1
FORM 10-Q
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 April 30, 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
June 12, 1995:
Common Stock, par value $.01......9,129,507 shares
1
2
PART 1 - FINANCIAL INFORMATION
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- ---------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands, except per share data)
Net revenues $29,426 $28,670 $89,938 $84,137
Cost of revenues 20,468 20,285 62,374 60,243
------- ------- ------- -------
Gross margin 8,958 8,385 27,564 23,894
Costs and expenses (income):
Selling, general and administrative 5,551 5,567 16,216 16,441
Exercise of non-qualified options - - 855 -
Acquisition expenses 165 - 1,000 -
Depreciation and amortization 957 880 2,841 2,516
Additional consideration - sale of TMD - - (326) -
------- ------- ------- -------
Operating income 2,285 1,938 6,978 4,937
Other income (expense):
Interest, net 9 (145) (80) (470)
Other (1) 11 (17) 15
------- ------- ------- -------
Income before income taxes 2,293 1,804 6,881 4,482
Provision for income taxes 903 745 3,075 1,839
------- ------- ------- -------
Net income $ 1,390 $ 1,059 $ 3,806 $ 2,643
======= ======= ======= =======
Net income per common share $ 0.15 $ 0.12 $ 0.41 $ 0.29
======= ======= ======= =======
Weighted average number of common shares outstanding 9,254 8,742 9,264 8,702
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited)
2
3
Item 1. Financial Statements (Continued).
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
April 30,
---------------------- July 31,
ASSETS 1995 1994 1994
- ------ ------- ------- -------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,065 $ 873 $ 1
Trade receivables, net 19,456 19,588 20,690
Inventories 3,576 3,912 3,487
Income tax refunds receivable - - 584
Deferred income taxes 1,643 - 1,121
Prepaid expenses and other 865 1,250 742
------- ------- -------
TOTAL CURRENT ASSETS 27,605 25,623 26,625
PROPERTY AND EQUIPMENT, NET 8,093 8,522 8,679
GOODWILL AND OTHER INTANGIBLES 15,114 16,056 15,682
EQUITY SECURITIES AVAILABLE FOR SALE 2,461 1,240 1,240
OTHER ASSETS 1,703 2,000 1,736
------- ------- -------
TOTAL ASSETS $54,976 $53,441 $53,962
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 738 $ 8,064 $ 789
Accounts payable 5,705 3,857 6,132
Accrued compensation and benefits 2,130 1,902 1,457
Accrued lease costs 1,221 1,040 1,086
Other current liabilities 672 155 414
------- ------- -------
TOTAL CURRENT LIABILITIES 10,466 15,018 9,878
LONG-TERM DEBT 463 1,792 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 - 9,125,507, 8,740,043 and
8,749,793 shares at April 30, 1995, April 30, 1994, 91 87 87
and July 31, 1994, respectively
Additional paid-in capital 29,793 26,493 26,559
Net unrealized gain (loss) on equity securities 558 - -
Retained earnings 13,605 8,849 10,443
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 44,047 35,431 37,091
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $54,976 $53,441 $53,962
======= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited)
3
4
Item 1. Financial Statements (Continued).
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ----------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands) (In thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,390 $ 1,059 $ 3,806 $ 2,643
------- ------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 957 880 2,841 2,516
Decrease (Increase) in deferred income taxes 16 - (859) -
(Gain) loss on sale of property and equipment 21 (1) 36 7
Exercise of non-qualified stock options - - 855 -
Additional consideration - sale of TMD - - (326) -
Changes in operating assets and liabilties:
Decrease (increase) in trade receivables 962 316 1,234 (1,314)
Decrease (increase) in inventories 531 436 (89) 1,206
Decrease (increase) in income tax refunds receivable - - 584 -
Decrease (increase) in prepaid expenses and other 214 297 (123) 58
Decrease (increase) in notes receivable - 32 - 2,818
Decrease (increase) in other assets 17 312 32 592
Increase (decrease) in accounts payable (1,992) (2,009) (427) (3,090)
Increase (decrease) in accrued compensation, accrued
lease costs and other current liabilities 646 476 904 (23)
------- ------- ------- -------
Total adjustments 1,372 739 4,662 2,770
------- ------- ------- -------
Net cash provided by operating activities 2,762 1,798 8,468 5,413
------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
(Increase) in equity securities - 160 - 160
Additions to property and equipment (635) (821) (1,722) (1,505)
------- ------- ------- -------
Net cash used in investing activities (635) (661) (1,722) (1,345)
------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Reductions in notes payable and long-term debt (298) (782) (5,381) (6,097)
Issuance of common stock 235 585 729 585
Preferred stock dividends - (142) (30) (178)
Purchases of treasury shares - (99) - (99)
------- ------- ------- -------
Net cash used in financing activities (63) (438) (4,682) (5,789)
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,064 699 2,064 (1,721)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 174 1 2,594
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,065 $ 873 $ 2,065 $ 873
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 3 $ 113 $ 178 $ 529
Income taxes $ 901 $ 653 $ 3,341 $ 2,392
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Increase in value of equity securities available for sale
net of income taxes of $337 $ 558 $ - $ 558 $ -
Issuance of stock upon exercise of non-qualified options $ - $ - $ 1,473 $ -
Treasury shares received in lieu of cash $ - $ - $ (778) $ -
Treasury shares retired $ - $ - $ 778 $ -
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements
(unaudited)
4
5
ITEM 1. FINANCIAL STATEMENTS (CONT.).
