<PAGE> 1
FORM 10-Q
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 June 30, 1998
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 0-20606
PHARMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2310352
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3611 Queen Palm Drive 33619
Tampa, FL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 626-7788
- --------------------------------------------------------------------------------
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 report(s) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 4, 1998
----- -----------------------------
Common Stock, $.01 Par Value 89,924,626
<PAGE> 2
PHARMERICA, INC. AND SUBSIDIARIES
INDEX
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements............................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
PART 2: OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 2. Changes in Securities ............................................. 17
Item 3. Defaults upon Senior Securities.................................... 17
Item 4. Submission of Matters to Vote of Security Holders.................. 17
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
SIGNATURES.................................................................. 19
INDEX OF EXHIBITS........................................................... 20
Page 2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
PharMerica, Inc and Subsidiaries
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1998
1997 (UNAUDITED)
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 34,215 $ 72,808
Accounts receivable, net of allowance for doubtful accounts of
$22,096 and $21,994 205,225 256,070
Inventories 51,766 62,520
Prepaid expenses and other current assets 6,307 2,218
Deferred tax assets 35,360 29,195
----------- -------------
Total Current Assets 332,873 422,811
Equipment and leasehold improvements, net 46,599 57,985
Goodwill, net of accumulated amortization of $ 26,653
and $ 36,932 723,954 778,485
Other assets 10,822 17,379
----------- -------------
Total Assets $ 1,114,248 $ 1,276,660
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 109,483 $ 108,679
Current portion of long term debt 7,533 11,451
Accrued restructuring charges 14,269 8,753
----------- -------------
Total Current Liabilities 131,285 128,883
Deferred income taxes 21,216 25,725
Long term debt, net of current portion 427,889 556,320
Restructuring charges, net of current 4,980 4,760
----------- -------------
Total Liabilities 585,370 715,688
STOCKHOLDERS' EQUITY
Common stock $.01 par value; 300,000 shares authorized; 876 899
87,930 shares issued and 87,591 outstanding as of
December 31, 1997 and 89,864 issued and outstanding as of
June 30, 1998
Preferred stock, $.01 par value; 500 shares authorized; and
0 outstanding at June 30, 1998 - -
Additional paid-in capital 413,567 423,626
Retained earnings 114,435 136,447
----------- -------------
Total Stockholders' Equity 528,878 560,972
----------- -------------
Total Liabilities and Stockholders' Equity $ 1,114,248 $ 1,276,660
=========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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PharMerica, Inc and Subsidaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1997 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 153,738 $ 287,672 $ 301,330 $ 562,349
COST OF SALES 82,310 160,862 162,397 313,664
------------ ------------ ------------ ------------
Gross profit 71,428 126,810 138,933 248,685
OPERATING EXPENSES:
Selling, general and
administrative expenses 52,210 89,452 101,439 174,979
Depreciation and amortization 5,082 8,892 9,908 17,417
------------ ------------ ------------ ------------
Operating income 14,136 28,466 27,586 56,289
INTEREST EXPENSE, NET 4 9,588 48 17,383
------------ ------------ ------------ ------------
Income before provision for
income tax 14,132 18,878 27,538 38,906
PROVISION FOR INCOME TAXES 5,845 8,196 11,421 16,894
------------ ------------ ------------ ------------
Net income $ 8,287 $ 10,682 $ 16,117 $ 22,012
============ ============ ============ ============
Earnings per common and common
equivalent share:
Basic $ 0.17 $ 0.12 $ 0.32 $ 0.25
============ ============ ============ ============
Diluted $ 0.17 $ 0.12 $ 0.32 $ 0.24
============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding:
Basic 50,000 90,039 50,000 88,918
============ ============ ============ ============
Diluted 50,051 92,421 50,051 91,347
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4
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PharMerica, Inc and Subsidaries
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30,1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid in Capital Earnings
---------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 87,591 $ 876 $ 413,567 $ 114,435
Shares released from escrow 332 3 (3) -
Common stock issued in connection with
Exercise of stock options and warrants 1,941 20 10,062 -
Net income for the six months ended
June 30 1998 - - - 22,012
========== ========== =============== ==========
89,864 $ 899 $ 423,626 $ 136,447
========== ========== =============== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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PharMerica, Inc and Subsidaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,117 $ 22,012
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 9,906 17,417
Change in assets and liabilities, net of acquisitions
