<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION NO. 333-08403
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CAPSTONE PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 11-2310352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
2930 WASHINGTON BOULEVARD
BALTIMORE, MARYLAND 21230
(800) 766-2761
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
R. DIRK ALLISON
CHIEF EXECUTIVE OFFICER
CAPSTONE PHARMACY SERVICES, INC.
2930 WASHINGTON BOULEVARD
BALTIMORE, MARYLAND 21230
(800) 766-2761
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
MARK MANNER JAMES R. TANENBAUM
HARWELL HOWARD HYNE GABBERT & MANNER, P.C. STROOCK & STROOCK & LAVAN
1800 FIRST AMERICAN CENTER 7 HANOVER SQUARE
315 DEADERICK STREET NEW YORK, NEW YORK 10004-2696
NASHVILLE, TENNESSEE 37238 (212) 806-5400
(615) 256-0500
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest investment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
/ / ________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 16, 1996
9,000,000 SHARES
[CAPSTONE LOGO]
COMMON STOCK
All of the shares of Common Stock of Capstone Pharmacy Services, Inc. (the
"Company" or "Capstone") offered hereby (the "Offering") are being offered by
the Company. The Common Stock of the Company (the "Common Stock") is quoted on
The Nasdaq Stock Market's National Market (the "Nasdaq Stock Market") under the
symbol "DOSE." On August 14, 1996, the last sale price of the Company's Common
Stock as reported by the Nasdaq Stock Market was $11.875 per share.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THEC ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share......................... $ $ $
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Total(3).......................... $ $ $
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</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $600,000.
(3) The Company has granted the Underwriters a 45-day over-allotment option to
purchase up to an additional 1,350,000 shares of Common Stock on the same
terms and conditions as set forth above, solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to reject orders in whole or in part and to
withdraw, to cancel or to modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
September , 1996.
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
BT SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
VOLPE, WELTY & COMPANY
The date of this Prospectus is September , 1996.
<PAGE> 3
COMBINED LOCATIONS MAP
[Map of the United States depicting Company locations.]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby
may not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995) (except for purposes of their
business or otherwise) and this Prospectus may only be issued or passed on in
the United Kingdom to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom this Prospectus may otherwise lawfully be passed on.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus. Investors
should carefully consider the information set forth under the heading "Risk
Factors." Except as otherwise indicated, all information presented assumes no
exercise of the Underwriters' over-allotment option. All references in this
Prospectus to the "Company" or "Capstone" refer to Capstone Pharmacy Services,
Inc., a Delaware corporation, and its subsidiaries.
THE COMPANY
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions throughout the United
States. On July 29, 1996, Capstone acquired the institutional pharmacy services
business of Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of
Integrated Health Services, Inc. ("IHS"). The acquisition of Symphony (the
"Symphony Acquisition") increases the number of long-term care beds served by
Capstone from approximately 44,000 in seven states to approximately 84,000 in 13
states, making Capstone the second largest independent institutional pharmacy
company in the United States. Management believes the Symphony Acquisition is a
major strategic step in positioning Capstone as a leading provider of
institutional pharmacy services in numerous metropolitan markets nationwide. The
Symphony Acquisition significantly increases Capstone's client base and
geographic scope and establishes relationships between Capstone and IHS as well
as other large operators of long-term care facilities not previously served by
Capstone. In addition, management believes that Capstone's expanded national
presence will enable it to compete more effectively for larger customers who
operate multiple facilities while achieving purchasing efficiencies and other
economies of scale.
Capstone provides long-term care facilities with comprehensive
institutional pharmacy services that include the purchasing, repackaging and
dispensing of pharmaceuticals, infusion therapy and Medicare Part B services,
and pharmacy consulting services, all of which are supported by computerized
record keeping and third-party billing services. The Company serves its
long-term care clients primarily through regional pharmacies that are open 24
hours, seven days a week. By establishing regional pharmacies that each have the
capability to serve in excess of 10,000 patients, management believes that the
Company can provide a broader range of services to its long-term care clients on
a more cost-effective basis than many of its competitors. In the correctional
business, where it currently is the largest non-captive provider of pharmacy
services in the United States, the Company provides pharmaceuticals under
capitated contracts to correctional institutions that have privatized their
inmate health care services. Management believes the Company's experience in
managing capitated correctional contracts, which involves the utilization of
closed formularies, generic substitution, rigorous drug utilization review and
proactive physician education, will provide a significant competitive advantage
as managed care becomes more prevalent in the long-term care industry.
In connection with an investment by Counsel Corporation ("Counsel") in
December 1994, the Company installed a new management team, refocused its
operating strategy on its core institutional pharmacy business and initiated an
aggressive acquisition strategy. As a result of these efforts, the Company's net
sales increased to $107.1 million on a pro forma basis for the six months ended
June 30, 1996 from $23.1 million for the six months ended June 30, 1995.
Capstone's profitability also improved during the same time period, with income
from continuing operations of $5.0 million on a pro forma basis for the six
months ended June 30, 1996 compared to a loss from continuing operations of $3.0
million for the six months ended June 30, 1995.
Industry analysts estimate that the provision of institutional pharmacy
services is a $4.0 billion industry that is highly fragmented and undergoing
rapid consolidation. It is estimated that independent institutional pharmacy
companies such as Capstone currently serve approximately 34% of long-term care
facilities in the United States, while retail and in-house pharmacies serve
approximately 40% and 26%, respectively. The growth in institutional pharmacy
services, which is estimated to be 13% per year, is being driven in part by an
increase in the demand for nursing home beds, with occupancy projected to
increase from approximately 1.6 million residents in 1995 to approximately 2.3
million residents by the year 2000. While the majority of long-term care
facilities previously met their pharmaceutical needs through retail pharmacies,
the portion of
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<PAGE> 5
the market served by institutional pharmacy services providers has increased as
long-term care facilities and third-party payors have recognized the need for
integrated, patient-specific pharmacy services. Increasing pressure by
governmental and private payors on acute care hospitals to discharge patients
into lower cost long-term care settings as early as possible has resulted in
those facilities having to treat higher acuity patients who require more
intensive clinical and pharmaceutical services. The Company believes long-term
care providers and payors recognize that sophisticated pharmacy services
represent the most cost-effective treatment for chronic patients who typically
reside in long-term care facilities. Management also believes the correctional
system demand for sophisticated pharmacy services is increasing due to the trend
toward privatization of prison health care services. As the market demand for
high-quality, cost-effective institutional pharmacy services is reinforced by
growth in managed care and correctional privatization, management believes that
many existing independent pharmacy providers will be increasingly receptive to
the prospect of consolidating with larger companies such as Capstone.
Capstone's strategy is to enhance its position as a leading provider of
institutional pharmacy services by: (i) acquiring institutional pharmacy
companies in metropolitan markets; (ii) achieving regional market density in
order to enhance its operating leverage; (iii) positioning itself as the
provider of choice to managed care payors in the markets in which it operates;
and (iv) emphasizing internal growth through the addition of new clients and the
expansion of ancillary services. Since the beginning of 1995, the Company has
focused on expanding operations in major metropolitan markets, concentrating
initially on the urban corridor from Baltimore to Boston and more recently
acquiring operations in Chicago. As a result of the Symphony Acquisition,
Capstone also operates in metropolitan markets including Los Angeles, Dallas,
New Orleans, Minneapolis-St. Paul and Tampa-St. Petersburg. Since December 31,
1994, Capstone has increased its long-term care bed count from approximately
16,200 to approximately 84,000 and the number of inmates served in correctional
institutions from approximately 65,000 to approximately 120,000. Growth in the
Company's long-term care business has been achieved through acquisitions in both
existing and new markets and through internal growth, and growth in Capstone's
correctional business has been achieved solely through the addition of new
capitated contracts.
SYMPHONY ACQUISITION
On July 29, 1996, the Company acquired Symphony from IHS. Symphony provides
institutional pharmacy services to approximately 445 long-term care facilities
containing approximately 40,000 beds, with approximately 20% of those beds
located in facilities affiliated with IHS. The Symphony purchase price was
comprised of $125 million in cash and $25 million in Common Stock. Capstone
financed the cash portion of the Symphony Acquisition with a $25 million
investment by Counsel and the proceeds from a $100 million bridge loan (the
"Bridge Loan"). Approximately $100 million of the estimated net proceeds of the
Offering will be used to repay in full the Bridge Loan.
4
<PAGE> 6
THE OFFERING
Common Stock offered by the
Company............................. 9,000,000 shares
Common Stock to be outstanding after
the Offering........................ 29,061,545 shares(1)
Use of proceeds..................... To repay in full the Bridge Loan, to
repay in full or in part other
outstanding indebtedness and for
general corporate purposes, which may
include potential future acquisitions.
See "Use of Proceeds."
Nasdaq Stock Market symbol.......... DOSE
- ---------------
(1) Includes 4,224,980 shares issued in connection with the Symphony Acquisition
and excludes vested and unvested stock options to purchase 1,759,500 shares
of Common Stock and outstanding warrants to purchase 4,670,000 shares of
Common Stock.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY TEN MONTHS PRO FORMA SIX MONTHS ENDED JUNE 30,
28, ENDED YEAR ENDED ------------------------------------
--------------------- DECEMBER 31, DECEMBER 31, PRO FORMA
1994 1995 1995 1995(1) 1995 1996 1996(1)
--------- --------- ------------ ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 51,254 $ 43,608 $ 48,841 $ 191,816 $ 23,140 $ 46,147 $ 107,141
Cost of sales........... 32,441 27,970 30,654 109,244 14,847 28,846 61,119
--------- --------- ------------ ------------ --------- ---------- ----------
Gross profit.......... 18,813 15,638 18,187 82,572 8,293 17,301 46,022
Total operating
expenses.............. 18,741 26,084 18,855 79,052 11,278 15,861 39,544
--------- --------- ------------ ------------ --------- ---------- ----------
Income (loss) from
operations............ 72 (10,446) (668) 3,520 (2,985) 1,440 6,478
Income (loss) from
continuing
operations............ (521) (10,781) (645) 1,353 (2,961) 779 5,016
Fully diluted income
(loss) from continuing
operations per
share................. $ (0.08) $ (1.67) $ (0.05) $ 0.05(2) $ (0.35) $ 0.04(3) $ 0.16(2)
Fully diluted weighted
average shares
outstanding........... 6,071,687 6,458,891 12,398,401 27,666,073 8,505,854 18,264,102 32,092,832
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $23,513 $ 37,760
Total assets............................................................. 69,776 245,322
Long-term debt........................................................... 19,785 26,775
Stockholders' equity..................................................... 41,030 190,030
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ PRO FORMA
1994 1995 JUNE 30, 1996(4)
------ ------- -----------------
<S> <C> <C> <C>
STATISTICAL DATA:
Long-term care pharmacy beds served at period-end.................. 16,200 34,218 40,828
Correctional inmates served at period-end.......................... 63,658 112,956 109,721
</TABLE>
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(1) Pro forma to give effect to the Company's acquisitions of Premier Pharmacy,
Inc. ("Premier") in May 1995, Geri-Care Systems, Inc. and Scripts & Things,
Inc. ("Geri-Care") in January 1996, IMD Corporation ("IMD") in February
1996, DCMed, Inc. (DCMed, Inc. is the parent company of Medidyne Corp. and
is referred to hereinafter, together with Medidyne Corp., as "Medidyne") in
July 1996 and the Symphony Acquisition, as well as the Offering at an
assumed public offering price of $12.00 per share, as if all had occurred on
January 1 of each respective period, if applicable. See "Pro Forma Unaudited
Consolidated Financial Data."
(2) No federal tax provision has been reflected due to assumed utilization of
federal net operating loss carryforwards. If those carryforwards were not
available, pro forma fully diluted income from continuing operations per
share for the year ended December 31, 1995 and the six months ended June 30,
1996 would have been $0.03 and $0.10, respectively.
(3) The Company was able to utilize net operating loss carryforwards to offset
federal income taxes during the period. If these net operating loss
carryforwards were not available, fully diluted income from continuing
operations per share would have been $0.03.
(4) Pro forma to give effect to the Symphony Acquisition, the Medidyne
acquisition and the Offering at an assumed public offering price of $12.00
per share as if all had occurred as of June 30, 1996. See "Pro Forma
Unaudited Consolidated Financial Data."
6
<PAGE> 8
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following factors in addition to those discussed
elsewhere or incorporated by reference in this Prospectus. Information contained
or incorporated by reference in this Prospectus may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate" or "continue", or the
negative thereof, or other variations thereon or comparable terminology. The
following matters constitute cautionary statements identifying important factors
with respect to any such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
reflected in any such forward-looking statements.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS. The Symphony
Acquisition approximately doubles the number of beds served by the Company, the
number of Company employees and the Company's net sales in 1996. The Company has
made four significant acquisitions in 1996, including the Symphony Acquisition.
The integration of all of the acquisitions is critical to the Company's success.
Potential obstacles to successful integration include, but are not limited to:
cost containment; elimination of redundancies at the corporate and field level;
consolidation of financial and managerial reporting functions; coordination of
field managerial activities with corporate management; achievement of purchasing
efficiencies; expansion of the customer base of the combined entity; roll-out of
new products and services to acquired facilities; and addition and integration
of key personnel. There can be no assurance that Symphony or any other
acquisition will be integrated successfully into the Company's operations or
will not have a material adverse effect upon the Company's results of
operations, financial condition or prospects. In addition, there can be no
assurance that the Symphony Acquisition or any other acquisition will achieve
net sales and earnings that justify the Company's investment therein or expenses
related thereto.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. In addition to growth
resulting from the Symphony Acquisition, the Company has experienced growth that
has placed, and is likely to continue to place, significant pressure on its
management resources. The Company's successful implementation of its growth
strategy depends upon its ability to attract and retain qualified corporate,
financial, clinical, operating and regional management personnel. The loss of
the services of one or more of the Company's key executives, could have a
material adverse effect on the Company's results of operations, financial
condition or prospects. The Company does not have employment agreements with
certain of its key executives. There can be no assurances that the Company will
be able to attract and retain sufficient numbers of qualified personnel.
DEPENDENCE ON ACQUISITIONS FOR GROWTH. A significant component of the
Company's historical growth has come through acquisitions of institutional
pharmacy companies, and the success of the Company's growth strategy is
dependent on additional acquisitions. The Company will compete for acquisition
candidates with buyers who may have greater financial and other resources than
the Company and may be able to pay higher acquisition prices than the Company.
No assurance can be given that the Company will be able to identify suitable
acquisition candidates or to consummate acquisitions on terms acceptable to the
Company. To the extent that the Company is unable to acquire institutional
pharmacy companies, or to integrate such acquisitions successfully, its ability
to expand its business would be reduced significantly. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Growth
Strategy."
GROWTH STRATEGY; NEED FOR ADDITIONAL FINANCING. In order to implement its
growth strategy, the Company will require substantial capital resources and will
need to incur, from time to time, additional bank indebtedness. The Company also
may need to issue equity or debt securities, in public or private transactions,
the terms of which will depend on market and other conditions. There can be no
assurance that any such additional financing will be available on terms
acceptable to the Company if at all. As a result, the Company may not be able to
implement fully its growth strategy. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
NASDAQ STOCK MARKET NET TANGIBLE ASSET CRITERIA. In order for the Nasdaq
Stock Market to continue to quote prices for the Company's Common Stock, the
Company must maintain a certain minimum level of
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<PAGE> 9
net tangible assets. The calculation of net tangible assets excludes the value
of goodwill, which typically represents a substantial part of the assets
acquired by the Company, insofar as most institutional pharmacy companies
maintain relatively low levels of fixed assets. Should the Company continue to
acquire substantial goodwill and/or increase its liabilities without increasing
its stockholders' equity, it may, from time to time, fail to comply with
Nasdaq's net tangible asset criteria. Such failure, if not remedied, could
result in the Company's Common Stock no longer being quoted on the Nasdaq Stock
Market. Such a result could have a material adverse effect on the liquidity and
price of the Company's Common Stock.
LIMITED HISTORY OF PROFITABILITY. The Company has incurred net losses in
its last three fiscal years. For the years ended February 28, 1995 and 1994,
losses from continuing operations were approximately $10.8 million and $521,000,
respectively, and for the ten months ended December 31, 1995, the Company had a
loss from continuing operations of approximately $645,000. While the Company has
been profitable for the past four consecutive quarters, there can be no
assurance that it will continue to be profitable in the future. See "Selected
Historical Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. The Company derives,
directly or indirectly, a majority of its net sales from government-sponsored
reimbursement programs. The Company's net sales and profitability are, and will
continue to be, affected by the efforts of all payors to contain or reduce the
costs of health care by lowering reimbursement rates, narrowing the scope of
covered services, increasing case management review of service, and negotiating
reduced contract pricing. Any changes in reimbursement levels under Medicare,
Medicaid, or private pay programs, including managed care contracts, could have
a material adverse effect on the Company's results of operations, financial
condition and prospects. Changes in the mix of patients among Medicare, Medicaid
and different types of private pay sources may adversely affect the Company's
net sales and profitability. See "Business -- Reimbursement."
HEALTH CARE REFORM. The health care industry is subject to changing
political, economic and regulatory influences that may affect the institutional
pharmacy industry. In recent years, several comprehensive national health care
reform proposals were introduced in the United States Congress. While none of
the proposals were adopted, health care reform may again be addressed by the
United States Congress. Several states also are considering health care reforms
through Medicaid managed care demonstration projects. Although these projects
generally exempt institutional pharmacy services and long-term care facilities,
no assurance can be given that such projects or other proposals will not change
the Medicaid reimbursement system in a manner that would affect the Company's
operations. The Company cannot predict which, if any, federal or state
modifications or reform proposals will be adopted, when they may be adopted or
what their impact on the Company may be if adopted. There can be no assurance
that the adoption of certain modifications or proposals will not have a material
adverse effect on the Company's results of operations, financial condition or
prospects. See "Business -- Government Regulation."
ROLE OF MANAGED CARE. As managed care assumes an increasingly significant
role in the health care industry, Capstone's future success will, in part, be
dependent on obtaining and retaining managed care contracts. Competition for
such contracts is intense and, in most cases, will require Capstone to compete
based on breadth of services offered, pricing, ability to track and report
patient outcomes and cost data and provision of value-added pharmacy consulting
services, among other factors. In addition, reimbursement rates under managed
care contracts typically are significantly lower than those paid by other
private third-party payors. There can be no assurance that the Company will
retain or continue to obtain such managed care contracts or that the managed
care contracts it obtains will be on terms as favorable to the Company as those
of its current managed care and other contracts. See "Business -- Growth
Strategy."
COMPETITION. The long-term care pharmacy markets in which Capstone
operates are highly fragmented, and the majority of competition in such markets
comes from small to mid-size local operators whose primary advantage is market
familiarity. Capstone's competition in the correctional pharmacy market comes
primarily from other large providers. Management believes that the primary
competitive factor in its industry is breadth and quality of service. Additional
competitive factors include reputation, ease of doing business with
8
<PAGE> 10
the specific providers, ability to develop and to maintain relationships with
referral sources and competitive pricing. Some of the Company's present and
potential competitors are significantly larger than Capstone and have, or may
obtain, greater financial and marketing resources than Capstone. See
"Business -- Competition."
GOVERNMENT REGULATION. Capstone is subject to extensive federal, state and
local regulation. Federal laws governing the Company's activities include
regulations covering the repackaging, storing and dispensing of drugs, Medicare
reimbursement and certification, and certain financial relationships with
physicians and other health care providers. Capstone is subject to state laws
governing Medicaid, professional training, pharmacy licensure, payment of
remuneration in exchange for patient referrals and the dispensing and storage of
pharmaceuticals. The pharmacies operated by the Company must comply with all
applicable laws, regulations and licensing standards. Many of the Company's
employees must maintain certain licenses in order to provide services. The
long-term care facilities which contract for the Company's pharmacy services are
also subject to federal, state and local regulations and are required to be
licensed in the states in which they are located. The failure by these
institutions to comply with such regulations or to obtain or renew any required
licenses could result in the loss of the Company's ability to provide pharmacy
services to their residents. There can be no assurance that federal, state or
local governments will not change existing standards or impose additional
standards, compliance with which may require the Company to incur additional
expense. Any significant additional expense incurred in connection with such
compliance or any failure to comply with existing or future standards could have
a material adverse effect upon Capstone's results of operation, financial
condition or prospects. See "Business -- Government Regulation."
INFLUENCE OF PRINCIPAL STOCKHOLDER. Upon completion of the Offering the
Company's principal stockholder, Counsel, and its affiliates will beneficially
own approximately 28.5% of the outstanding shares of the Common Stock of the
Company (27.3% if the Underwriters' over-allotment option is exercised in full).
As a condition of Counsel's initial investment in Capstone, the Company agreed
contractually to use its good faith efforts to have elected as directors up to
four Counsel nominees, subject to certain conditions. As a result of its equity
ownership in the Company and its nominees on the Company's Board of Directors,
Counsel can significantly influence the management and policies of the Company,
including the election of the Company's directors and the outcome of matters
submitted to stockholders of the Company for approval. See "Security Ownership
of Directors, Executive Officers and Principal Holders."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, and
assuming no exercise of the Underwriters' over-allotment option, the Company
will have 29,061,545 shares of Common Stock outstanding. Of these shares,
19,795,403 will be freely tradeable and the remainder will be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. Of these restricted securities, 9,167,579 shares are subject to certain
"piggyback" registration rights that are currently exercisable, 8,132,579 are
subject to certain demand registration rights that are currently exercisable,
and 1,035,000 shares are subject to certain demand rights that are exercisable
beginning in October 1996. An additional 1,759,500 shares are issuable upon the
exercise of outstanding stock options, and 4,670,000 shares are issuable upon
the exercise of certain outstanding warrants. Upon the exercise of such options
and warrants, 4,002,774 of these shares will be freely tradeable, and the
remainder will be restricted securities. Of these restricted securities,
2,336,726 shares are subject to certain demand and piggyback registration rights
that are currently exercisable. Holders of 3,491,129 of the shares of Common
Stock referred to herein have agreed not to sell any of their shares for a
period of 120 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters. Following the Offering,
sales of substantial amounts of the Company's Common Stock in the public market
pursuant to Rule 144 or otherwise, or the potential of such sales, could
adversely affect the prevailing market price for the Common Stock and impair the
Company's ability to raise additional capital through the sale of equity
securities. See "Description of Capital Stock -- Shares Eligible for Future
Sale."
LIABILITY AND ADEQUACY OF INSURANCE. The provision of health care services
entails an inherent risk of liability. Capstone currently maintains product and
professional liability insurance intended to cover such claims in amounts which
it believes are consistent with industry standards. There can be no assurance
that claims in excess of the insurance coverage or claims not covered by
insurance will not arise. A successful claim in excess of its insurance coverage
could have a material adverse effect upon the Company's results of
9
<PAGE> 11
operations, financial condition and future prospects. Claims, regardless of
their merit or eventual outcome, may also have a material adverse effect upon
Capstone's ability to attract customers, to maintain its insurance policies or
to expand its business. There can be no assurance that Capstone will be able to
obtain liability insurance coverage in the future on acceptable terms, if at
all.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 9,000,000 shares of the
Common Stock, at an assumed public offering price of $12.00 per share, are
estimated to be approximately $102.0 million after deduction of underwriting
discounts, commissions and estimated offering expenses (or approximately $117.4
million if the over-allotment option is exercised in full). The Company intends
to use the net proceeds to repay in full the Bridge Loan. As of August 16, 1996,
amounts outstanding under the Bridge Loan were approximately $100.0 million. The
Bridge Loan bears interest at a floating interest rate of LIBOR plus a margin
ranging from 6.0% to 6.25%. The Bridge Loan, if not paid by July 30, 1997, will
convert to a term loan with a nine year maturity bearing a floating interest
rate of the nine-year treasury rate in effect from time to time plus 6.5%. The
remaining net proceeds, if any, will be used to repay in whole or in part other
indebtedness and for general working capital purposes, including potential
future acquisitions.
