1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q/A
(AMENDMENT NO. 2)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1995
Commission File Number 0-18366
PHARMACY MANAGEMENT SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-1482767
(State of Incorporation) (I.R.S. Employer Identification No.)
3611 Queen Palm Drive, Tampa, Florida 33619
(Address of Principal Executive Offices)
(813) 626-7788
(Telephone Number)
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 / /
Number of outstanding shares of each class of Registrant's common stock as
of March 13, 1995:
Common Stock, par value $.01.......................... 9,120,107 shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
The registrant amends Items 1 and 2 of Part I of its Quarterly Report on
Form 10-Q for the quarterly period ended January 31, 1995, as filed on March 17,
1995, and as amended on April 4, 1995, and restates that report in its entirety
as follows:
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
----------------------- -----------------------
1995 1994 1995 1994
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............................ $30,030 $28,079 $60,512 $55,467
Cost of revenues........................ 20,904 20,214 41,906 39,958
------- ------- ------- -------
Gross margin............................ 9,126 7,865 18,606 15,509
Costs and expenses (income):
Selling, general and administrative... 5,310 5,497 10,665 10,874
Exercise of non-qualified options..... 855 -- 855 --
Acquisition expenses.................. 835 -- 835 --
Depreciation and amortization......... 950 809 1,884 1,636
Additional consideration -- sale of
TMD................................ (326) -- (326) --
------- ------- ------- -------
Operating income.............. 1,502 1,559 4,693 2,999
Other expenses (income):
Interest, net......................... 34 155 89 325
Other................................. 8 5 16 (4)
------- ------- ------- -------
Income before income taxes.... 1,460 1,399 4,588 2,678
Provision for income taxes.............. 912 561 2,172 1,094
------- ------- ------- -------
Net income.................... $ 548 $ 838 $ 2,416 $ 1,584
======= ======= ======= =======
Net income per common share............. $ 0.06 $ 0.09 $ 0.26 $ 0.17
======= ======= ======= =======
Weighted average number of common shares
outstanding........................... 9,110 8,675 8,998 8,683
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
1
3
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JANUARY 31,
----------------- JULY 31,
1995 1994 1994
------- ------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................... $ 1 $ 174 $ 1
Trade receivables, net.......................................... 20,418 19,904 20,690
Inventories..................................................... 4,107 4,348 3,487
Income tax refunds receivable................................... -- -- 584
Deferred income taxes........................................... 1,996 -- 1,121
Prepaid expenses and other...................................... 1,079 1,547 742
------- ------- --------
TOTAL CURRENT ASSETS.................................... 27,601 25,973 26,625
PROPERTY AND EQUIPMENT, NET....................................... 8,246 8,375 8,679
GOODWILL AND OTHER INTANGIBLES.................................... 15,303 16,284 15,682
EQUITY SECURITIES AVAILABLE FOR SALE.............................. 1,566 1,400 1,240
OTHER ASSETS...................................................... 1,721 2,321 1,736
------- ------- --------
TOTAL ASSETS............................................ $54,437 $54,353 $ 53,962
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................... $ 755 $ 6,898 $ 789
Accounts payable................................................ 7,697 5,866 6,132
Accrued compensation and benefits............................... 1,662 1,488 1,457
Accrued lease costs............................................. 1,177 989 1,086
Other current liabilities....................................... 376 144 414
------- ------- --------
TOTAL CURRENT LIABILITIES............................... 11,667 15,385 9,878
LONG-TERM DEBT.................................................... 744 3,740 5,793
REDEEMABLE CONVERTIBLE PREFERRED STOCK............................ -- 1,200 1,200
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series B Convertible Preferred Stock............................ -- 1 1
Series C Convertible Preferred Stock............................ -- 1 1
Common Stock, $.01 par value: authorized -- 20,000,000 shares;
issued and outstanding -- 9,116,007, 8,664,950 and 8,749,793
shares at January 31, 1995, January 31, 1994, and July 31,
1994, respectively........................................... 91 87 87
Additional paid-in capital...................................... 29,106 25,943 26,559
Retained earnings............................................... 12,829 7,996 10,443
------- ------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 42,026 34,028 37,091
------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $54,437 $54,353 $ 53,962
======= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited).
