<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission file number 0-20606
-------
CAPSTONE PHARMACY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2310352
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9901 E. Valley Ranch Parkway 75063
Suite 3001 (Zip Code)
Irving, TX
(Address of principal executive offices)
Registrant's telephone number, including area code: (972) 401-1541
Not applicable
- --------------------------------------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at August 12, 1997
---------------------------- ------------------------------
Common Stock, $.01 Par Value 34,017,466
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART 1: FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements............................... 1
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..... 1
Consolidated Statements of Income for the three months and six months ended
June 30, 1997 and 1996 ................................................... 2
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended June 30, 1997 ............................................... 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and 1996.................................................... 4
Notes to Unaudited Consolidated Financial Statements...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11
PART 2: OTHER INFORMATION
Items 1. Legal Proceedings......................................................... 15
Item 2. Changes in Securities..................................................... 15
Item 3. Defaults upon Senior Securities........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
Item 5. Other Information......................................................... 15
Item 6 Exhibits and Reports on Form 8-K.......................................... 15
SIGNATURES........................................................................... 16
EXHIBIT INDEX........................................................................ 17
</TABLE>
<PAGE> 3
PART 1: FINANCIAL STATEMENTS
ITEM 1: FINANCIAL STATEMENTS
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,365,642 $ 9,407,354
Accounts receivable, net of allowance for doubtful accounts of
$6,864,000 as of June 30, 1997, and $5,778,000, as of
December 31, 1996, respectively 69,173,641 50,503,619
Inventories 20,284,610 13,541,511
Prepaid expenses and other current assets 3,858,434 1,523,194
Deferred tax benefit 3,085,273 5,408,381
------------- -------------
Total Current Assets 106,767,600 80,384,059
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 12,369,834 10,468,963
OTHER ASSETS 2,185,318 1,369,982
GOODWILL, net of accumulated amortization of $7,636,000 as of
June 30, 1997, and $4,074,000 as of December 31, 1996, respectively 240,120,502 178,778,162
------------- -------------
Total Assets $ 361,443,254 $ 271,001,116
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 17,870,892 $ 18,337,485
Current portion of long-term debt 2,577,263 3,557,199
Current portion of non-compete agreements 200,000 200,000
Accrued restructuring charges 1,793,341 2,107,846
------------- -------------
Total Current Liabilities 22,441,496 24,202,530
NON-COMPETE AGREEMENTS, net of current portion 200,000 200,000
LONG-TERM DEBT, net of current portion 96,717,927 39,165,739
RESTRUCTURING CHARGES, net of current portion 2,533,804 2,687,068
------------- -------------
Total Liabilities 121,893,227 66,255,337
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized at
June 30, 1997 and December 31, 1996; 34,020,825 shares issued
and 33,682,363 outstanding as of June 30, 1997, and 31,134,221
shares issued and 30,795,759 outstanding as of
December 31, 1996 336,823 307,957
Capital in excess of par 244,320,079 213,593,829
Accumulated deficit (5,106,875) (9,155,957)
------------- -------------
Total Stockholders' Equity 239,550,027 204,745,829
------------- -------------
Total Liabilities and Stockholders' Equity $ 361,443,254 $ 271,001,166
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
1
<PAGE> 4
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE, 30 SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET SALES 77,462,019 24,119,216 $ 146,485,577 $ 46,147,081
COST OF SALES 43,261,353 15,270,022 81,951,692 28,845,588
----------- ------------ ------------- ------------
Gross profit 34,200,666 8,849,194 64,533,885 17,301,493
----------- ------------ ------------- ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 24,831,013 7,175,704 47,753,781 14,452,997
Depreciation and amortization 2,559,731 592,648 4,916,966 1,161,705
Costs relating to pharmacy closure 0 246,446 -- 246,446
Merger related costs 1,659,017 0 1,659,017 --
----------- ------------ ------------- ------------
Total operating expenses 29,049,761 8,014,798 54,329,764 15,861,148
----------- ------------ ------------- ------------
Income from operations 5,150,905 834,396 10,204,121 1,440,345
----------- ------------ ------------- ------------
NONOPERATING EXPENSE (INCOME):
Interest expense, net 1,718,275 421,427 2,961,430 684,615
Other income, net (67,319) (48,704) (155,115) (95,232)
----------- ------------ ------------- ------------
Total nonoperating expense (income), net 1,650,956 372,723 2,806,315 589,383
