<PAGE> 1
FORM 10-K/A-2
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 II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are attached hereto,
following page 12.
1
<PAGE> 3
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
2
<PAGE> 4
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 served as executive Vice President and Chief Operating
Officer of the Company from October 1993 to March 1995. 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.
3
<PAGE> 5
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
4
<PAGE> 6
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 Director Haronian became subject to the
reporting requirements of Section 16(a) of the Exchange Act in January 1994 and
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.
5
<PAGE> 7
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
$117,500, respectively.
(5) Mr. Perlis served as interim Chief Executive Officer following the
resignation of Mr. Mandelbaum and until completion of the Premier
Acquisition in May 1995. Mr. Perlis currently serves as Vice Chairman
of the Company.
(6) Resigned in December 1994.
6
<PAGE> 8
Option Grants
The table below provides information on grants of stock options
pursuant to the Company's Option Plans (the "Option Plans") during the fiscal
year ended February 28, 1995, to the officers named in the Summary Compensation
Table. Additional grants have been made to certain officers and other employees
since February 28, 1995. See "Stock Ownership of Directors, Executive Officers
and Principal Holders." The Company grants no stock appreciation rights.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO EXERCISE OR ASSUMED ANNUAL RATES OF STOCK
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION FOR OPTION
NAME GRANTED (#) FISCAL YEAR ($/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.
7
<PAGE> 9
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.
8
<PAGE> 10
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF TOTAL
NAME OWNED(1) OUTSTANDING(2)
---- ------------ --------------
<S> <C> <C>
Counsel Corporation(3) . . . . . . . . . . 4,933,088 40.9%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada MX5 1E3
R. Dirk Allison (4) . . . . . . . . . . . . 57,646 *
Don H. Thompson(5) . . . . . . . . . . . . 15,618 *
Allan C. Silber(6) . . . . . . . . . . . . 95,000 1.0
Morris A. Perlis(6) . . . . . . . . . . . . 95,000 1.0
Hazel W. Johnson-Brown(7) . . . . . . . . . 15,000 *
Joseph L. Falkson, Ph.D.(8) . . . . . . . . 30,000 *
Joseph F. Furlong, III(4) 57,000 *
Eugene A. Gasbarro(7) . . . . . . . . . . . 15,000 *
John Haronian(6),(8) . . . . . . . . . . . 125,000 1.3
Edward Sonshine, Q.C.(4) . . . . . . . . . 57,000 *
Ronald M. Stone(7) . . . . . . . . . . . . 15,000 *
All directors and executive officers 577,264 5.7
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 328,398 shares issuable under the 1992 Option Plan and shares
issuable upon exercise of warrants.
9
<PAGE> 11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) (1) & (2) and (d) Financial Statements and Financial
Statement Schedules. See Index to Financial Statements included elsewhere in
this Annual Report.
(a) (3) and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K. None.
10
<PAGE> 12
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
11
<PAGE> 13
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
(a) 1. Financial Statements:
The following financial statements of the Company are included herein.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets - February 28, 1995 and 1994 . . . . . . . . . . . . . . . . F-2 - F-3
Consolidated Statements of Operations - years ended
February 28, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders'
Equity - years ended February 28, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows - years ended
February 28, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 - F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-8 - F-27
2. Financial statement schedules:
The following financial statement schedule of the Company is included in Item 14(d)
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . F-28
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or the information is disclosed in the consolidated
financial statements.
12
<PAGE> 14
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHOICE DRUG SYSTEMS, INC.
We have audited the accompanying consolidated balance sheets of Choice Drug
Systems, Inc. (a New York corporation) and subsidiaries as of February 28, 1995
and 1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended February 28, 1995. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Choice Drug Systems, Inc. and
subsidiaries as of February 28, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Index to
Financial Statements and Schedules is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
May 22, 1995
F-1
<PAGE> 15
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
February 28,
-------------------------------------
1995 1994
------------- ------------
<S> <C> <C>
Current assets:
Cash $ 546,898 $ 443,258
Accounts receivable, net of allowance for doubtful
accounts of $1,561,233 and $1,387,227 as of
February 28, 1995 and 1994, respectively 6,169,272 8,333,452
Inventories 3,888,163 5,185,992
Income tax refund receivable (Note 8) 500,000 391,301
Prepaid expenses and other current assets 350,568 1,262,504
Net assets of discontinued operations (Note 7) 302,820 -
------------- ------------
11,757,721 15,616,507
------------- ------------
Equipment and leasehold improvements, net (Notes 1 and 3) 1,329,093 1,768,586
------------- ------------
Other assets:
Notes receivable, less current portion (Note 5) 94,435 246,765
Security deposits and other assets (Note 9) 509,498 830,480
Goodwill, net of accumulated amortization of $1,117,181
and $785,246 as of February 28, 1995 and 1994
respectively (Note 2) 5,521,512 5,853,447
Contract rights, net of accumulated amortization of
$154,662 and $110,841 as of February 28, 1995 and
1994 respectively - 43,821
------------- ------------
6,125,445 6,974,513
------------- ------------
Total assets $ 19,212,259 $ 24,359,606
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE> 16
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28,
--------------------------------------
1995 1994
-------------- ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt (Notes 4 and 9) $ 765,387 $ 9,064,836
Accounts payable 2,664,143 3,055,345
Accrued expenses and other current liabilities 1,702,711 1,565,270
Accrued restructuring charges (Note 6) 1,216,410 -
-------------- ------------
Total current liabilities 6,348,651 13,685,451
-------------- ------------
Long-term debt, net of current portion (Notes 4 and 9) 7,650,455 2,357,696
Long-term portion of accrued restructuring charges (Note 6) 435,623 -
-------------- ------------
8,086,078 2,357,696
-------------- ------------
Commitments and contingencies (Notes 2, 9, 10 and 11)
Stockholders' equity (Note 11):
Preferred stock, $.01 par value; 500,000 shares authorized;
none issued
Common stock, $.01 par value; 15,000,000 shares
authorized; 8,120,810 and 6,086,810 shares issued
and outstanding as of February 28, 1995 and 1994,
respectively 81,208 60,868
Capital in excess of par 17,200,050 9,339,340
Accumulated deficit (12,503,728) (1,083,749)
-------------- ------------
4,777,530 8,316,459
-------------- ------------
Total liabilities and shareholders' equity $ 19,212,259 $ 24,359,606
============== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE> 17
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended February 28,
-------------------------------------------------
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 43,506,863 $ 51,253,713 $ 39,554,569
Cost of sales (Note 12) 28,185,254 32,440,841 24,120,931
-------------- ------------- -------------
Gross profit 15,321,609 18,812,872 15,433,638
-------------- ------------- -------------
Operating expenses:
Selling and administrative expenses 18,637,213 17,304,015 14,827,678
Depreciation 604,723 565,541 523,752
Amortization of intangibles 384,251 408,679 568,445
Costs in connection with litigation (Note 10) 4,389,163 463,207 82,829
Restructuring costs (Note 6) 2,069,432 - -
Terminated acquisition costs (Note 16) - - 395,000
-------------- ------------- -------------
Total operating expenses 26,084,782 18,741,442 16,397,704
-------------- ------------- -------------
Operating (loss) income from continuing operations (10,763,173) 71,430 (964,066)
-------------- ------------- -------------
Non-operating expense (income):
Interest expenses, net 905,404 670,425 419,637
Other income (Note 15) (420,881) (26,366) (32,314)
-------------- ------------- -------------
Total non-operating expense 484,523 644,059 387,323
-------------- ------------- -------------
Loss from continuing operations before
income taxes and discontinued operations (11,247,696) (572,629) (1,351,389)
Income tax (benefit) (Note 8) (466,214) (51,495) -
-------------- ------------- -------------
Loss from continuing operations (10,781,482) (521,134) (1,351,389)
Discontinued Operations (Note 7):
Loss from operations of discontinued business segments,
net of tax benefits of $-0-, $175,000 and $-0-
