Express Scripts DEF 14A 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Express Scripts, Inc.
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EXPRESS SCRIPTS, INC.
One Express Way
Saint Louis, Missouri 63121
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 28, 2008
The 2008 Annual Meeting of Stockholders of EXPRESS SCRIPTS, INC., a Delaware corporation (the Company), will be held at the principal executive offices of the Company, One Express Way, Saint Louis, Missouri 63121, on Wednesday, May 28, 2008, at 9:30 a.m. Central Time (the meeting), to consider and act upon the following matters:
Only stockholders of record at the close of business on March 31, 2008, are entitled to notice of and to vote at the meeting. At least ten days prior to the meeting, a complete list of stockholders entitled to vote will be available for inspection by any stockholder for any purpose germane to the meeting, during ordinary business hours, at the office of the Secretary of the Company at One Express Way, Saint Louis, Missouri 63121. As a stockholder of record, you are cordially invited to attend the meeting in person. Regardless of whether you expect to be present at the meeting, please either complete, sign and date the enclosed proxy and mail it promptly in the enclosed envelope, or vote electronically via the Internet or telephone as described in greater detail in the proxy statement. Returning the enclosed proxy, or voting electronically or telephonically, will not affect your right to vote in person if you attend the meeting.
By Order of the Board of Directors
Thomas M. Boudreau
Executive Vice President, Law & Strategy and
One Express Way
Saint Louis, Missouri 63121
April 14, 2008
Even though you may plan to attend the meeting in person, please vote by telephone or the Internet, or execute the enclosed proxy card and mail it promptly. A return envelope (which requires no postage if mailed in the United States) is enclosed for your convenience. Telephone and Internet voting information is provided on your proxy card. Should you attend the meeting in person, you may revoke your proxy and vote in person.
EXPRESS SCRIPTS, INC.
One Express Way
Saint Louis, Missouri 63121
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Express Scripts, Inc., a Delaware corporation, which we refer to as the Company, to be voted at our 2008 Annual Meeting of Stockholders, which we refer to as the annual meeting or the meeting, and any adjournment or postponement of the meeting. The meeting will be held at our principal executive offices, One Express Way, Saint Louis, Missouri 63121, on Wednesday, May 28, 2008, at 9:30 a.m. Central Time, for the purposes contained in the accompanying Notice of Annual Meeting of Stockholders and in this proxy statement. This proxy statement and the accompanying proxy will be first sent or given to stockholders on or about April 14, 2008.
ABOUT THE MEETING
Because you were a stockholder of our company as of March 31, 2008, or the record date, and are entitled to vote at the annual meeting, our board of directors is soliciting your proxy to vote at the meeting.
This proxy statement summarizes the information you need to know to vote at the meeting. This proxy statement and form of proxy were first mailed or made available to stockholders on or about April 14, 2008.
You are voting on four items:
1. Election of directors (see page 5);
2. Approval and ratification of an amendment to the Companys Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Companys common stock from 650,000,000 shares to 1,000,000,000 shares (see page 45);
3. Approval and ratification of an increase in the number of shares of the Companys common stock authorized for issuance under the Express Scripts, Inc. Employee Stock Purchase Plan (the ESPP) from 2,000,000 shares to 3,500,000 shares (see page 46); and
4. Ratification of PricewaterhouseCoopers LLP as independent registered public accountants for 2008 (see page 50).
Stockholders of Record: If you are a stockholder of record, there are four ways to vote:
Street Name Holders: Shares which are held in a brokerage account in the name of the broker are said to be held in street name. If your shares are held in street name you should follow the voting instructions provided by your broker. You may complete and return a voting instruction card to your broker, or vote via the telephone or internet. Check your proxy card for more information. If you hold your shares in street name and wish to vote at the meeting, you must obtain a legal proxy from your broker and bring that proxy to the meeting.
Regardless of how your shares are registered, if you complete and properly sign the accompanying proxy card and return it to the address indicated, or vote via the telephone or internet, your shares will be voted as you direct.
Our board recommends the following votes:
1. FOR each of the nominees as directors;
2. FOR the approval and ratification of an amendment to the Companys Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Companys common stock from 650,000,000 shares to 1,000,000,000 shares;
3. FOR the approval and ratification of an increase in the number of shares of the Companys common stock authorized for issuance under the ESPP from 2,000,000 shares to 3,500,000 shares; and
4. FOR the ratification of the appointment of PricewaterhouseCoopers LLP as independent registered public accountants for 2008.
Unless you give instructions on your proxy card, the persons named as proxy holders will vote your shares in accordance with the recommendations of our board of directors.
We do not know of any other matters that will be brought before the stockholders for a vote at the annual meeting. If any other matter is properly brought before the meeting, your signed or electronic proxy card gives authority to George Paz and Thomas M. Boudreau to vote on such matters in their discretion.
Only stockholders of record at the close of business on the record date are entitled to receive notice of and to participate in the annual meeting. If you were a stockholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting.
You will have one vote for every share of our common stock you owned on the record date.
Approximately 251,100,000, consisting of one vote for each share of our common stock outstanding on the record date. There is no cumulative voting.
The holders of a majority of the aggregate voting power of our common stock outstanding on the record date, or approximately 125,550,000 votes, must be present in person, or by proxy, at the meeting in order to constitute a quorum necessary to conduct the meeting.
If you vote, your shares will be part of the quorum. Abstentions and broker non-votes will be counted in determining the quorum. A broker non-vote occurs when a bank or broker holding shares in street name submits a proxy that states that the broker does not vote for some or all of the proposals, because the broker has not received
instructions from the beneficial owners on how to vote on the proposals and does not have discretionary authority to vote in the absence of instructions.
We urge you to vote by proxy even if you plan to attend the meeting so that we will know as soon as possible that a quorum has been achieved.
In the election of directors, the affirmative vote of a plurality of the votes present in person or by proxy and entitled to vote at the meeting is required. A proxy that has properly withheld authority with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for the purposes of determining whether there is a quorum.
For the proposal to approve and ratify the Amendment to the Companys Amended and Restated Certificate of Incorporation, the affirmative vote of a majority of the outstanding shares of common stock entitled to vote at the meeting will be required for approval. Accordingly, abstentions and broker non-votes will have the effect of votes against this proposal.
For each of the proposal to approve and ratify the increase of shares authorized for issuance under the ESPP and the proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accountants, the affirmative vote of the holders of a majority of the shares represented in person or by proxy and entitled to vote on the proposal will be required for approval. An abstention with respect to each of these proposals will not be voted, although it will be counted for the purposes of determining whether there is a quorum. Accordingly, an abstention will have the effect of a negative vote. Broker non-votes on a proposal (shares held by brokers that do not have discretionary authority to vote on the matter and have not received voting instructions from their clients) are not counted or deemed present or represented for determining whether stockholders have approved that proposal. Please note that brokers that have not received voting instructions from their clients cannot vote on their clients behalf on the proposal to approve the increase of shares available under the ESPP.
Yes. Just send in a new proxy card with a later date, or cast a new vote by telephone or Internet, or send a written notice of revocation to our Corporate Secretary at the address on the cover of this proxy statement. Also, if you attend the meeting and wish to vote in person, you may request that your previously submitted proxy not be used.
This year we are taking advantage of the new Securities and Exchange Commission (SEC) rules that allow companies to furnish proxy materials to stockholders via the Internet. If you received a Notice of Internet Availability of Proxy Materials, or Notice, by mail, you will not receive a printed copy of the proxy materials, unless you specifically request one. The Notice instructs you on how to access and review all of the important information contained in the proxy statement and annual report as well as how to submit your proxy over the Internet. If you received the Notice and would still like to receive a printed copy of our proxy materials, you should follow the instructions for requesting these materials included in the Notice. We plan to mail the Notice to stockholders by April 18, 2008.
Any Express Scripts stockholder as of March 31, 2008 may attend the meeting. If you own shares in street name, you should ask your broker or bank for a legal proxy to bring with you to the meeting. If you do not receive the legal proxy in time, bring your most recent brokerage statement so that we can verify your ownership of our stock and admit you to the meeting. However, you will not be able to vote your shares at the meeting without a legal proxy.
