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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM _________________________
TO ___________________
COMMISSION FILE NUMBER 0-27602
NCS HEALTHCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1816187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
3201 Enterprise Parkway, Beachwood, Ohio 44122
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 378-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock, par value $.01 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of September 20, 1999, the registrant had 14,453,662 shares of Class A
Common Stock, par value $.01 per share, and 5,899,673 shares of Class B Common
Stock, par value $.01 per share, issued and outstanding. As of that date, the
aggregate market value of these shares, which together constitute all of the
voting stock of the registrant, held by non-affiliates was $37,416,868 (based
upon the closing price of $2.50 per share of Class A Common Stock on the NASDAQ
National Market on September 20, 1999). For purposes of this calculation, the
registrant deems the 483,595 shares of Class A Common Stock and the 4,902,993
shares of Class B Common Stock held by all of its Directors and executive
officers to be the shares of Class A Common Stock and Class B Common Stock held
by affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held in 1999 are
incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K is
as of June 30, 1999.
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NCS HEALTHCARE, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
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<S> <C> <C>
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 45
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 46
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PART I
ITEM 1. BUSINESS
GENERAL
NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent
provider of pharmacy services to long-term care institutions including skilled
nursing facilities, assisted living facilities and other institutional health
care settings. The Company purchases and dispenses prescription and
non-prescription pharmaceuticals and provides client facilities with related
management services, automated medical record keeping, drug therapy evaluation
and regulatory assistance. The Company also provides a broad array of ancillary
health care services to complement its core pharmacy services, including
infusion therapy, physical, speech and occupational therapies, nutrition
management, software services, mobile diagnostics and other services. The
Company is considered to operate principally in one business segment.
NCS entered the long-term care pharmacy services industry in 1986 with the
acquisition of Modern Pharmacy Consultants, Inc. in Northeastern Ohio. Through
June 30, 1999, the Company had completed a total of 49 acquisitions (other than
fold-in acquisitions). There were no significant acquisitions during fiscal
1999. As a result of these acquisitions, the Company has expanded its geographic
presence into 34 states serving approximately 262,000 residents.
On February 14, 1996, the Company issued 4,476,000 shares of Class A
Common Stock at $16.50 per share in connection with its initial public offering.
A portion of the net proceeds from the stock issuance were used to repay
approximately $27,000,000 of outstanding indebtedness under long and short-term
borrowings. The remaining proceeds were used to fund business acquisitions.
On October 4, 1996, the Company issued 4,235,000 shares of Class A Common
Stock at $31.00 per share in connection with a public offering. A portion of the
net proceeds were used to repay approximately $7,000,000 of outstanding
indebtedness under short-term borrowings. The remaining proceeds were used to
fund business acquisitions.
On August 13, 1997, the Company issued $100,000,000 of convertible
subordinated debentures due 2004. Net proceeds to the Company were approximately
$97,250,000 net of underwriting discounts and expenses. The debentures carry an
interest rate of 5 3/4% and are convertible into shares of Class A Common Stock
at any time prior to maturity at $32.70 per share. A portion of the proceeds
from the debenture offering was used to repay approximately $21,000,000 of
outstanding indebtedness under short-term borrowings. The remaining proceeds
were used to fund business acquisitions.
MARKET OVERVIEW
Institutional pharmacies purchase, repackage and distribute
pharmaceuticals to residents of long-term care facilities such as skilled
nursing facilities, assisted living facilities and other institutional health
care settings. Unlike hospitals, most long-term care facilities do not have
on-site pharmacies but depend instead on outside sources to provide the
necessary products and services. In response to a changing regulatory
environment and other factors, the sophistication and breadth of services
required by long-term care facilities have increased dramatically in recent
years. Today, in addition to providing pharmaceuticals, institutional pharmacies
provide consultant pharmacy services, which include monitoring the control,
distribution and administration of drugs within the long-term care facility and
assisting in compliance with applicable regulations, as well as therapeutic
monitoring and drug utilization review services. With the average long-term care
facility patient taking seven to nine medications per day, high quality,
cost-efficient systems for dispensing and monitoring patient drug regimens are
critical. Providing these services places the institutional pharmacy in a
central role of influencing the effectiveness and cost of care.
Based on data from industry sources, the Company estimates that the U.S.
market for pharmacy services (including consulting services and related
supplies) in long-term care and assisted living facilities will approximate $6.5
billion for 1999. The Company believes that the market is growing due primarily
to three factors. First, the number of long-term care facility residents is
rising as a result of demographic trends. According to the Administration on
Aging, it is estimated that by the year 2000, over 35 million Americans, or one
in eight, will be 65 years or older. By 2030, it is estimated that the number of
Americans who will be 85 or older, the segment of the population that comprises
the largest percentage of residents at long-term care facilities, will triple.
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The second factor creating growth in the institutional pharmacy market is
the increasing number of medications taken per day by long-term care facility
residents. This increase is due to (i) advances in medical technology which have
resulted in the availability of new drug therapy regimens and (ii) the generally
higher acuity levels of residents as a result of both payors' efforts to have
care delivered in the lowest cost setting and the generally older, and
consequently sicker, population of long-term care facility residents.
The third factor is that hospitals are discharging patients earlier due to
funding pressures and cost containment efforts. Therefore, an increasing number
of patients are now receiving care outside of traditional hospitals in
alternative settings such as long-term care facilities. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has hindered
hospital discharges of Medicare A residents. However, the Company believes that
this is a short-term situation and is not a lasting trend.
In addition, the cost containment pressures in the hospital sector are
also beginning to create opportunities for institutional pharmaceutical
companies among rural hospitals as evidenced by an increasing trend towards
outsourcing pharmaceutical services in this market. Based on data from industry
sources, the Company estimates that the U.S. institutional pharmaceutical market
for rural hospitals will approximate $4.0 billion for 1999.
The institutional pharmacy market has undergone significant consolidation
over the last few years. Prior to the 1970's, pharmacy needs of long-term care
facilities were fulfilled by local retail pharmacies. Since then, the pharmacy
and information needs of long-term care facilities have grown substantially and
regulatory requirements and the reimbursement environment have become more
complex. Institutional pharmacy companies, both independent and captive (those
owned by an operator of long-term care facilities), have proven to be better
positioned to meet these changing market demands. As a result, over the past 25
years the proportion of the market served by retail pharmacies has steadily
declined, and institutional pharmacies have become the dominant providers of
pharmacy services to the long-term care market.
There are several factors that drove the consolidation among providers of
long-term care pharmaceutical services. All of these factors relate to the
advantages that large institutional providers have over retail and small
institutional providers.
Scale Advantages. Larger pharmacies are able to (i) realize
advantages associated with size, including purchasing power, service
breadth, more sophisticated sales and marketing programs and formulary
management capabilities, (ii) achieve efficiencies in administrative
functions and (iii) access the capital resources necessary to invest in
critical computer systems and automation.
Ability to Serve Multi-site Customers and Managed Care Payors.
As a result of their ability to serve long-term care customers with
several physical locations, larger pharmacies possess a significant
competitive advantage over their smaller counterparts. Additionally,
the Company believes that there are significant opportunities for
full-service institutional pharmacies with a comprehensive range of
services and regional coverage to provide a spectrum of health care
products and services to managed care payors.
Regulatory Expertise and Systems Capabilities. Long-term care
facilities are demanding more sophisticated and specialized services
from pharmacy providers due, in part, to the implementation in 1990 of
the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA
regulations, which were designed to upgrade and standardize care in
nursing facilities, mandated strict new standards relating to planning,
monitoring and reporting on the progress of patient care to include,
among other things, prescription drug therapy. More recently, the
implementation of Medicare's Prospective Payment System (PPS) has
required that long-term care facilities estimate the total cost of stay
of a resident prior to admission. The facilities, in turn, rely on
their ancillary providers, such as institutional pharmacy vendors, to
help them manage the costs of care of their Medicare A-covered
residents. As a result, long-term care administrators increasingly seek
experienced pharmacists and specialized providers with computerized
information and documentation systems designed to monitor patient care
and control the facilities' and payors' costs.
Changing Reimbursement Environment. The long-term care market
has undergone significant change over the last year as Medicare's new
Prospective Payment System has been implemented. This reimbursement
change which was mandated by the Balanced Budget Act of 1997 pays
nursing homes a flat rate for all services, a significant departure
from the prior cost-based system. In order to assist long-term care
customers with this new regulation, institutional pharmacy providers
must offer sophisticated PPS contracts that include cost-effective
formularies.
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BUSINESS STRATEGY
NCS' strategy is to capitalize on industry trends and Company expertise to
strengthen its position as a leading provider of high quality, integrated
pharmacy and related services to institutional clients. The Company intends to
implement this strategy by leveraging its current base of business through
standardization of "best practices," cross marketing its services across its
customer base to generate internal growth, utilizing its proprietary technology
to deliver information and providing a broad array of ancillary health care
services to complement its core pharmacy services.
SERVICES
The Company has traditionally provided institutional pharmacy and infusion
products and services to long-term care facility residents. In recent years, NCS
has developed an array of services which address the increasing needs of
long-term care facilities to accommodate higher acuity admissions and manage
costs. NCS believes that it is one of the few companies capable of offering
customers the depth and breadth of these products and services. For the year
ended June 30, 1999, approximately 78% of the Company's revenues were derived
from providing pharmacy and consultant pharmacy services to long-term care
facilities. An additional 5% of revenues were derived from providing infusion
therapy services, 3% were derived from providing other therapy services and the
remaining 14% were primarily derived from providing various other products and
services, including nutrition management, oxygen and Medicare Part B services.
Pharmacy Services. The Company's core business is providing pharmaceutical
dispensing services to residents of long-term care facilities and other
institutions. The Company purchases, repackages and dispenses prescription and
non-prescription medication in accordance with physician orders and delivers
such prescriptions at least daily to long-term care facilities for
administration to residents by the nursing staffs of these facilities. The
Company typically serves facilities within a two hour drive time of its
distribution facility and provides 24 hour coverage 365 days per year. As of
June 30, 1999, the Company provided its services from 84 sites in 34 states. NCS
also provides its services through the management of third party institutional
pharmacies.
Upon receipt of a doctor's order, the information is entered into the
Company's management information system, which automatically reviews the order
for patient-specific allergies and potentially adverse interactions with other
medications the patient is receiving. Following this analysis, a report on each
order is produced for review by a Company pharmacist, who performs a prospective
drug utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA").
In addition, subject to the prescribing physician's approval, the pharmacist may
make therapeutic substitutions based on guidelines established by the Company's
Therapeutic Formulary Committee.
NCS provides pharmaceuticals to its clients through a unit dose
distribution system. The Company divides the pharmaceuticals received in bulk
form from its suppliers into unit dose packages for its customers. The unit dose
format is designed to reduce errors, improve control over the distribution of
pharmaceuticals and save nursing administration time relative to the bulk
systems traditionally used by retail pharmacies.