Pending the above uses, such net proceeds will be placed in short-term,
interest-bearing, investment-grade securities, certificates of deposit or direct
or guaranteed obligations of the United States of America.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's revolving credit facility prohibits the payment of
dividends as long as there is indebtedness outstanding.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth the short-term indebtedness and consolidated
capitalization (unaudited) of the Company (i) as of June 30, 1996, (ii) pro
forma to give effect to the acquisitions of Symphony and Medidyne as if they had
occurred as of June 30, 1996 and (iii) pro forma as adjusted to give effect to
the Offering at an assumed public offering price of $12.00 per share and the
application of the net proceeds therefrom as set forth under "Use of Proceeds."
This table should be read in conjunction with the Company's Consolidated
Financial Statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term indebtedness............................... $ -- $ 100,000 $ --
======== ========== ===========
Long-term debt and capital leases, net of current
portion............................................. $ 19,785 $ 28,775 $ 26,775
-------- ------------ --------------
Stockholders' equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 15,836,565 shares issued and
15,498,103 outstanding; 19,723,083 outstanding
pro forma; 28,723,083 outstanding pro forma, as
adjusted......................................... 155 197 287
Capital in excess of par......................... 52,378 102,336 204,246
Accumulated deficit.............................. (11,503) (14,503) (14,503)
-------- ------------ --------------
Total stockholders' equity.................. 41,030 88,030 190,030
-------- ------------ --------------
Total capitalization................... $ 60,815 $ 116,805 $ 216,805
======== ========== ===========
</TABLE>
- ---------------
(1) Reflects the pro forma capitalization prior to the Offering after giving
effect to (i) the Symphony Acquisition, (ii) the Bridge Loan and (iii) the
Medidyne acquisition. See "Pro Forma Unaudited Consolidated Financial
Data."
11
<PAGE> 13
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the years ended February 28, 1994
and 1995, and the ten months ended December 31, 1995 are derived from the
audited consolidated financial statements of the Company. The financial data for
the six months ended June 30, 1996 and 1995 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring items, which the Company considers necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The data should be read in conjunction with the
Company's Consolidated Financial Statements, related notes and other financial
information included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY TEN MONTHS SIX MONTHS ENDED JUNE
28, ENDED 30,
--------------------- DECEMBER 31, ----------------------
1994 1995 1995 1995 1996
--------- --------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............................. $ 51,254 $ 43,608 $ 48,841 $ 23,140 $ 46,147
Cost of sales.......................... 32,441 27,970 30,654 14,847 28,846
--------- --------- ------------ --------- ----------
Gross profit................. 18,813 15,638 18,187 8,293 17,301
--------- --------- ------------ --------- ----------
Operating expenses:
Selling, general and
administrative expenses......... 17,241 18,637 17,469 8,651 14,453
Depreciation and amortization..... 1,037 989 1,146 563 1,162
Costs relating to pharmacy
closure......................... -- -- -- -- 246
Costs in connection with
litigation...................... 463 4,389 -- -- --
Restructuring charges............. -- 2,069 240 2,064 --
--------- --------- ------------ --------- ----------
Total operating expenses..... 18,741 26,084 18,855 11,278 15,861
--------- --------- ------------ --------- ----------
Income (loss) from
operations................. 72 (10,446) (668) (2,985) 1,440
Total non-operating expense, net....... 644 801 202 95 589
--------- --------- ------------ --------- ----------
Income (loss) before income taxes...... (572) (11,247) (870) (3,080) 851
Provision (benefit) for income taxes... (51) (466) (225) (119) 72
--------- --------- ------------ --------- ----------
Income (loss) from continuing
operations................. $ (521) $ (10,781) $ (645) $ (2,961) $ 779
======== ======== ========== ======== =========
Fully diluted income (loss) from
continuing operations per share...... $ (0.08) $ (1.67) $ (0.05) $ (0.35) $ 0.04
======== ======== ========== ======== =========
Fully diluted weighted average shares
outstanding.......................... 6,071,687 6,458,891 12,398,401 8,505,854 18,264,102
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
1994 1995 DECEMBER 31, 1995 JUNE 30, 1996
------- ------- ----------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 1,931 $ 5,909 $10,814 $ 23,513
Total assets............................. 24,360 19,212 42,131 69,776
Long-term debt, less current portion..... 2,358 7,650 2,692 19,785
Stockholders' equity..................... 8,316 4,778 26,840 41,030
</TABLE>
12
<PAGE> 14
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
The following pro forma financial data may not be indicative of the future
results of operations or what the actual results of operations would have been
had the transactions described previously actually been effective January 1 of
each respective period. The following pro forma financial data are presented on
a condensed and annualized basis. See the Company's Form 8-K dated July 30,
1996, as amended by Form 8-K/A, for additional pro forma information.
PRO FORMA INCOME STATEMENT DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
ACQUIRED
ACTUAL(1) OPERATIONS(2) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales.................................. $ 55,894 $ 135,922 $ -- $ 191,816
Cost of sales.............................. 35,182 74,062 -- 109,244
---------- ------------- ----------- ----------
Gross profit............................. 20,712 61,860 -- 82,572
---------- ------------- ----------- ----------
Operating expenses:
Selling, general and administrative
expenses.............................. 20,031 49,718 -- 69,749
Depreciation and amortization............ 1,352 3,318 2,324(3) 6,994
Restructuring charges.................... 2,309 -- -- 2,309
---------- ------------- ----------- ----------
Total operating expenses......... 23,692 53,036 2,324 79,052
---------- ------------- ----------- ----------
Income (loss) from operations.............. (2,980) 8,824 (2,324) 3,520
---------- ------------- ----------- ----------
Non-operating expense, net:
Interest expense, net.................... 776 3,042 (1,250)(4) 2,568
Other income............................. (475) (36) -- (511)
---------- ------------- ----------- ----------
Total non-operating expense,
net............................ 301 3,006 (1,250) 2,057
---------- ------------- ----------- ----------
Income (loss) before income taxes.......... (3,281) 5,818 1,074 1,463
Provision (benefit) for income taxes....... (344) 1,767 (1,313)(5) 110
---------- ------------- ----------- ----------
Income (loss) from continuing operations... $ (2,937) $ 4,051 $ 239 $ 1,353
========= ========== ========= =========
Fully diluted income (loss) from continuing
operations per share..................... $ 0.05
=========
Pro forma weighted average number of shares (6) 27,666,073
outstanding..............................
</TABLE>
- ---------------
(1) Reflects the Company's actual results of operations for the ten months ended
December 31, 1995 plus results of operations for January and February 1995.
(2) Reflects the acquisitions of Premier, Geri-Care, IMD, Medidyne and the
Symphony Acquisition as if they had been completed on January 1, 1995.
(3) Reflects the additional amortization of goodwill related to the Premier,
Geri-Care, IMD and Medidyne acquisitions and the Symphony Acquisition over
a period of 40 years.
(4) Reflects the net effect of (i) a reduction of interest expense incurred by
Symphony on debt which will not be assumed by Capstone as part of the
Symphony Acquisition, (ii) a reduction of interest expense assuming that
the net proceeds of the Offering, after repayment of the Bridge Loan, are
used to repay certain other indebtedness and (iii) additional interest
expense on the long-term debt related to the IMD and Medidyne acquisitions,
at an annual interest rate of 7.5%.
(5) Reflects an adjustment to the provision for income taxes to reflect an
effective state tax rate of 7.5%. No federal tax provision has been
reflected due to assumed full utilization of federal net operating loss
carryforwards.
(6) Reflects the fully diluted weighted average number of shares outstanding for
the ten months ended December 31, 1995 plus (i) 1,007,692 shares issued in
conjunction with the Geri-Care acquisition, (ii) 1,035,000 shares issued at
a price of $8.50 per share in a private placement consummated on April 18,
1996 (the "April 1996 Private Placement"), (iii) 4,224,980 shares issued to
IHS and Counsel in conjunction with the Symphony Acquisition and (iv)
9,000,000 shares contemplated by the Offering at an assumed price of $12.00
per share.
13
<PAGE> 15
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
PRO FORMA INCOME STATEMENT DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
---------------------------------------------------------
ACQUIRED
ACTUAL OPERATIONS(1) ADJUSTMENTS PRO FORMA
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................................. $ 46,147 $ 60,994 $ -- $ 107,141
Cost of sales.............................. 28,846 32,273 -- 61,119
----------- ------------- ----------- -----------
Gross profit............................. 17,301 28,721 -- 46,022
Operating expenses:
Selling, general and administrative
expenses.............................. 14,452 21,268 -- 35,720
Depreciation and amortization............ 1,162 1,431 985(2) 3,578
Costs relating to pharmacy closure....... 246 -- -- 246
Restructuring charges.................... -- -- -- --
----------- ------------- ----------- -----------
Total operating expenses................. 15,860 22,699 985 39,544
----------- ------------- ----------- -----------
Income from operations..................... 1,441 6,022 (985) 6,478
----------- ------------- ----------- -----------
Non-operating expense, net:
Interest expense, net.................... 685 1,262 (936)(3) 1,012
Other income............................. (95) 139 -- 44
----------- ------------- ----------- -----------
Total non-operating expense,
net............................ 590 1,401 (936) 1,056
----------- ------------- ----------- -----------
Income (loss) before income taxes.......... 851 4,621 (50) 5,422
Provision for income taxes................. 72 1,581 (1,247)(4) 407
----------- ------------- ----------- -----------
Income from continuing operations.......... $ 779 $ 3,040 $(1,197) $ 5,016
========== ========== ========= ==========
Fully diluted income from continuing
operations per share..................... $ 0.04 $ 0.16
========== ==========
Pro forma weighted average number of common
shares outstanding....................... 18,264,102 32,092,832(5)
</TABLE>
- ---------------
(1) Reflects the acquisitions of IMD and Medidyne and the Symphony Acquisition
as if they had occurred on January 1, 1996.
(2) Reflects the additional amortization of goodwill related to the IMD and
Medidyne acquisitions and the Symphony Acquisition over a period of 40
years.
(3) Reflects the net effect of (i) a reduction of interest expense incurred by
Symphony on debt which will not be assumed by Capstone as part of the
Symphony Acquisition, (ii) a reduction of interest expense assuming that
the net proceeds of the Offering after repaying the Bridge Loan are used to
repay certain other indebtedness and (iii) additional interest expense on
the long-term debt related to the IMD and Medidyne acquisitions at an
annual interest rate of 7.5%.
(4) Reflects the adjustment to pro forma provision for income taxes to reflect
an effective state tax rate of 7.5%. No federal tax provision has been
reflected due to assumed utilization of federal net operating loss
carryforwards.
(5) Reflects the fully diluted weighted average number of shares outstanding for
the six months ended June 30, 1996 plus (i) the impact of the 1,035,000
shares of Common Stock issued in the April 1996 Private Placement as if it
had occurred on January 1, 1996, (ii) 4,224,980 shares issued to IHS and
Counsel in connection with the Symphony Acquisition and (iii) the 9,000,000
shares contemplated by this Offering at an assumed price of $12.00 per
share.
14
<PAGE> 16
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
PRO FORMA BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------
ACQUIRED
ACTUAL OPERATIONS(1) ADJUSTMENTS PRO FORMA
-------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 1,392 $ 768 $ -- $ 2,160
Accounts receivable, net of allowance for
doubtful accounts......................... 21,082 25,962 -- 47,044
Inventories.................................. 7,408 5,916 -- 13,324
Other current assets......................... 1,442 1,157 -- 2,599
-------- ------------- ----------- ---------
Total current assets................. 31,324 33,803 -- 65,127
Property, equipment and other assets........... 4,610 9,981 -- 14,591
Goodwill, net of accumulated amortization...... 33,842 54,965 76,797(2) 165,604
-------- ------------- ----------- ---------
Total assets......................... $ 69,776 $ 98,749 $ 76,797 $ 245,322
======== ========== ========= ========
Current liabilities:
Accounts payable............................. $ 3,338 $ 8,091 $ 500 $ 11,929
Other current liabilities.................... 4,473 10,965 -- 15,438
-------- ------------- ----------- ---------
Total current liabilities............ 7,811 19,056 500 27,367
-------- ------------- ----------- ---------
Other long-term liabilities.................... 1,150 -- -- 1,150
Long-term debt, net of current portion......... 19,785 41,756 (34,766)(3) 26,775
-------- ------------- ----------- ---------
20,935 41,756 (34,766) 27,925
-------- ------------- ----------- ---------
Stockholders' equity:
Common stock and capital in excess of par.... 52,533 30,761 121,239(4) 204,533
Retained earnings (accumulated deficit)...... (11,503) 7,176 (10,176)(5) (14,503)
-------- ------------- ----------- ---------
41,030 37,937 111,063 190,030
-------- ------------- ----------- ---------
Total liabilities and stockholders'
equity............................. $ 69,776 $ 98,749 $ 76,797 $ 245,322
======== ========== ========= ========
</TABLE>
- ---------------
(1) Reflects the acquisition of Medidyne and the Symphony Acquisition as if they
had occurred as of June 30, 1996.
(2) Reflects the additional goodwill recorded as part of the Medidyne
acquisition and the Symphony Acquisition as part of the purchase price
allocations.
(3) Reflects the net effect of (i) the additional long-term debt incurred
related to the Medidyne acquisition, (ii) a reduction of long-term debt on
the books of Symphony at June 30, 1996, which is not being assumed by
Capstone and (iii) a reduction in indebtedness from the excess net proceeds
of the Offering.
(4) Reflects $50.0 million of additional equity raised in connection with the
Symphony Acquisition and $102.0 million in estimated net proceeds from the
Offering (assuming no exercise of the Underwriters' over-allotment option),
net of intercompany eliminations.
(5) Reflects intercompany eliminations and $3.0 million in fees relating to the
Bridge Loan.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements, including the related notes,
and the other financial information incorporated by reference herein.
GENERAL
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions throughout the United
States. The Company provides its long-term care clients with comprehensive
institutional pharmacy services that include (i) the purchasing, repackaging and
dispensing of pharmaceuticals, (ii) infusion therapy and Medicare Part B
services, which are comprised of enteral nutrition and urologic supplies, and
(iii) pharmacy consulting services, all of which are supported by computerized
record keeping and third-party billing services. The Company serves its
long-term care clients primarily through regional pharmacies that are open 24
hours, seven days a week. In the correctional business, the Company provides
pharmaceuticals primarily under capitated contracts at correctional institutions
that have privatized inmate health care services.
In the first quarter of 1995, Capstone implemented a corporate
restructuring plan that included installation of a new management team,
refocusing the Company's operations on core institutional pharmacy businesses
and the initiation of an aggressive acquisition strategy. In conjunction with
the restructuring, the Company exited certain non-strategic, unprofitable lines
of business. The Company sold its medical/surgical supply operations, closed a
long-term care pharmacy in Missouri, discontinued its long-term care mail order
pharmacy operations and sold its computer software division. Capstone took
certain charges and realized certain gains relating to the discontinuation of
these operations. The Company anticipates that certain additional one-time
charges related to the Symphony Acquisition will be taken in the third and
fourth quarter of 1996.
The acquisition of institutional pharmacy companies has resulted in a
significant change in the Company's financial profile. Between May 1, 1995 and
June 30, 1996, the Company completed three acquisitions that added approximately
$49,000,000 in 1995 annualized net sales. The Company acquired, effective July
1, 1996, Medidyne, a provider of Medicare Part B services. On July 29, 1996, the
Company acquired Symphony from IHS, adding approximately 445 long-term care
facilities containing over 40,000 beds. The Symphony Acquisition significantly
increases the Company's client base and geographic scope. All of the these
acquisitions have been accounted for using the purchase method of accounting
and, as a result, the Company will incur significant future amortization expense
associated with goodwill.
On a pro forma basis for all acquisitions, including the Symphony
Acquisition, the Company's net sales and income from continuing operations for
the 12 months ended December 31, 1995 were $191,816,000 and $1,353,000,
respectively, compared to actual net sales of $43,608,000 and a loss from
continuing operations of $10,781,000 in the prior fiscal year ended February 28,
1995, and the Company's pro forma net sales and income from continuing
operations for the six months ended June 30, 1996 were approximately
$107,141,000 and $5,016,000, respectively, compared to actual net sales of
approximately $23,140,000 and an actual loss from continuing operations of
$2,961,000 for the six months ended June 30, 1995.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales increased to $46,147,000 in the 1996 period from
$23,140,000 in the 1995 period, an increase of $23,007,000, or 99.4%. Of this
increase, approximately $22,049,000 was attributable to the acquisitions of
Premier, Geri-Care, and IMD.
16
<PAGE> 18
Cost of Sales. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $28,846,000 in the 1996
period from $14,847,000 in the 1995 period, an increase of $13,999,000, or
94.3%. Of this increase, approximately $13,517,000 was attributable to
acquisitions, and the remainder resulted from increased sales volumes in
existing operations. As a percentage of net sales, cost of sales was 62.5% in
the 1996 period compared to 64.2% in the 1995 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $14,453,000 in the 1996 period from $8,651,000 in the 1995 period, an
increase of $5,802,000, or 67.1%. Of this increase, approximately $7,647,000 was
attributable to acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 31.3% in the 1996 period compared to 37.4% in the
1995 period. The decrease as a percentage of net sales was due to the sale of
the medical/ surgical supply business, reduced costs as a result of the
corporate restructuring discussed above and expense reimbursements associated
with a pre-acquisition management agreement related to Medidyne.
Depreciation and Amortization. Depreciation and amortization increased to
$1,162,000 in the 1996 period from $563,000 in the 1995 period, an increase of
$599,000, or 106.4%. Of this increase, approximately $309,000 was attributable
to depreciation related to acquisitions. Amortization of goodwill increased by
$310,000 in the 1996 period as a result of acquisitions.
Interest Expense. Net interest expense increased to $685,000 in the 1996
period from $465,000 in the 1995 period, an increase of $220,000, or 47.3%. This
increase primarily resulted from interest expense related to bank borrowings to
fund the acquisition of IMD.
Income Taxes. Income taxes in the 1996 and 1995 periods consisted of
accruals for estimated state and local income taxes based upon apportioned state
taxable income, offset by estimated refundable federal income taxes resulting
from the benefit of net operating loss carrybacks and the utilization of net
operating loss carryforwards.
Income (Loss) from Continuing Operations. Income from continuing
operations increased to $779,000 in the 1996 period from a loss of $2,961,000 in
the 1995 period, an increase of $3,740,000. This increase was attributable to
restructuring charges in the amount of $2,064,000 incurred in the 1995 period,
increased sales primarily as the result of acquisitions and to the reduction of
cost of sales and selling, general and administrative expenses as a percentage
of net sales.
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
$48,841,000 compared to $43,608,000 for the fiscal year ended February 28, 1995.
Of this difference, approximately $13,815,000 was attributable to the
acquisition of Premier. Net sales decreased substantially due to sale of the
medical/surgical supply business, partially offset by the addition of new
correctional contracts.
Cost of Sales. Cost of sales for the ten months ended December 31, 1995
was $30,654,000 compared to $27,970,000 for the fiscal year ended February 28,
1995. Of this difference, approximately $8,814,000 was attributable to the
Premier acquisition. As a percentage of net sales, cost of sales for the ten
months ended December 31, 1995 was 62.8% compared to 64.1% for fiscal 1995. The
decrease as a percentage of net sales was primarily due to the sale of the lower
margin medical/surgical supply business. In addition, the Company renegotiated
its purchasing contracts during the 1995 period, lowering its cost of sales.
Cost of sales was not materially affected by price changes in products purchased
during the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the ten months ended December 31, 1995 were
$17,469,000 compared to $18,637,000 for the fiscal year ended February 28, 1995.
As a percentage of net sales, selling, general and administrative expenses for
the ten months ended December 31, 1995 were 35.8% compared to 42.7% for fiscal
1995. The decrease as a percentage of net sales was due to the sale of the
medical/surgical supply business and reduced costs as a
17
<PAGE> 19
result of the corporate restructuring discussed above. The Premier acquisition
added approximately $4,800,000 of additional selling, general and administrative
expense.
Interest Expense. Net interest expense for the ten months ended December
31, 1995 was $634,000 compared to $905,000 for the fiscal year ended February
28, 1995. This decrease primarily resulted from the reduction of the Company's
debt using proceeds from private placements and the difference between the ten
month and 12 month periods.
Other Income. Other income for the ten months ended December 31, 1995 was
$432,000 compared to $104,000 for the fiscal year ended February 28, 1995. The
difference primarily resulted 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 $225,000 compared to $466,000 for the fiscal year ended February
28, 1995. The benefit for income taxes for the ten months ended December 31,
1995, primarily resulted from the carry back of a prior year taxable loss to
prior periods.
Income (Loss) from Continuing Operations. The loss from continuing
operations for the ten months ended December 31, 1995 was $645,000 compared to a
loss of $10,781,000 for the fiscal year ended February 28, 1995. This difference
was attributable partially to the inclusion in the prior period of nonrecurring
costs in connection with claims and litigation of $4,389,000 and restructuring
charges of $2,069,000. The remaining difference was due to the acquisition of
Premier and to the corporate restructuring discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies.
The Company's net cash used in operating activities was $4,492,000,
$3,588,000 and $1,123,000 for the six months ended June 30, 1996, the ten months
ended December 31, 1995 and the fiscal year ended February 28, 1995,
respectively. Generally, the cash used in operating activities in each of the
periods resulted from increased working capital requirements. Specifically, net
cash from operating activities was impacted by a $3,387,000 decrease in accounts
payable and a $2,424,000 increase in inventories and accounts receivable in the
six months ended June 30, 1996, and by a $11,420,000 net loss and a $3,500,000
litigation settlement payment by the Company in the fiscal year ended February
28, 1995.
The Company's net cash provided by (used in) investing activities was
($18,075,000), ($6,559,000) and $9,000 for the six months ended June 30, 1996,
the ten months ended December 31, 1995 and the fiscal year ended February 28,
1995, respectively. Net cash from investing activities was impacted by
$17,428,000 of acquisition spending for Geri-Care and IMD in the six months
ended June 30, 1996 and by $4,169,000 of acquisition spending for Premier and a
$2,243,000 advance in the ten months ended December 31, 1995.
Net cash provided by financing activities was approximately $21,195,000,
$12,364,000 and $1,218,000 for the six months ended June 30, 1996, the ten
months ended December 31, 1995 and the fiscal year ended February 28, 1995,
respectively. Net cash from financing activities was impacted by an equity
offering for net proceeds of $8,382,000 and $20,483,000 of borrowings in the six
months ended June 30, 1996; by equity offerings for net proceeds of $21,682,000
and long-term debt repayments of $10,885,000 in the ten months ended December
31, 1995; and by an equity offering for net proceeds of $7,281,000 and long-term
debt repayments of $5,903,000 in the fiscal year ended February 28, 1995.
The Company's current ratio was 4.0:1, 2.0:1 and 2.0:1 at June 30, 1996,
December 31, 1995 and February 28, 1995, respectively. The increased current
ratio at June 30, 1996 was due primarily to an increase in accounts receivable,
inventories and prepaid expenses coupled with a reduction in accounts payable
and current portion of long-term debt.
During January 1996, Creditanstalt Corporate Finance, Inc.
