CAPSTONE PHARMACY SERVICES INC, DEF 14A, 1997-06-05

CAPSTONE PHARMACY SERVICES INC
DEF 14A, 1997-06-05
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

Previous: SUMMIT TAX EXEMPT L P II, SC 14D1/A, 1997-06-05

Next: F&M BANCORPORATION INC, 8-K, 1997-06-05

<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

CAPSTONE PHARMACY SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

CAPSTONE PHARMACY SERVICES, INC.
9901 EAST VALLEY RANCH PARKWAY, SUITE 3001
IRVING, TEXAS 75063

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 27, 1997

TO THE STOCKHOLDERS OF CAPSTONE PHARMACY SERVICES, INC.:

The Annual Meeting of Stockholders of CAPSTONE PHARMACY SERVICES, INC. (the
"Company") will be held at Hotel Intercontinental, 111 East 48th Street, New
York, New York 10017, on June 27, 1997, at 8:00 a.m. Eastern Daylight Time, for
the purposes of considering and voting upon the following matters:

1. To elect new Directors to serve for one-year terms and until their
successors are duly elected and qualified;

2. To approve an amendment to the Company's 1995 Incentive and Nonqualified
Stock Option Plan for Key Personnel and Directors to increase the number of
shares of Common Stock reserved for issuance from 1,600,000 shares to
4,000,000 shares;

3. To approve an amendment to the Company's 1995 Nonqualified Stock Option
Plan for Directors to increase the number of shares of Common Stock
reserved for issuance from 200,000 shares to 400,000 shares; and

4. In their discretion, on such other matters as may properly come before the
Annual Meeting.

Stockholders of record at the close of business on May 30, 1997, will be
entitled to vote at the Annual Meeting of Stockholders.

The Company's Board of Directors urges all Stockholders of record to
exercise their right to vote at the Annual Meeting of Stockholders personally or
by proxy. Accordingly, we are sending you the accompanying Proxy Statement and
the enclosed proxy card.

Your attention is directed to the Proxy Statement accompanying this notice
for a statement regarding matters to be acted upon at the Annual Meeting of
Stockholders.

By Order of the Board of Directors,

James D. Shelton, Secretary

Irving, Texas
June 4, 1997

YOUR REPRESENTATION AT THE ANNUAL MEETING OF STOCKHOLDERS IS IMPORTANT. TO
ENSURE YOUR REPRESENTATION, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD. SHOULD
YOU DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED IN
THE MANNER PROVIDED IN THE ACCOMPANYING PROXY STATEMENT.

<PAGE> 3

CAPSTONE PHARMACY SERVICES, INC.
9901 EAST VALLEY RANCH PARKWAY, SUITE 3001
IRVING, TEXAS 75063

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 27, 1997

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of CAPSTONE PHARMACY SERVICES, INC. (the
"Company") to be used at the Annual Meeting of Stockholders to be held on June
27, 1997, and at any adjournment thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting of
Stockholders will be held at Hotel Intercontinental, 111 East 48th Street, New
York, New York 10017, on June 27, 1997, at 8:00 a.m. Eastern Daylight Time. This
Proxy Statement and the accompanying form of proxy are being mailed to
stockholders on or about June 4, 1997.

A stockholder who executes and returns the accompanying form of proxy may
revoke it at any time before it is voted by giving written notice of revocation
to the Secretary of the Company, by executing a proxy bearing a later date, or
by attending the Annual Meeting of Stockholders and voting in person. Proxies
will be voted in accordance with instructions noted on the proxies. Unless
otherwise specifically instructed in the proxies, it is the intention of the
persons named in the proxy to vote all proxies received by them FOR THE ELECTION
OF ALL OF THE NOMINEES NAMED HEREIN WHO ARE STANDING FOR ELECTION AS DIRECTORS,
FOR APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1995 INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN FOR KEY PERSONNEL AND DIRECTORS TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE FROM 1,600,000 SHARES TO 4,000,000
SHARES, AND FOR APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1995 NONQUALIFIED
STOCK OPTION PLAN FOR DIRECTORS TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE FROM 200,000 SHARES TO 400,000 SHARES. Management does not
know of any other matters which will be presented for action at the Annual
Meeting of Stockholders. If any other matter does come before the Annual Meeting
of Stockholders, however, the persons appointed in the proxy will vote in
accordance with their best judgment on such matter.

This solicitation is made by the Company, by whom the cost of this proxy
solicitation will be borne. It is contemplated that proxies will be solicited
solely by mail. Corporate Communications, Inc. will be paid a fee of $5,000.00
in connection with mailing proxies on behalf of the Company. Banks, brokers and
other custodians will be requested to forward proxy soliciting materials to
their customers where appropriate, and the Company will reimburse such banks,
brokers, and custodians for their reasonable out-of-pocket expenses in sending
the proxy materials to beneficial owners of the Company's shares.

<PAGE> 4

SUMMARY OF MATTERS TO BE CONSIDERED

At the Annual Meeting of Stockholders, the stockholders of the Company will
be asked to vote on the following matters: (1) the election of nine nominees to
serve as directors for one-year terms and until their successors are duly
elected and qualified (See Proposal 1: "Election of Directors"); (2) To approve
an amendment to the Company's 1995 Incentive and Nonqualified Stock Option Plan
for Key Personnel and Directors to increase the number of shares of Common Stock
reserved for issuance from 1,600,000 shares to 4,000,000 shares (See Proposal 2:
"Amendment of 1995 Nonqualified Stock Option Plan for Key Personnel and
Directors"); (3) to approve an amendment to the Company's 1995 Nonqualified
Stock Option Plan for Directors to increase the number of shares of Common Stock
reserved for issuance from 200,000 shares to 400,000 shares (See Proposal 3:
"Amendment of 1995 Nonqualified Stock Option Plan for Directors"); and (4) on
such other matters as may properly come before the Annual Meeting of
Stockholders.

VOTING

Stockholders of record as of May 30, 1997, will be entitled to vote at the
Annual Meeting of Stockholders. At the close of business on that day, there were
outstanding 34,005,266 shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock"). See "Stock Ownership of Directors, Executive
Officers and Principal Holders." Each share of Common Stock is entitled to one
vote, which may be given in person or by proxy authorized in writing. The
Company has no other classes of voting stock issued. The Company has the
authority to issue shares of preferred stock in one or more series, although no
series of preferred stock has been designated or issued.

To vote by proxy, a stockholder should complete, sign, date and return the
enclosed proxy to the Secretary of the Company. The Board of Directors urges you
to so complete the proxy card whether or not you plan to attend the Annual
Meeting of Stockholders. If you attend the Annual Meeting of Stockholders in
person, you may, if you wish, vote in person on all matters brought before the
Annual Meeting of Stockholders even if you have previously delivered your proxy.
Any stockholder who has given a proxy may revoke it any time prior to exercise
by filing an instrument revoking it with the Secretary of the Company, by duly
executing a proxy bearing a later date, or by attending the Annual Meeting of
Stockholders and voting in person. The mere presence at the Annual Meeting of a
stockholder who has appointed a proxy will not revoke the appointment.

The director nominees will be elected by a plurality of the votes of the
shares of Common Stock present or represented and entitled to vote at the Annual
Meeting of Stockholders. All other matters submitted to the stockholders will be
approved by the affirmative vote of a majority of shares for which votes are
cast at the Annual Meeting of Stockholders. Abstentions and broker non-votes
will not be counted as affirmative votes, but will be counted for purposes of
determining the presence or absence of a quorum. On matters requiring majority
or two-thirds vote of all outstanding shares for approval, abstentions have the
effect of negative votes. Abstentions and broker non-votes have no legal effect
on any other proposal.

<PAGE> 5

STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS

The following table sets forth, as of May 27, 1997 the number and
percentage of shares of the Company's Common Stock owned by (i) all persons
known to the Company to be holders of 5% or more of such securities, (ii) each
director and nominee, (iii) each of the executive officers named in the Summary
Compensation Table appearing elsewhere herein, and (iv) all directors and
executive officers of the Company, as of May 27, 1997, as a group. Unless
otherwise indicated, all holdings are of record and beneficial.

