<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 2, 1997
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-20606 11-2310352
- ---------------------------- ------------------------ ----------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
9901 E. Valley Ranch Parkway, Suite 3001, Irving, Texas 75063
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(972) 401-1541
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, or former address if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
(i) Audited balance sheet of Clinical Care - SNF Pharmacy,
Inc. as of December 31, 1996, and the related statements of
operations, changes in stockholder's equity and cash flows for
the year then ended.
(ii) Audited balance sheet of Portaro Pharmacies, Inc. (d/b/a
Clinical Care Pharmacy) as of November 31, 1996, and the
related statements of operations, changes in stockholder's
equity and cash flows for the year then ended.
(iii) Audited balance sheets of Pharmacare, Inc. as of
December 31, 1996 and 1995, and the related statements of
operations, changes in stockholders' equity and cash flows
for the years ended December 31, 1996, 1995 and 1994.
(a) Pro forma financial information. Pro forma unaudited financial data for
the year ended December 31, 1996, and the three months ended March 31,
1997, reflecting the acquisitions by the Company of IMD Corporation,
DCMed, Inc., Symphony Pharmacy Services, Inc., Happy Harry's Inc.,
Institutional Pharmacy, Inc., Clinical Care - SNF Pharmacy, Inc.,
Portaro Pharmacies, Inc., Alger Health Services, Inc., Pennsylvania
Prescriptions, Inc., Pharmacare, Inc., Willowwood. and Macromed.
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Clinical Care - SNF Pharmacy, Inc.:
We have audited the accompanying balance sheet of Clinical Care - SNF Pharmacy,
Inc. (a California corporation) as of December 31, 1996, and the related
statements of operations, changes in stockholder's equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clinical Care - SNF Pharmacy,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/S/ARTHUR ANDERSEN LLP
Baltimore, Maryland,
April 23, 1997
<PAGE> 4
CLINICAL CARE - SNF PHARMACY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES $13,995,571
COST OF SALES 7,962,729
-----------
Gross profit 6,032,842
-----------
OPERATING EXPENSES:
Selling, general and administrative 5,345,995
Provision for doubtful accounts 180,000
Depreciation 50,945
-----------
Total operating expenses 5,576,940
-----------
Income from operations 455,902
-----------
NONOPERATING EXPENSE:
Interest expense 115,483
Loss on disposal of equipment 1,762
-----------
Total nonoperating expense 117,245
-----------
Income before provision for taxes 338,657
PROVISION FOR TAXES 4,961
-----------
Net income $ 333,696
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
CLINICAL CARE - SNF PHARMACY, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 1,321
Accounts receivable, less allowance for doubtful
accounts of $180,000 1,779,657
Inventory 452,046
Prepaid expenses and other current assets 52,746
----------
Total current assets 2,285,770
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 120,192
OTHER ASSETS 20,160
----------
Total assets $2,426,122
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 649,487
Accounts payable 852,946
Accrued compensation and employee benefits 274,695
Other accrued expenses and liabilities 7,415
Current portion of long-term debt 107,390
----------
Total current liabilities 1,891,933
LONG-TERM DEBT, net of current portion 342,501
----------
Total liabilities 2,234,434
==========
COMMITMENTS
STOCKHOLDER'S EQUITY:
Common stock, $.10 par value, 500,000 shares authorized,
10,000 shares issued and outstanding 1,000
Retained earnings 190,688
----------
Total stockholder's equity 191,688
----------
Total liabilities and stockholder's equity $2,426,122
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 6
CLINICAL CARE - SNF PHARMACY, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
--------- --------- ---------
<S> <C> <C> <C>
BALANCE, at December 31, 1995 $ 1,000 $ 471,380 $ 472,380
Dividends -- (614,388) (614,388)
Net income -- 333,696 333,696
--------- --------- ---------
BALANCE, at December 31, 1996 $ 1,000 $ 190,688 $ 191,688
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
CLINICAL CARE - SNF PHARMACY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 333,696
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation and amortization 50,945
Loss on disposal of equipment 1,762
Change in operating assets and liabilities, net of noncash
transactions-
Decrease in accounts receivable 110,493
Increase in inventory (74,713)
Increase in prepaid expenses and other current assets (50,574)
Increase in other assets (11,235)
Increase in accounts payable 325,494
Increase in accrued compensation and employee benefits 47,563
Decrease in other accrued expenses and liabilities (2,428)
---------
Net cash flows from operating activities 731,003
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55,950)
---------
Net cash used in investing activities (55,950)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 68,292
Net repayments on stockholder loan (12,921)
Repayments of long-term debt (152,151)
Dividends paid (614,388)
---------
Net cash used in financing activities (711,168)
---------
NET DECREASE IN CASH (36,115)
CASH, beginning of year 37,436
---------
CASH, end of year $ 1,321
=========
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 99,933
=========
Taxes $ 2,205
=========
NONCASH TRANSACTIONS:
Conversion of accounts payable to debt $ 606,888
=========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 8
CLINICAL CARE - SNF PHARMACY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Clinical Care - SNF Pharmacy, Inc. (the Company) was incorporated on December 9,
1980, and is an independent provider of pharmacy services to long-term care
institutions including skilled nursing facilities, assisted living facilities
and other institutional health care settings, and home care. The Company
purchases and dispenses prescription and nonprescription pharmaceuticals,
provides clinical services, pharmacy systems and supplies long-term care
facilities with a full complement of training, policies, equipment, supplies and
billing for each service delivered. The Company also provides an array of
ancillary heath care services to complement its core pharmacy services,
including infusion therapy and nutrition management. The Company conducts its
operations throughout Southern California.
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 revenue, expenses, gains
and losses during the reporting periods. Actual results could differ from these
estimates.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using accelerated methods over the estimated useful
lives or, with respect to leasehold improvements, over the term of the lease,
whichever is shorter.
Furniture and fixtures 5 - 7 years
Computer hardware and software 5 - 7 years
Equipment 5 - 7 years
<PAGE> 9
Income Taxes
In October 1994, the Company elected to be taxed as an S-corporation, which is a
pass-through tax entity. This election requires the individual stockholder,
rather than the Company, to pay federal and state income tax on the Company's
earnings.