Accounts receivable (14,432) (46,012)
Inventories (1,839) (8,320)
Prepaid expenses and other current assets (128) 4,306
Deferred income taxes 66 10,721
Accounts payable and accrued expenses 2,588 (7,851)
Accrued restructuring charges - (5,737)
Other - 1,146
---------- ----------
Total Adjustments (3,839) (34,330)
---------- ----------
Net cash flows from operating activities 12,278 (12,318)
---------- ----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (5,608) (16,291)
Payments for acquisitions, net of cash acquired (27,589) (60,588)
---------- ----------
Net cash flows from investing activities (33,197) (76,879)
---------- ----------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings - 122,300
Net proceeds from issuance of subordinated debt - 316,875
Advances from Beverly Enterprises, Inc. 20,531 -
Proceeds from exercise of stock options and warrants - 10,082
Prepayments of long-term debt (519) (321,467)
---------- ----------
Net cash flows from financing activities 20,012 127,790
---------- ----------
Net (decrease) increase in cash and cash equivalents (907) 38,593
Cash and cash equivalents, beginning of period 7,575 34,215
========== ==========
Cash and cash equivalents, end of period $ 6,668 $ 72,808
========== ==========
Supplemental cash flow information:
Cash paid for:
Interest $ 130 $ 7,083
========== ==========
Taxes $ - $ 12,082
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. ORGANIZATION AND BUSINESS
PharMerica, Inc., (the surviving company of the merger (the "Merger") involving
Capstone Pharmacy Services, Inc. (Capstone) and Pharmacy Corporation of America
(PCA)) (together with its subsidiaries, the "Company"), is a Delaware
corporation.
The Company is one of the nation's largest institutional pharmacies principally
engaged in the business of providing pharmaceuticals and related services to
long-term care facilities, correctional institutions, hospitals and health
maintenance organizations. The Company also provides mail service pharmacy
services, including the delivery of drugs and medical equipment to workers'
compensation payors, claimants and employers. As of June 30, 1998, the Company
operated approximately 160 pharmacies and pharmacy related outlets.
2. EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of the Company's
common and common equivalent shares outstanding for the three and six months
ended June 30, 1997 and 1998. The amount of common stock equivalents outstanding
was computed using the treasury stock method.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary and fully diluted EPS with a presentation
of basic and diluted EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.
Earnings per share information for the three and six months ended June 30, 1997
reflect the historical operating results of PCA, the shares issued by Capstone
in the Merger and the dilutive effect of stock options of the PCA employees
assumed.
The following table is a reconciliation of the number of shares used in the
denominator of the basic and diluted earnings per share calculation for each of
the periods presented. The numerator of the calculation is net income.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares-basic 50,000 90,039 50,000 88,918
Dilutive effect of outstanding
options and warrants 51 2,382 51 2,429
------ ------ ------ ------
Weighted average shares-diluted 50,051 92,421 50,051 91,347
====== ====== ====== ======
</TABLE>
3. BASIS OF PRESENTATION
The interim consolidated financial statements of the Company for the six months
ended June 30, 1997 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company at June 30, 1998, and the results
of its operations and cash flows for the three and six months ended June 30,
1997 and 1998.
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<PAGE> 8
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
The results of operations for the six months ended June 30, 1997 and 1998, are
not necessarily indicative of results to be expected for the full year. These
interim consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's annual
report on Form 10-K, as filed with the Securities and Exchange Commission for
the year ended December 31, 1997. The balance sheet at December 31, 1997, has
been derived from the audited financial statements at that date.
4. ACQUISITIONS
During January 1998, the Company acquired the stock of Express Pharmacy
Services, Inc., a Tampa, Florida mail order pharmacy company. The purchase price
was approximately $19,676, and goodwill at the date of acquisition was $18,622.
During February 1998, the Company acquired the assets of Kentucky Health
Services, Inc., d/b/a Med Source, a Kentucky based provider of institutional
pharmacy services. The purchase price was approximately $25,000, and goodwill at
the date of acquisition was $23,335.
Also, during the six months ended June 30, 1998, the Company acquired the assets
or stock of seven additional companies. The total purchase price was
approximately $17,193, and total goodwill was approximately $16,017.
All of the businesses described above have been accounted for using the purchase
method of accounting, with the assets and liabilities of the acquired companies
recorded at their estimated fair market values at the dates of acquisition. The
operations of the acquired companies, since the dates of acquisition, are
included in the accompanying unaudited consolidated statements of income.