Number of
Shares Beneficially Percentage of Total
Name Owned (1) Outstanding (2)
- ------------------------------------------------------- ------------------------- --------------------
<S> <C> <C>
Counsel Corporation (3) ............................... 8,356,815 23.0%
Exchange Tower
Two First Canadian Place, Suite 1300
Toronto, Ontario, Canada M5X 1E3
Integrated Health Services, Inc. ...................... 2,112,490 6.2
10065 Red Run Blvd.
Owings Mills, Maryland 21117
Denis A. and Sandra Lou Portaro Revocable Trust of
1992 and Ronald Belville ............................ 2,513,804 7.4
2596 Mission Street
San Marino, California 91108
Northwestern Mutual Life Insurance Co. ................ 866,300 2.5
720 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
Dirk Allison (4) ...................................... 225,245 *
James D. Shelton ...................................... -0- *
Robert Della Valle (5) ................................ 33,333 *
Allan C. Silber (6) ................................... 498,333 1.4
Morris A. Perlis (6) .................................. 498,333 1.4
Joseph F. Furlong, III (7, 8, 12) ..................... 277,000 *
John Haronian (8, 10).................................. 145,000 *
Edward Sonshine, Q.C. (7, 8) .......................... 77,000 *
Gail Wilensky, Ph.D. (9) ............................. 17,500 *
Albert Reichmann (9) .................................. 17,500 *
John E. Zuccotti (9, 11) .............................. 27,000 *
All directors and executive officers as a group
(11 persons) (13) ................................... 1,816,244 5.1%
</TABLE>

- -------------------

* Indicates less than 1%

<PAGE> 6

1 Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws,
where applicable.

2 The percentages shown are based on 34,005,266 shares of Common Stock
outstanding on May 27, 1997, plus, as to each individual and group listed,
the number of shares of Common Stock deemed to be owned by such holder
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), which includes shares subject to stock options and
warrants held by such holder which are exercisable within sixty (60) days
of such date.

3 Includes 1,298,181 and 1,038,545 shares issuable upon the exercise of
warrants at $4.50 and $5.50 per share, respectively. Directors Silber,
Sonshine and Perlis are directors of Counsel and director Silber
beneficially owns or controls approximately 18% of the common stock of
Counsel, a majority of which is pledged to a lender. Directors Sonshine and
Perlis own in the aggregate less than 5% of Counsel's common stock. All of
the directors listed in this footnote (3) disclaim beneficial ownership of
shares of Common Stock in their capacity as directors of Counsel, and Mr.
Silber disclaims beneficial ownership of shares of Common Stock in his
capacity as a significant stockholder of Counsel.

4 Includes 15,170 and 12,136 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively and 16,666, 15,000, 50,000, 83,333
and 2,500 shares issuable upon the exercise of options at $4.31, $4.44,
$8.50, $10.50 and $11.25 per share, respectively.

5 Includes 33,333 shares issuable upon the exercise of options at $10.50 per
share.

6 Includes 25,000 and 20,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively and 15,000, 2,500, 250,000, 50,000,
83,333 and 2,500 shares issuable upon the exercise of options at $4.44,
$7.50, $4.31, $8.50, $10.50 and $11.25 per share, respectively.

7 Includes 15,000 and 12,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.

8 Includes 15,000, 2,500 and 2,500 shares issuable upon the exercise of
options at $4.44, $7.50 and $11.25 per share, respectively.

9 Includes 15,000 and 2,500 shares issuable upon the exercise of options at
$4.44 and $11.25 per share, respectively.

10 Includes 15,000 and 15,000 shares issuable upon the exercise of options at
$2.85 and $3.50 per share, respectively, and 25,000 and 20,000 shares
issuable upon the exercise of warrants at $4.50 per share and $5.50 per
share, respectively.

11 Includes 2,500 and 2,000 shares issuable upon the exercise of warrants at
$4.50 and $5.50 per share, respectively.

12 Includes 200,000 shares issuable upon the exercise of warrants at $12.00
per share.

13 Includes 1,570,804 shares issuable upon the exercise of options and
warrants.

<PAGE> 7

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section l6(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") (and, if such security is registered
on a national securities exchange, also with the exchange). Such executive
officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

Based solely upon representations submitted by the Company's directors and
executive officers and the Company's review of filings on Forms 3, 4 and 5,
including amendments thereto, the Company has concluded that all such forms were
timely filed.

EXECUTIVE OFFICERS

The Company's executive officers are as follows:

PRINCIPAL OCCUPATION;
NAME OF OFFICER AGE OFFICER SINCE OCCUPATION LAST FIVE YEARS
- --------------- --- ------------- --------------------------
<S> <C> <C> <C>
R. Dirk Allison 41 May 1995 Director of the Company since August
1995; President and Chief Executive
Officer of the Company since May 1995;
President and Chief Executive Officer of
PremierPharmacy, Inc. ("Premier") from
July 1993 to May 1995; President and
Chief Executive Officer of Allied
Pharmacy Management, Inc. ("Allied")
from February 1988 to June 1993.

James D. Shelton 42 February 1997 Executive Vice President, Chief Financial
Officer and Secretary of the Company
since February 1997; Vice President-
Chief Financial Officer of Allied from
December 1993 to January 1997; Vice
President of Evergreen Healthcare, Inc.
from October 1992 to December 1993,
and as Vice President-Chief Financial
Officer of its predecessor, National
Heritage, Inc. from February 1990 to
October 1992.

</TABLE>

<PAGE> 8

<TABLE>
<S> <C> <C> <C>
Robert Della Valle 45 July 1996 Executive Vice President and Chief
Operating Officer of the Company since
July 1996; President and Chief Executive
Officer and Vice President of Allied;
employed by Allied since June 1987 and
held the position of President and Chief
Operating Officer from July 1993 to July
1996.
</TABLE>

<PAGE> 9

EXECUTIVE COMPENSATION

The following table sets forth the compensation for the services in all
capacities to the Company for the fiscal year ended December 31, 1996 (the "1996
Fiscal Year"), the ten months ended December 31, 1995 and fiscal year ended
February 28, 1995 of those persons who were, at any time during the 1996 Fiscal
Year, the Company's chief executive officer or, at December 31, 1996, the
Company's other executive officers, and who received annual salary and bonus in
excess of $100,000:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ------------------------ -------
SECURITIES
RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR(S) SALARY($) BONUS($) COMPENSATION(1)($) AWARD(S)($) SARS (#) PAYOUTS COMPENSATION
- ------------------------ -------- --------- ----------- ------------------ ----------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Dirk Allison ........ Dec 1996 230,000 104,425(4) -0- -0- 327,500 -0- -0-
President and CEO(2) Dec 1995(3) 123,000 -0- -0- -0- 65,000 -0- -0-
Feb 1995 * * * * * * *

Robert Della Valle ..... Dec 1996 79,719 40,000(4) -0- -0- 150,000 -0- -0-
Chief Operating Dec 1995 * * * * * * *
Officer(5) Feb 1995 * * * * * * *

Donald W. Hughes ....... Dec 1996 150,000 -0- -0- -0- 30,000 -0- -0-
Former CFO(6) Dec 1995(3) 9,230 -0- -0- -0- 20,000 -0- -0-
Feb 1995 * * * * * * *
</TABLE>

- ----------------------------

* Indicates periods prior to employment with the Company.

(1) Perquisites for each executive officer are in amounts which do not require
disclosure.
(2) Mr. Allison joined the Company in May, 1995.
(3) Represents a ten-month period.
(4) Earned in 1996 and paid in 1997.
(5) Mr. Della Valle joined the Company in July, 1996.
(6) Mr. Hughes resigned in February, 1997.

<PAGE> 10

OPTION GRANTS

The table below provides information on grants of stock options pursuant to
the Company's Option Plans (the "Option Plans") during the 1996 Fiscal Year, to
the officers named in the Summary Compensation Table. Additional grants have
been made to certain officers, directors and other employees since December 31,
1996. See "Stock Ownership of Directors, Executive Officers and Principal
Holders." The Company grants no stock appreciation rights.

OPTION/SAR GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------- ------------ ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
R. Dirk Allison 75,000 4.7% 8.50 03/15/06 400,920 1,016,011
250,000 15.7% 10.50 11/29/06 1,650,848 4,183,574
2,500 * 11.25 12/31/06 17,688 44,824

Robert Della Valle 50,000 3.1% 10.13 07/30/06 318,535 807,231
100,000 6.3% 10.50 11/29/06 660,339 1,673,430

Donald W. Hughes(2) 25,000 1.6% 8.50 02/02/98 133,640 338,670
5,000 * 10.13 02/02/98 31,854 80,723
</TABLE>

- --------------------
* Less than one percent.

