<PAGE> 1
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE:
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[ X ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from February 28, 1995 to December 31, 1995
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 (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. [ X ]
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 March
18, 1996, was $94,775,135.
On March 18, 1996, 14,623,002 shares of the registrant's $0.01 par
value Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Part III,
Items 10, 11, 12 and 13 of this Form 10-K: Portions of the Registrant's
definitive proxy materials for its 1996 Annual Meeting of stockholders.
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTORY SUMMARY
Capstone Pharmacy Services, Inc. (the "Company") is an institutional
pharmacy providing prescription and non-prescription pharmaceuticals and
related services including intravenous therapy services and pharmacy consulting
services, to residents of over 200 long-term care facilities containing
approximately 44,000 beds in New York, New Jersey, Maryland, Massachusetts,
Pennsylvania, Illinois and Delaware. In addition, the Company provides
services to inmates in over 120 correctional facilities housing over 120,000
inmates throughout the United States making Capstone the largest private
provider of such services to inmates in the United States. The Company also
provides pharmaceuticals and related services to hospitals and health
maintenance organizations.
MATERIAL CORPORATE DEVELOPMENTS
Name Change, Reincorporation and Fiscal Year Change. 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 fiscal year-end from February 28 to
December 31.
Acquisitions. On May 22, 1995, the Company acquired Premier Pharmacy,
Inc. ("Premier"), another institutional pharmacy, for a purchase price of $4.25
million (the "Premier Acquisition"). Premier's operations generate annualized
revenues of approximately $24 million, primarily from pharmacy services
provided to long-term care facilities and hospitals.
Effective January 3, 1996 the Company acquired Geri-Care Systems, Inc.
and Scripts & Things, Inc. ("Geri-Care"), a privately held provider of
pharmacy services to nursing homes in the New York metropolitan area that
generates annualized revenues of approximately $7,000,000. The purchase price
was approximately $6,400,000, payable $1,350,000 in cash and promissory notes,
and the remainder in common stock of the Company. The agreement also includes
an additional contingent incentive payment of $1,500,000, payable in common
stock of the Company, as compensation for certain new business to be generated
through 1998 by the selling shareholders of Geri-Care.
On February 29, 1996, the Company entered into an Asset Purchase
Agreement with IMD Corporation ("IMD") by which the Company acquired the
operations of IMD. The purchase price was approximately $15,500,000 in cash.
2
<PAGE> 3
New Management. Since December 1994 the Company's management has been
altered substantially to include a new Chairman, Vice Chairman, and Chief
Executive Officer, all of whom have substantial experience in the health care
industry. R. Dirk Allison, former Chief Executive Officer of Premier, was
elected as President and Chief Executive Officer of the Company and Allan C.
Silber and Morris Perlis became Chairman and Vice Chairman of the Company,
respectively.
Prior to the arrival of new management, the Company had begun the
disposal of certain non-core business lines and restructuring of its remaining
business in an effort to return the Company to profitability. The Company's
new management has begun a broader and more substantial reorganization and
restructuring of the Company that is expected to include consolidation of
operations, elimination and reduction of various overhead expenses and
divestiture of certain non-performing or under-performing assets.
Credit Facility. On May 22, 1995, the Company entered into a
three-year revolving line of credit (as amended, the "Line of Credit") in the
amount of $10,000,000 from Creditanstalt Corporate Finance, Inc.
("Creditanstalt"). The initial borrowings under the Line of Credit were used
in conjunction with funds from the May Private Placement (as discussed below)
to pay off the Company's prior bank indebtedness, pay off Premier's prior bank
indebtedness, fund the Premier Acquisition and retire certain other trade
debts. The Line of Credit bears interest at prime rate plus .5%, and is secured
by substantially all the assets of the Company. The Line of Credit replaced a
$6,000,000 credit facility at prime rate plus 1.5%.
During January 1996, Creditanstalt agreed to amend the Line of Credit
to provide for an increase in borrowings available under the Line of Credit to
$15,000,000 and to add a term loan facility (the "Term Loan") in the amount of
$10,000,000 (collectively, the "Credit Facility"). Creditanstalt has agreed
that availability under the Line of Credit and the Term Loan will be increased
to $21,000,000 and $14,000,000, respectively, in the event the Company raises
at least $7,500,000 of additional common equity. Borrowings under the Credit
Facility are secured by substantially all of the assets of the Company, bear
interest at rates of either prime plus .25% or LIBOR plus 1.25% and are subject
to other restrictions and loan covenants, all as defined by the underlying
agreements.
Private Placements. On May 22, 1995, the Company completed a private
placement (the "May Private Placement") 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 $5,759,000, net of
related costs at a price of $3.65 per Unit.
The securities sold in the May Private Placement are unregistered and
are thus subject to typical restrictions on resale or transfer. In connection
with the May Private Placement, Counsel Corporation, a Toronto, Ontario, Canada
corporation ("Counsel") agreed to abandon certain demand
3
<PAGE> 4
and piggyback registration rights previously granted to it by the Company.
Investors in the May Private Placement, including Counsel, are however,
entitled to demand and piggyback registration rights comparable to those
abandoned by Counsel. The terms of the May Private Placement were approved by
an independent committee of the Board of Directors. In addition, the Board of
Directors received an opinion from an independent investment banking firm to
the effect that the transaction was fair from a financial point of view to the
Company's shareholders.
On August 29, 1995, the Company completed a second private placement
(the "August 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 $15,061,000, net of related costs including placement
commissions. There were no warrants issued in connection with the August
Private Placement. The proceeds of this private placement were used to retire
outstanding debt of $9,650,000 due to Creditanstalt and for general working
capital purposes. The Company has also granted registration rights with
respect to shares issued under the August Private Placement comparable to the
registration rights granted in the May Private Placement.
The Company is currently contemplating a private placement of up to
approximately 3,000,000 shares at a price determined based on the average
closing price of the Company's common stock on the five trading days prior to
the closing thereof. It is expected that registration rights will be granted
to the purchasers in the private placement that are similar to the rights
granted by the Company in the May and August Private Placements.
Extension of Expiration Date of Redeemable Warrants and Related
Potential Issuance of Class B Warrants. In August 1995, the Company's Board of
Directors extended the expiration date of certain outstanding redeemable
warrants issued as part of the Company's initial public offering (the "IPO
Warrants") to March 31, 1996. Subsequent to year-end, the expiration date of
the IPO Warrants was extended further to June 30, 1996. The exercise price of
the 650,000 IPO Warrants is $6.00 per share. The expiration date of the
650,000 Class B Warrants (which are exercisable at $10.00 per share) to be
issued upon exercise of the IPO Warrants was also extended subsequent to
year-end to June 30, 1997. The other terms of the IPO Warrants remain the
same.
THE BUSINESS
The Company's primary business consists of supplying prescription
drugs to institutional customers. The Company typically dispenses prescription
drugs to health care facilities utilizing unit dose packaging, whereby the
Company individually packages drugs to meet each patient's needs for a day or
for some multi-day period. Each drug is then dispensed by either individually
sealing the required dose or sealing such dose in an individual cavity within a
blister package. The Company can customize the timing and packaging of its
delivery system to meet specific client needs.
The Company utilizes a simplified order processing system which
enables a health care facility to order pharmaceuticals using pre-printed forms
and generally to take delivery of such orders within 24 hours. The order entry
form is custom-printed and contains computer generated information
4
<PAGE> 5
relating to the currently prescribed drug regimen for each patient, certain
vital statistics about the patient and a check-off list for the physician to
use to request special diets, laboratory tests and therapy consultations. The
treating physician at a health care facility reviews the drug regimen on the
printed form for accuracy and completeness with respect to each patient, making
changes as necessary.
Once delivered to the Company, the order entry forms are entered into
a computer system, and the data is used to fill prescriptions and print
prescription labels containing information about the patient, the drug ordered
and the regimen prescribed by the physician.
Suppliers. The Company purchases substantially all of its
pharmaceutical inventories from wholesalers and manufacturers. In connection
therewith, the Company has entered into a primary wholesaler agreement with a
supplier (the "Supplier") pursuant to which the Company receives twice-daily
deliveries of ordered inventory from the Supplier. The Company also has in
place secondary wholesale agreements to further minimize the number of its
channels of distribution while maximizing inventory quality and cost savings to
the Company. Because of readily available alternatives, management believes
that the Company is not dependent on any one supplier.
The Company has historically maintained between 50 and 60 days of
pharmaceutical inventory on hand. The Company is taking steps to reduce this
inventory level through improved supplier arrangements, improved purchasing and
dispensing systems and additional internal controls.
Customers. The primary customers of the Company are long-term care
facilities, correctional facilities, and hospitals. The Company is not
dependent on any one customer. The table below sets forth the percentage of
revenues from continuing operations derived from each payor source for the
periods presented:
<TABLE>
<CAPTION>
Year Ended February 28,
Ten Months Ended ----------------------------------------
Payor Source December 31, 1995 1995 1994 1993
- ------------ ----------------- ---- ---- ----
<S> <C> <C> <C> <C>
Long-Term Care Facilities 63.3% 59.2% 55.9% 56.5%
Correctional Facilities 23.1% 21.1% 16.2% 15.4%
Hospitals 13.6% 6.8% 4.8% 5.4%
Medical/Surgical 0.0% 12.9% 23.1% 22.7%
</TABLE>
Competition. The industry in which the Company operates is highly
competitive. Among the Company's competitors are companies which have
substantially greater capital, marketing and other resources than those
available to the Company. The Company experiences competition from national,
regional, and local providers of similar services. The Company's strategy is
to create a competitive advantage by developing market dominance as the low
cost, high quality provider. The Company has experienced gross margin pressure
in its markets as the health care market continues
5
<PAGE> 6
to develop lower cost alternatives. The Company believes that its strategy of
consolidation and systems development will allow it to compete effectively in
this environment.
