<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-20606
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2310352
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9901 E. Valley Ranch Parkway 75063
Suite 3001 (Zip Code)
Irving, TX
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 401-1541
2930 Washington Boulevard, Baltimore, Maryland
- --------------------------------------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at May 12, 1997
- ---------------------------- ---------------------------
Common Stock, $.01 Par Value 34,005,266
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART 1: FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996............... F-1
Consolidated Statements of Income for the three months ended
March 31, 1997 and 1996.............................................................. F-2
Consolidated Statements of Changes in Stockholders' Equity for the three months
ended March 31, 1997................................................................. F-3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and 1996.............................................................. F-4
Notes to Unaudited Consolidated Financial Statements................................. F-5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ F-10
</TABLE>
PART 2: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
INDEX OF EXHIBITS
<PAGE> 3
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,308,190 $ 9,407,354
Accounts receivable, net of allowance for doubtful accounts of
$7,128,000 as of March 31, 1997, and $5,778,000, as of
December 31, 1996, respectively 63,401,985 50,503,619
Inventories 18,134,696 13,541,511
Prepaid expenses and other current assets 2,823,053 1,523,194
Deferred tax benefit 3,929,876 5,408,381
------------- -------------
Total Current Assets 98,597,800 80,384,059
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 12,130,249 10,468,963
OTHER ASSETS 1,965,559 1,369,982
GOODWILL, net of accumulated amortization of $5,485,000 as of
March 31, 1997, and $4,074,000 as of December 31, 1996, respectively 236,024,195 178,778,162
------------- -------------
Total Assets $ 348,717,803 $ 271,001,166
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 17,859,814 $ 18,337,485
Current portion of long-term debt 3,245,645 3,557,199
Current portion of non-compete agreements 200,000 200,000
Accrued restructuring charges 2,007,545 2,107,846
------------- -------------
Total Current Liabilities 23,313,004 24,202,530
NON-COMPETE AGREEMENTS, net of current portion 200,000 200,000
LONG-TERM DEBT, net of current portion 84,697,551 39,165,739
RESTRUCTURING CHARGES, net of current portion 2,608,055 2,687,068
------------- -------------
Total Liabilities 110,818,610 66,255,337
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized at March 31,
1997, and December 31, 1996; 34,005,266 shares issued
and 33,666,814 outstanding as of March 31, 1997, and
31,134,221 shares issued and 30,795,769 outstanding as of
December 31, 1996 336,668 307,957
Capital in excess of par 244,264,407 213,593,829
Accumulated deficit (6,701,882) (9,155,957)
------------- -------------
Total Stockholders' Equity 237,899,193 204,745,829
------------- -------------
Total Liabilities and Stockholders' Equity $ 348,717,803 $ 271,001,166
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-1
<PAGE> 4
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
NET SALES $69,023,558 $ 22,027,865
COST OF SALES 38,690,339 13,575,566
----------- ------------
Gross profit 30,333,219 8,452,299
----------- ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 22,925,269 7,277,293
Depreciation and amortization 2,357,234 569,057
----------- ------------
Total operating expenses 25,282,503 7,846,350
----------- ------------
Income from operations 5,050,716 605,949
----------- ------------
NONOPERATING EXPENSE (INCOME):
Interest expense, net 1,155,359 263,188
Other income, net -- (46,528)
----------- ------------
Total nonoperating expense (income), net 1,155,359 216,660
----------- ------------
Net income before income tax provision 3,895,357 389,289
INCOME TAX PROVISION 1,441,282 103,000
----------- ------------
Net income $ 2,454,075 $ 286,289
=========== ============
EARNINGS PER SHARE:
Primary $ 0.07 $ 0.02
=========== ============
Fully diluted $ 0.07 $ 0.02
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Primary 36,683,917 16,592,126
=========== ============
Fully diluted 36,915,693 16,692,186
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE> 5
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Capital
------------------------ in Excess Accumulated
Shares Amount of Par Deficit Total
----------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996 30,795,759 $307,957 $213,593,829 $(9,155,957) $204,745,829
Common stock issued in
connection with the
exercise of stock
options 162,251 1,623 697,666 -- 699,289
Common stock issued in