(1) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates set by the Securities and Exchange Commission and, therefore,
are not intended to forecast possible future appreciation, if any, of the
Company's Common Stock price.

(2) Mr. Hughes resigned February 2, 1997. 8,333 and 1,667 of the options shown
in the table remain exercisable by Mr. Hughes following his resignation.

<PAGE> 11

OPTION EXERCISES AND VALUES

The table below provides information as to exercises of options by the
executive officers named in the Summary Compensation Table during the 1996
Fiscal Year under the Option Plans and the year-end value of unexercised
options. The Company grants no stock appreciation rights.

AGGREGATED OPTION/SAR EXERCISES IN THE FISCAL YEAR
ENDED DECEMBER 31, 1996 AND PERIOD-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED MONEY OPTIONS/SARS
OPTIONS/SARS AT AT DECEMBER 31, 1996
DECEMBER 31, 1996 FISCAL YEAR-END ($)(1)
FISCAL YEAR-END (#)

SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
R. Dirk Allison -0- -0- 142,499/250,001 $367,587/526,338
Robert Della Valle -0- -0- 33,333/116,667 29,333/121,167
Donald W. Hughes (2) -0- -0- 16,667/-0- 61,951/-0-
</TABLE>

- --------------------------

(1) Options are classified as "in-the-money" if the market value of the
underlying Common Stock exceeds the exercise price of the option. The per
share value of such in-the-money options is the difference between the
option exercise price and $11.38, the per share fair market value of the
underlying Common Stock as of December 31, 1996. Such amounts may not
necessarily be realized. Actual values which may be realized, if any, upon
the exercise of options will be based on the per share market price of the
Common Stock at the time of exercise and are thus dependent upon future
performance of the Common Stock.

(2) Mr. Hughes resigned February 2, 1997. The number of securities underlying
options granted to Mr. Hughes prior to his resignation were 20,000, 25,000
and 5,000 shares issuable upon the exercise of options at $6.00, $8.50 and
$10.13, respectively. The table sets forth the amounts that remain
exercisable by Mr. Hughes following his resignation.

COMPENSATION COMMITTEE REPORT

The following Compensation Committee Report is not deemed to be part of a
document filed with the SEC pursuant to the Securities Act of 1933 (the
"Securities Act") or the Exchange Act and is not to be deemed incorporated by
reference in any documents filed under the Securities Act or the Exchange Act
without the express written consent of the persons named below.

Decisions on compensation of the Company's senior executives, except for
decisions related to awards under the Company's Options Plans, are made by the
Compensation Committee of the Company's Board of Directors. It is the task of
the Compensation Committee to establish executive compensation guidelines for
the Company which are reasonable and appropriate, meet their stated purpose and
effectively serve the needs of the Company and its stockholders.

<PAGE> 12

The current members of the Compensation Committee have met with the entire
Board of Directors in setting the compensation for the current executive
officers and have set forth policies to govern such compensation currently and
in the future. The Committee continues to review all management compensation in
light of these policies.

Compensation Philosophy and Policies for Executive Officers

The Company's primary business goal is to provide high quality service
while maximizing stockholder value. The Company believes it can best achieve
this goal by achieving leadership in the provision of relevant and high quality
health services, expanding its operations primarily through acquisitions and
internal growth without imperiling the achievement of other strategic
objectives, and establishing a reputation as a desirable employer and
responsible corporate citizen. In late 1995, the Company reviewed and
reformulated its compensation philosophy and policies and has subsequently
followed such philosophy and policies in setting compensation. The Compensation
Committee has continued to review the Company's compensation philosophy and
policies, as well as their effect on individual compensation. The Compensation
Committee seeks to forge a strong link between the Company's business goals and
its compensation program by aligning the interests of its stockholders and
management personnel, including executive officers. The Company's executive
compensation program is intended to be consistent with this overall philosophy
for compensation at all management levels. The Company believes that by aligning
management compensation with the Company's business goal, the likelihood of the
Company's success on both a short-term and long-term basis is increased.

The Company's current executive compensation program supports the Company's
strategy and objective of creating stockholder value by:

- Emphasizing pay for performance by linking a significant portion of
executive compensation to the performance of both the Company and the
individual executive officer.

- Directly aligning the interest of executives with the long-term
interest of stockholders by awarding stock options at current market
prices to give value to the executives through long-term stock
appreciation.

- Providing compensation opportunities that attract and retain talented
and committed executives on a long-term basis.

- Appropriately balancing the Company's short-term and long-term
business, financial and strategic goals.

Currently, the Company's executive compensation program is comprised of
three principal components: base salary, annual cash incentive (bonus) and
long-term incentive opportunity through stock options. The annual executive pay
targets (base salary plus incentive) are intended to be competitive with
executive compensation of other U.S. public health care companies, particularly
institutional pharmacy companies, when the Company meets or exceeds its annual
operating goals.

<PAGE> 13

The Company attempts to compare its executive pay targets with the annual
pay of other publicly held companies, particularly institutional pharmacy
companies, subject to available information. These other companies include
companies from the Peer Group reflected in the Stock Performance Graph found
elsewhere in this Proxy. Since the Peer Group is small, however, the
Compensation Committee retains the discretion to compare the Company's executive
pay targets with those of companies outside of this group. The Compensation
Committee also has considered the turnaround situation faced by current
management in setting compensation. The Compensation Committee expects
compensation for the current fiscal year to be below the median even if
incentive targets are reached.

The Compensation Committee intends to review its compensation packages in
light of the recently announced merger that would combine Capstone with Beverly
Enterprises, Inc. The Compensation Committee believes that compensation should
meet the following goals in connection with the proposed merger: incentivize
current management and employees during the interim period prior to the merger;
retain management and employees to participate in managing and operating the
combined entity; and, ultimately, fit with the internal compensation system of
the combined entity.

Base Salary

All management salaries, including those of the executives, are evaluated
on a regular basis. In making its decision on salary levels, the Company does
not use a predetermined formula. In determining the salaries of the Company's
new executive team, the Company considered past earnings of those individuals as
well as historical Company compensation and the new executives' potential to
contribute to the Company's future. In evaluating appropriate pay levels and
salary increases for Company executives, the Compensation Committee, without
assigning particular weight to any, intends to consider the following factors:
level of responsibility of the executive, individual job performance, internal
salary structure, pay practices of other companies, size of the Company and
achievement of the Company's strategic goals. In the past, salary ranges have
been based primarily on individual job performances and past earnings.

Annual Cash Incentives

Annual cash incentive awards are designed to focus management attention on
key operational goals for the current fiscal year. The key operational goals are
specific to each executive's area of responsibility. Specific weighting is
assigned for identified financial, strategic and management practices goals. At
least 50% of the available bonus percentage for each named executive officer is
now tied to Company profitability, generally defined by achievement of the
annual budget as approved by the Board of Directors. The remaining percentages
are based on specific goals set for each executive, such as quality of care,
revenue growth, accounts receivable management, control expenses and integration
of acquisitions. The nature of the operational goals and the weighting assigned
to each is subject to change annually.

Company executives may earn a bonus of between 20% and 50% of their annual
base salaries based upon achievement of their specific operational goals and
achievement by the Company or business unit of its financial targets. At the end
of the year, performance in light of these goals is determined on an arithmetic
scale with the pre-established weighting. Discretionary adjustments by

<PAGE> 14

the Compensation Committee are possible if the Committee believes the
circumstances so warrant. For the 1996 Fiscal Year, bonuses awarded to Messrs.
Allison and Della Valle were $104,425 (45.0% of base compensation) and $40,000
(24.2% of base compensation), respectively.

Long-Term Incentives

The Company's long-term incentive compensation program consists of
incentive and nonqualified stock options which are related to improvement in
long-term stockholder value. Stock option grants are designed to focus an
executive's attention on managing the Company from the perspective of long-term
owner with an equity stake in the business. Stock options are granted under the
Option Plans by the Disinterested Stock Option Plan Committee.

The option grants to executive officers offer the right to purchase shares
of Common Stock at their fair market value on the date of the grant. These
options will have value only if the Company's stock price increases. The number
of shares covered by each grant is selected based on the executive's level of
responsibility and past and anticipated contributions to the Company.

