<PAGE> 1
FORM 10-K/A-2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-20606
CAPSTONE PHARMACY SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2310352
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2930 WASHINGTON BOULEVARD,
BALTIMORE, MARYLAND 21230
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 646-7373
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of March
25, 1997, was $12.375.
On March 25, 1997, 34,066,915 shares of the registrant's $0.01 par value
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Part III, Items
10, 11, 12 and 13 of this Form 10-K: Portions of the Registrant's definitive
proxy materials for its 1997 Annual Meeting of stockholders.
<PAGE> 2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Company's Directors and Executive Officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
R. Dirk Allison................................. 41 President, Chief Executive Officer and Director
James D. Shelton................................ 42 Executive Vice President, Chief Financial Officer & Secretary
Robert Della Valle.............................. 45 Executive Vice President and Chief Operating Officer
Joseph F. Furlong, III(1)....................... 48 Director
John Haronian (2)(3)............................ 64 Director
Morris A. Perlis (1)............................ 48 Vice Chairman
Albert Reichmann(1)............................. 68 Director
Allan C. Silber................................. 48 Chairman
Edward Sonshine, Q.C.(2)........................ 50 Director
Gail Wilensky, Ph. D. (3)....................... 53 Director
John E. 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. He served as President and Chief Executive Officer of
Premier Pharmacy, Inc., an institutional pharmacy company ("Premier"), from
July 1993 to May 1995. Mr. Allison served as President and Chief Executive
Officer of Allied Pharmacy Management, Inc., a pharmacy company ("Allied"),
from February 1988 to June 1993.
Mr. Shelton has served as Executive Vice President, Chief Financial
Officer and Secretary of the Company since February 1997. Mr. Shelton served as
Vice President-Chief Financial Officer of Allied from December 1993 to
January 1997. Mr. Shelton served as Vice President-Chief Financial Officer
of Evergreen Healthcare, Inc., a long-term care company, from October 1992 to
December 1993, and as Vice President-Chief Financial Officer of its predecessor,
National Heritage, Inc., from February 1990 to October 1992.
Dr. Della Valle joined the Company as Executive Vice President and
Chief Operating Officer in July 1996. Prior to joining the Company, Dr. Della
Valle was President and Chief Executive Officer and Vice President of Allied. He
had been employed by Allied since June 1987 and held the position of President
and Chief Operating Officer from July 1993 to July 1996.
Mr. Furlong has served as a Director of the Company since December
1994. Mr. Furlong has been President of Adirondack Capital Advisors, L.L.C., a
financial advisory firm since May 1996. He was a partner of Colman Furlong &
Co., a merchant banking firm, from February 1991 to April 1996 and 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,
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Inc., a home health care provider ("American HomePatient"), since June 1994. He
has served as a director of Healthy Planet Products, an environmentally
friendly greeting card manufacturer, since August 1996.
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 Group, 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. Perlis has been Vice Chairman of the Company since May 1995 and a
Director 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, a Canadian corporation primarily engaged
in the health care industry, 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. He has served as a
director of NOMA, Inc., a manufacturer of consumer wire and cable, since
September 1993. Mr. Perlis was President of Morris A. Perlis & Assoc., 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. Perlis served as interim President of Stadtlander Drug Co.,
Inc., a mail order pharmacy company ("Stadtlander"), from September 1996 to
December 1996. He has served as director of Stadtlander since July 1996 and as
Chief Executive Officer since September 1996.
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. Silber has served as Chairman since February 1995 and 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 American HomePatient since September 1991. Mr. Silber served
as chairman of American HomePatient from September 1991 to May 1994. He has
served as director of Stadtlander since July 1996 and as Chairman since
September 1996.
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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. He has served as a director of
Stadtlander since July 1996.
Dr. Wilensky has served as a Director since August 1995. She has
served as the John M. Olin Senior Fellow, Project HOPE since January 1993, and
as Chair, Physician Payment Review Commission since May 1995. 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. Dr. Wilensky also serves as a director for Advanced Tissue
Sciences, Coram Healthcare, Neopath Inc., Quest Diagnostics, St. Jude Medical,
Syncor International, SMS Corporation and United Healthcare.
Mr. Zuccotti has served as a Director of the Company since August
1995. He has served as Chairman, CEO and President of World Financial
Properties, Inc., a real estate company, since November 1996, and had served as
President and Chief Executive Officer of its predecessor company Olympia &
York Companies (U.S.A.), since January 1990. Mr. Zuccotti served as a director
of Olympia & York Companies (U.S.A.) since the inception of a 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 California Tax Exempt Money Market Fund, 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. He also serves on the Board of Trustees of Columbia University.
Pursuant to a Stock Purchase Agreement by and between Capstone and
Counsel, dated December 16, 1994, so long as Counsel continues to own the
common stock acquired under the Stock Purchase Agreement, Capstone will use its
best efforts to cause the election to its Board of Directors of four (4)
individuals designated by Counsel who are reasonably acceptable to Capstone,
currently Messrs. Silber, Perlis, Sonshine and Furlong. The Stock Purchase
Agreement also specifies that Capstone will use its best efforts to maintain a
Board of Directors consisting of eleven (11) members. Currently Mr. Silber
serves as Chairman of the Board and Mr. Perlis as Vice Chairman.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in
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ownership with the Securities and Exchange Commission ("SEC") (and, if such
security is registered on a national securities exchange, also with the
exchange). Such executive officers, directors and greater than 10% stockholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon representations submitted by the Company's directors
and executive officers and the Company's review of filings on Forms 3, 4 and 5,
including amendments thereto, the Company has concluded that all such forms
were timely filed.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the services in
all capacities to the Company for the fiscal year under December 31, 1996 (the
"1996 Fiscal Year"), the ten months ended December 31, 1995 and fiscal year
ended February 28, 1995 of those persons who were, at any time during the 1996
Fiscal Year, the Company's chief executive officer or, at December 31, 1996,
the Company's other executive officers, and who received annual salary and
bonus in excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS
------------------- --------------------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/
PRINCIPAL POSITION YEAR(S) SALARY($) BONUS ($) COMPENSATION (1)( $) AWARD(S)($) SARS (#)
- ------------------------ ----------- ----------- ------------ -------------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Dirk Allison......... Dec 1996(3) 230,000 104,425(4) -0- -0- 327,500
President and CEO(2) Dec 1995(3) 123,000 -0- -0- -0- 65,000
Feb 1995 * * * * *
Robert Della Valle...... Dec 1996 79,719 40,000(4) -0- -0- 150,000
Chief Operating Dec 1995 * * * * *
Officer(5) Feb 1995 * * * * *
Donald W. Hughes........ Dec 1996(3) 150,000 -0- -0- -0- 30,000
Former CFO(6) Dec 1995 9,230 -0- -0- -0- 20,000
Feb 1995 * * * * *
</TABLE>
<TABLE>
<CAPTION>
--------
PAYOUTS
-------
NAME AND LTI ALL OTHER
PRINCIPAL POSITION PAYOUTS ($) COMPENSATION($)
- ------------------------ ------------ ----------------
<S> <C> <C>
R. Dirk Allison......... -0- -0-
President and CEO(2) -0- -0-
* *
Robert Della Valle...... -0- -0-
Chief Operating * *
Officer(5) * *
Donald W. Hughes........ -0- -0-
Former CFO(6) -0- -0-
* *
</TABLE>
- --------------------------
* Indicates periods prior to employment with the Company.
(1) Perquisites for each executive officer are in amounts which do not
require disclosure.
(2) Mr. Allison joined the Company in May, 1995.
(3) Represents a ten-month period.
(4) Earned in 1996 and paid in 1997.
(5) Mr. Della Valle joined the Company in July, 1996.
(6) Mr. Hughes resigned in February, 1997.
OPTION GRANTS
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The table below provides information on grants of stock options
pursuant to the Company's Option Plans (the "Option Plans") during the 1996
Fiscal Year, to the officers named in the Summary Compensation Table.
Additional grants have been made to certain officers, directors and other
employees since December 31, 1996. See "Security Ownership of Directors,
Executive Officers and Principal Holders". The Company grants no stock
appreciation rights.
OPTION/SAR GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------- ----------------- ------------------ ---------------- --------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Dirk Allison 75,000 4.7% 8.50 03/15/06 400,920 1,016,011
250,000 15.7% 10.50 11/29/06 1,650,848 4,183,574
2,500 * 11.25 12/31/06 17,688 44,824
Robert Della Valle 50,000 3.1% 10.13 07/30/06 318,535 807,231
100,000 6.3% 10.50 11/29/06 660,339 1,673,430
Donald W. Hughes (2) 25,000 1.6% 8.50 02/02/98 133,640 338,670
5,000 * 10.13 02/02/98 31,854 80,723
</TABLE>
- ---------------------
* Less than one percent.
(1) The dollar amounts under these columns are the result of calculations
at 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation,
if any, of the Company's Common Stock price.
(2) Mr. Hughes resigned February 2, 1997. 8,333 and 1,667 of the options
shown in the table remain exercisable by Mr. Hughes following his
resignation.
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OPTION EXERCISES AND VALUES
The table below provides information as to exercises of options by the
executive officers named in the Summary Compensation Table during the 1996
Fiscal Year under the Company's option plans and the year-end value of
unexercised options. The Company grants no stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN THE FISCAL YEAR
ENDED DECEMBER 31, 1996 AND PERIOD-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
DECEMBER 31, 1996 AT DECEMBER 31, 1996
FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
------------------- -------------------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------- ---------------- ---------------- -------------------------- ---------------------
<S> <C> <C> <C> <C>
R. Dirk Allison -0- -0- 142,499/250,001 $367,587/526,338
Robert Della Valle -0- -0- 33,333/116,667 29,333/121,167
Donald W. Hughes(2) -0- -0- 16,667/-0- 61,951/-0-
</TABLE>
- --------------------
(1) Options are classified as "in-the-money" if the fair market value of
the underlying Common Stock exceeds the exercise price of the option.
