<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 March 31, 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 or 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 of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at April 15, 1998
----- ------------------------------
Common Stock, $.01 Par Value 88,525,258
<PAGE> 2
PHARMERICA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART 1: FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997................ 3
Unaudited Consolidated Statements of Income for the three months
ended March 31, 1998 and 1997................................................................... 4
Unaudited Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1998............................................................................ 5
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997................................................................... 6
Notes to Unaudited Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 16
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................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................................................. 17
SIGNATURES................................................................................................... 18
INDEX OF EXHIBITS............................................................................................ 19
</TABLE>
<PAGE> 3
PART 1: FINANCIAL INFORMATION
ITEM 1. Financial Statements
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,215 $ 40,503
Accounts receivable, net of allowance for doubtful accounts of
$22,096 and $23,287 205,225 247,077
Inventories 51,766 52,981
Prepaid expenses and other current assets 6,307 4,306
Deferred tax asset 35,360 29,403
---------- ----------
Total Current Assets 332,873 374,270
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 46,599 52,381
GOODWILL, net of accumulated amortization of $26,653
and $32,380 723,954 777,220
OTHER ASSETS 10,822 18,071
---------- ----------
Total Assets $1,114,248 $1,221,942
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 109,483 $ 107,080
Current portion of long-term debt 7,533 12,986
Accrued restructuring charges 14,269 11,710
---------- ----------
Total Current Liabilities 131,285 131,776
DEFERRED TAX LIABILITY 21,216 23,396
LONG-TERM DEBT, net of current portion 427,889 518,367
ACCRUED RESTRUCTURING CHARGES, net of current portion 4,980 4,980
---------- ----------
Total Liabilities 585,370 678,519
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 300,000,000 shares authorized at December
31, 1997 and March 31, 1998; 87,930,184 shares issued and
87,591,722 outstanding as of December 31, 1997 and 88,134,800
shares issued and outstanding as of March 31, 1998 876 882
Preferred Stock, $.01 par value; and 500,000 shares authorized; and $0
outstanding at December 31, 1997 and March 31, 1998 -- --
Additional paid-in capital 413,567 416,776
Retained earnings 114,435 125,765
---------- ----------
Total Stockholders' Equity 528,878 543,423
---------- ----------
Total Liabilities and Stockholders' Equity $1,114,248 $1,221,942
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE> 4
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998, AND 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
NET SALES $147,592 $274,677
COST OF SALES 80,087 152,802
-------- --------
Gross profit 67,505 121,875
OPERATING EXPENSES:
Selling, general and administrative
expenses 49,229 85,528
Depreciation and amortization 4,826 8,524
-------- --------
Operating income 13,450 27,823
INTEREST EXPENSE, NET 46 7,795
-------- --------
Income before provision for
income tax 13,404 20,028
PROVISION FOR INCOME TAXES 5,576 8,698
-------- --------
Net income $ 7,828 $ 11,330
======== ========
Earnings per common and common
equivalent share:
Basic $ .16 $ .13
======== ========
Diluted $ .16 $ .13
======== ========
Weighted average number of common and common
equivalent shares outstanding:
Basic 50,000 87,797
======== ========
Diluted 50,051 90,275
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE> 5
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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
Common stock issued in connection with
exercise of stock options and warrants 543 6 3,209 --
Net income for the three months ended
March 31, 1998 -- -- -- 11,330
------ -------- -------- ----------
BALANCE, March 31, 1998 88,134 $ 882 $416,776 $ 125,765
====== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement.
5
<PAGE> 6
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,828 $ 11,330
Adjustments to reconcile net income to net cash flows
from operating activities;
Depreciation and amortization 4,826 8,524
Change in assets and liabilities, net of acquisitions
Accounts receivable (4,978) (35,566)
Inventories (318) 1,388
Prepaid expenses and other current assets (60) 2,150
Deferred income taxes 1,046 8,137
Accounts payable and accrued expenses 2,067 (8,263)
Accrued restructuring charges -- (2,560)
Other -- 1,280
--------- ---------
Total adjustments 2,583 (24,910)
--------- ---------
Net cash flows from operating activities 10,411 (13,580)
--------- ---------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (3,710) (7,522)
Payments for acquisitions, net of cash acquired (22,144) (57,334)
--------- ---------
Net cash flows from investing activities (25,854) (64,856)
--------- ---------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings -- 82,900
Net proceeds from issuance of subordinated debt -- 316,875
Advances (to) from Beverly Enterprises, Inc. 13,852 --
Proceeds from exercise of stock options and warrants -- 3,215
Repayment of long-term debt (313) (318,266)
--------- ---------
Net cash flows from financing activities 13,539 84,724
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,904) 6,288
Cash and cash equivalents, beginning of period 7,575 34,215
--------- ---------
Cash and cash equivalents, end of period $ 5,671 $ 40,503
========= =========
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 93 $ 3,778
========= =========
Taxes $ -- $ 2,451
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
6
<PAGE> 7
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 (Note 4).