California also recognizes the "S" election; however a 1.5% California franchise
tax is payable. The provision for income taxes consists solely of the California
franchise tax.
Revenue Recognition
Revenues are recorded as products are shipped and services are rendered. A
portion of the Company's sales is 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
Accounts receivable are uncollateralized and are primarily reimbursed, directly
or indirectly, by state and federal government-sponsored programs.
Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. As of
December 31, 1996, management believes there were no indications of impairment
that would affect the carrying values of assets.
2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are summarized by major classifications, as
follows:
<TABLE>
<S> <C>
Furniture and fixtures $ 87,841
Equipment 256,605
Computer hardware and software 92,682
Leasehold improvements 3,351
---------
440,479
Less: Accumulated depreciation and amortization (320,287)
---------
$ 120,192
=========
</TABLE>
<PAGE> 10
3. SHORT-TERM BORROWINGS:
During 1996, the Company entered into a promissory note arrangement with a
primary vendor to convert a portion of the Company's accounts payable balance.
The note is payable upon demand or, if no demand is made, then on November 1,
2001. The note bears interest at prime plus 2%, which was 10.25% at December 31,
1996. The unpaid principal balance was $606,888 at December 31, 1996. The note
is collateralized by certain assets of the Company.
During 1996, the Company's line of credit arrangement was converted to a note
payable due by December 15, 1997. The balance of the line of credit at the
conversion was $68,292. This note bears interest at the prime rate plus 5.5%,
subject to an increase of 1% if the borrower does not maintain its primary
deposit account with the lendor. The Company failed to comply with this term and
an additional 1% was included in the interest rate. At December 31, 1996, the
interest rate was 14.75%. The unpaid principal balance was $42,599 at December
31, 1996.
4. LONG-TERM DEBT:
The Company entered into a promissory note arrangement with a bank. The note
bears interest at the prime rate plus 2.25%, subject to an increase of 1% if the
borrower does not maintain its primary deposit account with the lendor. The
Company failed to comply with this term and an additional 1% was included in the
interest rate. The note is payable in monthly installments through December
1997. At December 31, 1996, the interest rate was 11.5%. The unpaid principal
balance was $9,534 at December 31, 1996.
During 1994, the Company entered into a promissory note arrangement with a bank.
The note bears interest at the prime rate plus 3.5%, subject to an increase of
1% if the borrower does not maintain its primary deposit account with the
lendor. The Company failed to comply with this term and an additional 1% was
included in the interest rate. The note is payable in monthly installments
through May 2001. At December 31, 1996, the interest rate was 12.75%. The unpaid
principal balance was $440,357 at December 31, 1996.
Future maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $107,390
1998 97,857
1999 97,857
2000 97,857
2001 48,930
--------
$449,891
========
</TABLE>
<PAGE> 11
5. COMMITMENTS:
The Company has operating leases for its office and warehouse space, automobiles
and equipment. Future minimum lease payments under operating leases that have
remaining noncancellable terms are as follows:
<TABLE>
<S> <C>
1997 $109,005
1998 81,447
1999 37,461
2000 11,012
2001 5,382
--------
$244,307
========
</TABLE>
Rent expense incurred during the year ended December 31, 1996, totaled $287,401.
6. MAJOR VENDOR:
The Company purchases a significant amount of their inventory from one vendor.
During 1996, approximately 91% of the Company's purchases were made from this
vendor.
7. EMPLOYEE BENEFIT PLAN:
The Company provides a 401(k) plan (the Plan) for eligible employees of the
Company. During 1996, the Company voluntarily contributed to the Plan. The
Company's contribution and plan administrative expense for the year was $16,900.
8. SUBSEQUENT EVENTS:
During January 1997, the sole stockholder of the Company contributed $100,000 of
cash to the Company.
Subsequent to year-end, 100% of the Company's outstanding stock was purchased by
Capstone Pharmacy Services, Inc. (Capstone). During 1997, Capstone paid off all
debt obligations of the Company.
<PAGE> 12
PORTARO PHARMACIES, INC.
DBA CLINICAL CARE PHARMACY
FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Portaro Pharmacies, Inc.:
We have audited the accompanying balance sheet of Portaro Pharmacies, Inc. (a
California corporation) as of November 30, 1996, and the related statements of
operations, changes in stockholder's equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Portaro Pharmacies, Inc. as of
November 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/S/ARTHUR ANDERSEN LLP
Baltimore, Maryland,
May 1, 1997
<PAGE> 14
PORTARO PHARMACIES, INC.
dba CLINICAL CARE PHARMACY
BALANCE SHEET
AS OF NOVEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 123,933
Trade accounts receivable, less allowance for doubtful
accounts of $492,030 1,771,530
Due from employees 196,734
Inventory 1,067,598
Prepaid expenses and other current assets 23,334
----------
Total current assets 3,183,129
PROPERTY AND EQUIPMENT, net 591,423
OTHER ASSETS, net 377,017
----------
Total assets $4,151,569
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 274,291
Accrued expenses and other current liabilities 254,958
Current portion of long-term debt 60,878
Current portion of capital lease obligations 43,108
Borrowings under line of credit 1,697,751
----------
Total current liabilities 2,330,986
LONG-TERM DEBT, net of current portion 190,000
CAPITAL LEASE OBLIGATIONS, net of current portion 96,378
----------
Total liabilities 2,617,364
----------
COMMITMENTS
STOCKHOLDER'S EQUITY:
Common stock, no par value, 1,000 shares authorized;
50 shares issued and outstanding 5,000
Retained earnings 1,529,205
----------
Total stockholder's equity 1,534,205
----------
Total liabilities and stockholder's equity $4,151,569
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 15
PORTARO PHARMACIES, INC.
