<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of report (date of earliest event reported): October 15, 1998
PHARMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-20606 11-2310352
-------- ------- ----------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
3611 Queen Palm Drive, Tampa, Florida 33619
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(800) 237-7676
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(former name or former address if changed since last report)
ITEM 5. OTHER EVENTS.
Registrant is filing financial statements pursuant to Item 7 for the
acquisition of National Institutional Pharmaceutical Services, Inc. ("NIPSI"),
previously reported under Item 2 of the Registrant's Periodic Report on Form 8-K
dated September 3, 1998.
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
(i) Audited balance sheet of National Institutional Pharmacy Services,
Inc. (excluding Medicare Part B business) as of May 31, 1998, and the
related income statement, statements of changes in parent's equity in
business and cash flows for the year then ended.
(b) Pro forma financial information. Pro forma financial data for the year
ended December 31, 1997 and the six months ended June 30, 1998, reflecting
the acquisition by the Company of National Institutional Pharmacy Services,
Inc.
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
National Institutional Pharmacy Services, Inc.:
We have audited the accompanying balance sheet of National Institutional
Pharmacy Services, Inc., Exclusive of Medicare Part B Business (the Company See
Note 1) as of May 31, 1998, and the related income statement, statements of
changes in parent's equity in business and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Institutional Pharmacy
Services, Inc., Exclusive of Medicare Part B Business as of May 31, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Albuquerque, New Mexico,
October 8, 1998
<PAGE> 4
NATIONAL INSTITUTIONAL PHARMACY SERVICES, INC.,
EXCLUSIVE OF MEDICARE PART B BUSINESS
BALANCE SHEET
AS OF MAY 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 579,317
Accounts receivable, less allowance for doubtful
accounts of $2,535,915 9,353,396
Intercompany receivables, net 16,484,012
Inventory 2,787,314
------------
Total current assets 29,204,039
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 1,461,926
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of $658,162 5,799,079
OTHER ASSETS, net 85,559
------------
Total assets $ 36,550,603
============
LIABILITIES AND PARENT'S EQUITY IN BUSINESS
CURRENT LIABILITIES:
Accounts payable $ 1,927,505
Accrued expenses 2,575,206
Demand note payable 32,000,000
------------
Total liabilities 36,502,711
------------
COMMITMENTS AND CONTINGENCIES
PARENT'S EQUITY IN BUSINESS 47,892
------------
Total liabilities and parent's equity in business $ 36,550,603
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 5
NATIONAL INSTITUTIONAL PHARMACY SERVICES, INC.,
EXCLUSIVE OF MEDICARE PART B BUSINESS
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
NET SALES $56,292,914
COST OF SALES 24,473,958
-----------
Gross profit 31,818,956
-----------
OPERATING EXPENSES:
Labor and benefits 12,318,403
Selling, general and administrative 1,953,182
Supplies 490,086
Provision for bad debts 1,234,887
Vehicle, meals and travel 538,782
Property operating costs 1,022,775
Depreciation and amortization 863,776
-----------
Total operating expenses 18,421,891
-----------
Income from operations 13,397,065
Interest expense 3,238,956
-----------
Net income before provision for income taxes 10,158,109
PROVISION FOR INCOME TAXES 3,533,809
-----------
Net income $ 6,624,300
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
NATIONAL INSTITUTIONAL PHARMACY SERVICES, INC.,
EXCLUSIVE OF MEDICARE PART B BUSINESS
STATEMENT OF CHANGES IN PARENT'S EQUITY IN BUSINESS
FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
BALANCE, at May 31, 1997 $ 21,889,783
Distributions (32,000,000)
Net income 6,624,300
Capital contribution 3,533,809
------------
BALANCE, at May 31, 1998 $ 47,892
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
NATIONAL INSTITUTIONAL PHARMACY SERVICES, INC.,
EXCLUSIVE OF MEDICARE PART B BUSINESS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,624,300
Adjustments to reconcile net income to net cash from
operating activities-
Income taxes paid by Parent 3,533,809
Depreciation and amortization 863,775
Change in operating assets and liabilities-
Increase in accounts receivable (584,141)
Increase in intercompany receivables (9,687,692)
Increase in inventory (30,959)
Decrease in prepaids 23,448
Decrease in goodwill and other intangible assets 120,455
Decrease in accounts payable (995,418)
Increase in accrued expenses 1,304,371
-----------
Net cash flows from operating activities 1,171,948
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (538,449)
-----------
Net cash flows from investing activities (538,449)
-----------
NET INCREASE IN CASH 633,499
CASH, beginning of year (54,182)
-----------
CASH, end of year $ 579,317
===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 1,066,667
===========
NON CASH FINANCING ACTIVITY:
Dividend paid in form of demand note payable $32,000,000
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 8
NATIONAL INSTITUTIONAL PHARMACY SERVICES, INC.,
EXCLUSIVE OF MEDICARE PART B BUSINESS
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
National Institutional Pharmacy Services, Inc. (NIPSI), is a Delaware
corporation that provides medical supplies and equipment, prescription drugs and
over-the-counter drugs to long-term care facilities, rehabilitation hospitals
and specialty hospitals. NIPSI is a wholly-owned subsidiary of Integrated Health
Services, Inc. (the Parent).
