[This filing amends Item 1 of Form 10-KSB for the year ended December 31, 1997.]
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 0-20594
COMPSCRIPT, INC.
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(Name of Small Business Issuer in Its Charter)
FLORIDA 65-0506539
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1225 BROKEN SOUND PARKWAY
BOCA RATON, FLORIDA 33481
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(Address of Principal Executive Offices)(Zip Code)
(561) 994-8585
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Securities Exchange Act of
1934:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
----------------------------------------
(Title of Class)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10- KSB. [X]
State registrant's revenues for the year ended December 31, 1997. $50,590,325
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on February 26, 1998 computed by reference to the closing bid
price of the CompScript, Inc. Common Stock as reported by THE WALL STREET
JOURNAL on that date ($4.1875): $40,343,954
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock, par value
$.0001 per share (the "Common Stock"), as of February 26, 1998, was 14,072,063.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART 1
Item 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
CompScript, Inc. (formerly Capital Brands, Inc.,) (the "Company" or
"Compscript") is a comprehensive provider of pharmacy management services
equipped to both lower costs and improve the quality of care to its customers.
CompScript offers a broad range of pharmacy, infusion therapy, consulting
services and mail order, to managed care networks, long-term and subacute care
facilities, home health patients, and recipients of managed care. CompScript's
proprietary pharmacy management capabilities combine sophisticated clinical
tools with the latest technologies in databases and drug profiles.
Since May 1996, the Company has consummated four acquisitions of
institutional pharmacy providers located in Mobile, Alabama (May 1996), Miami,
Florida (January 1997), Metarie, 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.
Capital Brands, Inc.'s ("Capital Brands") predecessor, Capital
Acquisitions, Inc. was incorporated in March 1988 as a Delaware corporation.
Prior to September, 1991, Capital Brands was principally engaged in
organizational activities, raising capital through a public offering and
searching for and investigating business opportunities. During late 1995,
representatives of Capital Brands were introduced to the management of
AldenCare, Inc. [now known as CompScript-Boca, Inc. ("CompScript-Boca")], to
discuss their respective needs. At the time, Capital's business operations
consisted of its direct ownership of equity investments and its indirect
ownership and operation of various fast food operations located in Poland. These
investments and operations had historically generated losses for Capital.
CompScript-Boca was seeking to expand its operations, and believed that such
expansion would be most effective through a public company that could provide
not only operating capital, but the opportunity to grow through acquisitions and
the existence of a liquid market for its securities.
In furtherance of the desires of Capital and CompScrip-Boca, the principal
shareholders and directors of both parties met to discuss a possible business
combination. Among the matters discussed were: (i) consummation of a tax free
reorganization under the Internal Revenue Code and the rules and regulations
thereunder; (ii) compliance with applicable securities laws for a private
offering by Capital; (iii) concluding the business combination as expeditiously
as was practicable in light of Capital's continuing losses and CompScript-Boca's
need for expansion; (iv) providing the surviving entity to the business
combination with operating capital; and (v) the prospects for future
profitability of the surviving entity. These discussions led to the execution of
a letter of intent on January 2,1996, followed by the execution of a definitive
agreement on February 29, 1996 (the "Definitive Agreement").
The transactions contemplated by the Definitive Agreement (the
"Acquisition") were consummated on April 26, 1996, by the issuance of shares of
Capital's common stock (amounting to approximately 80% of its issued and
outstanding common stock) to approximately 41 shareholders of CompScript-Boca
(who owned approximately 93% of CompScript-Boca's outstanding common stock). The
CompScript-Boca shareholders who were parties to the Acquisition were selected
based upon (i) their ownershihp of a sufficient percentage of CompScript-Boca so
that the Acquisition could be consummated as a tax-free exchange, and (ii) their
status as "accredited investors" (within the meaning of Rule 501 under the Act)
so that the Acquisition could be accomplished within the time frames established
by the parties. In anticipation of consummating the Acquisition, Capital
divested itself of its interests in International Fast Foods Corporation, Family
Chicken, Inc. and International Hotel Corporation. The Acquisition has been
accounted for as a "reverse acquisition", and the Company recorded, at the time
of the Acquisition, a minority interest in CompScript-Boca of $222,628,
representing approximately 7% of the net assets of CompScript-Boca on the date
of the Acquisition.