Chief Executive Officer Compensation

Mr. Allison is the Company's Chief Executive Officer. Generally, the Chief
Executive Officer is eligible to participate in the same executive compensation
plans available to the Company's other senior executive officers. The
Compensation Committee's general approach in setting the Chief Executive
Officer's annual compensation is derived from the same considerations described
above, that is to be competitive with other U.S. publicly held health care
corporations, but also to have a significant portion of annual incentive
compensation based upon specific corporate-wide operating performance criteria.

The Compensation Committee approved a $230,000 base salary for Mr. Allison
for the 1996 Fiscal Year and established his range of incentive bonus at between
35-50% of this base salary, or a maximum of $115,000. Mr. Allison's compensation
package was developed primarily based upon his historical compensation elsewhere
and his experience in the industry and with turn-around situations. According to
market data, such base salary and annual incentive target were below the median
of the comparison companies mentioned above and appropriately within the
Company's overall internal pay practices. For the 1996 Fiscal Year, Mr. Allison
received a bonus of $104,425. In 1996, stock options to acquire 325,000 shares
of Common Stock were granted to Mr. Allison in connection with his position as
Chief Executive Officer.

Tax Regulations

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
disallows a tax deduction to public companies for executive compensation in
excess of $1 million. It is not anticipated that the Company will pay any of its
executive officers compensation in excess of $1 million in the current fiscal
year and, accordingly, to date the Company has not adopted a policy in this
regard.

<PAGE> 15

THE FOREGOING REPORT IS SUBMITTED BY ALL OF THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS, WHOSE MEMBERS ARE AS FOLLOWS:
ALBERT REICHMANN, MORRIS A. PERLIS AND JOSEPH F. FURLONG, III.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The following current directors served on the Compensation Committee during
the 1996 Fiscal Year: Reichmann, Perlis and Furlong. No member of the
Compensation Committee is an employee of the Company.

<PAGE> 16

CERTAIN TRANSACTIONS

CERTAIN SERVICES BY NON-EMPLOYEE DIRECTORS

Since his election to the Board of Directors in December 1994, Mr. Silber
has provided various services to the Company in connection with improving the
financial position, results of operations and capital structure of the Company.
These have included his service as Co-Chairman and Chairman of the Board of
Directors, assistance with routine acquisitions, assistance with the completion
of certain private placements and direction of the replacement of the Company's
bank line of credit. Mr. Silber has received no cash compensation for such
services.

Since his election to the Board of Directors in December 1994, Mr. Perlis
has provided various services to the Company in connection with the Company's
long term strategy and decisions concerning the retention or disposition of the
Company's lines of business. These have included his service as Vice Chairman of
the Board of Directors and interim Chief Executive Officer, negotiation of
modifications to material contracts and indebtedness of the Company, assistance
with personnel and operational matters, and assistance with the Company's
regulatory compliance program. Mr. Perlis has received no cash compensation for
such services.

Set forth below is a summary of various transactions involving the Company
and certain directors, officers, stockholders or other affiliates. It is the
policy of the Company to notify the Board of Directors and seek the approval of
a majority of the members of the Board or an appropriate committee who are not
related to an interested party in connection with transactions between the
Company and a related party.

PRIVATE OFFERINGS BY THE COMPANY

On July 29, 1996, Counsel purchased from the Company in a private placement
transaction, 2,112,490 shares of common stock at a price of approximately $11.83
per share for net proceeds to the Company of $25 million. The proceeds were used
as part of the purchase price for the Symphony acquisition.

Counsel Corporation beneficially owns approximately 23.0% of the
outstanding Common Stock and voting power of the Company and, as such, is the
Company's largest stockholder. As a result of Counsel's investment in the
Company, the Company has agreed to use its best efforts to cause four Counsel
nominees to serve on the Company's Board of Directors. As a result of the
foregoing, Counsel has a significant influence on matters brought before the
stockholders or the Board of Directors, although it cannot control the outcome
of any vote.

CONSULTING SERVICES

Director Furlong is a principal of Adirondack Capital Advisors LLC
("Adirondack"). The Company has entered into an agreement with Adirondack, dated
June 25, 1996, pursuant to which Adirondack will assist the Company in
identifying and negotiating transactions with acquisition targets. Adirondack
receives as compensation 3.0% of the first $10.0 million of aggregate
transaction value plus .7% of aggregate transaction value in excess thereof as
well as a number of warrants to

<PAGE> 17

buy the Company's common stock set according to a formula, not to exceed 200,000
in the aggregate, at a strike price of $12.00. As of May 20, 1997 the Company
had issued warrants to purchase 200,000 shares and had paid approximately
$1,109,740 in connection with this Agreement. An additional $87,000 was earned,
but unpaid in connection with this Agreement.

Adirondack and the Company have also entered into an agreement, dated
December 10, 1996, pursuant to which Adirondack serves as financial advisor to
the Company in connection with the proposed merger of Beverley Enterprises, Inc.
with and into the Company. Pursuant to that agreement, Adirondack has earned
$1.0 million for rendering a fairness opinion and will receive an additional
$3.0 million fee if the merger is consummated.

An affiliate of Director Reichmann received fees of $445,000 in connection
with the Geri-Care and IMD acquisitions.

Directors Silber and Perlis received fees of $600,000 and $400,000,
respectively, in connection with the Symphony acquisition.

Curtis B. Johnson, the general counsel of DCAmerica Inc. ("DCA"), a Counsel
subsidiary, has provided legal services to the Company since April 1995 pursuant
to an agreement between the Company and DCA providing for reimbursement of DCA's
allocable costs related to such services. Mr. Johnson has options to acquire
25,000 shares of Capstone's common stock for an exercise price of $4.31 per
share.

Marvin Sirota, a former officer and director of the Company, is providing
consulting services pursuant to a Severance and Consulting Agreement dated
January 15, 1995. Under the Severance and Consulting Agreement, Mr. Sirota
receives $11,607.00 per month through May 31, 1997 plus expenses incurred in
connection with his obligations to the Company.

Frank Mandelbaum, a former officer and director of the Company, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated January 26, 1995. Under the Severance and Consulting Agreement, Mr.
Mandelbaum receives $11,607.00 per month through May 31, 1997 plus expenses
incurred in connection with his obligations to the Company.

Charles Lathrop, Jr., a former officer and director of the Company, is
providing consulting services pursuant to a Severance and Consulting Agreement
dated March 8, 1995. Under the Severance and Consulting Agreement, Mr. Lathrop
receives $10,000 per month through April 14, 1997 and $4,583 per month for
twelve months thereafter, plus expenses incurred in connection with his
obligations to the Company.

It is the policy of the Company to notify the Board of Directors and seek
the approval of a majority of the members of the Board or its Executive
Committee who are not related to Counsel in connection with transactions between
the Company and its affiliates, including Counsel.

<PAGE> 18

STOCK PERFORMANCE GRAPH

The stock performance graph depicted below is not deemed to be part of a
document filed with the Securities and Exchange Commission pursuant to the
Securities Act or the Exchange Act and is not to be deemed incorporated by
reference in any documents filed under the Securities Act or the Exchange Act
without the express written consent of the Company.

The following graph compares the cumulative total returns of the Company
with those of the Nasdaq Market Index and a peer group index. Cumulative return
assumes $100 invested in the Company or respective index on February 28, 1992,
with dividend reinvestment through December 31, 1996. The Company has selected a
peer group known as the DOSE Group as compiled by Research Data Group. This peer
group index is comprised of approximately 7 companies, excluding the Company.
These companies are Care Group, Inc., Genesis Health Ventures Inc., Mednet Mpc
Corp, Omnicare Inc., Synetic Inc., Vitalink Pharmacy Services Inc. and Grancare
Inc. Delaware.

COMPARISON OF 58 MONTH CUMULATIVE TOTAL RETURN*
AMONG CAPSTONE PHARMACY SERVICES, INC., THE S & P 500 INDEX AND A PEER GROUP

<TABLE>
<CAPTION>
Measurement Period Capstone Pharmacy
(Fiscal Year Covered) Services, Inc. Peer Group S & P 500
<S> <C> <C> <C>
2/29/92 100 100 100
2/28/93 43 82 111
2/28/94 40 99 120
2/28/95 43 133 133
12/31/95 92 179 166
12/31/96 140 241 204
</TABLE>

To date, the Company has not directly tied executive compensation to stock
performance. The future impact of stock performance on executive compensation
will be determined by the Compensation Committee.