Regulation. As with all health care businesses, the Company is
subject to extensive Federal, state and local regulation. The Company's
pharmacy operations are regulated by Federal and state laws governing the
distribution, sale, repackaging and dispensing of drugs and devices, and
certain of the Company's employees are subject to state laws and regulations
governing the professional practice of pharmacy.
As a provider of goods and services under the Medicare and Medicaid
programs, the Company is subject to all laws, rules and regulations concerning
the requirements for participation in these programs, including quality
assurance standards, "anti-kickback" legislation, and other statutes and
regulations designed to prevent fraud and abuse.
Failure to abide by applicable laws governing its business could
subject the Company to civil monetary penalties, exclusion from the Medicare
and Medicaid programs, criminal penalties and cancellation of licenses and
permits; such adverse action could have a material adverse affect on the
Company.
Health care is an area of extensive and dynamic regulatory change.
Changes in laws or regulations, or new interpretations of existing laws or
regulations, could have a dramatic effect on permissible activities, the
relative costs associated with doing business, and the amount and availability
of reimbursement by government and third-party payors. There can be no
assurance that new regulations which could adversely affect the Company's
business will not be imposed by Federal, state or local governments, or that
changing conditions will not affect the Company's ability to comply with
regulations in the markets in which it wishes to commence, or presently
conducts, business.
Employees. As of March 18, 1996, the Company had approximately 502
full-time employees and approximately 184 part-time employees. Of the
Company's full-time employees, 108 are licensed pharmacists. Management
believes the Company's relationship with its employees is good. None of the
Company's employees are represented by labor unions under any collective
bargaining agreement.
6
<PAGE> 7
ITEM 2. PROPERTIES.
The following table sets forth, with respect to properties leased and
owned by the Company at December 31, 1995, the location of the property, the
amount of square feet of the property, the year in which the lease expires, if
applicable, and the use which the Company makes of such facilities:
<TABLE>
<CAPTION>
Square Feet Expiration
Address (approximate) of Lease Use
------- ------------- -------- ---
<S> <C> <C> <C>
Leased:
2930 Washington Boulevard 63,000 June 2002 Executive Offices, Sales,
Baltimore, Maryland Warehouse and Distribution Center
414 Alfred Avenue 23,487 October 1997 Sales, Warehouse and Distribution
Teaneck, New Jersey Center
457 Doughty Boulevard 11,000 October 1996 Sales, Warehouse and Distribution
Inwood, New York Center
310 Turner Way 1,500 March 1997 Sales, Warehouse and Distribution
Aston Township, Pennsylvania Center
419 W. Redwood Street 2,179 December 1995 Ambulatory Pharmacy
Baltimore, MD 21201
301 St. Paul Place 1,490 January 1997 Ambulatory Pharmacy
Baltimore, MD 21201
3702 W. Truman Blvd. 3,000 Renews annually DOC Pharmacy
Jefferson City, MO 65109 with pharmacy
contract
700 Washington Blvd. 198 December 1997 Ambulatory Pharmacy
Baltimore, MD 21230
2401 W. Belvedere Ave. 1,200 December 1998 Ambulatory Pharmacy
Baltimore, MD 21215
5 O'Dell Plaza 8,300 October 1999 Distribution Center
Yonkers, NY 10701
500 Northridge Road, #600 4,508 September 1998 Subleased
Atlanta, GA 30350
9901 East Valley Ranch Pkwy 7,776 July 1999 Subleased
Irving, TX 75063
Owned:
907 East 5th Street 1,000 Leased
Monahans, Texas
</TABLE>
7
<PAGE> 8
The Company considers that, in general, its physical properties are
well maintained, in good operating condition and adequate for their intended
purposes.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit styled Marvin Levine, Gloria Levine, and John McBay v.
-----------------------------------------------
Capstone Pharmacy Services, Inc., PremierPharmacy, Inc., and Compuscript, Inc.
- ------------------------------------------------------------------------------
was filed in the Supreme Court of the State of New York, County of Westchester
(No. 19238/95) on November 15, 1995. Plaintiffs sold the stock of Compuscript,
Inc. ("Compuscript") to Premier in 1993 pursuant to the terms of a purchase
agreement (the "Agreement"). Plaintiffs claim Premier, which the Company has
acquired, and Compuscript owe them approximately $1,000,000 under promissory
notes delivered to plaintiffs as part of the consideration for plaintiffs'
Compuscript stock. Plaintiffs claim Compuscript and Premier owe plaintiffs an
additional $1,100,000 because of the alleged occurrence of certain events that
would give rise to this obligation under the Agreement. Plaintiffs finally
claim the Company is liable to plaintiffs for tortiously interfering with
plaintiffs' rights under the Agreement with Premier and Compuscript and under
the promissory notes. Plaintiffs seek total judgments of $7,100,000, plus
interest and costs against the Company and its subsidiaries. All defendants
have answered the Complaint and are vigorously contesting plaintiffs' claims.
In addition, Premier has filed a counterclaim against plaintiffs for breaches
of certain representations and warranties in the Agreement. Discovery has not
yet begun.
Primary Medical Care, Inc., d/b/a Primary Incontinence Care, Inc.
("Primary"), a subsidiary of the Company, has received notice from the Medicare
Part B division of Blue Cross and Blue Shield of Florida, Inc. ("BC/BS"), that
Primary owes Medicare Part B approximately $2.5 million as a result of alleged
overpayments for certain supplies billed to Medicare by Primary prior to
October 20, 1993, related to the care and maintenance of "G-tubes" for patients
on enteral or parenteral feeding. BC/BS has indicated that it may forward the
refund request to the Health Care Financing Administration ("HCFA") for further
recovery actions. Although it is not possible to predict the outcome of this
matter with certainty, management believes that it has both legal and equitable
defenses to any action for recovery of the amount claimed and intends to
vigorously defend against these claims.
In connection with the settlement of a class action law suit filed in
June 1993, the parties have agreed to accept in full settlement $600,000 in
common stock to be issued by the Company and $650,000 in cash, which was
previously paid by the Company's directors and officers liability insurance
carrier. The common stock is issuable upon final approval of an escrow
agreement and the number of shares to be issued will be based upon a specified
formula, which will result in the issuance of approximately 98,500 common
shares. The Company's portion of the proposed settlement ($600,000), is
included in costs in connection with litigation in the consolidated statement
of operations, for the year ended February 28, 1995.
8
<PAGE> 9
Except for the above described proceedings, as of March 18, 1996,
there were no material legal proceedings pending against the Company nor, to
the Company's knowledge, were any material proceedings against it contemplated
by any governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter (which included December only) of the ten
months ended December 31, 1995, no matters were submitted to a vote of the
Company's security holders.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Shares are traded on the NASDAQ National Market System
(the "NASDAQ Stock Market") under the designation "DOSE." The following table
indicates high and low sales quotations for the periods indicated based upon
information supplied by the NASDAQ Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
Bid Quotations
--------------
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended February 28, 1995
-----------------------------------
1st Quarter . . . . . . . . . . . . . . . . . . . . . . $3.250 $2.375
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . 3.875 2.125
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . 4.562 2.750
4th Quarter . . . . . . . . . . . . . . . . . . . . . . 4.312 3.375
Ten Months Ended December 31, 1995(1)
----------------------------------
1st Quarter . . . . . . . . . . . . . . . . . . . . . . 5.000 2.812
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . 5.562 4.000
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . 6.938 5.188
4th Quarter (December only) . . . . . . . . . . . . . . 7.875 6.250
</TABLE>
- --------------------------------------------
(1) Effective December 31, 1995, the Company changed its fiscal year end from
February 28 to December 31.
As of March 18, 1996, the number of record holders of the Company's
shares was approximately 271, which does not include individual participants in
security position listings. The Company believes that the number of beneficial
owners of the Company's shares exceeds 400, the minimum number required by the
NASDAQ Stock Market of its listed companies. On March 18, 1996, the closing
bid quotation for the Company's common stock was $9.062, as reported by the
NASDAQ Stock Market.
The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. The Company's loan
arrangements prohibit the payment of dividends.
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Ten Months Fiscal Year Ended February 28,
Ended -----------------------------------------------------
December 31,
1995 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $ 48,841 $ 43,608 $ 51,254 $ 39,555 $ 25,793
(Loss) income from continuing
operations (645) (10,781) (521) (1,351) 3,077
(Loss) income from operations of
discontinued business segments 19 (135) (340) (241) (37)
Gain (loss) on disposal of
discontinued business segments, net 565 (503) - - -
Net income (loss) 222 (11,420) (862) (1,593) 1,580
EARNINGS PER SHARE DATA
Primary:
Continuing operations $ (0.06) $ (1.67) $ (0.08) $ (0.22) $ 0.32
Discontinued operations 0.05 (0.10) (0.06) (0.04) (0.01)
Extraordinary Item 0.03 - - - -
----------- ----------- ---------- ----------- -----------
Net income (loss) $ 0.02 $ (1.77) $ (0.14) $ (0.26) $ 0.31
=========== =========== ========== =========== ===========
Fully diluted:
Continuing operations $ (0.05) $ (1.67) $ (0.08) $ (0.22) $ 0.32
Discontinued operations 0.05 (0.10) (0.06) (0.04) (0.01)
Extraordinary item 0.02 - - - -
----------- ----------- ---------- ----------- -----------
Net income (loss) $ 0.02 $ (1.77) $ (0.14) $ (0.26) $ 0.31
=========== =========== ========== =========== ===========
Weighted average number of
Common shares outstanding
Primary 11,337,997 6,458,891 6,071,687 6,187,376 5,147,667
=========== =========== ========== =========== ===========
Fully Diluted 12,398,401 6,458,891 6,071,687 6,187,376 5,147,667
=========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, February 28,
------------ ----------------------------------------------------
1995 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF BALANCE SHEETS
Total Current Assets $ 21,950 $ 11,758 $ 15,617 $ 17,654 $ 8,970
Total Assets 42,131 19,212 24,360 26,717 11,453
Total Current Liabilities 11,135 5,848 13,685 16,134 3,047
Total Long-Term Liabilities 4,156 8,586 2,358 1,506 185
Total Stockholders' Equity 26,840 4,778 8,316 9,077 8,220
</TABLE>
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Ten Months Ended December 31, 1995 Compared to Fiscal Year Ended February 28,
1995
NET SALES:
Net sales for the ten months ended December 31, 1995 were
approximately $48,841,000 compared to approximately $43,608,000 for
the fiscal year ended February 28, 1995. During the ten months ended
December 31, 1995, net sales increased due to the acquisition of
Premier and the addition of new correctional business, partially
offset by the decline of revenues resulting from the sale of the
Company's medical/surgical supply business.
