<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 September 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
- --------------------------------------------------------------------------------
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 November 4, 1997
----- -------------------------------
Common Stock, $.01 Par Value 35,246,643
<PAGE> 2
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART 1: FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements.......................................................F-1
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996........................F-1
Consolidated Statements of Income for the nine months ended
September 30, 1997 and 1996.......................................................................F-2
Consolidated Statements of Changes in Stockholders' Equity for the nine months
ended September 30, 1997 and 1996.................................................................F-3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996.......................................................................F-4
Notes to Unaudited Consolidated Financial Statements..............................................F-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............F-11
PART 2: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX OF EXHIBITS
</TABLE>
<PAGE> 3
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,340 $ 9,407
Accounts receivable, net of allowance for doubtful accounts of
$6,960 as of September 30, 1997, and $5,778 as of
December 31, 1996, respectively 73,811 50,504
Inventories 23,272 13,542
Prepaid expenses and other current assets 3,701 1,523
Deferred tax asset 831 5,408
--------- ---------
Total Current Assets 116,955 80,384
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net 13,200 10,469
OTHER ASSETS 1,432 1,370
GOODWILL, net of accumulated amortization of $8,723 as of
September 30, 1997, and $4,074 as of December 31, 1996,
respectively 256,419 178,778
--------- ---------
Total Assets $ 388,006 $ 271,001
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 20,081 $ 18,337
Current portion of long-term debt 2,288 3,557
Current portion of non-compete agreements 200 200
Accrued restructuring charges 1,482 2,108
--------- ---------
Total Current Liabilities 24,051 24,202
NON-COMPETE AGREEMENTS, net of current portion 150 200
LONG-TERM DEBT, net of current portion 111,339 39,166
RESTRUCTURING CHARGES, net of current portion 2,509 2,687
--------- ---------
Total Liabilities 138,049 66,255
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000 shares authorized at September 30,
1997, and December 31, 1996; 34,983 shares issued and 34,644 outstanding
as of September 30, 1997, and 31,135 shares issued and 30,796
outstanding as of December 31, 1996 347 308
Capital in excess of par 252,618 213,594
Accumulated deficit (3,008) (9,156)
--------- ---------
Total Stockholders' Equity 249,957 204,746
--------- ---------
Total Liabilities and Stockholders' Equity $ 388,006 $ 271,001
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-1
<PAGE> 4
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 81,563 $ 44,015 $228,048 $ 90,162
COST OF SALES 45,403 25,524 127,355 54,370
-------- -------- -------- --------
Gross profit 36,160 18,491 100,693 35,792
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative
expenses 25,725 14,790 73,481 29,243
Depreciation and amortization 2,630 1,489 7,547 2,651
Costs relating to pharmacy closure -- -- -- 246
Restructuring charges -- 2,825 -- 2,825
Merger related costs 1,866 -- 3,525 --
-------- -------- -------- --------
Total operating expenses 30,221 19,104 84,553 34,965
-------- -------- -------- --------
Operating income (loss) 5,939 (613) 16,140 827
-------- -------- -------- --------
NONOPERATING EXPENSE:
Interest expense, net 1,771 357 4,577 947
Acquisition financing fees and expenses -- 4,574 -- 4,574
-------- -------- -------- --------
Total nonoperating expense 1,771 4,931 4,577 5,521
-------- -------- -------- --------
Net income (loss) before income
tax provision 4,168 (5,544) 11,563 (4,694)
INCOME TAX PROVISION 2,066 (2,209) 5,415 (2,137)
-------- -------- -------- --------
Net income (loss) $ 2,102 $ (3,335) $ 6,148 $ (2,557)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary $ .06 $ (0.17) $ .17 $ (0.16)
======== ======== ======== ========
Fully diluted $ .06 $ (0.17) $ .17 $ (0.16)
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding:
Primary 36,845 19,397 36,576 16,298
======== ======== ======== ========
Fully diluted 37,305 19,397 37,055 16,298
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-2
<PAGE> 5
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------- Capital in Accumulated
Shares Amount Excess of Par Deficit
-------- -------- ------------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 30,796 $ 308 $213,594 $ (9,156)
Common stock issued in connection with
the exercise of stock options 503 6 2,698 --
Common stock issued in connection with
acquisitions 2,709 27 29,973 --
Common stock issued in connection with
the redemption of Series B warrants 636 6 6,353 --
Net income for the nine months ended
September 30, 1997 -- -- -- 6,148
-------- -------- -------- --------
BALANCE, September 30, 1997 34,644 $ 347 $252,618 $ (3,008)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-3
<PAGE> 6
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,148 $ (2,557)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities-
Depreciation and amortization 7,547 2,651
Change in assets and liabilities, net of effects from
