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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1994
Commission File No. 0-18366
PHARMACY MANAGEMENT SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Florida 59-1482767
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>
3611 Queen Palm Drive
Tampa, Florida 33619
(Address of Principal Executive Offices)
(813) 626-7788
(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
<TABLE>
<CAPTION>
Total Market Value of Voting
Class of Outstanding Shares Stock Held by Nonaffiliates
Common Stock at September 20, 1994 at September 20, 1994
------------------------- ---------------------- -----------------------------
<S> <C> <C>
Common Stock 8,750,193 $48,800,429
$.01 par value
</TABLE>
Exhibit Index on Page 24
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The Registrant (1) deletes the reference on the cover page and on the
exhibit index to the incorporation by reference of its Annual Report to
Shareholders for the fiscal year ended July 31, 1994, in Part III of the Form
10-K and (2) amends Items 1, 5, 7, 8, and 14 of its Annual Report on Form 10-K
for the fiscal year ended July 31, 1994, as filed on September 26, 1994, and as
amended on October 24 and November 23, 1994, and restates that report in its
entirety as follows:
PART I
ITEM 1. BUSINESS
Pharmacy Management Services, Inc. was incorporated in Florida in 1972 and
is a holding company for seven wholly owned subsidiaries. Pharmacy Management
Services, Inc. (together with its consolidated subsidiaries, the "Company") is a
leading independent nationwide provider of medical cost containment and managed
care services, providing professionally managed solutions for containing the
escalating costs of workers' compensation. The Company offers services that
address essentially all of an injured worker's healthcare related needs, from
the time of the job-related injury through return to employment or home care.
These services enhance the quality of care for the injured worker while
containing the cost of care for the insurer or other payor of workers'
compensation benefits.
BUSINESS DEVELOPMENT
The Company's original business provides insurance companies and other
payors of workers' compensation with home delivery of prescription drugs,
medical supplies and medical equipment to long-term, high-cost, injured workers
who are receiving workers' compensation benefits. Since its initial public
offering in 1990, the Company has expanded and diversified its services through
acquisitions and internal development.
In fiscal year 1991, the Company acquired the preferred provider
organization operated by MedView Services, Incorporated, the computer software
design business of Insurance Software Packages, Inc. and the case management and
vocational counseling businesses of Resource Opportunities, Inc. and Nancy Sapp
& Associates, Inc. During the past four fiscal years, the Company has internally
developed an on-line retail prescription drug card, medical bill auditing and
utilization review services, a first notice of injury reporting service, and a
variety of computer driven-products designed to reduce the administrative costs
of processing workers' compensation claims.
In 1992, the Company determined that the business of selling
electro-medical therapy products to physical therapy and rehabilitation clinics
that it began in 1989 and conducted through its subsidiary, Technical Medical
Devices, Inc., was not compatible with its business strategy. On November 15,
1992, the Company sold substantially all the assets of that business to Staodyn,
Inc., a manufacturer of electro-medical therapy products. (See Notes 11 and 14
of the Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations.")
In fiscal year 1993, the Company changed the way it manages and markets its
business units. The Company decentralized the operating management of its
business units under subsidiary presidents while improving centralized executive
and financial controls. In addition, the Company integrated for the first time
its complete line of managed care services and implemented a solutions-based
marketing strategy.
In fiscal year 1994, the Company continued to focus on integration of its
managed care services to provide seamless solutions to manage and control the
workers' compensation costs of customers. In addition, the Company began a
process redesign project to reduce operating costs and improve response to
customers' needs in the home delivery service business.
WORKERS' COMPENSATION OVERVIEW
Workers' compensation is an employee benefit that is mandated and
delineated by state law. Workers' compensation laws require employers to provide
medical disability benefits to employees who suffer job-
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related injuries and disabilities, without cost-sharing by the injured employee.
Although they vary from state to state, workers' compensation laws usually
require the employer to compensate an injured worker for lost wages and to pay
all the costs of remedial medical care and treatment, including prescription
drugs, medical supplies and medical equipment. The federal government
administers a similar program for federal employees. Employers provide these
statutory benefits to their employees through self-insurance, participation in
state-run funds, or the purchase of insurance from commercial insurance
companies.
Workers' compensation laws cover a broad spectrum of job-related injuries
ranging from less severe injuries, such as cuts and bruises, to acute injuries,
such as paralysis, severe burns, dismemberment and lower back pain. Injured
employees sometimes suffer significant emotional and physical trauma and are
absent from work for several days or even months or years, depending on the
severity of the injury. Workers who suffer long-term injuries typically incur
substantial out-of-pocket expenses each month for the prescription drugs,
medical supplies and medical equipment required for the remedial care and
treatment of their injury. The injured worker submits a claim for reimbursement
of these expenses to the local office of the applicable insurer or other payor
of workers' compensation benefits.
Employers, insurance companies and other payors of workers' compensation
benefits seek ways to control the escalating volume and costs of workers'
compensation claims. Although most states prohibit employers from restricting a
claimant's choice of healthcare provider, many states allow employers to direct
employees to a specific primary healthcare provider at the onset of medical
treatment, subject to an employee's right to change physicians after a specified
period of time. These restrictions impede an employer's ability to use a health
maintenance organization, a preferred provider organization or similar managed
care arrangement. In addition, workers' compensation laws differ from state to
state, making it difficult for payors and multi-state employers to adopt uniform
policies to manage, control and administer medical and pharmacy benefits and
their associated costs. Consequently, managing the cost of workers' compensation
requires methods that are tailored to each employer's applicable medical
benefits and regulatory environment.
SUMMARY OF SERVICES
The Company's managed care and medical cost containment solutions include
the following: first notice of injury reporting; case management and vocational
counseling; a preferred provider organization of physicians, hospitals, clinics,
and other ancillary providers; an on-line retail prescription drug card; home
delivery of prescription drugs, medical supplies and medical equipment and an
array of computer software solutions to reduce a payor's administrative costs.
The Company does not have any patents, licenses, trademarks, franchises or
concessions that are material to its business, except for its corporate
trademarks. Compliance with applicable environmental laws is not expected to
have a material effect on the Company's earnings, capital expenditures or
competitive position.
HOME DELIVERY SERVICE
The Company's primary service business is the home delivery of prescription
drugs, medical supplies and medical equipment to long-term, high-cost, injured
workers who are receiving workers' compensation benefits. The Company ships
prescription drugs, medical supplies and medical equipment to all 50 states from
a central distribution and warehouse facility in Tampa, Florida. This service
accounted for approximately 73.2%, 75.2% and 70.7% of the Company's consolidated
revenues in fiscal years 1994, 1993 and 1992, respectively. Approximately 75% of
the home delivery pharmacy revenues are derived from prescription and over-the-
counter drugs. Generic drugs constitute about 35-38% of all drug shipments and
approximately 19% of all drug revenues.
The Company works directly with workers' compensation payors to provide
their claims representatives with the appropriate training and on-site
assistance to identify potential long-term, high-cost claimants. After
identifying these claimants, the Company coordinates with the claims
representative, the claimant's treating physician and (as appropriate) the
claimant's attorney and rehabilitation nurse to determine the prescription
drugs, medical supplies and medical equipment that are required for the care and
treatment of the claimant's injury and the requisite schedule for supplying
those items.
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A claimant orders prescribed items from the Company using a toll-free
telephone number. The order is processed by the Company's team of registered
pharmacists and medical equipment supply technicians who determine the
following: (1) whether the prescribing physician is authorized by the payor; (2)
whether the ordered item is related to the claimant's injury; (3) whether the
order is excessive or the refill is earlier than prescribed; and (4) whether any
prescription drug that is ordered is duplicative of any other drug being
provided to the claimant. Medical goods are shipped to the claimants for home
delivery primarily by Federal Express, United Parcel Service or United States
mail.
The Company's screening procedures identify requested items that have not
been prescribed by an authorized physician, have not been prescribed at the
frequency or in the quantity requested by the claimant, or are unrelated to the
claimant's work-related injury. These items are not sent to the claimant or
billed to the payor and are reported to the payor as avoided costs.
The Company's order fulfillment procedures also include a series of medical
quality control checks to verify all pertinent claimant information, the method
and timing of the shipment, that the prescribed items are consistent with the
diagnosis and any special instructions, and that the requested medication will
not cause a drug interaction that could be harmful to the claimant. In addition,
a pharmacist reviews each drug prescription to assure that it complies with all
documentation requirements of applicable pharmacy law.
The Company's home delivery service benefits both the payor and the
claimant. This service helps the payor contain costs by providing competitively
priced goods and controlling unauthorized or excessive use of prescription
drugs, medical supplies and medical equipment. The Company's single monthly
invoice per claimant helps reduce the payor's processing costs, and the Company
provides the payor with comprehensive reports on each claimant that enable the
payor to identify usage trends and estimate future costs.
The Company's home delivery service offers convenience to a claimant by
eliminating cash payments, avoiding the delay and inconvenience of submitting
claims for reimbursement, delivering products directly to the claimant's home,
responding promptly to claimant inquiries, and offering substantially all the
medical goods needed by the claimant from a single, readily accessible source.
The Company's home delivery service currently requires approximately
$3.5-$4.0 million of inventory to satisfy the rapid delivery needs of its
customers. The Company's pharmacy stocks approximately 5,000 different brand
name and generic prescription drugs and over 2,000 items of medical supply or
equipment, including wheelchairs, hospital beds, whirlpool baths and
electro-medical therapy products. The Company purchases pharmaceuticals directly
from manufacturers and through wholesalers. To the maximum extent possible, it
purchases in volumes sufficient to obtain lower prices and in advance of
anticipated price increases and takes advantage of any special discounts or
other financial incentives from manufacturers.
PREFERRED PROVIDER ORGANIZATION
The Company employs a two-pronged strategy to reduce the medical expenses
incurred by group health, auto medical, and workers' compensation claimants. The
Company controls the volume of medical expenses through the use of pre-admission
and concurrent medical utilization review, and it reduces the cost of medical
treatment through bill auditing, retrospective medical utilization review, and
the use of its preferred provider organization (PPO). This two-pronged strategy
enables the Company to compete effectively for business with large HMO and other
managed care companies.
The Company operates one of the largest preferred provider organizations in
the nation, covering 22 states and including over 79,000 physicians, 1,800
hospitals, and 12,000 ancillary providers. The Company's PPO network comprises a
full array of providers, including physicians, laboratories, radiological
facilities, outpatient surgical centers, mental health providers, physical
therapists, chiropractors, and other ancillary providers. The Company has over
30 full-time employees who focus solely on network development to respond to the
PPO's growing client base. By establishing contractual relationships with the
complete range of providers, the Company is able to impact most healthcare costs
and to facilitate referrals within the network for all needed care. The
Company's PPO reduces workers' compensation, auto medical and group medical
expense by controlling the cost of services provided by participating healthcare
providers and benefits the
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patients by offering screened and credentialed healthcare providers who are
conveniently located throughout the country. The Company's PPO accounted for
12.6%, 8.9% and 7.3% of the Company's consolidated revenues in fiscal years
1994, 1993 and 1992, respectively.
The Company has developed a "Gatekeeper" program that integrates its PPO
with utilization review and case management services. To access the program, an
employer directs an injured worker to a physician in the Company's "Gatekeeper"
network who is designated as a Managed Care Coordinator (MCC). The injured
worker is given an identification card by the employer at the time of injury.
The injured worker presents that identification card to the MCC when seeking
treatment. The identification card indicates the instructions the provider
should follow for approval of treatment plans, pre-certification of medical
procedures and referrals to specialists. Through the pre-admission and
concurrent medical utilization review procedures, the Company controls
hospitalization expenses by reducing inpatient admissions and the duration of
hospital stays. In addition, all provider bills are reviewed for appropriate
coding, for compliance with approved treatment and for conformity with state fee
schedules or usual and customary charges. Finally, all bills are reduced
according to the PPO contractual agreement.
The Company also offers manual bill auditing and retrospective medical
utilization review services, including auditing of hospital and chiropractic
bills. These services, performed primarily by Company-employed registered
nurses, verify that medical care was delivered to the patient, that the
healthcare provider was authorized to provide the rendered service, that the
healthcare was appropriate and covered by workers' compensation and that the
charges for the rendered medical services were usual and customary.
CASE MANAGEMENT AND VOCATIONAL REHABILITATION SERVICES
The Company offers on-site medical case management and vocational
rehabilitation services through 26 offices in 12 states. The Company provides
medical case management for injuries that are complex or catastrophic or for
which a prolonged recovery is anticipated. In cases of work related injuries, a
small number of severe injuries make up a large portion of the total dollar
amount spent. These are the injuries that are managed by the Company's case
managers and vocational rehabilitation professionals. The Company's case
managers confer with the patient, the patient's family, the attending physician
and the other healthcare providers to identify the appropriate rehabilitative
treatment, to provide the payor with a realistic estimate of long-term exposure
and to select the most cost-effective healthcare alternatives, including
transferring the patient from a hospital to an alternative care facility. The
case managers also may coordinate the delivery of the necessary care or services
and arrange for special pricing of those services. The goal is to manage the
quality of care while eliminating unneeded treatment and lengthy inpatient and
outpatient treatment.
