<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20049
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): March 1, 1997
PHARMERICA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-20606 11-2310352
------------------------------- ------------------------ ----------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification
incorporation) Number)
</TABLE>
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)
CAPSTONE PHARMACY SERVICES, INC.
- --------------------------------------------------------------------------------
(former name or former address if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Registrant is filing financial statements pursuant to Item 7 for two
acquisitions that are not required be filed under Item 2.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
(i) Audited balance sheet of Pennsylvania Prescriptions, Inc.
(d/b/a Emerald Drugs) as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity and
cash flows for the year then ended.
(ii) Audited balance sheet of Med-Tec Pharmaceutical Services, Inc.
as of June 30, 1997, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for
the year then ended.
(b) Pro forma financial information. Pro forma financial data for the year
ended December 31, 1996 and the nine months ended September 30, 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, Macromed and
Med-Tec Pharmaceutical Services, Inc.
(c) Exhibits. The exhibits filed as a part of this report are listed in
the Exhibit Index immediately following the signature page.
<TABLE>
<CAPTION>
Exhibit No. Exhibit Index
----------- -------------
<S> <C>
2.1 Asset Purchase Agreement dated August 8, 1997 between Med Tec
Pharmaceutical Services, Inc., the Shareholders and the
Registrant (incorporated by reference to Exhibit 2 from the
Registrant's Periodic Report on Form 8-K dated September 30,
1997).
2.2 Asset Purchase Agreement dated March 6, 1997 between Pennsylvania
Prescriptions, Inc. (d/b/a Emerald Drugs), the Shareholders and
the Registrant (incorporated by reference to Exhibit 2.8 from the
Registrant's 10-K dated March 31, 1997).
4.1 Form of Series B Warrant Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-3 (Reg. No. 333-03643).
4.2 Form of Series B Warrant Agreement, dated as of August 7, 1996,
between the Company and First Union National Bank of North
Carolina (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3 (Reg. No.
333-03643)).
4.4 Form of Warrant ($4.50) for Purchase of Common Stock
(incorporated by reference to Exhibit 4.5 to the Company's 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 Company's
Annual Report on Form 10-K for fiscal year ended February 29,
1995).
4.6 Stock Purchase Agreement, dated December 16, 1994, between the
Company and Counsel Corporation (incorporated by reference to
Exhibit 4.7 to the Company's 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 Company's 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 Company's 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 Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1996)
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 Company's Annual Report on Form
10-K for fiscal year ended December 31, 1996)
4.11 Form of ACA Investors Warrant ($12.00) for purchase of Common
Stock (incorporated by reference to Exhibit 4.11 to the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
1996)
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Med-Tec Pharmaceutical Services, Inc.:
We have audited the accompanying balance sheet of Med-Tec Pharmaceutical
Services, Inc. (a Pennsylvania corporation) as of June 30, 1997, and the related
statements of operations, changes in stockholders' deficit 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 Med-Tec Pharmaceutical
Services, Inc. as of June 30, 1997, 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,
December 5, 1997
<PAGE> 4
MED-TEC PHARMACEUTICAL SERVICES, INC.
