<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------------
Commission file number 0-20606
-------
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2310352
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
2930 Washington Boulevard, Baltimore, MD 21230-1197
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 646-7373
Choice Drug Systems, Inc. (former name); February 28 (ending of former fiscal
year)
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at January 12, 1996
- ---------------------------- -------------------------------
Common Stock, $.01 Par Value 14,583,502
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of
November 30, 1995 and February 28, 1995 1-2
Consolidated Statements of Operations for the
three months ended November 30, 1995 and 1994 and
the nine months ended November 30, 1995 and 1994 3
Consolidated Statement of Changes in
Stockholders' Equity for the nine months
ended November 30, 1995 4
Consolidated Statements of Cash Flows for the
nine months ended November 30, 1995 and 1994 5
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II.OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities Signatures 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30,
1995 February 28,
(Unaudited) 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 2,383,595 $ 546,898
Accounts receivable, net of allowance for doubtful
accounts of $1,613,000 as of November 30, 1995
and $1,561,000 as of February 28, 1995 12,011,859 6,169,272
Inventories 5,106,537 3,888,163
Income tax refund receivable 793,427 500,000
Prepaid expenses and other current assets 591,950 350,568
Net assets of discontinued operations 135,897 302,820
----------- -----------
21,023,265 11,757,721
----------- -----------
Equipment and leasehold improvements, net 2,654,400 1,329,093
----------- -----------
Other assets:
Notes receivable, less current portion 77,289 94,435
Security deposits and other assets 535,124 509,498
Deferred financing costs 246,382 -
Goodwill, net of accumulated amortization of $1,481,000 as of
November 30, 1995 and $1,117,000 as of February 28, 1995 14,285,364 5,521,512
----------- -----------
15,144,159 6,125,445
----------- -----------
Total assets $38,821,824 $19,212,259
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 30,
1995 February 28,
(Unaudited) 1995
------------- ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 885,232 $ 765,387
Accounts payable 2,614,725 2,664,143
Accrued expenses and other current liabilities 2,119,689 1,702,711
Accrued restructuring charges 1,007,530 1,216,410
------------ ------------
Total current liabilities 6,627,176 6,348,651
------------ ------------
Deferred income taxes 589,964 -
Other long-term liabilities 779,481 -
Long-term debt, net of current portion 4,028,777 7,650,455
Long-term portion of accrued restructuring charges 169,231 435,623
------------ ------------
5,567,453 8,086,078
------------ ------------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $.01 par value; 500,000 shares authorized;
none issued - -
Common stock, $.01 par value; 30,000,000 shares authorized
at November 30, 1995 and 15,000,000 shares authorized at
February 28, 1995; 13,575,810 shares issued and outstand-
ing as of November 30, 1995 and 8,120,810 shares issued and
outstanding as of February 28, 1995. 135,758 81,208
Capital in excess of par 38,846,829 17,200,050
Accumulated deficit (12,355,392) (12,503,728)
------------ ------------
26,627,195 4,777,530
------------ ------------
Total liabilities and shareholders' equity $ 38,821,824 $ 19,212,259
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- ------------------------------
1995 1994 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $16,421,664 $10,621,124 $43,381,334 $32,896,879
Cost of sales 10,126,783 7,445,836 27,185,754 21,446,014
----------- ----------- ----------- -----------
Gross profit 6,294,881 3,175,288 16,195,580 11,450,865
----------- ----------- ----------- -----------
Operating expenses:
Selling and administrative expenses 5,770,667 4,835,588 15,706,036 12,923,919
Depreciation 231,952 137,170 603,610 410,172
Amortization of intangibles 120,116 92,827 368,822 278,482
Costs in connection with claims and
litigation 0 971,638 0 4,389,163
----------- ----------- ----------- -----------
Total operating expenses 6,122,735 6,037,223 16,678,468 18,001,736
----------- ----------- ----------- -----------
Operating income (loss) from
continuing operations before
income taxes, discontinued
operations and extraordinary
item 172,146 (2,861,935) (482,888) (6,550,871)
----------- ----------- ----------- -----------
Non-operating expense (income):
Interest expense, net 71,348 229,675 616,207 695,214
Other income (11,038) (139,315) (304,322) (191,718)
----------- ----------- ----------- -----------
Total non-operating expense, net 60,310 90,360 311,885 503,496
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes,
discontinued operations and
extraordinary item 111,836 (2,952,295) (794,773) (7,054,367)
Income tax benefit (182,205) (15,180) (181,905) (22,119)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before discontinued