COST OF SALES:
Cost of sales includes the cost of drugs sold to patients and
institutions. Cost of sales for the ten months ended December 31,
1995 was approximately $30,654,000 as compared to approximately
$27,970,000 for the fiscal year ended February 28, 1995. As a
percentage of sales, cost of sales for the ten months ended December
31, 1995 was 62.8% compared to 64.1% for fiscal 1995. The lower
percentage in the current year is due to the sale of the lower margin
medical/surgical supply business. In addition, the Company
renegotiated its purchasing contracts in the most recent period
lowering its cost of sales. Cost of sales was not materially affected
by price changes in products purchased during the period.
The Company sells its pharmaceutical services at an amount based upon
the average wholesale price of the drug, which is set by the drug
manufacturer, plus a dispensing fee. In some jurisdictions in which
the Company operates, the dispensing fee is regulated by certain
governmental agencies. Therefore, the Company absorbs any
inflationary costs until the allowable dispensing fee is increased by
such governmental agencies. In addition, as the cost of a drug
increases, the manufacturer generally increases its average wholesale
price, which is normally passed on to the Company. The Company's
pricing flexibility with respect to sales generated by other products
is limited by competition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses, excluding depreciation
and amortization, were approximately $17,469,000 or 35.8% of sales for
the ten months ended December 31, 1995, compared to approximately
$18,637,000 or 42.7% of sales for the fiscal year ended February 28,
1995. The percentages decreased due to the sale of the
medical/surgical supply business and reduced costs as a result of the
restructuring and consolidation of corporate operations.
12
<PAGE> 13
INTEREST EXPENSE:
Net interest expense was approximately $634,000 for the ten months
ended December 31, 1995 compared to approximately $905,000 for the
fiscal year ended February 28, 1995. This decrease results primarily
from the reduction of the Company's debt using proceeds of the May and
August private placements and the difference between the ten month and
twelve month periods.
OTHER INCOME:
Other income was approximately $432,000 for the ten months ended
December 31, 1995, compared to approximately $104,000 for the fiscal
year ended February 28, 1995. The increase results primarily from a
gain on the sale of assets from the Company's medical/surgical supply
business.
INCOME TAXES:
Benefit for income taxes for the ten months ended December 31, 1995
was approximately $225,000 compared to approximately $466,000 for the
fiscal year ended February 28, 1995. The benefit for income taxes for
the ten months ended December 31, 1995, primarily results from the
carryback of a prior year taxable loss to prior periods and represents
a change in estimate of the amount refundable based upon final
preparation of the tax return.
NET INCOME (LOSS):
Net income for the ten months ended December 31, 1995 was
approximately $222,000 compared to a net loss of approximately
$11,420,000 for the fiscal year ended February 28, 1995. This
increase was partially attributed to the inclusion in the prior period
of nonrecurring costs in connection with claims and litigation of
approximately $4,389,000 and restructuring charges of $2,069,000. The
remaining variance is due to the acquisition of Premier, as well as to
various business changes, many of which are discussed in the captions
above.
Fiscal Year Ended February 28, 1995 Compared to Fiscal Year Ended February 28,
1994
NET SALES:
During the fiscal year ended February 28, 1995, the Company's net
sales decreased 14.9% to approximately $43,608,000 from approximately
$51,254,000 in the prior year. The decrease in net sales was
primarily attributable to a decrease in Medicare Part B revenues as a
result of the settlement with the U.S. Attorney and a reduction in
medical/surgical supply revenues resulting from the discontinuation of
certain product lines. During the fiscal years
13
<PAGE> 14
ended February 28, 1995 and February 28, 1994, sales covered by
governmental reimbursement programs were approximately $11,675,000 and
$16,129,000, respectively. Thus, a decreasing portion of the
Company's sales were covered by various state and Federal
reimbursement programs. Of these sales, the Medicare B portion
declined to approximately $710,000 for the fiscal year ended February
28, 1995, from approximately $4,950,000 in the prior fiscal year.
COST OF SALES:
Cost of sales decreased by 13.8% to approximately $27,970,000 from
approximately $32,441,000 for the fiscal year ended February 28, 1994.
Gross profit margins decreased to 35.9% from 36.7% in the prior year.
The percentage decrease in gross profit margins was primarily due to
the loss of certain purchasing contracts during the period and
diminished cash flow, which prevented the Company from taking
advantage of payment discounts. Gross profit margins were not
materially affected by price changes in products purchased during the
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses for fiscal year ended
February 28, 1995, increased by 8.1% to approximately $18,637,000 from
approximately $17,241,000 for the fiscal year ended February 28, 1994.
This increase was primarily attributable to writeoffs of bad debts and
increased outside professional fees throughout the period. As a
percentage of net sales, selling and administrative expenses increased
to 42.7% from 33.6% in the fiscal year ended February 28, 1994,
primarily as a result of the above items as well as the increase of
fixed expenses as a percentage of the lower sales recorded by the
Company.
INTEREST EXPENSE:
Net interest expense was approximately $905,000 for the fiscal year
ended February 28, 1995 compared to approximately $670,000 for the
fiscal year ended February 28, 1994, due to the increase in debt
incurred to fund losses during the fiscal year ended February 28, 1995
and higher interest rates which were in effect during the fiscal year
ended February 28, 1995.
OTHER ITEMS:
During the fiscal year ended February 28, 1995, the Company incurred
costs in connection with potential claims and litigation costs of
approximately $4,389,000 as compared to approximately $463,000 in the
prior fiscal year. These increases were primarily attributable to the
settlement of the U.S. Attorney's investigation, the cost of a proxy
contest and the settlement of the class action suit.
14
<PAGE> 15
INCOME TAXES:
Benefit for income taxes was approximately $466,000 for the fiscal
year ended February 28, 1995 compared to approximately $51,000 for the
fiscal year ended February 28, 1994. The increase resulted primarily
from a larger taxable loss for the fiscal year ended February 28,
1995.
NET LOSS:
Net loss increased to approximately $11,420,000 for the fiscal year
ended February 28, 1995 from approximately $862,000 for the fiscal
year ended February 28, 1994. Contributing to the increase in the net
loss was the decreased gross profit on the lower sales, the $4,389,000
in costs in connection with claims and litigation, approximately
$2,069,000 in restructuring charges in connection with a corporate
reorganization and consolidation, and approximately $1,385,000 in bad
debt expense for the year. The net loss per share for the fiscal year
ended February 28, 1995 was $1.77 compared to a net loss per share of
$0.14 per share in the prior year.
RESTRUCTURING AND DISCONTINUED OPERATIONS
During February 1995, the Company began an extensive reorganization of
its operations including the closure of certain unprofitable locations, the
sale of non-core business lines, consolidation of corporate operations, and a
realignment of its executive, managerial and operating personnel. The
financial statements of the Company have been adjusted to reflect certain
reorganization costs and the discontinued operations. Prior year financial
statements have also been adjusted to reflect the effect of the discontinued
operations.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company's net cash used in operating activities was approximately
$3,588,000 for the ten months ended December 31, 1995 compared to approximately
$1,123,000 for the fiscal year ended February 28, 1995. In the ten months
ended December 31, 1995, cash used by operations resulted primarily from an
increase in accounts receivable, a decrease in accrued expenses and other
current liabilities offset by an increase in the net income of the Company.
Net cash used by investing activities was approximately $6,559,000 for
the ten months ended December 31, 1995 compared to $9,000 provided by investing
activities for the fiscal year ended February 28, 1995. This change resulted
primarily from the acquisition of Premier Pharmacy, the advance to the
Company's Geri-Care acquisition and the increase in the net purchases of
equipment and leasehold improvements.
15
<PAGE> 16
Net cash provided by financing activities was approximately
$12,364,000 for the ten months ended December 31, 1995 compared to $1,218,000
for the fiscal year ended February 28, 1995. This increase resulted primarily
from the two private placements of common stock previously described, partially
offset by debt reduction.
Working capital increased to approximately $10,814,000 at December 31,
1995 from approximately $5,909,000 at February 28, 1995. The increase in
working capital resulted primarily from the acquisition of Premier ($3,160,000
in working capital at May 31, 1995) and the excess of the receipts from the
proceeds of the Company's two private placements of its common stock over the
funds which were disbursed to retire bank debt and vendor debt, acquire Premier
and retire certain bank debt of Premier.
The Company's current ratio at December 31, 1995 was 1.97:1, compared
to 2.01:1 at February 28, 1995.
During January 1996, Creditanstalt agreed to amend the Line of Credit
to provide for an increase in borrowings available under the Line of Credit to
$15,000,000 and to add a term loan facility in the amount of $10,000,000.