BALANCE SHEET
AS OF JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 89,648
Accounts receivable, less allowance for doubtful
accounts of $603,956 2,720,335
Inventory 940,824
Prepaid expenses 16,274
-----------
Total current assets 3,767,081
PROPERTY AND EQUIPMENT, net 724,117
OTHER ASSETS, net 39,005
-----------
Total assets $ 4,530,203
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,139,745
Accrued expenses 266,430
Current portion of long-term debt 147,019
-----------
Total current liabilities 1,553,194
LONG-TERM DEBT, net of current portion 1,100,729
DUE TO AFFILIATES 2,189,806
-----------
Total liabilities 4,843,729
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $10 par value, 1,000 shares issued and
outstanding 10,000
Retained deficit (323,526)
-----------
Total stockholders' deficit (313,526)
-----------
Total liabilities and stockholders' deficit $ 4,530,203
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 5
MED-TEC PHARMACEUTICAL SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<S> <C>
NET SALES $ 12,393,395
COST OF SALES 7,754,461
------------
Gross profit 4,638,934
------------
OPERATING EXPENSES:
Pharmacy payroll and operating costs 2,359,679
Selling and administrative 769,352
Delivery charges 673,739
Provision for bad debts 481,352
Property operating costs 191,404
Depreciation and amortization 175,060
------------
Total operating expenses 4,650,586
------------
Loss from operations (11,652)
------------
NONOPERATING EXPENSE:
Management fees (300,000)
Interest expense (113,163)
Other expense (22,893)
------------
Total nonoperating expense (436,056)
------------
Net loss $ (447,708)
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
MED-TEC PHARMACEUTICAL SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Common Retained
Stock Deficit Total
------- --------- ---------
<S> <C> <C> <C>
BALANCE, at June 30, 1996 $10,000 $ 272,182 $ 282,182
Stockholder distributions -- (148,000) (148,000)
Net loss -- (447,708) (447,708)
------- --------- ---------
BALANCE, at June 30, 1997 $10,000 $(323,526) $(313,526)
======= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
MED-TEC PHARMACEUTICAL SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(447,708)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 175,060
Change in operating assets and liabilities-
Decrease in accounts receivable 43,574
Increase in inventory (69,921)
Increase in prepaid expenses (8,620)
Increase in other assets (8,728)
Increase in accounts payable 71,690
Increase in accrued expenses 60,953
---------
Net cash flows from operating activities (183,700)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (200,114)
Proceeds from disposals of equipment 2,675
Net cash flows from investing activities (197,439)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 79,941
Repayments of long-term debt (132,841)
Increase in due to affiliates 601,135
Stockholder distributions (148,000)
---------
Net cash flows from financing activities 400,235
---------
NET INCREASE IN CASH 19,096
CASH, beginning of year 70,552
CASH, end of year $ 89,648
=========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 113,163
=========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 8
MED-TEC PHARMACEUTICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Med-Tec Pharmaceutical Services, Inc. (the Company), is a Pennsylvania
corporation that provides medical supplies and equipment, prescription drugs and
over-the-counter drugs to long-term care facilities and their residents in the
mid-Atlantic region.
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 consists principally of medical supplies and pharmaceuticals and is
stated at the lower of cost or market value utilizing the FIFO (first-in,
first-out) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, with respect to leasehold improvements, over the remaining term of
the lease, whichever is shorter. Property and equipment are depreciated over the
following useful lives:
<TABLE>
<S> <C>
Leasehold improvements 10 years or remaining
term of the lease
Furniture and equipment 5 - 20 years
Vehicles 3 - 4 years
</TABLE>
Income Taxes
The Company elected to be taxed as an S-corporation. This election requires the
individual stockholders, rather than the Company, to pay federal income tax on
the Company's earnings. There is no provision for federal income tax included in
the financial statements.
<PAGE> 9
Revenue Recognition
Revenue is recorded as products are shipped and services are rendered. The
Company sells its products principally to residents of long-term care facilities
who are insured by commercial insurers or by various state Medical Assistance
programs. In addition, the Company receives a fee from certain customers to
process their claims for reimbursement from insurers and program payors.
Sales to residents insured by the various state Medical Assistance programs or
the Medicare program are recorded based upon the respective program's allowable
fee schedule. Sales to all other residents are based on the Company's
established prices. None of the Company's sales are subject to audit or
retroactive adjustment by the respective payors.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are primarily reimbursed by third
party payors. As of June 30, 1997, the approximate percentages of accounts
receivable from each payor category are as follows:
<TABLE>
<S> <C>
Medicare 8%
Medicaid 18%
Commercial and private payors 74%
----
100%
====
</TABLE>
2. PROPERTY AND EQUIPMENT:
Property and equipment, as stated at cost, are summarized by major
classifications, as follows:
<TABLE>
<S> <C>
Leasehold improvements $ 166,405
Furniture and equipment 839,577
Vehicles 329,306
----------
1,335,288
Less: Accumulated depreciation and amortization 611,171
----------
Property and equipment, net $ 724,117
==========
</TABLE>
Depreciation expense for the year ended June 30, 1997, was $175,060.