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 March 31, 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 months ended
March 31, 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 months ended March 31, 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 (Note 4).
3. BASIS OF PRESENTATION:
The interim consolidated financial statements of the Company for the three
months ended March 31, 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 March 31, 1998, and the results
of its operations and cash flows for the three months ended March 31, 1997 and
1998.
7
<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 three months ended March 31, 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 dated 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 three months ended March 31, 1998, the Company acquired the
assets or stock of five additional companies. The total purchase price was
approximately $13,359, and total goodwill was approximately $12,387.
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.
8
<PAGE> 9
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 three months ended March 31,
1997 and 1998 would have been:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
NET SALES $242,831 $277,555
COST OF SALES 135,698 154,392
-------- --------
Gross profit 107,133 123,163
OPERATING EXPENSES
Selling, general and administrative
expenses 78,391 86,144
Depreciation and Amortization 8,884 8,603
-------- --------
Operating Income 19,858 28,416
Interest Expense, net 7,252 7,985
-------- --------
Income before provision for income tax 12,606 20,431
INCOME TAX PROVISION 5,471 8,859
-------- --------
Net income $ 7,135 $ 11,572
======== ========
Diluted income per share $ .08 $ .13
======== ========
</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, (4) 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 teams 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 on 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.
9
<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 6 former PCA pharmacies, 14 former Capstone
pharmacies, and will 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 March 31, 1998, approximately $2,560 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.
10
<PAGE> 11
8. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. Purchases under primary supplies relationships during the
three months ended March 31, 1997 and 1998 were approximately 94% and 82% of
total inventory purchases, respectively.
9. SUBSEQUENT EVENTS:
In April 1998, the Company acquired the assets of the Chamberlain Group LLC, a
geriatric pharmaceutical care management organization headquartered in
Chesapeake, Virginia.
11
<PAGE> 12
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 March 31, 1998, PharMerica provided pharmacy services to
approximately 345,000 long-term care residents in 36 states and to over 106,000
workers' compensation claimants nationwide.
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 to and announced. After the Merger was consummated, the
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, eleven of which
have already occurred, 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. The Company expects to realize
approximately $16 million of these synergies in 1998 and the full $25 million
in anticipated annual synergies (which includes approximately $2 million of
additional income as described above) beginning in 1999.
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.
12
<PAGE> 13
RESULTS OF OPERATIONS
PRO FORMA THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO PRO FORMA THREE
MONTHS ENDED MARCH 31, 1997
NET SALES. The Company's pro forma net sales increased approximately
$34.7 million, or 14.3%, to $277.6 million in 1998 from $242.8 million in 1996.
This increase is a result of marketing and customer retention initiatives as
well as increased IV penetration and long-term care beds serviced.
COST OF SALES. The Company's pro forma cost of sales increased
approximately $18.7 million, or 13.8%, to $154.4 million in 1998 from $135.7
million in 1997. As a percent of net sales, cost of sales decreased to 55.6% in
1998 from 55.9% in 1997. This decrease was primarily due to renegotiation of the
Company's primary pharmaceutical wholesaler contract and 16 other contracts with
drug manufacturers and distributors. The Company anticipates all pharmacies will
be converted to these contracts during the second quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's pro forma
selling, general and administrative expenses, which includes wages and related
expenses, facility expenses, and other administrative overhead, increased
approximately $7.7 million, or 9.9%, to $86.1 million in 1998 from $78.4
million in 1997. As a percent of net sales, selling, general and administrative
expenses decreased to 31.0% in 1998 from 32.3% in 1997. This decrease was
primarily the result of leveraging the Company's corporate and regional
overhead and continued pharmacy consolidation. Since the Merger, the Company
has identified 19 pharmacies for consolidation. To date, 11 of 19 have been
completed, with the remaining consolidations to be completed by the third
quarter of 1998.
DEPRECIATION AND AMORTIZATION. The Company's pro forma depreciation
and amortization decreased slightly due to the write off of assets related to
the restructuring and other impairment charges taken in the fourth quarter of
1997.
INCOME TAXES. The Company had a pro forma annual effective tax rate of
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 $4.4
million (62.2%) or $.05 per share to $11.6 million, or $.13 per share in 1998.
The net earnings growth is attributable to the cost savings incentives and
consolidation activities resulting from the Merger as well as a 14.3% increase
in pro forma revenues over 1997 levels.
13
<PAGE> 14
THREE MONTHS ENDED MARCH 31, 1998, COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1997
NET SALES. Net sales increased to $274.7 million in the 1998 period from $147.6
million in the 1997 period, an increase of $127.1 million or 86.1%. Of this
increase, approximately $95.2 million is attributable to the operations of the
acquisitions completed between April 1, 1997 and March 31, 1998. The additional
increase is attributable to marketing and customer retention as well as
increased IV service penetration and 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 $152.8 million in the 1998
period from $80.1 million in the 1997 period, an increase of $72.7 million or
90.8%. As a percentage of net sales, cost of sales increased to 55.6% in the
1998 period from 54.3% in the 1997 period as a result of less favorable
reimbursement in the markets of the acquired companies.