The per share value of such in-the-money options is the difference
between the option exercise price and $11.38, the per share fair
market value of the underlying Common Stock as of December 31, 1996.
Such amounts may not necessarily be realized. Actual values which may
be realized, if any, upon the exercise of the options will be based on
the per share market price of the Common Stock at the time of exercise
and are thus dependent upon future performance of the Common Stock.
(2) Mr. Hughes resigned February 2, 1997. The number of securities
underlying options granted to Mr. Hughes prior to his resignation were
20,000, 25,000 and 5,000 shares issuable upon the exercise of options
at $6.00, $8.50 and $10.13, respectively. The table sets forth the
amounts that remain exercisable by Mr. Hughes following his
resignation.
COMPENSATION COMMITTEE REPORT
The following Compensation Committee Report is not deemed to be part
of a document filed with the SEC pursuant to the Securities Act of 1933 (the
"Securities Act") or the Exchange Act and is not to be deemed incorporated by
reference in any documents filed under the Securities Act or the Exchange Act
without the express written consent of the persons named below.
Decisions on compensation of the Company's senior executives, except
for decisions related to awards under the Company's Option Plans, are made by
the Compensation Committee of the Company's Board of Directors. It is the task
of the Compensation Committee to establish executive compensation guidelines
for the Company which are reasonable and appropriate, meet their stated purpose
and effectively serve the needs of the Company and its stockholders.
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The current members of the Compensation Committee have met with the
entire Board of Directors in setting the compensation for the current executive
officers and have set forth policies to govern such compensation currently and
in the future. The Committee continues to review all management compensation in
light of these policies.
Compensation Philosophy and Policies for Executive Officers
The Company's primary business goal is to provide high quality service
while maximizing stockholder value. The Company believes it can best achieve
this goal by achieving leadership in the provision of relevant and high quality
health services, expanding its operations primarily through acquisitions and
internal growth without imperiling the achievement of other strategic
objectives, and establishing a reputation as a desirable employer and
responsible corporate citizen. In late 1995, the Company reviewed and
reformulated its compensation philosophy and policies and has subsequently
followed such philosophy and policies in setting compensation. The Compensation
Committee has continued to review the Company's compensation philosophy and
policies, as well as their effect on individual compensation. The Compensation
Committee seeks to forge a strong link between the Company's business goals and
its compensation program by aligning the interests of its stockholders and
management personnel, including executive officers. The Company's executive
compensation program is intended to be consistent with this overall philosophy
for compensation at all management levels. The Company believes that by
aligning management compensation with the Company's business goal, the
likelihood of the Company's success on both a short-term and long-term basis is
increased.
The Company's current executive compensation program supports the
Company's strategy and objective of creating stockholder value by:
- Emphasizing pay for performance by linking a significant
portion of executive compensation to the performance of both
the Company and the individual executive officer.
- Directly aligning the interest of executives with the
long-term interest of stockholders by awarding stock options
at current market prices to give value to the executives
through long-term stock appreciation.
- Providing compensation opportunities that attract and retain
talented and committed executives on a long-term basis.
- Appropriately balancing the Company's short-term and
long-term business, financial and strategic goals.
Currently, the Company's executive compensation program is comprised
of three principal components: base salary, annual cash incentive (bonus) and
long-term incentive opportunity through stock options. The annual executive pay
targets (base salary plus incentive) are intended to be
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competitive with executive compensation of other U.S. public health care
companies, particularly institutional pharmacy companies, when the Company
meets or exceeds its annual operating goals.
The Company attempts to compare its executive pay targets with the
annual pay of other publicly held companies, particularly institutional
pharmacy companies, subject to available information. These other companies
include companies from the Peer Group reflected in the Stock Performance Graph
found elsewhere in this Report. Since the Peer Group is small, however, the
Compensation Committee retains the discretion to compare the Company's
executive pay targets with those of companies outside of this group. The
Compensation Committee also has considered the turnaround situation faced by
current management in setting compensation. The Compensation Committee expects
compensation for the current fiscal year to be below the median even if
incentive targets are reached.
The Compensation Committee intends to review its compensation packages
in light of the recently announced merger that would combine Capstone with
Pharmacy Corporation of American ("PCA") a subsidiary of Beverly Enterprises,
Inc. The Compensation Committee believes that compensation should meet the
following goals in connection with the proposed merger: incentivise current
management and employees during the interim period prior to the merger; retain
management and employees to participate in managing and operating the combined
entity; and, ultimately, fit with the internal compensation system of the
combined entity.
Base Salary
All management salaries, including those of the executives, are
evaluated on a regular basis. In making its decision on salary levels, the
Company does not use a predetermined formula. In determining the salaries of
the Company's new executive team, the Company considered past earnings of those
individuals as well as historical Company compensation and the new executives'
potential to contribute to the Company's future. In evaluating appropriate pay
levels and salary increases for Company executives, the Compensation Committee,
without assigning particular weight to any, intends to consider the following
factors: level of responsibility of the executive, individual job performance,
internal salary structure, pay practices of other companies, size of the
Company and achievement of the Company's strategic goals. In the past, salary
ranges have been based primarily on individual job performances and past
earnings.
Annual Cash Incentives
Annual cash incentive awards are designed to focus management
attention on key operational goals for the current fiscal year. The key
operational goals are specific to each executive's area of responsibility.
Specific weighting is assigned for identified financial, strategic and
management practices goals. At least 50% of the available bonus percentage for
each named executive officer is now tied to Company profitability, generally
defined by achievement of the annual budget as approved by the Board of
Directors. The remaining percentages are based on specific goals set for each
executive, such as quality of care, revenue growth, accounts receivable
management, control
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expenses and integration of acquisitions. The nature of the operational
goals and the weighting assigned to each is subject to change annually.
Company executives may earn a bonus of between 20% and 50% of their
annual base salaries based upon achievement of their specific operational goals
and achievement by the Company or business unit of its financial targets. At
the end of the year, performance in light of these goals is determined on an
arithmetic scale with the pre-established weighting. Discretionary adjustments
by the Compensation Committee are possible if the Committee believes the
circumstances so warrant. Bonuses awarded to Messrs. Allison and Della Valle
were $104,425 (45.0% of base compensation) and $40,000 (24.2% of base
compensation), respectively.
Long-Term Incentives
The Company's long-term incentive compensation program consists of
incentive and nonqualified stock options which are related to improvement in
long-term stockholder value. Stock option grants are designed to focus an
executive's attention on managing the Company from the perspective of long-term
owner with an equity stake in the business. Stock options are granted under the
Option Plans by the Disinterested Stock Option Plan Committee.
The option grants to executive officers offer the right to purchase
shares of Common Stock at their fair market value on the date of the grant.
These options will have value only if the Company's stock price increases. The
number of shares covered by each grant is selected based on the executive's
level of responsibility and past and anticipated contributions to the Company.
Chief Executive Officer Compensation
Mr. Allison is the Company's Chief Executive Officer. Generally, the
Chief Executive Officer is eligible to participate in the same executive
compensation plans available to the Company's other senior executive officers.
The Compensation Committee's general approach in setting the Chief Executive
Officer's annual compensation is derived from the same considerations described
above, that is to be competitive with other U.S. publicly held health care
corporations, but also to have a significant portion of annual incentive
compensation based upon specific corporate-wide operating performance criteria.
The Compensation Committee approved a $230,000 base salary for Mr.
Allison for the 1996 Fiscal Year and established his range of incentive bonus
at between 35-50% of this base salary, or a maximum of $115,000. Mr. Allison's
compensation package was developed primarily based upon his historical
compensation elsewhere and his experience in the industry and with turn-around
situations. According to market data, such base salary and annual incentive
target were below the median of the comparison companies mentioned above and
appropriately within the Company's overall internal pay practices. For the 1996
Fiscal Year, Mr. Allison received a bonus of $104,425. In 1996, stock options
to acquire 325,000 shares of Common Stock were granted to Mr. Allison in
connection with his position as Chief Executive Officer.
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Tax Regulations
Section 162(m) of the Internal Revenue Code of 1986, as amended,
generally disallows a tax deduction to public companies for executive
compensation in excess of $1 million. It is not anticipated that the Company
will pay any of its executive officers compensation in excess of $1 million in
the current fiscal year and, accordingly, to date the Company has not adopted a
policy in this regard.
THE FOREGOING REPORT IS SUBMITTED BY ALL OF THE MEMBERS OF THE
COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS, WHOSE
MEMBERS ARE AS FOLLOWS: ALBERT REICHMANN, MORRIS A. PERLIS AND
JOSEPH F. FURLONG, III.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following current directors served on the Compensation Committee
during the 1996 Fiscal Year: Reichmann, Perlis and Furlong. No member of the
Compensation Committee is an employee of the Company.
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STOCK PERFORMANCE GRAPH
The stock performance graph depicted below is not deemed to be part of
a document filed with the Securities and Exchange Commission pursuant to the
Securities Act or the Exchange Act and is not to be deemed incorporated by
reference in any documents filed under the Securities Act or the Exchange Act
without the express written consent of the Company.
The following graph compares the cumulative total returns of the
Company with those of the Nasdaq Market Index and a peer group index.
Cumulative return assumes $100 invested in the Company or respective index on
February 28, 1992, with dividend reinvestment through December 31, 1996. The
Company has selected a peer group known as the DOSE Group as compiled by
Research Data Group. This peer group index is comprised of approximately 7
companies, excluding the Company. These companies are Care Group, Inc., Genesis
Health Ventures Inc., Mednet Mpc Corp, Omnicare Inc., Synetic Inc., Vitalink
Pharmacy Services Inc. and Grancare Inc. Delaware.
