<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 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
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COMMISSION FILE NUMBER 0-20606
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CHOICE DRUG SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2310352
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2930 WASHINGTON BOULEVARD, BALTIMORE, MARYLAND 21230
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANTS'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 646-7373
NONE
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE CLOSE OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT MAY 31, 1995
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COMMON STOCK, $.01 PAR VALUE 9,735,810
<PAGE> 2
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
QUARTER ENDED MAY 31,1995
COMPARED WITH THE QUARTER ENDED MAY 31, 1994
OVERVIEW:
During the first quarter of fiscal year 1996 and continuing into the
second quarter of fiscal year 1996 management has actively implemented a
corporate restructuring of the Company by concentrating on its core
business lines of long-term care pharmacy and correctional pharmacy
services. The Company has been successful in developing new revenues in
both the long-term care division and the correctional division with much
of the new business coming under contract in the months of June, July and
August. At the same time the Company has actively worked to sell or
close non-core and unprofitable business segments. The Company began in
the first quarter and completed in June and July the sale of it's medical
surgical operations and software division. The Company has successfully
completed the shut-down of the Missouri long-term care operation and began
the process for closing it's mail-order operation which is expected to be
completed by the end of July, 1995. In addition the Company has taken
major steps to reduce it's operating cost through a consolidation of three
corporate offices into Baltimore, Maryland, and by reducing overhead cost
through a reduction in work force which took place in June, 1995. The
effect of these changes will begin to reflect themselves in the results of
operations and cash flow of the second and third quarter as the costs
associated with these various activities continue to decrease.
The Company is currently going through a conversion of it's financial
systems to a mid-range IBM based platform and has just completed the
conversion of it's payroll and human resource systems. The Company is
also working on the conversion of all pharmacy systems to a single
solution and plans to have several sites converted by the end of the third
quarter. Operating expenses are being reviewed and reduced as
opportunities are identified and additional steps are being made to
improve the billing and collections function of each division. The
Company will continue to focus on the reduction of its operating cost as
it further integrates the various operations and improves its management
information systems. Product costs are being evaluated as the Company
implements a new primary wholesaler relationship and purchasing policies.
In addition, inventory levels are being reduced as the company works to
eliminate excess inventory.
<PAGE> 3
RESULTS OF OPERATIONS
QUARTER ENDED MAY 31,1995
COMPARED WITH THE QUARTER ENDED MAY 31, 1994
(CONTINUED)
THREE MONTHS ENDED MAY 31, 1995 COMPARED TO THREE MONTHS ENDED MAY 31, 1994
NET REVENUES:
Net revenues decreased from $11,223,000 to $10,709,000, a decrease of
$514,000 or 4.6%. This decrease was primarily attributable to reduced
sales in medical/surgical supplies which were not offset by pharmacy sales
increases.
COST OF SALES:
Cost of sales includes the cost of drugs and medical/surgical supplies
sold to patients and institutions. Cost of sales decreased from
$6,934,000 to $6,908,000 a decrease of less than 1%. As a percentage of
sales, cost of sales for the comparable quarter increased from 61.6% to
64.5%. The cost of sales percentage for the first quarter of fiscal year
1996 is comparable to the 64.8% cost of sales percentage for the fiscal
year ended February 28, 1995.
SELLING AND ADMINISTRATIVE EXPENSES:
Selling and administrative expenses excluding depreciation and
amortization increased from $3,920,000 to $4,078,000, an increase of
$158,000 or 4.0%. This increase was attributable to costs associated with
the settlement of amounts owed under an agreement not to compete, costs
of consultants and related travel expenses associated with the Company's
reorganization, and the implementation of a standard bad debt expense
accrual. The current periods operating cost do not reflect the majority
of the Company's ongoing efforts to reduce payroll and operating costs.
INTEREST EXPENSE:
Net interest expense decreased from $229,000 to $216,000 a decrease of
$13,000. The decrease is primarily attributable to changes in the mix of
the Company's debt between the corresponding periods and the changes
associated with the CreditAnstalt debt facility, proceeds from the
Private Placement and the retirement of vendor debt.
OTHER INCOME:
Included in other income for the current period is $283,000 arising from
the discounting of indebtedness to a major vendor. The vendor debt was
retired in May, 1995 in conjunction with the company's Private Placement
and the Premier acquisition.
<PAGE> 4
RESULTS OF OPERATIONS
QUARTER ENDED MAY 31,1995
COMPARED WITH THE QUARTER ENDED MAY 31, 1994
(CONTINUED)
NET LOSS:
Net loss for the period increased to $418,000 from $153,000 in the
comparable prior period. This increase is a direct result of the lower
gross profit margin on decreased sales and the increases in operating
expenses, including the newly implemented bad debt expense accrual, which
were not fully offset by the gain on the discounted indebtedness.