<PAGE> 10
3. LONG-TERM DEBT:
As of June 30, 1997, the following debt was outstanding:
<TABLE>
<S> <C>
PNC Bank, N.A., committed line of credit up to $1,000,000, with
expiration date of December 1999, interest paid monthly at the
bank's prime rate (8.5% at June 30, 1997), collateralized by all
the assets of the Company and a surety agreement by a
stockholder. $ 750,000
PNC Bank, N.A., 5-year term loan in the amount of $500,000, payable in
monthly installments of $8,333, plus interest at the bank's prime
rate plus 1/2% (9.0% at June 30, 1997) through April 2001,
collateralized by all the assets of the Company and a surety
agreement by a stockholder. 383,343
Ford Motor Credit Corporation, 36 to 48-month notes payable in monthly
installments ranging from $390 to $595, plus interest at 9.5% to
10.5%, with the last payment due August 2000,
collateralized by vehicles. 104,908
Secured installment notes, 3-year notes payable in monthly installments
ranging from $60 to $215, with the last payment due March 2000,
collateralized by equipment purchased. 9,497
----------
1,247,748
Less: Current portion 147,019
----------
Total long-term portion $1,100,729
==========
</TABLE>
At June 30, 1997, principal maturities of the long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1998 $ 147,019
1999 145,529
2000 870,681
2001 84,519
----------
$1,247,748
==========
</TABLE>
<PAGE> 11
4. COMMITMENTS:
The Company has operating leases for office and warehouse space in Valley Forge,
Pennsylvania, and Mt. Laurel, New Jersey. Total rental expense for fiscal year
1997 was $164,659. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1998 $106,296
1999 106,296
2000 84,216
2001 73,176
2002 and thereafter 115,862
--------
$485,846
========
</TABLE>
5. DUE TO AFFILIATES:
Due to affiliates consists of unpaid management fees and noninterest-bearing
cash advances from related parties. These balances have been personally
guaranteed by a stockholder of the Company. The affiliates have entered into
agreements stating that amounts due will be payable 367 days after demand by the
affiliates. Amounts due to affiliates are as follows:
<TABLE>
<S> <C>
Accord Health Services, Inc. $1,844,467
Revere Medical, Inc. 345,339
----------
Due to affiliates $2,189,806
==========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
During the normal course of business, the Company engages in transactions with
other entities in which a shareholder of the Company maintains an ownership
interest. Sales to affiliated companies during the year ended June 30, 1997, are
as follows:
<TABLE>
<S> <C>
Greenleaf Nursing and Convalescent $ 327,403
Kutztown Manor 264,670
Briarleaf Nursing and Convalescent 424,370
Brandywine Nursing and Convalescent 226,278
Pikesville Nursing and Convalescent 497,590
----------
Sales to affiliated companies $1,740,311
==========
</TABLE>
Amounts due from related entities as of June 30, 1997, are included in accounts
receivable and total $221,327.
7. 401(K) SAVINGS PLAN:
On July 1, 1995, the Company adopted a 401(k) savings plan which is available to
all full-time employees. The Company matches 50% of a participant's contribution
up to the first 6% of eligible compensation. The Company's savings plan
contribution for fiscal year 1997 was $33,649.
<PAGE> 12
8. SUBSEQUENT EVENT:
In August 1997, Capstone Pharmacy Services, Inc. purchased substantially all of
the assets of the Company for $14.9 million in cash, $1.4 million in the form of
a note and assumed approximately $1.5 million of the Company's debt.
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pennsylvania Prescriptions, Inc. d/b/a Emerald Drug Stores:
We have audited the accompanying balance sheet of Pennsylvania Prescriptions,
Inc. d/b/a Emerald Drug Stores (a Pennsylvania corporation) as of December 31,
1996, and the related statements of operations, changes in stockholders' 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 Pennsylvania Prescriptions,
Inc. d/b/a Emerald Drug Stores 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.
Baltimore, Maryland,
August 12, 1997
<PAGE> 14
PENNSYLVANIA PRESCRIPTIONS, INC.
d/b/a EMERALD DRUG STORES
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 110,269
Accounts receivable, less allowance for doubtful
accounts of $203,022 1,103,245
Accounts receivable, other 15,962
Inventory 1,137,808
Prepaid expenses and other current assets 20,745
----------
Total current assets 2,388,029
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 352,870
OTHER ASSETS, net 427,725
----------
Total assets $3,168,624
==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Short-term borrowings $ 267,317
Accounts payable 1,520,695
Accrued expenses and other current liabilities 201,055
Current portion of long-term debt 226,299
----------
Total current liabilities 2,215,366
LONG-TERM DEBT, net of current portion 813,518
INSTALLMENT OBLIGATION 27,746
----------
Total liabilities 3,056,630
----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 2,000 shares authorized,
issued and outstanding 2,000
Additional paid-in capital 65,306
Retained earnings 44,688
----------
Total stockholders' equity 111,994
----------
Total liabilities and stockholders' equity $3,168,624
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 15
PENNSYLVANIA PRESCRIPTIONS, INC.