2
4
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ---------------------
1995 1994 1995 1994
------- ------- ------- -------
(IN THOUSANDS) (IN THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................ $ 548 $ 838 $ 2,416 $ 1,584
------- ------- ------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 950 809 1,884 1,636
Increase in deferred income taxes................... (875) -- (875) --
(Gain) loss on sale of property and equipment....... 15 10 15 8
Exercise of non-qualified options................... 855 -- 855 --
Additional consideration -- sale of TMD............. (326) -- (326) --
Decrease (increase) in trade receivables............ 795 (755) 272 (1,630)
Decrease (increase) in inventories.................. 344 763 (620) 770
Decrease (increase) in income tax refunds
receivable........................................ -- -- 584 --
Decrease (increase) in prepaid expenses and other... 140 (297) (337) (239)
Decrease (increase) in notes receivable............. -- 2,755 -- 2,786
Decrease (increase) in other assets................. 104 275 15 280
Increase (decrease) in accounts payable............. 1,211 1,692 1,565 (1,081)
Increase (decrease) in accrued compensation, accrued
lease costs and other current liabilities......... (569) (1,084) 258 (499)
------- ------- ------- -------
Total adjustments.............................. 2,644 4,168 3,290 2,031
------- ------- ------- -------
Net cash provided by operating activities...... 3,192 5,006 5,706 3,615
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment................... (379) (519) (1,087) (684)
------- ------- ------- -------
Net cash used in investing activities.......... (379) (519) (1,087) (684)
------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Reductions in notes payable and long-term debt........ (3,228) (5,053) (5,083) (5,315)
Issuance of common stock.............................. 427 -- 494 --
Preferred stock dividends............................. (12) (18) (30) (36)
------- ------- ------- -------
Net cash used in financing activities.......... (2,813) (5,071) (4,619) (5,351)
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... -- (584) -- (2,420)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 1 758 1 2,594
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 1 $ 174 $ 1 $ 174
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest............................................ $ 99 $ 206 $ 175 $ 416
Income taxes........................................ $ 2,377 $ 1,388 $ 2,440 $ 1,739
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock upon exercise of non-qualified
options............................................. $ 1,473 $ -- $ 1,473 $ --
Treasury shares received in lieu of cash.............. $ (778) $ -- $ (778) $ --
Treasury shares retired............................... $ 778 $ -- $ 778 $ --
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
5
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION -- The accompanying unaudited condensed
consolidated financial statements of Pharmacy Management Services, Inc. and its
subsidiaries have been prepared in accordance with the Securities and Exchange
Commission's instructions to Form 10-Q and, therefore, omit or condense
footnotes and certain other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The accounting policies followed for quarterly financial reporting conform with
generally accepted accounting principles for interim financial statements and
include those accounting policies disclosed in Note 1 to the Notes to
Consolidated Financial Statements included in the Company's Annual Report to
Shareholders for 1994 and incorporated by reference in the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1994. In the opinion of
management, all adjustments of a normal recurring nature that are necessary for
a fair presentation of the financial information for the interim periods
reported have been made. Certain amounts for the three and six month periods
ended January 31, 1994 have been reclassified to conform to the January 31, 1995
classification. The results of operations for the three and six months ended
January 31, 1995 are not necessarily indicative of the results that can be
expected for the entire fiscal year ending July 31, 1995. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report to Shareholders for 1994 and incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1994.
(b) PRINCIPLES OF CONSOLIDATION -- The accompanying condensed consolidated
financial statements consist of the accounts of Pharmacy Management Services,
Inc. ("PMSI") and its wholly-owned subsidiaries (together, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) INCOME TAXES -- The Company accounts for income taxes in accordance
with the asset and liability method prescribed by Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(d) NET INCOME PER COMMON SHARE -- Primary net income per common share is
based on net income, less preferred stock dividend requirements of $12,000 and
$30,000 for the three and six months ended January 31, 1995, respectively, and
$49,261 and $98,521 for the three and six months periods ended January 31, 1994,
respectively, divided by the weighted average number of common and dilutive
common equivalent shares outstanding during those periods. Fully diluted net
income per common share has been omitted for all reported periods because it is
not materially different from primary net income per share or is anti-dilutive.