<PAGE> 19

PROPOSAL 1:

ELECTION OF DIRECTORS

The Board of Directors of the Company currently consists of nine members.
Directors are elected to hold office for one-year terms and then until their
successors have been duly elected and qualified.

The Board of Directors proposes that the nominees indicated below be
elected as directors to serve for a one-year term and until their successors are
duly elected and qualified. Should any nominee for the office of director become
unable to accept nomination or election, which is not anticipated, it is the
intention of the persons named in the proxy, unless otherwise specifically
instructed in the proxy, to vote for the election of such other person as the
Board of Directors may recommend.

NOMINEES FOR ELECTION AS DIRECTORS

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
R. Dirk Allison...........................41 President, Chief Executive Officer and Director
Joseph F. Furlong, III (1)................48 Director
John Haronian(2)(3).......................64 Director
Morris A. Perlis(1).......................48 Vice Chairman
Albert Reichmann(1).......................68 Director
Allan C. Silber...........................48 Chairman
Edward Sonshine, Q.C.(2)..................50 Director
Gail Wilensky, Ph.D.(3)...................53 Director
John E. Zuccotti(2).......................59 Director
</TABLE>

(1) Member of Compensation Committee
(2) Member of Audit Committee.
(3) Member of Disinterested Stock Option Plan Committee.

Mr. Allison has served as President and Chief Executive Officer of the
Company since May 1995. He served as President and Chief Executive Officer of
Premier, an institutional pharmacy company, from July 1993 to May 1995. Mr.
Allison served as President And Chief Executive Officer of Allied, a pharmacy
company, from February 1988 to June 1993.

Mr. Furlong has served as a Director of the Company since December 1994.
Mr. Furlong has been President of Adirondack Capital Advisors, L.L.C., a
financial advisory firm since May 1996. He was a partner of Colman Furlong &
Co., a merchant banking firm, from February 1991 to April 1996 and he was a
partner of Robertson Stephens & Company, an investment banking firm from
November 1984 to January 1991. Mr. Furlong has served as a director of American
HomePatient, Inc., a home health care provider ("American HomePatient"), since
June 1994. He has served as a director of Healthy Planet Products, an
environmentally friendly greeting card manufacturer, since August 1996.

Mr. Haronian has served as a Director of the Company since January 1994.
He has served as President of Tri-State Group, since April 1991. Mr. Haronian
has served as President of Peoples

<PAGE> 20

Liquor, Inc, since November 1991. From May 1965 until November 1990,
Mr. Haronian served as President of Douglas Drug, Inc.

Mr. Perlis has been Vice Chairman of the Company Since May 1995 and a
Director since December 1994, Mr. Perlis served as interim chief executive
officer of the Company from December 1994 to May 1995. He has served as a
director of and consultant to Counsel, a Canadian corporation primarily engaged
in the health care industry, since September 1992, and as President of Counsel
since January 1994. Mr. Perlis has served as a director of American HomePatient
since March 1993, and as its Chairman since May 1994. He has served as a
director of NOMA, Inc., a manufacturer of consumer wire and cable, since
September 1993. Mr. Perlis was President of Morris A. Perlis & Assoc., an
executive management consulting firm, from September 1992 until January 1994 and
President of American Express Canada, Inc. from September 1988 until September
1992. Mr. Perlis served as interim President of Stadtlander Drug Co., Inc., a
mail order pharmacy company ("Stadtlander"), from September 1996 to December
1996. He has served as director of Stadtlander since July 1996 and as Chief
Executive Officer since September 1996.

Mr. Reichmann has served as a Director of the Company since August 1995. He
has served as Chairman and a Director of Olympia & York Developments, Limited, a
privately held Canadian real estate company, for at least five years prior to
February 1993. Mr. Reichmann currently participates in major philanthropic
activities in addition to serving on the boards of several major hospitals in
Canada.

Mr. Silber has served as Chairman since February 1995 and a director of the
Company since December 1994. Mr. Silber has been Chairman, Chief Executive
Officer and a director of Counsel since August 1979. He served as President of
Counsel from August 1979 until January 1994. Mr. Silber has served as a director
of American HomePatient since September 1991. Mr. Silber served as chairman of
American HomePatient from September 1991 to May 1994. He has served as director
of Stadtlander since July 1996 and as Chairman since September 1996.

Mr. Sonshine has served as a Director of the Company since December 1994.
He has been President and Chief Executive Officer of RioCan Real Estate
Investment Trust of Toronto, Canada since July 1995. Mr. Sonshine has served as
a director of American HomePatient since September 1991. Mr. Sonshine has served
as Vice Chairman of Counsel since January 1994, as a director of Counsel since
August 1979, and as Chairman, President and Chief Executive Officer of Counsel
Management Services, Inc, since October 1993. Mr. Sonshine served as Executive
Vice President of Counsel from February 1987 until January 1994. Mr. Sonshine
served as President and Chief Executive Officer of Icarus Realty Corp. from
February 1987 until September 1993. He has served as a director of Stadtlander
since July 1996.

Dr. Wilensky has served as a Director since August 1995. She has served as
the John M. Olin Senior Fellow, Project HOPE since January 1993, and as Chair,
Physician Payment Review Commission since May 1995. Dr. Wilensky served as
Deputy Assistant to the President for Policy Development from March 1992 to
January 1993. She was Administrator of the Health Care Financing Administration
of the Department of Health and Human Services from January 1990 to March 1992.
Dr. Wilensky also serves as a director for Advanced Tissue Sciences, Coram

<PAGE> 21

Healthcare, Neopath Inc., Quest Diagnostics, St. Jude Medical, Syncor
International, SMS Corporation and United Healthcare.

Mr. Zuccotti has served as a Director of the Company since August 1995. He
has served as Chairman, CEO and President of World Financial Properties, Inc., a
real estate company, since November 1996, and had served as President and Chief
Executive Officer of its predecessor company Olympia and York Companies
(U.S.A.), since January 1990. Mr. Zuccotti served as a director of Olympia &
York Companies (U.S.A.) since the inception of a board of directors in July
1993. He has served as a director of Dreyfus Strategic Municipal Bond Fund, Inc.
since November 1989. Mr. Zuccotti also serves as director of Dreyfus California
Tax Exempt Money Market Fund, Dreyfus Capital Value Fund, Inc., Dreyfus Insured
Municipal Bond Fund, Dreyfus New Leaders Fund, Inc., Dreyfus Strategic
Municipals, Inc., Dreyfus Municipal Bond Fund, Inc., Dreyfus Municipal Money
Market Fund, Inc., and Starrett Housing Corporation. He also serves on the Board
of Trustees of Columbia University.

Pursuant to a Stock Purchase Agreement by and between Capstone and Counsel,
dated December 16, 1994, so long as Counsel continues to own the common stock
acquired under the Stock Purchase Agreement, Capstone will use its best efforts
to cause the election to its Board of Directors of four (4) individuals
designated by Counsel who are reasonably acceptable to Capstone, currently
Messrs. Silber, Perlis, Sonshine and Furlong. The Stock Purchase Agreement also
specifies that Capstone will use its best efforts to maintain a Board of
Directors consisting of eleven (11) members. Currently Mr. Silber serves as
Chairman of the Board and Mr. Perlis as Vice Chairman.

Directors who are not officers, employees or consultants of the Company
(currently all Directors except Mr. Allison) receive a fee of $500 for each
meeting of the Board of Directors or any Committee of the Board attended by
telephone and a fee of $1,000 for each such meeting attended in person. All
directors are reimbursed for actual expenses incurred in connection with
attendance at meetings of the Board of Directors or Committees of the Board.

The Board of Directors currently has standing Audit, Compensation, and
Disinterested Stock Option Plan Committees and an Executive Committee. The Board
of Directors currently has no standing nominating committee.

The Executive Committee is presently composed of Directors Silber, Perlis
and Allison. Messrs. Perlis and Silber joined the Committee simultaneously with
Counsel's investment in the Company in December 1994. The Delaware General
Corporation Law and the Company's Bylaws provide that the Board may designate
such a committee from their number to carry out the functions of the Board as
permitted by law. Between meetings of the Board, an executive committee may
exercise all powers of the Board except for those prohibited by Delaware General
Corporation Law. During the 1996 Fiscal Year, the Executive Committee held no
meetings and adopted one written consent action.