d/b/a EMERALD DRUG STORES
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
NET SALES $12,301,364
COST OF SALES 8,533,595
-----------
Gross profit 3,767,769
-----------
OPERATING EXPENSES:
Selling, general and administrative 3,650,036
Provision for doubtful accounts 28,132
Depreciation and amortization 160,596
-----------
Total operating expenses 3,838,764
-----------
Loss from operations (70,995)
-----------
NONOPERATING INCOME (EXPENSE):
Interest expense (105,009)
Other income 41,508
-----------
Total nonoperating expense (63,501)
-----------
Net loss $ (134,496)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 16
PENNSYLVANIA PRESCRIPTIONS, INC.
d/b/a EMERALD DRUG STORES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------ ------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1995 $2,000 $65,306 $ 205,683 $ 272,989
Dividends -- -- (26,499) (26,499)
Net loss -- -- (134,496) (134,496)
------ ------- --------- ---------
BALANCE, at December 31, 1996 $2,000 $65,306 $ 44,688 $ 111,994
====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 17
PENNSYLVANIA PRESCRIPTIONS, INC.
d/b/a EMERALD DRUG STORES
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (134,496)
Adjustments to reconcile net loss to net cash flows from
operating activities-
Depreciation and amortization 160,596
Provision for doubtful accounts 28,132
Change in operating assets and liabilities, net of working
capital acquired-
Increase in accounts receivable (436,689)
Increase in inventory (144,339)
Increase in prepaid expenses and other current assets (11,656)
Increase in other assets (25,771)
Increase in accounts payable 34,315
Increase in accrued expenses and other current liabilities 46,195
-----------
Net cash flows from operating activities (483,713)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (238,395)
Acquisition (473,886)
Proceeds from disposals of equipment 21,808
-----------
Net cash flows from investing activities (690,473)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,169,531
Repayments of long-term debt (32,161)
-----------
Net cash flows from financing activities 1,137,370
-----------
NET DECREASE IN CASH (36,816)
CASH, beginning of year 147,085
-----------
CASH, end of year $ 110,269
===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for-
Interest $ 107,099
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 18
PENNSYLVANIA PRESCRIPTIONS, INC.
D/B/A EMERALD DRUG STORES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pennsylvania Prescriptions, Inc. (the Company), doing business as Emerald Drug
Stores, was incorporated in Pennsylvania on October 13, 1977, and is primarily a
retail pharmacy chain, operating ten stores in south central PA. The Company
also provides independent pharmacy services to long-term care institutions
including skilled nursing homes, assisted living facilities and other
institutional health care settings. The Company purchases and dispenses
prescription and nonprescription pharmaceuticals.
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
The Company uses the dollar value LIFO (last in, first out) method for
valuation. If the FIFO method of valuation had been used, inventory would have
been $306,284 higher and earnings $9,970 higher.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using accelerated methods over the estimated future
lives or, with respect to leasehold improvements, over the term of the lease,
whichever is shorter.
<TABLE>
<S> <C>
Equipment 5 - 7 years
Furniture and fixtures 5 - 7 years
Auto equipment 5 - 7 years
</TABLE>
Income Taxes
The Company elected to be taxed as an S-corporation, which is a pass-through tax
entity. This election requires the individual stockholders, rather than the
Company, to pay federal
<PAGE> 19
and state income tax on the Company's earnings. Pennsylvania also recognizes the
"S" election. There is no provision for income taxes included in the financial
statements.
Revenue Recognition
Revenues are recorded as products are sold or 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 by third
party payors. As of December 31, 1996, the approximate percentages of sales and
accounts receivable from each payor category are as follows:
<TABLE>
<S> <C>
Third party payors 60%
Institutional contracts 30%
Other payors 10%
</TABLE>
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 the
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, as stated at cost, are summarized by major
classifications, as follows:
<TABLE>
<S> <C>
Equipment $ 679,861
Furniture and Fixtures 110,588
Auto Equipment 166,187
Leasehold Improvements 119,388
-----------
1,076,024
Less: Accumulated depreciation and amortization (723,154)
Equipment and leasehold improvements, net $ 352,870
===========
</TABLE>
Depreciation expense for the year ended December 31, 1996, was $148,659.
