<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-20606
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2310352
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
2930 Washington Boulevard, Baltimore, MD 21230-1197
(Address of principal executive offices) (Zip Code)
Registrants's telephone number, including area code: (410) 646-7373
None
- ------------------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 13, 1996
Common Stock, $.01 Par Value 20,071,545
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 1-2
Consolidated Statements of Operations for the
three and six month periods ended June 30, 1996 and 1995 3
Consolidated Statement of Changes in
Stockholders' Equity for the six months
ended June 30, 1996 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX OF EXHIBITS 19
</TABLE>
<PAGE> 3
Part 1. Financial Information
Item 1. Financial Statements
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,391,663 $ 2,763,416
Accounts receivable, net of allowance for doubtful
accounts of $1,422,000 as of June 30, 1996
and $1,294,000 as of December 31, 1995 21,081,613 12,646,087
Inventories 7,407,978 5,023,008
Refundable income taxes 131,000 828,628
Prepaid expenses and other current assets 1,312,042 688,549
----------- -----------
31,324,296 21,949,688
----------- -----------
Equipment and leasehold improvements, net 3,838,881 2,692,298
----------- -----------
Other assets:
Notes receivable, less current portion 89,404 77,289
Advances to affiliates -- 2,242,841
Security deposits and other assets 681,135 587,915
Goodwill, net of accumulated amortization of
$2,057,000 as of June 30, 1996 and
$1,554,000 as of December 31, 1995 33,842,246 14,580,564
----------- -----------
34,612,785 17,488,609
----------- -----------
Total assets $69,775,962 $42,130,595
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
<PAGE> 4
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,337,882 $ 4,671,435
Accrued expenses and other current liabilities 1,628,984 1,465,837
Current portion of long-term debt 2,125,087 4,222,608
Current portion of non-compete agreements 200,000 200,000
Accrued restructuring charges 518,639 575,349
----------- -----------
7,810,592 11,135,229
----------- -----------
Deferred income taxes 542,787 542,787
Non-compete agreements, net of current portion 400,000 400,000
Long-term debt, net of current portion 19,784,552 2,692,202
Long-term portion of accrued restructuring charges 207,734 520,640
----------- -----------
20,935,073 4,155,629
----------- -----------
Stockholders' equity:
Common stock: $.01 par value; 30,000,000 shares
authorized at June 30, 1996 and December 31,
1995; 15,836,565 shares issued and 15,498,103
shares outstanding as of June 30, 1996 and
13,610,810 shares issued and outstanding as of
December 31, 1995 154,981 136,108
Capital in excess of par 52,377,769 38,985,006
Accumulated deficit (11,502,453) (12,281,377)
----------- -----------
41,030,297 26,839,737
----------- -----------
Total liabilities and stockholders' equity $69,775,962 $42,130,595
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE> 5
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $24,119,216 $12,384,154 $46,147,081 $23,140,073
Cost of sales 15,270,022 7,940,181 28,845,588 14,846,725
----------- ----------- ----------- -----------
Gross profit 8,849,194 4,443,973 17,301,493 8,293,348
----------- ----------- ----------- -----------
Operating expenses:
Selling,general and administrative expenses 7,175,704 4,777,552 14,452,997 8,650,798
Depreciation and amortization 592,648 281,752 1,161,705 563,466
Costs relating to pharmacy closure 246,446 -- 246,446 --
Restructuring charges -- (5,802) -- 2,063,630
----------- ----------- ----------- -----------
Total operating expenses 8,014,798 5,053,502 15,861,148 11,277,894
----------- ----------- ----------- -----------
Operating income (loss) from continuing
operations before income taxes, discon-
tinued operations and extraordinary item 834,396 (609,529) 1,440,345 (2,984,546)
----------- ----------- ----------- -----------
Non-operating expense (income):
Interest expense, net 421,427 252,749 684,615 465,029
Other income, net (48,704) (314,268) (95,232) (370,200)
----------- ----------- ----------- -----------
Total non-operating expense (income), net 372,723 (61,519) 589,383 94,829
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes, discontinued operations
and extraordinary item 461,673 (548,010) 850,962 (3,079,375)
Provision (benefit) for income taxes (30,962) 300 72,038 (118,545)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before discontinued operations and
extraordinary item 492,635 (548,310) 778,924 (2,960,830)
Discontinued operations:
Loss from operations of discontinued business
segments -- (4,587) -- (272,628)
Income (loss) on disposal of business segments, net -- 477,840 -- (25,227)
----------- ----------- ----------- -----------
Net income (loss) before extraordinary item 492,635 (75,057) 778,924 (3,258,685)
Extraordinary item:
Discount on repayment of vendor debt -- 283,364 -- 283,364