Acquisition/disposal of businesses:
Increase in accounts receivable (14,133) (6,480)
Increase in inventories (5,101) (650)
Increase in prepaid expenses and other current assets (1,887) (319)
Increase/decrease in deferred tax asset 4,577 (1,812)
Increase/decrease in other assets (52) 432
Decrease in accounts payable and accrued expenses (13,537) (3,612)
Increase/decrease in accrued restructuring charges (804) 2,271
--------- ---------
Net cash flows from operating activities (17,242) (10,076)
--------- ---------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (3,663) (1,339)
Acquisitions, net of cash acquired (51,553) (150,737)
Repayments advances to affiliates -- 2,243
--------- ---------
Net cash flows from investing activities (55,216) (149,833)
--------- ---------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings 71,500 27,355
Net proceeds from acquisition financing -- 100,000
Net repayments from acquisition financing -- (100,000)
Repayment of subsidiary pre-acquisition indebtedness -- (1,800)
Proceeds from exercise of stock options 2,704 --
Proceeds from issuance of common stock 6,359 144,929
Repayment of long-term debt and other long-term
obligations, net (2,172) (1,206)
--------- ---------
Net cash flows from financing activities 78,391 169,278
--------- ---------
Net increase in cash and cash equivalents 5,933 9,369
Cash and cash equivalents, beginning of period 9,407 2,763
--------- ---------
Cash and cash equivalents, end of period $ 15,340 $ 12,132
========= =========
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 3,767 $ 2,665
========= =========
Taxes $ 1,474 $ 313
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE> 7
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
PART 1: FINANCIAL INFORMATION
ITEM 1.
1. ORGANIZATION AND BUSINESS:
Capstone Pharmacy Services, Inc., 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 nine months ended
September 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 primary 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
Proforma EPS that would have been reported for the three and nine months periods
ended September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1997 1996 1997 1996
----- ------ ------ ------
<S> <C> <C> <C> <C>
Proforma Earnings per share:
Basic $0.06 $(0.17) $0.18 $(0.16)
===== ====== ===== ======
Diluted $0.06 $(0.17) $0.17 $(0.16)
===== ====== ===== ======
</TABLE>
3. BASIS OF PRESENTATION:
The interim condensed consolidated financial statements of the Company for the
nine months ended September 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
September 30, 1997, and the results of its operations and cash flows for the
nine months ended September 30, 1997 and 1996. Certain reclassifications
F-5
<PAGE> 8
have been made to the prior period financial statements to conform with the
current period presentation.
The results of operations for the nine months ended September 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, payable $1,320 in cash and promissory notes, with the
remainder representing 669 shares of the Company's common stock. The agreement
also includes an additional 338 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.
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. Total goodwill at
the date of acquisition was $13,146.
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. 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.
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, including
$25,000 representing the issuance of 2,112 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303.
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. Total goodwill at the date of acquisition was
$2,407.
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. Total goodwill at
the date of acquisition was $4,068.
F-6
<PAGE> 9
Acquisitions During the Nine Months Ended September 30, 1997
In January 1997, the Company acquired 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, $15,000 and $8,500, respectively. The
purchase price for Clinical Care-SNF, Inc. was $20,000, payable $5,000 in cash
and the remainder representing 1,354 shares of the Company's common stock. The
purchase price for Portaro Pharmacies, Inc. was $20,000, payable $5,000 in cash
and the remainder representing 1,354 shares of the Company's common stock. The
purchase price for Alger Health Services was $4,200. Total goodwill at the date
of acquisition for these acquisitions amounted to $50,162.
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 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.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based provider
of institutional pharmacy services. The purchase price was approximately
$8,500. Total goodwill at the date of acquisition was $7,826.
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. Total goodwill at the date of acquisition approximated $2,900.
In April 1997, the Company acquired Willowood Service, Inc., a
Massachusetts-based provider of institutional pharmacy services. The total
purchase price was $2,880. Total goodwill at the date of acquisition was
$2,913.
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. Total goodwill at the date
of acquisition was $1,862.
In August 1997, the Company acquired Med-Tec Pharmaceutical Services, Inc., a
provider of institutional pharmacy services and Medicare Part B services, to
long term care facilities in the greater Philadelphia, Pennsylvania area. The
purchase price was $16,300. Total goodwill at the date of acquisition
was $14,342.