<PAGE> 20
3. OTHER ASSETS:
Other assets, as stated at cost, are summarized by major classifications, as
follows:
<TABLE>
<S> <C>
Security deposits $ 12,938
Cash surrender value - officers life insurance 118,121
Long-term contracts 34,000
Covenant not to compete 251,000
Goodwill 45,000
---------
461,059
Less: accumulated amortization (33,334)
---------
Other assets, net $ 427,725
=========
</TABLE>
Amortization expense for the year ended December 31, 1996, was $11,937.
Face value of life insurance policies on key employees is $1,050,000.
Pennsylvania Prescriptions, Inc. is the beneficiary of these policies.
4. SHORT-TERM BORROWINGS:
The Company had outstanding lines of credit payable to separate banks as of
December 31, 1996, in the aggregate amount of $325,000. The line of credit is
$150,000, due July 1, 1998, with an interest rate calculated as the prime rate
minus 75 basis points, which was 7.50% at December 31, 1996. The unpaid
principal balance was $120,000 at December 31, 1996. The line of credit is
unsecured.
During 1996, the Company entered into a new line of credit arrangement with a
bank. The line of credit is $175,000, due June 1997, with an interest rate based
on the bank's base lending rate, which was 8.35% at December 31, 1996. The
unpaid principal balance was $147,317 at December 31, 1996. The line of credit
is secured by the assets of the Company and personal guarantees of the
stockholders and their spouses.
5. LONG-TERM DEBT:
As of December 31, 1996, the following debt was outstanding:
<TABLE>
<S> <C>
Promissory notes, 8.25%, secured by the assets of the Company and
personal guarantees of the stockholders and their spouses, last
monthly payments due January 2001. $ 894,810
Equipment credit lines, five-year notes, 8.3% - 8.6%, secured by
perfected interest on equipment purchased, last monthly
payments due January 2001 - April 2001. 98,207
Equipment credit lines, three-year notes, 8.75% - 8.95%, secured by
perfected interest on equipment purchased, last monthly
payments due June 1999 - July 1999. 31,091
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
Secured installment notes, five-year note, 9.75%, secured by auto
equipment, last monthly payment due March 1997.
$ 1,223
Secured installment notes, four-year notes, 7.8% - 9.5%, secured by
auto equipment, last monthly payments due January 1997 -
February 1999. 14,486
----------
1,039,817
Less: Current portion 226,299
----------
Total long-term portion $ 813,518
==========
</TABLE>
At December 31, 1996, principal payments on the long-term debt are due as
follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1997 $ 226,299
1998 251,322
1999 260,160
2000 273,991
2001 28,045
----------
$1,039,817
==========
</TABLE>
6. INSTALLMENT OBLIGATION:
During 1996, the Company entered into an installment obligation for the purchase
of equipment. The obligation is to be paid in 36 monthly installments. At
December 31, 1996, the remaining balance was $27,746.
7. COMMITMENTS:
The Company has operating leases for equipment and office space. Future minimum
lease payments under operating leases that have remaining noncancellable terms
are as follows:
<TABLE>
<S> <C>
1997 $198,250
1998 105,906
1999 75,292
2000 34,718
2001 20,731
--------
$434,897
========
</TABLE>
The Company is committed to two noncancellable leases which are not presented in
the above table. The Company does not believe that the lessor upheld terms of
the contract. The Company has ceased making lease payments and has joined a
class action lawsuit to be relieved of future lease payments. The estimated
total of unpaid lease payments is $231,000.
Total rental expense for 1996 was $181,655.
<PAGE> 22
8. SIGNIFICANT RELIANCE ON SUPPLIER:
During the year ended December 31, 1996, the company made purchases of
$7,165,055 from Cardinal Syracuse, Inc. This represents 81.5% of the total
purchases of resalable inventory.
9. PROFIT SHARING PLAN:
In September 1985, the Company adopted a defined contribution profit sharing
plan covering full-time employees who had met plan requirements. The plan is a
discretionary noncontributory plan. Contributions are at the discretion of the
board of directors. The Company made no contribution to the plan for the year
ended December 31, 1996.