At those sites at which Concord DX, the Company's proprietary computer
system, has been implemented, the Company utilizes its work flow control to
improve efficiencies. In most cases, the Company uses its bar-coding system.
Under this system, a bar code label is applied to each unit dose package.
Through bar coding, information relating to the contents and destination of each
unit dose package distributed can be automatically entered into the Concord DX
system. This bar code technology enables the Company to monitor pharmaceuticals
throughout the production and distribution process, thereby reducing errors,
improving pharmacy control and enhancing production efficiency. At the request
of the Company, certain manufacturers have begun to provide pharmaceuticals that
are pre-packaged and bar coded. At June 30, 1999, approximately 80% of the
Company's sites were converted to the Concord DX system.
As an additional service, NCS furnishes its clients with information
captured by its computerized medical records and documentation system. This
system captures patient care information, which is used to create monthly
management and quality assurance reports. The Company believes that this system
of information management, combined with the unit dose delivery system, improves
the efficiency and controls in nursing administration and reduces the likelihood
of drug-related adverse consequences.
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Consultant Pharmacy Services. Federal and state regulations mandate that
long-term care facilities improve the quality of patient care by retaining
consultant pharmacist services to monitor and report on prescription drug
therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and
standardize health 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. Noncompliance with these regulations may
result in monetary sanctions as well as the potential loss of the facility's
ability to participate in Medicare and Medicaid reimbursement programs.
NCS provides consulting services that help clients comply with federal and
state regulations applicable to long-term care facilities. The Company's
services include: (i) reviewing each patient's drug regimen 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) participating on the Pharmacy and Therapeutics, Quality
Assurance and other committees of the Company's clients; (iii) inspecting
medication carts and storage rooms; (iv) monitoring and reporting at least
quarterly on facility-wide drug usage and drug administration systems and
practices; (v) developing and maintaining the client's pharmaceutical policy and
procedure manuals; and (vi) assisting the long-term care facility in complying
with state and federal regulations as they pertain to patient care.
Additionally, NCS offers a specialized line of consulting services which
help long-term care facilities enhance care and reduce and contain costs as well
as comply with state and federal regulations. Under this service line, the
Company 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 continuing education seminars for
the long-term care facilities' staff on topics such as drug information relating
to clinical indications, adverse drug reactions, drug protocols and special
geriatric considerations in drug therapy, information and training on
intravenous drug therapy and updates on OBRA and other regulatory compliance
issues; (v) mock regulatory reviews for nursing staffs; and (vi) nurse
consultant services and consulting for dietary, social services and medical
records.
Infusion Therapy. Infusion therapy is the intravenous delivery of
medication. The Company's infusion therapy services include pain management,
antibiotic therapy and chemotherapy for long-term care residents and home care
patients. NCS has received Joint Commission on the Accreditation of Healthcare
Organizations accreditation at four sites and accreditation with commendation at
another site. NCS prepares the product to be administered and delivers the
product to the long-term care facility for administration by the nursing staff.
Because the proper administration of infusion therapy requires a highly trained
nursing staff, the Company provides education and certification programs to its
clients in order to assure proper staff training and compliance with regulatory
requirements. NCS believes that, by enhancing the ability of client facilities
to administer infusion therapies, these programs have led to a greater use of
infusion therapies throughout the Company's long-term care facility customer
base.
Other Therapies. In 1993, the Company began providing physical, speech and
occupational therapy services. The Company currently provides these services to
residents of 72 long-term care facilities.
Nutrition Management. NCS assists long-term care facilities in menu
planning, purchasing and managing their dietary operations. Because the food
service area is typically one of the principal areas of regulatory violations,
this is an area of critical concern to long-term care facility operators.
Currently, NCS provides this service to 301 long-term care facility customers.
Other. The Company provides long-term care facilities with assistance in
complying with regulations concerning healthy and sanitary environments. The
Company also assists its customers with various regulatory compliance matters
and products and services relating to durable medical equipment ("DME"), oxygen,
mobile diagnostics and Medicare Part B products and services. Finally, NCS
offers specialized educational services that aid facilities in the training of
their staffs. These services include surveys to prepare facilities for state
reviews and training on appropriate nursing techniques in infusion therapy,
wound care management and restorative nursing.
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FORMULARY MANAGEMENT
NCS employs formulary management techniques designed to assist physicians
in making the best clinical choice of drug therapy for patients at the lowest
cost. Under the Company's formulary programs, NCS pharmacists assist prescribing
physicians in designating the use of particular drugs from among therapeutic
alternatives (including generic substitutions) and in the use of more
cost-effective delivery systems and dose forms. The formulary takes into account
such factors as pharmacology, safety and toxicity, efficacy, drug
administration, quality of life and other considerations specific to the elderly
population of long-term care facilities.
Successful implementation of formulary guidelines is dependent upon close
interaction between the pharmacist and the prescribing physician. NCS seeks to
attract and retain highly trained clinical pharmacists and encourages their
active participation in the caring for residents of long-term care facilities,
including consultation with the facilities' medical staff and other prescribing
physicians, to increase the likelihood that the most efficacious, safe and
cost-effective drug therapy is prescribed. The Company's formulary program is
directed by the NCS Formulary Committee, which is comprised of eight pharmacists
and two additional members. The Company believes that adherence to the NCS
formulary guidelines provides the most cost effective therapy to the resident
and strengthens the Company's purchasing power with pharmaceutical
manufacturers.
HUB AND SPOKE OPERATING NETWORK
The Company is in the process of consolidating its 84 pharmacy sites into
a hub and spoke operating network. Hub sites are responsible for the dispensing
of all maintenance medications, billing and accounting, customer service and
medical record keeping. Satellite sites are responsible only for the dispensing
of new prescriptions and local consulting services. The benefits of the
Company's hub and spoke model are increased quality, productivity, customer care
and formulary compliance. In addition, by moving to a hub and spoke model, the
Company believes that it can decrease its overall operating costs and working
capital needs.
MANAGEMENT INFORMATION SYSTEMS
An integral part of NCS' operations is its proprietary management
information system called "Concord DX", which has extensive capabilities
designed to improve operating efficiencies and controls both internally and at
the customer level. In conjunction with the unit dose distribution system and
the use of a bar-coding label system on unit dose packages, Concord DX is able
to monitor pharmaceuticals within NCS throughout the production and distribution
process. At the customer level, Concord DX automatically screens prescription
orders received from physicians for patient-specific allergies and potentially
adverse reactions given other medications the patient may be receiving. Concord
DX is also used to create individual patient medical records and monthly
management and quality assurance reports for NCS' customers. To date, Concord DX
has been implemented in 80% of NCS' customer base.
In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot").
For the past 11 years, Rescot has developed one of the premier pharmacy systems
used for managing patient and pharmacy data. Rescot has been instrumental in the
design and implementation of Concord DX.
In addition to these internal capabilities, NCS has added a suite of
software applications named ASTRAL designed to address customers' needs. Each of
the ASTRAL applications meets one of three goals: (1) improve the profitability
of the nursing home, (2) enhance the quality of care delivered, or (3) improve
the nursing home's ability to conform to regulatory requirements. NCS' current
ASTRAL modules are as follows:
NCS ON-LINE is the core product in ASTRAL. It improves profitability by
dramatically reducing nursing time associated with ordering medicines and
printing pharmacy reports. NCS On-Line provides a real time connection to NCS
for ordering, reviewing med sheets and generating reports. Patient care is
enhanced by reducing the amount of nursing time associated with clerical
functions.
PROVIEW improves a nursing home's profitability by enhancing the
facility's ability to make economic admission decisions. ProView analyzes the
costs and revenues associated with a resident prior to admission. In this era of
Prospective Pay, it is a valuable tool for ensuring that a customer
prospectively evaluates all financial aspects related to admitting a resident.
OSCAR is an on-line survey tool which compares a facility's state
surveys over time and across regions. By using OSCAR, a nursing facility can
quickly gain perspective as to how they are performing relative to their history
and their state, regional or national competitors. NCS updates this quarterly
and it has improved their customers' ability to conform to regulations.
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LIVEWELL is a clinical documentation and pharmacy ordering system
designed for the assisted living market. It enhances care by electronically
documenting the medical records and ordering functions.
In addition to the innovations currently being used by NCS customers,
the Company believes that the integration of other information systems within
the nursing home is a critical future customer need. The Company believes that
access to both clinical and financial information is a key factor in improving
care and managing costs. The Company believes that the ASTRAL system will
facilitate a unified NCS culture through improved site-to-site communication and
will enhance the Company's ability to deliver high quality, standardized
services throughout its geographic market.
SALES AND MARKETING
In marketing to prospective customers, NCS has organized the selling
efforts of each formerly independent location into a single sales force
consisting of 40 account executives, six regional sales managers and a vice
president of sales. While the six regional sales managers train and oversee the
account executives, they are also responsible for selling to regional and
national chain accounts along with the vice president of sales; thus making up
the national account team. Subsequently, all field sales representatives are
trained in each of the Company's products and services and sell these services
throughout their respective geographic territories. A typical territory consists
of approximately 250 long-term care facilities, and the salesperson follows an
eight-week call cycle. These individuals are paid base salaries with commissions
comprising up to 75% of a successful salesperson's compensation. The Company
believes that long-term care facilities change institutional pharmacies fairly
infrequently, but when a change is made, it is generally the result of a
competitor's ability to offer better service or a broader array of products and
services. Additionally, in the PPS environment, price competition is becoming an
increasing factor. The marketing team is comprised of a six-person team who
reports to the director of marketing. They are responsible for the overall
branding of the Company through trade advertising, direct telemarketing,
educational seminars, industry press releases, industry trade shows and
competitive information.
PURCHASING
NCS purchases pharmaceuticals primarily through a national wholesale
distributor, with whom it has negotiated a prime vendor contract, and directly
from certain pharmaceutical manufacturers. The Company also is a member of
industry buying groups that contract with manufacturers for volume-based
discounted prices which are passed through to the Company by its wholesale
distributor. More recently, the Company has formed a group purchasing
organization with two other large pharmaceutical buyers in the long-term care
and acute care industries. The Company anticipates that it will purchase the
majority of its pharmaceuticals through this new organization. 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.
CUSTOMERS
At June 30, 1999, NCS had contracts to provide services to approximately
262,000 residents in 34 states. These contracts, as is typical in the industry,
are generally for a period of one year but can be terminated by either party for
any reason upon thirty days written notice. Over the past two years, NCS has
expanded its customer base to also include rural hospitals and at June 30, 1999,
NCS had contracts to manage hospital pharmacies in 23 states. As of June 30,
1999, no individual customer or market group represented more than 5% of the
total sales of the Company's institutional pharmacy business.
COMPETITION
Competition among providers of pharmacy services to long-term care
facilities is highly competetive. The Company believes that it is one of the top
three national independent institutional pharmacies in the country.