connection with
acquisitions 2,708,804 27,088 29,972,912 -- 30,000,000
Net income for the three
months ended
March 31, 1997 -- -- -- 2,454,075 2,454,075
---------- -------- ------------ ----------- ------------
BALANCE, March 31, 1997 33,666,814 $336,668 $244,264,407 $(6,701,882) $237,899,193
========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,454,075 $ 286,289
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation and amortization 2,357,234 569,057
Change in assets and liabilities, net of effects from
acquisition/disposal of businesses:
Increase in accounts receivable (7,439,708) (787,308)
Increase in inventories (972,101) (491,121)
(Increase) decrease in prepaid expenses and other
current assets (996,406) 769,865
Decrease in deferred tax benefit 1,478,506 --
Increase in other assets (595,577) (9,759)
Decrease in accounts payable and accrued
expenses (9,836,954) (1,955,338)
Decrease in pre-acquisition advances to affiliates, net -- (427,086)
Decrease in accrued restructuring charges (179,314) (125,748)
------------ ------------
Net cash flows from operating activities (13,730,245) (2,171,149)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (1,505,005) (328,652)
Acquisitions, net of cash acquired (28,360,968) (17,048,672)
Repayments of notes receivable -- 32,973
------------ ------------
Net cash flows from investing activities (29,865,973) (17,344,351)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings 44,720,865 20,483,000
Repayment of subsidiary pre-acquisition indebtedness -- (1,800,000)
Proceeds from exercise of stock options 699,289 130,712
Repayment of other long-term debt, net (923,100) (785,687)
------------ ------------
Net cash flows from financing activities 44,497,054 18,028,025
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 900,836 (1,487,475)
CASH AND CASH EQUIVALENTS, beginning of period 9,407,354 2,763,416
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,308,190 $ 1,275,941
============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for:
Interest $ 736,131 $ 82,671
============ ============
Taxes $ 84,265 $ 68,296
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 7
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART 1: FINANCIAL INFORMATION
ITEM 1.
1. ORGANIZATION AND BUSINESS:
Capstone Pharmacy Services, Inc. and subsidiaries (a Delaware corporation),
together with its wholly-owned subsidiaries (the "Company") is principally
engaged in the business of providing institutional pharmacy services to
long-term care facilities, correctional institutions, hospitals and health
maintenance organizations throughout the United States.
2. EARNINGS PER SHARE:
Earnings per share is based upon the weighted average number of the Company's
common and common equivalent shares outstanding for the three months ended March
31, 1997 and 1996. The amount of common stock equivalents outstanding was
computed using the treasury stock method.
3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the Company for the
three months ended March 31, 1997 and 1996, included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company at March 31, 1997 and 1996,
and the results of its operations and cash flows for the three months ended
March 31, 1997 and 1996. Certain reclassifications have been made to the prior
period financial statements to conform to the current period presentation.
The results of operations for the three months ended March 31, 1997 and 1996,
are not necessarily indicative of results to be expected for the full year.
These interim condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's annual report on Form 10-K, as filed with the Securities and
Exchange Commission for the year dated December 31, 1996. The balance sheet at
December 31, 1996, has been derived from the audited financial statements at
that date.
4. 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 provides 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 business to be generated
F-5
<PAGE> 8
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 Three Months Ended March 31, 1997
In January 1997, the Company entered into acquisition 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 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. Total goodwill at the date of
acquisition for these acquisitions amounted to $42,215,000.
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. Total goodwill at the date of acquistion was $4,123,000.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based provider
of institutional pharmacy services. The purchase price was approximately
$8,500,000. Total goodwill at the date of acquistion was $7,826,000.
F-6
<PAGE> 9
Effective March 1997, the Company acquired Macromed, a New York-based provider
of Medicare Part B services. The total purchase price was approximately
$2,800,000. Total goodwill at the date of acquistion approximated $2,900,000.