On February 23, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Omnicare, Inc., pursuant to which a
wholly-owned subsidiary of Omnicare will merge with and into the Company (the
"Merger"). Following the Merger, the Company will become a wholly-owned
subsidiary of Omnicare. In connection with the Merger, shareholders of the
Company will receive shares of Omnicare common stock (NYSE: OCR) with a market
value of $4.50 per share, determined in accordance with, and subject to the
terms of, the Merger Agreement. Omnicare is a leading independent provider of
pharmacy and related services to long-term care institutions such as nursing
homes, retirement centers and other institutional health care facilities.
Consummation of the Merger is conditioned on, among other things, receipt of
approval from holders of more than 50% of the Company's outstanding common
stock. It is anticipated that the Company's shareholders will be asked to vote
upon the Merger, and that consummation of the Merger will occur by the end of
the third quarter of 1998.
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See Item 10. "Executive Compensation", Item 12. "Security Ownership of Certain
Beneficial Owners and Management - Changes in Control" and Item 13. Certain
Relationships and Related Transactions".
Effective December 31, 1997, the Company cancelled its contracts to
provide pharmacy benefit management ("PBM") services due to lack of
profitability and cash flow constraints.
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 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 received accreditation under the Joint Commission on
Accreditation of Health Care Organizations ("JCAHO") in connection with the
Company's long-term care institutional pharmacy services. This accreditation was
received in October 1996, for the Company's Boca Raton facility, in October 1997
for its Ohio facility, and in January 1998 for its Miami facility. 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 unit doses 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 prescription 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
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and standardize care by setting forth more stringent standards relating 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 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.
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
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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 Joint
Commission on Accreditation of Healthcare Organization ("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 intravenously. 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,
hematological, nutritional, pain management, chemotherapeutic, hydration,
endocrine, respiratory and AIDS management treatments to patients.
MAIL SERVICE PHARMACY BENEFITS. The Company operates a 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.
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RECENT EVENTS. Effective December 31, 1997, the Company cancelled its
contracts to provide pharmacy benefit management ("PBM") services due to lack of
profitability and cash flow constraints. Prior to that, PBM consisted 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 included 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.
In connection with the growth and expansion of the Company's mail service
operations, on January 1, 1998, the Company entered into an 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 assist the Company
in securing new mail order and related business. The Consulting Agreement
provides that for a five year period through December 31, 2002, the Consultants
shall receive commissions attributable to all new business obtained by
Consultants in excess of certain established base-line pricing. Additionally,
the Consultants received a total of 115,000 shares of the Company's common stock
in January 1998 as compensation for these services. The Consultants shall devote
such time as reasonably necessary to perform services under the Consulting
Agreement. This Consulting Agreement supersedes a January 1997 agreement which
provided for the payment of $50,000 per month through January 1998, and was
renewable for an additional 12 month period if gross revenues (less adjustments)
attributable to all mail order business exceeded certain targeted amounts.
ACQUISITION STRATEGY
The Company has targeted acquisition candidates with strong management, a
demonstrated capacity for growth and opportunities to realize efficiencies
through consolidation and integration. The Company has identified 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.
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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 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 1,400,000 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 (the "Shulman 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 of 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 of 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 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.
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COMPETITION
The Long Term-Care industry is highly fragmented but experiencing
significant consolidation. 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 considers its principal
competitive advantages to be independence from nursing home owner/operators,
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.
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 regional and large national companies. Many of these larger companies
have greater financial and marketing resources than the Company.
