As filed with the Securities and Exchange Commission on July 24, 1997
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
Registration Statement Under the Securities Act of 1933
COMPSCRIPT, INC.
(Name of Small Business Issuer in its Charter)
FLORIDA 8741 65-0506539
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number Identification No.)
1225 BROKEN SOUND PARKWAY, N.W. SUITE A, BOCA RATON, FLORIDA 33487
(Address and telephone number of principal executive offices
and principal place of business)
BRIAN A. KAHAN, PRESIDENT
COMPSCRIPT, INC.
1225 BROKEN SOUND PARKWAY, N.W.
BOCA RATON, FLORIDA 33487
(561) 994-8585
(Name, address and telephone number of agent for service)
Copies to:
ATLAS, PEARLMAN, TROP & BORKSON, P.A.
200 EAST LAS OLAS BOULEVARD, SUITE 1900
FORT LAUDERDALE, FLORIDA 33301
(954) 763-1200
Approximate date of commencement proposed sale of the securities to the public:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box [ ]
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CALCULATION OF REGISTRATION FEE
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount to Offering Price Per Aggregate Offering Amount of
to be Registered be Registered Share Price Registration Fee(2)
<S> <C> <C> <C> <C>
Common Stock
(par value
$.0001 per share) 662,341 (1) (1) $871.83
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(1) Not applicable.
(2) The registration fee was computed pursuant to Rule 457 under the
Securities Act of 1933, as amended, based upon the market value of the
Company's Common Stock as reported on NASDAQ on July 21, 1997.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
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COMPSCRIPT, INC.
-------------
Cross Reference Sheet Required by Rule 404(a)
S-4 Item No. and Caption Caption or Location in Prospectus
<S> <C>
A. INFORMATION ABOUT THE
TRANSACTION
1. Front of Registration Statement Facing Page of Registration Statement;
and Outside Front Cover of Cross-Reference Sheet; Outside Front Cover
Prospectus Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus of Prospectus; Table of Contents; Available
Information
3. Risk Factors, Ratio of Earnings Prospectus Summary; Risk Factors; The
to Fixed Charges and Other Exchange Offer; The Company
Information
4. Terms of the Transaction Prospectus Summary; The Exchange Offer;
Certain Federal Income Tax Considerations;
Comparison of Common Stock and Minority
Interests
5. Pro Forma Financial Information Prospectus Summary; Pro Forma Condensed
Consolidated Financial Information
6. Material Contacts with the Company Prospectus Summary; Risk Factors; The
Exchange Offer; Management; Conflicts of
Interest; Certain Transactions
7. Additional Information Required for *
Reoffering by Persons and Parties
Deemed to be Underwriters
8. Interests of Named Experts and *
Counsel
9. Disclosure of Commission Position *
on Indemnification for Securities Act
Liabilities
<PAGE>
B. INFORMATION ABOUT THE
REGISTRANT
10. Incorporation with Respect to S-3 *
Registrants
11. Incorporation of Certain Information by
Reference *
12. Information with Respect to S-2 or S-3
Registrants *
13. Incorporation of Certain Information
by Reference *
14. Information with Respect to Registrants Prospectus Summary; Risk Factors; The
Other Than S-3 or S-2 Registrants Exchange Offer; The Company; Recent
Transactions; Dividends on and Market
Prices of the Company's Common Stock;
Pro Forma Condensed Consolidated
Financial Information: Selected Consolidated
Data; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management; Conflicts
of Interest; Certain Transactions; Principal
Stockholders; Description of Capital Stock
C. INFORMATION ABOUT THE
COMPANY BEING ACQUIRED
15. Information with Respect to S-3 *
Companies
16. Information with Respect to S-2 or S-3 *
Companies
17. Information with Respect to Companies Prospectus Summary; Business
Other than S-3 or S-2 Companies
<PAGE>
D. VOTING AND MANAGEMENT
INFORMATION
18. Information if Proxies, Consents or *
Authorizations are to be Solicited
19. Information if Proxies, Consents or Risk Factors; Recent Transactions;
Authorizations are not to be Solicited or Management, Conflicts of Interest; Certain
in an Exchange Offer Transactions; Principal Stockholders
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* Not applicable or answer is in the negative.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JULY 24, 1997
COMPSCRIPT, INC.
Up to 662,341 Shares-Exchange Offer of Common Stock, par value $.0001
CompScript, Inc. (the "Company") is a Florida corporation that is a
comprehensive provider of pharmacy management services.
On the terms and conditions set forth in this Prospectus, the Company
hereby offers to exchange (the "Exchange Offer") shares of its common stock,
$.0001 par value per share ("Common Stock") for the outstanding minority equity
interests (the "Minority Interests") in its 93% owned subsidiary
CompScript-Boca, Inc. (the "Subsidiary"). The Exchange Offer is being made to
enable each of the holders of the Minority Interests (a "Minority Holder" or
"Offeree") to (i) acquire Common Stock of the Company on the same terms as the
former shareholders of the Subsidiary who exchanged their shares in the April
1996 share exchange with the Company (formerly known as Capital Brands, Inc.)
and (ii) diversify and increase the liquidity of their investments. See "The
Exchange Offer - Purpose and Background of the Exchange Offer." Each Minority
Holder will receive 3.898373 shares of Common Stock for each share of Subsidiary
Common Stock (the "Exchange Value"). The Exchange Offer is being made for any
and all Minority Interests and no minimum aggregate number of Minority Interests
must be tendered for the Exchange Offer to be consummated. A Minority Holder
must tender for exchange all of his or its Minority Interests if he or it
tenders any. The Exchange Offer expires at 2:00 p.m., Fort Lauderdale, Florida
time on ___________, 1997 (the "Expiration Date"). See "The Exchange Offer -
Terms of the Exchange Offer; Exchange Period." Upon the consummation of the
Exchange Offer, and assuming Offerees elect to receive Common Stock in exchange
for all Minority Interests, the Company will own 100% of the outstanding equity
interests of the Subsidiary. Each Minority Holder has the option of rejecting
the Exchange Offer described in this Prospectus. In such event, each Minority
Holder will continue to hold his or its Minority Interest with the same rights
and obligations attendant thereto as existed prior to the Exchange Offer. See
"Risk Factors - Effect of Exchange Offer on Nonparticipating Offerees" and
"Comparison of Common Stock and Minority Interests." Offerees electing to
participate in the Exchange Offer will become owners of Common Stock in the
Company and will be subject to the risks attendant thereto. See "Risk Factors -
Company Risks."
The Common Stock is quoted on the Nasdaq Stock Market's SmallCap Market
(the "Nasdaq SmallCap Market") under the Symbol "CPRX." On ___________, 1997,
the last reported sales price of the Common Stock was $__________ per share. See
"Dividends on and Market Prices of the Company's Common Stock."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY MINORITY HOLDERS IN EVALUATING THE EXCHANGE OFFER, THE COMPANY AND
ITS BUSINESS, SUCH AS THE FOLLOWING MATERIAL RISK FACTORS:
<PAGE>
\bullet\ THE COMPANY'S DETERMINATION OF THE EXCHANGE VALUES IS
SUBJECTIVE AND THE COMPANY HAS NOT OBTAINED ANY FAIRNESS
OPINION OR INDEPENDENT APPRAISAL RELATIVE TO THE EXCHANGE
OFFER.
\bullet\ THE COMPANY HAS NO OBJECTIVE BASIS FOR ITS BELIEF THAT THE
EXCHANGE VALUE IS FAIR FROM A FINANCIAL POINT OF VIEW, AND
THE BOARD OF DIRECTORS OR THE SUBSIDIARY HAS NOT MADE ANY
FAIRNESS FINDINGS CONCERNING THE EXCHANGE VALUE.
\bullet\ CERTAIN MEMBERS OF MANAGEMENT AND DIRECTORS OF THE COMPANY
HAVE INHERENT CONFLICTS OF INTEREST IN ESTABLISHING THE
EXCHANGE VALUE.
\bullet\ THE BOARD OF THE COMPANY HAS NOT MADE A RECOMMENDATION
CONCERNING THE EXCHANGE OFFER.
--------------------
THE EXCHANGE OFFER WILL EXPIRE ON ___________, 1997, AT 2:00 P.M. FORT
LAUDERDALE, FLORIDA
SEE "RISK FACTORS" COMMENCING ON PAGE __ BELOW
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHAREHOLDERS AND INVESTORS
SHOULD CONSIDER WITH RESPECT TO THE EXCHANGE OFFER,
THE COMPANY AND ITS BUSINESS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ______________, 1997
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY COMPSCRIPT OR THE SUBSIDIARY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES COVERED BY THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS
OR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION ABOUT
COMPSCRIPT OR THE SUBSIDIARY CONTAINED IN THIS PROSPECTUS SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended, and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New
York, New York 10048. Copies of such material may be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Copies of such material can be
obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of the Web site is
(http://www.sec.gov). Such reports, proxy statements and other information
concerning the Company may also be inspected at the offices of The Nasdaq
SmallCap Market at 1735 K Street, N.W., Washington, D.C. 20006. The Company has
previously and intends to furnish its stockholders with annual reports
containing audited financial statements and may distribute quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
This Prospectus, which constitutes part of a Registration Statement on Form S-4
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "Act"), omits certain information contained in the Registration
Statement in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the Company and the
securities offered hereby.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE CORPORATE SECRETARY, COMPSCRIPT, INC., 1225 BROKEN SOUND PARKWAY, N.W., BOCA
RATON, FLORIDA 33487; TELEPHONE (561) 994-8585 TO WHICH THIS REQUEST IS TO BE
DIRECTED. IN ORDER TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY A DATE FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH THE FINAL
BUSINESS DECISION MUST BE MADE.
i
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<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
PROSPECTUS SUMMARY..................................................................................... 1
The Company..................................................................................... 1
Risk Factors.................................................................................... 2
Comparison of Common Stock and Minority Interests............................................... 3
Subsidiary...................................................................................... 3
The Exchange Offer.............................................................................. 4
Conflicts of Interest........................................................................... 7
RISK FACTORS........................................................................................... 7
Exchange Offer Risks............................................................................ 7
Effect of Exchange Offer on Nonparticipating Offerees........................................... 9
THE EXCHANGE OFFER..................................................................................... 13
Present Ownership of Subsidiary; Securities to be Exchanged..................................... 13
Terms of the Exchange Offer..................................................................... 13
Conflicts of Interest; Position of Each Subsidiary's Board of Directors with
Respect to the Exchange Offer................................................................ 14
Purpose and Background of the Exchange Offer.................................................... 14
Calculation of Exchange Values.................................................................. 16
How to Exchange................................................................................. 16
Exchange Period................................................................................. 17
Closing and Issuance of Stock................................................................... 17
Withdrawal...................................................................................... 17
Validity of Offeree's Acceptance of Exchange Offer.............................................. 17
Revocability of Offeree's Acceptance of Exchange Offer.......................................... 18
Accounting Treatment............................................................................ 18
Tax Consequences................................................................................ 18
Management and Operations of the Company After the Exchange..................................... 18
Federal or Regulatory Approvals................................................................. 18
Expenses and Fees............................................................................... 18
COMPARISON OF COMMON STOCK AND MINORITY INTERESTS...................................................... 19
COMPARISON OF SHAREHOLDER RIGHTS....................................................................... 20
Annual Meetings................................................................................. 20
Shareholder Meeting Procedures.................................................................. 21
Record Dates.................................................................................... 21
Directors....................................................................................... 22
Amendment to Articles and Bylaws................................................................ 22
Indemnification................................................................................. 23
ii
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PAGE
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INDEMNIFICATION AGAINST SECURITIES ACT LIABILITIES..................................................... 24
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.............................................................. 24
No Rulings Received............................................................................. 24
Subsidiary Organized as Corporation............................................................. 25
CAPITALIZATION......................................................................................... 25
DIVIDENDS ON AND MARKET PRICE FOR THE
COMPANY'S COMMON STOCK................................................................................ 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS................................................................................. 27
General......................................................................................... 27
Results of Operations........................................................................... 28
Liquidity and Capital Resources................................................................. 32
THE BUSINESS........................................................................................... 34
Products and Services........................................................................... 34
Acquisition Strategy............................................................................ 40
Suppliers....................................................................................... 41
Competition..................................................................................... 42
Government Regulation........................................................................... 43
Pharmacy Benefits Management Regulation......................................................... 47
Servicemarks and Trademarks..................................................................... 50
Insurance....................................................................................... 51
Employees....................................................................................... 51
Product and Market Development.................................................................. 51
Material/Supplies............................................................................... 51
Inventories..................................................................................... 51
Environmental Matters........................................................................... 52
Description of Properties....................................................................... 52
Legal Proceedings............................................................................... 52
MANAGEMENT............................................................................................. 52
Executive Compensation.......................................................................... 54
Option SAR Grants in Last Fiscal Year........................................................... 55
Aggregated Fiscal Year Ended Option Value Table................................................. 56
Stock Option Plan............................................................................... 56
Security Ownership of Certain Beneficial Owners and Management.................................. 58
iii
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PAGE
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Compliance with Section 16(a) of the Securities Exchange Act of 1934............................ 59
Certain Relationships and Related Transactions.................................................. 60
CONFLICTS OF INTEREST.................................................................................. 60
DESCRIPTION OF COMPANY SECURITIES...................................................................... 61
Common Stock.................................................................................... 61
Transfer Agent and Registrar.................................................................... 61
Preferred Stock................................................................................. 62
LEGAL MATTERS.......................................................................................... 62
EXPERTS................................................................................................ 62
INDEX TO FINANCIAL INFORMATION......................................................................... 63
</TABLE>
iv
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN
TERMS USED IN THE SUMMARY AND ELSEWHERE IN THIS PROSPECTUS ARE USED AS DEFINED
IN THE SUMMARY OR ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
CompScript, Inc. ("CompScript" or the "Company") is a comprehensive
provider of pharmacy management services equipped to both lower costs and
improve the quality of care to its customers. The Company offers a broad range
of pharmacy management services, including infusion therapy, consulting
services, mail order, and pharmacy benefit claim administration to managed care
networks, long term and subacute care facilities, home health patients, and
recipients of managed care. The Company's proprietary pharmacy management
capabilities combine sophisticated clinical tools with the latest technologies
in databases and drug profiles. The Company's network of participating retail
pharmacies, along with its electronic on-line adjudication system and a mail
service dispensing facility, allow the Company to offer a fully integrated
pharmacy benefit management program. The mailing address of the Company and its
principal executive offices is 1225 Broken Sound Parkway, N.W., Boca Raton,
Florida 33487; telephone number (561) 994-8585.
On April 26, 1996, CompScript acquired approximately 93% of the
outstanding common stock of CompScript-Boca, Inc. ("CompScript-Boca" or the
"Subsidiary"), a privately-held provider of pharmacy management services, in
exchange for issuance of 7,394,982 shares of the Company's common stock. As a
result of this transaction, CompScript-Boca shareholders became the owners of
approximately 80% of the Company's then outstanding common stock and assumed
100% control of the Company's Board of Directors. Accordingly, the acquisition
has been treated for financial reporting purposes as a reverse acquisition.
After completion of the transaction, the Company became the owner of
approximately 93% of the outstanding common stock of Subsidiary and accordingly,
recorded at the time of the transaction a minority interest in the acquired
Subsidiary of $222,628, representing approximately 7% of the net assets of the
acquired Subsidiary on the date of acquisition.
Since May 1996, the Company has consummated four acquisitions of
institutional pharmacy providers located in Mobile, Alabama (May 1996), Miami,
Florida (January 1997), Metaire, Louisiana (February 1997) and Mentor, Ohio
(March 1997) and one acquisition of a mail service dispensing pharmacy with its
principal operations in Cleveland, Ohio (August 1996). See Item 1 "Description
of Business Acquisition Strategy."
CompScript presently operates 7 institutional pharmacies that serve
long-term and subacute facilities in Florida, Alabama, Mississippi, Louisiana
and Ohio.
1
<PAGE>
RISK FACTORS
Certain risks are associated with an Offeree's decision whether to
participate in the Exchange Offer and with the ownership of Common Stock in the
Company. These risks can generally be divided between risks associated with the
Exchange Offer, risks to nonparticipating Offerees, and risks associated with
the ownership of Company Common Stock. For a full discussion of factors to be
considered by all Offerees. See "Risk Factors." The following risks are
particular to the Exchange Offer.
\bullet\ The determination of the Exchange Value has been based solely
upon the same evaluation as the previous shareholders of the
Subsidiary exchanged their shares in April 1996 and does not
necessarily reflect the market value of the Subsidiary or
Minority Interest. No fairness opinion or independent
appraisal has been obtained with respect to the value of the
Subsidiary or Minority Interest. Although the Company believes
the Exchange Value is fair from a financial point of view, no
objective basis exists for such belief.
\bullet\ Certain members of management and directors of the Company
have an inherent conflict of interest in establishing the
Exchange Value of the Minority Interests as a result of their
ownership interest in the Company, their involvement in the
formation of the Subsidiary and their status as officers and
directors of the Subsidiary. Accordingly, the making of the
Exchange Offer and the determination of the Exchange Value
involve conflicts of interest among the Company, its
management and the management of the Subsidiary, on the one
hand, and the Minority Holders, on the other hand. Neither the
Board of the Company nor of the Subsidiary has made any
recommendation concerning the Exchange Offer.
\bullet\ Upon the consummation of the Exchange Offer, it is possible
that a significant number of former Minority Holders will
dispose of the shares of the Common Stock acquired in the
Exchange Offer. Any such dispositions, if significant, could
adversely affect the market price of the Common Stock.
\bullet\ Although the Company anticipates that the Exchange Offer will
constitute a nontaxable reorganization pursuant to the
Internal Revenue Code of 1986, as amended (the "Code"), no
assurances can be given in this regard. See "Certain Federal
Income Tax Considerations." The Company is not seeking any
ruling from the IRS or any legal opinion regarding the
Exchange Offer. See "Certain Federal Income Tax
Considerations."
\bullet\ Because the decision of a Minority Holder to participate in
the Exchange Offer is voluntary, no Minority Holder will be
required to vote or will be entitled to exercise any
dissenter's or appraisal rights in connection with the
Exchange Offer. Any Minority Holder not electing to
participate in the Exchange Offer will retain such holder's
Minority Interest in the Subsidiary.
2
<PAGE>
\bullet\ Offerees who do not elect to participate in the Exchange Offer
will continue to own their respective interest in the
Subsidiary, with the same rights, obligations and interests as
they have at present. The risks associated with the ownership
of a Minority Interest generally will not be affected by the
Exchange Offer.
\bullet\ The Company could merge the Subsidiary into either the Company
or another subsidiary of the Company, to acquire the Minority
Interest of any Nonparticipating Offeree, or to liquidate the
Subsidiary. In such event, the consideration proposed in any
such transaction could be more or less than the applicable
Exchange Value of the Common Stock being offered for such
Minority Interests in the Exchange Offer.
The following risks are associated with the ownership of Common Stock
in the Company.
\bullet\ The growth of the Company's business may require additional
investment to finance its operations and development. These
activities may be financed in whole or in part directly by the
Company or its existing or future subsidiaries, through debt
or equity financings, or other arrangements. Failure to obtain
any required additional financing could adversely affect the
growth of the Company.
\bullet\ The pharmacy management business is highly competitive. Many
actual and potential competitors have greater financial,
marketing and other resources than the Company. No assurance
can be given that the Company will compete successfully.
COMPARISON OF COMMON STOCK AND MINORITY INTERESTS
Each Offeree accepting the Exchange Offer will receive shares of Common
Stock in exchange for his or its Minority Interest. Substantial differences
exist between the Common Stock and the Minority Interests including the
following: the Common Stock will be freely tradable on the Nasdaq SmallCap
Market while no trading market exists for the Minority Interests; the Common
Stock represents an equity interest in a larger entity while each Minority
Interest represents an equity interest in a single entity; Offerees
participating in the exchange will be unable to control any material corporate
decisions affecting the Company; and each Offeree's percentage ownership in the
Subsidiary will be greater than the Offeree's percentage ownership in the
Company following the exchange. See "Comparison of Common Stock and Minority
Interests."
SUBSIDIARY
The Subsidiary is a Florida corporation and a 93% owned subsidiary of
the Company, organized to provide institutional pharmacy and pharmacy benefit
management services. The Exchange Offer is being made to Minority Holders that
own equity interests in the Subsidiary. The Company determined the Exchange
Value for each Minority Interest on the same terms and
3
<PAGE>
conditions as former shareholders of the Subsidiary that exchanged their shares
for shares in the Company in April 1996. Certain members of Company management
and certain members of its board of directors have an inherent conflict of
interest in establishing the Exchange Value for the Subsidiary. See "Risk
Factors - Exchange Offer - Subjective Valuation of Minority Interests; Lack of
Fairness Opinion or Independent Appraisal; Certain Conflicts in Establishing the
Exchange Value; The Exchange Offer - Position of Subsidiary, Board of Directors
with Respect to the Exchange Offer and Conflicts of Interest." The Company has
neither sought nor obtained any appraisals or fairness opinions regarding the
valuation of the Subsidiary, nor conducted any detailed quantitative analysis to
determine the value of any Subsidiary. The Company believes that the Exchange
Value and the valuation of the Subsidiary is fair from a financial point of
view. However, no objective basis exists for such belief. Rather the Company
considered various subjective factors. In addition, the Company did not
undertake to perform any detailed quantitative analysis, review in detail any
independent measurements of value, such as comparable Company valuations,
multiples of book value analysis or discounted cash flow analysis or review in
detail other alternatives to the Exchange Offer. The Board of Directors of the
Company is not making a recommendation concerning the Exchange Offer. Therefore
the determination of the Exchange Value is highly subjective and the
determination by the Company of the fairness thereof has been made without
objective basis. See "The Exchange Offer - Calculation of Exchange Values; Risk
Factors - Exchange Offer Risks - Subjective Valuation of the Minority Interests;
Lack of Fairness Opinion or Independent Appraisal; Certain Conflicts in
Establishing the Exchange Values." The Company's existing business plan for the
Subsidiary is not expected to change materially if Minority Holders of the
Subsidiary determine not to participate in the Exchange.
<TABLE>
<CAPTION>
THE EXCHANGE OFFER
<S> <C>
Securities to be Exchanged The Exchange Offer is an offer to exchange up to an
aggregate of 662,341 shares of Common Stock in exchange
for Minority Interests in the Subsidiary, in which the
Company owns approximately 93% of the outstanding equity
interests. See "Exchange Offer - Securities to be
Exchanged."
Terms of the Exchange Offer 3.898373 shares of Common Stock will be issued for each
one share of Subsidiary Common Stock exchange. No
fractional shares will be issued. Any fractional shares will
be rounded (upward) to the nearest whole share. See
"Exchange Offer - Terms of the Exchange Offer." Neither
holders of equity interests in the Company nor the
Subsidiary are required to vote in connection with the
Exchange Offer. Because each Minority Holder's
participation in the Exchange Offer is voluntary, Minority
Holders will not be entitled to exercise any dissenter's or
appraisal rights in connection with the Exchange Offer.
4
<PAGE>
Purpose and Background of the The Company anticipates achieving certain benefits from the
Exchange Offer simplification of its corporate structure, such as (i) enabling
the Company to more clearly present its operations to prospective
investors and lenders, and (ii) reducing certain administrative
burdens. See "The Exchange Offer - Purchase and Background of the
Exchange Offer." Offerees electing to participate in the Exchange
Offer are also subject to certain risks. The Company believes that
by offering Minority Holders the opportunity to exchange their
Minority Interests in the Subsidiary for Company Common Stock,
Minority Holders will be able to diversify their investment
across numerous geographic markets and increase the liquidity
of their investment. See "The Exchange Offer Purpose and
Background of the Exchange Offer." Offerees who do not elect
to participate in the Exchange Offer will continue to hold
their respective Minority Interests with all risks attendant
thereto. See "Risk Factors - Effect of Exchange Offer in
Nonparticipating Offerees."
Calculation of Exchange Value The Exchange Value for the Minority Interests was determined
by management of the Company based upon the same
exchange ratio as the former shareholders of the Subsidiary
exchanged their shares with the Company in April 1996.
The Company has neither sought nor obtained any appraisals
or fairness opinions regarding the valuation of the
Subsidiary, nor conducted any detailed quantitative analysis
in determining the value of the Subsidiary. The Company
believes that the Exchange Value and the valuation of the
Subsidiary are fair from a financial point of view. However,
no objective basis exists for such belief. Rather, the
Company considered various subjective factors. In addition,
the Company did not (i) undertake to perform any detailed
quantitative analysis (ii) review in detail other independent
measurements of value, such as comparable company
valuations, multiples of book value analyses or discounted
cash flow analyses, (iii) solicit offers for the purchase of the
assets of any Subsidiary, or (iv) review in detail other
alternatives to the Exchange Offer. Neither the Board of the
Company nor the Subsidiary is making any recommendation
concerning the Exchange Offer. Therefore, the
determination of the Exchange Value is highly subjective and
the determination by the Company of the fairness thereof has
been made without objective basis. See "The Exchange
Offer - Calculation of Exchange Values;" "Risk Factors -
5
<PAGE>
Exchange Offer Risks - Subjective Valuation of the Minority
Interests; Lack of Fairness Opinion or Independent
Appraisal; Certain Conflicts in Establishing the Exchange
Values."
How to Exchange Each Offeree accepting the Exchange Offer must complete
and execute the Letter of Transmittal which accompanies this
Prospectus and return such letter, along with the certificates
(or a certification of lost certificates) representing the
Minority Interest to the Company on or before the Expiration
Date. See "The Exchange Offer - How to Exchange."
Expenses and Fees All expenses of the Exchange Offer, estimated to be
approximately $75,000 will be paid by the Company.
Officers and employees of the Company will be reimbursed
for out-of-pocket expenses but will not receive any
compensation or commission in connection with the
Exchange Offer. See "The Exchange Offer - Expenses and
Fees."
Exchange Period The Exchange Offer will expire on __________, 1997. See
"The Exchange Offer - Exchange Period."
Closing and Issuance of Stock The "Closing Date" will not be later than 5 days following
the Expiration Date. Stock certificates for the Common
Stock will be issued as soon as practicable after the Closing
Date. See "The Exchange Offer - Closing and Issuance of
Stock."
Withdrawal The Company reserves the right at any time to withdraw the
Exchange Offer on or after the date of this Prospectus if, in
its sole judgment, certain events affecting the Company, the
Subsidiary, the Exchange Offer or the financial markets have
occurred. The Company reserves the absolute right at any
time to reject any or all tenders of Minority Interests. If the
Exchange Offer is not consummated, all offers to accept the
Exchange Offer shall be void and no shares of Common
Stock will be issued pursuant to that Exchange Offer. See
"The Exchange Offer - Withdrawal."
Tax Aspects The Company anticipates that the exchange of Minority Interests in
the corporate Subsidiary for Common Stock will be eligible for treatment
as a nontaxable reorganization pursuant to the Code. However, the
Company is not seeking
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any ruling from the Internal Revenue Service ("IRS") or
obtaining any legal opinion regarding the tax effects of the
Exchange Offer. Each Minority Holder should consult his
or its own tax or legal advisor regarding the particular tax
consequences to him or it of the Exchange Offer. See
"Certain Federal Income Tax Considerations."
Risk Factors Offerees should consider all information in this Prospectus before
tendering their Minority Interests for Common Stock. In particular,
Offerees should consider the factors set forth herein under "Risk
Factors."
Nonparticipating Offerees Nonparticipating Offerees will retain the same rights,
obligations and interests which they presently have with
respect to their ownership of the Minority Interests in the
Subsidiaries. See "Risk Factors - Effect of Exchange Offer
on Nonparticipating Offerees."
</TABLE>
CONFLICTS OF INTEREST
Certain members of management and directors of the Company have an
inherent conflict of interest in establishing the Exchange Value of the Minority
Interests arising from their ownership interest in the Company; their
involvement in the formation of the Subsidiary and their status as officers and
directors of the Subsidiary. See "Risk Factors - Exchange Offer Risks Subjective
Valuation of Minority Interests; Lack of Fairness Opinion or Independent
Appraisal;" "The Exchange Offer - Position of Each Subsidiary's Board of
Directors or Managers with Respect to the Exchange Offer" and "Conflicts of
Interest."
RISK FACTORS
EXCHANGE OFFER RISKS
SUBJECTIVE VALUATION OF MINORITY INTERESTS; LACK OF FAIRNESS OPINION OR
INDEPENDENT APPRAISAL. The determination of the Exchange Value has been based
upon the same ratio as the former shareholders of the Subsidiary exchanged their
shares in April 1996 with the Company and does not necessarily reflect the
market value of any Subsidiary or Minority Interest. No fairness opinion or
independent appraisal has been obtained with respect to the value of the
Subsidiary or Minority Interest. Other valuations of the Minority Interest may
be equally fair and reasonable but yield materially different values. Although
the Company believes that the Exchange Value and the valuation of the Subsidiary
are fair from a financial point of view, no objective basis exists for such
belief. The Company did not (i) undertake to perform any detailed quantitative
analysis, (ii) review in detail other independent measurements of value, such as
comparable company valuations, multiples of book value analyses or discounted
cash flow analyses, or (iii) review in detail other alternatives to the Exchange
Offer except the merger of
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<PAGE>
the Subsidiary into the Company or a wholly-owned subsidiary thereof, on the
same terms thereof. The Board of the Company is not making any recommendation
concerning the Exchange Offer. Therefore, the determination of the Exchange
Value is highly subjective and the determination by the Company of the fairness
thereof has been made without any objective basis. See "The Exchange Offer -
Calculation of Exchange Values."
CERTAIN CONFLICTS IN ESTABLISHING THE EXCHANGE VALUE. Certain members
of management and directors of the Company have an inherent conflict of interest
in establishing the Exchange Value of the Minority Interests as a result of
their ownership interest in the Company, their involvement in the formation of
the Subsidiary and their status as officers and directors of the Subsidiary.
Accordingly, the making of the Exchange Offer and the determination of the
Exchange Value involve conflicts of interest among the Company, its management
and the management of the Subsidiary, on the one hand, and the Minority Holders,
on the other hand. Neither the Board of the Company nor the Board of any
Subsidiary is making any recommendation with respect to the Exchange Offer. See
"Conflicts of Interests."
POSSIBLE VOLATILITY OF STOCK PRICE. Upon the consummation of the
Exchange Offer, it is possible that a significant number of former Minority
Holders will dispose of the shares of the Common Stock acquired in the Exchange
Offer. Any such dispositions, if significant, could adversely affect the market
price of the Common Stock. In any event, the market price of the Common Stock
could be subject to wide fluctuations in response to quarterly variations in the
Company's results of operations, changes in earnings estimates by analysts,
conditions in the pharmacy benefit management industry or general market or
economic conditions. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many emerging growth companies,
often unrelated to the operating performance of the specific companies. Such
market fluctuations could adversely affect the market price for the Common
Stock. See "Dividends on and Market Price for the Company's Common Stock."
ABSENCE OF VOTING, DISSENTER'S OR APPRAISAL RIGHTS. Because the
decision of a Minority Holder to participate in the Exchange Offer is voluntary,
no Minority Holder will be required to vote or will be entitled to exercise any
dissenter's or appraisal rights in connection with the Exchange Offer. Any
Minority Holder not electing to participate in the Exchange Offer will retain
such holder's Minority Interest in the applicable Subsidiary.
POSSIBLE TAXABLE STATUS OF EXCHANGE OFFER; OTHER TAX ISSUES. Although
the Company anticipates that the Exchange Offer will constitute a nontaxable
reorganization pursuant to the Code, no assurances can be given in this regard.
See "Certain Federal Income Tax Considerations." The Company is not seeking any
ruling from the IRS or any legal opinion regarding the Exchange Offer. See
"Certain Federal Income Tax Considerations." The tax consequences of the
Exchange Offer may differ for various Minority Holders, and each Minority Holder
should consult with his or its own tax advisor regarding the tax effects of the
Exchange Offer. See "The Exchange Offer - Tax Consequences" and "Certain Federal
Income Tax Considerations."
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<PAGE>
EFFECT OF EXCHANGE OFFER ON NONPARTICIPATING OFFEREES
GENERAL. The Subsidiary is a separate and distinct legal entity.
Offerees who do not elect to participate in the Exchange Offer will continue to
own their respective interest in the Subsidiary with the same rights,
obligations and interests as they have at present. The risks associated with the
ownership of a Minority Interest generally will not be affected by the Exchange
Offer.
LACK OF MARKET; RISKS TO MINORITY HOLDERS IN CERTAIN CORPORATE
TRANSACTIONS. There is not presently, nor is there expected to be, any market
for the stock or interests in the Subsidiary. Although the Company has no
present intention to merge any Subsidiary into the Company or another subsidiary
of the Company, to acquire the Minority Interest of any nonparticipating
Offeree, there can be no assurance that such events will not occur. In such
event, the consideration proposed in any such transaction could have a value
more or less than the applicable Exchange Value of the Common stock being
offered for such Minority Interests in the Exchange Offer. If such consideration
has a lesser value, nonexchanging Minority Holders would have received a lesser
benefit than Minority Holders who exchanged their Minority Interests in the
Exchange Offer. In addition, any such subsequent attempts by the Company to
acquire Minority Interests following the Exchange Offer would not necessarily
have to be extended to all or be extended to nonexchanging Minority Holders and
therefore the nonexchanging Minority Holders may not receive any offer of such
consideration, whether of lesser or greater value than in the current Exchange
Offer described herein. If the Subsidiary should be merged into the Company, the
holders of interests in the Subsidiary would receive the consideration offered
in the merger unless they dissent from the merger, in which case such holders
may be entitled, with respect to the valuation of their shares of interests, to
appraisal rights as provided for under the corporate laws of the state of
organization of the Subsidiary, provided they perfect their dissenter's rights,
if any, pursuant to the terms of the relevant state statute. In such case,
nonparticipating Minority Holders could receive consideration for their Minority
Interests which is more or less than the Exchange Value of the Common Stock
offered hereby. Minority Holders should contact their own legal and tax advisers
regarding their rights as minority holders under applicable state laws upon a
merger, short-form merger, or liquidation of the Subsidiary.
COMPANY IMPACT OF ACQUISITIONS. In accordance with its strategy for
growth, the Company is presently engaged in an expansion program which
incorporates an active acquisition program in the long-term care pharmacy
industry. For the years ended December 31, 1995 and 1996, a significant amount
of the growth in the Company's revenues resulted from acquisitions. The success
of the Company's acquisition program and of its underlying growth strategy will
depend, among other things, on the continued availability of suitable
acquisition candidates. Many of the Company competitors have greater financial
and other resources than the Company and are often willing to pay higher prices
for acquisitions. Competition for certain acquisition targets is intense. There
can be no assurance as to the Company's ability to compete or pay for
acquisitions, or that the Company will be able to complete any acquisitions on
favorable terms, or at all, in the future.