("Creditanstalt") agreed to amend the Company's revolving line of credit (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 new term loan facility in the amount
of $10,000,000 (the
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"Term Loan"). Upon completion of a private placement in April 1996, maximum
availability under the Line of Credit and the Term Loan was increased pursuant
to the terms thereof to $21,000,000 and $14,000,000, respectively, subject to
certain borrowing base limitations. 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 0.25% or LIBOR plus 1.25% (8.25% and
6.875%, respectively, as of July 20, 1996) and are subject to other restrictions
and loan covenants, all as defined by the underlying agreements. As of August
12, the Company had outstanding borrowings of $13,422,852 under the Line of
Credit and $14,000,000 under the Term Loan. Following the Offering, the Company
intends to seek an increase in borrowings available under the Line of Credit to
approximately $75,000,000.
On December 16, 1994, Counsel purchased from the Company in a private
placement transaction 2,000,000 shares of Common Stock at a price of $3.65 per
share for net proceeds to the Company of approximately $7,191,000, and received
warrants for the purchase of an additional 1,800,000 shares of Common Stock
exercisable at any time over a three-year period. On May 22, 1995, the Company
completed a private placement of 1,600,000 units (the "Units") at a price of
$3.65 per Unit. Net proceeds to the Company were approximately $5,760,000. Each
Unit consists 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. Counsel acquired 596,362 Units, and officers and directors
of the Company acquired 261,780 Units. On August 29, 1995, the Company completed
a private placement of 3,500,000 shares of Common Stock at a price of $4.38 per
share for net proceeds of approximately $15,080,000. Counsel Corporation
purchased 1,311,237 shares in the August 1995 Private Placement. On April 18,
1996, the Company completed a private placement of 1,035,000 shares of Common
Stock at a price of $8.50 per share for net proceeds of approximately $8,370,000
(the "April 1996 Private Placement"). The net proceeds from these four private
placements were used primarily to repay indebtedness related to acquisitions of
Premier in May 1995, Geri-Care in January 1996 and IMD in February 1996. On July
29, 1996, Counsel purchased from the Company in a private placement transaction
2,112,490 shares of Common Stock at a price of approximately $11.83 per share
for net proceeds to the Company of $25,000,000. The proceeds were used as part
of the purchase price for the Symphony Acquisition. As an additional part of
such purchase price, the Company issued 2,112,490 shares of Common Stock valued
at approximately $11.83 per share to IHS.
In connection with the Symphony Acquisition, Capstone entered into a senior
subordinated credit agreement with Bankers Trust Company as agent and lender and
Canadian Imperial Bank of Commerce as lender, pursuant to which the lenders
funded the $100.0 million Bridge Loan. The Bridge Loan bears interest at a
floating interest rate of LIBOR plus a margin of from 6.0% to 6.25%. The Bridge
Loan, if not paid by July 30, 1997, will convert to a term loan with a nine year
maturity at a floating interest rate of the nine-year treasury rate plus 6.5%.
The proceeds of the Bridge Loan were used to pay a portion of the Symphony
Acquisition purchase price. In connection with the Bridge Loan, the Company
incurred a commitment fee of $2,750,000, which together with certain other
one-time charges, will be recognized as an expense in the quarter ending
September 30, 1996.
During August 1996, the Company registered the shares underlying its
outstanding Series A and B warrants. Upon exercise of the 650,000 Series A
warrants at an exercise price of $6.00 per share, holders of the Series A
warrants will receive 650,000 shares of Common Stock and 650,000 newly-issued
Series B warrants which can be exercised through August 1997 at a price of
$10.00 per share. If fully exercised, net proceeds from the Series A warrants
will total $3,900,000 and will be used to repay existing indebtedness under the
Line of Credit.
The Company believes its existing Line of Credit is sufficient to fund its
working capital needs. In order to implement its growth strategy, the Company
will require substantial capital resources and will need to incur, from time to
time, additional bank indebtedness. The Company also may need to issue, in
public or private transactions, equity or debt securities, the availability and
terms of which will depend on market and other conditions. There can be no
assurance that any such additional financing will be available on terms
acceptable to the Company, if at all.
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BUSINESS
GENERAL
Capstone is a leading provider of institutional pharmacy services to
long-term care facilities and correctional institutions throughout the United
States. On July 29, 1996, Capstone acquired the institutional pharmacy services
business of Symphony, a subsidiary of IHS. The Symphony Acquisition increases
the number of long-term care beds served by Capstone from approximately 44,000
in seven states to approximately 84,000 in 13 states, making Capstone the second
largest independent institutional pharmacy company in the United States.
Management believes the Symphony Acquisition is a major strategic step in
positioning Capstone as a leading provider of institutional pharmacy services in
numerous metropolitan markets nationwide. The Symphony Acquisition significantly
increases Capstone's client base and geographic scope and establishes
relationships between Capstone and IHS as well as other large operators of
long-term care facilities not previously served by Capstone. In addition,
management believes that Capstone's expanded national presence will enable it to
compete more effectively for larger customers who operate multiple facilities
while achieving purchasing efficiencies and other economies of scale.
Capstone provides long-term care facilities with comprehensive
institutional pharmacy services that include the purchasing, repackaging and
dispensing of pharmaceuticals, infusion therapy and Medicare Part B services,
and pharmacy consulting services, all of which are supported by computerized
record keeping and third-party billing services. The Company serves its
long-term care clients primarily through regional pharmacies that are open 24
hours, seven days a week. By establishing regional pharmacies that each have the
capability to serve in excess of 10,000 patients, management believes that the
Company can provide a broader range of services to its long-term care clients on
a more cost-effective basis than many of its competitors. In the correctional
business, where it currently is the largest non-captive provider of pharmacy
services in the United States, the Company provides pharmaceuticals under
capitated contracts to correctional institutions that have privatized their
inmate health care services. Management believes the Company's experience in
managing capitated correctional contracts, which involves the utilization of
closed formularies, generic substitution, rigorous drug utilization review and
proactive physician education, will provide a significant competitive advantage
as managed care becomes more prevalent in the long-term care industry.
INDUSTRY OVERVIEW
Institutional pharmacies purchase, repackage and dispense pharmaceuticals
to residents of long-term care facilities such as nursing homes, sub-acute
facilities, assisted living facilities and, in certain instances, to inmates in
correctional institutions. Unlike acute care hospitals, most long-term care
facilities do not maintain on-site pharmacies because they do not generally
require a volume of prescribed medications sufficient to make a pharmacy
cost-effective. Prior to the 1970s, the pharmacy needs of long-term care
facilities generally were fulfilled by local retail pharmacies. In response to
increasingly strict nursing home regulations, changes in the reimbursement
environment and the increasing acuity of long-term care patients, the breadth of
pharmacy services required by long-term care facilities has increased
substantially. In addition to providing oral medications, many institutional
pharmacies provide infusion therapy services and supplies, Medicare Part B
services such as enteral nutrition services and urologic supplies, and pharmacy
consulting services, including monitoring the control and administration of
pharmaceuticals within a facility, assistance in complying with applicable
regulations, therapeutic monitoring and drug utilization review services. The
Company believes that institutional pharmacy companies are best positioned to
meet evolving market demands in the long-term care industry and to assume a
proactive role in influencing the effectiveness and cost of health care.
Industry analysts estimate that the provision of institutional pharmacy
services is a $4.0 billion industry that is growing approximately 13% per year.
Management believes this growth is being driven by two primary factors: (i) the
increasing number of patients receiving treatment in long-term care or other
institutional settings and (ii) the increasing number of medications taken per
day by patients in long-term care and correctional institutions. Management
believes that several factors will continue to influence the increase in the
number of patients residing in long-term care settings including the aging of
the population, earlier discharge of patients from acute care settings into
lower cost institutional settings, growth in the number of
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assisted living beds and a decreasing tendency for families to maintain the role
as primary care giver for elderly relatives. Factors influencing the increase in
medications administered to institutional patients include advances in medical
technology, which have resulted in the availability of new drug therapy
regimens, and the increasing acuity level of nursing home and sub-acute patients
as a result of quicker discharge following acute care procedures. Management
believes that the average long-term care patient receives approximately six to
eight medications per day.
The long-term care segment of the institutional pharmacy industry is highly
fragmented, with small retail pharmacies serving approximately 40% of long-term
care facilities, independent institutional pharmacy companies serving
approximately 34% of long-term care facilities and in-house captive pharmacies
serving the remaining 26% of such facilities. Management believes that
consolidation will accelerate as long-term care providers migrate from
traditional retail pharmacies to larger institutional pharmacy companies.
Factors driving consolidation in the institutional pharmacy industry include:
- Economies of Scale. Larger institutional pharmacies are able to leverage
corporate purchasing agreements to reduce supply costs. Management
believes that industry-wide drug costs average between 50% and 60% of
sales, making purchasing efficiencies critical to controlling costs.
Industry participants purchase the majority of their drug supplies from
large drug wholesalers, and larger industry participants have greater
bargaining power to reduce costs associated with such purchases.
- Ability to Provide a Broad Range of Services. As a result of their
ability to serve multiple facilities from a single location, larger
pharmacies generally are able to offer more services at a lower cost per
bed. These services include 24 hours, seven days per week coverage,
clinical pharmacists, registered nurses and more frequent deliveries.
- Regulatory Expertise and Systems Capabilities. Long-term care facilities
are demanding more sophisticated and specialized services from pharmacy
providers due, in part, to increasingly complex government regulations
requiring enhanced planning, monitoring and reporting capabilities
regarding patient care. As a result, long-term care administrators seek
experienced institutional pharmacy providers which offer computerized
information and documentation systems designed to monitor patient care and
to assist in controlling facility and payor costs.
GROWTH STRATEGY
Capstone's objective is to enhance its position as a leading provider of
high-quality, cost-effective institutional pharmacy services. The Company
provides comprehensive pharmacy services primarily in metropolitan areas in
order to develop the regional market penetration and critical mass necessary to
position the Company as the pharmacy services provider of choice to long-term
care facilities and third-party payors. Following are the key elements of the
Company's growth strategy:
- Acquire Institutional Pharmacy Companies in Metropolitan Markets. The
acquisition of high-quality institutional pharmacy companies in targeted
metropolitan markets has been the primary contributor to the Company's
growth. Capstone focuses on acquisitions in metropolitan markets because
of the relatively higher number of long-term care beds available to be
served compared to non-metropolitan markets. The Company has implemented
this strategy successfully in the Baltimore to Boston corridor and is
adopting a similar approach in the Chicago market. As a result of the
Symphony Acquisition, Capstone also has operations in metropolitan markets
including Los Angeles, Dallas, New Orleans, Minneapolis-St. Paul and
Tampa-St. Petersburg.
- Achieve Regional Market Density. Capstone identifies acquisition
candidates that solidify its position in a market and enable it to develop
a critical mass of long-term care clients. By establishing regional
pharmacies that each have the capability to serve in excess of 10,000
patients, management believes the Company can provide a broader range of
services to its long-term care clients on a more cost-effective basis than
many of its competitors. This strategy of developing regional market
density around a single pharmacy location allows the Company to serve
long-term care facilities within a 150-mile
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radius. In addition, this strategy enables the Company to consolidate
smaller individual pharmacies, capitalizing on operating efficiencies and
economies of scale in marketing and corporate overhead.
- Position for Managed Care. Capstone provides pharmacy services under
capitated contracts to correctional institutions across the United States.
Management believes its experience in managing capitated contracts, which
utilize closed formularies, generic substitution, rigorous drug
utilization review and proactive physician education, will provide the
Company with a significant competitive advantage as managed care becomes
more prevalent in the long-term care industry. In conjunction with the
strategy of achieving regional market density, management believes the
Company's capitation expertise will position Capstone to be the provider
of choice to managed care payors in the markets in which it operates.
- Emphasize Internal Growth. The Company seeks to generate internal growth
by adding new clients and expanding the range of services offered to
existing clients. The Symphony Acquisition significantly increases
Capstone's client base and geographic scope and establishes relationships
between Capstone and IHS as well as other large operators of long-term
care facilities not previously serviced by Capstone. Management believes
there are attractive opportunities to increase the number of IHS-
affiliated beds served, as well as opportunities to add beds in long-term
care facilities that previously were unwilling to consider Symphony as a
provider because of its status as an in-house captive of an industry
competitor. Once a client relationship is established, the Company seeks
to increase net sales by offering infusion therapy and Medicare Part B
services. Because of the recent addition of these ancillary services to
the Company's product line, management believes substantial growth
opportunities exist within the current client base.
SERVICES
Capstone provides institutional pharmacy services to long-term care
facilities, correctional institutions and a limited number of hospital
pharmacies. Management believes that the primary competitive factor in its
industry is breadth and quality of service. In addition to providing oral
medications to its clients, the Company provides ancillary services that
generate incremental sales. Following is a description of each of the Company's
primary lines of business.
Pharmacy Services. Capstone's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and correctional
institutions. The Company purchases pharmaceuticals in bulk quantities from
wholesalers and manufacturers and dispenses both prescription and
non-prescription drugs in patient-specific unit dose or blister packages in
accordance with physician orders. Prescription and non-prescription medications
are delivered at least daily to long-term care facilities for administration to
residents by the nursing staffs of such facilities. Capstone's pharmacists
package drugs to meet each patient's needs for either single-day or multi-day
dosage requirements. Each drug is dispensed by either individually sealing the
required unit dose or sealing such dose in an individual cavity within a blister
package. Capstone can customize the timing and packaging of its delivery system
to meet specific client needs.
Capstone uses an order processing system that enables its long-term care
clients to order pharmaceuticals using either a pre-printed label or monthly
order forms. Clients generally take delivery of routine orders within 24 hours;
however, most of the Company's pharmacies are open 24 hours to provide emergency
service when needed. Once a physician order is received by Capstone, it is
entered into one of the Company's pharmacy computer systems where information is
screened for drug and food interactions, allergies, and refill limitations. Upon
entry, the prescription becomes part of the permanent patient record, and a
label is printed for application to the Company's blister package. The package
label contains specific patient information as well as physician name,
medication, dosage information and cautionary messages. Prior to delivery to the
long-term care facility, the completed prescription with patient-specific label
attached is reviewed by one of the Company's pharmacists and re-verified against
the original order entry data. Following this final quality assurance check, the
prescription is delivered by courier service to the facility.
As an additional service, the Company furnishes its clients with customized
information from its computerized medical records and documentation system. This
system aggregates and organizes detailed
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patient medical records, facility drug usage and monthly management and quality
assurance reports. Management believes this system of client-tailored
information management, combined with the Company's patient-specific unit dose
delivery system, results in improved efficiency and accuracy in the
administration of medications and reduces the likelihood of drug-related adverse
consequences.
In addition to its core long-term care and correctional business, the
Company also provides pharmacy management services to 12 acute care hospitals
pursuant to management contracts on either a single-year or multi-year basis.
Pharmacy Consulting Services. Capstone provides value-added consulting
services that help clients comply with federal and state regulations applicable
to long-term care facilities, manage medication costs more effectively and
maximize the efficacy of drug regimens. These pharmacy consulting services
include (i) a review of each patient's medical record and drug regimen to
facilitate the monitoring of potential adverse drug reactions, (ii)
recommendation of therapeutic alternatives, where appropriate, (iii) monthly
evaluation of facility-wide drug usage and drug costs and (iv) maintenance of
drug administration records that assist the long-term care facility with
regulatory compliance.
Ancillary Services. Capstone provides long-term care facilities with
infusion therapies and Medicare Part B services, which consist of enteral
nutrition and urologic supplies, as well as counseling and assistance with
regulatory compliance in connection with such services. The Company's registered
nurses provide on-site training to client facility staff members in the use of
infusion and enteral supplies and equipment. Prior to the acquisition of
Medidyne and the Symphony Acquisition in July 1996, ancillary services did not
comprise a material component of Capstone's net sales.
OPERATIONS
Organization. Capstone's long-term care operations are divided into five
geographic regions, each headed by a regional vice president. Management
believes this regional organizational structure provides the flexibility to
accommodate continued growth. Capstone believes that the institutional pharmacy
business is dependent in large part on personal service and encourages its
pharmacists to develop personal relationships and to be responsive to local
market demands. The Company uses more centralized financial and inventory
control systems support than typically available to small, independent pharmacy
operators. Additional services performed at the corporate level include quality
improvement oversight, financial and accounting functions, group purchasing,
acquisitions and development.
Pharmacy Distribution Model. In the long-term care business, the Company
typically provides services through regional pharmacies that have the capability
to serve long-term care facilities via courier within a 150-mile radius. These
regional pharmacies are open 24 hours, seven days a week and are staffed with
clinical pharmacists, registered nurses and pharmacy technicians. The Company
provides services from 34 pharmacies in 13 states. In the correctional business,
the Company dispenses pharmaceuticals via overnight delivery primarily from a
centralized mail service pharmacy operation located in Baltimore.
Formulary Management. Capstone utilizes a closed formulary management
system in its capitated correctional business. Under the Company's closed
formulary, Capstone pharmacists assist prescribing physicians in selecting the
most appropriate drug among therapeutic alternatives, including generic
substitutions, and in the use of more cost-effective dosage amounts.
Management believes that its experience with formulary management in its
correctional business, combined with Symphony's newly established long-term care
formulary program, should enhance Capstone's ability to implement an effective
formulary management system that will be attractive to long-term care providers
and third-party payors.
Sales & Marketing. The Company's marketing efforts are directed at
long-term care facility operators and providers of health care services to
correctional institutions. While pricing is an important factor in the selection
of pharmacy providers, Capstone's experience is that the primary factor,
particularly among long-term care operators, is the quality and range of
services offered. Consequently, the Company strives to provide
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high-quality services that are tailored to each client's needs. Once a
relationship is established, Capstone then attempts to expand the range of
services it provides.
Capstone's marketing efforts are conducted by five regional salespersons
with support from 34 pharmacy managers. The Company's consultant pharmacists and
nurse consultants also are integral to the marketing effort because of their
daily contact with the facility managers and the residents in those facilities.
Purchasing. Capstone purchases substantially all of its pharmaceutical
inventories from wholesalers and manufacturers. In order to lower its costs,
Capstone has entered into a primary wholesaler agreement with a single supplier
from which the Company receives twice-daily deliveries of inventory. Capstone
also has in place secondary wholesale agreements to minimize its purchasing
channels while maximizing inventory quality and cost savings. Because of readily
available alternatives, Capstone is not dependent on any one supplier. In
November 1995, Capstone negotiated a new supplier contract with terms that are
more favorable to Capstone than its previous contracts. With the Symphony
Acquisition, management believes a more favorable primary wholesaler agreement
as well as more favorable pricing from drug manufacturers will be available to
the Company.
COMPETITION
The institutional pharmacy market is highly fragmented and competition
varies significantly from market to market. The Company's competitors include
small retail pharmacies, large chain pharmacies, in-house captive pharmacies and
a small number of national institutional pharmacies. Management believes that
the competitive factors most important in the Company's lines of business are
quality and range of service offered, reputation with referral sources, ease of
doing business with the provider, ability to develop and to maintain
relationships with referral sources and competitive prices. Some of the
Company's present and potential competitors are significantly larger than the
Company and have, or may obtain, greater financial and marketing resources than
the Company. In addition, there are relatively few barriers to entry in the
local markets served by the Company, and it may encounter substantial
competition from local market entrants.
REIMBURSEMENT
The Company is reimbursed, directly or indirectly, by government-sponsored
programs for a majority of its institutional pharmacy services.
The Medicaid program is a federal-state cooperative program designed to
enable states to provide medical assistance to aged, blind or disabled
individuals, or to members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of HHS for approval. The federal Medicaid statute specifies a variety
of requirements which the state plan must meet, including requirements relating
to eligibility, coverage of services, payment and administration. For residents
eligible for Medicaid, the Company bills the individual state Medicaid program.
Medicaid programs are funded jointly by the federal government and individual
states and are administered by the states. The reimbursement rates for pharmacy
services under Medicaid are determined on a state-by-state basis subject to
review by the Health Care Financing Administration and applicable federal law.
Federal regulations and the regulations of certain states establish "upper
limits" for reimbursement for prescription drugs under Medicaid. Pharmacy
services are priced on a state-by-state basis at the lower of "usual and
customary" charges or cost (which generally is defined as a function of average
wholesale price and may include a profit percentage) plus a fixed dispensing fee
which is adjusted to reflect associated costs on an annual or less frequent
basis. State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement program or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. The U.S. Congress has passed a
fiscal year 1996 budget reconciliation bill that provides for substantial
reductions in the rate of spending increases in the Medicare program and in the
federal share of
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the Medicaid program over the next seven years. The annual increase in the
federal share would vary from state to state based on a variety of factors. Such
provisions, if ultimately signed into law, could adversely affect the Company's
business.
Medicare, a federally-funded health insurance program, consists of two
parts: Medicare Part A, which covers, among other things, pharmaceutical costs
for eligible long-term patients; and Medicare Part B, which covers certain items
and services provided by medical suppliers, including enteral nutrition and
urologic supplies. Medicare Part A requires long-term care facilities to submit
all of their costs for patient care, including pharmaceutical costs, in a
unified bill. Thus, fees for pharmaceuticals provided to Medicare Part A
patients are paid to the Company by the long-term care facility on a monthly
basis. Pricing is consistent with that of private pay residents or is set
between private pay rates and Medicaid rates. Medicare Part A has a cost-sharing
arrangement under which patients must pay a portion of their costs. These
non-covered co-payments are billed by the facility directly to the residents or
the state Medicaid plan, as the case may be.
Payment for Medicare Part B is based on a fee schedule, which varies
depending on the state in which the patient receiving the items resides, and is
made on a per-item basis directly to the supplier. The Company either bills
Medicare directly for Medicare Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. Medicare
Part B also has an annual deductible as well as a co-payment obligation on
behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
and freezes and funding reductions, all of which may adversely affect the
Company's business. There can be no assurance that payments for pharmaceutical
supplies and services under governmental reimbursement programs will continue to
be based on the current methodology or remain comparable to present levels. In
this regard, the Company may be subject to rate reductions as a result of
federal budgetary legislation related to the Medicare and Medicaid programs. In
addition, various state Medicaid programs periodically experience budgetary
shortfalls which may result in Medicaid payment delays to the Company. To date,
the Company has not experienced any material adverse effect due to any such
budgetary shortfall.
In addition, the failure, even if inadvertent, of Capstone and/or its
client institutions to comply with applicable reimbursement regulations could
adversely affect Capstone's business. Additionally, changes in such
reimbursement programs or in regulations related thereto, such as reductions in
the allowable reimbursement levels, modifications in the timing or processing of
payments and other changes intended to limit or decrease the growth of Medicaid
and Medicare expenditures, could adversely affect the Company's business.
For patients carrying third-party insurance, the patient's individual
insurance plan is billed monthly. For those patients who are ineligible for the
Medicaid and Medicare programs and are not covered by private insurance, the
Company bills the individual or another responsible party monthly based on
prevailing regional market rates or "usual and customary" charges. In New York,
the Company receives payment directly from the long-term care facilities it
serves, regardless of the patients' or facilities' reimbursement sources.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations cover required qualifications, day-to-day operations, reimbursement
and the documentation of activities. Capstone continuously monitors the effects
of regulatory activity on its operations.
States generally require that companies operating a pharmacy within the
state be licensed by the state board of pharmacy. The Company currently has its
pharmacies licensed in each state in which it operates a pharmacy. In addition,
the Company currently delivers prescription drugs from its licensed pharmacies
to many states in which the Company does not operate a pharmacy. Most of these
states regulate the delivery by
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out-of-state pharmacies of prescription drugs to patients in such states, and
Capstone's pharmacies hold these requisite licenses. In addition, Capstone's
pharmacies are registered with the appropriate state and federal authorities
pursuant to statutes governing the regulation of controlled substances.