The Audit Committee presently is composed of Directors Haronian, Sonshine
and Zuccotti. Responsibilities of this Committee include engagement of
independent auditors, review of audit fees,

<PAGE> 22

supervision of matters relating to audit functions, and review and setting of
internal polices and procedures regarding audits, accounts and other financial
controls. During the 1996 Fiscal Year, the Audit Committee held one meeting and
adopted no written consent actions.

The Compensation Committee presently is composed of Directors Reichmann,
Perlis and Furlong. Responsibilities of this Committee include approval of
remuneration arrangements for executive officers of the Company, review of
compensation plans relating to executive officers and directors, including
benefits under the Company's compensation plans, and general review of the
Company's employee compensation policies. Prior to the creation of the
Disinterested Stock Option Plan Committee, the Compensation Committee also had
the authority to grant options under the Company's option plans. During the 1996
Fiscal Year, the Compensation Committee held one meeting and adopted no written
consent actions.

The Disinterested Stock Option Plan Committee presently is composed of
Directors Haronian and Wilensky. The Disinterested Stock Option Plan Committee
was created June 28, 1995, and is authorized to grant options to directors and
employees of the Company under the Company's Option Plans. During the 1996
Fiscal Year, the Disinterested Stock Option Plan Committee held no meetings and
adopted four written consent actions.

During the 1996 Fiscal Year, the Company's Board of Directors held six
meetings and adopted eight written consent actions. Each current director who
was serving on the Board of Directors during the last fiscal year attended at
least 75% of the Board meetings and Committee meetings held or taken during the
period in which such person served as a director of the Company and committee
member during the last fiscal year.

A plurality of the votes of the shares of Common Stock present or
represented by proxy at the Annual Meeting of Stockholders and entitled to vote
is required to elect the nominees as directors of the Company. Counsel has
expressed its intention to vote all its shares in favor of the election of the
nominees. THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE IN FAVOR
OF THE ELECTION OF THE NOMINEES AS DIRECTORS.

<PAGE> 23

PROPOSAL 2:

INCREASE IN THE NUMBER OF SHARES RESERVED
FOR ISSUANCE UNDER THE 1995 INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN FOR KEY PERSONNEL AND DIRECTORS

On May 28, 1997, the Board of Directors approved an amendment to the
Company's 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel
and Directors ("Key Personnel Plan") to increase the number of shares of Common
Stock reserved for issuance from 1,600,000 shares to 4,000,000 shares. The Board
of Directors has adopted the amendment in part to provide an equity interest and
incentive to directors and employees. There are approximately 70 directors and
employees eligible to be granted options under the Key Personnel Plan.

During the Company's fiscal year ended December 31, 1996, options to
purchase 1,477,334 shares at exercise prices of $8.50, 10.13, 10.50 and 11.00
per share were granted under the Key Personnel Plan to employees of the Company,
562,669 of which are contingent upon adoption by the Company's stockholders of
the proposed amendment to the Key Personnel Plan. Since January 1, 1997 options
to purchase 40,000 shares at an exercise price of $11.50 per share were granted
under the Key Personnel Plan to an employee of the Company, all of which are
contingent upon adoption by the Company's stockholders of the proposed amendment
to the Key Personnel Plan. As of May 27, 1997, there were outstanding under the
Key Personnel Plan options, contingent and otherwise, to purchase 2,202,669
shares of Common Stock with an aggregate market value of approximately $16.7
million (based on the May 27, 1997 closing price of $10.06 per share for the
Company's Common Stock). The outstanding options have expiration dates ranging
from July 2005 to January 2007.

The Key Personnel Plan provides that the exercise price of an option must
not be less than the fair market value of the Common Stock on the trading day
next preceding the date of grant. Payment for shares of Common Stock to be
issued upon exercise of an option may be made either in cash, Common Stock or
any combination thereof, at the discretion of the option holder.

The maximum term of any option granted pursuant to the Key Personnel Plan
is ten years. Options are nontransferable, other than by will, the laws of
descent and distribution or pursuant to certain domestic relations orders.
Shares subject to options granted under the Key Personnel Plan which expire,
terminate or are canceled without having been exercised in full become available
again for option grants.

The Disinterested Stock Option Plan Committee of the Board currently
administers the plan. Subject to certain limitations, the Board and its
Committee have the authority to determine the recipients of, as well as the
exercise prices, exercise periods, length and other terms of, stock options
granted pursuant to the Key Personnel Plan. In making such determinations, the
Board may take into account the nature of the services rendered or to be
rendered by option recipients, and their past, present or potential
contributions to the Company.

<PAGE> 24

The number of shares of Common Stock which may be granted under the Key
Personnel Plan or under any outstanding options will be proportionately
adjusted, to the nearest whole share, in the event of any stock dividend, stock
split, share combination or similar recapitalization involving the Common Stock
or any spin-off, spin-out or other significant distribution of the Company's
assets to its stockholders for which the Company receives no consideration.

Generally, no option may be exercised until the holder has been employed by
the Company or one of its subsidiaries continuously for at least three months
from the date of grant. In the event the option holder is terminated as an
employee by reason of disability or death, the holder or his or her
representative may exercise the option for a period of 12 months following such
termination unless the Board of Directors elects, in its sole discretion, to
extend the exercise period. If the employment of an option holder is terminated
for "cause," as defined in the Key Personnel Plan, the unexercised options
expire. In the event the option holder is terminated as an employee for any
reason other than disability, death or cause, the holder may exercise his or her
option for a period of three months following termination, unless extended by
agreement of the Company.

In the event of a dissolution or sale of all or substantially all of the
assets of the Company, or a merger or consolidation in which the Company is not
the surviving corporation, each outstanding option will terminate, unless there
is an express assumption of the option by the surviving corporation. However, as
to any option which is to so terminate, each holder will have the right
immediately prior to the dissolution, sale, merger or consolidation to exercise
his or her options, in whole or in part.

Either nonqualified or incentive stock options may be granted under the Key
Personnel Plan. No federal income tax consequences occur to either the Company
or the optionee upon the Company's grant or issuance of a stock option under the
Key Personnel Plan. Upon an optionee's exercise of a stock option, the optionee
will recognize ordinary income in an amount equal to the difference between the
fair market value of the stock purchased pursuant to the exercise of the option
and the exercise price of the option. However, if the stock purchased upon
exercise of the option is not transferable or is subject to a substantial risk
of forfeiture, then the optionee will not recognize income until the stock
becomes transferable or is no longer subject to such a risk of forfeiture
(unless the optionee makes an election under Internal Revenue Code Section 83(b)
to recognize the income in the year of exercise, which election must be made
within 30 days of the option exercise). The Company will be entitled to a
deduction in an amount equal to the ordinary income recognized by the optionee
in the year in which such income is recognized by the optionee. Upon a
subsequent disposition of the stock, the optionee will recognize capital gain to
the extent the sales proceeds exceed the optionee's cost of the stock plus the
previously recognized ordinary income.

Incentive stock options granted under the Key Personnel Plan are intended
to qualify for favorable tax treatment under Internal Revenue Code Section 422.
No individual may be granted incentive stock options under the Key Personnel
Plan exercisable for the first time during any calendar year and having an
aggregate fair market value in excess of $100,000. If the recipient of an
incentive stock option disposes of the underlying shares before the end of
certain holding periods (essentially the later of one year after the exercise
date or two years after the grant date), he or she will generally recognize
ordinary income in the year of disposition in an amount equal to the difference
between his or her purchase price and the fair market value of the Common Stock
on the

<PAGE> 25

exercise date. If a disposition does not occur until after the expiration of the
holding periods, the recipient will generally recognize a capital gain equal to
the excess of the disposition price over the price paid by the recipient on the
exercise date. The Company generally will not be entitled to a tax deduction for
compensation expense on account of the original sales to employees, but may be
entitled to a deduction if a participant disposes of stock received upon
exercise of an incentive stock option under the Key Personnel Plan prior to the
expiration of the holding periods.

A copy of the amendment to the 1995 Incentive and Nonqualified Stock Option
Plan for Key Personnel and Directors is attached hereto as Exhibit A.