Institutional pharmacies compete principally on the basis of quality, cost
effectiveness and service level. In the geographic areas it serves, the Company
competes with local retail pharmacies, captive pharmacies and local, regional
and national institutional pharmacies. The Company competes with several other
companies with similar marketing strategies, some of which have greater
resources than the Company.
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REIMBURSEMENT AND BILLING
As is generally the case for long-term care facility services, NCS
receives payments through reimbursement from Medicaid and Medicare programs and
directly from individual residents (private pay), private third-party insurers
and long-term care facilities. For the fiscal year ended June 30, 1999, the
Company's payor mix was approximately 39% Medicaid, 3% Medicare, 19% private
pay, 16% third-party insurance and other and 23% long-term care facilities,
including amounts for which the long-term care facility receives reimbursement
under Medicare Part A. Medicare and Medicaid are highly regulated. The failure
of NCS and/or its client institutions to comply with applicable reimbursement
regulations could adversely affect the Company's business.
Private Pay. For those residents who are not covered by
government-sponsored programs or private insurance, NCS generally bills the
patient or other responsible party on a monthly basis. Depending upon local
market practices, NCS may alternatively bill private residents through the
long-term care facility. Pricing for private pay residents is based on
prevailing regional market rates or "usual and customary" charges.
Medicaid. The Medicaid program is a federal-state cooperative program
designed to enable states to provide medical assistance to aged, blind or
disabled individuals, or to 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 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. For
residents eligible for Medicaid, the Company bills the individual state Medicaid
program or, in certain circumstances state designated managed care or other
similar organizations. Medicaid programs are funded jointly by the federal
government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
certain prescription drugs under Medicaid. In most states pharmacy services are
priced at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. In addition, most states establish a fixed
dispensing fee which is adjusted to reflect associated costs on an annual or
less frequent basis.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. The annual increase in the
federal share would vary from state to state based on a variety of factors. Such
provisions, if ultimately signed into law, could adversely affect the Company's
business. Additionally, any shift from Medicaid to state designated managed care
could adversely affect the Company's business due to historically lower
reimbursement rates for managed care.
Medicare. The Medicare program is a federally funded and administered
health insurance program for individuals age 65 and over or for certain
individuals who are disabled. The Medicare program consists of two parts:
Medicare Part A, which covers, among other things, inpatient hospital, skilled
long-term care 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. Under the Balanced Budget Act of 1997, a prospective payment system (PPS)
was instituted for Medicare Part A reimbursement to skilled nursing facilities
(SNFs). The prospective payment is in the form of a federal per diem rate for
all covered SNF services. PPS began for SNFs whose costs reporting periods began
after July 1, 1998 and the federal rate will be phased in over four years. Fees
for pharmaceuticals provided to Medicare Part A patients are paid to the Company
by the long-term care facility on a monthly basis. Pricing is in the form of a
PPS contract that may include per diems, formulary requirements and risk sharing
components. Medicare Part A has a cost-sharing arrangement under which
beneficiaries must pay a portion of their costs. These non-covered co-payments
are billed by the facility directly to residents or the state Medicaid plan, as
the case may be.
7
<PAGE> 11
Medicare Part B provides benefits covering, among other things, outpatient
treatment, physicians' services, durable medical equipment ("DME"), orthotics,
prosthetic devices and medical supplies. Products and services covered for
Medicare Part B eligible residents in the long-term care facility include, but
are not limited to, enteral feeding products, ostomy supplies, urological
products, orthotics, prosthetics, surgical dressings, tracheostomy care supplies
and a limited number of other medical supplies. All claims for DME, prosthetics,
orthotics, prosthetic devices, including enteral therapy and medical supplies
("DMEPOS") are submitted to and paid by four regional carriers known as Durable
Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage
guidelines, allowable utilization frequencies and billing procedures for DMEPOS.
Payment is based on a fee schedule, which varies depending on the state in which
the patient receiving the items resides. Payments for Medicare Part B products
to eligible suppliers, which include long-term care facilities and suppliers
such as NCS, are made on a per-item basis directly to the supplier. In order to
receive Medicare Part B reimbursement payments, suppliers must meet certain
conditions set by the federal government. NCS, as an eligible supplier, either
bills Medicare directly for Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility. For Part
B services, such as physical, speech and occupational therapy, long-term care
facilities bill Medicare for reimbursement of the amounts paid to NCS for these
services. Medicare limits such reimbursement to the reasonable amount that would
have been paid if provider employees had furnished the services. To date,
Medicare has published "salary equivalency guidelines" for physical and
respiratory therapy services. Medicare does not currently have salary
equivalency guidelines for other therapy services, but may disallow payment for
rates that substantially exceed rates paid for such services by other providers
in the same area. Moreover, Medicare is likely to issue salary equivalency
guidelines for occupational and speech therapy services in the near future.
Medicare Part B also has an annual deductible as well as a co-payment obligation
on behalf of the patient, and the portion not covered by Medicare is billed
directly to the patient or appropriate secondary payor.
Third-Party Insurance. Third-party insurance includes funding for
residents covered by private plans, veterans' benefits, workers' compensation
and other programs. The resident's individual insurance plan is billed monthly
and rates are consistent with those for other private pay residents.
Long-Term Care Facilities. In addition to occasional private patient
billings and those related to drugs for Medicare eligible residents, long-term
care facilities are billed directly for consulting services, certain
over-the-counter medications and bulk house supplies.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
service, are subject to extensive federal, state and local laws and regulations.
These laws and regulations cover required qualifications, day-to-day operations,
reimbursement and the documentation of activities. NCS continuously monitors the
effects of regulatory activity on its operations.
Licensure, Certification and Regulation. States generally require that
companies operating a pharmacy within that state be licensed by the state board
of pharmacy. The Company currently has pharmacy licenses in each of the states
in which it operates a pharmacy. In addition, the Company's pharmacies are
registered with the appropriate state and federal authorities pursuant to
statutes governing the regulation of controlled substances.
Long-term care 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 ensure compliance with applicable program participation
requirements. Long-term care facilities are also subject to the long-term care
facility reforms of OBRA, which impose strict compliance standards relating to
the quality of care for long-term care operations, including vastly increased
documentation and reporting requirements. In addition, pharmacists, nurses and
other health 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 regulation regarding professional standards of conduct.
Federal and State Laws Affecting the Repackaging, Labeling and Interstate
Shipping of Drugs. Federal and state laws impose certain repackaging, labeling
and package insert requirements on pharmacies that repackage drugs for
distribution beyond the regular practice of dispensing or selling drugs directly
to patients at retail. A drug repackager must register with the FDA. The Company
believes that it holds all required registrations and licenses and that its
repackaging operations are in compliance with applicable state and federal
requirements.
8
<PAGE> 12
Medicare and Medicaid. For an extensive period of time, the long-term care
facility pharmacy business has operated under regulatory and cost containment
pressures from state and federal legislation primarily affecting Medicaid and
Medicare.
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 long-term care facilities and suppliers
of DMEPOS, 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. See "--Reimbursement and Billing."
Federal law and regulations contain a variety of requirements relating to
the furnishing of prescription drugs under Medicaid. First, states are given
broad authority, subject to certain standards, to limit or to specify conditions
as to the coverage of particular drugs. Second, 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 long-term care facilities relating to drug regimen
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 long-term care facility residents if the
long-term care 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
long-term care facility satisfies the drug regimen review requirement, and the
states in which the Company operates currently require its pharmacies to comply
therewith. Third, federal regulations impose certain requirements relating to
reimbursement for prescription drugs furnished to Medicaid residents. See
"--Reimbursement and Billing--Medicaid."
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 prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers that deal with the long-term care facility. Such
limitations may increase the competition that the Company faces in providing
services to long-term care facility patients.
Prospective Payment System. The Balanced Budget Act of 1997 (BBA),
enacted on August 5, 1997, mandated the implementation of a prospective payment
system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare
Part A patients, effective for all SNFs whose cost reporting period begins on or
after July 1, 1998.
Under the new PPS, SNFs receive a single per diem payment for all
Medicare Part A covered SNF services. The new single, per diem federal rate is
being phased in over a four-year period beginning July 1, 1998. Each Medicare A
covered patient is designated into one of 44 resource utilization group (RUG),
or case-mix categories, as defined by the Health Care Financing Administration
(HCFA). The per diem payment associated with each RUG category encompass all
costs of furnishing covered skilled nursing services including routine,
ancillary and capital-related costs. PPS incorporates payment for pharmacy
within the nursing component (as a non-therapy ancillary) of the federal per
diem and adjust costs by the nursing index.
Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws include the federal anti-kickback statute, which prohibits, among
other things, knowingly and willfully soliciting, receiving, offering or paying
any remuneration directly or indirectly in return for or to induce the referral
of an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many states
have enacted similar statutes which are not necessarily limited to items and
services for which 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 broadly. Recent Federal legislation has increased the enforcement
and penalties for violation of these statutes.
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 the criteria for a specific Safe Harbor does not
necessarily mean that an arrangement violates the federal statute, the
arrangement is subject to review by the HHS Office of Inspector General ("OIG"),
which is charged with administering the federal anti-kickback statute. Beginning
January 1, 1997, the Secretary of Health and Human Services began issuing
written advisory opinions regarding the applicability of certain aspects of the
anti-kickback statute to specific arrangements or proposed arrangements.
Advisory opinions will be binding as to the Secretary and the party requesting
the opinion.
9
<PAGE> 13
The OIG has issued "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 has recently issued a Fraud Alert concerning prescription
drug marketing practices that could potentially violate the federal
anti-kickback 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 arise
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices and the like. Further, a number of the states involved
in these enforcement actions have requested that the FDA exercise greater
regulatory oversight in the area of pharmaceutical promotional activities by
pharmacists. It is not possible to determine whether the FDA will act in this
regard or what effect, if any, FDA involvement would have on the Company's
operations.
The Company believes its contract 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.
Environmental Matters. In operating its facilities, NCS makes every effort
to comply with environmental laws. No major difficulties have been encountered
in effecting compliance. In addition, no material capital expenditures for
environmental control facilities are expected. While the Company 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.
General. In the ordinary course of its business, the Company is subject to
inspections, audits, inquiries and similar actions by governmental authorities
responsible for enforcing the laws and regulations to which the Company is
subject.
In January 1997, government authorities requested information from the
Company in connection with an audit and investigation of the circumstances
surrounding the apparent drug-related homicide of a non-management employee of
one of the Company's pharmacies. The information provided relates to the
Company's inventory and the possible theft of controlled substances from this
pharmacy. The review identified inadequacies in record keeping and inventory
control at this pharmacy. In a meeting with governmental authorities in August
1997, the Company discussed its findings and those of the government and
documented corrective measures taken by the Company. In September 1998, the
Company was notified by the United States Department of Justice, United States
Attorney for the Southern District of Indiana ("USA-Indiana") that the United
States Drug Enforcement Administration had referred this matter to the Office of
the USA-Indiana for possible legal action involving certain numerous alleged
violations of federal law. The USA-Indiana invited the Company to contact the
Office of the USA-Indiana in an effort to resolve the matter. The Company
subsequently contacted the Office of the USA-Indiana, and discussions regarding
a possible settlement of this matter ensued and are currently proceeding. No
specific settlement terms or amounts have yet been agreed upon by the parties.