[GRAPH TO BE INSERTED]
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[GRAPH]
13
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RESEARCH TOTAL RETURN- DATA SUMMARY
DOSE
<TABLE>
<CAPTION>
Cumulative Total Returns
--------------------------------------------------
2/92 2/93 2/94 2/95 12/95 12/96
<S> <C> <C> <C> <C> <C> <C> <C>
Capstone Pharmacy Svcs Inc Dose 100 43 40 43 92 140
PEER GROUP PPERI 100 82 99 133 179 241
S&P 500 1500 100 111 120 129 166 204
</TABLE>
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To date, the Company has not directly tied executive compensation to
stock performance. The future impact of stock performance on executive
compensation will be determined by the Compensation Committee.
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ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
HOLDERS
The following table sets forth, as of April 29, 1997, the number and
percentage of shares of the Company's Common Stock owned by (i) all persons
known to the Company to be holders of 5% or more of such securities, (ii) each
director, (iii) each of the executive officers named in the Summary
Compensation Table appearing elsewhere herein, and (iv) all directors and
executive officers of the Company, as of April 29, 1997, as a group. Unless
otherwise indicated, all holdings are of record and beneficial.
<TABLE>
<CAPTION>
Number of
Shares Beneficially Percentage of Total
Name Owned(1) Outstanding(2)
- ----------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
Counsel Corporation(3)..................................... 8,356,815 23.0%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada M5X 1E3
Integrated Health Services, Inc............................ 2,112,490 6.2
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Denis A. and Sandra Lou Portaro Revocable Trust of 1992 and
Ronald Belville......................................... 2,513,804 7.4
2596 Mission Street
San Marino, California 91108
Northwestern Mutual Life Insurance Co...................... 866,300 5.6
720 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
Dirk Allison (3)........................................... 225,245 *
James D. Shelton........................................... -0- *
Robert Della Valle (5)..................................... 33,333 *
Allan C. Silber (6)........................................ 498,333 1.4
Morris a. Perlis (6)....................................... 498,333 1.4
Joseph F. Furlong, III (7,8,12)............................ 242,505 *
John Haronian (8,10)....................................... 145,000 *
Edward Sonshine, Q.C.(7,8)................................. 77,000 *
Gail Wilensky, Ph.D. (9)................................... 17,500 *
Albert Reichmann (9)....................................... 17,500 *
John E. Zuccotti (9,11).................................... 27,000 *
All directors and executive officers
as a group (11 persons)(13)................................ 1,781,749 5.0%
</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 34,005,266 shares of Common Stock
outstanding on April 25, 1997, 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 (60) 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
16
<PAGE> 17
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 16,666,
15,000, 50,000, 83,333 and 2,500 shares issuable upon the exercise of
options at $4.31, $4.44, $8.50, $10.50 and $11.25 per share,
respectively.
5 Includes 33,333 shares issuable upon the exercise of options at $10.50
per share.
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, 50,000, 83,333 and 2,500 shares issuable upon the exercise of
options at $4.44, $7.50, $4.31, $8.50, $10.50 and $11.25 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, 2,500 and 2,500 shares issuable upon the exercise of
options at $4.44, $7.50 and $11.25 per share, respectively.
9 Includes 15,000 and 2,500 shares issuable upon the exercise of options
at $4.44 and $11.25 per share, respectively.
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 165,505 shares issuable upon the exercise of warrants at
$12.00 per share.
13 Includes 1,536,309 shares issuable upon the exercise of options and
warrants.
17
<PAGE> 18
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
CERTAIN SERVICES BY NON-EMPLOYEE DIRECTORS
Since his election to the Board of Directors in December 1994, Mr.
Silber has provided various services to the Company in connection with
improving the financial position, results of operations and capital structure
of the Company. These have included his service as Co-Chairman and Chairman of
the Board of Directors, assistance with routine acquisitions, assistance with
the completion of certain private placements and direction of the replacement
of the Company's bank line of credit. Mr. Silber has received no cash
compensation for such services.
Since his election to the Board of Directors in December 1994, Mr.
Perlis has provided various services to the Company in connection with the
Company's long term strategy and decisions concerning the retention or
disposition of the Company's lines of business. These have included his service
as Vice Chairman of the Board of Directors and interim Chief Executive Officer,
negotiation of modifications to material contracts and indebtedness of the
Company, assistance with personnel and operational matters, and assistance with
the Company's regulatory compliance program. Mr. Perlis has received no cash
compensation for such services.
Set forth below is a summary of various transactions involving the
Company and certain directors, officers, stockholders or other affiliates. It
is the policy of the Company to notify the Board of Directors and seek the
approval of a majority of the members of the Board or an appropriate committee
who are not related to an interested party in connection with transactions
between the Company and a related party.
PRIVATE OFFERINGS BY THE COMPANY
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 million.
The proceeds were used as part of the purchase price for the Symphony
acquisition.
Counsel Corporation beneficially owns approximately 23.0% of the
outstanding Common Stock and voting power of the Company and, as such, is the
Company's largest stockholder. As a result of the Counsel's investment in the
Company, the Company has agreed to use its best efforts to cause four Counsel
nominees to serve on the Company's Board of Directors. As a result of the
foregoing, Counsel has a significant influence on matters brought before the
stockholders or the Board of Directors, although it cannot control the outcome
of any vote.
CONSULTING SERVICES
Director Furlong is a principal of Adirondack Capital Advisors LLC
("Adirondack"). The Company has entered into an agreement with Adirondack,
dated June 25, 1996 pursuant to which Adirondack will assist the Company in
identifying and negotiating transactions with acquisition
18
<PAGE> 19
targets. Adirondack receives as compensation 3.0% of the first $10.0 million of
aggregate transaction value plus .7% of aggregate transaction value in excess
thereof as well as a number of warrants to buy the Company's common stock set
according to a formula, not to exceed 200,000 in the aggregate, at a strike
price of $12.00. As of April 25, 1997 the Company had issued warrants to
purchase 200,000 shares and had paid approximately $1,109,740 in connection
with this Agreement. An additional $87,000 was earned, but unpaid in connection
with this Agreement.
Adirondack and the Company have also entered into an agreement, dated
December 10, 1996, pursuant to which Adirondack serves as financial advisor to
the Company in connection with the proposed merger of PCA with and into the
Company. In connection with its services to the Company hereunder, Adirondack
will receive $4.0 million plus a fee for rendering a fairness opinion if the
proposed transaction is consummated.
An affiliate of Director Reichmann received fees of $445,000 in
connection with the Geri-Care and IMD acquisitions.
Directors Silber and Perlis received fees of $600,000 and $400,000,
respectively in connection with the Symphony acquisition.
Curtis B. Johnson, the general counsel of DCAmerica Inc. ("DCA"), a
Counsel Corporation subsidiary, has provided legal services to the Company
since April 1995 pursuant to an agreement between the Company and DCA providing
for reimbursement of DCA's allocable costs related to such services. Mr.
Johnson has options to acquire 25,000 shares of Capstone's common stock for an
exercise price of $4.31 per share.
Marvin Sirota, a former officer and director of the Company, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated January 15, 1995. Under the Severance and Consulting Agreement, Mr.
Sirota receives $11,607.00 per month through May 31, 1997 plus expenses
incurred in connection with his obligations to the Company.
Frank Mandelbaum, a former officer and director of the Company, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated January 26, 1995. Under the Severance and Consulting Agreement, Mr.
Mandelbaum receives $11,607.00 per month through May 31, 1997 plus expenses
incurred in connection with his obligations to the Company.
Charles Lathrop, Jr., a former officer and director of the Company, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated March 8, 1995. Under the Severance and Consulting Agreement, Mr. Lathrop
receives $10,000 per month through April 14, 1997 and $4,583 per month for
twelve months thereafter, plus expenses incurred in connection with his
obligations to the Company.
OTHER TRANSACTIONS
As a result of the Company's acquisition of Symphony, Symphony's
former parent company, IHS, is a significant Company stockholder. The Company
provides institutional pharmacy services to several long-term care facilities
owned and managed by IHS. Since the Company's acquisition of Symphony during
1996, net revenues of approximately $8,139,000 have been generated from sales
to IHS owned and managed long-term care facilities.
To facilitate the timely purchase of MediDyne at a time when Capstone
had insufficient capital resources to make the purchase, an interim purchase of
MediDyne was made by Counsel Corporation, a significant stockholder of the
Company. At the time that Capstone was able to make the purchase, Counsel sold
MediDyne to Capstone for the price it paid plus its additional costs of
operating MediDyne in the interim period. No other consideration was paid to
Counsel for making the acquisition and operating MediDyne on an interim basis.
For a discussion of the relationships between the Company and its
affiliates, directors, officers and principal stockholders, please see
"Security Ownership of Directors, Executive Officers and Principal Holders,"
and "Directors and Executive Officers."
It is the policy of the Company to notify the Board of Directors and
seek the approval of a majority of the members of the Board or its Executive
Committee who are not related to Counsel in connection with transactions
between the Company and its affiliates, including Counsel.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) & (2) and (d) Financial Statements and Financial Statement
Schedules. See Index to Financial Statements included elsewhere in this Annual
Report.
(a) (3) and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K dated within
the quarter ended December 31, 1996:
The Company filed a periodic report on Form 8-K dated October 2,
1996, to report pursuant to Item 5 certain unaudited restated
quarterly financial data for 1995 to reflect the Company's fiscal
year change.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ James D. Shelton
-------------------------------
James D. Shelton,
Chief Financial Officer
July 29, 1997
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer and July 29, 1997
- ----------------------- Director
R. Dirk Allison
/s/ James D. Shelton Chief Financial Officer July 29, 1997
- -----------------------
James D. Shelton
* Chairman July 29, 1997
- -----------------------
Allan C. Silber
* Vice Chairman July 29, 1997
- -----------------------
Morris A. Perlis
* Director July 29, 1997
- -----------------------
Albert Reichmann
* Director July 29, 1997
- -----------------------
John E. Zuccotti
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
* Director July 29, 1997
- -----------------------------
Gail Wilensky, Ph.D.