These acquisitions have been accounted for using the purchase method of
accounting, with the assets and liabilities of the acquired companies recorded
at their estimated fair market values at the dates of acquisition. Goodwill,
representing the excess of acquisition cost over the fair value of the net
assets acquired, is amortized over 40 years.
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS:
The results of operations of acquired businesses are included in the Company's
consolidated results from the date of acquisition. Had the acquisitions
discussed in Note 4 occurred on January 1, 1996, management estimates that the
unaudited pro forma results of operations for the three months ended March 31,
1997 and 1996 ($000 omitted, except for per share data) would have been:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
NET SALES $73,266 $70,069
COST OF SALES 41,300 39,363
------- -------
Gross profit 31,966 30,706
OPERATING EXPENSES 26,506 26,916
NON-OPERATING EXPENSES, net 1,481 1,649
------- -------
Income before income tax provision 3,979 2,141
INCOME TAX PROVISION 1,471 958
------- -------
Net income $ 2,508 $ 1,183
======= =======
Net income per share $ 0.07 $ 0.03
======= =======
</TABLE>
These pro forma operating results reflect certain adjustments, including
amortization of goodwill acquired, incremental interest expense and adjustments
for the provision of income taxes to reflect an effective tax rate of 37%. The
pro forma results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated on January 1, 1996,
nor are they necessarily indicative of future results.
6. CREDIT FACILITY:
The Company maintains a Revolving Credit Facility with a syndicate of five
commercial banks under which borrowings of up to $125 million are available.
Under the 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
F-7
<PAGE> 10
leverage ratio at the time of borrowing. The 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.
Scheduled reductions of the $125,000,000 maximum balance allowed under the
Revolving Credit Facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997 $ --
1998 10,000,000
1999 35,000,000
2000 40,000,000
2001 40,000,000
------------
$125,000,000
============
</TABLE>
The 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 March 31, 1997, the Company is in compliance with all
debt covenants.
7. RESTRUCTURING:
New York Pharmacy Consolidation
Effective June 30, 1996, the Company closed its Inwood, New York, long-term care
pharmacy and consolidated its operations with those of other of the Company's
long-term care pharmacies in the New York metropolitan area.
Long-Term Care Pharmacy
During August 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations by
consolidating two of its existing California facilities into a new, more
centralized location and by consolidating its Aston, Pennsylvania, and
Baltimore, Maryland, long-term care pharmacies into one of its existing
mid-Atlantic pharmacies. In addition, the Company's restructuring plan includes
the relocation of its corporate headquarters.
The Company has recorded as a restructuring charge during the year ended
December 31, 1996, the estimated costs associated with the long-term care
pharmacy restructuring of $2,825,000. These costs include, among other items,
future lease obligations relating to facility closures and severance and other
costs relating to planned downsizing of the Company's work force.
F-8
<PAGE> 11
8. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. In light of the financial and operating significance of
purchases, the Company routinely monitors the performance of its primary
supplier and negotiates settlements and future service levels based thereon.
Anticipated settlement amounts are recorded based upon management's estimates.
The Company changed its primary supplier in December 1996.
9. SUBSEQUENT EVENTS:
In April 1997, the Company acquired Willowood Services, Inc., a
Massachusetts-based provider of institutional pharmacy services to approximately
750 beds. The purchase price was approximately $2,900,000.
In April 1997, the Company announced a proposed merger with Beverly Enterprises,
Inc.'s ("Beverly") pharmacy unit, Pharmacy Corporation of America (PCA). The
Company will issue approximately 50,000,000 shares to existing Beverly
stockholders and assume approximately $275,000,000 in debt. The Company
anticipates that the transaction will be finalized during the fourth quarter of
1997.