dba CLINICAL CARE PHARMACY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
NET SALES $ 13,740,483
COST OF SALES 7,413,694
------------
Gross profit 6,326,789
------------
OPERATING EXPENSES:
Selling, general and administrative 5,855,421
Provision for doubtful accounts 461,831
Depreciation and amortization 190,445
------------
Total operating expenses 6,507,697
------------
Loss from operations (180,908)
------------
NONOPERATING INCOME (EXPENSE):
Interest income 19,063
Loss on sale of property and equipment (17,590)
Interest expense (188,792)
------------
Total nonoperating expense (187,319)
------------
Loss before provision for income taxes (368,227)
PROVISION FOR INCOME TAXES 800
------------
Net loss $ (369,027)
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 16
PORTARO PHARMACIES, INC.
dba CLINICAL CARE PHARMACY
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Common Retained Stockholder's
Stock Earnings Equity
----------- ----------- -------------
<S> <C> <C> <C>
BALANCE, at November 30, 1995 $ 5,000 $ 1,898,232 $ 1,903,232
Net loss -- (369,027) (369,027)
----------- ----------- -----------
BALANCE, at November 30, 1996 $ 5,000 $ 1,529,205 $ 1,534,205
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 17
PORTARO PHARMACIES, INC.
dba CLINICAL CARE PHARMACY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net loss $(369,027)
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation and amortization 190,445
Loss on disposal of property and equipment 17,590
Changes in operating assets and liabilities-
Decrease in trade accounts receivable 861,759
Increase in inventory (273,774)
Decrease in prepaid expenses and other assets 47,299
Decrease in accounts payable (16,699)
Decrease in accrued expenses and other current liabilities (24,979)
---------
Net cash provided by operating activities 432,614
---------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Payments on loans to employees 10,849
Proceeds from disposal of property and equipment 24,255
Purchases of property and equipment (455,635)
Increase in other assets (327,192)
---------
Net cash used in investing activities (747,723)
---------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Net borrowings under line of credit 248,027
Proceeds from long-term debt 518,036
Repayment of loan from stockholder and employee (309,187)
Repayments of long-term debt (109,481)
Repayments of capital lease obligation (20,660)
---------
Net cash provided by financing activities 326,735
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,626
CASH AND CASH EQUIVALENTS, beginning of year 112,307
---------
CASH AND CASH EQUIVALENTS, end of year $ 123,933
=========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 175,362
=========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 18
PORTARO PHARMACIES, INC.
dba CLINICAL CARE PHARMACY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Portaro Pharmacies, Inc. (the Company) was incorporated on December 9, 1980, and
is an independent provider of pharmacy services to long-term care institutions
including skilled nursing facilities, assisted living facilities and other
institutional health care settings, and home care. The Company purchases and
dispenses prescription and nonprescription pharmaceuticals, provides clinical
services, pharmacy systems and supplies long-term care facilities with a full
complement of training, policies, equipment, supplies and billing for each
service delivered. The Company also provides an array of ancillary heath care
services to complement its core pharmacy services, including infusion therapy
and nutrition management. The Company conducts its operations throughout
Southern California.
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market instruments. Cash
equivalents are highly liquid and are stated at cost plus accrued interest,
which approximates fair value.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
Property and Equipment
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using accelerated methods over the estimated useful
lives or, with respect to leasehold improvements, over the term of the lease,
whichever is shorter.
Automobiles, trucks, computer hardware and software 3 - 5 years
Equipment 5 - 7 years
Leasehold improvements Term of lease
<PAGE> 19
Repairs and maintenance are charged to expense when incurred; replacements and
betterments are capitalized. The asset cost and related accumulated depreciation
are removed from the accounts for assets sold or retired, and any resulting gain
or loss is included in the statement of operations.
Other Assets
Other assets consists primarily of goodwill, a covenant not to compete and
start-up costs. The goodwill is related to a 1995 acquisition, and the covenant
not to compete is related to a 1996 acquisition (see Note 9). The start-up costs
were incurred during 1996 and relate to the Company's efforts to establish a
reputable consulting service line of business for patients, doctors and
pharmaceutical companies (see Note 6). This line of business has not yet
commenced operations.
Revenue Recognition
Revenues are recorded as products are shipped and services are rendered. A
portion of the Company's sales is 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
Accounts receivable are uncollateralized and are primarily reimbursed, directly
or indirectly, by state and federal government-sponsored programs.
Income Taxes
In December 1987, the Company elected to be taxed as an S-corporation, which is
a pass-through tax entity. This election requires the individual stockholder,
rather than the Company, to pay federal and state income tax on the Company's
earnings.
California also recognizes the "S" election; however a 1.5% California franchise
tax is payable. The provision for income taxes consists solely of the California
franchise tax. If a certain threshold of income is not met, a minimum tax of
$800 is due.
Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. As of
December 31, 1996, management believes there were no indications of impairment
that would affect the carrying values of assets.
2. LOAN RECEIVABLE FROM STOCKHOLDER:
There is a loan receivable from the sole stockholder which is due on demand,
unsecured and subordinated to Wells Fargo Bank. The balance was $191,684 at
November 30, 1996, and bears interest at 8.75%. This balance is included in due
from employees on the balance sheet.
<PAGE> 20
3. PROPERTY AND EQUIPMENT:
Property and equipment are summarized by major classifications, as follows:
<TABLE>
<S> <C>
Automobiles and trucks $ 366,193
Equipment 435,977
Computer hardware and software 349,716
Leasehold improvements 173,271
----------
1,325,157
Less: Accumulated depreciation 733,734
----------
$ 591,423
==========
</TABLE>
Depreciation expense for the year ended November 30, 1996, was $180,832
4. MAJOR VENDOR:
The Company purchases a significant amount of their inventory from one vendor.
During the year, approximately 86% of the Company's purchases were made from
this vendor.
5. LINE OF CREDIT PAYABLE:
The Company currently has a $1,700,000 line of credit with Wells Fargo Bank.
Interest is payable monthly at 1/2% above the bank's prime rate (the prime rate
was 8.25% at November 30, 1996). The line of credit is secured by accounts
receivable and equipment, expires March 3, 1997, and is guaranteed by the sole
stockholder. At November 30, 1996, the outstanding balance was $1,697,751.