Dilutive common equivalent shares consist of stock options and convertible
preferred stock.
4
6
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) INVENTORIES
Inventories are summarized as follows (in thousands):
JANUARY 31,
----------------- JULY 31,
1995 1994 1994
------ ------ --------
(UNAUDITED)
Drugs.................................................... $3,039 $3,127 $ 2,474
Medical equipment and supplies........................... 659 741 597
Electro-medical therapy products......................... 409 480 416
------ ------ --------
$4,107 $4,348 $ 3,487
====== ====== ======
(3) EQUITY SECURITIES AVAILABLE FOR SALE
FASB Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity Securities" became
applicable to the Company beginning August 1, 1994. SFAS 115 requires that at
acquisition, management shall classify debt and equity securities into one of
three categories: held to maturity, available-for-sale, or trading. Held to
maturity securities are those which the Company has the positive intent and
ability to hold to maturity. Trading securities are defined as securities bought
and held principally for the purpose of selling in the near term.
Available-for-sale securities are defined as investments not classified as
trading securities or as held to maturity.
Equity securities consist of shares of common stock of Staodyn, Inc.
("Staodyn") received pursuant to the sale on November 15, 1992 of the
electro-medical products business operated by the Company's subsidiary,
Technical Medical Devices, Inc. ("TMD"). In connection with that transaction,
Staodyn and the Company entered into a shareholder agreement that provided the
Company price protection for 400,000 of the 500,000 Staodyn shares that it
originally received in the transaction. If the average closing sale price of
Staodyn's stock in the Nasdaq National Market System during the 30 consecutive
trading days preceding November 15, 1994 (the "Measuring Price"), was lower than
$5.00 per share, Staodyn was obligated to issue to the Company an additional
number of shares sufficient (based on the Measuring Price) to make up the
aggregate deficiency between $2,000,000 and the value (at the Measuring Price)
of the 400,000 shares then held by the Company. Pursuant to this price
protection agreement, Staodyn issued to the Company in November 1994 an
additional 750,389 shares.
At August 1, 1994, the Company did not apply SFAS 115 to the Staodyn common
stock then held by it because the total number of contingent shares was yet to
be finally determined and the shares remained subject to restrictions on resale
imposed by securities laws. In November 1994 when the Company received the
additional 750,389 Staodyn shares pursuant to the price protection agreement
(and the total number of Staodyn shares to be received by the Company was
finally determined, and all the shares became eligible for public sale under SEC
Rule 144), the Company applied SFAS 115 to record the additional 750,389 Staodyn
shares at a value of $1.3125 per share, which was the closing sale price per
share of Staodyn's stock in the Nasdaq National Market System on November 15,
1994, and to reduce the recorded carrying value of the balance of the Staodyn
shares then held by the Company from their original recorded value of $2.80 per
share to $1.3125 per share. The net effect of the receipt of the contingent
Staodyn shares and the adjustment of the recorded value of the existing Staodyn
shares was a gain of $326,000, which PMSI reported as an additional gain from
the sale of TMD.
Effective November 15, 1994, Management classified these securities as
available-for-sale. SFAS 115 requires securities available for sale to be
recorded at fair value. Both unrealized gains and losses on available-for-sale
securities, net of taxes, are included as a separate component of shareholders'
equity in the consolidated balance sheets until these gains or losses are
realized. If a security has a decline in fair value that is other than
temporary, then the security will be written down to its fair value by recording
a loss in the consolidated statements of operations. The carrying value of the
1,193,389 Staodyn shares held at January 31,
5
7
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995, was equal to their market value on that date of $1.3125 per share, so no
change in the carrying value has been recorded and no unrealized gain or loss
existed. There were no sales of equity securities for the three and six months
ended January 31, 1995. Realized gains or losses are computed using the
average-cost method.