If you submit a proxy card without indicating your vote, your shares will be voted as follows:
The current term of office of all of our directors expires at the meeting or when their successors are duly elected and qualified. The Corporate Governance Committee of our board has nominated eleven of our current directors to be elected to serve until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified. Howard Waltman is retiring from the board upon the expiration of his current term, but will continue to serve as a non-voting emeritus member of the board. Mr. Waltmans retirement will result in one vacancy on the board. The Corporate Governance Committee of the board is currently in the process of identifying a candidate to fill this vacancy. Proxies cannot be voted for a greater number of persons than the number of nominees named below. Unless otherwise specified, all proxies will be voted in favor of the eleven nominees listed below for election as directors of our company.
Our board of directors has no reason to expect that any of the nominees will be unable to stand for election on the date of the meeting or will not serve. If a vacancy occurs among the original nominees prior to the meeting, the proxies will be voted for a substitute nominee named by our board and for the remaining nominees. Directors are elected by a plurality of the votes present in person or by proxy and entitled to vote at the meeting. Our board has determined that, in its judgment, with the exception of Mr. Paz, who is also an executive officer of our company, and Mr. Toan, who retired as an executive officer of our company in March 2005, all of the members of our board of directors are independent, as defined by the listing standards of The Nasdaq Global Select Market, as of the date of this Proxy Statement.
The following information is furnished as of March 1, 2008, for each of the nominees for our Board of Directors:
Gary G. Benanav, 62, was elected a director of Express Scripts in January 2000. Mr. Benanav served as Vice Chairman and a Director of New York Life Insurance Company or New York Life, a life insurance and financial services company, from November 1999 until his retirement in March 2005. Mr. Benanav also served as Chairman and Chief Executive Officer of New York Life International from December 1997 until his retirement in March 2006. He is also a director of Barnes Group, Inc.
Frank J. Borelli, 72, was elected a director of Express Scripts in January 2000. Mr. Borelli has been a Senior Advisor to Stone Point Capital, an investment management company and formerly a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. or M&MC, a global professional services firm, since his retirement from M&MC in January 2001 where he served as Senior Vice President, among other positions.. He is also a director and Audit Committee Chairman of Genworth Financial, Inc. and is a director of the Interpublic Group of Companies and a director of Signal Holdings Inc., an investee company of Trident Fund, which is managed by Stone Point Capital LLC.
Maura C. Breen, 52, was elected a director of Express Scripts in July 2004. Ms. Breen is Senior Vice President and General Manager for the New York Region for Verizon Communications, Inc. or Verizon, a provider of communications services, a post to which she was appointed in March 2006. Previously, Ms. Breen was Senior Vice President/Support Services, Network Services Group for Verizon, from December 2003 through March 2006. Ms. Breen also served as Senior Vice President & Chief Marketing Officer, Retail Market Groups for Verizon from July 2001 through December 2003.
Nicholas J. LaHowchic, 60, was elected a director of Express Scripts in July 2001. Mr. LaHowchic has served as President and Chief Executive Officer of Limited Logistics Services, Inc. or LLS, from October 1997, and as Executive Vice President for Limited Brands, Inc., a retail apparel company and the parent of LLS, from April 2004 until his retirement in February 2007. LLS provides supply chain, compliance and procurement services to retailers including Limited Brands, Inc. Mr. LaHowchic is also a director of Advance Auto Parts Inc.
Thomas P. Mac Mahon, 61, was elected a director of Express Scripts in March 2001. Mr. Mac Mahon served as President and Chief Executive Officer and a member of the Executive and Management Committees of Laboratory Corporation of America Holdings or LabCorp, the second largest independent clinical laboratory company in the U.S., from January 1997 until his retirement on December 31, 2006. Mr. Mac Mahon, who has been
a director of LabCorp since April 1995, continues to serve as Chairman of the Board of LabCorp, a position he has held since April 1996. Mr. Mac Mahon also serves as a director of Pharmerica Corporation and Golden Pond Healthcare, Inc.
Woodrow A. Myers Jr., M.D., 54, was elected a director of Express Scripts in May 2007. Dr. Myers has served as the Managing Director of Myers Ventures, LLC, a healthcare consulting company, since December 2005. Previously, Dr. Myers served as Executive Vice President and Chief Medical Officer of Wellpoint, Inc, a health benefits company, from September 2000 through December 2005. Dr. Myers is also a director of Genomic Health, Inc. and ThermoGenesis Corp.
John O. Parker, Jr., 63, was elected a director of Express Scripts in July 2001. Mr. Parker has served as a Venture Partner with Rho Ventures LLC, a venture capital firm, since January 2002. Mr. Parker also serves on the boards of PHT Corporation and Medical Present Value, Inc., both privately held companies.
George Paz, 52, was elected a director of Express Scripts in January 2004 and has served as Chairman of the Board since May 2006. Mr. Paz was first elected President of Express Scripts in October 2003 and also assumed the role Chief Executive Officer of Express Scripts on April 1, 2005. Mr. Paz joined Express Scripts and was elected Senior Vice President and Chief Financial Officer in January 1998 and continued to serve as Express Scripts Chief Financial Officer following his election to the office of President until his successor joined Express Scripts in April 2004.
Samuel K. Skinner, 69, was elected a director of Express Scripts in February 2004. Mr. Skinner has been Of Counsel with the law firm of Greenberg Traurig, LLP since 2004. Mr. Skinner previously served as President, Chief Executive Officer and a director of USF Corporation (formerly USFreightways Corporation) or USF, a transportation, freight forwarding and supply chain management company, from 2000 until his retirement in 2003. Mr. Skinner was also Chairman of the Board of USF from 2001 until his retirement. Mr. Skinner is also a director of Navigant Consulting, Inc., Midwest Air Group, Inc., Diamond Management and Technology Inc., Dade Behring Holdings, Inc., and the Chicago Board Options Exchange.
Seymour Sternberg, 64, was elected a director of Express Scripts in March 1992. Mr. Sternberg currently is the Chairman of the Board and Chief Executive Officer of New York Life and has served in this capacity since April 1997. From October 1995 until October 2002, he was the President of New York Life, and from October 1995 until March 1997 he also held the position of Chief Operating Officer of New York Life. Mr. Sternberg is also a director of CIT Group, Inc., and is a director/manager of various New York Life subsidiaries.
Barrett A. Toan, 60, was elected a director of Express Scripts in October 1990 and served as Chairman of the Board from November 2000 until May 2006. Mr. Toan was Express Scripts Chief Executive Officer from March 1992 until his retirement in March 2005. Mr. Toan was an executive employee of Express Scripts from May 1989 until his retirement and served as President of Express Scripts from October 1990 to April 2002. Mr. Toan is also a director of Sigma-Aldrich Corporation, a specialty chemical company, and Genworth Financial, Inc., an insurance and financial services company.
The Board of Directors unanimously recommends a vote FOR the election of each of the nominees listed above.
Our bylaws authorize the board to elect one or more directors emeritus to serve at the pleasure of the board. Each director emeritus serves as an advisor and consultant to the board, and may also be appointed by the board to serve as an advisor and consultant to one or more committees of the board. A director emeritus is invited to attend meetings of the board and any such committees, and may participate in discussions during such meetings. However, no director emeritus shall be entitled to vote on any business that comes before the board or any committee.
Howard L. Waltman, 75, is retiring from the board at the end of his current term, which expires on the date of the annual meeting. The Board currently intends to elect Mr. Waltman to serve as Director Emeritus following his retirement. Mr. Waltman has been a director of Express Scripts since its inception in September 1986, and has served as Presiding Director since October 2006. Mr. Waltman served as Chairman of the Board of Express Scripts from March 1992 until November 2000. Mr. Waltman is also a director of Emergent Group, Inc.
Our board of directors is responsible for establishing broad corporate policies and for overseeing the overall management of the Company. In addition to considering various matters which require board approval, our board provides advice and counsel to, and ultimately monitors the performance of, our senior management.