Long-term care facilities are also required to be licensed in the states in
which they operate and, if serving Medicare or Medicaid patients, must be
certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to state and federal
nursing home regulations which impose strict compliance standards relating to
quality of care for long-term care facilities operations, including extensive
documentation and reporting requirements. In addition, pharmacists, nurses and
other health care professionals who provide services on the Company's behalf are
in most cases required to obtain and maintain professional licenses and are
subject to state regulation regarding professional standards of conduct.
Federal and state laws impose certain repackaging, labeling, and packing
insert requirements on pharmacies that repackage drugs for distribution beyond
the regular practice of dispensing or selling drugs directly to patients at
retail. A drug repackager must be registered with the Food and Drug
Administration. The Company holds all required registration and licenses, and
its repackaging operations are in material compliance with applicable state and
federal requirements.
The long-term care pharmacy business operates under regulatory and cost
containment pressures from state and federal legislation primarily affecting
Medicaid and, to a lesser extent, Medicare. As is the case for nursing home
services generally, Capstone receives reimbursement from both the Medicaid and
Medicare programs, directly from individual residents (private pay), and from
other payors such as third-party insurers. The Company believes that its
reimbursement mix is in line with long-term care expenditures nationally.
Federal regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given broad
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
requirements for long-term care facilities relating to drug regimen reviews for
Medicaid patients in such facilities. Recent regulations clarify that, under
federal law, a pharmacy is not required to meet the general standards for drugs
dispensed to long-term care facility residents if the long-term care facility
complies with the drug regimen review requirements. However, the regulations
indicate that states may nevertheless require pharmacies to comply with the
general standards, regardless of whether the long-term care facility satisfies
the drug regimen review requirement, and the states in which the Company
operates currently do require its pharmacies to comply therewith. Third, federal
regulations impose certain requirements relating to reimbursement for
prescription drugs furnished to Medicaid patients.
In addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs which may affect the Company's
operations. For example, some states have enacted "freedom of choice"
requirements which may prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers. Such limitations may increase the competition which
the Company faces in providing services to long-term care patients.
The Company is subject to federal and state laws that govern financial and
other arrangements between health care providers. These laws include the federal
anti-kickback statute and physician self-referral prohibitions. The
anti-kickback statute was originally enacted in 1977 and amended in 1987, and
which prohibits, among other things, knowingly and willfully soliciting,
receiving, offering or paying any remuneration directly or indirectly in return
for or to induce the referral of an individual to a person for the furnishing of
any item or service for which payment may be made in whole or in part under
Medicare or Medicaid. Many states have enacted similar statutes which are not
necessarily limited to items and services for which payment is made by Medicare
or Medicaid. Violations of these laws may result in fines, imprisonment, and
exclusion from the Medicare and Medicaid programs or other state-funded
programs. Federal and state court decisions interpreting these statutes are
limited, but have generally construed the statutes to apply if "one purpose" of
remuneration is to induce referrals or other conduct within the statute. In
August 1994, the Office of Inspector General ("OIG") of the Department of Health
and Human Services, issued a Special Fraud Alert regarding
26
<PAGE> 28
prescription drug marketing schemes which it believes may violate the
anti-kickback statute. Among the specific activities identified in the Fraud
Alert were a "product conversion" program in which a drug company offered cash
awards to pharmacies who changed from another company's drug product to their
product. The Fraud Alert also targets marketing programs in which drug companies
offer cash or other benefits to pharmacists in exchange for marketing tasks in
the course of pharmacy practice related to Medicare or Medicaid.
The physician self-referral prohibition, commonly referred to as the
"Stark" law, prohibits a physician from referring Medicare or Medicaid patients
to "designated health services" in which the physician (or family member) has a
financial interest, either through ownership or compensation arrangements.
Prohibited referrals will not be reimbursed by Medicare or Medicaid, and the
statute makes it illegal to seek reimbursement from any other source. In
addition, violations may result in fines and/or civil penalties and exclusion
from the Medicare and Medicaid programs. The list of "designated health
services" includes outpatient prescription drugs. Some states have also passed
similar "anti-self referral" legislation. The Company does not believe that the
Stark law or similar state laws, have had, or will have, a significant adverse
impact on the operations of the Company.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arose
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like. Further, a number of states involved in
these enforcement actions have requested that the Federal Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether FDA will act in this regard or what effect, if any, FDA
involvement would have on the Company's operations.
The Company believes its contract arrangements with other health care
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
LITIGATION
A lawsuit, Marvin Levine, Gloria Levine, and John McBay v. Capstone
Pharmacy Services, Inc., Premier Pharmacy, 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. The plaintiffs sold the stock of Compuscript,
Inc. ("Compuscript") to Premier in 1993 pursuant to the terms of a purchase
agreement (the "Agreement") and claim that Premier, which the Company has
acquired, and Compuscript owe them approximately $1,000,000 under promissory
notes delivered to them as part of the consideration for their Compuscript
stock. Plaintiffs also claim that Compuscript and Premier owe them an additional
$1,100,000 because of the alleged occurrence of certain events that would give
rise to such an obligation under the Agreement. Finally, the plaintiffs claim
the Company is liable for tortiously interfering with their rights under the
Agreement and under the promissory notes. The complaint seeks total judgments of
$7,100,000, plus interest and costs against the defendants. The defendants,
including Capstone, have answered the complaint and are vigorously contesting
the plaintiffs' claims. In addition, Premier has filed a counterclaim against
the plaintiffs for breaches of certain representations and warranties in the
Agreement. Capstone does not believe that this litigation is likely to have a
material adverse effect on it.
The Company is from time to time subject to claims and suits arising in the
ordinary course of business, including claims for repayment of monies paid to
the Company under Medicare or Medicaid. Although the Company and its
subsidiaries are not parties to any such litigation in which, in management's
opinion, an adverse determination would have a material effect on the Company's
financial position, there can be no assurance that the Company will not become
involved in such litigation in the future.
27
<PAGE> 29
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------- --- ------------------------------------------------------
<S> <C> <C>
R. Dirk Allison................. 40 President, Chief Executive Officer and Director
Donald W. Hughes................ 46 Vice President, Chief Financial Officer and Secretary
Robert Della Valle.............. 45 Vice President, Chief Operating Officer
Allan C. Silber................. 47 Chairman
Morris A. Perlis(1)............. 47 Vice Chairman
Joseph F. Furlong, III(1)....... 47 Director
John Haronian(2)(3)............. 63 Director
Albert Reichmann(1)............. 67 Director
J. Brendan Ryan(3).............. 53 Director
Edward Sonshine, Q.C.(2)........ 49 Director
Gail Wilensky, Ph.D.(3)......... 53 Director
John Zuccotti(2)................ 59 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Disinterested Stock Option Plan Committee.
Mr. Allison has served as President and Chief Executive Officer of the
Company since May 1995 and a Director since August 1995. He served as President
and Chief Executive Officer of Premier from July 1993 to May 1995. Mr. Allison
served as President and Chief Executive Officer of Allied Pharmacy Management,
Inc. from February 1988 to June 1993.
Mr. Hughes has served as Vice President, Chief Financial Officer and
Secretary of the Company since December 1995. Prior to joining the Company, Mr.
Hughes was Executive Vice President and Chief Financial Officer of Broventure
Company, Inc., a closely-held investment management company. He had been
employed by Broventure since July 1984 and held the position of Chief Financial
Officer since January 1988 and Executive Vice President since November 1990.
Mr. Della Valle joined the Company as Vice President and Chief Operating
Officer in July 1996. Prior to joining the Company, Mr. Della Valle was
President and Chief Executive Officer and Vice-President of Allied Pharmacy
Management, Inc. ("Allied Pharmacy"). He had been employed by Allied Pharmacy
since August 1991 and held the position of President and Chief Operating Officer
from July 1993 to July 1996.
Mr. Silber has served as Chairman since February 1995 and as a Director of
the Company since December 1994. Mr. Silber has been Chairman, Chief Executive
Officer and a director of Counsel since August 1979. He served as President of
Counsel from August 1979 until January 1994. Mr. Silber has served as a director
of Advocat Inc., a nursing home operator ("Advocat"), since January 1994 and as
a director of American HomePatient, Inc. ("American HomePatient") since
September 1991. Mr. Silber served as Chairman of American HomePatient from
September 1991 to May 1994.
Mr. Perlis has served as Vice Chairman of the Company since May 1995 and as
a Director of the Company since December 1994. Mr. Perlis served as interim
Chief Executive Officer of the Company from December 1994 to May 1995. He has
served as a director of and consultant to Counsel since September 1992, and as
President of Counsel since January 1994. Mr. Perlis has served as a director of
American HomePatient since March 1993 and as its Chairman since May 1994. Mr.
Perlis was President of Morris A. Perlis & Assoc.,
28
<PAGE> 30
an executive management consulting firm, from September 1992 until January 1994
and President of American Express Canada, Inc. from September 1988 until
September 1992.
Mr. Furlong has served as a Director of the Company since December 1994.
Mr. Furlong has served as President of Adirondack Capital Advisors, L.L.C., a
financial advisory/consulting firm, since May 1996. Mr. Furlong was a partner of
Colman Furlong & Co., a merchant banking firm, from February 1991 until April
1996. Prior to that he was a partner of Robertson Stephens & Company, an
investment banking firm, from November 1984 to January 1991. Mr. Furlong has
served as a director of American HomePatient since June 1994.
Mr. Haronian has served as a Director of the Company since January 1994.
Mr. Haronian has served as Chairman of Vision World, Inc. and President of
Tri-State Leasing, Inc. since April 1991. Mr. Haronian has served as President
of Peoples Liquor, Inc. since November 1991. From May 1965 until November 1990,
Mr. Haronian served as President of Douglas Drug, Inc.
Mr. Reichmann has served as a Director of the Company since August 1995. He
has served as Chairman and a director of Olympia & York Developments, Limited, a
privately held Canadian real estate company, for at least five years prior to
February 1993. Mr. Reichmann currently participates in major philanthropic
activities in addition to serving on the boards of several major hospitals in
Canada.
Mr. Ryan has served as a Director of the Company since August 1995. Mr.
Ryan is Chairman and Chief Executive Officer of Foote Corne & Belding, a
worldwide advertising and communications firm. He formerly served as President
and Chief Executive Officer of FCB/Leber Katz Partners and FCB Direct ("FCB") in
New York, a diversified advertising firm, since 1991. Prior to that, he was
Executive Vice President of Ogilvy & Mather, an advertising firm from 1977 to
1991 and a director and department head of OMW from 1986 to 1991. Mr. Ryan has
served as a member of the Citizens Crime Commission of New York City since 1985.
He is a director of True North Communications, Inc., the parent corporation of
FCB.
Mr. Sonshine has served as a Director of the Company since December 1994.
He has been President and Chief Executive Officer of RioCan Real Estate
Investment Trust of Toronto, Canada since July 1995. Mr. Sonshine has served as
a director of American HomePatient since September 1991. Mr. Sonshine has served
as Vice Chairman of Counsel since January 1994, as a director of Counsel since
August 1979, and as Chairman, President and Chief Executive Officer of Counsel
Management Services, Inc. since October 1993. Mr. Sonshine served as Executive
Vice President of Counsel from February 1987 until January 1994. Mr. Sonshine
served as President and Chief Executive Officer of Icarus Realty Corp. from
February 1987 until September 1993. Mr. Sonshine has been a director of Advocat
since May 1995.
Dr. Wilensky has served as a Director of the Company since August 1995. She
has served as Chair, Physician Payment Review Commission, Senior Fellow since
May 1995, and as John M. Olin Senior Fellow, Project HOPE since January 1993.
Dr. Wilensky served as Deputy Assistant to the President for Policy Development
from March 1992 to January 1993. She was Administrator of the Health Care
Financing Administration of the Department of Health and Human Services from
January 1990 to March 1992.
Mr. Zuccotti has served as a Director of the Company since August 1995. He
has served as President and Chief Executive Officer of Olympia & York Companies
(U.S.A.), since January 1990 and has served as a director since the inception of
its board of directors in July 1993. He has served as a director of Dreyfus
Strategic Municipal Bond Fund, Inc. since November 1989. Mr. Zuccotti also
serves as director of Dreyfus Calif. Tax Exempt Money Market, Dreyfus Capital
Value Fund, Inc., Dreyfus Insured Municipal Bond Fund, Dreyfus New Leaders Fund,
Inc., Dreyfus Strategic Municipals, Inc., Dreyfus Municipal Bond Fund, Inc.,
Dreyfus Municipal Money Market Fund, Inc., and Starrett Housing Corporation.
29
<PAGE> 31
SECURITY OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The following table sets forth, as of August 7, 1996, information with
respect to the beneficial ownership of the Company's outstanding Common Stock by
(i) each director of the Company, (ii) each executive officer of the Company
(iii) all directors and executive officers of the Company as a group and (iv)
each stockholder known by the Company to be the beneficial owner of more than 5%
of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF TOTAL
NAME OWNED(1) OUTSTANDING(2)
- --------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
Counsel Corporation(3)............................................... 8,356,815 37.3%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada M5X 1E3
Integrated Health Services, Inc...................................... 2,112,490 10.5
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Dirk Allison(4)...................................................... 114,413 *
Donald W. Hughes(5).................................................. 8,333 *
Allan C. Silber(6)................................................... 387,500 1.9
Morris A. Perlis(6).................................................. 387,500 1.9
Joseph F. Furlong, III(7)(8)......................................... 74,500 *
John Haronian(8)(10)................................................. 142,500 *
Edward Sonshine, Q.C.(7)(8).......................................... 74,500 *
Gail Wilensky, Ph.D.(9).............................................. 15,000 *
Albert Reichmann(9).................................................. 15,000 *
J. Brendan Ryan(9)................................................... 15,000 *
John E. Zuccotti(9)(11).............................................. 24,500 *
All directors and executive officers as a group(12) (11 persons)..... 1,258,746 6.0
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws,
where applicable.
(2) The percentages shown are based on 20,061,545 shares of Common Stock
outstanding on August 7, 1996, plus, as to each individual and group
listed, the number of shares of Common Stock deemed to be owned by such
holder pursuant to Rule 13d-3 under the Securities Exchange Act of 1934
(the "Exchange Act"), which includes shares subject to stock options and
warrants held by such holder which are exercisable within sixty days of
such date.
(3) Includes 1,298,181 and 1,038,545 shares issuable upon the exercise of
warrants at $4.50 and $5.50 per share respectively. Directors Silber,
Sonshine and Perlis are directors of Counsel and director Silber
beneficially owns or controls approximately 18% of the common stock of
Counsel, a majority of which is pledged to a lender. Directors Sonshine and
Perlis own in the aggregate less than 5% of Counsel's common stock. All of
the directors listed in this footnote (3) disclaim beneficial ownership of
shares of Common Stock in their capacity as directors of Counsel, and Mr.
Silber disclaims beneficial ownership of shares of Common Stock in his
capacity as a significant stockholder of Counsel.
(4) Includes 15,170 and 12,136 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively, and 16,667, 15,000 and 25,000
shares issuable upon the exercise of options at $4.31, $4.44 and $8.50 per
share, respectively.
(5) Includes 8,333 shares issuable upon the exercise of options at $8.50 per
share.
30
<PAGE> 32
(6) Includes 25,000 and 20,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively and 15,000, 2,500, 250,000 and
25,000 shares issuable upon the exercise of options at $4.44, $7.50, $4.31
and $8.50 per share, respectively.
(7) Includes 15,000 and 12,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.
(8) Includes 15,000 and 2,500 shares issuable upon the exercise of options at
$4.44 and $7.50 per share, respectively.
(9) Includes 15,000 shares issuable upon the exercise of options at $4.44 per
share.
(10) Includes 15,000 and 15,000 shares issuable upon the exercise of options at
$2.85 and $3.50 per share, respectively, and 25,000 and 20,000 shares
issuable upon the exercise of warrants at $4.50 per share, and $5.50 per
share, respectively.
(11) Includes 2,500 and 2,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.
(12) Includes 1,013,306 shares issuable upon the exercise of options and
warrants.
31
<PAGE> 33
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $.01 per share and 500,000 shares of serial preferred stock, par value
$.01 per share. As of August 7, 1996, 20,061,545 shares of Common Stock and no
shares of preferred stock were issued and outstanding. In addition as of August
7, 1996 there were options and warrants outstanding to purchase 1,759,500 and
4,670,000 shares of Common Stock, respectively.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 29,061,545 shares of
Common Stock outstanding. Of these shares, 19,795,403 will be freely tradeable,
and the remainder will be "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act. Of these restricted securities,
9,167,579 shares are subject to certain piggyback registration rights that are
currently exercisable, 8,132,579 are subject to certain demand registration
rights that are currently exercisable, and 1,035,000 shares are subject to
certain demand registration rights that are exercisable beginning in October
1996. An additional 1,759,500 shares are issuable upon the exercise of
outstanding stock options, and 4,670,000 shares are issuable upon the exercise
of certain outstanding warrants. Upon the exercise of such options and warrants,
4,002,774 of these shares will be freely tradeable, and the remainder will be
restricted securities. Of these restricted securities, 2,336,726 shares are
subject to certain demand and piggyback registration rights that are currently
exercisable. Holders of 3,491,129 of the shares of Common Stock referred to
herein have agreed not to sell any of their shares for a period of 120 days
after the date of this Prospectus without the prior written consent of the
representatives of the Underwriters.
32
<PAGE> 34
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation, Lehman Brothers, Inc., BT Securities Corporation, Wheat,
First Securities, Inc. and Volpe, Welty & Company are acting as Representatives,
have severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Equitable Securities Corporation.........................................
Lehman Brothers Inc. ....................................................
BT Securities Corporation................................................
Wheat, First Securities, Inc. ...........................................
Volpe, Welty & Company...................................................
----------
Total.......................................................... 9,000,000
=========
</TABLE>
The Company is obligated to sell and the Underwriters are obligated to
purchase all of the 9,000,000 shares of Common Stock offered hereby, if any
shares are purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers at such price less a concession not
in excess of $ per share of Common Stock; and that such selected dealers may
reallow a concession not in excess of $ per share of Common Stock to certain
other brokers and dealers. After the public offering, the offering price and the
concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase at the public offering price, less
the underwriting discount, as set forth on the cover page of this Prospectus, up
to 1,350,000 additional shares of Common Stock. If the Underwriters exercise
their option to purchase any of the additional shares of Common Stock, each of
the Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by each of them as shown in the above table bears
to the Underwriters' initial commitment. The Underwriters may exercise such
options only to cover over-allotments in connection with the sale of Common
Stock offered hereby. The Underwriters, should they exercise their
over-allotment options, will exercise such options on a pro rata basis.
In connection with this Offering, certain Underwriters and selling group
members, if any, or their respective affiliates who are qualified registered
market makers on the Nasdaq Stock Market may engage in passive market making on
the Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid of a price not in excess of the highest
independent bid for such security if all independent bids are lowered when
certain purchase limits are exceeded.
The Company and the Company's directors and executive officers have agreed
that they will not offer, pledge, issue, sell, contract to sell, grant any
option for the sale of or otherwise dispose of any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, any shares of
Common Stock for a period of 120 days after the date of this Prospectus without
the prior written consent of the Representatives, subject to certain exceptions.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
33
<PAGE> 35
Bankers Trust Company, an affiliate of BT Securities Corporation, an
Underwriter, is the agent and a lender under the Bridge Loan for which it is
receiving interest income and customary fees.
Some of the proceeds to the Company from this Offering will be applied to
reduce indebtedness on the Bridge Loan. See "Use of Proceeds." Because more than
10% of the net proceeds of the Offering will be paid to an affiliate of BT
Securities Corporation, a member of the National Association of Securities
Dealers, Inc. (the "NASD") and a participant in the distribution of the Common
Stock being offered hereby, this Offering is being made pursuant to the
provisions of Rule 2710(c)(8) of the NASD Conduct Rules.
Equitable Securities Corporation performed investment banking services for
the Company in connection with the April 1996 Private Placement for which they
received customary fees.
The Underwriters have represented and agreed that (i) they have not offered
or sold and will not offer to sell any shares of Common Stock to persons in the
United Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purpose of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (ii)
they have complied and will comply with all applicable provisions of the
Financial Services Act (the "Act") with respect to anything done by them in
relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom and (iii) they have only issued or passed on, and will only issue
or pass on, in the United Kingdom, any document received by them in connection
with this issue of Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act of (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom the document may otherwise
lawfully be issued or passed on.
LEGAL MATTERS
The validity of the shares of the Common Stock offered hereby will be
passed upon for the Company by Harwell Howard Hyne Gabbert & Manner, P.C.,
Nashville, Tennessee. Certain legal matters relating to the sale of Common Stock
will be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York,
New York.
EXPERTS
The audited consolidated financial statements and schedules of the Company,
included or incorporated by reference herein have been audited by Arthur
Andersen LLP, independent public accountants, and the consolidated financial
statements and schedules of Symphony included herein, have been audited by KPMG
Peat Marwick LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firms as experts in giving said reports.
AVAILABLE INFORMATION
The Company's principal executive offices are located at 2930 Washington
Boulevard, Baltimore, Maryland 21230, phone number (410) 646-7373. The Company
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "Commission"). Copies of such reports
and other information filed by the Company can be obtained, at prescribed rates,
from the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports
and other information can be inspected at the Public Reference Section referred
to above and at the Regional Offices of the Commission at Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 75
Park Place, 14th Floor, New York, New York 10007. Copies of such material can be
obtained by mail from the
34
<PAGE> 36
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information filed electronically with the Commission. In
addition, reports, proxy material and other information concerning the Company
may be inspected at the offices of the Nasdaq Stock Market at the following
address: Nasdaq Market Surveillance, Fourth Floor, 9513 Key West Avenue,
Rockville, Maryland 20850.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the ten months ended
December 31, 1995, as amended by Forms 10-K/A and 10-K/A-2;
2. The Company's Registration Statement on Form 8-A relating to the
Company's Common Stock dated June 18, 1986, as amended by a Form
8-A/A dated July 18, 1996;
3. The Company's Current Report on Form 8-K dated December 31, 1995, as
amended by Form 8-K/A;
4. The Company's Current Report on Form 8-K dated February 29, 1996, as
amended by Forms 8-K/A and 8-K/A2;
5. The Company's Current Report on Form 8-K dated March 20, 1996;
6. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;
7. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996;
8. The Company's Current Report on Form 8-K dated July 18, 1996 as
amended by Form 8-K/A; and
9. The Company's Current Report on Form 8-K dated July 30, 1996, as
amended by Form 8-K/A.
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), (c), 14 or 15(d) of the Exchange Act and prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the request of such
person, a copy of any or all of the documents which are incorporated by
reference in this Prospectus, but not delivered herewith, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into the information that this Prospectus incorporates). Written or telephone
requests should be directed to R. Dirk Allison, President, Capstone Pharmacy
Services, Inc., 2930 Washington Boulevard, Baltimore, Maryland 21230, (800)
766-2761.
35
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
(A) 1. FINANCIAL STATEMENTS:
The following financial statements of the Company and Symphony Pharmacy
Services, Inc. are included herein.
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
CAPSTONE PHARMACY SERVICES, INC.
Report of Independent Public Accountants........................................ F-2
Consolidated Balance Sheets -- As of December 31, 1995 and February 28, 1995.... 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-18
SYMPHONY PHARMACY SERVICES, INC.