Gains or losses on the disposition of investment securities are recognized
using the average cost method.
(4) LONG-TERM DEBT
Long-term debt at January 31, 1995 consisted of the following (in
thousands):
$7,500 revolving bank line of credit, maturing November 30, 1997............ $ 250
$7,500 revolving bank line of credit, maturing November 30, 1997............ --
$1,120 installment note, principal payable in four equal annual installments
of $280 commencing October 30, 1993, non-interest bearing................. 560
$600 note, principal payable in three equal annual installments of $200
commencing December 31, 1993, interest payable annually at 7%............. 200
Non-compete agreements, principal payable in varying amounts and
frequencies, non-interest bearing......................................... 344
Note payable, installments payable monthly through December, 1997........... 109
Capital lease obligations................................................... 36
------
1,499
Less current maturities..................................................... 755
------
$ 744
======
The revolving lines of credit listed above represent borrowings under a
$15.0 million revolving credit agreement with two banks, under which the Company
may borrow up to 75% of its outstanding eligible consolidated accounts
receivable and up to 50% of its consolidated inventories. Trade receivables and
inventories are pledged as collateral under the revolving credit agreement.
Interest is payable monthly at rates varying from the lender's prime rate minus
1/8 to 3/8 percent or LIBOR (London Interbank Offered Rate) plus 1 1/4 to 1 3/8
percent, depending on the Company's ratio of liabilities to tangible net worth,
as defined in the revolving credit agreement. At January 31, 1995, amounts
available for borrowing under the revolving credit agreement were approximately
$13.3 million. Under the terms of the revolving credit agreement, the unused
credit is subject to a 1/8 of one percent per annum commitment fee that is
payable quarterly.
The Company's credit agreement with the banks contains certain covenants
relating to tangible net worth, payment of dividends, purchase of treasury
shares, and the acquisition and disposition of assets. The most restrictive of
these covenants requires the Company to maintain a cash flow coverage ratio of
1.2 to 1.0. The Company is in compliance with all its loan covenants.
(5) CONVERTIBLE PREFERRED STOCK
Each share of both the Series B $.98 Convertible Preferred Stock and the
Series C $.98 Convertible Preferred Stock was mandatorily and automatically
convertible into one share of Common Stock on the earlier of (i) the first date
on or after April 1, 1994 on which the per share market price of the Common
Stock was greater than or equal to $16.25 or (ii) April 1, 1996. On November 14,
1994, the market price of the Company's Common Stock exceeded $16.25 per share.
Accordingly, all 73,846 outstanding shares of Series B Convertible Preferred
Stock and all 53,748 outstanding shares of Series C Convertible Preferred Stock,
respectively, were converted into a total of 127,594 shares of Common Stock.
On January 3, 1995, all 100,000 authorized, issued and outstanding shares
of Redeemable Series A $.72 Convertible Preferred Stock were converted at the
election of the holders of these shares, into an equal number of shares of
Common Stock.
6
8
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACQUISITION TRANSACTION
On December 26, 1994, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Beverly Enterprises, Inc. ("Beverly") and
Beverly Acquisition Company ("Acquisition Sub") a wholly owned subsidiary of
Beverly. Pursuant to the terms and conditions of the Merger Agreement, the
Company has agreed to merge with and into Acquisition Sub (the "Merger").
Acquisition Sub will be the surviving corporation in the Merger, and the
separate corporate existence of the Company will cease as a result of the
Merger.
Pursuant to the Merger, shares of the Company's common stock (the "Company
Shares") will be converted into shares of Beverly common stock ("Beverly
Shares") at a floating exchange rate based on $16.50 per Company Share and the
average of the closing sales price of Beverly Shares during the ten consecutive
trading days ending on the second day before the effective time of the Merger
(the "Beverly Closing Price"), provided that the Beverly Closing Price is not
lower than $12.25 or higher than $18.00. If the Beverly Closing Price is higher
than $18.00, each Company Share will be converted into .9167 Beverly Shares. If
the Beverly Closing Price is lower than $12.25, each Company Share will be
converted into 1.3469 Beverly Shares. If the Beverly Closing Price is lower than
$10.00, the Company may (but is not obligated to) terminate the Merger before
the closing of the Merger. The exchange ratio is subject to adjustment in the
event of a stock split, stock dividend, recapitalization, restructuring,
divisive reorganization, special or extraordinary dividend or distribution, and
certain other corporate developments affecting Beverly Shares that occur or have
a record date before the effective time of the Merger. Additionally, Beverly has
agreed to assume all outstanding options to purchase Company Shares. The number
of option shares and the exercise price of each option will be adjusted based on
the exchange ratio for the Merger.