In some states, vocational rehabilitation is a statutorily mandated
workers' compensation benefit. Vocational rehabilitation assists an injured
employee to return to his or her former employment or another job with similar
economic value. Vocational rehabilitation services include retraining, job
analysis, job modification, vocational testing, job placement assistance,
transferable skill analysis, work capacity assessments, and labor market
surveys. These services reduce workers' compensation costs by expediting the
injured employee's return to work.
RETAIL PRESCRIPTION DRUG CARD
The Company provides a retail prescription drug card service for workers'
compensation payors. The service enables injured workers to obtain prescription
drugs at no cost from the network of over 30,000 participating retail pharmacies
throughout the country by presenting an identification card. The identification
card provides access to the Company's on-line system for adjudication of
prescription drugs. This service controls the relatedness to the injury, type,
cost, quality and frequency of prescription drugs dispensed to an injured
worker.
Upon presentation of the insured worker's prescription drug card, the
network pharmacy accesses the Company's on-line computer database to determine
whether the prescription request is approved or rejected. Approximately 30% of
all prescription requests are denied. The Company's computer system verifies the
following within seconds: (1) whether the injured worker is eligible for
benefits; (2) whether the prescription
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is for a drug that is typically covered by workers' compensation benefits; (3)
whether the prescription relates to the person's work-related injury; (4)
whether the injured worker's utilization pattern is within acceptable
guidelines; (5) whether any drug interaction problem exists; (6) whether the
prescription complies with any required generic drug guidelines; and, (7)
whether the prescription pricing conforms to the contract between the pharmacy
and the Company. The Company negotiates volume discounts with the participating
pharmacies and passes the savings on to the payors who use this service.
Approved transactions are filled at no cost to the injured worker. The pharmacy
is paid by the Company for approved transactions on a periodic basis, and the
Company is reimbursed by the payor.
The service provides savings for the payor of up to 30-35% savings of the
allowable reimbursements in states having workers' compensation fee schedules.
These savings are derived from: (1) discounts of at least 10% from the workers'
compensation fee schedule according to the Company's contractual agreements with
the pharmacies participating in the network; (2) real-time, injury-specific
pharmacy benefit management that is updated daily and achieves consistent
savings of up to 20%; and (3) administrative cost savings resulting from one
invoice per claimant per month and the availability of consolidated invoice
reporting to facilitate the payment of all claims with one check.
Through this service and the Company's home delivery of prescription drugs
service, the Company provides the payor with comprehensive control over the
prescription drug program for workers' compensation claimants. The retail
prescription drug card controls acute drug purchases and the home delivery
service manages the drug maintenance requirements. For those prescription drugs
that are purchased outside its network, the Company offers prescription bill
auditing services to reduce prices to applicable statutory fee schedules and to
prevent duplicate billing or overutilization.
FIRST NOTICE OF INJURY
The Company provides an internally developed first notice of injury
reporting service for all 50 states. This service not only assists in timely
preparation and distribution of regulatorily required injury reports, which are
different for each state, but also provides employers with early intervention
for managed care options, including preferred provider referrals to clinics,
hospitals and physicians. The Company's employees are available 24 hours per
day, seven days per week to receive toll-free employer telephone calls, prepare
reports of injury and notify appropriate parties.
ADMINISTRATIVE SOFTWARE
The Company also offers a broad range of computer software systems designed
to perform provider bill review and medical bill audit for insurance carriers,
self-insured employers and third-party administrators. The systems enable a
payor to significantly reduce over-payments and ensure compliance with
individual state-mandated fee schedule requirements. The Company's microcomputer
based software products include applications for workers' compensation claims
administration, group health claims administration, and multi lines (general
liability, fire and casualty, long-term disability, auto medical) claims
administration and workers' compensation medical bill auditing for states with
fee schedules or "usual and customary" fee requirements. The Company currently
has an installed base of approximately 235 systems.
MARKETING
The Company markets its products and services nationally through its own
sales representatives to insurance companies, state insurance funds, third-party
administrators and employers who fund and administer their own workers'
compensation programs. The Company serves over 35,000 claims representatives in
approximately 15,000 claims offices, representing approximately 4,000 payors. No
one payor represents 10% or more of the Company's business.
COMPETITION
The healthcare cost containment industry is highly fragmented and
competitive. The intensity of competition probably will increase. The Company's
principal competition consists of local retail pharmacies,
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local medical equipment suppliers, branch offices of national medical equipment
supply companies, local and regional case management and vocational
rehabilitation companies and several preferred provider organizations. The
Company competes primarily on the basis of the effectiveness and responsiveness
of its managed care and cost containment services and, to a lesser extent, on
price. The Company believes that its specialization in workers' compensation,
its array of integrated services, its independence from insurance companies, its
integrated management information systems and its ability to offer comprehensive
solutions on a nationwide basis enhance its ability to compete in the workers'
compensation market.
The Company believes that it currently does not have any significant,
direct competitor who offers the same or a similar combination of products,
services and information in the workers' compensation market. A number of
competitors have substantial financial resources and experience in workers'
compensation and could expand their present services to compete with the
Company. In addition, payors of workers' compensation benefits could decide to
devote resources to performing the services that the Company provides.
EMPLOYEES
At July 31, 1994, the Company had approximately 900 employees, of which
approximately 400 were nurses, pharmacists and other skilled medical
technicians. None of the Company's employees are covered by a collective
bargaining agreement. The Company's relations with employees have been generally
satisfactory, and it has not experienced any work stoppages attributable to
labor disputes.
ITEM 2. PROPERTIES
The Company is primarily a service company, so it does not have any
materially important physical properties, aside from leased office facilities.
The Company leases two office buildings at 3611 and 3625 Queen Palm Drive in
Tampa, Florida, that serve as its principal offices and contain 100,000 square
feet and 73,000 square feet, respectively. The leases on these facilities expire
in 2003 and 2006, respectively. The Company's wholly owned subsidiary, MedView
Services, Incorporated, leases a 22,000 square-foot office building in the
Detroit, Michigan, area pursuant to a lease that expires in 1996. MedView and
another wholly owned subsidiary, Resource Opportunities, Inc., lease a total of
approximately 54,400 square feet of office space at 32 locations throughout the
country pursuant to mostly short-term leases expiring within the next two years.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any pending
material legal proceedings, except for ordinary routine litigation incidental to
the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the Nasdaq National Market System
under the symbol PMSV. The table below sets forth the high and low bid prices of
the Company's common stock, as reported in the Nasdaq National Market System,
for each quarter during the past two fiscal years. Cash dividends were not paid
on common shares during any of these periods, and the Company does not
anticipate that dividends will be paid on common shares in the foreseeable
future. The Company's revolving credit loan agreement with two banks requires
the Company to maintain a tangible net worth, as defined, of at least $14.0
million at July 31, 1994 and $15.0 million at July 31, 1995. The Company's
tangible net worth, as defined, was
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$21.4 million at July 31, 1994. At July 31, 1994, the Company had approximately
300 record holders of its common stock.
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
FISCAL QUARTER HIGH LOW HIGH LOW
------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First............................................ $ 9 $6 3/4 $9 $6 1/2
Second........................................... 8 1/4 6 9 1/2 6 1/4
Third............................................ 9 6 1/4 8 3/4 4 3/4
Fourth........................................... 10 1/2 6 1/2 7 1/2 5
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net revenues.......................... $113,149 $109,934 $106,116 $81,686 $55,681
Gross margin.......................... 32,440 30,677 29,692 20,704 13,573
Operating income (loss)............... 7,137 5,566 (1,376) 3,209 3,340
Income (loss) before income taxes..... 6,582 4,846 (2,771) 2,976 2,929
Net income (loss)..................... $ 4,256 $ 2,782 $ (2,011) $ 1,893 $ 1,969
Per common share:
Net income (loss)................... $ 0.47 $ 0.30 $ (0.25) $ 0.21 $ 0.27
Cash dividends...................... -- -- -- -- --
Weighted average number of common
shares outstanding.................. 8,721 8,692 8,725 8,795 7,161
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Total assets.......................... $53,962 $59,700 $61,305 $59,258 $32,672
Trade receivables, net................ 20,690 18,274 20,810 20,506 11,409
Inventories........................... 3,487 5,118 7,766 12,163 10,177
Working capital....................... 16,747 12,969 21,554 23,986 26,661
Current maturities of long-term
debt................................ 789 4,258 3,344 1,374 --
Long-term debt........................ 5,793 11,695 18,246 15,645 --
Redeemable convertible preferred
stock............................... 1,200 1,200 1,200 1,200 --
Shareholders' equity.................. 37,091 32,480 29,966 32,301 28,802
</TABLE>
- ---------------
NOTE: Net revenues for fiscal years 1993, 1992, and 1991 were favorably affected
by revenues from Technical Medical Devices, Inc., a subsidiary that was sold on
November 15, 1992. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 11 and 14 of the Notes to
Consolidated Financial Statements.)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's management has continued its efforts to improve operations
by:
(1) decentralizing operating management, while maintaining
centralized executive and financial controls;
(2) maintaining effective controls over the Company's variable
expenses, trade receivables and inventories; and
(3) concentrating on providing professional managed solutions for
workers' compensation payors and claimants.
The operating efficiencies and improved cash flow achieved by these actions have
permitted the Company to concentrate on increasing its market share for its home
delivery service, its preferred provided organization (PPO), its case management
and its related ancillary services, while developing its on-line retail
prescription drug card and its first notice of injury reporting service.
The following table presents the ratios of certain financial items to net
revenues for each of the last three fiscal years:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 71.4 72.1 72.0
----- ----- -----
Gross margin................................................ 28.6 27.9 28.0
Costs and expenses:
Selling, general and administrative....................... 19.3 20.1 20.5
Depreciation and amortization............................. 3.0 2.7 2.1
Restructuring charges..................................... -- -- 6.7
----- ----- -----
Operating income (loss)..................................... 6.3 5.1 (1.3)
Other income (expense):
Interest expense, net..................................... (0.5) (1.0) (1.3)
Gain on sale of TMD....................................... -- 0.9 --
Write-off of goodwill..................................... -- (0.6) --
----- ----- -----
Income (loss) before income taxes........................... 5.8 4.4 (2.6)
Provision (benefit) for income taxes........................ 2.0 1.9 (0.7)
----- ----- -----
Net income (loss)........................................... 3.8% 2.5% (1.9)%
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for fiscal year 1994 increased slightly to approximately
$113.1 million, compared to approximately $109.9 million for fiscal year 1993.
Substantially all of this increase was attributable to increased volumes from
the 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 fiscal years. The net revenues of
the home delivery service remained relatively constant from fiscal year 1993 to
fiscal year 1994 because of a significant increase in the percentage of generic
drug prescriptions dispensed. 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
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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.
Net revenues for fiscal year 1993 increased slightly to approximately
$109.9 million, compared to approximately $106.1 million for fiscal year 1992.
Net revenues for fiscal years 1993 and 1992 included $2.8 million and $10.3
million, respectively, of revenues from Technical Medical Devices, Inc. ("TMD"),
a former subsidiary that was sold to Staodyn, Inc. on November 15, 1992.
Excluding the TMD revenue, approximately 75% of the increase in revenues in
fiscal year 1993 was attributable to increased volumes of business from payors
and claimants in the home delivery service, while approximately 25% of the
increase represents increased volumes of business from the PPO and case
management services, resulting from more customers and greater market
penetration.
COST OF REVENUES
Cost of revenues as a percentage of net revenues decreased to 71.4% in
fiscal year 1994, compared to 72.1% in fiscal year 1993. The reduction is
attributed to a greater percentage of generic drugs being dispensed through the
home delivery service and the increased volume in the Company's PPO and case
management services.
Cost of revenues as a percentage of net revenues was relatively constant
for fiscal years 1993 and 1992. A slight increase in the cost of revenues as a
percentage of revenues in the home delivery service was partially offset by
lower cost of revenues in the PPO and case management services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of net
revenues declined in each of the past two fiscal years and were 19.3%, 20.1% and
20.5% for fiscal years 1994, 1993 and 1992, respectively. The decrease in fiscal
year 1994 was primarily attributable to increased volumes in the PPO and case
management services and to selling and operational efficiencies in the other
services as a result of improved management controls and systems. The
improvement in fiscal year 1993 was primarily attributable to selling and
operational efficiencies attained by the home delivery service as a result of
improved management controls and systems.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was approximately $3,427,000, $2,967,000 and
$2,169,000 for fiscal years 1994, 1993 and 1992, respectively. The year-to-year
increases in depreciation and amortization are attributable to capital
expenditures for computer equipment and software.
RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 1992, the Company recorded pre-tax
restructuring charges of approximately $7,097,000 ($4,400,000 after-tax or $.50
per common share) primarily related to the revaluation of certain assets of TMD
to their estimated liquidation value in anticipation of the liquidation or sale
of TMD and, to a minor extent, charges associated with changes in senior
management, increased allowances for warranty claims on software installation
and write-offs of certain software development costs.
INTEREST EXPENSE
Net interest expense amounted to $580,000, $1,034,000 and $1,363,000 for
fiscal years 1994, 1993 and 1992, respectively. The Company reduced its interest
expense in fiscal year 1994, compared to fiscal year 1993, as a result of an
$8.5 million reduction in bank borrowings. The Company reduced its interest
expense in fiscal year 1993, compared to fiscal year 1992, as a result of both
repayment of bank borrowings ($6.5 million) and a reduction of approximately
0.75% in the average interest rate of the Company's bank borrowings.
9
<PAGE> 11
GAIN ON SALE OF TMD
During fiscal year 1993, the Company recognized a non-recurring gain of
$950,000 on the sale of TMD. This amount represents the value, net of
transaction costs, assigned to the Staodyn common stock that the Company
received as part of the consideration in the sale of TMD. The Company also
received $500,000 cash and a $2,700,000 note receivable from Staodyn, which
approximated the liquidation value of the tangible assets of TMD sold to
Staodyn. Additional gains or losses from the sale of TMD could be recognized
depending on the realizable value of the Staodyn, Inc. common stock received by
the Company in the transaction, which were recorded at a discount of $2.20 per
share to their then current market value of $5.00 per share to reflect the
illiquidity resulting from the volatility of the trading price of the stock and
restrictions on resale imposed by state and federal securities laws and PMSI's
agreements with Staodyn. (See Note 11 of Notes to Consolidated Financial
Statements).
WRITE-OFF OF GOODWILL
During fiscal year 1993, the Company wrote off approximately $620,000 of
goodwill, which had been allocated to the 1991 acquisition of the bill auditing
business of Insurance Software Packages, Inc. ("ISP"). The Company's preferred
provider organization (the "PPO"), which was acquired in May 1991, also had a
bill auditing business and, when the bill auditing business of ISP was
integrated with the bill auditing business of the PPO in November 1992, the
Company determined that it was no longer appropriate to have this goodwill
allocated to the bill auditing business of ISP reflected in its records. The
Company monthly evaluates the existence of goodwill impairment on the basis of
whether the goodwill is fully recoverable from the projected nondiscounted cash
flows of each business unit. If the projected nondiscounted cash flows for a
particular business unit indicates that the value of the related goodwill or
other intangible assets might not be recoverable over the expected amortization
period, then the carrying value of the related goodwill or other intangible
assets and/or the amortization period are adjusted accordingly. Other than the
$620,000 write-off of goodwill in fiscal year 1993, no other impairment of
goodwill or reduction of the amortization period has been determined to be
appropriate.
PROVISION (BENEFIT) FOR INCOME TAXES
The combined effective federal and state income tax rate of the Company for
fiscal year 1994 was 35.3%, compared to a 42.6% effective rate for fiscal year
1993 and a 27.4% tax benefit for losses incurred in fiscal year 1992. The
effective rate for fiscal year 1994 is approximately 2.5% lower than would be
expected primarily due to the impact of research and development tax credits of
approximately $380,000. The effective rate in fiscal year 1993 was approximately
5% higher than would normally be expected because of the write-off of goodwill
mentioned above, which is not deductible for income tax purposes.
INFLATION
The Company has not experienced significant increases in either the cost of
products or operating expenses due to inflation. Inflation is not expected to
adversely affect the Company in the future, unless it increases significantly.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $16,747,000 of working capital at July 31, 1994, compared
with $12,969,000 and $21,554,000 at the end of fiscal years 1993 and 1992,
respectively. The increase in working capital in fiscal year 1994 was primarily
attributable to a reduction of the current maturities of long-term debt from the
Company's positive cash flow from operating activities. The working capital
decrease in fiscal year 1993, compared to fiscal year 1992, stemmed from a
reduction in current assets (primarily trade receivables and inventories) of
approximately $6 million in fiscal year 1993 and an increase in current
liabilities of approximately $3 million (primarily trade accounts payable and
the current portion of long-term debt). The cash flow resulting from this
reduction in working capital was used to reduce long-term debt during fiscal
year 1993 by $6.5 million.
10
<PAGE> 12
Management believes that the Company's working capital is sufficient to maintain
its current level of operations and its projected levels of operations over the
next 12 to 18 months.
The Company had positive cash flow from operating activities of $8,627,000
for fiscal year 1994 compared to $11,796,000 for fiscal year 1993 and $904,000
for fiscal year 1992. Increases in trade receivables of approximately $2,400,000
and reductions in accounts payable of approximately $815,000 accounted for the
major portion of the difference between fiscal years 1994 and 1993. In fiscal
year 1993, improvement in cash flow from operating activities resulted primarily
from improved control of trade receivables and inventories, from collection of
trade receivables of TMD that were retained in connection with its sale and from
tax refunds related to the restructuring charges in fiscal year 1992.
Net trade receivables at year end were $20,690,000, $18,274,000 and
$20,810,000 for fiscal years 1994, 1993 and 1992, respectively. The increase in
trade receivables in fiscal year 1994 is attributable to increased use of the
on-line retail prescription drug card and increased PPO revenues. The PPO
historically has more days of sales outstanding in trade receivables than the
Company's other businesses. The number of days of revenues in trade receivables
was 57.8 at July 31, 1994, compared to 55.9 at July 31, 1993 and 63.4 at July
31, 1992. The decrease in fiscal year 1993 is primarily attributable to the sale
of TMD and the collection of approximately $2,500,000 of TMD receivables
retained by the Company.
Inventories at year end were $3,487,000, $5,118,000 and $7,766,000 for
fiscal years 1994, 1993 and 1992, respectively. The decrease in fiscal year 1994
was primarily due to improved inventory turnover and the increase in the generic
drug mix in the home delivery of prescription drugs. The decrease in fiscal year
1993 was primarily attributable to the sale of TMD, which included approximately
$2,700,000 of inventories.
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 banks'
prime rates. The amount available for borrowing at July 31, 1994 was
approximately $10.4 million. The Company believes that its cash flow from
operating activities (in excess of $8 million in each of the last two fiscal
years), together with the funds available under its credit facility
(approximately $10.4 million at July 31, 1994), will be sufficient to satisfy
the Company's anticipated capital requirements for the next 12 to 18 months. The
Company's $15 million revolving credit lines expire on November 30, 1997.
The Company anticipates that capital expenditures for fiscal year 1995,
primarily for computer equipment and software, will be approximately $3.5
million and that its capital expenditures requirements for the next several
years will grow no faster than the rate of growth of the Company's revenue. The
Company believes that it will be able to generate sufficient funds internally to
meet its short-term capital expenditure requirements.
Healthcare reform is a major national priority, but the impact of reform on
the Company is not presently determinable. None of the pending healthcare reform
bills would directly affect workers' compensation.
The Company's future liquidity will continue to be dependent on its
operating cash flow and management of trade receivables and inventories.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
by this item are included at the end of this report and described under Item 14
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Company are as follows:
Cecil S. Harrell (age 60) is the founder of the Company and has been its
Chief Executive Officer since the Company's inception in 1972 and Chairman of
the Board since December 1991. Before founding the Company, Mr. Harrell served
as President of several retail and institutional pharmacies and was a sales
representative for Eli Lilly & Company. Mr. Harrell is a registered pharmacist
and currently serves on the Board of Directors of the American Managed Care
Pharmacy Association. Mr. Harrell has been a director of the Company since 1972.
Bertram T. Martin, Jr. (age 44) was elected President and Chief Operating
Officer of the Company in June 1993. From 1985 until June 1993, he was a Vice
President, director, and shareholder of Tunstall Consulting, Inc., a corporate
financial consulting business. Mr. Martin has been a director of the Company
since 1989 and is a member of the Compensation Committee.
David N. Campbell (age 65) is a business consultant. From 1973 until his
retirement in 1989, Mr. Campbell was employed in various executive capacities
with TECO Energy, Inc. and its subsidiary Tampa Electric Company, serving most
recently as Senior Vice President/Staff Services for TECO Energy, Inc. Mr.
Campbell has been a director of the Company since 1991, is the Chairman of the
Compensation Committee, and is a member of the Audit Committee.
Peter T. Pruitt (age 61) has been an Executive Vice President of Willis
Corroon Corporation since November 1993, and previously served as President and
Chief Operating Officer of Frank B. Hall & Co., Inc. from 1985 until April 1993.
Mr. Pruitt became a director of the Company in 1994.
W. Seymour Holt (age 65) was a Vice President of health care accounts and
administration for Eli Lilly and Company from 1990 until 1993. He previously
served as Vice President and General Manager of Dista Products, a marketing
division of Eli Lilly and Company, from the division's inception in 1972. He was
associated with Eli Lilly and Company for 35 years, serving in various
management and marketing positions. Mr. Holt became a director of the Company in
1993 and is the Chairman of the Audit Committee.
The directors are elected to serve until the next Annual Meeting of the
Company's shareholders or until their successors are duly elected and qualified.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- -------------------------- --- ------------------------------------------------------
<S> <C> <C>
Cecil S. Harrell.......... 60 Chairman of the Board and Chief Executive Officer
Bertram T. Martin, Jr..... 44 President and Chief Operating Officer
David L. Redmond.......... 43 Secretary, Treasurer, Senior Vice President and
Chief Financial Officer
Debra Cerre-Ruedisili..... 39 Senior Vice President and Chief Operating Officer,
MedView Services, Incorporated (wholly owned
subsidiary)
Michael W. Clark.......... 38 President, Prescription Management Services, Inc.
(wholly owned subsidiary)
Alice T. Hall............. 56 President, Resource Opportunities, Inc. (wholly owned
subsidiary)
Michael J. Leep........... 34 Vice President of Operations, Resource Opportunities,
Inc.
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
NAME AGE OFFICE
- -------------------------- --- ------------------------------------------------------
<S> <C> <C>
Robert H. Marks........... 44 President, MedView Services, Incorporated
Michael R. Webb........... 50 Vice President -- Sales, Prescription Management
Services, Inc.
</TABLE>
All the executive officers of the Company serve at the pleasure of its
Board of Directors. Background information is provided below regarding the
executive officers who are not directors of the Company.
BACKGROUND OF EXECUTIVE OFFICERS
Debra Cerre-Ruedisili has been Senior Vice President and Chief Operating
Officer of MedView Services, Incorporated ("MedView") since 1991. She has been
employed by MedView in various management capacities since 1987.
Michael W. Clark became President of Prescription Management Services, Inc.
in 1992. He served as the Company's Vice President of Operations from 1988 to
1992.
Alice T. Hall is the founder and President of Resource Opportunities, Inc.
She has been an executive officer of that company since 1977.
Michael J. Leep has been the Vice President of Operations for Resource
Opportunities, Inc. since July, 1990. He has been employed by that company in
various capacities since 1988.
Robert H. Marks was elected President of MedView in 1991, after serving as
a Vice President since 1989. He was President of Med-Save, Inc., the nation's
largest independent practice association, from 1987 to 1989.
David L. Redmond has been Treasurer, Senior Vice President and Chief
Financial Officer of the Company since 1991. He became Secretary of the Company
in 1992. He was a director and Chief Financial Officer of Bicoastal Corporation
(formerly known as The Singer Company) from 1989 to 1991 and served temporarily
as President of that corporation from 1990 to 1991. Bicoastal Corporation filed
for Chapter 11 bankruptcy protection in 1989. Its plan of reorganization has
been confirmed, and all its creditors have been paid 100% of their claims. Mr.
Redmond was a partner of KPMG Peat Marwick, an international independent
accounting firm, from 1983 to 1988.
Michael R. Webb joined the Company as Vice President of Sales for
Prescription Management Services, Inc. in October 1992. He previously was
employed as Vice President of Sales and Marketing for Prescription Health
Services, Inc. from 1989 to 1992 and as Director of Marketing/Prescription
Services Division for Baxter International during 1988 and 1989. Mr. Webb is a
registered pharmacist.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
To the Company's knowledge, based solely on its review of copies of the
reports furnished to it and written representations by its directors and
officers that no other reports were required, all directors and executive
officers and beneficial owners of more than 10% of its common stock filed with
the Securities and Exchange Commission ("SEC") on a timely basis during fiscal
year 1994 all required statements of beneficial ownership and changes in
ownership of Company Common Stock, except as described below in this paragraph.