The line of credit agreement provides that the Company must maintain a current
ratio of at least 1.40 to 1.0 and total liabilities divided by tangible net
worth must not be greater than 1.75 to 1.0. In addition, the Company must
generate a net income of $250,000. This line of credit was paid off subsequent
to year-end.
The Company was not in compliance with certain covenants at year-end; however,
the agreement provides for a 90-day grace period after year-end. During this
period, the amounts outstanding under the line of credit were paid off.
6. GOODWILL, COVENANTS AND START-UP COSTS:
Goodwill is recognized as the costs in excess of fair value of net assets of the
business acquired. Recoverability is reviewed annually or sooner if events or
changes in circumstances indicate that the carrying amount may exceed fair
value. Start-up costs are capitalized as costs are incurred during the
development of a new line of business.
<PAGE> 21
As of November 30, 1996, the Company had the following intangible assets:
<TABLE>
<S> <C>
Goodwill $ 8,828
Covenant not to compete 70,367
Start-up costs 257,442
--------
$336,637
========
</TABLE>
These amounts are being amortized over periods of five to seventeen years.
Accumulated amortization relating to other assets was $9,613 as of November 30,
1996. (The same amount was expensed in the statement of operations for the year
ended November 30, 1996.)
7. LONG-TERM DEBT:
Long-term debt at November 30, 1996, is summarized as follows:
<TABLE>
<S> <C>
Notes payable in monthly installments, including interest at 13.35%
through May 10, 1997 $ 878
Note payable, with interest at prime plus 2.0%; principal payable
in monthly installments of $5,000 through January 5, 2001;
secured by receivables, inventory, fixtures and equipment 250,000
---------
250,878
Less: Current portion of long-term debt (60,878)
---------
Long-term debt, net of current portion $ 190,000
=========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Years Ending November 30, Amount
------------------------- --------
<S> <C>
1997 $ 60,878
1998 60,000
1999 60,000
2000 60,000
2001 10,000
--------
$250,878
</TABLE>
<PAGE> 22
8. COMMITMENTS:
The Company has entered into capital and operating leases for pharmacy
facilities, vehicles and office equipment. Some of these leases require the
Company to pay for a portion of common area maintenance. Rent expense incurred
during the year ended November 30, 1996, totaled $396,591. Payments on capital
lease obligations during the year ended November 30, 1996, totaled $20,660.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Years Ending November 30, Leases Leases
------------------------- -------- ---------
<S> <C> <C>
1997 $ 51,898 $ 209,353
1998 50,908 174,143
1999 50,908 92,775
2000 30,958 --
-------- ---------
Total minimum lease payments 184,672 $ 476,271
=========
Less: Amounts representing imputed interest (45,186)
--------
Present value of net minimum payments 139,486
Less: Current portion (43,108)
--------
$ 96,378
========
</TABLE>
After year-end, the Company entered into additional vehicle lease obligations.
9. ACQUISITIONS:
In January 1996, the Company acquired certain assets of a pharmacy owned by
Drugcare, Inc. for $307,890 in cash and notes payable. This acquisition has been
recorded using the purchase method of accounting, including a $75,000 covenant
not to compete over five years. No goodwill was recorded at the date of
acquisition.
Unaudited pro forma combined results of operations of the Company for the year
ended November 30, 1996, assuming that the acquisition described above had been
made as of December 1, 1995, are presented below:
<TABLE>
<S> <C>
Net sales $13,908,736
Gross profit $ 6,390,822
Loss from operations $ (168,455)
Net loss $ (365,033)
</TABLE>
10. PROFIT SHARING PLAN:
The Company has established the Clinical Care Portaro Pharmacies, Inc. dba
Clinical Care 401(k) Profit Sharing Plan whereby employees may contribute up to
20% of their compensation. The Company, at the discretion of the Board of
Directors, will match employee contributions in an amount not to exceed $250
annually. For the year ended November 30, 1996, the Company made no matching
contributions.
<PAGE> 23
11. RELATED PARTY TRANSACTIONS:
The building in which corporate headquarters and one of the pharmaceutical
facilities are located is owned by the only stockholder. Management believes the
monthly rent is charged at fair value to Portaro. The rent expense during the
year related to this arrangement was $186,903. No lease exists for this
relationship.
12. SUBSEQUENT EVENT:
Subsequent to year-end, 100% of the Company's outstanding stock was purchased by
Capstone Pharmacy Services, Inc. (Capstone). During 1997, Capstone paid off the
borrowing under the line of credit.