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<PAGE>
As a consequence of recent acquisitions, the Company has grown
significantly in size and has broadened the geographic area in which it
operates. Any acquisition involves inherent uncertainties, such as the effect on
the acquired businesses of integration into a larger organization and the
availability of management resources to oversee the operations of the acquired
business. The Company's ability to integrate the operations of acquired
companies is essential to its future success. Even though an acquired business
may have enjoyed excellent profitability and growth as an independent company
prior to the acquisition, there can be no assurance that such profitability and
growth would continue thereafter. There can be no assurance as to the Company's
ability to integrate new businesses nor as to its success in managing the
significantly larger operations resulting therefrom.
CAPITAL REQUIREMENTS RELATING TO GROWTH STRATEGY. To take advantage of
the consolidation trend in the institutional pharmacy industry and to expand the
geographic area in which it operates, the Company's strategy includes growth
through acquisitions. This strategy may require significant capital resources.
Capital is needed not only for acquisitions, but also for the effective
integration, operation and expansion of such businesses. The Company believes
that its bank credit facility is adequate to support its capital requirements,
although large acquisitions may require funds exceeding the capacity of the
facility. There can be no assurance that acceptable financing for future
acquisitions or for the integration, expansion and operation of existing
businesses can be obtained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
DECREASE IN NUMBER OF LONG-TERM CARE COMPANIES. The current trend in
the long-term care market is to consolidate facilities. Additionally, certain
operators of long-term care facilities have been acquiring their own companies
to provide pharmacy products and services, rather than obtaining such products
and services from independent providers like the Company. Both of these trends
may adversely affect the Company by decreasing the number of customers for whom
the Company can effectively compete.
REGULATION AND REIMBURSEMENT. The Company's pharmacy business is
subject to federal, state and local regulations, and its pharmacies are required
to be licensed in the states in which they are located. The failure to obtain or
renew any required regulatory approvals or licenses could adversely affect the
continued operation of the Company's business. In addition, the long-term care
facilities that contract for the services of the Company are also subject to
federal, state and local regulations and are required to be licensed in the
states in which they are located. The failure by these institutions to comply
with such regulations or to obtain or renew any required licenses could result
in the loss of the Company's ability to provide pharmacy services to these
long-term facilities' residents. The Company is also subject to federal and
state laws that prohibit certain direct and indirect payments between health
care providers that are intended, among other things, to induce or encourage the
referral of residents to, or the recommendation of, a particular provider of
items or services. Violation of these laws can result in loss of licensure,
civil and criminal penalties and exclusion from the Medicare and Medicaid
programs.
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<PAGE>
UNCERTAINTY DUE TO PROPOSED CHANGES IN NATIONAL AND STATE HEALTH CARE
POLICIES. The Clinton administration and members of Congress have proposed
reforms to the system of health care delivery in the United States. None of
these proposals have been adopted. The process by which the administration or
Congress will pursue additional or modified proposals for national health care
reform and the precise nature of any such proposals are unclear at this time. In
addition, several states are considering various health care reforms, including
reforms through Medicaid managed care demonstration projects. Several states in
which the Company operates have applied for, or received, approval from the U.S.
Department of Health and Human Services ("HHS") for waivers from certain
Medicaid requirements, which are generally required for such managed care
projects. Although these demonstration projects generally exempt institutional
care, including long-term care facilities and institutional pharmacy services,
no assurance can be given that these waiver projects ultimately will not change
the reimbursement system for long-term care, including pharmacy services, from
fee-for-service to managed care negotiated or capitated rates. It is not
possible to predict what reforms of the health care system will be adopted and
the effect, if any, such reforms may have on the Company's business. See
"Business Reimbursement and Billing" and "Business - Government Regulation."
RISK OF PROFESSIONAL LIABILITY; AVAILABILITY OF INSURANCE. The
Company's business exposes it to risks that are inherent in the packaging and
distribution of pharmaceuticals and the provision of ancillary services. The
Company currently maintains professional liability and errors and omissions
insurance. There can be no assurance that the coverage limits of such insurance
will be adequate to protect the Company against future claims. In addition,
there can be no assurance that the Company will be able to maintain professional
liability insurance in the future on acceptable terms or with adequate coverage
against potential liabilities.
COMPETITION. The Long-Term Care industry is highly fragmented but
experiencing significant consolidation. There are a large number of small
companies offering long-term care pharmacy services. Most of these are smaller
than the Company. By its nature, the long-term care pharmacy business is highly
regionalized and, within a given geographic region of operations, highly
competitive. In the geographic regions it serves, the Company competes with
numerous local retail pharmacies, local and regional institutional pharmacies
and pharmacies owned by long-term care facilities. The Company competes in this
market on the basis of quality, cost-effectiveness and the increasingly
comprehensive and specialized nature of its services along with the clinical
expertise, pharmaceutical technology and professional support it offers. In its
program of acquiring institutional pharmacy providers, the Company competes with
several other companies with similar acquisition strategies, some of which have
greater resources than the Company. No individual customer or market group is
critical to the total sales of the Company's long-term care pharmacy business.
The Company believes that the primary competitive factors in each of
its businesses are price, quality of service and breadth of available services.
The Company also believes that its larger competitors offer limited core
pharmacy management services that lack the depth and breadth of diversification
offered by the Company, and that most of the Company's small competitors offer
even more limited services with greater financial limitations. The Company
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<PAGE>
considers its principal competitive advantages to be independence from nursing
home owner/operators and drug manufacturers, strong managed care knowledge, and
experience which supports the development of advanced services, and its
commitment to providing flexible and distinctive service to its customers.
There are a large number of companies offering pharmacy benefit
management services in the U.S. Most of these companies are smaller than the
Company and offer their services on a local or regional basis. As a full
service, national pharmacy benefits manager, the Company competes with a number
of larger, national companies, as well as numerous insurance and Blue Cross/Blue
Shield plans, certain HMOs and retail drug chains which have their own pharmacy
benefit management capabilities. Many of these larger companies have greater
financial and marketing resources than the Company.
Consolidation is a critical factor in the pharmaceutical industry
generally. Horizontal and vertical merger and acquisition activity in the
manufacturing segment has been robust, with significant resultant movements in
market share. Competitors that are owned by nursing home owners/operators and
manufacturers may have pricing advantages that are unavailable to the Company
and other independent companies. With respect to infusion therapy services, the
Company competes with a number of large national companies.
CONTROL OF THE COMPANY. Upon completion of the Exchange Offer, the
directors and executive officers of the Company and their affiliates
collectively will own approximately 35.3% of the outstanding beneficial voting
power of the Company. As a result, these stockholders will be able to exercise
significant influence over matters requiring stockholder approval, including the
election of Directors and the approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principals and Selling Stockholders" and
"Description of Capital Stock."
MATERIAL DEPENDENCE ON EXECUTIVE OFFICERS; KEY PERSONNEL. The Company
is materially dependent on the efforts and abilities of Brian A. Kahan, its
President, Chief Executive Officer, and a Director. In August 1996, the Company
entered into an employment agreement with Mr. Kahan for an initial term of 5
years, which may be extended for up to 3 additional one year terms. The loss of
the services of Mr. Kahan could have a material adverse effect upon the
Company's business and future prospects. The Company does not maintain any
key-man life insurance on the life of Mr. Kahan. See "Management".
DIVIDEND POLICY. CompScript has never declared or paid cash dividends
on its Common Stock and the Company does not currently intend to declare or pay
cash dividends on its Common Stock in the foreseeable future.
THE COMPANY'S BUSINESS. The discussion of the Company's business
incorporates management's current best estimate and analysis of the potential
market, opportunities and difficulties that face the Company. There can be no
assurances that the underlying assumptions accurately reflect the Company's
opportunities and potential for success. Competitive and
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<PAGE>
economic forces on marketing, distribution and pricing of the Company's services
make forecasting of sales, revenues and costs extremely difficult and
unpredictable. See "Business."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Articles
of Incorporation and Bylaws may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt of the Company, which include when
and by whom special meetings of the Company may be called. In addition, certain
provisions of the Florida Business Corporation Act ("FBCA") also may be deemed
to have certain anti-takeover effects which include that control of shares
acquired in excess of certain specified thresholds will not possess any voting
rights unless these voting rights are approved by a majority of a corporation's
disinterested shareholders. Additionally, the Company's Articles of
Incorporation, Bylaws, and Florida law, authorize the Company to indemnify its
directors, officers, employees and agents and limit the personal liability of
corporate directors for monetary damages, except in certain instances. See
"Description of Securities." Furthermore, the Board of Directors has the
authority to issue up to 1,000,000 shares of the Company's preferred stock and
to fix the dividend, liquidation, conversion, redemption and other rights,
preferences and limitations of such shares, without any further vote or action
of the shareholders. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or the rights of the holders of the Company's Common Stock. In the event of
issuance, the preferred stock could be utilized under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. Although the Company has no present intention to issue any shares of
its preferred stock, there can be no assurance that the Company will not do so
in the future. See "Description of Securities."
THE EXCHANGE OFFER
PRESENT OWNERSHIP OF SUBSIDIARY; SECURITIES TO BE EXCHANGED
The Company hereby offers to exchange its Common Stock for the
outstanding equity interests in the Subsidiary of which the Company owns
approximately 93% of the outstanding equity interests. After the Exchange Offer,
assuming that all Minority Interests are tendered and accepted for exchange, the
Subsidiary will be a wholly-owned subsidiary of Company.
TERMS OF THE EXCHANGE OFFER
The Company is offering, subject to the terms and conditions set forth
herein, 3.898373 shares of its Common Stock for each one share of Subsidiary
Common Stock. There can be no assurance that the Exchange Offer will qualify as
a nontaxable reorganization with respect to the Subsidiary. See "The Exchange
Offer - Tax Consequences." and "Certain Federal Income Tax Considerations." The
Consequences" and "Certain Federal Income Tax Considerations." The Exchange
Offer will expire at 2:00 p.m. on __________, 1997. See "The Exchange Offer
Exchange Period." No fractional shares will be issued by the Company. If the
proposed Exchange Offer would result in a fractional share being issued to any
Offeree, the number of
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<PAGE>
shares of Common Stock to be issued to such Offeree will be rounded (upward) to
the nearest whole share.
CONFLICTS OF INTEREST; POSITION OF EACH SUBSIDIARY'S BOARD OF DIRECTORS WITH
RESPECT TO THE EXCHANGE OFFER
Brian A. Kahan, a principal shareholder, President and Chief Executive
Officer, Chairman of the Board of the Company and Robert J. Gardner, Vice
President and Director, serve on the Board of Directors of the Subsidiary and
constitute the entire Board of Directors. As members of the Board of Directors
of the Company and the Board of the Subsidiary, Messrs. Kahan and Gardner have
fiduciary obligations to the members and shareholders of the Company and each
Minority Holder of the Subsidiary resulting in a conflict of interest which
precludes their ability to make recommendations concerning the Exchange Offer.
Therefore, the Board of Directors of the Subsidiary will decline to make any
recommendation regarding the Exchange Offer. The Board of Directors of the
Subsidiary has not made any determination of the fairness of the Exchange Value
or valuation of the Subsidiary from a financial point of view. However, Messrs.
Kahan and Gardner, in their capacities as members of the Board of Directors of
the Company, did participate in the Company's determination that the Exchange
Value is fair from a financial point of view, although the Company has no
objective basis for such belief. The Company has not retained a separate advisor
to act on behalf of the Minority Holders based upon (i) the preexisting
relationship of a majority of the Minority Holders with the Company and its
management, (ii) the estimated cost and time required for a separate advisor to
become fully informed with respect to the Subsidiary and the Company, (iii) the
consensual nature of the Exchange Offer, and (iv) the likely limitations on the
effectiveness of an independent advisor given the difficulties in valuing the
Subsidiary.
PURPOSE AND BACKGROUND OF THE EXCHANGE OFFER
POTENTIAL BENEFITS TO THE COMPANY. The Company believes that the
simplification of its organizational structure will enable the Company to more
clearly present its operations to prospective investors and lenders, thereby
enhancing the Company's ability to obtain capital to develop and expand the
markets it serves. See "Risk Factors - Company Risks - Need for Additional
Financing," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." In addition, the
Company expects to realize administrative efficiencies in its operation of each
Subsidiary arising from the elimination of certain accounting and reporting
requirements associated with the Minority Interests.
POTENTIAL BENEFITS TO MINORITY HOLDERS. The Company also believes that
the Exchange Offer provides a means by which Minority Holders may transform an
investment in the Subsidiary to a freely tradeable investment in a publicly
traded company. The proposed Exchange Offer affords the Minority Holders the
opportunity to increase the liquidity of their investment and to diversify the
risk associated with their investment. Upon the consummation of the Exchange
Offer, an existing Minority Holder will be subject to all risks associated with
the ownership of an equity interest in the Company. See "Risk Factors - Company
Risks." Upon
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<PAGE>
the consummation of the Exchange Offer (assuming all the Minority Interests are
tendered and accepted), the Subsidiary will be a wholly-owned subsidiary of the
Company.
NO RECOMMENDATION OF COMPANY. Because of (i) conflicts of interest
between the Company and the Subsidiary arising in connection with the
determination of the Exchange Value for the Minority Interests and the common
directors and management of the Company and each Subsidiary, and (ii) the
voluntary nature of the Exchange Offer, the Company has declined to make any
recommendations regarding whether the Minority Holders should accept the
Exchange Offer. Minority Holders electing not to participate in the Exchange
Offer will continue to own their respective Minority Interests in the
Subsidiary.
SUBJECTIVE VALUATION OF MINORITY INTERESTS; FAIRNESS DETERMINATION BY
COMPANY; LACK OF FAIRNESS OPINION AND INDEPENDENT APPRAISAL. The Company
believes that the Exchange Value attributable to each Minority Interest is fair
from the financial point of view. See "The Exchange Offer - Calculation of
Exchange Values." The Board of Directors of the Subsidiary has not made any
independent determination of the fairness of the Exchange Values or valuation of
the Subsidiaries from a financial point of view. However, Messrs. Kahan and
Gardner, in their capacities as members of the Board of Directors of the
Company, did participate in the Company's determination that the Exchange Value
is fair from financial point of view, although the Company has no objective
basis for such belief. See "The Exchange Offer - Conflicts of Interest; Position
of Subsidiary's Board of Directors with Respect to the Exchange Offer." Rather,
the Company considered a number of subjective factors. No independent appraisal
or fairness opinion has been obtained regarding the Subsidiary, and therefore
the value in determining the Exchange Value of each Minority Interest is
subjective and has been made without any objective basis. See "Risk Factors -
Exchange Offer Risks - Subjective Valuation of Minority Interest; Lack of
Fairness Opinion or Independent Appraisal; Certain Conflicts in Establishing the
Exchange Values" and "The Exchange Offer - Calculation of Exchange Values."
NO OTHER ALTERNATIVES CONSIDERED. In determining the Exchange Values,
the Company did not (i) undertake to perform any detailed quantitative analysis,
(ii) review in detail other independent measurements of value such as comparable
company valuations, multiples of book value analyses or discounted cash flow
analyses, or (iii) review in detail other alternatives to the Exchange Offer.
The pursuit of any such alternatives to the Exchange Offer might ultimately have
resulted in Minority Holders receiving consideration for their Minority
Interests having a value more or less than the Exchange Value of the Common
Stock being offered for such Minority Interests in the Exchange Offer. Because
of the voluntary nature of the Exchange Offer, the Company's existing business
plan for the Subsidiary is not expected to change materially if Minority Holders
of the Subsidiary determine not to participate in the exchange. See "Risk
Factors - Effect of Exchange Offer on Nonparticipating Offerees - Substantial
Capital Requirements of Subsidiaries for Development."
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<PAGE>
CALCULATION OF EXCHANGE VALUES
To determine the Exchange Value for each Minority Interest, the Company
has used the same exchange ratio as the ratio the former Subsidiary shareholders
used in their exchange with the Company in April 1996. The Company believes that
the Exchange Value attributable to each Minority Interest is fair from a
financial point of view. The Board of Directors of the Subsidiary has not made
any independent determination of the fairness of the Exchange Value from a
financial point of view. However, Messrs. Kahan and Gardner, in their capacities
as members of the Board of Directors of the Company, did participate in the
Company's determination that the Exchange Value is fair from a financial point
of view, although the Company has no objective basis for such belief. See "The
Exchange Offer - Conflicts of Interest; Position of Each Subsidiary's Board of
Directors with Respect to the Exchange Offer." Rather, the Company considered a
number of subjective factors. The Company did not (i) undertake to perform any
detailed quantitative analysis, (ii) review in detail other independent
measurements of value such as comparable company valuation, multiples of book
value analyses or discounted cash flow analyses, or (iii) review in detail other
alternatives to the Exchange Offer. The Company has not elected to obtain
independent appraisals or fairness opinions regarding the valuation of the
Exchange Value of any Minority Interest. After considering (i) the relatively
small number of Minority Holders in the Subsidiary, (ii) the preexisting
relationship of a majority of the Minority Holders with the Company and its
management, (iii) the estimated cost and time required to prepare such report,
(iv) the consensual nature of the Exchange Offer, and (v) the likely limitations
on the usefulness of such report given the nature of the Subsidiary. Therefore,
the determination of the Exchange Value is highly subjective and the
determination by the Company of the fairness thereof has been made without any
objective basis.
HOW TO EXCHANGE
Accompanying this Prospectus are instructions necessary for a Minority
Holder to tender his or its Minority Interest for exchange. Each Exchanging
Minority Holder must complete and execute all items indicated on his or its
Letter of Transmittal and return such documents, along with either the
certificates (or a certification of lost certificates) representing the Minority
Interest to the Company on or before the Expiration Date. Each Letter of
Transmittal requires the Minority Holder to make certain representations and
warranties in connection with the exchange, including, among others, that he or
it has full right, power and authority to transfer the Minority Interest
tendered; that such Minority Interest has not been previously conveyed; that the
Minority Interest is free and clear of all liens, encumbrances and adverse
claims; and that the Minority Interest is not subject to the terms of any
agreement, regulations or shareholders agreement which restrict the
transferability of the Minority Interest or the ability of the Company to
succeed to the rights of the Minority Holder. The Letter of Transmittal duly
completed, must be received by the Company not later than the Expiration Date. A
Minority Holder must tender for exchange all of his or its Minority Interest
subject to the Exchange Offer if he or it tenders any.
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EXCHANGE PERIOD
The Exchange Offer is scheduled to expire at 2:00 p.m., Fort
Lauderdale, Florida time, on the Expiration Date. The Exchange Offer will close
within five days following the Expiration Date. See "The Exchange Offer - Terms
of the Exchange Offer; Closing and Issuance of Stock." Minority Interests not
properly delivered for exchange by the Expiration Date will not be accepted by
the Company. See "The Exchange Offer - How to Exchange."
CLOSING AND ISSUANCE OF STOCK
The "Closing Date" will be no later than five days following the
Expiration Date. On the Closing Date, unless the Exchange Offer has been
withdrawn by the Company, the Company will instruct its transfer agent to issue
certificates for the requisite number of shares of Common Stock to the Minority
Holders who have properly delivered their Minority Interests for exchange and
whose Minority Interests have been accepted by the Company for exchange as soon
as practicable after the Closing Date. See "The Exchange Offer - Exchange
Period; Withdrawal."
WITHDRAWAL
The Company may, in its sole discretion, elect to withdraw the Exchange
Offer as to the Minority Holders in the Subsidiary if, at any time prior to the
Expiration Date, a material change occurs which adversely affects the Subsidiary
or the Company or the financial markets generally. The Company reserves the
right, at any time prior to the Closing Date, to withdraw the Exchange Offer if,
in the sole judgment of the Company, there exists any actual or threatened legal
impediment to the completion of the Exchange Offer, including any material legal
action or administrative proceeding instituted or threatened against the Company
or any Subsidiary with respect to the exchange. No such impediments are known to
exist. If the Exchange Offer is not consummated, all offers to accept the
Exchange Offer shall be void and no shares of Common Stock will be issued
pursuant to the Exchange Offer.
VALIDITY OF OFFEREE'S ACCEPTANCE OF EXCHANGE OFFER
All questions as to validity, form, eligibility and acceptance with
respect to Minority Interests delivered for exchange will be determined by the
Company in its sole discretion. Such discretion includes the interpretation of
the terms and conditions of the Exchange Offer and the instructions to the
Letter of Transmittal. The Company reserves the right to waive any
irregularities or conditions as to any Minority Interests delivered for
exchange. If any irregularities exist with regard to an Offeree's acceptance of
the Exchange Offer, they must be cured before the Expiration Date, unless waived
by the Company. Any exchange documents which are not properly completed and
executed, and as to which irregularities are not cured or waived, will be
returned to the exchanging Offeree as soon as practicable. An Offeree's
acceptance of the Exchange Offer will be deemed not to have been made until any
irregularities or defects have been corrected or waived.
17
<PAGE>
REVOCABILITY OF OFFEREE'S ACCEPTANCE OF EXCHANGE OFFER
Minority Interests which are submitted for exchange pursuant to the
Exchange Offer may be withdrawn by the Offeree by written notice to the Company
received any time prior to the Expiration Date. After the Expiration Date, all
acceptances of the Exchange Offer are irrevocable until the Closing Date or
rejection by the Company.
ACCOUNTING TREATMENT
It is expected that the Exchange Offer will not have a material impact
on the Company's financial statements.
TAX CONSEQUENCES
The Company anticipates that the consummation of the Exchange Offer
will be eligible for treatment as a nontaxable reorganization, pursuant to Code
Section 368. See "Certain Federal Income Tax Considerations." However, the
Company is not seeking any ruling from the IRS or obtaining any legal opinion
regarding the tax effect of the Exchange Offer. Therefore, there can be no
assurance that the Exchange Offer will be treated as a nontaxable reorganization
to such Minority Holders. Each Minority Holder should consult his or its own tax
or legal advisor regarding the particular tax consequences to him or it of the
Exchange Offer. See "Certain Federal Income Tax Considerations - No Rulings
Received."
MANAGEMENT AND OPERATIONS OF THE COMPANY AFTER THE EXCHANGE
After consummation of the Exchange Offer, the Subsidiary will be a
wholly-owned subsidiary of the Company. The Company presently anticipates that
the Subsidiary will continue to be managed by a Board of Directors consisting of
Messrs. Kahan and Gardner. The Company does not anticipate that the Board of
Directors or management of the Company will change following the Exchange Offer.
FEDERAL OR REGULATORY APPROVALS
The Company does not anticipate that any federal or regulatory
approvals or consents will be required in connection with the Exchange Offer,
other than those already obtained or waived.
EXPENSES AND FEES
Whether or not the Exchange Offer is consummated, the Company will pay
its own expenses in connection with this offering. The expenses of the Exchange
Offer are anticipated to be $75,000, consisting of legal, accounting and
printing fees and other costs and expenses.
18
<PAGE>
COMPARISON OF COMMON STOCK AND MINORITY INTERESTS
The following differences between the Common Stock and the Minority
Interests should be considered by the Offerees.
<TABLE>
<CAPTION>
COMMON STOCK MINORITY INTERESTS
------------ ------------------
<S> <C>
NATURE OF THE INVESTMENT
Shares of Common Stock represent an equity The Minority Interests represent interests in a
investment in a publicly-traded company is subsidiary of the Company located in Florida.
engaged in the pharmacy benefit management
business in markets located throughout the
United States.
LIQUIDITY AND MARKETABILITY
The Company's Common Stock is currently At the present time, no trading market exists for
traded on the Nasdaq SmallCap Market, and the the Minority Interests. Moreover, a regular
Common Stock offered hereby will be freely market for such Minority Interests is unlikely to
tradeable upon issuance. See "Risk Factors - develop in the future
Exchange Risks - Possible Volatility of Stock
Price."
FINANCIAL REPORTING
The Company is subject to the reporting The Subsidiary is not currently subject to
requirements of the Securities Exchange Act of the reporting requirements of the Securities
1934, as amended, and will file reports prepared Exchange Act of 1934, as amended.
in accordance with the rules and regulations of
the SEC.
OWNERSHIP INTERESTS
Holders of Common Stock are entitled to vote The Minority Interests represent minority
for the election of directors and on other ownership interest in the Subsidiary. Because
corporate matters at meetings of stockholders, the Company owns 93% of the Subsidiary, the
and to receive dividends, if any, declared by the Company is able to control all corporate
Company. Because the Company's principal decisions affecting the Subsidiary. Each
stockholders currently own or control Offeree's percentage ownership interest in the
approximately 35.3% of the outstanding Subsidiary will be substantially greater than the
beneficial voting interests in the Company, the Oferee's percentage ownership interest in the
principal stockholders have the ability to control Company following the Exchange.
most corporate decisions affecting the Company.
See "Risk Factors - Company Risks - Control by
Principal Stockholders."
</TABLE>
19
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS
Upon the consummation of the Exchange Offer, shareholders of
Subsidiary, a Florida corporation, will become shareholders of the Company, also
a Florida corporation and Florida law will continue to govern shareholder rights
thereafter.
The following summarizes the differences between the Company's Articles
of Incorporation, as amended ("Articles"), and its Bylaws, on the one hand, and
the Articles and Bylaws of the Subsidiary, respectively, on the other hand.
Because both the Subsidiary and CompScript are currently governed by Florida
law, the summary below sets forth a comparison only as to the differences in the
corporate governing documents between the Subsidiary and CompScript. The summary
is not intended to be a comprehensive comparison and is qualified in its
entirety by reference to such Articles of Incorporation and Bylaws which are
available for inspection at their respective offices, and copies will be sent to
Minority Holders upon their request.
ANNUAL MEETINGS
The Company's Articles provide that only such business shall be
conducted as shall have been properly brought before the annual meeting of the
Company's shareholders. To be properly brought before an annual meeting,
business must be either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board, (b) otherwise
properly brought before the meeting by or at the direction of the Board, or (c)
otherwise properly brought before the meeting by a shareholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company, not less than 120 days or more than
180 days prior to the first anniversary of the date of the Company's notice of
annual meeting provided with respect to the previous year's annual meeting. If
no annual meeting was held in the previous year or the date of the annual
meeting has been changed to be more than 30 calendar days earlier than the date
contemplated by the previous year's proxy statement, such notice by the
shareholder to be timely must be received not later than the close of business
on the 10th day following the date on which notice of the date of the annual
meeting is given to shareholders or made public, whichever occurs first. The
notice sent by such shareholders to the Company's secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and record address of the shareholder proposing such business, (iii)
the class and number of shares of capital stock of the Company which are
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in such business. If the facts warrant, the chairman of the annual
meeting shall determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the requirements
described herein, and if the chairman should so determine, the chairman shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
20
<PAGE>
SHAREHOLDER MEETING PROCEDURES
The Company
Under Florida law, special meetings of the shareholders may be called
by the Board or such persons as may be authorized by the Articles or the Bylaws.
In addition, Florida law permits the holder of not less than 10% of all votes
entitled to be cast (unless a greater percentage, not to exceed 50% as specified
in the articles) to call a special meeting.
The Company's Articles provide that except as required by law, the
Company is not required to hold a special meeting of shareholders unless (i) the
holders of not less than 50% of all the votes entitled to be cast on any issue
proposed to be considered at the special meeting sign, date, and deliver to the
Company's secretary one or more written demands for the meeting describing the
purpose or purposes for which it is to be held; or (ii) the meeting is called by
any other persons designed in the Company's bylaws. The Company's Bylaws provide
that special meetings of the shareholders shall be held if called by the Board
of Directors, the President, or by holders of not less than 50% of all the votes
entitled to vote on any issue proposed or to be considered at the proposed
special meeting sign, date, and deliver one or more written demands to the
Company's Secretary describing the purpose or purposes for which it is to be
held
Subsidiary
Under Florida law, special meetings of the shareholders may be called
by the Board or such persons as may be authorized by the Articles or the Bylaws.
In addition, Florida law permits the holders of not less than 10% of all votes
entitled to be cast (unless a greater percentage, not to exceed 50% as specified
in the articles) to call a special meeting.
The Subsidiary's Bylaws provide that special meetings of the
shareholders may be called at any time by the Board of Directors and shall be
called by the Chairman of the Board, the President or the Secretary at the
request in writing of a majority of the Board of Directors or by shareholders
entitled to cast at least 20% of all votes entitled to be cast at such meeting.
Such request shall state the purpose or purposes of the proposed special
meeting.
RECORD DATES
The Company
The Company's Bylaws provide that the record date shall not be more
than sixty days nor less than 10 days prior to the date on which the particular
action requiring such determination of shareholders is to be taken.
21
<PAGE>
Subsidiary
The Subsidiary's Bylaws provide that the Board of Directors may fix a
record date which shall not be less than 10 and not more than 14 days before the
date of such meeting or other action. The CompScript Bylaws further provide that
if the Board of Directors do not fix a record date in advance, the date of such
meeting or action shall be fixed as the record.
DIRECTORS
The Company
The Company's Articles provide that the number of directors shall not
be less than one nor more than 10, the exact number to be fixed from time to
time in the manner provided in the Company's bylaws.
Subsidiary
The Subsidiary's Articles provide that the number of directors shall be
as determined in the Company's bylaws.
AMENDMENT TO ARTICLES AND BYLAWS
The Company
Florida law provides that an amendment to a corporation's Articles must
be approved by the Board of Directors and by affirmative vote of the holders of
a majority of the outstanding stock entitled to vote. The Company's Articles do
not contain any provision with respect to amendments to the Company's Articles.
Therefore, under Florida law, such amendment may be adopted upon approval of the
Board and the affirmative vote of the holders of a majority of the outstanding
stock entitled to vote.
The Company's Bylaws provide that the bylaws may be altered, amended or
repealed or new bylaws may be adopted at any meeting of the Board of Directors
at which a quorum is present, by the affirmative vote of a majority of the
directors presented at such meeting (provided notice of the proposed alteration,
amendment or repeal is contained in the notice of the meeting), subject to
repeal or change at any meeting of the shareholders at which a quorum is
present, by the affirmative vote of a majority of the shareholders present at
such meeting (provided notice of the proposed alteration, amendment or repeal is
contained in the notice of the meeting).
Subsidiary
The Subsidiary's Articles provide that such Articles may be amended in
the manner provided by law, as described above. The Articles further provide
that every amendment shall be approved by the Board of directors, proposed by
them to the shareholders and approved at a
22
<PAGE>
shareholders meeting by a majority of stock entitled to vote thereon, unless all
of the directors and a majority of the shareholders sign a written statement
manifesting their intention that a certain amendment of these Articles of
Incorporation be made.
INDEMNIFICATION
The Company
The Company has authority under Section 607.0850 of the FBCA to
indemnify its directors and officers to the extent provided for in such statute.
The Company's Articles provide that the Company shall indemnify and may insure
its officers and directors to the fullest extent permitted by law.
The provisions of the FBCA that authorize indemnification do not
eliminate the duty of care of a director, and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for (i) violations of criminal laws, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (ii) deriving an improper personal
benefit from a transaction, (iii) voting for or assenting to an unlawful
distribution and (iv) willful misconduct or conscious disregard for the best
interests of the Company in a proceeding by or in the right of the Company to
procure a judgment in its favor or in a proceeding by or in the right of a
shareholder. The statute does not affect a director's responsibilities under any
other law, such as the Federal securities laws.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsidiary
The Subsidiary's Bylaws provide that any person who was or is a
director, officer, employee or agent of Subsidiary, or is or was serving at the
request of Subsidiary as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by Subsidiary to the fullest extent provided by Florida law.
The Subsidiary's Bylaws further provide that upon a resolution of the
Board of Directors, Subsidiary may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of Subsidiary,
is or was serving at the request of Subsidiary as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or employee benefit plan, against any liability
asserted against and incurred by such person in any such capacity, or arising
out of such person's position as
23
<PAGE>
such, whether or not Subsidiary would have the power to indemnify that person
under Subsidiary's Bylaws.
INDEMNIFICATION AGAINST SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted for directors and officers and controlling persons
pursuant to the above-referenced provisions, the Subsidiary and CompScript have
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
NO RULINGS RECEIVED
The following discussion of the material Federal income tax
considerations relevant to the Exchange Offer does not purport to be a complete
analysis of all potential tax effects. The discussion is based upon the Code,
Treasury Regulations, IRS rulings and pronouncements and judicial decisions now
in effect all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a Minority Holder electing to receive
Common Stock.
The Company has not sought and will not seek any rulings from the IRS
or any opinions of counsel with respect to the positions of the Company
discussed below. There can be no assurance that the IRS will not take a
different position concerning the tax consequences of the purchase, ownership or
disposition of the Minority Interests or that any such position would not be
sustained. This summary is not intended to be a tax opinion or a substitute for
independent tax planning by the Minority Holders.
The tax treatment of a Minority Holder may vary depending on his or its
particular situation or status. This summary does not address the tax
consequences to taxpayers who are subject to special rules such as insurance
companies, tax-exempt organizations, financial institutions, broker-dealers and
foreign entities and individuals, or aspects of Federal income taxation that may
be relevant to a Minority Holder based upon such Minority Holder's particular
tax situation. In addition, the description does not consider the effect of any
applicable foreign, state, local or other tax laws.
EACH MINORITY HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM OR IT OF EXCHANGING MINORITY INTERESTS
FOR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
24
<PAGE>
SUBSIDIARY ORGANIZED AS CORPORATION
The Company anticipates that the transfer of shares of Common Stock by
the Company in exchange for the stock held by Minority Holders of the Subsidiary
will constitute a nontaxable reorganization pursuant to the Code Section 368.
Code Section 368(a)(1)(B) generally provides that the acquisition by one
corporation, in exchange solely for all or part of its voting stock, of stock of
another corporation will be a nontaxable transaction if, immediately after the
acquisition, the acquiring corporation has control of such other corporation
(whether or not such acquiring corporation had control immediately before the
acquisition). Control for this purpose means the ownership of stock possessing
at least 80% of the total combined voting power of all classes of stock entitled
to vote and at least 80% of the total number of shares of all other classes of
stock of the acquired corporation.
The key inquiry in determining whether the participation in the
Exchange Offer by Minority Holders of interests in the Subsidiary will be
eligible to receive nonrecognition treatment under Section 368(a)(1)(B) is
whether, for purposes of satisfying the "solely for voting stock requirement" of
that section, the Company will be treated as having acquired all of its
ownership interest in each such Subsidiary solely for voting stock of the
Company.
If the Exchange Offer is a nontaxable transaction under Code Section
368(a)(1)(B), a Minority Holder would not recognize taxable income on receipt of
shares of Common Stock. The shares of Common Stock received by a Minority Holder
would obtain a carryover tax basis equal to such holder's tax basis in the
Minority Interest transferred by such holder, and such holder's holding period
for the purpose in the shares of Common Stock would include the holding period
of such holder in the Minority Interest transferred to the Company.
