As filed with the Securities and Exchange Commission on January 9, 1998
Registration No. 333-32011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
COMPSCRIPT, INC.
(Name of Small Business Issuer in its Charter)
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FLORIDA 8741 65-0506539
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number Identification No.)
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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
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TITLE OF EACH
CLASS OF SECURITIES PROPOSED MAXIMUM PROPOSED MAXIMUM
TO BE REGISTERED AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
COMMON STOCK BE REGISTERED SHARE PRICE REGISTRATION FEE(2)
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(par value 662,341 (1) (1) $871.83
$.0001 per share)
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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
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A. INFORMATION ABOUT THE
TRANSACTION
1. Front of Registration Statement and Outside Facing Page of Registration Statement;
Prospectus Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectusof Prospectus; Table of
Contents; Available Information
3. Risk Factors, Ratio of Earnings to Prospectus Summary; Risk Factors; The
Fixed Charges and Other Information Exchange Offer; The Company
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
B. INFORMATION ABOUT THE
REGISTRANT
10. Incorporation with Respect to S-3 *
Registrants
11. Incorporation of Certain Information by
Reference *
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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
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
* Not applicable or answer is in the negative.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 9, 1998
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") up to 662,341 shares of its common
stock, $.0001 par value per share ("Common Stock") for 169,902 shares,
constituting all of the outstanding minority equity interests (the "Minority
Interests") in the Company's 92% owned subsidiary, CompScript- Boca, Inc. (the
"Subsidiary"). The Exchange Offer is being made to enable each of the 76 holders
of the Minority Interests (a "Minority Holder" or "Offeree") to (i) acquire
Common Stock of the Company on the same terms as former shareholders of the
Subsidiary who exchanged their shares in the April 1996 share exchange with the
Company (which was known as Capital Brands, Inc. at the time of such exchange)
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. The Exchange Offer
expires at 2:00 p.m., Fort Lauderdale, Florida time on ___________, 1998 (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 ___________, 1998, 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:
/bullet/ THE BOARD OF DIRECTOR'S DETERMINATION OF THE EXCHANGE VALUE IS
SUBJECTIVE AND THE COMPANY HAS NOT OBTAINED ANY FAIRNESS OPINION OR
INDEPENDENT APPRAISAL RELATIVE TO THE EXCHANGE OFFER.
/bullet/ THE BOARD OF THE COMPANY HAS NOT MADE A RECOMMENDATION CONCERNING THE
EXCHANGE OFFER, NOR HAS THE BOARD OF DIRECTORS OF THE SUBSIDIARY 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.
THE EXCHANGE OFFER WILL EXPIRE ON ___________, 1998, AT 2:00 P.M. FORT
LAUDERDALE, FL TIME
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SEE "RISK FACTORS" COMMENCING ON PAGE 6 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 ______________, 1998
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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.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY...........................................................................................1
The Company..................................................................................................1
Risk Factors.................................................................................................1
Comparison of Common Stock and Minority Interests............................................................2
Subsidiary...................................................................................................3
The Exchange Offer...........................................................................................3
Conflicts of Interest........................................................................................5
RISK FACTORS.................................................................................................6
Exchange Offer Risks.........................................................................................6
Effect of Exchange Offer on Nonparticipating Offerees........................................................7
THE EXCHANGE OFFER..........................................................................................10
Present Ownership of Subsidiary; Securities to be Exchanged.................................................10
Terms of the Exchange Offer.................................................................................10
Conflicts of Interest; Position of Each Subsidiary's Board of Directors with
Respect to the Exchange Offer......................................................................11
Purpose and Background of the Exchange Offer................................................................11
Determination of the Exchange Value.........................................................................13
How to Exchange.............................................................................................15
Exchange Period.............................................................................................15
Closing and Issuance of Stock...............................................................................15
Withdrawal..................................................................................................15
Validity of Offeree's Acceptance of Exchange Offer..........................................................16
Revocability of Offeree's Acceptance of Exchange Offer......................................................16
Accounting Treatment........................................................................................16
Tax Consequences............................................................................................16
Pro Forma Financial Information.............................................................................16
Management and Operations of the Company After the Exchange.................................................16
Federal or Regulatory Approvals.............................................................................16
Expenses and Fees...........................................................................................16
COMPARISON OF COMMON STOCK AND MINORITY INTERESTS...........................................................17
COMPARISON OF SHAREHOLDER RIGHTS............................................................................17
Annual Meetings.............................................................................................18
Shareholder Meeting Procedures..............................................................................18
Record Dates................................................................................................19
Directors...................................................................................................19
Amendment to Articles and Bylaws............................................................................19
Indemnification.............................................................................................20
INDEMNIFICATION AGAINST SECURITIES ACT LIABILITIES..........................................................21
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...................................................................21
No Rulings Received.........................................................................................21
Opinion of Counsel..........................................................................................21
CAPITALIZATION..............................................................................................22
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DIVIDENDS ON AND MARKET PRICE FOR THE
COMPANY'S COMMON STOCK......................................................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS.......................................................................................23
General.....................................................................................................23
Results of Operations.......................................................................................25
Liquidity and Capital Resources.............................................................................28
THE BUSINESS................................................................................................30
Products and Services.......................................................................................30
Acquisition Strategy........................................................................................34
Suppliers...................................................................................................35
Competition.................................................................................................35
Government Regulation.......................................................................................36
Pharmacy Benefits Management Regulation.....................................................................39
Servicemarks and Trademarks.................................................................................42
Insurance...................................................................................................42
Employees...................................................................................................42
Product and Market Development..............................................................................42
Material/Supplies...........................................................................................42
Inventories.................................................................................................43
Environmental Matters.......................................................................................43
Description of Properties...................................................................................43
Legal Proceedings...........................................................................................43
MANAGEMENT..................................................................................................43
Executive Compensation......................................................................................45
Option SAR Grants in Last Fiscal Year.......................................................................46
Aggregated Fiscal Year Ended Option Value Table.............................................................46
Stock Option Plan...........................................................................................46
Security Ownership of Certain Beneficial Owners and Management..............................................48
Change in Control...........................................................................................50
Compliance with Section 16(a) of the Securities Exchange Act of 1934........................................50
Certain Relationships and Related Transactions..............................................................50
CONFLICTS OF INTEREST.......................................................................................51
DESCRIPTION OF COMPANY SECURITIES...........................................................................51
Common Stock................................................................................................51
Transfer Agent and Registrar................................................................................52
Preferred Stock.............................................................................................52
LEGAL MATTERS...............................................................................................52
EXPERTS.....................................................................................................52
INDEX TO FINANCIAL INFORMATION.............................................................................F-1
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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. Subsequent to the acquisition, the Subsidiary issued
additional shares, resulting in the Company's current ownership of approximately
92% of the Subsidiary.
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).
CompScript presently operates 7 institutional pharmacies that serve long-term
and subacute facilities in Florida, Alabama, Mississippi, Louisiana and Ohio.
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 Exchange Value has been based solely upon the same exchange ratio
applicable to previous shareholders of the Subsidiary who 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
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obtained with respect to the value of the Subsidiary or Minority
Interest.
/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 has received a tax opinion to the effect 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
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.
/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
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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 92% 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 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 Board of Directors 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 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 Board 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.
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THE EXCHANGE OFFER
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 92%
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 tendered for 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.
Purpose and Background of the The Company anticipates achieving
Exchange Offer certain benefits from the simplification
of its corporate structure, such as (i)
enabling the Company to more clearly
present its operations to prospective
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investors and lenders, and (ii) reducing
certain administrative burdens. See "The
Exchange Offer - Purpose 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
on Nonparticipating Offerees."
Calculation of Exchange Value The Exchange Value has been established
by the Board of Directors at 3.898373
shares of the Company's Common Stock
being issued in exchange for each share
of CompScript-Boca common stock tendered
by a Minority Holder. Such Exchange
Value is the same rate of exchange as
was offered to shareholders of
CompScript-Boca in the April 1996 share
exchange. While the April 1996 exchange
value was based upon Capital Brands,
Inc.'s receipt of an independent
fairness opinion, no independent
appraisal of the Minority Interests or
fairness opinion has been obtained by
the Company in connection with this
Exchange Offer. The Board of Directors
considered, but did not adopt, other
measures of value that could have been
used to value the CompScript-Boca shares
owned by the Minority Holders. The use
of any such other measures of value
might have suggested a different
exchange rate, which exchange rate might
be more or less favorable to Minority
Holders than the Exchange Rate offered
hereby. Nor did the Board adopt a
different exchange rate based upon
changes to the Company that have
occurred since the April 1996 share
exchange. For reasons more fully
described elsewhere in this Prospectus,
the Board does not believe that an
exchange value taking into account one
or more of the foregoing factors
necessarily yields a more accurate
exchange rate for purposes of this
Exchange Offer. Had the Board of
Directors engaged an independent third
party to provide an appraisal or
fairness opinion for purposes of this
Exchange Offer, the exchange rate might
have been different than the Exchange
Rate offered hereby. CompScript-Boca
shareholders are under no obligation to
tender their shares in this Exchange
Offer. See "Risk Factors - Subjective
Valuation of Minority Interests; Lack of
Fairness Opinion or Independent
Appraisal" and "The Exchange Offer -
Determination of the Exchange Value".