Goodwill, representing the excess of acquisition cost over the fair value of the
net assets acquired, is amortized over 40 years.
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5. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The results of operations of acquired businesses are included in the Company's
consolidated results from the date of acquisition. Had the acquisitions
discussed in Note 4 occurred on January 1, 1997, management estimates that the
unaudited pro forma results of operations for the six months ended June 30, 1997
and 1998 would have been:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
NET SALES $503,405 $567,089
COST OF SALES 279,847 316,280
-------- --------
Gross profit 223,558 250,809
OPERATING EXPENSES
Selling, general and administrative
expenses 162,526 176,084
Depreciation and amortization 18,254 17,523
-------- --------
Operating Income 42,778 57,202
INTEREST EXPENSE, net 15,027 17,645
-------- --------
Income before provision for income tax 27,751 39,557
INCOME TAX PROVISION 12,044 17,154
-------- --------
Net income $ 15,707 $ 22,403
======== ========
Diluted income per share $ .18 $ .25
======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the Company
and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) incremental interest charges on
intercompany balances with Beverly Enterprises, Inc at an effective rate of
6.5%. (4) the per share effect of stock issued as part of the acquisitions, and
(5) the related income tax effects. The pro forma results do not reflect any
anticipated operating efficiencies or synergies and are not necessarily
indicative of actual results which might have occurred had the operations and
management of the Company and the acquired companies been combined in prior
years.
6. LONG-TERM DEBT
The Company maintains a $550,000 Bank Credit Facility with several commercial
banks (the "Credit Facility"). Interest rates under the Credit Facility vary
based upon the type of borrowing. The Credit Facility matures on December
3, 2002.
In March 1998, the Company sold $325,000 of Senior Subordinated Notes (the
"Notes") in a private placement offering. The Notes bear interest at 8 3/8% and
mature in 2008. Net proceeds of the Notes were used to repay a portion of the
outstanding borrowings under the Credit Facility.
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<PAGE> 10
7. RESTRUCTURING CHARGES
During December 1997, in connection with the Merger, the Company adopted a plan
to restructure its long-term care pharmacy operations. In connection with this
plan, management intends to close six former PCA pharmacies, 14 former Capstone
pharmacies, and relocate Capstone's corporate headquarters from Irving, Texas to
Tampa, Florida. Management anticipates that the restructuring activities in
connection with the Merger will be substantially completed within the current
year.
The Company has recorded restructuring costs of $5,780 related to the closure of
the former PCA pharmacies, consisting of $3,621 of severance covering
approximately 180 pharmacy employees, $739 of lease termination costs and $1,420
of other exit costs.
The Company has also assumed liabilities, included in the Capstone purchase
price allocation of $9,583 related to the closure of the former Capstone
pharmacies and the relocation of Capstone's former headquarters, consisting of
$5,036 of severance covering approximately 260 employees, $3,059 of lease
termination costs and $1,488 of relocation costs. The terminated positions were
comprised primarily of pharmacy employees and several regional and corporate
positions.
As of June 30, 1998, approximately $5,737 has been charged against these
restructuring accruals.
In connection with the Capstone acquisition, the Company assumed approximately
$3,886 of liabilities from previous Capstone restructurings consisting primarily
of remaining lease termination costs.
8. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its purchase of
pharmaceuticals. Purchases under primary supplies relationships during the six
months ended June 30, 1997 and 1998 were approximately 94% and 83% of total
inventory purchases, respectively.
9. SUBSEQUENT EVENTS
In July 1998, the Company sold of its Department of Corrections business to
Stadtlander Drug Distribution Co., Inc., an affiliate of Counsel Corporation the
Company's largest shareholder. In exchange for substantially all net assets in
the business the Company received approximately 537,500 shares of its common
stock. The Company anticipates it will incur a loss of approximately $2 million
net of tax benefits.
In accordance with the terms of the Notes, during July 1998 the Company
exchanged $325,000 of Senior Subordinated Notes for publicly registered Notes
with substantially the same terms.
Page 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
information contained in the consolidated financial statements, including the
related notes, and the other financial information incorporated by reference
herein.