The consummation of the Merger is contingent on, among other things,
approval by the Company's shareholders, the declaration by the Securities and
Exchange Commission that a merger registration statement on Form S-4 (to be
filed by Beverly for purposes of registering the Beverly Shares to be issued to
the Company's shareholders pursuant to the Merger) is effective, and the
approval by the New York Stock Exchange of the listing, upon official notice of
issuance, of all Beverly Shares to be issued to the Company's shareholders
pursuant to the Merger.
7
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a leading independent national provider of medical cost
containment and managed care services, providing professionally managed
solutions for containing the escalating costs of workers' compensation. The
following table presents the ratios of certain financial items to net revenues
for the three and six months ended January 31, 1995 and 1994:
THREE MONTHS
ENDED SIX MONTHS ENDED
----------------- -----------------
JANUARY 31, JANUARY 31,
----------------- -----------------
1995 1994 1995 1994
----- ----- ----- -----
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 69.6 72.0 69.3 72.0
----- ----- ----- -----
Gross margin.................................. 30.4 28.0 30.7 28.0
Costs and expenses (income):
Selling, general & administrative........... 17.7 19.5 17.6 19.6
Exercise of non-qualified stock options..... 2.8 -- 1.4 --
Acquisition expenses........................ 2.8 -- 1.4 --
Depreciation and amortization............... 3.2 2.9 3.1 2.9
Additional consideration -- sale of TMD..... (1.1) -- (0.5) --
----- ----- ----- -----
Operating income.............................. 5.0 5.6 7.7 5.5
Interest expense, net......................... 0.1 0.6 0.1 0.6
----- ----- ----- -----
Income before income taxes.................... 4.9 5.0 7.6 4.9
Provision for income taxes.................... 3.1 2.0 3.6 2.0
----- ----- ----- -----
Net income.................................... 1.8% 3.0% 4.0% 2.9%
===== ===== ===== =====
The ensuing discussion and analysis of the Company's results of operations
and financial condition does not address the effect on the Company's liquidity,
capital resources, or results of operations of the consummation of the
acquisition of the Company by Beverly or Beverly's plans for the Company
following the acquisition.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the second quarter of fiscal year 1995 were approximately
$30.0 million compared to $28.1 million for the comparable period in fiscal year
1994. The increase in revenues for the period was primarily attributable to
increased revenues from the Company's preferred provider organization ("PPO")
and case management services, resulting primarily from more customers and
greater market penetration. The pricing for PPO and case management services
changed only slightly during the comparative periods. Net revenues for the six
months ended January 31, 1995 were approximately $60.5 million compared to
approximately $55.5 million in the comparable period in fiscal year 1994.
Substantially all of the increase in revenues for the period was attributable to
increased revenues from the Company's preferred provider organization ("PPO")
and case management services, resulting primarily from more customers and
greater market penetration. The pricing for PPO and case management services
changed only slightly during the comparative periods. During the second quarter
and first six months of fiscal year 1995, the net revenues of the PPO were
approximately 16% of consolidated revenues, compared to approximately 11% of
consolidated revenues in the comparable periods in fiscal year 1994. Net
revenues for the second quarter and first six months of fiscal year 1995 from
the home delivery of prescription drugs and medical equipment and supplies were
approximately the same as in the comparable period in fiscal year 1994 because
the percentage of generic drugs dispensed has doubled during the second quarter
and first six months of fiscal year 1995 when compared
8
10
to the comparable periods in fiscal year 1994. The percentage of generic drug
prescriptions dispensed relative to all drug prescriptions dispensed is expected
to continue to increase during the next two years. This trend is likely to slow
revenue growth, but should not have a material effect on the Company's operating
income from the sale of prescription drugs. Although generic prescription drugs
sell at lower prices than brand-name prescription drugs, the gross margins for
generic prescription drugs are substantially higher than they are for brand-name
prescription drugs.
