<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________ to___________
Commission file number 0-5118
SYSTEMED INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 95-2544661
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
970 West 190th Street, Suite 400
Torrance, California 90502
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 538-5300
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 21,862,322 shares of common
stock, $.001 par value, outstanding at March 31, 1995.
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<PAGE> 2
SYSTEMED INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - Financial information
Item 1. Financial statements
Consolidated balance sheets - as of March 31, 1995 (unaudited)
and December 31, 1994 3
Consolidated statements of income (unaudited) - three months ended
March 31, 1995 and 1994 4
Consolidated statements of cash flows (unaudited) - three months ended
March 31, 1995 and 1994 5
Notes to unaudited consolidated financial statements 6-8
Item 2. Management's discussion and analysis of financial condition and results
of operations 9-11
PART II - Other information
Item 6. Exhibits and reports on Form 8-K 12
SIGNATURES 13
</TABLE>
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<PAGE> 3
Part I. Item 1.
SYSTEMED INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,393,000 $ 12,849,000
Accounts receivable, less allowance of $579,000 at
March 31, 1995 and $655,000 at December 31, 1994 17,305,000 19,141,000
Inventories 5,303,000 4,538,000
Prepaid expenses and other 3,673,000 3,454,000
------------ ------------
Total current assets 38,674,000 39,982,000
Property, plant and equipment, net 5,570,000 6,075,000
Goodwill, less accumulated amortization of $1,698,000 at
March 31, 1995 and $1,649,000 at December 31, 1994 6,345,000 6,394,000
Other, including deferred debt offering costs, less related
accumulated amortization of $507,000 at March 31, 1995
and $496,000 at December 31, 1994. 3,390,000 880,000
------------ ------------
$ 53,979,000 $ 53,331,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 40,000
Accounts payable 4,323,000 4,012,000
Other accrued liabilities 6,520,000 6,900,000
Accrued restructuring and other charges 1,001,000 1,113,000
Reserve for estimated loss on disposal of
discontinued operations - 1,340,000
------------ ------------
Total current liabilities 11,844,000 13,405,000
Long-term debt 6,320,000 6,320,000
Other liabilities 17,000 31,000
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares
authorized; 8% cumulative and convertible;
161,325 shares issued and outstanding at March 31, 1995
and 163,325 at December 31, 1994; (liquidation preference
of $1,613,000 at March 31, 1995 and $1,633,000 at
December 31, 1994) - -
Common stock, $.001 par value; 30,000,000 shares
authorized; 21,862,322 shares issued and outstanding
at March 31, 1995 and 21,706,488 at December 31, 1994 22,000 22,000
Additional paid-in capital 72,929,000 72,437,000
Accumulated deficit (37,153,000) (38,227,000)
Foreign currency translation adjustment - (657,000)
------------ -----------
Total stockholders' equity 35,798,000 33,575,000
------------ -----------
$ 53,979,000 $ 53,331,000
============ ============
</TABLE>
See accompanying notes
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<PAGE> 4
SYSTEMED INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, March 31,
1995 1994
----------- -----------
<S> <C> <C>
Net operating revenues $38,366,000 $33,121,000
Operating costs and expenses:
Cost of sales 31,786,000 28,376,000
Selling, marketing and customer service 2,936,000 2,000,000
General and administrative 2,465,000 2,374,000
----------- -----------
Total operating costs and expenses 37,187,000 32,750,000
----------- -----------
Operating income 1,179,000 371,000
Other income (expense):
Interest income 162,000 93,000
Interest expense (164,000) (169,000)
Other non-operating, net 3,000 (5,000)
----------- -----------
Total other income (expense) 1,000 (81,000)
----------- -----------
Income before provision for income taxes 1,180,000 290,000
Provision for income taxes 106,000 29,000
----------- -----------
Net income $ 1,074,000 $ 261,000
=========== ===========
Per common share information:
- -----------------------------
Net income per common and common equivalent share $ .05 $ .01
=========== ===========
Weighted average number of common and common equivalent shares 23,054,000 22,037,000
=========== ===========
</TABLE>
See accompanying notes
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<PAGE> 5
SYSTEMED INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, March 31,
1995 1994
----------- -----------
<S> <C> <C>
Operating Activities:
Net income $ 1,074,000 $ 261,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 430,000 399,000
Provision for losses on accounts receivable - 100,000
Other 7,000 117,000