A majority of the votes cast for shares of Common Stock present or
represented by proxy at the Annual Meeting of Stockholders and entitled to vote
is required to approve the amendment of the 1995 Incentive and Nonqualified
Stock Option Plan for Key Personnel and Directors. Counsel has expressed its
intention to vote all of its shares in favor of the amendment. THE BOARD OF
DIRECTORS HAS APPROVED THE AMENDMENT AND RECOMMENDS THAT STOCKHOLDERS VOTE IN
FAVOR OF THE PROPOSED AMENDMENT.

<PAGE> 26

PROPOSAL 3:

INCREASE IN THE NUMBER OF SHARES RESERVED
FOR ISSUANCE UNDER THE 1995 NONQUALIFIED
STOCK OPTION PLAN FOR DIRECTORS

On May 28, 1997, the Board of Directors approved an amendment to the
Company's 1995 Nonqualified Stock Option Plan for Directors ("Director Plan") to
increase the number of shares of Common Stock reserved for issuance from 200,000
shares to 400,000 shares. The Board of Directors has adopted the amendment in
part to provide an equity interest and incentive to directors. The nine members
of the Board of Directors are eligible to participate in the Director Plan.

During the Company's fiscal year ended December 31, 1996, options to
purchase 25,000 shares at an exercise prices of $11.25 per share were granted
under the Director Plan to directors of the Company, none of which are
contingent upon adoption by the Company's stockholders of the proposed amendment
to the Director Plan. No options have been granted under the Director Plan since
January 1, 1997. As of May 27, 1997, there were outstanding under the Director
Plan options, contingent and otherwise, to purchase 187,500 shares of Common
Stock with an aggregate market value of approximately $1.2 million (based on the
May 27, 1997 closing price of $10.06 per share for the Company's Common Stock).
The outstanding options have expiration dates ranging from August 2005 to
December 2006.

The Director Plan provides that the exercise price of an option must not be
less than the fair market value of the Common Stock on the trading day next
preceding the date of grant. Payment for shares of Common Stock to be issued
upon exercise of an option may be made either in cash, Common Stock or any
combination thereof, at the discretion of the option holder.

The maximum term of any option granted pursuant to the Director Plan is ten
years. Options are nontransferable, other than by will, the laws of descent and
distribution or pursuant to certain domestic relations orders. Shares subject to
options granted under the Director Plan which expire, terminate or are canceled
without having been exercised in full become available again for option grants.

The Disinterested Stock Option Plan Committee of the Board currently
administers the plan. Subject to certain limitations, the Board and its
Committee have the authority to determine the exercise periods, length and other
terms of stock options granted pursuant to the Director Plan. The Director Plan
provides that members of the Board who are serving on the last day of the
Company's fiscal year and who have served for six months of such fiscal year
will be granted options to acquire 2,500 shares of Common Stock.

The number of shares of Common Stock which may be granted under the
Director Plan or under any outstanding options will be proportionately adjusted,
to the nearest whole share, in the event of any stock dividend, stock split,
share combination or similar recapitalization involving the Common Stock or any
spin-off, spin-out or other significant distribution of the Company's assets to
its stockholders for which the Company receives no consideration.

25
<PAGE> 27

Generally, no option may be exercised to any extent until the holder has
served as a director of the Company continuously for at least three months from
the date of grant. In the event the option holder ceases to serve as a director
by reason of disability or death, the holder or his or her representative may
exercise the option for a period of 12 months following such termination unless
the Board of Directors elects, in its sole discretion, to extend the exercise
period. If the service of the option holder is terminated for "cause," as
defined in the Director Plan, the unexercised options expire. In the event
service of the option holder is terminated for any reason other than disability,
death or cause, the holder may exercise his or her option for a period of three
months following termination, unless extended by agreement of the Company.

Only nonqualified stock options may be granted under the Director Plan. No
federal income tax consequences occur to either the Company or the optionee upon
the Company's grant or issuance of a stock option under the Director Plan. Upon
an optionee's exercise of a stock option, the optionee will recognize ordinary
income in an amount equal to the difference between the fair market value of the
stock purchased pursuant to the exercise of the option and the exercise price of
the option. However, if the stock purchased upon exercise of the option is not
transferable or is subject to a substantial risk of forfeiture, then the
optionee will not recognize income until the stock becomes transferable or is no
longer subject to such a risk of forfeiture (unless the optionee makes an
election under Internal Revenue Code Section 83(b) to recognize the income in
the year of exercise, which election must be made within 30 days of the option
exercise). The Company will be entitled to a deduction in an amount equal to the
ordinary income recognized by the optionee in the year in which such income is
recognized by the optionee. Upon a subsequent disposition of the stock, the
optionee will recognize capital gain to the extent the sales proceeds exceed the
optionee's cost of the stock plus the previously recognized ordinary income.

A copy of the amendment to the 1995 Nonqualified Stock Option Plan for
Directors is attached hereto as Exhibit B.

A majority of the votes cast for shares of Common Stock present or
represented by proxy at the Annual Meeting of Stockholders and entitled to vote
is required to approve the amendment of the 1995 Nonqualified Stock Option Plan
for Directors. Counsel has expressed its intention to vote all of its shares in
favor of the amendment. THE BOARD OF DIRECTORS HAS APPROVED THE AMENDMENT AND
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE PROPOSED AMENDMENT.

<PAGE> 28

NEW PLAN BENEFITS

Since December 31, 1996, options to acquire an aggregate of 40,000 shares
of Common Stock were granted, all of which are subject to approval by the
stockholders of the amendment to the Key Personnel Plan, which will allow the
Company to reserve up to 4,000,000 shares of Common Stock for issuance under the
Key Personnel Plan. In 1996 and 1997 the Company granted options with respect to
an additional 602,669 shares that are contingent upon such approval. Since
December 31, 1996, there have not been any options granted under the Director
Plan. However, each of the directors will receive an automatic grant of 2,500
shares on December 31, 1997. 10,000 shares granted pursuant to the automatic
grants will be subject to the adoption of an amendment to the Director Plan. The
following table sets forth those granted options that are subject to adoption of
the amendments to the respective plans and held by (i) each executive officer
named in the Summary Compensation Table, (ii) all current executive officers as
a group, (iii) all current directors, who are not executive officers, as a
group, and (iv) all employees, including all current officers who are not
executive officers, as a group. The following table does not reflect options
previously granted under the Key Personnel Plan and the Director Plan which are
not subject to the amendment. These options are instead noted in footnotes 2 and
3 to the table.

NEW PLAN BENEFITS

<TABLE>
<CAPTION>
KEY PERSONNEL PLAN DIRECTOR PLAN
------------------------------ -------------------------------
DOLLAR NUMBER OF DOLLAR NUMBER OF
NAME AND POSITION VALUE($)(1) UNITS(2) VALUE($)(1) UNITS(3)
----------------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C>
R. Dirk Allison -0- 250,000 -0- 2,500
President, CEO, Director, Nominee
James D. Shelton -0- 40,000 -0- -0-
Executive Vice President, Chief
Financial Officer and Secretary
Robert Della Valle -0- 100,000 -0- -0-
Executive Vice President and Chief
Operating Officer
Morris Perlis -0- 14,335 -0- 2,500
Director, Nominee
Allan C. Silber -0- 14,334 -0- 2,500
Director, Nominee
All current Executive Officers -0- 390,000 -0- 2,500
as a group (3 persons)
All current Directors who are not -0- 28,669 -0- 20,000
Executive Officers as a group
(8 persons)
All Employees including Officers -0- 184,000 -0- -0-
who are not Executive Officers
as a group (16 persons)
</TABLE>

- ----------

<PAGE> 29

1 The Dollar Value of all contingent options is -0- because the exercise price
of each option is equal to the fair market value of the underlying common
stock on the date of grant. Actual dollar values that may be realized will be
based on the exercise price and the market price of the Common Stock on the
date of exercise, and are thus indeterminable at this time.

2 Number of Units references number of shares of Common Stock underlying
options granted under the 1995 Incentive and Nonqualified Stock Option Plan
for Key Personnel and Directors contingent upon stockholder approval. Options
previously granted under the 1995 Incentive and Nonqualified Stock Option
Plan for Key Personnel and Directors and not subject to the proposed
amendment to the plan are as follows: 125,000 to officer Allison; 50,000 to
officer Della Valle; 10,000 to former officer Hughes; 310,666 to director
Silber; 310,665 to director Perlis and 163,334 to other employees of the
Company, none of which have been exercised. No individual other than Allan C.
Silber and Morris A. Perlis has or is expected to receive options to acquire
five percent (5%) or more of the Common Stock available upon exercise of
options under the 1995 Incentive and Nonqualified Stock Option Plan for Key
Personnel and Directors.