* Director July 29, 1997
- -----------------------------
Joseph F. Furlong, III
* Director July 29, 1997
- -----------------------------
John Haronian
* Director July 29, 1997
- -----------------------------
Edward Sonshine, Q.C.
</TABLE>
* Signed by James D. Shelton pursuant to a duly granted power-of-attorney
22
<PAGE> 23
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
(a) 1. Financial Statements:
The following financial statements of the Company are included herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - As of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations - For the year ended December 31, 1996,
the ten months ended December 31, 1995 and the year ended February 28, 1995 F-5
Consolidated Statements of Changes in Stockholders' Equity - For the year ended
December 31, 1996, the ten months ended December 31, 1995 and the year ended
February 28, 1995 F-6
Consolidated Statements of Cash Flows - For the year ended December 31, 1996,
the ten months ended December 31, 1995 and year ended February 28, 1995 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capstone Pharmacy Services, Inc. and subsidiaries:
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, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1996, the ten months ended
December 31, 1995 and the year ended February 28, 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 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 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
audits provide 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 Capstone Pharmacy
Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations, changes in stockholders' equity and their cash
flows for the year ended December 31, 1996, the ten months ended December 31,
1995 and the year ended February 28, 1995, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland
March 14, 1997
F-2
<PAGE> 25
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
Assets
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,407,354 $ 2,763,416
Accounts receivable, net of allowance
for doubtful accounts of $5,778,000
and $1,294,000 50,503,619 12,646,087
Inventories 13,541,511 5,023,008
Refundable income taxes -- 828,628
Prepaid expenses and other current assets 1,523,194 688,549
Deferred tax asset 5,408,381 --
------------ -----------
Total Current Assets 80,384,059 21,949,688
Equipment and leasehold improvements, net 10,468,963 2,692,298
Goodwill, net of accumulated amortization of
$4,074,000 and $1,554,000 178,778,162 14,580,564
Advances to affiliates -- 2,242,841
Other assets 1,369,982 665,204
------------ -----------
Total Assets $271,001,166 $42,130,595
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-3
<PAGE> 26
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 18,337,485 $ 6,137,272
Current portion of long-term debt 3,557,199 4,222,608
Current portion of non-compete agreements 200,000 200,000
Accrued restructuring charges 2,107,846 575,349
------------ -----------
Total Current Liabilities 24,202,530 11,135,229
------------ -----------
Deferred income taxes -- 542,787
Non-compete agreements, net of current portion 200,000 400,000
Long-term debt, net of current portion 39,165,739 2,692,202
Restructuring charges,
net of current portion 2,687,068 520,640
------------ -----------
Total Liabilities 66,255,337 15,290,858
------------ -----------
Commitments and Contingencies
Stockholders' Equity
Common stock $.01 par value; 50,000,000
shares authorized at December 31, 1996
and 30,000,000 shares authorized at
December 31, 1995; 31,134,221 shares
issued and 30,795,769 outstanding as of
December 31, 1996 and 13,610,810 issued
and outstanding as of December 31, 1995 307,957 136,108
Additional paid-in capital 213,593,829 38,985,006
Accumulated deficit (9,155,957) (12,281,377)
------------ -----------
Total Stockholders' Equity 204,745,829 26,839,737
------------ -----------
Total Liabilities and Stockholders' Equity $271,001,166 $42,130,595
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-4
<PAGE> 27
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996, the Ten Months
Ended December 31, 1995, and the Year Ended February 28, 1995
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, 1996 December 31, 1995 February 28, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $144,397,836 $48,841,443 $43,607,946
Cost of sales 85,531,996 30,654,118 27,969,532
------------ ----------- -----------
Gross profit 58,865,840 18,187,325 15,638,414
------------ ----------- -----------
Operating expenses:
Selling, general and administrative expenses 46,591,975 17,468,930 18,637,213
Depreciation and amortization 4,633,787 1,102,892 988,974
Costs in connection with litigation -- -- 4,389,163
Costs relating to pharmacy closure 246,446 -- --
Restructuring charges 2,825,000 240,000 2,069,432
------------ ----------- -----------
Total operating expenses 54,297,208 18,811,822 26,084,782
------------ ----------- -----------
Operating income (loss) 4,568,632 (624,497) (10,446,368)
------------ ----------- -----------
Non-operating expense (income):
Interest expense, net 1,899,784 677,009 905,404
Acquisition financing fees and expenses 4,573,530 -- --
Other income, net (149,206) (431,900) (104,076)
------------ ----------- -----------
Total non-operating expense (income), net 6,324,108 245,109 801,328
------------ ----------- -----------
Loss from continuing operations
before income taxes, discontinued opera-
ions and extraordinary items (1,755,476) (869,606) (11,247,696)
Benefit for income taxes (5,120,857) (225,082) (466,214)
------------ ----------- -----------
Income (loss) from continuing operations
before discontinued operations and
extraordinary items 3,365,381 (644,524) (10,781,482)
Discontinued operations:
Gain (loss) from operations of discontinued business
segments -- 18,667 (135,430)
Gain (loss) on disposal of business segments, net -- 564,844 (503,067)
------------ ----------- -----------
Net income (loss) before extraordinary items 3,365,381 (61,013) (11,419,979)
Extraordinary items:
Discount on repayment of vendor debt 283,364
Loss on extinguishment of debt, net of
tax benefit of $123,616 (239,961) -- --
------------ ----------- -----------
Net income (loss) $ 3,125,420 $ 222,351 $(11,419,979)
============ =========== ===========
Earnings (loss) per common and common equivalent share:
Primary
Continuing operations $ 0.15 $ (0.06) $ (1.67)
Discontinued operations -- 0.05 (0.10)
Extraordinary items (0.01) 0.03 --
------------ ----------- -----------
Net income (loss) $ 0.14 $ 0.02 $ (1.77)
============ =========== ===========
Fully diluted
Continuing operations $ 0.14 $ (0.05) $ (1.67)
Discontinued operations -- 0.05 (0.10)
Extraordinary items (0.01) 0.02 --
------------ ----------- -----------
Net income (loss) $ 0.13 $ 0.02 $ (1.77)
============ =========== ===========
Weighted average common and common equivalent shares outstanding:
Primary 22,916,764 11,337,997 6,458,891
============ =========== ===========
Fully diluted 23,214,767 12,398,401 6,458,891
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 28
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1996, the Ten Months Ended
December 31, 1995 and the Year Ended February 28, 1995
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- paid-in Accumulated
Shares Amount capital deficit
---------- --------- ------------- -----------
<S> <C> <C> <C> <C>
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 2,000,000 20,000 7,171,300 --
Stock issued in connection with
exercise of stock options 34,000 340 89,410
Stock issued in connection with
settlement of litigation -- -- 600,000 --
Net loss -- -- -- (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 5,100,000 51,000 20,769,231 --
Stock issued in connection with the
acquisition of PremierPharmacy Inc. 35,000 350 157,150 --
Stock issued in connection with
exercise of stock options 355,000 3,550 858,575 --
Net income -- -- -- 222,351
---------- -------- ------------- ------------
Balance, December 31, 1995 13,610,810 136,108 38,985,006 (12,281,377)
Issuance of common stock:
Stock issued in connection with
private placements, net of related
issuance costs 3,147,490 31,475 33,350,784 --
Stock issued in connection with
settlement of litigation 98,563 986 (986) --
Stock issued in connection with
the acquisitions of Symphony
Pharmacy Services, Inc., Geri-Care
Systems, Inc. and Scripts & Things,
Inc. 2,781,720 27,817 29,469,051 --
Stock issued in connection with
conversion of warrants 685,010 6,850 3,928,401 --
Stock issued in connection with
public offering 10,350,000 103,500 107,235,306 --
Stock issued in connection with
exercise of stock options, net 122,166 1,221 626,267
Net income -- -- -- 3,125,420
---------- -------- ------------- ------------
Balance, December 31, 1996 30,795,759 $307,957 $ 213,593,829 ($ 9,155,957)
========== ======== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 29
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996, the Ten Months Ended December 31, 1995,
and the Year Ended February 28, 1995
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
December 31, December 31, February 28,
1996 1995 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,125,420 $ 222,351 $(11,419,979)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 7,316,345 1,145,669 988,974
Gain on sale of pharmacies (150,267) -- --
(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 of
acquisitions and dispositions:
(Increase) decrease in accounts receivable (9,938,491) (2,644,719) 2,161,906
(Increase) decrease in inventories (109,400) 357,029 1,297,829
Decrease (increase) in refundable income taxes 848,726 (238,168) (108,699)
(Increase) decrease in prepaid expenses and
other current assets (508,342) (51,870) 779,825
Increase in deferred tax asset (5,408,381) -- --
Increase in other assets (439,468) (133,629) (333,011)
Decrease in accounts payable and accrued expenses (3,734,342) (988,497) (145,061)
Increase (decrease) in accrued restructuring
charges 2,098,925 (691,200) 1,652,033
------------- ------------ ------------
Net cash flows from operating activities (6,899,275) (3,587,878) (1,123,116)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (2,643,629) (1,076,976) (252,943)
Proceeds from sale of equipment and leasehold
improvements 230,960 -- --
Acquisitions, net of cash acquired (158,702,741) (4,168,872) --
Proceeds from sale of business segment -- 700,000 --
Advances to affiliates -- (2,242,841) --
Repayments of notes receivable 9,277 229,571 261,555
------------- ------------ ------------
Net cash flows from investing activities (161,106,133) (6,559,118) 8,612
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings 82,173,525 11,600,000 --
Net repayments of commercial bank borrowings (46,922,852) (9,650,000) --
Net proceeds from acquisition bridge loan 100,000,000 -- --
Net repayments of acquisition bridge loan (100,000,000) -- --
Payment of acquisition financing costs (2,500,000) -- --
Loan proceeds from affiliate -- 1,268,250 --
Loan repayments to affiliate -- (1,268,250) --
Non-compete agreement payments (200,000) (200,000) --
Repayments of other long-term debt (2,753,210) (10,884,850) (5,902,723)
Principal payments of capital lease obligations (196,224) (183,992) (160,183)
Proceeds from issuance of common stock, net 145,048,107 21,682,356 7,281,050
------------- ------------ ------------
Net cash flows from financing activities 174,649,346 12,363,514 1,218,144
------------- ------------ ------------
Net increase in cash and cash equivalents 6,643,938 2,216,518 103,640
CASH AND CASH EQUIVALENTS, beginning of period 2,763,416 546,898 443,258
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 9,407,354 $ 2,763,416 $ 546,898
============= ============ ============
Supplemental Disclosure of Cash Flows Information
Cash paid for:
Interest $ 3,678,922 $ 659,184 $ 887,691
============= ============ ============
Taxes $ 181,500 $ 144,149 $ 224,477
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 30
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND FEBRUARY 28, 1995
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.
