<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1995
Commission File Number 0-18366
PHARMACY MANAGEMENT SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-1482767
(State of Incorporation) (I.R.S. Employer
Identification No.)
3611 Queen Palm Drive, Tampa, Florida 33619
(Address of Principal Executive Offices)
813/626-7788
(Registrant's Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of outstanding shares of each class of Registrant's common stock as of
March 13, 1995:
Common Stock, par value $.01......9,120,107 shares
Exhibit Index on Page 13.
<PAGE> 2
Item 1. Financial Statements.
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues $30,030 $28,079 $60,512 $55,467
Cost of revenues 20,904 20,214 41,906 39,958
------- ------- ------- -------
Gross margin 9,126 7,865 18,606 15,509
Costs and expenses:
Selling, general and administrative 5,310 5,497 10,665 10,874
Exercise of non-qualified options 855 - 855 -
Acquisition expenses 835 - 835 -
Depreciation and amortization 950 809 1,884 1,636
------- ------- ------- -------
Operating income 1,176 1,559 4,367 2,999
Other income (expense):
Interest, net (34) (155) (89) (325)
Additional consideration - sale of TMD 326 - 326 -
Other (8) (5) (16) 4
------- ------- ------- -------
Income before income taxes 1,460 1,399 4,588 2,678
Provision for income taxes 912 561 2,172 1,094
------- ------- ------- -------
Net income $ 548 $ 838 $ 2,416 $ 1,584
======= ======= ======= =======
Net income per common share $ 0.06 $ 0.09 $ 0.26 $ 0.17
======= ======= ======= =======
Weighted average number of common shares outstanding 9,110 8,675 8,998 8,683
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited)
2
<PAGE> 3
Item 1. Financial Statements (Continued).
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
January 31, July 31,
-------------------
ASSETS 1995 1994 1994
- - ------ ------- ------- --------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1 $ 174 $ 1
Trade receivables, net 20,418 19,904 20,690
Inventories 4,107 4,348 3,487
Income tax refunds receivable - - 584
Deferred income taxes 1,996 - 1,121
Prepaid expenses and other 1,079 1,547 742
------- ------- -------
TOTAL CURRENT ASSETS 27,601 25,973 26,625
PROPERTY AND EQUIPMENT, NET 8,246 8,375 8,679
GOODWILL AND OTHER INTANGIBLES 15,303 16,284 15,682
EQUITY SECURITIES AVAILABLE FOR SALE 1,566 1,400 1,240
OTHER ASSETS 1,721 2,321 1,736
------- ------- -------
TOTAL ASSETS $54,437 $54,353 $53,962
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 755 $ 6,898 $ 789
Accounts payable 7,697 5,866 6,132
Accrued compensation and benefits 1,662 1,488 1,457
Accrued lease costs 1,177 989 1,086
Other current liabilities 376 144 414
------- ------- -------
TOTAL CURRENT LIABILITIES 11,667 15,385 9,878
LONG-TERM DEBT 744 3,740 5,793
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 - 9,116,007, 8,664,950 and
8,749,793 shares at January 31, 1995, January 31, 1994, 91 87 87
and July 31, 1994, respectively
Additional paid-in capital 29,106 25,943 26,559
Retained earnings 12,829 7,996 10,443
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 42,026 34,028 37,091
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $54,437 $54,353 $53,962
======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited)
3
<PAGE> 4
Item 1. Financial Statements (Continued).
Pharmacy Management Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 548 $ 838 $ 2,416 $ 1,584
------- ------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 950 809 1,884 1,636
Increase in deferred income taxes (875) - (875) -
(Gain) loss on sale of property and equipment 15 10 15 8
Exercise of non-qualified options 855 - 855 -
Additional consideration - sale of TMD (326) - (326) -
Decrease (increase) in trade receivables 795 (755) 272 (1,630)
Decrease (increase) in inventories 344 763 (620) 770
Decrease (increase) in income tax refunds receivable - - 584 -
Decrease (increase) in prepaid expenses and other 140 (297) (337) (239)
Decrease (increase) in notes receivable - 2,755 - 2,786
Decrease (increase) in other assets 104 275 15 280
Increase (decrease) in accounts payable 1,211 1,692 1,565 (1,081)
Increase (decrease) in accrued compensation, accrued
lease costs and other current liabilities (569) (1,084) 258 (499)
------- ------- ------- -------
Total adjustments 2,644 4,168 3,290 2,031
------- ------- ------- -------
Net cash provided by operating activities 3,192 5,006 5,706 3,615
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (379) (519) (1,087) (684)
------- ------- ------- -------
Net cash used in investing activities (379) (519) (1,087) (684)
------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Reductions in notes payable and long-term debt (3,228) (5,053) (5,083) (5,315)
Issuance of common stock 427 - 494 -
Preferred stock dividends (12) (18) (30) (36)
------- ------- ------- -------
Net cash used in financing activities (2,813) (5,071) (4,619) (5,351)
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (584) - (2,420)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1 758 1 2,594
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1 $ 174 $ 1 $ 174
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 99 $ 206 $ 175 $ 416
Income taxes $ 2,377 $ 1,388 $ 2,440 $ 1,739
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of stock upon exercise of non-qualified options $ 1,473 $ - $ 1,473 $ -
Treasury shares received in lieu of cash $ (778) $ - $ (778) $ -
Treasury shares retired $ 778 $ - $ 778 $ -
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
(unaudited)
4
<PAGE> 5
Item 1. Financial Statements (Cont.).