In January 1998, federal and state government authorities sought and
obtained various documents and records from a Harrin, Illinois pharmacy operated
by a wholly-owned subsidiary of the Company. The Company has cooperated fully
and continues to cooperate fully with the government's inquiry. In June 1999,
representatives of the Company met with attorneys with the Civil and Criminal
Divisions of the Office of the United States Department of Justice, United
States Attorney for the Southern District of Illinois ("USA-Illinois") regarding
the government's investigation. The USA-Illinois informed the Company that it
had information that allegedly substantiated numerous violations of federal law,
but the Company has not received any written notification of these allegations.
Discussions regarding the government's investigation have ensued and are
currently proceeding between representatives of the USA-Illinois and the
Company.
EMPLOYEES
As of June 30, 1999, the Company had approximately 4,200 full-time
employees. None of its employees are represented by a union. The Company
considers relations with its employees to be good.
10
<PAGE> 14
ITEM 2. PROPERTIES
The Company presently maintains its executive offices in approximately
10,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in
2000 with an unaffiliated third party. NCS currently considers this space to be
sufficient for its corporate headquarters operations.
As of June 30, 1999, the Company leased or owned 101 properties in 34
states with a total square footage of 792,000 square feet ranging in size from
approximately 500 square feet to approximately 35,000 square feet. The terms of
the leases relating to these properties vary in length remaining, from one month
to ten years and, in some cases, include options to extend. For information
concerning the Company's rental obligations, see Note 5 (Operating Leases) of
the Notes to Consolidated Financial Statements, which is set forth at Item 8 of
this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
On June 7, 1999, a lawsuit was filed against the Company in the Superior
Court of Norfolk County, Massachusetts. Plaintiffs are certain selling
stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS
acquired on September 17, 1997. The complaint alleges breach of contract and
unfair business practices arising out of NCS' non-payment of certain amounts
allegedly payable under the terms of an earn-out provision included in the
acquisition agreement. Plaintiffs seek to compel payment of NCS stock worth
$17,385,223 based on the preliminary earn-out calculation.
Under the terms of the earn-out arrangement, amounts payable under the
earn-out are to be paid through the issuance of additional shares of Class A
Common Stock. If on the first anniversary of the date of issuance of the
earn-out shares, the per share price of the Company's Class A Common Stock is
less than $17.225 per share, then the Company will be required to issue
additional shares to compensate for the difference in value.
The case has been scheduled for pretrial on October 4, 1999, at which time
the court will set a discovery schedule and an order concerning the progression
of proceedings. NCS strongly believes that it has meritorious defenses against
the claim of the plaintiffs and believe, the earn-out, if any, is substantially
less than the amount claimed by the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jon H. Outcalt 63 Chairman of the Board of Directors
Kevin B. Shaw 42 President, Chief Executive Officer and Director
Phyllis K. Wilson 58 Executive Vice President and Director
Gerald D. Stethem 35 Chief Financial Officer
William B. Byrum 55 Executive Vice President and Chief Operating Officer
Marvin R. Richardson 42 Executive Vice President
Patrick Morris 39 Senior Vice President
John P. DiMaggio 36 Senior Vice President
Michael J. Mascali 39 Senior Vice President
Thomas Bryant Mangum 48 Senior Vice President
A. Malachi Mixon III 59 Director
Richard L. Osborne 61 Director
Boake A. Sells 62 Director
</TABLE>
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Jon H. Outcalt, Chairman of the Board, is a founding principal of NCS and
has served as Chairman of the Board since 1986. He was a Senior Vice President
of Alliance Capital Management L.P., a global investment management company,
from 1975 to December 1995. Mr. Outcalt serves on the Board of Directors of
Myers Industries, Inc., a manufacturer of plastic and rubber parts for the
automotive and other industries, and Ohio Savings Financial Corporation, a
savings and loan holding company. He is a graduate of Trinity College (B.A.) and
the Wharton Graduate School of Business (M.B.A.).
Kevin B. Shaw, President, Chief Executive Officer and a Director of the
Company, is a founding principal of NCS and has served as President, Secretary
and a Director of the Company since 1986 and as Chief Executive Officer since
December 1995. Prior to joining the Company, he was employed by McKinsey &
Company and Owens Corning Fiberglas. Mr. Shaw is a graduate of Harvard College
(B.A.) and Stanford Graduate School of Business (M.B.A.).
Phyllis K. Wilson, R.PH., Executive Vice President and a Director of the
Company since November, 1993, is the founder of NCS' Columbus, Ohio operation.
From 1989 to June 1995, she was responsible for corporate development and
oversaw the Company's Ohio and Michigan operations. She is past President of the
Ohio State Board of Pharmacy and served on the Board from 1977 to 1985. Ms.
Wilson is a founding member of the American Society of Consultant Pharmacists
and is a graduate of Ohio State University with a B.S. in Pharmacy.
11
<PAGE> 15
Gerald D. Stethem, Chief Financial Officer, joined NCS in November, 1994
and served as Controller until February 1998, at which time he was named Chief
Financial Officer. He was previously with Ernst & Young LLP, an auditing and
accounting firm, where he served as a Manager in the firm's Entrepreneurial
Services Group. He is a graduate of Ohio State University with a B.A. in
Accounting.
William B. Byrum, Executive Vice President and Chief Operating Officer,
joined the Company in September 1995. From April 1993 to September 1995, Mr.
Byrum was President and Chief Executive Officer of Corinthian Healthcare
Systems, Inc., an institutional pharmacy, prior to its acquisition by the
Company. From 1991 to April 1993, he was Vice President of Development
(Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice
President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc.,
serving in various management positions. Mr. Byrum is a graduate of Purdue
University with a B.S. in Pharmacy.
Marvin R. Richardson, Executive Vice President, joined NCS in June 1995 as
a Regional Vice President. From 1991 to 1995, Mr. Richardson was the founder and
President of Quality Health Care of Indiana, an institutional pharmacy, prior to
its acquisition by the Company. He is a graduate of Purdue University with a
B.S. in Pharmacy.
Patrick Morris, Senior Vice President, joined the Company in February
1997. Mr. Morris was with the law firm of Calfee, Halter & Griswold LLP,
Cleveland, Ohio from 1985 to February 1997, and was a partner in such firm from
1993 to February 1997. Mr. Morris is a graduate of Trinity College (B.A.) and
Case Western Reserve University School of Law (J.D.).
John P. DiMaggio, Senior Vice President, joined the Company in December
1992 and served as Management Information Systems Director of the Company until
December 1994. Mr. DiMaggio served as Vice President of Information Systems of
the Company from December 1994 to November 1998, at which time he assumed his
current position as Senior Vice President of Information Systems. Mr. DiMaggio
has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S.
Degree in Computer Science from the University of Pittsburgh.
Michael J. Mascali, Senior Vice President, joined the Company in October
1995. Mr. Mascali was a Regional Vice President of Operations from October 1995
to February 1998. From February 1998 to January 1999, he was Senior Vice
President of Compliance and from January 1999 to May 1999 he was Senior Vice
President of Operations, at which time he assumed his current position as Senior
Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali was a
director of pharmacy for Synetic and Pharmacy Corporation of America in
Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's
University with a B.S. in Pharmacy.
Thomas Bryant Mangum, Senior Vice President, joined the Company in June
1998. From November 1996 to June 1998, Mr. Mangum was Senior Director of
Pharmacy for Tenet HealthCare System, an owner and manager of acute care
hospitals. From November 1995 to November 1996, he was Vice President of
Pharmacy services for Premier, Inc., a group purchasing organization for acute
care hospitals, where he had responsibility for pharmaceutical contract
negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice
President of Pharmacy and Nutrition Services for SunHealth, a group purchasing
organization for acute care hospitals. He is a graduate of University of North
Carolina Pharmacy School and currently serves on the Pharmacy School Board.
A. Malachi Mixon III, a Director of the Company since December 1994, has
been the Chief Executive Officer and a Director of Invacare Corporation since
1979 and, since 1983, its Chairman of the Board. Mr. Mixon also served as
President of Invacare Corporation from 1979 to 1996. Invacare Corporation is a
leading worldwide manufacturer and distributor of home health care products. He
serves as a Director of Lamson & Sessions Co., a supplier of engineered
thermoplastic products, and Sherwin-Williams Company, a producer and distributor
of coatings and related products, and is Chairman of the Board of Trustees of
The Cleveland Clinic Foundation, one of the world's leading health care
institutions. Mr. Mixon is a graduate of Harvard College (B.A.) and the Harvard
Graduate School of Business (M.B.A.).
Richard L. Osborne, a Director of the Company since 1986, has served as
the Executive Dean of the Weatherhead School of Management, Case Western Reserve
University, Cleveland, Ohio, since 1971. Mr. Osborne serves on the Board of
Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts
for the automotive and other industries, New Horizons Worldwide, Inc., a
provider of computer training services, and Ohio Savings Financial Corporation,
a savings and loan holding company. He is a graduate of Bowling Green State
University (B.S.) and Case Western Reserve University (M.S.).
Boake A. Sells, a Director of the Company since November 1993, has been a
self-employed private investor since June 1992. He was Chairman of the Board,
President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to
June 1992, and was formerly President and Chief Operating Officer of Dayton
Hudson Corporation and President and Chief Operating Officer of Cole National
Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading
casino gaming company. He is a graduate of University of Iowa (B.A.) and Harvard
Graduate School of Business (M.B.A.).
12
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol NCSS. The following table sets forth, for the two fiscal years ended June
30, 1999, the high and low sale prices per share for the Class A Common Stock,
as reported on the Nasdaq National Market. These prices do not include retail
markups, markdowns or commissions.
HIGH LOW
---- ---
1998
First Quarter $ 29.13 $ 22.38
Second Quarter 27.50 22.25
Third Quarter 33.50 24.13
Fourth Quarter 32.88 27.00
1999
First Quarter $ 29.31 $ 16.50
Second Quarter 23.75 12.00
Third Quarter 23.44 9.44
Fourth Quarter 15.00 5.06
On September 23, 1999, the last sale price of the Class A Common Stock as
reported by Nasdaq was $ 2.1875 per share. As of September 23, 1999, there were
approximately 246 holders of record of the Class A Common Stock, and
approximately 41 holders of record of Class B Common Stock.
The Company has never declared or paid cash dividends on its Class A
Common Stock. The Company currently intends to retain any earnings for use in
its business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion. On August 3, 1999
the Company amended its line of credit agreement entering into several
restrictive covenants including a restriction on declaration and payment of cash
dividends to shareholders.