The Company will recognize no gain or loss on its transfer of shares of
Common Stock to Minority Holders in exchange for the Minority Interests in the
Corporate Subsidiary. In addition, the Subsidiary will not recognize gain or
loss in connection with the Exchange Offer.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1997, and as adjusted to give effect to the Exchange Offer
(assuming 100% participation by the Minority Holders). This table should be read
in conjunction with the Company's consolidated financial statements (including
the notes thereto) included elsewhere in this Prospectus.
25
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED(1)
------ --------------
<S> <C> <C>
Long Term Debt $ 5,274,140 $ 5,274,140
Minority Interest 222,628 --
Shareholders' equity:
Common stock, $.0001 par value;
50,000,000 shares authorized;
13,627,063 shares issued and
outstanding actual, and
14,289,404 shares, issued and
outstanding, as adjusted (1) 1,364 1,430
Preferred stock, $.0001 par value;
1,000,000 shares authorized; no
shares issued and outstanding -- --
Additional paid-in capital 9,798,568 10,021,130
Accumulated deficit (5,271,876) (5,271,876)
Total shareholders' equity 4,528,056 4,750,684
Total capitalization $ 10,024,824 $ 10,024,824
</TABLE>
- ---------------
(1) Excludes 900,000 shares of Common stock reserved for issuance upon
exercise of stock options available under the Company's stock option
plan and 375,000 shares reserved for issuance upon the exercise of
options to purchase up to an equivalent number of shares.
DIVIDENDS ON AND MARKET PRICE FOR THE COMPANY'S COMMON STOCK
The Company's Common Stock, $.0001 par value, is traded on the NASDAQ
SmallCap Market under the symbol "CPRX." The following sets forth the range of
high and low closing bid prices for the Common Stock as reported on the NASDAQ
during each of the quarters presented. The quotations set forth below are
inter-dealer quotations, without retail mark-ups, mark-downs or commissions and
may not necessarily represent actual transactions. The quotations have been
adjusted for the Company's 1 to 8 reverse stock split on April 26, 1996.
HIGH LOW
---- ---
1994
First Quarter.......................................... $30.00 $26.00
Second Quarter......................................... 26.00 21.00
Third Quarter.......................................... 23.00 21.00
Fourth Quarter......................................... 23.00 16.00
26
<PAGE>
1995
First Quarter.......................................... 20.25 11.00
Second Quarter......................................... 20.50 6.50
Third Quarter.......................................... 7.25 3.50
Fourth Quarter......................................... 6.50 3.00
1996
First Quarter.......................................... 8.75 3.00
Second Quarter......................................... 9.00 5.75
Third Quarter.......................................... 7.25 4.13
Fourth Quarter......................................... 10.25 5.75
1997
First Quarter.......................................... 10.94 7.94
The Company believes that as of March 31, 1997, there were over 300
record holders of the Company's Common Stock. The Company believes that there
are in excess of 300 beneficial holders of the Company's Common Stock.
The Company has not paid any cash dividends on its common stock and
currently intends to declare or pay cash dividends in the foreseeable future.
The Company presently intends to retain any earnings that may be generated to
provide funds for the operation of business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
CompScript, Inc. (CompScript or the Company, f/k/a Capital Brands,
Inc.) is a comprehensive provider of pharmacy management services including
institutional pharmacy, infusion therapy, mail order and consultant pharmacist
services as well as pharmacy benefit claim administration to managed care
networks, long-term and subacute care facilities, home health patients and
recipients of managed care. The Company is the successor to CompScript-Boca,
Inc. (Boca, f/k/a CompScript, Inc. which was f/k/a Aldencare, Inc.), which was
incorporated under the laws of the State of Florida on October 3, 1991.
On April 26, 1996, shareholders who previously owned approximately 93%
of Boca exchanged their shares of Boca's Common Stock for 7,394,982 common
shares (representing an 80% interest) of Capital Brands, Inc. (Capital), a
publicly-held company involved in the development of consumer-based businesses
in the Republic of Poland (the Acquisition). This exchange was structured as a
tax-free reorganization. The Acquisition was accounted for as a reverse
acquisition of Capital by Boca pursuant to which Boca was recapitalized to
include the assets and liabilities of Capital revalued to reflect the market
value of Capital's net tangible assets at the date of the Acquisition,
consisting of cash and marketable equity securities. The Company incurred
acquisition costs of approximately $1,889,000, all of which was charged to
additional
27
<PAGE>
paid-in capital. As Capital had no operations as of the Acquisition date, no pro
forma financial information is presented related to this transaction. Effective
July 5, 1996, Capital changed its name to CompScript, Inc. The remaining 7% of
Boca is accounted for as a minority interest in a consolidated subsidiary on the
Company's December 31, 1996 supplemental consolidated balance sheet.
On May 31, 1996, the Company issued 666,350 shares of its Common Stock
for all the outstanding common stock of Delta Pharmacy Services, Inc. (Delta).
The acquisition of Delta enhanced the Company's institutional pharmacy services
for long-term care into Alabama, Mississippi, and Northern Florida. On August
19, 1996, the Company issued 187,500 shares of its Common Stock for all the
outstanding stock of Securx, Inc. (Securx). The acquisition of Securx enabled
the Company to strengthen its overall pharmacy benefit management program and
become a nationally recognized full-service, on-line adjudicated mail order
dispensing pharmacy.
On January 10, 1997, the Company acquired Medical Services Consortium,
Inc. ("MSC") by exchanging 1.4 million shares of the Company's Common Stock for
all of the outstanding Common Stock of MSC. On February 28, 1997, the Company
issued 375,000 shares of Common Stock for all of the outstanding common stock of
Campo Medical Pharmacy, Inc. ("Campo") and on March 26, 1997, the Company
acquired Hytree Pharmacy, Inc. ("Hytree") by exchanging 850,000 shares of the
Company's Common Stock for all of the outstanding Hytree common shares. These
three acquisitions completed during the first quarter of 1997 enabled the
Company to continue to add critical mass to its existing institutional pharmacy
and long term care business.
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 1996 and 1995
All acquisitions discussed above were accounted for as pooling of
interests and, accordingly, the Company's supplemental consolidated financial
statements included elsewhere in this Prospectus have been restated for all
periods presented. (See Note 1 to the Supplemental Consolidated Financial
Statements.) In accordance with accounting rules for pooling of interests
transactions, charges to operating income for acquisition-related expenses of
approximately $934,000 were recorded during 1996.
The Company also incurred significant costs (which the Company believes
are nonrecurring) associated with the start up and reorganization of its mail
order pharmacy ("Mail Order") operations during 1996. As a result of the Company
incurring dual operating costs while moving the operations from Ohio to Florida;
installing an entirely new proprietary order entry, customer service, dispensing
and on-line adjudication software system; incurring ramp up costs in the area of
customer service and dispensing personnel to handle new contracts which began in
January of 1997, the Company incurred a loss of approximately $1,100,000 related
to Mail Order operations during the fourth quarter of 1996.
28
<PAGE>
The Company believes that as a result of the Mail Order operations
nonrecurring costs incurred during the fourth quarter of 1996, it has put into
place the infrastructure to support anticipated future growth associated with
further development of its Mail Order operations. While the results of the Mail
Order operations cannot be predicted and is dependent, in large part, on the
Company's success in implementing its marketing and business strategy,
management believes the additional personnel and increased administrative and
operational expenses will be partially offset by increased growth in the Mail
Order operations.
During the year ended December 31, 1995, the Company recognized a
goodwill impairment charge of $3,636,362 with no associated tax benefit, related
to the Company's 1994 acquisition of CompScript, Inc., which became the Ohio
Division. (See Note 4 to the Supplemental Consolidated Financial Statements.)
The Ohio Division was purchased to be the Company's entry into the workers'
compensation, pharmacy benefits management (PBM) line of business. During the
year ended December 31, 1995, the contracts attributed to the Ohio Division
generated minimal revenue due in part to the nonexclusive nature of the
contracts. In addition, the inability of the Ohio Division to convert existing
relationships with prospective clients into new PBM contracts or to secure new
prospective clients contributed to significant operating losses and negative
cash flows relative to the Ohio Division in 1995.
The following table presents the Company's supplemental, consolidated
results of operations excluding the certain items previously discussed ("the
Adjustments"):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------------
1995 1996
---- ----
<S> <C> <C>
Net loss, as reported ($4,225,836) ($1,155,756)
Merger costs - pooling of interests ---- 934,223
Mail order pharmacy -
nonrecurring costs ---- 1,100,000
Goodwill impairment charge 3,636,362 ----
Tax effect [A] ---- (350,000)
------------- -----------
Net (loss) income excluding
the Adjustments ($ 589,474) $ 528,467
Net loss per share:
Net loss per share, as reported ($ .37) ($ .09)
Merger costs - pooling of interests ---- .07
Mail order pharmacy -
nonrecurring costs ---- .09
Goodwill impairment charge .32 ----
Tax effect [A] ---- ( .03)
------------- ---------------
Net (loss) income per share, excluding
the Adjustments ($ .05) $ .04
</TABLE>
29
<PAGE>
[A] Represents the tax effect relating to the Mail Order nonrecurring costs at
the Company's 1996 effective tax rate. No tax effect was computed relating to
the 1996 merger costs or the 1995 goodwill impairment charges as such charges
were recorded with no associated tax benefit.
Net income for the year ended December 31, 1996, excluding the
Adjustments was $528,467 compared to net loss excluding the Adjustments of
$589,474 in 1995. Income per share excluding the Adjustments was $0.04 compared
to a loss per share ($0.05) in 1995. Net loss as reported was $1,155,756 or
($0.09) per share for the year ended December 31, 1996, compared to a net loss
of $4,225,386 or ($0.37) in 1995.
Revenues for the year ended December 31, 1996 increased 22.5% to
$42,716,356 from $34,856,690 for the year ended December 31, 1995. The strong
increase in revenues is primarily attributed to the Company's steady internal
growth of its existing and acquired businesses resulting from marketing efforts
to new and existing clients and the integration of new and existing products and
services.
Gross profits increased to $17,025,573 in 1996 from $14,896,972 in
1995, an increase of $2,128,601 or 14.3% Gross profit margins decreased to 39.9%
in 1996 from 42.7% in 1995 primarily as a result of higher costs associated with
the Company's Mail Order operations during the fourth quarter (as previously
discussed) when compared to the Company's other operations. Gross profit as a
percentage of sales for all operations excluding Mail Order decreased slightly
to 48.0% in 1996 compared to 49.5% in 1995. This decrease is attributable to a
change in revenue mix during the fourth quarter of 1996 as a result of reduced
infusion revenues.
Selling general and administration expenses as a percentage of revenues
for 1996 and 1995 were 37.3% and 41.1% respectively. This decrease is
attributable to the increase in revenues during 1996, as well as the continued
efforts to leverage corporate overhead over a larger revenue base. The Company
believes its acquisition strategy will enable it to continue to reduce these
expenses as a percentage of revenues in the future, as the Company believes it
has developed the infrastructure necessary to absorb additional acquisitions
without corresponding percentage increases in selling, general and
administrative expenses. During the year ended December 31, 1996, the Company
incurred additional general and administrative costs associated with increased
payroll costs from the addition of new executives, as well as increased legal
and professional fees relating to the Company's acquisitions along with costs
associated with becoming a public company during 1996.
The Company's provision for doubtful accounts increased approximately
$816,000 in the year ended December 31, 1996, primarily due to a charge of
approximately $345,000 relating to the Company's Mail Order operations during
the fourth quarter of 1996. The balance of the increase was a result of
historical reserves based on increased revenue volume.
Interest and other income decreased $16,267 to $58,331 during 1996,
compared to 1995, as interest on temporary cash investments fluctuated depending
upon the amount of excess cash available for investment.
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Interest expense for the year ended December 31, 1996 increased to
$359,298 from $312,468 during 1995, primarily due to higher levels of borrowings
outstanding.
Quarters Ended March 31, 1997 and 1996
Sales for the three months ended March 31, 1997 (the "1997 Quarter")
were $11,498,619 compared to $10,360,411 for the three months ended March 31,
1996 (the "1996 Quarter"). The $1,138,208 or 11.0% increase was primarily
attributed to the Company's successful and continued acquisition strategy.
Gross profits increased $459,620 to $4,703,901 during the 1997 Quarter
from $4,244,281 in the 1996 Quarter, as a result of the increased revenue. Gross
profit margins remained constant at approximately 41.0% during both periods.
Selling, general and administrative expenses ("SG&A") were $4,696,093
in the 1997 Quarter compared to $3,922,458 in the 1996 Quarter, an increase of
$773,635 partially attributable to the 11.0% increase in revenues. During the
1997 Quarter, the Company also incurred additional SG&A expenses associated with
payroll costs from the addition of new executives necessary for the Company's
operations as a public company and for continued development of its acquisition
strategy. The Company believes its acquisition strategy will enable it to
continue to reduce SG&A expenses as a percentage of revenues in the future, as
the Company believes it has developed the executive management infrastructure
necessary to absorb additional acquisitions without corresponding percentage
increases in selling, general and administrative expenses. Ramp-up costs related
to the expansion of the Company's mail order operation that continued to take
place in the 1997 Quarter, along with start-up costs incurred relating to the
opening of two new branch locations in Jackson, Mississippi and Tampa, Florida
in February and March, 1997, respectively, also contributed to increased SG&A in
the 1997 Quarter.
In connection with the Company's acquisition on April 26, 1996, the
Company acquired marketable equity securities valued at $1,125,000. Subsequent
to the acquisition, on July 26, 1996, the Company sold its 1,125,000 shares of
Common Stock of QPQ Corporation ("QPQ"), representing its entire marketable
equity portfolio, to a major shareholder of QPQ in exchange for a $1,125,000
non-recourse promissory note payable in full, including interest, on July 4,
1997. On May 16, 1997 the Company and the note holder settled all outstanding
obligations of the note holder to the Company in exchange for the 1,125,000
shares of QPQ back to the Company. During the 1997 Quarter, the Company recorded
an $800,000 charge against the note which has been classified as "loss on
realization of note receivable" in the 1997 Quarter Statement of Operations. The
Company deemed it appropriate to evaluate the collateral underlying the note, as
the value of the QPQ stock declined significantly during the 1997 Quarter. Such
collateral will be reevaluated in future periods based on the market value of
the QPQ stock.
The 1997 Quarter included $613,457 of one-time charges related to
merger and acquisition costs associated with the three acquisitions completed
during the 1997 Quarter. There were no
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similar costs included in the Statement of Operations associated with the 1996
Quarter. Net interest costs and other income remained constant during the 1997
Quarter as compared to the 1996 Quarter.
As a result of the events previously discussed, the Company reported a
net loss of $1,616,102, or $.12 per share, for the 1997 Quarter compared to net
income of $91,663, or $.01 per share, during the 1996 Quarter. Exclusive of the
one-time charges related to merger costs and the provision related to the note
receivable previously discussed, the Company's loss from operations for the 1997
Quarter would have been reduced to $202,645 or $.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operating requirements to date primarily
through operations, the private sale of equity securities (prior to the reverse
acquisition on April 26, 1996), and the exercise of options and warrants and
borrowings under its existing line of credit agreement. As of March 31, 1997,
the Company had cash and cash equivalents of $857,740, accounts receivable of
$7,983,422 working capital of $6,434,097 a current ratio of 1.60 to 1.00, and
available funds under its revolving credit facility of approximately $75,000. As
of December 31, 1996, the Company had cash and cash equivalents at $857,740
accounts receivable of $6,369,720, working capital of $4,192,492, a current
ratio of 1.59 to 1.00, and available funds under its revolving credit facility
of approximately $75,000.
Three Months Ended March 31, 1997
Net cash used in operating activities for the 1997 Quarter was
$3,015,016 compared to a use of $105,679 during the 1996 Quarter. The increase
in cash used in operating activities was primarily attributable to the operating
loss incurred during the 1997 Quarter, along with increases in accounts
receivable and inventory to support the 11.0% increase in revenues at a greater
rate than the corresponding increase in accounts payable.
Investing activities increased $320,621 to $652,916 as a direct result
of net purchases of property and equipment related to the Company's expansion of
its Boca Raton office and new mail order facility which was completed in
February 1997. The Company also made expenditures for equipment and leasehold
improvements pertaining to the new office and institutional pharmacy location
that MSC will be moving into during June of 1997. This new facility is necessary
to accommodate the increased revenues at MSC, along with its continuing emphasis
on infusion therapy services. During the 1997 Quarter, the Company opened two
new branch locations in Jackson, Mississippi and Tampa, Florida which began
operations in February and March, 1997, respectively.
Financing activities provided $3,517,396 in cash in the 1997 Quarter
compared to $351,247 in the 1996 Quarter primarily as result of proceeds of
$469,996 relating to the exercise of options and net advances under the
Company's credit line and new borrowings. Subsequent to March 31, 1997, the
Company received net proceeds of $1,000,000 related to the exercise of 200,000
stock options.
Year Ended December 31, 1996
Net cash used in operating activities for the year ended 1996 was
$1,080,633 compared to net cash provided by operations during 1995 of $332,747.
The increase in cash used in operating activities of $1,413,380 during 1996 was
primarily attributable to the operating loss incurred during the year ended
December 31, 1996, along with increases in accounts receivable and inventory to
support the 22.5% increase in revenues at a greater rate than the corresponding
increase in accounts payable.
Investing activities comprised mainly of the net purchase of property
and equipment of $872,206 related to the Company's additions to its Boca Raton
office and new mail order facility, along with new and enhanced management
information systems in its mail order and long-term care operations,
respectively. Net additions to property and equipment were $349,556 in 1995.
Investmennt activities also provided for $403,808 of net cash required acquired
in connection with with the reverse acquisitions during 1996.
Financing activities provided $1,822,716 in cash in 1996 compared to
$94,945 in 1995 primarily as a result of $1,163,376 relating to the exercise of
options and warrants and net advances under the Company's credit lines of
$800,000.
The Company's future capital requirements for operations include
financing the growth of working capital items such as accounts receivable and
inventory, purchasing equipment and upgrading management information and
inventory control systems. Based upon the continuation
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of the Company's business development, the Company believes that cash flow from
operations, the exercise of stock options (which is subject to market
conditions) and borrowings under its credit facility will provide sufficient
cash to fund its operations and meet current obligations for the year ending
December 31, 1997. The Company is attempting to improve cash flows from
operations and maintain flexibility in financing both interim and long-term
working capital requirements by reducing inventory levels, as a result of the
utilization of its inventory control system which will improve the scheduling
and timing of purchases. In the event the Company dramatically expands its
operations or makes acquisitions that would require funds in addition to its
existing liquid assets and cash flows, it would have to seek additional debt or
equity financing. There can be no assurance that the Company could obtain such
financing or that such financing would be available on terms acceptable to the
Company.
On January 3, 1997, the Company amended its financing agreement with
its primary lender, to increase its revolving line of credit agreement to allow
for borrowings up to $5,000,000 from the $750,000 limit previously in effect.
The primary reason for the increase was to provide additional working capital
for operations and fund the Company's acquisition activity.
The credit facility is collateralized by all of the Company's accounts
receivable, inventory, fixed assets and other assets, and consists of a term
loan due on April 30, 1998. Interest, which is paid monthly on the credit
facility, accrues at the lessor of the prime rate or the three-month London
Interbank Offered Rate, plus two hundred fifty (250) basis points (effective
rate 8.06% at March 31, 1997). The credit facility requires the Company to
maintain at all times, certain net worth, debt coverage and working capital
levels and restricts acquisitions and dispositions of property, and limits
additional borrowings from other lenders. At March 31, 1997, the Company had an
outstanding balance of $4,665,466 under the credit facility.
In connection with the credit facility on January 3, 1997, the Company
also entered into a $500,000 promissory note with the same lender to fund the
company's office and Mail Order expansion, which was completed in the first
quarter of 1997. The principal sum of the promissory note shall be paid in
monthly installments of $8,333.33 plus interest at 9.0% for 60 months beginning
on February 1, 1997. Collateral and debt covenants are the same as those of the
Company's $5,000,000 revolving credit line facility.
On March 19, 1997, the Company entered into an additional $750,000
promissory note with its existing lender, primarily for working capital
purposes. Such loan matures on July 26, 1997, and bears interest at prime. This
loan is cross collateralized with all other borrowings previously discussed. In
addition to the collateral previously discussed, this note is collateralized by
the 1,125,00 shares of Q.P.Q. Corporation common stock.
Except for the historical information contained herein, the matters set
forth in this Prospectus are forward looking and involve a number of risks and
uncertainties that could cause actual results to differ materially from these
statements and trends. Such factors include, but are not limited to: the effect
of changes in governmental regulation, reimbursement policies and
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federal and state healthcare funding; the continued availability of suitable
acquisition candidates; significant changes to general economic conditions;
strengthened competition in the Company's geographic markets; the failure of the
Company to obtain or maintain required regulatory licenses and approvals or the
loss of key personnel.
THE BUSINESS
CompScript is a comprehensive provider of pharmacy management services
equipped to both lower costs and improve the quality of care to its customers.
The Company offers a broad range of pharmacy, infusion therapy, consulting
services, mail order, and pharmacy benefit claim administration to managed care
networks, long term and subacute care facilities, home health patients, and
recipients of managed care. The Company's proprietary pharmacy management
capabilities combine sophisticated clinical tools with the latest technologies
in databases and drug profiles. The Company's network of participating retail
pharmacies, along with its electronic on-line adjudication system and a mail
service dispensing facility, allow the Company to offer a fully integrated
pharmacy benefit management program. The mailing address of the Company and its
principal executive offices is 1225 Broken Sound Parkway, N.W., Boca Raton,
Florida 33487; telephone number (561) 994-8585.
On April 26, 1996, CompScript, Inc. acquired approximately 93% of the
outstanding common stock of the Subsidiary, a privately-held provider of
pharmacy management services in exchange for issuance of 7,394,982 shares of the
Company's common stock. As a result of this transaction, CompScript-Boca
shareholders became the owners of approximately 80% of the Company's then
outstanding common stock and assumed 100% Control of the Company's Board of
Directors. Accordingly, the acquisition has been treated for financial reporting
purposes as a reverse acquisition. After completion of the transaction, the
Company became the owner of approximately 93% of the outstanding common stock of
Subsidiary and accordingly, recorded at the time of the transaction a minority
interest in the acquired Subsidiary of $222,628, representing approximately 7%
of the net assets of the acquired Subsidiary on the date of acquisition.
Since May 1996, the Company has consummated four acquisitions of
institutional pharmacy providers located in Mobile, Alabama (May 1996), Miami,
Florida (January 1997), Metaire, Louisiana (February 1997) and Mentor, Ohio
(March 1997) and one acquisition of a mail service dispensing pharmacy with its
principal operations in Cleveland, Ohio (August 1996). See Item 1 "Description
of Business Acquisition Strategy."
CompScript presently operates 7 institutional pharmacies that serve
long-term and subacute facilities in Florida, Alabama, Mississippi, Louisiana
and Ohio.
PRODUCTS AND SERVICES
INSTITUTIONAL PHARMACY. CompScript purchases, repackages and dispenses
prescription and non-prescription medication in accordance with physician orders
and delivers such prescriptions at least daily to the nursing facilities for
administration to individual patients by the facility's
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nursing staff. CompScript typically services nursing homes within a 150-mile
radius of its pharmacy locations. CompScript maintains a 24-hour, on-call
pharmacist service 365 days per year for emergency dispensing and delivery or
for consultation with the facility's staff or attending physician.
Compscript has established Joint Commission on Accreditation of Health
Care Organizations ("JCAHO") accreditation in connection with the Company's
long-term care institutional pharmacy services. JCAHO accreditation was received
in October 1996, for the Company's Boca Raton facility and the Company intends
to attain such accreditation for its other institutional pharmacy locations. The
Company believes this accreditation distinguishes the Company from many of its
competitors.
Upon receipt of a prescription, the relevant patient information is
entered into CompScript's computerized proprietary dispensing and billing
systems. At that time, the dispensing system will check the prescription for any
potentially adverse drug interactions or patient sensitivity. When required
and/or specifically requested by the physician or patient, branded drugs are
dispensed; generic drugs are substituted in accordance with applicable state and
federal laws and as requested by the physician or patient. The Company also
provides therapeutic interchange, with physician approval, in accordance with
the Company's pharmaceutical care guidelines.
CompScript provides a "modified unit-dose" distribution system. Most of
its prescriptions are filled utilizing specialized unit-of-use packaging and
delivery systems. Maintenance medications are typically provided in 30-day
supplies utilizing either a box unit-dose system or unit-dose punch card system.
The unitdoses system, preferred over the bulk delivery systems employed by
retail pharmacies, improves control over drugs in the nursing facility and
improves patient compliance with drug therapy by increasing the accuracy and
timeliness of drug administration.
Integral to CompScript's drug distribution system is its proprietary
computerized medical records and documentation system. CompScript provides to
the facility computerized medication administration records and physician's
order sheets and treatment records for each patient. Data extracted from these
computerized records are also formulated into monthly management reports on
patient care and quality assurance. The computerized documentation system in
combination with the modified unit-dose drug delivery system results in greater
efficiency in nursing time, improved control, reduced drug waste in the facility
and lower error rates in both dispensing and administration. These benefits
improve drug efficacy and result in fewer drug-related failures and
hospitalizations.
CONSULTANT PHARMACIST SERVICES. Federal and state regulations mandate
that nursing facilities, in addition to providing a source of pharmaceuticals,
retain consultant pharmacist services to monitor and report on prescriptions
drug therapy in order to maintain and improve the quality of patient care. The
Omnibus Budget Reconciliation Act ("OBRA") implemented in 1990 seeks to further
upgrade and standardize care by setting forth more stringent standards relating
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to planning, monitoring and reporting on the progress of prescription drug
therapy as well as facility-wide drug usage.
CompScript provides consultant pharmacist services which help clients
comply with such federal and state regulations applicable to nursing homes.
Consultant pharmacists work on a proprietary laptop program to offer
institutions patient specific clinical data. The services offered by
CompScript's consultant pharmacists include: (i) comprehensive, monthly drug
regimen reviews for each patient in the facility to assess the appropriateness
and efficacy of drug therapies, including a review of the patient's medical
records, monitoring drug reactions to other drugs or food, monitoring lab
results and recommending alternate therapies or discontinuing unnecessary drugs;
(ii) participation on the Pharmacy and Therapeutics, Quality Assurance and other
committees of client nursing facilities as well as periodic involvement in staff
meetings; (iii) monthly inspection of medication carts and storage rooms; (iv)
monitoring and monthly reporting on facility-wide drug usage and drug
administration systems and practices; (v) development and maintenance of
pharmaceutical policy and procedures manuals; and (vi) assistance to the nursing
facility in complying with state and federal regulations as they pertain to
patient care.
Additionally, CompScript offers a specialized line of consulting
services which help nursing facilities to enhance care and reduce and contain
costs as well as to comply with state and federal regulations. Under this
service line, CompScript provides: (i) data required for OBRA and other
regulatory purposes, including reports on psychotropic drug usage (chemical
restraints), antibiotic usage (infection control) and other drug usage; (ii)
Plan of Care programs which assess each patient's state of health upon admission
and monitor progress and outcomes using data on drug usage as well as dietary,
physical therapy and social service inputs; (iii) counseling related to
appropriate drug usage and implementation of drug protocols; (iv) on-site
educational seminars for the nursing facility staff on topics such as drug
information relating to clinical indications, adverse drug reactions, drug
protocols and special geriatric considerations in drug therapy, and information
and training on intravenous drug therapy and updates on OBRA and other
regulatory compliance issues; (v) mock regulatory reviews for nursing staffs;
and (vi) nurse consultant services and consulting for dietary, social services
and medical records.
ANCILLARY SERVICES. CompScript provides the following ancillary
products and services to nursing facilities:
Infusion Therapy Products and Services. With cost containment pressures
in the health care industry, nursing facilities are increasingly providing
subacute care as a means of treating moderately acute but stabilized patients
more cost-effectively than hospitals, provided that the nursing staff and
pharmacy are capable of supporting higher degrees of acuity. CompScript provides
infusion therapy support services for such residents in its client nursing
facilities and, to a lesser extent, hospice and home care patients. Infusion
therapy consists of the product (a nutrient, antibiotic, chemotherapy or other
drugs in solution) and the intravenous ("IV") administration of the product.
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CompScript prepares the product to be administered using proper
equipment in a sterile environment and then delivers the product to the nursing
home for administration by the nursing staff. Proper administration of IV drug
therapy requires a highly trained nursing staff. CompScript's consultant
pharmacists and nurse consultants operate an education and certification program
on IV therapy to assure proper staff training and compliance with regulatory
requirements in client facilities offering an IV program. By providing an
infusion therapy program, CompScript enables its client nursing facilities to
admit and retain patients who otherwise would need to be cared for in an
acute-care facility.
CompScript's proprietary computer system and specialization in the
subacute arena have been instrumental in new business development and the reason
over 65% of the facilities are considered subacute or competent in IV therapy.
The Company believes that by providing these high acuity pharmacy services it
has a competitive advantage over other pharmacy providers. The most common
infusion therapies CompScript provides in the nursing home environment are total
parenteral nutrition, antibiotic therapy, chemotherapy, pain management and
hydration.
HOME INFUSION THERAPY SERVICES. CompScript has established a JCAHO
accredited home infusion company to serve homebound patients. CompScript offers
outcomes management with an emphasis on diagnosis of level of severity,
specialized management reporting, and statewide coverage, which makes CompScript
particularly attractive to managed care companies. CompScript offers managed
care companies a full continuum of coverage for their clients, from hospitals to
subacute units to long-term care facilities to the patient's homes.
Infusion therapy services involve the administration of prescription
drugs and other products that are prescribed by a physician to a patient by
catheter, feeding tube or IV. The Company's managed care clients benefit from
outpatient infusion therapy services because the length of hospital stays can be
reduced. Rather than receiving infusion therapy in a hospital, the Company can
provide infusion therapy services to patients at home, in a physician's office
or in a free-standing center operated by a health maintenance organization
("HMO") or other entity. The Company provides antimicrobial, cardiovascular,
hematologic, nutritional, pain management, chemotherapeutic, hydration,
endocrine, respiratory and AIDS management treatments to patients.
PHARMACY BENEFIT MANAGEMENT SERVICES. The Company's pharmacy benefit
management ("PBM") service is the systematic management of outpatient
prescription drug usage to foster high quality, cost-effective pharmaceutical
care through the application of managed care principles and development of
information technologies. PBM services consist of retail pharmacy network
administration, except in the Long-Term Care Pharmacy Network; formulary
administration; electronic point-of-sale claims processing, drug utilization
review ("DUR"); mail pharmacy service; and benefit plan design consultation.
Advanced PBM services include the development of advanced formulary compliance
and therapeutic substitution programs; therapy management services such as prior
authorization, therapy guidelines, step therapy protocols, and disease
management interventions, and sophisticated management information reporting and
analytic services.
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The Company contracts with retail pharmacies to provide prescription
drugs to members of the pharmacy benefit plans managed by the Company. These
pharmacies typically discount the price at which they will provide drugs to
members in return for designation as a network pharmacy. The Company manages a
national network that is responsive to various client needs related to cost
containment and convenience of access for members. The Company is a provider of
PBM services to the managed care industry, including several large U.S. HMOs.
LONG-TERM CARE PHARMACY NETWORK. In May of 1995, CompScript formed the
first of its kind, Long-Term Care Pharmacy Network. The network is comprised of
long-term care "closed-shop" institutional pharmacies. This network is organized
to provide full comprehensive services to the institutionalized frail elderly
population with the consistencies of one long-term care model benefit. This
network is being marketed to payers with both national and regional interests as
one pharmaceutical vendor for their long-term/chronic care pharmaceutical care
beneficiaries.
GROUP HEALTHCARE AND WORKER'S' COMPENSATION NETWORKS. The Company uses
on-line electronic claims processing to provide effective pharmacy benefit
management services to its clients. All retail pharmacies in the Company's
pharmacy network communicate with the Company on-line and in real time to
process prescription drug claims. When a member of a plan presents his or her
identification card at a network pharmacy, the network pharmacist sends the
specified claim data in an industry standard format to the Company which
processes the claim and responds to the pharmacy, typically within a few
seconds. The electronic processing of the claim involves confirming the member's
eligibility for benefits under the applicable health benefit plan and the
conditions to or limitations of coverage, such as the amount of copayments or
deductibles the member must pay; performing a concurrent DUR analysis and
alerting the pharmacist to possible drug interactions or other indications of
inappropriate prescription drug usage; updating the member's prescription drug
claim record; and, if the claim is accepted, confirming to the pharmacy that it
will receive payment for the drug dispensed.
The Company provides advanced PBM services to its clients which involve
the application of clinical expertise and sophisticated management information
systems to manage the pharmacy benefit. An important advanced PBM service
provided by the Company is the enhancement of formulary compliance. Formularies
are lists of drugs for which coverage is provided under the applicable plan;
they are widely used in managed health care plans and, increasingly, by other
healthcare risk managers. The Company administers a number of different
formularies for its clients that often identify preferred drugs whose use is
encouraged or required through various benefit design features. Historically,
many clients have selected a plan design which includes an open formulary in
which all drugs are covered by the plan and preferred drugs, if any, are merely
recommended. More advanced formularies consist of restricted formularies, in
which various financial or other disincentives exist to the selection of
non-preferred drugs, or closed formularies, in which benefits are available only
for drugs listed on the formulary. Formulary preferences can be encouraged by
restricting the formulary through plan design features such as tiered
copayments, which require the member to pay a higher amount for a nonpreferred
drug; through prescriber education programs, in which the Company or the managed
care client actively seek
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to educate the prescribers about the formulary preferences; and through the
Company's therapeutic substitution programs that target certain high-cost
therapy classes for concentrated formulary compliance efforts.
The Company's electronic claims processing system also enables it to
implement sophisticated intervention programs to assist in managing prescription
drug utilization. The system can be used to alert the pharmacist to generic and
therapeutic substitution opportunities and formulary compliance issues, or to
administer prior authorization and therapy protocol programs at the time a claim
is submitted for processing. The Company's claims processing system also creates
a database of drug utilization information that can be accessed on a
retrospective basis to analyze utilization trends and prescribing patterns for
more intensive management of the drug benefit.
The Company is developing disease management programs to assist health
plans in managing the total health care costs associated with certain diseases,
such as diabetes and asthma, for which pharmaceutical therapy is a principal
treatment regimen. A disease management program may entail mailing information
about the disease to health plan members who have the disease. Additionally, the
program includes periodic reminders to encourage compliance with the therapy.