operations and extraordinary
item 294,041 (2,937,115) (612,868) (7,032,248)
Discontinued Operations:
Gain on sale of assets of discontinued
business segments, net 0 0 477,840 0
Income from operations of discontinued
business segments, net 0 86,000 0 121,208
----------- ----------- ----------- -----------
Net income (loss) before extraordinary
item 294,041 (2,851,115) (135,028) (6,911,040)
Extraordinary item:
Discount on repayment of vendor debt 0 0 283,364 0
----------- ----------- ----------- -----------
Net Income (Loss) $ 294,041 $(2,851,115) $ 148,336 $(6,911,040)
=========== =========== =========== ===========
Earnings per share data:
Primary:
Continuing operations $ 0.02 $ (0.48) $ (0.06) $ (1.15)
Discontinued operations 0.00 0.01 0.04 0.02
Extraordinary item 0.00 0.00 0.03 0.00
----------- ----------- ----------- -----------
Net income (loss) $ 0.02 $ (0.47) $ 0.01 $ (1.13)
=========== =========== =========== ===========
Fully Diluted:
Continuing operations $ 0.02 $ (0.48) $ (0.05) $ (1.15)
Discontinued operations 0.00 0.01 0.04 0.02
Extraordinary item 0.00 0.00 0.02 0.00
----------- ----------- ----------- -----------
Net income (loss) 0.02 $ (0.47) $ 0.01 $ (1.13)
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Primary 14,237,976 6,091,206 10,859,759 6,091,206
=========== =========== =========== ===========
Fully Diluted 14,270,630 6,091,206 11,219,356 6,091,206
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
Common stock Capital Retained
------------------------- in excess earnings
Shares Amount of par (deficit)
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
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 5,100,000 51,000 20,788,204
Stock issued in connection with
exercise of stock options 355,000 3,550 858,575
Net income for the period 148,336
---------- -------- ----------- ------------
Balance, November 30, 1995 13,575,810 $135,758 $38,846,829 $(12,355,392)
========== ======== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 148,336 $(6,911,040)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating
activities:
Proposed settlement of litigation - 4,000,000
Depreciation 603,610 459,008
Amortization of intangibles 368,822 278,482
Provision for bad debts 146,448 593,615
Gain on sale of equipment - (3,045)
Gain on discount of debt repayment to a
major vendor (283,364) -
Gain on the sale of inventory (74,842) -
Changes in assets and liabilities, net of effects
of acquisitions and divestitures:
(Increase) decrease in accounts receivable (2,171,939) 202,979
Decrease (increase) in inventories 273,500 873,217
(Increase) decrease in income tax refund
receivable (202,967) 30,942
Decrease (increase) in prepaid expenses and
other current assets 187,334 (66,329)
(Increase) decrease in other assets (77,108) 233,370
(Decrease) increase in accounts payable,
accrued expenses and other current
liabilities and accrued restructuring
charges (2,334,658) 2,915,696
Decrease in other long term liabilities (455,290) -
----------- -----------
Net cash (used in) provided by operating
activities (3,872,118) 2,606,895
----------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (944,611) (211,280)
Acquisition of Premier Pharmacy, Inc., net of cash (4,168,872) -
Proceeds from notes receivable 86,955 204,110
Proceeds from sale of equipment - 3,045
----------- -----------
Net cash (used in) investing activities (5,026,528) (4,125)
----------- -----------
Cash flows from financing activities:
Loan proceeds from CreditAnstalt 9,750,000 -
Loan repayment to CreditAnstalt (9,650,000) -
Proceeds from issuance of common stock - net 21,701,329 26,250
Loan proceeds from Counsel Corp. 1,268,250 -
Loan repayment to Counsel Corp. (1,268,250) -
Net repayments of UJB bank debt (2,983,303) (1,244,848)
Repayments of other long-term debt (658,978) (1,079,693)
Repayment of debt to a major vendor (1,776,064) -
Repayment of PremierPharmacy prior bank
indebtedness (5,536,275) -
Principal payments of capital lease obligations (111,366) (109,047)
----------- -----------
Net cash provided by (used in) financing
activities 10,735,343 (2,407,338)
----------- -----------
Net increase in cash 1,836,697 195,432
Cash, beginning of period 546,898 443,258
----------- -----------
Cash, end of period $ 2,383,595 $ 638,690
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995
1. ORGANIZATION AND BACKGROUND:
Capstone Pharmacy Services, Inc. (formerly known as Choice Drug
Systems, Inc. together with its subsidiaries, herein referred to as
the "Company" or the "Registrant"), a Delaware corporation is
principally engaged in the business of providing pharmaceuticals and
related services to long-term care facilities, correctional
institutions, hospitals, health maintenance organizations and
medical/surgical entities (each a "Health Care Facility" and
collectively, the "Health Care Facilities"). The Company's
long-term care and health maintenance organization customers are
primarily located in New York, New Jersey, Maryland and Delaware,
while the Company's hospital and correctional facility customers are
located throughout the United States.