Committees of the Board. Our board has four standing committees of the Board of Directors: the Audit Committee, the Compensation and Development Committee or the Compensation Committee, the Corporate Governance Committee, and the Compliance Committee. Each committee has a written charter and is composed entirely of directors deemed to be, in the judgment of our board, independent in accordance with Nasdaq listing standards. Our board of directors met 14 times in 2007. Each director attended at least 75% of the total number of meetings of the board and the board committees of which he or she was a member in 2007. While we do not have a formal policy requiring members of the board to attend the annual meeting, we encourage all directors to attend. All of the boards twelve members attended the annual meeting in 2007. The following table lists the members, primary functions and number of meetings held for each of the committees:
The Board also formed a special Transaction Committee to consider matters related to our efforts to acquire Caremark Rx, Inc. in early 2007. Messrs. Borelli, Mac Mahon and Waltman served on the Transaction Committee, which is no longer active.
Presiding Director. Our corporate governance guidelines were revised in October 2006 to call for the selection of a Presiding Director of the board at such times as the position of chairman of the board is held by a member of management. The Presiding Director is a non-employee director selected by the other non-employee directors whose duties include the following:
Mr. Waltman was elected as Presiding Director of our board in October 2006. A new Presiding Director will be selected following Mr. Waltmans retirement.
Directors who are employed by our company or its subsidiaries do not receive compensation for serving as directors. Directors who are not employees of our company or its subsidiaries are entitled to receive:
We also reimburse non-employee directors for out-of-pocket expenses incurred in connection with attending board and committee meetings.
Our non-employee directors also receive equity awards under our 2000 Long-Term Incentive Plan, as amended or the 2000 LTIP, as follows:
The equity grants are divided between shares of restricted stock and stock-settled stock appreciation rights, or SSARs, as follows:
Historically we have granted non-qualified stock options or stock options to our non-employee directors instead of SSARs and we may consider returning to the use of stock options in the future. All of the SSARs and stock options granted to the non-employee directors under the 2000 LTIP have an exercise price of 100% of the fair market value of the shares on the date they are granted, and a seven-year term. The SSARs and restricted stock vest ratably over three years, with accelerated vesting upon the directors retirement, provided that the directors combined age and years of service on the Board total at least 75, or upon the failure by the Company to renominate the director for election.
The following table provides information regarding our compensation of non-employee directors for 2007:
DIRECTOR COMPENSATION IN 2007
Compensation for any director emeritus is established by the board at the time such director emeritus is elected to serve.
Corporate Governance Guidelines and Committee Charters. We have adopted Corporate Governance Guidelines to outline our corporate governance structure and address significant corporate governance issues. Copies of these Guidelines as well as the Charters for each of our board committees can be found on the Corporate Governance page in the Investor Information section of our website at www.express-scripts.com (information on our website does not constitute part of this proxy statement).
Code of Ethics. We have adopted a Code of Ethics which applies to all of our directors, officers, and employees including our senior financial officers. A copy of the Code of Ethics is available in the Investor Information section of our website at www.express-scripts.com. We will post any amendments to the Code of Ethics, or any waivers of the Code of Ethics for any of our directors, executive officers or senior financial officers, in the same section of our website.
Communicating with the Directors. Stockholders wishing to communicate with our board of directors or with an individual board member with respect to our company may do so by writing to the board or the specific board member, and mailing the correspondence to: Attention: Corporate Secretary, Express Scripts Inc., One Express Way, Saint Louis, Missouri 63121. The outside of the envelope should clearly indicate that it contains a stockholder communication. Our board of directors has approved a process pursuant to which the office of the Corporate Secretary will review and forward the correspondence to the appropriate person or persons for response, with the exception of correspondence which is inappropriate or unrelated to the duties and responsibilities of the board.
Selection of Nominees for the Board of Directors. The Corporate Governance Committee is responsible for evaluating potential candidates to serve on our board of directors, and for selecting nominees to be presented for election to the board at our annual meeting of stockholders. In evaluating potential director candidates, the Corporate Governance Committee considers the skills and characteristics possessed by each candidate in the context of the perceived needs of the board at that point in time. Among the factors considered by the Corporate Governance Committee in considering a potential nominee are the following:
In identifying potential candidates for the board, the Corporate Governance Committee relies on recommendations from a number of possible sources, including current directors and officers. The Corporate Governance Committee may also retain outside consultants or search firms to help in identifying potential candidates for membership on the board. In the past, the Corporate Governance Committee has engaged the firm of Spencer Stuart to assist with director searches. The Corporate Governance Committee will also consider candidates recommended by stockholders on the same basis as other candidates.
Any stockholder wishing to recommend a candidate for consideration by the Corporate Governance Committee to become a nominee for election to the board may do so by submitting a written recommendation to the committee in accordance with our procedures for the submission of Stockholder Proposals, as set out in our
Bylaws (see Stockholder Proposals beginning on page 51). For a nominee to be considered, the following information must be submitted in accordance with the required procedures:
The request for nomination must also be accompanied by a written consent of the proposed nominee to being named as a nominee and to serve as a director if elected. Our Corporate Secretary will review all such stockholder recommendations, and will forward those that comply with the above-described requirements to the Corporate Governance Committee for evaluation and consideration.
The Compensation Discussion and Analysis provides a narrative commentary on the companys compensation policies, programs and practices for our Chief Executive Officer, Chief Financial Officer and other members of our executive management team. Throughout this Proxy Statement we will refer to our Chief Executive Officer, Chief Financial Officer and the three other officers named in the Summary Compensation Table on page 24 as the named executives or the named executive officers.
The broad topics discussed in this analysis include:
Aligning Compensation with Stockholder Interests. The primary goal of our compensation structure is to align the interests of our executives with our stockholders through compensation vehicles which reward the achievement of established intermediate and long-term goals with the ultimate objective of increasing long-term stockholder value. The elements utilized to help achieve this goal of alignment include the following:
Rewarding Annual and Long-Term Performance. Our compensation structure is also intended to reward the achievement of certain annual and long-term performance objectives by the individual executives, the Companys business units, and the Company overall. This objective, in many ways, overlaps the alignment objective and is achieved through the same compensation vehicles. The elements intended to reward annual and/or long-term performance include the following:
Attracting and Retaining Talented Executives. In a constantly growing and changing business, it is vital that we be able to continually attract and retain superior employees in key executive positions. The key compensation elements aimed at attracting and retaining executives include the following:
Compensation Committee Members and the Compensation Committee Charter. The Committee is responsible for establishing, overseeing and reviewing executive compensation policies and for approving, validating and benchmarking the compensation and benefits for named executive officers. The Committee includes three independent Directors Gary G. Benanav (Chair), Thomas P. Mac Mahon and Howard L. Waltman. Each of these Directors satisfies the independence requirements of the Nasdaq Stock Market. A Charter for the Compensation Committee was adopted in November 2000 and amended in December 2002. A copy of the Charter can be found on the Corporate Governance page in the Investor Information section of the website at www.express-scripts.com.
The Committees principal functions under the Charter include:
The Charter is reviewed at least annually by both the Committee and the Corporate Governance Committee of the Board. The Committee is scheduled to meet four times per year to consider compensation activities applicable to senior executives and other matters. Additional meetings may be scheduled as required by the Committee.
Role of Management in Establishing Compensation. At the direction of the Chair of the Committee, management generally prepares the meeting materials for the Committee in advance of its meetings. The compensation consultant retained by the Committee may also prepare materials depending on the topics to be covered. In the meetings, the Committee will consider for approval compensation changes for senior executives and equity grants for newly hired or promoted senior executives. Management may also ask that additional issues involving compensation policies or design be considered. During the annual evaluation process, the Chief Executive Officer is given the opportunity to evaluate senior executives for purposes of annual merit increases, annual incentive payments and long term equity grants. The Committee makes all compensation decisions for the named executives and other members of our senior management team. However, the Chief Executive Officer and certain other members of management may also provide recommendations to the Committee on these matters.
