<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of Report (Date of earliest event reported):
July 30, 1996
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-20606 11-2310352
-------- ----------- ----------
(State or other (Commission File (Employer
jurisdiction of Number) Identification
incorporation) Number)
</TABLE>
2930 Washington Boulevard, Baltimore, Maryland 21230
----------------------------------------------------
(Address of principal executive offices)
(410) 646-7373
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name or former address,
if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of the business acquired. Audited
consolidated balance sheets of Symphony Pharmacy Services, Inc. and subsidiaries
as of December 31, 1994, and 1995, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995.
(b) Pro forma financial information. Pro forma unaudited
financial data for the ten months ended December 31, 1995, and the six months
ended June 30, 1996, reflecting the acquisitions by the Company of
PremierPharmacy, Inc., Geri-Care Systems, Inc. and Scripts & Things, Inc., IMD
Corporation, DCMed, Inc. and Symphony Pharmacy Services, Inc.
(c) Exhibits. The exhibit filed as a part of this report is
listed in the Exhibit Index immediately following the signature page.
2
<PAGE> 3
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-1
<PAGE> 4
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-2
<PAGE> 5
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-3
<PAGE> 6
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-4
<PAGE> 7
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-5
<PAGE> 8
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-6
<PAGE> 9
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-7
<PAGE> 10
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-8
<PAGE> 11
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-9
<PAGE> 12
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-10
<PAGE> 13
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-11
<PAGE> 14
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-12
<PAGE> 15
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
From March 1, 1995 through June 30, 1996, the Company acquired several
institutional pharmacy and pharmacy service companies. These acquisitions
consist of the acquisition of Premier Pharmacy, Inc. (Premier) on May 22, 1995,
Geri-Care Systems, Inc. and Scripts & Things, Inc. (Geri-Care) on January 3,
1996, IMD Corporation (IMD) on February 29, 1996, and DCMed, Inc. (DCMed) on
July 1, 1996.
Also, on July 29, 1996, the Company acquired the institutional pharmacy
business of Symphony Pharmacy Services, Inc. from Integrated Health Services,
Inc. for $125 million in cash and $25 million in Common Stock. The Company
financed the cash portion of the acquisition with a $25 million
investment by Counsel Corporation and $100 million in cash from a bridge loan.
The Company also intends to refund the bridge loan and other long-term
indebtedness using the proceeds from a secondary offering of 9,000,000 shares
at an assumed offering price of $12.00 per share.
The following unaudited pro forma income statement data for the ten months
ended December 31, 1995 and the six months ended June 30, 1996 have been
prepared based on historical income statements of the Company, as adjusted to
reflect the acquisitions of Premier, Geri-Care, IMD, DCMed and Symphony as if
each had occurred on March 1, 1995 and January 1, 1996, respectively. The
unaudited pro forma condensed consolidated balance sheet as of June 30, 1996
has been prepared based on the historical balance sheet of the Company, as
adjusted to reflect the acquisitions of DCMed and Symphony as if they had been
acquired as of June 30, 1996. The pro forma income statement data may not be
indicative of the future results of operations of or what the actual results of
operations would have been had the acquisitions described above been effective
March 1, 1995 and January 1, 1996.
F-13
<PAGE> 16
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Capstone Pharmacy IMD
Services, Inc. IMD Pro Forma
per Form 10-Q Corporation(1) Adjustments DCMed(1)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 46,147 $1,721 $ - $5,030
Cost of sales 28,646 982 - 2,241
-----------------------------------------------------------------
Gross profit 17,301 739 - 2,789
Operating expenses:
Selling, general and administrative expenses 14,452 710 - 2,302
Depreciation and amortization 1,162 20 25 (2) 15
Costs relating to pharmacy closure 246 - - -
Restructuring charges - - - -
-----------------------------------------------------------------
Income from operations 1,441 9 (25) 472
-----------------------------------------------------------------
Non-operating expense, net:
Interest expense, net 685 - 64 (3) -
Other income (95) - - -
-----------------------------------------------------------------
Total non-operating expense, net 590 - 64 -
-----------------------------------------------------------------
Income before income taxes 851 9 (90) 472
Provision for income taxes 72 8 - -
-----------------------------------------------------------------
Income from continuing operations $ 779 $ 1 $(90) $ 472
=================================================================
Weighted average number of common
shares outstanding 18,264,102
Fully diluted income from continuing operations per share $ 0.04
==========
</TABLE>
<TABLE>
<CAPTION>
DCMed Symphony Symphony
Pro Forma Pharmacy Pro Forma
Adjustments Services(1) Adjustments Pro Forma
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ - $54,243 $ - $107,141
Cost of sales - 29,050 - 61,119
--------------------------------------------------------------------
Gross profit - 25,193 - 46,022
Operating expenses:
Selling, general and administrative expenses 18,256 35,720
Depreciation and amortization 39 (2) 1,396 921 (2) 3,578
Costs relating to pharmacy closure - - - 246
Restructuring charges - - - -
--------------------------------------------------------------------
Income from operations (39) 5,541 (921) 6,478
--------------------------------------------------------------------
Non-operating expense, net:
Interest expense, net 225 (3) 1,262 (1,225)(3) 1,012
Other income - 139 - 44
--------------------------------------------------------------------
Total non-operating expense, net 225 1,401 (1,225) 1,056
--------------------------------------------------------------------
Income before income taxes (264) 4,140 304 5,422
Provision for income taxes - 1,573 (1,247)(4) 407
--------------------------------------------------------------------
Income from continuing operations $(264) $ 2,567 $ 1,550 $ 5,016
====================================================================
Weighted average number of common
shares outstanding 32,092,832 (5)
Fully diluted income from continuing operations per share $ 0.16
==========
</TABLE>
(1) Reflects the acquisitions of IMD, DCMed and Symphony as if they had
occurred on January 1, 1996.