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, 1996, Counsel Corporation, an Ontario corporation
("Counsel"), owned approximately 6,020,000 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.
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.
F-8
<PAGE> 31
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist principally of purchased pharmaceuticals.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives or with respect to leasehold improvements, over the term
of the lease if shorter.
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
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 $2,474,000,
$417,000, and $384,000 for the year ended December 31, 1996, the ten months
ended December 31, 1995 and the year ended February 28, 1995, respectively.
The Company periodically reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of the goodwill from expected future operating cash flows on an
undiscounted basis. In management's opinion, no such impairment existed as of
December 31, 1996 or 1995.
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, as amended. Contributions by the Company may be made to the plan
subject to the discretion of the Board of
F-9
<PAGE> 32
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors. No Company contribution was made for the year ended December 31,
1996, or the ten months ended December 31, 1995.
Revenue Recognition
Revenues are recorded as products are shipped and services 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.
Concentration of Credit Risk
A significant portion of the Company's revenue and related receivables are
reimbursable from two primary payors, Medicaid and Medicare. Collectively,
Medicaid and Medicare accounted for 32% and 20% of accounts receivable reported
on the consolidated balance sheets at December 31, 1996 and 1995, respectively.
Income Taxes
The Company files a consolidated Federal income tax return. Income tax
expense is based on reported earnings before income taxes. 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.
Earnings Per Share
Net loss per common share for the year ended February 28, 1995, was
computed by dividing the net loss by the average weighted number of common
shares outstanding. For the ten months ended December 31, 1995, and the year
ended December 31, 1996, 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
Acquisitions during the year ended December 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts
& Things, Inc. ("Geri-Care") which provide institutional pharmacy services to
long-term care facilities in the New York metropolitan area. The purchase price
was approximately $6,000,000, payable $1,320,000 in cash and promissory notes,
with the remainder representing 669,230 shares of the Company's common stock.
The agreement also includes an additional 338,462 shares of the Company's
common stock held in escrow as a contingent incentive payment for certain new
F-10
<PAGE> 33
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business to be generated through 1998 by the selling shareholders of Geri-Care.
Total goodwill at the date of acquisition was $6,259,000.
In February 1996, the Company purchased IMD Corporation ("IMD") which
provides institutional pharmacy services to long-term care facilities in the
Chicago metropolitan area. The total purchase price was $15,882,000. Total
goodwill at the date of acquisition was $13,146,000.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned
subsidiary MediDyne Corporation (collectively, "MediDyne"), a provider of
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 total purchase price was $7,500,000. The
agreement also provides for an earn-out based on the future adjusted earnings
of the business, payable in cash. Total goodwill at the date of acquisition was
$7,667,000.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000,000, including
$25,000,000 representing the issuance of 2,112,490 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303,000.
In October 1996, the Company acquired the institutional pharmacy business
of Happy Harry's, Inc., a Delaware based retail drug store operator. The total
purchase price was $3,695,000. Total goodwill at the date of acquisition was
$2,407,000.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839,000. Total goodwill at
the date of acquisition was $4,068,000.
Acquisitions During the Ten Months Ended December 31, 1995
In May 1995, the Company acquired PremierPharmacy, Inc. ("Premier"), which
provides pharmacy services to long-term care facilities located in the New York
metropolitan area and hospitals located in the southeastern United States. The
total purchase price was $4,250,000. Total goodwill at the date of acquisition
was $10,494,000.
All business acquisitions described above have been accounted for by the
purchase method of accounting with the assets and liabilities of the acquirees
recorded at their estimated fair market values at the date of acquisition. The
operations of the acquirees, since the dates of acquisition, are included in the
accompanying consolidated statements of operations. Goodwill for these business
acquisitions is being amortized over twenty to forty years.
F-11
<PAGE> 34
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined results of operations of the Company for the
year ended December 31, 1996, and the ten months ended December 31, 1995, are
presented below. Such pro forma presentation has been prepared assuming that the
acquisitions described above have been made as of March 1, 1995 (in thousands,
except per share data).
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
(unaudited)
<S> <C> <C>
Net revenues $222,504 $188,488
Gross profit 95,343 81,875
Net income before extraordinary 10,077 3,795
item
Net income 10,077 3,506
Primary and fully diluted, net
income per share $ 0.28 $ 0.11
======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) the per share effect of stock issued
as part of the acquisition and (4) the related income tax effects. The pro forma
results are not necessarily indicative of actual results which might have
occurred had the operations and management teams of the Company and the acquired
companies been combined in prior years.
F-12
<PAGE> 35
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1996 and 1995, are
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Leasehold improvements $ 474,546 $ 544,272
Furniture, fixtures and equipment 12,471,101 3,945,149
Data processing equipment 2,376,750 1,512,500
Automobiles and trucks 290,186 258,379
------------- ------------
15,612,583 6,260,300
Accumulated depreciation and
amortization (5,143,620) (3,568,002)
------------- ------------
Equipment and leasehold improvements,
net $ 10,468,963 $ 2,692,298
============= ============
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $2,160,000, $686,000 and $605,000 for the year ended
December 31, 1996, the ten months ended December 31, 1995 and the year ended
February 28, 1995, respectively.
F-13
<PAGE> 36
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt at December 31, 1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Borrowings under a $125,000,000 revolving credit $37,200,000 $ -
facility with a group of five commercial banks,
interest at varying rates based on the type of
borrowing, secured by substantially all assets of the
Company, due at scheduled maturities through December 2001.
Unsecured note payable to former owners of 1,651,086 -
MediDyne, non-interest bearing, payable quarterly
based on MediDyne's financial performance,
due January 1998
Borrowings under a $10,000,000 revolving loan with - 1,950,000
CreditAnstalt, interest at prime plus 0.5% secured by
substantially all assets of the Company, due on
demand
Unsecured note payable to relative of 215,319 297,938
former stockholder, payable in quarterly
installments with interest at 9% through
January 2000
Amounts due under a Medicare settlement 1,933,330 2,537,500
with the United States Government,
payable in quarterly installments with
interest at 7.75% through 2001
Unsecured notes payable to former 1,000,000 1,000,000
stockholders of a Premier subsidiary,
interest at 6%, currently payable
Unsecured notes payable to former 309,641 464,752
stockholders of a Premier subsidiary, due
in monthly installments of $14,898,
including interest at 6% through
October 31, 1998
Unsecured note payable to a former - 153,334
stockholder of a Premier subsidiary,
interest at 7%, due August 11, 1996
</TABLE>
F-14
<PAGE> 37
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Unsecured notes payable to former $ 90,000 $ 120,000
stockholders of a Premier subsidiary,
interest at 7%, due in annual installments of
$30,000 through June 30, 1999
Capital lease obligations (Note 10) 316,092 364,844
Other 7,470 26,442
----------- -----------
42,722,938 6,914,810
Less: Current portion (3,557,199) (4,222,608)
----------- -----------
Long-term portion $39,165,739 $ 2,692,202
=========== ===========
</TABLE>
Future maturities of long-term debt, exclusive of capital lease obligations
at December 31, 1996, follow:
1997 $ 3,426,957
1998 757,090
1999 539,480
2000 483,319
2001 37,200,000
-----------
$42,406,846
===========
To finance acquisitions, the Company extinguished its outstanding debt
under the revolving loan agreement with CreditAnstalt and replaced it with a
$125,000,000 revolving credit facility through a group of five commercial banks
("new credit facility") on December 6, 1996. Extinguishment of the existing debt
included payoff of the outstanding balance of $31,422,852 and an incurred loss
$239,961, net of tax, resulting from the write-off of unamortized deferred
financing costs. The loss is recorded as an extraordinary item in the
accompanying consolidated statement of operations. The Company incurred
approximately $1,010,000 in debt acquisition costs associated with the new
credit facility, which are to be amortized over the life of the debt.
Under the new credit facility, the Company has the option to borrow under
base rate and eurodollar rate revolving loans, swing line loans, and letters of
credit. Interest rates on base rate and swing line loans are at the higher of
the prime rate or 0.5% in excess of the federal funds effective rate, plus an
applicable margin based on the Company's leverage ratio at the time of
borrowing. The
F-15
<PAGE> 38
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swing line loans are also adjusted for a commitment fee percentage tied to the
Company's leverage ratio. Interest on base rate and swing line loans is due
quarterly in arrears. Interest rates on eurodollar rate loans are calculated at
the eurodollar rate plus an applicable margin based on the Company's leverage
ratio at the time of borrowing. Interest is due at the end of the one, two, or
three month interest period elected by the Company. If the Company elects a six
month eurodollar rate loan, interest is payable in arrears at the end of the
third and sixth month. Letter of credit fees are based on the eurodollar loan
margin, plus the greater of 0.25% of the maximum available to be drawn for
letters of credit, as defined in the agreement, or $500, and is to be paid
quarterly in arrears. As of December 31, 1996, the Company's outstanding
borrowings total $37,200,000 under a base rate loan at an effective interest
rate, including the amortization of deferred financing costs, of 8.29%.