Management may be asked to assist in conducting the meetings and to provide applicable data, information and other resources. The Committees independent compensation consultant also participates as requested by the
Committee. As part of their regular meetings, Committee members generally meet in executive session during which members of management are not present.
In consultation with the Committee, management establishes compensation parameters below the senior executive level which generally reflect the compensation philosophy and direction established by the Committee in setting compensation for senior management.
Role of the Compensation Consultant. The Committee has traditionally engaged a nationally recognized consulting firm to review alternatives and to provide advice regarding appropriate compensation levels for the senior executive officers (the Compensation Consultant). As requested, the Compensation Consultant also provides data and analysis to support its recommendations and advice. The current Compensation Consultant, Watson Wyatt Worldwide, was selected in 2005 following a detailed RFP process managed by the Committee. The Committee considered several national consulting firms and, following interviews and evaluation by the Committee, Watson Wyatt Worldwide was retained. The Committee is solely responsible for commissioning the work of the Compensation Consultant. The Compensation Consultant is independent of management and does no other executive compensation work for the company, although the Compensation Consultant has provided salary survey information to management other than for senior executives. In February 2008 the Committee adopted a policy requiring the approval of the Committee Chair, or, at the Chairs discretion, the entire Committee, before the Compensation Consultant can be utilized to perform any other services for the Company other than those required under its engagement by Committee. The Committee has authority to hire and dismiss the Compensation Consultant and budgetary authority to establish engagements with the consultant. Management is copied on the work by the Compensation Consultant and discusses work in progress at the discretion of the Committee. The bills for consulting work go first to the Committee and then to the Company for payment. As requested, a representative of the Compensation Consultant may attend the meetings of the Committee in person or by telephone.
The role of the Compensation Consultant is to provide independent, expert advice to the Committee on the design and level of compensation paid to our senior executives. The Compensation Consultant compares the compensation elements for the senior executive officers, including the Chief Executive Officer, with the compensation received by executives in comparable positions at a peer group of companies. The Committee considers these peer group pay levels as one of the factors utilized in arriving at its final compensation decisions. It is the Committees current intention to conduct a benchmark study annually to assure that the senior executives are compensated appropriately from a competitive and design perspective. Following its analysis, the Compensation Consultant makes recommendations for consideration by the Committee. In 2005 the Compensation Consultant conducted a review of the long-term incentive compensation and recommended changes in the program design that were approved by the Committee and are reflected in the Components of Executive Compensation section that follows.
Management does not currently engage a separate executive compensation consultant.
Benchmarking of Executive Compensation Programs. Our compensation approach is to combine base pay, annual incentive pay, and long-term incentive awards to create a total package that is, in general, approximately at the median compensation level for executive officers of a peer group of companies if financial and non-financial objectives are achieved, and that can be at or above the 75th percentile of such compensation level if stretch financial and non-financial goals are achieved.
Analysis by the Compensation Consultant identified a group of 13 companies judged to be comparable to the company (the Peer Group Companies) based on their revenue and market capitalization, industry, similarity to the Company and complexity. In 2007 one of the prior Peer Group Companies (Caremark Rx, Inc.) was acquired resulting in a reevaluation of the mix of companies chosen for the peer group. As a result of such reevaluation, three new companies were added to the peer group CVS/Caremark Corporation, Becton, Dickinson and Company,
and Cigna Corporation. This change was also applied to previous grants of performance shares which included Caremark Rx, Inc. within the peer group. The Peer Group Companies are:
The Peer Group Companies recommended by the Compensation Consultant and approved by the Committee include companies which are different from those in the peer group index in the Stock Performance Graph included in the Companys annual report to stockholders. All of the Peer Group Companies are public companies in the health care industry. The Committee expects it will be necessary, as a result of mergers, acquisitions and other changes, to update the list of Peer Group Companies periodically in order to maintain a sufficient number of companies for pay comparisons.
The Committee annually reviews and assesses the compensation levels provided by the Compensation Consultant for executive officers at the Peer Group Companies, and also evaluates the financial and market performance of the Peer Group Companies in making compensation decisions. In addition, the Committee also reviews public compensation information available through SEC filings and published survey information provided by various consulting firms. This review constitutes one of the factors the Committee uses in determining the appropriate pay levels for the senior executives. The review involves compensation received by executives in comparable positions and looks at the various elements of the compensation package and how these elements support corporate objectives.
Components of Executive Compensation
The Committee has structured an executive compensation program comprised of three primary components: base pay, annual incentive pay, and long-term incentive pay. Segmenting and stratifying the elements of executive compensation helps focus compensation resources where they are expected to be most effective. In developing the mix of components, the Committee has sought to balance the need for fixed compensation provided in base pay with variable compensation provided in the annual and long-term incentive plans.
Base Pay. Adequate and competitive base pay allows for the recruitment of high caliber executives and helps to reduce turnover. The Committee uses base pay at the Peer Group Companies as a reference point for equivalent or similar positions with the Company. The Committee determines the salary for each of the executive officers by considering the value and performance of the executive, recommendations by management (for executives other than the Chief Executive Officer) and the Compensation Consultant, the level and scope of responsibilities of the position, and the pay levels of similarly positioned executive officers in the Peer Group Companies. Competitive pay levels are represented in median pay for the positions at the Peer Group Companies and other sources as well as recommended pay range alternatives provided by the Compensation Consultant. At the senior executive level, results applicable to the business unit or functional division headed by the executive are also factored into decisions related to changes in the base pay of the executive.
Salary levels are typically reviewed annually as part of our performance review process or upon a promotion or significant change in an executives responsibilities. Salary increases are based on both individual performance and changes in our overall budget for compensation. Changes in salary for the named executives and other members of senior management are approved by the Committee and annual changes are generally effective each year as of April 1.
Annual Incentive Bonus Pay. The Annual Bonus Plan provides the Company with a powerful tool to assist in focusing the executive on accomplishing current operational and financial objectives over a one-year period. Each executive has a bonus target which is stated as a percentage of his or her annual base salary. The targets are set by the
Committee taking into consideration the annual incentive pay levels existing at the Peer Group Companies for similar positions and other factors. Payouts under the annual incentive program are determined as follows:
In 2006, the 2000 LTIP was amended to permit cash awards to be granted under the plan. This permits the Company to enhance the tax deductibility of Annual Bonus Plan awards made to the named executive officers (see Deductibility of Compensation on page 22). Annual bonus awards for 2007 made under the 2000 LTIP have a maximum achievable level (i.e. 250% of target for named executive officers and 200% of target for the CEO), are conditioned upon the achievement of a minimum EPS target, and are subject to the downward discretion of the Committee.
Long-Term Incentive Awards. The Committee believes that our long-term compensation program should orient and align senior executives with the interests of stockholders and focus the executives efforts on our long-term success. The long-term incentive awards are designed to retain executives and motivate them toward results that exceed those of the Peer Group Companies. The long-term compensation program consists of grants of stock options, restricted stock and performance shares (in some previous years the Company has granted SSARs in lieu of stock options). These equity grants increase in value if the market value of the stock appreciates over time. For that reason, the executives are motivated to engage in behaviors that will increase the long-term value of the stock and thereby benefit all stockholders.
Each executive officer receives an equity grant upon employment (or upon promotion to senior executive status) and, in the past, typically has received an additional annual equity grant each succeeding year. The
Committee believes that providing equity compensation opportunities provides a clear and powerful motivation to the executive team to achieve financial and operational objectives that will, over time, increase the market price of the stock. Several of the senior executives have also received special grants of non-qualified stock options, SSARs and/or restricted stock in connection with their entering into employment agreements. The purpose of these grants for newly-hired executives is to provide incentive for high potential individuals to join the company and/or to compensate them for compensation they may have forfeited when leaving their prior employer.