(2) Reflects the additional amortization of goodwill related to the IMD, DCMed
and Symphony acquisitions, over a period of 40 years.
(3) Reflects a reduction of interest expense incurred by Symphony on debt which
will not be assumed by Capstone as part of the acquisition and a reduction
of interest expense assuming that the excess of the proceeds of the
secondary offering over the amount used to repay the bridge loan is used to
repay a portion of the existing line of credit, net of additional interest
expense on the long-term debt related to the IMD and DCMed 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 full utilization of federal net operating loss
carryforwards.
(5) Reflects the fully diluted shares outstanding for the year ended June 30,
1996 plus (i) the impact of the 1,035,000 shares issued in the April 1996
private placement as if it had occurred on January 1, 1996, (ii) 4,224,980
shares to be issued in connection with the Symphony acquisitions and (iii)
9,000,000 shares contemplated by the secondary offering at an assumed price
of $12.00 per share.
F-14
<PAGE> 17
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA BALANCE SHEET DATA
AS OF JUNE 30, 1996
(in thousands)
<TABLE>
<CAPTION> DCMed Symphony Symphony
Capstone Pharmacy Pro Forma Pharmacy Pro Forma
Services, Inc. DCMed(1) Adjustments Services(1) Adjustments Pro Forma
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,392 $ (110) $ - $ 878 $ - $ 2,160
Accounts receivable, net of allowance
for doubtful accounts 21,082 4,105 - 21,857 - 47,044
Inventories 7,408 616 - 5,300 - 13,324
Other current assets 1,442 - - 1,157 - 2,599
-------------------------------------------------------------------------------
Total current assets 31,324 4,611 - 29,192 - 65,127
Property, equipment and other assets 4,610 177 - 9,804 - 14,591
Goodwill, net of accumulated amortization 33,842 - 3,117 (2) 54,965 73,680 (2) 165,604
-------------------------------------------------------------------------------
Total assets 69,776 4,788 3,117 93,961 73,680 245,322
===============================================================================
Current liabilities:
Accounts payable 3,338 1,122 - 6,969 500 11,929
Other current liabilities 4,473 793 - 10,172 - 15,438
-------------------------------------------------------------------------------
Total current liabilities 7,811 1,915 - 17,141 500 27,367
-------------------------------------------------------------------------------
Other long-term liabilities 1,150 - - - - 1,150
Long-term debt, net of current portion 19,785 - 5,990 (3) 41,756 (40,756)(3) 26,775
-------------------------------------------------------------------------------
20,935 - 5,990 41,756 (40,756) 27,925
-------------------------------------------------------------------------------
Stockholders' equity:
Common stock and capital in excess of par 52,533 2,400 (2,400)(4) 28,361 123,639 (4) 204,533
Retained earnings (accumulated deficit) (11,503) 473 (473)(5) 6,703 (9,703)(5) (14,503)
-------------------------------------------------------------------------------
41,030 2,873 (2,873) 35,064 113,936 190,030
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $69,776 $4,788 $3,117 $93,961 $ 73,680 $245,322
===============================================================================
</TABLE>
(1) Reflects the acquisitions of DCMed and Symphony acquisitions as if
they had occurred on June 30, 1996.
(2) Reflects the additional goodwill recorded as part of the DCMed and Symphony
acquisitions as part of the purchase price allocations.
(3) Reflects the net effect of (i) the additional long-term debt incurred
related to the DCMed acquisition, (ii) a reduction of long-term debt on the
books of Symphony at June 30, 1996, which was not 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 acquisitions and $102.0 million in estimated net proceeds from the
Offering (assuming no exercise of the overallotment option), net of
intercompany eliminations.