These financial statements present the result of operations and financial
position for the business operations of NIPSI, which were sold subsequent to
year-end. Accordingly, the financial statements have been presented exclusive of
the Medicare Part B business and joint ventures, which were not sold, and are
presented as National Institutional Pharmacy Services, Inc., Exclusive of
Medicare Part B Business (the Company) (see Note 7).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue, expenses, gains
and losses during the reporting periods. Actual results could differ from these
estimates.
Income Taxes
The Parent files a consolidated federal income tax return. Income tax expense is
based on reported earnings before income taxes after adjusting for permanent
differences. The Parent has paid corporate income taxes related to the Company's
operations since its inception. During the current year the Company recorded a
provision for income taxes of $3,533,809 in taxes. This provision has been
reflected as a corresponding capital contribution due to the Parent's ultimate
intent to honor the related tax obligations.
Inventory
Inventory consists principally of medical supplies and pharmaceuticals and is
stated at the lower of cost or market value utilizing the FIFO (first-in,
first-out) method.
<PAGE> 9
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or, with respect to leasehold improvements, over the
remaining term of the lease, whichever is shorter. Equipment and leasehold
improvements are depreciated over the following useful lives:
<TABLE>
<S> <C>
Leasehold improvements 10 years or remaining
term of the lease
Furniture and equipment 5 - 20 years
Vehicles 3 - 4 years
</TABLE>
Revenue Recognition
Revenue is recorded as products are shipped and services are rendered. The
Company sells its products principally to residents of long-term care
facilities, speciality hospitals and rehabilitation hospitals who are insured by
commercial insurers or by various state Medical Assistance programs. In addition
the Company has certain agreements with customers to manage the on-site
pharmacy. The Company receives a set management fee for these services.
A portion of the Company's sales are covered by various state and Federal
reimbursement programs, which are subject to review and/or audit. Reimbursement
programs are also subject to change from time to time. Revenues are reported at
the estimated net amounts to be received from individuals, third party payors,
nursing facilities and others.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are primarily reimbursed by third
party payors. As of May 31, 1998, the approximate percentages of accounts
receivable from each payor category are as follows:
<TABLE>
<S> <C>
Medicaid 15.8%
Commercial and private payors 84.2
-----
100.0%
=====
</TABLE>
Goodwill
Costs in excess of fair values of businesses acquired are recorded as goodwill
and amortized using the straight-line method over 40 years. Amortization of
goodwill amounted to approximately $161,159, for the year ended May 31, 1998.
On an ongoing basis, the Company reviews the carrying value of its intangible
assets in light of any events or circumstances that indicate they may be
impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of May 31, 1998,
the Company does not believe there is any indication that the carrying value or
the amortization period of its intangibles need to be adjusted.
<PAGE> 10
401(k) Benefit Plan
The Parent sponsors a supplemental retirement program established under Section
401(k) of the Internal Revenue Code, as amended. Contributions by the Parent may
be made to the plan subject to the discretion of the Board of Directors. No
Parent contribution was made for the year ended May 31, 1998.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements, as stated at cost, are summarized by major
classifications, as follows:
<TABLE>
<S> <C>
Leasehold improvements $ 317,917
Furniture and equipment 3,226,273
Vehicles 209,703
----------
3,753,893
Less: Accumulated depreciation and amortization 2,291,967
----------
Property and equipment, net $1,461,926
==========
</TABLE>
The Company has expensed as acquired fixed assets with an original purchase of
less than $500. This policy is immaterial to the financial statements hereon.