In connection with the 2005 executive compensation study, the Committee revised its approach with respect to long term incentive compensation. Factors involved in determining the appropriate equity vehicles to use included consideration of the prevalence of equity grants in the Peer Group Companies and general industry, the desired equity mix, rewarding share price improvement, retention, and relative stock and financial performance. Starting in 2006, the Committee implemented a long-term compensation program under which senior executives receive annual grants of long-term equity compensation divided among three different types of equity grants. The annual awards are approved by the Committee based on the dollar value of the entire equity package, which is allocated among the forms of equity as follows:
The Committee grants all three types of awards in order to meet several objectives. The Committee believes that measuring performance against the Companys competitors with respect to important financial metrics adds a significant dimension to the long-term program design. By including performance shares, the program provides motivation both to achieve results that will be positively responded to in the marketplace and to produce results that
will exceed equivalent measures among the competitors. The weighting of the equity components that comprise the long-term plan package is subject to change based on the Committees evaluation and discretion.
In February 2008, the Committee concluded that it was appropriate to bring the chief executive officers total direct compensation (base pay, annual incentive bonus pay and long term incentives) up to or near the 50th percentile among the Peer Group Companies. However, in keeping with the Companys increased emphasis on pay-for-performance, the Committee concluded that a larger portion of the chief executive officers long term incentive grant (35%) should be represented by performance shares, as compared to the 25% for the Companys other executive officers. As a result, Mr. Pazs 2008 long term incentive awards were allocated as follows: 40% stock options, 25% restricted stock, and 35% performance shares.
The Committee has discretion to determine the vesting schedule for each time-based equity grant and generally makes grants that become exercisable in equal amounts over three years. Except in the cases of retirement, disability or death, in general, executives must be employed by the company at the scheduled vesting time for their equity awards in order for such vesting to occur.
The Committee has historically made annual equity grants (including stock options and SSARs) during the first calendar quarter, following the finalization of our year-end financial results. By making grants at this time the Committee is able to consider the previous year financial performance in determining the size and structure of such grants, both in the aggregate and with respect to individual executives. Additionally, by making the awards during the first quarter, such grants are coordinated with the annual bonus awards and annual salary adjustments.
The size of an executives equity compensation award is based upon the evaluation by the Committee and, for executives other than the Chief Executive Officer, regarding the contribution that the executive officer is expected to make to the overall growth and profitability during the vesting period. The Committee also considers long-term incentive compensation levels at the Peer Group Companies. While the Company maintains stock ownership guidelines, the Committee does not take into account existing stock ownership levels of individual executives in determining the amount of equity awards.
If a business transaction occurs that would change the basis for determining the results for incentive compensation payments, the Committee may adjust the metrics to reflect the new business circumstances in a manner that provides equivalent opportunity and results requirements. The Committee may also make similar adjustments to account for changes in accounting principles or practices, changes in the number of shares outstanding, and similar changes, and may determine whether adjustments should be made for one-time or extraordinary items, prior period adjustments, discontinued operations and similar items. Such adjustments could occur for the metrics in the Annual Bonus Plan or the performance share portion of the equity grants.
Perquisites. In accordance with the compensation philosophy to pay for results, no perquisites are provided to the senior executive officers that we would be required to report under the rules applicable to this Proxy Statement. In fact, the only perquisite available to the named executives is a Company-paid comprehensive physical examination and wellness recommendations at a nationally recognized medical facility. These examinations are available to our senior executives every two years before age 50 and annually thereafter. The estimated value of this program is about $5,000 per examination.
Deferred Compensation. The Company provides an opportunity for executives to participate in the EDCP, a deferred compensation program that is intended to comply with the rules provided under section 409A of the Internal Revenue Code. Under the EDCP participating executives can elect to defer up to 50% of their annual base pay and up to 100% of their annual bonus. In addition, we have historically made contributions to each executives account under the EDCP equal to 6% of the executives annual cash compensation, with the contributions subject to a cliff vesting at the end of the third calendar year following the year for which they are awarded. At such time as an executive becomes eligible for retirement under the EDCP (which occurs upon reaching a minimum of age 55 and having a combined age plus years of service with the Company of 65), all contributions made to such executives account under the EDCP immediately become vested. Other than the 6% annual cash contribution to the EDCP and the opportunity to participate in the ESI qualified 401(k) plan, the Company provides no retirement benefit to its executives.
Deferred compensation gives executives a tax favored method of accumulating assets for current or retirement living expenses. The three-year vesting schedule that applies to the Company contributions is intended to serve as a retention device for the executives. Amounts contributed to the EDCP by either the participant or the Company are assumed to have been invested in one or more of a number of publicly available mutual funds and a Company Common Stock Fund. The plan is not formally funded and the returns that are paid on the participants accounts are equal to the gain or loss on the hypothetical market investments. As a result, the Committee believes that the Company has not promised to pay above-market returns on any participants account under the EDCP.
Base Pay. During 2005, the Committee evaluated how we were paying our executive officers in comparison to the Peer Group Companies and determined, based upon the recommendation of the compensation consultant, that they were generally paid below the market median. As a result, in 2006, the Committee decided to increase the pay of the named executive officers, including the Chief Executive officer, to better align them with the pay for comparable jobs at the Peer Group Companies and as disclosed in various compensation surveys. The Committee determined that these salary adjustments should be implemented over two years, with the initial market-based increase put in place in 2006. The adjustments effective April 1, 2007, as set out in the chart below, reflect the second portion of the market-based increase as well standard merit adjustments resulting from our annual review process and an assessment of each individuals performance.
In addition, during 2007 the Company reorganized certain internal operations resulting in the assumption of additional duties by certain members of our senior management team, including Mr. Boudreau and Mr. Ignaczak. In May 2007, the Committee determined that these additional duties warranted certain compensation adjustments (effective as of May 21, 2007) which are also reflected in the chart below.
Annual Incentive Bonus Program. As described above, each named executive officers bonus target under the Annual Bonus Plan for 2007 was determined based on a percentage of his base salary, and the bonus potential for each of the named executive officers for 2007 ranged from 0% to 250% of such target (other than for Mr. Paz for whom the range was 0% to 200% of target). Generally, the bonus payouts for performance below the threshold performance level, at the threshold performance level, and at the target performance level for 2007 would have been 0%, 25% and 100% respectively, and the maximum payout for the achievement of stretch performance goals
would have been 250% of the target payout (200% of the target payout for Mr. Paz). For the 2007 performance period, the various bonus targets and payouts for the named executive officers (paid in March 2008) were as follows:
The payouts under the Annual Bonus Plan for 2007 were based on our actual EPS of $2.15 versus a budgeted EPS of $1.98, and actual EBITDA of $1,115.7 million against a budgeted EBITDA of $1,045.5 million.
2007 Long Term Incentive Awards. Specific 2007 long term incentive awards to the named executive officers are contained in the table under the caption Grants of Plan Based Awards Table on page 26. The awards include regular awards, granted in February 2007, along with special grants of performance shares and restricted stock made in May 2007. These special grants were authorized by the Committee to make up for an error in calculating the peer group benchmarking data for use in determining the annual grants.
Additional Benefits. Except as specifically described in this Compensation Discussion and Analysis, the executive officers participate in employee benefit plans generally available to all employees on the same terms as similarly situated employees, including our 401(k) plan and health and welfare plans. The Company provides equivalent health insurance to all of our employees, and the employee paid portions of the premiums on such insurance are tiered such that more highly compensated employees pay higher premiums in order to subsidize the premiums for lower paid employees. As a result, the employee contributions paid by our executives are more than 300% higher than those paid by our lower paid employees.
All of the executives have offices that are no larger than those of the regular offices in our headquarters building and reserved parking is not provided for employees at any level. No financial counseling programs are provided and the Company does not permit personal use of corporate aircraft without express prior approval of the Committee, which approval has never been sought nor granted.
Employment Agreements. We have entered into employment agreements with our CEO and each of our Executive Vice Presidents, which also contain severance and change in control provisions. The Committee believes these agreements are appropriate for a number of reasons including the following:
These agreements do not materially affect the Committees annual compensation determinations, as they only restrict its ability to reduce base salary. All of the employment agreements with the exception of the agreement with Mr. Paz were re-executed in 2006 in order to make them consistent among the executive officers. Mr. Paz executed a new employment agreement effective April 1, 2008, which replaced an agreement entered into in April 2005. Additional information about the severance and change in control provisions of the agreements can be found under the caption Employment Agreement and Potential Payments Upon Termination or Change in Control on page 30.