Changes in assets and liabilities:
Decrease in accounts receivable 251,000 2,409,000
(Increase) decrease in inventory (2,366,000) 372,000
Increase in prepaid expenses and other (97,000) (54,000)
Increase in other assets - (1,000)
Net increase (decrease) in accounts payable and other accruals 1,178,000 (232,000)
Decrease in accrued restructuring and other charges (112,000) (384,000)
Net decrease in reserve for estimated
loss on disposal of discontinued operations - (267,000)
----------- ----------
Net cash provided by operating activities 365,000 2,720,000
Investing Activities:
Capital expenditures (941,000) (346,000)
Net cash transferred on sale (409,000) -
Other 6,000 7,000
----------- ----------
Net cash used in investing activities (1,344,000) (339,000)
----------- ----------
Financing Activities:
Net repayments under line of credit agreements - (166,000)
Repayment of long-term debt - (7,000)
Proceeds from sales of common stock 523,000 489,000
----------- ----------
Net cash provided by financing activities 523,000 316,000
----------- ----------
Net (decrease) increase in cash and cash equivalents (456,000) 2,697,000
Cash and cash equivalents at beginning of period 12,849,000 9,007,000
----------- -----------
Cash and cash equivalents at end of period $12,393,000 $11,704,000
=========== ===========
</TABLE>
See accompanying notes
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<PAGE> 6
SYSTEMED INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
1. Basis of presentation
---------------------
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the consolidated
financial position of Systemed Inc. and subsidiaries (the Company) and the
consolidated results of its operations and its cash flows for the three
month periods ended March 31, 1995 and 1994. Although the Company believes
that the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of
operations for the periods presented are not necessarily indicative of
results to be expected for the full year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
Systemed Inc. is a Delaware corporation with substantially all of its
business derived from activities in the prescription benefits management
(PBM) industry, through its mail service pharmacy and prescription claims
administration subsidiaries. In addition, approximately 3% of consolidated
net operating revenues are generated by the distribution of pharmaceutical
products through its subsidiary, Newport Pharmaceuticals de Costa Rica
(NPCR).
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries, all of which are wholly-owned.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain 1994 accounts have been reclassified to conform to the 1995
presentation.
2. Sale of subsidiary
------------------
In March 1995, the Company sold its subsidiary, Newport Synthesis Ltd
(NSL), to the principal management of NSL for a nominal value.
Additionally, the agreement requires NSL to repay its outstanding
intercompany obligations of $2,710,000, which were converted to a
promissory note payable in equal annual installments of $165,000 over 15
years, with interest at 8.1%, and a balloon payment of $240,000 plus
interest due in the fifth year if certain profit thresholds are achieved.
The principal amount of this promissory note is equivalent to the Company's
net investment in NSL. Therefore, no additional provision for loss on
disposal was required. Under the terms of the agreement, the Company
retains Board representation rights at NSL until the note is paid in full.
Due to the nature and structure of the transaction, generally accepted
accounting principles dictate that it should be reflected in the financial
statements as a transferred business and the net assets which constitute
the note receivable have been classified in Other assets. Payments
received on the note will be recorded as a reduction to the carrying value
of the segregated assets.
The consolidated statements of income exclude revenues and expenses, for all
periods presented, of NSL. Net operating revenues for NSL were $1,124,000,
for the three months ended March 31, 1994. Loss from discontinued operations
of $81,000 for the three months ended March 31, 1994 has been charged to the
reserve for estimated loss on disposal of discontinued operations.
-6-
<PAGE> 7
SYSTEMED INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
3. Inventories
-----------
<TABLE>
<CAPTION>
Inventories consisted of the following: March 31, December 31,
1995 1994
---------- ------------
<S> <C> <C>
Raw materials $ 307,000 $ 432,000
Work in progress 49,000 649,000
Finished goods 4,947,000 3,457,000
---------- ----------
$5,303,000 $4,538,000
========== ==========
</TABLE>
Finished goods inventory included $4,356,000 and $2,067,000 of
pharmaceutical drugs at the Company's mail service pharmacy at March 31,
1995 and December 31, 1994, respectively.
