt financing. We cannot be assured that such financing will be available on acceptable terms, if at all, or that such
financing will not be dilutive to our stockholders.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We have minimal market risk inherent in our financial position. Our market risk primarily represents the potential loss arising from adverse changes in market interest rates. Our results from operations could be impacted by decreases in
interest rates on our cash and cash equivalents, including our investments in Auction Rate Securities. Additionally, we are exposed to market risk from changes in interest rates related to debt outstanding under our credit facility. We do not expect
our cash flows to be affected to any significant degree by a sudden change in market interest rates.
We operate our business within the
United States and Puerto Rico and execute all of our transactions in U.S. dollars and therefore do not have any foreign currency exchange risk. We do not have any derivative financial instruments and do not hold any derivative financial instruments
for trading purposes.
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control Over Financial
Reporting
There have been no changes in our internal control over financial reporting for our quarter ended September 30, 2008
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
|
ITEM 1.
|
Legal Proceedings
|
In the ordinary course of
business, we may become subject to legal proceedings and claims. We are not aware of any legal proceedings or claims, which, in the opinion of management, will have a material effect on our financial condition, results of operations or cash flows.
In addition to the other information
set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business,
financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.
17
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None.
|
ITEM 3.
|
Defaults Upon Senior Securities
|
None.
|
ITEM 4.
|
Submission of Matters to a Vote of Security Holders
|
None.
|
ITEM 5.
|
Other Information
|
The Registrant filed a Form 8-K
on September 16, 2008 to announce that the Company is changing its name to Catalyst Health Solutions, Inc. effective October 1, 2008. As a result of the name change, effective October 1, 2008 the Company’s common stock began
trading under a new ticker symbol, CHSI, on the NASDAQ Capital Market.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
3(i)(a)
|
|
Certificate of Ownership and Merger Merging Catalyst Health Solutions, Inc. with and into HealthExtras, Inc., effective October 1, 2008
*
|
|
|
|
|
3(i)(b)
|
|
Amended and Restated Certificate of Incorporation of Catalyst Health Solutions, Inc., effective October 1, 2008
*
|
|
|
|
|
3(ii)
|
|
Amended and Restated Bylaws of Catalyst Health Solutions, Inc., effective October 1, 2008*
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
|
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
|
|
|
|
|
32.0
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes Oxley Act of 2002*
|
18
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
|
|
|
|
|
|
|
|
|
CATALYST HEALTH SOLUTIONS, INC.
|
|
|
|
|
|
November 6, 2008
|
|
By:
|
|
/s/ David T. Blair
|
|
|
|
|
|
David T. Blair
|
|
|
|
|
|
Chief Executive Officer and Director
|
|
|
|
|
|
November 6, 2008
|
|
By:
|
|
/s/ Hai Tran
|
|
|
|
|
|
Hai Tran
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
19
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