Deductibility of Compensation. The goal for the deductibility of compensation is to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, to the extent deemed practicable or appropriate by the Committee. Section 162(m) places a limit of $1 million on the amount of compensation that a publicly-traded company may deduct in any one year for any of its named executive officers. This limitation does not apply to performance-based compensation meeting certain requirements (including the requirement that such compensation be paid under a stockholder approved plan). For 2007 the grants of SSARs and performance shares were designed to satisfy the deductibility requirements of Section 162(m).
As discussed above, in 2006, the stockholders approved amendments to the 2000 LTIP which, among other things, provided for the annual bonus awards to be awarded and paid under the plan, thus satisfying the requirement under Section 162(m) that performance based compensation be paid pursuant to a stockholder approved plan. Accordingly, the Committee intends for these awards under the annual incentive program to be deductible in 2008 and future years.
Stock Ownership Guidelines. In 2001, the Committee established guidelines for stock ownership among its executive group. The purpose of the guidelines is to have each executive assert his or her commitment to the company and to the stockholders by holding a prescribed number of full value shares or restricted stock. While restricted stock, performance shares and phantom stock equivalents under the EDCP are included in determining compliance with these thresholds, stock options and SSARs, whether vested or unvested are not included. Even though these guidelines are not mandatory, each executives status with respect to stock ownership is annually reviewed and communicated. Each executive has five years from the time of becoming an executive officer to attain the recommended ownership level. The guidelines require each individual to hold a number of eligible shares with a value at least equal to a multiple of his or her base annual salary as follows: 4.0x for the Chief Executive Office, 3.5x for the Chief Operating Officer, 3.0x for all Executive Vice Presidents, 2.5x for all Senior Vice Presidents, and 1.5x for all Vice Presidents. In 2007 the Committee increased the ownership requirements for Senior Vice Presidents from 2x to 2.5x.
As of December 31, 2007, each of the Named Executive Officers has met his stock ownership requirements through holdings of shares of the stock, including restricted stock, performance shares or share equivalents beneficially owned under the deferred compensation plan.
Option Granting Policy. Effective in November 2006, the Committee adopted a Policy for Grant Approvals and for Establishing Grant Date for Equity Grants. Under this policy:
Derivatives Trading. Because a primary goal of equity-based incentive compensation is to align the interests of our executives with our stockholders, Company policy prohibits the trading of derivative securities related to the stock.
The Compensation Committee and Development Committee of Express Scripts, Inc. has reviewed and discussed the Compensation Discussion and Analysis section of this Proxy Statement with management, and based on such review and discussions the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.
March 31, 2008
COMPENSATION AND DEVELOPMENT COMMITTEE
Gary Benanav, Chairman
Thomas P. Mac Mahon
The Compensation and Development Committee is comprised of Gary Benanav (Chair), Thomas Mac Mahon and Howard Waltman, none of whom are employees or current or former officers of our company, or had any relationship with our company required to be disclosed under Certain Relationships and Related Party Transactions.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation of our named executive officers listed in the table for the year ended December 31, 2007.
GRANTS OF PLAN-BASED AWARDS IN 2007
The following table provides additional information about awards of restricted stock, stock-settled stock appreciation rights and performance shares granted to the named executive officers in 2007:
OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR-END
The following table provides information on vested and unvested equity awards held by the named executive officers as of December 31, 2007:
The following table provides information on the value realized by the executive officers for stock options exercised during 2007, and for restricted stock awards which vested during 2007:
The following table provides information on contributions, earnings and account balances for the named executives in our Executive Deferred Compensation Plan, or EDCP:
The material terms of the EDCP are described in our Compensation Discussion and Analysis under Components of Executive Compensation Deferred Compensation on page 19.
EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS
UPON TERMINATION OR CHANGE IN CONTROL
Employment Agreement with Mr. Paz
General Terms. On April 1, 2005, we entered into an employment agreement with Mr. Paz in connection with his promotion to the office of Chief Executive Officer. This agreement with Mr. Paz, which we refer to as the 2005 agreement was effective as of April 1, 2005 with an initial term through March 31, 2008. On April 1, 2008, we entered into a new employment agreement with Mr. Paz, with a term through March 31, 2011, which we refer to as the 2008 agreement. The terms of the 2008 agreement are described in New Employment Agreement with Mr. Paz beginning on page 39.
The 2005 agreement provided for:
Termination by Us for Cause or by Mr. Paz other than for Good Reason or Retirement. If Mr. Pazs employment is terminated before the employment period expires for cause, as defined in the 2005 agreement, or by Mr. Paz other than for good reason or retirement, as those terms are defined in the 2005 agreement, he is not entitled to receive any further payments or benefits that have not already been paid or provided, including any unvested portion of the option grant or restricted stock awards. However, Mr. Paz is entitled to the following accrued rights:
Termination by Us (other than for Cause or Disability) or Termination by Mr. Paz for Good Reason. If Mr. Paz is terminated other than for cause or disability, or by him for good reason, as those terms are defined in the 2005 agreement, he will receive:
Termination upon Death. If Mr. Paz dies before the employment period expires, his estate will receive:
Termination for Disability or Retirement. If Mr. Paz is terminated for disability or retirement (i.e., voluntary retirement on or after age 591/2 but not within 90 days after a change in control of us) before the employment period expires, he will receive:
Effect of Change in Control on Deferred Bonus. If a change in control, as defined in the 2000 LTIP, occurs prior to March 31, 2008 Mr. Paz will receive:
Post-Employment Restrictive Covenants. Upon termination of employment, Mr. Paz is prohibited from:
Mr. Paz must comply with these restrictions in order to receive the severance benefits described above.
Section 409A Adjustments. If any severance payments made to Mr. Paz following termination (other than payments under the EDCP) should be subject to the restrictions of Section 409A of the Internal Revenue Code, then we must negotiate in good faith to amend his employment agreement to the extent necessary to create payment terms with respect to such post-termination payments which are as close as possible to those originally set forth in his employment agreement while not violating the terms of Section 409A.
Excise Tax Gross-Up Payment. If any severance payments would result in Mr. Pazs liability for the payment of an excise tax under Section 4999 of the Internal Revenue Code, or any similar state or local tax, we will make a gross-up payment to him to fully offset such tax provided the aggregate present value of the benefit amount is equal to or exceeds 125% of the maximum total payment which could be made to him without triggering the excise tax. If the aggregate present value of the amount of the benefit, however, exceeds such maximum amount, but is less than 125% of such maximum amount, then we may reduce the benefit so that no portion of the amount is subject to the excise tax, and no gross-up payment will be made.
Estimated Benefits. The table below reflects the amount of incremental compensation which would be paid to Mr. Paz upon the termination of his employment or upon a change in control. These amounts assume that such termination or change in control was effective as of December 31, 2007, and that the price of our common stock upon which certain of the calculations are made was the closing price of $73.00 per share on that date. Accordingly, the computation of these amounts requires the company to make certain estimates which are further described in the description of the 2005 agreement above or in the accompanying footnotes. Some of these amounts are payable pursuant to the terms of the 2005 agreement while others arise from the terms of the applicable grant and/or benefit plan. Those amounts payable pursuant to the 2005 agreement generally require the executive to sign a general release and to comply with certain contractual terms including those related to noncompetition, nonsolicitation and non-disparagement.
Because the incremental amount of payments to be made depend on several factors, the actual amounts to be paid out upon termination of employment or a change in control can only be determined at the time of the event. The tables do not include the nonqualified deferred compensation that would be paid, which is set forth in the Nonqualified Deferred Compensation Table above, except to the extent an individual is entitled to an additional
benefit as a result of the termination. The estimated payments upon termination and change in control are as follows:
The 2000 LTIP defines comparable employment as employment with us or our successor following a change in control pursuant to which:
General Terms. On May 1, 2006, we entered into executive employment agreements with several key executives, including each of the named executive officers other than Mr. Paz. These employment agreements are substantially identical, except as indicated below. The initial employment period under these agreements ran from May 1, 2006 through March 31, 2007, and, under each of the agreements, is automatically extended for successive one-year renewal periods unless either party gives notice of non-renewal at least ninety days prior to the end of the then current term. Neither party under any of the agreements gave such notice prior to March 31, 2007 termination date, and, as a result, each of these agreement has been renewed through March 31, 2008; provided, however, that Mr. Lowenbergs employment with the Company, along with his employment agreement, terminated as of March 1, 2008, and Mr. Stiftens employment with the Company, along with his employment agreement, are currently scheduled to terminate in April 2008.