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 on Form 10-K, as
amended, 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 nine month
periods ended April 30, 1994 have been reclassified to conform
to the April 30, 1995 classification. The results of
operations for the three and nine months ended April 30, 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 on Form 10-K, as amended, 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 that are 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.
5
6
ITEM 1. FINANCIAL STATEMENTS (CONT.).
(d) Net Income Per Common Share -- Primary net income per common
share is based on net income, less preferred stock dividend
requirements of $30,000 for the nine months ended April 30,
1995, and $49,261 and $98,521 for the three and nine months
periods ended April 30, 1994, respectively, divided by the
weighted average number of common and dilutive common
equivalent shares outstanding during those periods. There
were no preferred stock dividends in the three months ended
April 30, 1995. 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.
(2) Inventories
Inventories are summarized as follows (in thousands):
April 30,
---------
1995 1994 July 31, 1994
------------------ -------------
(unaudited)
Drugs $ 2,618 $ 2,645 $ 2,474
Medical equipment and supplies 554 742 597
Electro-medical therapy products 404 525 416
------- ------- -------
$ 3,576 $ 3,912 $ 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 securities.
Equity securities consist of shares of common stock of Staodyn, Inc.
("Staodyn") (NASDAQ:SDYN) 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.
6
7
ITEM 1. FINANCIAL STATEMENTS (CONT.).
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 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 in November, 1994.
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, 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 April 30, 1995, was adjusted to their
market value on that date of $2.0625 per share. An unrealized gain of
$558,000, net of tax of $337,000, has been recorded as "Net unrealized
gain on equity securities" in the stockholders'equity section of the
Company's Condensed Consolidated Balance Sheet at April 30, 1995.
There were no sales of equity securities for the three and nine months
ended April 30, 1995. Realized gains or losses are computed using the
average-cost method.
(4) Long-Term Debt
Long-term debt at April 30, 1995 consisted of the following (in
thousands):
$7,500 revolving bank line of credit, maturing November 30, 1997 .................................. $ --
$7,500 revolving bank line of credit, maturing November 30, 1997 .................................. --
$1,120 installment note, principal inyfour equal annual installments
of $280 commencing October 30, 1993, non-interest bearing ................................... 560
$600 note, principal payable in three eqannual 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 ........................................................... 324
Note payable, installments payable monthly through December 1997 .................................. 99
Capital lease obligations ......................................................................... 18
------
1,201
Less current maturities ........................................................................... 738
------
$ 463
======
7
8
ITEM 1. FINANCIAL STATEMENTS (CONT.).
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 April 30,
1995, amounts available for borrowing under the revolving credit
agreement were approximately $12.6 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) Acquistion Transaction
Pursuant to an Agreement and Plan of Merger dated December 26, 1994,
as amended May 19, 1995 (the "Merger Agreement") between PMSI and
Beverly Enterprises, Inc. ("Beverly"), PMSI has agreed to merge with
and into Beverly (the "Merger"). Beverly will be the surviving
corporation in the Merger.
Pursuant to the Merger, shares of PMSI 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
trading day before the effective time of the
8
9
ITEM 1. FINANCIAL STATEMENTS (CONT.).
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,
PMSI 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 PMSI's shareholders 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 PMSI's shareholders pursuant to the
Merger. PMSI commenced on May 24, 1995, a solicitation of written
consents from its shareholders for the purpose of approving the
Merger, the Merger Agreement, and the transactions contemplated
thereby. The consent solicitation period will expire on June 23,
1995. Barring unforeseen events, the Merger is expected to close by
the end of June 1995.