These acquisitions have been accounted for using the purchase method of
accounting, with the assets and liabilities of the acquired companies recorded
at their estimated fair market values at the dates of acquisition. Goodwill,
representing the excess of acquisition cost over the fair value of the net
assets acquired, is amortized over 20 to 40 years.
F-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 nine months ended September
30, 1997 and 1996 would have been:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
NET SALES $242,763 $213,195
-------- --------
COST OF SALES 136,292 123,371
-------- --------
Gross profit 106,471 89,825
-------- --------
OPERATING EXPENSES 89,336 81,919
-------- --------
NON-OPERATING EXPENSES, net 5,638 10,324
-------- --------
Income before income tax provision 11,498 (2,418)
-------- --------
INCOME TAX PROVISION 5,383 (1,169)
-------- --------
Net income $ 6,115 $ (1,249)
======== ========
Income per share $ 0.17 $ (0.04)
======== ========
</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 36%. 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 Beverly
Enterprises, Inc. ("Beverly"), after it spins off all of its business other than
its institutional pharmacy unit, Pharmacy Corporation of America ("PCA"). In
conjunction with the transaction, the company will issue approximately 50,000
shares to existing Beverly stockholders and assume $275,000 in debt.
Additionally, the merger will be accounted for under the purchase method of
accounting and will be treated as a reverse merger/acquisition 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.
The amounts reported in the accompanying statements of income as merger related
costs represent investment banking, accounting and legal fees and other direct
costs incurred. Beverly and Capstone have set the date for the shareholder
meetings on November 20, 1997. The Company anticipates the merger to be
completed during the fourth quarter 1997. In conjunction with the merger the
Company will change its name to PharMerica, Inc.
7. CREDIT FACILITY:
The Company maintains a Revolving Credit Facility with a syndicate of five
commercial banks under which borrowings of up to $125,000 are available.
F-8
<PAGE> 11
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
nine-month eurodollar rate loan, interest is payable in arrears at the end of
the third and sixth month. Letter of credit fees are based on the eurodollar
loan margin, plus the greater of 0.25% of the maximum available to be drawn for
letters of credit, as defined in the agreement, or $500, and is to be paid
quarterly in arrears.
Scheduled reductions of the $125,000 maximum balance allowed under the
Revolving Credit Facility on December 1 of each year are as follows:
<TABLE>
<C> <C>
1997 $ --
1998 10,000
1999 35,000
2000 40,000
2001 40,000
--------
$125,000
========
</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 September 30, 1997, the Company is in compliance with
all debt covenants.
8. STOCKHOLDER'S EQUITY:
The Company's Series A Warrants expired. Series A Warrants representing 643 of a
total of 650 shares of common stock were exercised before expiring, at an
exercise price of $6.00 per share. During September 1997 636 of the total 643
Series B Warrants were exercised at $10.00 per share and the unexercised Series
B Warrants expired.
F-9
<PAGE> 12
9. RESTRUCTURING:
During July 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations in Los
Angeles by consolidating two of its existing facilities into a new, more
centralized location. The Company has assumed liabilities, included in the
acquisition cost allocation, of approximately $1,600 for costs to involuntarily
terminate employees of Symphony and to close the pharmacy location. Included in
these liabilities are approximately $330 of severance costs related to the
termination of 79 employees, including pharmacists, technicians, IV nurses,
drivers and others. The remaining costs relate to the termination of lease
agreements.
During August 1996, the Company adopted a plan of restructuring to consolidate
its Aston, Pennsylvania and Baltimore, Maryland long-term care pharmacies into
one of its existing Mid-Atlantic pharmacies. The Company has recorded
restructuring costs of $450 for the year ended December 31, 1996 which includes
approximately $125 of employee severance costs with the remainder of the costs
for the termination of leases.
Also, during September 1996, the Company adopted a formal plan of restructuring
to close its Baltimore, Maryland corporate offices and correctional pharmacy.
The corporate offices were relocated to Irving, Texas and the correctional
pharmacy was relocated to another location in the Baltimore area. The Company
has recorded restructuring costs of $2,375 for the year ended December 31, 1996,
which primarily includes approximately $400 of employee severance costs and
approximately $1,800 of lease termination costs with the remainder due to losses
on asset impairments and disposals of assets. The restructuring plan includes
the termination of 32 accounting and clerical personnel.
10. 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.