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."
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Expenses and Fees All expenses of the Exchange Offer,
estimated to be approximately $228,000
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
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<PAGE>
with the Exchange Offer. See "The
Exchange Offer - Expenses and Fees."
Exchange Period The Exchange Offer will expire on
__________, 1998. 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 reasonable judgment, certain
events affecting the Company, the
Subsidiary, the Exchange Offer or the
financial markets have occurred. The
Company reserves the 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 has received a tax opinion
stating, in substance, that the exchange
of Minority Interests in the corporate
Subsidiary for Common Stock of the
Company will be eligible for treatment
as a nontaxable reorganization pursuant
to the Code. However, the Company is not
seeking any ruling from the Internal
Revenue Service ("IRS") 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 rendering
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 Subsidiary's Board of Directors
with Respect to the Exchange Offer" and "Conflicts of Interest."
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<PAGE>
RISK FACTORS
EXCHANGE OFFER RISKS
SUBJECTIVE VALUATION OF MINORITY INTERESTS; LACK OF FAIRNESS OPINION OR
INDEPENDENT APPRAISAL. The Exchange Value is the same ratio as was applicable to
the former shareholders of the Subsidiary who exchanged their shares in April
1996 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. The
Board of Directors considered, but did not adopt, other measures of value that
could have been used to value the CompScript-Boca shares owned by the Minority
Holders. The use of any such other measures of value might have suggested a
different exchange rate, which exchange rate might be more or less favorable to
Minority Holders than the Exchange Rate offered hereby. Nor did the Board adopt
a different exchange rate based upon changes to the Company that have occurred
since the April 1996 share exchange. For reasons more fully described elsewhere
in this Prospectus, the Board does not believe that an exchange value taking
into account one or more of the foregoing factors necessarily yields a more
accurate exchange rate for purposes of this Offering. Had the Board of Directors
engaged an independent third party to provide an appraisal or fairness opinion
for purposes of this Exchange Offer, the exchange rate might have been different
than the Exchange Rate offered hereby. CompScript-Boca shareholders are under no
obligation to tender their shares in this Exchange Offer. See "The Exchange
Offer - Determination of the Exchange Value".
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 Subsidiary.
POSSIBLE TAXABLE STATUS OF EXCHANGE OFFER; OTHER TAX ISSUES. Although the
Company has received an opinion of counsel to the effect that the Exchange Offer
will constitute a nontaxable reorganization pursuant to the Code, the Company is
not seeking any ruling from the IRS 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."
6
<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 the 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
Exchange Value of the Common stock being offered for such Minority Interests in
the Exchange Offer. If such consideration has a lesser value, non- exchanging
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 non-exchanging Minority Holders and therefore the non-exchanging 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.
In the event that the Company is sold or merged, or participates in a business
combination in which the Company is not the surviving entity, holders of
Minority Interests who elect not to participate in the Exchange Offer may not
have the opportunity to participate in such sale, merger or business
combination, and may not be afforded dissenters' rights of appraisal in
connection therewith. Moreover, holders of Minority Interests who do not
participate in the Exchange Offer will remain shareholders of the Subsidiary
(see "Comparison of Common Shares and Minority Interests"), and, therefore, will
not have the opportunity to participate in a public trading market or benefit
from market appreciation, if any, that might occur in the event of any sale,
merger or business combination involving the Company. As of the date hereof,
there are no active negotiations between the Company and any other party with
respect to a possible sale or merger of the Company or a business combination
involving a change in control of the Company.
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. 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
7
<PAGE>
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.
The Company intends to continue its practice of growth through acquisitions,
whereby the Company acquires on-going business operations deemed to be
compatible with the Company, in exchange for shares of the Company's Common
Stock. The issuance of shares in connection with acquisitions may have an
immediate dilutive impact on the Company's shareholders. One of the difficulties
encountered by the Company in connection with acquisitions of on-going
businesses is identifying candidates possessing the requisite synergies with the
Company to permit a cohesive blend of operations and management. There is no
assurance that the Company will continue to identify compatible acquisition
candidates, or that future acquisitions, if consummated, will inure to the
long-term benefit of the Company or its shareholders.
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 or Plan
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.
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.
8
<PAGE>
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 - 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 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. However, there is no assurance that the competitive advantages
perceived by the Company will permit the Company to compete on a profitable
basis.
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 33.8% 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 "Management--Security Ownership of Certain Beneficial Owners
and Management" and "Description of Company Securities."
9
<PAGE>
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 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 Company 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 92%
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 __________, 1998. See "The Exchange Offer
Exchange Period."
10
<PAGE>
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 shares of Common Stock to be issued to such Offeree will be rounded (upward)
to the nearest whole share.
CONFLICTS OF INTEREST; POSITION OF 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
BACKGROUND OF THE EXCHANGE OFFER. During late 1995, representatives of Capital
Brands, Inc., the Company's predecessor ("Capital"), were introduced to the
management of AldenCare, Inc. [formerly known as CompScript, Inc. and now known
as CompScript-Boca, Inc. ("AldenCare")], with a view towards consummating a
business combination. 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. For each of the
three years ended December 31, 1995, Capital incurred losses of approximately
($1,723,000), ($2,939,000) and ($2,354,000), respectively. In addition, in March
1995, International Fast Foods Corporation, one of Capital's largest operating
investments, became embroiled in a lawsuit, the reasons for and results of which
were to place a substantial drain on Capital's cash flow. Moreover, in November
1995, NASDAQ had advised Capital that it was in danger of delisting due to
Capital's failure to adhere to NASDAQ listing requirements. Notwithstanding that
Capital was able to maintain its NASDAQ listing through the infusion of
additional capital, Capital's historic operating losses and its prospects
indicated that the potential for future delisting existed.
From the perspective of Capital, a business combination was desirable in order
to truncate on-going losses from operations and seek to enhance shareholder
value through the acquisition of an operating business deemed to possess the
potential for long-term profitable operations.
For the years ended September 30, 1995 and 1994, AldenCare generated revenues of
$10,485,269 and $8,377,939, respectively, and achieved net income of $597,453
and $30,595, respectively. At the time AldenCare was introduced to Capital,
AldenCare 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 paid for by
the issuance of shares with a liquid market, thereby offering a potential exit
strategy to the shareholders of acquired companies.
In pursuit of the results desired by Capital and AldenCare, representatives of
both parties met to discuss a possible business combination. Among the factors
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 AldenCare's need for expansion; (iv) providing
the surviving entity to the business combination with operating capital, free
from substantial debt and the on-going cash drain caused by funding litigation;
(v) eliminating historical operating losses from the path of the surviving
entity; and (vi) 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").
<PAGE>
The Definitive Agreement provided for the issuance of shares of Capital in
exchange for outstanding shares of AldenCare, at an exchange ratio of 3.898373
shares of Capital to be issued in exchange for each outstanding share of
AldenCare. The Definitive Agreement contemplated a "reverse acquisition" whereby
11
<PAGE>
Capital would acquire AldenCare, but the shareholders of AldenCare who exchanged
their shares would acquire the ownership of approximately 80% of Capital.
The exchange ratio was arrived at through arm's length negotiations between
management of Capital and management of AldenCare, and took into account the
respective historic results of operations of Capital and AldenCare, their then
existing operations and their respective prospects for the future. Consummation
of the transactions contemplated by the Definitive Agreement was conditioned
upon the occurrence of certain events, including: (i) Capital's retention of
shares of QPQ Corporation, but the divestiture of its interests in International
Fast Foods Corporation ("IFFC"), Family Chicken, Inc. and International Hotel
Corporation ("IHC"); (ii) Capital's delivery at closing of $1.0 million in net
cash or equivalents; (iii) Capital's receipt of a favorable "fairness opinion"
to the effect that the terms of the proposed exchange value were fair and
reasonable from a financial point of view; (iv) Capital's completion of a 1:8
reverse stock split; and (v) evidence to AldenCare that Capital's NASDAQ listing
was reasonably likely to continue.