F-9
<PAGE> 12
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART 1: FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Capstone is a leading provider of institutional pharmacy services to long-term
care facilities and correctional institutions throughout the United States. The
Company provides its long-term care clients with comprehensive institutional
pharmacy services that include (i) the purchasing, repackaging and dispensing of
pharmaceuticals, (ii) infusion therapy and Medicare Part B services, which are
comprised of enteral nutrition and urologic supplies, and (iii) pharmacy
consulting services, all of which are supported by computerized recordkeeping
and third-party billing services. The Company serves its long-term care clients
primarily through regional pharmacies that are open 24 hours, seven days a week.
In the correctional business, the Company provides pharmaceuticals primarily
under capitated contracts at correctional institutions that have privatized
inmate health care services.
In the first quarter of 1995, Capstone implemented a corporate restructuring
plan that included installation of a new management team, refocusing the
Company's operations on core institutional pharmacy businesses and the
initiation of an aggressive acquisition strategy. In conjunction with the
restructuring, the Company exited certain nonstrategic, unprofitable lines of
business. The Company sold its medical/surgical supply operations, closed a
long-term care pharmacy in Missouri, discontinued its long-term care mail order
pharmacy operations and sold its computer software division. Capstone took
certain charges and realized certain gains relating to the discontinuation of
these operations.
During the third quarter of 1996, Capstone implemented a restructuring plan that
will consolidate and integrate the Company's recent acquisitions with existing
operations, as well as promote an efficient structure to support continued
growth. Key aspects of this plan include the consolidation of California,
Pennsylvania and Maryland long-term care pharmacies and the closure of excess
facilities. The Company also has relocated its corporate headquarters
to Irving, Texas.
The acquisition of institutional pharmacy companies has resulted in a
significant change in the Company's financial profile. Between January 1, 1996
and March 31, 1997, the Company completed a total of 12 such acquisitions. Six
of these acquisitions were completed during the three months ended March 31,
1997. On a pro forma basis for all acquisitions, the Company's net sales and
income before taxes for the period ended March 31, 1997, were $73,266,000 and
$3,979,000, respectively, compared to pro forma net sales and income before
taxes of $70,069,000 and $2,141,000, respectively, for the period ended March
31, 1996. All of these acquisitions have been accounted for using the purchase
method of accounting and, as a result, the Company will incur significant future
amortization expense associated with goodwill.
F-10
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997, COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1996
NET SALES. Net sales increased to $69,024,000 in the 1997 period from
$22,028,000 in the 1996 period, an increase of $46,996,000 or 213%. This
increase is primarily attributable to the addition of revenue related to the
acquisitions completed and the beds added as a result of the Company's
preferred provider agreements with long-term care operators.
COST OF SALES. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $38,690,000 in the 1997
period from $13,576,000 in the 1996 period, an increase of $25,114,000 or 185%.
As a percentage of net sales, cost of sales decreased to 56.1% in the 1997
period from 61.6% in the 1996 period as a result of more favorable
reimbursement in the markets of the acquired companies, the addition of higher
margin infusion and Medicare Part B services and purchasing efficiencies
related to greater purchasing volume. In addition, the Company entered into new
prime vendor and group purchasing organization agreements during the fourth
quarter of 1996. These agreements resulted in a reduction in cost of goods sold
during the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $22,925,000 in the 1997 period from $7,277,000 in the 1996 period, an
increase of $15,648,000 or 215%. This increase in expenses was due to
acquisitions closed subsequent to the 1996 period. As a percentage of net
sales, selling, general and administrative expenses were 33.2% in the 1997
period, compared to 33.0% in the 1996 period. Management believes that selling,
general and administrative expenses as a percentage of net revenues in future
periods will decline as operational synergies and the benefits of restructuring
plans are fully realized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$2,357,000 in the 1997 period from $569,000 in the 1996 period, an increase of
$1,788,000 or 314%. This increase is due mainly to the increased amortization
expense incurred as a result of the acquisitions.
NONOPERATING EXPENSE. Nonoperating expenses include interest and other
nonoperating items. Nonoperating expenses increased to $1,155,000 in the 1997
period from $217,000 in the 1996 period, an increase of $938,000. The increase
is primarily due to interest expense on bank borrowings related to acquisitions.