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. The Company changed its
primary supplier in December 1996 and 1995.
11. SUBSEQUENT EVENTS:
During October 1997, the Company acquired the assets of Sweetwater Pharmacy,
Inc., a provider of institutional pharmacy services in the San Diego, California
area. Sweetwater has annualized revenues of approximately $4,500 and
services over 1400 beds, 560 of which are serviced through mail order. The
purchase price was approximately $1,200.
F-10
<PAGE> 13
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART 1: FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Capstone is a leading provider of institutional pharmacy services to long-term
care facilities and correctional institutions throughout the United States. The
Company provides its long-term care clients with comprehensive institutional
pharmacy services that include (i) the purchasing, repackaging and dispensing of
pharmaceuticals, (ii) infusion therapy and Medicare Part B services, which are
comprised of enteral nutrition and urologic supplies, and (iii) pharmacy
consulting services, all of which are supported by computerized recordkeeping
and third-party billing services. The Company serves its long-term care clients
primarily through regional pharmacies 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.
Healthcare providers are continuing to be challenged to reduce costs while
maintaining the quality of patient care. Management 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 a 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.
During the third quarter of 1996, Capstone implemented a restructuring plan that
will consolidate and integrate the Company's recent acquisitions with existing
operations, as well as promote an efficient structure to support continued
growth. Key aspects of this plan include the consolidation of California,
Pennsylvania and Maryland long-term care pharmacies and the closure of excess
facilities and the relocation of the Company's Corporate headquarters to Irving,
Texas.
The acquisition of institutional pharmacy companies has resulted in a
significant change in Capstone's financial profile. Between May 1995 and
September 1997, Capstone completed a total of 16 such acquisitions. These
acquired operations have provided Capstone with the capacity and customer base
to provide higher margin ancillary services such as Medicare Part B services and
intravenous ("IV") therapy ("Ancillary Services"). All of these acquisitions
have been accounted for using the purchase method of accounting, and as a
result, Capstone will incur significant future amortization expense associated
with goodwill.
F-11
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
NET SALES. Net sales increased to $81,563 in the 1997 period from $44,015 in the
1996 period, an increase of $37,548 or 85.3%. Of this increase, approximately
$28 million is attributable to the operations of the 13 acquisitions completed
between June 30, 1996 and September 30, 1997. Additionally, ancillary
service revenues increased to approximately 13% of total revenues from
approximately 7% 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 $45,403 in the 1997 period
from $25,524 in the 1996 period, an increase of $19,879 or 77.9%. As a
percentage of net sales, cost of sales decreased to 55.7% in the 1997 period
from 58.0% 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, purchasing efficiencies related to greater
purchasing volume and a new prime vendor contract.
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 $25,725 in the 1997 period from $14,790 in 1996 period, an increase
of $10,935 or 73.9%. As a percentage of net sales, selling, general and
administrative expenses were 31.5% in the 1997 period, compared to 33.6% in the
1996 period. The decrease as a percentage of net sales was a result of the
restructuring plans discussed above and operational synergies achieved as a
result of the acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $2,630
in the 1997 period from $1,489 in the 1996 period, an increase of $1,141 or
76.6%. This increase is due mainly to the increased amortization expense
incurred as a result of the acquisitions.
RESTRUCTURING CHARGES. During the 1996 period the Company adopted restructuring
plans in connection with the Symphony acquisition which will result in the
closure and consolidation of several pharmacies as well as relocating the
corporate headquarters.
MERGER RELATED COSTS. 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. Interest expense, net increased $1,414, to $1,771 in the
1997 period due to increased Bank borrowings related to acquisitions.
Additionally, the Company incurred certain non-recurring financing charges
related to the Symphony acquisition during the 1996 period.
F-12
<PAGE> 15
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997, COMPARED WITH THE NINE MONTHS ENDED JUNE 30,
1996
NET SALES. Net sales increased to $228,048 in the 1997 period from $90,162 in
the 1996 period, an increase of $137,886 or 152.9%. Of this increase,
approximately $116.1 million is attributable to the operations of the 13
acquisitions completed between June 30, 1996 and September 30, 1997.
Additionally, ancillary service revenues increased to 13% of total revenues from
3% of total revenues 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 $127,355 in the 1997
period from $54,370 in the 1996 period, an increase of $72,985 or 134.2%. As a
percentage of net sales, cost of sales decreased to 55.8% in the 1997 period
from 60.3% 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, Capstone entered into new prime vendor and
group purchasing organization agreements during the fourth quarter of 1996.