W. Seymour Holt failed to timely file a statement of change of beneficial
ownership with respect to a single purchase transaction. Peter T. Pruitt became
a director of the Company during fiscal year 1994 and failed to timely file an
initial statement of beneficial ownership. Additionally, David L. Redmond failed
to timely report a single purchase transaction and incorrectly reported the
wrong transaction date for the transactions that were timely reported.
Additionally, Mr. Redmond failed to timely file five statements of changes of
beneficial ownership with respect to a total of nine purchase transactions and
three option grants.
13
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION
ANNUAL COMPENSATION
The following table presents information concerning the compensation of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company, for services in all capacities to the Company
and its subsidiaries:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
------------------------------------------ COMPENSATION--
OTHER ANNUAL SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTION AWARDS
- ------------------------------------------ ---- --------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Cecil S. Harrell.......................... 1994 180,000 100,000 * --
Chairman of the Board, 1993 175,000 100,000 * --
Chief Executive Officer, 1992 160,000 80,000 * --
and Director
Bertram T. Martin, Jr.**.................. 1994 190,000 100,000 * --
President, Chief Operating 1993 18,000 35,000 * 185,000
Officer, and Director 1992 -- -- * --
David L. Redmond.......................... 1994 150,000 60,000 -- --
Senior Vice President and 1993 100,000 50,000 * 63,000
Chief Financial Officer 1992 90,000 25,000 * 37,000
Robert H. Marks........................... 1994 113,300 50,000 * 5,000
President, MedView 1993 100,000 50,000 * 15,000
Services, Incorporated 1992 80,500 -- * 10,000
Debra Cerre-Ruedisili..................... 1994 112,000 50,000 * 5,000
Senior Vice President 1993 100,000 50,000 * 15,000
and Chief Operating Officer, 1992 80,750 -- * 10,000
MedView Services, Incorporated
</TABLE>
- ---------------
* Except for Mr. Marks, the compensation consists only of executive perquisites
and other personal benefits that in the aggregate are less than 10% of total
salary and bonus. The compensation for Mr. Marks also includes noncompete
payments of $2,500 per month for the period May 20, 1991, to May 20, 1994,
pursuant to the acquisition of MedView, Incorporated by the Company.
** Mr. Martin became President and Chief Operating Officer of the Company on
June 21, 1993.
COMPENSATION AGREEMENTS
The Company has employment agreements with all the executive officers
listed in the Summary Compensation Table. All the employment agreements are for
a term of one year ending on July 31, 1995, are renewable annually, provide for
annual salary, incentive bonus compensation, fringe benefits and
indemnification, and include a covenant not to compete and other restrictions on
post-employment activities intended to protect the Company's business interests.
The salaries and bonuses are based on the recommendation of the Compensation
Committee to the Company's Board of Directors and are as follows for fiscal year
1995:
<TABLE>
<CAPTION>
NAME SALARY MAXIMUM BONUS
-------------------------------------------------- -------- -------------
<S> <C> <C>
Cecil S. Harrell.................................. $180,000 $ 100,000
Bertram T. Martin, Jr............................. 200,000 115,000
David L. Redmond.................................. 170,000 70,000
Robert H. Marks................................... 118,300 70,000
Debra Cerre-Ruedisili............................. 117,000 70,000
</TABLE>
14
<PAGE> 16
The incentive compensation of the Chief Executive Officer and Chief Financial
Officer are contingent on the Company earning targeted amounts of annual net
income. The incentive compensation of the other executive officers is contingent
on each individual's achievement of specified financial goals for his or her
business unit, including goals relating to revenues, cash flow, and net income.
The employment agreement of the Chief Operating Officer provides for severance
compensation equal to the salary due to that officer for the balance of the
contract year, plus a noncompete payment equal to $405,000 (payable in quarterly
installments over 12 months) for termination without cause and is coupled with a
Severance Agreement that provides a severance compensation benefit of
approximately two times his total compensation (payable in a lump sum). The
employment agreements of the other three executive officers (but not the Chief
Executive Officer) provide for severance compensation equal to one year's salary
for a termination of employment without cause and are coupled with a Severance
Agreement that provides a severance compensation benefit equal to two years of
total compensation for an involuntary or constructive termination of employment
following a "Change in Control." The Severance Agreements define a "Change in
Control" to include (subject to certain exceptions not stated here) any of the
following: (a) the shareholders of the Company approve (i) the liquidation of
all or substantially all the consolidated assets of the Company and its
subsidiaries, (ii) a sale, lease, exchange, or other transfer of all or
substantially all the consolidated assets of the Company and its subsidiaries,
or (iii) a merger, consolidation, reorganization, tender offer, exchange offer,
or share exchange in which the Company is not the surviving corporation or
becomes a majority-owned subsidiary; or (b) the occurrence of any event,
transaction, or arrangement that results in any person or group becoming a
beneficial owner of (i) a majority of the outstanding equity securities of the
Company or any subsidiary that contributed more than 50% of the Company's
consolidated revenues for its fiscal year, (ii) securities of the Company
representing 30% or more of the combined voting power of all the outstanding
securities of the Company that are entitled to vote generally in the election of
directors, or (iii) with respect to any subsidiary that contributed more than
50% of the Company's consolidated revenues for its last fiscal year, securities
of that subsidiary representing a majority of the combined voting power of all
the outstanding securities of that subsidiary that are entitled to vote
generally in the election of its directors, unless in each case the beneficial
owner is the Company, a subsidiary, an employee benefit plan sponsored by the
Company, a person or group who is a record or beneficial owner of 30% or more of
the Company's outstanding common stock on the effective date of the Severance
Agreement or a person who becomes a beneficial owner of 30% or more of the
Company's outstanding common stock on the effective date of the Severance
Agreement solely by becoming a trustee of an inter vivos trust created by a
person who is the record or beneficial owner of 30% or more of the Company's
outstanding common stock on the effective date of the Severance Agreement. The
Severance Agreement expires automatically, without further obligation, on the
earlier of (A) the second anniversary of the date of a Change in Control or (B)
if occurring before a Change in Control, when the executive officer attains age
62 or ceases for any reason to be employed by the Company. In addition, the
Company unilaterally may terminate the Severance Agreement without any
obligation to the executive officer upon the occurrence of certain events
specified in the Severance Agreement.
RETIREMENT PLAN
All of the executive officers are eligible to participate in the PMSI
Profit Sharing and Retirement Savings Plan, which is available to all employees
who have completed one year of service and are at least 21 years of age.
Employees may contribute at least 1%, but not more than 15%, of their
compensation. Company matching contributions are made at the discretion of the
Board of Directors, and may be made in either cash or common stock of the
Company. The Company did not make any matching contributions in fiscal years
1993 or 1992. Effective February 1, 1994, the Company began contributing an
amount equal to 25% of each employee's contribution, up to 4% of each employee's
pay.
DIRECTOR COMPENSATION
During fiscal year 1994, directors of the Company who were not officers or
employees were paid an annual retainer of $15,000, paid in equal quarterly
installments. The directors of the Company were not paid any additional fees for
service on committees of the Board of Directors. Additionally, on December 2,
1993, the Board of Directors adopted a Deferred Compensation Plan for
Non-Employees, which permits outside
15
<PAGE> 17
directors to defer all or a portion of their director compensation. The deferred
compensation is accounted for in "units" that track the value of the Company's
Common Stock. Additional units will be credited to each participant's account
each time the Company declares a cash or stock dividend on the Common Stock to
reflect the amount of the dividend the participant would have received if he had
owned an equivalent amount of shares of Common Stock. The deferred compensation
is payable only in cash in either a lump sum or in installments (with interest)
upon the occurrence of certain events (including death, disability, attainment
of age 70, and certain other fixed dates).
STOCK OPTION PLAN
The Company has a stock option plan (the "Option Plan") under which it may
grant options to purchase up to 800,000 shares of Common Stock at an exercise
price of not less than the fair market value of the Common Stock on the date of
grant. Options to purchase a total of 535,150 shares of Common Stock were
outstanding under the Option Plan as of November 25, 1994. Subject to
limitations contained in the Option Plan, a committee of the Board of Directors
administers the Option Plan and has the exclusive, discretionary power to
determine the participants and the number and nature of the stock options
granted under the plan. This administrative committee may designate the options
granted under the Option Plan as either "nonstatutory stock options" or
"incentive stock options" that qualify for favorable federal income tax
treatment.
Stock options granted under the Option Plan are not transferable, generally
vest and become exercisable at a rate of 20% per year over a five-year period,
and expire not later than ten years after the date granted or sooner in the
event of death, disability, retirement, or termination of employment. If a
"change in control" (as defined in the Option Plan) occurs, all outstanding
options become immediately exercisable.
The table below provides information regarding stock options that were
granted during fiscal year 1994 to the executive officers listed in the Summary
Compensation Table. The table also shows hypothetical values of the granted
options at the end of the option terms (ten years), assuming that the price of
the Company's Common Stock appreciates annually at the compounded rates of 5%
and 10%, using the exercise price of each option as the beginning price. The
real value of the options in this table depends on the actual appreciation of
the value of the Company's Common Stock. No assurance exists that the price of
the Company's Common Stock will appreciate at the rates assumed in the table.
OPTION GRANTS IN FISCAL YEAR 1994
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------
NAME GRANTED* FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($)
- --------------------------------- ---------- ------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cecil S. Harrell................. -- -- -- -- -- --
Bertram T. Martin, Jr............ -- -- -- -- -- --
David L. Redmond................. -- -- -- -- -- --
Robert H. Marks.................. 5,000 20.0 6.75 03/02/04 21,250 53,800
Debra Cerre-Ruedisili............ 5,000 20.0 6.75 03/02/04 21,250 53,800
</TABLE>
- ---------------
* All the options were granted at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant and are exercisable
ratably over a five-year period, beginning one year after the date of grant.
16
<PAGE> 18
The following table presents information regarding the aggregate stock
options held at the end of fiscal year 1994 by the executive officers of the
Company who are listed in the Summary Compensation Table, none of whom exercised
any stock options during fiscal year 1994.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1994
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cecil S. Harrell............. -- -- -- -- -- --
Bertram T. Martin, Jr........ -- -- 47,600 151,400 142,200 477,800
David L. Redmond............. -- -- 27,800 72,200 38,950 153,550
Robert H. Marks.............. -- -- 10,000 20,000 15,000 37,500
Debra Cerre-Ruedisili........ -- -- 10,000 20,000 15,000 37,500
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
David N. Campbell and Bertram T. Martin, Jr. served as the Compensation
Committee of the Board of Directors during fiscal year 1994. Mr. Martin became
the Company's President and Chief Operating Officer on June 21, 1993. Mr. Martin
did not participate in the deliberations of the Board of Directors concerning
his compensation arrangement and does not participate in the deliberations of
the Board of Directors concerning his annual salary and bonus adjustments. The
report of the Compensation Committee follows.
COMPENSATION COMMITTEE REPORT
As members of the Compensation Committee, we review and recommend to the
Board of Directors for approval the compensation and fringe benefits for the
Company's senior officers, consisting of approximately 15 persons. We evaluate
the performance of senior management, including the Chief Executive Officer, and
administer the Company's compensation program for senior officers.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy for executive officers conforms to
its compensation philosophy for all employees generally. The Company's
compensation is designed to:
- Provide compensation comparable to that offered by companies with similar
businesses, allowing the Company to successfully attract and retain the
employees necessary to its long-term success;
- Provide compensation that rewards individual achievement and
differentiates among employees based upon individual performance;
- Provide incentive compensation that varies according to both the
Company's success in achieving its performance goals and the employee's
contribution to that success; and
- Provide an appropriate linkage between employee compensation and the
creation of shareholder value through awards that are tied to the
Company's financial performance and by facilitating employee stock
ownership.
In furtherance of these goals, the compensation of the Company's executive
officers comprises salary, annual cash bonuses, long-term incentive compensation
in the form of stock options, and various fringe benefits, including medical
benefits and a 401(k) savings plan.
SALARIES
The Compensation Committee reviewed the salaries of all the executive
officers of the Company for fiscal year 1994. The Compensation Committee made
salary decisions concerning the executive officers based on a variety of
considerations in conformance with the compensation philosophy stated above.
First, salaries were competitively set relative to both other companies in the
health care industry and other comparable
17
<PAGE> 19
companies. Second, the Compensation Committee considered each executive
officer's level of responsibility and individual performance, including an
assessment of the person's overall value to the Company. Third, internal equity
among employees was factored into the decision. Finally, the Compensation
Committee considered the Company's financial performance and its ability to
absorb any increases in salaries.