PHARMACY MANAGEMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of Pharmacy Management Services, Inc. and its
subsidiaries have been prepared in accordance with the
Securities and Exchange Commission's instructions to Form 10-Q
and, therefore, omit or condense footnotes and certain other
information normally included in financial statements prepared
in accordance with generally accepted accounting principles.
The accounting policies followed for quarterly financial
reporting conform with generally accepted accounting
principles for interim financial statements and include those
accounting policies disclosed in Note 1 to the Notes to
Consolidated Financial Statements included in the Company's
Annual Report to Shareholders for 1994 and incorporated by
reference in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994. In the opinion of
management, all adjustments of a normal recurring nature that
are necessary for a fair presentation of the financial
information for the interim periods reported have been made.
Certain amounts for the three and six month periods ended
January 31, 1994 have been reclassified to conform to the
January 31, 1995 classification. The results of operations
for the three and six months ended January 31, 1995 are not
necessarily indicative of the results that can be expected for
the entire fiscal year ending July 31, 1995. The unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report to
Shareholders for 1994 and incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1994.
(b) Principles of Consolidation
The accompanying condensed consolidated financial statements
consist of the accounts of Pharmacy Management Services, Inc.
("PMSI") and its wholly-owned subsidiaries (together, the
"Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Income Taxes
The Company accounts for income taxes in accordance with the
asset and liability method prescribed by Financial Accounting
Standards Board (FASB) Statement of Financial Accounting
Standards No. 109, "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. 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.
5
<PAGE> 6
Item 1. Financial Statements (Cont.).
(d) Net Income Per Common Share
Primary net income per common share is based on net income,
less preferred stock dividend requirements of $12,000 and
$30,000 for the three and six months ended January 31, 1995,
respectively, and $49,261 and $98,521 for the three and six
months periods ended January 31, 1994, respectively, divided
by the weighted average number of common and dilutive common
equivalent shares outstanding during those periods. Fully
diluted net income per common share has been omitted for all
reported periods because it is not materially different from
primary net income per share or is anti-dilutive. Dilutive
common equivalent shares consist of stock options and
convertible preferred stock.
(2) Inventories
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 31,
------------------
1995 1994 July 31, 1994
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Drugs $3,039 $3,127 $ 2,474
Medical equipment and supplies 659 741 597
Electro-medical therapy products 409 480 416
------ ------ -------
$4,107 $4,348 $ 3,487
====== ====== =======
</TABLE>
(3) Equity Securities Available For Sale
At August 1, 1994 the Company adopted FASB Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 requires that at
acquisition, management shall classify debt and equity securities into
one of three categories: held to maturity, available-for-sale, or
trading. Held to maturity securities are those which the Company has
the positive intent and ability to hold to maturity. Trading
securities are defined as securities bought and held principally for
the purpose of selling in the near term. Available-for-sale
securities are defined as investments not classified as trading
securities or as held to maturity.
Equity securities consist of shares of Staodyn, Inc. ("Staodyn")
received pursuant to the sale of the Company's Technical Medical
Devices, Inc. ("TMD") subsidiary on November 15, 1992. Management
classifies these securities as available-for-sale. SFAS 115 requires
securities available for sale to be recorded at fair value. Both
unrealized gains and losses on available-for-sale securities, net of
taxes, are included as a separate component of shareholders' equity in
the consolidated balance sheets until these gains or losses are
realized. If a security has a decline in fair value that is other
than temporary, then the security will be written down to its fair
value by recording a loss in the consolidated statements of
operations. Carrying value of equity securities held at January 31,
1995 approximate market value, accordingly no change in fair value has
been recorded. There were no sales of equity securities for the three
and six months ended January 31, 1995.
Gains or losses on the disposition of investment securities are
recognized using the average cost method.
(4) Long-Term Debt
Long-term debt at January 31, 1995 consisted of the following (in
thousands):
<TABLE>
<S> <C>
$7,500 revolving bank line of credit,
maturing November 30, 1997 $ 250
$7,500 revolving bank line of credit,
maturing November 30, 1997 --
$1,120 installment note, principal payable
in four equal annual installments of $280
commencing October 30, 1993, non-
interest bearing 560
$600 note, principal payable in three equal
annual installments of $200 commencing
December 31, 1993, interest payable
annually at 7% 200
Non-compete agreements, principal payable
in varying amounts and frequencies,
non-interest bearing 344
Note payable, installments payable monthly
through December, 1997 109
Capital lease obligations 36
------
1,499
Less current maturities 755
------
$ 744
======
</TABLE>
6
<PAGE> 7
Item 1. Financial Statements (Cont.).