Independent Auditors' Report.................................................... F-19
Consolidated Balance Sheets -- December 31, 1994 and 1995....................... F-20
Consolidated Statements of Earnings -- Years ended December 31, 1993, 1994 and
1995.......................................................................... -21
Consolidated Statements of Changes in Stockholders' Equity -- Years ended
December 31, 1993, 1994 and 1995.............................................. -22
Consolidated Statements of Cash Flows -- Years ended December 31, 1993, 1994 and
1995.......................................................................... F-23
Notes to Consolidated Financial Statements -- December 31, 1993, 1994 and
1995.......................................................................... F-24 - F-30
</TABLE>
F-1
<PAGE> 38
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
--------------------------------------
Arthur Andersen LLP
Baltimore, Maryland
March 11, 1996 (except with respect to
the matters discussed in Notes 16 and 17,
as to which the date is July 29, 1996)
F-2
<PAGE> 39
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
(NOTE 1)
<S> <C> <C>
ASSETS
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
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
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 17)
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> 40
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> 41
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> 42
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> 43
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.
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.
F-7
<PAGE> 44
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
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
F-8
<PAGE> 45
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
1995 1995
---------------- ------------
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<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.
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.
F-9
<PAGE> 46
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are comprised of the following:
<TABLE>
<CAPTION>
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.
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 --
</TABLE>
F-10
<PAGE> 47
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
<S> <C> <C>
Unsecured notes payable to former stockholders 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 --
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 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.
F-11
<PAGE> 48
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and sale of the medical/surgical supply operations of a wholly
owned subsidiary, B.T. Smith, Inc., and the closing of the Company's long-term
care pharmacy operation in Missouri, Choice Drug Systems of Missouri, Inc., on
June 30, 1995.
Prior to the closing and ultimate sale of its medical/surgical supply
operations, the Company consolidated the medical/surgical supply operation of
B.T. Smith, Inc. with the medical/surgical supply division of J&J Drug & Medical
Service, Inc. in its Baltimore, Maryland pharmacy location. Accounting and
administration functions previously based at the Inwood, New York and Teaneck,
New Jersey pharmacy locations were also consolidated and moved to the Baltimore
office location. The effect of this consolidation was to refocus the Inwood and
Teaneck pharmacies on the core long-term care business; to consolidate the
Company's medical/surgical supply business in one location in anticipation of
its sale; and to consolidate accounting functions at the Company's Baltimore
headquarters location. The Company initiated these actions to streamline and
reduce the cost of operating its medical/surgical supply business and its
accounting function and to exit the unprofitable Missouri long-term care market.
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
F-12
<PAGE> 49
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
TEN MONTHS
ENDED YEARS ENDED FEBRUARY 28,
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, the
accrual for employee severance costs and the termination of leases.
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-13
<PAGE> 50
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 YEARS ENDED
ENDED FEBRUARY 28,
DECEMBER 31, ---------------
1995 1995 1994
------------ ----- -----
(IN THOUSANDS)
<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 YEARS ENDED
ENDED FEBRUARY 28,
DECEMBER 31, -----------------
1995 1995 1994
------------ ------- -----
(IN THOUSANDS)
<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>
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.
F-14
<PAGE> 51
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of cumulative temporary differences at December 31, 1995 and
February 28, 1995, follow:
<TABLE>
<CAPTION>
DECEMBER FEBRUARY
31, 28,
1995 1995
----------- -----------
(IN THOUSANDS)
<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 FEBRUARY
31, 28,
1995 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Puerto Rico withholding tax.................................... $ 425 $ --
Depreciation and other......................................... 118 --
----- -----
Net deferred tax liability........................... $ 543 $ --
===== =====
</TABLE>
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> <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
F-15
<PAGE> 52
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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
---------------------------------
TEN MONTHS YEARS ENDED
ENDED FEBRUARY 28,
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.
F-16
<PAGE> 53
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
TEN MONTHS ENDED 28,
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
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.
F-17
<PAGE> 54
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
16. SUBSEQUENT EVENT -- PRIVATE PLACEMENT
In April 1996, the Company completed a private placement of 1,035,000
shares of common stock. The private placement generated proceeds of
approximately $8,400,000, net of related costs.
17. SUBSEQUENT EVENT -- ACQUISITION
On July 29, 1996, the Company acquired Symphony Pharmacy Services, Inc.
(Symphony), an institutional pharmacy provider, from Integrated Health Services,
Inc. (IHS). The Symphony purchase price was comprised of $125,000,000 in cash
and $25,000,000 in common stock issued to IHS. The Company financed the cash
portion of the Symphony acquisition with a $25,000,000 investment by Counsel and
a $100,000,000 bridge loan. Management expects that the Symphony acquisition
will almost double the number of beds served by the Company, the number of
Company employees and the Company's net sales. There can be no assurance that
Symphony will be integrated successfully into the Company's operations.
In conjunction with the Symphony acquisition, the Company is currently
contemplating a secondary offering of approximately 9,000,000 shares of common
stock at an assumed offering price of $12.00 per share. The secondary offering
is expected to generate net proceeds of approximately $102,000,000 which will be
used to refund the bridge loan and certain other long-term indebtedness.
F-18
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Symphony Pharmacy Services, Inc.:
We have audited the accompanying consolidated balance sheets of Symphony
Pharmacy Services, Inc. and subsidiaries (wholly-owned by Integrated Health
Services, Inc.) as of December 31, 1994 and 1995 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Symphony
Pharmacy Services, Inc. (wholly-owned by Integrated Health Services, Inc.) as of
December 31, 1994 and 1995 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
July 16, 1996
F-19
<PAGE> 56
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 1,342 $ 1,017
Accounts receivable, net of allowance for doubtful accounts of $3,798 in
1994 and $3,223 in 1995 (note 7)...................................... 15,407 19,597
Inventories.............................................................. 5,429 5,321
Other current assets..................................................... 514 466
------- -------
Total current assets............................................. 22,692 26,401
------- -------
Property and equipment, net (note 3)....................................... 9,760 9,875
Intangible assets of businesses acquired, net of accumulated amortization
of $1,073 in 1994 and $2,521 in 1995..................................... 53,567 55,694
Deferred income taxes (note 6)............................................. 3,335 2,640
------- -------
$89,354 $94,610
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (note 4)........................... $ 7,276 $ 5,465
Advances from parent company............................................. 7,575 5,448
Income taxes payable to parent company (note 6).......................... 4,353 5,188
Interest payable to parent company (note 7).............................. 1,871 4,418
------- -------
Total current liabilities........................................ 21,075 20,519
------- -------
Notes payable to parent company (note 7)................................... 42,058 41,848
Commitments and contingencies (Notes 5 and 8)
Stockholders' equity:
Common stock: $.01 par value. Authorized 1,000 shares;
issued and outstanding 100 shares..................................... -- --
Additional paid-in capital............................................... 24,836 28,361
Retained earnings........................................................ 1,385 3,882
------- -------
Total stockholder's equity....................................... 26,221 32,243
------- -------
$89,354 $94,610
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 57
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Sales (note 7)..................................................... $9,461 $52,295 $91,016
Cost of sales...................................................... 4,815 27,865 48,837
------ ------- -------
Gross profit............................................. 4,648 24,430 42,179
------ ------- -------
Operating expenses (note 7):
Salaries, wages and benefits..................................... 2,913 12,148 20,642
Depreciation and amortization.................................... 288 1,479 2,682
Other selling, general and administrative expenses............... 1,137 6,835 12,279
------ ------- -------
Total operating expenses................................. 4,338 20,462 35,603
------ ------- -------
Operating income................................................... 308 3,968 6,576
Interest expense -- parent company (note 7)........................ 103 1,768 2,547
------ ------- -------
Earnings before income taxes....................................... 205 2,200 4,029
Federal and state income taxes (note 6)............................ 79 941 1,532
------ ------- -------
Net earnings............................................. $ 126 $ 1,259 $ 2,497
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 58
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN CAPITAL EARNINGS
------- --------------- --------
<S> <C> <C> <C>
Balance at January 1, 1993..................................... $ -- $ -- $ --
Net earnings for 1993.......................................... -- -- 126
Contribution of capital -- representing payments by parent
company in connection with business acquisitions............. -- 9,840 --
------- --------------- --------
Balance at December 31, 1993................................... -- 9,840 126
Net earnings for 1994.......................................... -- -- 1,259
Contribution of capital -- representing payments by parent
company in connection with business acquisitions............. -- 14,996 --
------- --------------- --------
Balance at December 31, 1994................................... -- 24,836 1,385
Net earnings for 1995.......................................... -- -- 2,497
Contribution of capital -- representing payments by parent
company in connection with prior business acquisitions....... -- 3,525 --
------- --------------- --------
Balance at December 31, 1995................................... $ -- $26,381 $3,882
======= ========== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 59
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................................... $ 126 $ 1,259 $ 2,497
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................ 288 1,479 2,682
Deferred income taxes........................................ -- 413 695
Increase in accounts receivable.............................. (2,655) (3,522) (4,190)
Decrease (increase) in inventories........................... (174) (584) 108
Decrease (increase) in other current assets.................. 526 (249) 80
Decrease in accounts payable and accrued expenses............ (461) (1,458) (1,811)
Increase in income taxes payable to parent company........... 79 526 837
Increase in interest expense payable to parent company....... 103 1,768 2,547
Other........................................................ 11 53 (33)
------- ------- -------
Net cash provided (used) by operating activities.................. (2,157) (315) 3,412
------- ------- -------
Cash flows from financial activities:
Advances from (repayments to) parent company.................... 5,790 1,785 (2,127)
Proceeds (payments) of notes payable to parent company.......... -- 9,573 (211)
Payment on long-term debt....................................... (2,433) (474) --
------- ------- -------
Net cash provided (used) by financing activities.................. 3,357 10,884 (2,338)
------- ------- -------
Cash flows from investing activities:
Business acquisitions (note 1).................................. (560) (6,425) --
Property and equipment additions................................ (640) (2,802) (1,399)
------- ------- -------
Net cash used by investing activities............................. (1,200) (9,227) (1,399)
------- ------- -------
Increase (decrease) in cash....................................... -- 1,342 (325)
Cash, beginning of year........................................... -- -- 1,342
------- ------- -------
Cash, end of year................................................. $ -- $ 1,342 $ 1,017
======= ======= =======
Noncash investing and financing activities:
Net assets of businesses acquired (note 1)...................... $31,532 $25,790 $ 3,525
Contribution of capital and issuance of notes payable to parent
company -- representing payments by parent company in
connection with business acquisitions (note 1)............... $31,532 $25,790 $ 3,525
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 60
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Symphony Pharmacy Services, Inc. (the Company), a Delaware corporation
established on May 9, 1995, is a wholly-owned subsidiary of Symphony Health
Services, Inc., which is wholly-owned by Integrated Health Services, Inc. (IHS
or the parent company). In a corporate reorganization on May 9, 1995, certain
subsidiaries of IHS or its subsidiaries became subsidiaries of Symphony Pharmacy
Services, Inc. These subsidiaries, which formerly operated as the Allied Health
Services division of IHS, are as follows:
Patient Care Pharmacy, Inc.
Patient Care Pharmacy of Colorado Springs, Inc.
Healthcare Pharmacy Services of Florida, Inc.
Healthcare Pharmacy Services of Pennsylvania, Inc.
Healthcare Pharmacy Services of Texas, Inc.
Amcare, Inc.
Amcare Health Services, Inc.
Amcare Santa Barbara, Inc.
Pharmaceutical Dose Services, Inc.
Suncoast Pharmacy Services, Inc.
Such corporations are engaged primarily in the business of selling
pharmaceutical related products and providing institutional pharmacy services to
long-term care and other institutions and their patients. The consolidated
financial statements represent the historical accounts of the Company and the
aforementioned subsidiaries and reflect the elimination of significant
intercompany balances and transactions among such entities.
The aforementioned corporations were acquired by IHS (or its subsidiaries)
at various dates in 1993 and 1994, as discussed more fully below. The new basis
of accounting, reflecting IHS's cost of the businesses acquired, has been
"pushed down" to the accounts of the Company. Such cost basis has been allocated
to the identifiable assets and liabilities acquired based on their respective
fair values at the dates of acquisition. Cost in excess of such aggregate fair
value (goodwill) is being amortized over 40 years using the straight-line
method. Such estimated useful life of goodwill of the pharmacy businesses
acquired gives recognition to the plans of IHS to develop post-acute health care
networks using IHS's long-term care facilities as platforms to provide other
services, including pharmaceutical products and services.
In June 1993, IHS acquired all of the outstanding capital stock of Patient
Care Pharmacy, Inc. (PCP), a business providing pharmacy services to geriatric
care facilities and other health care providers in Southern California. The
total cost for PCP was $10,400, including $9,840 representing 425,674 shares of
IHS common stock. In addition, IHS agreed to make contingent payments in shares
of common stock following each of the next three years based upon the earnings
of PCP. However, in March 1995, the PCP stockholders terminated all rights to
contingent payments in consideration for $3,525 representing 92,434 shares of
IHS common stock.
In December 1993, IHS acquired the capital stock of Central Park Lodges,
Inc. (CPL), a wholly-owned subsidiary of Trizec Corporation, Ltd. (Trizec), a
publicly-held Canadian real estate company. IHS acquired substantially all of
the United States operations of CPL, consisting of 30 geriatric care facilities
located in Florida, Pennsylvania and Texas and nine retirement facilities
located in Florida, with an aggregate of 5,210 beds; the Healthcare Pharmacy
Services division (HPS), which provides pharmacy consulting services and
supplies prescription drugs and intravenous medications to geriatric care
facilities through five pharmacies in Florida, Pennsylvania and Texas; and other
operations. The total purchase price was $185,300, which was
F-24
<PAGE> 61
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
allocated primarily based on the appraised value of the respective businesses
acquired. The allocated cost of the HPS acquisition was $21,692.
On August 8, 1994, the Company acquired substantially all of the assets of
Pikes Peak Pharmacy, Inc. (Pikes), a company which provides pharmacy services to
patients at nine facilities in Colorado Springs, Colorado which have an
aggregate of 625 beds. The total purchase price was $600.
On October 7, 1994, the Company acquired all of the outstanding stock of
Amcare, Inc. (Amcare), an institutional pharmacy serving approximately 135
skilled nursing facilities in California, Minnesota, New Jersey and
Pennsylvania. The purchase price was $21,000, including $10,500 representing the
issuance of 291,101 shares of IHS common stock. In addition, the Company
incurred direct costs of the acquisition of $4,550, representing legal and other
transaction costs of $600, integration costs principally for systems conversion
of $1,850, and severance and other termination costs of $2,100.
On October 11, 1994, the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La, Inc. (PDS), an institutional pharmacy serving
14 facilities. The purchase price was $4,190, including $3,900 representing the
issuance of 122,117 shares of IHS common stock. In addition, the Company
incurred direct costs of the acquisition of $1,875, representing legal and other
transaction costs of $300, integration costs principally for systems conversion
of $1,175, and severance and other termination costs of $400.
The total cost of the aforementioned acquisitions has been allocated as
follows:
<TABLE>
<CAPTION>
PCP HPS PIKES AMCARE PDS
------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Current assets.................................. $ 2,667 3,175 183 8,029 638
Property and equipment.......................... 1,001 3,000 -- 3,011 --
Intangible assets............................... 15,595 16,221 417 20,300 5,697
Current liabilities............................. (2,905) (704) -- (5,316) (270)
Long-term debt.................................. (2,433) -- -- (474) --
------- ------ ----- ------ -----
Net assets acquired............................. $13,925 21,692 600 25,550 6,065
======= ====== ==== ====== =====
Equities recorded:
Notes payable to parent company............... $ -- 21,692 -- 10,500 294
Contribution of capital:
1993....................................... 9,840 -- -- -- --
1994....................................... -- -- 600 10,500 3,896
1995....................................... 3,525 -- -- -- --
------- ------ ----- ------ -----
$13,365 21,692 600 21,000 4,190
======= ====== ==== ====== =====
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company applies the same significant accounting policies as established
by its parent company, which policies are summarized as follows:
Cash Equivalents
Cash equivalents consist of highly liquid instruments with an original
maturity of three months or less.
F-25
<PAGE> 62
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
Inventories
Inventories consist primarily of purchased pharmaceuticals and medical
supplies held for sale to customers and are stated at the lower of cost or
market. Cost is determined using a pricing convention which approximates the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful life of the assets, generally 10
years for equipment and the term of the lease for costs of leasehold
improvements.
Development Costs
Direct and incremental costs incurred to initiate and implement new
pharmacy locations are deferred during the start-up period (not exceeding six
months) and amortized on a straight-line basis over five years.
Income Taxes
The Company and its subsidiaries are included in the parent company's
consolidated Federal income tax return. The income tax provisions reported in
the financial statements are an allocation of the parent company's total income
tax provision. The Company's allocation was determined based on a calculation of
income taxes as if the Company were a separate taxpayer, in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting
for Income Taxes.
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities as required by SFAS No. 109. Such tax effects
are measured by applying enacted statutory tax rates applicable to future years
in which the differences are expected to reverse, and any change in tax rates
will be recognized in the period that includes the date of enactment. Valuation
allowances are recorded for deferred tax assets when it is more likely than not
that such deferred tax assets will not be realized.
Intangible Assets
Intangible assets arise from business combinations accounted for as
purchase transactions and are amortized using the straight-line method over an
estimated useful life of forty years.
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of intangible
assets. In December 1995, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which had no effect on the financial statements. In accordance with the
provisions of SFAS No. 121, if there is an indication that the carrying value of
an asset is not recoverable, the Company determines the amount of impairment
loss by comparing the carrying amount of the assets to their estimated fair
value. Intangible assets acquired in business combinations accounted for using
the purchase method are included as part of the carrying value in determining
recoverability. Goodwill also is evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities, and any excess of carrying value over such estimates is written off.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the
F-26
<PAGE> 63
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
carrying value of affected assets is allocated over the remaining lives.
Estimation of value and future benefits of intangible assets is made based upon
the related projected undiscounted future cash flows, excluding interest
payments.
Revenue Recognition
Revenue is recognized when products or services are provided. A significant
portion of the Company's revenues from sales of pharmaceutical and medical
products are reimbursable from Medicare and state Medicaid programs. Receivables
under these reimbursement programs and related revenues are reported at the net
realizable amount expected to be received from these third-party payors.
Business and Credit Concentrations
The Company's sales are provided through 26 pharmacies as of December 31,
1995, located in California, Colorado, Texas, Minnesota, Pennsylvania, New
Jersey, Florida and Louisiana. The Company generally does not require collateral
or other security in extending credit to long-term care and other institutions
and their patients; however, the Company routinely obtains assignments of (or is
otherwise entitled to receive) benefits receivable under the health insurance
programs, plans or policies of patients (e.g., Medicare, Medicaid, commercial
insurance and managed care organizations).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate their fair value because of the short-term nature of these
instruments. It is not practicable to estimate the fair value of notes payable
to the parent company because there are no specified due dates for these
instruments.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Equipment........................................................ $ 9,461 $10,736
Furniture, fixtures and leasehold improvements................... 545 618
Development costs................................................ 448 448
------- -------
10,454 11,802
Less accumulated depreciation and amortization................... 694 1,927
------- -------
Net property and equipment....................................... $ 9,760 $ 9,875
======= =======
</TABLE>
F-27
<PAGE> 64
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Accounts payable -- trade.......................................... $5,556 $2,423
Accrued salaries, wages and benefits............................... 1,720 2,842
Other accrued expenses............................................. -- 200
------ ------
$7,276 $5,465
====== ======
</TABLE>
(5) LEASES
As of December 31, 1995, the Company had operating leases as lessee or
sublessee of 26 distribution facilities and pharmacy units within long-term care
facilities expiring at various dates through June 30, 2002. Minimum rent
payments due under noncancellable operating leases in effect at December 31,
1995 are summarized as follows for the years ended December 31:
<TABLE>
<S> <C>
1996........................................................................ $1,044
1997........................................................................ 960
1998........................................................................ 937
1999........................................................................ 881
2000........................................................................ 479
Thereafter.................................................................. 286
------
$4,587
======
</TABLE>
Eight leases provide renewal options for various terms at fair market
rentals at the expiration of the initial term. The leases generally include
additional rental obligations for real estate taxes, utilities, insurance and
repairs. The Company's rental expense was $257 in 1993, $816 in 1994 and $1,227
in 1995.
(6) INCOME TAXES
The Company is included in the parent company's consolidated federal income
tax return. The allocated provision for income taxes is summarized below for
years ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- ------
<S> <C> <C> <C>
Federal...................................................... $65 $ 768 $1,250
State........................................................ 14 173 282
----- ----- ------
$79 $ 941 $1,532
==== ==== ======
Current...................................................... $79 $ 528 $ 837
Deferred..................................................... -- 413 695
----- ----- ------
$79 $ 941 $1,532
==== ==== ======
</TABLE>
F-28
<PAGE> 65
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
The provision for income taxes is reconciled to the amount computed by
applying the Federal corporate tax rate of 35% to earnings before income taxes
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
Income tax computed at statutory rate.................... $72 $ 770 $ 1,410
State income taxes, net of Federal tax benefit........... 9 112 183
Other.................................................... (2) 59 (61)
----- ------- -------
$79 $ 941 $ 1,532
==== ======= =======
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Excess of book over tax basis of assets.......................... $ 353 $ 853
Allowance for doubtful accounts.................................. (1,462) (1,241)
Pre-acquisition separate company net operating loss
carryforward................................................... (2,790) (2,175)
Other............................................................ 564 (77)
------- -------
$(3,335) $(2,640)
======= =======
</TABLE>
(6) INCOME TAXES
The provision for Federal and state income taxes is recorded using the
overall effective tax rate of the consolidated group applied to the Company's
pre-tax earnings before adjustment for permanent differences related to
nondeductible amortization of goodwill of $210 in 1993, $835 in 1994 and $1,297
in 1995. Deferred income tax (assets) liabilities are recorded for the Company's
temporary differences using the same effective tax rate. The difference between
the total provision for income tax and the deferred income tax provision, both
determined as discussed above, represents income taxes currently payable to the
parent company. The provision for income taxes, deferred income taxes and income
taxes currently payable may vary from such amounts that would have been computed
on a stand-alone basis.
At December 31, 1995, certain subsidiaries of the Company had
pre-acquisition net operating loss carryforwards available for Federal and state
income tax purposes of approximately $5,649 which expire in 2008. The annual
utilization of these net operating loss carryforwards is subject to certain
limitations under the Internal Revenue Code.
Management believes no valuation reserves are needed for deferred income
tax assets and there has been no valuation allowance during the three-year
period ended December 31, 1995. It is the Company's belief that it is more
likely than not that the results of future operations will generate sufficient
taxable income to realize the deferred tax assets.
(7) RELATED PARTY TRANSACTIONS
Notes Payable to Parent Company
The Company had various unsecured notes payable to the parent company of
$42,058 and $41,848 as of December 31, 1994 and 1995, respectively. The notes
were incurred primarily for the Company's business acquisitions during 1994 and
1993, as described in note 1. The notes have no specified due dates, but
management of the parent company has indicated that repayment will not be sought
for at least the next twelve months or until the occurrence of the closing of a
sale of a significant portion of the Company's assets.
F-29
<PAGE> 66
SYMPHONY PHARMACY SERVICES, INC. AND SUBSIDIARIES
(WHOLLY-OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
The notes bear interest ranging from 5.75% to 8.50% as of December 31, 1994 and
1995. The Company incurred interest expense to the parent company of $103 in
1993, $1,768 in 1994 and $2,547 in 1995.
Advances from Parent Company
Under a cash management facility provided by the parent company, the
Company's accounts payable are transferred to a centralized account and applied
to increase the intercompany account. The Company's available cash is similarly
provided to the parent company through a decrease in the intercompany balance.
Such advances bear no interest. Also, advances from the parent company include
direct costs of business acquisitions discussed in note 1, which bear no
interest.