Availability under the Line of Credit and the Term Loan will be increased to
$21,000,000 and $14,000,000, respectively, in the event the Company raises at
least $7,500,000 of additional common equity. Borrowings under the Line of
Credit and Term Loan are secured by substantially all of the assets of the
Company, bear interest at rates of either prime plus .25% or LIBOR plus 1.25%
and are subject to other restrictions and loan covenants, all as defined by the
underlying agreements.
In March 1996, the Company extended the expiration date of the IPO
Warrants from March 31, 1996 until June 30, 1996, unless the Company exercises
its right of redemption earlier. The other terms of the IPO Warrants remain
unchanged. In addition, the expiration date of certain related Class B
Warrants was extended until June 30, 1997 unless the Company earlier exercises
its right of redemption. One Class B Warrant will be issued for each IPO
Warrant which is exercised prior to June 30, 1996. Each Class B Warrant will
enable the holder to purchase one share of the Company's Common Stock at an
exercise price of $10.00 per share at any time until June 30, 1997, unless
earlier redeemed by the Company at a redemption price of $.25 per Class B
Warrant upon not less than 60 days prior written notice. The Company may not
issue any common shares pursuant to the exercise of any of the IPO Warrants or
Class B Warrants unless there is a Registration Statement in effect.
The Company is currently contemplating a private placement of up to
approximately 3,000,000 shares of common stock. See "Item 1. Business -
Private Placements."
16
<PAGE> 17
SFAS 109
During the fiscal year ended February 28, 1994, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109"). The adoption of SFAS No. 109
did not have a material impact on the results of operations.
Inflation
The Company believes that inflation has not had a significant effect
on its profit margins.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are attached hereto,
following page 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1996 Annual
Meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1996 Annual
Meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1996 Annual
Meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1996 Annual
Meeting of stockholders.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(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.
The Company filed the following reports on Form 8-K dated within the
fourth quarter of the ten month period ended December 31, 1995 (December only):
(i) Current Report on Form 8-K dated December 31, 1995 reporting
the Geri-Care Acquisition and the Company's fiscal year change
pursuant to Items 2, 7 and 8 thereof.
(ii) Current Report on Form 8-K/A dated December 31, 1995 reporting
the financial statements required in connection with the
Geri-Care Acquisition pursuant to Items 2 and 7 thereof.
19
<PAGE> 20
SIGNATURES
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.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ Donald W. Hughes
------------------------------------------
Donald W. Hughes, Chief Financial Officer
March 29, 1996
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ R. Dirk Allison Chief Executive Officer and Director March 29, 1996
------------------------------------------
R. Dirk Allison
/s/ Donald W. Hughes Chief Financial Officer March 29, 1996
-----------------------------------------
Donald W. Hughes
/s/ Allan C. Silber Chairman March 29, 1996
-------------------------------------------
Allan C. Silber
/s/ Morris A. Perlis Vice Chairman March 29, 1996
-------------------------------------------
Morris A. Perlis
/s/ Albert Reichmann Director March 29, 1996
-------------------------------------------
Albert Reichmann
/s/ J. Brendan Ryan Director March 29, 1996
-------------------------------------------
J. Brendan Ryan
/s/ John E. Zuccotti Director March 29, 1996
-------------------------------------------
John E. Zuccotti
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
/s/ Gail Wilensky, Ph.D. Director March 29, 1996
-------------------------------------------
Gail Wilensky, Ph.D.
/s/ Joseph F. Furlong, III Director March 29, 1996
-------------------------------------------
Joseph F. Furlong, III
/s/ John Haronian Director March 29, 1996
-------------------------------------------
John Haronian
/s/ Edward Sonshine, Q.C. Director March 29, 1996
------------------------------------------
Edward Sonshine, Q.C.
</TABLE>
21
<PAGE> 22
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(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 - As of December 31, 1995 and
February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 - F-3
Consolidated Statements of Operations - For the ten months ended
December 31, 1995 and the years ended February 28, 1995 and 1994 . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity - For
the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows - For the ten months ended
December 31, 1995 and years ended February 28, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 - F-24
</TABLE>
<PAGE> 23
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
And Stockholders of Capstone
Pharmacy Services, Inc.:
We have audited the accompanying consolidated balance sheets of Capstone
Pharmacy Services, Inc. (a Delaware corporation and formerly Choice Drug
Systems, Inc.) and subsidiaries as of December 31, 1995 and February 28, 1995,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the ten months ended December 31, 1995, and the years
ended February 28, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Capstone Pharmacy Services,
Inc. and subsidiaries as of December 31, 1995 and February 28, 1995, and the
results of their operations and their cash flows for the ten months ended
December 31, 1995, and the years ended February 28, 1995 and 1994, in
conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Baltimore, Maryland
March 11, 1996
F-1
<PAGE> 24
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and February 28, 1995
ASSETS
<TABLE>
<CAPTION>
December 31, February 28,
1995 1995
--------------- ----------------
(Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 2,763,416 $ 546,898
Accounts receivable, net of allowance for doubtful
accounts of $1,294,000 as of December 31, 1995
and $1,561,000 as of February 28, 1995 12,646,087 6,169,272
Inventories (Note 1) 5,023,008 3,888,163
Refundable income taxes (Note 8) 828,628 500,000
Prepaid expenses and other current assets 688,549 350,568
Net assets of discontinued operations (Note 7) - 302,820
--------------- ----------------
21,949,688 11,757,721
--------------- ----------------
Equipment and leasehold improvements, net
(Notes 1 and 3) 2,692,298 1,329,093
--------------- ----------------
Other assets:
Notes receivable, less current portion 77,289 94,435
Advances to affiliates (Note 15) 2,242,841 -
Security deposits and other assets 587,915 509,498
Goodwill, net of accumulated amortization of
$1,554,000 as of December 31, 1995 and
$1,117,000 as of February 28, 1995 (Notes 1 and 2) 14,580,564 5,521,512
--------------- ----------------
17,488,609 6,125,445
--------------- ----------------
Total assets $ 42,130,595 $ 19,212,259
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 25
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and February 28, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, February 28,
1995 1995
------------ ------------
(Note 1)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,671,435 $ 2,664,143
Accrued expenses and other current liabilities 1,465,837 1,702,711
Current portion of long-term debt (Notes 4 and 9) 4,222,608 765,387
Current portion of non-compete agreements 200,000 -
Accrued restructuring charges (Note 6) 575,349 716,173
------------- -------------
11,135,229 5,848,414
------------- -------------
Deferred income taxes (Note 8) 542,787 -
Non-compete agreements, net of current portion 400,000 -
Long-term debt, net of current portion (Notes 4 and 9) 2,692,202 7,650,455
Long-term portion of accrued restructuring charges (Note 6) 520,640 935,860
------------- -------------
4,155,629 8,586,315
------------- -------------
Commitments and contingencies (Notes 9, 10 and 15)
Stockholders' equity (Note 11):
Common stock: $.01 par value; 30,000,000 shares
authorized at December 31, 1995 and 15,000,000
shares authorized at February 28, 1995; 13,610,810
shares issued and outstanding as of December 31, 1995
and 8,120,810 shares issued and outstanding as of
February 28, 1995 136,108 81,208
Capital in excess of par 38,985,006 17,200,050
Accumulated deficit (12,281,377) (12,503,728)
------------- -------------
26,839,737 4,777,530
------------- -------------
Total liabilities and stockholders' equity $ 42,130,595 $ 19,212,259
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 26
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the ten months ended December 31, 1995 and
the years ended February 28, 1995 and 1994
<TABLE>
<CAPTION>
Ten Months
Ended Years Ended February 28,
December 31, ----------------------------
1995 1995 1994
------------- -------------- ------------
(Note 1)
<S> <C> <C> <C>
Net sales (Note 1) $ 48,841,443 $ 43,607,946 $ 51,253,713
Cost of sales (Note 12) 30,654,118 27,969,532 32,440,841
------------- -------------- ------------
Gross profit 18,187,325 15,638,414 18,812,872
------------- -------------- ------------
Operating expenses:
Selling, general and administrative expenses 17,468,930 18,637,213 17,240,810
Depreciation and amortization 1,145,669 988,974 1,037,425
Costs in connection with litigation (Notes 4 and 9) - 4,389,163 463,207
Restructuring charges (Note 6) 240,000 2,069,432 -
------------- -------------- ------------
Total operating expenses 18,854,599 26,084,782 18,741,442
------------- -------------- ------------
(Loss) income from operations (667,274) (10,446,368) 71,430
------------- -------------- ------------
Non-operating expense (income):
Interest expense, net (Note 4) 634,232 905,404 670,425
Other income, net (Note 13) (431,900) (104,076) (26,366)
------------- -------------- ------------
Total non-operating expense, net 202,332 801,328 644,059
------------- -------------- ------------
Loss before income taxes, discontinued
operations and extraordinary item (869,606) (11,247,696) (572,629)
Benefit for income taxes (Note 8) (225,082) (466,214) (51,495)
------------- -------------- ------------
Loss from continuing operations (644,524) (10,781,482) (521,134)
Discontinued Operations (Note 7):
Gain (loss) from operations of discontinued business
segments, net of tax benefits of $ - 0 - , $ - 0 - and
$ 175,000 for the ten months ended December 31, 1995
and the years ended February 28, 1995 and 1994,
respectively 18,667 (135,430) (340,416)
Gain (loss) on disposal of business segments, net 564,844 (503,067) -
------------- -------------- ------------
Loss before extraordinary item (61,013) (11,419,979) (861,550)
Extraordinary item (Note 5):
Discount on repayment of vendor debt 283,364 - -
------------- -------------- ------------
Net Income (loss) $ 222,351 $ (11,419,979) $ (861,550)
============= ============== ============
Earnings per share data:
Primary
Continuing operations $ (0.06)$ (1.67) $ (0.08)
Discontinued operations 0.05 (0.10) (0.06)
Extraordinary item 0.03 - -
------------- -------------- ------------
Net income (loss) $ 0.02 $ (1.77) $ (0.14)
============= ============== ============
Fully Diluted
Continuing operations $ (0.05)$ (1.67) $ (0.08)
Discontinued operations 0.05 (0.10) (0.06)
Extraordinary item 0.02 - -
------------- -------------- ------------
Net income (loss) $ 0.02 $ (1.77) $ (0.14)
============= ============== ============
Weighted average number of common
shares outstanding:
Primary 11,337,997 6,458,891 6,071,687
============= ============== ============
Fully Diluted 12,398,401 6,458,891 6,071,687
============= ============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 27
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the ten months ended December 31, 1995 and
the years ended February 28, 1995 and 1994
<TABLE>
<CAPTION>
Common stock Capital
------------------------- in excess Accumulated
Shares Amount of par deficit
---------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
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 the year ended February 28, 1994 - - - (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
costs (Note 5) 2,000,000 20,000 7,171,300 -
Stock issued in connection with
exercise of stock options (Note 11) 34,000 340 89,410 -
Stock to be issued in settlement
of litigation (Note 9) - - 600,000 -
Net loss for the year ended February 28, 1995 - - - (11,419,979)
---------- ------------- ------------ ---------------
Balance, February 28, 1995 8,120,810 81,208 17,200,050 (12,503,728)
Issuance of common stock:
Stock issued in connection with
private placements, net of related
issuance costs (Note 5) 5,100,000 51,000 20,769,231 -
Stock issued in connection with the
acquisition of PremierPharmacy, Inc.