On August 28, 1995, at the Annual Meeting of Shareholders, the
shareholders of the Company approved a proposal to change the
Company's state of incorporation from New York to Delaware pursuant
to an Agreement and Plan of Merger. The Agreement and Plan of
Merger became effective on October 2, 1995. In addition to the
Agreement and Plan of Merger, the shareholders approved an increase
in the number of authorized shares of the Company's Common Stock
from 15,000,000 to 30,000,000 shares. Effective October 2, 1995,
the Company changed its name from Choice Drug Systems, Inc. to
Capstone Pharmacy Services, Inc.
2. INCOME (LOSS) PER SHARE:
Net income (loss) per share is based on the weighted average number
of the Company's common shares together with the assumed conversion
of options and warrants outstanding for the three and nine month
periods ended November 30, 1995 and 1994.
3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the
Company for the nine month periods ended November 30, 1995 and 1994
included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited interim consolidated
financial statements reflect all adjustments necessary to present
fairly the financial position of the Company at November 30, 1995
and the results of operations for the three and nine month periods
ended November 30, 1995 and 1994 and the related statements of cash
flows for the nine month periods ended November 30, 1995 and 1994.
The results of operations for the three and nine month periods ended
November 30, 1995 are not necessarily indicative of the results to
be expected for the full year. These interim condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K/A2 as filed with the Securities and
Exchange Commission for the fiscal year ended February 28, 1995.
The balance sheet at February 28, 1995 has been derived from the
audited financial statements at that date. Certain prior interim
period amounts have been reclassified to conform to the current
period presentation.
6
<PAGE> 9
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. ACQUISITIONS:
In May 1995, the Company acquired PremierPharmacy, Inc. ("Premier"),
an institutional pharmacy, for a purchase price of $4.25 million in
cash. Premier's operations generate annualized revenues of
approximately $24.0 million, primarily from pharmacy services
provided to long-term care facilities and hospitals located in the
New York metropolitan area and 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. Goodwill, representing the excess of acquisition costs
over the fair market value of acquired net assets, is amortized over
40 years.
During January 1996, the Company acquired Geri-Care Systems, Inc.
and its affiliate Scripts & Things, Inc. ("Geri-Care") a Brooklyn,
New York based provider of institutional pharmacy services.
Geri-Care generates annualized revenues of approximately $7.0
million from institutional pharmacy services primarily in the New
York metropolitan area.
In November 1995, the Company announced that it had signed a letter
of intent to purchase IMD Corporation ("IMD"), a privately held
Chicago, Illinois based provider of institutional pharmacy services.
IMD's operations generate annualized revenues of approximately $16.0
million, primarily from nursing homes located in the Chicago
metropolitan area.
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS:
The results of operations of acquired businesses are included in the
Company's consolidated results from the date of acquisition. Had
the acquisition of Premier and the private placement funding this
acquisition (Note 7) occurred on March 1, 1994, management estimates
that the unaudited pro forma results of operations for the nine
months ended November 30, 1995 and 1994 ($000 omitted) would have
been:
<TABLE>
<CAPTION>
Nine Months Ended November 30,
------------------------------
1995 1994
------- -------
<S> <C> <C>
Net sales $49,374 $52,091
Cost of sales 31,063 32,424
Gross profit 18,311 19,667
Operating expenses including interest and taxes 20,306 26,263
Loss from continuing operations (1,995) (6,596)
Discontinued operations 478 121
Extraordinary item 283 -
------- -------
Net loss $(1,234) $(6,475)
======= =======
Net loss per common share $ (.08) $ (.84)
======= =======
</TABLE>
7
<PAGE> 10
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
These pro forma operating results reflect certain adjustments,
including amortization of goodwill acquired and related income tax
effects. The pro forma 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.