There were no equity securities of the Company issued during the fourth
fiscal quarter that were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
13
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 65,602 $ 113,281 $275,040 $ 509,064 $ 717,825
Cost of revenues 46,570 82,415 205,536 380,217 540,547
---------- ---------- -------- ---------- -----------
Gross profit 19,032 30,866 69,504 128,847 177,278
Selling, general and
administrative expenses (1) 14,539 22,236 51,153 93,895 139,522
Special charge to increase allowance
for doubtful accounts (2) - - - - 32,384
Nonrecurring charges (2) - 2,811 - 8,862 8,115
---------- ---------- -------- ---------- -----------
Operating income (loss) 4,493 5,819 18,351 26,090 (2,743)
Interest (expense) income, net (1,089) (1,611) 1,576 (5,745) (18,301)
---------- ---------- -------- ---------- -----------
Income (loss) before
income taxes 3,404 4,208 19,927 20,345 (21,044)
Income tax (expense) benefit (1,536) (1,852) (8,655) (9,014) 7,640
---------- ---------- -------- ---------- -----------
Income (loss) before accounting change 1,868 2,356 11,272 11,331 (13,404)
Cumulative effect of
accounting change (1) - - - - (2,921)
---------- ---------- -------- ---------- -----------
Net income (loss) $ 1,868 $ 2,356 $ 11,272 $ 11,331 $ (16,325)
========== ========== ======== ========== ===========
Net income (loss) per share - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ ( 0.81)
========== ========== ======== ========== ===========
Net income (loss) per share - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ ( 0.81)
========== ========== ======== ========== ===========
Income (loss) before accounting
change - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ (0.66)
========== ========== ======== ========== ===========
Income (loss) before accounting
change - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ (0.66)
========== ========== ======== ========== ===========
Weighted average common
shares outstanding - basic 5,818 8,462 15,991 19,100 20,200
========== ========== ======== ========== ===========
Weighted average common
shares outstanding - diluted 6,764 8,995 16,843 19,372 20,200
========== ========== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 286 $ 21,460 $ 8,160 $ 21,186 $ 29,424
Working capital 10,616 48,336 53,164 149,362 197,395
Total assets 38,595 110,668 321,030 623,790 699,499
Line of credit - - 10,285 147,800 214,700
Long-term debt, excluding
current portion 18,505 1,961 8,043 3,879 1,936
Convertible subordinated debentures 1,900 6,549 4,813 102,753 100,000
Stockholders' equity 8,117 91,100 253,226 287,334 276,434
</TABLE>
(1) Selling, general and administrative expenses for 1999 include $11,503
of pre-tax costs that would have been capitalized prior to the adoption
of SOP 98-5, "Reporting on the Costs of Start-up Activities." The
cumulative effect of accounting change represents start-up costs, net
of tax, that were previously capitalized as of June 30, 1998.
(2) For 1996, represents a nonrecurring charge in connection with the
termination of certain compensation arrangements with the prior owners
of certain acquired businesses. For 1998, represents a nonrecurring
charge related to restructuring and other nonrecurring expenses in
connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and
other nonrecurring items. For 1999, represents a special charge to
increase the allowance for doubtful accounts, and other nonrecurring
charges in association with the implementation and execution of
strategic restructuring and consolidation initiatives of certain
operations and other nonrecurring items. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
14
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations, expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 74.7 74.7 75.3
----- ----- -----
Gross margin 25.3 25.3 24.7
Selling, general and administrative expenses 18.6 18.5 19.4
Special charge to increase allowance for doubtful accounts - - 4.5
Nonrecurring charges - 1.7 1.2
----- ----- -----
Operating income (loss) 6.7 5.1 (0.4)
Interest (expense) income, net .6 (1.1) (2.6)
----- ----- -----
Income (loss) before income taxes 7.3 4.0 (3.0)
Cumulative effect of accounting change - - (0.4)
Income tax (expense) benefit (3.2) (1.8) 1.1
----- ----- -----
Net income (loss) 4.1% 2.2% (2.3)%
===== ===== =====
</TABLE>
YEARS ENDED JUNE 30, 1999 AND 1998
The net loss for the year ended June 30, 1999 was $16.3 million or $0.81
per diluted share compared to net income of $11.3 million or $0.59 per diluted
share for the year ended June 30, 1998. The net loss for the year ended June 30,
1999 before the cumulative effect adjustment to adopt the Accounting Standards
Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share
compared to net income of $11.3 million or $0.59 per diluted share in the prior
year.
Net income for the year ended June 30, 1999, excluding the special and
nonrecurring charges described below, and the effect of adopting SOP 98-5,
increased to $17.9 million or $0.88 per diluted share, from $16.6 million or
$0.86 per diluted share, excluding nonrecurring charges, in the prior year.
Revenues for the year ended June 30, 1999 increased 41.0% to $717.8
million from $509.1 million for the year ended June 30, 1998. The increase in
revenues over the prior fiscal year is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $208.7 increase for
the year ended June 30, 1999, $113.4 million of the increase is attributable to
revenues for the fiscal year ended June 30, 1999 including a full period of
operations for fiscal 1998 acquisitions. These fiscal 1998 acquisitions include
Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in
September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in
January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy
and Managed Pharmacy Services, affiliates of Eckerd Corporation in February
1998, Apple Institutional Services in March 1998 and the institutional pharmacy
assets of Walgreens Co. in June 1998. Internal growth accounted for $95.3
million of the increase as the Company's existing operations continued to grow
through marketing efforts to new and existing clients, increased drug
utilization of long-term care facility residents, and the growth and integration
of new and existing products and services. The total number of beds serviced by
the Company as of June 30, 1999 increased 5.6% to 262,000 beds, from 248,000
beds at June 30, 1998.
Cost of revenues for the year ended June 30, 1999 increased $160.3 million
or 42.2% to $540.5 million from $380.2 million for the year ended June 30, 1998.
Cost of revenues as a percentage of revenues increased to 75.3% for the year
ended June 30, 1999 from 74.7% for the year ended June 30, 1998. The Company's
leverage associated with purchasing pharmaceuticals, formulary management
program and the leveraging of production costs positively impacted gross margins
during the year ended June 30, 1999. However, these improvements were offset by
gross margin reductions as a result of pricing pressures and a reduction in
higher margin services as more facilities served by the Company were subject to
the phased in implementation of the PPS reimbursement system during the last
three months of the fiscal year ended June 30, 1999.
Selling, general and administrative expenses for the year ended June 30,
1999 increased $45.6 million or 48.6% to $139.5 million from $93.9 million for
the year ended June 30, 1998. Selling, general and administrative expenses as a
percentage of revenues increased from 18.5% for the year ended June 30, 1998 to
19.4% for the year ended June 30, 1999.
15
<PAGE> 19
Excluding the $11.5 million pre-tax increase for costs which would
otherwise have been capitalized prior to early adoption of SOP 98-5 during the
year ended June 30, 1999, selling, general and administrative expenses increased
$34.1 million or 36.3% to $128.0 million from $93.9 million for the year ended
June 30, 1998. Excluding the effects of early adoption of SOP 98-5, selling,
general and administrative expenses as a percentage of revenues decreased from
18.5% for the year ended June 30, 1998 to 17.8% for the year ended June 30,
1999. The percentage decrease for the year ended June 30, 1999 is a result of
creating operational efficiencies with acquisitions and the ability to leverage
overhead expenses over a larger revenue base. At the time of acquisition, the
selling, general and administrative expenses of the acquired companies are
typically higher than the Company as a whole. The increase in selling, general,
and administrative expenses in absolute dollars is mainly attributable to
expenses associated with the operations of businesses acquired during the prior
fiscal year.
Excluding the effects of the early adoption of SOP 98-5 and the special
and nonrecurring charges as described below, operating income for the year ended
June 30, 1999 increased $14.3 million or 40.6% to $49.3 million from $35.0
million for the year ended June 30, 1998. This improvement is primarily
attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the effects of the early adoption of
SOP 98-5 during the year ended June 30, 1999 and the special and nonrecurring
charges, operating income as percentage of sales for the years ended June 30,
1999 and 1998 was 6.9%.
The adverse impact of the implementation of the Medicare Prospective
Payment System (PPS) under the Balanced Budget Act of 1997, for Medicare
residents of skilled nursing facilities was significantly greater than
anticipated. PPS has created numerous changes to reimbursement policies
applicable to skilled nursing under Medicare Part A. Prior to PPS, Medicare
reimbursed each skilled nursing facility based on that facility's actual
Medicare Part A costs plus a premium. Under PPS, Medicare pays skilled nursing
facilities a fixed fee per Medicare Part A patient day based on the acuity level
of the patient. The per diem rate covers all items and services furnished during
a covered stay for which reimbursement was formerly made separately under
Medicare. Consequently, the Company has experienced revenue pressure as a result
of nursing facilities attempting to manage pharmaceutical costs along with all
other costs associated with patient care under a simple per diem reimbursement
amount. In addition, there has been a reduction in utilization of other
therapies such as speech, occupational and physical rehabilitation.
Additionally, as a result of these changes, skilled nursing facilities have
become increasingly more reluctant to admit Medicare residents, especially those
requiring complex care, causing Medicare census in these facilities to weaken
and a reduction in the average length of stay for Medicare residents. These
factors have had the effect of significantly reducing overall occupancy in the
facilities served by the Company. The resident acuity level has also decreased
as these facilities have attempted to avoid high acuity patients negatively
impacting overall utilization of drugs, particularly those with higher cost such
as infusion therapy. For Medicare certified skilled nursing facilities with a
high cost structure, or those which are unable to cut costs, PPS has caused
significant earnings and cash pressure. Some facilities have sought
consolidation as a method of reducing costs and increasing efficiencies causing
the Company to experience some bed loss.
These outcomes have negatively impacted nursing facilities and the
institutional pharmacy services industry as a whole. Although there may be some
legislative relief for the Company's customers, management is positioning the
Company to succeed in the current PPS environment by adjusting its cost
structure appropriately. The Company is rapidly reducing operating and overhead
costs and accelerating the implementation of the hub and spoke fulfillment and
delivery model. Savings are expected to exceed $20 million on an annualized
basis, once implemented.
During the fourth quarter of 1999 the Company recorded special and
nonrecurring charges of $40.5 million before tax ($24.3 million net of tax). A
special charge of $32.4 million before tax was recorded to increase the
allowance for doubtful accounts, and nonrecurring charges of $8.1 million before
tax were recorded in connection with the implementation and execution of
strategic restructuring and consolidation initiatives of certain operations and
other nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers
primarily as a result of the implementation of the Medicare Prospective Payment
System ($12.9 million pre-tax charge, as described below). The acquisition
related items pertain to specific receivable collectibility issues related to
acquired operating systems, and other nonrecurring issues which have resulted in
potentially uncollectible receivables ($11.0 million and $8.5 million pre-tax
charges, respectively, as described below).
16
<PAGE> 20
Accounts receivable collection and allowance adequacy is a continuous focus
of management. Bad debt provisions and allowances are continually monitored and
evaluated based on historical experience and projected future trends. Until
several months ago bad debt experience rates had remained relatively consistent
and the recorded provisions reflected this experience. However, during the last
three months of the fiscal year ended June 30, 1999, these same processes and
procedures identified trends indicating a significant change in the financial
viability in many of the Company's customers and accordingly an increase in the
amount of potentially uncollectible accounts.