4. Long-term debt
--------------
<TABLE>
<CAPTION>
Long-term debt consisted of the following at: March 31, December 31,
1995 1994
---------- ------------
<S> <C> <C>
10% senior secured convertible notes $6,320,000 $6,320,000
Less current portion - -
---------- ----------
Long-term portion $6,320,000 $6,320,000
========== ==========
</TABLE>
At March 31, 1995, the Company was in compliance with all covenants of the
above debt agreement.
5. Statements of cash flows
------------------------
During the three months ended March 31, 1995 and 1994 cash paid for interest
was $321,000 and $330,000, respectively. Cash payments for income taxes was
$50,000 in 1995 and $30,000 in 1994.
-7-
<PAGE> 8
SYSTEMED INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
6. Per share data
--------------
Per share data have been computed by dividing the net income by the weighted
average number of common shares and equivalents outstanding during the
period. Common stock equivalents include dilutive stock options and warrants
and the dilutive effects of preferred stock conversions. Fully diluted per
share calculations are not presented in the financial statements because the
assumed conversion of convertible debt and any additional incremental
issuance of stock options or warrants would be antidilutive.
-8-
<PAGE> 9
SYSTEMED INC.
March 31, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Health Care Reform
- ------------------
Employers, insurers, and government payor programs are continuing to
attempt to contain health care costs by limiting the price or reimbursement
levels of medical products and services or establishing managed care programs
to increase efficiency in medical care procurement and utilization. The Company
believes it should benefit from the increasing use of managed care programs
since it offers prescription benefits management services which are easily
adaptable into a variety of managed care programs and provide efficiencies and
cost savings compared to traditional indemnity health insurance programs where
insurers obtain prescriptions from local pharmacies at retail prices. However,
proposals to restructure the health care system by the Clinton Administration
and by members of Congress, industry consolidation and restructurings resulting
from actual and anticipated changes in the U.S. health care delivery system,
and the investment community's reaction thereto, create an environment which
could produce significant volatility in the trading and market price of the
Company's common stock.
Results of Operations
- ---------------------
The following table summarizes, by segment, the operations of the Company for
the periods indicated (amounts in 000's):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1995 1994
--------- ---------
<S> <C> <C>
Net operating revenues:
Prescription benefits management $37,350 $32,377
Other 1,016 744
------- -------
Total net operating revenues $38,366 $33,121
------- -------
Operating income (loss):
Prescription benefits management $ 2,169 $ 1,049
Corporate and other (990) (678)
------- -------
Total operating income 1,179 371
Non-operating expense 1 (81)
Provision for income taxes (106) (29)
------- -------
Net income $ 1,074 $ 261
======= =======
</TABLE>
The following table sets forth certain financial data as a percentage of
consolidated net operating revenues of the Company for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1995 1994
--------- ---------
<S> <C> <C>
Net operating revenues:
Prescription benefits management 97.4% 97.8%
Other 2.6 2.2
----- -----
Total net operating revenues 100.0 100.0
Cost of sales 82.8 85.7
Selling, marketing and customer service 7.7 6.0
General and administrative 6.4 7.2
----- -----
Operating income 3.1 1.1
Non-operating expenses - (.2)
----- -----
Income before provision for income taxes 3.1 .9
Provision for income taxes (.3) (.1)
----- -----
Net income 2.8% .8%
===== =====
</TABLE>
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<PAGE> 10
SYSTEMED INC.
March 31, 1995
Results of Operations (Cont'd)
- ------------------------------
Consolidated net operating revenues were $38.4 million for the three months
ended March 31, 1995, reflecting an increase of 16 percent over the same period
of the prior year. Consolidated operating income for the first quarter of 1995
of $1.2 million comprised an increase of $808,000 or 218 percent when compared
to the same period of last year. The Company's consolidated net income of
$1,074,000 for the first quarter of 1995 was 311 percent above the $261,000 of
consolidated net income earned in the first quarter of 1994.
