<PAGE> 1
FORM 10-K/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______ TO
_____.
COMMISSION FILE NUMBER 0-20606
CHOICE DRUG SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2310352
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2930 WASHINGTON BOULEVARD,
BALTIMORE, MARYLAND 21230
- ---------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 646-7373
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
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 the
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. [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of May
22, 1995, was $36,102,657.
On May 22, 1995, 9,735,810 shares of the registrant's $0.01 par value
Common Stock was outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTORY SUMMARY
Choice Drug Systems, Inc. (together with its subsidiaries, the
"Company" or the "Registrant"), a corporation organized in New York in 1973, is
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals
health maintenance organizations and medical surgical entities (each a "Health
Care Facility" and collectively, the "Health Care Facilities"). The Company's
long-term care and health maintenance organization customers are primarily
located in New York, New Jersey, Maryland and Delaware, while the Company's
hospital and correctional facility customers are located throughout the United
States.
MATERIAL CORPORATE DEVELOPMENTS
New Management. In connection with the Counsel Investment and the
Premier Acquisition (each as defined below), the Company's management has been
revised substantially to include four new directors, including a new Chairman
and Vice Chairman, and a new Chief Executive Officer and a new Chief Financial
Officer, all of whom have substantial experience in the health care industry.
Prior to the arrival of new management, the Company had begun a
disposal of certain non-core business lines and a restructuring of its
remaining business in an effort to return the Company to profitability. The
Company's new management has begun a broader and more substantial
reorganization and restructuring of the Company that is expected to include
consolidation of operations, elimination and reduction of various overhead
expenses and divestiture of certain non-performing or under-performing assets.
Counsel Investment. On December 22, 1994, Counsel Corporation, a
Toronto, Ontario, Canada corporation ("Counsel"), purchased from the Company in
a private placement transaction (the "Counsel Investment"), 2,000,000 shares of
Company common stock at a price of $3.65 per share for an aggregate amount of
$7,300,000, along with warrants for the purchase of an additional 1,800,000
shares exercisable at any time over a three year period. 1,000,000 warrants
are exercisable at $4.50 per share and 800,000 are exercisable at $5.50 per
share. The Company simultaneously granted Counsel certain demand and piggyback
registration rights. In connection with the Counsel Investment, the Company
increased the size of its Board of Directors from seven to eleven, filling the
vacancies with four additional nominees designated by Counsel. The Company
elected Allan C. Silber, Chairman of the Board and Chief Executive Officer of
Counsel, as Co-Chairman of the Company, and Morris Perlis, a director of and
consultant to Counsel, as the interim Chief Executive
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Officer of the Company. In conjunction with the Premier Acquisition (as
defined below), Mr. Silber and Mr. Perlis became Chairman and Vice Chairman of
the Company, respectively.
Recent Acquisition. On May 22, 1995, the Company acquired
PremierPharmacy, Inc. ("Premier"), another institutional pharmacy, for a
purchase price of $4.25 million (the "Premier Acquisition"). Premier's
operations generate annualized revenues of approximately $30 million, primarily
from pharmacy services provided to long-term care facilities and hospitals. In
connection with such transaction, Dirk Allison, Chief Executive Officer of
Premier, and Don Thompson, Chief Financial Officer of Premier, have been
elected as Chief Executive Officer and Chief Financial Officer of the Company,
respectively.
Credit Facility. On May 22, 1995, the Company entered into a
three-year revolving line of credit (the "Line of Credit") in the amount of
$10,000,000 from CreditAnstalt Corporate Finance, Inc. ("CreditAnstalt"). The
initial borrowings under the Line of Credit were used in conjunction with funds
from the Private Placement (as defined below) to pay off the Company's prior
bank indebtedness, pay off Premier's prior bank indebtedness, fund the Premier
Acquisition and retire certain other trade debts. The Line of Credit currently
bears interest at prime rate plus .5%. In connection with the Line of Credit,
the Company paid a facility fee to CreditAnstalt in the amount of $50,000. The
Line of Credit is secured by substantially all the assets of the Company. The
Letter of Credit replaces a $6,000,000 credit facility at prime rate plus 1.5%.
Private Placement. On May 22, 1995, the Company completed a private
offering of 1,600,000 units (the "Units"). Each Unit consisted of one share of
Common Stock, a three-year warrant to acquire 0.5 share of Common Stock at the
exercise price of $4.50 per share, and a three-year warrant to acquire 0.4
share of Common Stock at the exercise price of $5.50 per share. Investors were
granted registration rights with respect to both the Common Stock included in
the Units and the Common Stock underlying the related warrants. The offering
of Units raised $5,840,000 at a price of $3.65 per Unit. Counsel acquired
596,362 Units, representing approximately 37.3% of the Units sold. Counsel's
acquisition of Units increased its beneficial ownership of the Company's Common
Stock from approximately 38.4% to 40.9%. In addition, Curt Johnson, who is
employed by Counsel to serve as in-house legal counsel and who provides legal
services to the Company pursuant to an agreement between the Company and
Counsel, acquired 27,400 Units, representing approximately 1.7% of the Units
sold. J.E. Duffy, a consultant to the Company who also provides consulting
services to affiliates of Counsel, acquired 6,850 Units, representing less than
1.0% of the Units sold.
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Certain directors and executive officers of the Company also
participated in the Private Placement as noted in the table below:
<TABLE>
<CAPTION>
Number of Units % of
Participant Acquired Units
----------- -------- -----
<S> <C> <C>
Joseph F. Furlong III(1) 30,000 1.88%
John Haronian 50,000 3.13
Morris A. Perlis(1) 50,000 3.13
Allan C. Silber1 50,000 3.13
Edward Sonshine, Q.C.(1) 30,000 1.88
R. Dirk Allison 30,340 1.90
Don H. Thompson 8,220 *
Carl A. Pannuti 13,700 *
Joe McLelland 2,740 *
Individuals cited above as a 265,000 16.56
group (9) persons
</TABLE>
_________
* Indicates less than 1%
(1) Affiliated with Counsel. See "Item 10. Directors and Executive Officers of
the Registrant," which provides details as to nature of each person's
affiliation with Counsel, including affiliations pertaining to beneficial
ownership in the Company's securities.
The securities sold in the Private Placement are unregistered and are
thus subject to typical restrictions on resale or transfer. In connection
with the Private Placement, Counsel agreed to abandon the demand and piggyback
registration rights granted by the Company in December 1994. Investors in the
Private Placement, including Counsel, are, however, entitled to demand and
piggyback registration rights comparable to those abandoned by Counsel.