(4) Long-Term Debt (Cont.)
The revolving lines of credit listed 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 minus 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 revolving credit agreement. At January
31, 1995, amounts available for borrowing under the revolving credit
agreement were approximately $13.3 million. Under the terms of the
revolving credit agreement, the unused credit is subject to a 1/8 of
one percent per annum commitment fee that is payable quarterly.
The Company's credit agreement with the banks contains certain
covenants relating to tangible net worth, payment of dividends,
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 its loan covenants.
(5) Convertible Preferred Stock
Each share of both the Series B $.98 Convertible Preferred Stock and
the Series C $.98 Convertible Preferred Stock was mandatorily and
automatically convertible into one share of Common Stock on the
earlier of (i) the first date on or after April 1, 1994 on which the
per share market price of the Common Stock was greater than or equal
to $16.25 or (ii) April 1, 1996. On November 14, 1994, the market
price of the Company's Common Stock exceeded $16.25 per share.
Accordingly, all 73,846 outstanding shares of Series B Convertible
Preferred Stock and all 53,748 outstanding shares of Series C
Convertible Preferred Stock, respectively, were converted into a total
of 127, 594 shares of Common Stock.
On January 3, 1995, all 100,000 authorized, issued and outstanding
shares of Redeemable Series A $.72 Convertible Preferred Stock were
converted at the election of the holders of these shares, into an
equal number of shares of Common Stock.
(6) Acquistion Transaction
On December 26, 1994, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Beverly Enterprises, Inc.
("Beverly") and Beverly Acquistion Company ("Acquisition Sub") a
wholly owned subsidiary of Beverly. Pursuant to the terms and
conditions of the Merger Agreement, the Company has agreed to merge
with and into Acquisition Sub (the "Merger"). Acquisition Sub will be
the surviving corporation in the Merger, and the separate corporate
existence of the Company will cease as a result of the Merger.
Pursuant to the Merger, shares of the Company's common stock (the
"Company Shares") will be converted into shares of Beverly common
stock ("Beverly Shares") at a floating exchange rate based on $16.50
per Company Share and the average of the closing sales price of
Beverly Shares during the ten consecutive trading days ending on the
second day before the effective time of the Merger (the "Beverly
Closing Price"), provided that the Beverly Closing Price is not lower
than $12.25 or higher than $18.00. If the Beverly Closing Price is
higher than $18.00, each Company Share will be converted into .9167
Beverly Shares. If the Beverly Closing Price is lower than $12.25,
each Company Share will be converted into 1.3469 Beverly Shares. If
the Beverly Closing Price is lower than $10.00, the Company may (but
is not obligated to) terminate the Merger before the closing of the
Merger. The exchange ratio is subject to adjustment in the event of a
stock split,
7
<PAGE> 8
Acquistion Transaction(Cont.).
stock dividend, recapitalization, restructuring, divisive
reorganization, special or extraordinary dividend or distribution, and
certain other corporate developments affecting Beverly Shares that
occur or have a record date before the effective time of the Merger.
Additionally, Beverly has agreed to assume all outstanding options to
purchase Company Shares. The number of option shares and the exercise
price of each option will be adjusted based on the exchange ratio for
the Merger.
The consummation of the Merger is contingent on, among other things,
approval by the Company's shareholders, the declaration by the
Securities and Exchange Commission that a merger registration
statement on Form S-4 (to be filed by Beverly for purposes of
registering the Beverly Shares to be issued to the Company's
shareholders pursuant to the Merger) is effective, and the approval by
the New York Stock Exchange of the listing, upon official notice of
issuance, of all Beverly Shares to be issued to the Company's
shareholders pursuant to the Merger.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
OVERVIEW
The Company is a leading independent national provider of medical cost
containment and managed care services, providing professionally managed
solutions for containing the escalating costs of workers' compensation. The
following table presents the ratios of certain financial items to net revenues
for the three and six months ended January 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------ ----------------
1995 1994 1995 1994
------ ----- ----- -----
<C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 69.6 72.0 69.3 72.0
----- ----- ----- -----
Gross Margin 30.4 28.0 30.7 28.0
Costs and epenses:
Selling, general & administrative 17.7 19.5 17.6 19.6
Exercise of non-qualified stock options 2.8 -- 1.4 --
Acquisition expenses 2.8 -- 1.4 --
Depreciation and amortization 3.2 2.9 3.1 2.9
----- ----- ----- -----
Operating income 3.9 5.6 7.2 5.5
Interest expense, net (0.1) (0.6) (0.1) (0.6)
Additional consideration - sale of TMD 1.1 -- 0.5 --
----- ----- ----- -----
Income before income taxes 4.9 5.0 7.6 4.9
Provision for income taxes 3.1 2.0 3.6 2.0
----- ----- ----- -----
Net income 1.8% 3.0% 4.0% 2.9%
===== ===== ===== =====
</TABLE>
The ensuing discussion and analysis of the Company's results of operations and
financial condition does not address the effect on the Company's liquidity,
capital resources, or results of operations of the consummation of the
acquisition of the Company by Beverly or Beverly's plans for the Company
following the acquisition.