----------- ----------- ----------- -----------
Net income (loss) $ 492,635 $ 208,307 $ 778,924 $(2,975,321)
=========== =========== =========== ===========
Earnings per share data:
Primary
Continuing operations $ 0.03 $ (0.05) $ 0.04 $ (0.35)
Discontinued operations -- 0.04 -- (0.04)
Extraordinary item -- 0.03 -- 0.04
----------- ----------- ----------- -----------
Net income (loss) $ 0.03 $ 0.02 $ 0.04 $ (0.35)
=========== =========== =========== ===========
Fully diluted
Continuing operations $ 0.03 $ (0.05) $ 0.04 $ (0.35)
Discontinued operations -- 0.04 -- (0.04)
Extraordinary item -- 0.03 -- 0.04
----------- ----------- ----------- -----------
Net income (loss) $ 0.03 $ 0.02 $ 0.04 $ (0.35)
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Primary 18,302,678 11,196,293 17,441,663 8,505,854
=========== =========== =========== ===========
Fully diluted 18,795,230 11,386,877 18,264,102 8,505,854
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Common Stock Capital
----------------------- in excess Accumulated
Shares Amount of par deficit Total
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 13,610,810 $136,108 $38,985,006 $(12,281,377) $26,839,737
Common stock issued in connection
with acquisition 1,007,692 10,077 7,169,729 -- 7,179,806
Common stock held in escrow (338,462) (3,385) (2,408,157) -- (2,411,542)
Common stock issued in connection
with private placement 1,035,000 10,350 8,371,909 -- 8,382,259
Common stock issued in connection
with the exercise of stock options 84,500 845 260,268 -- 261,113
Common stock issued in connection
with settlement of class action suit 98,563 986 (986) -- --
Net income for the six months
ended June 30, 1996 -- -- -- 778,924 778,924
---------- -------- ----------- ------------ -----------
Balance, June 30, 1996 15,498,103 $154,981 $52,377,769 $(11,502,453) $41,030,297
========== ======== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE> 7
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
. Six months ended June 30,
----------------------------
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from (to) operating activities:
Net income (loss) $ 778,924 $(2,975,321)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,161,705 563,466
Change in assets and liabilities, net of effects
from acquisition/disposal of businesses:
(Increase) decrease in accounts receivable (1,761,710) 1,677,365
(Increase) decrease in inventories (661,815) 908,042
Decrease in prepaid expenses and other current assets 106,245 14,573
Increase in other assets (132,424) (419,743)
Decrease in accounts payable (3,386,963) (1,285,172)
Decrease in accrued expenses and other current liabilities (226,311) (818,723)
(Decrease) increase in accrued restructuring charges (369,616) 1,590,369
----------- -----------
Net cash used in operating activities (4,491,965) (745,144)
----------- -----------
Cash flows from (to) investing activities:
Purchase of equipment and leasehold improvements (699,794) (289,067)
Acquisitions, net of cash acquired (17,427,618) (4,168,872)
Repayments of notes receivable 52,555 199,655
----------- -----------
Net cash used in investing activities (18,074,857) (4,258,284)
----------- -----------
Cash flows from (to) financing activities:
Net proceeds from commercial bank borrowings 20,483,000 10,555,138
Net repayments of commercial bank borrowings (5,000,000) (3,888,441)
Loan proceeds from affiliate -- 768,250
Loan payments to affiliate -- (268,500)
Repayment of subsidiary pre-acquisition indebtedness (1,800,000) (5,536,276)
Repayment of vendor debt -- (1,776,064)
Proceeds from exercise of stock options 261,113 313,750
Proceeds from issuance of common stock 8,382,259 5,758,801
Repayments of other long-term debt (968,748) (553,553)
Principal payments of capital lease obligations (162,555) (65,185)
----------- -----------
Net cash provided by financing activities 21,195,069 5,307,920
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,371,753) 304,492
Cash and cash equivalents, beginning of period 2,763,416 25,000
----------- -----------
Cash and cash equivalents, end of period $ 1,391,663 $ 329,492
=========== ===========
Supplemental Disclosure of Cash Flows Information
Cash paid for:
Interest $ 325,497 $ 410,354
=========== ===========
Taxes $ 96,079 $ 107,244
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE> 8
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND BUSINESS:
Capstone Pharmacy Services, Inc. (formerly known as Choice Drug
Systems, Inc.), a Delaware corporation, together with its wholly-owned
subsidiaries (the "Company") is principally engaged in the business of
providing pharmaceuticals and related services to long-term care
facilities, correctional institutions, hospitals and health
maintenance organizations. The Company's long-term care and health
maintenance organization customers are primarily located in New York,
New Jersey, Maryland, Pennsylvania, Delaware and Illinois, while the
Company's hospital and correctional facility customers are located
throughout the United States.