The terms of the Private Placement were approved by an independent
committee of the Board of Directors. In addition, the Board of Directors
received an opinion from an independent
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investment banking firm to the effect that the transaction was fair from a
financial point of view to the Company's shareholders.
NASDAQ Listing Criteria. As a result of its past financial
performance and the Premier Acquisition, the Company does not comply with
current NASDAQ listing criteria for tangible net worth. Additional steps will
be required to comply with applicable NASDAQ listing criteria, including
raising approximately $6.0 million in additional capital (beyond the $5,840,000
of proceeds discussed above).
Settlement of Litigation. On November 10, 1994, the Company entered
into an agreement with the United States settling an investigation conducted by
the U. S. Attorney for the Eastern District of Pennsylvania into claims for
reimbursement under the Medicare program made by certain of the Company's
subsidiaries.
Under terms of the settlement the Company, without admitting any
liability, has agreed to repay, over a six-year period, $3.4 million to the
government. $100,000 was paid upon the execution of the document on November
10, 1994, $400,000 was paid on December 31, 1994 and $2.9 million plus interest
at an annual rate of 7.75% will be paid in quarterly installments over a
six-year period ending January 1, 2001. To date one such quarterly installment
has been paid, leaving a balance of approximately $2.78 million at May 22,
1995.
The settlement agreement also requires that the Company not allow any
person convicted in any local, state or federal court of any felony involving
health care matters to serve as an officer or director of the Company or any of
its subsidiaries. In addition, if on or before December 31, 1997, the Company
sells or transfers a significant portion of its assets or if it undergoes a
significant change in the nature of its business, but not limited to a merger
or acquisition, the Company would be required to make all payments until
December 31, 1998, at which time all outstanding and unpaid principal
($966,664) shall be immediately due and payable. The Company also would be
required to notify the United States Attorney's office for the Eastern District
of Pennsylvania 30 days before the expected closing of any such transaction.
Although the Company notified such office of the Premier Acquisition prior to
its consummation, such transaction did not trigger the acceleration provision.
On June 1, 1993, a class action lawsuit was filed against the Company
and three of its former officers, alleging violations of certain securities
laws (the "Class Action Suit"). The complaint does not identify any specific
amount of damages allegedly suffered. The parties have tentatively agreed to
settle the Class Action Suit for $600,000 in common stock to be issued by the
Company and $650,000 in cash to be paid by the Company's directors and
officer's liability insurance carrier. Such settlement is subject to court
approval and final settlement documentation. The Company's portion of the
proposed settlement, $600,000 in common stock is included in "Costs in
connection with litigation" in the consolidated financial statements for the
year ended February 28, 1995.
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Extension of Expiration Date of Redeemable Warrants and Related
Potential Issuance of Class B Warrants. In May 1994, the Company extended the
expiration date of certain redeemable warrants issued by the Company. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity, Capital Resources and Cash Flow."
THE BUSINESS
The Company's primary business consists of supplying prescription
drugs to institutional customers. The Company typically dispenses prescription
drugs to health care facilities utilizing unit dose packaging, whereby the
Company individually packages drugs to meet each patient's needs for a day or
for some multi-day period. Each drug is then dispensed by either individually
sealing the required dose or sealing such dose in an individual cavity within a
blister package. The Company can customize the timing and packaging of its
delivery system to meet specific client needs.
The Company utilizes a simplified order processing system which
enables a health care facility to order pharmaceuticals using pre-printed forms
and generally to take delivery of such orders within 24 hours. The order entry
form is custom-printed and contains computer generated information relating to
the currently prescribed drug regimen for each patient, certain vital
statistics about the patient and a check-off list for the physician to use to
request special diets, laboratory tests and therapy consultations. The
treating physician at a health care facility reviews the drug regimen on the
printed form for accuracy and completeness with respect to each patient, making
changes as necessary.
Once delivered to the Company, the order entry forms are entered into
a computer system, and the data is used to fill prescriptions and print
prescription labels containing information about the patient, the drug ordered
and the regimen prescribed by the physician.
Suppliers. The Company purchases substantially all of its
pharmaceutical inventories from wholesalers and manufacturers. In connection
therewith, the Company has entered into a primary wholesaler agreement with a
supplier (the "Supplier") pursuant to which the Company receives twice-daily
deliveries of ordered inventory from the Supplier. The Company also has in
place secondary wholesale agreements to further minimize the number of its
channels of distribution while maximizing inventory quality and cost savings to
the Company. Because of readily available alternatives, the Company is not
dependent on any one supplier.
The Company has historically maintained between 50 and 60 days of
pharmaceutical inventory on hand. The Company is taking steps to reduce this
inventory level through improved supplier arrangements, improved purchasing and
dispensing systems and additional internal controls.
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Customers. The primary customers of the Company are long-term care
facilities, correctional facilities, hospitals, health maintenance
organizations and medical/surgical entities. The Company is not dependent on
any one customer. The table below sets forth the percentage of revenues from
continuing operations derived from each payor source for the years presented:
<TABLE>
<CAPTION>
Year Ended February 28,
-----------------------
Payor Source 1995 1994 1993
- ------------ ---- ---- ----
<S> <C> <C> <C>
Long-Term Care Facilities 41.4% 37.2% 32.9%
Correctional Facilities 21.1% 16.2% 15.4%
Hospitals 6.8% 4.8% 5.4%
Health Maintenance Organizations 17.8% 18.7% 23.6%
Medical/Surgical 12.9% 23.1% 22.7%
</TABLE>
Competition. The industry in which the Company operates is highly
competitive. Among the Company's competitors are companies which have
substantially greater capital, marketing and other resources than those
available to the Company. The Company experiences competition from national,
regional, and local providers of similar services. The Company's strategy is
to create a competitive advantage by developing market dominance as the low
cost, high quality provider. The Company has experienced gross margin pressure
in its markets as the health care market continues to develop lower cost
alternatives. The Company believes that its strategy of consolidation and
systems development will allow it to compete effectively in this environment.
Regulation. As with all health care businesses, the Company is
subject to extensive federal, state and local regulation. The Company's
pharmacy operations are regulated by federal and state laws governing the
distribution, sale, repackaging and dispensing of drugs and devices, and
certain of the Company's employees are subject to state laws and regulations
governing the professional practice of pharmacy.
As a provider of goods and services under the Medicare and Medicaid
programs, the Company is subject to all laws, rules and regulations concerning
the requirements for participation in these programs, including quality
assurance standards, "anti-kickback" legislation, and other statutes and
regulations designed to prevent fraud and abuse.