BONUSES
Each executive officer is eligible to receive an annual cash bonus that is
generally paid pursuant to an incentive compensation formula established at the
beginning of a fiscal year in connection with the preparation of the Company's
operating budget for the year. A target bonus (expressed as a percentage of
salary) is established for each executive officer and consists of discretionary
and nondiscretionary components that are tied primarily to targeted levels of
Company financial performance for the fiscal year in relation to the Company's
operating budget, as well as any individual achievements by the executive in his
or her area of responsibility. In formulating recommendations to the Board of
Directors with respect to cash bonus awards, the Compensation Committee
evaluates each executive officer's role and responsibility in the Company and
other factors that the committee deems relevant to motivate each executive
officer to achieve strategic performance goals.
STOCK OPTIONS
The Company has a stock option plan that is designed to align the interests
of the shareholders and the Company's executive officers in the enhancement of
stockholder value. Stock options are granted under the plan by an administrative
committee comprising disinterested members of the Board of Directors. The Chief
Executive Officer, who also is the founder and principal shareholder of the
Company, does not participate in the Company's stock option plan. In general,
stock options are granted on an annual basis if warranted by the Company's
growth and profitability. All stock options are granted at an exercise price not
lower than the fair market value of the Company's Common Stock on the date of
grant. In formulating its recommendations to the administrative committee for
the stock option plan, the Compensation Committee evaluates the Company's
overall financial performance for the year, the desirability of long-term
service from an executive officer, and the number of stock options held by other
executives in the Company who have the same, more, or less responsibility. To
encourage long-term performance, the stock options granted in fiscal years 1993
and 1994 vest ratably over a five-year period and expire ten years after the
date of grant.
In addition, a substantial portion of the stock options granted in fiscal
year 1993 to the Company's President and Chief Operating Officer and to its
Chief Financial Officer are restricted stock options that vest and become
exercisable only if the Company achieves specified amounts of annual and
cumulative earnings per share for each of five fiscal years or the Company's
Common Stock attains certain targeted prices. The terms of these restricted
stock options are identical so the officers will have parallel incentives.
CHIEF EXECUTIVE OFFICER COMPENSATION
The total compensation of the Chief Executive Officer for fiscal year 1994
was based on his duties and responsibilities and determined after a review of
the total compensation paid to chief executive officers of comparable companies,
both in and outside the health care industry. His salary was set to account for
slightly less than two-thirds of his maximum potential compensation for the
year. The Chief Executive Officer's cash bonus for fiscal year 1994 was
contingent and based entirely on a formula tied to the Company's net income for
the year. The Company achieved 110% of the Chief Executive Officer's net income
target for fiscal year 1994.
COMPENSATION COMMITTEE
David N. Campbell, Chairman
Bertram T. Martin, Jr.
18
<PAGE> 20
PERFORMANCE GRAPH
The following graph shows a comparison of the four-year cumulative total
return for the Company's Common Stock, the Nasdaq Stock Market (U.S.) Index, and
the Nasdaq Health Services Stocks Index, assuming an investment of $100 on
August 1, 1990, the beginning of the first fiscal year following the Company's
initial public offering. The cumulative return of the Company was computed by
dividing the difference between the price of the Company's Common Stock at the
end and the beginning of the measurement period (August 1, 1990, to July 31,
1994) by the price of the Company's Common Stock at the beginning of the
measurement period.
(GRAPH)
<TABLE>
<CAPTION>
Pharmacy Nasdaq
Management Nasdaq Stock Health
Measurement Period Services, Market (U.S.) Services
(Fiscal Year Covered) Inc. Index Stocks Index
<S> <C> <C> <C>
8/1/90 100.00 100.00 100.00
7/31/91 72.22 118.07 170.28
7/31/92 57.41 138.61 200.28
7/31/93 51.85 168.56 224.66
7/31/94 81.25 172.49 250.66
</TABLE>
19
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below shows as of November 25, 1994, the number of shares of the
Company's Common Stock beneficially owned by each director, by the Chief
Executive Officer, and by the other four most highly compensated executive
officers of the Company, by all directors and executive officers of the Company
as a group, and by each person who is known by the Company to beneficially own
more than 5% of the outstanding Common Stock:
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIAL OWNER(2)(3) BENEFICIALLY OWNED(1) CLASS(1)(3)
----------------------------------------------------- --------------------- ------------
<S> <C> <C>
David N. Campbell.................................... 3,500(4) *
Debra Cerre-Ruedisili................................ 11,000(5) *
Charles H. Guy, Jr................................... 650,100 7.3%
Cecil S. Harrell..................................... 3,775,863(6) 42.5%
James N. Harrell..................................... 770,050 8.7%
W. Seymour Holt...................................... 25,600 *
Robert H. Marks...................................... 10,000(7) *
Bertram T. Martin, Jr................................ 3,823,553(6) 43.0%
Peter T. Pruitt...................................... 100 *
David L. Redmond..................................... 43,900(8) *
Wellington Management Company........................ 664,100 7.5%
All directors and executive officers
as a group (12 persons)............................ 3,996,963(9) 45.0%
</TABLE>
- ---------------
NOTES:
(1) Except as discussed below, information regarding beneficial ownership was
furnished by the persons named in the table and is as of November 25, 1994.
The information for Wellington Management Company is as of December 31,
1993, and was derived from the Schedule 13G filed by it with the SEC. Except
as otherwise indicated below, each person reported in the table as a
beneficial owner of shares has sole voting and investment power over the
shares owned of record by him and only shared voting and investment power
over shares owned of record by, or jointly with, another person. Beneficial
ownership percentages of less than 1% are indicated by an asterisk.
(2) The business address for Cecil S. Harrell and Bertram T. Martin, Jr. is 3611
Queen Palm Drive, Tampa, Florida 33619. The business address for Charles H.
Guy, Jr. is 205 South Hoover, Tampa, Florida 33609, and the mailing address
for James N. Harrell is 15451 Plantation Oaks, No. 13, Tampa, Florida 33647.
The business address for Wellington Management Company is 75 State Street,
Boston, Massachusetts 02109.
(3) Two of the five beneficial owners of more than 5% of the outstanding Common
Stock are directors of the Company. James N. Harrell is the brother of Cecil
S. Harrell.
(4) Includes 3,000 shares issuable upon the exercise of stock options that are
currently exercisable.
(5) Includes 10,000 shares issuable upon the exercise of stock options that are
currently exercisable.
(6) Includes 3,774,953 shares owned of record by a revocable trust created by
Cecil S. Harrell under which he and Bertram T. Martin, Jr. are co-trustees,
so each of them is shown in the table as beneficially owning all the shares
owned by the trust. In addition, Mr. Martin's beneficial ownership includes
47,600 shares issuable upon the exercise of stock options that are currently
exercisable.
(7) Includes 10,000 shares that are issuable upon the exercise of stock options
that are currently exercisable.
(8) Includes 27,800 shares that are issuable upon the exercise of stock options
that are currently exercisable.
(9) Includes a total of 170,400 shares issuable upon the exercise of stock
options that are currently exercisable.
20
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of the Company were customers
or suppliers of the Company, or directors, officers, or shareholders of
corporations that were customers or suppliers of the Company, during fiscal year
1994 and engaged in transactions with the Company in the ordinary course of
business that were subject to usual trade terms. In addition, since the
beginning of the last fiscal year, the Company has periodically made advances to
its Chief Executive Officer and a revocable trust created by him under which he
is a co-trustee. The advances are repayable with interest at the prime rate. The
maximum aggregate amount outstanding since the beginning of the Company's last
fiscal year was $390,707, the amount outstanding as of July 31, 1994, was zero,
and the amount outstanding as of September 30, 1994, was $200,844.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements and supplementary financial
data of the Company are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets, July 31, 1994 and 1993........................... F-3
Consolidated Statements of Operations for fiscal years
ended July 31, 1994, 1993 and 1992.......................................... F-4
Consolidated Statements of Shareholders' Equity for
the fiscal years ended July 31, 1994, 1993 and 1992......................... F-5
Consolidated Statements of Cash Flows for the fiscal years
ended July 31, 1994, 1993 and 1992.......................................... F-6
Notes to Consolidated Financial Statements.................................... F-7
</TABLE>
FINANCIAL STATEMENT SCHEDULES
The following additional information pertaining to the consolidated
financial statements of the Company for fiscal years 1994, 1993 and 1992 is
filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants -- Fiscal
years ended July 31, 1994, 1993 and 1992.................................... F-1
Consent of Independent Accountants -- Fiscal
years ended July 31, 1994, 1993 and 1992.................................... F-2
</TABLE>
All other schedules specified in the accounting regulations of the SEC have
been omitted because they are either inapplicable or not required. Individual
financial statements of the Company have been omitted because the Company is a
holding company and all subsidiaries included in the consolidated financial
statements filed with this report are wholly owned.
REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K during the fourth
quarter of fiscal year 1994.
21
<PAGE> 23
EXHIBITS
The following exhibits are filed as part of this report:
<TABLE>
<S> <C>
2-1 Stock Purchase Agreement dated December 20, 1990, for the purchase of Resource
Opportunities, Inc. common stock by a wholly owned subsidiary of the Company.
(Incorporated by reference from Exhibit C(a) to the Company's Form 8-K filed on
January 9, 1991, SEC File No. 0-18366)
2-2 Stock Purchase Agreement dated March 25, 1991, for the purchase of Insurance Software
Packages, Inc. common stock by a wholly owned subsidiary of the Company.
(Incorporated by reference from Exhibit C(1) to the Company's Form 8-K filed on April
1, 1991, SEC File No. 0-18366)
2-3 Acquisition and Merger Agreement dated March 28, 1991, for the purchase of Nancy Sapp
& Associates, Inc. common stock by a wholly owned subsidiary of the Company.
(Incorporated by reference from Exhibit C(4) to the Company's Form 8-K filed on April
1, 1991, SEC File No. 0-18366)
2-4 Acquisition and Merger Agreement dated May 20, 1991, for the purchase of MedView,
Incorporated common stock by a wholly owned subsidiary of the Company. (Incorporated
by reference from Exhibit C(1) to the Company's Form 8-K filed on June 4, 1991, SEC
File No. 0-18366)
3-1 Articles of Incorporation of the Company, as amended to date.*
3-2 By-laws of the Company. (Incorporated by reference from Exhibit 3-2 to the Company's
Form 10-K filed on July 31, 1991, SEC File No. 0-18366)
4-1 Credit Agreement dated May 26, 1994, between the Company and Barnett Bank of Tampa,
N.A. and NationsBank of Florida, N.A. (Incorporated by reference from Exhibit 4-1 to
the Company's Form 10-Q for the fiscal quarter ended April 30, 1994, SEC File No.
0-18366)
10-1 1990 Incentive and Non-Statutory Stock Option Plan of the Company, as amended to
date.**
10-2 Deferred Compensation Plan for Non-Employees effective December 2, 1993.
10-3 Asset Purchase Agreement dated November 6, 1992, between Staodyn, Inc. and Technical
Medical Devices, Inc. (with exhibits, except as noted).*
10-4 Executive Liability and Defense Coverage Section of Executive Protection Policy
effective October 1, 1993, issued by Federal Insurance Company and binder for renewal
of coverage effective October 1, 1994.
10-5 Form of Indemnity Agreement between the Company and its directors.**
10-6 Form of Indemnity Agreement between the Company and its executive officers.**
10-7 Form of Severance Agreement between the Company and its executive officers.**
10-8 Restricted Stock Option Agreement dated June 11, 1993, between the Company and
Bertram T. Martin, Jr.**
10-9 Restricted Stock Option Agreement dated June 11, 1993, between the Company and David
L. Redmond.**
10-10 Employment Agreement between the Company and Cecil S. Harrell, as currently in
effect.
10-11 Employment Agreement between the Company and Bertram T. Martin, Jr., as currently in
effect.
10-12 Employment Agreement between the Company and David L. Redmond, as currently in
effect.
10-13 Employment Agreement between Prescription Management Services, Inc. and Michael W.
Clark, as currently in effect.
10-14 Employment Agreement between MedView Services, Incorporated and Robert H. Marks, as
currently in effect.
10-15 Employment Agreement between MedView Services, Incorporated and Debra
Cerre-Ruedisili, as currently in effect.
</TABLE>
22
<PAGE> 24
<TABLE>
<S> <C>
10-16 Employment Agreement between Resource Opportunities, Inc. and Alice T. Hall, as
currently in effect.**
10-17 Employment Agreement between Resource Opportunities, Inc. and Michael J. Leep, as
currently in effect.
10-18 Third Amended and Restated Lease Agreement dated September 1, 1989, between the
Company and NCNB National Bank of Florida and Lease Agreement dated January 24, 1990,
between the Company and NCNB National Bank of Florida.**
10-19 Employment Agreement between Prescription Management Services, Inc. and Michael R.