<PAGE> 5
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company's net cash used in operating activities was $550,000 for the three
month period ended May 31, 1995 compared to the $154,000 net cash provided by
operations for the three month period ended May 31, 1994. Cash used by
operations for the three month period ended May 31, 1995 resulted from the
Company's significant operating loss which included a non-recurring gain on the
discount of indebtedness in the amount of $283,000, the reduction of accounts
payable and accrued expenses and the increase in prepaid expenses and other
current assets which was partially offset by the reduction in accounts
receivable and inventories and additions to the allowance for doubtful
accounts.
Net cash used in investing activities was $4,243,000 for the three month period
ended May 31, 1995 compared to $60,000 for the prior period. This significant
increase in cash used in investing activities resulted from the acquisition of
PremierPharmacy, Inc. as of May 31, 1995. (See note 4 to the Unaudited
Consolidated Financial Statements.)
Cash provided by financing activities was $5,676,000 for the three month period
ended May 31, 1995 compared to the $455,000 of cash used in financing
activities for the prior period. This significant change resulted from the
receipt of $9,650,000 from the loan facility with CreditAnstalt, $5,840,000
received from the private placement of 1,600,000 shares of the Company's common
stock and $750,000 from the proceeds of a loan made to the Company by Counsel
Corp. These funds were used to retire United Jersey Bank debt in the amount of
$2,983,000, retire the debt to a major vendor in the amount of $1,776,000
(which resulted in a gain on the discount of debt in the amount of $283,000)
and to retire CreditAnstalt senior debt of $5,536,000 associated with Premier
prior to its merger with the Company.
Working capital increased to $9,018,000 from $5,409,000 at May 31, 1995. The
increase in working capital resulted from the excess of the receipts from the
proceeds of the loan facility with CreditAnstalt and the private placement of
1,600,000 shares of the Company's common stock over the funds which were
disbursed to retire bank debt, vendor debt and the bank debt of Premier.
The Company's current ratio of May 31, 1995 was 2.01:1 compared to 1.85:1 at
February 28, 1995. At May 31, 1995, prior to its merger with the Company,
Premier had working capital in the amount of $3,472,000 and a current ratio of
2.50:1.
As previously discussed, a result of its past financial performance and the
Premier acquisition, the Company does not comply with current NASDAQ listing
criteria for tangible net worth. Steps are being taken to comply with
applicable NASDAQ listing criteria, which includes raising approximately $8.0
to $10.0 million in additional capital.
<PAGE> 6
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.
CHOICE DRUG SYSTEMS, INC.
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(Registrant)
Dated: July 20, 1995 By: /s/ Don H. Thompson
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Don H. Thompson
Senior Vice President and Principal
Financial Officer
<PAGE> 7
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.
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<S> <C>
2.1 Agreement and Plan Merger dated April 5, 1995 by and among Premier
Pharmacy, Inc., Registrant and a Delaware corporation organized as a
wholly owned subsidiary of Registrant (Incorporated by reference to
Exhibit 2.1 to Registrant's Annual Report on Form 10-K for the year ended
February 28, 1995 (the "1995 Annual Report Form 10-K"))
4.1 Form of Warrants issued pursuant to Registrant's private offering which
closed on May 22, 1995. (Incorporated by reference to Exhibits 4.5 and
4.6 to Registrant's 1995 Annual Report on Form 10-K.)
4.2 Form of Registration Rights Agreement dated as of May 22, 1995 among
Registrant and investors of such Offering. (Incorporated by reference
to Exhibit 4.1 to Registrants Form 8-K dated May 22, 1995).
27 Financial Data Schedule (for SEC use only)
99.1 Credit Agreement among Registrant and CreditAnstalt Corporate Finance,
Inc., dated May 19, 1995. (Incorporated by reference to Exhibit 10.19
to Registrant's Annual Report on Form 10-K.)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FILED FOR THE THREE MONTH PERIOD ENDED MAY 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILED ON JULY 17, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-START> MAR-01-1995
<PERIOD-END> MAY-31-1995
<CASH> 1,431
<SECURITIES> 0
<RECEIVABLES> 11,694
<ALLOWANCES> 2,197
<INVENTORY> 5,244
<CURRENT-ASSETS> 17,921
<PP&E> 7,130
<DEPRECIATION> 4,820
<TOTAL-ASSETS> 35,170
<CURRENT-LIABILITIES> 8,903
<BONDS> 16,106
<COMMON> 23,083
0
0
<OTHER-SE> (12,921)
<TOTAL-LIABILITY-AND-EQUITY> 35,170
<SALES> 10,709
<TOTAL-REVENUES> 0
<CGS> 6,908
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,127
<LOSS-PROVISION> 159
<INTEREST-EXPENSE> 216
<INCOME-PRETAX> (701)
<INCOME-TAX> 0
<INCOME-CONTINUING> (701)
<DISCONTINUED> 0
<EXTRAORDINARY> 283
<CHANGES> 0
<NET-INCOME> (418)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