Depreciation expense for the year ended May 31, 1998, was $699,603.
3. DEMAND NOTE PAYABLE:
During the current year, the Company declared a $32,000,000 dividend payable to
the Parent. The Parent loaned the proceeds back to the Company in exchange for a
demand note payable. As of May 31, 1998, the following debt was outstanding:
<TABLE>
<S> <C>
Unsecured note payable to NIPSI Holding Co., interest
at 10%, payable on demand $32,000,000
===========
</TABLE>
Interest expense for the year ended May 31, 1998, was $3,238,956. Although the
note is due on demand, the provision was not utilized by the note holder through
the date of the sale of the Company (See Note 7).
<PAGE> 11
4. COMMITMENTS:
The Company has operating leases for various office and warehouse space. Total
rental expense for fiscal year 1998 was $228,835. Future minimum lease payments
are as follows:
<TABLE>
<CAPTION>
Year Ending May 31,
-------------------
<S> <C>
1999 $158,956
2000 99,692
2001 81,324
2002 24,832
2003 and thereafter 2,219
--------
$367,023
========
</TABLE>
5. RELATED PARTY TRANSACTIONS:
During the normal course of business, the Company engages in transactions with
other entities of the Parent. Sales to affiliated companies during the year
ended May 31, 1998 totaled $25,170,889. Amounts due from related entities as of
May 31, 1998, are included in accounts receivable and total $6,112,113.
6. MAJOR VENDOR:
The Company is currently committed to purchase a certain percentage of the
facilities' requirements of prescription pharmaceuticals from the primary
supplier. During the current year all inventory needed by the Company was
purchased from the primary supplier when the primary supplier had the inventory
in-stock. Purchases of inventory under primary supplier relationships during the
year ended May 31, 1998, was approximately 89% of total inventory purchases.
7. SUBSEQUENT EVENT:
Effective July 1, 1998, certain assets of the Company were purchased by
PharMerica, Inc. (PharMerica). PharMerica is a publicly-held company which owns
and operates similar businesses throughout the United States.
<PAGE> 12
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma income statement data for the year ended
December 31, 1997, and the six months ended June 30, 1998 have been prepared
based on historical income statements of the Company, as adjusted to reflect the
acquisitions of NIPSI and the Company's other acquisitions as if each had
occurred on January 1, 1997 and January 1, 1998, respectively. The pro forma
income statement data may not be indicative of the future results of operations
of or what the actual results of operations would have been had the acquisitions
described above been effective January 1, 1998 and 1997. The unaudited pro forma
balance sheet has been prepared assuming NIPSI was acquired on June 30, 1998.
<PAGE> 13
UNAUDITED PROFORMA INCOME STATEMENT
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------------------------------------
($000s omitted)
Other Merger
PharMerica NIPSI Acquisitions Adjustments Total
---------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $652,179 $ 56,293 $ 363,563 $ -- $1,072,035
Cost of sales 355,577 24,474 209,159 -- 589,210
-------- -------- --------- -------- ----------
Gross Profit 296,602 31,819 154,404 -- 482,825
Operating Expenses:
Selling, general
and
administrative 216,087 17,558 107,618 -- 341,263
Depreciation/
Amortization 21,408 864 15,563 563 (1) 38,398
Restructuring costs 5,780 -- (5,780) -- --
Merger related costs -- -- -- -- --
Impairment of long-
lived assets 5,155 -- (5,155) -- --
-------- -------- --------- -------- ----------
Total operating
expenses 248,430 18,422 112,246 563 379,660
-------- -------- --------- -------- ----------
Income from
operations 48,172 13,397 42,158 (563) 103,165
Interest expense, net 2,483 3,239 34,713 (1,939)(2) 38,496
-------- -------- --------- -------- ----------
Income before
taxes 45,689 10,158 7,446 1,377 64,669
Provision for
income taxes 18,992 3,534 9,721 479 (3) 32,726
-------- -------- --------- -------- ----------
$ 26,697 $ 6,624 $ (2,275) $ 897 $ 31,943
======== ======== ========= ======== ==========
Diluted earnings per
share $ 0.380
==========
Weighted average shares
outstanding 83,978