COST OF REVENUES
Cost of revenues as a percentage of net revenues was approximately 2.4%
lower for the second quarter of fiscal year 1995 than it was for the second
quarter of fiscal year 1994. Cost of revenues as a percentage of net revenues
was approximately 2.7% lower for the six months ended January 31, 1995 than it
was for the comparable period in fiscal year 1994. The improvement in gross
margin is attributable to dispensing a greater percentage of generic drugs in
the home delivery business and the increased volume of revenue provided by the
Company's PPO and case management services, which have higher gross margins than
the home delivery business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of revenues
decreased approximately 1.8% to 17.7% for the three months ended January 31,
1995, compared to 19.5% for the three months ended January 31, 1994. Selling,
general and administrative expenses as a percentage of revenue decreased
approximately 2.0% to 17.6% for the six months ended January 31, 1995, compared
to 19.6% for the six months ended January 31, 1994. The decreases are
attributable to improved control over expenses while revenues increased 6.9% for
the quarter and 9.1% for the six months ended January 31, 1995.
EXERCISE OF NON-QUALIFIED STOCK OPTIONS
In December 1994, two executive officers exercised non-qualified stock
options for a total of 95,000 shares of common stock at an average exercise
price of $6.50 per share. The financial statement effect of these exercises was
approximately $855,000 of compensation expense.
ACQUISITION EXPENSES
As previously reported in the Company's Current Report on Form 8-K dated
December 26, 1994, the Company entered into an Agreement and Plan of Merger with
Beverly Enterprises, Inc. ("Beverly") on December 26, 1994 (The "Merger
Agreement") pursuant to which the Company agreed to be merged with and into
Beverly Acquisition Company, a wholly owned subsidiary of Beverly (the
"Merger"). (See Note 6 to Notes to Condensed Consolidated Financial Statements
(Unaudited) included elsewhere in this Report.) The Merger is expected to be
consummated in the spring of 1995. During the second quarter of fiscal year
1995, the Company incurred approximately $835,000 of expenses associated with
this acquisition transaction, consisting primarily of legal and investment
banking fees. Most of these costs are not deductible expenses for income tax
purposes. The Company funded the payment of these expenses from cash flow from
operating activities. The Company expects to incur additional expenses
associated with the acquisition transaction, and the total amount is expected to
be significant (see "Acquisition Transaction" below).
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $141,000 (or approximately
17%) more for the three months ended January 31, 1995, than it was for the three
months ended January 31, 1994, and was approximately $248,000 (or approximately
15%) more for the six months ended January 31, 1995, than it was for the six
months ended January 31, 1994. The increase is attributable to capital
expenditures for computer equipment and software during fiscal years 1995 and
1994.
9
11
ADDITIONAL CONSIDERATION -- SALE OF TMD
The Company recorded additional income of approximately $326,000 on
November 15, 1994 when it received an additional 750,389 shares of common stock
of Staodyn, Inc. ("Staodyn") as a final adjustment of the consideration for the
sale of TMD to Staodyn, which occurred on November 15, 1992. The purchase
agreement between Staodyn and TMD provided that TMD could receive additional
shares of Staodyn common stock based upon the trading range of the common stock
two years after the date of the original transaction. The amount of income
recorded on November 15, 1994 represents the amount necessary to record the
total shares of Staodyn common stock received at their fair value on November
15, 1994. The additional Staodyn shares were recorded at a value of $1.25 per
share (the closing trading price of the stock on November 15, 1994), and the
recorded carrying value of the remaining 443,000 Staodyn shares previously
received in the transaction were reduced to that same value. The net impact of
these transactions was a gain of $326,000, which is reported as "Additional
consideration -- sale of TMD" on the Company's Condensed Consolidated Statements
of Income for the period.