GENERAL
PharMerica is a leading provider of institutional pharmacy services to
the elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
specialty hospitals and the home. The Company is also a leading provider of mail
order pharmacy services to the workers' compensation and catastrophic care
markets. As of June 30, 1998, PharMerica provided pharmacy services to
approximately 366,000 long-term care beds, 165,000 online pharmacy patients and
82,000 patients through its mail order workers' compensation pharmacy.
PharMerica was formed as a result of the Merger involving PCA, a
subsidiary of Beverly, and Capstone. Capstone issued 50 million shares of its
common stock and assumed approximately $275.0 million of debt to acquire all of
the outstanding stock of Beverly. Immediately prior to this transaction, Beverly
distributed its long-term care business to New Beverly Holdings, Inc. ("New
Beverly") leaving only its institutional pharmacy business, PCA, to be acquired
by Capstone. Because Beverly's shareholders owned a majority of the Company
after the Merger, for accounting purposes, the transaction was treated as an
acquisition of Capstone by PCA.
Since the Merger was treated as a reverse merger transaction for
accounting purposes, the shares of Capstone at the date of close plus the fair
value of Capstone's outstanding options and warrants, represent the
consideration for the Merger. In accordance with EITF 95-19, the purchase price
in the Merger for accounting purposes was determined using the fair value of
Capstone's common stock over a reasonable period of time before and after the
transaction was agreed and announced. After the Merger was consummated,
historical financial statements of the Company became those of PCA. Therefore,
the Company's 1997 historical financial results reflect a full year of PCA
operations and one month of Capstone operations.
The Company believes that, when fully realized, the synergies from the
Merger will be approximately $25 million annually. This includes savings
primarily from the consolidation of 19 institutional pharmacies, more favorable
pricing terms in the Company's new primary purchasing contracts and corporate
regional overhead reductions. It also includes additional income generated
through expanded market coverage of available beds under the Company's existing
preferred provider agreements with regional and national long-term care
providers.
In pursuit of its acquisition strategy, the Company routinely reviews
potential pharmacy and pharmacy services provider acquisitions. At any given
time, the Company may be in discussions with one or more such pharmacy and
pharmacy services provider owners, some of which may be material. There can be
no assurance that any of these or other negotiations will lead to definitive
agreements or, if agreements were reached, that any transactions would be
consummated.
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PRO FORMA SIX MONTHS ENDED JUNE 30, 1998
COMPARED TO THE PRO FORMA
SIX MONTHS ENDED JUNE 30, 1997
NET SALES. The Company's pro forma net sales increased approximately
$63.7 million, or 12.7%, to $567.1 million in 1998 from $503.4 million in 1997.
This increase is a result of marketing and customer retention initiatives, a
continued focus on ancillary and IV penetration at existing accounts.
OPERATING INCOME. The Company's pro forma operating income increased
approximately $14.4 million, or 33.6%, to $57.2 million in 1998 from $42.8
million in 1997. As a percentage of net sales, operating income increased to
10.1% in 1998 from 8.5% in 1997. This increase is primarily a result of
integration of the Company's corporate and regional overhead, continued pharmacy
consolidation, and decreased deprecation and amortization resulting from
impairment charges taken in the fourth quarter of 1997. Since the Merger, the
Company has consolidated corporate functions in Tampa, Florida and has
identified 19 pharmacies for consolidation. The Company anticipates
consolidation activities should be completed during the fourth quarter of 1998.
INCOME TAXES. The Company had a pro forma annual effective tax rate of
approximately 43.4% for both periods. The annual effective tax rate was higher
than the federal and state statutory rate primarily due to the impact of pro
forma non-deductible goodwill amortization associated with the Company's
acquisition activities and the Merger.
NET INCOME. The Company's pro forma net earnings increased $6.7 million
(42.7%) or $.07 per share to $22.4 million, or $.25 per share in 1998. The net
earnings growth is attributable to the cost savings initiatives and
consolidation activities resulting from the Merger as well as a 12.7% increase
in pro forma revenues over 1997 levels.
Page 12
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THREE MONTHS ENDED JUNE 30, 1998, COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales increased to $287.7 million in the 1998 period from $153.7
million in the 1997 period, an increase of $134.0 million or 87.2%. Of this
increase, approximately $103.3 million is attributable to the operations of the
acquisitions. The additional increase is attributable to marketing and customer
retention initiatives, a continued focus on ancillary and IV penetration at
existing accounts and continued gains in long-term care beds serviced. The
Company did not experience any material change in reimbursement levels in the
1998 period.