(Note 2) 35,000 350 157,150 -
Stock issued in connection with
exercise of stock options (Note 11) 355,000 3,550 858,575 -
Net income for the ten months ended
December 31, 1995 - - - 222,351
---------- ------------- ------------ ---------------
Balance, December 31, 1995 (Note 1) 13,610,810 $ 136,108 $ 38,985,006 $ (12,281,377)
========== ============= ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 28
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ten months ended December 31, 1995 and
the years ended February 28, 1995 and 1994
<TABLE>
<CAPTION>
Ten Months
Ended Years Ended February 28,
December 31, ---------------------------
1995 1995 1994
-------------- ------------- ------------
(Note 1)
<S> <C> <C> <C>
Cash flows from (to) operating activities:
Net income (loss) $ 222,351 $ (11,419,979) $ (861,550)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,145,669 988,974 1,037,425
(Gain) loss on disposal of business segments (564,844) 503,067 -
Settlement of litigation - 3,500,000 -
Change in assets and liabilities, net of effects from
acquisition/disposal of businesses:
(Increase) decrease in accounts receivable (2,644,719) 2,161,906 184,737
Decrease in inventories 357,029 1,297,829 754,674
(Increase) decrease in refundable income taxes (238,168) (108,699) 482,969
(Increase) decrease in prepaid expenses and
other current assets (51,870) 779,825 (31,159)
(Increase) decrease in other assets (133,629) (333,011) 17,135
Increase (decrease) in accounts payable 821,665 (282,502) (1,023,784)
(Decrease) increase in accrued expenses and
other current liabilities (1,810,162) 137,441 1,259,862
(Decrease) increase in accrued restructuring charges (691,200) 1,652,033 -
------------- ------------- ------------
Net cash (used in) provided by operating activities (3,587,878) (1,123,116) 1,820,309
------------- ------------- ------------
Cash flows from (to) investing activities:
Purchase of equipment and leasehold improvements (1,076,976) (252,943) (316,737)
Acquisition of PremierPharmacy, Inc. net of cash acquired (4,168,872) - -
Proceeds from sale of business segment 700,000 - -
Advances to affiliates (2,242,841) - -
Repayments of notes receivable 229,571 261,555 372,088
------------- ------------- ------------
Net cash (used in) provided by investing activities (6,559,118) 8,612 55,351
------------- ------------- ------------
Cash flows from (to) financing activities:
Loan proceeds from Creditanstalt 11,600,000 - -
Loan repayments to Creditanstalt (9,650,000) - -
Proceeds from issuance of common stock, net 21,682,356 7,281,050 101,250
Loan proceeds from Counsel Corporation 1,268,250 - -
Loan repayments to Counsel Corporation (1,268,250) - -
Non-compete agreement payments (200,000) - -
Repayments of long-term debt, net (10,884,850) (5,902,723) (1,715,698)
Principal payments of capital lease obligations (183,992) (160,183) (140,379)
------------- ------------- ------------
Net cash provided by (used in) financing activities 12,363,514 1,218,144 (1,754,827)
------------- ------------- ------------
Net increase in cash and cash equivalents 2,216,518 103,640 120,833
Cash and cash equivalents, beginning of year 546,898 443,258 322,425
------------- ------------- ------------
Cash and cash equivalents, end of year $ 2,763,416 $ 546,898 $ 443,258
============= ============= ============
Supplemental Disclosure of Cash Flows Information
Cash paid for:
Interest $ 659,184 $ 887,691 $ 741,705
============= ============= ============
Taxes $ 144,149 $ 224,477 $ 24,349
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 29
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Capstone Pharmacy Services, Inc. (formerly known as Choice Drug
Systems, Inc.) together with its subsidiaries (the "Company"), a
Delaware corporation, 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 and Delaware, 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.
As of December 31, 1995, Counsel Corporation, an Ontario corporation
("Counsel"), owned approximately 3,908,000 shares of the Company's
common stock together with warrants to purchase approximately
2,337,000 additional shares. Counsel is a management and business
development company operating primarily in the United States health
care industry (See Note 5).
Principles of Consolidation
The consolidated financial statements include the accounts of Capstone
Pharmacy Services, Inc. and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues, expenses, gains and losses during the
reporting periods. Actual results could differ from these estimates.
F-7
<PAGE> 30
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventories consist principally of purchased
pharmaceuticals.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost.
Depreciation and amortization are computed using 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> <C>
Furniture, fixtures and equipment . . . . . . . 3-10 years
Automobiles and trucks . . . . . . . . . . . . . 3-4 years
Leasehold improvements . . . . . . . . . . . . . 5-10 years
Equipment under capital leases . . . . . . . . . 3-5 years
</TABLE>
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining
useful lives at the acquisition date.
Goodwill
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over periods of
twenty to forty years. Amortization of goodwill amounted to
approximately $460,000, $384,000 and $408,000 for the ten months ended
December 31, 1995 and the years ended February 28, 1995 and 1994,
respectively.
The Company monitors the individual financial performance of each of
the acquired businesses and continually evaluates the realizability of
goodwill and the potential for any impairment to its recoverability
based on the projected future net income of the respective acquired
businesses.
F-8
<PAGE> 31
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
401(K) Benefit Plan
Effective May 22, 1995, employees of the Company may participate in a
supplemental retirement program established under Section 401(K) of
the Internal Revenue Code of 1986, as amended. Contributions by the
Company may be made to the plan subject to the discretion of the Board
of Directors. No Company contribution was made for the ten months
ended December 31, 1995.
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.
Income Taxes
The Company files a consolidated Federal income tax return. Income
tax expense is based on reported earnings before income taxes.
Effective March 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Under this Statement, deferred taxes on income are provided for those
items for which the reporting period and methods used 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 existing assets and liabilities. The impact of initially
adopting SFAS No. 109 for the year ended February 28, 1994 was $0.
Earnings Per Share
Net loss per common share for the years ended February 28, 1995 and
1994, was computed by dividing the net loss by the weighted average
number of common shares outstanding. For the ten months ended
December 31, 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.
F-9
<PAGE> 32
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
In May 1995, the Company acquired Premier Pharmacy, Inc. ("Premier"),
an institutional pharmacy, for a purchase price of $4,250,000 in cash.
Premier's operations generate annualized revenues of approximately
$24,000,000, primarily from pharmacy services provided to long-term
care facilities located in the New York metropolitan area and
hospitals located in the southeastern United States.
The Premier acquisition has been accounted for under the purchase
method of accounting with the assets and liabilities of Premier
recorded at their estimated fair market values at the date of
acquisition. The operations of Premier, since the acquisition, are
included in the accompanying consolidated statement of operations for
the ten months ended December 31, 1995. Goodwill of approximately
$9,350,000, representing the excess of acquisition costs over the
fair market value of acquired net assets, is being amortized over
forty years.
The following proforma information reflects the combined results of
operations of the Company as if the acquisition of Premier was
consummated on March 1, 1994:
<TABLE>
<CAPTION>
Ten Months Ended Year Ended
December 31, February 28,
(In thousands, except for per share amounts) 1995 1995
--------------- ----------------
<S> <C> <C>
Net sales $ 54,834 $ 68,503
Cost of sales 34,531 42,704
--------------- ----------------
Gross profit 20,303 25,799
Operating expenses including
interest and taxes 22,330 37,493
--------------- ----------------
Loss from continuing operations (2,027) (11,694)
Discontinued operations 584 (638)
Extraordinary items 283 -
--------------- ----------------
Net loss $ (1,160) $ (12,332)
=============== ================
Net loss per share $ (.10) $ (1.53)
=============== ================
</TABLE>
These proforma operating results reflect certain adjustments,
including amortization of goodwill acquired and related income tax
effects. The proforma results are not necessarily indicative of the
operating results that would have occurred had the Premier acquisition
been consummated on March 1, 1994, nor are they necessarily indicative
of future results.