----------- ------------ ------------- ------------
Net income before income tax provision 3,499,949 461,673 7,397,806 850,962
INCOME TAX PROVISION 1,907,442 (30,962) 3,348,724 72,038
----------- ------------ ------------- ------------
Net income 1,592,507 492,635 $ 4,049,082 $ 778,924
=========== ============ ============= ============
EARNINGS PER SHARE:
Primary $ 0.04 $ 0.03 $ 0.11 $ 0.04
=========== ============ ============= ============
Fully diluted $ 0.04 $ 0.03 $ 0.11 $ 0.04
=========== ============ ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Primary 36,148,479 $ 18,302,678 36,416,198 17,441,663
=========== ============ ============= ============
Fully diluted 36,688,219 $ 18,795,230 36,801,956 18,264,102
=========== ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 5
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Common Stock Capital
------------------------------- in Excess Accumulated
Shares Amount of Par Deficit Total
-------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996 30,795,759 $ 307,957 $ 213,593,829 (9,155,957) $ 204,745,829
Common stock issued in
connection with the
exercise of stock
options 177,800 1,778 753,338 - 755,116
Common stock issued in
connection with
acquisitions 2,708,804 27,088 29,972,912 - 30,000,000
Net income for the six
months ended
June 30, 1997 - - - 4,049,082 4,049,082
-------------- -------------- --------------- --------------- ---------------
BALANCE, June 30, 1997 33,682,363 $ 336,823 $ 244,320,079 $ (5,106,875) $ 239,550,027
============== ============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,049,082 $ 778,924
Adjustments to reconcile net income to net cash (used in)
provided by operating activities-
Depreciation and amortization 4,916,966 1,161,705
Change in assets and liabilities, net of effects from
acquisition/disposal of businesses:
Increase in accounts receivable (12,731,681) (1,761,710)
Increase in inventories (3,046,776) (661,815)
Decrease (increase) in prepaid expenses and other
current assets (2,066,787) 106,245
Decrease in deferred tax benefit 2,323,108 --
Increase in other assets (815,336) (132,424)
Decrease in accounts payable and accrued expenses (8,620,774) (3,613,274)
Decrease in accrued restructuring charges (467,769) (369,616)
------------ ------------
Net cash flows from operating activities (16,459,967) (4,491,965)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (1,873,683) (699,794)
Acquisitions, net of cash acquired (36,509,538) (17,427,618)
Repayments of notes receivable -- 52,555
------------ ------------
Net cash flows from investing activities (38,383,221) (18,074,857)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings 56,500,000 15,483,000
Repayment of subsidiary pre-acquisition indebtedness -- (1,800,000)
Proceeds from exercise of stock options 755,116 261,113
Proceeds from issuance of common stock -- 8,382,259
Repayment of other long-term debt, net (1,412,437) (968,748)
Principal payments of capital lease obligations (41,203) (162,555)
------------ ------------
Net cash flows from financing activities 55,801,476 21,195,069
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 958,288 (1,371,753)
CASH AND CASH EQUIVALENTS, beginning of period 9,407,354 2,763,416
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,365,642 $ 1,391,663
============ ============
SUPPLEMENTAL DISCLOSURE:
Cash paid for:
Interest $ 1,461,106 $ 325,497
============ ============
Taxes $ 1,428,275 $ 96,079
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 7
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS:
Capstone Pharmacy Services, Inc. and subsidiaries (a Delaware corporation),
together with its wholly-owned subsidiaries (the "Company") is principally
engaged in the business of providing institutional pharmacy services to
long-term care facilities, correctional institutions, hospitals and health
maintenance organizations throughout the United States.
2. EARNINGS PER SHARE:
Earnings per share is based upon the weighted average number of the Company's
common and common equivalent shares outstanding for the six months ended June
30, 1997 and 1996. The amount of common stock equivalents outstanding was
computed using the treasury stock method.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and
early adoption is not permitted. When adopted, it will require restatement of
prior years' EPS. When adopted for the year ending December 31, 1997, the pro
forma EPS that would have been reported for the three and six month periods
ended June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pro forma earnings per share:
Basic $ 0.06 $ 0.03 $ 0.12 $ 0.05
======= ======== ======== =======
Diluted $ 0.04 $ 0.03 $ 0.11 $ 0.04
======= ======== ======== =======
</TABLE>
3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the Company for the
six months ended June 30, 1997 and 1996, included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the accompanying unaudited
interim consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company at June 30, 1997,
and the results of its operations for the three and six month periods ended
June 30, 1997 and cash flows for the six months ended June 30, 1997 and 1996.