On August 28, 1995, the Company changed its state of incorporation
from New York to Delaware. Effective October 2, 1995, the Company
changed its name from Choice Drug Systems, Inc. to Capstone Pharmacy
Services, Inc. Additionally, effective December 31, 1995, the Company
changed its year-end from February 28 to December 31.
2. INCOME (LOSS) PER SHARE:
Net income (loss) per common share for the six month period ended June
30, 1995 was computed by dividing the net income (loss) by the
weighted average number of common shares outstanding. For the three
and six month periods ended June 30, 1996, and the three month period
ended June 30, 1995, primary and fully diluted earnings per common
share were computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents
outstanding. The amount of common stock equivalents outstanding was
computed using the treasury stock method.
3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the Company
for the three and six month periods ended June 30, 1996 and 1995
included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the
accompanying unaudited interim consolidated financial statements
reflect all adjustments necessary to present fairly the financial
position of the Company at June 30, 1996 and the results of its
operations for the three and six month periods ended June 30, 1996 and
1995 and the related statements of cash flows for the six months ended
June 30, 1996 and 1995.
The results of operations for the three and six month periods ended
June 30, 1996 and 1995 are not necessarily indicative of the results
to be expected for the full year. These interim condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission for the ten months ended December 31, 1995. The balance
sheet at December 31, 1995 has been derived from the audited financial
statements at that date.
6
<PAGE> 9
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company has restated its previously reported fiscal 1995 quarterly
results of operations to provide comparable 1995 calendar quarter data
to the results of operations presented during 1996. This restatement,
presented for the three and six month periods ended June 30, 1995,
required certain adjustments and reclassifications to conform 1995
monthly and quarterly amounts and their presentation to those used in
the 1996 quarterly periods.
4. ACQUISITIONS:
In May 1995, the Company acquired Premier Pharmacy, Inc. ("Premier"),
an institutional pharmacy services provider to long-term care
facilities and hospitals located in the New York metropolitan area and
in the southeastern United States.
During January 1996, the Company acquired Geri-Care Systems, Inc. and
its affiliate Scripts & Things, Inc. ("Geri-Care") a Brooklyn, New
York based provider of institutional pharmacy services primarily to
long-term care facilities in the New York metropolitan area. The
Agreement and Plan of Merger between the selling shareholders of
Geri-Care and the Company provides for, among other things, the future
payment of additional shares (338,462) of the Company's common stock
based on certain circumstances defined in the agreement. At closing,
the additional shares were issued and placed into an escrow account
and have been accounted for as a reduction of outstanding shares in
the accompanying consolidated balance sheets.
In February 1996, the Company acquired IMD Corporation ("IMD"), a
Chicago, Illinois based provider of institutional pharmacy services to
nursing homes located in the Chicago metropolitan area.
The Premier, Geri-Care and IMD acquisitions have been accounted for
under the purchase method of accounting with the assets and
liabilities of the acquired companies recorded at their estimated fair
market values at the dates of acquisition. Goodwill, representing the
excess of acquisition cost over the fair market value of the net
assets acquired is amortized over 40 years.