(5) Reflects intercompany eliminations and $3.0 million in fees relating to the
Bridge Loan.
F-15
<PAGE> 18
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Capstone Pharmacy Previously-
Services, Inc. Acquired Pro Forma
per Form 10-K Entities(1) Adjustments DCMed(4)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 48,841 $30,549 $ - $8,875
Cost of sales 30,654 18,285 - 3,838
-----------------------------------------------------------------
Gross profit 18,187 12,264 - 5,037
Operating expenses:
Selling and administrative expenses 17,469 9,578 - 5,003
Depreciation and amortization 1,146 462 485 (2) 29
Restructuring costs 240 - - -
-----------------------------------------------------------------
(Loss) Income from operations (668) 2,224 (486) 5
-----------------------------------------------------------------
Non-operating expense (income):
Interest expense, net 634 366 773 (3) -
Other income (432) (29) - -
-----------------------------------------------------------------
Total non-operating expense (income) 202 337 773 -
-----------------------------------------------------------------
Income (Loss) before income taxes (870) 1,887 (1,258) 5
Provision (Benefit) for income taxes (225) 303 - 2
-----------------------------------------------------------------
(Loss) Income from continuing operations $ (645) $1,584 $(1,258) $ 3
=================================================================
Weighted average number of common
shares outstanding 12,398,401
==========
Income (Loss) from continuing operations per share $ (0.05)
==========
</TABLE>
<TABLE>
<CAPTION>
DCMed Symphony Symphony Other
Pro Forma Pharmacy Pro Forma Pro Forma
Adjustments Services(4) Adjustments Adjustments Pro Forma
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $91,016 $ - $ - $179,281
Cost of sales - 48,837 - - 101,614
-------------------------------------------------------------------------
Gross profit - 42,179 - - 77,667
Operating expenses:
Selling and administrative expenses - 32,921 - - 64,971
Depreciation and amortization 78 (2) 2,682 1,761 (2) - 6,643
Restructuring costs - - - - 240
-------------------------------------------------------------------------
(Loss) Income from operations (78) 6,576 (1,761) - 5,813
--------------------------------------------------------------------------
Non-operating expense (income):
Interest expense, net 449 (3) 2,547 (2,472)(3) - 2,297
Other income - - - (461)
-------------------------------------------------------------------------
Total non-operating expense (income) 449 2,547 (2,472) - 1,836
-------------------------------------------------------------------------
Income (loss) before income taxes (527) 4,029 711 - 3,977
Provision (Benefit) for income taxes - 1,532 - (1,314)(5) 298
-------------------------------------------------------------------------
(Loss) Income from continuing operations $(527) $ 2,497 $ 711 $1,314 $ 3,679
=========================================================================
Weighted average number of common
shares outstanding 27,666,073 (6)
==========
Income (Loss) from continuing operations per share $ 0.13
==========
</TABLE>
(1) Reflects Geri-Care results for the nine months ended September 30, 1995,
and IMD results for the year ended December 31, 1995. These results do
not differ materially from ten month results.
(2) Reflects the additional amortization of goodwill related to the Premier,
Geri-Care, IMD, DCMed and Symphony acquisitions, over a period of 40 years.
(3) Reflects a reduction of interest expense incurred by Symphony on debt which
was not assumed by Capstone as part of the acquisition and a reduction
of interest expense assuming that the excess of the proceeds of the
secondary offering over the amount used to repay the bridge loan is used to
repay a portion of the existing line of credit, net of additional interest
expense on the long-term debt related to the IMD and DCMed acquisitions at
an annual interest rate of 7.5%.
(4) Reflects results from DCMed and Symphony for the year ended December 31,
1995, which do not differ materially from ten month results.
(5) Relects 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 full utilization of federal net operating loss
carryforwards.
(6) Reflects the fully diluted shares outstanding for the year ended December
31, 1995 plus (i) 1,007,692 shares issued in conjunction with the Geri-Care
acquisition, (ii) 1,035,000 shares issued in the April 1996 private
placement, (iii) 4,224,980 shares to be issued in conjunction with the
Symphony acquisition and (iv) 9,000,000 shares contemplated by the
secondary offering at an assumed price of $12.00 per share.
F-16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ Donald W. Hughes
-------------------------------
Vice-President,
Chief Financial Officer
and Secretary
Date: August 16, 1996
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Numbered Page
- -------- ----------- -------------
<S> <C> <C>
2. Form of Asset Purchase Agreement among Integrated
Health Services, Inc., Symphony Pharmacy
Services, Inc., various of its subsidiaries
and the Registrant (incorporated by reference
to the Form 8-K dated July 18, 1996 filed by
the Registrant)
</TABLE>