Scheduled reductions of the $125,000,000 maximum balance allowed under the
new credit facility on December 1 of each year are as follows:
1997 $ -
1998 10,000,000
1999 35,000,000
2000 40,000,000
2001 40,000,000
-------------
$ 125,000,000
=============
The new revolving credit facility is secured by substantially all assets of
the Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions, and sale of assets, as well as minimum
financial ratios. As of December 31, 1996, the Company is in compliance with all
debt covenants.
The average effective interest rate on amounts outstanding under the
CreditAnstalt agreement for the periods outstanding during 1996 and 1995 were
approximately 7.5% and 8.75%, respectively. A letter of credit fee at an
annual rate of 1.25% was paid on a monthly basis. Amounts available to be
borrowed under this agreement were based upon levels of accounts receivable and
inventories. The weighted average and highest outstanding balance under this
agreement for the period outstanding through December 6, 1996 were $21,581,000
and $31,422,852, respectively.
In connection with the Symphony acquisition, the Company entered into a
senior subordinated credit facility with a group of lenders pursuant to which
the lenders funded a $100 million bridge loan. The proceeds of the bridge loan
were used to pay a portion of the Symphony acquisition purchase price. The
bridge loan bore interest at a floating interest rate of LIBOR plus 6.01% to
6.25%. In connection with the bridge loan, the Company incurred a commitment fee
of $2,500,000, net of an early loan repayment discount. The bridge loan was
repaid in full by the Company on September 26, 1996, using the proceeds of the
September 1996 public offering.
F-16
<PAGE> 39
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included as acquisition financing fees and expenses in the accompanying
consolidated statement of operations is the $2,500,000 commitment fee, bridge
loan interest of approximately $1,813,000 and bridge loan closing costs of
approximately $261,000. In connection with the acquisition of MediDyne (See
Note 2), the Company incurred a $2,900,000 note payable to the former owners of
MediDyne in consideration for the purchase. The note is non-interest bearing
and is to be repaid quarterly based on MediDyne's earnings before taxes,
depreciation and amortization in excess of $600,000. As of December 31, 1996,
the outstanding balance of $1,651,084 is expected by management to be paid
within one year and, therefore, has been included in current portion of
long-term debt in the accompanying consolidated balance sheet.
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 sheets as of December
31, 1996 and 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.
Interest expense for the year ended December 31, 1996, the ten months ended
December 31, 1995, and the year ended February 28, 1995, was approximately
$3,713,000, $677,000 and $905,000 respectively. These amounts include
amortization of deferred financing costs of approximately $183,000, $43,000 and
$0, respectively.
Based on the borrowing rates currently available to the Company, the fair
value of long term debt, including the current portion but exclusive of capital
lease obligations, as of December 31, 1996, is approximately $42,410,000.
F-17
<PAGE> 40
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PUBLIC STOCK OFFERING
In September 1996, the Company completed an offering of 10,350,000 shares
of common stock to the public at a price of $11.00 per share. Net proceeds of
approximately $107,235,000 were received, net of direct costs of approximately
$6,615,000. Direct costs included the underwriters discount, accounting and
legal fees, printing and marketing expenses and other miscellaneous costs.
6. PRIVATE PLACEMENTS
In December 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 an 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 an exercise price of $5.50 per share.
In May 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.
In August 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.
In April 1996, the Company completed a third private placement of its
common stock. This offering consisted of 1,035,000 shares at a price of $8.50
per share. The net proceeds of this private placement were $8,400,000, net of
related costs. The proceeds from this private placement were used to fund
acquisitions and provide general working capital for the Company.
In July 1996, the Company completed a private placement of its common
stock with Counsel. Counsel acquired 2,112,490 shares of common stock for
proceeds of $25,000,000. The proceeds from this private placement were used to
fund the acquisition of Symphony.
F-18
<PAGE> 41
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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. The exit 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 operation of B.T.
Smith, Inc. with the medical/surgical supply division of J & J Drug & Medical
Services, 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 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 included in the
operating expenses for the year ended February 28, 1995, which includes the
write-down of accounts receivable, inventories and fixed assets to net
realizable value and the accrual for the termination of leases, employee
severance costs, and the estimated administrative costs of terminating
operations. The restructuring charges include approximately $940,000 severance
costs which were accrued and expensed related to the termination of 15 pharmacy
employees and amounts due to former executives of the Company under severance
agreements that expire in May 1997. Also included in the restructuring costs is
$560,000 related to the termination of long-term leases with the remainder of
the charges due to disposal of assets. During the ten months ended December 31,
1995, the Company recorded, as a change in estimate, an additional $100,000
accounts receivable for the medical/surgical supply operations. The
restructuring plan was completed by December 31, 1995.
In connection with the February 1995 restructuring, the Company made
severance payments of approximately $459,000 and $335,000 and paid other exit
costs of approximately $154,000 and $227,000 during the year ended December 31,
1996 and the ten months ended December 31, 1995, respectively.
The net sales and loss from continuing operations of the medical/surgical
supply operations and the Missouri location are as follows:
<TABLE>
<CAPTION>
Ten Months
Ended Year Ended
December 31, 1995 February 28, 1995
----------------- -----------------
<S> <C> <C>
Net Sales............................ $ 854,018 $ 3,983,533
============= ==============
Loss from continuing operations...... $ (157,218) $ (2,406,438)
============= ==============
</TABLE>
F-19
<PAGE> 42
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1995, the Company adopted a formal plan of restructuring in
order to consolidate certain of its satellite locations. As a result of the
exit plan, one pharmacy will be closed by June 1996. The Company recorded
restructuring costs of $140,000 as an operating expense 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. Approximately $60,000 of severance costs were accrued and expensed
in relation to the termination of 20 pharmacy employees. At December 31, 1996,
all severance costs have been paid. The Company completed this restructuring
plan during 1996.
During July 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations in Los
Angeles by consolidating two of its existing facilities into a new, more
centralized location. The Company has assumed liabilities, included in the
acquisition cost allocation, of approximately $1,600,000 for costs to
involuntarily terminate employees of Symphony and to close the pharmacy
location. Included in these liabilities are approximately 330,000 of severance
costs related to the termination of 79 employees, including pharmacists,
technicians, IV nurses, drivers and others. The remaining costs relate to the
termination of lease agreements. As of December 31, 1996, no severance payments
have been made. Management anticipatees the completion of this plan by December
1997.
During August 1996, the Company adopted a plan of restructuring to
consolidate its Aston, Pennsylvania and Baltimore, Maryland long-term care
pharmacies into one of its existing Mid-Atlantic pharmacies. The Company has
recorded restructuring costs of $450,000 for the year ended December 31, 1996
which includes employee severance costs with the remainder of the costs for the
termination of leases. No severance costs have been paid to the 48
pharmacy-related employees as of December 31, 1996. The Company plans to
complete this restructuring by December 1997.
Also, during September 1996, the Company adopted a formal plan of
restructuring to close its Baltimore, Maryland corporate offices and
correctional pharmacies. The corporate offices will be relocated to Irving,
Texas and the correctional pharmacy will be relocated to another location in the
Baltimore area. The Company has recorded restructuring costs of $2,375,000 for
the year ended December 31, 1996, which primarily includes approximately
$400,000 of employee severance costs and approximately $1,800,000 of lease
termination costs with the remainder due to losses on asset impairments and
disposals of assets. The restructuring plan includes the termination of 32
accounting and clerical personnel. The Company made severance payments related
to the corporate office restructuring of approximately $107,000 during the year
ended December 31, 1996 and anticipates the completion of the plan by September
1997.
8. 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 are included in the
consolidated statements of operations under
F-20
<PAGE> 43
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
gain (loss) from operations of discontinued business segments. The loss on
disposal of $503,067 reflected in 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 and $2,731,000 for the ten months ended December 31, 1995 and the year
ended February 28, 1995, respectively.
9. INCOME TAXES
The benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Year Ended
December 31, 1996 December 31, 1995 February 28, 1995
----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Federal:
Current $ - $ (219) $ (466)
Deferred (5,510) ( 46) -
---------- ------- -------
(5,510) (265) (466)
State and local 389 40 -
---------- ------- -------
$ (5,121) $ (225) $ (466)
========== ======= =======
</TABLE>
F-21
<PAGE> 44
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1996, the Federal benefit for income taxes
is primarily due to the reversal of the valuation allowance recorded on the
Company's deferred tax assets. Based on the current operating profitability of
the Company and budgeted taxable income for 1997, management believes that it
is now more likely than not that the Company's deferred tax assets will be
realized. As a result of this change in estimate, the valuation allowance of
$5,186,000 on deferred tax assets was reversed during the year ended December
31, 1996.
The actual income tax benefit for the year ended December 31, 1996, the ten
months ended December 31, 1995 and the year ended February 28, 1995 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>
Year Ended Ten Months Ended Year Ended
December 31, 1996 December 31, 1995 February 28, 1995
----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Tax benefit at statutory rate $ (597) $ (296) $ (3,824)
Additional funds received - (219) -
Increase resulting from:
State income taxes, net 257 26 -
of federal income tax
effect
Current loss not
available for carryback - 172 3,206
Tax effect of
permanent differences 276 68 152
Reduction of valuation
allowance (5,186) - -
Other items, net 129 24 -
--------- --------- ---------
Benefit for income taxes $ (5,121) $ (225) $ (466)
========= ========= =========
</TABLE>
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $16,663,000 for Federal income tax purposes, expiring in
increments through 2011. The utilization
F-22
<PAGE> 45
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of approximately $11,106,000 of such losses is restricted to offset only
future taxable income generated by Choice Maryland and Premier.