7
<PAGE> 10
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS:
The results of operations of acquired businesses are included in the
Company's consolidated results from the date of acquisition. Had the
acquisition of Premier and the private placement funding for this
acquisition (Note 7) and the acquisition of Geri-Care and IMD and the
bank borrowings used to fund the IMD acquisition (Note 6) occurred on
January 1, 1995, management estimates that the unaudited pro forma
results of operations for the three and six month periods ended June
30, 1996 and 1995 ($000 omitted, except for per share data) would
have been:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 24,119 $ 22,034 $ 47,868 $ 45,169
Cost of sales 15,270 14,029 29,828 28,217
------ ------ ------ ------
Gross profit 8,849 8,005 18,040 16,592
Operating expenses including
interest and taxes 8,356 9,471 17,240 18,578
Restructuring charges -- 6 -- (2,064)
------ ------ ------ ------
Income (loss) from
continuing operations 493 (1,460) 800 (3,690)
Discontinued operations -- 473 -- (298)
Extraordinary Item -- 283 -- 283
------ ------ ------ ------
Net income (loss) $493 $ (704) $ 800 $ (3,705)
====== ====== ====== ======
Net income (loss)
per common share $ .03 $ ( .07) $ .04 $ ( .39)
====== ====== ====== ======
</TABLE>
These pro forma operating results reflect certain adjustments,
including amortization of goodwill acquired, incremental interest
expense and related income tax effects. The pro forma results are
not necessarily indicative of the operating results that would have
occurred had the Premier, Geri-Care and IMD acquisitions been
consummated on January 1, 1995, nor are they necessarily indicative of
future results.
6. CREDIT FACILITY:
The Company maintains a Revolving Credit Facility and a Term Loan
Facility (the "Term Loan") with a commercial bank under which
borrowings of up to $21.0 million on the Revolving Credit Facility and
up to $14.0 million on the Term Loan are available. Borrowings under
the agreement are secured by substantially all of the assets of the
Company. Amounts available to be borrowed under this agreement are
based upon specific levels of accounts receivable, inventory and
EBITDA, as defined. The Revolving Credit Facility bears interest at
prime plus .25% and the Term Loan bears interest at the prevailing
LIBOR rate plus 1.25%. Borrowings under both facilities are subject
to other provisions and covenants, all as defined by the underlying
agreement.
8
<PAGE> 11
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. PRIVATE PLACEMENTS:
On December 16, 1994, the Company entered into a Stock Purchase
Agreement with Counsel Corporation, an Ontario corporation
("Counsel"), pursuant to which Counsel acquired 2,000,000 shares of
the Company's common stock for net proceeds of approximately
$7,191,000. 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.
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 shares of Common Stock at
the exercise price of $4.50 per share, and a three-year warrant to
acquire 0.4 shares of Common Stock at the exercise price of $5.50 per
share. Investors were granted registration rights with respect to
both the Common Stock included in the Units and the Common Stock
underlying the related warrants. The offering of Units raised
proceeds of approximately $5,760,000, net of related expenses at a
price of $3.65 per Unit. The proceeds of this private placement were
used in part to fund the acquisition of Premier.
On August 29, 1995, the Company completed a private placement of its
common stock. This offering consisted of 3,500,000 shares at a price
of $4.38 per share. The net proceeds of this offering were
approximately $15,080,000, net of related expenses including placement
commissions. There were no warrants issued in connection with this
private placement.
On April 18, 1996, the Company completed a private placement of its
common stock. This offering consisted of 1,035,000 shares at a price
of $8.50 per share. The net proceeds of this offering, approximately
$8,382,000 net of related expenses including placement commissions,
increased the Company's net worth so that its tangible net worth meets
the requirements of the Nasdaq stock market. There were no warrants
issued in connection with this private placement.
8. RESTRUCTURING:
During February 1995, the Company adopted a formal plan of corporate
restructuring in order to realign and consolidate businesses,
concentrate resources, and better position itself to achieve its
strategic growth objectives. This plan included the sale of the
Company's medical/surgical supply business and the closing of the
Company's long-term care pharmacy operation located in Missouri.
9. PHARMACY CLOSURE:
Effective June 30, 1996, the Company closed its Inwood, New York
long-term care pharmacy and consolidated its operations with those of
other of the Company's long-term care pharmacies in the New York
metropolitan area.