Costs related to the merger are recognized as incurred and separately
reflected as acquisition expenses in the accompanying condensed
consolidated statements of income.
9
10
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 nine months ended April 30, 1995 and 1994:
Three Months Ended Nine Months Ended
------------------ -----------------
April 30, April 30,
--------- ---------
1995 1994 1995 1994
---- ---- ---- ----
Net revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 69.6 70.8 69.4 71.6
----- ----- ----- -----
Gross margin.............................................. 30.4 29.2 30.6 28.4
Costs and expenses (income)
Selling, general & administrative...................... 18.9 19.4 18.0 19.5
Exercise of non-qualified stock options................ -- -- 0.9 --
Acquisition expenses................................... 0.5 -- 1.1 --
Depreciation and amortization.......................... 3.2 3.0 3.2 3.0
Additional consideration - sale of TMD................. -- -- (0.4) --
----- ----- ----- -----
Operating Income.................................. 7.8 6.8 7.8 5.9
Interest expense, net..................................... -- 0.5 0.1 0.6
----- ----- ----- -----
Income before income taxes........................... 7.8 6.3 7.7 5.3
Provision for income taxes................................ 3.1 2.6 3.5 2.2
----- ----- ----- -----
Net income....................................... 4.7% 3.7% 4.2% 3.1%
===== ===== ===== =====
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 third quarter of fiscal year 1995 were approximately $29.4
million compared to $28.7 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")
10
11
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
nine months ended April 30, 1995 were approximately $89.9 million compared to
approximately $84.1 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 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 third quarter and first nine months of fiscal
year 1995, the net revenues of the PPO were approximately 17% and 16% of
consolidated revenues, respectively, compared to approximately 13% and 12%,
respectively, of consolidated revenues in the comparable periods in fiscal year
1994. Net revenues for the first nine 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 approximately doubled during
fiscal year 1995 when compared to 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 1.2% lower
for the third quarter of fiscal year 1995 than it was for the third quarter of
fiscal year 1994. Cost of revenues as a percentage of net revenues was
approximately 2.2% lower for the nine months ended April 30, 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 were
approximately 18.9% for the three months ended April 30, 1995 and approximately
19.4% for the three months ended April 30, 1994. The decrease is primarily
attributable to increased net revenues while selling, general and
administrative expenses remained relatively constant. Selling, general and
administrative expenses as a percentage of revenue declined by 1.5% to 18.0%
for the nine months ended April 30, 1995, compared to 19.5% for the comparable
period in fiscal year 1994. The decrease is attributable to improved control
over expenses while revenues increased 6.9% for the nine months ended April 30,
1995 as compared to the same period in the previous year.
Exercise of Non-Qualified Stock Options
In December 1994, two executive officers exercised non-qualified stock options
for a total of 95,000 non-qualified 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
Pursuant to an Agreement and Plan of Merger dated December 26, 1994, as amended
May 19, 1995 (the "Merger Agreement"), PMSI has agreed to merge (the "Merger")
with and into Beverly Enterprises, Inc. ("Beverly") with Beverly being the
surviving corporation in the Merger. (See Note 6 to Notes to Condensed
11
12
Consolidated Financial Statements (Unaudited) included elsewhere in this
Report.) On May 19, 1995, PMSI and Beverly amended the Merger Agreement
primarily for the purpose of (a) deleting any condition or requirement that the
Merger be accounted for as a "pooling of interests" for accounting purposes and
(b) modifying the structure of the transaction by removing a wholly owned
subsidiary of Beverly as a party to the Merger and providing for a direct
merger of PMSI with and into Beverly. Barring unforeseen events, the Merger is
expected to be consummated by the end of June 1995. The Company incurred
approximately $165,000 and $835,000 of expenses associated with this
acquisition transaction during the third and second quarters, respectively, of
fiscal year 1995, consisting primarily of professional fees and financial
advisory fees payable to an investment banking firm. 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 Merger, and
the total amount is expected to be approximately $3 million (see "Acquisition
Transaction" below).
Depreciation and Amortization
Depreciation and amortization was approximately $77,000 (or approximately 9%)
more for the three months ended April 30, 1995, than it was for the three
months ended April 30, 1994, and was approximately $325,000 (or approximately
13%) more for the nine months ended April 30, 1995, than it was for the nine
months ended April 30, 1994. The increase is attributable to capital
expenditures for computer equipment and software during fiscal years 1995 and
1994.