Failure to abide by applicable laws governing its business could
subject the Company to civil monetary penalties, exclusion from the Medicare
and Medicaid programs, criminal penalties and cancellation of licenses and
permits; such adverse action could have a material adverse affect on the
Company.
Health care is an area of extensive and dynamic regulatory change.
Changes in laws or regulations, or new interpretations of existing laws or
regulations, could have a dramatic effect on
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permissible activities, the relative costs associated with doing business, and
the amount and availability of reimbursement by government and third-party
payors. There can be no assurance that new regulations which could adversely
affect the Company's business will not be imposed by federal, state or local
governments, or that changing conditions will not affect the Company's ability
to comply with regulations in the markets in which it wishes to commence, or
presently conducts, business.
Employees. As of May 22, 1995, the Company had approximately 448
full-time employees and approximately 153 part-time employees. Of the
Company's full-time employees, 122 are licensed pharmacists. Management
believes the Company's relationship with its employees is satisfactory.
ITEM 2. PROPERTIES.
The following table sets forth, with respect to properties leased
(none are owned) by the Company at February 28, 1995, the location of the
property, the amount of square feet of the property, the year in which the
lease expires and the use which the Company makes of such facilities:
<TABLE>
<CAPTION>
Square Feet Expiration
Address (approximate) of Lease Use
------- -------------- -------- ---
<S> <C> <C> <C>
2930 Washington Boulevard 63,000 June 2002 Executive Offices, Sales,
Baltimore, Maryland Warehouse and
Distribution Center
414 Alfred Avenue 23,487 October 1997 Sales, Warehouse and
Teaneck, New Jersey Distribution Center
457 Doughty Boulevard 11,000 October 1996 Sales, Warehouse and
Inwood, New York (pursuant to the lease, an Distribution Center
additional 4,000 square
feet may also be leased by
the Company)
310 Turner Way 1,500 March 1997 Sales, Warehouse and
Aston Township, Pennsylvania Distribution Center
2415 North Kingshighway Blvd 1,400 Month-to-Month Distribution Center
St. Louis, Missouri Tenancy
419 W. Redwood Street 2,179 December 1995 Ambulatory Pharmacy
Baltimore, MD 21201
301 St. Paul Place 1,490 January 1997 Ambulatory Pharmacy
Baltimore, MD 21201
3702 W. Truman Blvd. 3,000 Renews annually DOC Pharmacy
Jefferson City, MO 65109 with pharmacy
contract
</TABLE>
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<TABLE>
<CAPTION>
Square Feet Expiration
Address (approximate) of Lease Use
------- -------------- -------- ---
<S> <C> <C> <C>
700 Washington Blvd. 198 May 1995 Ambulatory Pharmacy
Baltimore, MD 21230
2401 W. Belvedere Ave. 1,200 December, 1998 Ambulatory Pharmacy
Baltimore, MD 21215
</TABLE>
The Company considers that, in general, its physical properties are
well maintained, in good operating condition and adequate for their intended
purposes.
ITEM 3. LEGAL PROCEEDINGS
During February 1993, the Company was notified that an administering
agency retroactively eliminated a reimbursement program for certain products
sold by the Company and other providers. The Company believes that the change,
made without prior notice, did not comply with the regulations covering such a
change. The Company has approximately $265,000 in net accounts receivable that
have been rejected by the agency. However, the agency has referred these
outstanding claims to another administering agency having different
jurisdiction.
In July of 1994 the Company and seven other similarly situated
suppliers requested a fair hearing before a hearing officer at Blue Cross and
Blue Shield of South Carolina, arguing that the suppliers' claims should be
covered. By a decision dated November 30, 1994, the Hearing Officer upheld the
original denials of the suppliers' claims. On January 26, 1995, the suppliers
requested an in-person hearing before an Administrative Law Judge of the Social
Security Administration, the next step in the Administrative Appeal Process.
That request is still pending.
Except for the above described proceedings, as of May 22, 1995, there
were no material legal proceedings pending against the Company nor, to the
Company's knowledge, were any material proceedings against it contemplated by
any governmental authority. See "Item 1. Business - Material Corporate
Developments - Settlement."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended February 28, 1995,
no matters were submitted to a vote of the Company security holders.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Shares are traded on the NASDAQ National Market System
(the "NASDAQ Stock Market") under the designation "DOSE." The following table
indicates high and low sales quotations for the periods indicated based upon
information supplied by the NASDAQ Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
Fiscal Year Ended February 28, Bid Quotations
------------------------------ --------------
High Low
---- ---
<S> <C> <C> <C>
1994
----
1st Quarter .............................................. 4.250 2.500
2nd Quarter .............................................. 4.625 2.875
3rd Quarter .............................................. 3.500 2.375
4th Quarter .............................................. 4.000 2.500
1995
----
1st Quarter .............................................. 3.375 2.250
2nd Quarter .............................................. 4.000 2.068
3rd Quarter .............................................. 5.250 2.625
4th Quarter .............................................. 4.313 3.375
</TABLE>
As of May 22, 1995, the number of record holders of the Company's
shares was approximately 288, which does not include individual participants in
security position listings. On May 22, 1995, the closing bid quotation for the
Company's common stock was $4.50, as reported by the NASDAQ Stock Market.