8
<PAGE> 9
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the second quarter of fiscal year 1995 were approximately
$30.0 million compared to $28.1 million for the comparable period in fiscal
year 1994. The increase in revenues for the period was primarily attributable
to increased revenues from the Company's preferred provider organization
("PPO") and case management services. Net revenues for the six months ended
January 31, 1995 were approximately $60.5 million compared to approximately
$55.5 million in the comparable period in fiscal year 1994. Substantially all
of the increase in revenues for the period was attributable to increased
revenues from the Company's preferred provider organization ("PPO") and case
management services. Net revenues for the second quarter and first six months
of fiscal year 1995 in the home delivery of prescription drugs and medical
equipment and supplies were approximately the same as in the comparable period
in fiscal year 1994 because the percentage of generic drugs dispensed has
doubled during the second quarter and first six months of fiscal year 1995 when
compared to the comparable periods in fiscal year 1994. During the second
quarter and first six months of fiscal year 1995, the net revenues of the PPO
were approximately 16% of consolidated revenues, compared to approximately 11%
of consolidated revenues in the comparable periods in fiscal year 1994.
Cost of Revenues
Cost of revenues as a percentage of net revenues was approximately 2.4% lower
for the second quarter of fiscal year 1995 than it was for the second quarter
of fiscal year 1994. Cost of revenues as a percentage of net revenues was
approximately 2.7% lower for the six months ended January 31, 1995 than it was
for the comparable period in fiscal year 1994. The improvement in gross margin
is attributable to dispensing a greater percentage of generic drugs in the home
delivery business and the increased volume of revenue provided by the Company's
PPO and case management services, which have higher gross margins than the home
delivery business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues
decreased approximately 1.8% to 17.7% for the three months ended January 31,
1995, compared to 19.5% for the three months ended January 31, 1994. Selling,
general and administrative expenses as a percentage of revenue decreased
approximately 2.0% to 17.6% for the six months ended January 31, 1995 compared
to 19.6% for the six months ended January 31, 1994. The decreases are
attributable to improved control over expenses while revenues increased 6.9%
for the quarter and 9.1% for the six months ended January 31, 1995.
Exercise of Non-Qualified Stock Options
In December 1994, two executive officers exercised non-qualified stock options
for a total of 95,000 shares of common stock at an average exercise price of
$6.50 per share. The financial statement effect of these exercises was
approximately $855,000 of compensation expense.
Acquisition Expenses
As previously reported in the Company's Current Report on Form 8-K dated
December 26, 1994, the Company entered into an Agreement and Plan of Merger
with Beverly Enterprises, Inc. ("Beverly") on December 26, 1994 (The "Merger
Agreement") pursuant to which the Company agreed to be merged with and into
Beverly Acquisition Company, a wholly owned subsidiary of Beverly (the
"Merger"). (See Note 6 to Notes to Condensed Consolidated Financial Statements
(Unaudited) included elsewhere in this Report.) The Merger is expected to be
consummated in the Spring, 1995. During the second quarter of fiscal year
1995, the Company incurred approximately $835,000 of expenses associated with
this acquisition
9
<PAGE> 10
transaction, consisting primarily of legal and investment banking fees. Most
of these costs are not deductible expenses for income tax purposes. The
Company funded the payment of these expenses from cash flow from operating
activities. The Company expects to continue to incur expenses associated with
the acquisition transaction, and the total amount is expected to be significant
(see "Acquisition Transaction" below).
Depreciation and Amortization
Depreciation and amortization was approximately $141,000 or approximately 17%
more for the three months ended January 31, 1995, than it was for the three
months ended January 31, 1994, and was approximately $248,000 or approximately
15% more for the six months ended January 31, 1995, than it was for the six
months ended January 31, 1994. The increase is attributable to capital
expenditures for computer equipment and software during fiscal years 1995 and
1994.
Interest Expense
Net interest expense for the three months ended January 31, 1995 decreased
approximately $121,000 or approximately 78% compared to the comparable period
in fiscal year 1994. Net interest expense for the six months ended January
31, 1995 was approximately $236,000 or approximately 73% less than in the
comparable period in fiscal year 1994. These significant decreases are
primarily attributable to the reduction in bank debt during the relevant
periods.
Additional Consideration - Sale of TMD
The Company recorded additional income of approximately $326,000 on November
15, 1994 when it received the final adjusted number of Staodyn, Inc.
