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FORM 10-Q/A
(Amendment No. 1)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant To Section 13 Or 15(D)
Of The Securities Exchange Act Of 1934
For the quarterly period ended January 31, 1995
Commission File Number 0-18366
PHARMACY MANAGEMENT SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-1482767
(State of Incorporation) (I.R.S. Employer
Identification No.)
3611 Queen Palm Drive, Tampa, Florida 33619
(Address of Principal Executive Offices)
813/626-7788
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of outstanding shares of each class of Registrant's common stock as of
March 13, 1995:
Common Stock, par value $.01......9,120,107 shares
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The registrant amends the following items, exhibits, financial statements or
other portions of its Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 1995:
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company is a leading independent national provider of medical cost
containment and managed care services, providing professionally managed
solutions for containing the escalating costs of workers' compensation. The
following table presents the ratios of certain financial items to net revenues
for the three and six months ended January 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------- -----------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 69.6 72.0 69.3 72.0
---- ---- ---- ----
Gross margin 30.4 28.0 30.7 28.0
Costs and expenses:
Selling, general & administrative 17.7 19.5 17.6 19.6
Exercise of non-qualified stock options 2.8 -- 1.4 --
Acquisition expenses 2.8 -- 1.4 --
Depreciation and amortization 3.2 2.9 3.1 2.9
--- --- --- ---
Operating income 3.9 5.6 7.2 5.5
Interest expense, net (0.1) (0.6) (0.1) (0.6)
Additional consideration - sale of TMD 1.1 -- 0.5 --
--- --- --- --
Income before income taxes 4.9 5.0 7.6 4.9
Provision for income taxes 3.1 2.0 3.6 2.0
--- --- --- ---
Net income 1.8% 3.0% 4.0% 2.9%
=== === === ===
</TABLE>
The ensuing discussion and analysis of the Company's results of operations and
financial condition does not address the effect on the Company's liquidity,
capital resources, or results of operations of the consummation of the
acquisition of the Company by Beverly or Beverly's plans for the Company
following the acquisition.
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the second quarter of fiscal year 1995 were approximately
$30.0 million compared to $28.1 million for the comparable period in fiscal
year 1994. The increase in revenues for the period was primarily attributable
to increased revenues from the Company's preferred provider organization
("PPO") and case management services, resulting primarily from more customers
and greater market penetration. The pricing for PPO and case management
services changed only slightly during the comparative periods. Net revenues
for the six months ended January 31, 1995 were approximately $60.5 million
compared to approximately $55.5 million in the comparable period in fiscal year
1994. Substantially all of the increase in revenues for the period was
attributable to increased revenues from the Company's preferred provider
organization ("PPO") and case management services, resulting primarily from
more customers and greater
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market penetration. The pricing for PPO and case management services changed
only slightly during the comparative periods. During the second quarter and
first six months of fiscal year 1995, the net revenues of the PPO were
approximately 16% of consolidated revenues, compared to approximately 11% of
consolidated revenues in the comparable periods in fiscal year 1994. Net
revenues for the second quarter and first six months of fiscal year 1995 from
the home delivery of prescription drugs and medical equipment and supplies were
approximately the same as in the comparable period in fiscal year 1994 because
the percentage of generic drugs dispensed has doubled during the second quarter
and first six months of fiscal year 1995 when compared to the comparable
periods in fiscal year 1994. The percentage of generic drug prescriptions
dispensed relative to all drug prescriptions dispensed is expected to continue
to increase during the next two years. This trend is likely to slow revenue
growth, but should not have a material effect on the Company's operating income
from the sale of prescription drugs. Although generic prescription drugs sell
at lower prices than brand-name prescription drugs, the gross margins for
generic prescription drugs are substantially higher than they are for
brand-name prescription drugs.
Cost of Revenues
Cost of revenues as a percentage of net revenues was approximately 2.4% lower
for the second quarter of fiscal year 1995 than it was for the second quarter
of fiscal year 1994. Cost of revenues as a percentage of net revenues was
approximately 2.7% lower for the six months ended January 31, 1995 than it was
for the comparable period in fiscal year 1994. The improvement in gross margin
is attributable to dispensing a greater percentage of generic drugs in the home
delivery business and the increased volume of revenue provided by the Company's
PPO and case management services, which have higher gross margins than the home
delivery business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues
decreased approximately 1.8% to 17.7% for the three months ended January 31,
1995, compared to 19.5% for the three months ended January 31, 1994. Selling,
general and administrative expenses as a percentage of revenue decreased
approximately 2.0% to 17.6% for the six months ended January 31, 1995, compared
to 19.6% for the six months ended January 31, 1994. The decreases are
attributable to improved control over expenses while revenues increased 6.9%
for the quarter and 9.1% for the six months ended January 31, 1995.