9
<PAGE> 12
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. DISCONTINUED OPERATIONS:
In connection with the adoption of the formal plan of corporate
restructuring (Note 8) on June 30, 1995, the Company discontinued the
operations of its mail order pharmacy subsidiary and effective July 3,
1995, sold the assets of its computer software division.
11. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases
of pharmaceuticals. In Light of the financial and operating
significance of purchases, the Company routinely monitors the
performance of its primary supplier and negotiates settlements and
future service levels based thereon. Anticipated settlement amounts
are recorded based upon management's estimates. The company changed
its primary supplier in December 1995.
12. SUBSEQUENT EVENTS:
During July, 1996, the Company completed the purchase of the
outstanding common stock of DCMed, Inc., an Englewood, New Jersey
based supplier of enteral nutrition and urologic supplies, from an
affiliate of Counsel. The purchase price was funded primarily by
advances under the Company's existing Term Loan and Revolving Credit
Facility.
Effective April 1, 1996, under the terms of a management agreement,
Capstone Pharmacy Services, Inc. began to manage the business
activities of DCMed, Inc. and recorded reimbursements in the amount of
$720,000 as a reduction of selling, general and administrative expenses
for the three and six month periods ended June 30, 1996.
On July 29, 1996, the Company acquired Symphony Pharmacy Services,
Inc. (Symphony), an institutional pharmacy provider, from Integrated
Health Services, Inc. (IHS). The Symphony purchase price was
comprised of $125,000,000 in cash and $25,000,000 in common stock
issued to IHS. The Company financed the cash portion of the Symphony
acquisition with a $25,000,000 investment by Counsel and a
$100,000,000 bridge loan. Management expects that the Symphony
acquisition will almost double the number of beds served by the
Company, the number of Company employees and the Company's net sales.
In connection with the Symphony acquisition, the Company is currently
contemplating a secondary offering of approximately 9,000,000 shares
of common stock at an assumed offering price of $12.00 per share. The
secondary offering is expected to generate net proceeds of
approximately $102,000,000 which will be used to refund the bridge
loan and certain other long-term indebtedness.
10
<PAGE> 13
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Capstone is a leading provider of institutional pharmacy services
to long-term care facilities and correctional institutions throughout
the United States. The Company provides its long-term care clients
with comprehensive institutional pharmacy services that include (i)
the purchasing, repackaging and dispensing of pharmaceuticals, (ii)
infusion therapy and Medicare Part B services, which are comprised of
enteral nutritional and urologic supplies and, (iii) pharmacy
consulting services, all of which are supported by computerized record
keeping and third party billing services. The Company serves its
long-term care clients primarily through regional pharmacies that are
open 24 hours, seven days a week. In the correctional business, the
Company provides pharmaceuticals primarily under capitated contracts
at correctional institutions that have privatized inmate health care
services.
In the first quarter of 1995, Capstone implemented a corporate
restructuring plan that included installation of a new management
team, refocusing the Company's operations on core institutional
pharmacy businesses and the initiation of an aggressive acquisition
strategy. In conjunction with the restructuring, the Company exited
certain non-strategic, unprofitable lines of business. Consequently,
the Company sold its medical/surgical supply operations, closed a
long-term care pharmacy in Missouri, discontinued its long-term care
mail order pharmacy operations and sold its computer software division.
Capstone took certain charges and realized certain gains relating to
the discontinuation of these operations. The Company anticipates that
certain additional one-time charges related to the Symphony
acquisition will be taken in the third and fourth quarters of 1996.
The acquisition of institutional pharmacy companies has resulted
in a significant change in the Company's financial profile. Since May
1995, the Company has completed three acquisitions that added
approximately $49,000,000 in 1995 annualized net sales. On July 29,
1996, the Company acquired Symphony Pharmacy Services, Inc., adding
approximately 445 long-term care facilities containing over 40,000
beds and approximately $109,000,000 in 1996 annualized net sales.
The Symphony acquisition significantly increases the Company's client
base and geographic scope. The Company also acquired, effective July
1, 1996, DCMed, Inc., a provider of Medicare Part B services. This
acquisition adds approximately $12,000,000 in 1996 annualized net sales
to the Company. All of these acquisitions have been accounted for using
the purchase method of accounting and, as a result, the Company will
incur significant future amortization expense associated with goodwill.