======
</TABLE>
<PAGE> 14
UNAUDITED PROFORMA INCOME STATEMENT
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------------------------------------------------------
($000s omitted)
Other Merger
PharMerica NIPSI Acquisitions Adjustments Total
---------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $562,349 $28,147 $(10,332) $ -- $580,164
Cost of sales 313,664 12,237 (8,074) -- 317,827
-------- ------- -------- ----- --------
Gross Margin 248,685 15,910 (2,257) -- 262,337
Selling, general
and
administrative 174,980 8,779 (2,965) -- 180,794
Depreciation/
Amortization 17,416 432 89 282 (1) 18,219
-------- ------- -------- ----- --------
Total operating
expenses 192,396 9,211 (2,876) 282 199,012
Income from
operations 56,289 6,699 619 (282) 63,325
Interest expense, net 17,383 1,620 315 (970)(2) 18,348
-------- ------- -------- ----- --------
Income before
taxes 38,906 5,079 304 688 44,977
Provision for
income taxes 16,894 1,767 122 240 (3) 19,022
-------- ------- -------- ----- --------
Net income $ 22,012 $ 3,312 $ 182 $ 449 $ 25,955
======== ======= ======== ===== ========
Diluted earnings per
share $ 0.29
========
Weighted average shares
outstanding 90,782
========
</TABLE>
<PAGE> 15
UNAUDITED PROFORMA BALANCE SHEET
($000s omitted)
<TABLE>
<CAPTION>
As of June 30, 1998
--------------------------------------------------
Merger
ASSETS PharMerica NIPSI Adjustments Total
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 72,808 $ 579 $ (579)(4) $ 72,808
Accounts receivable 256,070 9,353 -- 265,423
Inventories 62,520 2,787 -- 65,307
Prepaid expenses and other 2,218 16,484 (16,484)(4) 2,218
Deferred tax assets 29,195 -- -- 29,195
---------- -------- -------- ----------
Total current assets 422,811 29,203 (17,063) 434,951
Equipment and leasehold
improvements 57,985 1,462 -- 59,447
Goodwill 778,485 5,799 7,516 (5) 791,800
Other assets 17,379 86 -- 17,465
---------- -------- -------- ----------
Total assets $1,276,660 $ 36,550 $ (9,547) $1,303,663
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable and accrued
expenses $ 108,679 $ 4,503 $ 2,500 (6) $ 115,682
Current portion of long-term debt 11,451 32,000 (32,000)(4) 11,451
Accrued restructuring charges 8,753 -- -- 8,753
---------- -------- -------- ----------
Total current liabilities 128,883 36,503 (29,500) 135,886
Deferred income taxes 25,725 -- -- 25,725
Long-term debt 556,320 -- 20,000 (7) 576,320
Restructuring charges 4,760 -- -- 4,760
---------- -------- -------- ----------
Total liabilities 715,688 36,503 (9,500) 742,691
---------- -------- -------- ----------
Common stock 899 -- -- 899
Additional paid-in capital 423,626 47 (47)(8) 423,626
Retained earnings 136,447 -- -- 136,447
---------- -------- -------- ----------
Total stockholders' equity 560,972 47 (47) 560,972
---------- -------- -------- ----------
Total liabilities and stockholders
equity $1,276,660 $ 36,550 $ (9,547) $1,303,663
========== ======== ======== ==========
</TABLE>
<PAGE> 16
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Represents the amortization of the additional goodwill recorded for NIPSI
over 40 years.
(2) Represents a reduction for the interest expense paid by NIPSI on their note
payable to IHS offset by the additional interest expense on the amounts
borrowed on PharMerica's line of credit to finance the acquisition at an
assumed rate of 6.5%.
(3) Represents the tax effect of the pro forma merger adjustments.
(4) Represents assets not acquired and liabilities not assumed.
(5) Additional goodwill recorded from the NIPSI transaction.
(6) Reflects assumed expenses of the transaction.
(7) Reflects the additional borrowings on PharMerica's line of credit to
finance the acquisition.
(8) Elimination of NIPSI's equity accounts.
<PAGE> 17
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.
PHARMERICA, INC.
By: /s/ Gerald Gerlach
--------------------------------------------
Gerald Gerlach
Vice President and Corporate Controller
Date: October 15, 1998
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO.
- -----------
2 Asset Purchase Agreement dated August 19, 1998 by and between
Registrant, NIPSI and IHS (incorporated by reference to Exhibit 2 from
the Registrant's Periodic Report on Form 8-K dated September 3, 1998.