Exercise of Non-Qualified Stock Options
In December 1994, two executive officers exercised non-qualified stock options
for a total of 95,000 shares of common stock at an average exercise price of
$6.50 per share. The financial statement effect of these exercises was
approximately $855,000 of compensation expense.
Acquisition Expenses
As previously reported in the Company's Current Report on Form 8-K dated
December 26, 1994, the Company entered into an Agreement and Plan of Merger
with Beverly Enterprises, Inc. ("Beverly") on December 26, 1994 (The "Merger
Agreement") pursuant to which the Company agreed to be merged with and into
Beverly Acquisition Company, a wholly owned subsidiary of Beverly (the
"Merger"). (See Note 6 to Notes to Condensed Consolidated Financial Statements
(Unaudited) included elsewhere in this Report.) The Merger is expected to be
consummated in the spring of 1995. During the second quarter of fiscal year
1995, the Company incurred approximately $835,000 of expenses associated with
this acquisition transaction, consisting primarily of legal and investment
banking fees. Most of these costs are not deductible expenses for income tax
purposes. The Company funded the payment of these expenses from cash flow from
operating activities. The Company expects to incur additional expenses
associated with the acquisition transaction, and the total amount is expected
to be significant (see "Acquisition Transaction" below).
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Depreciation and Amortization
Depreciation and amortization was approximately $141,000 (or approximately 17%)
more for the three months ended Janauary 31, 1995, than it was for the three
months ended January 31, 1994, and was approximately $248,000 (or approximately
15%) more for the six months ended January 31, 1995, than it was for the six
months ended January 31, 1994. The increase is attributable to capital
expenditures for computer equipment and software during fiscal years 1995 and
1994.
Interest Expense
Net interest expense for the three months ended January 31, 1995 decreased
approximately $121,000, or approximately 78%, compared to the comparable period
in fiscal year 1994. Net interest expense for the six months ended January
31, 1995 was approximately $236,000, or approximately 73% less than in the
comparable period in fiscal year 1994. These significant decreases are
primarily attributable to the reduction in bank debt during the relevant
periods.
Additional Consideration - Sale of TMD
The Company recorded additional income of approximately $326,000 on November
15, 1994 when it received the final adjusted number of shares of Staodyn, Inc.
("Staodyn") common stock as final consideration for the sale of TMD to Staodyn,
which occurred on November 15, 1992. The purchase agreement between Staodyn
and TMD provided that TMD could receive additional shares of Staodyn common
stock based upon the trading range of the common stock two years after the date
of the original transaction. The amount of income recorded on November 15,
1994 represents the amount necessary to record the total shares of Staodyn
common stock received at its fair value on November 15, 1994.
Provision for Income Taxes
The combined effective federal and state income tax rate for the three months
ended January 31, 1995 was 62.5%, compared to 40.1% for the comparable period
in fiscal year 1994. The combined rate for the six months ended January 31,
1995 was 47.3%, compared to 40.9% for the six months ended January 31, 1994.
The increase in the effective rate is primarily attributable to non-deductible
acquistion related expenses.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's working capital decreased to approximately $15.9 million at
January 31, 1995 compared to approximately $16.7 million at July 31, 1994. The
decrease is primarily due to a higher level of accounts payable at January 31,
1995.
The Company had positive cash flow from operations of approximately $3.2
million for the three months ended January 31, 1995, compared to approximately
$5.0 million for the comparable period in fiscal year 1994. The primary
difference was the receipt of notes receivable payments of approximately $2.7
million during the three months ended January 31, 1994. For the six months
ended January 31, 1995, the Company had positive cash flow from operations of
approximately $5.7 million, compared to approximately $3.6 million for the six
months ended January 31, 1994. The primary differences were improved net
income and favorable changes in cash flows from accounts receivable and
accounts payable, offset by the effect of the notes receivable payments
received during the three months ended January 31, 1994.
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Net trade receivables decreased approximately $800,000 and approximately
$300,000 for the three and six month periods ended January 31, 1995 and 1994
respectively. These decreases are primarily attributable to improved
collection of accounts receivable.