The tax effect of cumulative temporary differences at December 31, 1996 and
1995 follow:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(in thousands)
<S> <C> <C>
Current Deferred Tax Assets:
Tax carry forwards $ 5,665 $ 4,172
Accounts receivable allowances 85 413
Accrued litigation costs 657 1,255
Accrued restructuring charges 1,104 536
Accrued liabilities 440 280
Other 1,178 254
---------- ---------
9,129 6,910
Less: Valuation allowance (1,724) (6,910)
---------- ---------
Net deferred tax asset $ 7,405 $ -
========== =========
Deferred Tax Liabilities:
Puerto Rico withholding tax $ 425 $ 425
Goodwill Amortization 1,330 -
Depreciation and other 242 118
---------- ---------
Net deferred tax liability $ 1,997 $ 543
========== =========
</TABLE>
10. COMMITMENTS
Leases
The Company leases office and warehouse space, automobiles and equipment.
Rental expense under these leases aggregated approximately $1,664,000, $781,000,
and $719,000 for the year ended December 31, 1996, the ten months ended December
31, 1995, and the year ended February 28, 1995, respectively.
F-23
<PAGE> 46
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments, follow:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
------------- -------- ----------
<S> <C> <C>
1997 $ 157,074 $1,741,995
1998 113,863 1,612,177
1999 74,538 1,411,448
2000 26,788 1,013,377
2001 6,571 933,803
2002 and Thereafter - 1,938,370
--------- ----------
Total minimum lease payments 378,834 $8,651,170
==========
Less: amount representing interest (62,742)
---------
Present value of net minimum
lease payments 316,092
Less: current portion (130,242)
---------
Long-term portion $ 185,850
=========
</TABLE>
11. CONTINGENCIES
A lawsuit has been filed against the Company by the former shareholders of
a subsidiary of Premier. The plaintiffs sold their business to Premier in 1993
and claim that the company owes them approximately $1,000,000 under promissory
notes delivered to them as part of the consideration for their stock. (See Note
4). The plaintiffs also claim that the Company owes them an additional
$1,100,000 under an earn-out agreement. Finally, the plaintiffs claim the
Company is liable for tortiously interfering with their rights under the
purchase agreement and under the promissory notes. The plaintiffs seek total
judgments of $7,100,000, plus interest and costs against the Company. The
Company has answered the complaint and is vigorously contesting the plaintiff's
claims. In addition, the Company has filed a counterclaim against the plaintiffs
for breaches of certain representations and warranties in the agreement.
Management of the Company does not believe that this litigation is likely to
have a material adverse effect on its financial position and results of
operations.
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.
F-24
<PAGE> 47
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCKHOLDER'S 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. On September 28, 1996 the Company's stockholders approved an increase in
the authorized common stock of the Company from 30,000,000 shares to 50,000,000
shares.
Stock Option Plans
The Company has eight stock option plans and an employee stock purchase
plan covering up to 3,029,168 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.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its fixed stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net income:
As reported $ 3,125,420 $ 222,351
Pro forma (7,763,229) (3,155,567)
Primary Earnings per share:
As reported 0.14 0.02
Pro forma (0.34) (0.28)
</TABLE>
F-25
<PAGE> 48
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fully diluted Earnings Per Share:
<TABLE>
<S> <C> <C>
As reported 0.13 0.02
Pro forma (0.33) (0.25)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following key assumptions were used
in the Black-Scholes option-pricing model.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Risk-Free Interest Rate 5.00% 5.00%
Expected Life 5-10 years 5-10 years
Volatility 62.9% 73.9%
</TABLE>
A summary of option transactions during the year ended December 31, 1996,
the ten months ended December 31, 1995 and the year ended February 28, 1995
follow:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 FEBRUARY 28, 1998
------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Under option:
Beginning of the
Year/Period................. 1,564,000 $4.40 1,094,500 $3.73 918,500 $4.33
Granted..................... 1,589,000 9.99 949,500 4.41 564,000 3.23
Exercised................... (122,166) 3.02 (355,000) 2.43 (34,000) 2.64
Canceled.................... (1,666) 4.31 (125,000) 3.81 (354,000) 4.15
--------- ----- --------- ----- --------- -----
End of Year/Period............ 3,029,168 $7.39 1,564,000 $4.40 1,094,500 $3.73
--------- ----- --------- ----- --------- -----
Options exercisable -- Year-
End/Period.................... 1,828,149 6.02 1,389,000 $4.40 1,094,500 $3.73
--------- ----- --------- ----- --------- -----
Shares available for grant --
Year-End/Period............... 856,250 -- 693,750 -- 568,250 --
--------- ----- --------- ----- --------- -----
Weighted average fair value
of options granted............ $6.85 $3.56
----- -----
</TABLE>
F-26
<PAGE> 49
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable at Exercise
Prices at December 31, 1996 Life Price December 31, 1996 Price
------ -------------------- ----------- -------- ----------------- ------
<S> <C> <C> <C> <C> <C>
$2.85-5.00 1,052,334 7.8 Years $ 4.10 968,998 $ 4.08
$5.00-$7.50 377,000 5.1 Years $ 5.65 350,332 $ 5.63
$7.50-$10.00 400,834 9.2 Years $ 8.45 134,158 $ 8.41
$10.00-$11.25 1,199,000 9.9 Years $10.48 374,661 $10.55
$2.85-$11.25 3,029,168 8.5 Years $ 7.39 1,828,149 $ 6.02
</TABLE>
F-27
<PAGE> 50
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
During 1994, in exchange for consulting services, the Company issued
warrants exercisable for 40,000 shares of common stock with an exercise price of
$3.50.
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, and subsequently
extended the expiration date to August 23, 1996. During August 1996, the Company
registered the shares underlying its outstanding Series A and B warrants. Series
A warrants representing 643,344 of a total of 650,000 shares of common stock
were exercised before expiring, at an exercise price of $6.00 per share. The
expiration date of the 643,344 Series B Warrants (which are exercisable at
$10.00 per share) issued upon exercise of the IPO Warrants is August 16, 1997.
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.
In December 1995, as part of their debt agreement, the Company issued
warrants to CreditAnstalt which grants CreditAnstalt the right to purchase
15,000 shares of common stock at a price of $7.31 per share. These warrants
expire in December 2000.
In January 1996, as part of the acquisition of IMD Corporation, the Company
issued warrants to purchase 75,000 shares of common stock at a price of $7.50
per share. These warrants expire in January 1999.
Total warrants for 4,132,684 shares were outstanding at December 31, 1996,
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 $12.00 per share. 46,615 (excluding the
Series A warrants) warrants were exercised during the year, at exercise prices
ranging from $3.50 to $5.50 per share.
13. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its pharmaceutical
purchases. During both 1995 and 1996, the Company changed its primary supplier.
Purchases of inventory under primary supplier relationships during the year
ended December 31, 1996, the ten months ended December 31, 1995, and the year
ended February 28, 1995, were approximately 82%, 87% and 55% of total inventory
purchases, respectively.
F-28
<PAGE> 51
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Trade accounts payable $11,390,194 $4,671,435
Accrued salaries, payroll taxes and benefits 4,172,362 669,860
Miscellaneous accrued expenses 2,385,929 795,977
----------- ----------
$17,948,485 $6,137,272
=========== ==========
</TABLE>
15. RELATED PARTIES
As a result of the Company's acquisition of Symphony (See Note 2),
Symphony's former parent company, IHS, is a significant Company stockholder. The
Company provides institutional pharmacy services to several long-term care
facilities owned and managed by IHS. Since the Company's acquisition of Symphony
during 1996, net revenues of approximately $8,139,000 have been generated from
sales to IHS owned and managed long-term care facilities. Amounts due from IHS
owned and managed long-term care facilities of approximately $6,983,000 at
December 31, 1996 are included in accounts receivable, net in the accompanying
consolidated balance sheet.
To facilitate the timely purchase of MediDyne an interim purchase of
MediDyne was made by Counsel Corporation, a significant stockholder of the
Company. The terms of the agreement are described in Note 2.
The Company entered into arrangements with a company which owns long-term
care facilities in the state of Minnesota to provide pharmacy services and
certain administrative functions in exchange for a monthly management fee. These
management fees, totaling approximately $58,000, have been included in other
income in the accompanying consolidated statement of operations for the year
ended December 31, 1996. In addition, the Company has provided working capital
funding. At December 31, 1996, amounts due of approximately $661,000 are
included in the accompanying consolidated balance sheet.
F-29
<PAGE> 52
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for financial statements with fiscal years beginning after December 15, 1995.
The adoption of SFAS No. 121 as of January 1, 1996 had no impact on the
Company's financial position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require restatement
of prior years' EPS. When adopted for the year ended December 31, 1997, the
Company will report basic EPS instead of primary EPS. The pro forma basic and
diluted EPS would be as follows:
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Proforma earnings (loss) per common and
common equivalent share:
Basic continuing operations $ 0.17 $(0.06)
Discontinued operations -- 0.05
Extraordinary items (0.01) 0.03
------ ------
Net income $ 0.16 $ 0.02
====== ======
Diluted continuing operations $ 0.15 $(0.06)
Discontinued operations -- 0.05
Extraordinary items (0.01) 0.03
------ ------
Net income $ 0.14 $ 0.02
====== ======
</TABLE>
17. SUBSEQUENT EVENTS
In January 1997, the Company entered into purchase agreements with
Clinical Care-SNF, Inc., Portaro Pharmacies, Inc. and Alger Health Services.
These three acquisitions expand the Company's presence in the State of
California and represent institutional pharmacy revenues of approximately
$15,000,000, $15,000,000 and $8,500,000, respectively.