Each employment agreement generally provides for:
The initial base salary and minimum bonus target amounts (expressed as a percentage of base salary) for each of the officers under the new agreements were:
Termination by Us for Cause or by Executive other than for Good Reason or Retirement. If the executives employment is terminated before the employment period expires by us for cause, as defined in the agreement, or by him other than for good reason or retirement, as those terms are defined in the agreement, he is not entitled to receive any further payments or benefits that have not already been paid or provided, including any unvested portion of the option grant or restricted stock awards. However, he is entitled to the following accrued rights:
Termination by Us (other than for Cause or Disability) or for Good Reason. If the executives employment is terminated by us other than for cause or disability, or by the executive for good reason, as those terms are defined in the agreement, the executive is entitled to receive:
Termination due to Death, Disability or Retirement. If the executives employment terminates on account of death, disability or retirement, as those terms are defined in the agreement, before the end of his employment period, he (or his estate) generally is entitled to receive:
Post-Employment Restrictive Covenants. Upon termination of employment, each executive is prohibited from:
Excise Tax Gross-Up Payment. If any benefit to be paid would result in the executives liability for the payment of an excise tax under Section 4999 of the Internal Revenue Code or any similar state or local tax, we will make a gross-up payment to the executive to fully offset the excise tax provided the aggregate present value of the amount of the benefit is equal to or exceeds 125% of the maximum total payment which could be made to the executive without triggering the excise tax. If the aggregate present value of the amount of the benefit exceeds such
maximum amount, but is less than 125% of such maximum amount, then we may reduce the amount of the benefit so that no portion of the benefit is subject to the excise tax, and no gross-up payment would be made.
Estimated Benefits. The tables below reflect the amount of incremental compensation which would be paid to each of Messrs. Boudreau, Lowenberg, Ignaczak and Stiften upon the termination of his employment or upon a change in control. These amounts assume that such termination or change in control was effective as of December 31, 2007, and that the price of our common stock upon which certain of the calculations are made was the closing price of $73.00 per share on that date. Accordingly, the computation of these amounts requires the company to make certain estimates which are further described in the description of the employment agreements above or in the accompanying footnotes. Some of these amounts are payable pursuant to the terms of the employment agreements while others arise from the terms of the applicable grant and/or benefit plan. Those amounts payable pursuant to the employment agreements generally require the executive to sign a general release and to comply with certain contractual terms including those related to noncompetition, nonsolicitation and non-disparagement.
Because the incremental amount of payments to be made depend on several factors, the actual amounts to be paid out upon termination of employment or a change in control can only be determined at the time of the event. The tables do not include the nonqualified deferred compensation that would be paid, which is set forth in the Nonqualified Deferred Compensation Table above, except to the extent an individual is entitled to an additional benefit as a result of the termination. The estimated payments upon termination and change in control are as follows:
On April 1, 2008, we entered into the 2008 agreement with Mr. Paz. The terms of the 2008 agreement are substantially identical to the terms of the agreements with our other executives, as described in Employment Agreements with Other Named Executive Officers beginning on page 34, except as follows:
On the Record Date there were approximately 251,100,000 outstanding shares of our common stock. Unless otherwise provided, all references to shares of our common stock in this proxy statement have been adjusted to reflect all of our previous stock splits, including the three separate two-for-one stock splits effective June 22, 2007, June 24, 2005 and June 22, 2001, each of which was effected in the form of a stock dividend of one share for each outstanding share to holders of record.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information regarding the beneficial ownership of our common stock as of March 1, 2008 (unless otherwise noted) by (i) each person known by us to own beneficially more than five percent of the outstanding shares of our common stock, (ii) each of our directors and nominees, (iii) each of our current or former executive officers named in the Summary Compensation Table on page 24, and (iv) all of our current executive officers and directors as a group. The table includes shares that may be acquired on March 1, 2008, or within 60 days of March 1, 2008, upon the exercise of stock options by employees or outside directors. Unless otherwise indicated, each of the persons or entities listed below exercises sole voting and investment power over the shares that each of them beneficially owns.
The following table summarizes information as of December 31, 2007 relating to our equity compensation plans under which equity securities are authorized for issuance:
The Audit Committee of Express Scripts, Inc. is composed of four directors who, in the judgment of our board of directors, meet the independence requirements of the Nasdaq Global Select Market. Since 1992 the Audit Committee has operated under a Charter adopted by our board of directors. The Charter, as amended, is available through the Investor Information section of our website at www.express-scripts.com. The primary function of the Audit Committee is to assist our board of directors in its oversight of the integrity of our companys financial reporting processes and system of internal controls with respect to finance and accounting. Management is responsible for our financial statements and overall reporting process, including the system of internal controls. The independent registered public accountants are responsible for conducting annual audits and quarterly reviews of our financial statements and expressing an opinion as to the conformity of the annual financial statements with generally accepted accounting principles.
The Audit Committee submits the following report pursuant to the Securities and Exchange Commission rules:
Frank Borelli, Chairman
Maura C. Breen
Nicholas J. LaHowchic
John O. Parker, Jr.
The Report of the Audit Committee will not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement or portions thereof into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under such Acts.
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, persons who beneficially own more than ten percent of a registered class of our equity securities, and certain other persons to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (SEC) and Nasdaq, and to furnish the Company with copies of the forms. Based solely on our review of the forms we received or filed with the SEC, or written representations from reporting persons, we believe that all of our directors, executive officers and greater than ten percent beneficial owners complied with all such filing requirements during 2007. However, we have determined that Michael Holmes did not timely file a report with respect to the purchase of 4,000 shares (split-adjusted) of our stock on May 11, 2006, and that Thomas Boudreau did not timely file a report with respect to the sale of 150 shares of our stock by his spouse on January 2, 2008.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Stock Ownership. New York Life currently owns 40,000,000 shares (or approximately 15.8%) of our outstanding common stock, based on Amended Statement of Ownership on Schedule 13G filed February 13, 2008.
In August 2001, New York Life and its subsidiary NYLIFE, LLC, or NYLife entered into a ten-year forward sale contract with an affiliate of Credit Suisse First Boston Corporation, or CSFB, with respect to 18,000,000 of its shares of our common stock, and, in April 2003, New York Life entered into a five-year forward sale contract with CSFB and one of CSFBs affiliates with respect to 22,000,000 of its shares of our Common Stock. New York Life has reported that, absent the occurrence of certain accelerating events, it will retain the right to vote the shares under the forward sale contracts, or the Forward Sale Shares, during the term of each forward sale contract.
Stockholder and Registration Rights Agreement. We are a party to a Stockholder and Registration Rights Agreement with New York Life. The rights agreement was originally entered into in connection with the November 2000 offering of a portion of the shares of our common stock then held by New York Life. The principal terms of this agreement are as follows:
Rights Regarding the Board of Directors. The rights agreement originally provided New York Life with the right to designate for nomination two directors to our board of directors as long as the aggregate number of shares of our common stock held by New York Life and its non-investment subsidiaries exceeded certain minimum levels. As
a result of a series of transactions involving the shares held by New York Life and its affiliates completed during 2003, New York Lifes nomination right was reduced to one, and, following certain transactions completed during 2006 New York Lifes nomination right was eliminated. Under the terms of the rights agreement, New York Lifes nomination right cannot be resurrected.