for the years ended February 28, 1995, 1994 and 1993
respectively (135,430) (340,416) (241,408)
Loss on disposal of business segments including
provision of $36,000 for operating losses during
phase-out period (503,067) - -
-------------- ------------- -------------
Net Loss $ (11,419,979) $ (861,550) $ (1,592,797)
============== ============= =============
Net loss per common share:
Continuing operations $ (1.67) $ (0.08) $ (0.22)
Discontinued operations $ (0.10) $ (0.06) $ (0.04)
-------------- ------------- -------------
Net loss $ (1.77) $ (0.14) $ (0.26)
============== ============= =============
Weighted average number of shares outstanding 6,458,891 6,071,687 6,187,376
============== ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE> 18
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Common stock Capital Retained
------------------------ in excess earnings
Shares Amount of par (deficit)
--------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, February 29, 1992 5,580,211 $ 55,802 $ 6,793,883 $ 1,370,598
Issuance of common stock for
acquisition of Rombro Health
Services Limited and related
expenses of registration (Note 2) 435,099 4,351 2,415,109
Issuance of common stock 11,500 115 29,698
Net loss for year (1,592,797)
--------- --------- ------------ ------------
Balance, February 28, 1993 6,026,810 60,268 9,238,690 (222,199)
Issuance of common stock in
connection with exercise of
stock warrants 60,000 600 100,650
Net loss for year (861,550)
--------- --------- ------------ ------------
Balance, February 28, 1994 6,086,810 60,868 9,339,340 (1,083,749)
Issuance of common stock:
Stock issued to Counsel Corporation
in connection with stock purchase
agreement, net of related issuance
expense (Note 5) 2,000,000 20,000 7,171,300
Stock issued in connection with
exercise of stock options 34,000 340 89,410
Stock to be issued in settlement
of litigation (Note 10) - - 600,000
Net loss for year (11,419,979)
--------- --------- ------------ ------------
Balance, February 28, 1995 8,120,810 $ 81,208 $ 17,200,050 $(12,503,728)
========= ========= ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE> 19
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended February 28,
-------------------------------------------------
1995 1994 1993
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (11,419,979) $ (861,550) $ (1,592,797)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 604,723 628,746 561,121
Amortization of intangibles 384,251 408,679 568,445
Provision for bad debts 2,351,810 100,523 270,006
Loss on disposal of business segments (Note 7) 503,067 - -
Accrued restructuring charges (Note 6) 1,652,033 - -
Write-down of contract rights - 9,845 62,053
Settlement of litigation (Note 10) 3,500,000 - -
(Gain) loss on sale of equipment (5,222) 3,860 (39,806)
Other, net - - (36,700)
Change in assets and liabilities, net of effects of
acquisitions and divestitures:
(Increase) decrease in accounts receivable (189,904) 84,214 (283,814)
Decrease (increase) in inventories 1,297,829 754,674 (469,892)
Decrease (increase) in prepaid expenses and
other current assets 779,825 (31,159) 187,340
(Increase) decrease in other assets (333,011) 7,290 (135,732)
(Decrease) increase in accounts payable and
accrued expenses (253,761) 236,078 (15,844)
(Increase) decrease in income tax refund receivable (108,699) 482,969 -
-------------- ------------- -------------
Net cash (used in) provided by operating activities (1,237,038) 1,824,169 (925,620)
-------------- ------------- -------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (253,066) (346,848) (415,141)
Cost of acquisitions, net of cash acquired - - (294,726)
Net proceeds from sale of certain assets of subsidiaries - - 255,117
Proceeds from note from sale of certain assets of
subsidiaries - - 234,775
Proceeds from notes receivable 261,555 372,088 -
Proceeds from sale of equipment 5,345 26,251 172,709
-------------- ------------- -------------
Net cash provided by (used in) investing activities 13,834 51,491 (47,266)
-------------- ------------- -------------
Cash flows from financing activities:
Net (repayments) borrowings from short-term notes (4,585,930) (808,160) 3,072,420
Repayments of long-term debt (1,316,793) (907,538) (1,713,165)
Principal payments of capital lease obligations (160,183) (140,379) (98,902)
Proceeds from issuance of common stock 7,389,750 101,250 29,813
Other - - (27,972)
-------------- ------------- -------------
Net cash provided by (used in) financing activities 1,326,844 (1,754,827) 1,262,194
-------------- ------------- -------------
Net increase in cash 103,640 120,833 289,308
Cash, beginning of year 443,258 322,425 33,117
-------------- ------------- -------------
Cash, end of year $ 546,898 $ 443,258 $ 322,425
============== ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE> 20
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flows Information:
<TABLE>
<CAPTION>
Cash paid during year for: 1995 1994 1993
-------------------------- ---- ---- ----
<S> <C> <C> <C>
Interest $ 887,691 $ 741,705 $ 463,191
Taxes 224,477 24,349 440,791
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
In May, 1995, the Company obtained long term financing (see Note 17) and used
the proceeds to fully repay amounts due to UJB and a major supplier which had
previously been recorded as short term. These amounts have been reclassified
as long term as of February 28, 1995, in accordance with generally accepted
accounting principles.
During November 1993, the Company converted certain accounts receivable into a
promissory note in the amount of $40,000, payable in eight equal installments
plus interest at 8% per annum.
On June 19, 1992, the Company acquired all common shares of Rombro Health
Services Limited at a cost of $2,847,432 (see Note 2). In conjunction with the
acquisition, common stock was issued as follows:
<TABLE>
<S> <C>
Total cost of acquisition . . . . . . . . . . . . . . . $ 2,847,432
Less: cost of completing acquisition paid in cash . . (400,000)
-------------
Value of common stock issued . . . . . . . . . . . . . $ 2,447,432
=============
</TABLE>
Effective March 1, 1992, the Company sold all of the common stock of a
subsidiary for $500,149, less closing costs (see Note 2). In conjunction with
the sale, notes were received as follows:
<TABLE>
<S> <C>
Selling price of common stock . . . . . . . . . . . . . $ 500,149
Less: cash received . . . . . . . . . . . . . . . . . (300,000)
-------------
Value of notes received from sale . . . . . . . . . . . $ 200,149
=============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<PAGE> 21
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
Choice Drug Systems, Inc. is principally engaged in the business of
providing pharmaceuticals and related services, including durable
medical equipment, Medicare B reimbursable products, such as surgical
supplies and disposables, and a computerized care plan to various
health care facilities. (See Note 6 on Restructuring Charges and Note
7 on Discontinued Operations.)
Principles of Consolidation
The consolidated financial statements include the accounts of Choice
Drug Systems, Inc. and its wholly-owned subsidiaries (collectively the
"Company"). All material intercompany accounts and transactions have
been eliminated.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories consist principally of purchased
merchandise.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is provided by the straight-line method
over the following estimated useful lives or with respect to leasehold
improvements, over the term of the lease if shorter.
<TABLE>
<S> <C>
Furniture, fixtures and equipment . . . 3-10 years
Med-carts . . . . . . . . . . . . . . . 5 years
Automobiles . . . . . . . . . . . . . . 3-4 years
Leasehold improvements . . . . . . . . 5-10 years
Equipment under capital leases . . . . 3-5 years
</TABLE>
Goodwill and Contract Rights
Cost in excess of fair values of businesses acquired are recorded as
goodwill and amortized on a straight-line method over a period of ten
to twenty years. The Company evaluates impairment of goodwill on a
quarterly basis by comparing the sum of expected future cash flows
over the remaining amortizable life of goodwill
F-8
<PAGE> 22
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
with the net remaining book value of the goodwill. If the sum of the
expected future cash flows is greater than the amount of goodwill
remaining, no recognition of impairment would be needed.
Contract rights represent the cost to acquire the existing contracts
to provide pharmaceuticals to long-term health care facilities.
Contract rights are amortized on a straight-line method over a period
of 5 years.
Computer Software Costs
The Company has incurred costs in connection with developing computer
software for sale. Such costs, which are charged to operations as
incurred, amounted to approximately $30,000, $97,000, and $91,000 were
expensed during the years ended February 28, 1995, 1994, and 1993,
respectively. The Company also capitalized certain production costs
of computer software. These costs, totaling $72,360 at February 28,
1995, were written off as part of the charge for discontinued
operations (see Note 7).