The negative trends in the financial viability of the Company's customers
attributed primarily to a greater than expected adverse impact of the
implementation of PPS. PPS became effective for skilled nursing facilities on
July 1, 1998. PPS implementation coincides with each facility's cost reporting
period (fiscal year) beginning after June 30, 1998. Since a majority of these
facilities report on a December 31 year-end, most facilities were reimbursed
under the PPS provisions beginning January 1, 1999. The negative impact of PPS
reimbursement on the financial health of long-term care facilities became
evident during the last three months of the fiscal year ended June 30, 1999 with
a significant increase in the number of customers declaring bankruptcy or
liquidating assets as compared to historical trends. As a result of these recent
negative trends, a before tax increase of $12.9 million in the allowance for
doubtful accounts was required as of June 30, 1999. Management has reviewed the
Company's credit and collection processes, enhancing the policies and procedures
where necessary, in order to identify and mitigate future collection issues
under the PPS reimbursement system.
One of the Company's primary initiatives has been to integrate its pharmacy
operations under one common operating system, NCS' Concord DX system. At June
30, 1999, approximately 80% of the pharmacy sites have been successfully
converted to NCS' Concord DX system. Prior to conversion to Concord DX, acquired
pharmacies continued to use their historical operating and billing systems.
During the fiscal year ended June 30, 1999, the Company accelerated its focus on
conversion of all historical billing and operating systems to Concord DX. As
part of the conversion process, receivables billed under historical systems were
intensely scrutinized and any collectibility risk was further assessed at the
time of conversion. Accordingly, an $11.0 million pretax increase to the
allowance for doubtful accounts was recorded to allow for potentially
uncollectible accounts under historical systems.
The Company recorded additional special charges to increase the allowance
for doubtful accounts for numerous smaller items aggregating $8.5 million before
taxes. These special charge items primarily include uncollectible accounts
receivable acquired in business combinations in excess of allowances established
at time of acquisition, and uncollectible accounts receivable resulting from
system conversion and transitions to new service provider numbers subsequent to
acquisition.
During the fourth quarter of fiscal 1999, the Company adopted a new plan
of restructuring to consolidate certain pharmacy sites in similar geographies.
The plan is a continuation of the plan adopted in fiscal 1998 to combine
pharmacies in close proximity in order to improve operating efficiencies. As a
result of the new exit plan, 4 additional pharmacy sites will be consolidated
into either a new or existing location. During the year ended June 30, 1999, the
Company recorded nonrecurring charges of $4.7 million related to the new site
consolidations and additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2.1 million related to
employee severance and other compensation related expenses, $0.6 million related
to lease termination costs and $2.0 million related to asset impairments and
other miscellaneous costs. As of June 30, 1999, three site consolidations had
been completed with the remainder expected to be completed by the end of fiscal
2000.
17
<PAGE> 21
The remaining $3.4 million of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter associated with the Company's
expense reduction initiatives, additional acquisition related and other
miscellaneous expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as
follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 6/30/99
----------- ------------- ------------ -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 2.1 $ (1.5) $ .6
Lease terminations Cash .6 (.1) .5
Asset impairments Non-cash 1.5 (1.5) --
Other Cash .5 (.5) --
Special increase to allowance Non-cash 32.4 (32.4) --
for doubtful accounts
Other Cash 3.4 (2.7) .7
------- ------- -------
Total $ 40.5 $(38.7) $ 1.8
======= ======= =======
</TABLE>
The Company had net interest expense of $18.3 million for the year ended
June 30, 1999, compared to net interest expense of $5.7 million during the year
ended June 30, 1998. The increase in expense is due to increased borrowings on
the line of credit and the issuance of $100 million of convertible subordinated
debentures in August 1997. These funds were used primarily for acquisitions.
18
<PAGE> 22
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues for the year ended June 30, 1998 increased 85.1% to $509.1
million from $275.0 million for the year ended June 30, 1997. The increase in
revenues over the prior fiscal year is primarily attributed to two factors: the
Company's acquisition program and internal growth. Of the $234.1 increase for
the year ended June 30, 1998, $69.2 million was due to the acquisitions of
Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in
September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in
January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy
and Managed Pharmacy Services, affiliates of Eckerd Corporation in February
1998, Apple Institutional Services in March 1998 and the institutional pharmacy
assets of Walgreens Co. in June 1998. In addition, $87.8 million of the increase
is attributable to revenues for the fiscal year ended June 30, 1998 including a
full period of operations for fiscal 1997 acquisitions. These fiscal 1997
acquisitions include Advanced Rx Services, Inc. in July 1996, IPAC Pharmacy,
Inc., Medical Arts Pharmacy, Northside Pharmacy Inc., Med-Equip, Thrifty Medical
Supply, Inc. and Thrifty Medical of Tulsa L.L.C. in August 1996, Hudson Pharmacy
of Wichita, Inc. in September 1996, Spectrum Health Services, Inc. in October
1996, Clinical Health Systems in November 1996, Rescot Systems Group, Inc., W.P.
Malone, Inc., Long Term Care Pharmacy Services and Eakles Drug Store, Inc. in
January 1997, Pharmacare, Advanced Pharmaceutical Services, Inc. and Dahlin
Pharmacy, Inc. in February 1997, Stoll Services, Inc., Cooper Hall Pharmacy,
Inc., Hammer Incorporated, Daven Drug, and Medi-Centre Pharmacy in March 1997,
Vangard Labs, Inc. in April 1997, Long Term Care, Inc. in May 1997 and Look Drug
Store, Inc. and HLF Adult Home Pharmacy in June 1997. Internal growth accounted
for $77.1 million of the increase as the Company's existing operations continued
to grow through marketing efforts to new and existing clients, increased drug
utilization of long-term care facility residents, and the growth and integration
of new and existing products and services. The total number of beds serviced by
the Company as of June 30, 1998 increased 63% to 248,000 beds, from 152,000 beds
at June 30, 1997.
Cost of revenues for the year ended June 30, 1998 increased $174.7 million
or 85.0% to $380.2 million from $205.5 million for the year ended June 30, 1997.
Cost of revenues as a percentage of revenues were 74.7% for the years ended June
30, 1998 and June 30, 1997. The Company's leverage associated with purchasing
pharmaceuticals, formulary management program and the leveraging of production
costs positively impacted gross margins during the year ended June 30, 1998.
However, these improvements were offset by the lower margins of companies
acquired during the year ended June 30, 1998. At the time of acquisition, the
gross margins of the acquired companies are typically lower than the Company as
a whole; however, the Company is typically able to increase the gross margins of
the acquired companies through more advantageous purchasing terms and the use of
formulary management.
Selling, general and administrative expenses for the year ended June 30,
1998 increased $42.7 million or 83.6% to $93.9 million from $51.2 million for
the year ended June 30, 1997. Selling, general and administrative expenses as a
percentage of revenues decreased from 18.6% for the year ended June 30, 1997 to
18.4% for the year ended June 30, 1998. The percentage decrease for the year
ended June 30, 1998 is a result of creating operational efficiencies with
acquisitions and the ability to leverage overhead expenses over a larger revenue
base. At the time of acquisition, the selling, general and administrative
expenses of the acquired companies are typically higher than the Company as a
whole. The Company has been successful at creating operational efficiencies with
acquisitions as selling, general and administrative expenses as a percentage of
revenues has decreased six quarters in a row. The increase in selling, general,
and administrative expenses in absolute dollars is mainly attributable to
expenses associated with the operations of businesses acquired during the
current and prior fiscal year.
Excluding the nonrecurring charge described below, operating income for
the year ended June 30, 1998 increased $16.6 million or 90.5% to $35.0 million
from $18.4 million for the year ended June 30, 1997. This improvement is
primarily attributable to increased sales volume generated during the year from
acquisitions and internal growth. Excluding the nonrecurring charge described
below, operating income as percentage of sales for the year ended June 30, 1998
increased slightly to 6.9% from 6.7% for the year ended June 30, 1997.
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million ($5.3 million net of tax) related to
restructuring and other nonrecurring expenses in connection with the
implementation and execution of strategic restructuring and consolidation
initiatives of certain operations and other nonrecurring items. As a result of
the plans described below, the Company expects to remove $1.5 million from its
cost structure in fiscal 1999. These savings are predominantly due to reduced
wage-related costs, reduced carrying costs of fixed assets, reduced rent charges
and other miscellaneous savings. The components of the nonrecurring charge are
described below.
19
<PAGE> 23
During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan will combine pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5.3 million related to the site consolidations
during the year ended June 30, 1998, which consists of $0.5 million related to
employee severance costs in relation to the termination of 149 employees, $0.7
million related to lease termination costs and $4.1 million related to asset
impairments and other miscellaneous costs. As of June 30, 1999, fourteen site
consolidations had been completed with the remainder expected to be completed by
the end of fiscal 2000. All of the employee terminations under the plan have
occurred as of June 30, 1999.
Approximately $0.9 million of the nonrecurring charge relates to the
buyout of existing employment agreements with the prior owners of certain
acquired businesses.
In June 1998 the Company entered into a new $150 million revolving credit
facility and a $50 million bridge facility (June 1998 facilities) that replaced
the existing $135 million revolving credit facility. The June 1998 facilities
were replaced in July 1998 by a $245 million revolving credit facility.
Approximately $1.3 million of the nonrecurring charge relates to the write-off
of deferred financing fees on the $135 million revolving credit facility and
certain financing fees associated with the June 1998 facilities.
The remaining $1.4 million of the nonrecurring charge primarily relates to
additional acquisition related expenses.
The Company anticipates that the activities related to the costs included
in the reserve as of June 30, 1999 will be completed in fiscal 2000.
Details of the fourth quarter fiscal 1998 nonrecurring charge are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99
----------- ------------- ------------- -------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance packages Cash $ .5 $ -- $ .5 $ (.5) $ --
Lease terminations Cash .7 -- .7 (.4) .3
Asset impairments Non-cash 3.5 (3.5) -- -- --
Other Cash .6 (.4) .2 (.2) --
Buyout of employment agreements Cash .9 (.2) .7 (.6) .1
Write-off financing fees Non-cash 1.3 (1.3) -- -- --
Other
Cash 1.0 (.8) .2 (.1) .1
Non-cash .4 (.4) -- -- --
------ ------ ------ ---- ------
Total $ 8.9 $ (6.6) $ 2.3 $(1.8) $ .5
====== ====== ====== ===== ======
</TABLE>
The Company had net interest expense of $5.7 million for the year ended
June 30, 1998, compared to net interest income of $1.6 million during the year
ended June 30, 1997. The increase in expense is due to increased borrowings on
the line of credit and the issuance of $100 million of convertible subordinated
debentures in August 1997. These funds were used primarily for acquisitions. The
net interest income position in fiscal 1997 is primarily attributable to the
reduction of long-term debt with funds from the Company's initial public
offering completed on February 14, 1996 and interest income earned on funds from
a secondary public offering completed by the Company on October 4, 1996.