6. CREDIT FACILITY:
On May 22, 1995, the Company entered into a three-year revolving line
of credit (the "Line of Credit") in the amount of $10,000,000 with
CreditAnstalt Corporate Finance, Inc. ("CreditAnstalt"). The initial
borrowings under the Line of Credit were used in conjunction with
funds from the Private Placement (as described below) to repay the
Company's prior bank indebtedness, repay Premier's prior bank
indebtedness, fund the Premier Acquisition and retire certain other
trade debts. The Line of Credit currently bears interest at prime
rate plus .5%. In connection with the Line of Credit, the Company
paid a facility fee to CreditAnstalt in the amount of $50,000. The
Line of Credit is secured by substantially all the assets of the
Company. The Line of Credit replaces a $6,000,000 credit facility
with interest at prime rate plus 1.5%.
During December, 1995, CreditAnstalt agreed to amend the existing Line
of Credit to provide for an increase in borrowings available under the
Line of Credit to $15.0 million and to add a term loan facility (the
"Term Loan") in the amount of $10.0 million. Availability under the
Line of Credit and the Term Loan will be increased to $21.0 million
and $14.0 million, respectively, in the event the Company raises at
least $7.5 million 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.
7. PRIVATE PLACEMENTS:
On May 22, 1995, the Company completed a private offering of 1,600,000
units (the "Units"). Each Unit consisted of one share of Common
Stock, a three-year warrant to acquire 0.5 shares of Common Stock at
the exercise price of $4.50 per share, and a three-year warrant to
acquire 0.4 shares of Common Stock at the exercise price of $5.50 per
share. Investors were granted registration rights with respect to
both the Common Stock included in the Units and the Common Stock
underlying the related warrants. The offering of Units raised
proceeds of approximately $5,760,000, net of related expenses at a
price of $3.65 per Unit.
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 offering were
$15,080,000, net of related expenses 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
the outstanding debt of $9,650,000 due to CreditAnstalt and for
general working capital purposes.
8
<PAGE> 11
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. RESTRUCTURING:
During February 1995, the Company adopted a formal plan of corporate
restructuring in order to realign and consolidate businesses,
concentrate resources, and better position itself to achieve its
strategic growth objectives. This plan included the sale of the
Company's medical/surgical supply operations and the closing of the
Company's long-term care pharmacy operation located in Missouri.
The Company sold its medical/surgical supply operations effective June
1, 1995. On that date, the Company formally ceased taking orders for
its medical/surgical supply products at which time it entered into an
arrangement whereby the buyer of its medical/surgical supply inventory
would fulfill all customer order requirements outstanding at and
subsequent to June 1, 1995. The sale of the Company's
medical/surgical supply inventory resulted in a gain in the amount of
$290,000 which is recorded as other income.
The Company formally closed its Missouri operations on June 9, 1995.
9. DISCONTINUED OPERATIONS:
In connection with the adoption of a formal restructuring plan (Note
8), the Company decided to discontinue the operations of its mail
order pharmacy subsidiary and to sell the assets of its computer
software division.
On June 30, 1995, the Company sold the assets of its computer software
division for $700,000 which resulted in a gain in the amount of
$478,000 which has been recorded as income from discontinued
operations.
The Company closed its mail order pharmacy business effective July
31, 1995.
9
<PAGE> 12
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $606,000 $695,000
Taxes $ 44,000 $ 35,000
</TABLE>
10
<PAGE> 13
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview and Status of the Company:
During the nine months ended November 30, 1995, the Company implemented a
corporate restructuring plan. Key elements of the plan include concentrating
the Company's operating and marketing focus on its core business lines --
long-term care pharmacy and correctional pharmacy services. The Company has
also raised additional private equity which has enabled it to reduce debt and
initiate a merger and acquisition program intended to further its overall
strategy of becoming a low-cost, high quality provider of pharmacy services
for a broad range of institutional clients. At the same time, the Company has
worked to sell or close non-core and unprofitable business segments.
The Company's third quarter results of operations were favorably impacted by
the sale in the second quarter of its unprofitable medical/surgical operations
and its computer software division, as well as the shut-down of its Missouri
long-term care pharmacy and the closure of its mail order operations. In
addition, the Company has continued steps previously initiated to reduce both
operating and overhead costs through the consolidation and streamlining of
operations and corporate functions. Partially offsetting the improved results
of operations were increased legal and other costs associated with the ongoing
implementation of the Company's restructuring plan.