11
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1995
Net Sales. Net sales increased to $24,119,000 in the 1996 period
from $12,384,000, in the 1995 period, an increase of $11,735,000 or
94.8%. Of this increase, approximately $11,394,000 was attributable
to the acquisitions of Premier, Geri-Care, and IMD.
Cost of Sales: Cost of sales includes the cost of
pharmaceuticals sold to patients and institutions. Cost of sales
increased to $15,270,000 in the 1996 period from $7,940,000 in the
1995 period, an increase of $7,330,000 or 92.3%. Of this increase,
approximately $7,085,000 was attributable to acquisitions, and the
remainder resulted from increased sales volumes in existing
operations. As a percentage of net sales, cost of sales was 63.3% in
the 1996 period compared to 64.1% in the 1995 period.
Selling, General and Administrative Expenses: Selling, general
and administrative expenses include salaries, benefits, facility
expenses and other administrative overhead. Selling, general and
administrative expenses increased to $7,176,000 in the 1996 period
from $4,778,000 in the 1995 period, an increase of $2,398,000 or
50.2%. Of this increase, approximately $3,823,000 was attributable to
acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 29.8% in the 1996 period compared to
38.6% in the 1995 period. The decrease was due to the sale of the
medical/surgical supply business, reduced costs as the result of the
corporate restructuring process as discussed above and the expense
reimbursements associated with the DCMed, Inc. management agreement
discussed in the notes to financial statements.
Depreciation and Amortization. Depreciation and amortization
increased to $593,000 in the 1996 period from $282,000 in the 1995
period, an increase of $311,000 or 110.3%. Of this increase
approximately $155,000 was attributable to depreciation related to
acquisitions. Amortization of goodwill increased by $157,000 in the
1996 period as the result of acquisitions.
Interest Expense. Net interest expense increased to $421,000 in
the 1996 period from $253,000 in the 1995 period, an increase of
$168,000 or 66.4%. This increase primarily resulted from interest
expense related to bank borrowings to fund the acquisition of IMD.
Income Taxes. Benefit for income taxes in the 1996 period
consists of accruals for estimated state and local income taxes based
upon apportioned state taxable income offset by estimated refundable
federal income taxes resulting from the benefit of net operating loss
carrybacks and utilization of net operating loss carryforwards.
Income (Loss) from Continuing Operations. Income from continuing
operations increased to $493,000 in the 1996 period from a loss of
$548,000 in the 1995 period, an increase of $1,041,000. This
increase was attributable to increased sales primarily as the result
of acquisitions and the reduction of cost of sales and selling,
general and administrative expenses as a percentage of sales.
12
<PAGE> 15
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales increased to $46,147,000 in the 1996 period
from $23,140,000, in the 1995 period, an increase of $23,007,000 or
99.4%. Of this increase, approximately $22,049,000 was attributable
to the acquisitions of Premier, Geri-Care, and IMD.
Cost of Sales: Cost of sales includes the cost of
pharmaceuticals sold to patients and institiutions. Cost of sales
increased to $28,846,000 in the 1996 period from $14,847,000, in the
1995 period, an increase of $13,999,000 or 94.3%. Of this increase,
approximately $13,517,000 was attributable to acquisitions, and the
remainder from increased sales volumes in existing operations. As a
percentage of net sales, cost of sales was 62.5% in the 1996 period
compared to 64.2% in the 1995 period.
Selling, General and Administrative Expenses: Selling, general
and administrative expenses include salaries, benefits, facility
expenses and other administrative overhead. Selling, general and
administrative expenses increased to $14,453,000 in the 1996 period
from $8,651,000 in the 1995 period, an increase of $5,802,000 or
67.1%. Of this increase, approximately $7,647,000 was attributable to
acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 31.3% in the 1996 period compared to
37.4% in the 1995 period. The decrease was due to the sale of the
medical/surgical supply business, reduced costs as the result of the
corporate restructuring as discussed above and expense reimbursements
associated with the DCMed, Inc. management agreement discussed in the
notes to financial statements.
Depreciation and Amortization. Depreciation and amortization
increased to $1,162,000 in the 1996 period from $563,000 in the 1995
period, an increase of $599,000 or 106.4%. Of this increase,
approximately $309,000 was attributable to depreciation related to
acquisitions. Amortization of goodwill increased by $310,000 in the
1996 period as the result of acquisitions.