INCOME TAXES. Income taxes in the 1997 and 1996 periods are recorded at
effective rates of 37% and 26%, respectively. The increase in the effective tax
rates is due to the full realization of federal net operating loss carryforwards
during the fourth quarter of 1996.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
THREE MONTHS ENDED MARCH 31, 1997, COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1996
The Company requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies.
The Company's net cash flows from operating activities were $(13,730,000) and
$(2,171,000), respectively, for the three months ended March 31, 1997 and 1996.
Generally, the cash flows from operating activities in each of the periods
resulted from increased working capital requirements associated with the
acquisitions and the beds added pursuant to the preferred provider agreements.
F-11
<PAGE> 14
The Company's net cash flows from investing activities were $(29,866,000) and
$(17,344,000) for the three months ended March 31, 1997 and 1996, respectively.
Net cash flows from investing activities were impacted by acquisitions
previously discussed and investments in new pharmacy locations and information
systems during the 1997 period.
Net cash flows from financing activities were approximately $44,497,000 and
$18,028,000 for the three months ended March 31, 1997 and 1996, respectively.
Net cash flows from financing activities were primarily impacted by borrowings
to fund acquisitions and working capital requirements.
During December 1996, the Company entered into a revolving $125 million credit
facility (the "Credit Facility") with a syndicate of banks for which Bankers
Trust Company acts as agent. Approximately $32,000,000 of the Credit Facility
was used to retire amounts outstanding under the Company's prior credit
facility. Borrowings under the agreement are secured by substantially all of the
assets of the Company. The Credit Facility bears interest, at the option of the
Company, at (a) Bankers Trust Company's prime rate plus an applicable margin
based on the Company's leverage ratio, or (b) the prevailing eurodollar rate
quoted by Bankers Trust Company, plus an applicable margin based upon the
Company's leverage ratio. Availability under the Credit Facility is subject to
the Company's leverage ratio and other provisions and covenants, all as defined
by the underlying agreement. As of May 12, 1997, the Company had outstanding
borrowings of approximately $91,200,000 under the Credit Facility.
F-12
<PAGE> 15
The Company believes its existing credit facility is sufficient to fund its
current working capital needs. In order to implement its growth strategy, the
Company will require substantial capital resources and will need to incur, from
time to time, additional bank indebtedness. The Company also may need to issue,
in public or in private transactions, equity or debt securities, the
availability and terms of which will depend on market and other conditions.
There can be no assurance that any such additional financing will be available
on terms acceptable to the Company, if at all.
F-13
<PAGE> 16
PART 2: OTHER INFORMATION
Items 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
In the fiscal quarter ended March 31, 1997, the Company sold the
following securities without registration under the Securities Act:
<TABLE>
<CAPTION>
Date Title Amount Purchasers Consideration
---- ----- ------ ---------- -------------
<S> <C> <C> <C> <C>
1/97(1) Common Stock 1,354,402 Shareholder of Sale of business.
Clinical Care-SNF Stock represented $15
million in purchase
price consideration
1/97(1) Common Stock 1,354,402 Shareholder of Sale of business.
Portaro Pharmacies Stock represented $15
million in purchase
price consideration
1/97-3/97(1) $12.00 Warrants 200,000 ACA Investors Issued pursuant to
acquisition consulting
agreement in connection
with various acquisitions
</TABLE>
- -----------------
(1) Offering made pursuant to Section 4(2) of the Securities Act in reliance
upon the limited number of offers and sales and the nature of the
transaction and the purchaser.
(2) Offering made pursuant to Rule 506 of Regulation D and Section 4(2) of the
Securities Act in reliance upon criteria set forth in Regulation D.
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
a) The exhibits filed as a part of this Report are listed in the
Exhibit Index immediately following the signature page.
b) Reports on Form 8-K filed in the first three months of 1997.