<PAGE> 24
PHARMACARE, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
AND FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
PharmaCare, Inc.:
We have audited the accompanying balance sheets of PharmaCare, Inc. (a Virginia
corporation) as of December 31, 1996 and 1995, and the related statements of
income, changes in stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PharmaCare, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/S/ARTHUR ANDERSEN LLP
Baltimore, Maryland,
June 6, 1997
<PAGE> 26
PHARMACARE, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
------
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 336,211 $ 380,252
Accounts receivable, less allowance for doubtful
accounts of $150,000 in 1996 and 1995 626,948 643,105
Inventory 157,000 157,635
Prepaid expenses and other current assets 4,361 1,600
Due from stockholder 8,792 197,819
---------- ----------
Total current assets 1,133,312 1,380,411
EQUIPMENT, net 101,150 120,037
---------- ----------
Total assets $1,234,462 $1,500,448
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 101,131 $ 101,354
Accrued expenses and other current liabilities 79,661 76,849
---------- ----------
Total current liabilities 180,792 178,203
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value, authorized 5,000 shares;
800 shares issued and outstanding 75,000 75,000
Retained earnings 978,670 1,247,245
---------- ----------
Total stockholder's equity 1,053,670 1,322,245
---------- ----------
Total liabilities and stockholder's equity $1,234,462 $1,500,448
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 27
PHARMACARE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 4,996,505 $ 4,306,284 $ 3,371,576
COST OF SALES 2,915,651 2,319,190 1,820,313
----------- ----------- -----------
Gross profit 2,080,854 1,987,094 1,551,263
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,157,987 1,060,197 957,737
Depreciation 29,068 40,871 41,344
----------- ----------- -----------
Total operating expenses 1,187,055 1,101,068 999,081
----------- ----------- -----------
Income from operations 893,799 886,026 552,182
----------- ----------- -----------
NONOPERATING INCOME (EXPENSE):
Interest income (expense), net 17,626 11,186 (149)
----------- ----------- -----------
Total nonoperating income (expense) 17,626 11,186 (149)
----------- ----------- -----------
Net income $ 911,425 $ 897,212 $ 552,033
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 28
PHARMACARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, at December 31, 1993 $ 75,000 $ 638,000 $ 713,000
Dividends -- (420,000) (420,000)
Net income -- 552,033 552,033
----------- ----------- -----------
BALANCE, at December 31, 1994 75,000 770,033 845,033
Dividends -- (420,000) (420,000)
Net income -- 897,212 897,212
----------- ----------- -----------
BALANCE, at December 31, 1995 75,000 1,247,245 1,322,245
Dividends -- (1,180,000) (1,180,000)
Net income -- 911,425 911,425
----------- ----------- -----------
BALANCE, at December 31, 1996 $ 75,000 $ 978,670 $ 1,053,670
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 29
PHARMACARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 911,425 $ 897,212 $ 552,033
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 29,068 40,871 41,344
Change in operating assets and liabilities, net of
noncash transactions-
Decrease (increase) in accounts receivable 16,157 (184,523) --
Decrease (increase) in inventory 635 (36,989) (207)
(Increase) decrease in prepaid expenses and other
current assets (2,761) -- 1,578
Increase in other assets -- -- 4,833
(Decrease) increase in accounts payable (223) 26,249 (27,823)
Increase in accrued expenses and other current
liabilities 2,812 14,362 5,522
----------- ----------- -----------
Net cash provided by operating activities 957,113 757,182 577,280
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,181) (56,928) (13,200)
----------- ----------- -----------
Net cash used in investing activities (10,181) (56,928) (13,200)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on stockholder loan 190,000 -- --
Borrowings by stockholder (973) (197,819) --
Dividends paid (1,180,000) (420,000) (420,000)
----------- ----------- -----------
Net cash used in financing activities (990,973) (617,819) (420,000)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (44,041) 82,435 144,080
CASH, beginning of year 380,252 297,817 153,737
----------- ----------- -----------
CASH, end of year $ 336,211 $ 380,252 $ 297,817
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 26 $ 334 $ 291
=========== =========== ===========
Taxes $ 71,046 $ 70,572 $ 41,815
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 30
PHARMACARE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PharmaCare, Inc. (the Company) was incorporated on October 4, 1990, and is an
independent provider of pharmacy services to long-term care institutions
including skilled nursing facilities, assisted living facilities, home care and
other institutional health care settings. The Company purchases and dispenses
prescription and nonprescription pharmaceuticals, provides clinical services,
pharmacy systems and supplies long-term care facilities with a full complement
of training, policies, equipment, supplies and billing for each service
delivered. The Company also provides an array of ancillary heath care services
to complement its core pharmacy services, including infusion therapy and
nutrition management. The Company conducts its operations throughout
Southwestern Virginia.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosure of contingent assets and liabilities.
While actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
Equipment
Equipment is recorded at cost. Depreciation and amortization are computed using
straight-line methods over the following estimated useful lives.
Furniture and fixtures 7 years
Machinery and equipment 5 years
Computer hardware and software 5 years
Income Taxes
From inception, the Company elected to be taxed as an S-corporation, which is a
pass-through tax entity. This election requires the individual stockholder,
rather than the Company, to pay Federal and state income tax on the Company's
earnings. Virginia also recognizes the "S" election.
<PAGE> 31
Revenue Recognition
Revenues are recorded as products are shipped and services are rendered. A
portion of the Company's sales is 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
Accounts receivable are uncollateralized and are primarily reimbursed, directly
or indirectly, by state and Federal government-sponsored programs.
Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. As of
December 31, 1996 and 1995, management believes there were no indications of
impairment that would affect the carrying values of assets.
2. EQUIPMENT:
Equipment is summarized by major classifications, as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Furniture and fixtures $ 177,867 $ 167,686
Machinery and equipment 118,426 118,426
Computer hardware and software 1,200 1,200
--------- ---------
297,493 287,312
Less: Accumulated depreciation and amortization (196,343) (167,275)
--------- ---------
$ 101,150 $ 120,037
========= =========
</TABLE>
3. COMMITMENTS:
The Company has operating leases for its office and warehouse space. Future
minimum lease payments under operating leases that have remaining noncancellable
terms are as follows:
<TABLE>
<S> <C>
1997 $ 19,200
1998 17,600
--------
$ 36,800
========
</TABLE>
Rent expense incurred during the years ended December 31, 1996, 1995 and 1994,
totaled $19,200 for each of the years.
4. EMPLOYEE BENEFIT PLAN:
The Company provides a profit sharing plan (the Plan) for eligible employees of
the Company. During 1996 and 1995, the Company made no contributions to the
Plan. During 1994, the Company contributed
<PAGE> 32
approximately $48,000 to the Plan.
5. CONTINGENCIES:
The Company is subject to various claims and litigation in the ordinary course
of its business. In the opinion of management and outside counsel, settlement of
these claims and litigation will not have a material adverse effect on the
financial position or future operating results of the Company.
6. SUBSEQUENT EVENT:
Subsequent to year-end, substantially all of the assets of the Company were
purchased by Capstone Pharmacy Services, Inc.