Revenue Recognition
Revenues are recorded as products are shipped and services are
rendered. A portion of the Company's sales are covered by various
state and Federal reimbursement programs, which are subject to review
and/or audit. Reimbursement programs are also subject to change from
time to time.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Income Taxes
The Company files a consolidated Federal tax return. Income tax
expense is based on reported earnings before income taxes. Effective
March 1, 1993, the Company adopted the method of accounting for income
taxes prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under this Standard,
deferred taxes on income are provided for those items for which the
reporting period and methods for income tax purposes differ from those
used for financial statement purposes using the asset and liability
method. Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of
F-9
<PAGE> 23
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
existing assets and liabilities. The adoption of SFAS No. 109 had no
effect on the Company's financial position or results of operations
for the fiscal year ended February 28, 1994.
Income Per Share
Income per share is computed by dividing net income by the weighted
average number of common shares outstanding. For fiscal years ended
February 28, 1995, 1994 and 1993, the effect on per share earnings of
the assumed exercise of common stock equivalents or conversion of
convertible promissory notes payable would be either anti-dilutive or
not material.
2. ACQUISITIONS AND DIVESTITURES
Choice Drug Systems of Maryland, Inc.
On March 1, 1992, the Company entered into an Agreement and Plan of
Reorganization and Merger with Choice Drug Systems of Maryland, Inc.,
formerly known as Rombro Health Services, Limited ("Choice Maryland"
or "Rombro"), and its shareholders (the "Rombro Shareholders"). At
the closing on June 19, 1992, all the issued and outstanding shares of
Rombro were converted into 596,637 shares of the Company's common
stock. During the third quarter of fiscal 1993, the Company recorded
a reduction of inventory as of the acquisition date of $1,050,000 due
to a revaluation following a physical inventory. As a result, the
Company renegotiated the purchase price and the Rombro Shareholders
returned 161,538 of the prior issued shares. In addition, under the
original merger agreement, the Rombro Shareholders entered into
employment agreements. One Rombro Shareholder remains employed by the
Company pursuant to an agreement which expires in June 1995.
The acquisition was accounted for as a purchase. The cost of the
acquisition, as renegotiated in the amount of $2,447,432, was
determined by valuing the shares issued at $5.625 per share which
represented the market price as of the acquisition date, together with
approximately $400,000 in costs to complete the transaction. The
excess of cost over the fair value of net assets acquired resulted in
goodwill of $5,642,148, which is being amortized over 20 years.
Choice Maryland's results of operations from June 19, 1992 have been
included with those of the Company.
The Company leases office and warehouse space from a partnership which
is wholly-owned by the Rombro Shareholders. The lease is for a period
of 10 years beginning June 19, 1992 at a current annual rent of
approximately $302,000 subject to annual increases of 5%. The Company
has guaranteed to make payments to the
F-10
<PAGE> 24
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
holder of the loan on the leased property should the Rombro
Shareholders default on their payments. Such loan amounted to
$1,307,382 at February 28, 1995.
J & J Medical Supply, Inc.
On March 1, 1992, a subsidiary of the Company sold the stock of its
wholly-owned retail subsidiary for $500,149. At closing $300,000 was
paid in cash and the balance was evidenced by two promissory notes.
One note totaling $50,000 is payable May 1, 1997 with interest payable
monthly at a rate of 9.5%. The second note totaling $150,149 is
payable in sixty equal monthly installments of principal and interest
at 9.5% per annum commencing June 1, 1992. The loss on this sale
amounted to $7,275, after write-off of goodwill of $257,438.
Pro Forma Information
The following unaudited pro forma information reflects the combined
results of operations of the Company as if the acquisition of Rombro
Health Services Limited were consummated on March 1, 1992:
<TABLE>
<CAPTION>
Fiscal Year Ended
February 28, 1993
-----------------
(In thousands except for
per share amounts)
<S> <C>
Net sales . . . . . . . . . . . . . . . . . $ 51,417
Net loss . . . . . . . . . . . . . . . . . . $ (3,391)
Loss per common share . . . . . . . . . . . $ (.55)
</TABLE>
The pro forma results are based upon certain assumptions and estimates that the
Company believes are reasonable. Such results reflect adjustments for interest
expense, amortization of goodwill and income taxes. The pro forma results do
not purport to be indicative of results that would have been obtained had the
acquisition occurred at the beginning of the respective period, nor are they
intended to be a projection for future periods.
F-11
<PAGE> 25
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are comprised of the following:
<TABLE>
<CAPTION>
February 28,
---------------------------------------
1995 1994
----------- ------------
<S> <C> <C>
Leasehold improvements . . . . . . . $ 749,468 $ 739,633
Furniture, fixtures and equipment. . 3,181,738 2,947,460
Data processing equipment . . . . . 910,377 827,825
Automobiles and trucks . . . . . . . 161,454 120,267
----------- ------------
5,003,037 4,635,185
Less:
Accumulated depreciation
and amortization 3,673,944 2,866,599
----------- ------------
$ 1,329,093 $ 1,768,586
=========== ============
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $605,000, $629,000 and $561,000 for 1995,
1994 and 1993, respectively.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
February 28
-------------------------------------
1995 1994
----------- -------------
<S> <C> <C>
Loan payable, bank (a) $ 2,983,303 $ 7,569,231
Note payable (b) 355,372 426,148
Capital lease obligations (see Note 9) 401,104 405,072
Subordinated promissory note, payable in
equal monthly installments, including
interest, due February 1, 1995 (c) - 836,180
Subordinated promissory note, payable in
equal monthly installments, including
interest, due December 1, 1998 (d) 1,533,333 1,900,000
Promissory note, payable in equal monthly
installments, including interest, due
June 1, 1999 (e) 242,730 280,073
Medicare Settlement (See Note 10) 2,900,000
Other - 5,828
----------- -------------
8,415,842 11,422,532
Less: current portion 765,387 9,064,836
----------- -------------
$ 7,650,455 $ 2,357,696
=========== =============
</TABLE>
F-12
<PAGE> 26
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
(a) In connection with the Choice Maryland acquisition, the
Company entered into an Amended and Restated Loan and Security
Agreement (the "Loan Agreement") with United Jersey Bank
("UJB"), pursuant to which Rombro and its subsidiaries became
co-borrowers with the Company. Under the Loan Agreement the
Company was able to borrow up to the lesser of $9,000,000 or
an amount computed according to a borrowing formula. Maturity
was on the earlier of demand by UJB, or June 30, 1994. The
bank loan bore interest at the rate of 1% over UJB's prime
rate. In connection with this transaction, a major supplier
of the Company entered into an inventory purchase agreement
whereby, under certain conditions, it is obligated to purchase
the Company's inventory at an agreed upon formula at the
request of UJB.
On May 31, 1994, the Company and UJB amended the Loan
Agreement to extend the maturity to the earlier of demand by
UJB, or June 30, 1995. Under this amended agreement, the
maximum amount which the Company could borrow was reduced from
$9,000,000 to $8,000,000, and the interest rate increased from
a rate of 1% above UJB's prime rate to a rate of 1.5% above
UJB's prime rate. Included in this amendment were changes to
certain financial ratios. Substantially all other terms of
the Loan Agreement remained the same. The Company was in
default with certain of its financial ratio covenants of its
Loan Agreement with the bank at August 31, 1994 and November
30, 1994.