In anticipation of consummating the Definitive Agreement, Capital divested
itself of (i) its interest in IFFC to Mitchell Rubinson, the former president of
Capital, in exchange for 1,300,000 shares of Capital owned by Mr. Rubinson and
valued at $325,000 (consistent with Capital's accounting treatment of those
shares), (ii) its interest in Family Chicken, Inc. to Mr. Rubinson, in exchange
for 18,750 shares of Capital owned by Mr. Rubinson, valued at $37,500
(consistent with the Capital's accounting treatment of those shares) and (iii)
its interest in IHC to Mr. Rubinson, for nominal ($100) consideration. In
addition, Capital engaged Werbel Roth Securities, Inc. ("Werbel Roth"), an
investment banker, to render its opinion as to the fairness of the exchange
value proposed by the Definitive Agreement. Prior to the closing, Werbel Roth
rendered its opinion that from a financial point of view, the exchange value was
fair and reasonable to the shareholders of Capital. See "Determination of the
Exchange Value". The share exchange and other transactions contemplated by the
Definitive Agreement were authorized by the respective Boards of Directors of
Capital and AldenCare, and by the shareholders of AldenCare at a Special Meeting
of its Shareholders held on March 26, 1996.
The transactions contemplated by the Definitive Agreement were consummated on
April 26, 1996. At the closing, Capital issued an aggregate of 7,471,699
(post-split) shares of its common stock to approximately 41 shareholders of
AldenCare, who thereupon became the owner of approximately 80% of Capital's
outstanding common stock. At the closing, Capital had net assets consisting of
approximately $1,000,000 in cash and $1,125,000 in securities of QPQ
Corporation.
REASONS FOR THE EXCHANGE OFFER. This Exchange Offer is being undertaken by the
Company as part of its continued commitment to exchange its shares for 100% of
the outstanding shares of the Subsidiary upon the same terms and conditions. In
April 1996, at the time the Company acquired 93% of the Subsidiary, the Boards
of Directors of the Company and CompScript-Boca (which at that time was known as
CompScript, Inc.) desired to conclude the share exchange as efficiently and
expeditiously as was practicable. Consequently, it was mutually determined that
the Company proceed with such exchange only with those CompScript-Boca
shareholders as was believed would permit the Company to conclude such
transaction and remain within the guidelines established by the SEC for
transactions not requiring registration under the Securities Act. It has been
the Company's continued commitment, as previously communicated to holders of the
Minority Interests, to enable such Holders to exchange their shares on the same
terms and conditions as were applicable to the April 1996 exchange, at such time
as the Company was able to do so in compliance with applicable securities laws.
POTENTIAL BENEFITS TO THE COMPANY. The Board of Directors 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 Board of Directors 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 the consummation of the Exchange Offer
12
<PAGE>
(assuming all the Minority Interests are tendered and accepted), the Subsidiary
will be a wholly-owned subsidiary of the Company.
NO RECOMMENDATION BY 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.
DETERMINATION OF THE EXCHANGE VALUE
The Exchange Value has been established by the Board of Directors at 3.898373
shares of the Company's common stock being issued in exchange for each share of
CompScript-Boca common stock tendered by a Minority Holder. The Board of
Directors considers the Exchange Offer being made hereby to be a continuing part
of the Company's plan to acquire 100% of CompScript-Boca. Accordingly, the
Exchange Value is the same rate of exchange as was offered to shareholders of
CompScript-Boca in the April 1996 share exchange. While the April 1996 exchange
value was based, in part, upon a fairness opinion rendered to Capital by Werbel
Roth, no independent appraisal of the Minority Interests or fairness opinion has
been obtained by the Company in connection with this Exchange Offer.
In connection with the April 1996 share exchange, Capital engaged Werbel Roth to
review the terms and conditions of the share exchange and render its opinion as
to whether, from a financial point of view, the exchange ratio was fair and
reasonable to the shareholders of Capital. In connection with rendering their
opinion, Werbel Roth (i) reviewed the financial statements and other financial
information of Capital and CompScript-Boca, (ii) discussed with the executive
officers of Capital and CompScript-Boca their respective business operations,
competition, management, industry aspects and current and future prospects,
(iii) reviewed the share exchange agreement and related documents, (iv) reviewed
valuations of publicly-traded companies deemed comparable to CompScript-Boca,
(v) reviewed the trading history of Capital's common stock, (vi) reviewed the
future business and financial viability of Capital in the event the share
exchange was not consummated, and (vii) discussed the share exchange and related
documents with the attorneys for Capital.
Following completion of its due diligence, Werbel Roth delivered its fairness
opinion stating that the April 1996 share exchange is fair from a financial
point of view to the shareholders of Capital. In arriving at such determination,
Werbel Roth referenced Capital's continuing operating losses and its limited
resources and working capital, and CompScript-Boca's strong financial condition
and future prospects. The Werbel Roth fairness opinion was rendered to Capital,
not to CompScript-Boca, and was rendered in connection with the April 1996 share
exchange, not with respect to the Exchange Offer made hereby. The Werbel Roth
fairness opinion does not address the fairness of the Exchange Value offered
hereby.
The Board of Directors considered, but did not adopt, other measures of value
that could have been used to value the CompScript-Boca shares owned by the
Minority Holders, including, but not limited to the Company's revenues, its
earnings or the market price for its common stock, in comparison to such indices
in April 1996, or comparable company valuations, multiples of book value and/or
discounted cash flow. The use of any such other measures of value might have
suggested a different exchange rate, which exchange rate might be more or less
favorable to Minority Holders than the Exchange
13
<PAGE>
Rate offered hereby. Nor did the Board adopt a different exchange rate based
upon changes to the Company that have occurred since the April 1996 share
exchange, including but not limited to the Company's acquisition of five
operating businesses and the issuance of approximately 3,670,000 shares of
common stock in connection therewith. The Board does not believe that an
exchange value taking into account one or more of the foregoing factors
necessarily yields a more accurate exchange rate for purposes of this Offering
for reasons including that (i) the acquisitions have only been minimally
acretive to earnings and their overall impact on the Company cannot be measured
in the short-term, (ii) the issuance of shares in connection with consummation
of the acquisitions was dilutive to stockholders, and (iii) the market for the
Company's common stock has been somewhat volatile, and periods of volatility are
not necessarily associated with identifiable events.
Had the Board of Directors engaged an independent third party to provide an
appraisal or fairness opinion for purposes of this Exchange Offer, the exchange
rate might have been different than the Exchange Rate offered hereby, for the
foregoing reasons, or others. However, there is no assurance that the use of any
of the measures of value described above, or consideration being given to
changes to the Company since April 1996, are more appropriate determinants of
the exchange rate than the Exchange Value offered hereby. On April 25, 1996, the
day prior to the original exchange offer, the closing bid price for the
Company's common stock was $7.76 per share. However, as discussed in the Werbel
Roth fairness opinion, during the period from January 1996, when the original
exchange offer was announced, until April 12, 1996, the market value of
Capital's Common Stock rose from approximately $4.00 per share to $7.75 per
share. On the day prior commencement of this Exchange Offer, the closing bid
price for the Company's Common Stock was $___ per share. CompScript-Boca
shareholders are under no obligation to tender their shares in this Exchange
Offer.
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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.
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 reasonable 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 reasonable 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.
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<PAGE>
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.
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
The Exchange Offer will be recorded as an acquisition of minority interests. The
value of the shares issued will be based upon the closing bid price of the
Company's common stock on a day within 5 days prior to the effective date of the
Exchange Offer.
TAX CONSEQUENCES
The Company has obtained a tax opinion to the effect that 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
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."
PRO FORMA FINANCIAL INFORMATION
The results of the Exchange Offer (acquisition of the Minority Interests) on a
pro forma basis, as if such transaction had occurred on January 1, 1996, would
be approximately as follows:
SEPTEMBER 30, 1997
------------------
Increase (Decrease)
Goodwill $ 1,661,000
Other assets $( 228,000)
Minority interest $( 223,000)
Common stock $ 66
Additional paid-in capital $ 1,656,000
The pro forma effect of the Exchange Offer will be to increase the Company's net
loss by approximately $50,000 and $66,000 for the nine months ended September
30, 1997 and the year ended December 31, 1996, respectively, based upon a 25
year amortization period for goodwill. Net loss per share will be increased by
less than $.01 for both of the periods indicated.