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
5
<PAGE> 8
The results of operations for the six months ended June 30, 1997 and 1996, are
not necessarily indicative of results to be expected for the full year. These
interim condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's annual report on Form 10-K, as filed with the Securities and
Exchange Commission for the year dated December 31, 1996. The balance sheet at
December 31, 1996, has been derived from the audited financial statements at
that date.
4. ACQUISITIONS:
Acquisitions During the Year Ended December 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts &
Things, Inc. ("Geri-Care"), which provides institutional pharmacy services to
long-term care facilities in the New York metropolitan area. The purchase price
was approximately $6,000,000, payable $1,320,000 in cash and promissory notes,
with the remainder representing 669,230 shares of the Company's common stock
held in escrow as a contingent incentive payment for certain new business to be
generated through 1998 by the selling shareholders of Geri-Care. Total goodwill
at the date of acquisition was $6,259,000.
In February 1996, the Company purchased IMD Corporation ("IMD") which provides
institutional pharmacy services to long-term care facilities in the Chicago
metropolitan area. The total purchase price was $15,882,000. Total goodwill at
the date of acquisition was $13,146,000.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned subsidiary
MediDyne Corporation (collectively, "MediDyne"), a provider of Medicare Part B
services, which consist of enteral nutrition and urologic supplies, as well as
counseling and assistance with regulatory compliance in connection with such
services. The total purchase price was $7,500,000. The agreement also provides
for an earn-out based on the future adjusted earnings of the business, payable
in cash. Total goodwill at the date of acquisition was $7,667,000.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000,000, including
$25,000,000 representing the issuance of 2,112,490 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303,000.
In October 1996, the Company acquired the institutional pharmacy business of
Happy Harry's, Inc., a Delaware-based retail drug store operator. The total
purchase price was $3,695,000. Total goodwill at the date of acquisition was
$2,407,000.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839,000. Total goodwill at
the date of acquisition was $4,068,000.
6
<PAGE> 9
Acquisitions During the Six Months Ended June 30, 1997
In January 1997, the Company entered into asset purchase agreements with
Clinical Care-SNF, Inc., Portaro Pharmacies, Inc. and Alger Health Services.
These three acquisitions expand the Company's presence in the state of
California and represent institutional revenues of approximately $15,000,000,
$15,000,000 and $8,500,000, respectively. The purchase price for Clinical
Care-SNF, Inc. was $20,000,000, payable $5,000,000 in cash and the remainder
representing 1,354,402 shares of the Company's common stock. The purchase price
for Portaro Pharmacies, Inc. was $20,000,000, payable $5,000,000 in cash and the
remainder representing 1,354,402 shares of the Company's common stock. The
purchase price for Alger Health Services was $4,200,000. Total goodwill at the
date of acquisition for these acquisitions amounted to $50,162,000.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania, institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200,000 and includes an earn-out
provision based upon future adjusted earnings of the Company after certain
conditions are met. Payments upon the satisfaction of the earn-out provision
will be recorded as an adjustment to goodwill. Total goodwill at the date of
acquisition was $4,123,000.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based provider
of institutional pharmacy services. The purchase price was approximately
$8,500,000. Total goodwill at the date of acquisition was $7,826,000.
Effective March 1997, the Company acquired Macromed, a New York-based provider
of Medicare Part B services. The total purchase price was approximately
$2,800,000. Total goodwill at the date of acquisition approximated $2,900,000.
In April 1997, the Company acquired Willowood Service, Inc., a
Massachusetts-based provider of institutional pharmacy services. The total
purchase price was $2,880,000. Total goodwill at the date of acquisition was
$2,913,000.
In May 1997, the Company acquired Care Health Systems, Inc., a
Pennsylvania-based provider of institutional pharmacy services doing business as
Care Apothecary. The purchase price was $2,200,000. Total goodwill at the date
of acquisition was $1,862,000.
These acquisitions have been accounted for using the purchase method of
accounting, with the assets and liabilities of the acquired companies recorded
at their estimated fair market values at the dates of acquisition. Goodwill,
represent the excess of acquisition cost over the fair value of the net assets
acquired, is amortized over 40 years.