<TABLE>
<CAPTION>
Date Filed Report Name
---------- -------------------------------------------------
<S> <C>
01/31/97 Current Report on Form 8-K dated January 31, 1997
</TABLE>
F-14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
(Registrant)
Dated: May 15, 1997 By: /s/James D. Shelton
---------------------------------
Executive Vice President and
Chief Financial Officer
F-15
<PAGE> 18
INDEX OF EXHIBITS
Exhibit
Number Description
------- -------------------------------------------------------------
2.1 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).
2.2 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).
2.3 Stock Purchase Agreement among Alger Health Services, Inc., IPS
and the Company, dated January 24, 1997. (incorporated by
reference to Exhibit 2.7 to the Company's Annual Report on Form
10-K dated March 31, 1997 (the "1996 Annual Report"))
2.4 Asset Purchase Agreement between Pennsylvania Prescriptions, Inc.
d/b/a Emerald Drug Store, dated March 6, 1997. (incorporated by
reference to Exhibit 2.8 to the 1996 Annual Report)
2.5 Asset Purchase Agreement by and between Pharmacare, Inc. and IPS,
dated March 24, 1997. (incorporated by reference to Exhibit 2.9
to the 1996 Annual Report)
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).
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. (incorporated by reference to
Exhibit 4.9 to the 1996 Annual Report)
4.10 Warrant to purchase shares of Common Stock dated December 20,
1995 for the purchase of 15,000 shares. (incorporated by
reference to Exhibit 4.10 to the 1996 Annual Report)
4.11 Form of ACA Investors Warrant ($12.00) for purchase of Common
Stock. (incorporated by reference to Exhibit 4.11 to the 1996
Annual Report)
10.1 Registration Rights Agreement dated January 3, 1997 by and among
the Company and Ron Belville, Denis A Portaro, Sandra Portaro and
the Denis A. and Sandra Lou Portaro Revocable Trust of 1992
(incorporated by reference to Exhibit 10.19 to the 1996 Annual
Report).
11 Statement re computation of per share earnings
27 Financial Data Schedule
F-16
<PAGE> 1
EXHIBIT 11
CAPTONE PHARMACY SERVICES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Q: 3/31/97
<TABLE>
<CAPTION>
Fully
Primary Diluted
----------- -----------
<S> <C> <C>
OPTIONS/WARRANTS OUTSTANDING
- ----------------------------
Qrtly. avg. stock price 11.806
===========
Period ending stock price, if higher 11.806
===========
N/A BECAUSE ENDING PRICE LOWER (11) THAN AVG PRICE
Proceeds from exercise of stock options 20,998,427
Proceeds from exercise of warrants 25,032,190
-----------
46,030,617
Average stock price 11.806
-----------
# of shares repurchased 3,898,970
Total shares related to o/s options 2,795,533 2,795,533
Total shares related to o/s warrants 4,122,409 4,122,409
Less: repurchased shares (3,898,970) (3,898,970)
----------- -----------
Dilutive Effect 3,018,972 3,018,972
SHARES EXERCISED/GRANTED DURING PERIOD
- --------------------------------------
See separate calculation 54,192 55,198
1ST QUARTER WEIGHTED AVG. SHARE OUTSTANDING
- -------------------------------------------
See separate calculation 33,503,061 33,503,061
SHARES HELD IN ESCROW
- ---------------------
107,692 338,462
----------- -----------
TOTAL PRIMARY/FULLY-DILUTED WASO 36,683,917 36,915,693
- --------------------------------
</TABLE>
<PAGE> 2
CAPTONE PHARMACY SERVICES, INC.
CALCULATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
A: 12/31/96
FOR THE THREE MONTHS ENDING 3/31/97
<TABLE>
<CAPTION>
Transaction Weighted
Stock Transactions Date Shares Days O/S Average
- ------------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance @ 12/31/96 30,795,769 90 30,795,769
Clinical Care 1/3/97 2,708,804 87 2,618,511
Robbins 1/6/97 5,000 84 4,667
Yankellow 1/6/97 15,000 84 14,000
Kantor 1/9/97 5,000 81 4,500
Robbins 1/10/97 6,500 80 5,778
Kantor 1/15/97 5,000 75 4,167
Robbins 1/15/97 6,000 75 5,000
Duffy 1/16/97 6,165 74 5,069
Smith 1/21/97 6,666 69 5,111
Robbins 1/21/97 5,000 69 3,833
Robbins 1/22/97 5,000 68 3,778
Kantor 1/22/97 5,000 68 3,778
Robbins 1/24/97 7,500 66 5,500
Kantor 1/27/97 5,000 63 3,500
Kantor 2/14/97 5,000 45 2,500
Robbins 2/19/97 4,000 40 1,778
Lathrop 2/25/97 10,000 34 3,778
Robbins 2/25/97 3,600 34 1,360
Thompson 3/3/97 4,110 28 1,279
Robbins 3/3/97 5,100 28 1,587
Robbins 3/3/97 5,300 28 1,649
Debrowski 3/3/97 5,000 28 1,556
Robbins 3/11/97 3,800 20 844
Robbins 3/18/97 1,500 13 217
Mandelbaum 3/21/97 31,500 10 3,500
Robbins 3/21/97 500 10 56
---------- ----------
33,666,814 33,503,061
</TABLE>
<PAGE> 3
CAPSTONE PHARMACY SERVICES
CALCULATION OF DILUTIVE EFFECT OF OPTION/WARRANT EXERCISES & GRANTS
FIRST QUARTER ACTIVITY
<TABLE>
<CAPTION>
Primary* Fully Fully
Dilutive Dilutive # of days Primary Dilutive
Date of Shares Exer/Grant Avg. Stock End Stock Exer/Grant Effect Effect before/after Prorated Prorated
Exer/Grant Exer/Grant Price Price Price Value (Shares) (Shares) Exer/Grant Effect Effect
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Options:
Exercised (A)
Yankellow 1/6/97 5,000 2.850 11.375 11.313 14,250 3,747 3,740 5 208 208
Yankellow 1/6/97 10,000 3.810 11.375 11.313 38,100 6,651 6,632 5 369 368
Kantor 1/9/97 5,000 5.000 11.802 12.438 25,000 2,882 2,990 8 256 266
Robbins 1/10/97 6,500 5.000 11.839 12.063 32,500 3,755 3,806 9 375 381
Kantor 1/15/97 5,000 5.000 11.800 11.750 25,000 2,881 2,872 14 448 447
Robbins 1/15/97 6,000 5.000 11.800 11.750 30,000 3,458 3,447 14 538 536
Smith 1/21/97 6,666 5.880 11.763 12.000 39,196 3,334 3,400 20 741 755
Robbins 1/21/97 5,000 5.000 11.763 12.000 25,000 2,875 2,917 20 639 648
Robbins 1/22/97 5,000 5.000 11.788 12.125 25,000 2,879 2,938 21 672 686
Kantor 1/22/97 5,000 5.000 11.788 12.125 25,000 2,879 2,938 21 672 686
Robbins 1/24/97 7,500 5.000 11.820 12.125 37,500 4,327 4,407 23 1,106 1,126
Kantor 1/27/97 5,000 5.000 11.800 11.938 25,000 2,881 2,906 26 832 839
Kantor 2/14/97 5,000 5.000 11.600 11.000 25,000 2,845 2,727 44 1,391 1,333
Robbins 2/19/97 4,000 5.000 11.605 11.500 20,000 2,277 2,261 49 1,239 1,231
Lathrop 2/25/97 10,000 2.860 11.650 12.250 28,600 7,545 7,665 55 4,611 4,684
Robbins 2/25/97 3,600 5.000 11.650 12.250 18,000 2,055 2,131 55 1,256 1,302
Robbins 3/3/97 5,100 5.000 11.708 12.875 25,500 2,922 3,119 61 1,980 2,114