The pro forma financial information has been prepared by management based on the
historical financial statements of the Company at and for the year ended
December 31, 1996 and the nine months ended September 30, 1997, adjusted where
necessary, to reflect the Exchange Offer, as if the Exchange Offer had been in
effect during the entire periods presented. The pro forma results assume a
current market price for the Company's Common Stock. The actual impact on the
Company's financial statements will be calculated based on the closing bid price
for the Common Stock on a date within 5 days of the commencement date of the
Exchange Offer. The pro forma financial information is presented for
illustrative purposes and does not purport to represent what the results of
operations or financial condition of the Company for the periods or at the dates
presented would have been if such Exchange Offer had been consummated as of such
dates and is not indicative of the results that may be obtained in the future.
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 $228,000, consisting of legal, accounting and printing
fees and other costs and expenses.
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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>
<S> <C>
COMMON STOCK MINORITY INTERESTS
- ------------ ------------------
NATURE OF THE INVESTMENT
Shares of Common Stock represent an The Minority Interests represent interests in
equity investment in a publicly-traded a subsidiary of the Company located in Florida.
company is engaged in the pharmacy
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
traded on the Nasdaq SmallCap Market, for the Minority Interests. Moreover, a regular
and the Common Stock offered hereby will market for such Minority Interests is unlikely to
be freely tradeable upon issuance. See develop in the future.
"Risk Factors - Exchange Risks - Possible
Volatility of Stock Price."
FINANCIAL REPORTING
The Company is subject to the reporting The Subsidiary is not currently subject to the
requirements of the Securities Exchange reporting requirements of the Securities Exchange
Act of 1934, as amended, and will file Act of 1934, as amended.
reports prepared in accordance with the
rules and regulations of the SEC.
OWNERSHIP INTERESTS
Holders of Common Stock are entitled to The Minority Interests represent minority
vote for the election of directors and ownership interest in the Subsidiary.
on other corporate matters at meetings Because the Company currently owns
of stockholders, and to receive dividends, approximately 92% of the Subsidiary, the
if any, declared by the Company. Because Company is able to control all corporate
the Company's principal stockholders currently decisions affecting the Subsidiary. Each
own or control approximately 33.8% of the Offeree's percentage ownership interest
outstanding beneficial voting interests in in the Subsidiary will be substantially
the Company, the principal stockholders have greater than the Offeree's percentage
the ability to control most corporate ownership interest in the Company following
decisions affecting the Company. See "Risk the Exchange.
Factors - Company Risks Control by Principal
Stockholders."
</TABLE>
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.
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<PAGE>
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.
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.
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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.
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
19
<PAGE>
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 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 such, whether or not Subsidiary would have the
power to indemnify that person under Subsidiary's Bylaws.
20
<PAGE>
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 with
respect to the discussion 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 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.
OPINION OF COUNSEL
The Company has been advised by Atlas, Pearlman, Trop & Borkson, P.A., subject
to the terms and conditions set forth in their opinion, a copy of which has been
filed as an exhibit to the registration statement of which this Prospectus forms
a part, that the Exchange Offer will constitute a reorganization under Section
368 of the Internal Revenue Code of 1986, as amended (the "Code"), and that: (i)
no gain or loss will be recognized for federal income tax purposes by the
Company or by the Subsidiary as a result of the consummation of the Exchange
Offer; (ii) no gain or loss will be recognized for federal income tax purposes
by the owners of Minority Interests upon the exchange of their shares for shares
of the Company's Common Stock; (iii) the basis of the Company's Common Stock
received in the Exchange Offer by a holder of Subsidiary shares will be the same
as the basis of the Subsidiary's shares surrendered in exchange therefor; and
(iv) the holding period of the Common Stock received in the Exchange Offer by a
holder of Subsidiary shares will include the period during which the Subsidiary
shares surrendered in exchange therefor were held by the holder, provided such
Subsidiary shares were held as capital assets.
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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.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company at
September 30, 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.
SEPTEMBER 30, 1997
------------------
ACTUAL AS ADJUSTED(1)(2)
------ -----------------
Current portion of notes payable $ 139,992 $ 139,992
Current portion of capital lease
obligations 64,351 64,351
Long Term Debt 839,430 839,430
Minority Interest 222,628 --
Shareholders' equity:
Common stock, $.0001 par value;
50,000,000 shares authorized;
13,957,063 shares issued and
outstanding actual, and
14,619,404 shares, issued and
outstanding, as adjusted (1) 1,396 1,462
Preferred stock, $.0001 par value;
1,000,000 shares authorized; no
shares issued and outstanding -- --
Additional paid-in capital 11,560,536 13,216,164
Accumulated deficit (5,843,965) (5,843,965)
Total shareholders' equity 5,717,967 7,373,661
Total capitalization $ 6,984,368 $ 8,417,434
- -------------------------
(1) Excludes 1,900,000 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.
(2) Additional paid-in capital, as adjusted, is presented net of costs of
the share exchange, estimated to be approximately $228,000.
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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
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
Second Quarter................................ 8.38 6.63
Third Quarter................................. 7.19 2.88
Current Price................................. 2.75
The Company believes that as of September 30, 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.
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<PAGE>
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, for an aggregate purchase price of $2,125,000,
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. The net tangible assets consisted of cash of
$1,000,000 and marketable equity securities, consisting of 1,125,000 shares of
the Common Stock of QPQ Corporation (currently 18,750 shares, following reverse
stock splits effected by QPQ), valued at $1,125,000. The Company incurred
acquisition costs of approximately $1,889,000, 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 related to this
transaction.
Immediately prior to the acquisition, Capital's assets included of equity
interests it held in various entities. Capital agreed that, at or prior to
closing, it would divest itself of certain of the equity interests, and deliver
its remaining assets consisting of cash and marketable equity securities. In
anticipation of consummating the Acquisition, Capital divested itself of (i) its
interest in International Fast Foods Corporation to Mitchell Rubinson, the
former president of Capital, in exchange for 1,300,000 shares of Capital owned
by Mr. Rubinson and valued at $325,000 (consistent with Capital's accounting
treatment of those shares), (ii) its interest in Family Chicken, Inc. to Mr.
Rubinson, in exchange for 18,750 shares of Capital owned by Mr. Rubinson, valued
at $37,500 (consistent with the Capital's accounting treatment of those shares)
and (iii) its interest in International Hotel Corporation to Mr. Rubinson, for
nominal ($100) consideration. 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
restated consolidated balance sheet.
Pursuant to an agreement dated October 1, 1996, the Company has engaged Shulman
& Associates Inc. ("Shulman") as its consultant to assist the Company in
identifying, evaluating, structuring, negotiating and closing business
acquisitions (the "Shulman Agreement"). Pursuant to the Shulman Agreement, the
Company has agreed to compensate Shulman for its services through the issuance
of shares of the Company's common stock, in amounts based upon the aggregate
market value of each business acquisition that is closed (see "Business -
Acquisition Strategy").
On May 31, 1996, the Company issued an aggregate of 666,350 shares of its Common
Stock, having an aggregate market value of $5,497,388 (or $8.25 per share), for
all the outstanding common stock of Delta Pharmacy Services, Inc. (Delta). In
connection with this transaction the Company also issued (i) 22,500 shares,
having an aggregate market value of $135,000 (or $6.00 per share), pursuant to
the Shulman Agreement, and (ii) 3,666 shares, having an aggregate market value
of $21,996 (or $6.00 per share) to the Company's counsel as consideration for
legal services rendered. The acquisition of Delta enhanced the Company's
institutional pharmacy services for long-term care into Alabama, Mississippi,
and Northern Florida.
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<PAGE>
On August 19, 1996, the Company issued an aggregate of 187,500 shares of its
Common Stock, having an aggregate market value of $984,375 (or $5.25 per share),
for all the outstanding common stock of Securx, Inc. (Securx). In connection
with this transaction the Company also issued (i) 67,500 shares, having an
aggregate market value of $405,000 (or $6.00 per share), to Shulman and (ii)
3,667 shares, having an aggregate market value of $22,002 (or $6.00 per share)
to the Company's counsel as consideration for legal services rendered. In
addition to identifying Securx and assisting in the structuring, negotiating and
closing of the Securx transaction, Shulman provided other services including,
assisting shareholders of a corporate owner of Securx to structure the
transaction to meet their needs, reviewing the claims involved in a litigation
between Securx and a predecessor of Securx and evaluating the consequences of
the litigation on the Company's proposed acquisition, and negotiating the terms
of a resolution to an outstanding judgment against Securx by one of its
suppliers, including a lien filed against the inventory of 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.
During the first quarter of 1997, the Company also completed three acquisitions
that enabled the Company to continue to expand its existing institutional
pharmacy and long term care business.