("Staodyn") common stock as final consideration for the sale of TMD to
Staodyn, which occurred on November 15, 1992. The purchase agreement between
Staodyn and TMD provided that TMD could receive additional shares of Staodyn
common stock based upon the trading range of the common stock two years after
the date of the original transaction. The amount of income recorded on
November 15, 1994 represents the amount necessary to record the total shares of
Staodyn common received at its fair value on November 15, 1994.
Provision for Income Taxes
The combined effective federal and state income tax rate for the three months
ended January 31, 1995 was 62.5% compared to 40.1% for the comparable period in
fiscal year 1994. The combined rate for the six months ended January 31, 1995
was 47.3% compared to 40.9% for the six months ended January 31, 1994. The
increase in the effective rate is primarily attributable to non-deductible
acquistion related expenses.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's working capital decreased to approximately $15.9 million at
January 31, 1995 compared to approximately $16.7 million at July 31, 1994. The
decrease is primarily due to a higher level of accounts payable at January 31,
1995.
The Company had positive cash flow from operations of approximately $3.2
million for the three months ended January 31, 1995, compared to approximately
$5.0 million for the comparable period in fiscal year 1994. The primary
difference was the receipt of notes receivable payments of approximately $2.7
million during the three months ended January 31, 1994. For the six months
ended January 31, 1995, the Company had positive cash flow from operations of
approximately $5.7 million compared to
10
<PAGE> 11
approximately $3.6 million for the six months ended January 31, 1994. The
primary differences were improved net income, favorable changes in cash flows
from accounts receivable and accounts payable, offset by the effect of the
notes receivable payments received during the three months ended January 31,
1994.
Net trade receivables decreased approximately $800,000 and approximately
$300,000 for the three and six month periods ended January 31, 1995 and 1994
respectively. These decreases are primarily attributable to improved
collection of accounts receivable.
Inventories at January 31, 1995 approximated $4.1 million, compared to
approximately $3.5 million at July 31, 1994. The increase is attributable to
special purchases of prescription drugs at favorable prices and terms.
Capital expenditures for the six months ended January 31, 1995 were
approximately $1.1 million. These expenditures were financed by cash flow from
operations. The Company further reduced its bank debt by approximately $3.0
million for the quarter and approximately $4.8 million for the six months ended
January 31, 1995.
The Company has revolving lines of credit with two banks that allow it to
borrow up to $15 million at variable rates that currently approximate the
bank's prime rates. The amount available for borrowing at January 31, 1995 was
$13.3 million. The Company believes that cash generated from future
operations, together with the funds available under its lines of credit, will
be sufficient to finance the Company's operations and its anticipated capital
requirements for at least the next 12 to 24 months, depending on the level of
business expansion.
Healthcare Reform is a major national priority, but the impact of the reforms
is not presently determinable. The Company's future liquidity will continue to
depend on its operating cash flow and management of trade receivables and
inventories.
ACQUISITION TRANSACTION
The Merger Agreement includes covenants that, on an interim basis pending
consummation of the Merger, restrict the Company from doing the following: (a)
granting or permitting a lien on, selling, leasing, exchanging, transferring or
otherwise disposing of, or granting to any person a right or option to lease,
purchase, or otherwise acquire, any material amount of its assets or
properties, including the capital stock of its subsidiaries, any indebtedness
owed to it and any rights of value to it (except in the ordinary course of
business consistent with past practices and except for inter-company
transfers); (b) selling, issuing, awarding, granting, pledging, redeeming,
purchasing or otherwise acquiring, transferring or encumbering any of its
capital stock or other securities or any rights, options or warrants to acquire
any of its capital stock or other securities; (c) reclassifying any
outstanding common stock into a different class or number of shares or
otherwise changing its authorized capitalization, or paying, declaring or
setting aside for payment a dividend or other distribution in respect of any of
its capital stock, whether payable in cash, stock or other property; (d)
borrowing any money, issuing any debt securities or assuming, endorsing or
guaranteeing, or becoming a surety, accommodation party or otherwise
responsible for an obligation or indebtedness of a person other than itself and
any of its subsidiaries (except for borrowings under its existing credit
agreements in the usual and ordinary course of business); (e) amending,
renewing, waiving, breaching, extending, modifying, entering into, releasing in
any respect or relinquishing any right or benefit under any mortgage,
agreement, instrument, obligation or other commitment that would be material to
the Company; (f) settling or compromising any material claim, liability, tax
assessment or financial contingency; (g) entering into any transaction with
any of its officers, directors, affiliates or shareholders (except in the usual
and ordinary course of business and on an arms' length basis); and (h)
authorizing, recommending, consummating or otherwise entering into any
agreement providing for a merger,
11
<PAGE> 12
dissolution, consolidation, restructuring, recapitalization, reorganization,
partial or complete liquidation or the acquisition or disposition of a material
amount of assets or securities owned by the Company. Management does not
expect that any of these interim restrictions will materially adversely affect
the Company's liquidity, operations, capital resources, or ability to proceed
with planned capital expenditures, if the Merger is consummated this Spring as
contemplated. The Merger Agreement also requires the Company to pay Beverly a
"termination fee" of $5,000,000 if Beverly or the Company terminates the Merger
Agreement under certain circumstances.