Robbins 3/3/97 5,300 5.000 11.708 12.875 26,500 3,037 3,242 61 2,058 2,197
Debrowski 3/3/97 5,000 8.000 11.708 12.875 40,000 1,584 1,893 61 1,073 1,283
Robbins 3/11/97 3,800 5.000 11.797 12.500 19,000 2,189 2,280 69 1,679 1,748
Robbins 3/18/97 1,500 5.000 11.823 11.875 7,500 866 868 76 731 733
Mandelbaum 3/21/97 6,500 2.850 11.811 11.531 18,525 4,932 4,893 79 4,329 4,295
Mandelbaum 3/21/97 25,000 3.500 11.811 11.531 87,500 17,592 17,412 79 15,442 15,284
Robbins 3/21/97 500 5.000 11.811 11.531 2,500 288 283 79 253 249
Cancelled
---------
Hughes 2/2/97 13,334 6.000 11.793 11.793 80,004 6,550 6,550 32 2,329 2,329
Hughes 2/2/97 16,667 8.500 11.793 11.793 141,670 4,654 4,654 32 1,655 1,655
</TABLE>
<PAGE> 4
CAPSTONE PHARMACY SERVICES
CALCULATION OF DILUTIVE EFFECT OF OPTION/WARRANT EXERCISES & GRANTS
FIRST QUARTER ACTIVITY
<TABLE>
<CAPTION>
Primary* Fully Fully
Dilutive Dilutive # of days Primary Dilutive
Date of Shares Exer/Grant Avg. Stock End Stock Exer/Grant Effect Effect before/after Prorated Prorated
Exer/Grant Exer/Grant Price Price Price Value (Shares) (Shares) Exer/Grant Effect Effect
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Options:
Hughes 2/2/97 3,334 10.130 11.793 11.793 33,773 470 470 32 167 167
Debrowski 3/3/97 10,000 8.000 11.708 12.875 80,000 3,167 3,786 61 2,147 2,566
Fleischer 2/14/97 5,000 8.750 11.600 11.600 43,750 1,228 1,228 44 601 601
Sauer 1/l/97 3,334 8.500 11.500 11.500 28,339 870 870 0 -- --
Quarberg 2/14/97 20,000 10.130 11.600 11.600 202,600 2,534 2,534 44 1,239 1,239
Quarberg 2/14/97 10,000 10.500 11.600 11.600 105,000 948 948 44 464 464
Grants
------
Jim Shelton 1/20/97 40,000 11.500 11.821 11.821 460,000 1,086 1,086 33 389 390
Warrants:
Exercised
---------
J. Duffy 1/16/97 3,425 4.500 11.767 11.438 15,413 2,115 2,077 15 345 339
J. Duffy 1/16/97 2,740 5.500 11.767 11.438 15,070 1,459 1,422 15 243 237
D. Thompson 3/3/97 4,110 4.500 11.708 12.875 18,495 2,530 2,673 61 1,715 1,812
Grants
------
N/A
-------- --------
Total primary and fully-dilutive effect of shares exercised/granted in 1st quarter 54,192 55,198
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,308,190
<SECURITIES> 0
<RECEIVABLES> 63,401,985
<ALLOWANCES> 7,128,000
<INVENTORY> 18,134,696
<CURRENT-ASSETS> 98,597,800
<PP&E> 12,130,249
<DEPRECIATION> 6,089,854
<TOTAL-ASSETS> 348,717,803
<CURRENT-LIABILITIES> 23,313,004
<BONDS> 87,943,196
0
0
<COMMON> 336,668
<OTHER-SE> 237,562,525
<TOTAL-LIABILITY-AND-EQUITY> 348,717,803
<SALES> 69,023,558
<TOTAL-REVENUES> 69,023,558
<CGS> 38,690,339
<TOTAL-COSTS> 38,690,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 690,236
<INTEREST-EXPENSE> 1,155,359
<INCOME-PRETAX> 3,895,357
<INCOME-TAX> 1,441,282
<INCOME-CONTINUING> 2,454,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,454,075
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