Cost of goods sold are being reduced as a result of the Company's continued
focus on its purchasing activities to improve primary wholesaler discounts and
achieve price advantages. Increased purchasing volume, lower inventory levels
relative to sales volume and the reconfiguring of operations are the key
elements of the Company's success in reducing cost of sales. The Company
continues to implement the plans initiated during the second quarter to improve
purchasing efficiency and inventory cost control.
The Company has continued its efforts to consolidate regional pharmacy
operations in the northeast United States and to expand its operations into
other major metropolitan markets. The Company completed the acquisition of
Geri-Care Systems, Inc. during January 1996, which will facilitate further
consolidation of the Company's operations in the New York metropolitan area.
If the announced acquisition of IMD Corporation is consummated, the Company
will greatly expand its existing operations in the Chicago, Illinois
metropolitan area.
11
<PAGE> 14
RESULTS OF OPERATIONS, THREE MONTHS ENDED
NOVEMBER 30, 1995 COMPARED WITH THE THREE
MONTHS ENDED NOVEMBER 30, 1994
NET SALES:
Net sales increased to $16,421,664 from $10,621,124, an increase of
$5,800,540 or 54.6%. Of this increase, approximately $5,900,000 was
attributable to the acquisition of PremierPharmacy, Inc. The
remaining variance in net revenues was attributable to the exclusion
of medical/surgical revenues during the current period compared to the
same period last year, net of the increased revenues due to new
correctional business added during the quarter.
COST OF SALES:
Cost of sales includes the cost of drugs sold to patients and
institutions. Cost of sales increased to $10,126,783 from $7,445,836.
As a percentage of sales, cost of sales for the quarter ended November
30, 1995 was 61.7% compared to 70.1% for the quarter ended November
30, 1994. The higher percentage in the prior period results primarily
from an inventory write down correcting the Company's prior
application of its gross profit method of accounting for inventories
and the recording of a reserve for certain inventory obsolescence.
Cost of sales decreased from 62.5% for the second quarter of fiscal
1996 to 61.7% for the third quarter of fiscal 1996, reflecting
improvements in the Company's purchasing activities.
SELLING AND ADMINISTRATIVE EXPENSES:
Selling and administrative expenses, excluding depreciation and
amortization, increased from $4,835,588 or 45.5% of sales to
$5,770,667 or 35.1% of sales, an increase of $935,079. Of this
increase, approximately $2,058,000 was attributable to the acquisition
of PremierPharmacy, Inc. The remaining variance includes reductions
of selling and administrative expenses due to the sale of the
medical/surgical supply operation and other decreases in operating
costs partially offset by the increased cost of consultants and travel
expenses. During the third quarter of the fiscal 1996, the Company
incurred approximately $24,000 in non-recurring legal and other costs
associated with the reorganization of the company.
INTEREST EXPENSE:
Net interest expense decreased by approximately $158,000 compared to
the same quarter in the prior year. This decrease results primarily
from the retirement of the Company's debt using proceeds of the August
29, 1995 private placement.
INCOME TAXES:
Included in income tax benefit for the three months ended November 30,
1995 is approximately $179,000 of refundable Federal income taxes in
excess of the original estimate. The refund results from the
carryback to prior periods of the fiscal 1995 net operating loss for
Federal income tax purposes on the Federal income tax returns as
filed.
12
<PAGE> 15
NET INCOME (LOSS):
Net income for the quarter was $294,041 compared to a net loss of
$2,851,115 for the comparable quarter in the prior period. This
increase was partially attributable to the inclusion in the prior
period of costs in connection with claims and litigation of $971,638.
In addition, the acquisition of PremierPharmacy, Inc. contributed
approximately $285,000 to net income for the three month period ended
November 30, 1995. The remaining variance is due primarily to various
business changes many of which are discussed in the captions above.
13
<PAGE> 16
RESULTS OF OPERATIONS, NINE MONTHS ENDED
NOVEMBER 30, 1995 COMPARED WITH THE
NINE MONTHS ENDED NOVEMBER 30, 1994
NET SALES:
Net sales increased to $43,381,334 from $32,896,879, an increase of
$10,484,455. Of this increase, approximately $11,963,000 was
attributable to the acquisition of PremierPharmacy, Inc. Partially
offsetting the effect of this acquisition was a decrease in net
revenues attributable to the sale of medical/surgical operations
during the current period, compared to the same period of last year.