Interest Expense. Interest expense increased to $685,000 in the
1996 period from $465,000 in the 1995 period, an increase of $220,000
or 47.3%. This increase primarily resulted from interest expense
related to bank borrowings to fund the acquisition of IMD.
Income Taxes. Provision (benefit) for income taxes consist of
accruals for estimated state and local income taxes based upon
apportioned state taxable income, offset by estimated refundable
federal income taxes resulting from the benefit of net operating loss
carryforwards and the utilization of net operating loss carryforwards
in the 1996 period.
Income (Loss) from Continuing Operations. Income from continuing
operations increased to $779,000 in the 1996 period from a loss of
$2,961,000 in the 1995 period, an increase of $3,740,000. This
increase was attributable primarily to restructuring charges in the
amount of $2,064,000 incurred in the 1995 period, increased sales
primarily as the result of acquisitions and the reduction of cost of
sales and selling, general and administrative expenses as a percentage
of sales.
13
<PAGE> 16
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
The Company requires capital primarily for the acquisition of
institutional pharmacy companies, to finance its working capital
requirements and for the purchase of equipment for existing
pharmacies.
The Company's net cash used in operating activities was $4,492,000
for the 1996 period and $745,000 for the 1995 period. Generally, the
cash used in operating activities in each of the periods resulted from
increased working capital requirements. Specifically, net cash from
operating activities in the 1996 period was impacted by a $3,387,000
decrease in accounts payable and increases in accounts receivable and
in inventories of $1,762,000 and $662,000, respectively. Net cash
from operating activities in the 1995 period was impacted by a net
loss of $2,975,000, a decrease of $1,285,000 in accounts payable and
decreases in accounts receivable and inventories of $1,677,000 and
$908,000, respectively.
The Company's net cash used in investing activities was
$18,075,000 and $4,258,000 for the six months ended June 30, 1996 and
1995, respectively. Net cash from investing activities was impacted
by $17,428,000 of acquisition spending for Geri-Care and IMD in the
six months ended June 30, 1996 and by $4,169,000 of acquisition
spending for Premier in the six months ended June 30, 1995.
Net cash provided by financing activities was approximately
$21,195,000 and $5,308,000 for the six months ended June 30, 1996 and
1995, respectively. Net cash from financing activities was impacted
by $20,483,000 and $10,555,000 of bank borrowings; equity offerings of
$8,382,000 and $5,759,000; and by repayments of bank and other
indebtedness of $6,800,000 and $11,201,000 each in the six months
ended June 30, 1996 and 1995, respectively.
The Company's current ratio was 4.0:1 and 2.0:1 at June 30, 1996
and December 31, 1995, respectively. The increased current ratio at
June 30, 1996 was due primarily to the increase in accounts
receivable, inventories and prepaid expenses coupled with a reduction
in accounts payable and the current portion of long-term debt.
On July 29, 1996, the Company acquired Symphony Pharmacy Services,
Inc. (Symphony), an institutional pharmacy provider, from Integrated
Health Services, Inc. (IHS). The Symphony purchase price will be
comprised of $125,000,000 in cash and $25,000,000 in common stock
issued to IHS. The Company intends to finance the cash portion of the
Symphony acquisition with a $25,000,000 investment by Counsel and a
$100,000,000 bridge loan. Management expects that the Symphony
acquisition will almost double the number of beds served by the
Company, the number of Company employees and the Company's net sales.
In connection with the Bridge Loan, the Company incurred a commitment
fee of $2,750,000, which together with certain other one-time charges
will be recognized as an expense in the quarter ending September 30,
1996.
In conjunction with the Symphony acquisition, the Company is
currently contemplating a secondary offering of approximately
9,000,000 shares of common stock at an assumed offering price of
$12.00 per share. The secondary offering is expected to generate net
proceeds of approximately $102,000,000 which will be used to refund
the bridge loan and certain other long-term indebtedness.
14
<PAGE> 17
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
During August 1996, the Company registered the shares underlying
its outstanding Series A and Series B warrants. Upon exercise of the
650,000 Series A warrants at an exercise price of $6.00 per share,
holders of the Series A warrants will receive 650,000 shares of Common
Stock and 650,000 newly-issued Series B warrants which can be
exercised through August 1997 at a price of $10.00 per share. If
fully exercised, net proceeds from the Series A warrants will total
$3,900,000 and will be used to repay existing debt and for general
working capital purposes.