INTEREST EXPENSE
Net interest expense for the three months ended January 31, 1995 decreased
approximately $121,000, or approximately 78%, compared to the comparable period
in fiscal year 1994. Net interest expense for the six months ended January 31,
1995 was approximately $236,000, or approximately 73% less than in the
comparable period in fiscal year 1994. These significant decreases are primarily
attributable to the reduction in bank debt during the relevant periods.
PROVISION FOR INCOME TAXES
The combined effective federal and state income tax rate for the three
months ended January 31, 1995 was 62.5%, compared to 40.1% for the comparable
period in fiscal year 1994. The combined rate for the six months ended January
31, 1995 was 47.3%, compared to 40.9% for the six months ended January 31, 1994.
The increase in the effective rate is primarily attributable to non-deductible
acquisition related expenses.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased to approximately $15.9 million at
January 31, 1995 compared to approximately $16.7 million at July 31, 1994. The
decrease is primarily due to a higher level of accounts payable at January 31,
1995.
The Company had positive cash flow from operations of approximately $3.2
million for the three months ended January 31, 1995, compared to approximately
$5.0 million for the comparable period in fiscal year 1994. The primary
difference was the receipt of notes receivable payments of approximately $2.7
million during the three months ended January 31, 1994. For the six months ended
January 31, 1995, the Company had positive cash flow from operations of
approximately $5.7 million, compared to approximately $3.6 million for the six
months ended January 31, 1994. The primary differences were improved net income
and favorable changes in cash flows from accounts receivable and accounts
payable, offset by the effect of the notes receivable payments received during
the three months ended January 31, 1994.
Net trade receivables decreased approximately $800,000 and approximately
$300,000 for the three and six month periods ended January 31, 1995 and 1994
respectively. These decreases are primarily attributable to improved collection
of accounts receivable.
Inventories at January 31, 1995 approximated $4.1 million, compared to
approximately $3.5 million at July 31, 1994. The increase is attributable to
special purchases of prescription drugs at favorable prices and terms.
Capital expenditures for the six months ended January 31, 1995 were
approximately $1.1 million. These expenditures were financed by cash flow from
operations. The Company further reduced its bank debt by
10
12
approximately $3.0 million for the quarter and approximately $4.8 million for
the six months ended January 31, 1995.
The Company has revolving lines of credit with two banks that allow it to
borrow up to $15 million at variable rates that currently approximate the bank's
prime rates. The amount available for borrowing at January 31, 1995 was $13.3
million. The Company believes that cash generated from future operations (in
excess of $8 million in each of the last two fiscal years), together with the
funds available under its lines of credit (approximately $13.3 million at
January 31, 1995), will be sufficient to finance the Company's operations and
its anticipated capital requirements for at least the next 12 to 18 months. The
Company's $15 million revolving credit lines expire on November 30, 1997.
Healthcare Reform is a major national priority, but the impact of the
reforms is not presently determinable. The Company's future liquidity will
continue to depend on its operating cash flow and management of trade
receivables and inventories.