Because UJB did not grant a waiver to the default which
existed at August 31, 1994, the Company entered into a
forbearance agreement with UJB on December 22, 1994, which
further constricted the Company's borrowing base under its
credit facility as to inventory and accounts receivable,
reduced the maximum borrowing capacity from $8,000,000 to
$6,500,000 and extended the maturity to the earlier of demand
by UJB or December 31, 1995. The Company paid UJB
administrative fees totaling $50,000 in connection with the
execution of this forbearance agreement. Since the Company
had been borrowing the maximum amount available to it under
the terms of the credit facility, the terms of this
forbearance agreement required the Company to repay
approximately $374,000 of its obligation to UJB at December
22, 1994. The forbearance agreement also included changes to
certain required financial ratios. Substantially all other
terms of the Loan Agreement remained the same. The Company
was not in compliance with certain financial ratios under the
forbearance agreement as of February 28, 1995. On May 22,
1995, the Company paid off its indebtedness to UJB under this
agreement (see Note 17 and Supplemental Disclosures of Cash
Flows Information).
F-13
<PAGE> 27
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
(b) A note payable is due to a relative of one of the Rombro
Shareholders. This note payable resulted form a repurchase of
shares prior to the acquisition of Choice Maryland by the
Company. Payments of $26,689 are due quarterly with interest
at 9% per annum through January 2000.
(c) Effective March 1, 1993, Rombro issued a note to a major
supplier in substitution of certain accounts payable totaling
$1,311,638. This note in the amount of $1,480,000, including
interest at 9% per annum, was payable in 24 equal
installments. On September 20, 1993, Rombro issued a second
note to the supplier in substitution of certain additional
accounts payable totaling $210,000. This note, in the amount
of approximately $224,000 including interest at 9% per annum,
was payable in 17 equal installments. These notes were
secured by a lien on the assets of Choice Maryland and its
subsidiaries, subordinated to the security interests of UJB
and the Small Business Administration. In addition, the
Company guaranteed these notes. This Note was paid in full on
January 26, 1995.
(d) Effective November 30, 1993, the Company issued a note to the
same major supplier in substitution of certain accounts
payable in the amount of $2,000,000. The note is payable in
60 equal installments beginning January 1, 1994 of principal
plus interest at 9% per annum through February 28, 1995 and
thereafter at a rate of 3% over the prime rate until the note
is repaid. The note is secured by a lien on the assets of the
Company and its subsidiaries, and is subordinated to the
security interest of UJB. This Note was paid in full on May
22, 1995.
(e) Effective February 22, 1994, the Company issued a note to the
same major supplier in substitution of certain terminated
acquisition expenses in the amount of $280,073. The note is
payable in 60 installments beginning July 1, 1994 of principal
plus interest at 9% per annum through February 28, 1995 and
thereafter at a rate of 3% over the prime rate until June 30,
1999. The note is secured by a lien on the assets of the
Company and its subsidiaries. This note was paid in full on
May 22, 1995. (See Note 17.)
F-14
<PAGE> 28
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Annual maturities of the Company's long-term debt, exclusive
of capital lease obligations, for five fiscal years subsequent
to February 28, 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending Total
------------------ -------------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 616,713
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623,839
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631,779
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,157,068
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,006
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483,333
-------------
$ 8,014,738
=============
</TABLE>
5. RELATED PARTIES
On December 16, 1994, the Company entered into a Stock Purchase
Agreement with Counsel Corporation, an Ontario corporation
("Counsel"). Pursuant to the Stock Purchase Agreement, Counsel
acquired 2,000,000 shares of the Company's Common Stock for the
aggregate consideration of $7,300,000. Counsel was also granted two
three-year warrants, the first of which grants Counsel the right to
purchase up to 1,000,000 shares of the Company's Common Stock at the
exercise price of $4.50 per share, and the second of which grants
Counsel the right to acquire up to 800,000 shares of the Company's
Common Stock at the exercise price of $5.50 per share.
The Company and Counsel also entered into a Registration Rights
Agreement, dated December 16, 1994, which granted Counsel certain
piggy-back registration rights beginning September 1, 1995 and the
right to exercise up to two demand registrations beginning December
16, 1996. Under the Registration Rights Agreement, the Company agreed
not to grant to any person registration rights superior to the
registration rights granted to Counsel. Similarly, the Company agreed
not to grant registration rights that are equivalent to the rights
granted to Counsel with respect to more than 3,800,000 shares of
Common Stock. The Company and Counsel have agreed to terminate the
December 16, 1994 Registration Rights Agreement.
Certain directors and officers of Counsel and its subsidiaries sit on
the Board of Directors of the Company. The significant shareholder of
Counsel, owning approximately 25% of the issued and outstanding stock
of that corporation is the Chairman of the Board of Directors of the
Company. Mr. Furlong, a consultant to Counsel Corporation, also is a
director of the Company.
F-15
<PAGE> 29
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
In April 1995 Counsel and the Company entered into an arrangement
whereby Counsel's general counsel will provide certain legal services
to the Company for which Counsel will receive reimbursement for a pro
rata portion of Counsel's expense associated with the employment of
such employee. In addition, the Company has retained as corporate
counsel the same law firm that represents Counsel and its subsidiaries
and affiliates.
In connection with the acquisition of Choice Maryland, the Company
received three promissory notes dated June 19, 1992 from certain
parties related to the Rombro Shareholders. The three notes,
originally aggregating $393,798, provide for twelve consecutive
monthly payments of interest at 9% per annum and then 24 equal
consecutive monthly installments of $16,408. As of February 28, 1995
the unpaid balance of these notes was $55,143. Under the renegotiated
agreement with the Rombro Shareholders these notes become due and
payable within ten days after the date one half or more of the
aggregate Company stock acquired by the Rombro Shareholders have been
sold, transferred, or otherwise disposed of by one or more of these
shareholders.
In addition, as of February 28, 1995, a subsidiary of the Company was
owed $34,966 by a company controlled by a relative of a Rombro
Shareholder. The note provides for monthly payments of $2,292 plus
interest at prime rate plus 2% per annum. Maturity is on February 1,
1997.
In December, 1993, the Company entered into an agreement with two
companies, one of whose officers is also a director of the Company, to
enter into a joint venture to market pharmaceuticals to federal
agencies, state agencies and private sector entities. In January,
1994 the Company made an initial cash contribution to the joint
venture of $50,000. The Company also agreed to contribute an
additional $200,000 to this joint venture upon the occurrence of
certain events and conditions. These conditions and events were not
met and consequently the Company did not make any additional
contributions to the joint venture. In November, 1994, the joint
venture arrangement was terminated and the Company wrote off its
$50,000 advance to the joint venture as the joint venture expended all
of its funds and had no additional assets.
6. RESTRUCTURING CHARGES
On February 14, 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. This plan includes the termination of
the medical/surgical supply operations and the closing of the
Company's Missouri location, which will cease operations on or about
June 30, 1995. The Company has
F-16
<PAGE> 30
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
recorded restructuring costs of $2,069,432 for the year ended February
28, 1995, which includes the write-down of accounts receivable,
inventories, and fixed assets to net realizable value and the accrual
for the termination of leases, employee severence costs, and the
estimated administrative costs of terminating operations.
7. DISCONTINUED OPERATIONS
In connection with adoption of a formal restructuring plan, the
Company has decided to discontinue the operations of its mail order
and its computerized health care software business. Such operations
will cease on or about June 30, 1995.
The net losses of these operations for the year ended February 28,
1995 are included in the consolidated statements of operations under
"loss from discontinued operations". The loss on disposal reflected
on the consolidated statements of operations includes the write-down
of the assets of the mail order and computer software businesses to
net realizable values and the estimated costs of disposing of these
operations, including a pro-rata share of the Company's use for office
space in Baltimore.
The Company had net sales from discontinued operations of
approximately $2,731,000, $3,123,000, and $2,998,000 for the years
ended February 28, 1995, 1994, and 1993, respectively.
Net assets of discontinued operations represent total assets less
liabilities of operations to be divested by the Company. The
operations to be divested include the Company's mail order business
and its computerized health care software business. The net assets of
these operations have been shown as an asset in the Company's
consolidated balance sheet as of February 28, 1995. Net assets of the
mail order business and the computer software business are $154,458
and $148,362, respectively. Such net assets are comprised of net
receivables of $170,848 and $227,158, respectively, and fixed assets
of $2,856 and $22,539, respectively, less current liabilities of
$19,246 and $101,335, respectively.