Additional Consideration - Sale of TMD
The Company recorded additional income of approximately $326,000 on November
15, 1994 when it received the additional 750,389 shares of common stock of
Staodyn, Inc. ("Staodyn") as 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 its fair value on November 15, 1994. The
additional Staodyn shares were recorded at a value of $1.3125 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 the 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 April 30, 1995 decreased
approximately $154,000, from the comparable period in fiscal year 1994. Net
interest expense for the nine months ended April 30, 1995 was approximately
$390,000, or approximately 83% 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 April 30, 1995 was 39.4% compared to 41.3% for the comparable period in
fiscal year 1994. The combined rate for the nine months ended April 30, 1995
was 44.7% compared to 41.0% for the nine months ended April 30, 1994. The
increase in the effective rate for the nine months ended April 30, 1995 is
primarily attributable to non-deductible expenses related to the Merger.
12
13
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's working capital increased to approximately $17.1 million at April
30, 1995 compared to approximately $16.7 million at July 31, 1994. The
increase is primarily due to a higher level of cash on hand at April 30, 1995.
The Company had positive cash flow from operations of approximately $2.8
million for the three months ended April 30, 1995, compared to approximately
$1.8 million for the comparable period in fiscal year 1994. The primary
differences were improved net income and a reduction in accounts receivable of
$1.0 million for the period ended April 30, 1995 compared to $0.3 million for
the same period in fiscal year 1994. For the nine months ended April 30, 1995,
the Company had positive cash flow from operations of approximately $8.5
million, compared to approximately $5.4 million for the same period in fiscal
year 1994. The primary differences were improved net income, favorable changes
in cash flows from accounts receivables and accounts payables, offset by the
effect of the notes receivable payments received during fiscal year 1994.
Net trade receivables decreased approximately $962,000 and approximately
$1,234,000 for the three and nine month periods ended April 30, 1995. These
decreases are primarily attributable to improved collection of accounts
receivable.
Inventories at April 30, 1995 were relatively unchanged compared to July 31,
1994.
Capital expenditures for the nine months ended April 30, 1995 were
approximately $1.7 million. These expenditures were financed by cash flow from
operations. The Company further reduced its bank debt by approximately $0.3
million for the quarter and approximately $4.6 million for the nine months
ended April 30, 1995. The Company had no bank debt at April 30, 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 April 30, 1995 was
$12.6 million compared to $13.3 million at January 31, 1995. The reduced
amount available for borrowing is due to lower levels of accounts receivable
and inventories at April 30, 1995. The Company believes that cash generated
from future operations (in excess of $8 millon in each of the last two fiscal
years), together with the funds available under its lines of credit, 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.
13
14
ACQUISITION TRANSACTION
The Merger Agreement includes covenants that, on an interim basis pending
consummation of the Merger, restrict PMSI 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 June as contemplated. The
Merger Agreement also requires PMSI to pay Beverly a "termination fee" of
$5,000,000 if Beverly or PMSI terminates the Merger Agreement under certain
circumstances.
The Company incurred during the nine months ended April 30, 1995 approximately
$1,000,000 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.
14
15
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, in accordance
with its terms, 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.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K
PMSI did not file any Current Reports on Form 8-K during the
quarterly period ended April 30, 1995.
Exhibits
The following exhibits are filed as part of this Report:
Exhibit 2.6 Amendment No. 1 to Agreement and Plan of Merger
dated May 19, 1995, among Beverly Enterprises,
Inc., Beverly Acquisition Corporation, and
Pharmacy Management Services, Inc.
Exhibit 10.23 First Amendment to Deferred Compensation Plan for
Non-Employees of Pharmacy Management Services,
Inc. and Subsidiaries dated June 6, 1995.
Exhibit 27 Nine Month Financial Data Schedule (for SEC use
only).
Exhibit 27.1 Three Month Financial Data Schedule (for SEC use
only).
15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACY MANAGEMENT SERVICES, INC.
Date: June 14, 1995 By: /s/ DAVID L. REDMOND
-------------------------
David L. Redmond
Senior Vice President and
Chief Financial Officer
(Its Duly Authorized Officer)
16
17
Index to Exhibits
-----------------
Exhibit No. Description
----------- -----------
Exhibit 2.6 Amendment No. 1 to Agreement and Plan of Merger
dated May 19, 1995, among Beverly Enterprises,
Inc., Beverly Acquisition Corporation, and
Pharmacy Management Services, Inc.
Exhibit 10.23 First Amendment to Deferred Compensation Plan for
Non-Employees of Pharmacy Management Services,
Inc. and Subsidiaries dated June 6, 1995.
Exhibit 27 Nine Month Financial Data Schedule (for SEC use
only).
Exhibit 27.1 Three Month Financial Data Schedule (for SEC use
only).