On January 10, 1997, the Company acquired Medical Services Consortium, Inc.
("MSC") by issuing an aggregate of 1,400,000 shares of the Company's Common
Stock, having an aggregate market value of $12,600,000 (or $9.00 per share), for
all of the outstanding Common Stock of MSC. In connection with this transaction
the Company also issued (i) 45,000 shares, having an aggregate market value of
$414,855 (or $9.219 per share), pursuant to the Shulman Agreement and (ii) 3,667
shares, having an aggregate market value of $22,002 (or $6.00 per share) to the
Company's counsel as consideration for legal services rendered.
On February 28, 1997, the Company issued an aggregate of 375,000 shares of
Common Stock, having an aggregate market value of $3,984,375 (or $10.625 per
share), for all of the outstanding common stock of Campo Medical Pharmacy, Inc.
("Campo"). In connection with this transaction the Company also issued 15,000
shares, having an aggregate market value of $155,625 (or $10.375 per share),
pursuant to the Shulman Agreement.
On March 26, 1997, the Company acquired Hytree Pharmacy, Inc. ("Hytree") by
issuing an aggregate of 850,000 shares of the Company's Common Stock, having an
aggregate market value of $7,384,375, for all of the outstanding shares of
Hytree. In connection with this transaction the Company also issued 30,000
shares, having an aggregate market value of $225,000 (or $7.50 per share),
pursuant to the Shulman Agreement.
The per share value of the shares issued to Shulman and the Company's counsel,
respectively, in connection with the foregoing acquisitions is different from
the per share value of the shares issued in exchange for the outstanding shares
of the acquired companies, as a result of arms' length negotiations between the
Company, on the one hand, and Shulman and the Company's counsel, respectively,
on the other hand.
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 restated consolidated financial statements included
elsewhere in this Prospectus have been restated for all periods presented. (See
Note 1 to the Restated 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
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<PAGE>
1997, the Company incurred a loss of approximately $1,100,000 related to Mail
Order operations during the fourth quarter of 1996.
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 Restated 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.
As a result of the items previously discussed, net loss for the year ended
December 31, 1996, was $1,155,756 compared to net loss of $4,225,836 in 1995.
Net loss per share was $0.09 compared to a loss per share $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. Approximately 17% of the
increase is attributable to marketing efforts to new clients, and approximately
5.5% is attributable to growth in sales made to existing clients.
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. Infusion revenues historically produced a significantly
higher gross margin than gross margins in connection with the long-term care
activities.
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.
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<PAGE>
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. 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.
Income tax expense decreased from a provision of $251,834 in 1995 to a benefit
of $139,716 in 1996. In 1995, the provision for income taxes was incurred due to
the Company's taxable income of approximately $580,000, which differed from
income before income taxes primarily due to the nondeductibility of the goodwill
impairment charge of approximately $3.6 million and the net losses of Delta and
MSC, both of which were Subchapter S-Corporations throughout 1995. In 1996, an
income tax benefit was recognized only to the extent that the Company had the
ability to carryback a portion of its 1996 net operating loss for income tax
purposes to prior tax years.
Quarters Ended September 30, 1997 and 1996
Sales for the three and nine-month periods ended September 30, 1997 were
$12,998,281 and $37,344,723, respectively, compared to $11,013,682 and
$31,968,223, respectively, for the three and nine months ended September 30,
1996. The $1,984,599 and $5,376,500, or 18% and 17% increase, respectively, was
primarily attributed to the Company's marketing efforts directed towards new
clients.
Gross profit increased $598,671 to $5,225,300 for the three months ended
September 30, 1997 from $4,626,629 in the three months ended September 30, 1996
as a result of the increased revenue. For the nine months ended September 30,
1997, gross profit increased $ 1,775,522 to $15,026,408 from $13,250,886 in the
nine months ended September 30, 1996 also due to the increase in revenue for
those periods. Gross profit margins decreased from 42% and 41% for the three-
and nine-month periods, respectively, ended September 30, 1996, to 40% for the
three- and nine-month periods ended September 30, 1997 due to price increases of
certain pharmaceuticals.
Selling general and administrative expenses ("SG&A") were $5,189,820 and
$15,303,080, respectively, for the three- and nine-month periods ended September
30, 1997, compared to $4,606,613 and $12,252,985, respectively, for the three-
and nine-month periods ended September 30, 1996. The increases of $583,207 and
$3,050,095, respectively, were partially attributable to the increases in
revenues. During the three and nine months ended September 30, 1997, 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 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 nine
months ended September 30, 1997.
In connection with the Company's reverse acquisition of Capital Brands, Inc. 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 (who formerly
served as the President of Capital Brands, Inc.) 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 which were returned to the Company. During the nine months ended
September 30, 1997, the Company recorded an $800,000 charge against the note,
which has been classified as "loss on realization of note receivable" in the
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
27
<PAGE>
nine months ended September 30, 1997. As a result of reverse stock splits
effected by QPQ, the number of shares of QPQ common stock currently owned by the
Company is 18,750. According to QPQ's current filings, it is currently engaged
in the development and operation of primary-care medical service centers. The
Company currently owns approximately 7.8% of QPQ's outstanding common stock.
The nine-month period ended September 30, 1997 included $688,706 of one-time
charges related to merger and acquisition costs associated with the three
acquisitions completed during the nine-month period ended September 30, 1997.
There were $668,855 and $934,223 in similar costs in the statement of operations
associated with the three- and nine-month periods ended September 30, 1996,
respectively. Interest expense increased by $76,682 to $205,438, or 60%, for the
three-month period ended September 30, 1997 in comparison to $128,756 for the
three month period ended September 30, 1997. For the nine-month period ended
September 30, 1997, interest expense increased by $105,506 to $453,119, or 30%,
as compared to $347,613 for the nine-month period ended September 30, 1996.
These increases are attributable to the increase in the Company's debt,
primarily the line-of-credit facility.
As a result of the events previously discussed, the Company reported a net loss
of $149,580, or $.01 per share for the three months ended September 30, 1997
compared to a net loss of $857,946, or $.06 per share, during the three months
ended September 30, 1996, and a net loss of $2,188,192 or $.16 per share for the
nine months ended September 30,1997 compared to a net loss of $373,650 or $.03
during the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1997
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 borrowings under its existing line of credit
agreement. As of September 30, 1997, the Company had cash and cash equivalents
of $806,141, accounts receivable of $9,881,080, working capital of $2,674,715
and a current ratio of 1.21 to 1.00.
Net cash used in operating activities for the nine months ended September 30,
1997 was $4,449,756 compared to $989,668 during the nine months ended September
30, 1996. The increase in cash used in operating activities was primarily
attributable to the operating loss incurred during the nine months ended
September 30, 1997, along with increases in accounts receivable and inventory to
support the 17% increase in revenues.
Net cash used in investing activities was $1,556,869 for the nine months ended
September 30, 1997, which was 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 computer and processing equipment, and leasehold improvements
pertaining to the new office and institutional pharmacy location that MSC moved
into during September of 1997. This new facility was necessary to accommodate
the increased revenues at MSC, along with its continuing emphasis on infusion
therapy services. During the nine months ended September 30, 1997, the Company
opened two new branch locations in Jackson, Mississippi and Tampa, Florida,
which began operations in February and March 1997, respectively. Net cash used
in investing activities was $80,791 for the nine months ended September 30,1996,
consisted of $484,599 used in purchases equipment net of $403,808 of cash
received in excess of costs incurred from the reverse acquisition of Capital
Brands, Inc.
Financing activities provided $5,955,026 in cash in the nine months ended
September 30, 1997, compared to $1,560,958 in the nine months ended September
30, 1996, comprised of the following:
Nine months ended
September 30,
1996 1997
--------------------------
Issuance of shares of common stock $ - $ 950,000
Exercise of options and warrants 823,920 1,019,588
Net proceeds from (repayment of) line of credit (253,087) 5,715,774
Net proceeds from (repayment of) other debt 990,125 (1,730,336)
--------------------------
$ 1,560,958 $ 5,955,026
==========================
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
28
<PAGE>
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.
Investment activities also provided for $403,808 of net cash required acquired
in connection 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. Additionally, the Company has terminated its agreement with an outside
consultant who had been engaged to develop new mail order business. As a result,
the Company will reduce costs by approximately $245,000 for the remainder of
fiscal 1997, with no corresponding decrease in revenue. Management has also
decided to terminate its pharmacy benefits management contracts, effective
December 31, 1997, which is expected to result in a material reduction in
selling, general and administrative expenses.