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. The 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
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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 the year ended December 31, 1997, CompScript's payor mix was
approximately as follows: 35% private pay and nursing homes, 27% Medicaid, 20%
Medicare (of which, 19% was attributable to Part A and 1% to Part B) and 18%
insurance and other private sources.
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.
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
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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.
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 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 Medicare or Medicaid makes payment. 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 compliance with applicable
regulations. 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. Until recently,
there were 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. However, the Health Insurance Portability and Accountability Act of 1996,
signed into law on August 21, 1996, now requires the Secretary of HHS to issue
written advisory opinions, which are binding on the Secretary and the party
requesting the opinion, regarding the applicability of certain aspects of the
anti-kickback statute to specific or proposed arrangements.
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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 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. In recent years, the
Clinton administration and Congress have considered various proposals to reform
the health care system. On August 5, 1997, the Balanced Budget Act of 1997 (the
"Balanced Budget Act") was enacted. The Balanced Budget Act, among other things,
mandates the establishment of a prospective payment system ("PPS") for Medicare
skilled nursing facilities ("SNFs"), under which facilities will be paid a
federal per diem rate for virtually all covered SNF services. It is anticipated
that the PPS will be phased in over three cost reporting periods, starting with
cost reporting periods beginning on or after July 1, 1998. In order to ensure
that the frail elderly residing in SNFs receive needed and appropriate
medication therapy, the results of studies conducted by independent
organizations, including those which examine appropriate payment mechanism and
payment rates for medication therapy, must be considered as part of the PPS for
SNFs. The Balanced Budget Act provides for the imposition of cost savings
measures affecting Medicare SNF services, and imposes limits on annual updates
in payments to Medicare SNFs for routine services, and institutes consolidated
billing for SNF residents, effective July 1, 1998. The Balanced Budget Act also
imposes numerous other cost savings measures affecting Medicare SNF services.
The Balanced Budget Act also repeals the federal payment standard for
Medicaid payments to Medicaid nursing facilities effective October 1, 1997.
There can be no assurance that budget constraints or other factors will not
cause states to reduce Medicaid reimbursement to nursing facilities or that
payments to nursing facilities will be made on a timely basis. The law also
grants greater flexibility to states to establish Medicaid managed care projects
without the need to obtain a federal waiver. Although these waiver projects
generally exempt institutional care, including nursing facility and
institutional pharmacy services, no assurances can be given that managed care or
capitated rates will not replace fee-for-service reimbursement for long-term
care, including pharmacy services. The Company anticipates that federal and
state governments will continue to review and assess alternative health care
delivery systems and payment methodologies. It is not possible to predict the
effect of the recent budget legislation or the interpretation or administration
of such legislation on the Company's business. 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.
Several state Medicaid programs have established mandatory statewide
managed care programs for Medicaid beneficiaries to control costs through
negotiated or capitated rates, rather than traditional cost-based reimbursement.
These programs propose to use savings acheived to expand coverage to include
those not previously eligible for Medicaid. HHS has approved waivers for
statewide managed care demonstration projects in several states, and similar
waivers are pending in several other states. To date, the Company's operations
have not been adversely affected by these demonstration projects. There is no
assurance that future Medicaid managed care systems will not have an adverse
effect on the Company's business.
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Federal and state laws and regulations govern various aspects of the
Company's businesses. 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.
OTHER REGULATION:
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 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 Miami and Boca Raton, Florida, and Mentor, Ohio facilities have
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
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servicemarks. If the Company is unable to obtain any additional registrations,
the Company believes there would be no material adverse effect on the Company.
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 February 28, 1998, the Company and its subsidiaries employed a total
of 365 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.
MATERIALS/SUPPLIES
CompScript purchases pharmaceuticals through a wholesale distributor 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.
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.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPSCRIPT, INC.
DATE: May 8, 1998 By: /s/ BRIAN A. KAHAN
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Brian A. Kahan, Chairman of the Board, Chief
Executive Officer [Principal
Executive Officer]