The purchase price for Clinical Care-SNF, Inc. was $20,000,000, payable
$5,000,000 in cash and the remainder representing 1,354,402 shares of the
Company's common stock. The purchase price for Portaro Pharmacies, Inc. was
$20,000,000, payable $5,000,000 in cash and the remainder representing
1,354,402 shares of the Company's common stock. The purchase price for Alger
Health Services was $4,200,000.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200,000 and includes an earn-out
provision.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia based
provider of institutional pharmacy services. The purchase price was
approximately $8,500,000.
F-30
<PAGE> 53
INDEX OF EXHIBITS
[UPDATE]
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Asset Purchase Agreement dated February 29, 1996, by and among IMD
Corporation, Dennis Ruben, the Trust, Illinois Pharmacy Acquisition Co.
and Capstone Pharmacy Services, Inc. (the "Company") (incorporated by
reference to Exhibit 2 to Form 8-K dated February 29, 1996).
2.2 Asset Purchase Agreement among Integrated Health Services, Inc. ("IHS"),
Symphony Pharmacy Services, Inc., various of its subsidiaries ("Symphony")
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).
2.3** Amendments No. 1 to the Asset Purchase Agreement by and between IHS,
Symphony and the Company, dated July 30, 1996.
2.4 Stock Purchase Agreement by and between DCAmerica and the Company
effective July 1, 1996 (incorporated by reference to Exhibit 2.3 to
Form 10-Q dated September 30, 1996).
2.5 Agreement and Plan of Merger dated January 3, 1997, by and among
Clinical Care-SNF, Inc., Ron Belville, the Company and Institutional
Pharmacy Services, Inc. ("IPS") (incorporated by reference to Exhibit
2.1 to Form 8-K dated January 31, 1997).
2.6 Agreement and Plan of Merger dated January 3, 1997, by and among Portaro
Pharmacies, Inc., Denis Portaro, Sandra Portaro, Denis A. and Sandra Lou
Portaro Revocable Trust of 1992, the Company and IPS (incorporated by
reference to Exhibit 2.2 to Form 8-K dated January 31, 1997).
2.7** Stock Purchase Agreement among Alger Health Services, Inc., IPS
and the Company, dated January 24, 1997.
2.8** Asset Purchase Agreement between Pennsylvania Prescriptions, Inc. d/b/a
Emerald Drug Store, dated March 6, 1997.
2.9** Asset Purchase Agreement by and between Pharmacare, Inc. and IPS,
dated March 24, 1997.
3.1 Certificate of Incorporation of Choice Drug Systems, Inc. (incorporated
by reference to Exhibit 3.1 to Form 10-Q for period ending August 30, 1995).
3.2 Certificate of Ownership and Merger Merging Choice Mergeco, Inc. into
Choice Drug Systems, Inc. (incorporated by reference to Exhibit 3.2 to
Form 10-Q for period ending August 30, 1995).
</TABLE>
<PAGE> 54
<TABLE>
<S> <C>
3.3 Certificate of Amendment (incorporated by reference to Exhibit A to the
Company's Proxy Statement for Special Meeting of Stockholders on August
15, 1996).
3.4 Bylaws of Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.3 to Form 10-Q for period ending August 30, 1995).
4.1 Form of Series B Warrant Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-3
(Reg. No. 3643).
4.2 Form of Series B Warrant Agreement, dated as of August 7, 1996, between
the Registrant and First Union National Bank of North Carolina
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-3 (Reg. No. 3643)).
4.4 Form of Warrant ($4.50) for Purchase of Common Stock (incorporated by
reference to Exhibit 4.5 to the 1995 Annual Report on Form 10-K for
fiscal year ended February 29, 1995).
4.5 Form of Warrant ($5.50) for Purchase of Common Stock (incorporated by
reference to Exhibit 4.6 to the 1995 Annual Report on Form 10-K for
fiscal year ended February 29, 1995).
4.6 Stock Purchase Agreement, dated December 16, 1994, between Registrant
and Counsel Corporation (incorporated by reference to Exhibit 4.7 to
the 1995 Annual Report on Form 10-K for fiscal year ended February 29,
1995).
4.7 Warrant to Purchase Shares of Common Stock, dated December 16, 1994,
for the purchase of 800,000 shares (incorporated by reference to
Exhibit 4.8 to the 1995 Annual Report on Form 10-K for fiscal year
ended February 29, 1995).
4.8 Warrant to Purchase Shares of Common Stock, dated December 16, 1994,
for the purchase of 1,000,000 shares (incorporated by reference to
Exhibit 4.9 to the 1995 Annual Report on Form 10-K for fiscal year
ended February 29, 1995).
4.9** Warrant to purchase shares of Common Stock dated January 1, 1996, for
the purchase of 75,000 shares.
4.10** Warrant to purchase shares of Common Stock dated December 20, 1995 for
the purchase of 15,000 shares.
4.11** Form of ACA Investors Warrant ($12.00) for purchase of Common Stock.
10.1 1987 Stock Option Plan, adopted by the Board of Directors on March 11,
1987 and by the Shareholders on July 29, 1987 (incorporated by
reference to Exhibit 100 to the 1987 Annual Report*).
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
10.2 1988 Stock Option Plan, adopted by the Board of Directors on February
26, 1988 and by the shareholders on August 17, 1988 (incorporated by
reference to Exhibit 10CC to the 1988 Annual Report*).
10.3 1991 Stock Option Plan, adopted by the Board of Directors on May 22,
1991 and by the Shareholders on December 16, 1991 (incorporated by
reference to Exhibit 10KK to the 1991 Annual Report*).
10.4 1992 Stock Option Plan, adopted by the Board of Directors on July 14,
1992 and by the shareholders on September 2, 1992 (incorporated by
reference to Exhibit B to the Registrant's 1992 Proxy Statement*).
10.5 Agreement, dated December 23, 1993, between the Registrant and Mediquest,
Inc. (incorporated by reference to Exhibit NN to 1994 Form 10-K).
10.6 Credit Agreement Among Choice Drug Systems, Inc. and Creditanstalt Corporate
Finance, Inc., dated May 19, 1995 (incorporated by reference to Exhibit
10.19 to the 1995 Annual Report on Form 10-K for fiscal year ended
February 29, 1995).
10.7 Revolving Credit Note dated May 19, 1995, made in favor of
Creditanstalt Corporate Finance, Inc. (incorporated by reference to
Exhibit 10.20 to the 1995 Annual Report on Form 10-K for fiscal year
ended February 29, 1995).
10.8 Agreement and Plan of Merger, dated April 5, 1995, by and among the
Registrant, Choice Acquisition Corp. and Premier Pharmacy, Inc.
(incorporated by reference to Exhibit 2.1 to the 1995 Annual Report on
Form 10-K for fiscal year ended February 29, 1995).
10.9 1995 Nonqualified Stock Option Plan for Directors of the Company
(incorporated by reference to Exhibit A to Schedule 14A filed August 2,
1995).
10.10 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel and
Directors of the Company (incorporated by reference to Exhibit B to
Schedule 14A filed August 2, 1995).
10.11 Amendment to Choice Drug Systems, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit C to Schedule 14A filed
August 2, 1995).
10.12 1996 Employee Stock Purchase Plan of the Company (incorporated by
reference to Exhibit D to Schedule 14A filed August 2, 1995).
10.13 Form of Registration Rights Agreement dated May 22, 1995 (incorporated
by reference to Exhibit 4.4 on Form 8-K dated May 22, 1995).
10.14 Form of Amendment to Registration Rights Agreement dated August 30,
1995 (incorporated by reference to Exhibit 4.2 to Form 8-K dated August
31,1995).
</TABLE>
<PAGE> 56
<TABLE>
<S> <C>
10.15 Form of Second Amendment to Registration rights Agreement dated March
20, 1996 (incorporated by reference to Exhibit 10.1 to Form 10-Q dated
March 31, 1996).
10.16 Form of Third Amendment to Registration rights Agreement dated April
11, 1996 (incorporated by reference to Exhibit 10.2 to Form 10-Q dated
March 31, 1996).
10.17 Form of Registration Rights Agreement dated April 17, 1996 (incorporated
by reference to Exhibit 10.1 to Form 10-Q dated September 10, 1996).
10.18** Registration Rights Letter Agreement, dated December 19, 1996 regarding
Registration Rights in connection with the purchase by Counsel
Corporation of 2,112,490 shares of Common Stock of Capstone Pharmacy
Services, Inc. on July 29, 1996.
10.19** Registration Rights Amendment dated January 3, 1997 by and among Capstone
Pharmacy Services, Inc. and Ron Belville, Denis A. Portaro and Sandra
Lou Portaro and the Denis A. and Sandra Lou Revocable Trust of 1992.
10.20** Senior Subordinated Credit Agreement dated December 6, 1996 by and
between the Company and Bankers Trust Company as agent and lender.
10.21** Form of Revolving Credit Note by and between the Company and lender.
10.22 Agreement and Plan of Merger, dated September 30, 1995, by and among
Geri-Care Systems, Inc., Scripts and Things, Inc., Abraham Wieder, Raphael
Lieberman, Capstone Pharmacy Services, Inc., Geri Mergeco, Inc. and
Scripts Mergeco, Inc. (incorporated by reference to Exhibit 2 to
Form 8-K for December 31, 1995).
10.23** Adirondack Capital Advisors Consulting Agreement dated June 25, 1996.
21** List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
24** Power of Attorney (included on signature page).
27** Financial Data Schedule (for SEC use only).
</TABLE>
* Denotes a management contract or compensatory plan, contract or arrangement.
** Filed with original annual report on Form 10-K.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K/A-2, into the Company's previously filed
Registration Statements File Nos. 033-21995,033-29317,033-62867, 033-62865,
033-62877, 033-62879, 033-62881, 033-62883, 333-03643, 333-18477 and 333-21927.
/s/ Arthur Andersen LLP
Baltimore, Maryland
July 29, 1997