COST OF SALES:
Cost of sales includes the cost of drugs and medical/surgical supplies
sold to patients and institutions. Cost of sales increased to
$27,185,754 from $21,446,014, an increase of $5,739,740. Of this
increase, approximately $7,220,000 was attributable to the acquisition
of PremierPharmacy, Inc. and the remaining difference was primarily
attributable to the exclusion of the cost of medical/surgical supplies
in the current period.
SELLING AND ADMINISTRATIVE EXPENSES:
Selling and administrative expenses, excluding depreciation and
amortization, increased from $12,923,919 to $15,706,036 or $2,782,117.
Of this increase, approximately $4,283,000 was attributable to the
acquisition of PremierPharmacy, Inc. The remaining variance includes
reductions of selling and administrative expenses due to the sale of
the medical/surgical supply operation and decreases in other operating
costs offset by increased costs relating to the settlement of amounts
owed under an agreement not to compete and the increased cost of
consultants and travel expenses.
INTEREST EXPENSE:
Net interest expense decreased by approximately $79,000 compared to
the same period in the prior year. This decrease results primarily
from the retirement during September 1995 of the Company's debt using
proceeds of the August 29, 1995 private placement.
INCOME TAX BENEFIT:
Included in income tax benefit for the nine months ended November 30,
1995 is approximately $179,000 of refundable Federal income taxes in
excess of the original estimate. The refund results from the
carryback to prior periods of the fiscal 1995 net operating loss for
Federal income tax purposes on the Federal income tax returns as
filed.
14
<PAGE> 17
NET INCOME (LOSS):
Net income for the nine month period ended November 30, 1995 was
$148,336 compared to a net loss of $6,911,040 for the comparable
period in the prior year. This change was primarily attributable to
costs in connection with claims and litigation of $4,389,163 during
the prior period and the inclusion in the current period of the gain
on the sale of subsidiary assets and the gain on the sale of
inventory, totaling $768,000. The remaining variance is due primarily
to various business changes, many of which are discussed in the
captions above.
15
<PAGE> 18
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
NINE MONTHS ENDED NOVEMBER 30, 1995
The Company's net cash used in operating activities was $3,872,118 for the nine
month period ended November 30, 1995 compared to the $2,606,895 net cash
provided by operations for the nine month period ended November 30, 1994. Cash
used in operations for the nine month period ended November 30, 1995 resulted
from the increase in accounts receivable, the reduction of accounts payable,
accrued expenses and other long term liabilities, partially offset by the
decrease in inventories and in prepaid expenses and other current assets.
Net cash used in investing activities was $5,026,528 for the nine month period
ended November 30, 1995 compared to $4,125 for the prior period. This
significant increase in cash used in investing activities resulted primarily
from the acquisition of PremierPharmacy, Inc. in May 1995. (See Note 4 to the
Unaudited Consolidated Financial Statements.)
Cash provided by financing activities was $10,735,343 for the nine month period
ended November 30, 1995 compared to the $2,407,338 of cash used in financing
activities for the prior period. This change resulted primarily from the
receipt of $20,839,000 of net proceeds from the private placements of 5,100,000
shares of the Company's common stock during the nine month period ended
November 30, 1995. These funds were used to retire United Jersey Bank debt in
the amount of $2,983,303, retire the debt to a major vendor in the amount of
$1,776,064 (which resulted in an extraordinary gain on the discount of debt in
the amount of approximately $283,000), and to retire CreditAnstalt senior debt
of $9,650,000. During the nine month period ended November 30, 1995, the
Company borrowed and repaid $10,918,250 from both CreditAnstalt and Counsel
Corp. incurred during the period between the Company's two private placements
of its common stock.
Working capital increased to $14,396,089 at November 30, 1995 from $5,409,070
at February 28, 1995. The increase in working capital resulted primarily from
the acquisition of PremierPharmacy, Inc. ($3,160,000 in working capital at May
31, 1995) and the excess of the receipts from the proceeds of the Company's two
private placements of its common stock over the funds which were disbursed to
retire bank debt and vendor debt, acquire PremierPharmacy, Inc., and retire
certain bank debt of PremierPharmacy, Inc.