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 $85.5 million in the 1998 period from $49.2 million in 1997 period, an
increase of $36.3 million or 73.7%. As a percentage of net sales, selling,
general and administrative expenses were 31.1% in the 1998 period, compared to
33.4% in the 1997 period. The decrease as a percentage of net sales was a result
of the restructuring and consolidation plans initiated as part of the Merger as
well as operational synergies achieved as a result of the acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $8.5
million in the 1998 period from $4.8 million in the 1997 period, an increase of
$3.7 million or 76.6%. This increase is due mainly to the increased amortization
expense incurred as a result of the acquisitions.
INTEREST EXPENSE, NET. Interest expense, net increased $7.7 million, to $7.8
million in the 1998 period due to increased bank borrowings related to
acquisitions. Additionally, the Company did not incur interest charges on its
intercompany payable to Beverly Enterprises, Inc. (refer to footnote 5 for
further discussion).
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.
14
<PAGE> 15
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 $(13.6) million and
$(10.4) million respectively, for the three months ended March 31, 1998 and
1997. Generally, the cash flows from operating activities in each of the periods
resulted from increased working capital requirements. Specifically, net cash
from operating activities was most significantly impacted by a $35.6 million
increase in accounts receivable. This increase resulted from approximately $19
million in increased revenues from the fourth quarter of 1997 and 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 $(64.9) million and
$(25.9) million for the three months ended March 31, 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 the both periods.
Net cash flows from financing activities were approximately $84.7 million and
$13.5 million for the three months ended March 31, 1998 and 1997, respectively.
Net cash flows from financing activities were impacted by borrowings to fund
acquisitions and working capital requirements.
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
option of the Company, at (a) the greater of Chase's base CD rate, Chase's
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. Availability under the Credit
Facility is subject to the Company's leverage ratio and other provisions and
covenants. As of May 1, 1998, the Company had approximately $198 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
Bank Credit Facility will be used primarily to fund the Company's future
acquisitions. Availability of funds under the Bank Credit Facility is limited by
the financial covenants described in "Description of Bank Credit Facility." In
the event the funding requirements in connection with the potential future
acquisitions exceed the funds available pursuant to the Bank 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
16
<PAGE> 17
PART 2: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
The agreements governing the Senior Subordinated Notes contain a
limitation on "Restricted Payments" (as defined therein) including
dividend payments, such that (1) no Restricted Payments can be made
during a default on the Notes, and (2) the aggregate amount of yearly
Restricted Payments cannot exceed 50% of the Company's consolidated
net income.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
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 Reports on Form 8-K were filed in the reporting
period:
Form 8-K/A dated December 3, 1997 that contains Item 7
disclosures, including financial statements, related to the
Merger
Form 8-K dated March 18, 1998 that contains Item 5 disclosures
related to the Company's 1997 financial statements
17
<PAGE> 18
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.
PHARMERICA, INC.
Dated: May 14, 1998 By:/s/ James D. Shelton
---------------------------
Vice President and
Chief Financial Officer
18
<PAGE> 19
INDEX OF EXHIBITS
Exhibit
Number Description
------- ---------------------------------------------------------------
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).
3.5 Bylaws of Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.3 to the Company's Form 10-Q for period ending August
30, 1995).
4.1 Form of Warrant ($4.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-K for fiscal year ended February 29, 1995).
4.2 Form of Warrant ($5.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 10-K for fiscal year ended February 29,
1995).
4.3 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)
4.4 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)
4.5 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)
4.6 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 as of the
date hereof)
11 Statement re computation of per share earnings
27 Financial Data Schedule (for SEC use only)
19
<PAGE> 1
Exhibit 11
PHARMERICA, INC.
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE-MONTH PERIOD ENDING MARCH 31, 1998
<TABLE>
<CAPTION>
Basic Diluted
-------- -------
<S> <C> <C>
Three months ended March 31, 1998:
Stock Price Assumed $ 12.59
=======
Dilutive effect of Conversion of warrants
and stock options outstanding -- 2,478
Weighed average shares outstanding 87,797 87,797
------- -------
Weighed average number of common and
common equivalent shares outstanding 87,797 90,275
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMERICA, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 40,503
<SECURITIES> 0
<RECEIVABLES> 247,077
<ALLOWANCES> 23,287
<INVENTORY> 52,981
<CURRENT-ASSETS> 374,270
<PP&E> 52,381
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,221,942
<CURRENT-LIABILITIES> 131,776
<BONDS> 518,367
0
0
<COMMON> 882
<OTHER-SE> 542,541
<TOTAL-LIABILITY-AND-EQUITY> 1,221,942
<SALES> 274,677
<TOTAL-REVENUES> 274,677
<CGS> 152,802
<TOTAL-COSTS> 152,802
<OTHER-EXPENSES> 94,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,795
<INCOME-PRETAX> 20,028
<INCOME-TAX> 8,698
<INCOME-CONTINUING> 11,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,330
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