These agreements resulted in a reduction in the cost of sales 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 $73,481 in the 1997 period from $29,243 in the 1996 period, an increase of
$44,238 or 151.3%. 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 32.2% in the 1997 period, compared to 32.4% 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.
RESTRUCTURING CHARGES. During the 1996 period the Company adopted restructuring
plans in connection with the Symphony acquisition which will result in the
closure and consolidation of several pharmacies as well as relocating the
corporate headquarters.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $7,547
in the 1997 period from $2,651 in the 1996 period, an increase of $4,896 or
184.7%. This increase is due mainly to the increased amortization expense
incurred as a result of the acquisitions.
MERGER RELATED COSTS. 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 includes interest and acquisition
financing fees. Interest expense net increased $3,630 or 383.3% from the 1996
period. This increase primarily relates to the increased bank borrowings related
to acquisitions. Additionally, the Company incurred certain non-recurring
financing charges related to the Symphony acquisition during the 1996 period.
F-13
<PAGE> 16
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company requires capital primarily for the acquisition of institutional
pharmacy companies, to finance its working capital requirements and for the
purchase of equipment for existing pharmacies. The Company's net cash flows from
operating activities were $(17,242) and $(10,076) respectively, for the nine
months ended September 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 to operating activities was
impacted by a $13,537 decrease in accounts payable a $5,101 increase in
inventories and a $14,133 increase in accounts receivable in the nine months
ended September 30, 1997, and by a $6,480 increase in accounts receivable and a
$3,612 decrease in accounts payable and accrued expenses for the nine months
ended September 30, 1996.
The Company's net cash flows from investing activities were $(55,216) and
$(149,833) for the nine months ended September 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 $78,391 and $169,278
for the nine months ended September 30, 1997 and 1996, respectively. Net cash
flows from financing activities were impacted by borrowings to fund acquisitions
and working capital requirements.
During December 1996, the Company entered into a revolving $125 million credit
facility (the "Credit Facility") with a syndicate of banks for which Bankers
Trust Company acts as agent. Approximately $32,000 of the Credit Facility was
used to retire amounts outstanding under the Company's prior credit facility.
Borrowings under the agreement are secured by substantially all of the assets of
the Company. The Credit Facility bears interest, at the option of the Company,
at (a) Bankers Trust Company's prime rate plus between 0% to .50% based on the
Company's leverage ratio, or (b) the prevailing eurodollar rate quoted by
Bankers Trust Company, plus between .50% to 1.50%, based on the Company's
leverage ratio. Borrowings under the Credit Facility are based on the Company's
leverage ratio. Borrowings under the Credit Facility are subject to other
provisions and covenants, all as defined by the underlying agreement. The
Company incurred an extraordinary loss of approximately $240 related to the
retirement. As of September 30, 1997, the Company had outstanding borrowings of
approximately $108,700 under the Credit Facility.
The Company's current ratio was 4.86:1 at September 30, 1997, and 3.32:1 at
December 31, 1996, respectively. The increased current ratio at September 30,
1997, was due primarily to an increase in accounts receivable, inventories and
prepaid expenses, and a decrease in accounts payable.
In April 1996, the Company completed a private placement of 1,035 shares of
common stock at a price of $8.50 per share for net proceeds of approximately
$8,370 (the "April 1996 Private Placement"). The net proceeds from this private
placement were used to fund acquisitions and to provide general working capital.
In July 1996, Counsel purchased from the Company in a private placement
transaction, 2,112 shares of common stock at a price of approximately $11.83 per
share for net proceeds to the Company of $25,000. The
F-14
<PAGE> 17
proceeds were used as part of the purchase price for the Symphony
acquisition. As an additional part of such purchase price, the Company issued
2,112 shares of common stock valued at approximately $11.83 per share to IHS.
In connection with the Symphony acquisition, Capstone entered into a Senior
Subordinated Credit Agreement with Bankers Trust Company as agent and lender and
Canadian Imperial Bank of Commerce as lender, pursuant to which the lenders
funded the $100.0 million Bridge Loan. The Company incurred $1,813 in interest
charges, and $2,761 in fees and other costs during the third quarter of 1996
related to this loan. The loan was paid off in September 1996.
During August 1996, the Company registered the shares underlying its outstanding
Series A and B warrants. Series A warrants representing 643 of a total of 650
shares of common stock were exercised before expiring, at an exercise price of
$6.00 per share.