Registration Rights. As long as New York Life and its non-investment subsidiaries, in the aggregate, beneficially hold more than 12,000,000 shares of our common stock, New York Life may request that we effect up to three registrations of all or part of such shares with the SEC. One of these registrations may be requested to be effected as a shelf registration (allowing registration prior to the actual offering), and two of these registrations may be requested to be effected as firm underwritten offerings under the Securities Act of 1933. We are not obligated to file a registration statement at the request of New York Life: (1) within a period of 90 days after the effective date of any other registration statement filed by us (other than a registration statement concerning employee benefit plans); or (2) while a registration statement relating to a shelf registration filed at the request of New York Life is effective under the Securities Act. In addition, so long as New York Life and its non-investment subsidiaries, in the aggregate, beneficially hold in excess of 12,000,000 shares of the common stock, if we propose to register shares of common stock for our account under the Securities Act (other than a registration concerning employee benefit plans), New York Life will have piggy-back rights with respect to such registration. The underwriters of any such offering have the right to limit the number of shares included by New York Life in any such registration if the managing underwriter indicates that, in its opinion, the number of shares to be included by New York Life would adversely affect the offering. We would bear the expenses of any registration described in this paragraph.
Voting of Common Stock. New York Life and its subsidiaries have agreed to vote any shares of our common stock held by them in favor of the slate of nominees for our Board of Directors, as recommended by us. However, this voting requirement does not apply to any of the Forward Sale Shares held by third parties and which New York Life would have to recall in order to vote, provided that (i) New York Life gives us notice indicating that such shares are being held by third parties, and (ii) we do not require New York Life to nonetheless recall such shares. We do not presently intend to call for the recall of such shares to be voted at the meeting.
Term. The Stockholder and Registration Rights Agreement will terminate on the earlier of: (1) November 7, 2008 or (2) at such time as New York Life and its non-investment subsidiaries, in the aggregate, own less than 12,000,000 shares of our common stock.
Other Relationships and Transactions. Pursuant to agreements with New York Life, we provide pharmacy benefit management services to employees and retirees of New York Life and certain New York Life health insurance policyholders. During 2007, we derived approximately $35 million, or 0.19% of our total revenues for 2007, from all services provided to New York Life.
Our 401(k) and deferred compensation plans are administered by affiliates of New York Life, which collected approximately $1.1 million for such services.
Our Corporate Governance Committee is responsible for reviewing and approving all material transactions with any related persons. This obligation is set forth in our Corporate Governance Committees Charter. A copy of the Corporate Governance Committee Charter is available in the Investor Information section of our website at www.express-scripts.com under the Corporate Governance Documents. (Information on our website does not constitute part of this registration statement).
To identify related person transactions, each year we submit and require our directors and officers to complete director and officer questionnaires identifying any transactions with us in which the officer or director or their family members have a material interest. We review related party transactions due to the potential for a conflict of interest. Our Code of Ethics and Corporate Code Business Conduct require all directors, officers and employees who may have a conflict of interest to promptly notify our General Counsel, Board, Compliance Committee or Chief Compliance Officer.
We expect our directors, officers and employees to act and make decisions that are in our best interests and encourage them to avoid situations which present a conflict between our interests and their own personal interests. In addition, we are strictly prohibited from extending personal loans to, or guaranteeing the personal loans of, any director or officer. A copy of our Code of Ethics is available in the Investor Information section of our website at www.express-scripts.com. (Information on our website does not constitute part of this proxy statement).
II. PROPOSAL TO APPROVE AND RATIFY AN AMENDMENT TO
THE EXPRESS SCRIPTS, INC. AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES
OF THE COMPANYS COMMON STOCK FROM 650,000,000 SHARES TO 1,000,000,000 SHARES
The board of directors has unanimously adopted, and proposes that the stockholders approve and ratify, an amendment to Article 4 of our Amended and Restated Certificate of Incorporation (the Certificate of Incorporation) which, if adopted, would increase the number of authorized shares of our common stock from 650,000,000 to 1,000,000,000 shares.
At March 31, 2008 there were approximately 251,100,000 authorized shares of the Companys Common Stock outstanding. Of the remaining unissued shares, approximately 23,400,000 were reserved for issuance under the Companys stock option, employee stock purchase and deferred compensation plans, leaving a balance of approximately 375,500,000 authorized, unissued and unreserved shares of common stock. Without the approval of additional shares, the Board would be unable to authorize a 3-for-1 stock split, or authorize a 2-for-1 stock split while retaining a sufficient number of unissued shares.
The board believes it is in the best interest of the Company to increase the number of authorized shares of our common stock in order to give us greater flexibility in considering and planning for future business needs. The shares of common stock will be available for issuance by the board of directors for various corporate purposes, including but not limited to, stock splits, stock dividends, grants under employee stock plans, financings, corporate mergers and acquisitions and other general corporate transactions. The Company has no current plan, commitment, arrangement, understanding or agreement regarding the issuance of the additional shares of common stock resulting from the proposed increase in authorized shares. However, the board may consider the issuance of additional shares in a stock split or a stock dividend in the future, dependent upon then-existing market conditions and other factors. Having this additional authorized common stock available for future use will allow the Company to issue additional shares without the expense and delay of arranging a special meeting of stockholders. The additional authorized shares would be available for issuance at the discretion of the Board and without further stockholder approval, except as may be required by law or the rules of The Nasdaq Stock Market.
The issuance of additional shares of common stock could have the effect of making it more difficult for a third party to acquire control of the Company, or of discouraging a third party from attempting to acquire control of the Company. Management of the Company is not currently aware of any plans on the part of a third party to attempt to effect a change of control of the Company, and the amendment has been proposed for the reasons discussed above and not for any possible anti-takeover effects it could have.
The proposed additional shares of common stock would be part of the existing class of common stock and would have the same rights and privileges as the shares of common stock presently outstanding.
Article 4 of the Certificate of Incorporation also authorizes the issuance of 5,000,000 shares of preferred stock, none of which are currently outstanding. The proposed amendment will not increase or otherwise affect the authorized preferred stock.
If the amendment to increase the number of authorized shares of common stock is approved, the first sentence of the first paragraph of Article 4 of the Certificate of Incorporation will be amended to read in its entirety as follows:
4. The total number of shares of stock which the Corporation has authority to issue is 1,005,000,000 shares, of which (i) 5,000,000 shares are preferred stock, par value $0.01 per share (the Preferred Stock), and (ii) 1,000,000,000 shares are common stock, par value $0.01 per share.
If the proposed amendment is approved, we will file an amendment to the Certificate of Incorporation as soon as practicable after the meeting.
Approval of this proposal requires the affirmative vote of a majority of the outstanding shares of common stock entitled to vote at the Meeting. Accordingly, abstentions and non-votes will have the effect of votes against this proposal.
The board of directors unanimously recommends a vote FOR the approval and ratification of the proposed amendment to the Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Companys Common Stock from 650,000,000 shares to 1,000,000,000 shares.
We are asking the Companys stockholders to approve and ratify an amendment to the Express Scripts, Inc. Employee Stock Purchase Plan (the ESPP) which increases the maximum number of shares of common stock authorized for issuance under the ESPP from 2,000,000 to 3,500,000. The ESPP was originally adopted by the Companys Board of Directors on November 24, 1998 and approved by our stockholders on May 26, 1999. The ESPP has since been amended by the board or its Compensation and Development Committee, which we refer to as the Committee, most recently on February 20, 2008. The most recent amendment included an increase in the number of shares of our common stock issuable under the plan from 2,000,000 to 3,500,000, subject to stockholder approval. If stockholder approval is not obtained, no shares may be issued beyond the 2,000,000 previously authorized, and such increase will become void and of no force and effect.
Currently, 2,000,000 shares of the Companys common stock are authorized for issuance under the ESPP, after taking into account stock splits. Of these shares, approximately 1,890,000 shares have previously been purchased and approximately 110,000 shares remain available for purchase in the current and future offering periods under the ESPP. The amended and restated ESPP you are being asked to approve will increase the maximum number of shares of common stock authorized for issuance under the ESPP by 1,500,000, to 3,500,000 shares. These additional shares may be newly issued by the Company or may be purchased in the open market or from private sources.