3 Number of Units references number of shares of Common Stock underlying
options to be granted under the 1995 Nonqualified Stock Option Plan for
Directors in December 1997 if stockholder approval is obtained. Options
previously granted under the 1995 Nonqualified Stock Option Plan for
Directors and not subject to the proposed amendment to the plan are as
follows: 17,500 to director Allison; 20,000 to director Silber; 20,000 to
director Perlis; 20,000 to director Sonshine and 110,000 to other directors
of the Company, none of which have been exercised.

<PAGE> 30

INDEPENDENT PUBLIC ACCOUNTANTS

The accounting firm of Arthur Andersen LLP was appointed by the Board of
Directors to serve as the Company's Independent Public Accountants for the
fiscal year ended December 31, 1997. A representative of that firm will be
present at the Annual Meeting of Stockholders and will have the opportunity to
make a statement if he so desires and to respond to questions.

<PAGE> 31

DEADLINE FOR SUBMITTING
STOCKHOLDER PROPOSALS

Proposals of stockholders intended for consideration at the Company's 1998
Annual Meeting of Stockholders must be received by the Company's executive
offices at 9901 East Valley Ranch Parkway, Suite 3001, Irving, Texas 75063, no
later than February 3, 1998, if any such proposal is to be eligible for
inclusion in the Company's proxy materials for that Annual Meeting of
Stockholders.

OTHER MATTERS

The management of the Company knows of no other matters to be brought
before the Annual Meeting of Stockholders. If any other matter is duly presented
for action, it is the intention of the persons named in the enclosed proxy to
vote on such matter in accordance with their best judgment.

A copy of the Company's Annual Report to Shareholders is being mailed to
each stockholder of record together with this Proxy Statement.

EACH STOCKHOLDER IS URGED TO EXECUTE AND RETURN THE ENCLOSED PROXY
PROMPTLY. IN THE EVENT A STOCKHOLDER DECIDES TO ATTEND THE ANNUAL MEETING, THE
PROXY MAY, IF SUCH STOCKHOLDER WISHES, BE REVOKED AND SUCH STOCKHOLDER MAY VOTE
THE SHARES IN PERSON. IN ADDITION, A PROXY MAY BE REVOKED BY A STOCKHOLDER AT
ANY TIME BEFORE SUCH PROXY IS VOTED.

30
<PAGE> 32
EXHIBIT A

AMENDMENT NO. 2 TO
CAPSTONE PHARMACY SERVICES, INC.
1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY PERSONNEL AND DIRECTORS

Amendment No. 2 to Capstone Pharmacy Services, Inc. (the "Corporation")
1995 Incentive and Nonqualified Stock Option Plan for Key Personnel and
Directors (the "Plan"). Capitalized terms used in this Amendment No. 2, if not
otherwise defined herein, shall have the respective meanings attributed to such
terms in the Plan.

1. The Plan is hereby amended by striking Section 3 in its entirety and
inserting the following in lieu thereof:

3. Stock Subject to the Plan. There will be reserved for issuance upon
the exercise of Options 4,000,000 shares of Common Stock, which will be
authorized and unissued Common Stock. If an Option expires or terminates
for any reason without being exercised in full, the shares subject thereto
which have not been purchased will again be available for purposes of the
Plan. The number of shares as to which Options may be granted under the
Plan will be proportionately adjusted, to the nearest whole share, in the
event of any stock dividend, stock split, reorganization, merger,
consolidation, share combination or similar recapitalization involving the
Common Stock or any spin-off, spin-out or other significant distribution of
assets of stockholders for which the Corporation receives no consideration.
In the event that there is an insufficient number of authorized shares of
Common Stock available to allow exercise of the Options on the date of any
grant hereunder, such Options will not be exercisable until there are
sufficient shares of Common Stock authorized for issuance.

-- End of Amendment --

<PAGE> 33
EXHIBIT B

AMENDMENT NO. 1 TO
CAPSTONE PHARMACY SERVICES, INC.
1995 NONQUALIFIED STOCK OPTION PLAN FOR DIRECTORS

Amendment No. 1 to Capstone Pharmacy Services, Inc. (the "Corporation")
1995 Nonqualified Stock Option Plan for Directors (the "Plan"). Capitalized
terms used in this Amendment No. 1, if not otherwise defined herein, shall have
the respective meanings attributed to such terms in the Plan.

1. The Plan is hereby amended by striking Section 3 in its entirety and
inserting the following in lieu thereof:

3. Stock Subject to the Plan. There will be reserved for issuance upon
the exercise of Options 400,000 shares of Common Stock, which will be
authorized and unissued Common Stock. If an Option expires or terminates
for any reason without being exercised in full, the shares subject thereto
which have not been purchased will again be available for purposes of the
Plan. The number of shares as to which Options may be granted under the
Plan will be proportionately adjusted, to the nearest whole share, in the
event of any stock dividend, stock split, share combination or similar
recapitalization involving the Common Stock, any merger, consolidation or
reorganization, or any spin-off, spin-out or other significant distribution
of assets of stockholders for which the Corporation receives no
consideration. In the event that there is an insufficient number of
authorized shares of Common Stock available to allow exercise of the
Options on the date of any grant hereunder, such Options will not be
exercisable until there are sufficient shares of Common Stock authorized
for issuance.

-- End of Amendment --

<PAGE> 34
Appendix A

PROXY CAPSTONE PHARMACY SERVICES, INC. PROXY

ANNUAL MEETING OF STOCKHOLDERS, JUNE 27, 1997

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoints R. Dirk Allison and James D. Shelton, or
either of them, as proxies, with power of substitution, to vote all shares of
the undersigned at the Annual Meeting of the Stockholders of Capstone Pharmacy
Services, Inc., to be held on June 27, 1997, at 8:00 a.m. Eastern Daylight Time
at Hotel Intercontinental, 111 East 48th Street, New York, New York 10017, and
at any adjournments or postponements thereof, in accordance with the following
instructions:

(1) ELECTION OF DIRECTORS

<TABLE>
<S> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
(except as marked to the contrary below) nominees listed below
</TABLE>

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE CHECK
THE BOX TO VOTE "FOR" ALL NOMINEES AND STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)

<TABLE>
<S> <C> <C> <C>
John Haronian Allan C. Silber Morris A. Perlis Dr. Gail Wilensky
Edward Sonshine, Q.C. R. Dirk Allison John E. Zuccotti Albert Reichmann
Joseph F. Furlong, III
</TABLE>

(2) To approve an amendment to the Company's 1995 Incentive and Nonqualified
Stock Option Plan for Key Personnel and Directors to increase the number of
shares of Common Stock reserved for issuance from 1,600,000 shares to
4,000,000 shares.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

(3) To approve an amendment to the Company's 1995 Nonqualified Stock Option Plan
for Directors to increase the number of shares to Common Stock reserved for
issuance from 200,000 shares to 400,000 shares.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

(4) In their discretion, on such other matters as may properly come before the
meeting.

[ ] FOR DISCRETION [ ] AGAINST DISCRETION [ ] ABSTAIN

(CONTINUED ON REVERSE SIDE)

(CONTINUED FROM OTHER SIDE)

THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR THE NOMINEES IN THE ELECTION
OF DIRECTORS, FOR THE AMENDMENT TO THE 1995 INCENTIVE AND NONQUALIFIED STOCK
OPTION PLAN FOR KEY PERSONNEL AND DIRECTORS, FOR THE AMENDMENT TO THE 1995
NONQUALIFIED STOCK OPTION PLAN FOR DIRECTORS, AND, IN THE DISCRETION OF THE
PROXIES, ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.

PLEASE SIGN AND DATE BELOW AND RETURN PROMPTLY.

Dated: 1997
-----------------------,

----------------------------------

Dated: 1997
-----------------------,

----------------------------------

Signatures of stockholder(s)
should correspond exactly with the
name printed hereon. Joint owners
should each sign personally.
Executors, administrators,
trustees, etc., should give full
title and authority.

CAPSTONE PHARMACY SERVICES, INC.
9901 EAST VALLEY RANCH PARKWAY, SUITE 3001
IRVING, TEXAS 75063