Webb, as currently in effect.
11 Computation of Earnings Per Share.
22 Subsidiaries of the Company.**
</TABLE>
- ---------------
* Incorporated by reference from the same exhibit designation in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1992 (SEC File
No. 0-18366).
** Incorporated by reference from the same exhibit designation in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1993 (SEC File
No. 0-18366).
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: April 6, 1995 By: /s/ David L. Redmond
---------------------------
David L. Redmond
Senior Vice President and
Chief Financial Officer
23
<PAGE> 25
EXHIBIT INDEX
EXHIBIT REFERENCE
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2-1 Stock Purchase Agreement dated December 20, 1990, for the purchase of Resource
Opportunities, Inc. common stock by a wholly owned subsidiary of the Company.... *
2-2 Stock Purchase Agreement dated March 25, 1991, for the purchase of Insurance
Software Packages, Inc. common stock by a wholly owned subsidiary of the
Company......................................................................... *
2-3 Acquisition and Merger Agreement dated March 28, 1991, for the purchase of Nancy
Sapp & Associates, Inc. common stock by a wholly owned subsidiary of the
Company......................................................................... *
2-4 Acquisition and Merger Agreement dated May 20, 1991, for the purchase of
MedView, Incorporated common stock by a wholly owned subsidiary of the
Company......................................................................... *
3-1 Articles of Incorporation of the Company, as amended to date.................... *
3-2 By-laws of the Company.......................................................... *
4-1 Credit Agreement dated May 26, 1994, between the Company and Barnett Bank of
Tampa, N.A. and NationsBank of Florida, N.A..................................... *
10-1 1990 Incentive and Non-Statutory Stock Option Plan of the Company, as amended to
date............................................................................ *
10-2 Deferred Compensation Plan for Non-Employees effective December 2, 1993......... 20
10-3 Asset Purchase Agreement dated November 6, 1992, between Staodyn, Inc. and
Technical Medical Devices, Inc. (with exhibits, except as noted)................ *
10-4 Executive Liability and Defense Coverage Section of Executive Protection Policy
effective October 1, 1993, issued by Federal Insurance Company and binder for
renewal of coverage effective October 1, 1994................................... 33
10-5 Form of Indemnity Agreement between the Company and its directors............... *
10-6 Form of Indemnity Agreement between the Company and its executive officers...... *
10-7 Form of Severance Agreement between the Company and its executive officers...... *
10-8 Restricted Stock Option Agreement dated June 11, 1993, between the Company and
Bertram T. Martin, Jr........................................................... *
10-9 Restricted Stock Option Agreement dated June 11, 1993, between the Company and
David L. Redmond................................................................ *
10-10 Employment Agreement between the Company and Cecil S. Harrell, as currently in
effect.......................................................................... 91
10-11 Employment Agreement between the Company and Bertram T. Martin, Jr., as
currently in effect............................................................. 108
10-12 Employment Agreement between the Company and David L. Redmond, as currently in
effect.......................................................................... 123
10-13 Employment Agreement between Prescription Management Services, Inc. and Michael
W. Clark, as currently in effect................................................ 140
10-14 Employment Agreement between MedView Services, Incorporated and Robert H. Marks,
as currently in effect.......................................................... 158
10-15 Employment Agreement between MedView Services, Incorporated and Debra Cerre-
Ruedisili, as currently in effect............................................... 178
10-16 Employment Agreement between Resource Opportunities, Inc. and Alice T. Hall, as
currently in effect............................................................. *
10-17 Employment Agreement between Resource Opportunities, Inc. and Michael J. Leep,
as currently in effect.......................................................... 196
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
10-18 Third Amended and Restated Lease Agreement dated September 1, 1989, between the
Company and NCNB National Bank of Florida and Lease Agreement dated January 24,
1990, between the Company and NCNB National Bank of Florida..................... *
10-19 Employment Agreement between Prescription Management Services, Inc. and Michael
R. Webb, as currently in effect................................................. 220
11 Computation of Earnings Per Share............................................... 237
22 Subsidiaries of the Company..................................................... *
</TABLE>
- ---------------
* Incorporated by reference.
** The page numbers listed in the Exhibits Index are the sequentially numbered
pages of the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1994, in the form originally filed with the SEC.
25
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders, Pharmacy Management Services, Inc.:
We have audited the accompanying consolidated balance sheets of Pharmacy
Management Services, Inc. and Subsidiaries as of July 31, 1994 and 1993, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended July 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pharmacy Management Services, Inc. and Subsidiaries as of July 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
August 1, 1993, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
Coopers & Lybrand L.L.P.
Tampa, Florida
September 13, 1994
F-1
<PAGE> 28
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K/A (Amendment
No. 3) of our report dated September 13, 1994, on our audits of the consolidated
financial statements of Pharmacy Management Services, Inc. and Subsidiaries as
of July 31, 1994 and 1993, and for each of the three years in the period ended
July 31, 1994. We also consent to the incorporation by reference in the
registration statements of Pharmacy Management Services, Inc. and Subsidiaries
on Form S-8 (File No. 33-37549) and Form S-8 (File No. 33-80078) of our report
dated September 13, 1994, on our audits of the consolidated financial statements
of Pharmacy Management Services, Inc. and Subsidiaries as of July 31, 1994 and
1993, and for the three years in the period ended July 31, 1994, which report is
included in the Annual Report on Form 10-K/A (Amendment No. 3).
Coopers & Lybrand L.L.P.
Tampa, Florida
April 6, 1995
F-2
<PAGE> 29
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, JULY 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
- ---------------------------------------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................... $ 1 $ 2,594
Trade receivables, net.............................................. 20,690 18,274
Inventories......................................................... 3,487 5,118
Income tax refunds receivable....................................... 584 --
Deferred income taxes............................................... 1,121 548
Prepaid expenses and other.......................................... 742 760
-------- --------
TOTAL CURRENT ASSETS........................................ 26,625 27,294
PROPERTY AND EQUIPMENT................................................ 8,679 8,924
GOODWILL AND OTHER INTANGIBLES........................................ 15,682 16,867
NOTES RECEIVABLE...................................................... 184 3,002
EQUITY SECURITIES..................................................... 1,240 1,400
OTHER ASSETS.......................................................... 1,552 2,213
-------- --------
TOTAL ASSETS................................................ $53,962 $59,700
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt................................ $ 789 $ 4,258
Accounts payable.................................................... 6,132 6,947
Accrued compensation and benefits................................... 1,457 1,457
Accrued lease costs................................................. 1,086 874
Other current liabilities........................................... 414 789
-------- --------
TOTAL CURRENT LIABILITIES................................... 9,878 14,325
LONG-TERM DEBT........................................................ 5,793 11,695
REDEEMABLE CONVERTIBLE PREFERRED STOCK................................ 1,200 1,200
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Series B Convertible Preferred Stock................................ 1 1
Series C Convertible Preferred Stock................................ 1 1
Common Stock, $.01 par value: authorized 20,000,000 shares; issued
and outstanding 8,749,793 and 8,664,950 at July 31, 1994 and July
31, 1993, respectively........................................... 87 87
Additional paid-in capital.......................................... 26,559 25,943
Retained earnings................................................... 10,443 6,448
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 37,091 32,480
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $53,962 $59,700
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 30
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JULY 31, 1994,
1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues........................................... $113,149 $109,934 $106,116
Cost of revenues....................................... 80,709 79,257 76,424
-------- -------- --------
Gross margin...................................... 32,440 30,677 29,692
Costs and expenses
Selling, general and administrative.................. 21,876 22,144 21,802
Depreciation and amortization........................ 3,427 2,967 2,169
Restructuring charges................................ -- -- 7,097
-------- -------- --------
Operating income (loss)........................... 7,137 5,566 (1,376)
Other income (expense)
Interest expense, net................................ (580) (1,034) (1,363)
Gain on sale of TMD.................................. -- 950 --
Write-off of goodwill................................ -- (620) --
Other................................................ 25 (16) (32)
-------- -------- --------
Income (loss) before income taxes................. 6,582 4,846 (2,771)
Provision (benefit) for income taxes................... 2,326 2,064 (760)
-------- -------- --------
Net income (loss)................................. $ 4,256 $ 2,782 $ (2,011)
======== ======== ========
Net income (loss) per common share..................... $ 0.47 $ 0.30 $ (0.25)
======== ======== ========
Weighted average number of common shares outstanding... 8,721 8,692 8,725
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JULY
31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK
-------------- -------------- ADDITIONAL TREASURY NET
PAR PAR PAID-IN RETAINED STOCK, SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL EARNINGS AT COST EQUITY
------ ----- ------ ----- ---------- --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1991......... 117 $ 2 8,723 $87 $ 25,956 $ 6,349 $ (93 ) $32,301
Issuance of stock.............. 9 -- 4 -- 146 -- -- 146
Purchase of treasury shares.... -- -- -- -- -- -- (284 ) (284)
Net loss....................... -- -- -- -- -- (2,011) -- (2,011)
Preferred stock dividends...... -- -- -- -- -- (186) -- (186)
------ ----- ------ ----- ---------- --------- -------- -------------
Balance, July 31, 1992......... 126 2 8,727 87 26,102 4,152 (377 ) 29,966
Issuance of stock.............. 2 -- 1 -- 29 -- -- 29
Purchase of treasury shares.... -- -- -- -- -- -- (101 ) (101)
Cancellation of treasury
shares....................... -- -- (63 ) -- (188) (290) 478 --
Net income..................... -- -- -- -- -- 2,782 -- 2,782
Preferred stock dividends...... -- -- -- -- -- (196) -- (196)
------ ----- ------ ----- ---------- --------- -------- -------------
Balance, July 31, 1993......... 128 2 8,665 87 25,943 6,448 -- 32,480
Issuance of stock.............. -- -- 97 -- 651 -- -- 651
Purchase of treasury shares.... -- -- -- -- -- -- (99 ) (99)
Cancellation of treasury
shares....................... -- -- (12 ) -- (35) (64) 99 --
Net income..................... -- -- -- -- -- 4,256 -- 4,256
Preferred stock dividends...... -- -- -- -- -- (197) -- (197)
------ ----- ------ ----- ---------- --------- -------- -------------
Balance, July 31, 1994......... 128 $ 2 8,750 $87 $ 26,559 $10,443 $ -- $37,091
======= ====== ======= ====== ========== ========= ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 32
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JULY 31, 1994,
1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 4,256 $ 2,782 $(2,011)
-------- -------- -------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 3,427 2,967 2,169
Loss on sale of property and equipment................. 7 43 53
Decrease (increase) in trade receivables............... (2,416) 2,536 (304)
Decrease in inventories................................ 1,631 2,648 4,397
Decrease (increase) in income tax refund receivable.... (584) 2,740 (2,740)
Increase in prepaid expenses and other current
assets............................................... (648) (296) (196)
Decrease in goodwill and other intangibles............. -- 313 94
Decrease (increase) in notes receivable................ 2,818 (3,002) --
Decrease (increase) in other assets.................... 1,114 (453) (370)
Increase (decrease) in accounts payable................ (815) 2,167 288
Decrease in accrued compensation, accrued lease costs,
and other current liabilities........................ (163) (649) (476)
-------- -------- -------
Total adjustments................................. 4,371 9,014 2,915
-------- -------- -------
Net cash provided by operating activities......... 8,627 11,796 904
-------- -------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (2,364) (2,846) (4,672)
Proceeds from the sale of property and equipment.......... -- 109 28
Decrease in equity securities............................. 160 -- --
Additional consideration paid on acquisitions............. -- (1,679) --
-------- -------- -------
Net cash used in investing activities............. (2,204) (4,416) (4,644)
-------- -------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Increases in notes payable and long-term debt............. 4,783 8,378 9,608
Reductions in notes payable and long-term debt............ (14,154) (14,015) (5,037)
Issuance of common stock.................................. 651 5 145
Issuance of preferred stock............................... -- 24 --
Preferred stock dividends................................. (197) (196) (186)
Purchases of treasury stock............................... (99) (101) (284)
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... (9,016) (5,905) 4,246
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (2,593) 1,475 506
Cash and cash equivalents at beginning of year.............. 2,594 1,119 613
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 1 $ 2,594 $ 1,119
======== ======== =======
Supplemental disclosures of cash flow information
Cash paid for:
Interest............................................... $ 663 $ 1,134 $ 1,416
======== ======== =======
Income taxes........................................... $ 3,090 $ 163 $ 1,947
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements consist of the accounts of Pharmacy
Management Services, Inc. ("PMSI") and its wholly owned subsidiaries (the
"Company"). The Company is a leading independent nationwide provider of medical
cost containment and managed care services, providing professionally managed
solutions for controlling the escalating costs of workers' compensation. The
Company's operations do not meet the requirements of Statement of Financial
Accounting Standards No. 14 for segment reporting. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues are recognized based on shipment of products or performance of
services. Revenues from the sale of software are recognized when installed and
accepted by the customer. Revenue from maintenance contracts is recorded as
deferred revenue and recognized in earnings ratably over the contract periods.