Inventories at January 31, 1995 approximated $4.1 million, compared to
approximately $3.5 million at July 31, 1994. The increase is attributable to
special purchases of prescription drugs at favorable prices and terms.
Capital expenditures for the six months ended January 31, 1995 were
approximately $1.1 million. These expenditures were financed by cash flow from
operations. The Company further reduced its bank debt by approximately $3.0
million for the quarter and approximately $4.8 million for the six months ended
January 31, 1995.
The Company has revolving lines of credit with two banks that allow it to
borrow up to $15 million at variable rates that currently approximate the
bank's prime rates. The amount available for borrowing at January 31, 1995 was
$13.3 million. The Company believes that cash generated from future operations
(in excess of $8 millon in each of the last two fiscal years), together with
the funds available under its lines of credit (approximately $13.3 million at
January 31, 1995), will be sufficient to finance the Company's operations and
its anticipated capital requirements for at least the next 12 to 18 months.
The Company's $15 million revolving credit lines expire on November 30, 1997.
Healthcare Reform is a major national priority, but the impact of the reforms
is not presently determinable. The Company's future liquidity will continue to
depend on its operating cash flow and management of trade receivables and
inventories.
ACQUISITION TRANSACTION
The Merger Agreement includes covenants that, on an interim basis pending
consummation of the Merger, restrict the Company from doing the following: (a)
granting or permitting a lien on, selling, leasing, exchanging, transferring or
otherwise disposing of, or granting to any person a right or option to lease,
purchase, or otherwise acquire, any material amount of its assets or
properties, including the capital stock of its subsidiaries, any indebtedness
owed to it and any rights of value to it (except in the ordinary course of
business consistent with past practices and except for inter-company
transfers); (b) selling, issuing, awarding, granting, pledging, redeeming,
purchasing or otherwise acquiring, transferring or encumbering any of its
capital stock or other securities or any rights, options or warrants to acquire
any of its capital stock or other securities; (c) reclassifying any
outstanding common stock into a different class or number of shares or
otherwise changing its authorized capitalization, or paying, declaring or
setting aside for payment a dividend or other distribution in respect of any of
its capital stock, whether payable in cash, stock or other property; (d)
borrowing any money, issuing any debt securities or assuming, endorsing or
guaranteeing, or becoming a surety, accommodation party or otherwise
responsible for an obligation or indebtedness of a person other than itself and
any of its subsidiaries (except for borrowings under its existing credit
agreements in the usual and ordinary course of business); (e) amending,
renewing, waiving, breaching, extending, modifying, entering into, releasing in
any respect or relinquishing any right or benefit under any mortgage,
agreement, instrument, obligation or other commitment that would be material to
the Company; (f) settling or compromising any material claim, liability, tax
assessment or financial contingency; (g) entering into any transaction with
any of its officers, directors, affiliates or shareholders (except in the usual
and ordinary course of business and on an arms' length basis); and (h)
authorizing, recommending, consummating or otherwise entering into any
agreement providing for a merger, dissolution, consolidation, restructuring,
recapitalization, reorganization, partial or complete liquidation or the
acquisition or disposition of a material amount of assets or securities owned
by the Company. Management does not expect that any of these interim
restrictions will materially adversely affect the Company's liquidity,
operations, capital resources or ability to proceed with planned capital
expenditures,
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if the Merger is consummated this Spring as contemplated. The Merger Agreement
also requires the Company to pay Beverly a "termination fee" of $5,000,000 if
Beverly or the Company terminates the Merger Agreement under certain
circumstances.
The Company incurred during the six months ended January 31, 1995 approximately
$835,000 of acquisition expenses associated with its consideration of
acquisition overtures and the pending Merger with Beverly, and it expects that
the total acquisition expenses for fiscal year 1995 will be approximately $3
million. The expenses will consist primarily of professional fees and
financial advisory fees payable to an investment banking firm. Management
expects to fund the payment of these expenses and the termination fee (if
payable) from cash flow from operating activities and, to the extent necessary,
its bank credit lines. Management believes that it has access to adequate
sources of borrowing to fund the payment of these expenses and the termination
fee (if it becomes payable), although payment of the expenses and the
termination fee would diminish available credit facilities, reduce
shareholders' equity and increase future interest expense.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACY MANAGEMENT
SERVICES, INC.
Date: March 31, 1995 By: /s/David L. Redmond
-------------------
David L. Redmond
Senior Vice President and
Chief Financial Officer
(Its Duly Authorized Officer)
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