<PAGE> 33
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
From January 1, 1996 through June of 1997, the Company acquired several
institutional pharmacy and pharmacy service companies. These acquisitions
consist of the following:
Acquiree Date
IMD Corporation February 1996
DC Med, Inc. July 1996
Symphony Pharmacy Services, Inc. July 1996
Happy Harry's Inc. October 1996
Institutional Pharmacy, Inc. December 1996
Clinical Care - SNF Pharmacy, Inc. January 1997
Portaro Pharmacies, Inc. January 1997
Alger Health Services, Inc. January 1997
Pennsylvania Prescriptions, Inc. March 1997
Macromed March 1997
Pharmacare, Inc. March 1997
Willowwood April 1997
The following unaudited pro forma income statement data for the year ended
December 31, 1996, and the three months ended March 31, 1997 have been prepared
based on historical income statements of the Company, as adjusted to reflect the
acquisitions of the above listed companies as if each had occurred on January 1,
1996 and January 1, 1997, respectively. The unaudited pro forma balance sheet as
of March 31, 1997, has been prepared based on the historical balance sheet of
the Company as adjusted to reflect the acquisition of Willowwood as if it had
been acquired as of March 31, 1997. The pro forma income statement data may not
be indicative of the future results of operations of or what the actual results
of operations would have been had the acquisitions described above been
effective January 1, 1997 and 1996.
<PAGE> 34
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Capstone Pharmacy Emerald
Services, Inc Emerald Pro Forma
per Form 10-Q Drug(1) Adjustments
------------- ------- -----------
<S> <C> <C> <C>
Net revenues 69,023,558 2,288,805 --
Cost of sales 38,690,339 1,586,060 --
---------- --------- -------
Gross profit 30,333,219 702,745 --
---------- --------- -------
Operating expenses:
Selling general and administrative expenses 22,925,269 627,027 --
Depreciation and amortization 2,357,234 18,852 17,179(2)
---------- --------- -------
Total operating expenses 25,282,503 645,879 17,179
---------- --------- -------
Income from operations 5,050,716 56,866 (17,179)
---------- --------- -------
Non-operating expenses (income):
Interest expense, net 1,155,359 15,293 74,607(3)
Other income (expense), net -- -- --
---------- --------- -------
Total non-operating expense (income), net 1,155,359 15,293 74,607
---------- --------- -------
Income from operations before income taxes 3,895,357 41,573 (91,786)
Provision for income taxes 1,441,282 -- (18,579)(4)
---------- --------- -------
Net income 2,454,075 41,573 (73,207)
========== ========= =======
</TABLE>
<PAGE> 35
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Pharmacare Willowwood
Pro Forma Willowwood Pro Forma
Pharmacare, Inc.(1) Adjustments Services(1) Adjustments
------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues 992,574 -- 592,849 --
Cost of sales 568,052 -- 311,964 --
------- -------- ------- -------
Gross profit 424,522 -- 280,885 --
------- -------- ------- -------
Operating expenses:
Selling general and administrative expenses 247,306 -- 202,267 --
Depreciation and amortization 1,999 48,913(2) 9,275 12,148(2)
------- -------- ------- -------
Total operating expenses 249,305 48,913 211,542 12,148
------- -------- ------- -------
Income from operations 175,217 (48,913) 69,343 (12,148)
------- -------- ------- -------
Non-operating expenses (income):
Interest expense, net -- 153,425(3) -- 51,984(3)
Other income (expense), net -- -- 15,000 (15,000)
------- -------- ------- -------
Total non-operating expense (income), net -- 153,425 15,000 36,984
------- -------- ------- -------
Income from operations before income taxes 175,217 (202,338) 54,343 (49,132)
Provision for income taxes -- (10,035)(4) 541 --
------- -------- ------- -------
Net income 175,217 (192,303) 53,802 (49,132)
======= ======== ======= =======
</TABLE>
<PAGE> 36
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Macromed Subtotal Pro Forma
Pro Forma Acquisition Capstone
Macromed(1) Adjustments Adjustments Income Statement
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Net revenues 368,000 -- 4,242,228 73,265,786
Cost of sales 143,520 -- 2,609,596 41,299,935
------- -------- --------- ----------
Gross profit 224,480 -- 1,632,632 31,965,851
------- -------- --------- ----------
Operating expenses:
Selling general and administrative expenses 19,000 -- 1,095,600 24,020,869
Depreciation and amortization 1,000 18,125(2) 127,491 2,484,725
------- -------- --------- ----------
Total operating expenses 20,000 18,125 1,223,091 26,505,594
------- -------- --------- ----------
Income from operations 204,480 (18,125) 409,541 5,460,257
------- -------- --------- ----------
Non-operating expenses (income):
Interest expense, net -- 30,685(3) 325,994 1,481,353
Other income (expense), net -- -- -- --
------- -------- --------- ----------
Total non-operating expense (income), net -- 30,685 325,994 1,481,353
------- -------- --------- ----------
Income from operations before income taxes 204,480 (48,810) 83,547 3,978,904
Provision for income taxes -- 57,598(4) 29,526 1,470,808
------- -------- --------- ----------
Net income 204,480 (106,408) 54,022 2,508,097
======= ======== ========= ==========
Weighted average number of common shares outstanding (5) 36,915,693
Fully diluted net income per share $ 0.07
</TABLE>
(1) Reflects the acquisitions of Pennsylvania Prescriptions, Pharmacare,
Willowwood and Macromed as if they had occurred on January 1, 1997.
(2) Reflects the additional amortization of goodwill related to the
Pennsylvania Prescriptions, Pharmacare, Willowwood and Macromed
acquisitions, over a period of 40 years.
(3) Reflects the additional interest expense related to the above
acquisitions at an annual interest rate of 7.22%.
(4) Reflects the adjustment to the provision for income taxes to reflect an
effective tax rate for each acquiree of 37%.