The net assets and liabilities relating to the mail order and computer
software operations have been segregated on the balance sheet from
their historic classifications to separately identify them as assets
held for sale. Such amounts are summarized at February 28, 1995 as
follows:
<TABLE>
<S> <C>
Accounts Receivable $ 398,006
Fixed Assets 25,395
Current Liabilities (120,581)
-----------
$ 302,820
===========
</TABLE>
F-17
<PAGE> 31
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
8. INCOME TAXES
The (benefit) provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended February 28
-------------------------------------------------------
CURRENT (BENEFIT) PROVISION 1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C> <C>
Federal $ (466,214) $ (102,000) $ -
State and local - 50,505 -
----------- ----------- ----------
TOTAL $ (466,214) $ (51,495) $ -
=========== =========== ==========
</TABLE>
The actual tax (benefit) provision for the fiscal years ended February
28, 1995, 1994, and 1993 is different from the amounts computed by
applying the statutory Federal income tax rate to losses from
continuing operations before income taxes. The reconciliation of
these differences is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended February 28
------------------------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Tax benefit at statutory rate $ (3,824) $ (194) $ (459)
Increase resulting from:
State income taxes, net
of federal income tax effect - 33 -
Current loss not available
for carryback 3,206 - 297
Tax effect of expenses which
are not deductible 152 123 169
Other - (13) (7)
--------- --------- ---------
Actual tax benefit $ (466) $ (51) $ -
========= ========= =========
</TABLE>
At February 28, 1995, the Company had a net operating loss
carryforward of approximately $4,700,000 for Federal income tax
purposes, expiring in increments through 2010. The utilization of
approximately $1,300,000 of such losses is restricted to offset only
future taxable income generated by Choice Maryland and further limited
to a cumulative amount of approximately $150,000 per year due to a
change in control. In addition, the future tax benefit of
approximately $1,000,000 of deferred tax assets when and if realized
will reduce goodwill or be credited to capital in excess of par.
F-18
<PAGE> 32
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The tax effect of temporary differences at February 28, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
February 28
--------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Accounts receivable allowances . . . $ 625,000 $ 629,000
Tax carryforwards . . . . . . . . . 1,868,000 721,000
Accrued litigation costs . . . . . . 1,400,000 -
Accrued restructuring charges . . . 828,000 -
Accrued liabilities . . . . . . . . 420,000 192,000
Other . . . . . . . . . . . . . . . 144,000 17,000
----------- -----------
Subtotal . . . . . . . . . . . . . . $ 5,285,000 $ 1,559,000
Valuation allowance . . . . . . . . (5,285,000) (1,559,000)
----------- -----------
TOTAL . . . . . . . . . . . . . . . $ 0 $ 0
=========== ===========
</TABLE>
9. COMMITMENTS
The Company leases office and warehouse space, automobiles and
equipment. Rental expense under these leases aggregated approximately
$719,000, $1,120,000, and $766,000 in 1995, 1994, and 1993,
respectively.
On December 20, 1991 the Company entered into a lease agreement for
computer equipment and software totaling $175,000. Monthly payments
are $3,462 including interest at 9.487% for a period of 59 months with
a balloon payment of $17,500 on November 20, 1996.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Fiscal Year Capital Operating
Ending Leases Leases
----------- ----------- -------------
<S> <C> <C>
1996 . . . . . . . . . . . . . . . . $ 179,005 $ 745,764
1997 . . . . . . . . . . . . . . . . 174,992 667,411
1998 . . . . . . . . . . . . . . . . 56,711 507,982
1999 . . . . . . . . . . . . . . . . 25,744 421,723
2000 . . . . . . . . . . . . . . . . 17,782 386,543
Thereafter . . . . . . . . . . . . . - 1,341,998
----------- -------------
Total minimum lease payments . . . . $ 454,234 $ 4,071,421
Less amounts representing interest . (53,130) =============
-----------
Present value of net minimum
lease payments . . . . . . . . . $ 401,104
Less current portion . . . . . . . . 148,674
-----------
$ 252,430
===========
</TABLE>
F-19
<PAGE> 33
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
10. CONTINGENCIES
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
made by certain of the Company's subsidiaries to the Medicare Program.
Under the terms of the settlement, without admitting any liability,
the Company has agreed to repay, over a six-year period, $3,400,000 to
settle the Government's claims. $100,000 was paid upon the execution
of the agreement on November 10, 1994, $400,000 was paid on December
31, 1994 and $2,900,000 plus interest at an annual rate of 7.75% will
be payable in quarterly installments over a six-year period ending
January 1, 2001.
The full amount of the settlement is included in the accompanying
consolidated financial statements for the year ended February 28,
1995. The Company offset $95,000 against the installment due on March
31, 1995 for certain claims for reimbursement which were processed
after settlement with the government. The remaining unprocessed
claims of approximately $287,000 were written off as of February 28,
1995, as there can be no assurance at this time that these claims will
be paid.
Upon receipt of the payments due on December 31, 1994, the United
States was deemed to have released the Company and its affiliates,
with the exception of a former officer from any civil or monetary
claims in connection with activities giving rise to the settlement.
In addition, the Government agreed not to seek exclusion from the
Medicare Program or state health programs against the Company and its
affiliates except for the reservation of such right as to this former
officer and two inactive subsidiaries.
The 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 hold the position of 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, but not limited to, a merger or acquisition, the Company
would be required to make all payments until December 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
F-20
<PAGE> 34
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
District of Pennsylvania 30 days before the expected closing of any
such transaction. The Company does not believe that the successful
completion of the merger with Premier (see Note 17) will accelerate
payment to the United States.
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, does not comply
with regulations covering such a change. The Company has
approximately $265,000 in net accounts receivable that have been
rejected by the agency. The Company, with others, brought suit to
reverse this retroactive change without notice. The suit was stayed
pending submission of these outstanding claims to another
administering agency having different jurisdiction.
However, because the issue remains in litigation and with the
increased passage of time until the Company would be able to recertify
its submissions, it is unlikely that the Company will be able to
obtain the necessary documentation and the Company has written off the
entire amount as of February 28, 1995.
On June 1, 1993, a class action lawsuit was filed against the Company,
two of its executive officers and a former officer who was a selling
shareholder of Choice Maryland alleging violations of certain
securities laws. The complaint does not identify any specific amount
of damages allegedly suffered. The parties have tentatively agreed to
settle the case for $600,000 in common stock to be issued by the
Company and $650,000 in cash which is to be paid by the Company's
Directors and Officers liability insurance carrier. However, such
agreement is subject to court approval, final settlement documentation
among the parties and the Company's insurance carrier, as well as
confirmatory discovery by the plaintiffs. The Company's portion of
the proposed settlement, $600,000, is included in "Costs in connection
with litigation" in the consolidated financial statements for the year
ended February 28, 1995.
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.
F-21
<PAGE> 35
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
11. STOCKHOLDERS' EQUITY
Common Stock Authorized
On September 2, 1992, the Company's shareholders approved an increase
in the authorized common stock of the Company from 10,000,000 shares
to 15,000,000 shares.
Common Stock Issued
On December 22, 1994, the Company received funds in the amount of
$7,300,000 pertaining to the issuance of 2,000,000 shares of its
common stock to Counsel (See Note 5).
From October 21, 1994 to February 17, 1995, the Company received funds
totaling $89,750 from the exercise of 34,000 options to purchase
common shares by certain employees.
Stock Option Plans
The Company has six stock option plans covering up to 1,705,000 shares
of the Company's common shares, pursuant to which officers, directors
and employees of the Company are eligible to receive either incentive
or non-qualified options. Stock options generally expire five or ten
years from the date of grant. The exercise price of an incentive
stock option must be equal to the fair market value of the Company's
common shares on the date such option was granted. The exercise price
of non-qualified stock options may be less than the fair market value
on the date of grant.