7
<PAGE> 10
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS:
The results of operations of acquired businesses are included in the Company's
consolidated results from the date of acquisition. Had the acquisitions
discussed in Note 4 occurred on January 1, 1996, management estimates that the
unaudited pro forma results of operations for the six months ended June 30, 1997
and 1996 ($000 omitted, except for per share data) would have been:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
NET SALES $ 152,104 $ 142,159
----------- ----------
COST OF SALES 85,463 80,520
----------- ----------
Gross profit 66,641 61,639
----------- ----------
OPERATING EXPENSES 56,088 53,866
----------- ----------
NON-OPERATING EXPENSES, net 3,162 3,481
----------- ----------
Income before income tax provision 7,391 4,292
----------- ----------
INCOME TAX PROVISION 3,378 1,785
----------- ----------
Net income $ 4,013 $ 2,507
----------- ----------
Income per share $ 0.11 $ 0.07
=========== ==========
</TABLE>
These pro forma operating results reflect certain adjustments, including
amortization of goodwill acquired, incremental interest expense and adjustments
for the provision of income taxes to reflect an effective tax rate of 37%. The
pro forma results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated on January 1, 1996,
nor are they necessarily indicative of future results.
6. MERGER WITH PHARMACY CORPORATION OF AMERICA:
During April 1997, the Company announced a proposed merger with the pharmacy
unit of Beverly Enterprises, Inc. ("Beverly"), Pharmacy Corporation of America
("PCA"). In Conjunction with the transaction, Beverly will transfer all
non-PCA assets and liabilities into a new corporation. The Company will issue
approximately 50,000,000 shares to existing Beverly stockholders and assume
$275,000,000 in debt. Additionally, the merger will be accounted for under the
purchase method of accounting and will be treated as a reverse
merger/acquisiton of the Company by Beverly. Under this method of accounting,
Beverly will be treated as the acquiring entity and the assets and liabilities
of the Company will be adjusted to their fair values in accordance with the
purchase method of accounting. Additionally, all costs the Company incurs
related to this merger will be expensed as incurred. These costs are estimated
to total approximately $10,000,000. The amounts reflected in statements of
income represent adviser fees, accounting and legal fees and other direct costs
incurred. Related to the Merger, the Company has filed a registration
statement on Form S-4 with the Securities and Exchange Commission.
7. CREDIT FACILITY:
The Company maintains a Revolving Credit Facility with a syndicate of five
commercial banks under which borrowings of up to $125 million are available.
Under the credit facility, the Company has the option to borrow under base rate
and eurodollar rate revolving loans, swing line loans and letters of credit.
Interest rates on base rate and swing line loans are at the higher of the prime
rate or 0.5% in excess of the federal funds effective rate, plus an applicable
margin based on the Company's leverage ratio at the time of borrowing. The swing
line loans are also adjusted for a commitment fee percentage tied to the
Company's leverage ratio. Interest on base rate and swing line loans is due
quarterly in arrears. Interest rates on eurodollar rate loans are calculated at
the eurodollar rate, plus an applicable margin based on the Company's leverage
ratio at the time of borrowing. Interest is due at the end of the one, two or
three-month interest period elected by the Company. If the Company elects a
six-month eurodollar rate loan,
8
<PAGE> 11
interest is payable in arrears at the end of the third and sixth month. Letter
of credit fees are based on the eurodollar loan margin, plus the greater of
0.25% of the maximum available to be drawn for letters of credit, as defined in
the agreement, or $500, and is to be paid quarterly in arrears.
Scheduled reductions of the $125,000,000 maximum balance allowed under the
Revolving Credit Facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997 $ -
1998 10,000,000
1999 35,000,000
2000 40,000,000
2001 40,000,000
------------
$125,000,000
============
</TABLE>
The Revolving Credit Facility is secured by substantially all assets of the
Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions and sale of assets, as well as minimum
financial ratios. As of March 31, 1997, the Company is in compliance with all
debt covenants.
8. PRIVATE PLACEMENT:
On April 18, 1996, the Company completed a private placement of its common
stock. This offering consisted of 1,035,000 shares at a price of $8.50 per
share. The net proceeds of this offering were approximately $8,382,000, net of
related expenses including placement commissions. There were no warrants issued
in connection with this private placement.
9
<PAGE> 12
9. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. In light of the financial and operating significance of
purchases, the Company routinely monitors the performance of its primary
supplier and negotiates settlements and future service levels based thereon.
Anticipated settlement amounts are recorded based upon management's estimates.
The Company changed its primary supplier in December 1996 and 1995. There were
no settlements paid and no significant commitments entered into for both
periods as a result of changes in vendors. Changes in future service levels
negotiated include, among others, method of delivery, frequency of orders and
bar coding ability, and are non-financial in nature.
10. SUBSEQUENT EVENTS:
During August 1997, the Company signed a definitive Purchase Agreement to
acquire the assets of Med-Tec Pharmaceutical Services, Inc., a provider of
institutional pharmacy services in the Philadelphia, Pennsylvania, area. Med-Tec
has annualized revenues of approximately $13 million and services over 4,200
beds in long-term care facilities. The transaction is expected to close
following certain regulatory approvals.