Holders of the exercised Series A warrants received 643 shares of common stock
and 643 Series B warrants which were exercisable at a price of $10.00 per share.
Proceeds from the Series A warrants were approximately $3,788 and will be used
for general working capital purposes.
During September 1997, 636 of the total 643 Series B warrants were exercised.
Proceeds from the Series B warrants were approximately $6,359 and will be used
for general working capital purposes.
During September 1996, the Company issued 10,350 shares in a follow-on
Public Offering, providing approximately $107,500 in net proceeds. A portion
of the proceeds were used to repay, in full, the Bridge Loan associated with the
Symphony acquisition.
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 Indebtedness (as defined
in the Merger Agreement between Beverly and Capstone), and to pay fees and
expenses related to the Transactions. Capstone's fees and expenses related to
the Transactions are estimated to be approximately $10 million. These fees and
expenses include printing, registration and mailing expenses for the Joint Proxy
Statement/Prospectus, legal, accounting and financial advisor fees and fees to
list the 50 million shares of Capstone Common Stock on the Nasdaq Stock Market.
The estimated fees and expenses related to replacing the Credit Facility are
also included in the estimate. The exact amount of such fees and expenses cannot
be determined until some time following consummation of the Merger. 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.
F-15
<PAGE> 18
PART 2: OTHER INFORMATION
Item 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
Not Applicable
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) No Reports on Form 8-K were filed in the reporting period.
F-16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
(Registrant)
Dated: November 14, 1997 By:/s/ James D. Shelton
---------------------------
Vice President and
Chief Financial Officer
F-17
<PAGE> 20
INDEX OF EXHIBITS
Exhibit
Number Description
------- ---------------------------------------------------------------
2 Asset Purchase Agreement dated August 8, 1997 between Med Tec
Pharmaceutical Services, Inc., the Shareholders and the Company
(incorporated by reference to Exhibit 2 from the Company's
Periodic Report on Form 8-K dated September 30, 1997).
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)
11 Statement re computation of per share earnings
27 Financial Data Schedule
17
<PAGE> 1
Exhibit 11
CAPSTONE PHARMACY SERVICES, INC.
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE AND NINE MONTH PERIOD ENDING SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Primary Fully Diluted
------- -------------
<S> <C> <C>
Nine months ended September 30, 1997:
Stock Price Assumed $ 11.33 $ 12.06
======= =======
Dilutive effect of Conversion of warrants
and stock options outstanding 2,618 2,821
Effect of shares exercised or
granted during the period 139 185
Weighed average shares outstanding 33,711 33,711
Shares held in escrow 108 338
Weighed average number of common and
------- -------
common equivalent shares outstanding 36,576 37,055
======= =======
Three months ended September 30, 1997:
Stock Price Assumed $ 11.40 $ 12.06
======= =======
Dilutive effect of Conversion of warrants
and stock options outstanding 2,637 2,821
Effect of shares exercised or
granted during the period 139 185
Weighed average shares outstanding 33,961 33,961
Shares held in escrow 108 338
Weighed average number of common and
------- -------
common equivalent shares outstanding 36,845 37,305
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CAPSTONE PHARMACY SERVICES, INC. FOR THE NINE MONTHS AND
YEAR ENDED SEPTEMBER 30, 1997 AND DECEMBER 31, 1996, RESPECTIVELY, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-1-1997 JAN-1-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 15,340 9,407
<SECURITIES> 0 0
<RECEIVABLES> 73,811 50,504
<ALLOWANCES> 6,950 5,778
<INVENTORY> 23,272 13,542
<CURRENT-ASSETS> 116,955 80,384
<PP&E> 13,200 10,469
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 388,006 271,001
<CURRENT-LIABILITIES> 24,051 24,202
<BONDS> 111,339 39,166
0 0
0 0
<COMMON> 347,308 0
<OTHER-SE> 252,618 213,594
<TOTAL-LIABILITY-AND-EQUITY> 388,006 271,001
<SALES> 228,048 90,162
<TOTAL-REVENUES> 228,048 90,167
<CGS> 127,355 54,370
<TOTAL-COSTS> 127,355 54,370
<OTHER-EXPENSES> 84,553 34,965
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,577 947
<INCOME-PRETAX> 11,563 (4,694)
<INCOME-TAX> 5,415 (2,137)
<INCOME-CONTINUING> 6,148 (2,557)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,148 (2,557)
<EPS-PRIMARY> 0.17 (0.16)
<EPS-DILUTED> 0.17 (0.16)
</TABLE>