High risk or noncompliant members can be identified and contacted for individual
counseling, and physicians can be encouraged to follow the health plan's
specified therapy protocol for treating the disease. Disease management programs
that promote compliance with the drug regimen can both reduce complications from
the underlying disease and manage the severity of the disease so that more
expensive drugs or medical procedures can be avoided, thus helping to manage the
total health care cost of the disease.
MAIL SERVICE PHARMACY BENEFITS. The Company integrates its pharmacy
network benefits with its mail service pharmacy benefits provided to its
clients. It operates one mail service pharmacy in Florida that provides members
with convenient access to maintenance medications, and enables the Company and
its clients to control drug costs through purchasing efficiencies and other
economies of scale. In addition, through its mail service pharmacy, the Company
is able to be directly involved with the prescriber and member, and is generally
able to achieve a higher level of generic and therapeutic substitution than can
be achieved through the retail pharmacy network, which further reduces the
client's costs.
On December 1, 1996, the Company entered into a Master Services
Agreement for administration of Pharmacy Gold, Inc.'s mail service prescription
drug plan. Pharmacy Gold, Inc. ("PGI"), is an affiliate of Blue Cross and Blue
Shield of Minnesota and provides pharmacy benefit management services throughout
the United States and its territories. Under the agreement, CompScript has
agreed that in the performance of its mail order pharmacy functions it will
achieve certain clinical, operational and service requirements including, but
not limited to, dispensing of pharmaceuticals in compliance with PGI's
designated drug formulary; achievement of certain agreed generic replacement
efficiency; assistance in developing educational enrollment materials for PGI
and its clients; filling prescriptions and mailing of such prescriptions to
participants in the plan within a designated number of days after request. The
Agreement is for
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a five year term expiring November 30, 2001. In order to continue the growth and
expansion of the Company's mail service operations, on January 9, 1997, the
Company entered into a Independent Consulting Agreement ("Consulting Agreement")
with Gerard Altieri ("Altieri"), a former director of the Company, and Ronald J.
Reith ("Reith"), a former officer of the Company (the "Consultants"). The
Consultants will work with the Company on securing new mail order and related
business for the Company and also work with the Company in connection with its
Agreement with "PGI". The Consulting Agreement provides that for the one year
period through January, 1998 the Consultants shall receive a payment of $50,000
per month which payments shall be extended for an additional 12 month period if
gross revenues (less adjustments) attributable to all PGI business exceed
certain targeted amounts. The Consultants shall provide the Company with
reasonable detailed monthly reports of their activity including the status of
the PGI business and new business. The Consultants shall devote such time as
reasonably necessary to perform services under the Consulting Agreement,
including maintaining and developing the present and future PGI business. In
addition, the Consultants shall receive commissions on gross revenues earned by
the Company each and every year from a customer contract procured by the
Consultants.
ACQUISITION STRATEGY
The Company believes that through consolidation of other companies
engaged in institutional pharmacy and pharmacy management services, it can
provide a broad array of high quality pharmacy and related services in a cost
effective manner. Acquisition and effective integration can result in
efficiencies in service delivery, management, marketing, information systems,
administrative functions and increases in purchasing leverage.
The Company targets acquisition candidates with strong management, a
demonstrated capacity for growth and opportunities to realize efficiencies
through consolidation and integration. The Company identifies acquisition
candidates with management who intend to continue to participate in the
operation of the business but believe that there are more substantial
opportunities in being involved in a larger, stronger organization. The Company
has historically issued equity in CompScript as the purchase price for an
acquired company in order to align the interests of the acquired company's
management with those of CompScript.
On May 31, 1996, in a transaction accounted for as a pooling of
interests, the Company acquired Delta Pharmacy Services, Inc., (Delta). In
connection with the transaction, the Company exchanged 666,350 shares of the
Company's Common Stock for all of the outstanding common stock of Delta. Delta
is in the business of supplying prescription pharmaceuticals, consulting and
enteral and parental therapies to long-term and alternate care providers in
Alabama and Northern Florida.
On August 19, 1996, in a transaction accounted for as a pooling of
interests, the Company acquired SECURx, Inc., ("SECURx"). In connection with the
transaction, the Company exchanged 187,500 shares of the Company's Common Stock
for all of the outstanding common stock, of SECURx. SECURx is in the business of
selling and distributing prescription drugs
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through mail order distribution to the general public through corporate
sponsored benefit plans of employers located in the Northeastern United States.
On January 10, 1997, in a transaction accounted for as a pooling of
interests, the Company acquired Medical Services Consortium, Inc. ("MSC"). In
connection with the transaction, the Company exchanged 1.4 million shares of the
Company's Common Stock for all of the outstanding common stock of MSC. MSC is in
the business of supplying prescription pharmaceuticals, consulting and enteral
and parental therapies to long-term and alternate care providers in South
Florida.
On February 28, 1997, in a transaction accounted for as a pooling of
interests, the Company acquired Campo Medical Pharmacy, Inc. ("Campo"). In
connection with the transaction, the Company exchanged 375,000 shares of the
Company's Common Stock for all of the outstanding common stock of Campo. Campo
is in the business of supplying prescription pharmaceuticals, and consulting
services to long-term and alternate care providers in Louisiana.
On March 26, 1997, in a transaction accounted for as a pooling of
interests, the Company acquired Hytree Pharmacy, Inc. ("Hytree"). In connection
with the transaction, the Company exchanged 850,000 shares of the Company's
Common Stock for all of the outstanding common stock of Hytree. Hytree is in the
business of providing institutional pharmacy services, home care, distribution
of durable medical equipment and supplies in Ohio.
In connection with the Company's acquisition strategy, on October 1,
1996, the Company entered into a five year Consulting and Acquisition Management
Agreement with Shulman & Associates Inc. ("Shulman"), pursuant to which Shulman
would assist CompScript in identifying, evaluating, structuring, negotiating,
and closing business acquisitions, including, but not limited to, asset
purchases, consolidations, mergers, joint ventures and strategic alliances. In
connection with such agreement, Shulman will receive a fee of 15,000 shares of
the Company's Common Stock if the "aggregate market value" (defined in such
agreement) of the acquisition transaction is up to $5,000,000, 30,000 shares if
the aggregate market value of the acquisition transaction is between $5,000,000,
but less than $10,000,000, and 45,000 shares if the aggregate market value if
the acquisition transaction is in excess of $10,000,000. In the event the
Company consummates a merger or consolidation involving itself or 50% or more of
its voting stock or a substantial portion of its assets is acquired in any one
transaction by way of tender or exchange offer, negotiated purchase or
otherwise, Shulman shall be paid a fee for 3% of the aggregate market value of
the business combination with a minimum of $1,000,000 and a maximum of
$3,000,000, provided, that if Shulman introduces the transaction to the Company
there shall be no maximum fee limitation.
SUPPLIERS
The Company's inventory in its pharmacies includes over 3,000 brand and
generic pharmaceuticals. If a pharmaceutical is not in its inventory, the
Company can generally obtain it from a supplier within one to two business days.
The Company purchases its pharmaceuticals
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primarily through wholesale distributors. Generic pharmaceuticals are generally
purchased directly from manufacturers or through wholesale distributors. The
Company believes that alternative sources of supply for most generic and brand
name pharmaceuticals are readily available.
COMPETITION
The Long Term-Care industry is highly fragmented but experiencing
significant consolidation. There are a large number of small companies offering
long-term care pharmacy services. Most of these are smaller than the Company. By
its nature, the long-term care pharmacy business is highly regionalized and,
within a given geographic region of operations, highly competitive. In the
geographic regions it serves, CompScript competes with numerous local retail
pharmacies, local and regional institutional pharmacies and pharmacies owned by
long-term care facilities. CompScript competes in this market on the basis of
quality, cost-effectiveness and the increasingly comprehensive and specialized
nature of its services along with the clinical expertise, pharmaceutical
technology and professional support it offers. In its program of acquiring
institutional pharmacy providers, the Company competes with several other
companies with similar acquisition strategies, some of which have greater
resources than the Company. No individual customer or market group is critical
to the total sales of the Company's long-term care pharmacy business.
The Company believes that the primary competitive factors in each of
its businesses are price, quality of service and breadth of available services.
CompScript also believes that its larger competitors offer limited core pharmacy
management services that lack the depth and breadth of diversification offered
by the Company, and that most of the Company's smaller competitors offer even
more limited services with greater financial limitations. The Company considers
its principal competitive advantages to be independence from nursing home
owner/operators and drug manufacturers, strong managed care knowledge and
experience which supports the development of advanced services, and its
commitment to providing flexible and distinctive service to its customers.
There are a large number of companies offering PBM services in the U.S.
Most of these companies are smaller than the Company and offer their services on
a local or regional basis. As a full service, national pharmacy benefit manager,
the Company competes with a number of larger, national companies, as well as
numerous insurance and Blue Cross/Blue Shield plans, certain HMOs and retail
drug chains which have their own pharmacy benefit management capabilities. Many
of these larger companies have greater financial and marketing resources than
the Company.
Consolidation is a critical factor in the pharmaceutical industry
generally. Horizontal and vertical merger and acquisition activity in the
manufacturing segment has been robust, with significant resultant movements in
market share. Competitors that are owned by nursing home owners/operators and
manufacturers may have pricing advantages that are unavailable to the Company
and other independent companies.
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With respect to infusion therapy services, the Company competes with a
number of regional and large national companies.
GOVERNMENT REGULATION
LTC Pharmacy
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations cover required qualifications, day-to-day operations, reimbursement
and the documentation of activities. CompScript continuously monitors the
effects of regulatory activity on its operations.
LICENSURE, CERTIFICATION AND REGULATION. States generally require that
companies operating a pharmacy within the state be licensed by the state board
of pharmacy. he Company currently has pharmacy licenses in each state in which
it operates a pharmacy. In addition, CompScript's pharmacies are registered with
the appropriate state and federal authorities pursuant to statutes governing the
regulation of controlled substances.
Client nursing facilities are also separately required to be licensed
in the states in which they operate and, if serving Medicare or Medicaid
patients, must be certified to be in compliance with applicable program
participation requirements. Client nursing facilities are also subject to the
nursing home reforms of the Omnibus Budget Reconciliation Act of 1987, which
imposed strict compliance standards relating to quality of care for nursing home
operations, including vastly increased documentation and reporting requirements.
In addition, pharmacists, nurses and other health care professionals who provide
services on the Company's behalf are, in most cases, required to obtain and
maintain professional licenses and are subject to state regulations regarding
professional standards of conduct.
MEDICARE AND MEDICAID. The nursing home pharmacy business has long
operated under regulatory and cost containment pressures from state and federal
legislation primarily affecting Medicaid and, to a lesser extent, Medicare.
As is the case for nursing home services generally, CompScript receives
reimbursement from the Medicaid programs, directly from individual residents
(private pay), and from other payors such as third-party insurers. The Company
believes that its reimbursement mix is in line with nursing home expenditures
nationally.
For those patients who are not covered by government-sponsored programs
or private insurance, CompScript generally directly bills the patient or the
patient's responsible party on a monthly basis. Depending upon local market
practices, CompScript may alternatively bill private patients through the
nursing facility. Pricing for private pay patients is based on prevailing
regional market rates or "usual and customary" charges.
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The Medicaid program is a cooperative federal-state program designed to
enable states to provide medical assistance to aged, blind, or disabled
individuals, or members of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of the Department of Health and Human Services ("HHS") for approval.
The federal Medicaid statute specifies a variety of requirements which the state
plan must meet, including requirements relating to eligibility, coverage of
services, payment and administration.
Federal law and regulations contain a variety of requirements relating
to the furnishing of prescription drugs under Medicaid. States are given broad
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Federal Medicaid law establishes standards
affecting pharmacy practice. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
requirements for nursing facilities relating to drug regiment reviews for
Medicaid patients in such facilities. Recent regulations clarify that, under
federal law, a pharmacy is not required to meet the general standards for drugs
dispensed to nursing facility residents if the nursing facility complies with
the drug regimen review requirements. However, the regulations indicate that
states may nevertheless require pharmacies to comply with the general standards,
regardless of whether the nursing facility satisfies the drug regimen review
requirement, and the states in which the Company operates currently do require
its pharmacies to comply therewith.
Federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid patients. In addition
to requirements imposed by federal law, states have substantial discretion to
determine administrative, coverage, eligibility and payment policies under their
state Medicaid programs which may affect the Company's operations. For example,
some states have enacted "freedom of choice" requirements which may prohibit a
nursing facility from requiring its residents to purchase pharmacy or other
ancillary medical services or supplies from particular providers that deal with
the nursing home. Such limitations may increase the competition which the
Company faces in providing services to nursing facility patients.
The Medicare program is a federally funded and administered health
insurance program for individuals age 65 and over or who are disabled. The
Medicare program consists of two parts: Part A, which covers, among other
things, inpatient hospital, skilled nursing facility, home health care and
certain other types of health care services; and Medicare Part B, which covers
physicians' services, outpatient services, and certain items and services
provided by medical suppliers. Medicare Part B also covers a limited number of
specifically designated prescription drugs. The Medicare program establishes
certain requirements for participation of providers and suppliers in the
Medicare program. Pharmacies are not subject to such certification requirements.
Skilled nursing facilities and suppliers of medical equipment and supplies,
however, are subject to specified standards. Failure to comply with these
requirements and standards may adversely affect an entity's ability to
participate in the Medicare program and receive reimbursement for services
provided to Medicare beneficiaries.
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The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings, and freezes and funding reductions, all of which may adversely affect
the Company's business. There can be no assurance that payments for
pharmaceutical supplies and services under governmental reimbursement programs
will continue to be based on the current methodology or remain comparable to
present levels. In this regard, the Company may be subject to rate reductions as
a result of federal budgetary legislation related to the Medicare and Medicaid
programs. In addition, various state Medicaid programs periodically experience
budgetary shortfalls which may result in Medicaid payment delays to the Company.
To date, the Company has not experienced any material adverse effect due to any
such budgetary shortfall. In addition, the failure, even if inadvertent, of
CompScript and/or its client institutions to comply with applicable
reimbursement regulations could adversely affect CompScript's business.
Additionally, changes in such reimbursement programs or in regulations related
thereto, such as reductions in the allowable reimbursement levels, modifications
in the timing or processing of payments and other changes intended to limit or
decrease the growth of Medicaid and Medicare expenditures, could adversely
affect the Company's business.
REFERRAL RESTRICTIONS. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which was originally
enacted in 1977 and amended in 1987, and which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which payment is made by Medicare or Medicaid. Violations of these
laws may result in fines, imprisonment, and exclusion from the Medicare and
Medicaid programs or other state-funded programs. Federal and state court
decisions interpreting these statutes are limited, but have generally construed
the statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the statute.
Federal regulations establish "safe harbors," which give immunity from
criminal or civil penalties to parties in good faith compliance. While the
failure to satisfy all criteria for a safe harbor does not mean that an
arrangement violates the statute, it may subject the arrangement to review by
the Office of Inspector General ("OIG"), which is charged with administering the
federal anti-kickback statute. There are no procedures for obtaining binding
interpretations or advisory opinions from the OIG on the application of the
federal anti-kickback statute to an arrangement or its qualification for a safe
harbor upon which the Company can rely.
The OIG issues "Fraud Alerts" identifying certain questionable
arrangements and practices which it believes may implicate the federal
anti-kickback statute. The OIG has issued a Fraud Alert providing its views on
certain joint venture and contractual arrangements between health care
providers. The OIG also issued a Fraud Alert concerning prescription drug
marketing practices that could potentially violate the federal statute.
Pharmaceutical marketing activities may implicate the federal anti-kickback
statute because drugs are often reimbursed under the
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Medicaid program. According to the Fraud Alert, examples of practices that may
implicate the statute include certain arrangements under which remuneration is
made to pharmacists to recommend the use of a particular pharmaceutical product.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arose
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like.
The Company believes its contractual arrangements with other health
care providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with the
Company's interpretation and application.
HEALTH CARE REFORM AND FEDERAL BUDGET LEGISLATION. The Clinton
administration and members of Congress have proposed plans to reform the health
care system. Currently, Congress is considering such reforms in the context of
federal budget reconciliation legislation. This legislation could result in
significant reductions in payments to providers under the Medicare program and a
complete restructuring and reduced payments to providers under the Medicare
program. With respect to Medicare, proposals include establishment of a
prospective payment system for Skilled Nursing Facilities ("SNFs"); limits on
payments to Medicare SNFs for certain non-routine services, including, among
others, prescription drugs, diagnostic services, and physical therapy and other
rehabilitative services; requiring consolidated billing by a SNF for all Part A
and B claims for SNF residents; and other limits on reimbursement of costs for
Medicare SNF services. If enacted, there can be no assurance that such proposals
could not have a material effect on the business of CompScript. While budget
negotiations are continuing, the future of any reform proposals in Congress is
unknown.
In addition, a number of states have enacted and are considering
various health care reforms, including reforms through Medicaid demonstration
projects. Federal law allows HHS to authorize waivers of federal Medicaid
program requirements, including requirements relating to coverage, free choice
of providers and payment for health care services, in connection with state
demonstration projects that promote Medicaid program objectives. HHS published
procedures and public notice requirements designed to open the waiver approval
process to public comment and to expedite processing. Legal actions have been
initiated challenging the waiver process and the authority of HHS to approve
waivers for broad-based Medicaid managed care programs. The federal budget
legislation restructuring the Medicaid program would effectively eliminate
Medicaid managed care demonstration projects.
Several state Medicaid programs have established mandatory statewide
managed care programs for Medicaid beneficiaries to control costs through
negotiated or capitated rates, as opposed to traditional cost-based
reimbursement for Medicaid services, and propose to use savings achieved through
these programs to expand coverage to those not previously eligible for
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Medicaid. HHS has approved waivers for statewide managed care demonstration
projects in several states, and are pending for several other states. These
demonstration projects generally exempt institutionalized care, including
nursing facility services, from the programs, and the Company's operations have
not been adversely affected with a managed care demonstration project in effect.
The Company is unable to predict what impact, if any, future projects might have
on the Company's operations. Because there are currently various reform
proposals under consideration at the federal and state levels, it is uncertain
at this time what health care reform initiatives, if any, will be implemented,
or whether there will be other changes in the administration of governmental
health care programs or interpretations or governmental policies or other
changes affecting the health care system. There can be no assurance that future
health care or budget legislation or other changes will not have an adverse
effect on the business of the Company.
Various aspects of the Company's businesses are governed by federal and
state laws and regulations. Since sanctions may be imposed for violations of
these laws, compliance is a significant operational requirement for the Company.
The Company believes that it is in substantial compliance with all existing
legal requirements material to the operation of its businesses.
PHARMACY BENEFITS MANAGEMENT REGULATION
Certain federal and related state laws and regulations affect aspects
of the Company's pharmacy benefit management business. Among these are the
following: FDA REGULATION. The FDA generally has authority to regulate drug
promotional materials that are disseminated "by or on behalf of" a drug
manufacturer. In October 1995, the FDA held hearings to determine whether and to
what extent the activities of pharmacy benefit management companies should be
subject to FDA regulations. At this hearing, FDA officials expressed concern
about the efforts of pharmacy benefit managers (PBMs) that are owned by drug
manufacturers to engage in therapeutic switching programs and about the criteria
used by such PBMs that govern the inclusion and exclusion of particular drugs in
formularies. Various parties, including the Company, have submitted written
comments to the FDA regarding the basis for FDA regulation of PBM activities. It
is the Company's position that, while the FDA may have jurisdiction to regulate
PBMs that are owned by drug manufacturers, the prescription drug benefit
programs developed and implemented by independent PBMs do not constitute the
distribution of materials that promote particular drugs "on behalf of" any
pharmaceutical manufacturers, and therefore, these programs are not subject to
FDA regulation. The FDA has not published any proposed rules to date on the
regulation of PBMs, and there can be no assurance that the FDA will not seek to
regulate certain aspects of the Company's PBM.
ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among
other things, an entity from paying or receiving, subject to certain exceptions
and "safe harbors," any remuneration to induce the referral of Medicare or
Medicaid beneficiaries or the purchase (or the arranging for or recommending of
the purchase) of items or service for which payment may be made under Medicare,
Medicaid, or other federally-funded state health care programs. Several
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states also have similar laws which are not limited to services for which
Medicare or Medicaid payment may be made. State laws vary and have been
infrequently interpreted by courts or regulatory agencies. Sanctions for
violating these federal and state anti-remuneration laws may include
imprisonment, criminal and civil fines, and exclusion from participation in the
Medicare and Medicaid programs.
The federal statute has been interpreted broadly by courts, the OIG
within the HHS, and administrative bodies. Because of the federal statute's
broad scope, federal regulations establish certain "safe harbors" from
liability. Safe harbors exist for certain properly reported discounts received
from vendors, certain investment interests, and certain properly disclosed
payments made by vendors to group purchasing organizations. A practice that does
not fall within a safe harbor is not necessarily unlawful, but may be subject to
scrutiny and challenge. In the absence of an applicable exception or safe
harbor, a violation of the statute may occur even if only one purpose of a
payment arrangement is to induce patient referrals or purchases. Among the
practices that have been identified by the OIG as potentially improper under the
statute are certain "product conversion programs" in which benefits are given by
drug manufacturers to pharmacists or physicians for changing a prescription (or
recommending or requesting such a change) from one drug to another. Such laws
have been cited as a partial basis, along with state consumer protection laws
discussed below, for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with such programs.
To the Company's knowledge, these anti-remuneration laws have not been
applied to prohibit PBMs from receiving discounts from drug manufacturers in
connection with drug purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the Company
will not be subject to scrutiny or challenge under such laws or regulations, or
that any such challenge would not have a material effect upon the Company.
ERISA REGULATIONS. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which the Company has
agreements to provide PBM services. The Company believes that the conduct of its
business is not subject to the fiduciary obligations of ERISA, but there can be
no assurance that the U.S. Department of Labor, which is the agency that
enforces ERISA, would not assert that the fiduciary obligations imposed by the
statute apply to certain aspects of the Company's operations.
Numerous state laws and regulations also affect aspects of the
Company's pharmacy benefit management business. Among these are the following:
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CONSUMER PROTECTION LAWS. Most states have consumer protection laws
that have been the basis for investigations and multi-state settlements relating
to financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching program features that have been viewed by
enforcement authorities as problematic in recent settlement agreements. However,
no assurance can be given that the Company will not be subject to scrutiny or
challenge under one or more of these laws.
NETWORK ACCESS LEGISLATION. A majority of states now have some form of
legislation affecting the ability of the Company to limit access to a pharmacy
provider network or from removing network providers. Such legislation may
require the Company or its client to admit any retail pharmacy willing to meet
the plan's price and other terms for network participation ("any willing
provider" legislation); or providing that a provider may not be removed from a
network except in compliance with certain procedures ("due process"
legislation). The Company has not been materially affected by these statutes
because it maintains a large network of over 46,000 retail pharmacies and will
admit any licensed pharmacy that meets the Company's credentialing criteria,
involving such matters as adequate insurance coverage, minimum hours of
operation, and the absence of disciplinary actions by the relevant state
agencies.
LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have
legislation that prohibits the plan sponsor from implementing certain
restrictive design features. For example, some states provide that members of
the plan may not be required to use network providers, but must also be provided
with benefits even if they choose to use non-network providers ("freedom of
choice" legislation). Other states mandate coverage of certain benefits or
conditions. Such legislation does not generally apply to the Company, but it may
apply to certain of the Company's customers (HMOs and insurers). If such
legislation were to become widespread and broad in scope, it could have the
effect of limiting the economic benefits achievable through pharmacy benefit
management.
LEGISLATION AFFECTING DRUG PRICES. Some states have adopted legislation
providing that a pharmacy participating in the state Medicaid program must give
the state the best price that the pharmacy makes available to any third party
plan ("most favored nation" legislation). Such legislation may adversely affect
the Company's ability to negotiate discounts in the future from network
pharmacies. Other states have enacted "unitary pricing" legislation, which
mandates that all wholesale purchasers of drugs within the state be given access
to the same discounts and incentives. Such legislation, if enacted in either
state, could adversely affect the Company's ability to negotiate discounts on
its prescription drugs to be dispensed by its mail service pharmacies.
MAIL PHARMACY REGULATION. The Company's mail service pharmacy is
located in Florida and the Company is licensed to do business as a pharmacy in
that state. Many of the states into which the Company delivers pharmaceuticals
have laws and regulations that require out-of-state mail service pharmacies to
register with, or be licensed by, the board of pharmacy or similar regulatory
body in the state. These states generally permit the mail service pharmacy to
follow the laws of the state within which the mail service pharmacy is located,
although one state also
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requires that the Company employ a pharmacist licensed in that state. The
Company has registered in every state in which, to the Company's knowledge, such
registration is required.
Other statutes and regulations impact the Company's mail service
operations. Federal statutes and regulations govern the labeling, packaging,
advertising and adulteration of prescription drugs and the dispensing of
controlled substances. The Federal Trade Commission requires mail order sellers
of goods generally to engage in truthful advertising, to stock a reasonable
supply of the product to be sold, to fill mail orders within thirty days, and to
provide customers with refunds when appropriate. The Company believes it is in
compliance with all requirements of the Federal Trade Commission.
REGULATION OF INFUSION THERAPY SERVICES. The Company's infusion therapy
services business is subject to many of the same or similar state laws and
regulations affecting the Company's pharmacy management business. In addition,
some states require that providers of infusion therapy services be licensed. The
Company is licensed as a home health agency, infusion pharmacy and pharmacy in
Florida. The Company is licensed as a pharmacy only, in Alabama. The Company
believes that it is in substantial compliance with such licensing requirements.
JCAHO, a non-profit, private organization, has established written
standards for health care organizations and home care services, including
standards for services provided by home infusion therapy companies. The
Company's Florida facility has received JCAHO accreditation. When accredited by
JCAHO, the Company can market infusion therapy services to Medicare and Medicaid
programs. If the Company expands its home infusion therapy services to other
states or to Medicaid programs, it may be required to comply with other
applicable laws and regulations.
FUTURE REGULATION. The Company is unable to predict accurately what
additional federal or state legislation or regulatory initiatives may be enacted
in the future relating to the businesses of the Company or the health care
industry in general, or what effect any such legislation or regulations might
have on the Company. There can be no assurance that federal or state governments
will not impose additional restrictions or adopt interpretations of existing
laws that could have a material adverse effect on the Company's business or
financial position.
SERVICEMARKS AND TRADEMARKS
The Company has registered the servicemark "CompScript" with the United
States Patent and Trademark Office. The Company's rights to this servicemark
will continue so long as the Company complies with the usage, renewal filing and
other legal requirements relating to the renewal of service marks. The Company
is in the process of applying for registration of several other trademarks and
servicemarks. If the Company is unable to obtain any additional registrations,
the Company believes there would be no material adverse effect on the Company.
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INSURANCE
The dispensing of pharmaceutical products by the Company's pharmacies,
and the products and services provided in connection with the Company's infusion
therapy programs (including the associated nursing services) may subject the
Company to litigation and liability for damages. The Company believes that its
insurance protection is adequate for its present business operations, but there
can be no assurance that the Company will be able to maintain its professional
and general liability insurance coverage in the future or that such insurance
coverage will be available on acceptable terms or be adequate to cover any or
all potential product or professional liability claims. A successful product or
professional liability claim in excess of the Company's insurance coverage could
have a material adverse effect upon the Company.
EMPLOYEES
As of March 31, 1997, the Company and its subsidiaries employed a total
of 332 employees.
PRODUCT AND MARKET DEVELOPMENT
CompScript's pharmacy business engages in a continuing program for the
development of new services and the marketing thereof. While new service and new
market development are important factors for the growth of this business,
CompScript does not expect that any new service or marketing effort, including
those in the developmental stage, will require the investment of a material
portion of CompScript's assets.
MATERIAL/SUPPLIES
CompScript purchases pharmaceuticals through a wholesale distributor
with whom it has a prime vendor contract and, on an increasing basis, under
contracts negotiated directly with pharmaceutical manufacturers. The Company
also is a member of industry buying groups which contract with manufacturers for
discounted prices. The Company has numerous sources of supply available to it
and has not experienced any difficulty in obtaining pharmaceuticals or other
products and supplies used in the conduct of its business.
INVENTORIES
CompScript's pharmacies maintain adequate on-site inventories of
pharmaceuticals and supplies to ensure prompt delivery service to its customers.
Inventories on hand are not considered to be high beyond industry standards. The
Company's primary wholesale distributor also maintains local warehousing in most
major geographic markets in which the Company operates.
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ENVIRONMENTAL MATTERS
In operating its facilities, CompScript makes every effort to comply
with pollution control laws. No major difficulties have been encountered in
effecting compliance. No material capital expenditures for environmental control
facilities are expected. While CompScript cannot predict the effect which any
future legislation, regulations, or interpretations may have upon its
operations, it does not anticipate any changes that would have a material
adverse impact on its operations.
DESCRIPTION OF PROPERTIES
The Company's principal offices, mail order pharmacy operations and
largest institutional pharmacy are located in leased facilities in Boca Raton,
Florida. The Company has leased 20,000 square feet under a lease which expires
in December 2002 and has an annual average rental of $147,000 plus common area
charges. The chart listed below sets forth the approximate square footage,
annual lease cost (exclusive of common area charges) and the lease termination
date for each institutional pharmacy maintained by the Company, exclusive of the
institutional pharmacy at the Company's principal offices.
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE ANNUAL COST TERMINATION DATE
- -------- ------- ----------- ----------------
<S> <C> <C> <C>
Mobile, Alabama 4,200 $ 24,000 May 1997
Tampa, Florida 2,520 18,900 December 1999
Miami, Florida 17,000 135,000 December 2001
Metarie, Louisiana 4,400 45,600 July 2001
Jackson, Mississippi 2,831 23,300 December 1999
Mentor, Ohio 20,000 120,000 August 2000
</TABLE>
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
MANAGEMENT
The following table sets forth certain information concerning the
current directors and the executive officers of the Company:
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<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Brian A. Kahan...................... 45 Chairman of the Board, Chief Executive Officer
and President of the Company
Robert J. Gardner................... 41 Vice President and Director
Juan C. Cocuy....................... 39 Chief Financial Officer
Robert Edelheit..................... 57 Director
Paul E. Heimberg.................... 46 Director
Malcolm Leonard..................... 54 Director
</TABLE>
BRIAN A. KAHAN has been a Chairman, Chief Executive Officer and
President of the Company since April 1996. In October 1991, Mr. Kahan founded
Aldencare and served as its Chief Executive Officer and became Chief Executive
Officer of CompScript when it merged with Aldencare in 1994. Mr. Kahan has a
B.S. in Pharmacy from the University of Maryland, School of Pharmacy. Mr. Kahan
is currently President of the American Society of Consultant Pharmacists and
serves on the LTC Commission for the State of Florida. Mr. Kahan is presently a
clinical instructor for the University of Florida and Nova Southeastern College
of Pharmacy and is a trustee for the Florida Pharmacy Foundation.
ROBERT J. GARDNER has been Vice President and Director of the Company
since August 1996. From July 1995 to August 1996 Mr. Gardner was group leader of
infusion therapy services for Olsten Kimberly Quality Care. From May 1994 to
July 1995 Mr. Gardner served as a healthcare consultant. From August 1992 to
April 1994 Mr. Gardner served as President of Abbey Pharmaceutical Services, a
nationwide provider of institutional and subacute pharmacy services, and, as
Western Area Vice President for Abbey Home Healthcare. From 1986 to 1992 Mr.
Gardner held a variety of positions with Pharmacy Corporation of America
including Vice President of Operations. Mr. Gardner has a Doctor of Pharmacy
Degree from the University of Pacific and a Master of Business Administration
from the University of Washington.
JUAN C. COCUY was appointed Chief Financial Officer on July 1, 1997.
Mr. Cocuy has been a partner with the accounting firm Martinelli, Cocuy & Co.,
CPA's in Wellington, Florida since January 1996. From August 1995 to December
1995, Mr. Cocuy was Vice President of The Vinca Group, LLC, Owings Mills,
Maryland, a healthcare consulting company. From August 1992 to August 1995, Mr.
Cocuy was Vice President of Finance and Chief Financial Officer of IntegraCare,
Inc. in Delray Beach, Florida, a publicly traded integrated health care services
provider. From October 1982 to August 1992, Mr. Cocuy served in various
capacities with Ernst & Young in West Palm Beach, Florida, most recently as
Senior Manager. Mr. Cocuy has a Bachelor of Science degree in business
administration from the University of South Florida and is licensed in the State
of Florida as a certified public accountant. He is a member of the American and
Florida Institutes of CPA's.
ROBERT EDELHEIT has served as a Director of the Company since April
1996. Mr. Edelheit is President of United Group Programs, employee benefit sales
and consulting firm with offices in Boca Raton, Atlanta and Philadelphia. Mr.
Edelheit received his B.S. in Business from
53
<PAGE>
the State University of New York. Mr. Edelheit is editor and publisher of the
newsletter, SYNOPSIS, a fax digest with an emphasis on employee benefits. Mr.
Edelheit has been an Associate Professor at Florida Atlantic University in Boca
Raton, Florida and speaks nationally on employee benefits.
PAUL E. HEIMBERG has served as Director of the Company since April
1996. Mr. Heimberg is a partner with the law firm of Heimberg & Lumer, in Boca
Raton, Florida since November 1995. Previously Mr. Heimberg was a partner with
the firm of Heimberg, Heimberg, Rader & Levenstein, P.A. from 1990 to 1995. Mr.
Heimberg received his B.A. from the University of Wisconsin and his J.D. from
Boston University Law School.
MALCOLM LEONARD has served as a Director of the Company since April
1996. Mr. Leonard is a Certified Public Accountant and has been the managing
partner of Leonard & Danzinger, CPA's since 1975. Mr. Leonard is a member of the
American Institute of Certified Public Accountants and the Florida Institute of
Certified Public Accountants. Mr. Leonard received a B.S. from Farleigh
Dickinson University.
The Company's officers are elected annually by the Company's Board of
Directors and serve at the discretion of the Company's Board of Directors. The
Company reimburses directors for their expenses in connection with their
activities as directors of the Company. Directors of the Company do not receive
additional compensation for their services as directors. Historically, the
Company has granted option to its Directors as compensation for services
granted.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate compensation paid to Brian
A. Kahan (the "Named Executive Officer") by the Company. None of the other
executive officers of the Company, were paid a total annual salary and bonus for
the fiscal year ended December 31, 1996 which was $100,000 or more.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
OTHER NUMBER OF
FISCAL ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION GRANTED COMPENSATION
- --------------------------- ------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Brian A. Kahan, 1996 $270,000 none 121,017 $5,075(1)
Chief Executive Officer 1995 $180,000 $52,000 None 4,393(1)
</TABLE>
(1) Represents auto lease payments of $5,075 and $4,393 in 1996 and 1995
respectively.