COST OF SALES. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $160.9 million in the 1998
period from $82.3 million in the 1997 period, an increase of $78.6 million. As a
percentage of net sales, cost of sales increased to 55.9% in the 1998 period
from 53.5% in the 1997 period as a result of less favorable purchasing contracts
at the acquired companies. The Company anticipates improvements in the acquired
companies' cost of sales as those companies are transitioned to the Company's
purchasing contracts and programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $89.5 million in the 1998 period from $52.2 million in 1997 period, an
increase of $37.3 million. As a percentage of net sales, selling, general and
administrative expenses were 31.1% in the 1998 period, compared to 34.0% in the
1997 period. The decrease as a percentage of net sales was a result of
leveraging fixed cost over a larger revenue base, as well as, the restructuring
and consolidation plans initiated as part of the Merger and operational
synergies achieved as a result of the acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $8.9
million in the 1998 period from $5.1 million in the 1997 period, an increase of
$3.8 million. This increase is due mainly to the increased amortization expense
incurred as a result of the acquisitions.
INTEREST EXPENSE, NET. Interest expense was $9.6 million in the 1998 as compared
to $4,000 in 1997. The 1998 amount primarly relates to bank borrowings to fund
the Merger as well as other acquisitions. During 1997, the Company did not incur
interest charges on its intercompany payable to Beverly Enterprises, Inc.
Page 13
<PAGE> 14
SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales increased to $562.3 million in the 1998 period from $301.3
million in the 1997 period, an increase of $261.0 million. Of this increase,
approximately $202.0 million is attributable to the operations of the
acquisitions completed. The additional increase is attributable to marketing and
customer retention initiatives, a continued focus on ancillary and IV
penetration at existing accounts and continued gains in long-term beds serviced.
The Company did not experience any material change in reimbursement levels in
the 1998 period.
COST OF SALES. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $313.7 million in the 1998
period from $162.4 million in the 1997 period, an increase of $151.3 million. As
a percentage of net sales, cost of sales increased to 55.8% in the 1998 period
from 53.9% in the 1997 period as a result of less favorable purchasing
contracts at the acquired companies. The Company anticipates improvements in the
acquired companies' cost of sales as those companies are transitioned to the
Company's purchasing contracts and programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $175.0 million in the 1998 period from $101.4 million in 1997 period, an
increase of $73.6 million or 72.6%. As a percentage of net sales, selling,
general and administrative expenses were 31.1% in the 1998 period, compared to
33.7% in the 1997 period. The decrease as a percentage of net sales was a result
of leveraging fixed costs over a larger revenue base, as well as, the
restructuring and consolidation plans initiated as part of the Merger and
operational synergies achieved as a result of the acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $17.4
million in the 1998 period from $9.9 million in the 1997 period, an increase of
$7.5 million. This increase is due mainly to the increased amortization expense
incurred as a result of the acquisitions.
INTEREST EXPENSE, NET. Interest expense, net increased to $17.4 million in the
1998 period from $48,000 in the 1997 period, primarly due to bank borrowings
related to the merger and other acquisitions. Additionally, the Company did not
incur interest charges on its intercompany payable to Beverly Enterprises, Inc.
YEAR 2000. The Company has assessed and continues to assess the impact of the
Year 2000 issue on its reporting systems and operations. The Year 2000 issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year such that, as the century date occurs, date
sensitive systems will recognize the year 2000 as 1900 or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process critical financial and operational information incorrectly. During 1997,
the Company incurred approximately $250,000 to modify existing computer systems
and applications and estimates that approximately $1.7 million in the aggregate
will be incurred in 1998 and 1999.
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LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies. The Company anticipates its
future capital requirements will primarily be needed to finance the acquisition
of institutional pharmacy and related operations.
The Company's net cash flows from operating activities were $(12.3) million and
$12.3 million respectively, for the six months ended June 30, 1998 and 1997.
Generally, the cash flows from operating activities in each of the periods
resulted from increased working capital requirements. Specifically, net cash
flows from operating activities during the 1998 period were impacted by a $46.0
million increase in accounts receivable. This increase resulted from
approximately $32 million in increased revenues from the fourth quarter of 1997,
a $8 million increase in accounts receivable from Beverly Enterprises, Inc.
pursuant to the terms of the Merger and an approximately $3 million increase in
accounts receivable for entities acquired since December 1997.