The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. The Company's loan
arrangements prohibit the payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations
Net Sales $ 43,507 $51,254 $39,555 $25,793 $24,851
(Loss) income from continuing
operations (10,781) (521) (1,351) 3,077 1,767
Loss from operations of
discontinued business segments (135) (340) (241) (37) (139)
Loss on disposal of
discontinued business segment (503) - - - -
Net (loss) income (11,420) (862) (1,593) 1,580 850
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Continuing operations (1.67) (0.08) (0.22) 0.32 0.16
Discontinued operations (0.10) (0.06) (0.04) (0.01) (0.03)
Extraordinary Item - - - - 0.06
Net income (loss) (1.77) (0.14) (0.26) 0.31 0.19
SUMMARY OF BALANCE SHEETS
Total Current Assets 11,758 15,617 17,654 8,970 7,647
Total Assets 19,212 24,360 26,717 11,453 10,716
Total Current Liabilities 6,349 13,685 16,134 3,047 6,446
Total Long-Term Liabilities 8,086 2,358 1,506 185 1,066
Total Stockholders' Equity 4,777 8,316 9,077 8,220 3,205
</TABLE>
During fiscal 1991, the Company acquired certain assets from World
Medical & Surgical Corp. During fiscal 1992, the Company sold certain assets of
Sterling Health Systems, Inc.. During fiscal 1993, the Company acquired Choice
Drug Systems of Maryland, Inc. (See Note 2 of Notes to Consolidated Financial
Statements). "Fully Diluted Earnings Per Share" is not presented because
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the effects would not be material. The Company did not declare or pay any cash
dividends during the five-year period ended February 28, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Fiscal Year Ended February 28, 1995 Compared to Fiscal Year Ended February 28,
1994
Revenues. During fiscal 1995, the Company's net sales decreased 15.1%
to $43,507,000 from $51,254,000 in the prior year. The decrease in revenues
was primarily attributable to a decrease in Medicare Part B revenues as a
result of the settlement with the US Attorney and a reduction in medical
surgical supply revenues resulting from the discontinuation of certain product
lines and the Company's poor cash flow. During the fiscal years ending
February 28, 1995 and February 28, 1994, sales covered by governmental
reimbursement programs were approximately $11,675,000 and $16,129,000,
respectively. Thus, a decreasing portion of the Company's sales were covered
by various state and federal reimbursement programs. Of these sales, the
Medicare B portion declined to approximately $710,000 from approximately
$4,950,000 in the prior fiscal year.
Gross Profits. Cost of sales decreased by 13.1% to $28,185,000 from
$32,441,000 for fiscal 1994. Gross profit margins decreased to 35.2% from
36.7% in the prior year. The percentage decrease in gross profit margins was
primarily due to the loss of certain purchasing contracts during the period and
diminished cash flow, which prevented the Company from taking advantage of
payment discounts. Gross profit margins were not materially affected by price
changes in products purchased during the period.
The Company sells its pharmaceutical services at an amount based upon
the average wholesale price of the drug, which is set by the drug manufacturer,
plus a dispensing fee. In some jurisdictions in which the Company operates,
the dispensing fee is regulated by certain governmental agencies. Therefore,
the Company absorbs any inflationary costs until the allowable dispensing fee
is increased by such governmental agencies. In addition, as the cost of a drug
increases, the manufacturer generally increases its average wholesale price,
which is normally passed on to the Company. The Company's pricing flexibility
with respect to sales generated by other products is limited by competition.
Selling and Administrative Expenses. Selling and administrative
expenses for the period increased by 7.7% to $18,637,000 from $17,304,000 for
fiscal 1994. This increase was primarily attributable to writeoffs of bad
debts and increased outside professional fees throughout the period. As a
percentage of net sales, selling and administrative expenses increased to 42.8%
from 33.7% in fiscal 1994, primarily as a result of fixed expenses increasing
on the lower sales recorded by the Company.
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Interest Expense. Net interest expense was $905,000 in fiscal 1995
compared to $670,000 in fiscal 1994, due to the increase in debt incurred to
fund losses during fiscal 1995 and higher interest rates which were in effect
during fiscal 1995.
Other Items. In fiscal 1995, the Company had costs in connection with
potential claims and litigation of $4,389,000 as compared to $463,000 in the
prior fiscal year. These increases were primarily attributable to the
settlement of the U.S. Attorney's investigation, the cost of a proxy contest
and the Class Action Suit.
Net Loss. Net loss increased to $11,420,000 from $862,000 in fiscal
1994. Contributing to the increase in the net loss was the decreased gross
profit on the lower sales, the $4,389,000 in costs in connection with potential
claims and litigation (See Note 10 to Consolidated Financial Statements),
$2,069,000 in restructuring charges in connection with a corporate
reorganization and consolidation, and $2,352,000 in bad debt expense for the
year. The fiscal 1995 reported loss per share was $1.86 compared to a loss of
$.14 per share in the prior year.
Restructuring and Discontinued Operations. During February 1995, the
Company began an extensive reorganization of its operations including the
closure of certain unprofitable locations, the sale of non-core business lines,
consolidation of corporate operations, and a restructuring of its executive,
managerial and operating personnel. The financial statements of the Company
have been adjusted to reflect certain reorganization costs and the discontinued
operations. Prior year financial statements have also been adjusted to reflect
the effect of the discontinued operations.
Fiscal Year Ended February 28, 1994 Compared to Fiscal Year Ended February 28,
1993.
Revenues. During fiscal 1994, the Company's net sales increased 29.6%
to $51,254,000 from $39,555,000, which was primarily attributable to the
inclusion of sales of Choice Maryland from its acquisition on June 19, 1992.
During the fiscal years ended February 28, 1994 and 1993, sales covered by
governmental reimbursement programs were approximately $16,129,000 and
$14,343,000, respectively. Thus, an increasing proportion of the Company's
sales were covered by various state and federal reimbursement programs.
Gross Profits. Cost of sales increased by 34.5% to $32,441,000 from
$24,121,000 for fiscal 1993. Gross profit margins decreased to 36.7% from
39.0% in the prior year. The percentage decrease in gross profit margins was
primarily due to the changing mix in the Company's sales, the inclusion of the
Company's Choice Maryland subsidiary and the fact that some sales of this
subsidiary were at lower gross profit margins than that of other subsidiaries
of the Company.
Selling and Administrative Expenses. Selling and administrative
expenses for the period increased 16.7% to $17,304,000 from $14,828,000. This
increase was attributable to the acquisition of Choice Maryland in fiscal 1994
as well as increased expenses in other areas, primarily legal expenses which
increased to $463,000 from $83,000 in fiscal 1993 as a result of the
contingencies
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referred to in Note 10 to the Consolidated Financial Statements. As a
percentage of net sales, selling and administrative expenses decreased to 33.7%
from 37.5% in fiscal 1993, primarily as a result of fixed expenses declining as
a percentage of sales on the higher sales recorded.
Interest Expense. Net interest expense was $670,000 in fiscal 1994
compared to $420,000 in fiscal 1993 due to the increase in debt, primarily
incurred in connection with the Choice Maryland acquisition.
Other Items. In this period the Company had costs in connection with
potential claims and litigation of $463,000 as compared to $83,000 in the prior
fiscal year, while amortization of intangibles decreased to $409,000 from
$568,000 in the prior fiscal year, due to certain non-recurring payments
relating to non-compete agreements partially offset by the inclusion of Choice
Maryland for the entire fiscal year.