Corporate Expenses Charged by Parent Company
The consolidated financial statements reflect charges for certain corporate
general and administrative expenses from the IHS corporate office to the Company
and its subsidiaries. Such corporate office charges represent allocations based
on determinations that management believes to be reasonable. However, IHS has
operated certain other businesses and has provided certain services to the
Company and its subsidiaries, including financial, legal, risk management
(workers' compensation and general liability) and other services. Accordingly,
expense allocations to the Company and its subsidiaries may not be
representative of costs of such services if the Company operated on a stand
alone basis.
Costs charged by IHS were insignificant in 1993, and were approximately
$437 in 1994 and $1,088 in 1995.
Accounts Receivable from and Sales to Parent Company
The Company provides pharmaceutical products and services to subsidiaries
of the parent company which operate long-term healthcare facilities and their
patients. Accounts receivable include balances due from such subsidiaries of
approximately $4,576 and $3,215 at December 31, 1994 and 1995, respectively.
Sales to such subsidiaries were approximately $2,300 in 1993, $15,000 in 1994
and $17,500 in 1995.
(8) COMMITMENTS AND CONTINGENCIES
The Company is from time to time subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of pending legal proceedings will not have a material adverse effect
on the Company's financial statements.
(9) SUBSEQUENT EVENTS
On June 19, 1996, the Company and its subsidiaries entered into an Asset
Purchase Agreement with Capstone Pharmacy Services, Inc. (the buyer), pursuant
to which the Company and its subsidiaries have agreed to sell substantially all
their business assets to the buyer. The selling price is $150 million (which is
subject to adjustment in certain circumstances) of which approximately $25
million will be in common stock of the buyer and the remainder will be in cash.
Closing is expected to occur by August 1, 1996.
F-30
<PAGE> 67
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO
CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS CREATE ANY IMPLICATION THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Use of Proceeds..................... 10
Dividend Policy..................... 10
Capitalization...................... 11
Selected Historical Consolidated
Financial Data.................... 12
Pro Forma Unaudited Consolidated
Financial Data.................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operation...................... 16
Business............................ 20
Management.......................... 28
Security Ownership of Directors,
Executive Officers and Principal
Holders........................... 30
Description of Capital Stock........ 32
Underwriting........................ 33
Legal Matters....................... 34
Experts............................. 34
Available Information............... 34
Incorporation of Certain Information
by Reference...................... 35
Index to Financial Statements....... F-1
Consolidated Financial Statements of
Capstone Pharmacy Services,
Inc............................... F-2
Consolidated Financial Statements of
Symphony Pharmacy Services,
Inc............................... F-19
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
9,000,0000 SHARES
[CAPSTONE LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
BT SECURITIES CORPORATION
WHEAT FIRST BUTCHER SINGER
VOLPE, WELTY & COMPANY
August , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the Common Stock registered
hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................. $ 38,367
Nasdaq Stock Market Listing Fee................................................. 17,500
*Blue Sky Fees and Expenses...................................................... 25,000
*Legal Fees and Expenses......................................................... 175,000
*Accounting Fees and Expenses.................................................... 100,000
*Printing and Engraving Costs.................................................... 157,500
*Miscellaneous Expenses.......................................................... 11,633
-------
Total.................................................................. $ 500,000
=======
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") applies to the
Company and the relevant portion of the DGCL provides as follows:
145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
II-1
<PAGE> 69
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2)
if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the shareholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
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<PAGE> 70
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees).
The Restated Certificate of Incorporation limits the liability of directors
(in their capacity as directors, but not in their capacity as officers) to the
Company or its shareholders to the fullest extent permitted by the DGCL, as
amended. Specifically, no director of the Company will be personally liable to
the Company or its shareholders for monetary damages for breach of the
director's fiduciary duty as a director, except as provided in Section 102 of
the DGCL for liability: (i) for any breach of the director's duty of loyalty to
the Company or its shareholders; (ii) for acts or omissions not in good faith
and which involve intentional misconduct or knowing violation of law; (iii)
under Section 174 of the DGCL, which relates to unlawful payments of dividends
or unlawful stock repurchases or redemptions; or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of this
provision in the Restated Certificate of Incorporation may have the effect of
reducing the likelihood of derivative litigation against directors, and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such action, if
successful, might otherwise have benefitted the Company and its shareholders.
Under the Restated Certificate of Incorporation and in accordance with
Section 145 of the DGCL, the Company will indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than a "derivative" action by or in the right of the
Company) by reason of the fact that such person was or is a director or officer
of the Company, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such acts were unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such an action and then, where the person is adjudged to be liable to the
Company, only if and to the extent that the Court of Chancery of the State of
Delaware or the court in which such action was brought determines that such
person is fairly and reasonably entitled to such indemnity and then only for
such expenses as the court deems proper. The Company will indemnify, pursuant to
the standard enumerated in Section 145 of the DGCL, any past or present officer
or director who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed derivative action by or in the right of the
Company.
The Restated Certification of Incorporation of the Company provides that
the Company may pay for the expenses incurred by an indemnified director or
officer in defending the proceedings specified above in advance of their final
disposition, provided that, if the DGCL so requires, such indemnified person
agrees to reimburse the Company if it is ultimately determined that such person
is not entitled to indemnification. The Company's Restated Certificate of
Incorporation also allows the Company, in its sole discretion, to indemnify any
person who is or was one of its employees and agents to the same degree as the
foregoing indemnification of directors and officers. To the extent that a
director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith. In addition, the Company may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Company or another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against and incurred by such
person in such
II-3
<PAGE> 71
capacity, or arising out of the person's status as such whether or not the
Company would have the power or obligation to indemnify such person against such
liability under the provisions of the DGCL. The Company maintains insurance for
the benefit of the Company's officers and directors insuring such persons
against certain liabilities, including civil liabilities under the securities
laws. Additionally, the Company has entered into indemnification agreements with
each of the Directors of the Company, which, among other things, provides that
the Company will indemnify such Directors to the fullest extent permitted by the
Restated Certificate of Incorporation and the DGCL and will advance expenses of
defending claims against such Directors.
Reference is hereby made to the Underwriting Agreement among the Company
and the Underwriters, filed as Exhibit 1.1 of this Registration Statement, for a
description of the indemnification arrangements between the Company and the
Underwriters, pursuant to which the Underwriters are obligated, under certain
circumstances, to indemnify directors, officers and controlling persons of the
Company against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
ITEM 16. EXHIBITS
(a) The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S> <C>
1.1 -- Underwriting Agreement
2.1 -- Asset Purchase Agreement among Integrated Health Services, Inc., Symphony
Pharmacy Services, Inc., various of its Subsidiaries and the Company dated
June 20, 1996 (incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated July 18, 1996)
4.1 -- Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended August 31, 1995)
4.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended August 31,
1995)
5.1 -- Opinion of Harwell Howard Hyne Gabbert & Manner, P.C.
23.1 -- Consent of Harwell Howard Hyne Gabbert & Manner, P.C. (see Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of KPMG Peat Marwick LLP
23.4 -- Consent of Blackman Kallick Bartelstein, LLP
23.5 -- Consent of Roth & Company
*24.1 -- Power of Attorney (previously filed)
</TABLE>
- ---------------
* Previously filed with Registration Statement on Form S-3.
(b) The 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 are inapplicable and, therefore, have been omitted.
II-4
<PAGE> 72
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this amendment to registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland, on the 16th day of
August, 1996.
CAPSTONE PHARMACY SERVICES, INC.
By: *
------------------------------------
R. Dirk Allison
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to Registration Statement has been signed on the dates indicated
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<C> <S> <C>
* President, Chief Executive August 16, 1996
- --------------------------------------------- Officer and Director (Chief
R. Dirk Allison Executive Officer)
/s/ DONALD W. HUGHES Vice President, Chief Financial August 16, 1996
- --------------------------------------------- Officer and Secretary (Chief
Donald W. Hughes Accounting Officer)
* Chairman August 16, 1996
- ---------------------------------------------
Allan C. Silber
* Vice Chairman August 16, 1996
- ---------------------------------------------
Morris A. Perlis
* Director August 16, 1996
- ---------------------------------------------
Joseph Furlong, III
Director
- ---------------------------------------------
John Haronian
* Director August 16, 1996
- ---------------------------------------------
Albert Reichmann
Director
- ---------------------------------------------
J. Brendan Ryan
* Director August 16, 1996
- ---------------------------------------------
Edward Sonshine
* Director August 16, 1996
- ---------------------------------------------
Dr. Gail Wilensky
* Director August 16, 1996
- ---------------------------------------------
John E. Zuccotti
*By: /s/ DONALD W. HUGHES
- ---------------------------------------------
Donald W. Hughes
Power of Attorney
</TABLE>
II-6
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ ----------------------------------------------------------------------
<C> <C> <S>
1.1 -- Underwriting Agreement
2.1 -- Asset Purchase Agreement among Integrated Health Services, Inc.,
Symphony Pharmacy Services, Inc., various of its Subsidiaries and the
Company dated June 20, 1996 (incorporated by reference to Exhibit 2 to
the Company's Current Report on Form 8-K dated July 18, 1996)
4.1 -- Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1995)
4.2 -- Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended August
31, 1995)
5.1 -- Opinion of Harwell Howard Hyne Gabbert & Manner, P.C.
23.1 -- Consent of Harwell Howard Hyne Gabbert & Manner, P.C. (see Exhibit 5)
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of KPMG Peat Marwick LLP
23.4 -- Consent of Blackman Kallick Bartelstein, LLP
23.5 -- Consent of Roth & Company
24.1 -- Power of Attorney (previously filed)
</TABLE>
<PAGE> 1
EXHIBIT 1.1
9,000,000 Shares
CAPSTONE PHARMACY SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
July __, 1996
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
BT SECURITIES CORPORATION
WHEAT FIRST BUTCHER & SINGER
VOLPE, WELTY & COMPANY
c/o Equitable Securities Corporation
As Representatives of the several
Underwriters
Nashville City Center
Suite 800
511 Union Street
Nashville, Tennessee 37219
Ladies and Gentlemen:
The undersigned, Capstone Pharmacy Services, Inc., a Delaware
corporation (the "Company") hereby confirms its agreement with you
(the "Representatives") and the other underwriters named in Schedule
1 hereto (you and the other underwriters being herein collectively
called the "Underwriters") as follows:
1. Introductory. The Company proposes to issue and sell to the
Underwriters 9,000,000 shares of common stock, par value $.01 per
share (the "Common Stock"), of the Company. (Such shares being
herein called the "Stock"). In addition, solely for the purpose of
covering over-allotments, the Company proposes to grant the
Underwriters the option to purchase up to an additional 1,350,000
shares of Common Stock (such shares being herein called the
"Additional Stock"). The Common Stock is more fully described in the
Prospectus referred to below.
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees
with, the several Underwriters that:
<PAGE> 2
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration
statement on Form S-3 and, as necessary to cause such
registration statement to become effective, has filed one
or more amendments thereto (Registration No. 333 - )
for the registration of the Stock and the Additional Stock
under the Securities Act of 1933, as amended (the "Act").
As used herein, the term "Registration Statement" means
such registration statement, including the prospectus,
financial statements, schedules, exhibits and all other
documents filed as a part thereof, as amended, when it
becomes effective, and shall include information with
respect to the Stock, the Additional Stock and the offering
permitted to be omitted from the Registration Statement
when it becomes effective pursuant to Rule 430A of the
General Rules and Regulations of the Commission under the
Act (the "Regulations"), which information is deemed to be
included therein when such Registration Statement becomes
effective as provided by Rule 430A of the Regulations; the
term "Preliminary Prospectus" means each prospectus
included in the Registration Statement, including any
amendments thereto, before it becomes effective under the
Act and any prospectus filed by the Company with the
consent of the Representatives pursuant to Rule 424(a) of
the Regulations; and the term "Prospectus" means the final
prospectus included as part of the Registration Statement,
except that if the prospectus relating to the Stock and the
Additional Stock in the form filed on behalf of the Company
with the Commission pursuant to Rule 424(b) of the
Regulations shall differ from such final prospectus, the
term "Prospectus" shall mean the prospectus so filed
pursuant to Rule 424(b) from and after the date on which it
shall have first been used.
(ii) When the Registration Statement becomes
effective, and at all times subsequent thereto until and
including the Closing Date (as defined in Section 3) and
each Additional Closing Date (as defined in Section 3), and
during such longer period as the Prospectus may be required
to be delivered in connection with sales by the
Underwriters or a dealer, and during such longer period
until any post-effective amendment thereto shall become
effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed
with the Commission any amendment or supplement to the
Registration Statement or the Prospectus) will contain
-2-
<PAGE> 3
all statements which are required to be stated therein in
accordance with the Act and the Regulations, will comply
with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading, and no event
will have occurred which should have been set forth in an
amendment or supplement to the Registration Statement or
the Prospectus which has not then been set forth in such an
amendment or supplement; each Preliminary Prospectus, as of
the date filed with the Commission, did not include any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; except that no
representation or warranty is made in this Section 2(a)(ii)
with respect to statements or omissions made in reliance
upon and in conformity with written information furnished
to the Company expressly for inclusion in any Preliminary
Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto, as stated in
Section 7(b) with respect to any Underwriter by or on
behalf of such Underwriter through the Representatives.
(iii) Neither the Commission nor, to the knowledge of
the Company, the "blue sky" or securities authority of any
jurisdiction has issued an order suspending the
effectiveness of the Registration Statement (a "Stop
Order"), preventing or suspending the use of any
Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing
to permit the effectiveness of the Registration Statement,
or suspending the registration or qualification of the
Stock or the Additional Stock, nor, to the knowledge of the
Company, has any of such authority instituted or threatened
to institute any proceedings with respect to a Stop Order.
(iv) Any contract, agreement, instrument, lease,
license or other document required to be described in the
Registration Statement or the Prospectus has been properly
described therein. Any contract, agreement, instrument,
lease, license or other document required to be filed as an
exhibit to the Registration Statement has been filed with
the Commission as an exhibit to the Registration Statement.
(v) Each of the Company and its direct and indirect
subsidiaries (collectively, the "Subsidiaries") is a
corporation duly organized,
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<PAGE> 4
validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, with full
corporate power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates
and permits of and from, and declarations and filings with,
all federal, state, local and other governmental
authorities and all courts and other tribunals, to own,
lease, license and use its respective properties and assets
and to carry on its respective businesses in the manner
described in the Prospectus (except for such consents,
authorizations, approvals, orders, licenses, certificates,
permits, declarations and filings which the failure to have
obtained, individually or in the aggregate, does not and
will not have a material adverse effect upon the financial
condition, results of operations, business, prospects,
properties or assets of the Company and its Subsidiaries,
taken as a whole), and neither the Company nor its
Subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such
consent, authorization, approval, order, license,
certificate, permit, declaration or filing, nor, to the
best knowledge of the Company and its Subsidiaries, is
there any basis therefor; no such consent, authorization,
approval, order, license, certificate, permit, declaration
or filing contains a materially burdensome restriction to
the Company and its Subsidiaries not adequately disclosed
in the Registration Statement and the Prospectus; the
Company and each of its Subsidiaries has fulfilled and
performed all of its respective material obligations with
respect to each such consent, authorization, approval,
order, license, certificate, permit, declaration or filing,
and no event has occurred which allows (or which, with
notice or lapse of time or both, would allow) revocation or
termination thereof or results in any material impairment
of the rights of the holder of any such consent,
authorization, approval, order, license, certificate,
permit, declaration or filing. Each of the Company and its
Subsidiaries is duly qualified to do business and is in
good standing in every jurisdiction in which its ownership,
leasing, licensing or use of property and assets or the
conduct of its business makes such qualification necessary,
except where the failure to be so qualified or in good
standing (considering all such failures together) does not
and will not have a material adverse effect upon the
financial condition, results of operations, business,
prospects, properties or assets of the Company.
-4-
<PAGE> 5
(vi) The Company has an authorized capitalization as
set forth in the Prospectus. Each outstanding share of
Common Stock is validly authorized, validly issued, fully
paid and nonassessable, has not been, or will not be,
issued and is not, or will not be, owned or held in
violation of any preemptive rights of stockholders. There
is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the
issuance of, any share of capital stock of the Company or
any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for
capital stock of the Company, except as properly described
in the Prospectus. All outstanding shares of capital stock
of each of the Subsidiaries have been validly authorized
and validly issued, and are fully paid and nonassessable.
The Company owns, directly or indirectly, all of the
outstanding shares of capital stock of each of the
Subsidiaries. All outstanding shares of capital stock of
each of the Subsidiaries are owned by the Company free and
clear of all liens, security interests, pledges, charges,
claims, encumbrances, stockholder agreements and voting
rights.
(vii) The financial statements, any supplementary
financial information, any related schedules and the pro
forma financial statements of the Company and its
Subsidiaries and their respective predecessors included in
the Registration Statement and the Prospectus fairly
present, in all material respects, with respect to the
Company, its Subsidiaries and such predecessors, the
financial position, the results of operations and the other
information purported to be shown therein at the respective
dates and for the respective periods to which they apply.
Such financial statements, supplementary financial
information, related schedules and pro forma financial
statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently
applied throughout the periods involved, are correct and
complete, and are in accordance with the books and records
of the Company, its Subsidiaries and their respective
predecessors in all material respects. The financial data
set forth in the Prospectus under the captions "Summary
Consolidated Financial Data", "Capitalization", "Selected
Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of
Operation" fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been
compiled on a basis consistent
-5-
<PAGE> 6
with that of the audited financial statements included in
the prospectus. The pro forma information set forth under
the captions "Summary Consolidated Historical Financial
Data", "Capitalization", "Selected Financial Consolidated
Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the
Prospectus includes all adjustments necessary for a fair
presentation of the financial position and results of
operations of the Company, its Subsidiaries and their
respective predecessors on a pro forma basis as if their
respective businesses had been conducted on a consolidated
basis for the periods stated therein, and the pro forma
adjustments have been properly applied on the basis
described therein. The accountants whose reports on the
audited financial statements are filed with the Commission
as a part of the Registration Statement are, and during the
periods covered by the reports included in the Registration
Statement and the Prospectus were, independent certified
public accountants with respect to the Company, one or more
of its Subsidiaries or their respective predecessors within
the meaning of the Act and the Regulations. No other
financial statements are required by Form S-3 or otherwise
to be included in the Registration Statement or the
Prospectus. There has been no material adverse change in
the financial condition, results of operations, business,
properties, or assets of the Company or any of its
Subsidiaries from the latest information set forth in the
Registration Statement or the Prospectus, except as
properly described in the Prospectus; and there is no fact
known to the Company which could reasonably be expected to
have a material and adverse effect on the future prospects
of the Company (other than political or economic matter of
general applicability or as properly described in the
Prospectus).
(viii) There is no litigation, arbitration, claim,
governmental or other proceeding or investigation (domestic
or foreign, formal or informal) pending or, to the
knowledge of the Company, threatened in writing, or in
prospect (or any basis therefor known to the Company) with
respect to the Company or its Subsidiaries or any of their
respective operations, businesses, properties or assets
except as properly described in the Prospectus or such as,
individually or in the aggregate, do not now have and are
not reasonably expected in the future to have a material
adverse effect upon the financial condition, results of
operations, business, prospects, properties or assets of
the Company. Neither the Company nor any
-6-
<PAGE> 7
of its Subsidiaries is in violation of, or in default with
respect to any law, rule, regulation, order, judgment or
decree (domestic or foreign), except as properly described
in the Prospectus or such as in the aggregate do not now
have and are not reasonably expected in the future to have
a material adverse effect upon the financial condition,
results of operations, business, prospects, properties or
assets of the Company, nor is the Company or any of its
Subsidiaries required to take any action in order to avoid
any such violation or default.
(ix) Each of the Company and its Subsidiaries has fee
simple title which is good and marketable (or which is good
and indefeasible or other local variation thereof) to all
real property which the Prospectus indicates is owned by
each of them respectively, free and clear of all liens,
security interests, pledges, charges, encumbrances,
mortgages and defects (except as properly described in the
Prospectus or such as in the aggregate do not now and are
not reasonably expected in the future to interfere
materially with the use made or proposed to be made of such
real property by the Company or any of its Subsidiaries).
Each of the Company and its Subsidiaries has good title to
all properties and assets which the Prospectus indicates
are owned by each of them respectively, free and clear of
all liens, security interests, pledges, charges, claims,
encumbrances and mortgages (except as properly described in
the Prospectus or such as in the aggregate do not now have
and are not reasonably expected in the future to have a
material adverse effect upon the financial condition,
results of operations, business, or properties which the
Prospectus indicates are assets of the Company). The real
property and buildings which the Prospectus indicates are
held under lease by the Company and any of its Subsidiaries
are held by them under legal, valid, binding, subsisting
and enforceable leases free of exceptions (except as
properly described in the Prospectus or such as do not now
and are not reasonably expected in the future to interfere
materially with the use made or proposed to be made of such
real property and buildings by the Company or any of its
Subsidiaries). No real property leased, or to the
knowledge of the Company licensed or used by the Company or
any of its Subsidiaries lies in an area which is or, to the
Company's knowledge will be, subject to zoning, use or
building code restrictions which would prohibit, and no
state of facts relating to the actions or inaction of
another person or entity
-7-
<PAGE> 8
or his, her or its ownership, leasing, licensing or use of
any real or personal property exists or, to the Company's
knowledge will exist, which would prevent the continued
effective leasing, licensing or use of such real property
in the respective businesses of the Company and its
Subsidiaries as presently conducted or as the Prospectus
indicates they contemplate conducting (except as properly
described in the Prospectus or such as in the aggregate do
not now have and will not in the future have a material
adverse effect upon the financial condition, results of
operations, business, prospects, properties or assets of
the Company).
(x) Each of the Company and its Subsidiaries possesses
such authority, licenses, approvals, franchises,
certificates and permits issued by the appropriate local,
state, federal or foreign regulatory agencies or bodies
necessary to conduct the businesses now operated by them,
except for such authority, licenses, approvals, franchises,
certificates and permits the absence of which, singly or in
the aggregate, would not have a material adverse effect on
the financial condition, results of operations, business,
prospects, properties or assets of the Company; and neither
the Company nor any of its Subsidiaries has received any
notice of proceedings relating to the revocation or
modification of any such authority, license, approval,
franchise, certificate or permit which, singly or in the
aggregate, if the subject of an unfavorable decision,
ruling, or finding, would materially and adversely affect
the financial condition, results of operations, business,
prospects, properties or assets of the Company.
(xi) Neither the Company nor, to the Company's
knowledge, any other party is now or is expected by the
Company to be in violation or breach of, or in default with
respect to any material provision of any contract,
agreement, instrument, lease, license, arrangement or
understanding which is material to the Company, and each
such contract, agreement, instrument, lease, license,
arrangement and understanding is in full force and effect
and is the legal, valid and binding obligation of the
Company or one of its Subsidiaries and, to the Company's
knowledge, the other parties thereto and is enforceable
against the Company or one of its Subsidiaries and, to the
Company's knowledge, against the other parties thereto in
accordance with its terms. Each of the Company and its
Subsidiaries enjoys peaceful and undisturbed possession
under all
-8-
<PAGE> 9
such leases and licenses under which it is operating.
Neither the Company nor its Subsidiaries is a party to or
bound by any contract, agreement, instrument, lease,
license, arrangement or understanding, or subject to any
charter or other restriction, which has had or is
reasonably expected in the future to have a material
adverse effect on the financial condition, results of
operations, business, prospects, properties or assets of
the Company, except as properly disclosed in the
Prospectus. Neither the Company nor its Subsidiaries is in
violation or breach of, or in default with respect to, any
term of its respective certificate of incorporation or
bylaws.