(5) Reflects the fully diluted shares outstanding for the three months
ended March 31, 1997
<PAGE> 37
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Capstone Pharmacy IMD
Services, Inc IMD Pro Forma
per Form 10-K Corporation(1) Adjustments
------------- -------------- -----------
<S> <C> <C> <C>
Net revenues 144,397,836 1,721,000 --
Cost of sales 85,531,996 982,000 --
----------- --------- -------
Gross profit 58,865,840 739,000 --
----------- --------- -------
Operating expenses:
Selling general and administrative expenses 46,591,975 710,000 --
Depreciation and amortization 4,633,787 20,000 25,000(2)
Costs relating to pharmacy closure 246,446 -- --
Restructuring charges 2,825,000 -- --
----------- --------- -------
Total operating expenses 54,297,208 730,000 25,000
----------- --------- -------
Income from operations 4,568,632 9,000 (25,000)
----------- --------- -------
Non-operating expenses (income):
Interest expense, net 1,899,784 -- 64,000(3)
Acquisition financing fees and expenses 4,573,530 -- --
Other income (expense), net (149,206) -- --
----------- --------- -------
Total non-operating expense (income), net 6,324,108 -- 64,000
----------- --------- -------
Loss from continuing operations before income taxes,
and extraordinary items (1,755,476) 9,000 (89,000)
Benefit for income taxes (5,120,857) 8,000 --
----------- --------- -------
Income (loss) from continuing operations before
extraordinary items 3,365,381 1,000 (89,000)
Extraordinary items:
Loss on extinguishment of debt, net (239,961) -- --
----------- --------- -------
Net income (loss) 3,125,420 1,000 (89,000)
=========== ========= =======
</TABLE>
<PAGE> 38
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DC Med Symphony Symphony Symphony
Pro Forma Pharmacy Pro Forma Pro Forma
DC Med(1) Adjustments Services(1) Adjustments
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues 5,030,000 -- 62,996,000 --
Cost of sales 2,241,000 -- 33,858,000 --
--------- -------- ---------- ----------
Gross profit 2,789,000 -- 29,138,000 --
--------- -------- ---------- ----------
Operating expenses:
Selling general and administrative expenses 2,302,000 -- 21,141,000 --
Depreciation and amortization 15,000 39,000(2) 1,626,000 1,074,500(2)
Costs relating to pharmacy closure -- -- -- --
Restructuring charges -- -- -- --
--------- -------- ---------- ----------
Total operating expenses 2,317,000 39,000 22,767,000 1,074,500
--------- -------- ---------- ----------
Income from operations 472,000 (39,000) 6,371,000 (1,074,500)
--------- -------- ---------- ----------
Non-operating expenses (income):
Interest expense, net -- 225,000(3) 1,483,000 (654,667)(4)
Acquisition financing fees and expenses -- -- -- --
Other income (expense), net -- -- 157,000 --
--------- -------- ---------- ----------
Total non-operating expense (income), net -- 225,000 1,640,000 (654,667)
--------- -------- ---------- ----------
Loss from continuing operations before income taxes,
and extraordinary items 472,000 (264,000) 4,731,000 (419,833)
Benefit for income taxes -- -- 1,798,000 --
--------- -------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items 472,000 (264,000) 2,933,000 (419,833)
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- --
--------- -------- ---------- ----------
Net income (loss) 472,000 (264,000) 2,933,000 (419,833)
========= ======== ========== ==========
</TABLE>
<PAGE> 39
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Happy Harrys IPS Tennessee
Happy Pro Forma IPS Pro Forma
Harry's(1) Adjustments Tennessee(1) Adjustments
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues 3,272,122 -- 4,088,661 --
Cost of sales 1,971,083 -- 1,915,268 --
---------- ---------- ---------- ----------
Gross profit 1,301,038 -- 2,173,393 --
---------- ---------- ---------- ----------
Operating expenses:
Selling general and administrative expenses 1,189,387 -- 1,351,035 --
Depreciation and amortization 135,648 50,146(2) 47,117 93,225(2)
Costs relating to pharmacy closure -- -- -- --
Restructuring charges -- -- -- --
---------- ---------- ---------- ----------
Total operating expenses 1,325,035 50,146 1,398,152 93,225
---------- ---------- ---------- ----------
Income from operations (23,997) (50,146) 775,241 (93,225)
---------- ---------- ---------- ----------
Non-operating expenses (income):
Interest expense, net 70,668 230,938(3) 5,911 324,088(3)
Acquisition financing fees and expenses -- -- -- --
Other income (expense), net -- -- -- --
---------- ---------- ---------- ----------
Total non-operating expense (income), net 70,668 230,938 5,911 324,088
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes,
and extraordinary items (94,665) (281,083) 769,330 (417,313)
Benefit for income taxes -- -- -- --
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items (94,665) (281,083) 769,330 (417,313)
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) (94,665) (281,083) 769,330 (417,313)
========== ========== ========== ==========
</TABLE>
<PAGE> 40
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Clinical Care Portaro
Clinical Care Pro Forma Portaro Pro Forma
- SNF Pharmacy(1) Adjustments Pharmacies(1) Adjustments
----------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenues 13,995,571 -- 13,698,652 --
Cost of sales 7,962,729 -- 7,413,694 --
----------- ----------- ----------- -----------
Gross profit 6,032,842 -- 6,284,958 --
----------- ----------- ----------- -----------
Operating expenses:
Selling general and administrative expenses 5,525,995 -- 6,275,421 --
Depreciation and amortization 50,945 481,250(2) 190,445 481,250(2)
Costs relating to pharmacy closure -- -- -- --
Restructuring charges -- -- -- --
----------- ----------- ----------- -----------
Total operating expenses 5,576,940 481,250 6,465,866 481,250
----------- ----------- ----------- -----------
Income from operations 455,902 (481,250) (180,908) (481,250)
----------- ----------- ----------- -----------
Non-operating expenses (income):
Interest expense, net 115,483 412,500(3) 188,792 412,500(3)
Acquisition financing fees and expenses -- -- -- --
Other income (expense), net 1,762 -- (1,473) --
----------- ----------- ----------- -----------
Total non-operating expense (income), net 117,245 412,500 187,319 412,500
----------- ----------- ----------- -----------
Loss from continuing operations before income taxes,
and extraordinary items 338,657 (893,750) (368,227) (893,750)
Benefit for income taxes 4,961 -- -- --
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
extraordinary items 333,696 (893,750) (368,227) (893,750)
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) 333,696 (893,750) (368,227) (893,750)