Net Loss. Net loss decreased 45.9% to $862,000 from $1,593,000 in
fiscal 1993, principally as a result of the increased gross profit on the
higher sales reported together with the Company's ongoing cost reduction
program and the tax benefit for the period. Contributing to the loss for the
period was $463,000 in costs in connection with potential claims and
litigation. (See Note 10 to Consolidated Financial Statements). The fiscal
1994 reported loss per share was $.14 compared to a loss of $.26 per share in
the prior year.
Liquidity, Capital Resources and Cash Flow.
The Company's net cash used in operations was $1,237,000 in fiscal
1995 compared to the $1,824,000 net cash provided by operations in fiscal
1994. In fiscal 1995, cash used by operations principally resulted from the
Company's significant operating loss which was partially offset by certain
major non-cash expenses such as the settlement of litigation, additions to the
allowance for doubtful accounts, the increase in accrued restructuring charges,
and the significant decrease in inventories.
Net cash provided by investing activities for the period was $14,000
in fiscal 1995 compared to $51,000 provided by investing activities in fiscal
1994, primarily as a result of the proceeds from notes receivable which was
offset by the net purchases of equipment and leasehold improvements.
Net cash provided by financing activities was $1,327,000 in fiscal
1995 compared to $1,755,000 net cash used in financing activities in fiscal
1994, primarily as a result of the investment by Counsel Corporation of
$7,300,000, the proceeds of which were used, in part, to repay short-term
borrowing.
Working capital increased to $5,409,000 from $1,931,000 at fiscal year
end 1994. The increase in working capital was primarily a result of
reclassifying short-term debt to long-term debt and a decrease in current
liabilities, which was offset by a decrease in current assets. Current assets
14
<PAGE> 15
decreased to $11,758,000 from $15,617,000 for the prior year. The decrease in
current assets was principally a result of a decrease in inventories, accounts
receivable and prepaid expenses and other current assets which were partially
offset by an increase in net current assets held for sale. Allowance for
doubtful accounts increased to $1,561,000 from $1,387,000. The decrease in
current liabilities to $6,349,000 in fiscal 1995 from $13,685,000 in fiscal
1994 was principally a result of the reclassification of short- term debt to
long-term debt after year end and a decrease in accounts payable offset by an
increase in accrued expenses and accrued restructuring charges. The Company's
ratio of current assets to current liabilities increased to 1.85:1 from 1.14:1
in the prior year. During fiscal 1995, the Company expended $253,000 on
leasehold improvements and equipment compared to an expenditure of $347,000
during fiscal 1994 on these items. The Company expects its capital expenditure
to be no greater than $400,000 in fiscal 1996. The decrease in stockholders'
equity to $4,778,000 from $8,316,000 is attributable to the net loss for the
period, which was partially offset by the issuance of common stock during the
period.
The Company negotiated a three year loan facility with CreditAnstalt
on May 19, 1995 with a maximum availability pursuant to a formula in the
facility of $10,000,000. As of May 22, 1995, the availability under the loan
facility was approximately $350,000. The Company believes that it will be able
to fund from internal sources all of its base operating and capital
requirements including expenditures for property and equipment in fiscal 1996.
The Company plans to raise additional capital to fund future acquisitions in
1996, increase its working capital availability, and satisfy NASDAQ listing
criteria. However, should the Company's losses continue and additional
funding be unavailable, the Company would be required to purchase inventory
from higher cost alternate sources which would have an adverse effect on its
gross profit margins.
The Company completed a private offering on May 22, 1995, pursuant to
which it raised gross proceeds of $5,840,000. Such proceeds were used in
connection with the initial borrowings under the Line of Credit to pay off
various indebtedness and complete the Premier Acquisition.
The Company was indebted to a major supplier in the amount of
$1,776,000 at February 28, 1995. The unpaid balance of this indebtedness was
repaid on May 22, 1995. At this time, the Company entered into a new
purchasing agreement with this vendor with lower product costs than were
previously available.
The Company began an extensive reorganization and restructuring of its
operations in February 1995, which includes disposing of certain unprofitable
or less profitable assets and business lines. In February 1995, the Company
adopted a formal plan of restructuring in order to realign and consolidate
businesses, concentrate resources, and better position itself to achieve its
strategic growth objectives.
Should the Company's losses continue and the contingencies discussed
above require capital greater than the Company's cash flow generation, the
Company would be required to seek additional funding. There can be no
assurance that the Company would be able to secure such funding.
15
<PAGE> 16
The Company expects its legal expenses to decline due to the
settlement of the various contingencies previously discussed.
In May 1994, the Company extended the expiration date of the IPSO
Warrants from September 30, 1994 until September 30, 1995, unless the Company
exercises its right of redemption earlier. The other terms of the IPSO
Warrants remain unchanged. In addition, the expiration date of the Class B
Warrants was extended until September 30, 1996 unless the Company earlier
exercises its right of redemption. One Class B Warrant will be issued for each
IPSO Warrant which is exercised prior to September 30, 1995. Each Class B
Warrant will enable the holder to purchase one share of the Company's Common
Stock at an exercise price of $10.00 per share at any time until September 30,
1996, unless earlier redeemed by the Company at a redemption price of $.25 per
Class B Warrant upon not less than 60 days prior written notice. The Company
may not issue any common shares pursuant to the exercise of any of the IPSO
Warrants or Class B Warrants unless there is a Registration Statement in
effect.
In December 1993, the Company entered into an agreement to have an
unrelated third party provide operations, billing and support services for
substantially all of its Medicare Part B products and services. The Company
continues to market these products and services. This will result in the
Company reporting lower net sales from this activity in subsequent periods and
is not expected to have a material effect on results of operations.
SFAS 109
In fiscal 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No.
109"). The adoption of SFAS No. 109 did not have a material impact on results
of operations.
Inflation
The Company believes that inflation has not had a significant effect
on its profit margins.
16
<PAGE> 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of February 28, 1995 and as
of immediately subsequent to the Premier Acquisition on May 22, 1995.
<TABLE>
<CAPTION>
Position with the Company as of Position with the Company as of
Name Age February 28, 1995 May 22, 1995
---- --- ----------------- -------------
<S> <C> <C> <C>
Allan C. Silber................... 46 Chairman Chairman
Morris A. Perlis ................. 46 Chief Executive Officer and Vice-Chairman
Director
R. Dirk Allison .................. 39 -- President and Chief Executive
Officer
Don H. Thompson .................. 35 -- Chief Financial Officer, Vice
President of Finance and
Secretary
Charles W. Lathrop, Jr. .......... 37 Executive Vice President and --
Chief Operating Officer
Hazel W. Johnson-Brown, Ph.D ..... 67 Director Director
Joseph L. Falkson, Ph.D........... 52 Director Director
Joseph F. Furlong III ............ 46 Director Director
Eugene A. Gasbarro................ 54 Director Director
John Haronian .................... 62 Director Director
Edward Sonshine, Q.C. ............ 48 Director Director
Ronald M. Stone .................. 52 Director Director
Robert D. Kroll................... 58 Director --
</TABLE>
At each annual meeting of shareholders, successors to the then current
directors will be elected to serve for one-year terms or until their successors
are duly elected and qualified.