The prescription benefits management segment revenues, which represented 97
percent of consolidated operating revenues, increased $5.0 million or 15
percent over the prior year. First quarter mail service pharmacy revenues
increased 15 percent from the comparable period of the prior year as a result
of an increase in prescriptions dispensed of 16 percent slightly offset by a
modest decrease (approximately 1/2 of 1 percent) in the average revenue per
prescription dispensed. The increase in the volume of prescriptions processed
during the quarter was due to the addition of new clients at the beginning of
the year, combined with increased utilization by existing customers. Claims
processing revenues for the first quarter of 1995 were 14 percent higher than
the same period of the prior year. The rise in revenues was the result of a 39
percent increase in the volume of transactions processed during this period,
offset by the impact of competitive pricing pressures and the conversion, by a
customer, of a large component of its eligible members to a lesser revenue but
higher margin per transaction product.
Other operating revenues represents revenues from the Company's Costa Rican
operation. The Company anticipates selling this operation and concentrating
its efforts in the prescription benefits management industry, which management
believes will offer the greatest revenue growth potential for the Company.
Cost of sales as a percentage of consolidated net operating revenues decreased
to 82.8 percent in the first quarter of 1995 from 85.7 percent for the similar
period of the prior year. The decline in the cost of sales percentage was the
result of significant benefits derived from the implementation of aggressive
drug procurement strategies, which includes purchase and market performance
discounts, further cost reduction from on-going process improvements at the
Company's mail service pharmacy and integration of operating activities within
the Company. Ongoing process improvement programs and new quality enhancement
activities initiated during the quarter, including an approximately $3.0
million capital expenditure for automation and capacity expansion of the
Company's mail service pharmacy, coupled with further strategies for drug
procurement. Cost reductions are anticipated to contribute to additional
savings in the future. The Company believes that its operations are performing
at levels which are competitive with industry norms.
Selling, marketing and customer service expense increased 47 percent from the
similar period of the prior year. These expenses for the first quarter of 1995
exceeded the prior year primarily as a result of the Company restructuring its
selling, marketing and customer service organizations in 1994. The initial
aspects of the restructuring plan, which lowered selling, marketing and
customer service costs below normal levels, included staff reduction,
consolidation of selected activities and relocation of certain functions.
During early 1994, as a result of these restructuring activities, the Company
incurred a reduced level of expenses. Subsequent to the end of the first
quarter of 1994, the Company began to make additional investments in staffing
and facilities, marketing and product literature and information systems
development designed to enhance client service and position the Company to
capitalize on new revenue opportunities. Consequently, the first quarter of
1995 reflects full expenses for the restructured and enhanced selling,
marketing and customer service functions, as well as additional costs for new
product development.
General and Administrative expenses for the first quarter of 1995 increased
$91,000 from the same period of last year. The increase in general and
administrative expenses was mainly due to additional staffing required to
handle growth in revenue volume and higher legal costs.
Interest income for the three months ended March 31, 1995 was $162,000, which
reflects an increase of 74 percent over the prior year. This increase was due
to higher interest rates earned on an increased amount of invested cash.
Interest expense was consistent with the prior year amount. Other
non-operating expense includes a small gain on disposal of equipment reduced by
modest amounts of foreign currency exchange losses.
The effective tax rate for the quarter was 9 percent and consists of amounts
provided for state taxes, Federal alternative minimum taxes and foreign taxes.
The Company has significant net operating loss carryforwards available to
offset future Federal tax liabilities in the near term.
-10-
<PAGE> 11
SYSTEMED INC.
March 31, 1995
Liquidity and Capital Resources
- -------------------------------
At March 31, 1995, the Company had cash and cash equivalents of $12.4 million
available to meet its operating and other cash needs. The Company has
significant unused borrowing capability consisting of a line of credit
available to Systemed Pharmacy Inc. Although this borrowing facility contains
certain restrictions on the transferring of funds, management believes that the
consolidated cash resources and its borrowing capability will be sufficient to
finance the Company's operations and anticipated capital expenditures during
1995.