F-10
<PAGE> 33
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is obligated to pay the former stockholders of certain
subsidiaries acquired by Premier $200,000 per year for the next three
years under non-compete agreements.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
<TABLE>
<CAPTION>
December 31, February 28,
1995 1995
------------- --------------
<S> <C> <C>
Leasehold improvements $ 544,272 $ 749,468
Furniture, fixtures and equipment 3,945,149 3,181,738
Data processing equipment 1,512,500 910,377
Automobiles and trucks 258,379 161,454
----------- -----------
6,260,300 5,003,037
Accumulated depreciation and
amortization (3,568,002) (3,673,944)
----------- -----------
$ 2,692,298 $ 1,329,093
=========== ===========
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $686,000, $605,000 and $629,000 for the ten
months ended December 31, 1995 and the years ended February 28, 1995
and 1994, respectively.
F-11
<PAGE> 34
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at December 31, 1995 and February 28, 1995, consisted
of the following:
<TABLE>
<CAPTION>
December 31, February 28,
1995 1995
---------------- --------------
<S> <C> <C>
Loan payable to United Jersey Bank, interest at
prime plus 1.5%, repaid on May 22, 1995 $ - $ 2,983,303
Borrowings under a $10,000,000 revolving loan
with Creditanstalt, interest at prime plus 0.5%,
secured by substantially all assets of the
Company, due on demand 1,950,000 -
Unsecured note payable to relative of former
stockholder, payable in quarterly installments
with interest at 9% through January 2000 297,938 355,372
Subordinated promissory note payable to major
supplier, payable in equal monthly
installments, interest at prime plus 3%,
repaid on May 22, 1995 - 1,533,333
Promissory note payable to major supplier,
payable monthly with interest at prime
plus 3%, repaid on May 22, 1995 - 242,730
Amounts due under a Medicare settlement
with the United States Government,
payable in quarterly installments with
interest at 7.75% through 2001 2,537,500 2,900,000
Unsecured notes payable to former stockholders of a
Premier subsidiary, interest at 6%, currently payable 1,000,000 -
Unsecured notes payable to former stock-
holders of a Premier subsidiary, due in
monthly installments of $14,898, including
interest at 6% through October 31, 1998 464,752 -
Unsecured note payable to former stockholder
of a Premier subsidiary, interest at 7%,
due August 11, 1996 153,334 -
Unsecured notes payable to former stockholders
of a Premier subsidiary, interest at 7%, due
in annual installments of $30,000 through
June 30, 1999 120,000 -
</TABLE>
F-12
<PAGE> 35
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, February 28,
1995 1995
--------------- -------------
<S> <C> <C>
Capital lease obligations (Note 9) 364,844 401,104
Other 26,442 -
----------- ----------
6,914,810 8,415,842
Less: Current portion (4,222,608) (765,387)
----------- ----------
Long-term portion $ 2,692,202 $7,650,455
=========== ==========
</TABLE>
Future maturities of long-term debt, exclusive of capital lease
obligations, at December 31, 1995, follow:
<TABLE>
<S> <C>
1996 $4,001,674
1997 768,391
1998 757,091
1999 539,481
2000 483,329
----------
$6,549,966
==========
</TABLE>
The Company's agreement with Creditanstalt requires that the Company
provide certain information and maintain certain financial ratios and
minimum net worth and earnings levels. The average interest rate on
amounts outstanding under this agreement was 8.75%. A letter of
credit fee of 1.25% is paid on a monthly basis. Amounts available to
be borrowed under this agreement are based upon levels of accounts
receivable and inventories. The Company had unused credit available
under this agreement as of December 31, 1995 of $7,450,000.
On November 1, 1995, the Company elected not to make a scheduled
installment payment on a note payable to former stockholders of a
Premier subsidiary in the aggregate principal amount of $1,000,000,
due to a dispute with these former stockholders. This amount is
recorded as current portion of long-term debt in the accompanying
consolidated balance sheet as of December 31, 1995.
On October 31, 1994, the Company entered into an agreement with the
United States Government 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. The subject of the investigation was the Company's
claims documentation and Medicare reimbursement practices for December
1993 and prior. Under the terms of the settlement, without admitting
any liability, the Company has agreed to repay, as a return of revenue
previously received, over a six-year period, $3,400,000 to settle the
Government's claims. Initially, $100,000 was paid upon the execution
of the agreement and $400,000 was paid on December 31, 1994.
Thereafter, $2,900,000
F-13
<PAGE> 36
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plus interest at an annual rate of 7.75% is payable in quarterly
installments over a six-year period ending January 1, 2001. The full
amount of the settlement, including related legal fees, is included in
costs in connection with litigation in the accompanying consolidated
statement of operations for the year ended February 28, 1995.
Based on the borrowing rates currently available to the Company, the
fair value of long-term debt, exclusive of capital lease obligations,
as of December 31, 1995, is approximately $5,942,000.
5. PRIVATE PLACEMENTS
On December 16, 1994, the Company entered into a Stock Purchase
Agreement with Counsel. Pursuant to the Stock Purchase Agreement,
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 placement 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. The offering of Units raised proceeds of
approximately $5,759,000, net of related costs, at a price of $3.65
per Unit. The proceeds of the private placement were used to fund the
acquisition of Premier and to retire the debt to a major vendor in the
amount of approximately $1,776,000, resulting in a gain on the
discount of debt of approximately $283,000. The gain on the discount
of debt is reflected in the accompanying consolidated statement of
operations for the ten months ended December 31, 1995 as an
extraordinary item.
On August 29, 1995, the Company completed a second 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 private placement
were approximately $15,061,000, net of related costs including
placement commissions. There were no warrants issued in connection
with this second private placement. The proceeds of this private
placement were used to retire outstanding debt of $9,650,000 due to
Creditanstalt and for general working capital purposes.
F-14
<PAGE> 37
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has granted certain registration rights with respect to
the common stock issued under these private placements and the common
stock underlying the related warrants.
6. RESTRUCTURING CHARGES
In February 1995, the Company adopted a formal plan of restructuring
in order to realign and consolidate businesses, concentrate resources,
and better position itself to achieve its strategic growth objectives.
This plan included the termination of the medical/surgical supply
operations and the closing of the Company's Missouri location on June
30, 1995. The Company recorded restructuring charges 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
severance costs, and the estimated administrative costs of terminating
operations. Also included in the restructuring costs are amounts due
to former executives of the Company under consulting agreements which
expire in May 1997 and other long-term contractual obligations related
to the restructured business.
During the ten months ended December 31, 1995, the Company recorded,
as a change in estimate, an additional $100,000 write-down of accounts
receivable for the medical/surgical supply operations.
The net sales and (loss) income from continuing operations of the
medical/surgical supply operations and the Missouri location, follow:
<TABLE>
<CAPTION>
Years Ended February 28,
Ten Months Ended ------------------------------------
December 31, 1995 1995 1994
----------------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 854,018 $ 3,983,533 $ 5,466,810
========= =========== ===========
(Loss) income from
continuing operations $(157,218) $(2,406,438) $ 9,569
========= =========== ===========
</TABLE>
In December 1995, the Company adopted a formal plan of restructuring
in order to consolidate certain of its satellite locations. The
Company recorded restructuring costs of $140,000 for the ten months
ended December 31, 1995, which includes the write-down of fixed assets
to net realizable value and the accrual for employee severance costs
and the termination of leases.
F-15
<PAGE> 38
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DISCONTINUED OPERATIONS
In February 1995, in connection with adoption of its formal
restructuring plan, the Company decided to discontinue the operations
of its mail order and computerized health care software businesses.
The mail order business was closed effective August 1, 1995 and the
assets of the computerized health care software business were sold to
an unrelated party on June 30, 1995 for $700,000, which resulted in a
gain in the amount of $564,844, net of related income taxes of
$38,000.
The net gains or losses of these operations for the ten months ended
December 31, 1995 and the year ended February 28, 1995 and 1994 are
included in the consolidated statements of operations under gain
(loss) from operations of discontinued business segments. The loss on
disposal of $503,067 reflected on the consolidated statement of
operations for the year ended February 28, 1995, includes the
write-down of the assets of the mail order and computer software
businesses to estimated net realizable value and the estimated costs
of disposing of these operations, including a pro-rata share of the
Company's expense for office space in Baltimore.
The Company had net sales from discontinued operations of
approximately $909,000, $2,731,000 and $3,123,000 for the ten months
ended December 31, 1995 and the years ended February 28, 1995 and
1994, respectively.
Net assets of discontinued operations have been included in the
accompanying consolidated balance sheet as of February 28, 1995, and
consist of the following:
<TABLE>
<CAPTION>
Mail Order Software
Business Business Total
-------- -------- -----
<S> <C> <C> <C>
Accounts receivable $170,848 $ 227,158 $ 398,006
Fixed assets 2,856 22,539 25,395
Current liabilities (19,246) (101,335) (120,581)
-------- ---------- ----------
Net $154,458 $ 148,362 $ 302,820
======== ========== ==========
</TABLE>
F-16
<PAGE> 39
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
Ten Months
Ended Years Ended February 28,
December 31, ---------------------------------
(In Thousands) 1995 1995 1994
------------ --------- --------
<S> <C> <C> <C>
Federal:
Current $ (219) $ (466) $ (102)
Deferred (46) - -
-------- -------- -------
(265) (466) (102)
State and local 40 - 51
-------- -------- -------
Total $ (225) $ (466) $ (51)
======== ======== =======
</TABLE>
For the ten months ended December 31, 1995, the Federal benefit for
income taxes is primarily due to the carryback of a prior year taxable
loss to prior periods and represents a change in estimate of the
amount refundable upon final preparation of the return.