Mr. Silber has served as a director of the Company since December
1994. Mr. Silber has been Chairman, Chief Executive Officer and a director of
Counsel since August 1979. He served as President of Counsel from August 1979
until January 1994. Mr. Silber has served as a director of
17
<PAGE> 18
Advocat Inc., a nursing home operator ("Advocat"), since January 1994 and as a
director of American HomePatient, Inc., a home healthcare provider ("American
HomePatient"), since September 1991. Mr. Silber served as chairman of American
HomePatient from September 1991 to May 1994.
Mr. Perlis has been Vice Chairman of the Company since May 1995 and a
director since December 1994. Mr. Perlis served as interim Chief Executive
Officer of the Company from December 1994 to May 1995. He has served as a
director of and consultant to Counsel since September 1992, and President of
Counsel since January 1994. Mr. Perlis has served as a director of American
HomePatient since March 1993, and as its Chairman since May 1994. He has served
as a director of NOMA, Inc., a manufacturer of consumer wire and cable, since
September 1993. Mr. Perlis was President of Morris A. Perlis & Assoc., an
executive management consulting firm, from September 1992 until January 1994
and President of American Express Canada, Inc. from September 1988 until
September 1992.
Mr. Allison became President and Chief Executive Officer of the
Company and all of the subsidiaries of the Company upon consummation of the
Premier Acquisition. Mr. Allison served as President and Chief Executive
Officer of Premier, an independent institutional pharmacy, and all of its
subsidiaries, from July 1993 until May 1995. From February 1988 until June
1993, Mr. Allison served as President, Chief Executive Officer, and a Director
of Allied Pharmacy Management, Inc., an institutional pharmacy ("Allied").
Mr. Thompson became Chief Financial officer, Vice President of Finance
and Secretary of the Company upon consummation of the Premier Acquisition. Mr.
Thompson was Vice President of Finance, Chief Financial Officer, Secretary and
Treasurer of Premier from October 1993 until May 1995. From May 1990 until
September 1993, Mr. Thompson served as Vice President, Chief Financial Officer,
Secretary and Treasurer of Allied.
Mr. Lathrop has served as executive Vice President and Chief Operating
Officer of the Company since October 1993. Prior to such time, Mr. Lathrop was
Vice President and Chief Operating Officer of a privately held drug store chain
in Connecticut from September 1992 until he joined the Company. From 1986 to
September 1992, Mr. Lathrop was associated with Hannaford Bros., Co., a New
York Stock Exchange listed company, rising to the position of Director of
Healthcare/Pharmacy.
Dr. Johnson-Brown has served as a director of the Company since
October 1994. Dr. Johnson-Brown is a Professor at the College of Nursing and
Health Science at George Mason University since August 1986. Dr. Johnson-Brown
is a Brigadier General USA Ret., U.S. Army Nurse Corps, having served from
February 1955 until August 1983.
18
<PAGE> 19
Dr. Falkson has served as a director of the Company since March 1994.
Dr. Falkson has been President of Continental Healthcare Corporation, an
international healthcare industry business development and consulting firm,
since 1984.
Mr. Furlong has served as a director of the Company since December
1994. Mr. Furlong has served as a director of American HomePatient since June
1994. Mr. Furlong has been a partner with Colman Furlong & Co., a merchant
banking firm, since February 1991. From November 1984 until January 1991, Mr.
Furlong was a partner with Robertson Stephens & Company, an investment banking
firm.
Mr. Gasbarro has served as a director of the Company since October
1994. Mr. Gasbarro has been a consultant of Delta Dynamics since May 1991 and a
program director of Laborers-AGC Education and Training Fund since December
1994. Mr. Gasbarro served as Senior Vice President of Eastland Bank from May
1990 until May 1991.
Mr. Haronian has served as a director of the Company since January
1994. Mr. Haronian has served as Chairman of Vision World, Inc. and President
of Tri-State Leasing, Inc. since April 1991. Mr. Haronian has served as
President of Peoples Liquor, Inc. since November 1991. From May 1965 until
November 1990 Mr. Haronian served as President of Douglas Drug, Inc.
Mr. Sonshine has served as a director of the Company since December
1994. Mr. Sonshine has served as a director of American HomePatient since
September 1991. Mr. Sonshine served as Vice Chairman of Counsel since January
1994; a director of Counsel since August 1979; Executive Vice President of
Counsel from February 1987 until January 1994; Chairman, President and Chief
Executive Officer of Counsel Management Services, Inc. since October 1993. Mr.
Sonshine has been a director of Advocat since May 1995. Mr. Sonshine served as
President and Chief Executive Officer of Icarus Realty Corp. from February 1987
until September 1993.
Mr. Stone has served as a director of the Company since October 1994.
Mr. Stone has been managing director of Barclays deZoete Wedd Securities, Inc.
(BZW), a wholly owned investment banking arm of Barclays Bank P.L.C., since
February 1994. From 1991 until 1993, Mr. Stone served as Co-Chairman of
Guardian Capital Group, Ltd. Mr. Stone served as Chairman of Guardian
Properties, Ltd. from 1983 until 1993.
Mr. Kroll resigned as a director of the Company in April 1995. Mr.
Kroll has been the President and Chief Executive Officer of B. Manischewitz
Co., a leading manufacturer of dry kosher food products in the United States,
since 1993. From 1990 to 1993, Mr. Kroll was President and Chief Executive
Office of New Jersey Office Supply, a division of Hanson Office Products.
Prior to that position, he served as a consultant from 1987 to 1990.