54
<PAGE>
The Company entered into an agreement with Mr. Kahan, amended and
restated on August 19, 1996, which provides that he shall serve as Chief
Executive Officer and Chairman of the Board of Directors for an initial term of
five (5) years, which may be extended for up to three (3) additional one (1)
year terms. Mr. Kahan's annual salary for the first year shall be $300,000
subject to annual increases equal to the greater of the percentage increase in
the consumer price index or six percent (6%) of the executive's previous year's
base salary. Pursuant to the Employment Agreement, Mr. Kahan is required to
devote substantially all his business time and attention to the business and
affairs of the Company. Mr. Kahan is entitled to a bonus equal to ten percent
(10%) of the Company's pre-tax profits for each year of the Agreement. Mr. Kahan
was granted 121,017 options exercisable at $5.13 per share. Mr. Kahan is
entitled to certain fringe benefits including an automobile allowance and
reimbursements for charitable donations or contributions in an amount not to
exceed $25,000. No such donations or contributions were made during 1996. In the
event that Mr. Kahan's employment is terminated by the Company other than for
cause, he shall receive either a lump sum equal to his total compensation and
benefits for the remaining balance of the term of the agreement, reduced to
present value or such payments on a monthly basis.
The Company entered into an agreement with Mr. Gardner which provides
that Mr. Gardner will serve as Vice President for a two year term beginning June
19, 1996. Mr. Gardner's current annual salary is $150,000, subject to an
increase to $200,000 on January 1, 1998. Mr. Gardner is entitled to receive an
annual cash bonus equal to $15,000 per year, and an additional cash bonus of an
amount not less than $10,000 a year based upon an agreed upon formula. Mr.
Gardner was granted fully vested options to purchase 140,000 shares at a price
of $5.13 per share. Mr. Gardner is entitled to certain fringe benefits including
an automobile allowance. In the event that within twelve (12) months of any
change of control of the Company or attempted change of control of the Company
(as such terms are defined in the Employment Agreement), the Company terminates
the employment of Mr. Gardner under the Employment Agreement, for any reason, or
Mr. Gardner's employment is constructively terminated, then in any such event
Mr. Gardner shall be entitled to receive the balance of the consideration due
under the Employment Agreement.
OPTION SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock
options granted to the Named Executive Officer during the year ended December
31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING OPTIONS/SARS GRANTED TO EMPLOYEES EXERCISE OR EXPIRATION
GRANTED IN FISCAL YEAR BASE PRICE DATE
----------------------- -------------------- ---------- ----------
<S> <C> <C> <C> <C>
Brian A. Kahan, CEO 121,017 28.4% $5.13 8/27/06
</TABLE>
55
<PAGE>
AGGREGATED FISCAL YEAR ENDED OPTION VALUE TABLE
The following table sets forth certain information concerning
unexercised stock options held by the Named Executive officer as of December 31,
1996. No stock options were exercised by the Named Executive Officer during the
period ended December 31, 1996. No stock appreciation rights were granted or are
outstanding.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN THE MONEY
HELD AT DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996(1)
------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brian A. Kahan, CEO 121,017 -0- 453,209 -0-
</TABLE>
(1) Dollar values are calculated based on the difference between the option
exercise price and $8.875, the closing price on December 31, 1996 as
reported by NASDAQ.
STOCK OPTION PLAN
On May 28, 1996 the Board of Directors adopted a stock option plan
called the "1996 Stock Option Plan." The Plan was approved by the Company's
shareholders at the 1996 Annual Meeting. Under the Plan, the Company has
reserved an aggregate of 900,000 shares of Common Stock for issuance pursuant to
options granted under the Plan ("Plan Options"). The Board of Directors or the
Compensation Committee of the Board of Directors (the "Committee") of the
Company administers the Plan including, without limitation, the selection of the
persons who will be granted Plan Options under the Plan, the type of Plan
Options to be granted, the number of shares subject to each Plan Option and the
Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not qualify ("Non-Qualified
Options"). Any Incentive Option granted under the Plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying
shares on the date of such grant, but the exercise price of any Incentive Option
granted to an eligible employee owning more than 10% of the Company's Common
Stock must be at least 110% of such fair market value as determined on the date
of the grant. The term of each Plan Option and the manner in which it may be
exercised is determined by the Board of the Directors or the Committee, provided
that no Plan Option may be exercisable more than 10 years after the date of its
grant and, in case of an Incentive Option granted to an eligible employee owning
more than 10% of the Company's Common Stock, no more than five years after the
date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee but shall in no event be less than 5% of the
fair market value of the underlying shares on the date of grant.
56
<PAGE>
Officers, key employees, board members and consultants of the Company
and its subsidiaries are eligible to receive Non-Qualified Options under the
Plan. Only officers, key employees and consultants of the Company who are
employed by the Company or by any subsidiary thereof are eligible to receive
Incentive Options.
If an optionee's employment is terminated for any reason, other than
his death or disability or termination for cause, the Plan Option granted to him
shall lapse to the extent unexercised on the earlier of the expiration date or
three days following the date of termination. If the optionee dies during the
term of his employment, the Plan Option granted to him shall lapse to the extent
unexercised on the earlier of the expiration date of the Plan Option or the date
one year following the date of the optionee's death. If the optionee is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, the Plan Option granted to him lapses to the
extent unexercised on the earlier of the expiration date of the option or one
year following the date of such disability. Plan Options will immediately
terminate if employment is terminated for cause as determined by the Company.
The Board of Directors or Committee may amend, suspend or terminate the
Plan at any time, except that no amendment shall be made without shareholder
approval which (i) increases the total number of shares subject to the Plan,
(ii) materially increases the benefits accruing to Plan participants, or (iii)
materially modifies the requirements as to eligibility for participation in the
Plan. Unless the Plan shall theretofore have been suspended or terminated by the
Board of Directors, the Plan shall terminate on May 29, 2006. Any such
termination of the Plan shall not affect any Plan Options granted under the Plan
prior to the actual date on which such action occurred.
The following discussion is based on federal income tax laws and
regulations in effect on May 31, 1996. It does not purport to be a complete
description of the federal income tax consequences of the Plan, nor does it
describe the consequences of state, local or foreign tax laws which may be
applicable. Accordingly, any person receiving a grant under the Plan should
consult with his own tax adviser.
An employee granted an Incentive Stock Option does not recognize
taxable income either at the date of grant or at the date of this timely
exercise. However, the excess of the fair market value of Common Stock received
upon exercise of the Incentive Stock Option over the Option exercise price is an
item of tax preference under Section 57(a)(3) of the Code and maybe subject to
the alternative minimum tax imposed by Section 55 of the Code. Upon disposition
of stock acquired on exercise of an Incentive Stock Option, long-term capital
gain or loss is recognized in an amount equal to the difference between the
sales price and the Incentive Stock Option exercise price, provided that the
option holder has not disposed of the stock within two years from the date of
grant and within one year from the date of exercise. If the Incentive Stock
Option holder disposes of the acquired stock (including the transfer of acquired
stock in payment of the exercise price of an Incentive Stock Option) without
complying with both of these holding period requirements ("Disqualifying
Disposition"), the option holder will recognize ordinary income at the time of
such Disqualifying Disposition to the extent of the difference between the
57
<PAGE>
exercise price and the lesser of the fair market value of the stock on the date
the Incentive Stock Option is exercised (the value six months after the date of
exercise may govern in the case of an employee whose sale of stock at a profit
could subject him to suit under Section 16(b) of the Securities Exchange Act of
1934) or the amount realized on such Disqualifying Disposition. Any remaining
gain or loss is treated as a short-term or long-term capital gain or loss,
depending on how long the shares are held. In the event of a Disqualifying
disposition, the Incentive Stock Option tax preference described above may not
apply (although, where the disqualifying Disposition occurs subsequent to the
year the Incentive Stock Option is exercised, it may be necessary to the
employee to amend his return to eliminate the tax preference item previously
reported). The Company and its subsidiary are not entitled to a tax deduction
upon either exercise of an Incentive Stock Option or disposition of stock
acquired pursuant to such an exercise, except to the extent that the Option
holder recognized ordinary income in a Disqualifying Disposition.
In respect to the holder of Non-Qualified Options, the option holder
does not recognize taxable income on the date of the grant of the Non-Qualified
Option, but recognizes ordinary income generally at the date of exercise in the
amount of the difference between the option exercise price and the fair market
value of the Common Stock on the date of exercise. However, if the holder of
Non-Qualified Options is subject to the restrictions on resale of Common Stock
under Section 16 of the Securities Exchange Act of 1944, such person generally
recognizes ordinary income at the end of the six-month period following the date
of exercise in the amount of the difference between the option exercise price
and the fair market value of the Common Stock at the end of the six-month
period. Nevertheless, such holder may elect within 30 days after the date of
exercise to recognize ordinary income as of the date of exercise. The amount of
ordinary income recognized by the option holder is deductible by the Company in
the year that income is recognized.
There are 899,917 options granted under the plan as of the date hereof.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this Prospectus,
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person who is known by the Company to own beneficially more
than 5% of its Common Stock, (ii) each director and nominee for director, (iii)
each executive officer, and (iv) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF OUTSTANDING
NAME BENEFICIAL OWNERSHIP(2) SHARES OWNED(2)
- ---- ----------------------- ----------------
<S> <C> <C>
Brian A. Kahan................... 4,553,470(3) 32.3%
Robert J. Gardner................ 141,025(4) 1.0%
Malcolm Leonard.................. 35,086(5) *
58
<PAGE>
Robert Edelheit.................. 107,206(6) *
Paul E. Heimberg................. 239,749(7) 1.7%
All directors and executive officers
as a group (6 persons)........... 5,076,536(8) 35.3%
</TABLE>
- -------------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the listed
beneficial owners identified is 1225 Broken Sound Parkway, N.W., Suite
A, Boca Raton, Florida 33451. Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all the shares of Common Stock
beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Proxy
Statement upon the exercise of warrants or options. Each beneficial
owner's percentage ownership is determined by assuming that warrants or
options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days from the date of this
Proxy Statement have been exercised.
(3) Includes 4,307,453 shares of Common Stock held in AldenCare Limited
Partnership, of which Mr. Kahan is the general partner and 125,000 held
by Mr. Kahan's wife. Includes options to purchase 121,017 shares
exercisable at $5.13 per share.
(4) Includes options to purchase 140,000 shares exercisable at $5.13 per
share.
(5) Includes 3,898 shares of Common Stock held by Mr. Leonard in a Joint
Tenancy with a Right of Survivorship ("JTWROS") with his sister Corinne
Leonard, 5,848 shares of Common Stock held by Mr. Leonard in a JTWROS
with his daughter Jennifer Gottlieb and 5,848 shares of Common Stock
held by Mr. Leonard in a JTWROS with his daughter Shari Leonard and
options to purchase 19,492 shares exercisable at $5.13 per shares.
(6) Includes options to purchase 58,476 shares exercisable at $5.13 per
share.
(7) Includes 3,898 shares of Common Stock held by Mr. Heimberg's wife,
Denise Heimberg and options to purchase 77,967 shares exercisable at
$5.13 per share.
(8) See notes 3 - 7 above.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, all
59
<PAGE>
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners have been complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Leonard & Danzinger, an accounting firm, of which Malcolm Leonard, a
Director of the Company is a principal provided financial services to the
Company. In connection for such services, Mr. Leonard's firm received $12,000
during fiscal 1996.
Robert Edelheit, a Director of the Company served as the agent in
connection with the Company's placement of certain of its employee insurance
programs. The transaction was an arms length transaction and the policies
entered into by the Company were no less favorable than could be obtained from
other third parties. Mr. Edelheit received an agent's commission from the
insuring company in connection with such policies. The Company paid no
consideration to Mr. Edelheit for his services.
See "Description of Business" - Mail Service Pharmacy Benefits, for
discussion of a consulting agreement with a former officer and a director of the
Company.
CONFLICTS OF INTEREST
Mr. Kahan, the President, Chief Executive Officer, Chairman of the
Board, and a principal shareholder and Mr. Gardner, Vice President and member of
the Board of Directors, each serve on the Board of Directors of the Subsidiary.
In addition, the Company owns 93% of the Subsidiary. While the Company has
sought to establish the Exchange Value for the Minority Interests in the
Subsidiary in a fair and equitable manner, Messrs. Kahan and Gardner have a
conflict of interest in determining Exchange Value as a result of their
ownership interest in the Company and management of the Subsidiary. Due to such
apparent conflicts of interest, Messrs. Kahan and Gardner have informed the
Company that they will not, in their capacity as directors of the Subsidiary,
make any recommendation regarding whether or not the proposed Exchange Offer
should be accepted by Minority Holders. Accordingly, since Messrs. Kahan and
Gardner constitute the entire governing body in the Subsidiary, the governing
body of the Subsidiary is not making any recommendation regarding whether or not
the proposed Exchange Offer should be accepted by Minority Holders. See
"Exchange Offer - Conflicts of Interest; Position of Each Subsidiary's Board of
Directors with Respect to the Exchange Offer." Messrs. Kahan and Gardner
participated in the Company's determination of the Exchange Value for each
Minority Interest. Neither the Company nor the Subsidiary has retained an
independent fairness opinion or advisor for the Minority Holders, and no
independent evaluation, report or fairness opinion has been requested by the
Company or the Subsidiary. The determination of the Exchange Value for each
Minority Interest is subjective. Also, all members of the Company's Board of
Directors have a conflict of interest in determining the Exchange Value for the
Minority Interests arising from their ownership or control of the Company's
Common Stock and/or options to acquire the same.
60
<PAGE>
DESCRIPTION OF COMPANY SECURITIES
The capital stock of the Company consists of (i) 50,000,000 shares of
common stock, $.0001 par value and (ii) 1,000,000 shares of preferred stock
$.0001 par value per share ("Preferred Stock"). After the closing of the
Exchange Offer, and assuming all of the Minority Interests are exchanged,
14,619,404 shares of Company Common Stock will be outstanding. There are no
Preferred Shares outstanding.
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock,
par value $.0001, of which 13,957,063 Shares are issued and outstanding as of
the date of this Prospectus, without giving effect to (i) 900,000 shares of
Common Stock reserved for issuance under the Company's 1996 Stock Option Plan,
or (ii) options exercisable at prices ranging from $7.00 per share to $10.00 per
share through April 1999 to purchase up to 175,000 shares of Company Common
Stock. The outstanding shares of Common Stock are fully paid and non-assessable.
The holders of Common Stock are entitled to one vote per share for the
election of directors and with respect to all other matters submitted to a vote
of shareholders. Shares of Common Stock do not have cumulative voting rights,
which means that the holders of more than 50% of such shares voting for the
election of directors can elect 100% of the directors if they choose to do so
and, in such event, the holders of the remaining shares so voting will not be
able to elect any directors.
Upon any liquidation, dissolution or winding-up of the Company, the
assets of the Company, after the payment of the Company's debts and liabilities
and any liquidation preferences of, and unpaid dividends on, any class of
"Preferred Stock" then outstanding, will be distributed pro-rata to the holders
of the Common Stock. See "Description of Securities." The holders of the Common
Stock do not have preemptive or conversion rights to subscribe for any
securities of the Company and have no right to require the Company to redeem or
purchase their shares. The holders of Common Stock are entitled to share equally
in dividends, if, as, and when declared by the Board of Directors of the
Company, out of funds legally available therefor, subject to the priorities
accorded any class of Preferred Stock which may be issued. A consolidation or
merger of the Company, or a sale, transfer or lease of all or substantially all
of the assets of the Company, which does not involve distribution by the Company
of cash or other property to the holders of Common Stock, will not be deemed to
be a liquidation, dissolution or winding up of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent or Registrar for the Common Stock is Continental
Stock Transfer.
61
<PAGE>
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
par value $.0001 per share. No Preferred Stock has been issued and the Company
does not presently contemplate the issuance of such shares. The Board of
Directors is empowered by the Company's Articles of Incorporation to designate
and issue from time to time one or more classes or series of Preferred Stock
without any action of the shareholders. The board of Directors may authorize
issuance in one or more classes or series and may fix and determine the relative
rights, preferences and limitations of each class or series so authorized. Such
action could adversely affect the voting power of the holders of the Company
Common Stock or could have the effect of discouraging or making difficult any
attempt by a period or group to obtain control of the Company.
LEGAL MATTERS
Certain legal matters regarding the issuance of the securities offered
hereby will be passed upon for the Company by Atlas, Pearlman, Trop & Borkson,
P.A., Fort Lauderdale, Florida.
EXPERTS
The supplemental consolidated financial statements of the Company as of
and for each of the two years in the period ended December 31, 1996, the
consolidated financial statements of the Company as of and for each of the two
years in the period ended December 31, 1996, the financial statements of Medical
Services Consortium, Inc. as of and for each of the two years in the period
ended December 31, 1996, the financial statements of Hytree Pharmacy, Inc. as of
March 31, 1996 and December 31, 1996 and for the year ended March 31, 1996 and
for the nine months ended December 31, 1996 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
certified public accountants, as set forth in their reports thereon appearing
elsewhere herein and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
62
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL INFORMATION
PAGE
----
<S> <C>
INTRODUCTION TO FINANCIAL INFORMATION...........................................................F-3
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
COMPSCRIPT, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants...............................................F-4
Supplemental Consolidated Balance Sheet - December 31, 1996......................................F-5
Supplemental Consolidated Statements of Operations -
Years ended December 31, 1995 (As Restated) and 1996.............................................F-6
Supplemental Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1995 and 1996...........................................................F-7
Supplemental Consolidated Statements of Cash Flows -
Years ended December 31, 1995 (As Restated) and 1996.............................................F-8
Notes to Supplemental Consolidated Financial Statements -
December 31, 1996................................................................................F-10
CONSOLIDATED FINANCIAL STATEMENTS
COMPSCRIPT, INC. AND SUBSIDIARIES
Consolidated Financial Statements for the Fiscal Years Ended
December 31, 1995 and 1996:
Report of Independent Certified Public Accountants...............................................F-32
Consolidated Balance Sheet - December 31, 1996...................................................F-33
Consolidated Statements of Operations - Years ended
December 31, 1995 (As Restated) and 1996.........................................................F-34
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1995 and 1996...........................................................F-35
Consolidated Statements of Cash Flows - Years ended
December 31, 1995 (As Restated) and 1996.........................................................F-36
Notes to Consolidated Financial Statements - December 31, 1996...................................F-38
F-1
<PAGE>
PAGE
----
Unaudited Consolidated Condensed Financial Statements for the
Three Months Ended March 31, 1997 and 1996:
Consolidated Condensed Balance Sheet - March 31, 1997............................................F-57
Consolidated Condensed Statements of Operations - Three Months Ended
March 31, 1996 and 1997..........................................................................F-58
Consolidated Condensed Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1997..........................................................................F-59
Notes to Consolidated Condensed Financial Statements - March 31, 1997............................F-60
FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
MEDICAL SERVICES CONSORTIUM, INC.
Report of Independent Certified Public Accountants...............................................F-65
Balance Sheet - December 31, 1996................................................................F-66
Statements of Operations - Years ended December 31, 1996 and 1995................................F-67
Statements of Shareholders' Deficit - Years ended
December 31, 1996 and 1995.......................................................................F-68
Statements of Cash Flows - Years ended December 31, 1996 and 1995................................F-69
Notes to Financial Statements - December 31, 1996................................................F-70
HYTREE PHARMACY, INC.
Report of Independent Certified Public Accountants...............................................F-77
Balance Sheets - March 31, 1996 and December 31, 1996............................................F-78
Statements of Income and Retained Earnings - Year ended
March 31, 1996 and Period from April 1, 1996 to December 31, 1996................................F-79
Statements of Cash Flows - Year ended March 31, 1996 and
Period from April 1, 1996 to December 31, 1996...................................................F-80
Notes to Financial Statements - December 31, 1996................................................F-81
</TABLE>
F-2
<PAGE>
INTRODUCTION TO FINANCIAL INFORMATION
The following financial information is included in this Prospectus:
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The Supplemental Consolidated Financial Statements present the financial
position, results of operations and cash flows of CompScript, Inc. (the
Company) as of and for each of the two years in the period ended December 31,
1996, after giving retroactive effect in all periods presented to the
acquisitions of Medical Services Consortium, Inc., Campo Medical Pharmacy, Inc.,
and Hytree Pharmacy, Inc. (the 1997 Poolings, collectively) on January 10, 1997,
February 28, 1997, and March 26, 1997, respectively, in transactions accounted
for as a pooling-of-interests.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS ENDED DECEMBER 31, 1995 AND
1996
The Consolidated Financial Statements present the financial position, results of
operations and cash flows of the Company as of and for each of the two years in
the period ended December 31, 1996, as previously reflected in the Company's
Annual Report on Form 10-KSB, and do not give retroactive effect to the 1997
Poolings.
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997
The Unaudited Consolidated Condensed Financial Statements present the financial
position, results of operations and cash flows of the Company as of March 31,
1997, and for the three months ended March 31, 1996 and 1997. As the 1997
Poolings were consummated prior to March 31, 1997, these unaudited financial
statements give retroactive effect in the three months ended March 31, 1996 and
1997 to the 1997 Poolings.
F-3
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
CompScript, Inc.
We have audited the accompanying supplemental consolidated balance sheet of
CompScript, Inc. and Subsidiaries (the Company) (formed as a result of the
consolidation of CompScript, Inc.; Medical Services Consortium, Inc.; Campo
Medical Pharmacy, Inc.; and Hytree Pharmacy, Inc.) as of December 31, 1996, and
the related supplemental consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1996. The supplemental consolidated financial statements give retroactive effect
to the mergers of CompScript, Inc. and Medical Services Consortium, Inc.; Campo
Medical Pharmacy, Inc.; and Hytree Pharmacy, Inc. on January 10, 1997, February
28, 1997 and March 26, 1997, respectively, which have been accounted for using
the pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CompScript, Inc. and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, after giving retroactive effect
to the combination of Medical Services Consortium, Inc.; Campo Medical Pharmacy,
Inc.; and Hytree Pharmacy, Inc., as described in the notes to the supplemental
consolidated financial statements, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
West Palm Beach, Florida
June 18, 1997
F-4
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheet
December 31, 1996
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 857,740
Accounts receivable, net of allowance of $634,848 6,369,720
Inventory 2,467,639
Note receivable 1,150,788
Income tax refund receivable 218,512
Deferred tax asset 80,201
Prepaid and other receivables 112,487
------------
Total current assets 11,257,087
Property and equipment, net 2,231,495
Other assets:
Costs in excess of net assets acquired, less accumulated
amortization of $61,359 143,171
Other 854,222
------------
Total other assets 997,393
------------
Total assets $ 14,485,975
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,502,436
Accrued salaries and benefits 762,405
Accrued expenses 761,721
Accrued pharmaceuticals dispensed by third parties 164,935
Distributions payable 53,560
Line of credit 674,693
Current portion of notes payable to shareholders 843,737
Current portion of notes payable 134,581
Current portion of capital lease obligations 166,527
------------
Total current liabilities 7,064,595
Deferred tax liability 35,100
Long-term debt:
Notes payable to shareholders 500,000
Notes payable 1,304,058
Capital lease obligations 74,530
------------
Total long-term debt 1,878,588
------------
Total liabilities 8,978,283
Minority interest 222,628
Shareholders' equity:
Common stock, $.0001 par value--50,000,000 shares authorized,
13,533,132 shares issued and outstanding 1,354
Preferred stock; $.0001 par value--1,000,000 shares authorized;
no shares issued and outstanding --
Additional paid-in capital 9,328,990
Accumulated deficit (4,045,280)
------------
Total shareholders' equity 5,285,064
------------
Total liabilities and shareholders' equity $ 14,485,975
============
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Supplemental Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1996
--------------------------------------
(AS RESTATED)
SEE NOTE 2
<S> <C> <C>
Sales $34,856,690 $42,716,356
Cost of sales 19,959,718 25,690,783
--------------------------------------
Gross profit 14,896,972 17,025,573
Selling, general and administrative expenses 14,317,316 15,953,914
Provision for doubtful accounts 315,467 1,131,941
Merger costs - 934,223
Contract termination settlement 363,959 -
Goodwill impairment charge 3,636,362 -
--------------------------------------
Total operating expenses 18,633,104 18,020,078
--------------------------------------
Operating loss (3,736,132) (994,505)
Other:
Interest and other income 74,598 58,331
Interest expense (312,468) (359,298)
--------------------------------------
Loss before provision for income taxes (3,974,002) (1,295,472)
Income tax provision (benefit) 251,834 (139,716)
--------------------------------------
Net loss $ (4,225,836) $ (1,155,756)
======================================
Net loss per share $ (0.37) $ (0.09)
======================================
Weighted average shares outstanding 11,339,469 12,466,648
======================================
Pro forma data (unaudited):
Historical loss before provision for income taxes $ (3,974,002) $ (1,295,472)
Pro forma tax (benefit) expense 22,000 (97,000)
--------------------------------------
Pro forma net loss $ (3,996,002) $ (1,198,472)
======================================
Pro forma loss per share $ (0.35) $ (0.10)
======================================
</TABLE>
F-6
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Supplemental Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL
----------------------------------- PAID-IN
SHARES AMOUNT CAPITAL
----------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 2,884,128 $5,499,239 $ 483,774
Common shares issued upon inception of SECURx, Inc. 48,097 5 74,995
Net loss - - -
----------------------------------------------------
Balance at January 1, 1996 2,932,225 5,499,244 558,769
Reverse acquisition of Capital Brands, Inc.:
Acquisition of Capital Brands, Inc.'s common shares, net of acquisition
costs of $1,888,807 1,806,750 181 261,012
Issuance of Capital Brands, Inc. Common Stock to CompScript-Boca, Inc.
shareholders 7,394,982 739 5,498,414
Receipt of CompScript-Boca, Inc. Common Stock and recording of minority
interest in CompScript-Boca, Inc. (2,039,840) (5,499,153) (384,941)
Common shares issued to entities acquired through poolings-of-interests to
reflect recapitalization of CompScript-Boca, Inc. as a result of the
reverse acquisition of Capital Brands, Inc. 2,586,465 258 (258)
Transfer of acquired entity's (Delta) accumulated deficit to additional
paid-in capital upon conversion from an S to a C corporation - - (101,687)
Adjustment for Hytree Pharmacy, Inc., pooling-of-interests from year-end
change (see Note 1) - - -
Distributions to shareholders - - -
Exercise of warrants 102,550 10 538,366
Exercise of stock options 625,000 62 624,938
Fair market value of stock options issued to nonemployees - - 1,411,250
Common shares issued to consultants 125,000 13 923,127
Net loss - - -
====================================================
Balance at December 31, 1996 13,533,132 $ 1,354 $9,328,990
====================================================
RETAINED EARNINGS TOTAL
(ACCUMULATED SHAREHOLDERS'
DEFICIT) EQUITY
------------------------------------------
Balance at January 1, 1995 $ 1,118,360 $7,101,373
Common shares issued upon inception of SECURx, Inc. - 75,000
Net loss (4,225,836) (4,225,836)
------------------------------------------
Balance at January 1, 1996 (3,107,476) 2,950,537
Reverse acquisition of Capital Brands, Inc.:
Acquisition of Capital Brands, Inc.'s common shares, net of acquisition
costs of $1,888,807 - 261,193
Issuance of Capital Brands, Inc. Common Stock to CompScript-Boca, Inc.
shareholders - 5,499,153
Receipt of CompScript-Boca, Inc. Common Stock and recording of minority
interest in CompScript-Boca, Inc. 162,313 (5,721,781)
Common shares issued to entities acquired through poolings-of-interests to
reflect recapitalization of CompScript-Boca, Inc. as a result of the
reverse acquisition of Capital Brands, Inc. - -
Transfer of acquired entity's (Delta) accumulated deficit to additional
paid-in capital upon conversion from an S to a C corporation 101,687 -
Adjustment for Hytree Pharmacy, Inc., pooling-of-interests from year-end
change (see Note 1) 39,512 39,512
Distributions to shareholders (85,560) (85,560)
Exercise of warrants - 538,376
Exercise of stock options - 625,000
Fair market value of stock options issued to nonemployees - 1,411,250
Common shares issued to consultants - 923,140
Net loss (1,155,756) (1,155,756)
==========================================
Balance at December 31, 1996 $(4,045,280) $5,285,064
==========================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1996
------------------------------------
(AS RESTATED)
SEE NOTE 2
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,225,836) $(1,155,756)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization of leasehold improvements 492,453 515,460
Contract termination settlement 363,959 -
Adjustment for Hytree Pharmacy, Inc. pooling-of-interests from year-end
change - 39,512
Gain on sale of property and equipment (2,270) -
Loss on disposition of asset 38,639 -
Noncash merger costs - 739,492
Stock compensation expense 90,000 -
Deferred taxes 79,800 (22,901)
Amortization 219,037 43,815
Goodwill impairment charge 3,636,362 -
Provision for doubtful accounts 315,467 842,779
Changes in operating assets and liabilities:
Accounts receivable (1,417,700) (1,961,725)
Inventory (558,168) (616,371)
Prepaid and other receivables (86,109) 80,830
Other assets (8,543) (10,878)
Income tax refund receivable (387) (440,903)
Accounts payable and accrued expenses 1,396,043 866,013
------------------------------------
Net cash provided by (used in) operating activities 332,747 (1,080,633)
INVESTING ACTIVITIES
Purchase of property and equipment (365,100) (943,422)
Proceeds from sale of equipment 15,544 71,216
Payments received on notes receivable - 21,225
Loans to shareholders (18,239) -
Payments received on loans to shareholders - 12,982
Acquisitions, net of cash acquired (115,000) 403,808
------------------------------------
Net cash used in investing activities (482,795) (434,191)
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1995 1996
------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Exercise of options and warrants $ - $ 1,163,376
Proceeds from sale of common stock 75,000 -
Proceeds from lines of credit 129,717 800,000
Repayment of lines of credit (148,895) (330,054)
Proceeds from notes payable to shareholder 675,041 450,414
Repayments of notes payable to shareholder (298,214) (355,801)
Proceeds from notes payable 3,729,103 2,647,113
Repayment of notes and leases payable (4,039,307) (2,520,332)
Distribution to shareholders - (32,000)
Payment of deferred acquisition costs (27,500) -
------------------------------------
Net cash provided by financing activities 94,945 1,822,716
------------------------------------
Net (decrease) increase in cash and cash equivalents (55,103) 307,892
Cash and cash equivalents at beginning of year 604,951 549,848
------------------------------------
Cash and cash equivalents at end of year $ 549,848 $ 857,740
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 368,264 $ 141,349
====================================
Cash paid for interest $ 269,282 $ 298,329
====================================
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Stock options issued in exchange for prepaid consulting fees $ - $ 302,285
====================================
Conversion of accounts receivable to a note receivable $ - $ 239,441
====================================
Distribution payable $ - $ 53,560
====================================
Fixed assets acquired pursuant to capital lease obligations and notes
payable $ 170,694 $ 63,916
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
December 31, 1996
1. THE COMPANY
CompScript, Inc. and Subsidiaries (CompScript or the Company), f/k/a Capital
Brands, Inc., is a comprehensive provider of pharmacy management services
including institutional pharmacy, infusion therapy, mail order and consultant
pharmacist services as well as pharmacy benefit claim administration to managed
care networks, long-term and subacute care facilities, home health patients and
recipients of managed care. The Company is the successor to CompScript-Boca,
Inc. (Boca), f/k/a CompScript, Inc. which was f/k/a Aldencare, Inc., which was
incorporated under the laws of the State of Florida on October 3, 1991.
On April 26, 1996, shareholders who previously owned approximately 93% of Boca
exchanged their shares of Boca's Common Stock for 7,394,982 common shares
(representing an 80% interest) of Capital Brands, Inc. (Capital), a
publicly-held company involved in the development of consumer-based businesses
in the Republic of Poland (the Acquisition). This exchange was structured as a
tax-free reorganization. The Acquisition was accounted for as a reverse purchase
of Capital by Boca pursuant to which Boca was recapitalized to include the
assets and liabilities of Capital revalued to reflect the market value of
Capital's net tangible assets at the date of the Acquisition, consisting of cash
and marketable equity securities. The Company incurred acquisition costs of
approximately $1,888,807, all of which was charged to additional paid-in
capital. As Capital had no operations as of the Acquisition date, no pro forma
financial information is presented. On July 5, 1996, Capital changed its name to
CompScript, Inc. The remaining 7% of Boca is accounted for as a minority
interest in a consolidated subsidiary on the Company's December 31, 1996
supplemental consolidated balance sheet.
On May 31, 1996, in a transaction accounted for as a pooling-of-interests, the
Company acquired Delta Pharmacy Services, Inc. (Delta). As a result, the
accompanying supplemental consolidated financial statements include the accounts
and results of operations of Delta for all periods presented. In connection with
the transaction, the Company exchanged 666,350 shares of the Company's Common
Stock for all of the outstanding common stock of Delta. Delta is in the business
of supplying prescription pharmaceuticals, consulting services and enteral and
parental therapies to long-term and alternate care providers in Alabama and
Northern Florida.
On August 19, 1996, in a transaction accounted for as a pooling-of-interests,
the Company acquired SECURx, Inc. (SECURx). As a result, the accompanying
supplemental consolidated financial statements include the accounts and results
of operations of SECURx for all periods presented. In connection with the
transaction, the Company exchanged 187,500 shares of the
F-10
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. THE COMPANY (CONTINUED)
Company's Common Stock for all of the outstanding common stock of SECURx. SECURx
is in the business of selling and distributing prescription drugs to the general
public through corporate sponsored benefit plans of employers located in the
northeastern United States.
On January 10, 1997, in a transaction accounted for as a pooling-of-interests,
the Company acquired Medical Services Consortium, Inc. (MSC). As a result, the
accompanying supplemental consolidated financial statements include the accounts
and results of operations of MSC for all periods presented. In connection with
the transaction, the Company exchanged 1.4 million shares of the Company's
Common Stock for all of the outstanding common stock of MSC. MSC is in the
business of supplying prescription pharmaceuticals, consulting services and
enteral and parental therapies to long-term and alternate care providers in
South Florida.
On February 28, 1997, in a transaction accounted for as a pooling-of-interests,
the Company acquired Campo Medical Pharmacy, Inc. (Campo). As a result, the
accompanying supplemental consolidated financial statements include the accounts
and results of operations of Campo for all periods presented. In connection with
the transaction, the Company exchanged 375,000 shares of the Company's Common
Stock for all of the outstanding common stock of Campo. Campo is in the business
of supplying prescription pharmaceuticals and consulting services to long-term
and alternate care providers in Louisiana.