10
<PAGE> 13
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Capstone is a leading provider of institutional pharmacy services to long-term
care facilities and correctional institutions throughout the United States. The
Company provides its long-term care clients with comprehensive institutional
pharmacy services that include (i) the purchasing, repackaging and dispensing of
pharmaceuticals, (ii) infusion therapy and Medicare Part B services, which are
comprised of enteral nutrition and urologic supplies, and (iii) pharmacy
consulting services, all of which are supported by computerized recordkeeping
and third-party billing services. The Company serves its long-term care clients
primarily through regional pharmacies, many of which are open 24 hours, seven
days a week. In the correctional business, the Company provides
pharmaceuticals primarily under capitated contracts at correctional
institutions that have privatized inmate health care services.
Health care providers are continuing to be challenged to reduce costs while
maintaining the quality of patient care. Mananagement believes that these
factors will result in the continuing consolidation of institutional pharmacy
providers during the next few years. In addition, Capstone believes that its
strategy of creating larger regional pharmacies in metropolitan areas will
allow it to reduce the costs of providing services to the residents it serves.
Capstone is also developing as formulary and various other clinical programs
which it believes will enhance the quality of patient care while reducing the
costs of providing this care. Several states have enacted or proposed
legislation regarding drug formularies that is intended to prevent "closed
formularies" from prohibiting prescription of certain drugs or certain classes
of drugs. Capstone's formulary is not a closed formulary but is a preferred
guide to drug utilization. Capstone's formulary program gives a physician
recommended guidance but sets no restrictions on drug utilization. Therefore,
pending and enacted legislation affecting closed formularies is not anticipated
to have a material effect on Capstone's program.
The acquisition of institutional pharmacy companies has resulted in a
significant change in the Company's financial profile. Between January 1, 1996
and June 30, 1997, the Company completed a total of 14 such acquisitions. Seven
of these acquisitions were completed during the six months ended June 30, 1997.
On a pro forma basis for all acquisitions, and excluding merger related costs
of $1.7 million, the Company's net sales and income before taxes for the period
ended June 30, 1997, were $152,104,000 and $7,391,000, respectively, compared
to pro forma net sales and income before taxes of $142,159,000 and $4,292,000,
respectively, for the period ended June 30, 1996. All of these acquisitions
have been accounted for using the purchase method of accounting and, as a
result, the Company will incur significant future amortization expense
associated with goodwill.
11
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997, COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1996
NET SALES. Net sales increased to $77,462,000 in the 1997 period from
$24,119,000 in the 1996 period, an increase of $53,343,000 or 221%. Of this
increase, approximately $51 million is attributable to the operations of the
12 acquisitions completed between March 31, 1996 and June 30, 1997.
Additionally ancillary service revenues increased to 13% of total revenues
from an immaterial amount in the 1996 period. The Company did not experience
any material change in reimbursement levels in the 1997 period.
COST OF SALES. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $43,261,000 in the 1997
period from $15,270,000 in the 1996 period, an increase of $27,991,000 or 183%.
As a percentage of net sales, cost of sales decreased to 55.8% in the 1997
period from 63.3% in the 1996 period as a result of more favorable reimbursement
in the markets of the acquired companies, the addition of higher margin infusion
and Medicare Part B services and purchasing efficiencies related to greater
purchasing volume. In addition, the Company entered into new prime vendor and
group purchasing organization agreements during the fouth quarter 1996. These
agreements resulted in a reduction in cost of goods in the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $24,831,000 in the 1997 period from $7,176,000 in the 1996 period, an
increase of $17,655,000 or 246%. This increase in expenses was due to
acquisitions closed subsequent to the 1996 period. As a percentage of net
sales, selling, general and administrative expenses were 32.1% in the 1997
period, compared to 29.8% in the 1996 period. Management believes that selling,
general and administrative expenses as a percentage of net revenues in future
periods will decline as operational synergies and the benefits of restructuring
plans are realized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$2,560,000 in the 1997 period from $593,000 in the 1996 period, an increase of
$1,967,000 or 332%. This increase is due mainly to the increased amortization
expense incurred as a result of the acquisitions.
MERGER AND RELATED COST. These costs include all direct costs the Company has
incurred in relation to the merger with PCA. These costs are primarily
advisor, legal and accounting fees. The Company will incur additional costs
until the merger is complete. Management has estimated the total cost to be
approximately $10 million and anticipates the transaction will be finalized
during the fourth quarter 1997.