ACQUISITION TRANSACTION
The Merger Agreement includes covenants that, on an interim basis pending
consummation of the Merger, restrict the Company from doing the following: (a)
granting or permitting a lien on, selling, leasing, exchanging, transferring or
otherwise disposing of, or granting to any person a right or option to lease,
purchase, or otherwise acquire, any material amount of its assets or properties,
including the capital stock of its subsidiaries, any indebtedness owed to it and
any rights of value to it (except in the ordinary course of business consistent
with past practices and except for inter-company transfers); (b) selling,
issuing, awarding, granting, pledging, redeeming, purchasing or otherwise
acquiring, transferring or encumbering any of its capital stock or other
securities or any rights, options or warrants to acquire any of its capital
stock or other securities; (c) reclassifying any outstanding common stock into a
different class or number of shares or otherwise changing its authorized
capitalization, or paying, declaring or setting aside for payment a dividend or
other distribution in respect of any of its capital stock, whether payable in
cash, stock or other property; (d) borrowing any money, issuing any debt
securities or assuming, endorsing or guaranteeing, or becoming a surety,
accommodation party or otherwise responsible for an obligation or indebtedness
of a person other than itself and any of its subsidiaries (except for borrowings
under its existing credit agreements in the usual and ordinary course of
business); (e) amending, renewing, waiving, breaching, extending, modifying,
entering into, releasing in any respect or relinquishing any right or benefit
under any mortgage, agreement, instrument, obligation or other commitment that
would be material to the Company; (f) settling or compromising any material
claim, liability, tax assessment or financial contingency; (g) entering into any
transaction with any of its officers, directors, affiliates or shareholders
(except in the usual and ordinary course of business and on an arms' length
basis); and (h) authorizing, recommending, consummating or otherwise entering
into any agreement providing for a merger, dissolution, consolidation,
restructuring, recapitalization, reorganization, partial or complete liquidation
or the acquisition or disposition of a material amount of assets or securities
owned by the Company. Management does not expect that any of these interim
restrictions will materially adversely affect the Company's liquidity,
operations, capital resources or ability to proceed with planned capital
expenditures, if the Merger is consummated this Spring as contemplated. The
Merger Agreement also requires the Company to pay Beverly a "termination fee" of
$5,000,000 if Beverly or the Company terminates the Merger Agreement under
certain circumstances.
The Company incurred during the six months ended January 31, 1995
approximately $835,000 of acquisition expenses associated with its consideration
of acquisition overtures and the pending Merger with Beverly, and it expects
that the total acquisition expenses for fiscal year 1995 will be approximately
$3 million. The expenses will consist primarily of professional fees and
financial advisory fees payable to an investment banking firm. Management
expects to fund the payment of these expenses and the termination fee (if
payable) from cash flow from operating activities and, to the extent necessary,
its bank credit lines. Management believes that it has access to adequate
sources of borrowing to fund the payment of these expenses and the termination
fee (if it becomes payable), although payment of the expenses and the
termination fee would diminish available credit facilities, reduce shareholders'
equity and increase future interest expense.
11
13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the Company nor any of its property is subject to any pending
material legal proceedings, except for ordinary routine litigation incidental to
its business.
ITEM 2. CHANGES IN SECURITIES.
As discussed more fully in Note 5 of the Notes to Condensed Consolidated
Financial Statements (Unaudited) included in this Report, all the Company's
outstanding Series B and Series C Convertible Preferred Stock was mandatorily
converted into an equal number of shares of Common Stock, effective November 14,
1994, and all the Company's outstanding Series A Redeemable Convertible
Preferred Stock was converted, at the election of the holders of those shares,
into an equal number of shares of Common Stock, effective January 3, 1995.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Company and Beverly filed their FTC Premerger Notification with respect
to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 on
January 30, 1995, and received early termination of the applicable waiting
period on February 8, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated December 26, 1994, to
report its execution of the Merger Agreement with Beverly.
EXHIBITS
The following exhibits are filed as part of this Report at the pages
indicated:
Exhibit 2-5 Agreement and Plan of Merger dated December 26, 1994, among
Beverly Enterprises, Inc., Beverly Acquisition Company, and
Pharmacy Management Services, Inc. (Incorporated by reference from
Exhibit 2-5 to the Company's Current Report on Form 8-K dated
December 26, 1995. Commission File No. 0-18366.)
Exhibit 10-20 First Amendment to Severance Agreement dated February 16, 1995,
between David L. Redmond and Pharmacy Management Services, Inc.
Exhibit 10-21 Letter agreement dated December 26, 1994, between Bertram T.
Martin, Jr. and Pharmacy Management Services, Inc.
Exhibit 10-22 Letter agreement dated December 26, 1994, between David L. Redmond
and Pharmacy Management Services, Inc.
12
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACY MANAGEMENT SERVICES, INC.
By: /s/ DAVID L. REDMOND
------------------------------------
David L. Redmond
Senior Vice President and
Chief Financial Officer
(Its Duly Authorized Officer)
Date: May 12, 1995
13