Working capital at March 31, 1995, was $26.8 million, an increase of $253,000
over the December 31, 1994 working capital balance. The December 31, 1994
balance included $2.0 million of working capital for Newport Synthesis Ltd.
(NSL), which was sold in March 1995. Therefore, the increase in working
capital at quarter end, excluding the impact from the sale of NSL, was $2.3
million. This rise in working capital was principally the result of an
increase in inventory maintained at the mail service pharmacy activity due to
favorable pricing opportunities and reduction of accrued liabilities as a
result of the timing of payments.
The Company's capital expenditures were primarily comprised of amounts expended
for the approximately $3.0 million program designed to further automate and
increase the capacity of the Company's mail service pharmacy in Iowa, and for
data processing equipment, new product offerings, and to a lesser degree,
office furniture and equipment for its core activities. Management believes
the existing facility capacity, with these continuing improvements, is adequate
to accommodate significant growth.
In the fourth quarter of 1993, the Company recorded a charge against earnings
for restructuring and other charges, including an accrual for estimated future
cash expenditures associated with that charge. During the first quarter of
1995, the Company funded $112,000 of the then estimated future cash
expenditures. Management believes that the estimate originally derived for
both the accrual and cash expenditures are still appropriate.
-11-
<PAGE> 12
SYSTEMED INC.
March 31, 1995
Part II.
Item 6. Exhibits and reports on Form 8-K
(a) Computation of earnings per share - see Exhibit 11.
(b) Financial Data Schedule - see Exhibit 27.
(c) Current report on Form 8-K, filed March 31, 1995, reporting the
change in registrant's certifying accounting firm.
(d) Amended report on Form 8-K/A, filed April 13, 1995, reporting the
change in registrant's certifying accounting firm.
-12-
<PAGE> 13
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.
SYSTEMED, INC.
Date: May 12, 1995 By: /s/ KENNETH J. KAY
------------ ---------------------------------------
Kenneth J. Kay, Senior Vice President,
Finance & Administration and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE> 1
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
SYSTEMED INC.
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1995 1994
--------- ---------
<S> <C> <C>
Primary
- -------
Average common shares outstanding 21,772 21,354
Net effect of dilutive stock options and warrants -
based on the treasury stock method 1,064 463
Assumed conversion of 8% preferred stock 218 220
-------- --------
Total 23,054 22,037
======== ========
Net income applicable to common stock $ 1,074 $ 261
======== ========
Net income per common and common equivalent share $ .05 $ .01
======== ========
Fully diluted
- -------------
Average common shares outstanding 21,772 21,354
Net effect of dilutive stock options and warrants -
based on the treasury stock method 1,137 659
Assumed conversion of 8% preferred stock 218 220
-------- --------
Total 23,127 22,233
======== ========
Net income applicable to common stock $ 1,074 $ 261
======== ========
Net income per common share and
common equivalent share
assuming issuance of all dilutive
contingent shares $ .05 $ .01
======== ========
</TABLE>
Income per common and common equivalent share was calculated by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during the period. Common stock equivalents include dilutive stock
options and warrants and the dilutive effects of preferred stock conversions.
Income per common and common equivalent share - assuming full dilution is not
presented in the financial statements because the assumed conversion of
convertible debt and any additional incremental issuance of stock options or
warrants would be antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 12,393,000
<SECURITIES> 0
<RECEIVABLES> 17,884,000
<ALLOWANCES> 579,000
<INVENTORY> 5,303,000
<CURRENT-ASSETS> 38,674,000
<PP&E> 11,306,000
<DEPRECIATION> 5,736,000
<TOTAL-ASSETS> 53,979,000
<CURRENT-LIABILITIES> 11,844,000
<BONDS> 6,320,000
<COMMON> 22,000
0
0
<OTHER-SE> 35,776,000
<TOTAL-LIABILITY-AND-EQUITY> 53,979,000
<SALES> 38,366,000
<TOTAL-REVENUES> 38,366,000
<CGS> 31,786,000
<TOTAL-COSTS> 37,187,000
<OTHER-EXPENSES> 1,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,000
<INCOME-PRETAX> 1,180,000
<INCOME-TAX> 106,000
<INCOME-CONTINUING> 1,074,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,074,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