The Company's net cash flows from investing activities were $(76.9) million and
$(33.2) million for the six months ended June 30, 1998 and 1997, respectively.
Net cash flows from investing activities were impacted by acquisitions
previously discussed and investments in new pharmacy locations and information
systems during both periods.
Net cash flows from financing activities were approximately $127.8 million and
$20.0 million for the six months ended June 30, 1998 and 1997, respectively. Net
cash flows from financing activities were impacted by borrowings to fund
acquisitions and working capital requirements.
Page 15
<PAGE> 16
In connection with the Merger in December 1997, the Company entered into a
revolving $550.0 million credit facility (the "Credit Facility") with a
syndicate of banks for which The Chase Manhattan Bank ("Chase") acts as
administrative agent. Approximately $113.7 million of the Credit Facility was
used to retire principal amounts outstanding under the Company's prior credit
facility and approximately $275.0 million was used to retire PCA debt assumed in
connection with the Merger. The Credit Facility bears interest, at the prime
rate (plus an applicable margin) or the federal funds rate plus an applicable
margin, or (b) the London Interbank market rate, plus an applicable margin based
upon the Company's leverage ratio and other provisions and covenants. As of
August 1, 1998, the Company had approximately $215 million outstanding under the
Credit Facility.
In March 1998, the Company sold $325 million of Senior Subordinated Notes in a
private placement offering. The Notes bear interest at 8 3/8% and mature in
2008. The Company used the net proceeds of the Notes to partially repay
indebtedness under the Credit Facility, which amounts may be subsequently
reborrowed.
The Company believes its liquidity and capital resources are adequate to meet
its operating needs for the foreseeable future. In order to implement its growth
strategy, the Company will require substantial capital resources and will need
to incur, from time to time, additional indebtedness. Availability under the
Credit Facility will be used primarily to fund the Company's future
acquisitions. Availability of funds under the Credit Facility is limited by
certain financial covenants. In the event the funding requirements in connection
with the potential future acquisitions exceed the funds available pursuant to
the Credit Facility, the Company also may need to issue, in public or in private
transactions, equity or debt securities, the availability and terms of which
will depend on market and other conditions. There can be no assurance that any
such additional financing will be available on terms acceptable to the Company,
if at all.
Page 16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART 2: OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 19, 1998, the Company held its 1998 Annual Meeting of
Shareholders for the purpose of electing three directors. Listed below are the
results of the election.
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
Cecil S. Harrell Albert Reichmann Gail Wilensky, Ph.D.
---------------- ---------------- --------------------
<S> <C> <C> <C>
For: 55,301,740 55,300,464 55,300,415
Against: ---- ---- ----
Withheld: ---- ---- ----
Abstentions: 971,223 972,499 972,548
Non-Voting (1): 32,252,295 32,252,295 32,252,295
Eligible Shares: 88,525,258 88,525,258 88,525,258
</TABLE>
(1) Includes broker non-votes
Page 17
<PAGE> 18
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as a part of this Report are listed in the
Exhibit Index immediately following the signature page.
(b) The following Report on Form 8-K was filed in the reporting
period:
Form 8-K dated May 15, 1998 that contains Item 5 disclosures,
including a letter sent to shareholders of the Company along
with its 1997 Annual Report.
Page 18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1998 PHARMERICA, INC.
By: /s/ Thomas Hofmeister
---------------------------------------
Controller and chief accounting officer
Page 19
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Choice Drug Systems, Inc. (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-Q for period ending August
30, 1995).
3.2 Certificate of Ownership and Merger Merging Choice Mergeco, Inc. into Choice
Drug Systems, Inc. (incorporated by reference to Exhibit 3.2 to the Company's
form 10-Q for period ending August 30, 1995.
3.3 Certificate of Amendment (incorporated by reference to Exhibit A to the
Company's Proxy Statement for Special Meeting of Stockholders on August 15,
1996).
3.4 Certificate of Amendment to Certificate of Incorporation of Capstone Pharmacy
Services, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed
December 12, 1997).
4.1 Warrant to purchase shares of Common Stock dated January 1, 1996, for the
purchase of 75,000 shares (incorporated by reference to Exhibit 4.9 to the
Company's Annual Report on Form 10-K for fiscal year ended December 31,
1996).