NONOPERATING EXPENSE. Nonoperating expenses include interest and other
nonoperating items. Nonoperating expenses increased to $1,651,000 in the 1997
period from $373,000 in the 1996 period, an increase of $1,278,000. The increase
is primarily due to bank borrowings related to acquisitions.
INCOME TAXES. Income taxes in the 1997 period are recorded at an estimated
efffective rate of 37%. The 1996 period reflects the benefit of net operating
loss carryforwards.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996
NET SALES. Net sales increased to $146,486,000 in the 1997 period from
$46,147,000 in the 1996 period, an increase of $100,339,000 or 217%. Of this
increase, approximately $98.6 million is attributable to the operations of the
12 acquisitions completed between March 31, 1996 and June 30, 1997.
Additionally ancillary service revenues increased to 13% of total revenues
from an immaterial amount in the 1996 period. The Company did not experience
any material change in reimbursement levels in the 1997 period.
COST OF SALES. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $81,952,000 in the 1997
period from $28,846,000 in the 1996 period, an increase of $53,106,000 or 184%.
As a percentage of net sales, cost of sales decreased to 55.9% in the 1997
period from 62.5% in the 1996 period as a result of more favorable reimbursement
in the markets of the acquired companies, the addition of higher margin infusion
and Medicare Part B services and purchasing efficiencies related to greater
purchasing volume. In addition, the Company entered into new prime vendor and
group purchasing organization agreements during the fouth quarter 1996. These
agreements resulted in a reduction in cost of goods in the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $47,754,000 in the 1997 period from $14,453,000 in the 1996 period, an
increase of $33,301,000 or 230%. This increase in expenses was due to
acquisitions closed subsequent to the 1996 period. As a percentage of net
sales, selling, general and administrative expenses were 32.5% in the 1997
period, compared to 31.3% in the 1996 period. Management believes that selling,
general and administrative expenses as a percentage of net revenues in future
periods will decline as operational synergies and the benefits of restructuring
plans are realized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$4,917,000 in the 1997 period from $1,162,000 in the 1996 period, an increase of
$3,755,000 or 323%. This increase is due mainly to the increased amortization
expense incurred as a result of the acquisitions.
MERGER AND RELATED COST. These costs include all direct costs the Company has
incurred in relation to the merger with PCA. These costs are primarily
advisor, legal and accounting fees. The Company will incur additional costs
until the merger is complete. Management has estimated the total cost to be
approximately $10 million and anticipates the transaction will be finalized
during the fourth quarter 1997.
NONOPERATING EXPENSE. Nonoperating expenses include interest and other
nonoperating items. Nonoperating expenses increased to $2,806,000 in the 1997
period from $589,000 in the 1996 period, an increase of $2,217,000. The increase
is primarily due to bank borrowings related to acquisitions.
INCOME TAXES. Income taxes in the 1997 and 1996 periods are recorded at
effective rates of 37% and 8%, respectively. The increase in the effective tax
rates is due to the full realization of federal net operating loss carryforwards
during the fourth quarter of 1996.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
SIX MONTHS ENDED JUNE 30, 1997, COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996
The Company requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies. The Company anticipates that
its future capital requirements primarily will be needed to finance the
acquisition of institutional pharmacy operations.
12
<PAGE> 15
The Company's net cash flows from operating activities were $(16,460,000) and
$(4,492,000), respectively, for the six months ended June 30, 1997 and 1996.
Generally, the cash flows from operating activities in each of the periods
resulted from increased working capital requirements. Specifically, net cash
from operating activities was impacted by a $8,621,000 decrease in accounts
payable and a $15,778,000 increase in inventories and accounts receivable in
the six months ended June 30, 1997, and by a $1,762,000 increase in accounts
receivable and a $3,613,000 decrease in accounts payable and accrued expenses
for the six months ended June 30, 1996.
The Company's net cash flows used in investing activities were $(38,383,000) and
$(18,075,000) for the six months ended June 30, 1997 and 1996, respectively. Net
cash flows from investing activities were impacted by acquisitions previously
discussed and investments in new pharmacy locations and information systems
during the 1997 period.
Net cash flows from financing activities were approximately $55,801,000 and
$21,195,000 for the six months ended June 30, 1997 and 1996, respectively. Net
cash flows from financing activities were impacted by borrowings to fund
acquisition and working capital requirements.
In April 1996, Capstone completed a private placement of its common stock.
This offering consisted of 1,035,000 shares at a price of $8.50 per share. The
net proceeds of this private placement were $8,400,000, net of related costs.