10. SUBSEQUENT EVENT:
In March 1997, Capstone Pharmacy Services, Inc. purchased all of the corporate
assets for $6,424,500. The former stockholders will also be paid an earn-out
amount equal to six times the earnings before interest, tax, depreciation and
amortization that exceeds $1,070,755 for the twelve-month period following the
opening of a nonretail pharmacy outlet.
<PAGE> 23
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
From January 1, 1996 through September 30, 1997, the Company acquired several
institutional pharmacy and pharmacy service companies. These acquisitions
consist of the following:
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
Med-Tec Pharmaceutical Services, Inc. September 1997
The following unaudited pro forma income statement data for the year ended
December 31, 1996, and the nine months ended September 30, 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. An unaudited pro forma
balance sheet has not been prepared since the acquisition of all of the above
listed companies was reflected in the companies balance sheet as of September
30, 1997 as filed in its current report on Form 10-Q. 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> 24
PHARMERICA, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PharMerica,
Inc. (formerly
Capstone
Pharmacy Total
Services, Inc.) Pro Forma
per Form Acquired Pro Forma Income
10-Q Companies(1) Adjustments Statement
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 228,048 $ 14,715 -- $ 242,763
Cost of sales (127,354) (8,938) -- (136,292)
--------- -------- ------- ---------
Gross profit 100,694 5,777 -- 106,471
Selling, general and administrative
expense 73,481 4,309 (77) 77,713
Depreciation and amortization (2) 7,547 186 364 8,098
Merger related costs 3,525 -- -- 3,525
--------- -------- ------- ---------
Total operating expenses 84,553 4,496 287 89,336
Income from operations 16,141 1,281 (287) 17,135
Nonoperating expense:
Interest expense (3) 4,578 98 962 5,639
Other income -- 14 (15) (1)
--------- -------- ------- ---------
Total nonoperating expense 4,578 112 947 5,638
Income before taxes 11,563 1,169 (1,234) 11,498
Provision for income taxes 5,415 26 (58) 5,383
--------- -------- ------- ---------
Net income $ 6,148 $ 1,143 $(1,176) $ 6,115
========= ======== ======= =========
Earnings per share $ 0.17
=========
</TABLE>
(1) Reflects the above listed acquisitions as if they had occurred on
January 1, 1997.
(2) Reflects the amortization of goodwill related to the above listed
acquisitions over 40 years.
(3) Reflects additional interest expense incurred on debt financed to
acquire the above listed acquisitions.
<PAGE> 25
PHARMERICA, INC.
PRO FORMA INCOME STATEMENT DATA
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PharMerica,
Inc. (formerly
Capstone
Pharmacy Total
Services, Inc.) Pro Forma
per Form Acquired Pro Forma Income
10-K Companies(1) Adjustments Statement
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 144,398 $ 151,150 -- $ 295,548
Cost of sales (85,532) (84,239) -- (169,771)
--------- --------- ------- ---------
Gross profit 58,866 66,911 -- 125,777
Selling, general and administrative
expense 46,592 53,493 (232) 99,853
Depreciation and amortization (2) 4,634 2,573 3,171 10,377
Costs relating to pharmacy closure 246 -- -- 246
Restructuring costs 2,825 -- -- 2,825
--------- --------- ------- ---------
Total operating expenses 54,297 56,066 2,939 113,302
Income from operations 4,569 10,845 (2,939) 12,475
Nonoperating expense:
Interest expense (3) 1,900 4,812 3,942 10,653
Acquisition financing fees 4,574 -- -- 4,574
Other income (149) 140 (360) (369)
--------- --------- ------- ---------
Total nonoperating expense 6,324 4,952 3,582 14,858
Income before taxes (1,755) 5,893 (6,521) (2,382)
Provision for income taxes (5,121) 2,047 (489) (3,563)
--------- --------- ------- ---------
Income from continuing operations $ 3,365 $ 3,847 $(6,031) $ 1,181
========= ========= ======= =========
Earnings per share $ 0.03
=========
</TABLE>
(4) Reflects the above listed acquisitions as if they had occurred on
January 1, 1997.
(5) Reflects the amortization of goodwill related to the above listed
acquisitions over 40 years.
(6) Reflects additional interest expense incurred on debt financed to
acquire the above listed acquisitions.
<PAGE> 26
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.
PHARMERICA, INC.
By: /s/ James D. Shelton
--------------------------------------------
Executive Vice President and Chief Financial
Officer
Date: December 15, 1997