F-22
<PAGE> 36
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
A summary of option transactions during the three years ended February
28, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Shares under option at beginning
of period ($1.88 - $6.00 a share) . . . . . . 818,500 832,000 468,250
Granted ($2.75 - $3.71) . . . . . . . . . . . 527,000 51,500 375,000
Cancelled ($1.88 - $6.00) . . . . . . . . . . (354,000) (65,000) -
Exercised ($2.25 - $3.38) . . . . . . . . . . (34,000) - (11,250)
-------- ------- -------
Options outstanding at end
of period ($1.88 - $6.00) . . . . . . . . . . 957,500 818,500 832,000
======= ======= =======
Shares available for future grant . . . . . . 605,250 778,250 764,750
======= ======= =======
</TABLE>
As of February 28, 1995, all options were exercisable under the
Employee Stock Option Plans.
In January 1995, the Company granted options to the Company's former
Chairman of the Board and former President, Vice Chairman of the
Board, and Chief Financial Officer to purchase 50,000 shares each of
common stock at a price of $3.71, the fair market value on the date of
grant. These options expire five years from the date of grant and
were issued as replacement options for options previously granted to
said individuals under their previous employment agreements with the
Company. On March 8, 1995, the former Chief Operating Officer,
pursuant to his prior employment agreement, was granted the option to
purchase 50,000 shares of common stock at a price of $2.86, the fair
market value on the date of grant. This option replaces options
granted to this executive under his previous employment agreement with
the Company (see Note 13), and expires on May 15, 1997.
On October 28, 1994, the six non-employee directors were each granted
options to purchase 15,000 common shares at a price of $3.50, the fair
market value at the date of grant. On October 28, 1994, two
principal officers, pursuant to their employment agreements, were each
granted options to purchase 25,000 common shares at a price of $3.50,
the fair market value on the date of grant, and one
F-23
<PAGE> 37
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
former officer was granted 25,000 options at $3.50, the fair market
value at the date of grant.
All options granted to directors terminate one year after such person
ceases to serve as a director.
On July 7, 1994, a key employee was granted options to purchase 20,000
common shares at a price of $2.88, the fair market value on the date
of grant. On May 2, 1994, a key employee was granted options to
purchase 2,000 common shares at a price of $3.13, the fair market
value on the date of grant.
On March 30, 1994, the five non-employee directors were each granted
options to purchase 15,000 common shares at a price of $2.85, the fair
market value on the date of grant. On September 2, 1992, the
non-employee directors were each granted options to purchase 15,000
common shares at a price of $6.00, the fair market value on the date
of grant. Currently, 60,000 of such options are outstanding of which
45,000 expired in fiscal 1995.
On March 30, 1994 three principal officers, pursuant to their
employment agreements were each granted options to purchase 25,000
common shares at a price of $2.85, the fair market value on the date
of grant and one officer pursuant to his employment agreement was
granted 25,000 options at $2.75. On September 2, 1992, three
principal officers of the Company, pursuant to their employment
agreements were each granted options to purchase 100,000 common shares
at a price of $6.00, the fair market value on the date of grant.
These options expire on September 2, 2002.
On December 16, 1991, the non-employee directors were each granted
options to purchase 15,000 common shares at a price of $5.38, the fair
market value on the date of grant. Currently, 45,000 of such options
are outstanding of which 30,000 expired in fiscal 1995. On October
2, 1990 three principal officers of the Company, pursuant to their
employment agreements, were each granted options to purchase 100,000
common shares at a price of $1.875, the fair market value on the date
of grant. These options expire on October 2, 1995.
In addition, options to purchase 100,000 shares at $5.00 per share
have been granted to the former owners of a subsidiary, since certain
annual sales goals of that subsidiary were met. These options are
exercisable at any time until November 5, 1997.
F-24
<PAGE> 38
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Warrants
In May 1994, the Board of Directors extended the expiration date of
its redeemable warrants issued in June 1986 as part of the Company's
initial public offering (the "IPO Warrants") from September 30, 1994
until the close of business on September 30, 1995. The exercise price
of these warrants is $6.00 per share. The expiration date of the
Class B Warrants (which are exercisable at $10.00 per share) to be
issued upon exercise of the IPO Warrants was extended to September 30,
1996. The other terms of the IPO Warrants remain the same. The
Company may not issue any common shares pursuant to the exercise of
the IPO Warrants and Class B Warrant unless there is a Registration
Statement in effect.
12. MAJOR VENDOR
During the years ended February 28, 1995 and 1994, one vendor
accounted for approximately 55% and 57%, respectively, of the
Company's total inventory purchases.
13. EMPLOYMENT AGREEMENTS
On October 25, 1993, the Company entered into an employment agreement
with a newly hired Executive Vice President and Chief Operating
Officer with a base annual compensation of $150,000, increasing 8% per
annum through October 25, 1998. However, the Company had the right to
terminate the agreement upon failure to reach specified pre-tax income
goals. On the date of employment, the executive was awarded 25,000
stock options at a price of $2.88, the closing price of the Company's
stock on that date. This agreement was terminated in March 1995, at
the time of the resignation of said executive. On March 8, 1995, the
Company entered into a consulting agreement with this executive,
calling for fees totaling $175,000 to be paid over a two year period
commencing May 15, 1995, which has been included in the restructuring
charges (see Notes 6 and 11).
The Company entered into employment agreements with three of its
executive officers effective June 1, 1991, with base current annual
compensation aggregating $570,800, increasing 10% per annum through
May 31, 1996. In addition, the agreements call for the award of
bonuses upon the achievement of certain performance levels, as well as
the grant of additional stock options. Two of these agreements were
terminated in January 1995, at the time of the resignation of said
officers. In January, 1995, the Company entered into consulting
agreements with
F-25
<PAGE> 39
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
each of these officers, calling for fees of approximately $662,000 to
be paid through May 31, 1997.
14. FOURTH QUARTER ADJUSTMENTS
In connection with the Company's reorganization and changes in
management and personnel during fiscal 1995, the Company wrote off
approximately $1,800,000 of uncollectable accounts receivable, and
increased the provision for bad debt by approximately $858,000. The
Company also determined that an adjustment to inventory of
approximately $174,000 was needed to accurately state the value of
inventory at February 28, 1995.
The Company increased its accruals for salary, health, and legal
expenses by approximately $90,000, $113,000, and $200,000,
respectively, to accurately record expenses for the year ended
February 28, 1995, and also decreased cost of sales by approximately
$295,000 for purchase rebates received from suppliers.
15. OTHER (INCOME) EXPENSE
<TABLE>
<CAPTION>
Fiscal Years Ended February 28
---------------------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Contract rights written off $ - $ 9,845 $ 62,053
(Gain) loss on sale of assets (5,222) 3,860 (32,531)
Settlement of dispute with vendor (185,722) - -
Refunds (131,083) - -
Other, net (98,844) (40,071) (61,836)
---------- --------- ---------
$ (420,881) $ (26,366) $ (32,314)
========== ========= =========
</TABLE>
16. TERMINATED ACQUISITION COSTS
During fiscal 1993, the Company terminated negotiations regarding the
acquisitions of certain health care companies. These costs, in the
amount of approximately $395,000, represent inventory advances and
professional fees incurred during negotiations.
17. SUBSEQUENT EVENTS
On April 5, 1995, the Company entered into an Agreement and Plan of
Merger with Premier Pharmacy, Inc., a Delaware corporation
("Premier"), by which the Company
F-26
<PAGE> 40
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
is to acquire the operations of Premier by a merger of a wholly-owned
subsidiary of the Company into Premier (collectively, the "Premier
Transaction"). The cost to acquire Premier is approximately
$4,250,000.00, which is to be paid in cash at closing. The merger
became effective on May 22, 1995.
Upon completion of the Premier Transaction, Premier's President and
Chief Executive Officer, and its Chief Financial Officer became
President and Chief Executive Officer and Chief Financial Officer of
the Company. In addition, certain other management positions are
being filled by former Premier management.
Premier is a privately held provider of pharmacy services to nursing
homes and hospitals with annualized revenues of approximately
$30,000,000. The long term care pharmacy business of Premier is based
in the New York metropolitan area and its hospital pharmacy business
operates in eight states.