4.2 Warrant to purchase shares of Common Stock dated December 20, 1995 for the
purchase of 15,000 shares (incorporated by reference to, Exhibit 4.10 to the
Company's Annual Report on Form 10-K for fiscal year ended December 31,
1996).
4.3 Form of ACA Investors Warrant ($12.00) for purchase of Common Stock
(incorporated by reference to Exhibit 4.11 to the Company's Annual Report on
Form 10-K for fiscal year ended December 31, 1996).
4.4 Indenture dated March 31, 1998 related to 8 3/8% Senior Subordinated Notes
(incorporated by reference to Exhibit 4.9 to the Company's Registration Statement
on Form S-4 filed May 15, 1998).
4.5 Registration Rights Agreement dated March 31, 1998 (incorporated by reference
to Exhibit 4.8 to the Company's Registration Statement on Form S-4/A filed
June 22, 1998).
10.1 1995 Nonqualified Stock Option Plan for Directors of the Company
(incorporated by reference to Exhibit A to Schedule 14A filed
August 2, 1995).
</TABLE>
Page 20
<PAGE> 21
<TABLE>
<S> <C>
10.2 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel and
Directors of the Company (incorporated by reference to Exhibit B to Schedule
14A filed August 2, 1995).
10.3 Amendment to 1995 Incentive and Nonqualified Stock Option Plan for Key
Personnel and Directors of the Company (incorporated by reference to Annex H
to the Company's Registration Statement on Form S-4 (Reg. No. 333-28517)).
10.4 1996 Employee Stock Purchase Plan of the Company (incorporated
by reference to Exhibit D to Schedule 14A filed August 2, 1995).
10.5 Amended and Restated 1996 Employee Stock Purchase Plan (incorporated by
reference to Annex K to the Company's Registration Statement on Form S-4
(Reg. No. 333-28517)).
10.6 Non-Qualified Deferred Compensation Plan for Executives (incorporated by
reference to Exhibit 4 to the Company's S-8 filed on November 21, 1997).
10.7 Adirondack Consulting Agreement dated June 25, 1996
(incorporated by reference to Exhibit 10.23 to Form 10-K for
year ending December 31, 1996).
10.8 Agreement and Plan of Distribution by and among Beverly
Enterprises, Inc., New Beverly Holdings, Inc. and the Company,
dated April 15, 1997 (incorporated by reference to Annex C to
the Company's Registration Statement on Form S-4 (Reg. No. 333-28517)).
10.9 Senior Subordinated Credit Agreement dated December 3, 1997 by and between
the Company and Chase Manhattan Bank (incorporated by reference to Exhibit
10.9 to the Company's 10-K filed on March 31, 1998).
10.10 Preferred Provider Agreement by and among Beverly Enterprises, Inc. and the
Company, dated December 3, 1997 (incorporated by reference to Exhibit 10.10 to
the Company's 10-K filed on March 31, 1998).
10.11 Adirondack Engagement Letter dated December 10, 1996
(incorporated by reference to Exhibit 10.11 to the Company's
10-K filed on March 31, 1998).
10.12 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.12 to the Company's 10-K filed on March
31, 1998).
10.13 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.13 to the Company's 10-K filed on March
31, 1998).
10.14 Purchase Agreement Dated March 25, 1998 by and among PharMerica, Inc.,
the Guarantors, Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Brothers Inc, BancAmerica Robertson Stephens, Chase Securities
Inc. and CIBC Oppenheimer Corp (incorporated by reference to Exhibit 1
to the Company's Registration Statement on Form S-4/A filed
June 22, 1998).
</TABLE>
27 Financial Data Schedule (for SEC use only).
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMERICA INC FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 72,808
<SECURITIES> 0
<RECEIVABLES> 256,070
<ALLOWANCES> (21,994)
<INVENTORY> 62,520
<CURRENT-ASSETS> 422,811
<PP&E> 57,985
<DEPRECIATION> (36,932)
<TOTAL-ASSETS> 1,276,660
<CURRENT-LIABILITIES> 128,883
<BONDS> 556,320
0
0
<COMMON> 899
<OTHER-SE> 560,073
<TOTAL-LIABILITY-AND-EQUITY> 1,276,660
<SALES> 562,349
<TOTAL-REVENUES> 562,349
<CGS> 313,664
<TOTAL-COSTS> 313,664
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,383
<INCOME-PRETAX> 38,906
<INCOME-TAX> 16,894
<INCOME-CONTINUING> 22,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,012
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