Based upon the continuation of the Company's business development, the Company
believes the cash flow from operations and borrowings under an expanded credit
facility will provide sufficient cash to fund its operations and meet current
obligations through December 31, 1998. 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 June 30, 1997, the Company had an
outstanding balance of $4,770,447 under the credit facility. The Company has
utilized borrowings under the credit facility as additional working capital.
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 (56,250 shares after giving effect to a 1:20 reverse split) of QPQ common
stock. The note was repaid during the third quarter of 1997.
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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 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 Securities and Exchange Commission, in Staff Legal Bulletin No. 5 (CF/IM),
has stated that public operating companies should consider whether there will be
any anticipated costs, problems and uncertainties associated with the Year 2000
issue, which affects many existing computer programs that use only two digits to
identify a year in the date field. The Company believes that the issues raised
by Staff Legal Bulletin No. 5 are not applicable in any material way to the
Company's business or operations. Additionally, the Company intends that any
computer systems that the Company may purchase or lease that are incident to the
Company's business will have already addressed the "Year 2000" issue.
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.
Subsequent to the acquisition, the Subsidiary issued additional shares,
resulting in the Company's current ownership of approximately 92% of the
Subsidiary.
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 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
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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 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
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
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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 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.
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
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members in return for designation as a network pharmacy. The Company is a
provider of PBM services to the managed care industry, including several large
U.S. HMOs.
The Company has historically experienced time delays in receiving reimbursement
from insurance carriers for payments the Company has made to pharmacists. As a
result, operation of the pharmacy benefit management division has been on a
negative cash flow basis. Moreover, operation of the Company's pharmacy benefits
management division has not been profitable. Consequently, effective December
31, 1997, the Company terminated its pharmacy benefits management contracts.
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 WORKERS' 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 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
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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 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 responsibilities included 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 provided that for the one year
period through January, 1998 the Consultants would receive a payment of $50,000
per month which payments were to be extended for an additional 12 month period
if gross revenues (less adjustments) attributable to all PGI business exceed
certain targeted amounts. In November 1997, the Consulting Agreement was
terminated in favor of a new arrangement, effective January 1, 1998, pursuant
to which 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.
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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 and 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 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.
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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. 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. 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 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.
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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.
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.
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
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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 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;
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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 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
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<PAGE>
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 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:
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. The
Company, to the best of its knowledge, has not engaged in such practices, nor
received such financial incentives. The Company believes its contractual
arrangements with other health care providers, its pharmaceutical suppliers and
its pharmacy practices are in compliance with these laws. 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
40
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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, nor does it anticipate being affected
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 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. The Company's practice is to ensure
that all licensing requirements and registration permits are current and in
compliance with the laws in each state in which the Company conducts business.
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, and these regulations do not
present a material risk to the Company's business.
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 licensure and operation of a pharmacy. In addition, some states
require that providers of infusion therapy services be licensed. The Company has
licensed infusion pharmacies in Florida and Louisiana. The Company is licensed
as a pharmacy only, in Alabama. The Company believes that it is in substantial
compliance with licensing requirements for infusion therapy services.
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 has received
JCAHO accreditation for both Homecare and Long Term Care in its Boca Raton,
Florida location. JCAHO accreditation in its Miami, Florida and Mentor, Ohio
location is pending the results of recent surveys. The Company has JCAHO surveys
scheduled in the first four months of 1998, and believes that accreditation will
be granted for all of its locations. When accredited by JCAHO, the Company can
market infusion therapy services to Medicare
41
<PAGE>
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.
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 maintains commercial property
coverage at each of the leased locations at which operations are conducted, in
varying amounts depending upon the location. The Company also maintains General
Liability coverage (with limits of $1,000,000/$3,000,000), Professional
Liability coverage (with limits of $1,000,000/$3,000,000), Umbrella coverage
(with a limit of $5,000,000), Directors and Officers Liability coverage (with a
limit of $3,000,000) and Workers Compensation and Employers Liability coverage
(in such amounts as are required by state law). 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 September 30, 1997, the Company and its subsidiaries employed a total of
325 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.
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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.
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. The Company believes
that the leased facilities are suitable and adequate for the Company's present
and foreseeable needs.
SQUARE
LOCATION FOOTAGE ANNUAL COST TERMINATION DATE
- -------- ------- ----------- ----------------
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
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:
<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
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<PAGE>
Juan C. Cocuy........................... 39 Chief Financial Officer
Robert Edelheit......................... 57 Director
Paul E. Heimberg........................ 47 Director
Malcolm Leonard......................... 55 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 Dr. Gardner was group leader of
infusion therapy services for Olsten Kimberly Quality Care. From May 1994 to
July 1995 Dr. Gardner served as a healthcare consultant. From August 1992 to
April 1994 Dr. 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 Dr.
Gardner held a variety of positions with Pharmacy Corporation of America
including Vice President of Operations. Dr. 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 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. At the present
time, there are no committees of the Board of Directors. The
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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 options to its Directors in consideration for their services
as such. During fiscal year 1996, the Company granted options to purchase
276,952 shares to members of the Board of Directors. Such options included
options granted to replace options previously granted to such persons (during
1994-1996) in their capacities with CompScript-Boca. The previously issued
options in CompScript-Boca were cancelled and forfeited upon the grant of
options by the Company. Additionally, during 1996, the Company awarded options
(to replace options previously issued by CompScript-Boca) to purchase 187,122
shares to persons who were, but no longer serve as Directors of the Company.
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 SECURITIES
NAME AND FISCAL ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------ ------ ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Brian A. Kahan, 1996 $270,000 None None 121,017 $5,075(1)
Chief Executive Officer 1995 $180,000 $52,000(2) None None 4,393(1)
1994(3) $158,654 $50,000(2) None None $5,075(1)
- ----------------------
</TABLE>
(1) Represents auto lease payments of $5,075, $4,393 and $5,075 in 1996,
1995 and 1994, respectively.
(2) Represents discretionary bonuses of $52,000 and $50,000 in 1995 and
1994, respectively.
(3) Paid by CompScript-Boca, Mr. Kahan's employer in 1994.
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
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<PAGE>
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
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS 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>
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, and was amended at the 1997 Annual Meeting. Under the
Plan, as amended, the Company has reserved an aggregate of 1,900,000 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%
46
<PAGE>
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. 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 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
47
<PAGE>
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.
As of October 31, 1997, there were 899,917 options granted under the plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMPSCRIPT, INC.
As of October 31, 1997, there were 13,957,063 shares of the Company's
Common Stock issued and outstanding. 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........................... 4,453,470(3) 31.6%
Robert J. Gardner........................ 141,025(4) 1.0%
Malcolm Leonard.......................... 35,086(5) *
Robert Edelheit.......................... 107,206(6) *
Paul E. Heimberg......................... 115,351(7) *
All directors and executive officers
as a group (6 persons)................... 4,852,138(8) 33.8%
</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 4,207,453 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.
48
<PAGE>
Does not include the possible increase in beneficial ownership of the
Company in the event of the exchange of shares of the Subsidiary that
may be deemed to be beneficially owned by Mr. Kahan (see table below).
(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 options to purchase 77,967 shares exercisable at $5.13 per
share.
(8) See notes 3 - 7 above.
SUBSIDIARY
As of October 31, 1997, there were 2,069,104 shares of common stock of
CompScript-Boca, Inc. ("Subsidiary") issued and outstanding, of which, 169,902
shares constitute the Minority Interests which are the subject of this Exchange
Offer. The following table sets forth, as of the date hereof, information with
respect to the beneficial ownership of the Common Stock of the Subsidiary 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>
CompScript, Inc.......................... 1,899,202 91.8%
Brian A. Kahan........................... 500(3) *
Robert J. Gardner........................ 0 0.0%
All directors and executive officers
as a group (3 persons)................... 500(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) Consists of 500 shares owned by the wife of Mr. Kahan. Does not include
8,000 shares owned by the brother of Mr. Kahan, as to which Mr. Kahan
disclaims beneficial ownership.
49
<PAGE>
CHANGE IN CONTROL
On April 26, 1996, the Company (which, at that time, was known as Capital
Brands, Inc.) 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 the issuance of
7,394,982 shares of the Company's common stock. As a result of this transaction:
(i) CompScript-Boca shareholders became the owners of approximately 80% of the
Company's then outstanding common stock, and based thereon, assumed 100% control
of the Company's Board of Directors, and (ii) the Company became the owner of
approximately 93% of the then outstanding common stock of CompScript-Boca. At
the time of the April 1996 exchange, Brian A. Kahan was the President and
principal shareholder of CompScript-Boca and, following the exchange of shares
of CompScript-Boca for shares of the Company, Mr. Kahan became the President and
a principal shareholder of the Company. Prior to the April 1996 exchange of
shares, Mitchell Rubinson was the President of the Company, and, according to
the Company's Form 10-KSB/A for the year ended December 31, 1996, as of April
15, 1996, Mr. Rubinson controlled approximately 15.5% of the Company's then
outstanding common stock. At the time of the April 1996 exchange, the only other
owner of 5% or more of the Company's common stock was Signature Equities Agency,
GmbH, a foreign corporation which owned approximately 47% of such outstanding
common stock.