On May 22, 1995, the Company obtained a three-year secured revolving
line of credit for $10,000,000 with Creditanstalt Corporate Finance,
Inc. ("Creditanstalt"). The line of credit has an interest rate of
prime plus .5%. The Company will be charged a commitment fee of
one-quarter of one percent per year, payable quarterly in arrears on
the unused average daily balance of the line. The Company was charged
a one-time facility fee of $50,000 upon closing of the line of credit.
The Company borrowed $9,650,000 of the $10,000,000 line to satisfy
outstanding debt of the Company to UJB and a major supplier, to
partially finance the Premier Transaction, and for general working
capital purposes.
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
$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. The offering
of Units raised $5,840,000 at the price of $3.65 per Unit.
F-27
<PAGE> 41
CHOICE DRUG SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FEBRUARY 28, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
===============================================================================================================================
Description Balance at begin- Charged to costs Charged to (1) Balance at
ning of period and Expenses Other Accounts Deductions End of Period
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended February 28, 1995:
Allowance for doubtful accounts 1,387,227 1,385,357 1,211,351 1,561,233
Accumulated depreciation and
amortization of equipment and
leasehold improvements 2,866,599 604,723 222,662 (3) 20,040 3,673,944
Accumulated amortization of goodwill 811,446 311,735 1,123,181
Accumulated amortization of contract
rights 110,841 43,821 154,662
Valuation allowance for deferred
taxes 1,559,000 3,726,000 5,285,000
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended February 28, 1994:
Allowance for doubtful accounts 2,182,375 98,775 893,923 1,387,227
Accumulated depreciation and
amortization of equipment and
leasehold improvements 2,257,975 628,748 20,122 2,866,599
Accumulated amortization of goodwill 468,204 343,242 811,446
Accumulated amortization of contract
rights 92,606 32,965 14,730 110,841
Valuation allowance for deferred
taxes 0 1,559,000 1,559,000
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended February 28, 1993:
Allowance for doubtful accounts 120,684 457,497 1,791,685 (2) 187,491 2,182,375
Accumulated depreciation and
amortization of equipment and
leasehold improvements 1,873,963 561,121 177,109 2,257,975
Accumulated amortization of goodwill 300,517 255,197 87,510 468,204
Accumulated amortization of contract
rights 88,962 43,286 39,642 92,606
Accumulated amortization of
covenants 285,737 240,490 526,227 0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Write-offs of bad debts, disposition of assets and reclassification of
certain net receivables.
(2) Allowance for doubtful accounts resulting from purchase transaction of
Rombro Health Services Limited on June 19, 1992.
(3) Restructuring charges related to reserve for loss on disposition of
assets.
F-28
<PAGE> 42
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
<S> <C>
2.1 Agreement and Plan of Recognition and Merger, dated March 1, 1992, by and among the
Registrant, David M. Rombro ("Dave Rombro"), David W. Rombro ("Dave Rombro"), Michael
Sosnowik, Rombro Health Services Limited ("Rombro") and IMS Acquisition Corp. (the
"Merger Agreement") -- incorporated by reference to Exhibit 2A to the Registrant's
Annual Report on Form 10-K for fiscal year ended February 28, 1993 (the "1992 Annual
Report").
2.2 Amendment No. 1 to the Merger Agreement, dated May 8, 1992 -- incorporated by
reference to Exhibit 2B to the 1992 Annual Report.
2.3 Amendment No. 2 to the Merger Agreement -- incorporated by reference to Exhibit 2C to
the Registrant's Current Report on Form 8-K, dated July 2, 1992 (the "1992 8-K").
2.4 Agreement, dated May 28, 1992, between Dave Rombro, Dave Rombro, Michael Sosnowik,
The Stewart Drug Co., Inc. ("Stewart"), Trip R Limited Partnership ("Triple R"),
Chesapeake Healthcare Systems Limited Partnership ("Chesapeake"), the Registrant and
Rombro, amending the Merger Agreement -- incorporated by reference to Exhibit 2D to
the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28,
1993 (the "1992 Annual Report").
3.1 Certificate of Incorporation of the Registrant, filed May 18, 1973 -- incorporated by
reference to Exhibit 3A to the Registrant's Annual Report on Form 10-K for fiscal
year ended February 29, 1988 (the "1988 Annual Report").
3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, filed
November 14, 1985 -- incorporated by reference to Exhibit 3B to the 1988 Annual
Report.
3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, filed
August 10, 1987 -- incorporated by reference to Exhibit 3C to the 1988 Annual Report.
3.4 Certificate of Amendment of Certificate of Incorporation of the Registrant, filed
December 24, 1992 -- incorporated by reference to Exhibit 3D to the 1992 Annual
Report.
3.5 Restated By-Laws of the Registrant -- incorporated by reference to Exhibit 3C to the
Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1987 (File
No. 1-9185) (the "1987 Annual Report").
3.6 Resolutions of the Board of Directors of the Registrant, dated May 23, 1990, amending
By-Laws -- incorporated by reference to Exhibit 3E to the Registrant's Annual Report
on Form 10-K for fiscal year ended February 28, 1990.
3.7 Resolutions of the Board of Directors of the Registrant, dated April 29, 1992,
amending By-Laws -- incorporated by reference to Exhibit 3G to the 1992 Annual
Report.
3.8 Resolution of the Board of Directors of the Registrant, dated March 30, 1994,
amending By-Laws -- incorporated by reference to Exhibit 3.8 to the Registrant's
Annual Report on Form 10-K for fiscal year ended February 28, 1995.
4.1 Specimen Stock Certificate -- incorporated by reference to Exhibit 4A to the
Registrant's Registration Statement on Form S-1 (File No. 33-5249) (the "Registration
Statement").
</TABLE>
<PAGE> 43
<TABLE>
<S> <C>
4.2 Form of Agreement for Underwriter's Warrants -- incorporated by reference to Exhibit
4B to the Registration Statement.
4.3 Specimen Warrant Certificate for Redeemable Warrants -- incorporated by reference to
Exhibit 4C to the Registration Statement.
4.4 Warrant Agreement, dated as of June 26, 1986, between the Registrant and J. Henry
Schroder Bank and Trust Company -- incorporated by reference to Exhibit 4D to the
1987 Annual Report.
9.1 Voting Agreement, dated May 22, 1991, among Frank Mandelbaum, Marvin Sirota and
Norman Pachtman -- incorporated by reference to Exhibit 9A to the Registrant's Annual
Report on Form 10-K for fiscal year ended February 28, 1991 (the "1991 Annual
Report").
9.2 Voting Agreement, dated June 18, 1992, between Dave Rombro, Dave Rombro, Michael
Sosnowik, Marvin Sirota, Norman Pachtman and Frank Mandelbaum -- incorporated by
reference to Exhibit 9A to the 1991 8-K.
10.1 1986 Stock Option Plan, adopted by the Board of Directors and Shareholders on April
17, 1986 -- incorporated by reference to Exhibit 10-K to the Registration Statement.*
10.2 Agreement of Lease, dated September 15, 1986, between the Registrant and Bernard
Milch -- incorporated by reference to Exhibit 10Q to the Registrant's Post Effective
Amendment No. 1 (File No. 33-5249).
10.3 1987 Stock Option Plan, adopted by the Board of Directors on March 11, 1987 and by
the Shareholders on July 29, 1987 -- incorporated by reference to Exhibit 10O to the
1987 Annual Report.*
10.4 Consulting Agreement, dated May 30, 1992, between the Registrant and The Equity
Group, Inc., together with Common Stock Purchase Warrants for 20,000 common shares,
par value $.01, of the Registrant -- incorporated by reference to Exhibit 10D to the
1993 Annual Report.
10.5 Agreement of lease, dated June 19, 1987, between J&J Drug & Medical Service ("J&J
Drug") and Franklin Associates for 414 Alfred Avenue, Teaneck, New Jersey (the J&J
Lease") -- incorporated by reference to Exhibit 10Y to the 1988 Annual Report.
10.6 First Lease Modification to the J&J Lease, dated May 21, 1992 -- incorporated by
reference to Exhibit 10F to the 1992 Annual Report.