No single customer accounts for more than 10% of the Company's revenues.
Cash Equivalents
Cash equivalents consist principally of short-term interest-bearing
investments that are carried at cost, which approximates market value. For
purposes of the statements of cash flows, the Company considers all short-term,
highly liquid investments with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Inventories at July 31, 1994 and 1993 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Drugs.............................................................. $2,474 $3,918
Electro-medical therapy products................................... 416 608
Medical equipment and supplies..................................... 597 592
------ ------
$3,487 $5,118
====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is charged against
results of operations over the estimated service lives of the related assets.
Improvements to leased property are amortized over the life of the lease or the
life of the improvement, whichever is shorter. For financial reporting purposes,
the Company principally uses the straight-line method of depreciation. For tax
purposes, the Company generally uses accelerated methods where permitted.
Expenditures for additions, major renewals and betterments are capitalized
and expenditures for repairs and maintenance are expensed as incurred. When
properties and equipment are retired or otherwise disposed of, the costs thereof
and the applicable accumulated depreciation are removed from the respective
accounts and the resulting gain or loss is reflected in earnings.
Goodwill and Other Intangibles
Goodwill recognized in business combinations (representing the excess of
cost over net assets of the companies acquired) that were accounted for as
purchases ($16,448,000 and $16,806,000 at July 31, 1994 and 1993, before
accumulated amortization of $1,359,000 and $1,027,000, respectively) is being
amortized on a straight-line basis over the expected lives of the related assets
over periods not exceeding 40 years. The Company monthly evaluates the existence
of goodwill impairment on the basis of whether the goodwill is fully recoverable
from projected nondiscounted cash flows of each business unit. If projected
nondiscounted cash flows for a particular business unit indicates that the value
of related goodwill or other intangible assets might
F-7
<PAGE> 34
not be recoverable over the expected amortization period, then the carrying
value of the related goodwill or other intangible assets and/or the amortization
period will be adjusted accordingly. As of July 31, 1994, the Company does not
believe there is any indication that the carrying value or the amortization
period of goodwill and other intangibles needs to be adjusted.
During fiscal year 1993, the Company wrote off approximately $620,000 of
goodwill, which had been allocated to the 1991 acquisition of the bill auditing
business of Insurance Software Packages, Inc. ("ISP"). The Company's preferred
provider organization (the "PPO"), which was acquired in May 1991, also had a
bill auditing business, and, when the bill auditing business of ISP was
integrated with the bill auditing business of the PPO in November 1992, the
Company determined that it was no longer appropriate to have the goodwill
allocated to the bill auditing service of ISP reflected in its records.
Other intangibles consist primarily of non-compete agreements related to
acquisitions consummated before July 25, 1991 ($1,891,000 and $2,169,000 at July
31, 1994 and 1993, before accumulated amortization of $1,298,000 and $1,081,000,
respectively) and are being amortized over the lives of the agreements,
primarily two to five years.
Software Development Costs
Certain software development costs are capitalized when incurred in
accordance with Financial Accounting Standards Board (FASB) Statement No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility. Costs incurred prior to the
establishment of technological feasibility are expensed as incurred. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
Amortization of capitalized software development costs is provided on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
remaining estimated economic life of the product. All software development costs
have been fully amortized as of July 31, 1994. As of July 31, 1993, the
unamortized portion of capitalized software development costs was $583,000 and
these costs were included in Other Assets on the consolidated balance sheets.
Amortization of software development costs was $583,000, $101,000, and $61,000
for the fiscal years ended July 31, 1994, 1993 and 1992, respectively.
Accrued Lease Costs
Rental expense is recorded in accordance with FASB Statement No. 13,
"Accounting for Leases," whereby rental expense is recognized on a straight-line
basis by totaling all rents due under the lease, including fixed increases, and
dividing by the total months of the leases.
Income Taxes
In February 1992, the FASB issued Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes of APB Opinion 11
to the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Effective August 1, 1993, the Company adopted Statement 109 and there was
no cumulative effect of that change in the method of accounting for income
taxes.
Pursuant to the deferred method of accounting for income taxes under APB
Opinion 11, which was applicable for fiscal year 1993 and prior years, deferred
income taxes are recognized for income and expense items that are reported in
different years for financial reporting purposes and income tax purposes using
the tax
F-8
<PAGE> 35
rate applicable for the year of calculation. Under the deferred method, deferred
taxes are not adjusted for subsequent changes in tax rates.
Net Income (Loss) Per Common Share
Primary earnings (loss) per common share is based on net income, less
preferred stock dividend requirements, divided by the weighted average number of
common and dilutive common equivalent shares outstanding during the year. Fully
diluted earnings (loss) per common share has been omitted for all periods
presented because they are anti-dilutive. Dilutive common equivalent shares
consist of stock options and convertible preferred stock.
Consolidated Statements of Cash Flows
Significant non-cash financing and investing activities for each of the
three fiscal years in the period ended July 31, 1994 were as follows: fiscal
year 1994 -- there were no material non-cash financing and investing activities;
fiscal year 1993 -- the Company wrote off accounts receivable in the amount of
approximately $1.9 million, wrote off goodwill in the amount of $620,000 (see
"Goodwill and Other Intangibles" above) and recorded a net non-cash gain of
$950,000 in connection with the sale of its Technical Medical Devices, Inc.
subsidiary (see Note 11), which gain resulted from the receipt of 500,000 shares
of Staodyn, Inc. common stock valued at $1.4 million, offset by the accrual of
$450,000 in transaction expenses; and fiscal year 1992 -- as discussed in Note
12, the Company recorded pre-tax restructuring charges of $7,097,000 and wrote
off approximately $2.0 million in uncollectable accounts receivable.
Reclassifications
Certain amounts have been reclassified to conform to 1994 presentations.
2. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Company's cash equivalents are in high-quality,
short-term securities placed with major banks and financial institutions. The
Company's investment policy limits its exposure to concentrations of credit
risk.
The Company's trade receivables result primarily from sales to a broad base
of insurance companies and large employers throughout the United States. The
Company routinely assesses the financial strength of its customers to minimize
its risk of loss. Accordingly, concentrations of credit risk are limited.
Trade receivables on the consolidated balance sheets at July 31, 1994 and
1993 are net of allowances for doubtful accounts of $393,000 and $273,000,
respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment at July 31, 1994 and 1993 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Equipment...................................................... $11,317 $ 9,681
Furniture and fixtures......................................... 2,152 1,941
Leasehold improvements......................................... 1,683 1,210
------- -------
15,152 12,832
Less accumulated depreciation and amortization............ 6,473 3,908
------- -------
$ 8,679 $ 8,924
======= =======
</TABLE>
Depreciation and amortization expense for property and equipment was
$2,603,000, $1,942,000 and $1,279,000 for the fiscal years ended July 31, 1994,
1993 and 1992, respectively.
F-9
<PAGE> 36
Balances related to capitalized leases, included in property and equipment
at July 31, 1994 and 1993, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Equipment........................................................... $239 $239
Less accumulated amortization....................................... 172 99
---- ----
Net............................................................ $ 67 $140
==== ====
</TABLE>
The Company leases its office buildings and various equipment used in its
operations under leases expiring through January 2006. The future minimum annual
lease payments under all leases with initial or remaining noncancellable lease
terms in excess of one year at July 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Fiscal year ending July 31,
1995...................................................... $73 $ 4,573
1996...................................................... -- 3,204
1997...................................................... -- 2,493
1998...................................................... -- 2,322
1999...................................................... -- 2,193
Thereafter................................................ -- 12,780
------- ---------
Total minimum lease payments................................... 73 $27,565
=========
Less amount representing interest.............................. 2
-------
Present value of net minimum lease payments.................... $71
=======
</TABLE>
The Company subleases a portion of its office buildings to third parties.
The future minimum annual sublease payments to be received under all
noncancellable subleases as of July 31, 1994 are (in thousands):
<TABLE>
<S> <C>
Fiscal year ending July 31,
1995................................................................ $ 105
1996................................................................ 70
---------
Total minimum sublease payments.......................................... $ 175
=========
</TABLE>
Rent expense (under operating leases) was approximately $4,923,000,
$5,026,000 and $3,793,000 for the fiscal years ended July 31, 1994, 1993 and
1992, respectively. Rental payments received under subleases were approximately
$105,000 and $36,000 for the fiscal years ended July 31, 1994 and 1993,
respectively. There were no subleases for the fiscal year ended July 31, 1992.
4. LONG-TERM DEBT
Long-term debt at July 31, 1994 consisted of the following (in thousands):
<TABLE>
<S> <C>
$7,500 revolving bank line of credit, matures November 30, 1997............. $2,636
$7,500 revolving bank line of credit, matures November 30, 1997............. 2,003
$1,120 installment note, principal payable in four annual installments of
$280 commencing October 30, 1993, non-interest bearing.................... 840
$600 note, principal payable in three annual installments of $200 commencing
December 31, 1993, interest payable annually at 7%........................ 400
Note payable, installments payable monthly through December, 1997........... 126
Non-compete agreements, payable in varying amounts and frequencies,
non-interest bearing...................................................... 506
Capital lease obligations................................................... 71
------
6,582
Less current maturities..................................................... 789
------
$5,793
======
</TABLE>
F-10
<PAGE> 37
The revolving lines of credit above represent borrowings under a $15.0
million revolving credit agreement with two banks, under which the Company may
borrow up to 75% of its outstanding eligible consolidated accounts receivable
and up to 50% of its consolidated inventories. Trade receivables and inventories
are pledged as collateral under the revolving credit agreement. Interest is
payable monthly at rates varying from the lender's prime rate less 1/8 to 3/8
percent or LIBOR (London Interbank Offered Rate) plus 1 1/4 to 1 3/8 percent,
depending on the Company's ratio of liabilities to tangible net worth, as
defined in the credit agreement. At July 31, 1994, amounts available under the
credit agreement were approximately $10.4 million. Under the terms of the credit
agreement, the unused credit is subject to a 1/8 of one percent per annum
commitment fee that is payable quarterly.
Aggregate annual maturities of long-term debt for the five years subsequent
to July 31, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending July 31,
1995........................................................... $ 789
1996........................................................... 699
1997........................................................... 436
1998........................................................... 4,658
1999........................................................... --
</TABLE>
Interest expense for the fiscal years ended July 31, 1994, 1993 and 1992
approximated $662,000, $1,192,000 and $1,403,000, respectively.
The Company's credit agreement contains certain loan covenants related to
tangible net worth, purchase of treasury shares, and the acquisition and
disposition of assets. The most restrictive of these covenants requires the
Company to maintain a cash flow coverage ratio of 1.2 to 1.0. The Company is in
compliance with all of its loan covenants.
The following information relates to lines of credit for the following
fiscal years (dollar amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Outstanding balance at the end of the year............... $ 4,639 $ 6,778 $ 11,568
Weighted average interest rate at the end of the year.... 6.04% 6.20% 5.91%
Maximum amount outstanding during the year............... $ 8,823 $ 14,025 $ 12,343
Average amount outstanding during the year............... $ 6,891 $ 10,626 $ 10,408
Weighted average interest rate during the year........... 6.10% 6.09% 6.82%
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
6. INCOME TAXES
As discussed in Note 1, the Company adopted FASB Statement 109 as of August
1, 1993, and there was no cumulative effect of that change in the method of
accounting for income taxes. Accordingly, income tax expense has not been
affected and there was no cumulative income statement effect from adopting the
liability method of Statement 109. Prior years' financial statements have not
been restated to apply the provisions of Statement 109.
F-11
<PAGE> 38
Income tax expense attributable to income from continuing operations
consisted of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Fiscal year ended July 31, 1994:
U.S. federal........................................... $2,017 $ (259) $1,758
State and local........................................ 510 58 568
------- -------- ------
$2,527 $ (201) $2,326
======= ======== ======
Fiscal year ended July 31, 1993:
U.S. federal........................................... $1,786 $ 60 $1,846
State and local........................................ 213 5 218
------- -------- ------
$1,999 $ 65 $2,064
======= ======== ======
Fiscal year ended July 31, 1992:
U.S. federal........................................... $ (809 ) $ (18) $ (827)
State and local........................................ 70 (3) 67
------- -------- ------
$ (739 ) $ (21) $ (760)
======= ======== ======
</TABLE>
Income tax expense attributable to income from continuing operations was
$2,326,000, $2,064,000 and $(760,000) for the fiscal years ended July 31, 1994,
1993 and 1992, respectively, and differed from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -----
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate..................... $2,238 $1,648 $(942)
State income tax, net of federal income tax benefit........... 375 195 7
Meals and entertainment exclusion............................. 30 33 37
Amortization of goodwill...................................... 144 135 130
Research and development tax (credit)......................... (380) -- --
Alternative minimum tax (credit).............................. (83) 83 --
Other......................................................... 2 (30) 8
------ ------ -----
$2,326 $2,064 $(760)
====== ====== =====
</TABLE>
For the fiscal years ended July 31, 1993 and 1992, deferred income tax
expense under APB Opinion 11 of $65,000 and $(21,000), respectively, resulted
from timing differences in the recognition of income and expense for income tax
and financial reporting purposes. These differences consist primarily of amounts
related to depreciation, to the capitalization of certain indirect costs to
inventory and to PPO network development costs.