The 1994 Stock Purchase Agreement provides that so long as Counsel
continues to own the Common Stock acquired under the Agreement, the Registrant
will use its best efforts to cause the
19
<PAGE> 20
election to its Board of Directors of four (4) individuals designated by
Counsel who are reasonably acceptable to the Registrant. Initial designees are
Allan Silber, Morris Perlis, Edward Sonshine and Joseph Furlong. The Stock
Purchase Agreement also specifies that the Registrant will use its best efforts
to maintain a Board of Directors consisting of eleven (11) members and use its
best efforts to cause the Executive Committee to consist of five (5) members,
including Allan Silber, Morris Perlis, Robert Kroll, John Haronian and one
other individual who, with Counsel's consent, is no longer a member of the
Executive Committee. Registrant also agreed pursuant to the Stock Purchase
Agreement to use its best efforts to elect Morris Perlis as Chief Executive
Officer of the Registrant on an interim basis, and to elect Allan Silber
Co-chairman of the Board of Directors on an interim basis. Currently Mr.
Silber serves as Chairman of the Board and Mr. Perlis as Vice Chairman. Mr.
Perlis was succeeded by Dirk Allison as Registrant's President and Chief
Executive Officer following the acquisition of the Premier operations.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") (and, if such security is registered
on a national securities exchange, also with the exchange). Such executive
officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely upon representations submitted by the Company's directors
and executive officers and the Company's review of filings on Forms 3, 4 and 5,
including amendments thereto, the Company has concluded that all such forms
were timely filed, except that each of Directors Stone, Gasbarro and
Johnson-Brown became subject to the reporting requirements of Section 16(a) of
the Exchange Act in October 1994 and did not timely file an initial statement of
beneficial ownership of securities on Form 3.
ITEM 11. EXECUTIVE COMPENSATION
Directors who are not officers, employees or consultants of the
Company (currently all Directors) receive a fee of $500 for each meeting of the
Board of Directors or any Committee of the Board of Directors attended by
telephone and a fee of $1,000 for each such meeting attended in person. All
directors are reimbursed for actual expenses incurred in connection with
attending Board of Directors and Committee meetings.
20
<PAGE> 21
SUMMARY COMPENSATION
The following table sets forth the compensation for the services in
all capacities to the Company for the fiscal years ended February 28, 1993,
1994 and 1995 of those persons who were, at any time during fiscal 1995, the
Company's chief executive officer or, at February 28, 1995, the Company's
other executive officers, and who received annual salary and bonus in excess
of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- ----------------------- ------------
Securities
Restricted Underlying Long-term
Name and Principal Other Annual Stock Options/ Incentive All Other
Position (1) Year(s) Salary($) Bonus($) Compensation(3)($) Award(s)($) SARs (#) Payouts($) Compensation($)
----------------------------- ------- --------- -------- ------------------ ----------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Dirk Allison . . . . . . . 1995 * * * * * * *
President and CEO(4) 1994 * * * * * * *
1993 * * * * * * *
Don H. Thompson . . . . . . 1995 * * * * * * *
Senior Vice President 1994 * * * * * * *
and Chief Operating 1993 * * * * * * *
Officer(4)
Morris A. Perlis . . . . . . 1995 -0- -0- -0- -0- -0- -0- -0-
Former Interim CEO(5) 1994 * * * * * * *
1993 * * * * * * *
Frank Mandelbaum . . . . . . 1995 172,006 --- --- --- 100,000 --- ---
Former President and 1994 189,200 --- --- --- --- --- ---
CEO(6) 1993 172,000 --- --- --- 100,000 --- ---
</TABLE>
______________
* Indicates periods prior to employment with the Company.
(1) Principal position given in table is as of June 1, 1995.
(2) Fiscal year runs from March 1 until February 28.
(3) Perquisites for each executive officer are in amounts which do not
require disclosure.
(4) Messrs. Allison and Thompson joined the Company on May 22, 1995, upon
completion of the Premier Acquisition. The base salaries for Messrs.
Allison and Thompson for the current fiscal year are $210,000 and
$117,500, respectively.
(5) Mr. Perlis served as interim Chief Executive Officer following the
resignation of Mr. Mandelbaum and until completion of the Premier
Acquisition in May 1995. Mr. Perlis currently serves as Vice Chairman
of the Company.
(6) Resigned in December 1994.
21
<PAGE> 22
Option Grants
The table below provides information on grants of stock options
pursuant to the Company's Option Plans (the "Option Plans") during the fiscal
year ended February 28, 1995, to the officers named in the Summary Compensation
Table. Additional grants have been made to certain officers and other employees
since February 28, 1995. See "Stock Ownership of Directors, Executive Officers
and Principal Holders." The Company grants no stock appreciation rights.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO EXERCISE OR ASSUMED ANNUAL RATES OF STOCK
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION FOR OPTION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE TERM (1)
---- --------------- --------------- ------------- ------------- -----------------------------
5.0% ($) 10.0% ($)
---------- ---------
<S> <C> <C> <C> <C> <C> <C>
R. Dirk Allison . . . -0- -0- -0- -- -0- -0-
Don H. Thompson . . . -0- -0- -0- -- -0- -0-
Morris A. Perlis . . -0- -0- -0- -- -0- -0-
Frank Mandelbaum(2) . 25,000 10.4 2.85 3/30/04 44,809 113,554
25,000 10.4 3.50 10/28/04 55,028 139,452
50,000 20.9 2.71 01/21/00 37,436 82,724
</TABLE>
____________________
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the Securities and Exchange Commission
and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's Common Stock price.
(2) Mr. Mandelbaum resigned as Chief Executive Officer in December 1994
and was retained by the Company as a consultant.
22
<PAGE> 23
OPTION EXERCISES AND VALUES
The table below provides information as to exercises of options by the
executive officers named in the Summary Compensation Table during the fiscal
year ended February 28, 1995 under the Company's option plans and the year-end
value of unexercised options and/or stock appreciation rights held by such
officers. The Company grants no stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT 1995 FISCAL AT 1995 FISCAL
YEAR-END (#) YEAR-END ($) (1)
SHARES ------------ ----------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
R. Dirk Allison . . . . . . -0- -0- -0-/-0- -0-/-0-
Don H. Thompson . . . . . . -0- -0- -0-/-0- -0-/-0-
Morris A. Perlis . . . . . -0- -0- -0-/-0- -0-/-0-
Frank Mandelbaum . . . . . -0- -0- 300,000/-0- $171,000/-0-
</TABLE>
______________________________________
(1) Options are classified as "in-the-money" if the fair market value of
the underlying Common Stock exceeds the exercise price of the option.
The per share value of such in-the-money options is the difference
between the option exercise price and $3,438, the per share fair
market value of the underlying Common Stock as of February 28, 1995.