The Company incurred during the six months ended January 31, 1995 approximately
$835,000 of acquisition expenses associated with its consideration of
acquisition overtures and the pending Merger with Beverly, and it expects that
the total acquisition expenses for fiscal year 1995 will be approximately $3
million. The expenses will consist primarily of professional fees and
financial advisory fees payable to an investment banking firm. Management
expects to fund the payment of these expenses and the termination fee (if
payable) from cash flow from operating activities and, to the extent necessary,
its bank credit lines. Management believes that it has access to adequate
sources of borrowing to fund the payment of these expenses and the termination
fee (if it becomes payable), although payment of the expenses and the
termination fee would diminish available credit facilities, reduce
shareholders' equity and increase future interest expense.
PART II - OTHER INFORMATION
Item 1. 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 its
business.
Item 2. Changes in Securities.
As discussed more fully in Note 5 of the Notes to Condensed Consolidated
Financial Statements (Unaudited) included in this Report, all the Company's
outstanding Series B and Series C Convertible Preferred Stock was mandatorily
converted into an equal number of shares of Common Stock, effective November
14, 1994, and all the Company's outstanding Series A Redeemable Convertible
Preferred Stock was converted, at the election of the holders of those shares,
into an equal number of shares of Common Stock, effective January 3, 1995.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
The Company and Beverly filed their FTC Premerger Notification with respect to
the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 on
January 30, 1995, and received early termination of the applicable waiting
period on February 8, 1995.
Item 6. Exhibits and Reports on Form 8-K.
12
<PAGE> 13
Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 26, 1994 to
report its execution of the Merger Agreement with Beverly.
Exhibits
The following exhibits are filed as part of this Report at the pages indicated:
Exhibit 2-5 Agreement and Plan of Merger dated December 26, 1994, among
Beverly Enterprises, Inc., Beverly Acquisition Company, and
Pharmacy Management Services, Inc. (Incorporated by reference
from Exhibit 2-5 to the Company's Current Report on Form 8-K
dated December 26, 1995. Commission File No. 0-18366.)
Exhibit 10-20 First Amendment to Severance Agreement dated February 16,
1995, between David L. Redmond and Pharmacy Management
Services, Inc.
Exhibit 10-21 Letter agreement dated December 26, 1994, between Bertram T.
Martin, Jr. and Pharmacy Management Services, Inc.
Exhibit 10-22 Letter agreement dated December 26, 1994, between David L.
Redmond and Pharmacy Management Services, Inc.
Exhibit 27.1 6-Month Financial Data Schedule (for SEC use only)
Exhibit 27.2 3-Month Financial Data Schedule (for SEC use only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACY MANAGEMENT
SERVICES, INC.
Date: March 17, 1995 By: /s/ David L. Redmond
----------------------------
David L. Redmond
Senior Vice President and
Chief Financial Officer
(Its Duly Authorized Officer)
13
<PAGE> 1
Exhibit 10-20
FIRST AMENDMENT TO SEVERANCE AGREEMENT
This FIRST AMENDMENT TO SEVERANCE AGREEMENT (this "Amendment") is
executed by DAVID L. REDMOND ("Executive") and PHARMACY MANAGEMENT SERVICES,
INC. (the "Company"), a Florida corporation, to amend the Severance Agreement
dated August 1, 1993, between Executive and the Company (the "Severance
Agreement"). Executive and the Company agree as follows:
1. Defined Terms. Unless expressly defined in this Amendment, the
capitalized terms used in this Amendment have the definitions attributed to
them in the Severance Agreement, and the definitions of those terms in the
Severance Agreement are incorporated by reference in this Amendment.
Section 1 of the Severance Agreement is amended to add the following
definition:
"Code" means the Internal Revenue Code of 1986, as amended.
2. Excise Tax Indemnification. The Severance Agreement is amended to add
the following paragraph to the end of section 4:
The Company shall indemnify and hold harmless Executive from
the following (the "Indemnified Tax Liability"): (a) any excise tax
imposed by section 4999 of the Code on any payment in the nature of
compensation to (or for the benefit of) Executive from the Company (or
any successor in interest) that constitutes an "excess parachute
payment" under section 280G of the Code, including indemnity payments
pursuant to this paragraph, and whether paid pursuant to this or any
other agreement or constituting property transfers pursuant to stock
options and other employee benefits that vest upon a change in the
ownership or effective control of the Company; and (b) from all
estimated state and federal income tax imposed on all indemnity
payments to Executive pursuant to the indemnification provisions of
this paragraph (based on the highest marginal tax rate). If any
payments (including any property transfers) by the Company in the
nature of compensation to (or for the benefit of) Executive will
constitute an "excess parachute payment" under section 280G(b) of the
Code, the Company shall pay to Executive, on demand, a cash sum in an
amount sufficient (on grossed-up basis), to hold Executive harmless
from the Indemnified Tax Liability, so the amounts received by
Executive will not be diminished by an excise tax imposed under
section 4999 of the Code or by any federal income tax payable in
respect of the indemnity payments received by Executive pursuant to
this paragraph.