15
<PAGE> 18
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On June 4, 1996, the Company held its 1996 Annual Meeting of
Stockholders for the purpose of electing 10 directors and amending the
Company's 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel
and Directors ("Key Personnel Plan") to increase the number of shares available
for grant thereunder to 1,600,000.
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
R. Dirk Joseph F. John Morris Albert
Allison Furlong, III Haronian A. Perlis Reichmann
------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
For 10,468,452 10,468,152 10,451,752 10,468,152 10,465,472
Against - - - - -
Withheld - - - - -
Abstentions 161,753 162,053 178,453 162,053 164,733
Non- 3,992,797 3,992,797 3,992,797 3,992,797 3,992,797
Voting (1)
Eligible 14,623,002 14,623,002 14,623,002 14,623,002 14,623,002
Shares
</TABLE>
<TABLE>
<CAPTION>
J. Brendan Allan C. Edward Gail John E.
Ryan Silber Sonshine Wilensky, Ph.D. Zuccotti
----------- --------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
For 10,466,872 10,468,152 10,468,152 10,465,872 10,466,752
Against -- -- -- -- --
Withheld -- -- -- -- --
Abstentions 163,333 162,053 162,053 164,333 163,453
Non-Voting 3,992,797 3,992,797 3,992,797 3,992,797 3,992,797
(1)
Eligible 14,623,002 14,623,002 14,623,002 14,623,002 14,623,002
Shares
</TABLE>
KEY PERSONNEL PLAN
<TABLE>
<S> <C>
For: 7,385,657
Against: 574,455
Withheld: ---
Absentions: 23,524
Non-Voting 6,639,366
(1)
Eligible 14,623,002
Shares
</TABLE>
(1) Includes broker non-votes.
16
<PAGE> 19
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
a) The exhibits filed as a part of this Report are listed in
the Exhibit Index immediately following the signature page.
b) Reports on Form 8-K filed in the second three months of
1996.
<TABLE>
<CAPTION>
Date Filed Report
---------- ------
<S> <C>
May 10, 1996 Current Report on Form 8-K/A dated February 29, 1996,
amending Form 8-K dated February 29, 1996, and reporting
certain financial statements of IMD and pro forma financial
information reflecting the acquisition of IMD by the Company.
</TABLE>
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
--------------------------------
(Registrant)
Dated: August 13, 1996 By: /S/ Donald W. Hughes
----------------------------
Donald W. Hughes
Vice President and
Chief Financial Officer
18
<PAGE> 21
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 Form of Asset Purchase Agreement among IHS, Symphony, various
of its subsidiaries and the Company (incorporated by reference
to Exhibit 2 to Form 8-K dated July 18, 1996)
3.1 Certificate of Incorporation of Choice Drug Systems, Inc.
(incorporated by reference to Exhibit 3.1 to Form 10-Q for
period ending August 31, 1995)
3.2 Certificate of Ownership and Merger Merging Choice Mergeco,
Inc. into Choice Drug Systems, Inc. (incorporated by reference
to Exhibit 3.2 to Form 10-Q for period ending August 31, 1995)
3.3 Bylaws of Choice Drug Systems, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-Q for period ending August 31, 1995)
27 Financial Data Schedule (SEC use only)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPSTONE PHARMACY SERVICES, INC. FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,392
<SECURITIES> 0
<RECEIVABLES> 22,504
<ALLOWANCES> 1,422
<INVENTORY> 7,408
<CURRENT-ASSETS> 31,324
<PP&E> 9,406
<DEPRECIATION> 5,567
<TOTAL-ASSETS> 69,776
<CURRENT-LIABILITIES> 7,811
<BONDS> 20,935
0
0
<COMMON> 155
<OTHER-SE> 40,875
<TOTAL-LIABILITY-AND-EQUITY> 69,776
<SALES> 46,147
<TOTAL-REVENUES> 0
<CGS> 28,846
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,297
<LOSS-PROVISION> 468
<INTEREST-EXPENSE> 685
<INCOME-PRETAX> 851
<INCOME-TAX> 72
<INCOME-CONTINUING> 779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 779
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