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 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.
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.
50
<PAGE>
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 approximately 92% 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.
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 were issued and outstanding as of October 31,
1997, without giving effect to (i) 1,900,000 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
51
<PAGE>
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 and Trust Co.
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 restated consolidated financial statements of the Company as of and for each
of the two years in the period 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 report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
52
<PAGE>
INDEX TO FINANCIAL INFORMATION
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
COMPSCRIPT, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants.........................F-2
Restated Consolidated Balance Sheet - December 31, 1996....................F-3
Restated Consolidated Statements of Operations -
Years ended December 31, 1995 and 1996.....................................F-4
Restated Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1995 and 1996.....................................F-5
Restated Consolidated Statements of Cash Flows -
Years ended December 31, 1995 and 1996.....................................F-6
Notes to Restated Consolidated Financial Statements -
December 31, 1996..........................................................F-8
Unaudited Consolidated Condensed Financial Statements for the
Nine Months Ended September 30, 1997 and 1996:
Consolidated Condensed Balance Sheet - September 30, 1997..................F-30
Consolidated Condensed Statements of Operations - Nine Months Ended
September 30, 1996 and 1997................................................F-31
Consolidated Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1996 and 1997................................................F-32
Notes to Consolidated Condensed Financial Statements -
September 30, 1997.........................................................F-33
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
and Shareholders
CompScript, Inc.
We have audited the accompanying restated 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 restated consolidated statements of operations, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996.
The restated 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 restated
consolidated financial statements. These restated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these restated 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 restated 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 restated
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-2
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Restated 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-3
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Restated Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1996
--------------------------------------
<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 11,444,737 12,466,648
======================================
Pro forma data (unaudited):
Historical loss before provision for income taxes $ (3,974,002) $ (1,295,472)
Pro forma tax (expense) benefit 22,000 (97,000)
--------------------------------------
Pro forma net loss $ (3,996,002) $ (1,198,472)
======================================
Pro forma loss per share $ (0.33) $ (0.09)
======================================
Pro forma weighted average shares outstanding 12,107,078 13,128,989
======================================
</TABLE>
F-4
SEE ACCOMPANYING NOTES.
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Restated Consolidated Statements of Shareholders' Equity
COMMON STOCK ADDITIONAL
----------------------------------- PAID-IN
SHARES AMOUNT CAPITAL
----------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1995 11,348,673 $ 1,135 $ 5,981,878
Common shares issued upon inception of SECURx, Inc. 187,500 19 74,981
Net loss - - -
----------------------------------------------------
Balance at January 1, 1996 11,536,173 1,154 6,056,859
Reverse acquisition of Capital Brands, Inc.:
Issuance of Capital Brands, Inc. Common Stock to CompScript-Boca, Inc.
shareholders, net of acquisition costs of $1,888,807 1,806,750 181 261,012
Recording of minority interest in CompScript-Boca, Inc. (662,341) (66) (384,875)
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.:
Issuance of Capital Brands, Inc. Common Stock to CompScript-Boca, Inc.
shareholders, net of acquisition costs of $1,888,807 - 261,193
Recording of minority interest in CompScript-Boca, Inc. 162,313 (222,628)
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-5
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Restated Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1996
------------------------------------
<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-6
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Restated 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-7
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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
restated consolidated balance sheet. (See also Note 9). The accompanying
historical consolidated financial statements do not include the financial
position, results of operations or cash flows of Capital prior to its
acquisition by Boca on April 26, 1996, except that Boca has been recapitalized
to reflect Capital's capital structure for all periods presented.
The following table reconciles the common shares issued in the reverse
acquisition to the beginning balance (January 1, 1996) of common shares
presented in the restated Consolidated Statements of Shareholders' Equity:
Issuance of Capital Brands, Inc. common stock
to CompScript-Boca, Inc. shareholders 7,394,982
Common shares issued to entities acquired through
poolings-of-interests to reflect recapitalization of
of CompScript-Boca, Inc. as a result of the reverse
acquisition of Capital Brands, Inc. 3,478,850
Shares of CompScript-Boca related to minority interest
converted into Capital Brands shares 662,341
----------
11,536,173
==========
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 restated 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
restated 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-8
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated 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 restated 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
restated 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 restated consolidated statements of operations
for both fiscal
F-9
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated 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 restated 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.
In 1995, SECURx issued the equivalent of 187,500 shares of the Company's common
stock upon its inception. The remaining changes in shareholders' equity
disclosed in the statement of shareholders' equity, other than net income, as
disclosed above, are transactions of CompScript.
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 restated consolidated
financial statements have been restated to conform with this change in year end.
F-10
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF CONSOLIDATION
The accompanying restated 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
restated 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-11
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-12
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated 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 restated 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.
A reconciliation of the Company's historical income tax provision (benefit) to
the pro-forma tax expense (benefit) for the years ended December 31, 1995 and
1996 is as follows:
1995 1996
---- ----
Historical income tax provision
(benefit) $251,834 $(139,716)
Pro Forma adjustments:
Tax (benefit) provision attributable
to MSC's pre-acquisition
results of operations (188,532) 204,524
Tax (benefit) provision attributable
to Delta's pre-acquisition
results of operations (10,012) 62,270
Elimination of valuation allowances
for deferred tax assets in
1995 or 1996 (77,790) (171,973)
Elimination of reduction of Company's
net operating loss carryback -- (52,105)
Elimination of deferred tax asset
relative to SECURx's 1995
net operating loss 46,500 --
-------- ----------
Pro forma tax expense (benefit) $ 22,000 $ (97,000)
======== ==========
F-13
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 and gives effect to the purchase of the Minority
Interest.
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-14
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-15
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated consolidated
balance sheet at December 31, 1996 and the collateral underlying the note
receivable consisting of marketable equity securities.
F-16
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated consolidated statement of operations.
F-17
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-18
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-19
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated
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 restated 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-20
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated 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-21
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated
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-22
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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
================= =================
</TABLE>
Weighted-average fair value of options granted during the year:
All stock options $1.72
Employee/director options 2.23
Nonemployee options 1.31
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
FAIR VALUE EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Options for which the:
Exercise price equals the stock price on date of grant 0.67 6.00
Exercise price exceeds the stock price on date of grant 1.52 5.88
Exercise price is less than the stock price on date of grant 1.95 2.19
</TABLE>
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-23
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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
restated 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 restated
consolidated balance sheet for cash and cash equivalents approximates its fair
value.