3. Continued Effectiveness; Effective Date. Except as amended by this
Amendment, the Severance Agreement continues in full force and effect. This
Amendment will become effective when executed by Executive and the Company.
14
<PAGE> 2
EXECUTED: February 16, 1995, in Tampa, Florida
WITNESS: PHARMACY MANAGEMENT
SERVICES, INC.
By: /s/ Judith R. Littlefield By: /s/ Cecil S. Harrell (SEAL)
----------------------------- ----------------------------
By: /s/ R. Gayle Miller Cecil S. Harrell
----------------------------- Chairman of the Board and
Chief Executive Officer
By: /s/ Janette L. Barr By: /s/ David L. Redmond
----------------------------- ----------------------------
By: /s/ Christina Scalice David L. Redmond
-----------------------------
(As to Mr Redmond)
15
<PAGE> 1
December 26, 1994 Exhibit 10-21
Bertram T. Martin, Jr.
2805 Parkland Boulevard
Tampa, FL 33629
Re: Restricted Stock Option Agreement
Dear Bert:
This letter confirms your agreement to amend in the manner described
in this letter the Restricted Stock Option Agreement dated June 14, 1993 (the
"Option Agreement"), pursuant to which Pharmacy Management Services, Inc. (the
"Company") granted to you nonqualified options to purchase up to 130,000 shares
of the Company's common stock. You are agreeing to amend the Option Agreement
in connection with the execution of the Agreement and Plan of Merger dated
December 26, 1994, among the Company, Beverly Enterprises, Inc. and Beverly
Acquisition Corporation (the "Acquisition Agreement"). Accordingly, the
amendments are contingent on the execution of the Acquisition Agreement by all
the parties to it and the closing of the merger contemplated by the Acquisition
Agreement. If the Acquisition Agreement is terminated for any reason, or if
that merger does not occur before June 30, 1995, the amendments to the Option
Agreement set forth in this letter will be void and of no effect.
Subject to the foregoing, you and the Company agree that, as of the
"Effective Time" (as defined in the Acquisition Agreement), the Option
Agreement will be amended as follows:
1. The definition of "Control Value" in section 1.2 of the Option
Agreement is deleted in its entirety:
2. The definition of "Expiration Date" in section 1.2 of the
Option Agreement is amended to delete clause (d) and to revise clause (b)
entirely to read:
(b) the 90th day after you cease to be an Employee (other
than as a result of your death or disability or a termination of your
employment within 60 days after a Change in Control):
3. The first two sentences of section 3.4 are amended entirely to
read as follows:
Except as otherwise provided below, you may exercise the Stock Option
only if you have continuously been an Employee of the Company (or any
successor in interest) during the period beginning on the Date of
Grant and ending on the 90th day before the Exercise Date of the Stock
Option. If your employment with the
16
<PAGE> 2
Bertram T. Martin, Jr.
December 26, 1994
Page 2
Company or a Subsidiary (or any successor in interest to the Company
or a Subsidiary) is terminated (voluntarily or involuntarily) at a
time when the Stock Option is exercisable, you may exercise the Stock
Option within 90 days following the effective date of termination,
unless the termination occurs within 60 days after a Change in
Control, in which case you may exercise the Stock Option as follows:
<TABLE>
<CAPTION>
Period of time following No. of days option
Change in Control remains exercisable
-------------------------- -------------------
<S> <C>
first 30 days 150 days
31-60 days 120 days
61 days or more 90 days
</TABLE>
: and
4. Section 3.10 of the Option Agreement is amended in its
entirety as follows:
3.10 Change in Control. If a Change in Control occurs or if a merger,
consolidation, or other reorganization occurs in which the Company is
the surviving corporation, the Stock Option will continue to be
exercisable, and you will be entitled to receive (upon exercise of the
Stock Option) the Option Shares or any cash, securities, or other
property into which the Shares were converted as a result of the
merger, consolidation, or reorganization.
Please acknowledge your agreement to amend the Option Agreement in the
foregoing manner by signing and dating this letter and returning it to me.
Please retain a copy of the executed letter for your records.
Very truly yours,
PHARMACY MANAGEMENT SERVICES, INC.
By: /s/ Cecil S. Harrell
----------------------------
Cecil S. Harrell
Chief Executive Officer and
Chairman of the Board
Accepted and agreed on
December 26, 1994
By: /s/ Bertram T. Martin, Jr.
--------------------------
Bertram T. Martin, Jr.