On March 26, 1997, in a transaction accounted for as a pooling-of-interests, the
Company acquired Hytree Pharmacy, Inc. (Hytree). As a result, the accompanying
supplemental consolidated financial statements include the accounts and results
of operations of Hytree for all periods presented. In connection with the
transaction, the Company exchanged 850,000 shares of the Company's Common Stock
for all of the outstanding common stock of Hytree. Hytree is in the business of
supplying prescription pharmaceuticals, respiratory and consulting services to
long-term and alternate care providers along with home care and sales and
rentals of durable medical equipment and supplies within the Ohio market.
Hytree's fiscal year end has been changed from March 31 to December 31 to
conform to the Company's fiscal year end. Fiscal 1995 represents the results of
CompScript, Delta, SECURx, MSC, and Campo for the year ended December 31, 1995,
and the results of Hytree for the year ended March 31, 1996. Fiscal 1996
represents the results of CompScript, Delta, SECURx, MSC, Campo, and Hytree for
the year ended December 31, 1996. Based on the difference in fiscal year ends,
results of operations for the three months ended March 31, 1996 for Hytree have
been included in the accompanying supplemental consolidated statements of
operations for both fiscal
F-11
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. THE COMPANY (CONTINUED)
1995 and 1996. For the three months ended March 31, 1996, Hytree recorded total
revenues of $2,602,629 and a net loss of $39,512. Accordingly, the accumulated
deficit and net loss in the accompanying supplemental consolidated statements
of shareholders' equity and cash flows, respectively, have been adjusted in
fiscal 1996 to reflect the net loss of Hytree for the three months ended March
31, 1996.
The following unaudited pro forma summary presents the supplemental consolidated
results of operations as if the pooling-of-interest transactions with Delta,
SECURx, MSC, Campo, and Hytree had occurred on January 1, 1995. The pro forma
financial information does not purport to be indicative of the results of
operations that would have occurred had the transactions taken place at the
beginning of the periods presented or of future results of operations.
<TABLE>
<CAPTION>
COMPSCRIPT DELTA SECURX MSC CAMPO HYTREE CONSOLIDATED
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1995
Total sales $ 10,940,526 $ 2,163,253 $2,467,251 $6,558,177 $2,723,028 $10,004,455 $34,856,690
===================================================================================================
Net (loss) income $ (3,686,619) $ (26,607) $ (135,419) $ (542,494) $ 54,594 $ 110,709 $(4,225,836)
===================================================================================================
YEAR ENDED
DECEMBER 31, 1996
Total sales $ 15,469,263 $ 1,173,945 (1) $3,406,563 (2) $8,577,551 $3,181,263 $10,907,771 $42,716,356
===================================================================================================
Net (loss) income $ (1,937,123) $ 165,479 (1) $ (226,698)(2) $ 477,874 $ 131,876 $ 232,836 $(1,155,756)
===================================================================================================
</TABLE>
(1) Represents results of operations for Delta from January 1, 1996 to the
date of its acquisition.
(2) Represents results of operations for SECURx from January 1, 1996 to the
date of its acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective June 29, 1996, the Company elected to change its year end from
September 30 to December 31. The Company's historical supplemental consolidated
financial statements have been restated to conform with this change in year end.
F-12
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF CONSOLIDATION
The accompanying supplemental consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and Boca, of which the
Company owns approximately 92%. All significant intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less, when acquired, to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company's customers are primarily long-term and alternate care providers in
Florida, Ohio, Louisiana and Alabama and corporate sponsored benefit plans of
employers in the northeastern United States. The Company directly bills its
customers or third-party payers, which are primarily Medicaid and private
insurers. Credit is extended based on an evaluation of the customer's financial
condition, and collateral is not required. Credit losses are provided for in the
supplemental consolidated financial statements and consistently have been within
management's expectations.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line and declining balance methods over the estimated useful lives of
the related assets. Furniture and equipment and vehicles are depreciated over a
five to seven year period. Leasehold improvements and assets under capital lease
are amortized over the useful lives of the underlying assets or the term of the
lease, whichever is shorter. Expenditures for maintenance and repairs are
charged to expense as incurred.
F-13
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COSTS IN EXCESS OF NET ASSETS ACQUIRED
In July 1995, SECURx recorded approximately $205,000 of costs in excess of net
assets acquired in connection with the acquisition of substantially all of the
assets and liabilities of a predecessor company of the same name. Costs in
excess of net assets acquired are amortized on a straight-line basis over five
years.
The Company periodically evaluates the recovery of the carrying amount of costs
in excess of net assets acquired by determining if any impairment indicators are
present. These indicators include duplication of resources resulting from
acquisitions, income derived from businesses acquired, the estimated
undiscounted cash flows of the entity over the remaining amortization period and
other factors.
REVENUE RECOGNITION
Revenue and the related cost of sales are recognized when services are provided
or products are delivered. For some pharmaceuticals that are located at the
customers' facilities, revenues are recognized when the product is dispensed to
the patient. Revenues are recorded net of adjustments and allowances resulting
from the difference between established rates for the products and services and
amounts reimbursable by government-sponsored health care programs (primarily
Medicaid) and private insurance carriers.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Financial Accounting Standards Board (FASB)
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. No compensation expense is typically recognized under APB Opinion
No. 25, as the exercise price of the Company's employee stock options generally
equals or exceeds the market price of the underlying stock on the date of grant.
F-14
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for equity awards issued to nonemployee consultants,
attorneys and other vendors at fair market value based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable on the date of grant. The fair value of
equity instruments issued to a nonemployee is measured as of the date that the
parties come to a mutual understanding of the terms of the arrangement and agree
to a binding contract.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense totaled
approximately $57,372 and $71,114 in 1995 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred income taxes at the end
of each period are determined based on the differences between the financial
statement and tax basis of assets and liabilities using the enacted tax rates
for the years in which the taxes are expected to be paid or recovered.
The Company files a consolidated income tax return with its majority-owned
subsidiaries which includes the taxable income or loss of each subsidiary from
its acquisition date through the end of the Company's tax year. Each entity is
required to file a separate income tax return prior to becoming a member of the
Company's consolidated income tax return. Prior to the acquisition of Delta and
MSC by the Company on May 31, 1996 and January 10, 1997, respectively, Delta and
MSC were taxed under the provisions of Subchapter S of the Internal Revenue Code
(IRC). Concurrent with the acquisition of Delta and MSC, these entities were
converted to C corporation status with respect to federal income taxes and, for
those states that recognize such tax election, state income taxes. As a result,
the accompanying supplemental consolidated financial statements include no
provision (benefit) for income taxes related to Delta's or MSC's income (loss)
prior to its acquisition by the Company. Accordingly, the supplemental
consolidated statements of operations for the years ended December 31, 1995 and
1996 include pro forma adjustments (unaudited) for income tax expense which
would have been recorded had Delta and MSC been taxable corporations and had the
Company been able to file a consolidated income tax return with the entities
acquired during 1996 and 1997 based on the tax laws in effect during the years
presented.
F-15
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of common
shares outstanding as the effect of the Company's outstanding Common Stock
equivalents was antidilutive for all periods presented. Weighted average common
shares outstanding reflect the exchange ratio of 3.898373 shares of the
Company's Common Stock for each share of Boca's Common Stock outstanding prior
to the Acquisition for all periods presented.
Pro forma net loss per share (unaudited) reflects the pro forma income tax
adjustments described above. There is no difference between historical and pro
forma weighted average shares.
LONG-LIVED ASSETS
FASB No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. The Company adopted FASB No.
121 during 1996 and, based on current circumstances, does not believe that any
impairment indicators are present relative to its long-lived assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-16
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Furniture and equipment $3,189,234
Vehicles 146,052
Leasehold improvements 379,289
Assets under capital leases 497,230
------------------
4,211,805
Less accumulated depreciation (1,980,310)
------------------
$2,231,495
==================
4. GOODWILL IMPAIRMENT
At December 31, 1995, the Company recognized a goodwill impairment charge of
approximately $3.6 million, with no associated tax benefit, related to
Aldencare, Inc.'s 1994 acquisition of substantially all of the assets of
CompScript, Inc., which became the Company's Ohio Division. The Ohio Division
was purchased to be the Company's entry into the workers compensation, pharmacy
benefits management (PBM) line of business. During the year ended December 31,
1995, the contracts attributed to the Ohio Division generated minimal revenue
due in part to the nonexclusive nature of the contracts. In addition, the
inability of the Ohio Division to convert existing relationships with
prospective clients into new PBM contracts or to secure new prospective clients
contributed to significant operating losses and negative cash flows relative to
the Ohio Division. Based on the poor financial results and the failure to obtain
new contracts, the Company believe that the PBM business acquired with the Ohio
Division would not generate positive cash flows in the foreseeable future and
the strategy to implement this line of business within the Ohio Division, would
no longer be a priority of the Company. Therefore, the Company wrote off the
unamortized carrying value of the goodwill of approximately $3.6 million on
December 31, 1995.
5. LINE OF CREDIT
In May 1995, the Company entered into a line-of-credit agreement which permits
borrowings up to $750,000. The line of credit is due upon demand and is secured
by substantially all of the assets of the Company. Interest is payable monthly
at prime plus .25% (8.50% at December 31, 1996) with a .25% fee on the unused
portion of the line. Approximately $675,000 is outstanding at December 31, 1996.
F-17
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
5. LINE OF CREDIT (CONTINUED)
On January 3, 1997, the Company amended its financing agreement with its primary
lender to increase its revolving line-of-credit agreement to allow for
borrowings up to $5 million from the $750,000 previously in effect (the New
Credit Facility). The primary reason for the increase was to provide additional
working capital for operations and fund the Company's acquisition activity.
Through June 18, 1997, the Company borrowed approximately $4.9 million under the
New Credit Facility.
The New Credit Facility is collateralized by all of the Company's accounts
receivable, inventory, fixed assets and other assets, and consists of a term
loan due on April 30, 1998. Interest, which is paid monthly on the credit
facility, accrues at the lessor of the prime rate or the three-month London
Interbank Offered Rate, plus 250 basis points. The New Credit Facility requires
the Company to maintain at all times, certain net worth, debt coverage and
working capital levels, and restricts acquisitions and dispositions of property
and limits additional borrowings from other lendors.
In connection with the New Credit Facility, on January 3, 1997, the Company also
entered into a $500,000 promissory note with the same lendor, the proceeds of
which were used to fund the Company's office and mail order space expansion,
which was completed in the first quarter of 1997. The principle sum of the
promissory note shall be paid in monthly installments of approximately $8,333
plus interest at 9.0% for 60 months beginning on February 1, 1997. Collateral
and debt covenants are the same as those of the New Credit Facility.
On March 19, 1997, the Company entered into an additional $750,000 promissory
note with its existing lender, primarily for working capital purposes. Such loan
matures on July 26, 1997 and bears interest at prime. This loan is cross
collateralized with all other borrowings previously discussed. In addition to
the collateral previously discussed, this note is collateralized by the
$1,125,000 note receivable recorded on the Company's supplemental consolidated
balance sheet at December 31, 1996 and the collateral underlying the note
receivable consisting of marketable equity securities.
F-18
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
$300,000 revolving credit arrangement with a bank, interest at prime plus 2.00%
(10.25% at December 31, 1996), collateralized by substantially all of the
assets of MSC. Monthly payments of $3,572 plus accrued interest are payable
monthly, with a final balloon payment of $89,252, plus accrued interest due
on September 1, 2000. $ 239,276
$300,000 unsecured promissory note, interest at prime plus 1.00% (9.25% at
December 31, 1996), principal and interest payable monthly through August 1,
1998. 209,358
Note payable to a related individual in monthly installments of $1,000 through
May 1997. 4,515
Note payable under a $1,000,000 line-of-credit arrangement, including interest
at 1/2% above the bank's prime rate (8.25% at December 31, 1996),
collateralized by substantially all assets of Hytree and guaranteed by the
former shareholders of Hytree. 959,799
Various notes payable to financing companies bearing interest at rates ranging from 6% to
10% and expiring at various dates through 1999. Collateralized by vehicles with an
aggregate carrying value of approximately $58,500. 25,691
------------------
1,438,639
Less current portion (134,581)
------------------
Long-term portion $1,304,058
==================
</TABLE>
In July 1995, MSC entered into the $300,000 unsecured note payable in connection
with a settlement agreed to upon the early termination of a prior contract with
business consultants to provide sales and marketing services to the Company. In
connection with the settlement, approximately $364,000, including the
forgiveness of a $64,000 account receivable from an affiliate of the business
consultants, has been recorded as contract termination settlement expense in the
1995 supplemental consolidated statement of operations.
F-19
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
6. NOTES PAYABLE (CONTINUED)
At December 31, 1996, annual payments on notes payable are as follows:
1997 $ 134,581
1998 1,147,330
1999 46,044
2000 110,684
------------------
$1,438,639
==================
7. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consists of the following:
<TABLE>
<CAPTION>
<S> <C>
$300,000 promissory note payable to a shareholder, interest at prime plus 6.00%
(14.25% at December 31, 1996), collateralized by the accounts receivable of
MSC. Interest is due monthly through January 1, 2001 and principal is due on
January 1, 2001. $ 300,000
$200,000 unsecured promissory note payable to a shareholder, interest at a fixed rate of
8%. Interest is due monthly through January 1, 2001 and principal is due on January 1,
2001. 200,000
$400,414 unsecured promissory notes payable to certain shareholders of the Company,
interest at a fixed rate of 7%. Interest is due monthly through December 31, 1997 and
principal is due on December 31, 1997. 400,414
$215,723 unsecured demand borrowings bearing interest at 12% and payable to shareholders of
the Company. 215,723
$350,000 demand promissory notes payable to a shareholder, interest at a fixed rate of 10%,
collateralized by the accounts receivable, inventories and equipment of
SECURx, the aggregate carrying value of which exceeds the outstanding
aggregate balance of the notes payable to shareholder at December 31, 1996. 227,600
------------------
1,343,737
Less current portion (843,737)
------------------
Long-term portion $ 500,000
==================
</TABLE>
F-20
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
7. NOTES PAYABLE TO SHAREHOLDERS (CONTINUED)
At December 31, 1996, annual payments on notes payable to shareholders
are as follows:
1997 $ 843,737
2001 500,000
------------------
$1,343,737
==================
8. CAPITAL LEASES
The Company leases certain equipment under long-term capital leases. Future
obligations are as follows:
Year ending December 31,
1997 $166,527
1998 79,021
1999 26,416
------------------
271,964
Less interest (30,907)
------------------
$241,057
==================
9. MINORITY INTEREST
On October 3, 1996, Boca issued an additional 27,000 shares of its Common Stock
to a shareholder of the Company, increasing the minority interest's aggregate
ownership interest in Boca to approximately 8%.
The Company intends to exchange the shares of Boca's Common Stock held by the
minority interest for the Company's Common Stock during 1997 at the same
exchange ratio used in the Acquisition. The minority interest's share of Boca's
1996 results of operations is not significant.
F-21
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY
EQUITY INSTRUMENTS ISSUED TO NONEMPLOYEES
During 1996, the Company granted 625,000 stock options at an exercise price of
$1 per share to certain consultants, 100,000 stock options at $6 per share to an
investment banking firm and 75,000 stock options at an exercise price of $6 and
9,000 shares of Common Stock to a law firm as consideration for services
rendered in connection with the Acquisition. The stock options were fully vested
on the date of grant. Included in the costs of the Acquisition, all of which
were charged against additional paid-in capital attributed to the Acquisition,
is an aggregate $1,292,000 related to the issuance of these equity instruments.
The consultants exercised the 625,000 stock options prior to December 31, 1996.
Subsequent to December 31, 1996, the 100,000 stock options and the 75,000 stock
options referred to above were exercised.
During 1996, the Company issued 90,000 shares of Common Stock to certain
consultants and 11,000 shares of Common Stock to a law firm as consideration for
services rendered in connection with the Company's acquisitions of Delta, SECURx
and MSC. The Company recorded an aggregate $740,000 related to the issuance of
these common shares, all of which is included in merger costs on the
supplemental consolidated statement of operations.
On May 1, 1996, the Company granted 200,000 stock options (100,000 options at an
exercise price of $8 and 100,000 options an exercise price of $10) to an
investment banking firm as consideration for a two-year consulting agreement
commencing on December 31, 1996. The stock options were fully vested on the date
of grant. In connection with the stock options granted, the Company recorded a
prepaid consulting fee of $144,000 as of December 31, 1996. This amount is
included in other assets on the December 31, 1996 supplemental consolidated
balance sheet. In May 1997, the investment banking firm agreed to perform
additional consulting services and in exchange the Company reduced the exercise
price for 100,000 options from $8 to $4. As a result of this reduction in
exercise price, the Company will recognize an additional $262,000 over the term
of the consulting agreement. Subsequently, in May 1997, all of the $4 stock
options referred to above were exercised.
On July 2, 1996, the Company granted 75,000 stock options exercisable at $7 per
share to a public relations firm in connection with a two-year contract. The
stock options were fully vested on the date of grant. In addition, the Company
agreed to issue an additional 75,000 options on July 2, 1997 and pay $30,000 per
year in connection with this contract. In connection with the stock options
granted, the Company recorded a prepaid expense of $20,000 at December 31, 1996.
The stock options expire five years from their respective dates of grant.
F-22
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
On December 27, 1996, the Company issued 15,000 of its common shares to certain
consultants as consideration for consulting services rendered in connection with
the Company obtaining a five-year agreement to provide mail order pharmacy
services to an insurer. The Company recorded a prepaid expense of approximately
$138,000 for these fees, which is included in other assets on the December 31,
1996 supplemental consolidated balance sheet, and intends to amortize these
costs over the life of the agreement.
COMMON STOCK WARRANTS
During 1996, the Company issued 102,550 common shares in connection with the
exercise of the Company's Class A and Class B warrants at a weighted average
exercise price of $5.25. On December 31, 1996, the remaining 96,950 outstanding
warrants expired unexercised.
STOCK OPTION PLANS
In October 1994, Boca adopted a stock option plan (the Boca Plan). The Boca Plan
provides for the granting of both incentive stock options and nonqualified stock
options for the purchase of up to 200,000 shares of Boca's Common Stock. Under
the Boca Plan, incentive stock options were granted on October 1, 1994 to
purchase 19,100 shares of Boca's Common Stock for a period of eight years from
October 1996 at an exercise price of $10 per share (the Boca Options). All of
the outstanding Boca Options were rescinded during 1996. The Company does not
intend to grant any additional stock options under the Boca Plan.
In May 1996, the Company adopted a stock option plan (the 1996 Plan). The 1996
Plan provides for the granting of both incentive stock options and nonqualified
stock options for the purchase of up to 900,000 shares of the Company's Common
Stock. The exercise price and vesting schedule of each stock option is
determined by the Compensation Committee of the Company. Stock options granted
under the 1996 Plan expire after ten years from the date of grant.
In October 1995, the FASB issued FASB No. 123, which provides an alternative to
APB Opinion No. 25. FASB No. 123 allows for a fair value based method of
accounting for stock options. However, for companies that continue to account
for stock-based compensation arrangements under APB Opinion No. 25, such as the
Company, FASB No. 123 requires disclosure of the pro forma effect on net loss
and loss per share of its fair value based accounting
F-23
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
for those arrangements. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1996: risk free interest rate of 6.49%,
dividend yield of 0%, volatility factor of the expected market price of the
Company's Common Stock of .47 and a weighted-average expected life of the
options of 4.09 years. As of December 31, 1996, the weighted average remaining
contractual life of all options outstanding was 9.7 years.
The following unaudited pro forma summary presents the Company's net income and
earnings per share as if the estimated fair value of the options were amortized
to expense over the options' vesting period. FASB No. 123 does not apply to
stock option grants prior to the year ended December 31, 1995 and no stock
options were granted in fiscal 1995, therefore, FASB No. 123 has no pro forma
effect on the 1995 net loss and net loss per share as reported in the
supplemental consolidated statement of operations.
YEAR ENDED
DECEMBER 31, 1996
---------------------
Pro forma net loss $(2,876,217)
---------------------
Pro forma net loss per share $ (0.23)
=====================
The pro forma effect of compensation expense from stock option awards on pro
forma net income reflects the vesting of 1996 option awards in 1996, in
accordance with FASB No. 123. Because pro forma compensation expense associated
with a stock option award is recognized over the vesting period, the initial
impact of applying FASB No. 123 may not be indicative of pro forma compensation
expense in future years, when the effect of multiple awards will be reflected in
pro forma net income.
F-24
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information for the
year ended December 31, 1996 relative to the Company's employee/director and
nonemployee stock options is as follows:
<TABLE>
<CAPTION>
EMPLOYEE/DIRECTOR NONEMPLOYEE
STOCK OPTIONS STOCK OPTIONS
---------------------------------- ----------------------------------
WEIGHTED WEIGHTED
OPTIONS FOR AVERAGE OPTIONS FOR AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 - $ - - $ -
Granted 882,500 5.17 1,075,000 3.72
Exercised - - 625,000 1.00
Forfeited - - - -
----------------- -----------------
Outstanding at December 31, 1996 882,500 5.17 450,000 7.50
================= =================
Exercisable at end of year 800,867 450,000
================= =================
Weighted-average fair value of options
granted during the year $2.23 $1.31
================= =================
</TABLE>
The exercise prices of the employee stock options granted during 1996 were below
the Company's stock prices on the dates of grant.
Options outstanding and exercisable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF OPTION PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------------- ---------------- ----------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Employees $ 5.13--$6.08 882,500 9.7 years $ 5.17 800,867 $ 5.13
================ =================
Nonemployees $ 6.00--$8.00 275,000 2.9 years $ 7.00 275,000 $ 7.00
$ 10.00 100,000 2.3 years $ 10.00 100,000 $ 10.00
$ 6.00 75,000 Unlimited $ 6.00 75,000 $ 6.00
---------------- -----------------
450,000 450,000
================ =================
</TABLE>
F-25
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1996, there are 17,500 options available for grant under the
1996 Plan.
COMMON STOCK
The following shares of Common Stock have been reserved for future issuance as
of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Upon the conversion of the minority interest 662,341
Upon the exercise of stock options outstanding or available
for grant 1,350,000
-----------------
2,012,341
=================
</TABLE>
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock, par
value $.0001. No shares of preferred stock have been issued as of December 31,
1996.
DISTRIBUTIONS TO SHAREHOLDERS
During 1996, the Board of Directors of MSC declared a $85,560 distribution to
the shareholders of MSC, of which $32,000 was paid prior to December 31, 1996.
The remaining balance of $53,560 is shown as distributions payable on the
supplemental consolidated balance sheet.
STOCK BONUS ARRANGEMENT
Effective February 1, 1996, Hytree entered into a stock bonus agreement with an
employee granting the employee up to a 2% nonvoting interest in Hytree.
Compensation expense of $90,000 was recorded in fiscal 1995 in connection with
the stock bonus agreement.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the supplemental
consolidated balance sheet for cash and cash equivalents approximates its fair
value.
F-26
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
NOTE RECEIVABLE: The fair value of the Company's note receivable is estimated
using discounted cash flow analysis, based on discount rates at which similar
notes would be made under current conditions, commensurate with the credit and
interest rate risks involved.
LINE OF CREDIT, NOTES PAYABLE, AND NOTES PAYABLE TO SHAREHOLDERS: The fair
values of the Company's line of credit, notes payable and notes payable to
shareholders are estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying and fair values of the Company's financial instruments at December
31, 1996 approximate their carrying values.
12. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
YEAR ENDED DECEMBER 31
1995 1996
-----------------------------------
Current:
Federal $114,416 $(154,995)
State 20,129 34,044
-----------------------------------
134,545 (120,951)
Deferred 117,289 (18,765)
===================================
Total $251,834 $(139,716)
===================================
F-27
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
DECEMBER 31,
1996
-------------------
Deferred tax liability:
Tax over book depreciation $ 35,100
Deferred tax assets:
Allowance for uncollectible accounts 205,329
Net operating loss carryforwards 46,564
Accrued stock bonus 27,000
Tax credits 25,377
Costs in excess of net assets acquired 15,393
Other 10,300
-------------------
Total deferred tax assets 329,963
Less valuation allowance (249,762)
-------------------
Net deferred tax assets 80,201
-------------------
Net deferred income taxes $ 45,101
===================
FASB No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $249,762 valuation allowance is necessary at December 31,
1996. At December 31, 1996, the Company has available net operating loss
carryforwards of $123,741 which expire in 2010. In addition, the Company had tax
credits of $25,377 that have no expiration date.
F-28
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
12. INCOME TAXES (CONTINUED)
The differences between the provision for income taxes and the amount which
results from applying the federal and state statutory tax rates to income before
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996
-----------------------------------
<S> <C> <C>
Income tax benefit at statutory rate $(1,351,161) $(440,660)
State income tax benefit, net (159,284) (36,621)
Merger costs, not deductible for tax purposes - 352,650
Taxes on Delta's and MSC's losses incurred (income earned)
prior to revocation of Subchapter S election 224,297 (274,335)
Goodwill amortization not deductible for tax purposes 74,300 -
Goodwill impairment charge not deductible for tax purposes 1,368,363 -
Reduction in net operating loss carryback benefit - 52,105
Change in valuation allowance 77,790 171,973
Other 17,529 35,172
-----------------------------------
$ 251,834 $(139,716)
===================================
</TABLE>
13. LEASE COMMITMENTS
The Company has various operating leases, primarily relating to branch offices
and warehouse facilities. The leases have various renewal options and escalation
clauses and often require the Company to make additional payments for
maintenance costs. Total rent expense for the years ended December 31, 1995 and
1996 amounted to $743,606 and $738,258, respectively.
F-29
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
13. LEASE COMMITMENTS (CONTINUED)
Approximate future minimum annual rentals under noncancelable operating leases
with initial or remaining terms in excess of one year are:
1997 $ 580,314
1998 598,661
1999 544,879
2000 443,331
2001 357,622
Thereafter 165,528
------------------
$2,690,335
==================
14. PROFIT SHARING PLANS
In 1993, the Company established a profit sharing savings plan (the Plan) that
covers substantially all of its employees and that qualifies as a cash or
deferred arrangement under Section 401(k) of the IRC. Under the Plan,
participating employees may defer up to 20% of their pre-tax salary before
reduction, but not more than approximately $9,500 per plan year. The Company may
make matching or other contributions to the Plan. There were no Company
contributions to the Plan for the fiscal years ended December 31, 1995 and 1996.
Effective January 1, 1995, MSC established the Medical Services Consortium, Inc.
401(k) Plan (the MSC Plan), a deferred profit sharing savings plan that covers
all employees of MSC that are at least 21 years old and who have been employed
by MSC at least 6 months. Under the MSC Plan, participating employees may defer
up to 15% of their pre-tax salary before reduction each year. MSC may make
contributions to the MSC Plan at MSC's discretion. Contributions vest over a
six-year period. MSC did not make any contributions to the MSC Plan for the
fiscal years ended December 31, 1995 and 1996.
Effective March 1, 1996, Hytree established the Hytree Pharmacy, Inc. 401(k)
Retirement Plan (the Hytree Plan), a deferred profit sharing savings plan that
covers all employees of Hytree that are at least 18 years old and who have been
employeed by MSC at least 90 days. Under the Hytree Plan, participating
employees may defer up to 15% of their pre-tax salary before reduction each
year. Hytree will match employee contributions up to 6% of each employee's
pre-tax salary before reduction each year. Hytree may make profit-sharing
contributions to the Hytree Plan at Hytree's discretion. Contributions vest over
a six-year period. Hytree's contributions to the Hytree Plan for the fiscal
years ended March 31, 1996 and December 31, 1996 were not significant.
F-30
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
15. SUBSEQUENT EVENT
On January 9, 1997, the Company entered into a five-year agreement with two
shareholders (each of which has less than a 5% beneficial ownership interest in
the Company) of the Company pursuant to which the shareholders will assist the
Company with the maintenance of existing PBM contracts as well as secure new
contracts for the Company. The Company agreed to pay the shareholders $50,000
per month for the first year of the contract, as well as commission ranging from
1/2% to 1% of net revenues generated by new contacts obtained by the
shareholders. The Company may cancel the contract at the end of the first year
if the shareholders have not met certain performance criteria.
In March 1997, the Company recorded an $800,000 charge against the $1,125,000
note receivable included in the supplemental consolidated balance sheet at
December 31, 1996. The Company deemed it appropriate to evaluate the collateral
underlying the note, as the value of the collateral (marketable equity
securities) declined significantly subsequent to December 31, 1996. On May 16,
1997, the note receivable was rescinded by the Company and the collateral of
1,125,000 shares of QPQ Corporation Common Stock reverted back to the Company.
F-31
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
CompScript, Inc.
We have audited the consolidated balance sheet of CompScript, Inc. and
Subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
CompScript, Inc. and Subsidiaries at December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
March 31, 1997
West Palm Beach, Florida
F-32
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
-----------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 440,328
Accounts receivable, net of allowance of $431,646 2,179,749
Inventory 1,091,264
Note receivable 1,125,000
Income taxes receivable 525,623
Prepaid and other receivables 65,353
-----------
Total current assets 5,427,317
Property and equipment, net 1,438,369
Other assets:
Costs in excess of net assets acquired, less accumulated
amortization of $61,359 143,171
Other 602,982
-----------
Total other assets 746,153
-----------
Total assets $7,611,839
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,296,317
Accrued salaries and benefits 188,110
Accrued expenses 598,379
Accrued pharmaceuticals dispensed by third parties 164,935
Line of credit 674,693
Notes payable to shareholder 227,600
Current portion of notes payable 13,466
Current portion of capital lease obligations 36,360
-----------
Total current liabilities 3,199,860
Long-term debt:
Notes payable 12,225
Capital lease obligations 20,356
-----------
Total long-term debt 32,581
-----------
Total liabilities 3,232,441
Minority interest 222,628
Shareholders' equity:
Common stock, $.0001 par value--50,000,000 shares
authorized 10,908,132 shares issued
and outstanding 1,091
Additional paid-in capital 8,855,393
Accumulated deficit (4,699,714)
-----------
Total shareholders' equity 4,156,770
-----------
Total liabilities and shareholders' equity $7,611,839
===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-33
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31
1995 1996
----------------------------------
(AS RESTATED)
SEE NOTE 2
<S> <C> <C>
Sales $15,571,030 $20,049,771
Cost of sales 8,784,308 12,846,113
------------------------------
Gross profit 6,786,722 7,203,658
Selling, general and administrative expenses 6,671,694 7,984,824
Provision for doubtful accounts 153,708 657,656
Merger costs - 875,223
Goodwill impairment charge 3,636,362 -
------------------------------
Total operating expenses 10,461,764 9,517,703
------------------------------
Operating loss (3,675,042) (2,314,045)
Other:
Interest and other income 71,419 29,462
Interest expense (96,115) (113,759)
------------------------------
Loss before provision for income taxes (3,699,738) (2,398,342)
Income tax provision (benefit) 148,907 (400,000)
------------------------------
Net loss $(3,848,645) $(1,998,342)
==============================
Net loss per share $ (0.44) $ (0.20)
==============================
Weighted average shares outstanding 8,714,469 9,841,648
==============================
Pro forma data (unaudited):
Historical loss before provision for income taxes $(3,699,738) $(2,398,342)
Pro forma tax (benefit) expense 96,259 (350,000)
-------------------------------
Pro forma net loss $(3,795,997) $(2,048,344)
===============================
Pro forma loss per share $ (0.44) $ (0.21)
===============================
</TABLE>
F-34
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------------- PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 2,210,770 $5,499,171 $ 9,982 $ 883,273 $6,392,426
Common shares issued upon inception of
SECURx, Inc. 48,097 5 74,995 - 75,000
Net loss - - - (3,848,645) (3,848,645)
-----------------------------------------------------------------
Balance at December 31, 1995 2,258,867 5,499,176 84,977 (2,965,372) 2,618,781
Reverse acquisition of Capital Brands, Inc.:
Acquisition of Capital Brands, Inc.'s
common shares, net of acquisition
costs of $1,888,807 1,806,750 181 261,012 - 261,193
Issuance of Capital Brands, Inc. Common
Stock to CompScript-Boca, Inc.
shareholders 7,394,982 739 5,498,414 - 5,499,153
Receipt of CompScript-Boca, Inc. Common
Stock and recording of minority
interest in CompScript-Boca, Inc. (2,039,840) (5,499,153) (384,941) 162,313 (5,721,781)
Common shares issued to Delta and SECURx
reflect recapitalization of CompScript-Boca,
Inc. as a result of the
reverse acquisition of Capital Brands, Inc. 634,823 63 (63) - -
Transfer of acquired entity's (Delta's) accumulated
deficit to additional paid-in
capital upon conversion from an S to a
C corporation - - (101,687) 101,687 -
Exercise of warrants 102,550 10 538,366 - 538,376
Exercise of stock options 625,000 62 624,938 - 625,000
Fair market value of stock options issued
to nonemployees - - 1,411,250 - 1,411,250
Common shares issued to consultants 125,000 13 923,127 - 923,140
Net loss - - - (1,998,342) (1,998,342)
=================================================================
Balance at December 31, 1996 10,908,132 $ 1,091 $8,855,393 $(4,699,714) $4,156,770
=================================================================
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1995 1996
-----------------------------
(AS RESTATED
SEE NOTE 2)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,848,645) $(1,998,342)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization of leasehold improvements 277,661 309,035
Gain on sale of property and equipment (2,270) -
Amortization 219,037 43,815
Noncash merger costs - 739,492
Goodwill impairment charge 3,636,362 -
Provision for doubtful accounts 153,708 657,656
Changes in operating assets and liabilities:
Accounts receivable (412,441) (670,401)
Inventory (333,574) (318,656)
Income tax refund receivable - (525,623)
Prepaid and other receivables (43,562) 49,295
Other assets (21,901) (20,281)
Accounts payable and accrued expenses 357,573 661,085
Payable to affiliated entities 136,367 (100,940)
-----------------------------
Net cash provided (used) by operating activities 118,315 (1,173,865)
INVESTING ACTIVITIES
Purchase of property and equipment (226,430) (660,386)
Proceeds from sale of equipment - 71,216
Acquisition, net of cash acquired (115,000) 403,808
-----------------------------
Net cash used in investing activities (341,430) (185,362)
FINANCING ACTIVITIES
Exercise of options and warrants - 1,163,376
Proceeds from sale of common stock 75,000 -
Proceeds from lines of credit 129,717 800,000
Repayment of lines of credit (148,895) (330,054)
Proceeds from notes payable to shareholder 228,600 50,000
Repayments of notes payable to shareholder - (103,800)
Proceeds from notes payable 10,207 -
Repayment of notes and leases payable (113,608) (95,732)
Payment of deferred acquisition costs (27,500) -
-----------------------------
Net cash provided by financing activities 153,521 1,483,790
-----------------------------
Net (decrease) increase in cash and cash equivalents (69,594) 124,563
Cash and cash equivalents at beginning of year 385,359 315,765
-----------------------------
Cash and cash equivalents at end of year $ 315,765 $ 440,328
=============================
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31
1995 1996
------------------------------
(AS RESTATED
SEE NOTE 2)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 272,444 $ 115,838
==============================
Cash paid for interest $ 54,499 $ 68,506
==============================
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Stock options issued in exchange for prepaid consulting fees $ - $ 302,285
==============================
Fixed assets acquired pursuant to capital lease obligations and notes payable
$ 54,550 $ 19,671
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-37
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. THE COMPANY
CompScript, Inc. (CompScript or the Company, f/k/a Capital Brands, Inc.) is a
comprehensive provider of pharmacy management services including institutional
pharmacy, infusion therapy, mail order and consultant pharmacist services as
well as pharmacy benefit claim administration to managed care networks,
long-term and subacute care facilities, home health patients and recipients of
managed care. The Company is the successor to CompScript-Boca, Inc. (Boca, f/k/a
CompScript, Inc. which was f/k/a Aldencare, Inc.), which was incorporated under
the laws of the State of Florida on October 3, 1991.