Such amounts may not necessarily be realized. Actual values which may
be realized, if any, upon the exercise of the options will be based on
the per share market price of the Common Stock at the time of exercise
and are thus dependent upon future performance of the Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following former or current directors served on the Compensation
Committee during a portion of the prior fiscal year: Falkson, Gasbarro,
Johnson-Brown, Stone and Gross. Mr. Haronian purchased Units in the Private
Placement for an aggregate purchase price of $182,500. See "Item 1. Business
- -- Material Corporate Developments -- Private Placment." No member of the
Compensation Committee is an employee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 1, 1995, the number and
percentage of shares of the Company's Common Stock owned by (i) all persons
known to the Company to be holders of 5% or more of such securities, (ii) each
director and nominee, (iii) each of the executive officers named in the Summary
Compensation Table appearing elsewhere herein and (iv) all directors and
executive officers of the Company, as of June 1, 1995, as a group. Unless
otherwise indicated, all holdings are of record and beneficial.
23
<PAGE> 24
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF TOTAL
NAME OWNED(1) OUTSTANDING(2)
---- ------------ --------------
<S> <C> <C>
Counsel Corporation(3) . . . . . . . . . . 4,933,088 50.7%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada MX5 1E3
R. Dirk Allison (4) . . . . . . . . . . . . 57,646 0.6
Don H. Thompson(5) . . . . . . . . . . . . 15,618 0.2
Allan C. Silber(6) . . . . . . . . . . . . 95,000 1.0
Morris A. Perlis(6) . . . . . . . . . . . . 95,000 1.0
Hazel W. Johnson-Brown(7) . . . . . . . . . 15,000 0.2
Joseph L. Falkson, Ph.D.(8) . . . . . . . . 30,000 0.3
Joseph F. Furlong, III(4) 57,000 0.6
Eugene A. Gasbarro(7) . . . . . . . . . . . 15,000 0.2
John Haronian(6),(8) . . . . . . . . . . . 125,000 1.3
Edward Sonshine, Q.C.(4) . . . . . . . . . 57,000 0.6
Ronald M. Stone(7) . . . . . . . . . . . . 15,000 0.2
All directors and executive officers 577,264 5.9
as a group(9) (11 persons)
</TABLE>
___________________________
* Indicates less than 1%
(1) Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property
laws, where applicable.
(2) The percentages shown are based on 9,735,810 shares of Common Stock
outstanding on June 1, 1995, plus, as to each individual and group
listed, the number of shares of Common Stock deemed to be owned by
such holder pursuant to Rule 13d-3 under the Securities Exchange Act
of 1934, which includes shares subject to stock options and warrants
held by such holder which are exercisable within sixty (60) days of
June 1, 1995.
(3) Includes 1,298,181 and 1,038,545 shares purchasable upon exercise of
warrants at $4.50 and $5.50 respectively. Counsel Corporation
("Counsel") is a publicly traded Ontario, Canada corporation primarily
engaged in health care and real estate asset management. Directors
Silber, Sonshine and Perlis are directors of Counsel and director
Silber beneficially owns or controls approximately 25% of the common
stock of Counsel, a majority of which is pledged to a lender.
Directors Sonshine and Perlis own in the aggregate less than 5% of
Counsel's common stock. All of the directors listed in this footnote
(3) disclaim beneficial ownership of shares of Common Stock in their
capacity as directors of Counsel, and Mr. Silber disclaims beneficial
ownership of shares of Common Stock in his capacity as a significant
shareholder of Counsel.
(4) Includes 15,000 and 12,000 shares purchasable upon exercise of
warrants at $4.50 and $5.50, respectively.
(5) Includes 4,110 and 3,288 shares purchasable upon exercise of warrants
at $4.50 and $5.50, respectively.
(6) Includes 25,000 and 20,000 shares purchasable upon exercise of
warrants at $4.50 and $5.50, respectively.
(7) Includes 15,000 shares purchasable upon exercise of options at $3.50
per share, issued under the 1992 Option Plan.
(8) Includes 15,000 and 15,000 shares purchasable upon exercise of options
at $2.85 and $3.50 per shares, respectively issued under the 1992
Option Plan
(9) Includes 105,000 shares issuable under the 1992 Option Plan and shares
issuable upon exercise of warrants.
24
<PAGE> 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a discussion of the relationships between the Company and its
affiliates, directors, officers and principal shareholders, please see "Stock
Ownership of Directors, Executive Officers and Principal Holders," "Executive
Officers" including "Compensation Committee Interlocks and Insider
Participation") and "Election of Directors."
It is the policy of the Company to notify the Board of Directors
and seek the approval of a majority of the members of the Board or its
Executive Committee who are not related to Counsel in connection with
transactions between the Company and its affiliates, including Counsel.
PRIVATE OFFERINGS BY THE COMPANY
Pursuant to a Stock Purchase Agreement, Counsel acquired an equity
interest in the Company on December 22, 1994. Item 1. Business - Material
Corporate Developments - Counsel Investment" Counsel also participated in a
private offering of Units by the Company, which offering closed on May 22,
1995. "Item 1. Business - Material Corporate Developments - Private Placement,"
certain directors of the Company are affiliated with Counsel, and Counsel and
certain directors and officers of the Company participated in the Company's
offering of Units. See "Item 1. Business - Material Corporate Developments -
Counsel Investment," "Item 1. Business - Material Corporate Developments -
Private Placement," and "Item 10. Directors and Executive Officers of the
Registrants."
At the time of the Company's private offering of the Units, the
Company loaned each of Mr. Silber and Mr. Perlis $182,500 to fund their
respective acquisitions of Units, subject to shareholder approval. See
"Item 1. Business - Material Corporate Developments - Private Placement."
The loans were evidenced by interest-bearing five year notes in favor of the
Company, each secured by the shares of common stock acquired by Mr. Silber and
Mr. Perlis in the offering. The loans have been rescinded and all funds paid by
the Company with respect to the loans have been refunded.
PREMIER ACQUISITION
As a result of consummation of the Premier Acquisition, Dirk
Allison, President, and Chief Executive Officer, and Don H. Thompson, Chief
Financial Officer and Vice President of Finance, received $270,958.72 and
$81,283.25, respectively. See "Item 1. Business - Material Corporate
Developments -- Recent Acquisition."
CONSULTING SERVICES
Counsel's in-house legal counsel, Mr. Curt Johnson, has provided
legal services to the Company since April, 1995 pursuant to an agreement
between the Company and Counsel. As of June 1, 1995, the Company had
reimbursed Counsel $0.0 for Mr. Johnson's services.
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Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHOICE DRUG SYSTEMS, INC.
By: /s/ Don H. Thompson
----------------------------------------
Don H. Thompson, Chief Financial Officer
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