(xii) All patents, patent applications, trademarks,
trademark applications, trade names, service marks,
copyrights, franchises and other intangible properties and
assets (all of the foregoing being herein called
"Intangibles") that the Company or any of its Subsidiaries
owns or has pending, or under which they are licensed, are
in good standing and uncontested, except as properly
described in the Prospectus or such as in the aggregate do
not now have and will not in the future have a material
adverse effect upon the financial condition, results of
operations, business, prospects, properties or assets of
the Company. There is no right under any Intangible
necessary to the respective businesses of the Company and
its Subsidiaries as presently conducted or as the
Prospectus indicates they contemplate conducting, except as
properly described in the Prospectus. Neither the Company
nor any of its Subsidiaries has infringed, is infringing,
or has received notice of infringement with respect to
asserted Intangibles of others, except for such
infringement or alleged infringement that has not had, or
cannot reasonably be expected to have, a material adverse
effect on the financial condition, results of operations,
business, prospects, properties or assets of the Company.
To the knowledge of the Company, there is no infringement
by others of Intangibles of the Company or its
Subsidiaries, except as properly described in the
Prospectus. To the knowledge of the Company, there is no
Intangible of others which has had or may reasonably be
expected to in the future have a material adverse effect on
the financial condition, results of operations, business,
prospects, properties or assets of the Company.
(xiii) None of the Company, its Subsidiaries or any
other person associated with or acting on behalf of the
Company or its Subsidiaries including, without
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<PAGE> 10
limitation, any director, officer, agent or employee of the
Company or its Subsidiaries has, directly or indirectly,
while acting on behalf of the Company or its Subsidiaries,
to the Company's knowledge (A) used any corporate funds for
unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (B) made
any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (C) violated any
provision of the Foreign Corrupt Practices Act of 1977, as
amended; or (D) made any other unlawful payment.
(xiv) The Company has all requisite corporate power
and authority to execute, deliver and perform this
Agreement. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution,
delivery and performance of this Agreement by the Company.
This Agreement has been duly authorized, executed and
delivered by the Company, and (assuming this Agreement is a
binding agreement of the Underwriters) is the legal, valid
and binding obligation of the Company, and is enforceable
as to the Company in accordance with its terms, except
insofar as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights
generally and except as to the availability of equitable
remedies. No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration
or filing with, any federal, state, local or other
governmental authority or any court or other tribunal
(domestic or foreign) is required by the Company for the
execution, delivery or performance of this Agreement by the
Company (except filings under the Act which have been or
will be made before the Closing Date and such consents
consisting only of consents under "blue sky" or securities
laws which have been obtained at or prior to the date of
this Agreement). No consent of any party to any material
contract, agreement, instrument, lease, license,
arrangement or understanding to which the Company or any of
its Subsidiaries is a party, or to which any of their
respective properties or assets are subject, is required
for the execution, delivery or performance of this
Agreement; and the execution, delivery and performance of
this Agreement will not violate, result in a breach of,
conflict with, or (with or without the giving of notice or
the passage of time or both) entitle any party to terminate
or call a default under
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<PAGE> 11
any such contract, agreement, instrument, lease, license,
arrangement or understanding, or violate or result in a
breach of any term of the certificate of incorporation or
bylaws of the Company or any of its Subsidiaries, or
violate, result in a breach of, or conflict with any law,
rule, regulation (except for such law, rule or regulation
the violation of which would not have a material adverse
effect on the financial condition, results of operations,
business, properties or assets of the Company or its
Subsidiaries), order, judgment or decree binding on the
Company or its Subsidiaries or to which any of their
respective operations, businesses, properties or assets is
subject.
(xv) The Stock and the Additional Stock are validly
authorized and, when issued and delivered in accordance
with this Agreement, the Stock and the Additional Stock to
be sold by the Company pursuant to this Agreement will be
validly issued, fully paid and nonassessable and will not
be issued in violation of any preemptive rights of
stockholders and the Underwriters will receive good title
to the shares of Stock and Additional Stock purchased by
them from the Company, free and clear of all liens,
security interests, pledges, charges, claims, encumbrances,
stockholder agreements and voting rights. The Common
Stock, the Stock and the Additional Stock conform to all
statements relating thereto contained in the Registration
Statement or the Prospectus.
(xvi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus and except as otherwise properly described in
the Prospectus, neither the Company nor its Subsidiaries
has (A) issued any securities (other than upon the exercise
of options and warrants properly described in the
Registration Statement) or incurred any liability or
obligation, primary or contingent, for borrowed money; (B)
entered into any material transaction not in the ordinary
course of business; or (C) declared or paid any dividend on
its capital stock.
(xvii) Neither the Company nor to the knowledge of the
Company, any of its officers, directors or affiliates (as
defined in the Regulations) has taken or will take,
directly or indirectly, prior to the termination of the
underwriting syndicate contemplated by this Agreement, any
action designed to stabilize or manipulate the price of any
security of the Company or which has caused or resulted in,
or which might in the
-11-
<PAGE> 12
future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of
the Stock or the Additional Stock.
(xviii) The Company has obtained from each of its
directors and officers and from Counsel Corporation and the
stockholders listed on Schedule __ hereto, an enforceable
written agreement, in a form approved by the
Representatives and counsel for the Underwriters, that for
a period of and 120 days from the date of the Prospectus
it, he or she will not, without the prior written consent
of the Representatives, sell, transfer, assign or make any
other disposition of any shares of capital stock of the
Company now owned or hereafter acquired by such
stockholder.
(xix) The Company and its Subsidiaries have filed all
necessary federal, state, local and foreign income and
franchise tax returns and have paid all taxes shown as due
thereon; and there is no tax deficiency that has been, or,
to the knowledge of the Company, might be, asserted or
threatened against the Company or any of its Subsidiaries
or any of their respective properties or assets that would
materially and adversely affect the financial condition,
results of operations, business, prospects, properties or
assets of the Company.
(xx) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary
course of business) or guarantees of indebtedness by the
Company or its Subsidiaries to or for the benefit of any of
their respective officers or directors or any of the
members of the families of any of them, except as properly
disclosed in the Prospectus.
(xxi) There are no rights or other agreements between
the Company or its Subsidiaries and any customer of the
Company or its Subsidiaries which would cause any material
sales reflected in the Company's consolidated financial
statements for the year ended December 31, 1995 included in
the Prospectus to fail to qualify as sales in accordance
with generally accepted accounting principles or the
Company's revenue recognition policy as reflected in the
audited consolidated financial statements included in the
Prospectus.
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<PAGE> 13
(xxii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance
with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit
preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (C) access to assets is
permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability
for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to
any differences.
(xxiii) Neither the filing of the Registration Statement
nor the offering or sale by the Company of the Stock or the
Additional Stock gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock.
(xxiv) The Company has filed an application to list the
Stock and the Additional Stock on the National Association
of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") National Market System ("NMS"), and has received
notification that the listing has been approved, subject to
official notice of issuance.
(xxv) The Company is not required to be registered
under the Investment Company Act of 1940, as amended.
For purposes of this Agreement, references to "knowledge"
of the Company or its Subsidiaries, or phrases of similar
import, shall be deemed to mean the actual knowledge of the
Company's Chief Executive Officer, Chief Operating Officer
or Chief Financial Officer.
3. Purchase, Sale and Delivery of the Stock and the Additional
Stock. On the basis of the representations, warranties, covenants
and agreements of the Company herein contained, but subject to the
terms and conditions herein set forth, and at a purchase price of
$___ per share, the Company agrees to sell to the several
Underwriters, and the Underwriters, severally and not jointly, agree
to purchase from the Company the number of shares of Stock set
opposite the respective names of the Underwriters on Schedule 1
hereto.
Payment for the Stock by the Underwriters shall be made by
certified or official bank checks in New York Clearing House
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<PAGE> 14
funds payable to the order of the Company at the offices of Harwell
Howard Hyne Gabbert & Manner, P.C., 1800 First American Center, 315
Deaderick Street, Nashville, Tennessee 37238 or at such other
location in the Nashville Metropolitan Area as the Representatives
shall determine and advise the Company by at least two full days
notice in writing, upon delivery of the Stock to the Representatives
for the respective accounts of the Underwriters. Such delivery and
payment shall be made at ______ o clock, New York City time, on the
third business day following the time of the public offering, as
defined in Section 10(a) (unless such time and date is postponed in
accordance with the provisions of Section 8(c)), or at such other
time as shall be agreed upon between the Representatives and the
Company. The time and date of such delivery and payment are herein
called the "Closing Date."
Certificates for the Stock shall be registered in such name or
names and in such authorized denominations as the Representatives may
request in writing at least two full business days prior to the
Closing Date. The Company shall permit the Representatives to
examine and package such certificates for delivery at least one full
business day prior to the Closing Date.
In addition, the Company hereby grants to the several
Underwriters the option to purchase up to 1,350,000 shares of the
Additional Stock at the same purchase price per share to be paid by
the several Underwriters to the Company for the Stock as provided for
in this Section 3. This option may be exercised only to cover
over-allotments in the sale of shares by the several Underwriters.
This option may be exercised by the Representatives on the basis of
the representations, warranties, covenants and agreements of the
Company, but subject to the terms and conditions herein set forth, at
any time and from time to time on or before the forty-fifth day
following the effective date of the Registration Statement, by
written notice by the Representatives to the Company. Such notice
shall set forth the aggregate number of shares of Additional Stock as
to which the option is being exercised, the name or names in which
the certificates for such Additional Stock are to be registered, the
authorized denominations in which such shares of Additional Stock are
to be issued, and the time and date, as determined by the
Representatives, when such shares of Additional Stock are to be
issued, and the time and date, as determined by the Representatives,
when such shares of Additional Stock are to be delivered (such time
and date are herein called the "Additional Closing Date"); provided,
however, that no Additional Closing Date shall be earlier than the
Closing Date nor earlier than the second business day after the date
on which the notice of the exercise of the option shall have been
given nor later than the eighth business day after the date on which
such notice shall have been given.
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<PAGE> 15
Each Underwriter agrees, severally and not jointly, to purchase
from the Company the number of shares of Additional Stock which bears
the same relationship to the total number of shares of Additional
Stock to be sold to the Underwriters by the Company, as the number of
shares of Stock set forth opposite the name of such Underwriter in
Schedule 1 hereto (or such number of shares of Stock increased as set
forth in Section 8 hereof) bears to the total number of shares of
Stock. The number of shares resulting from any of the computations
contemplated by this paragraph are subject to adjustments the
Representatives may at any time approve to eliminate fractional
shares.
Payment for the shares of Additional Stock by the Underwriters
shall be made by certified or official bank checks in New York
Clearing House funds, payable to the order of the Company, at the
offices of Harwell Howard Hyne Gabbert & Manner, P.C., 1800 Deaderick
Street, Nashville, Tennessee 37238, or at such other place in the
Nashville Metropolitan Area as the Representatives shall determine
and advise the Company by at least two full days notice in writing,
upon delivery of the shares of Additional Stock to the
Representatives for the respective accounts of the Underwriters.
Certificates for the shares of Additional Stock shall be
registered in such name or names and in such authorized denominations
as the Representatives may request in writing at least two full
business days prior to the Additional Closing Date with respect
thereto. The Company shall permit the Representatives to examine and
package such certificates for delivery at least one full business day
prior to the Additional Closing Date with respect thereto.
4. Offering. The Underwriters are to make a public offering
of the Stock on or as soon after the effective date of the
Registration Statement as the Representatives deem advisable. The
Stock initially is to be offered to the public at the initial public
offering price provided for in Section 3 (such price being herein
called the "public offering price"). After the initial public
offering, the Representatives may from time to time increase or
decrease the public offering price, in their sole discretion, by
reason of changes in general market conditions or otherwise.
5. Payment of Expenses. The Company hereby agrees to pay all
fees and expenses (other than fees and expenses of counsel for the
Underwriters, except for such fees and expenses of counsel for the
Underwriters as provided for in Sections 5(c) and 5(e) hereof) in
connection with (a) the preparation, printing, filing, distribution
and mailing of the Registration Statement and the Prospectus and the
printing, filing, distribution and mailing of this Agreement, the
Master Agreement Among Underwriters, the Master Selling Agreement and
related
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<PAGE> 16
documents, including the cost of all copies thereof and the
Preliminary Prospectuses and of the Prospectus and any amendments or
supplements thereto supplied to the Underwriters and dealers in
quantities as hereinabove stated, (b) the issuance, sale, transfer
and delivery of the Stock and the Additional Stock, including any
transfer or other taxes payable thereon, if any, (c) the
qualification of the Stock and the Additional Stock under state or
foreign "blue sky" or securities laws, including the costs of
printing and mailing the preliminary and final "Blue Sky Survey" and
the reasonable fees of counsel for the Underwriters and the
disbursements in connection therewith, (d) the filing fees payable to
the Commission, the National Association of Securities Dealers, Inc.
(the "NASD"), and the jurisdictions in which such qualification is
sought, (e) the reasonable fees of counsel for the Underwriters and
the disbursements in connection therewith relating to all filings
with the NASD and (f) the listing of the Stock and the Additional
Stock on NMS. If the sale of the Stock provided for herein is not
consummated because any condition to the obligations of the
Underwriters set forth in Section 6 hereof is not satisfied, because
this Agreement is terminated pursuant to Section 10 hereof or because
of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on their part to
be performed or satisfied hereunder other than by reason of a default
by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase
and sale of the Stock.
6. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Stock and the
Additional Stock, as provided herein, shall be subject, in their
discretion, to the continuing accuracy of the representations and
warranties of the Company contained herein and in each certificate
and document contemplated under this Agreement to be delivered to the
Representatives, as of the date hereof and as of the Closing Date (or
the Additional Closing Date, as the case may be), to the performance
by the Company of its obligations hereunder, and to the following
conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 o clock, New York City time, on the date of
this Agreement or such later date and time as shall be consented
to in writing by the Representatives.
(b) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i)
there shall not have been a material adverse change in the
general affairs, business, prospects, properties, management,
condition (financial or otherwise)
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<PAGE> 17
or results of operations of the Company and its Subsidiaries,
taken as a whole, whether or not arising from transactions in
the ordinary course of business, in each case other than as set
forth in or contemplated by the Registration Statement and the
Prospectus and (ii) neither the Company nor any of its
Subsidiaries shall have sustained any loss or interference with
its business or properties, which loss or interference is
material to the Company and its Subsidiaries, taken as a whole,
and which loss or interference is not set forth in the
Registration Statement and the Prospectus, if in the judgment of
the Representatives any such development makes it impracticable
or inadvisable to consummate the sale and delivery of the Stock
and the Additional Stock by the Underwriters at the initial
public offering price.
(c) At the Closing Date and any Additional Closing Date,
as the case may be, the Representatives shall have received the
favorable written opinion of Harwell Howard Hyne Gabbert &
Manner, P.C., as counsel for the Company, with respect to the
opinions expressed in paragraphs (i) through (xvi) below. Each
such opinion shall be dated the date of delivery, addressed to
the Underwriters, and in form and scope satisfactory to counsel
for the Underwriters, with reproduced copies or signed
counterparts thereof for each of the Underwriters, substantially
to the effect that:
(i) Each of the Company and its Subsidiaries has been
duly organized and is a validly existing corporation under
the laws of its respective jurisdiction of incorporation,
with full corporate power and authority to own, lease,
license, and use its properties and assets and to conduct
its business in the manner described in the Prospectus.
(ii) Each of the Company and its Subsidiaries is duly
qualified to do business and is in good standing in every
jurisdiction listed on Schedule A to such opinion.
(iii) The Company has an authorized share
capitalization as set forth under the heading
"Capitalization" in the Registration Statement and the
Prospectus, and the certificates for the Stock and
Additional Stock comply in all respects with Delaware law
and have been duly approved by the Board of Directors of
the Company. Each outstanding share of capital stock of
the Company is validly authorized, validly issued, fully
paid and nonassessable, and has not been issued and is not
owned or held in violation of any statutory preemptive
rights of stockholders or
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<PAGE> 18
similar rights whether by means of charter, bylaws or any
agreement. There is no commitment, plan or arrangement to
issue, and no outstanding option, warrant or other right
calling for the issuance of, any share of capital stock of
the Company or any security or other instrument which by
its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company, except as
properly described in the Prospectus. There is outstanding
no security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for
capital stock of the Company, except as properly described
in the Prospectus. All outstanding shares of capital stock
of each of the Subsidiaries have been validly authorized
and validly issued and are fully paid and nonassessable.
The Company, directly or indirectly, owns all of the
outstanding shares of capital stock of each of the
Subsidiaries listed in the opinion. All outstanding shares
of capital stock of each of the Subsidiaries listed in the
opinion are owned by the Company free and clear of any
liens, security interests and pledges, charges, claims,
encumbrances, stockholder agreements and voting rights.
(iv) There is no litigation, arbitration, claim,
governmental or other proceeding or investigation (domestic
or foreign, formal or informal) pending or threatened with
respect to the Company or its Subsidiaries or any of their
respective operations, businesses, properties or assets,
except as properly described in the Prospectus or such as,
individually or in the aggregate, do not now have and are
not reasonably expected in the future to have a material
adverse effect upon the financial condition, results of
operations, business, properties or assets of the Company.
(v) Neither the Company nor any other party is now,
or with notice or passage of time or both or upon
consummation of the transactions contemplated hereby will
be, in material violation or breach of, or in default with
respect to, any material provision of any contract,
agreement, instrument, lease, license, arrangement or
understanding which is material to the Company as listed in
the Company's most recent Annual Report on Form 10-K,
except as properly described in the Prospectus.
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<PAGE> 19
(vi) Neither the Company nor any of its Subsidiaries
is in violation or breach of, or in default with respect
to, any term of its respective certificate of incorporation
or, except for that which could not reasonably be expected
to have a material adverse effect on the financial
conditions, results of operations, business, properties or
assets of the Company or its Subsidiaries, its bylaws.
(vii) The Company has all requisite corporate power and
corporate authority to execute, deliver and perform this
Agreement. All necessary corporate proceedings of the
Company have been taken to authorize the Company's
execution, delivery and performance of this Agreement. The
Agreement has been duly authorized, executed and delivered
by the Company, is the legal, valid and binding obligation
of the Company, and is enforceable as to the Company in
accordance with its terms, except insofar as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally and
except as to the availability of equitable remedies and
except as rights to indemnity and contribution may be
limited by federal and state securities laws or the public
policy underlying such laws. No consent, authorization,
approval, order, license, certificate or permit of or from,
or declaration or filing with, any federal, state, local or
other governmental authority or any court or other tribunal
(domestic or foreign) is required by the Company for the
execution, delivery or performance of this Agreement by the
Company other than those that have been obtained and
granted as may have been required by state securities or
"blue sky" laws. Such opinion shall state that all filings
were made under the Act. Such opinion may state that
counsel is not representing the Company in respect of "blue
sky" matters. No consent of any party to any material
contract, agreement, instrument, lease, license,
arrangement or understanding listed in the Company's most
recent annual report on Form 10-K, is required for the
execution, delivery or performance of this Agreement other
than those which have been received; and the execution and
delivery of this Agreement will not, and this Agreement may
be performed in a manner that does not violate, result in a
breach of, conflict with, or (with or without the giving of
notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement or
understanding or violate or result in a breach of any
-19-
<PAGE> 20
term of the certificate of incorporation or bylaws of the
Company or its Subsidiaries, or violate, result in a breach
of, or conflict with any law, rule, regulation (except for
such law, rule or regulation, the violation of which would
not have a material adverse effect on the Company), order,
judgment, or decree binding on the Company or any of its
Subsidiaries or to which any of their respective
operations, businesses, properties or assets are subject.
(viii) Each share of Stock and Additional Stock is
validly authorized, validly issued, fully paid and
nonassessable and is not issued in violation of any
preemptive rights of stockholders or similar rights whether
by means of Charter, Bylaws or any agreement known to
counsel, and, subject to the foregoing, upon payment of the
purchase price pursuant to this Agreement and delivery of
certificates for the Stock and Additional Stock, the
Underwriters will receive good title to the shares of Stock
and Additional Stock purchased by them, free and clear of
all liens, security interests and pledges and free and
clear of any charges, claims, encumbrances, stockholder
agreements and voting rights. The Common Stock, the Stock
and the Additional Stock conform in all material respects
to all statements relating thereto contained in the
Registration Statement or the Prospectus.
(ix) Any contract, agreement, instrument, lease or
license known to counsel and required to be described in
the Registration Statement or the Prospectus has been
described properly therein. Any contract, agreement,
instrument, lease or license known to counsel required to
be filed as an exhibit to the Registration Statement has
been filed with the Commission as an exhibit to the
Registration Statement.
(x) Insofar as statements in the Prospectus purport
to summarize the provision of laws, rules, regulations,
orders, judgments, decrees, contracts, agreements,
instruments, leases or licenses, such statements have been
prepared or reviewed by such counsel and accurately reflect
the provisions purported to be summarized and are correct
in all material respects.
(xi) To the knowledge of such counsel, each of the
Company and its Subsidiaries possesses or has made
application for all material authority, material
certificates and material permits issued by the
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appropriate local, state, federal and foreign regulatory
agencies or bodies necessary to conduct their respective
businesses, in the manner described in the Prospectus, and
to the knowledge of such counsel, neither the Company nor
any of its Subsidiaries has received any notice of any
proceeding relating to the revocation or modification of
any such authority, material certificate or material permit
which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or fining, would have a
material adverse effect on the financial condition, results
of operations, business, properties or assets of the
Company, except as properly disclosed in the Prospectus.
(xii) On the basis of the participation of such counsel
in conferences with officers and other representatives of
the Company, representatives of, and counsel for, the
Underwriters, and representatives of the independent public
accountants for the Company, at which the contents of the
Registration Statement and the Prospectus and related
matters were discussed, but without independent
verification by such counsel of the accuracy, completeness
or fairness of the statements contained in the Registration
Statement, the Prospectus or any amendments or supplement
thereto, such counsel (A) is of the opinion that the
Registration Statement and the Prospectus and any
supplements or amendments thereto (except for financial
statements, related schedules and other financial data
contained therein, as to which such counsel need not
express an opinion) comply as to form in all material
respects with the Act and the Regulations and (B) nothing
has come to the attention of such counsel that leads them
to believe that the Registration Statement and the
Prospectus included therein (except for financial
statements, related schedules and other financial data
contained therein, as to which such counsel need not
express a belief) at the time the Registration Statement
became effective contained any untrue statement of a
material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, as amended
or supplemented, if applicable, includes any untrue
statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made,
not misleading.
(xiii) The Registration Statement has become effective
under the Act and, to such counsel's
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knowledge, no Stop Order has been issued and no proceedings
for that purpose have been instituted or threatened.
(xiv) No holders of Common Stock or other securities
of the Company known to counsel have any registration
rights with respect to Common Stock except as described in
the Prospectus or validly waived with respect to the
transaction contemplated hereby.
(xv) The statements in the Prospectus under the
captions "Risk Factors - Health Care Reform," "Risk Factors
- Government Regulation," Business - Government Regulation
, "Business - Reimbursement," and "Business Litigation"
insofar as such statements constitute a summary of the
legal matters, documents or proceedings referenced therein,
fairly present the information called for by the
Regulations with respect to such legal matters, documents
and proceedings in all material respects.
(xvi) The Company is not required to be registered
under the Investment Company Act of 1940, as amended.