On April 26, 1996, shareholders who previously owned approximately 93% of Boca
exchanged their shares of Boca's Common Stock for 7,394,982 common shares
(representing an 80% interest) of Capital Brands, Inc. (Capital), a
publicly-held company involved in the development of consumer-based businesses
in the Republic of Poland (the Acquisition). This exchange was structured as a
tax-free reorganization. The Acquisition was accounted for as a reverse purchase
of Capital by Boca pursuant to which Boca was recapitalized to include the
assets and liabilities of Capital revalued to reflect the market value of
Capital's net tangible assets at the date of the Acquisition, consisting of cash
and marketable equity securities. The Company incurred acquisition costs of
approximately $1,888,807, all of which was charged to additional paid-in
capital. As Capital had no operations as of the Acquisition date, no pro forma
financial information is presented. On July 5, 1996, Capital changed its name to
CompScript, Inc. The remaining 7% of Boca is accounted for as a minority
interest in a consolidated subsidiary on the Company's December 31, 1996
consolidated balance sheet.
On May 31, 1996, in a transaction accounted for as a pooling-of-interests, the
Company acquired Delta Pharmacy Services, Inc. (Delta). As a result, the
accompanying consolidated financial statements include the accounts and results
of operations of Delta for all periods presented. In connection with the
transaction, the Company exchanged 666,350 shares of the Company's Common Stock
for all of the outstanding common stock of Delta. Delta is in the business of
supplying prescription pharmaceuticals, consulting services and enteral and
parental therapies to long-term and alternate care providers in Alabama and
Northern Florida.
On August 19, 1996, in a transaction accounted for as a pooling-of-interests,
the Company acquired SECURx, Inc. (SECURx). As a result, the accompanying
financial statements include the accounts and results of operations of SECURx
for all periods presented. In connection with the transaction, the Company
exchanged 187,500 shares of the Company's Common Stock for all of the
outstanding common stock of SECURx. SECURx is in the business of selling and
F-38
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY (CONTINUED)
distributing prescription drugs to the general public through corporate
sponsored benefit plans of employers located in the northeastern United States.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the pooling-of-interest transactions with Delta
and SECURx had occurred on January 1, 1995. The pro forma financial information
does not purport to be indicative of the results of operations that would have
occurred had the transactions taken place at the beginning of the periods
presented or of future results of operations.
<TABLE>
<CAPTION>
COMPSCRIPT DELTA SECURX CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Total sales $10,940,526 $2,163,253 $2,467,251 $15,571,030
===========================================================================
Net loss $(3,686,619) $ (26,607) $ (135,419) $(3,848,645)
===========================================================================
YEAR ENDED DECEMBER 31, 1996
Total sales $15,469,263 $1,173,945 (1) $3,406,563 (2) $20,049,771
===========================================================================
Net (loss) income $(1,937,123) $ 165,479 (1) $ (226,698) (2) $(1,998,342)
===========================================================================
</TABLE>
(1) Represents results of operations for Delta from January 1, 1996 to the
date of its acquisition.
(2) Represents results of operations for SECURx from January 1, 1996 to the
date of its acquisition.
On January 10, 1997, in a transaction accounted for as a pooling-of-interests,
the Company acquired Medical Services Consortium, Inc. (MSC). In connection with
the transaction, the Company exchanged 1.4 million shares of the Company's
Common Stock for all of the outstanding common stock of MSC. MSC is in the
business of supplying prescription pharmaceuticals, consulting services and
enteral and parental therapies to long-term and alternate care providers in
South Florida.
On February 28, 1997, in a transaction accounted for as a pooling-of-interests,
the Company acquired Campo Medical Pharmacy, Inc. (Campo). In connection with
the transaction, the Company exchanged 375,000 shares of the Company's Common
Stock for all of the outstanding common stock of Campo. Campo is in the business
of supplying prescription pharmaceuticals and consulting services to long-term
and alternate care providers in Louisiana.
F-39
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. THE COMPANY (CONTINUED)
On March 26, 1997, in a transaction accounted for as a pooling-of-interests, the
Company acquired Hytree Pharmacy, Inc. (Hytree). In connection with the
transaction, the Company exchanged 850,000 shares of the Company's Common Stock
for all of the outstanding common stock of Hytree. Hytree is in the business of
supplying prescription pharmaceuticals, respiratory and consulting services to
long-term and alternate care providers along with home care and sales and
rentals of durable medical equipment and supplies within the Ohio market.
Hytree's fiscal year end is March 31.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the pooling-of-interest transactions with MSC,
Campo and Hytree had occurred on December 31, 1996. The pro forma financial
information does not purport to be indicative of the results of operations that
would have occurred had the transactions taken place on December 31, 1996 or of
future results of operations.
<TABLE>
<CAPTION>
COMPSCRIPT MSC CAMPO HYTREE (1) CONSOLIDATED
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Total sales $15,571,030 $6,558,177 $2,723,028 $10,004,455 $34,856,690
===============================================================================
Net (loss) income $(3,848,645) $($542,494) $ 54,595 $ 93,009 $(4,243,535)
===============================================================================
Loss per share $ (0.44) $ (0.37)
============== ============
YEAR ENDED DECEMBER 31, 1996
Total sales $20,049,771 $8,577,551 $3,181,263 $10,907,771 $42,716,356
===============================================================================
Net (loss) income $ (1,998,342) $ 477,874 $ 100,975 $ 362,901 $(1,056,592)
===============================================================================
Loss per share $ (0.20) $ (0.08)
================ =============
</TABLE>
(1) Pro forma results for Hytree for the year ended December 31, 1995 represent
Hytree's actual results for the year ended March 31, 1996, as Hytree's year
end was March 31. Hytree's pro forma results for the year ended December
31, 1996 have been restated to conform to the Company's year end.
F-40
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective June 29, 1996, the Company elected to change its year end from
September 30 to December 31. The Company's historical consolidated financial
statements have been restated to conform with this change in year end.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and Boca, of which the Company owns
approximately 92%. All significant intercompany balances and transactions have
been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less, when acquired, to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company's customers are primarily long-term and alternate care providers in
Florida and Alabama and corporate sponsored benefit plans of employers in the
Northeastern United States. The Company directly bills its customers or
third-party payers, which are primarily Medicaid and private insurers. Credit is
extended based on an evaluation of the customer's financial condition, and
collateral is not required. Credit losses are provided for in the financial
statements and consistently have been within management's expectations.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
F-41
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Furniture and equipment and vehicles are depreciated over a five to seven year
period. Leasehold improvements and assets under capital lease are amortized over
the useful lives of the underlying assets or the term of the lease, whichever is
shorter. Expenditures for maintenance and repairs are charged to expense as
incurred.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
In July 1995, SECURx recorded approximately $205,000 of costs in excess of net
assets acquired in connection with the acquisition of substantially all of the
assets and liabilities of a predecessor company of the same name. Costs in
excess of net assets acquired are amortized on a straight-line basis over five
years.
The Company periodically evaluates the recovery of the carrying amount of costs
in excess of net assets acquired by determining if any impairment indicators are
present. These indicators include duplication of resources resulting from
acquisitions, income derived from businesses acquired, the estimated
undiscounted cash flows of the entity over the remaining amortization period and
other factors.
REVENUE RECOGNITION
Revenue and the related cost of sales are recognized when services are provided
or products are delivered.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion (APB) No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Financial Accounting Standards Board (FASB)
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the use of
option valuation models that were not developed for use in valuing employee
stock options. No compensation expense is typically recognized under APB No. 25,
as the exercise price of the Company's employee stock options generally equals
or exceeds the market price of the underlying stock on the date of grant.
F-42
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for equity awards issued to nonemployee consultants,
attorneys and other vendors at fair market value based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable on the date of grant. The fair value of
equity instruments issued to a nonemployee is measured as of the date that the
parties come to a mutual understanding of the terms of the arrangement and agree
to a binding contract.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense totaled
approximately $33,909 and $37,042 in 1995 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. Under this method, deferred income taxes at the end
of each period are determined based on the differences between the financial
statement and tax basis of assets and liabilities using the enacted tax rates
for the years in which the taxes are expected to be paid or recovered.
The Company files a consolidated income tax return with its majority-owned
subsidiaries which includes the taxable income or loss of each subsidiary from
its acquisition date through the end of the Company's tax year. Each entity is
required to file a separate income tax return prior to becoming a member of the
Company's consolidated income tax return. Prior to its acquisition by the
Company on May 31, 1996, Delta was taxed under the provisions of Subchapter S of
the Internal Revenue Code (IRC). Concurrent with the acquisition of Delta, Delta
converted to C corporation status with respect to federal income taxes and, for
those states that recognize such tax election, state income taxes. As a result,
the accompanying consolidated financial statements include no provision
(benefit) for income taxes related to Delta's income (loss) prior to its
acquisition by the Company. Accordingly, the consolidated statements of
operations for the years ended December 31, 1995 and 1996 include pro forma
adjustments (unaudited) for income tax expense which would have been recorded
had Delta been a taxable corporation and had the Company been able to file a
consolidated income tax return with Delta and SECURx based on the tax laws in
effect during the years presented.
F-43
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of common
shares outstanding as the effect of the Company's outstanding Common Stock
equivalents was antidilutive for all periods presented. Weighted average common
shares outstanding reflect the exchange ratio of 3.898373 shares of the
Company's Common Stock for each share of Boca's Common Stock outstanding prior
to the Acquisition for all periods presented.
Pro forma net loss per share (unaudited) reflects the pro forma income tax
adjustments described above. There is no difference between historical and pro
forma weighted average shares.
LONG-LIVED ASSETS
FASB No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. The Company adopted FASB No.
121 during 1996 and, based on current circumstances, does not believe that any
impairment indicators are present relative to its long-lived assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-44
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Furniture and equipment $1,677,864
Vehicles 146,052
Leasehold improvements 218,707
Assets under capital leases 295,880
----------
2,338,503
Less accumulated depreciation (900,134)
----------
$1,438,369
==========
4. GOODWILL IMPAIRMENT
At December 31, 1995, the Company recognized a goodwill impairment charge of
approximately $3.6 million, with no associated tax benefit, related to
Aldencare, Inc.'s 1994 acquisition of substantially all of the assets of
CompScript, Inc., which became the Company's Ohio Division. The Ohio Division
was purchased to be the Company's entry into the workers' compensation, pharmacy
benefits management (PBM) line of business. During the year ended December 31,
1995, the contracts attributed to the Ohio Division generated minimal revenue
due in part to the nonexclusive nature of the contracts. In addition, the
inability of the Ohio Division to convert existing relationships with
prospective clients into new PBM contracts or to secure new prospective clients
contributed to significant operating losses and negative cash flows relative to
the Ohio Division. Based on the poor financial results and the failure to obtain
new contracts, the Company believed that the PBM business acquired with the Ohio
Division would not generate positive cash flows in the foreseeable future and
the strategy to implement this line of business within the Ohio Division would
no longer be a priority of the Company. Therefore, the Company wrote off the
unamortized carrying value of the goodwill of approximately $3.6 million on
December 31, 1995.
5. LINE OF CREDIT
In May 1995, the Company entered into a line-of-credit agreement which permits
borrowings up to $750,000. The line of credit is due upon demand and is secured
by substantially all of the assets of the Company. Interest is payable monthly
at prime plus .25% (8.50% at December 31, 1996) with a .25% fee on the unused
portion of the line.
Approximately $675,000 is outstanding at December 31, 1996.
F-45
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LINE OF CREDIT (CONTINUED)
On January 3, 1997, the Company amended its financing agreement with its primary
lender to increase its revolving line-of-credit agreement to allow for
borrowings up to $5 million from the $750,000 previously in effect (the New
Credit Facility). The primary reason for the increase was to provide additional
working capital for operations and fund the Company's acquisition activity.
Through March 31, 1997, the Company borrowed approximately $4.7 million under
the New Credit Facility.
The New Credit Facility is collateralized by all of the Company's accounts
receivable, inventory, fixed assets and other assets, and consists of a term
loan due on April 30, 1998. Interest, which is paid monthly on the credit
facility, accrues at the lessor of the prime rate or the three-month London
Interbank Offered Rate, plus 250 basis points. The credit facility requires the
Company to maintain at all times, certain net worth, debt coverage and working
capital levels, and restricts acquisitions and dispositions of property and
limits additional borrowings from other lendors.
In connection with the New Credit Facility, on January 3, 1997, the Company also
entered into a $500,000 promissory note with the same lendor, the proceeds of
which were used to fund the Company's office and mail order space expansion,
which was completed in the first quarter of 1997. The principle sum of the
promissory note shall be paid in monthly installments of approximately $8,333
plus interest at 9.0% for 60 months beginning on February 1, 1997. Collateral
and debt covenants are the same as those of the New Credit Facility.
On March 19, 1997, the Company entered into an additional $750,000 promissory
note with its existing lender, primarily for working capital purposes. Such loan
matures on July 26, 1997 and bears interest at prime. This loan is cross
collateralized with all other borrowings previously discussed. In addition to
the collateral previously discussed, this note is collateralized by the
$1,125,000 note receivable recorded on the Company's consolidated balance sheet
at December 31, 1996 and the collateral underlying the note receivable
consisting of marketable equity securities.
6. NOTES PAYABLE AND NOTES PAYABLE TO SHAREHOLDER
The Company has entered into various notes payable to financing companies
bearing interest at rates ranging from 6% to 10% and expiring at various dates
through 1999. The notes payable arose in connection with the purchase of certain
vehicles and are collateralized by vehicles with an aggregate carrying value of
approximately $58,500.
F-46
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE AND NOTES PAYABLE TO SHAREHOLDER (CONTINUED)
The notes payable to shareholder are due upon demand, bear interest at 10% and
are collateralized by the receivables, inventories and equipment of SECURx, the
aggregate carrying value of which exceeds the outstanding aggregate balance of
the notes payable to shareholder at December 31, 1996.
At December 31, 1996, annual payments on notes payable, including notes payable
to shareholder are as follows:
1997 $241,066
1998 9,045
1999 3,180
--------
$253,291
========
7. CAPITAL LEASES
The Company leases certain equipment under long-term capital leases. Future
obligations are as follows:
Year ending December 31,
1997 $42,744
1998 19,758
1999 1,752
--------
64,254
Less amounts representing interest (7,538)
--------
$56,716
========
8. MINORITY INTEREST
On October 3, 1996, Boca issued an additional 27,000 shares of its Common Stock
to a shareholder of the Company, increasing the minority interest's aggregate
ownership interest in Boca to approximately 8%.
The Company intends to exchange the shares of Boca's Common Stock held by the
minority interest for the Company's Common Stock during 1997 at the same
exchange ratio used in the Acquisition. The minority interest's share of Boca's
1996 results of operations is not significant.
F-47
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY
EQUITY INSTRUMENTS ISSUED TO NONEMPLOYEES
During 1996, the Company granted 625,000 stock options at an exercise price of
$1 per share to certain consultants, 100,000 stock options at $6 per share to an
investment banking firm and 75,000 stock options at an exercise price of $6 and
9,000 shares of Common Stock to a law firm as consideration for services
rendered in connection with the Acquisition. The stock options were fully vested
on the date of grant. Included in the costs of the Acquisition, all of which
were charged against additional paid-in capital attributed to the Acquisition,
is an aggregate $1,292,000 related to the issuance of these equity instruments.
The consultants exercised the 625,000 stock options prior to December 31, 1996.
Subsequent to December 31, 1996, the 75,000 stock options referred to above were
exercised. The remaining 100,000 stock options will expire on April 1, 1999.
During 1996, the Company issued 90,000 shares of Common Stock to certain
consultants and 11,000 shares of Common Stock to a law firm as consideration for
services rendered in connection with the Company's acquisitions of Delta, SECURx
and MSC. The Company recorded an aggregate $740,000 related to the issuance of
these common shares, all of which is included in merger costs on the
consolidated statement of operations.
On May 1, 1996, the Company granted 200,000 stock options (100,000 options at an
exercise price of $8 and 100,000 options an exercise price of $10) to an
investment banking firm as consideration for a two-year consulting agreement
commencing on December 31, 1996. The stock options were fully vested on the date
of grant. In connection with the stock options granted, the Company recorded a
prepaid consulting fee of $144,000 as of December 31, 1996. This amount is
included in other assets on the December 31, 1996 consolidated balance sheet.
On July 2, 1996, the Company granted 75,000 stock options exerciseable at $7 per
share to a public relations firm in connection with a two-year contract. The
stock options were fully vested on the date of grant. In addition, the Company
agreed to issue an additional 75,000 options on July 2, 1997 and pay $30,000 per
year in connection with this contract. In connection with the stock options
granted, the Company recorded a prepaid expense of $20,000 at December 31, 1996.
The stock options expire five years from their respective dates of grant.
F-48
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY (CONTINUED)
On December 27, 1996, the Company issued 15,000 of its common shares to certain
consultants as consideration for consulting services rendered in connection with
the Company obtaining a five-year agreement to provide mail order pharmacy
services to an insurer. The Company recorded a prepaid expense of approximately
$138,000 for these fees, which is included in other assets on the December 31,
1996 consolidated balance sheet, and intends to amortize these costs over the
life of the agreement.
COMMON STOCK WARRANTS
During 1996, the Company issued 102,550 common shares in connection with the
exercise of the Company's Class A and Class B warrants at a weighted average
exercise price of $5.25. On December 31, 1996, the remaining 96,950 outstanding
warrants expired unexercised.
STOCK OPTION PLANS
In October 1994, Boca adopted a stock option plan (the Boca Plan). The Boca Plan
provides for the granting of both incentive stock options and nonqualified stock
options for the purchase of up to 200,000 shares of Boca's Common Stock. Under
the Boca Plan, incentive stock options were granted on October 1, 1994 to
purchase 19,100 shares of Boca's Common Stock for a period of eight years from
October 1996 at an exercise price of $10 per share (the Boca Options). All of
the outstanding Boca Options were rescinded during 1996. The Company does not
intend to grant any additional stock options under the Boca Plan.
In May 1996, the Company adopted a stock option plan (the 1996 Plan). The 1996
Plan provides for the granting of both incentive stock options and nonqualified
stock options for the purchase of up to 900,000 shares of the Company's Common
Stock. The exercise price and vesting schedule of each stock option is
determined by the Compensation Committee of the Company. Stock options granted
under the 1996 Plan expire after ten years from the date of grant.
F-49
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY (CONTINUED)
In October 1995, the FASB issued FASB No. 123, which provides an alternative to
APB No. 25. FASB No. 123 allows for a fair value based method of accounting for
stock options. However, for companies that continue to account for stock-based
compensation arrangements under APB No. 25, such as the Company, FASB No. 123
requires disclosure of the pro forma effect on net loss and loss per share of
its fair value based accounting for those arrangements. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 1996: risk
free interest rate of 6.49%, dividend yield of 0%, volatility factor of the
expected market price of the Company's Common Stock of .47 and a
weighted-average expected life of the options of 4.09 years. As of December 31,
1996, the weighted average remaining contractual life of all options outstanding
was 9.7 years.
The following unaudited pro forma summary presents the Company's net income and
earnings per share as if the estimated fair value of the options were amortized
to expense over the options' vesting period. FASB No. 123 does not apply to
stock option grants prior to the year ended December 31, 1995 and no stock
options were granted in fiscal 1995, therefore, FASB No. 123 has no pro forma
effect on the 1995 net loss and net loss per share as reported in the
consolidated statement of operations.
YEAR ENDED 1996
---------------
Pro forma net loss $(3,718,803)
=============
Pro forma net loss per share $ (0.38)
=============
The pro forma effect of compensation expense from stock option awards on pro
forma net income reflects the vesting of 1996 option awards in 1996, in
accordance with FASB No. 123. Because pro forma compensation expense associated
with a stock option award is recognized over the vesting period, the initial
impact of applying FASB No. 123 may not be indicative of pro forma compensation
expense in future years, when the effect of multiple awards will be reflected in
pro forma net income.
F-50
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information for the
year ended December 31, 1996 relative to the Company's employee/director and
nonemployee stock options is as follows:
<TABLE>
<CAPTION>
EMPLOYEE/DIRECTOR STOCK NONEMPLOYEE STOCK
OPTIONS OPTIONS
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
OPTIONS FOR AVERAGE OPTIONS FOR AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995 - $ - - $ -
Granted 882,500 5.17 1,075,000 3.72
Exercised - - 625,000 1.00
Forfeited - - - -
--------- ----------
Outstanding at December 31, 1996 882,500 5.17 450,000 7.50
========= ==========
Exercisable at end of year 800,867 450,000
========= ==========
Weighted-average fair value of options
granted during the year $2.23 $1.31
========= ==========
</TABLE>
The exercise prices of the employee/director stock options granted during 1996
were greater than the Company's stock prices on the dates of grant.
F-51
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. SHAREHOLDERS' EQUITY (CONTINUED)
Options outstanding and exercisable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
RANGE OF OPTION PRICES OUTSTANDING PRICE EXERCISABLE PRICE
- ----------------------------------------- -------------- ----------------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Employees $ 5.13--$6.08 882,500 9.7 years $ 5.17 800,867 $ 5.13
======== ========
Nonemployees $ 6.00--$8.00 275,000 2.9 years $ 7.00 275,000 $ 7.00
$ 10.00 100,000 2.3 years $ 10.00 100,000 $ 10.00
$ 6.00 75,000 Unlimited $ 6.00 75,000 $ 6.00
--------
========
450,000 450,000
======== ========
At December 31, 1996, there are 17,500 options available for grant under the
1996 Plan.
COMMON STOCK
The following shares of Common Stock have been reserved for future issuance as
of December 31, 1996:
<S> <C>
Upon the closing of the acquisition of MSC 1,400,000
Upon the conversion of the minority interest 662,341
Upon the exercise of stock options outstanding or available for
grant 1,350,000
==========
3,412,341
==========
</TABLE>
F-52
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the consolidated
balance sheet for cash and cash equivalents approximates its fair value.
NOTE RECEIVABLE: The fair value of the Company's note receivable is estimated
using discounted cash flow analysis, based on discount rates at which similar
notes would be made under current conditions, commensurate with the credit and
interest rate risks involved.
LINE OF CREDIT, NOTES PAYABLE, AND NOTES PAYABLE TO SHAREHOLDERS: The fair
values of the Company's line of credit, notes payable and notes payable to
shareholders are estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying and fair values of the Company's financial instruments at December
31, 1996 approximate their carrying values.
11. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
YEAR ENDED DECEMBER 31,
1995 1996
------------------------------
Current:
Federal $ 95,408 $(400,000)
State 16,010 -
------------------------------
111,418 (400,000)
Deferred 37,489 -
==============================
Total $148,907 $(400,000)
==============================
F-53
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
DECEMBER 31,
1995 1996
-------------------------
Deferred tax assets:
Net operating loss carryforwards $46,564 $ 46,564
Tax credits - 25,377
Allowance for uncollectible accounts 26,095 162,428
Costs in excess of net assets acquired 5,131 15,393
--------------------------
77,790 249,762
Less valuation allowance (77,790) (249,762)
==========================
Net deferred tax assets $ - $ -
==========================
FASB No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $249,762 valuation allowance is necessary at December 31,
1996. At December 31, 1996, the Company has available net operating loss
carryforwards of $123,741 which expire in 2010. In addition, the Company had tax
credits of $25,377 that have no expiration date.
F-54
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The differences between the provision for income taxes and the amount which
results from applying the federal and state statutory tax rates to income before
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1996
---------------------------
<S> <C> <C> <C>
Income tax benefit at statutory rate $(1,257,911) $(815,436)
State income tax benefit, net (134,300) (87,060)
Merger costs, not deductible for tax purposes - 329,345
Taxes on Delta's loss incurred (income earned) prior to
revocation of Subchapter S election 10,012 (62,270)
Goodwill amortization not deductible for tax purposes 74,300 -
Goodwill impairment charge not deductible for tax purposes 1,368,363 -
Meals and entertainment not deductible for tax purposes 6,443 7,133
Officer's life insurance premiums not deductible for tax
purposes 4,210 4,210
Reduction in net operating loss carryback benefit - 52,105
Change in valuation allowance 77,790 171,973
----------------------------
$ 148,907 $(400,000)
============================
</TABLE>
12. LEASE COMMITMENTS
The Company has various operating leases, primarily relating to branch offices
and warehouse facilities. The leases have various renewal options and escalation
clauses and often require the Company to make additional payments for
maintenance costs. Total rent expense for the years ended December 31, 1995 and
1996 amounted to $132,739 and $181,229, respectively.
F-55
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. LEASE COMMITMENTS (CONTINUED)
Approximate future minimum annual rentals under noncancelable operating leases
with initial or remaining terms in excess of one year are:
1997 $ 198,197
1998 214,314
1999 204,628
2000 158,017
2001 151,644
Thereafter 165,528
-----------
$1,092,328
===========
13. PROFIT SHARING PLAN
In 1993, the Company established a profit sharing savings plan (the Plan) that
covers substantially all of its employees and that qualifies as a cash or
deferred arrangement under Section 401(k) of the IRC. Under the Plan,
participating employees may defer up to 20% of their pre-tax salary before
reduction, but not more than approximately $9,500 per plan year. The Company may
make matching or other contributions to the Plan. There were no Company
contributions to the Plan for the fiscal years ended December 31, 1995 and 1996.
14. SUBSEQUENT EVENT
On January 9, 1997, the Company entered into a five-year agreement with two
shareholders (each of which has less than a 5% beneficial ownership interest in
the Company) of the Company pursuant to which the shareholders will assist the
Company with the maintenance of existing pharmacy benefits management contracts
as well as secure new contracts for the Company. The Company agreed to pay the
shareholders $50,000 per month for the first year of the contract, as well as
commission ranging from 1/2% to 1% of net revenues generated by new contacts
obtained by the shareholders. The Company may cancel the contract at the end of
the first year if the shareholders have not met certain performance criteria.
F-56
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet (Unaudited)
MARCH 31,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 807,204
Accounts receivable, net 7,983,422
Inventory 2,779,848
Note receivable 325,000
Income tax refund receivable 355,657
Prepaid and other receivables 118,890
-------------
Total current assets 12,370,021
Property and equipment, net 2,654,452
Other assets:
Costs in excess of net assets acquired, less accumulated amortization
132,944
Other 803,331
-------------
Total other assets 936,275
=============
Total assets $15,960,748
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,686,913
Accrued salaries and benefits 693,312
Accrued expenses 941,317
Accrued pharmaceuticals dispensed by third parties 142,996
Line of credit -
Notes payable to shareholders 449,750
Current portion of notes payable 941,867
Current portion of capital lease obligations 79,769
-------------
Total current liabilities 5,935,924
Long-term debt:
Line of credit 4,665,466
Notes payable 560,596
Capital lease obligations 48,078
-------------
Total long-term debt 5,274,140
-------------
Total liabilities 11,210,064
Minority interest 222,628
Shareholders' equity:
Common stock, $.0001 par value--50,000,000 shares authorized,
13,627,063 shares issued and outstanding 1,364
Additional paid-in capital 9,798,568
Accumulated deficit (5,271,876)
-------------
Total shareholders' equity 4,528,056
-------------
Total liabilities and shareholders' equity $15,960,748
=============
</TABLE>
SEE ACCOMPANYING NOTES.
F-57
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (Unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1997
---------------------------------
<S> <C> <C>
Sales $10,360,411 $11,498,619
Cost of sales 6,116,130 6,794,718
---------------------------------
Gross profit 4,244,281 4,703,901
Selling, general and administrative expenses 3,922,458 4,696,093
Provision for doubtful accounts 131,464 121,905
Merger costs - 613,457
---------------------------------
Total operating expenses 4,053,922 5,431,455
---------------------------------
Operating income (loss) 190,359 (727,554)
Other:
Interest and other income 25,271 11,015
Interest expense (106,428) (99,563)
Loss on realization of note receivable - (800,000)
---------------------------------
Income (loss) before provision for income taxes 109,202 (1,616,102)
Income tax provision 17,539 -
---------------------------------
Net income (loss) $ 91,663 $ (1,616,102)
=================================
Net income (loss) per share $ 0.01 $ (0.12)
=================================
Weighted average shares outstanding 11,430,907 13,563,897
=================================
Pro forma data:
Historical income before provision for income taxes $ 109,202
Pro forma tax expense 32,852
-------------
Pro forma net income $ 76,350
=============
Pro forma net income per share $ 0.01
=============
</TABLE>
SEE ACCOMPANYING NOTES.
F-58
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED
MARCH 31,
1996 1997
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 91,663 $(1,616,102)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization of leasehold improvements 141,112 129,959
Amortization of goodwill 10,227 10,227
Noncash merger costs - 420,000
Provision for doubtful accounts 131,464 121,905
Loss on note receivable - 800,000
Changes in operating assets and liabilities:
Accounts receivable (345,334) (1,709,819)
Inventory 28,137 (312,209)
Income tax refund receivable 65,671 (87,845)
Prepaid and other receivables 82,805 (6,403)
Other assets (63,714) 50,891
Accounts payable and accrued expenses (247,710) (815,620)
---------------------------------
Net cash used in operating activities (105,679) (3,015,016)
INVESTING ACTIVITY
Purchase of property and equipment (232,295) (552,916)
---------------------------------
Net cash used in investing activity (232,295) (552,916)
FINANCING ACTIVITIES
Exercise of options and warrants - 469,996
Net proceeds from lines of credit 212,597 3,990,773
Net repayments on notes payable 176,758 (536,809)
Net repayments of notes payable shareholders - (393,987)
Repayment of leases payable (38,108) (12,577)
---------------------------------
Net cash provided by financing activities 351,247 3,517,396
---------------------------------
Net increase (decrease) in cash and cash equivalents 13,273 (50,536)
Cash and cash equivalents at beginning of period 549,548 857,740
---------------------------------
Cash and cash equivalents at end of period $ 562,821 $ 807,204
=================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 19,583 $ 87,500
=================================
Cash paid for interest $ 106,428 $ 99,563
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-59
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include
the accounts of the Company and all of its subsidiaries, which are
majority-owned. All significant intercompany transactions and balances have been
eliminated in consolidation.
The accompanying consolidated condensed financial statements as of
March 31, 1997 and for the three months ended March 31, 1997 and 1996 are
unaudited. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the rules and regulations of the Securities and Exchange Commission (the
"SEC"). 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. The Company believes it has made sufficient disclosures such that
the information presented is not misleading. In the opinion of management, the
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to state fairly the financial position and
results of operations as of and for the periods presented. Results for the three
month period ended March 31, 1997 are not necessarily indicative of the results
to be achieved for the year ending December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Net income (loss) per share for three month period ended March 31, 1997
and 1996, have been calculated based upon the weighted average number of common
shares outstanding after giving effect to outstanding options and warrants
during the periods in which their inclusion was dilutive.
The pro forma net income (loss) per share data has been calculated
after giving effect to the income tax matters discussed more fully in Note 3.
F-60
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share during profitable periods. There was no impact on
earnings per share relating to Statement 128 for the quarters ended March 31,
1997 and 1996.
2. ACQUISITIONS
During the first quarter of 1997, the Company completed three
acquisitions which were accounted for as poolings of interests. A summary of
each transaction follows:
On January 10, 1997, the Company acquired Medical Services Consortium,
Inc. (MSC). In connection with the transaction, the Company exchanged 1.4
million shares of the Company's Common Stock for all of the outstanding common
stock of MSC. MSC is in the business of supplying prescription pharmaceuticals,
consulting services and enteral and parental therapies to long-term and
alternate care providers in South Florida.
On February 28, 1997, the Company acquired Campo Medical Pharmacy, Inc.
(Campo). In connection with the transaction, the Company exchanged 375,000
shares of the Company's Common Stock for all of the outstanding common stock of
Campo. Campo is in the business of supplying prescriptions pharmaceuticals and
consulting services to long-term and alternate care providers in Louisiana.
On March 26, 1997, the Company acquired Hytree Pharmacy, Inc. (Hytree).
In connection with the transaction, the Company exchanged 850,000 shares of the
Company's Common Stock for all of the outstanding common stock of Hytree. Hytree
is in the business of supplying prescription pharmaceuticals, respiratory and
consulting services to long-term and alternate care providers, along with home
care and sales and rentals of durable medical equipment and supplies within the
Ohio market.
The accompanying consolidated condensed financial statements for all
periods presented have been restated to reflect the acquisitions. The following
unaudited pro forma summary presents the separate results of operations for
CompScript and the pooled entities for the three months ended March 31, 1996 and
1997. The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods presented or of future results of
operations.
F-61
<PAGE>
<TABLE>
<CAPTION>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
CompScript MSC Campo Hytree Consolidated
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months
Ended March 31, 1997
Total sales $ 5,039,531 $ 2,693,517 $768,770 $2,996,801 $11,498,619
=========== =========== ======== ========== ===========
Net (loss) income $(2,042,542) $ 253,834 $130,982 $ 41,624 $(1,616,102)
=========== =========== ======== ========== ===========
Three months
Ended March 31, 1996
Total sales $ 5,040,410 $ 1,910,387 $806,987 $2,602,627 $10,360,411
=========== =========== ======== ========== ===========
Net (loss) income $ (60,075) $ 205,956 $ 77,156 $ (131,374) $ 91,663
=========== =========== ======== ========== ===========
</TABLE>
3. NOTE RECEIVABLE
In connection with the Company's acquisition on April 26, 1996, the
Company acquired marketable equity securities valued at $1,125,000. Subsequent
to the acquisition, on July 26, 1996, the Company sold its 1,125,000 shares of
Common Stock of QPQ Corporation ("QPQ") representing its entire marketable
equity portfolio to a major shareholder of QPQ in exchange for a $1,125,000
non-recourse promissory note payable in full, including interest, on July 4,
1997. On May 16, 1997 the Company and the note holder settled all outstanding
obligations of the note holder to the Company in exchange for the 1,125,000
shares of QDQ back to the Company. During the 1997 Quarter, the Company recorded
an $800,000 charge against the note which has been classified as "loss on
realization of note receivable" in the 1997 Quarter Statement of Operations. The
Company deemed it appropriate to evaluate the collateral underlying the note, as
the value of the QPQ stock declined significantly during the 1997 Quarter. Such
collateral will be reevaluated in future periods based on the market value of
the QPQ stock.