F-24
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-25
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-26
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-27
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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-28
<PAGE>
CompScript, Inc. and Subsidiaries
Notes to Restated 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 restated 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-29
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Balance Sheet (Unaudited)
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 806,141
Accounts receivable, net 9,881,080
Inventory 3,031,192
Marketable securities 325,000
Income tax refund receivable 519,116
Deferred tax asset 80,201
Prepaid and other receivables 676,226
-------------
Total current assets 15,318,956
Property and equipment, net 3,330,022
Other assets:
Costs in excess of net assets acquired, less accumulated amortization 112,490
Other 697,898
-------------
Total other assets 810,388
-------------
Total assets $19,459,366
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,754,240
Accrued salaries and benefits 241,503
Accrued expenses 581,077
Accrued pharmaceuticals dispensed by third parties 100,711
Line of credit 6,390,467
Notes payable to shareholders 371,900
Current portion of notes payable 139,992
Current portion of capital lease obligations 64,351
-------------
Total current liabilities 12,644,241
Deferred tax liabilities 35,100
Long-term debt:
Notes payable 695,827
Capital lease obligations 143,603
-------------
Total long-term debt 839,430
-------------
Total liabilities 13,518,771
Minority interest 222,628
Shareholders' equity:
Common stock, $.0001 par value--50,000,000 shares authorized,
13,957,063 shares issued and outstanding at September 30, 1997 1,396
Additional paid-in capital 11,560,536
Accumulated deficit (5,843,965)
-------------
Total shareholders' equity 5,717,967
-------------
Total liabilities and shareholders' equity $19,459,366
=============
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Statements
of Operations (Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1996 1997
-----------------------------
<S> <C> <C>
Sales $31,968,223 $37,344,723
Cost of sales 18,717,337 22,318,315
-----------------------------
Gross profit 13,250,886 15,026,408
Selling, general and administrative expenses 12,252,985 15,303,080
Merger costs 934,223 688,706
-----------------------------
Total operating expenses 13,187,208 15,991,786
-----------------------------
Operating (loss) income 63,678 (965,378)
Other income (expense):
Interest and other income 68,338 30,305
Interest expense (347,613) (453,119)
Loss on realization of note receivable - (800,000)
-----------------------------
(279,275) (1,222,814)
-----------------------------
Loss before provision for income taxes (215,597) (2,188,192)
Income tax provision 158,053 -
-----------------------------
Net loss $ (373,650) $(2,188,192)
=============================
Net loss per share $ (.03) $ (.16)
=============================
Weighted average shares outstanding 12,393,297 13,764,067
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
<TABLE>
<CAPTION>
CompScript, Inc. and Subsidiaries
Consolidated Condensed Statements
of Cash Flows (Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
1996 1997
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (373,650) $(2,188,192)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization of leasehold improvements 466,308 580,918
Amortization of goodwill 30,681 30,681
Noncash merger costs - 420,000
Loss on realization of note receivable - 800,000
Changes in operating assets and liabilities:
Accounts receivable, net (796,175) (3,511,360)
Inventory (277,900) (563,553)
Note receivable - 25,788
Income tax refund receivable 191,571 (300,604)
Prepaid and other receivables 33,737 (301,739)
Other assets (224,655) 156,324
Accounts payable and accrued expenses (39,585) 401,981
---------------------------
Net cash used in operating activities (989,668) (4,449,756)
INVESTING ACTIVITY
Purchase of property and equipment (484,599) (1,556,869)
Acquisition, net of cash acquired 403,808 -
---------------------------
Net cash used in investing activity (80,791) (1,556,869)
FINANCING ACTIVITIES
Issuance of common stock and exercise of options and warrants 823,920 1,969,588
Net (repayments of) proceeds from line of credit (253,087) 5,715,774
Net proceeds from (repayments of) notes payable 1,077,236 (602,820)
Net repayments on notes payable shareholders - (971,837)
Repayments of leases payable (87,111) (155,679)
---------------------------
Net cash provided by financing activities 1,560,958 5,955,026
---------------------------
Net increase (decrease) in cash and cash equivalents 490,499 (51,599)
Cash and cash equivalents at beginning of period 549,548 857,740
---------------------------
Cash and cash equivalents at end of period $1,040,047 $ 806,141
===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 104,900 $ 87,500
===========================
Cash paid for interest $ 244,070 $ 247,681
===========================
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 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
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
unaudited. All periods presented have been restated to reflect the January 10,
1997, February 28, 1997, and March 26, 1997 acquisitions of Medical Services
Consortium, Inc. ("MSC"), Campo Medical Pharmacy, Inc. ("Campo"), and Hytree
Pharmacy, Inc. ("Hytree"), which were accounted for as poolings of interests
(see Note 2). 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
nine-month period ended September 30, 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 revenue and expenses during the reporting
period. Actual results could differ from these estimates.
Net income (loss) per share for the nine-month periods ended September
30, 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.
F-33
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION (CONT'D)
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 September 30, 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 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
parenteral therapies to long-term and alternate care providers in South Florida.
On February 28, 1997, the Company acquired 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, the Company acquired 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.
F-34
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
2. ACQUISITIONS (CONT'D)
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 nine months ended September 30, 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.
<TABLE>
<CAPTION>
COMPSCRIPT MSC CAMPO HYTREE CONSOLIDATED
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total sales $ 17,165,640 $8,081,389 $ 2,512,555 $9,585,139 $37,344,723
===================================================================================
Net (loss) income $ (3,448,114) $ 663,620 $ 330,743 $ 265,559 $(2,188,192)
===================================================================================
NINE MONTHS ENDED
SEPTEMBER 30, 1996
Total sales $ 15,413,688 $6,126,450 $ 2,460,591 $7,967,494 $31,968,223
===================================================================================
Net (loss) income $ (1,130,693) $ 398,544 $ 266,786 $ 91,713 $ (373,650)
===================================================================================
</TABLE>
F-35
<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
3. MARKETABLE SECURITIES
In connection with the Company's acqisition 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 which were returned to the Company. As of September 30, 1997, the
QPQ shares are classified as marketable securities and are held for future sale.
During the nine months ended September 30, 1997, the Company recorded an
$800,000 charge against the note which has been classified as "loss on
realization of note receivable" in the Statement of Operations for the nine
months ended September 30, 1997. The Company deemed it appropriate to evaluate
the collateral underlying the note, as the value of the QPQ stock declined
significantly during 1997.
4. INCOME TAXES
The income tax provisions for the nine-month periods ended September
30, 1997 and 1996, have been calculated by applying the Company's estimated
effective tax rate for the years 1997 and 1996.
For the nine-month period ended September 30, 1997, the relationship of
the provision for income taxes to pre-tax income reflects the exclusion of the
Subchapter S earnings of 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. The
consolidated condensed statement of operations for the nine months ended
September 30, 1996, do not include pro forma adjustments for income tax expense
which would have been recorded had Delta and MSC been taxable corporations as
the impact would not be significant.
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. On
August 25, 1997, the Company again amended the line-of-credit agreement to allow
for borrowings of up to $7 million. Through September 30, 1997, the Company
borrowed approximately $6.4 million under the New Credit Facility.
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<PAGE>
COMPSCRIPT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
5. NOTES PAYABLE (CONT'D)
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 lesser 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, restricts acquisitions and dispositions of property and limits
additional borrowings from other lenders.
In connection with the New Credit Facility, on January 3, 1997, the
Company also entered into a $500,000 promissory note with the same lender, 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 principal 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, bearing interest at prime, with its existing lender, primarily
for working capital purposes. This loan matured on July 26, 1997, and was repaid
in August 1997. It was cross collateralized with all other borrowings previously
discussed. In addition to the collateral previously discussed, this note was
collateralized by the $325,000 of marketable securities recorded on the
Company's consolidated balance sheet at September 30, 1997.
6. SHAREHOLDERS' EQUITY
Effective January 10, 1997, MSC's Subchapter S accumulated deficit of
approximately $420,000 was reclassified to additional paid-in capital upon the
conversion of MSC to a taxable corporation concurrent with its acquisition by
the Company.
During the nine months ended September 30, 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. 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 nine-month period ending September 30, 1997.
Additionally, during the period ended September 30, 1997, holders of options
exercised 378,898 options resulting in the issuance of 378,898 shares of Common
Stock and net proceeds to the Company of approximately $1,970,000.
F-37
<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................................................6
The Exchange Offer.........................................10
Comparison of Common Stock
and Minority Interests...................................17
Comparison of Shareholder Rights...........................17
Indemnification Against
Securities Act Liabilities...............................21
Certain Federal Income Tax Considerations..................21
Capitalization.............................................22
Dividends on and Market Price for
the Company's Common Stock...............................23
Management's Discussion and
Analysis or Plan of Operations...........................23
The Business...............................................30
Management.................................................43
Conflicts of Interest......................................51
Description of Company Securities..........................51
Legal Matters..............................................52
Experts....................................................52
Index to Financial Information............................F-1
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
-------------------
--------------
, 1998
<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)
5 Opinion of Atlas, Pearlman, Trop & Borkson, P.A., as to the validity of
securities being registered
8 Opinion of Atlas, Pearlman, Trop & Borkson, P.A., re: tax matters
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(i) Consent of Independent Certified Public Accountants
23.1(ii) Consent of Atlas, Pearlman, Trop & Borkson, P.A. (included as part of Exhibits 5 and 8)
27 Financial Data Schedule
</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 9th day of January, 1998.
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 Officer and
Principal 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, January 9, 1998
- -------------------------- President, Chief
Brian A. Kahan Executive Officer and
Director (Principal
Executive Officer)
/S/ ROBERT J. GARDNER Vice President and Director January 9, 1998
- --------------------------
Robert J. Gardner
/S/ PAUL E. HEIMBERG Director January 9, 1998
- --------------------------
Paul E. Heimberg
/S/ ROBERT EDELHEIT Director January 9, 1998
- --------------------------
Robert Edelheit
/S/ MALCOLM LEONARD Director January 9, 1998
- --------------------------
Malcolm Leonard
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
23.1(i) Consent of Independent Certified Public Accountants
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 18, 1997, in Amendment No. 3 to the Registration
Statement (Form S-4 No. 333-32011) 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
January 8, 1998