=========== =========== =========== ===========
</TABLE>
<PAGE> 41
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PA
Alger Prescriptions
Pro Forma Pennsylvania Pro Forma
Alger(1) Adjustments Prescriptions(1) Adjustments
-------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Net revenues 8,636,667 -- 12,342,410 --
Cost of sales 4,583,486 -- 8,524,416 --
---------- ---------- ---------- ----------
Gross profit 4,053,181 -- 3,817,994 --
---------- ---------- ---------- ----------
Operating expenses:
Selling general and administrative expenses 3,537,878 -- 3,585,634 --
Depreciation and amortization 86,367 102,000(2) 114,160 103,075(2)
Costs relating to pharmacy closure -- -- -- --
Restructuring charges -- -- -- --
---------- ---------- ---------- ----------
Total operating expenses 3,624,245 102,000 3,699,794 103,075
---------- ---------- ---------- ----------
Income from operations 428,936 (102,000) 118,200 (103,075)
---------- ---------- ---------- ----------
Non-operating expenses (income):
Interest expense, net 23,004 360,000(3) 103,705 465,000(3)
Acquisition financing fees and expenses -- -- -- --
Other income (expense), net (500) -- -- --
---------- ---------- ---------- ----------
Total non-operating expense (income), net 22,504 360,000 103,705 465,000
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes,
and extraordinary items 406,432 (462,000) 14,495 (568,075)
Benefit for income taxes 164,782 -- -- --
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items 241,650 (462,000) 14,495 (568,075)
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) 241,650 (462,000) 14,495 (568,075)
========== ========== ========== ==========
</TABLE>
<PAGE> 42
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PharmaCare Willowwood
Pro Forma Willowwood Pro Forma
PharmaCare(1) Adjustments Services(1) Adjustments
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues 5,479,042 -- 1,986,186 --
Cost of sales 2,972,899 -- 1,035,747 --
---------- ---------- ---------- ----------
Gross profit 2,506,143 -- 950,439 --
---------- ---------- ---------- ----------
Operating expenses:
Selling general and administrative expenses 1,180,913 -- 802,785 --
Depreciation and amortization 6,587 195,650(2) 16,317 48,593(2)
Costs relating to pharmacy closure -- -- -- --
Restructuring charges -- -- -- --
---------- ---------- ---------- ----------
Total operating expenses 1,187,500 195,650 819,102 48,593
---------- ---------- ---------- ----------
Income from operations 1,318,643 (195,650) 131,337 (48,593)
---------- ---------- ---------- ----------
Non-operating expenses (income):
Interest expense, net 26 637,500(3) 784 216,000(3)
Acquisition financing fees and expenses -- -- -- --
Other income (expense), net (16,679) -- 59,976 (60,000)
---------- ---------- ---------- ----------
Total non-operating expense (income), net (16,653) 637,500 60,760 156,000
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes,
and extraordinary items 1,335,296 (833,150) 70,577 (204,593)
Benefit for income taxes -- 25,107 456 --
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items 1,335,296 (858,257) 70,121 (204,593)
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) 1,335,296 (858,257) 70,121 (204,593)
========== ========== ========== ==========
</TABLE>
<PAGE> 43
CAPSTONE PHARMACY SERVICES, INC.
PRO FORMA INCOME STATEMENT DATA (continued)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Macromed Subtotal Capstone
Pro Forma Acquisition Income
Macromed(1) Adjustments Adjustments Statement
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues 2,208,000 -- 135,454,311 279,852,147
Cost of sales 861,120 -- 74,321,442 159,853,438
------------ ------------ ------------ ------------
Gross profit 1,346,880 -- 61,132,868 119,998,708
------------ ------------ ------------ ------------
Operating expenses:
Selling general and administrative expenses 228,000 -- 47,830,048 94,422,023
Depreciation and amortization 12,000 72,500(2) 5,086,775 9,720,562
Costs relating to pharmacy closure -- -- -- 246,446
Restructuring charges -- -- -- 2,825,000
------------ ------------ ------------ ------------
Total operating expenses 240,000 72,500 52,916,823 107,214,031
------------ ------------ ------------ ------------
Income from operations 1,106,880 (72,500) 8,216,046 12,784,678
------------ ------------ ------------ ------------
Non-operating expenses (income):
Interest expense, net -- 127,500(3) 4,811,732 6,711,516
Acquisition financing fees and expenses -- -- -- 4,573,530
Other income (expense), net -- -- 140,086 (9,120)
------------ ------------ ------------ ------------
Total non-operating expense (income), net -- 127,500 4,951,818 11,275,926
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes,
and extraordinary items 1,106,880 (200,000) 3,264,228 1,508,752
Benefit for income taxes -- 45,344 2,046,650 (3,074,207)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
extraordinary items 1,106,880 (245,344) 1,217,578 4,582,959
Extraordinary items:
Loss on extinguishment of debt, net -- -- -- (239,961)
------------ ------------ ------------ ------------
Net income (loss) 1,106,880 (245,344) 1,217,578 4,822,920
============ ============ ============ ============
Weighted average number of common shares outstanding(5) 36,236,893
Fully diluted net income per share $ 0.13
</TABLE>
(1) Reflects the following acquisitions as if they had occurred on January
1, 1996:
IMD Corporation
DC Med, Inc.
Symphony Pharmacy Services, Inc.
Happy Harry's Inc.
Institutional Pharmacy, Inc.
Clinical Care - SNF Pharmacy, Inc.
Portaro Pharmacies, Inc.
Alger Health Services, Inc.
Pennsylvania Prescriptions, Inc.
Macromed
Pharmacare, Inc.
<PAGE> 44
Willowwood
(2) Reflects the additional amortization of goodwill related to the above
acquisitions, over a period of 40 years.
(3) Reflects the additional interest expense related to the above
acquisitions at an annual interest rate of 7.5%.
(4) Reflects a reduction of interest expense incurred by Symphony on debt
which was not assumed by Capstone as part of the acquisition.
(5) Reflects the fully diluted shares outstanding for the year ended
December 31, 1996, plus (1) the impact of the 14,574,980 shares issued
in connection with the Symphony acquisition, (2) the 2,708,804 shares
issued in connection with the Clinical Care - SNF Pharmacy and Portaro
Pharmacies acquisitions and (3) the 1,035,000 shares issued in
connection with the IMD acquisition, all as if they had occurred on
January 1, 1996.
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ James D. Shelton
--------------------------------------------
Executive Vice President and Chief Financial
Officer
Date: June 16, 1997