10.7 1988 Stock Option Plan, adopted by the Board of Directors on February 26, 1988 and by
the shareholders on August 17, 1988 -- incorporated by reference to Exhibit 10CC to
the 1988 Annual Report.
10.8 1989 Stock Option Plan, adopted by the Board of Directors on May 24, 1989 and by the
shareholders on July 12, 1989 -- incorporated by reference to Exhibit A to the
Registrant's 1989 Proxy Statement.*
10.9 Agreement of Lease, dated December 1, 1990, between the Registrant and J. Perry
Knight -- incorporated by reference to Exhibit 10II to the 1991 Annual Report.
10.10 1991 Stock Option Plan, adopted by the Board of Directors on May 22, 1991 and by the
Shareholders on December 16, 1991 -- incorporated by reference to Exhibit 10KK to the
1991 Annual Report.*
10.11 Employment Agreement, dated May 22, 1991, between the Registrant and Marvin Sirota --
incorporated by reference to Exhibit 10NN to the 1991 Annual Report.*
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
10.12 Employment Agreement, dated May 22, 1912, between the Registrant and Norman Pachtman
-- incorporated by reference to Exhibit 10OO to the 1991 Annual Report.*
10.13 Employment Agreement, dated May 22, 1991, between the Registrant and Frank Mandelbaum
-- incorporated by reference to Exhibit 10PP to the 1991 Annual Report.*
10.14 Employment Agreement, dated June 19, 1992, between Rombro and Michael Sosnowik --
incorporated by reference to Exhibit 10C to the 1991 8-K.*
10.15 Employment Agreement, dated October 6, 1993, between the Registrant and Charles W.
Lathrop, Jr.* -- incorporated by reference to Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended February 28, 1995.
10.16 Agreement of Lease, dated February 1, 1990, between Triple R and Rombro (the "Rombro
Lease") -- incorporated by reference to Exhibit 10D to the 1992 8-K.
10.17 Amendment to the Rombro Lease, dated June 19, 1992, between Triple R and Rombro --
incorporated by reference to Exhibit 10E to the 1992 8-K.
10.18 Agreement of Lease, dated October 15, 1990, between Aston Investment Associates and
Institutional Pharmacy Services, Inc. ("IPS") -- incorporated by reference to Exhibit
10F to the 1992 8-K.
10.19 Promissory Note, dated June 19, 1992, made by Stewart in favor of Rombro, together
with Guarantee of David W. Rombro ("Dave Rombro"), David M. Rombro ("Dave Rombro")
and Michael Sosnowik -- incorporated by reference to Exhibit 10G to the 1992 8-K.
10.20 Promissory Note, dated June 19, 1992, made by Triple R in favor of Rombro, together
with Guarantee of Dave Rombro, Dave Rombro and Michael Sosnowik -- incorporated by
reference to Exhibit 10H to the 1992 8-K.
10.21 Promissory Note, dated June 19, 1992, made by Chesapeake in favor of Rombro, together
with Guarantee of Dave Rombro, Dave Rombro and Michael Sosnowik -- incorporated by
reference to Exhibit 10I to the 1992 8-K.
10.22 Promissory Note, dated February 17, 1989, made by RAD Pharmacy, Inc. in favor of
Rombro's Drug Center, Inc. ("Drug Center") -- incorporated by reference to Exhibit
10J to the 1992 8-K.
10.23 Guaranty Agreement, dated February 8, 1990, by Rombro, IPS, B.T. Smith, Inc. d/b/a
Institutional Nutritional Services ("B.T. Smith") and Drug Center, as Guarantor, to
and for the benefit of First American Bank of Maryland (the "First American Guaranty
Agreement") -- incorporated by reference to Exhibit 10K to the 1992 8-K.
10.24 Amendment to the First American Guaranty Agreement, dated June 19, 1992, between
Rombro, IPS, B.T. Smith and Drug Center, as Guarantor, and First American Bank of
Maryland -- incorporated by reference to Exhibit 10L to the 1992 8-K.
10.25 The U.S. Small Business Administration (the "SBA") Certified Development Company
Program "504" Note, dated February 12, 1990, made by Trip R, Dave Rombro, Dave
Rombro, Michael J. Rombro, Michael Sosnowik and Rombro in favor of BEDCO Development
Corp. -- incorporated by reference to Exhibit 10M to the 1992 8-K.
10.26 Subordination Agreement dated June 19, 1992 between the SBA, BEDCO Development Corp.,
Rombro and United Jersey Bank (the "Bank") -- incorporated by reference to Exhibit
10N to the 1992 8-K.
</TABLE>
<PAGE> 45
<TABLE>
<S> <C>
10.27 Revolving Loan and Security Agreement, dated June 19, 1992, among the Registrant and
its subsidiaries named therein and the Bank (the "Loan Agreement") -- incorporated by
reference to Exhibit 10O to the 1992 8-K.
10.28 Third Amendment, dated May 31, 1994, to the Loan Agreement -- incorporated by
reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1995.
10.29 Amended and Restated Promissory Note, dated May 31, 1994, made by the Registrant and
its subsidiaries named therein in favor of the Bank -- incorporated by reference to
Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1995.
10.30 Promissory Note, dated January 21, 1992, made by Rombro in favor of Michael J. Rombro
-- incorporated by reference to Exhibit 10Q to the 1992 8-K.
10.31 Letter Agreement, dated July 26, 1991, among Rombro, Chesapeake Applied Technologies,
Inc. ("Chesapeake Applied"), Chesapeake Healthcare and David Catway, individually --
incorporated by reference to Exhibit 10R to the 1992 8-K.
10.32 Modification Agreement, dated February 27, 1992, among Rombro, the Registrant,
Chesapeake Healthcare, Chesapeake Applied and David Catway, individually --
incorporated by reference to Exhibit 10S to the 1992 8-K.
10.33 1992 Stock Option Plan, adopted by the Board of Directors on July 14, 1992 and by the
shareholders on September 2, 1992 -- incorporated by reference to Exhibit B to the
Registrant's 1992 Proxy Statement.*
10.34 Agreement of Lease, dated as of October 1, 1992, between Choice Drug Systems of
Missouri, Inc. and Northview Village, Inc. -- incorporated by reference to Exhibit
10HH to the 1993 Annual Report.
10.35 Promissory Note, dated January 29, 1993, made by Rombro in favor of the Supplier --
incorporated by reference to Exhibit 10II to the 1993 Annual Report.
10.36 Inventory Purchase Agreement, dated March 30, 1993, between the Registrant and the
Supplier -- incorporated by reference to Exhibit 10JJ to the 1993 Annual Report.
10.37 Promissory Note, dated September 20, 1993, made by Choice Drug Systems of Maryland,
Inc. ("Choice Maryland") in favor of the Supplier -- incorporated by reference to
Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1995.
10.38 Promissory Note, dated November 30, 1993, made by the Registrant in favor of the
Supplier -- incorporated by reference to Exhibit 10.38 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended February 28, 1995.
10.39 Agreement, dated December 22, 1993 between the Registrant and Mediquest, Inc. --
incorporated by reference to Exhibit 10.39 to the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1995.
10.40 Agreement, dated December 23, 1993, between the Registrant, Continental Healthcare
Corporation and Support Services International, Inc.-- incorporated by reference to
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1995.
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
10.41 Promissory Note, dated February 22, 1994, made by Choice Maryland and the Registrant
in favor of the Supplier -- incorporated by reference to Exhibit 10.41 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1995.
21.1 List of Subsidiaries -- incorporated by reference to Exhibit
21.1 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 28, 1995.
23.1 Consent of Arthur Andersen LLP
</TABLE>
* Denotes a management contract or compensatory plan, contract or
arrangement.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K/A of our report dated May 22, 1995 included in Form
10-K. It should be noted that we have not audited any financial statements of
the company subsequent to February 28, 1995 or performed any audit procedures
subsequent to the date of our report.
Arthur Andersen LLP
New York, New York
June 28, 1995