17
<PAGE> 1
December 26, 1994 Exhibt 10-22
David L. Redmond
2514 Prospect Road
Tampa, FL 33629
Re: Restricted Stock Option Agreement
Dear Dave:
This letter confirms your agreement to amend in the manner described
in this letter the Restricted Stock Option Agreement dated June 14, 1993 (the
"Option Agreement"), pursuant to which Pharmacy Management Services, Inc. (the
"Company") granted to you nonqualified options to purchase up to 40,000 shares
of the Company's common stock. You are agreeing to amend the Option Agreement
in connection with the execution of the Agreement and Plan of Merger dated
December 26, 1994, among the Company, Beverly Enterprises, Inc. and Beverly
Acquisition Corporation (the "Acquisition Agreement"). Accordingly, the
amendments are contingent on the execution of the Acquisition Agreement by all
the parties to it and the closing of the merger contemplated by the Acquisition
Agreement. If the Acquisition Agreement is terminated for any reason, or if
that merger does not occur before June 30, 1995, the amendments to the Option
Agreement set forth in this letter will be void and of no effect.
Subject to the foregoing, you and the Company agree that, as of the
"Effective Time" (as defined in the Acquisition Agreement), the Option
Agreement will be amended as follows:
1. The definition of "Control Value" in section 1.2 of the Option
Agreement is deleted in its entirety:
2. The definition of "Expiration Date" in section 1.2 of the
Option Agreement is amended to delete clause (d) and to revise clause (b)
entirely to read as follows:
(b) the 90th day after you cease to be an Employee (other
than as a result of your death or disability or a termination of your
employment within 60 days after a Change in Control):
3. The first two sentences of section 3.4 are amended entirely to
read as follows:
Except as otherwise provided below, you may exercise the Stock Option
only if you have continuously been an Employee of the Company (or any
successor in interest) during the period beginning on the Date of
Grant and ending on the 90th day before the Exercise Date of the Stock
Option. If your employment with the
18
<PAGE> 2
David L. Redmond
December 26, 1994
Page 2
Company or a Subsidiary (or any successor in interest to the Company or a
Subsidiary) is terminated (voluntarily or involuntarily) at a time when the
Stock Option is exercisable, you may exercise the Stock Option within 90 days
following the effective date of termination, unless the termination occurs
within 60 days after a Change in Control, in which case you may exercise the
Stock Option as follows:
<TABLE>
<CAPTION>
Period of time following No. of days option
Change in Control remains exercisable
-------------------------- -------------------
<S> <C>
first 30 days 150 days
31-60 days 120 days
61 days or more 90 days
</TABLE>
: and
4. Section 3.10 of the Option Agreement is amended in its
entirety as follows:
3.10 Change in Control. If a Change in Control occurs or if a merger,
consolidation, or other reorganization occurs in which the Company is
the surviving corporation, the Stock Option will continue to be
exercisable, and you will be entitled to receive (upon exercise of the
Stock Option) the Option Shares or any cash, securities, or other
property into which the Shares were converted as a result of the
merger, consolidation, or reorganization.
Please acknowledge your agreement to amend the Option Agreement in the
foregoing manner by signing and dating this letter and returning it to me.
Please retain a copy of the executed letter for your records.
Very truly yours,
PHARMACY MANAGEMENT SERVICES, INC.
By: /s/ Cecil S. Harrell
----------------------------
Cecil S. Harrell
Chief Executive Officer and
Chairman of the Board
Accepted and agreed on
December 26, 1994
By: /s/ David L. Redmond
------------------------
David L. Redmond
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMACY MANAGEMENT SERVICES, INC. FOR THE SIX MONTHS
ENDED JANUARY 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 20,720
<ALLOWANCES> 302
<INVENTORY> 4,107
<CURRENT-ASSETS> 27,601
<PP&E> 16,504
<DEPRECIATION> 8,258
<TOTAL-ASSETS> 54,437
<CURRENT-LIABILITIES> 11,667
<BONDS> 744
<COMMON> 91
0
0
<OTHER-SE> 41,935
<TOTAL-LIABILITY-AND-EQUITY> 54,437
<SALES> 0
<TOTAL-REVENUES> 60,512
<CGS> 0
<TOTAL-COSTS> 41,906
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 266
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> 4,588
<INCOME-TAX> 2,172
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,416
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.2
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMACY MANAGEMENT SERVICES, INC. FOR THE THREE MONTHS
ENDED JANUARY 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 20,720
<ALLOWANCES> 302
<INVENTORY> 4,107
<CURRENT-ASSETS> 27,601
<PP&E> 16,504
<DEPRECIATION> 8,258
<TOTAL-ASSETS> 54,437
<CURRENT-LIABILITIES> 11,667
<BONDS> 744
<COMMON> 91
0
0
<OTHER-SE> 41,935
<TOTAL-LIABILITY-AND-EQUITY> 54,437
<SALES> 0
<TOTAL-REVENUES> 30,030
<CGS> 0
<TOTAL-COSTS> 20,904
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 141
<INTEREST-EXPENSE> 34
<INCOME-PRETAX> 1,460
<INCOME-TAX> 912
<INCOME-CONTINUING> 548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 548
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