20
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $8.3 million,
$(14.8) million and $(24.0) in fiscal 1997, 1998 and 1999, respectively. Cash
used in operating activities increased in fiscal 1999 due to increases in trade
accounts receivable, other current assets and inventories. The growth in
accounts receivable and inventory are primarily associated with internal sales
growth. Additionally, some accounts receivable growth is attributable to slower
payment trends by customers as a result of PPS implementation and other accounts
receivable issues previously described above. The increase in other current
assets primarily results from income tax refunds receivable at June 30, 1999.
These cash flow decreases were partially offset by increases in trade accounts
payable and accrued expenses. A majority of the trade accounts payable increase
is attributable to longer negotiated payment terms under a new primary
pharmaceutical supplier agreement implemented in June 1999. Cash provided by
operating activities decreased during fiscal 1998 due to increases in accounts
receivable and inventories primarily associated with internal sales growth.
These cash flow decreases were partially offset by increases in trade accounts
payable and accrued expenses.
Net cash used in investing activities decreased from $150.0 million in
fiscal 1997 and $202.8 million in fiscal 1998 to $35.0 million in fiscal 1999.
The decrease is primarily the result of fewer business acquisitions during 1999
as compared to the two previous years. The decrease is partially offset by an
increase in capital expenditures.
The Company made capital expenditures of $9.9 million in fiscal 1997,
$24.0 million in fiscal 1998 and $29.4 million in fiscal 1999. Significant
capital expenditures during the year ended June 30, 1999 primarily included
computer and information systems equipment and computer software as the Company
continued to invest in converting all sites to the Concord DX System. At June
30, 1999 a majority of the Company's sites had been converted. Additionally,
other capital expenditures during 1999 were made for furniture and fixtures,
leasehold improvements, medication carts and delivery vehicles. Significant
capital expenditures during the year ended June 30, 1998 included computer and
information systems equipment, computer software, furniture and fixtures at new
facilities in Pinellas Park, Florida and Van Nuys, California, leasehold
improvements, medication carts and delivery vehicles.
Net cash provided by financing activities increased from $128.4 million in
fiscal 1997 to $230.7 million in fiscal 1998 and then decreased to $67.2 million
in fiscal 1999. The increase in fiscal 1998 is primarily the result of funds
received from an offering of convertible subordinated debentures completed by
the Company on August 13, 1997 and an increase in funds borrowed under the
revolving credit facility. These funds were primarily utilized for acquisitions
in fiscal 1998. The decrease in cash provided by financing activities during
fiscal 1999 primarily results from reduced financing needs resulting from a
significant reduction in acquisition activity during 1999. The net proceeds
during 1999 were primarily obtained from the revolving credit agreement to fund
working capital needs resulting from internal growth and infrastructure
investments in a common operating system. Use of the revolving credit agreement
slowed to a net increase of $2.0 million during the fourth quarter of 1999 as a
result of reduced operating and overhead costs from strategic initiatives, more
favorable payment terms with the Company's new primary pharmaceutical supplier
and lower infrastructure investments in the conversion to a common operating
system.
In August 1997, the Company issued $100 million of convertible
subordinated debentures due 2004. The debentures carry an interest rate of 5
3/4%. The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. The Company's ability to make payments of
principal and interest on the debentures will depend on its ability to receive
distributions of cash from its subsidiaries. Each of the Company's wholly-owned
subsidiaries has guaranteed the Company's payment obligations under the
debentures, so long as such subsidiary is a member of an affiliated group
(within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as
amended) which includes the Company. The satisfaction by the Company's
subsidiaries of their contractual guarantees, as well as the payment of
dividends and certain loans and advances to the Company by such subsidiaries,
may be subject to certain statutory or contractual restrictions, are contingent
upon the earnings of such subsidiaries and are subject to various business
considerations.
The Company expects to meet future financing needs principally through the
use of its revolving credit facility. In June 1998, the Company entered into a
four-year, $150 million revolving credit facility (the "Credit Facility") with a
bank, which replaced the existing $135 million revolving agreement. Under the
Credit Facility, the Company also has available a $10 million swing line
revolving facility (the "Swing Line"). Also in June 1998, the Company entered
into a $50 million bridge facility agreement (the "Bridge Facility") due
December 31, 1998. Effective July 13, 1998, the Credit Facility was amended
increasing the total commitment from $150 million to $245 million and was
syndicated to a consortium of 11 banks. Also effective July 13, 1998 the Bridge
Facility was paid with funds under the amended Credit Facility and was
terminated. Effective August 3, 1999, the Credit Facility was amended to reduce
the available commitment from $245 million to $235 million, provide all of the
Company assets as security, limit the availability of the facility to use for
working capital only, require Lender approval on future acquisitions, and modify
covenants and the variable interest rate basis. The amended Credit Facility
bears interest at a variable rate based upon the Eurodollar rate plus a spread
of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded
Debt to EBITDA. The Company believes that its cash and available sources of
capital, including funds available under its revolving credit facility, are
sufficient to meet its normal operating requirements.
21
<PAGE> 25
The Company's effective income tax expense (benefit) rates were 43.4%, 44.3% and
(36.3)% for the years ended June 30, 1997, 1998 and 1999, respectively. The tax
rates differ from the federal statutory rate primarily as a result of state and
local income taxes and the non-deductibility of certain acquisition costs.
As discussed under the caption, "Business-Governmental Regulation," the
Company's facility in Indianapolis, Indiana has been the subject of an
investigation by federal authorities, and the Company has engaged in discussions
with representatives of the U.S. Attorney's office in Indianapolis concerning
the settlement of alleged violations of federal law at that facility. Company's
Herrin, Illinois facility is also under investigation by federal and state
authorities. It is possible that the imposition of significant fines or other
remedies in connection with the resolution of either of these matters could have
a material effect on the Company's financial condition and results of
operations.
YEAR 2000 READINESS DISCLOSURE
Computer systems in use after the beginning of the year 2000 will need to accept
four-digit entries in the date code field in order to distinguish 21st century
dates from 20th century dates. Consequently, many companies face significant
uncertainties because of the need to upgrade or replace their currently
installed computer systems to comply with such "Year 2000" requirements. Various
systems could be affected ranging from complex information technology ("IT")
computer systems to non-IT devices, such as an individual machine's programmable
logic controller.
The Company has reviewed all significant current and planned internal IT systems
and believes these systems are Year 2000 compliant. However, there can be no
assurance that coding errors or other defects will not be discovered in the
future. The Company is currently in the process of reviewing and assessing all
significant non-IT devices for Year 2000 compliance. The Company expects to
complete the process for review and assessment, device testing and resolution of
noncompliance issues, if any, by November 30, 1999.
The Company is currently determining the extent to which it may be impacted by
any third parties' failure to remediate their own Year 2000 issues. The Company
is assessing and reviewing relationships with all significant customers,
suppliers, payors and other third parties to determine the extent, if any, to
which the Company could be impacted by those third-parties' failure to remediate
their own Year 2000 issues. The Company expects to complete this review and
assessment by November 30, 1999. At this stage of the review no assurance can be
given that the failure by one or more third parties to become Year 2000
compliant will not have a material adverse impact on its operations.
The Company intends to develop contingency plans for significant third parties'
determined to be at high risk of noncompliance or business disruption before
October 31, 1999. The contingency plans will be developed on a case-by-case
basis. Judgments regarding contingency plans are themselves subject to many
variables and uncertainties. There can be no assurance that the Company will
correctly anticipate the level, impact or duration of noncompliance by third
parties, or that its contingency plan will be sufficient to mitigate the impact.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all future outcomes, especially when third parties are
involved, there could be circumstances in which the Company's operations could
be interrupted. If the federal and state healthcare reimbursement agencies or
their intermediaries fail to implement Year 2000 compliant technologies before
December 31, 1999, a significant cash flow problem may result. These agencies
and intermediaries have Year 2000 plans in place and we continue to monitor the
status of these projects. All of these government agencies have stated that
interim procedures would be implemented if their Year 2000 solutions are not in
place by January 1, 2000. In addition, disruptions in the economy in general
resulting from Year 2000 issues could also adversely impact the Company.
The majority of future costs related to Year 2000 readiness issues will be
expensed as incurred and are expected to be funded through operating cash flows.
Through the year ended June 30, 1999 costs related to the Year 2000 issue have
been immaterial to the financial results of the Company. Future costs related to
Year 2000 issues are also expected to be immaterial to the financial results of
the Company. Estimates of costs are based on currently available information and
developments may occur that could increase the costs related to Year 2000
issues.
22
<PAGE> 26
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into this
Annual Report on Form 10-K, including, but not limited to, those regarding the
Company's financial position, business strategy, acquisition strategy and other
plans and objectives for future operations and any other statements that are not
historical facts constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, there can be no assurance that
the actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have expected effects on its
business or operations. These forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors (including, but not limited
to, those specified below) which are difficult to predict and, in many
instances, are beyond the control of the Company. As a result, actual results of
the Company may differ materially from those expressed or implied by any such
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include
the impact of the Prospective Payment System, the availability and cost of
attractive acquisition candidates, continuation of various trends in the
long-term care market (including the trend toward consolidation), competition
among providers of long-term care pharmacy services, the availability of capital
for acquisitions and other capital requirements, changes in regulatory
requirements, reform of the health care delivery system, disruptions in the
Company's operations resulting from Year 2000 issues and other risks and
uncertainties described in the Company's SEC reports.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company has not entered
into derivative financial instruments for trading purposes. The Company's
primary market risk exposure relates to interest rate risk. The Company has
managed its interest rate risk by balancing its exposure between fixed and
variable rates while attempting to minimize its interest costs. The Company has
a balance of $214,700,000 on its revolving credit facility at June 30, 1999,
which is subject to a variable rate of interest based on the Eurodollar rate.
Assuming borrowings at June 30, 1999, a one-hundred basis point change in
interest rates would impact net interest expense by approximately $2,147,000 per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements
Report of Independent Auditors 24
Consolidated Balance Sheets at June 30, 1998 and 1999 25
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1999 27
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended June 30, 1999 28
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1999 30
Notes to Consolidated Financial Statements 31
23
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NCS HealthCare, Inc.
We have audited the accompanying consolidated balance sheets of NCS
HealthCare, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NCS HealthCare, Inc. and subsidiaries at June 30, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
July 1, 1998, the Company changed its method of accounting for start-up costs.