In rendering such opinions, counsel for the Company may rely (A)
as to matters involving the application of laws other than the
federal laws of the United States and the laws of the States of
Delaware and Tennessee, to the extent such counsel deems proper and
to the extent specified in such opinion, upon an opinion or opinions,
(in form and substance satisfactory to counsel for the Underwriters)
of other counsel, acceptable to counsel for the Underwriters,
familiar with applicable laws, in which case the opinions of such
counsel shall state that the opinion or opinions of such other
counsel are satisfactory in scope and form to such counsel and that
reliance thereon by such counsel and the Underwriters is reasonable;
(B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and its
Subsidiaries; and (C) to the extent they deem proper, upon written
statements or certificates of officers of departments of various
jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its Subsidiaries
provided that copies of any such statements or certificates shall be
delivered to counsel for the Underwriters.
(d) On or prior to the Closing Date and any Additional
Closing Date, as the case may be, the Underwriters shall have
been furnished such information, documents, certificates and
opinions as they may reasonably require for the purpose of
enabling them to review the
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<PAGE> 23
matters referred to in Section 6(b), and in order to evidence
the accuracy, completeness or satisfaction of any of the
representations, warranties, covenants, agreements or conditions
herein contained, or as the Representatives may reasonably
request.
(e) At the Closing Date and any Additional Closing Date,
as the case may be, the Representatives shall have received a
certificate of the chief executive officer and of the chief
financial officer of the Company, dated the Closing Date or such
Additional Closing Date, as the case may be, to the effect that
the condition set forth in Section 6(a) has been satisfied, that
as of the date of this Agreement and as of the Closing Date or
such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein
were and are accurate, and that as of the Closing Date or such
Additional Closing Date, as the case may be, the obligations to
be performed by the Company hereunder on or prior hereto have
been fully performed.
(f) At the time this Agreement is executed and at the
Closing Date and any Additional Closing Date, as the case may
be, the Representatives shall have received a letter, addressed
to the Underwriters and in form and substance satisfactory to
the Representatives, with reproduced copies or signed
counterparts thereof for each of the Underwriters, from the
Company's independent auditors dated the date of delivery:
(i) confirming that they are or during the period
covered by their report(s) included in the Registration
Statement and the Prospectus they were, independent
certified public accountants with respect to the Company
and its Subsidiaries within the meaning of the Act and the
published Regulations and stating that the response to Item
10 of the Registration Statement is correct insofar as it
relates to them;
(ii) stating that, in their opinion, the financial
statements, and any related schedules of the Company and
its Subsidiaries included in the Registration Statement and
the Prospectus examined by them comply in form in all
material respects with the applicable accounting
requirements of the Act and the Regulations;
(iii) stating that, on the basis of procedures (but not
an examination or review made in accordance with generally
accepted auditing standards) consisting of a reading of the
latest available unaudited interim financial statements of
the Company and its
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<PAGE> 24
consolidated Subsidiaries (with an indication of the date
of the latest available unaudited interim financial
statements), a reading of the unaudited pro forma financial
statements included in the Registration Statement and the
Prospectus, a reading of the latest available minutes of
the stockholders and Board of Directors of the Company and
its Subsidiaries and committees of such boards, inquiries
to certain officers and other employees of the Company and
its Subsidiaries responsible for financial and accounting
matters, and other specified procedures and inquiries,
nothing has come to their attention that caused them to
believe that (A) the unaudited financial statements and
schedules of the Company and its Subsidiaries included in
the Registration Statement and the Prospectus do not comply
in form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and
the related published rules and regulations under either
such act or are not fairly presented in conformity with
generally accepted accounting principles (except to the
extent that certain footnote disclosures regarding any stub
period may have been omitted in accordance with the
applicable rules of the Commission under the Exchange Act)
applied on a basis consistent with that of the audited
consolidated financial statements appearing therein, (B)
the pro forma financial statements included in the
Registration Statement and the Prospectus do not comply in
form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or
that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of
such statements (C) there was any change in the capital
stock or debt of the Company or any decrease in the net
current assets or stockholders' equity of the Company as of
the date of the latest available monthly unaudited
financial statements of the Company or as of a specified
date not more than five business days prior to the date of
such letter, each as compared with the amounts shown in the
June 30, 1996 balance sheet included in (or incorporated by
reference into) the Registration Statement and the
Prospectus, other than as properly described in the
Registration Statement and the Prospectus or any change or
decrease (which shall be set forth therein) which the
Representatives in their sole discretion shall accept, or
(D) there was any decrease in revenue, net earnings, or net
earnings per share of Common Stock of the Company during
the period July 1, 1996 to the date of the latest available
monthly unaudited financial statements of the Company or to
a
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<PAGE> 25
specified date not more than five business days prior to
the date of such letter, each as compared with the
corresponding period in 1995, other than as properly
described in the Registration Statement and the Prospectus
or any decrease (which shall be set forth therein) which
the Representatives in their sole discretion shall accept;
and
(iv) stating that they have compared specific
numerical data and financial information pertaining to the
Company, its Subsidiaries and their respective predecessors
set forth in the Registration Statement, each Preliminary
Prospectus, and the Prospectus, if applicable, which have
been specified by the Representatives prior to the date of
this Agreement, to the extent that such data and
information may be derived from the general accounting
records of the Company, its Subsidiaries and their
respective predecessors, and excluding any questions
requiring an interpretation by legal counsel, with the
results obtained from the application of specified
readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance
with generally accepted auditing standards) set forth in
the letter, and found them to be in agreement.
(g) All proceedings taken in connection with the issuance,
sale, transfer and delivery of the Stock and the Additional
Stock shall be satisfactory in form and substance to the
Representatives and to counsel for the Underwriters, and the
Underwriters shall have received from such counsel for the
Underwriters a favorable opinion, dated as of the Closing Date
and the Additional Closing Date, as the case may be, with
respect to such of the matters set forth under Section 6(b), and
with respect to such other related matters, as the
Representatives may reasonably request.
(h) The NASD, upon review of the terms of the public
offering of the Stock and the Additional Stock, shall not have
objected to the Underwriters' participation in such offering.
(i) The Representatives shall have received an opinion
dated the Closing Date of Stroock & Stroock & Lavan, counsel for
the Underwriters, with respect to the issuance and sale of the
Stock, and Additional Stock, as applicable, the Registration
Statement, the Prospectus, and such other related matters as the
Representatives may reasonably request for the purpose of
enabling them to pass upon such matters.
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<PAGE> 26
Any certificate or other document signed by any officer of the
Company and delivered to the Representatives or to counsel for the
Underwriters in connection with this Agreement and containing a
representation or warranty of the Company shall be deemed a
representation and warranty by the Company hereunder to the
Underwriters as to the statements made therein. The Company shall
furnish to the Representative or to counsel for the Underwriters such
conformed copies of such opinions, certificate, letters and documents
in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request. If any condition to the
Underwriters' obligations hereunder to be fulfilled prior to or at
the Closing Date or any Additional Closing Date, as the case may be,
is not so fulfilled, the Representatives may on behalf of the several
Underwriters terminate this Agreement or, if the Representatives so
elect, in writing waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each
Underwriter and each person, if any, who controls each Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
from and against any and all losses, claims, liabilities, expenses
and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under
the Act, the Exchange Act or other Federal or State statutory law or
regulation, at common law or otherwise, insofar as such losses,
claims, liabilities, expenses or damages arise out of or are based on
(i) any untrue statement or alleged untrue statement made by the
Company in Section 3 of this Agreement, (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) any
Preliminary Prospectus, the Registration Statement or the Prospectus
or any amendment or supplement to the Registration Statement or the
Prospectus and (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based
upon written information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify the Stock or the
Additional Stock under the securities or Blue Sky laws thereof or
filed with the Commission or any securities association or securities
exchange (each, an "Application") or (iii) the omission or alleged
omission to state in any preliminary prospectus, the Registration
Statement or the Prospectus or any supplement to the Registration
Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements
therein not misleading;
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<PAGE> 27
provided, however, further, that the Company will not be liable to
the extent that such loss, claim, liability, expense or damage arises
from the sale of the Stock or the Additional Stock in the public
offering to any person by an Underwriter and is based solely on an
untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information relating to
any Underwriter furnished in writing to the Company by the
Representatives on behalf of any Underwriter expressly for inclusion
in the Registration Statement, any Preliminary Prospectus or the
Prospectus. This indemnity agreement will be in addition to any
liability that the Company might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act,
each director of the Company and each officer of the Company who
signs the Registration Statement to the same extent as the foregoing
indemnity from the Company to each Underwriter, but only insofar as
losses, claims, liabilities, expenses or damages arise out of or are
based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of such Underwriter expressly for use
in the Registration Statement, any Preliminary Prospectus or the
Prospectus. This indemnity agreement will be in addition to any
liability that each Underwriter might otherwise have.
Notwithstanding the foregoing, no Underwriter shall be obligated to
indemnify any such party hereunder in an amount that exceeds the sum
of the underwriting discounts received by it pursuant to this
Agreement.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of
notice of commencement of any action against such party in respect of
which a claim is to be made against an indemnifying party or parties
under this Section 7, notify each such indemnifying party of the
commencement of such action, enclosing a copy of all papers served,
but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified
party under the foregoing provisions of this Section 7 unless, and
only to the extent that, such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. If any
such action is brought against any indemnified party and it notifies
the indemnifying party of its commencement, the indemnifying party
will be entitled to participate in and, to the extent that it elects
by delivering written notice to the indemnified party promptly after
receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of
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<PAGE> 28
the action, with counsel satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of
its election to assume the defense, the indemnifying party will not
be liable to the indemnified party for any legal or other expenses
except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in
connection with the defense. The indemnified party will have the
right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of
such indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying
party, (2) the indemnified party has reasonably concluded (based on
advice of counsel) that there may be legal defenses available to it
or other indemnified parties that are different from or in addition
to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying
party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed counsel
to assume the defense of such action within a reasonable time after
receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel
will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in
such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be
reimbursed by the indemnifying party promptly as they are incurred.
The Company will not, without the prior written consent of
Underwriters, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought
hereunder (whether or not the Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent
includes an unconditional release of each Underwriter and each such
controlling person from all liability arising out of such claim,
action, suit or proceeding. An indemnifying party will not be liable
for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 7 is
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<PAGE> 29
applicable in accordance with its terms but for any reason is held to
be unavailable from the Company or the Underwriters, the Company and
the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal
and other expenses reasonably incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Act or the Exchange
Act, officers of the Company who signed the Registration Statement
and directors of the Company, who also may be liable for
contribution) to which the Company and any one or more of the
Underwriters may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriters on the other. The relative
benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses)
received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth
in the table on the cover page of the Prospectus. If, but only if,
the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative
benefits referred to in the foregoing sentence but also the relative
fault of the Company, on the one hand, and the Underwriters, on the
other, with respect to the statements or omissions which resulted in
such loss, claim, liability, expense or damage, or action in respect
thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the
Representatives on behalf of the Underwriters, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(d) were to be
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, liability, expense
or damage, or action in respect thereof, referred to above in this
Section 7(d) shall be deemed to include, for purpose of this Section
7(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section
7(d), no
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<PAGE> 30
Underwriter shall be required to contribute any amount in excess of
the underwriting discounts received by it, and no person found guilty
of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) will be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 7(d) are
several in proportion to their respective underwriting obligations
and not joint. For purposes of this Section 7(d), any person who
controls a party to this Agreement within the meaning of the Act or
the Exchange Act will have the same rights to contribution as that
party, and each officer of the Company who signed the Registration
Statement will have the same rights to contribution as the Company,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim for
contribution may be made under this Section 7(d), will notify any
such party or parties from whom contribution may be sought, but the
omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may
have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
The Underwriters' obligations to contribute hereunder are several in
proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the
provisions of the Agreement Among Underwriters dated the date hereof
among the Representatives and the other Underwriters.
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company
contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf
of the Underwriters, (ii) acceptance of any of the Stock or
Additional Stock and payment therefor or (iii) any termination of
this Agreement.
8. Default by an Underwriter.
(a) If any Underwriter defaults in its obligation to purchase
Stock or Additional Stock hereunder, and if the number of shares of
Stock or Additional Stock to which the defaults of all Underwriters
in the aggregate relate does not exceed 10% of the number of shares
of Stock or Additional Stock, as the case may be, which all
Underwriters have agreed to purchase hereunder, then such shares of
Stock or Additional Stock to which such defaults relate shall be
purchased by the non- defaulting Underwriters in proportion to their
respective commitments hereunder.
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<PAGE> 31
(b) If such defaults exceed in the aggregate 10% of the number
of shares of Stock or Additional Stock, as the case may be, which all
Underwriters have agreed to purchase hereunder, the Representatives
may in their discretion arrange for themselves or for another party
or parties to purchase such shares of Stock or Additional Stock, as
the case may be, to which such defaults related on the terms
contained herein.
If the Representatives do not arrange for the purchase of such
shares of Stock or Additional Stock, as the case may be, within one
business day after the occurrence of defaults relating to in excess
of 10% of the number of shares of Stock or Additional Stock, as the
case may be, then the Company shall be entitled to a further period
of one business day within which to procure another party or parties
satisfactory to the Representatives to purchase such shares of Stock
or Additional Stock, as the case may be, on such terms. If the
Representatives do not or the Company does not arrange for the
purchase of the shares of Stock or Additional Stock, as the case may
be, to which such defaults related as provided in this Section 8(b),
this Agreement may be terminated by the Representatives or the
Company, without liability on the part of the Company (except that
the provisions of Sections 5, 7, 9, 10, 12, 13 and 14 shall survive
such termination) or the several Underwriters, but nothing in this
Agreement shall relieve a defaulting Underwriter of its liability, if
any, to the other several Underwriters and to the Company for any
damage occasioned by its default hereunder.
(c) If the shares of Stock or Additional Stock to which such
defaults relate are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as
aforesaid, the Representatives and the Company shall each have the
right to postpone the Closing Date or the Additional Closing Date, as
the case may be, for a reasonable period, but not in any event more
than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus or in
any other documents and arrangements with respect to the Stock or the
Additional Stock, and the Company agrees to prepare and file promptly
any amendment or supplement to the Registration Statement or the
Prospectus which in the opinion of counsel to the Underwriters may
thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 8 as
if such party had originally been a party to this Agreement and had
been allocated the number of shares of Stock and Additional Stock
actually purchased by it as a result of its original commitment to
purchase Stock and Additional Stock and its purchase of shares of
Stock or Additional Stock pursuant to this Section 8.
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<PAGE> 32
9. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements contained in
this Agreement shall be deemed to be representations, warranties,
covenants and agreements at the Closing Date and any Additional
Closing Date, and such representations, warranties, covenants and
agreements of the Underwriters and the Company, including the
indemnity and contribution agreements contained in Section 7, shall
remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any
indemnified person, or by or on behalf of the Company, or any person
or entity which is entitled to be indemnified under Section 7, and
shall survive termination of this Agreement or the delivery of the
Stock and the Additional Stock to the several Underwriters. In
addition, the provisions of Sections 5, 7, 9, 10, 12, 13 and 14 shall
survive termination of this Agreement, whether such termination
occurs before or after the Closing Date or any Additional Closing
Date.
10. Effective Date of this Agreement and Termination Thereof.
(a) This Agreement shall become effective at____ o clock, New
York City time, on the first full business day following the day on
which the Registration Statement becomes effective or at the time of
the public offering by the Underwriters of the Stock, whichever is
earlier. The time of the public offering shall mean the time, after
the Registration Statement becomes effective, of the release by the
Representatives for publication of the first newspaper advertisement
which is subsequently published relating to the Stock or the time,
after the Registration Statement becomes effective, when the Stock is
first released by the Representatives for offering by the
Underwriters or dealers by letter, telegram or knowledge, whichever
shall first occur. The Company may prevent this Agreement from
becoming effective without liability of any party to any other party,
except as noted below in this Section 10, by giving notice as
provided in Section 10(c) before the time this Agreement becomes
effective.
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date or any Additional
Closing Date, as the case may be, by giving notice to the Company if
any domestic or international event, act, or occurrence has disrupted
materially, or in the opinion of the Representatives will disrupt
materially in the immediate future, the securities markets; or if
there shall have been a general suspension of, or a general
limitation on prices for, trading in securities on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter
market; or if there shall have been an outbreak of major hostilities
or other national or international calamity; or if a banking
moratorium has been
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<PAGE> 33
declared by a state or federal authority; or if a moratorium in
foreign exchange trading by major international banks or persons has
been declared; or if there shall have been a material interruption in
the mail service or other means of communication within the United
States; or if the Company shall have sustained a material or
substantial loss by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the opinion of the
Representatives, make it inadvisable to proceed with the offering,
sale or delivery of the Stock or the Additional Stock, as the case
may be; or if there shall have been such change in the market for the
Company's securities or securities in general or in political,
financial or economic conditions as in the judgment of the
Representatives makes it impracticable to proceed with the offering,
sale and delivery of the Stock or the Additional Stock, as the case
may be, on the terms contemplated by the Prospectus.
(c) If the Representatives elect to prevent this Agreement from
becoming effective, as provided in this Section 10, or to terminate
this Agreement, the Representatives shall notify the Company promptly
by telephone, telex, telegram or knowledge, confirmed by letter. If,
as so provided, the Company elects to prevent this Agreement from
becoming effective or to terminate this Agreement, the Company shall
notify the Representatives promptly by telephone, telex, telegram or
knowledge, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
(except as specified in Section 10(e)), if this Agreement shall not
become effective by reason of an election pursuant to this Section 10
or if this Agreement shall terminate or shall otherwise fail to be
carried out within the time specified herein by reason of any failure
on the part of the Company to perform any covenant or agreement or
satisfy any condition of this Agreement by it to be performed or
satisfied, the sole liability of the Company to the several
Underwriters, in addition to the obligations the Company assumed
pursuant to Section 5, will be to reimburse promptly the several
Underwriters for such out-of-pocket expenses (including the fees and
expenses of their counsel) as shall have been incurred by them in
connection with this Agreement and the proposed offer, sale and
delivery of the Stock and the Additional Stock, and upon demand the
Company agrees to pay promptly the full amount thereof to the
Representative for the respective accounts of the Underwriters.
Anything to this Agreement to the contrary notwithstanding other than
Section 10(e), if this Agreement shall not be carried out within the
time specified herein for any reason other than the failure on the
part of the Company perform any covenant or agreement or satisfy any
condition of this Agreement by it to be performed or satisfied, the
Company
-33-
<PAGE> 34
shall have no liability to the several Underwriters other than for
the obligations assumed by the Company pursuant to Section 5.
(e) Notwithstanding any election hereunder or any termination
of this Agreement, and whether or not this Agreement is to be carried
out otherwise, the provisions of Sections 5, 7, 9, 10, 12, 13 and 14
shall not be affected in any way by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
11. Notices. All communications hereunder, except as
specifically may be provided otherwise herein, shall be in writing
and, if sent to any Underwriter, shall be mailed, delivered, or
telexed, telegraphed or telecopied, and confirmed by letter, to such
Underwriter, c/o Equitable Securities Corporation, Nashville City
Center, Suite 800, 511 Union Street, Nashville, Tennessee 37219,
Attention: R. Riley Sweat, with a copy to Stroock & Stroock & Lavan,
7 Hanover Square, New York, New York 10004, Attention: James R.
Tanenbaum, Esq.; or, if sent to the Company, shall be mailed,
delivered or telexed, telegraphed or telecopied, and confirmed by
letter, to the Company, 12930 Washington Boulevard, Baltimore,
Maryland 21230 Attention: President, with a copy to Harwell Howard
Hyne Gabbert & Manner, P.C., 1800 First American Center 315 Deadrick
Street, Nashville, Tennessee 37238, Attention: Mark Manner, Esq. All
notices hereunder shall be effective upon receipt by the party to
which such notice is addressed.
12. Parties. The Representatives represent that they are
authorized to act on behalf of the several Underwriters named in
Schedule I hereto, and the Company shall be entitled to act and rely
on any request, notice, consent, waiver or agreement purportedly
given on behalf of the Underwriters when the same shall have been
given by the Representatives on such behalf. This Agreement shall
inure solely to the benefit of, and shall be binding upon, the
several Underwriters, the Company and the persons and entities
referred to in Section 7 who are entitled to indemnification or
contribution, and their respective successors, legal representatives
and assigns (which shall not include any buyer, as such, of the Stock
or the Additional Stock), and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision
herein contained. Notwithstanding anything contained in this
Agreement to the contrary, all of the obligations of the Underwriters
hereunder are several and not joint.
13. Construction. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO THE RULES GOVERNING THE CONFLICTS OF LAW. TIME IS OF THE
ESSENCE IN THIS AGREEMENT.
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<PAGE> 35
14. Counterparts. This Agreement may be signed by any one or
more of the parties hereto in any number of counterparts, each of
which shall be deemed to be an original, but all such counterparts
shall constitute one and the same agreement.
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<PAGE> 36
If the foregoing correct sets forth the understanding between
you and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding
agreement between us.
Very truly yours,
CAPSTONE PHARMACY SERVICES, INC.
By:
-----------------------------------
Name:
Title:
Accepted as of the date first
above written.
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
BT SECURITIES CORPORATION
WHEAT FIRST BUTCHER & SINGER
VOLPE, WELTY & COMPANY
on behalf of themselves and
the other several Under-
writers named in Schedule 1
hereto
By: EQUITABLE SECURITIES CORPORATION
By:
---------------------------------
Name:
Title:
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<PAGE> 37
SCHEDULE 1
Number of Shares
to be Purchased
Underwriter from the Company
----------- ----------------
Equitable Securities Corporation
Lehman Brothers . . . . . . . .
BT Securities Corp . . . . . .
Wheat First Butcher & Singer. .
Volpe, Welty & Company. . . . .
Total .
-37-
<PAGE> 1
EXHIBIT 5.1
August 16, 1996
American HomePatient, Inc.
5200 Maryland Way, Suite 400
Brentwood, Tennessee 37027
Ladies and Gentlemen:
We have acted as legal counsel to Capstone Pharmacy Services, Inc., (the
"Company") in connection with the preparation of a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended ("Registration
Statement"), relating to up to 10,350,000 shares of the Company's common stock,
par value $.01 per share (the "Shares"), to be sold by the Company.
We have examined and are familiar with the Certificate of Incorporation
and the By-Laws of the Company, and the various corporate records and
proceedings relating to the organization of the Company and the filing of the
Registration Statement. We have also examined such other documents and
proceedings as we have considered necessary for the purpose of this opinion.
Based on the foregoing it is our opinion that the Shares will, when sold,
be legally issued, fully paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and with such state securities administrators as may
require such opinion of counsel for the registration of the Shares, and the
reference to this firm under the heading "Legal Matters" in the Prospectus.
Very truly yours,
/s/ Harwell Howard Hyne Gabbert & Manner, P.C.
<PAGE> 1
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
August 16, 1996
<PAGE> 1
Exhibit 23.3
ACCOUNTANTS' CONSENT
The Board of Directors
Symphony Pharmacy Services, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement on Form S-3 of
Capstone Pharmacy Services, Inc.
KPMG Peat Marwick LLP
August 16, 1996
<PAGE> 1
Exhibit 23.4
[Blackman Kallick Bartelstein, LLP Letterhead]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report for the years ended
December 31, 1995, 1994 and 1993 dated March 20, 1996 in Capstone Pharmacy
Services, Inc.'s Form 8-K dated February 29, 1996 and to all references to our
firm included in this registration statement.
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
August 16, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report on the audited financial
statements of Geri Care Inc. and Affiliate for the nine months ended September
30, 1995, dated December 18, 1995, included in Capstone Pharmacy Services,
Inc.'s Form 8K/A dated December 31, 1995 and to all references to our Firm
included in this registration statement.
/s/ Roth & Company
Brooklyn, New York
August 16, 1996