The proceeds from this private placement were used to fund acquisitions and
provide general working capital for Capstone.
Capstone's current ratio at June 30, 1997 was 4.76:1. The net cash deficit
from operations of $16.5 million for the six months ended June 30, 1997 was
primarily attributable to the timing of collections and disbursements during
this period. Capstone believes its liquidity and capital resources are
adequate to meet operating needs.
In December 1996, Capstone entered into a revolving $125 million credit
facility (the "Credit Facility") with a syndicate of banks for which Bankers
Trust Company acts as agent. Approximately $32 million of the Credit Facility
was used to retire amounts outstanding under Capstone's prior credit facility.
Borrowings under the agreement are secured by substantially all of the assets
of Capstone. The Credit Facility bears interest, at the option of Capstone, at
(a) Bankers Trust Company's prime rate plus an applicable margin based on
Capstone's leverge ratio, or (b) the prevailing Eurodollar rate quoted by
Bankers Trust Company, plus an applicable margin based upon Capstone's leverage
ratio. Availability under the Credit Facility is subject to Capstone's
leverage ratio and other provisions and covenants, all as defined by the
underlying agreement. As of August 13, 1997, Capstone had outstanding
borrowings of approximately $95 million under the Credit Facility.
Capstone anticipates it will receive approximately $22.5 million from the
exercise of outstanding warrants that will expire during the next twelve
months. The proceeds will be available to fund future working capital and
acquisition needs.
Capstone believes the Credit Facility is sufficient to fund its current working
capital needs prior to the Merger. Capstone intends to negotiate a $550
million credit facility to close simultaneously with the Merger. The new
credit facility will be used, in part, to repay amounts outstanding under the
Credit Facility and debt incurred by PCA to repay the assumed Pharmacy
Indebtness, and to pay fees and expenses related to the Transactions. In order
to implement its growth strategy, Capstone will require substantial capital
resources and will need to incur, from time to time, additional bank
indebtedness. After repayment of the Assumed Pharmacy Indebtedness, this
additional bank indebtedness will be used primarily to fund Capstone's future
acquisitions of institutional pharmacy operations. In the event the Merger is
not consummated or the funding requirements in connection with the potential
future acquisitions subsequent to the Merger exceeds the funds available
pursuant to the anticipated new credit facility. Capstone also may need to
issue, in public or in private transactions, equity or debt securities, the
availability and terms of which will depend on market and other conditions.
There can be no assurance that any such additional financing will be available
on terms acceptable to Capstone, if at all.
13
<PAGE> 16
PART 2: OTHER INFORMATION
Items 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On June 27, 1997, the Company held its 1997 Annual Meeting of
Stockholders for the purpose of electing 9 directors, amending the
Company's 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel
and Directors ("Key Personnel Plan") to increase the number of shares available
for grant thereunder to 4,000,000 and amending the Company's 1995 Nonqualified
Stock Option Plan for Directors ("Director Plan") to increase the number of
shares available for grant thereunder to 400,000.
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
R. Dirk Joseph F. John Morris Albert
Allison Furlong, III Haronian A. Perlis Reichmann
------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
For 31,392,419 31,392,419 31,337,419 31,352,019 31,390,839
Against -- -- -- -- --
Withheld -- -- -- -- --
Abstentions 321,747 321,747 376,747 362,147 323,327
Non- 2,291,100 2,291,100 2,291,100 2,291,100 2,291,100
Voting (1)
Eligible 34,005,266 34,005,266 34,005,266 34,005,266 34,005,266
Shares
</TABLE>
<TABLE>
<CAPTION>
Allan C. Edward Gail John E.
Silber Sonshine, Q.C. Wilensky, Ph.D. Zuccotti
--------- -------------- --------------- --------
<S> <C> <C> <C> <C>
For 31,352,019 31,392,019 31,390,839 31,392,419
Against -- -- -- --
Withheld -- -- -- --
Abstentions 362,147 322,147 323,327 321,747
Non-Voting 2,291,100 2,291,100 2,291,100 2,291,100
(1)
Eligible 34,005,266 34,005,266 34,005,266 34,005,266
Shares
</TABLE>
KEY PERSONNEL PLAN
<TABLE>
<S> <C>
For: 22,012,378
Against: 5,936,112
Withheld: --
Abstentions: 25,859
Non-Voting 6,030,917
(1)
Eligible 34,005,266
Shares
</TABLE>
DIRECTOR PLAN
<TABLE>
<S> <C>
For: 26,199,547
Against: 1,802,889
Withheld: --
Abstentions: 22,294
Non-Voting (1) 5,980,536
Eligible 34,005,266
Shares
</TABLE>
(1) Includes broker non-votes.