F-12
<PAGE> 39
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31,
1994 are presented below (in thousands).
<TABLE>
<S> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts...................................................... $ 151
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986....... 141
Accruals for financial reporting purposes...................... 37
Accrued lease costs............................................ 408
PPO network development costs.................................. 642
Net operating loss carryforwards............................... 217
Alternative minimum tax credit carryforwards................... 83
------
Total gross deferred tax assets........................... 1,679
------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation.................................................. (399)
Other.......................................................... (66)
------
Total gross deferred tax liabilities...................... (465)
------
Net deferred tax asset.................................... $1,214
======
</TABLE>
The net deferred tax asset of $1,214,000 is comprised of a current portion
of $1,121,000 classified as deferred income taxes and included in total current
assets, and a noncurrent portion of $93,000 included in other assets in the
consolidated balance sheets at July 31, 1994.
At July 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of $637,000, which are available through fiscal year
2002 to offset future separate federal taxable income, if any, from its wholly
owned subsidiary, MedView Services, Incorporated. In addition, the Company has
alternative minimum tax credit carryforwards of $83,000 which are available to
reduce future federal regular income taxes, if any, over an indefinite period.
FASB Statement 109 requires the recognition of a valuation allowance for
deferred tax assets if it is more likely than not that all or some portion of
the deferred tax asset will not be realized. Management has considered the facts
and circumstances that could impact the realizability of deferred tax assets,
including taxes paid in the current year and prior years that could be recovered
by carryback, as well as projected future earnings of its wholly owned
subsidiary, MedView Services, Incorporated, and has determined that it is more
likely than not that all deferred tax assets will be realized.
7. STOCK OPTIONS
In December 1989, the Company adopted a stock option plan under which
options may be granted to officers, employees, directors and others. A total of
800,000 shares of common stock has been reserved for issuance under the plan.
Options granted under the plan are exercisable at the fair market value of the
shares
F-13
<PAGE> 40
at the date of grant. Options expire five to ten years from the date of grant.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
OPTION
AVAILABLE PRICE
OUTSTANDING EXERCISABLE FOR GRANT PER SHARE
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Balance, July 31, 1992..................... 465,200 224,000 298,700 $6.75-11.75
Granted.................................... 157,500 -- (157,500) $6.50- 7.50
Became exercisable......................... -- 112,000 -- $6.75-10.875
Exercised.................................. (550) (550) -- $6.75
Canceled................................... (57,000) (20,400) 57,000 $6.75-11.75
Expired.................................... -- -- -- --
----------- ----------- ---------
Balance, July 31, 1993..................... 565,150 315,050 198,200 $6.50-11.75
Granted.................................... 28,500 -- (28,500) $6.75
Became exercisable......................... -- 93,300 -- $6.75-10.875
Exercised.................................. (96,550) (96,550) -- $6.75
Canceled................................... (107,500) (61,500) 107,500 $6.75-10.875
Expired.................................... -- -- -- --
----------- ----------- ---------
Balance, July 31, 1994..................... 389,600 250,300 277,200 $6.50-11.75
========= ======== ========
</TABLE>
In addition, the Company has granted a total of 170,000 non-qualified stock
options at $6.50 per share to two executive officers. The options are
exercisable only if certain financial performance criteria are attained by the
Company during the next four years. As a result of the financial performance of
the Company during fiscal year 1994, 34,000 of these non-qualified stock options
are vested and exercisable.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Each share of Redeemable Series A $.72 Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") has a par value of $.01 and entitles its
holder to receive an annual cash dividend of $.72. At July 31, 1994 and 1993,
there were 100,000 shares of Series A Preferred Stock authorized, issued and
outstanding. Dividends are payable annually, or through the date of conversion,
commencing December 31, 1991, and continuing through December 31, 1995. Each
share is convertible at any time into one share of Common Stock, as adjusted in
the event of future dilution. Shares not converted by December 31, 1995 are
redeemable at the rate of $12 per share plus accrued dividends. Holders of the
Series A Preferred Stock are entitled to a liquidation preference of $12 per
share, but holders have no voting rights.
9. SHAREHOLDERS' EQUITY
Each share of Series B $.98 Cumulative Convertible Preferred Stock ("Series
B Preferred Stock") has a par value of $.01 and entitles its holder to receive
an annual cash dividend of $.98. At July 31, 1994 and 1993, there were 100,000
shares of Series B Preferred Stock authorized, of which 73,846 shares were
issued and outstanding. Dividends are payable annually, or through the date of
conversion, commencing April 1, 1992, and continuing through April 1, 1996. Each
share of Series B Preferred Stock is convertible at any time into one share of
Common Stock, as adjusted in the event of future dilution. Each share is
mandatorily convertible on the earlier of (i) the first date on or after April
1, 1994 on which the market price of the Common Stock is greater than or equal
to $16.25 or (ii) April 1, 1996. Holders of Series B Preferred Stock are
entitled to a liquidation preference of $16.25 per share, but holders have no
voting rights.
Each share of Series C $.98 Cumulative Convertible Preferred Stock ("Series
C Preferred Stock") has a par value of $.01 and entitles its holder to receive
an annual cash dividend of $.98. At July 31, 1994 and 1993, there were 100,000
shares of Series C Preferred Stock authorized, of which 53,748 shares were
issued and outstanding. Dividends are payable annually, or through the date of
conversion, commencing April 1, 1992, and continuing through April 1, 1996. Each
share is convertible at any time on or before April 1, 1996 at the following
conversion ratios, as adjusted in the event of future dilution: (i) one share of
Common Stock for each share of Series C Preferred Stock, if the market price of
Common Stock is greater than or equal to $16.25 per share, (ii) 1.3 shares of
Common Stock for each share of Series C Preferred Stock, if the market price of
Common Stock is $12.50 or less, or (iii) if the market price of Common Stock is
greater than $12.50 but less than $16.25, that number of shares which are equal
to $16.25 divided by the market price of the
F-14
<PAGE> 41
Common Stock on the conversion date. Shares of Series C Preferred Stock are
mandatorily convertible (i) into one share of Common Stock on the first day on
or after April 1, 1994 on which the market price of the Common Stock is $16.25
or greater, or (ii) on April 1, 1996 at the conversion ratios described above.
Holders of Series C Preferred Stock are entitled to a liquidation preference of
$16.25 per share, but holders have no voting rights.
In connection with the acquisition of MedView Services, Incorporated
("MSI") in May 1991, 318,750 shares of Series D Cumulative Convertible Preferred
Stock ("Series D Preferred Stock") were placed in escrow to be released based
upon earnings of MSI over the five-year period ending July 31, 1996. On October
28, 1992, the Company and the selling shareholders of MSI executed a settlement
agreement in which all escrowed shares of Series D Preferred Stock were returned
to the Company. Any contingent consideration based on future earnings of MSI was
also eliminated. In exchange, the selling shareholders of MSI received a cash
payment of $450,000 on October 30, 1992 and a non-interest bearing note for
$1,120,000 with annual payments of $280,000 due commencing on October 30, 1993,
and continuing through 1996. Two of the selling shareholders also executed
covenants not to compete in exchange for non-interest bearing notes in the
aggregate amount of $480,000 with annual payments of $120,000 due commencing on
October 30, 1993, and continuing through October 30, 1996.
10. BENEFIT PLAN
The Company has a defined contribution 401(k) benefit plan covering
substantially all of the Company's employees who have completed one year of
service and are at least 21 years of age. Employees may contribute at least 1%
but not more than 15% of their salary. Effective February 1, 1994, the Company
began contributing an amount equal to 25% of each employee's contribution up to
4% of each employee's salary. Company matching contributions are made at the
discretion of the Board of Directors and, at the Company's election, can be made
in cash or in shares of Common Stock. There were no Company contributions prior
to February 1, 1994.
11. SALE OF TECHNICAL MEDICAL DEVICES, INC.
On November 15, 1992, the Company sold to Staodyn, Inc. ("Staodyn") the
electro-medical therapy products business operated by its subsidiary, Technical
Medical Devices, Inc. ("TMD"), in a transaction valued at approximately $7
million. The total consideration for the sale consisted of $500,000 in cash, a
$2.7 million two-year note secured by accounts receivable and inventory, 500,000
shares of Staodyn common stock (NASDAQ:SDYN), and the retention of TMD's
receivables having a net realizable value of approximately $2.5 million.
Resale of the 500,000 shares of Staodyn common stock is restricted by state
and federal securities laws. In connection with the issuance of the Staodyn
common stock to the Company, Staodyn and the Company entered into a shareholder
agreement which grants the Company registration rights with respect to all the
shares and price protection with respect to 400,000 of the shares to the extent
that their per share market value is below $5.00 per share as of November 15,
1994. If the market value is less than $5.00 per share as calculated, Staodyn
must issue additional shares of common stock to the Company to make up the
aggregate deficiency in the market value of the 400,000 shares of Staodyn common
stock then held by the Company. The market value at that time will be determined
by averaging the closing sale prices of the common stock for the 30 consecutive
trading days preceding November 15, 1994. The Company sold 57,000 shares of
Staodyn common stock pursuant to an effective registration statement of 100,000
Staodyn shares on Form S-3 during the fiscal year ended July 31, 1994 at an
average price of $2.80 per share, which was equal to the carrying cost of the
securities. Due to the restrictions on the resale of the shares as of the
balance sheet date, and the likelihood that this asset will not be converted to
cash within the Company's operating cycle, the Staodyn common stock has been
recorded as a non-current asset and reflected in the consolidated balance sheets
as "Equity Securities." At July 31, 1994, the closing price of Staodyn common
stock was $2.50 per share. No unrealized loss has been recorded to reflect this
price being less than $2.80 per share (the carrying value of the Staodyn stock
on the Company's records) because the decline is considered to be temporary and
the Company has price protection for potential declines in the market value
between November 15, 1992 and November 15, 1994.
F-15
<PAGE> 42
12. RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 1992, the Company recorded pre-tax
restructuring charges of approximately $7,097,000 ($4.4 million after tax or
$.50 per share) primarily related to the revaluation of certain assets of TMD to
their estimated liquidation value in anticipation of the liquidation or sale of
TMD (See Note 11) and, to a minor extent, charges associated with changes in
senior management, increased allowances for warranty claims on software
installation and write-offs of certain software development costs.
13. RETIREE HEALTH BENEFITS
Effective August 1, 1993, the Company adopted FASB Statement No. 106, which
requires the Company to accrue retiree health benefits. The adoption had no
effect on the Company's consolidated financial statements because the Company
does not provide any retiree health benefits.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET INCOME
NET GROSS NET INCOME (LOSS) PER
QUARTERS ENDED REVENUES MARGIN (LOSS) COMMON SHARE
---------------------------------- -------- ------ ---------- ------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal year 1994
First quarter................... $27,388 $7,644 $ 746 $ .08
Second quarter.................. 28,079 7,865 838 .09
Third quarter................... 28,670 8,385 1,059 .12
Fourth quarter.................. 29,012 8,546 1,613 .18
Fiscal year 1993
First quarter................... $28,172 $7,795 $ 502 $ .05
Second quarter.................. 26,067 7,303 574 .06
Third quarter................... 27,483 7,722 740 .08
Fourth quarter.................. 28,212 7,857 966 .11
Fiscal year 1992
First quarter................... $24,890 $6,899 $ 419 $ .04
Second quarter.................. 25,861 7,223 637 .07
Third quarter................... 27,422 7,686 804 .09
Fourth quarter.................. 27,943 7,884 (3,871) (.45)
</TABLE>
Net revenues for fiscal years 1993 and 1992 were favorably affected by
revenues of TMD, a subsidiary that was sold on November 15, 1992. The first and
second quarters of fiscal year 1993 (which ended October 31, 1992, and January
31, 1993, respectively) include TMD revenues of $2.5 million and $0.3 million,
respectively. Revenues of TMD were $10.3 million in fiscal year 1992.
F-16