The Company's current ratio at November 30, 1995 was 3.17:1, compared to 1.85:1
at February 28, 1995.
16
<PAGE> 19
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Marvin Levin, Gloria Levine, and John McBay v. Capstone Pharmacy
Services, Inc., PremierPharmacy, Inc., and Compuscript, Inc., Supreme
Court of the State of New York, County of Westchester (No. 19238/95):
Plaintiffs sold the stock of Compuscript, Inc. ("Compuscript") to
PremierPharmacy, Inc. ("Premier") in 1993 pursuant to the terms of a
purchase agreement (the "Agreement"). Plaintiffs filed this case on
November 15, 1995. Plaintiffs claim Premier, which Registrant has
acquired, and Compuscript owe them approximately $1,000,000 under
promissory notes delivered to plaintiffs as part of the consideration
for plaintiff's Compuscript stock. Plaintiffs claim Compuscript and
Premier owe plaintiffs an additional approximately $1,100,000 because
of the alleged occurrence of certain events that would give rise to
this obligation under the Agreement. Plaintiffs finally claim
Registrant is liable to plaintiffs for tortiously interfering with
plaintiffs' rights under the Agreement with Premier and Compuscript
and under the promissory notes. Plaintiffs seek judgments of
$2,100,000 against Premier and Compuscript and of $7,100,000 against
Registrant, plus interest and costs. All defendants have answered the
Complaint and are vigorously contesting plaintiffs' claims. In
addition, Premier has filed a counterclaim against plaintiffs for
breaches of certain representations and warranties in the Agreement.
Discovery has not yet begun.
Primary Medical Care, Inc., d/b/a Primary Incontinence Care, Inc.
("Primary"), a subsidiary of the Company, has received notice from
the Medicare Part B division of Blue Cross and Blue Shield of Florida,
Inc. ("BC/BS"), that Primary owes Medicare Part B approximately $2.5
million dollars as a result of alleged overpayments for certain
supplies billed to Medicare by Primary prior to October 20, 1993,
related to the care and maintenance of "G-tubes" for patients on
enteral or parenteral feeding. BC/BS has indicated that it may
forward the refund request to the Health Care Financing Administration
("HCFA") for further recovery actions. Although it is not possible to
predict the outcome of this matter with certainty, management
believes that it has both legal and equitable defenses to any action
for recovery of the amount claimed and intends to vigorously defend
against these claims.
Item 2 Changes in Securities: Not Applicable.
Item 3 Default Upon Senior Securities: Not Applicable.
Item 4 Submission of Matters to a Vote Security Holders: Not Applicable
Item 5 Other Information: Not Applicable
Item 6 Exhibits and Reports on Form 8-K:
(a) The exhibits filed as part of this report are listed in
the Index to Exhibits immediately following the signature page.
(b) A report on Form 8-K, dated December 31, 1995, was filed
by the Company to report information under Item 1 regarding the Geri-Care
acquisition. Financial statements have not yet been filed.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
--------------------------------
(Registrant)
Dated: January 16, 1996 By: /s/ Donald W. Hughes
-------------------------------
Donald W. Hughes
Vice President and
Chief Financial Officer
18
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
2 Agreement and Plan of Merger, dated September 30, 1995, by and
among Geri-Care Systems, Inc., Scripts & Things, Inc., Abraham
Wieder, Raphael Lieberman, Capstone Pharmacy Services, Inc.,
Geri Mergeco, Inc. and Scripts Mergeco, Inc. (Incorporated by
reference to Exhibit 2 to Registrant's Form 8-K dated
12/31/95).
27 Financial Data Schedule (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q OF CAPSTONE PHARMACY SERVICES, INC. FOR THE THREE MONTH PERIOD ENDED
NOVEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> NOV-30-1995
<CASH> 2,384
<SECURITIES> 0
<RECEIVABLES> 13,625
<ALLOWANCES> 1,613
<INVENTORY> 5,107
<CURRENT-ASSETS> 21,023
<PP&E> 7,710
<DEPRECIATION> 5,056
<TOTAL-ASSETS> 38,822
<CURRENT-LIABILITIES> 6,627
<BONDS> 5,567
0
0
<COMMON> 38,983
<OTHER-SE> (12,355)
<TOTAL-LIABILITY-AND-EQUITY> 38,822
<SALES> 16,422
<TOTAL-REVENUES> 0
<CGS> 10,127
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 112
<INCOME-TAX> 182
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