Item 5. Other Information
Not Applicable.
Item 6 Exhibits and Reports on Form 8-K
a) The exhibits filed as a part of this Report are listed in the
Exhibit Index immediately following the signature page.
b) Reports on Form 8-K filed in the second three months of 1997.
Date Filed Report Name
---------- -------------------------------------------------
06/16/97 Current Report on Form 8-K dated January 2, 1997
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
Dated: August 14, 1997 By: /s/ James D. Shelton
-------------------------------------
Vice President and
Chief Financial Officer
16
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description
------- -------------------------------------------------------------
2 Agreement and Plan of Merger between the Company and Beverly
Enterprises, Inc., dated April 15, 1997 (incorporated by
reference to Annex B the Joint Proxy Statement/Prospectus
contained in the Company's Registration Statement on Form S-4
(Reg. No. 333-28517).
3.1 Certificate of Incorporation of Choice Drug Systems, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's Form
10-Q for period ending August 30, 1995).
3.2 Certificate of Ownership and Merger Merging Choice Mergeco, Inc.
into Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.2 to the Company's Form 10-Q for period ending August
30, 1995).
3.3 Certificate of Amendment (incorporated by reference to Exhibit A
to the Company's Proxy Statement for Special Meeting of
Stockholders on August 15, 1996).
3.4 Bylaws of Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.3 to the Company's Form 10-Q for period ending August
30, 1995).
4.1 Form of Series B Warrant Certificate (incorporated by reference
to Exhibit 4.1 to the 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)
10.1 Agreement and Plan of Distribution by and among Beverly
Enterprises, Inc., New Beverly Holdings, Inc. and the Company,
dated April 15, 1997 (incorporated by reference to Annex C of the
Joint Proxy Statement/Prospectus contained in the Company's
Registration Statement on Form S-4 (Reg. No. 333-28517).
11 Statement re computation of per share earnings
27 Financial Data Schedule
17
<PAGE> 1
EXHIBIT 11
CAPSTONE PHARMACY SERVICES, INC.
PRIMARY & FULLY DILUTED EFFECT OF OPTIONS/WARRANTS - 2ND QUARTER
Q: 6/30/97
<TABLE>
<CAPTION>
Fully
Primary Diluted
------------- -------------
<S> <C> <C>
Options/Warrants Outstanding
- ----------------------------
Qrtly. avg. stock price 10,142
==========
Period ending stock price if higher 10,875
==========
Proceeds from exercise of stock options 21,458,427
Proceeds from exercise of warrants 25,032,190
----------
46,490,617
Average stock price 10,142
----------
# of shares repurchased 4,583,969
Proceeds from exercise of stock options 21,458,427
Proceeds from exercise of warrants 25,032,190
----------
46,490,617
Ending stock price 10,875
----------
# of shares repurchased 4,274,999
----------
Total shares related to o/s options 2,835,533 2,835,533
Total shares related to o/s warrants 4,122,409 4,122,409
Less: repurchased shares (4,583,969) (4,274,999)
---------- ----------
Dilutive Effect 2,373,973 2,682,943
Shares Exercised/Granted During Period
- --------------------------------------
See separate calculation
2nd Quarter Weighted Avg. Share Outstanding
- -------------------------------------------
See separate calculation 33,666,814 33,666,814
Shares Held in Escrow
- ---------------------
107,692 338,462
---------- ----------
Total Primary/Fully-diluted WASO 36,148,479 36,688,219
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,365,642
<SECURITIES> 0
<RECEIVABLES> 76,037,641
<ALLOWANCES> (6,864,000)
<INVENTORY> 20,284,610
<CURRENT-ASSETS> 106,767,600
<PP&E> 20,560,661
<DEPRECIATION> (8,190,827)
<TOTAL-ASSETS> 361,443,254
<CURRENT-LIABILITIES> 22,441,496
<BONDS> 0
0
0
<COMMON> 336,823
<OTHER-SE> 239,213,204
<TOTAL-LIABILITY-AND-EQUITY> 361,443,254
<SALES> 146,485,577
<TOTAL-REVENUES> 146,485,577
<CGS> 81,951,692
<TOTAL-COSTS> 81,951,692
<OTHER-EXPENSES> 54,329,764
<LOSS-PROVISION> 1,344,497
<INTEREST-EXPENSE> 2,961,430
<INCOME-PRETAX> 7,397,806
<INCOME-TAX> 3,348,724
<INCOME-CONTINUING> 4,049,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,049,082
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