The actual income tax benefit for the ten months ended December 31,
1995 and for the fiscal years ended February 28, 1995 and 1994 is
different from the amounts computed by applying the statutory Federal
income tax rates to losses from continuing operations before income
taxes. The reconciliation of these differences, follow:
<TABLE>
<CAPTION>
Ten Months
Ended Years Ended February 28,
December 31, -------------------------------
(In Thousands) 1995 1995 1994
------------ --------- --------
<S> <C> <C> <C>
Tax benefit at statutory rate $ (296) $ (3,824) $ (194)
Additional refunds received (219) - -
Increase resulting from:
State income taxes, net of
federal income tax effect 26 - 33
Current loss not available
for carryback 172 3,206 -
Tax effect of permanent
differences 68 152 123
Other items, net 24 - (13)
------- ---------- ---------
Benefit for income taxes $ (225) $ (466) $ (51)
======= ========== =========
</TABLE>
F-17
<PAGE> 40
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995, the Company had a net operating loss carry
forward of approximately $10,506,000 for Federal income tax purposes,
expiring in increments through 2011. The utilization of approximately
$2,903,000 of such losses is restricted to offset only future taxable
income generated by Choice Maryland and Premier.
The tax effect of cumulative temporary differences at December 31,
1995 and February 28, 1995, follow:
<TABLE>
<CAPTION>
December 31, February 28,
(In Thousands) 1995 1995
------------- ------------
<S> <C> <C>
Current Deferred Tax Assets:
Tax carry forwards $ 4,172 $ 1,868
Accounts receivable allowances 413 625
Accrued litigation costs 1,255 1,400
Accrued restructuring charges 536 828
Accrued liabilities 280 420
Other 254 144
----------- -----------
6,910 5,285
Less: Valuation allowance (6,910) (5,285)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, February 28,
(In Thousands) 1995 1995
------------ ------------
<S> <C> <C>
Puerto Rico withholding tax $ 425 $ -
Depreciation and other 118 -
----------- -----------
Net deferred tax liability $ 543 $ -
=========== ===========
</TABLE>
F-18
<PAGE> 41
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS
Leases
The Company leases office and warehouse space, automobiles and
equipment. Rental expense under these leases aggregated approximately
$781,000, $719,000, and $1,120,000 for the ten months ended December
31, 1995 and the years ended February 28, 1995 and 1994, respectively.
Future minimum lease payments, follow:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
----------- --------- -----------
<S> <C> <C>
1996 $ 249,404 $1,051,641
1997 90,587 932,029
1998 42,644 695,988
1999 30,241 533,824
2000 - 401,423
Thereafter - 600,677
--------- ----------
Total minimum lease payments 412,876 $4,215,582
==========
Less: Amounts representing
interest (48,032)
---------
Present value of net minimum
lease payments 364,844
Less: Current portion (220,934)
---------
Long-term portion $ 143,910
=========
</TABLE>
Other
In connection with the settlement of a class action law suit filed in
June 1993, the parties have agreed to accept in full settlement
$600,000 in common stock to be issued by the Company and $650,000 in
cash, which was previously paid by the Company's directors and
officers liability insurance carrier. The common stock is issuable
upon final approval of an escrow agreement and the number of shares to
be issued will be based upon a specified formula, which will result in
the issuance of approximately 98,500 common shares. The Company's
portion of the proposed settlement ($600,000), is included in costs in
connection with litigation in the accompanying consolidated statement
of operations, for the year ended February 28, 1995.
F-19
<PAGE> 42
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES
The Company is subject to various claims and litigation in the
ordinary course of its business. In the opinion of management and
outside counsel, settlement of these claims and litigation will not
have a material adverse effect on the financial position or future
operating results of the Company.
11. STOCKHOLDERS' EQUITY
Common Stock Authorized
On August 28, 1995, the Company's stockholders approved an increase in
the authorized common stock of the Company from 15,000,000 shares to
30,000,000 shares.
Stock Option Plans
The Company has eight stock option plans and an employee stock
purchase plan covering up to 2,655,000 shares of the Company's common
stock, 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 is
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-20
<PAGE> 43
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of option transactions during the ten months ended December 31,
1995 and the years ended February 28, 1995 and 1994, follow:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------------
Years Ended February 28,
Ten Months Ended -----------------------
December 31, 1995 1995 1994
----------------- ---- ----
<S> <C> <C> <C>
Shares under option at
beginning of period 994,500 818,500 832,000
Granted ($2.86-$7.50) 949,500 564,000 51,500
Canceled ($2.87-$6.00) (125,000) (354,000) (65,000)
Exercised ($1.88-$4.50) (355,000) (34,000) -
--------- -------- -------
Options outstanding at end
of period ($2.85-$7.50) 1,464,000 994,500 818,500
========= ======== =======
Shares available for future grant 693,750 568,250 778,250
========= ======== =======
Options exercisable at end
of period 1,289,000 994,500 818,500
========= ======== =======
</TABLE>
Warrants
In August 1995, the Company's Board of Directors extended the expiration
date of certain outstanding redeemable warrants issued as part of the
Company's initial public offering (the "IPO Warrants") to March 31, 1996.
Subsequent to year-end, the expiration date of the IPO Warrants was
extended further to June 30, 1996. The exercise price of the 650,000 IPO
Warrants is $6.00 per share. The expiration date of the 650,000 Class B
Warrants (which are exercisable at $10.00 per share) to be issued upon
exercise of the IPO Warrants was also extended subsequent to year-end to
June 30, 1997. The other terms of the IPO Warrants remain the same.
In connection with the private placements discussed in Note 5, the Company
issued warrants to purchase 3,240,000 shares of stock at prices ranging
from $4.50 to $5.50 per share. These warrants expire through May 1998.
Total warrants for 3,990,000 shares were outstanding at December 31, 1995,
including the IPO Warrants, warrants issued in connection with private
placements and 100,000 warrants issued in connection with prior
acquisitions, at exercise prices ranging from $4.50 to $5.50 per share.
No warrants were exercised during the year.
F-21
<PAGE> 44
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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. Purchases of inventory under
the primary supplier relationships during the ten months ended
December 31, 1995 and the years ended February 28, 1995 and 1994, were
approximately 87%, 55% and 57%, respectively, of the Company's total
inventory purchases.
13. OTHER INCOME
The components of other income, follow:
<TABLE>
<CAPTION>
Years Ended February 28,
Ten Months Ended -----------------------------
December 31, 1995 1995 1994
----------------- ---- ----
<S> <C> <C> <C>
(Gain) loss on sale of assets $ (289,865) $ (5,222) $ 3,860
Contract delivery fees (60,655) (50,666) -
Other, net (81,380) (48,188) (30,226)
------------- ----------- ---------
$ (431,900) $ (104,076) $ (26,366)
============= =========== =========
</TABLE>
14. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of". This Statement requires that
long-lived assets and certain intangibles be reviewed for impairment
under certain circumstances, and that an impairment loss be recorded
if the sum of expected future cash flows is less than the carrying
amount of the assets. The amount of any impairment loss is based on
the fair market value of the assets. The Statement also requires that
long-lived assets and intangibles to be disposed of be recorded at
the lower of cost or fair value, less costs to sell. The Company will
be required to adopt this standard for the year ending December 31,
1996.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This Statement
encourages
F-22
<PAGE> 45
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies to record compensation costs for stock options granted to
employees on the date of grant based on the fair value of these
options. Alternatively, it allows companies to continue to measure
compensation based on the difference between the option exercise price
and the fair market value of the stock on the date of grant.
Companies electing to continue with this method must provide proforma
disclosures of net income and earnings per share as if the fair value
based method of accounting was used. The Company will be required to
adopt this standard for the year ending December 31, 1996.
The impact, if any, that the adoption of these standards will have on
the Company's financial statements is not presently determinable.
15. SUBSEQUENT EVENTS
During January 1996, Creditanstalt agreed to amend the existing line
of credit to provide for an increase in borrowings available under the
line of credit to $15,000,000 and to add a term loan facility in the
amount of $10,000,000. Availability under the line of credit and the
term loan will be increased to $21,000,000 and $14,000,000,
respectively, in the event the Company raises at least $7,500,000 of
additional common equity. Borrowings under the amended line of credit
and term loan are secured by substantially all of the assets of the
Company, bear interest at rates of either prime plus .25% or LIBOR
plus 1.25% and are subject to other restrictions and loan covenants,
all as defined by the underlying agreements.
On January 3, 1996, the Company entered into an Agreement and Plan of
Merger with Geri-Care Systems, Inc. and Scripts & Things, Inc.
(Geri-Care), by which the Company acquired the operations of
Geri-Care. The purchase price was approximately $6,400,000, payable
$1,350,000 in cash and promissory notes, and the remainder in common
stock of the Company. The agreement also includes an additional
contingent incentive payment of $1,500,000 as compensation for certain
new business to be generated through 1998 by the selling shareholders
of Geri-Care. The Company has made advances to Geri-Care under the
terms of the Agreement of approximately $2,243,000.
Geri-Care is a privately held provider of pharmacy services to nursing
homes in the New York metropolitan area and generates annualized
revenues of approximately $7,000,000.
F-23
<PAGE> 46
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 29, 1996, the Company entered into an Asset Purchase
Agreement with IMD Corporation (IMD) by which the Company acquired the
operations of IMD. The purchase price was approximately $15,500,000
in cash.
IMD is a privately held institutional pharmacy business in the State
of Illinois and has annualized revenues of approximately $18,000,000.
The Company has paid fees totaling $570,000 to a company affiliated
with a member of the Board of Directors for certain services rendered
in connection with the Geri-Care and IMD acquisitions.
The Company is currently contemplating a private placement of up to
approximately 3,000,000 shares of common stock. The private placement
is expected to generate net proceeds of up to approximately
$24,000,000.
F-24
<PAGE> 47
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
The following financial statement schedule of the Company is included
in Item 14(d).
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . S-3
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.