F-62
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
4. INCOME TAXES
The income tax provisions for the three month period ended March 31,
1997 and 1996, have been calculated by applying the Company's estimated
effective tax rate for the years 1997 and 1996 after giving effect to the
matters described in the following paragraph.
For the three month period ended March 31, 1996, the relationship of
the provision for income taxes to pre-tax income reflects the exclusion of the
Subchapter S earnings of Delta Pharmacy Services, Inc. (Delta) and MSC from the
tax provision computation. Concurrent with the acquisitions of Delta on May 31,
1996 and MSC on January 10, 1997, Delta and MSC converted to C corporation
status and their earnings from those dates forward were included in the tax
provision computation. Accordingly, the consolidated condensed statement of
operations for the three months ended March 31, 1996, include pro forma
adjustments for income tax expense which would have been recorded had Delta and
MSC been taxable corporations and had the Company been able to file a
consolidated income tax return with the pooled entities based on the tax laws in
effect during the periods presented.
5. NOTES PAYABLE
On January 3, 1997, the Company amended its financing agreement with
its primary lender to increase its revolving line-of-credit agreement to allow
for borrowings up to $5 million from the $750,000 previously in effect (the New
Credit Facility). The primary reason for the increase was to provide additional
working capital for operations and fund the company's acquisition activity.
Through March 31, 1997, the Company borrowed approximately $4.7 million under
the New Credit Facility.
The New Credit Facility is collateralized by all of the Company's
accounts receivable, inventory, fixed assets and other assets, and consists of a
term loan due on April 30, 1998. Interest, which is paid monthly on the credit
facility, accrues at the lessor of the prime rate or the three-month London
Interbank Offered Rate, plus 250 basis points. The credit facility requires the
Company to maintain at all times, certain net worth, debt coverage and working
capital levels, and restricts acquisitions and dispositions of property and
limits additional borrowings from other lendors.
F-63
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
In connection with the New Credit Facility, on January 3, 1997, the
Company also entered into a $500,000 promissory note with the same lendor, the
proceeds of which were used to fund the Company's office and mail order space
expansion, which was completed in the first quarter of 1997. The principle sum
of the promissory note is payable in monthly installments of approximately
$8,333 plus interest at 9.0% for 60 months which began on February 1, 1997.
Collateral and debt covenants are the same as those of the New Credit Facility.
On March 19, 1997, the Company entered into an additional $750,000
promissory note with its existing lender, primarily for working capital
purposes. Such loan matures on July 26, 1997 and bears interest at prime. This
loan is cross collateralized with all other borrowings previously discussed. In
addition to the collateral previously discussed, this note is collateralized by
the $325,000 note receivable recorded on the Company's consolidated balance
sheet at March 31, 1997 and the collateral underlying the note receivable
consisting of marketable equity securities.
6. SHAREHOLDERS' EQUITY
During the three months ended March 31, 1997, the Company issued 15,000
shares of Common Stock to certain consultants as consideration for services
rendered in connection with the Company's acquisition of Campo. Subsequent to
March 31, 1997, an additional 30,000 shares were issued to such consultants as
consideration for services rendered in connection with the Company's acquisition
of Hytree. Costs of $420,000 associated with the issuance of those 45,000 shares
have been included in merger costs in the three month period ending March 31,
1997.
During the period ended March 31, 1997, holders of options exercised
78,898 options resulting in the issuance of 78,898 shares of Common Stock and
net proceeds to the Company of approximately $470,000.
Subsequent to March 31, 1997, the Company received net proceeds of
$1,000,000 as a result of option holders exercising 200,000 options.
F-64
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
Medical Services Consortium, Inc.
We have audited the balance sheet of Medical Services Consortium, Inc. (MSC) as
of December 31, 1996, and the statements of operations, shareholders' deficit
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of MSC's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Services Consortium,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
West Palm Beach, Florida
January 24, 1997
F-65
<PAGE>
Medical Services Consortium, Inc.
Balance Sheet
December 31, 1996
ASSETS
Current assets:
Cash and cash equivalents $ 413,071
Accounts receivable, net of allowances of $118,000 1,691,219
Inventory 311,189
Prepaid expenses 28,420
Current portion of notes receivable 25,788
----------
Total current assets 2,469,687
Property and equipment, net 182,747
Other assets:
Notes receivable, net of current portion 192,428
Other assets 55,431
----------
Total assets $2,900,293
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $1,434,574
Accrued salaries and benefits 182,361
Accrued expenses 117,450
Distributions payable 53,560
Current portion of capital lease obligations 47,704
Current portion of notes payable 116,600
Current portion of notes payable to shareholders 400,414
----------
Total current liabilities 2,352,663
Long-term debt, net of current portion:
Capital lease obligations 36,004
Notes payable 332,034
Notes payable to shareholders 500,000
----------
Total long-term debt, net of current portion 868,038
----------
Total liabilities 3,220,701
Shareholders' deficit:
Common stock, $5 par value--100 shares
authorized, 48 shares issued and 240
outstanding in 1996
Additional paid-in capital 99,760
Accumulated deficit (420,408)
----------
Total shareholders' deficit (320,408)
----------
Total liabilities and shareholders' deficit $2,900,293
==========
SEE ACCOMPANYING NOTES.
F-66
<PAGE>
Medical Services Consortium, Inc.
Statements of Operations
YEAR ENDED DECEMBER 31
1996 1995
----------------------
Sales $8,577,551 $6,558,177
Cost of sales 4,990,540 3,851,337
----------------------
Gross profit 3,587,011 2,706,840
Selling, general and administrative expenses 2,817,653 2,687,668
Contract termination settlement - 363,959
Provision for doubtful accounts 123,283 79,289
Merger costs 59,000 -
----------------------
Total operating expenses 2,999,936 3,130,916
----------------------
Operating income (loss) 587,075 (424,076)
Other:
Interest income 18,362 3,179
Interest expense 56,872 68,807
Interest expense on notes payable to shareholders 70,691 52,790
----------------------
Net income (loss) $ 477,874 $ (542,494)
======================
Pro forma data (unaudited):
Historical income (loss) before income taxes $ 477,874 $ (542,494)
Pro forma income tax (expense) benefit (191,600) 193,000
----------------------
Pro forma net income (loss) $ 286,274 $ (349,494)
======================
F-67
<PAGE>
Medical Services Consortium, Inc.
Statements of Shareholders' Deficit
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 48 $240 $99,760 $(270,228) $(170,228)
Net loss - - - (542,494) (542,494)
---------------------------------------------------------
Balance at December 31, 1995 48 240 99,760 (812,722) (712,722)
Net income - - - 477,874 477,874
Distribution to
shareholders - - - (85,560) (85,560)
---------------------------------------------------------
Balance at December 31, 1996 48 $240 $99,760 $(420,408) $(320,408)
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-68
<PAGE>
Medical Services Consortium, Inc.
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1995
-----------------------
OPERATING ACTIVITIES
Net income (loss) $ 477,874 $(542,494)
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities:
Contract termination settlement -- 363,959
Depreciation and amortization of leasehold
improvements 92,812 75,178
Provision for doubtful accounts 123,283 79,289
Changes in operating assets and liabilities:
Accounts receivable (677,221) (343,871)
Inventory 12,529 (66,210)
Prepaid expenses 30,928 (49,785)
Other assets (6,877) 19,423
Accounts payable 371,932 289,813
Accrued salaries and benefits 81,380 42,982
Accrued shareholders salaries (480,243) 294,470
Accrued expenses (27,274) 72,360
-----------------------
Net cash (used) provided by operating activities (877) 235,114
INVESTING ACTIVITIES
Purchase of property and equipment (25,109) (29,440)
Proceeds from sale of equipment -- 15,544
Payments received on notes receivable 21,225 --
-----------------------
Net cash used in investing activities (3,884) (13,896)
FINANCING ACTIVITIES
Distribution to shareholders (32,000) --
Payments on capital lease obligations (49,312) (39,755)
Payments on notes payable (115,382) (88,107)
Proceeds from notes payable to shareholders 400,414 --
-----------------------
Net cash provided (used) by financing activities 203,720 (127,862)
-----------------------
Net increase in cash and cash equivalents 198,959 93,356
Cash and cash equivalents at beginning of year 214,112 120,756
-----------------------
Cash and cash equivalents at end of year $ 413,071 $ 214,112
=======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 132,361 $ 120,027
=======================
NONCASH INVESTING AND FINANCING ACTIVITIES
Distributions payable $ 53,560 $ --
=======================
Conversion of accounts receivable to a note
receivable $ 239,441 $ --
=======================
Fixed assets acquired under capital lease $ 44,245 $ 72,433
=======================
SEE ACCOMPANYING NOTES.
F-69
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION
Medical Services Consortium, Inc. MSC was incorporated under the laws of the
State of Florida on June 29, 1992, for the purpose of supplying prescription
pharmaceuticals, consulting, enteral and parental therapies, and home health
care services to long-term and alternate care providers.
On January 10, 1997, MSC was acquired, in a business combination accounted for
as a pooling-of-interests, by CompScript, Inc. (CompScript). In connection with
the transaction, the shareholders of MSC exchanged all of MSC's outstanding
common stock for 1.4 million shares of CompScript's common stock and MSC was
merged into CompScript. Through December 31, 1996, MSC incurred approximately
$59,000 in expenses associated with the transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
MSC considers all highly liquid investments with an original maturity of three
months or less, when acquired, to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method, and market represents the lower of replacement cost
or estimated net realizable value.
CONCENTRATION OF CREDIT RISK
MSC's customers are primarily long-term and alternate care providers in South
Florida. MSC directly bills its customers or third-party payers, which are
primarily Medicaid and private insurers. Credit is extended based on an
evaluation of the customer's financial condition, and collateral is not
required. Credit losses are provided for in the financial statements and
consistently have been within management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation of equipment and
amortization of leasehold improvements is computed using the MACRS
(double-declining balance) method over the estimated useful lives of the related
assets, ranging from five to seven years. Expenditures for maintenance and
repairs are charged to expense as incurred.
F-70
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues from sales of most pharmaceuticals and all consulting services are
recognized when products are shipped or services are provided. For some
pharmaceuticals that are located at the customers' facilities, revenues are
recognized when the product is dispensed to the patient. Revenues are recorded
net of adjustments and allowances resulting from the difference between
established rates for the products and services and amounts reimbursable by
government-sponsored health care programs (primarily Medicaid) and private
insurance carriers.
ADVERTISING COSTS
MSC expenses advertising costs as incurred. Advertising expense totaled
approximately $21,000 and $8,000 in 1996 and 1995, respectively.
INCOME TAXES
MSC is taxed under the provisions of Subchapter S of the Internal Revenue Code,
which generally provides that in lieu of corporate taxes, the shareholders shall
be taxed on MSC's taxable income in accordance with their ownership interests.
As a result, the accompanying financial statements include no provision for
income taxes.
As a result of the acquisition of MSC by CompScript, MSC will no longer qualify
as a Subchapter S corporation and will be subject to corporate income taxes.
Accordingly, for informational purposes, the statements of operations include
pro forma adjustments (unaudited) for income tax expense which would have been
recorded if MSC had been a taxable corporation, based on the laws in effect
during those periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-71
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
Furniture and equipment $225,047
Equipment under capital leases 201,350
Leasehold improvements 31,686
--------
458,083
Less accumulated depreciation (275,336)
========
$182,747
========
4. NOTES PAYABLE
Notes Payable consist of the following:
$300,000 revolving credit arrangement with a bank,
interest at prime plus 2.00% (10.25% at
December 31, 1996), collateralized by
substantially all of the assets of MSC.
Monthly payments of $3,572 plus accrued interest
are payable monthly, with a final balloon
payment of $89,252, plus accrued interest due on
September 1, 2000. $239,276
$300,000 unsecured promissory note, interest at
prime plus 1.00% (9.25% at December 31, 1996),
principal and interest payable monthly through
August 1, 1998. 209,358
--------
448,634
Less current portion (116,600)
--------
$332,034
========
In July 1995, MSC entered into the $300,000 unsecured note payable in connection
with a settlement agreed to upon the early termination of a prior contract with
business consultants to provide sales and marketing services to MSC. In
connection with the settlement, approximately $364,000, including the
forgiveness of a $64,000 account receivable from an affiliate of the business
consultants, has been recorded as contract termination settlement expense in the
1995 statement of operations. On January 15, 1997, CompScript paid the
outstanding balance on this note payable.
F-72
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
On January 3, 1997, MSC entered into a new credit arrangement (New Credit
Arrangement) with a bank which contains a line-of-credit facility and a term
loan. The line-of-credit facility and term loan mature on January 3, 1998, are
collateralized by substantially all of the assets of MSC and permit borrowings
up to $500,000 and $200,000, respectively. Interest on the line of credit is
payable monthly at prime plus 1%, with the entire principal due at maturity.
Interest on the term loan is payable monthly at a fixed interest rate of 9.5%.
Principle payments of $4,200 are due monthly with the remaining outstanding
balance due on January 3, 1998. On January 3, 1997, MSC borrowed $150,000 on the
New Credit Arrangement and transferred the existing balance of MSC's previous
revolving credit arrangement to the New Credit Arrangement. On January 10, 1997,
CompScript paid the outstanding balance on this New Credit Arrangement.
Notes payable mature as follows:
1997 $116,600
1998 178,486
1999 42,864
2000 110,684
--------
$448,634
========
5. NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consist of the following:
<TABLE>
<CAPTION>
<S> <C>
$300,000 promissory note payable to a director and shareholder, interest
at prime plus 6.00% (14.25% at December 31, 1996), collateralized by
the accounts receivable of MSC. Interest is due monthly through
January 1, 2001 and principal is due on January 1, 2001. $300,000
$200,000 unsecured promissory note payable to a director and shareholder,
interest at a fixed rate of 8%. Interest is due monthly through January
1, 2001 and principal is due on January 1, 2001. 200,000
$400,414 unsecured promissory notes payable to certain officers and
shareholders of MSC, interest at a fixed rate of 7%.
Interest is due monthly through December 31, 1997 and principal is due
on December 31, 1997. 400,000
--------
900,414
Less current portion (400,414)
--------
$500,000
========
</TABLE>
F-73
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
5. NOTES PAYABLE TO SHAREHOLDERS (CONTINUED)
Notes payable to shareholders mature as follows:
1997 $400,414
2001 500,000
--------
$900,414
========
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by MSC in estimating its fair
value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
NOTE RECEIVABLE: The fair value of MSC's note receivable from a customer is
estimated using discounted cash flow analysis, based on discount rates at which
similar notes would be made under current conditions, commensurate with the
credit and interest rate risks involved.
NOTES PAYABLE: The fair values of MSC's notes payable are estimated using
discounted cash flow analysis, based on MSC's current incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and fair values of MSC's financial instruments at December
31, 1996 are as follows:
CARRYING FAIR
AMOUNT VALUE
--------------------
Note receivable $218,216 $218,216
Notes payable 448,634 453,909
Notes payable to shareholders 900,414 941,213
F-74
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
7. CAPITAL LEASES
The Company leases certain equipment under long-term capital leases. Future
obligations are as follows:
Year ending December 31,
1997 $ 60,630
1998 34,552
1999 11,895
---------
107,077
Less interest (23,369)
---------
83,708
Less current portion (47,704)
---------
$ 36,004
=========
8. SHAREHOLDERS' DEFICIT
Effective June 28, 1996, the Board of Directors of MSC declared a 12-for-5 stock
split. The accompanying financial statements have been retroactively restated to
reflect this stock split as of January 1, 1995.
During 1996, the Board of Directors declared a $85,560 distribution to
shareholders, of which $32,000 was paid prior to December 31, 1996. The
remaining balance of $53,560 is shown as distributions payable on the balance
sheet.
9. LEASE COMMITMENTS
MSC has various operating leases, primarily relating to office and warehouse
facilities. The leases have various renewal options and escalation clauses as
defined in the lease agreements. Total rent expense for the years ended December
31, 1996 and 1995 amounted to $80,714 and $69,867 , respectively.
Approximate future minimum annual rentals under noncancelable operating leases
with initial or remaining terms in excess of one year are:
1997 $178,597
1998 180,827
1999 136,731
2000 140,594
2001 146,218
--------
$782,967
========
F-75
<PAGE>
Medical Services Consortium, Inc.
Notes to Financial Statements (continued)
10. PROFIT SHARING PLAN
Effective January 1, 1995, MSC established the Medical Services Consortium, Inc.
401(k) Plan (the Plan), a deferred profit sharing savings plan that covers all
employees of MSC that are at least 21 years old and who have been employed by
MSC at least 6 months. Under the Plan, participating employees may defer up to
15% of their pre-tax salary before reduction each year. MSC may make
contributions to the Plan at MSC's discretion. Contributions vest over a six
year period. MSC did not make any contributions to the Plan for the fiscal years
ended December 31, 1996 and 1995.
F-76
<PAGE>
Report of Certified Public Accountants
Shareholders of Hytree Pharmacy, Inc.
We have audited the accompanying balance sheets of Hytree Pharmacy, Inc.
(Hytree) as of March 31 and December 31, 1996, and the related statements of
income and retained earnings, and cash flows for the year ended March 31, 1996
and for the period from April 1, 1996 to December 31, 1996. These financial
statements are the responsibility of the Hytree's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hytree Pharmacy, Inc. at March
31, 1996 and December 31, 1996, and the results of its operations and its cash
flows for the year ended March 31, 1996 and for the period from April 1, 1996 to
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
March 14, 1997
F-77
<PAGE>
<TABLE>
<CAPTION>
Hytree Pharmacy, Inc.
Balance Sheets
MARCH 31, DECEMBER 31,
1996 1996
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 300 $ 4,341
Accounts receivable, less allowance for doubtful accounts
of $30,000 1,713,841 2,185,941
Inventories 715,476 952,455
Income tax receivable 11,500
Prepaid expenses 10,800 10,050
Deferred taxes 52,100 49,300
---------------------------
2,504,017 3,202,087
Property and equipment, at cost:
Furniture and fixtures 195,172 198,484
Medical equipment 124,420 137,109
Rental equipment 499,151 627,560
Office equipment 204,053 222,756
Leasehold improvements 7,020 10,665
---------------------------
1,029,816 1,196,574
Less: Accumulated depreciation and amortization 603,687 704,860
---------------------------
426,129 491,714
Other assets:
Deposits 2,590 2,590
Cash surrender value of officer's life insurance 16,280
---------------------------
18,870 2,590
---------------------------
TOTAL ASSETS $ 2,949,016 $ 3,696,391
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 663,311 $ 577,394
Income tax payable 214,000
Accrued payroll and related expenses 208,726 372,638
Notes payable--shareholders 467,724 215,723
Current portion of long-term debt 60,386 67,668
---------------------------
1,400,147 1,447,423
Long-term debt 574,728 997,279
Deferred taxes 29,900 35,100
Shareholders' equity:
Common stock, no par value, 250 shares authorized;
150 shares issued and outstanding 263,860 263,860
Nonvoting common stock, no par value, 50 shares authorized;
.75 shares issued and outstanding 90,000 90,000
Retained earnings 590,381 862,729
---------------------------
944,241 1,216,589
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,949,016 $ 3,696,391
===========================
</TABLE>
SEE ACCOMPANYING NOTES.
F-78
<PAGE>
<TABLE>
<CAPTION>
Hytree Pharmacy, Inc.
Statements of Income and Retained Earnings
APRIL 1, 1996
YEAR ENDED TO
MARCH 31, DECEMBER 31,
1996 1996
----------------------------------
<S> <C> <C>
Net revenues $ 10,004,455 $ 8,305,142
Cost of revenues 5,482,335 4,368,982
----------------------------------
Gross profit 4,522,120 3,936,160
Selling, general and administrative expenses 4,218,470 3,368,034
Interest expense 90,210 94,285
Other expense (income) 16,731 (10,507)
----------------------------------
Income before income taxes 196,709 484,348
Provision for income taxes 86,000 212,000
----------------------------------
Net income 110,709 272,348
Retained earnings--beginning of period 479,672 590,381
----------------------------------
Retained earnings--end of period $ 590,381 $ 862,729
==================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-79
<PAGE>
<TABLE>
<CAPTION>
Hytree Pharmacy, Inc.
Statement of Cash Flows
APRIL 1, 1996
YEAR ENDED TO
MARCH 31, DECEMBER 31,
1996 1996
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 110,709 $ 272,348
Noncash items included in income:
Depreciation and amortization 130,644 101,517
Loss on abandoned leasehold improvements 37,506
Stock compensation expense 90,000
Deferred taxes 79,800 8,000
Provision for bad debts 82,470 61,840
Increase (decrease) in cash caused by changes in current items:
Accounts receivable (595,035) (533,940)
Inventories (159,593) (236,979)
Prepaid expenses 7,046 750
Accounts payable 171,294 (85,917)
Other current liabilities (22,211) 389,412
------------------------------
Net cash used in operating activities (67,370) (22,969)
INVESTING ACTIVITIES
Change in other assets (6,065) 16,280
Acquisition of property and equipment (93,017) (167,102)
------------------------------
Net cash used in investing activities (99,082) (150,822)
FINANCING ACTIVITIES
Borrowings on long-term debt 3,718,896 2,647,113
Increase in notes payable to shareholders 446,441
Notes payable to shareholders (292,842) (252,001)
Repayment of long-term debt (3,791,021) (2,217,280)
------------------------------
Net cash provided by financing activities 81,474 177,832
------------------------------
Net (decrease) increase in cash (84,978) 4,041
Cash--beginning of year 85,278 300
------------------------------
CASH--END OF YEAR $ 300 $ 4,341
==============================
NONCASH INVESTING AND FINANCING ACTIVITY
Acquisition of property and equipment under capital lease $ 43,711 $ -0-
==============================
SUPPLEMENTAL INFORMATION
Interest paid $ 90,210 $ 94,285
==============================
Income taxes paid $ 78,506 $ -0-
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-80
<PAGE>
Hytree Pharmacy, Inc.
Notes to the Financial Statements
For the Year Ended March 31, 1996 and for the
Period from April 1, 1996 to December 31, 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Hytree provides pharmacy services for nursing homes and homebound patients,
sells and rents medical equipment and supplies, and operates retail pharmacies,
all in Northeast Ohio.
In March of 1997 CompScript, Inc. (CompScript) announced its intent to exchange
CompScript common stock for all of the outstanding stock of Hytree Pharmacy,
Inc. The business combination will be accounted for as a pooling of interests.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the customer. A
significant portion of Hytree's revenues from sales of pharmaceutical and
medical products are reimbursable from third-party payors (principally Medicaid
and Medicare). Hytree monitors its receivables from these reimbursement sources
under policies established by management and reports such revenues at the net
realizable amount expected to be received.
ACCOUNTS RECEIVABLE
On average, approximately 52% of accounts receivable are due from third party
payors, 37% are due from nursing homes, and the remaining 11% are due from
guarantors and others. An allowance for doubtful accounts is provided for the
estimated losses that will be incurred in the collection of outstanding accounts
receivable balances. Estimated losses are based on a review of the current
status of outstanding accounts receivable balances and historical collection
experiences.
INVENTORIES
Inventories, consisting of pharmaceuticals, medical equipment and supplies, are
stated at the lower of cost (first in, first out method) or market.
F-81
<PAGE>
Hytree Pharmacy, Inc.
Notes to Financial Statements - Continued
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment is depreciated or amortized using the straight-line and
declining balance methods over the estimated useful lives of the assets as
follows:
Furniture and fixtures 5-7 years
Medical and rental equipment 7 years
Office equipment 5-7 years
Leasehold improvements 10 years
At December 31, 1996, property and equipment included assets held under capital
leases at an aggregate cost of $169,248, with related accumulated amortization
of $57,381. Amortization of equipment under capital leases is included in
depreciation expense.
INCOME TAXES
Hytree follows Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. This accounting standard requires that the liability method be
used in accounting for income taxes. Under this accounting method, deferred tax
assets and liabilities are determined based on the differences between the
financial reporting basis and the tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that apply in the periods in which
the deferred tax asset or liability is expected to be realized or settled.
USE OF ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could differ from the estimates that were used.
ADVERTISING COSTS
Hytree expenses advertising costs as incurred. Advertising costs for the year
ended March 31, 1996 and for the period from April 1, 1996 to December 31, 1996
amounted to $13,386 and $12,905, respectively.
F-82
<PAGE>
Hytree Pharmacy, Inc.
Notes to Financial Statements - Continued
B. NOTES PAYABLE--SHAREHOLDERS
Notes payable--shareholders consist of unsecured demand borrowings bearing
interest at 12% and payable to shareholders of Hytree. These notes are
subordinate to the line of credit borrowings (see Note C). Interest paid to the
shareholders for the year ended March 31, 1996 and for the period from April 1,
1996 to December 31, 1996 was $18,162 and $30,676, respectively.
In addition, accrued payroll and related expenses includes $6,000 and $349,276
at March 31, 1996 and December 31, 1996, respectively, owed to shareholders of
Hytree.
C. DEBT
At December 31, 1996, long-term debt consisted of the following:
Various capital lease agreements due in monthly
installments through October, 1999 at interest rates
ranging from 9.25% to 19.3% $ 100,633
Note payable to a related individual in monthly
installments of $1,000 through May 1997 4,515
Note payable under a $1,000,000 line of credit arrangement,
including interest at (OMEGA)% above the bank's prime rate
(prime--8.25% at December 31, 1996), collateralized by
substantially all assets of Hytree and guaranteed
by the shareholders of Hytree 959,799
--------------
1,064,947
Less: Current portion 67,668
--------------
Long-term portion $ 997,279
==============
Future maturities of long-term debt are as follows: 1997--$67,668;
1998--$984,510 and 1999--$12,769.
F-83
<PAGE>
Hytree Pharmacy, Inc.
Notes to Financial Statements - Continued
D. INCOME TAX EXPENSE
Income tax expense (benefit) for the year ended March 31, 1996 and for the
period from April 1, 1996 to December 31, 1996 consists of:
<TABLE>
<CAPTION>
APRIL 1, 1996 TO
YEAR ENDED MARCH 31, 1996 DECEMBER 31, 1996
------------------------------------------ ---------------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal $ 5,200 $ 67,800 $ 73,000 $ 173,400 $ 6,800 $ 180,200
State 1,000 12,000 13,000 30,600 1,200 31,800
----------------------------------------------------------------------------------
$ 6,200 $ 79,800 $ 86,000 $ 204,000 $ 8,000 $ 212,000
==================================================================================
</TABLE>
Hytree's deferred income tax asset is due primarily to the temporary effects of
accrued compensation, allowance for doubtful accounts and inventory obsolescence
reserve offset by accelerated tax depreciation.
The difference between the statutory federal income tax rate of 34% and the
effective income tax rate is due to state income taxes, net of federal benefit.
E. OPERATING LEASES
Minimum annual rentals under non-cancelable lease obligations, including amounts
due to a related party, are as follows:
1997 $ 157,920
1998 157,920
1999 157,920
2000 99,120
2001 14,160
------------
$ 587,040
============
F-84
<PAGE>
Hytree Pharmacy, Inc.
Notes to Financial Statements - Continued
E. OPERATING LEASES--CONTINUED
Hytree also leases medical equipment, automobiles and delivery equipment under
month-to-month cancellable agreements from BDB Leasing. Monthly lease payments
approximate $22,400.
F. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Total rent and lease expense for the year ended March 31, 1996 was $511,000, of
which $358,677 was incurred to related parties. Total rent and lease expense for
the period from April 1, 1996 to December 31, 1996 was $396,492, of which
$312,065 was incurred to related parties.
G. STOCK BONUS AGREEMENT
Effective February 1, 1996, Hytree entered into a stock bonus agreement
(Agreement) with an employee granting the employee up to a two percent
non-voting interest in Hytree. Compensation expense of $90,000 was recorded in
the year ended March 31, 1996 in connection with the Agreement.
F-85
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Representative. Neither the
delivery of this Prospectus nor any sale made hereunder shall, in any
circumstances, create an implication that there has been no change in the
affairs of the Company or that information contained herein is correct as of any
date subsequent to the date hereof. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to any person to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..........................................1
Risk Factors................................................7
The Exchange Offer.........................................13
Comparison of Common Stock
and Minority Intersts....................................19
Comparison of Shareholder Rights...........................20
Indemnification Against
Securities Act Liabilities...............................24
Certain Federal Income Tax Considerations..................24
Capitalization.............................................25
Dividends on and Market Price for
the Company's Common Stock...............................26
Management's Discussion and
Analysis or Plan of Operations...........................27
The Business...............................................34
Management.................................................52
Conflicts of Interest......................................60
Description of Company Securities.........................61
Legal Matters..............................................62
Experts....................................................62
Index to Financial Information.............................63
Until _________, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
COMPSCRIPT, INC.
662,341 Shares of
Common Stock
------------
PROSPECTUS
-------------------
--------------
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "Corporation Act") permits
the indemnification of directors, employees, officers and agents of Florida
corporations. The Company's Articles of Incorporation (the "Articles") and
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the Corporation Act. Insofar as indemnification
for liabilities arising under the Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as express in the act and is therefore unenforceable.
The Articles of Incorporation and Bylaws of the Company require the
Company to indemnify its Directors and officers to the fullest extent permitted
by the Business Corporation Act of the State of Florida.
II-1
<PAGE>
<TABLE>
<CAPTION>
ITEM 21. EXHIBITS.
A. EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
3.1 CompScript's Articles of Incorporation (1)
3.2 Amendments to CompScript's Articles of Incorporation dated April 24, 1996,
1996 and July 3, 1996 (3.2)(2)
3.3 CompScript's Bylaws(1)
4.1 Form of CompScript's Common Stock Certificate (3)
10.1 CompScript 1996 Stock Option Plan (4)
10.2 Share Exchange Agreement, dated February 29, 1996, among Capital Brands,
CompScript, Inc. and certain shareholders of CompScript, Inc. (10.1)(5)
10.3 Employment Agreement dated August 19, 1996 between CompScript and
Brian A. Kahan (10.3)(2)
10.4 Stock Purchase Agreement dated May 31, 1996 between CompScript and the
Shareholders of Delta Pharmacy Services, Inc. (10.1)(6)
10.5 Stock Purchase Agreement dated August 19, 1996 between CompScript and
the Shareholders of SecurX, Inc.(10.1)(7)
10.6 Stock Purchase Agreement dated January 10, 1997 between CompScript and
the Shareholders of Medical Services Consortium, Inc. (8)
10.8 Employment Agreement dated June 19, 1996 between CompScript and
Robert J. Gardner(9)
10.10 Revolving Loan Agreement dated January 3, 1997 between CompScript and
SunTrust Bank South Florida N.A.(9)
10.11 Independent Consulting Agreement dated January 9, 1997 between
Compscript, Gerard Altieri, Ronald J. Reith and Comprehensive Formulary
Management(9)
10.12 Management Consulting Agreement dated October, 1996 between
Compscript and Shulman & Associates, Inc.(4.1)(10)
10.13 Merger Agreement dated March 26, 1997 between Compscript, Compscript
Acquisition Subsidiary, Hytree Pharmacy, Inc. and the shareholders of
Hytree Pharmacy, Inc. (10.1) (11)
22.1 CompScript's Subsidiaries(9)
23.1 Consent of Independent Certified Public Accountants
</TABLE>
- -------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibit of the same number
filed with CompScript's Form 8-B dated September 2, 1994.
(2) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's Transition Report on 10-K
for the transition period from September 30, 1995 to December
31, 1995.
(3) Incorporated by reference to the exhibit of the same number
filed with CompScript's Form 10-KSB for the year ended
December 31, 1994.
II-2
<PAGE>
(4) Incorporated by reference to Appendix B of CompScript's Proxy
Statement for the year ended December 31, 1995.
(5) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's Form 8-K dated March 14,
1996.
(6) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's 8-K dated June 14 , 1996.
(7) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's 8-K dated August 30, 1996.
(8) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's 8-K dated January 10, 1997.
(9) Incorporated by reference to the exhibit of the same number
filed with CompScript's Form 10-KSB for the year ended
December 31, 1996.
(10) Incorporated by reference to the exhibit of the number
indicated filed with CompScript's Registration Statement Form
S-8 dated December 24, 1996.
(11) Incorporated by reference to the exhibit of the number
indicated filed with Compscript's 8-K dated March 26, 1997.
B. FINANCIAL STATEMENT SCHEDULES
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liability arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respect to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form,
II-3
<PAGE>
within one business day of receipt of such request and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
being duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Boca Raton, state of
Florida, on this 23rd day of July, 1997.
COMPSCRIPT, INC.
By: /S/ BRIAN A. KAHAN
------------------------------
Brian A. Kahan, President
and Chief Executive Officer
By: /S/ JUAN C. COCUY
-------------------------------
Juan C. Cocuy, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/S/ BRIAN A. KAHAN Chairman of the Board, July 23, 1997
- -------------------------- President, Chief
Brian A. Kahan Executive Officer and
Director (Principal
Executive Officer)
/S/ ROBERT J. GARDNER Vice President and Director July 23, 1997
- --------------------------
Robert J. Gardner
/S/ PAUL E. HEIMBERG Director July 23, 1997
- --------------------------
Paul E. Heimberg
/S/ ROBERT EDELHEIT Director July 23, 1997
- --------------------------
Robert Edelheit
/S/ MALCOLM LEONARD Director July 23, 1997
- --------------------------
Malcolm Leonard
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
23.1 Consent of Independent Certified Public Accountants.
EXHIBIT 23.1
Consent of Independent Certified Public Accounts
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated June 18, 1997, with respect to the supplemental
consolidated financial statements of CompScript, Inc. and Subsidiaries
(CompScript); March 31, 1997, with respect to the consolidated financial
statements of CompScript; January 24, 1997, with respect to the financial
statements of Medical Services Consortium, Inc.; and March 14, 1997, with
respect to the financial statements of Hytree Pharmacy, Inc. in the Registration
Statement (Form S-4) and related Prospectus of CompScript for the registration
of 662,341 shares of its common stock.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
West Palm Beach, Florida
July 18, 1997