S-1
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Capstone Pharmacy Services, Inc. included
in this registration statement and have issued our report thereon dated March
11, 1996. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
above is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Baltimore, Maryland
March 11, 1996
S-2
<PAGE> 49
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 AND FEBRUARY 28, 1995 AND 1994
- ---------------------------------------------------------------------------------------------------------------
Column A Column B Column C
- ---------------------------------------------------------------------------------------------------------------
Charged to
Description Operating Expenses Charged to
Balance at begin- (Excluding Restructuring
ning of period Restructuring) Charges
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ten Months Ended December 31, 1995:
Allowance for doubtful accounts $1,561,233 $ 569,187 $ 184,901(2)
Accumulated depreciation and amortization
of equipment and leasehold improvements 3,673,944 686,130 23,000(2)
Accumulated amortization of goodwill 1,117,181 459,539
Valuation allowance for deferred taxes 5,285,000 1,625,000
- ---------------------------------------------------------------------------------------------------------------
Year ended February 28, 1995:
Allowance for doubtful accounts 1,387,227 1,385,357
Accumulated depreciation and amortization of
equipment and leasehold improvements 2,866,599 604,723 222,662(2)
Accumulated amortization of goodwill 785,246 384,251
Accumulated amortization of contract rights 110,841 43,821
Valuation allowance for deferred taxes 1,559,000 3,726,000
- ---------------------------------------------------------------------------------------------------------------
Year ended February 28, 1994:
Allowance for doubtful accounts 2,182,375 98,775
Accumulated depreciation and amortization of
equipment and leasehold improvements 2,257,975 628,746
Accumulated amortization of goodwill 468,204 408,679
Accumulated amortization of contract rights 92,606 32,965
Valuation allowance for deferred taxes 0 1,559,000
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Column A Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------
Description Subsidiary
Acquisitions (1) Balance at
During Period Deductions End of Period
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ten Months Ended December 31, 1995:
Allowance for doubtful accounts $ 241,605 $ 1,263,043 $ 1,293,883
Accumulated depreciation and amortization
of equipment and leasehold improvements 815,072 3,568,002
Accumulated amortization of goodwill 23,000 1,553,720
Valuation allowance for deferred taxes 0 6,910,000
- --------------------------------------------------------------------------------------------------------------
Year ended February 28, 1995:
Allowance for doubtful accounts 1,211,351 1,561,233
Accumulated depreciation and amortization of
equipment and leasehold improvements 20,040 3,673,944
Accumulated amortization of goodwill 52,316 1,117,181
Accumulated amortization of contract rights 154,662
Valuation allowance for deferred taxes 5,285,000
- --------------------------------------------------------------------------------------------------------------
Year ended February 28, 1994:
Allowance for doubtful accounts 893,923 1,387,227
Accumulated depreciation and amortization of
equipment and leasehold improvements 20,122 2,866,599
Accumulated amortization of goodwill 91,637 785,246
Accumulated amortization of contract rights 14,730 110,841
Valuation allowance for deferred taxes 1,559,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Write-offs of bad debts, dispositions of assets and reclassification of
certain net receivables.
(2) Restructuring charges related to reserve for loss on disposition of
assets.
S-3
<PAGE> 50
INDEX OF EXHIBITS
Exhibit
Number Description
2.1 Agreement and Plan of Merger, dated September 30,
1995, by and among Geri-Care Systems, Inc., Scripts
and Things, Inc., Abraham Wieder, Raphael Lieberman,
Capstone Pharmacy Services, Inc., Geri Mergeco, Inc.
and Scripts Mergeco, Inc. (incorporated by reference
to Exhibit 2 to Form 8-K for December 31, 1995).
2.2 Asset Purchase Agreement dated February 29, 1996, by
and among IMD Corporation, Dennis Ruben, the Trust,
Illinois Pharmacy Acquisition Co. and Capstone
Pharmacy Services, Inc. (incorporated by reference to
Exhibit 2 to Form 8-K dated February 29, 1996).
3.1 Certificate of Incorporation of Choice Drug Systems,
Inc. (incorporated by reference to Exhibit 3.1 to Form
10Q for period ending August 30, 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 10Q
for period ending August 30, 1995).
3.3 Bylaws of Choice Drug Systems, Inc. (incorporated by
reference to Exhibit 3.3 to Form 10Q for period ending
August 30, 1995).
4.1 Form of Agreement for Underwriter's Warrants
(incorporated by reference to Exhibit 4B to the
Registration Statement).
4.2 Specimen Warrant Certificate for Redeemable Warrants
(incorporated by reference to Exhibit 4C to the
Registration Statement).
4.3 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).
4.4 Form of Warrant ($4.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.5 to the 1995
Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
4.5 Form of Warrant ($5.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.6 to the 1995
Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
4.6 Stock Purchase Agreement, dated December 16, 1994,
between Registrant and Counsel Corporation
(incorporated by reference to Exhibit 4.7 to the 1995
Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
4.7 Warrant to Purchase Shares of Common Stock, dated
December 16, 1994, for the purchase of 800,000 shares
(incorporated by reference to Exhibit 4.8 to the 1995
Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
4.8 Warrant to Purchase Shares of Common Stock, dated
December 16, 1994, for the purchase of 1,000,000
shares (incorporated by reference to Exhibit 4.9 to
the 1995 Annual Report on Form 10-K for fiscal year
ended February 29, 1995).
<PAGE> 51
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 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).
10.5 First Lease Modification to the J&J Lease, dated May
21, 1992 (incorporated by reference to Exhibit 10F to
the 1992 Annual Report).
10.6 Second Lease Modification to the J&J Lease, dated
October 13, 1994 (incorporated by reference to Exhibit
10.6 to the 1995 Annual Report on Form 10-K for fiscal
year ended February 29, 1995).
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 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*).
10.10 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).
10.11 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).
10.12 Guaranty Agreement, dated February 8, 1990, by Rombro,
IPS, B.T. Smith, Inc. ("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).
10.13 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).
10.14 The U.S. Small Business Administration (the "SBA")
Certified Development Company Program "504" Note,
dated February 12, 1990, made by Trip R, Dave Rombro,
Dov 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).
10.15 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).
<PAGE> 52
10.16 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*).
10.17 Agreement, dated December 23, 1993, between the
Registrant and Mediquest, Inc. (incorporated by
reference to Exhibit NN to 1994 Form 10-K).
10.18 Subordinated Promissory Note dated May 19, 1995, made
in favor of Counsel Corporation (incorporated by
reference to Exhibit 10.18 to the 1995 Annual Report
on Form 10-K for fiscal year ended February 29, 1995).
10.19 Credit Agreement Among Choice Drug Systems, Inc. and
Creditanstalt Corporate Finance, Inc., dated May 19,
1995 (incorporated by reference to Exhibit 10.19 to
the 1995 Annual Report on Form 10-K for fiscal year
ended February 29, 1995).
10.20 Revolving Credit Note dated May 19, 1995, made in
favor of Creditanstalt Corporate Finance, Inc.
(incorporated by reference to Exhibit 10.20 to the
1995 Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
10.21 Agreement and Plan of Merger, dated April 5, 1995, by
and among the Registrant, Choice Acquisition Corp. and
Premier Pharmacy, Inc. (incorporated by reference to
Exhibit 2.1 to the 1995 Annual Report on Form 10-K for
fiscal year ended February 29, 1995).
10.22 1995 Nonqualified Stock Option Plan for Directors of
the Company (incorporated by reference to Exhibit A to
Schedule 14A filed August 2, 1995).
10.23 1995 Incentive and Nonqualified Stock Option Plan for
Key Personnel and Directors of the Company
(incorporated by reference to Exhibit B to Schedule
14A filed August 2, 1995).
10.24 Amendment to Choice Drug Systems, Inc. 1992 Stock
Option Plan (incorporated by reference to Exhibit C to
Schedule 14A filed August 2, 1995).
10.25 1996 Employee Stock Purchase Plan of the Company
(incorporated by reference to Exhibit D to Schedule
14A filed August 2, 1995).
10.26 Form of Registration Rights Agreement dated May 22,
1995 (incorporated by reference to Exhibit 4.4 on Form
8-K dated May 22, 1995).
10.27 Form of Amendment to Registration Rights Agreement
dated August 30, 1995 (incorporated by reference to
Exhibit 4.2 to Form 8-K dated August 31,1995).
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (incorporated by reference to
Exhibit 27 of Form 8-K dated March 20, 1996)
* Denotes a management contract or compensatory plan, contract or arrangement.
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
Subsidiaries of Capstone Pharmacy Services, Inc.:
ACTIVE SUBSIDIARIES:
J & J Drug and Medical Service, Inc.
Choice Drug Systems of Missouri, Inc.
Choice Drug Systems of Maryland, Inc.
Champ Software, Inc.
Innovative Pharmacy Services, Inc.
Innovative Pharmacy Services of Puerto Rico, Inc.
Pharmacy Consulting Acquisition Corp.
Geri-Care Systems, Inc.
My Choice Plan, Inc.
B.T. Smith, Inc.
Institutional Pharmacy Services, Inc.
Rombro's Drug Center, Inc.
PharmaSource, Inc.
Compuscript, Inc.
Premier Pharmacy, Inc.
Scripts & Things, Inc.
INACTIVE SUBSIDIARIES:
Choice Consulting Services Inc.
Choice Care Inc.
Primary Medical Care, Inc.
<PAGE> 2
INACTIVE SUBSIDIARIES (CONTINUED)
Rombro Holding Company
Illinois Pharmacy Acquisition Co.
Healthcare Pharmacy Services, Inc.
J & J Institutional Pharmaceuticals, Inc.
Professional Pharmacy Packing, Inc.
Diversified Home Therapies, Inc.
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 033-21995, 033-62867, 033-62865, 033-62877,
033-62879, 033-62881 and 033-62883.
/s/ Arthur Andersen LLP
Baltimore, Maryland
March 29, 1996