August 11, 1999
Cleveland, Ohio Ernst & Young LLP
24
<PAGE> 28
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
JUNE 30,
--------
1998 1999
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 21,186 $ 29,424
Trade accounts receivable, less allowance for
doubtful accounts of $18,427 and $38,880 as of
June 30, 1998 and 1999 142,325 160,168
Inventories 43,784 49,244
Deferred income taxes 10,458 19,901
Prepaid expenses and other current assets 3,766 26,496
-------- --------
Total current assets 221,519 285,233
PROPERTY, PLANT AND EQUIPMENT
Land 129 204
Buildings 2,090 2,206
Machinery, equipment and vehicles 27,498 31,129
Computer equipment and software 22,340 37,458
Furniture, fixtures and leasehold improvements 17,502 23,394
-------- --------
69,559 94,391
Less accumulated depreciation and amortization 25,966 35,275
-------- --------
43,593 59,116
Goodwill, less accumulated amortization of $12,317
and $22,803 as of June 30, 1998 and 1999 340,209 343,247
Other assets, less accumulated amortization of
$2,117 and $3,286 as of June 30, 1998 and 1999 18,469 11,903
-------- --------
TOTAL ASSETS $623,790 $699,499
======== ========
See accompanying notes
25
<PAGE> 29
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1999
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 34,131 50,061
Accrued compensation and related expenses 17,360 15,798
Other accrued expenses 19,118 18,499
Current portion of long-term debt 1,548 3,480
-------- --------
Total current liabilities 72,157 87,838
Line of credit 147,800 214,700
Long-term debt, excluding current portion 3,879 1,936
Convertible subordinated debentures 102,753 100,000
Deferred income taxes 9,127 18,209
Other long-term liabilities 740 382
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share; 1,000,000
shares authorized; none issued - -
Common stock, $.01 par value per share:
Class A -- 50,000,000 shares authorized; 13,334,639
and 14,277,492 shares issued and outstanding at
June 30, 1998 and 1999, respectively 133 143
Class B -- 20,000,000 shares authorized; 6,463,244
and 6,005,280 shares issued and outstanding
at June 30, 1998 and 1999, respectively 65 60
Paid-in capital 258,462 263,882
Retained earnings 28,674 12,349
-------- --------
287,334 276,434
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $623,790 $699,499
======== ========
</TABLE>
See accompanying notes
26
<PAGE> 30
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues $275,040 $509,064 $717,825
Cost of revenues 205,536 380,217 540,547
-------- -------- --------
Gross profit 69,504 128,847 177,278
Selling, general and administrative expenses 51,153 93,895 139,522
Special charge to increase allowance for doubtful accounts -- -- 32,384
Nonrecurring charges -- 8,862 8,115
-------- -------- --------
Operating income (loss) 18,351 26,090 (2,743)
Interest expense (1,143) (8,199) (19,864)
Interest income 2,719 2,454 1,563
-------- -------- --------
Income (loss) before income taxes 19,927 20,345 (21,044)
Income tax (expense) benefit (8,655) (9,014) 7,640
Cumulative effect of accounting change, net of taxes -- -- (2,921)
-------- -------- --------
Net income (loss) $ 11,272 $ 11,331 $ (16,325)
======== ======== ==========
Earnings (loss) per share data:
Earnings (loss) per common share - basic $ 0.70 $ 0.59 $ (0.81)
======== ======== ==========
Earnings (loss) per common share - diluted $ 0.69 $ 0.58 $ ( 0.81)
======== ======== ==========
Weighted average number of common
shares outstanding - basic 15,991 19,100 20,200
======== ======== ==========
Weighted average number of common
shares outstanding - diluted 16,843 19,372 20,200
======== ======== ==========
</TABLE>
See accompanying notes
27
<PAGE> 31
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 56 $ 66 $ 84,907 $ 6,071 $ 91,100
Issuance of 4,235,000
shares of Class A
Common Stock 42 -- 123,584 -- 123,626
Issuance of 1,099,369
shares of Class A
Common Stock and
385,722 shares of
Class B Common Stock
for business
combinations 11 3 25,478 -- 25,492
Conversion of 246,208
shares of Class B
Common Stock to
246,208 shares of
Class A Common Stock 2 (2) -- -- --
Conversion of convertible
subordinated debentures
(172,569 shares of Class
A Common Stock) 2 -- 1,734 -- 1,736
Net income -- -- -- 11,272 11,272
-------- -------- -------- -------- --------
Balance at June 30, 1997 113 67 235,703 17,343 253,226
Exercise of stock options
(2,637 shares of Class
A Common Stock) -- -- 20 -- 20
Issuance of 796,608
shares of Class A
Common Stock and
563,879 shares of
Class B Common Stock
for business combinations 8 6 16,798 -- 16,812
Conversion of 843,377
shares of Class B
Common Stock to
843,377 shares of
Class A Common Stock 8 (8) -- -- --
Conversion of convertible
subordinated debentures
and notes payable
(378,379 shares of Class
A Common Stock) 4 -- 5,941 -- 5,945
Net income -- -- -- 11,331 11,331
-------- -------- -------- -------- --------
Balance at June 30, 1998 133 65 258,462 28,674 287,334
</TABLE>
28
<PAGE> 32
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(CONTINUED)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 133 $ 65 $ 258,462 $ 28,674 $ 287,334
Exercise of stock options
(3,545 shares of Class
A Common Stock and
69,692 shares of Class
B Common Stock) -- -- 823 -- 823
Issuance of 114,134
shares of Class A
Common Stock and
payback of 7,572 shares of
Class B Common Stock
for business combinations 1 -- 1,397 -- 1,398
Issuance of 31,383
shares of Class A
Common Stock
for profit sharing plan 1 -- 449 -- 450
Conversion of 520,084
shares of Class B
Common Stock to
520,084 shares of
Class A Common Stock 5 (5) -- -- --
Conversion of convertible
subordinated debentures
(273,707 shares of Class
A Common Stock) 3 -- 2,751 -- 2,754
Net (loss) -- -- -- (16,325) (16,325)
--------- --------- --------- --------- ---------
Balance at June 30, 1999 $ 143 $ 60 $ 263,882 $ 12,349 $ 276,434
========= ========= ========= ========= =========
</TABLE>
See accompanying notes
29
<PAGE> 33
NCS HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 11,272 $ 11,331 $ (16,325)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Non-cash portion of nonrecurring charges -- 5,229 1,486
Depreciation and amortization 8,885 16,454 23,512
Provision for doubtful accounts 1,325 2,279 35,568
Deferred income taxes 1,147 47 (3,665)
Cumulative effect of accounting change, net of taxes -- -- 2,921
Non-cash profit sharing expense -- -- 450
Changes in assets and liabilities, net of effects of assets and
liabilities acquired:
Trade accounts receivable (22,932) (55,086) (58,702)
Inventories (3,796) (12,098) (5,759)
Trade accounts payable 2,447 18,040 15,930
Accrued expenses 9,762 1,543 (2,366)
Prepaid expenses and other 162 (2,585) (17,042)
--------- --------- ---------
Net cash provided by (used in) operating
activities 8,272 (14,846) (23,992)
INVESTING ACTIVITIES
Capital expenditures for property, plant
and equipment (9,893) (24,019) (29,400)
Proceeds from sales of assets 247 1,183 300
Purchases of businesses (137,080) (171,083) (653)
Other (3,237) (8,872) (5,264)
--------- --------- ---------
Net cash used in investing activities (149,963) (202,791) (35,017)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 159 13 1,664
Repayment of long-term debt (5,679) (4,135) (1,675)
Borrowings on line-of-credit 34,236 169,299 108,325
Payments on line-of-credit (23,951) (31,784) (41,425)
Proceeds from convertible subordinated debentures -- 97,250 --
Proceeds from issuance of common stock and
exercise of stock options 123,626 20 358
--------- --------- ---------
Net cash provided by financing activities 128,391 230,663 67,247
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (13,300) 13,026 8,238
Cash and cash equivalents at beginning of period 21,460 8,160 21,186
--------- --------- ---------
Cash and cash equivalents at end of period $ 8,160 $ 21,186 $ 29,424
========= ========= =========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 1,116 $ 5,076 $ 20,179
========= ========= =========
Income taxes $ 6,925 $ 8,533 $ 1,792
========= ========= =========
</TABLE>
See accompanying notes
30
<PAGE> 34
NCS HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NCS HealthCare, Inc. (the Company) operates in one primary business
segment providing a broad range of health care services primarily to long-term
care institutions including skilled nursing facilities, assisted living
facilities and other institutional health care settings. The Company purchases
and dispenses prescription and non-prescription pharmaceuticals and provides
client facilities with related management services, automated medical record
keeping, drug therapy evaluation and regulatory assistance. The Company also
provides a broad array of ancillary health care services to complement its core
pharmacy services, including infusion therapy, physical, speech and occupational
therapies, nutrition management and mobile diagnostics.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when products or services are provided to the
customer. A significant portion of the Company's revenues from sales of
pharmaceutical and related products are reimbursable from Medicaid and Medicare
programs. The Company monitors its receivables from these and other third-party
payor programs and reports such revenues at the net realizable amount expected
to be received from third-party payors. Revenue from Medicaid and Medicare
programs accounted for 39% and 3%, respectively, of the Company's net patient
revenue for the year ended June 30, 1999.
Movement of the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
Balance at Provision for Write-offs Balance at
Beginning of Doubtful Net of End of
Period Accounts Acquisitions Recoveries Period
------------- ------------- ------------- ------------ ----------
Fiscal Year
Ended June 30,
<S> <C> <C> <C> <C> <C>
1999 $ 18,427 $35,568 $ -- $ (15,115) $ 38,880
1998 13,275 2,279 6,354 (3,481) 18,427
1997 3,629 1,325 9,846 (1,525) 13,275
</TABLE>
CASH EQUIVALENTS
The Company considers all investments in highly liquid instruments with
original maturities of three months or less at the date purchased to be cash
equivalents. Investments in cash equivalents are carried at cost which
approximates market value.
INVENTORIES
Inventories for all business units consist primarily of purchased
pharmaceuticals and medical supplies and are stated at the lower of cost or
market. Cost is determined by using the last-in, first-out (LIFO) method for 5%
of the June 30, 1999 net inventory balance and by using the first-in, first-out
(FIFO) method for the remaining 95%. If the FIFO inventory valuation method had
been used, inventories would have been $619 and $764 higher at June 30, 1998 and
1999, respectively.
31
<PAGE> 35
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation on
property, plant and equipment is computed using the straight-line method over
the estimated useful lives of the assets which are as follows:
Buildings 30 years
Machinery, equipment and vehicles 5 - 10 years
Computer equipment and software 3 - 5 years
Furniture, fixtures and leasehold improvements 3 - 10 years
Depreciation expense was $4,347, $7,813 and $11,420 for the years ended
June 30, 1997, 1998 and 1999, respectively.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Intangible assets consist primarily of goodwill. Costs in excess of the
fair value of net assets acquired in purchase transactions are classified as
goodwill and amortized using the straight-line method over periods up to 40
years.
The carrying value of goodwill is evaluated if circumstances indicate a
possible impairment in value. If undiscounted cash flows over the remaining
amortization period indicate that goodwill may not be recoverable, the carrying
value of goodwill will be reduced by the estimated shortfall of cash flows on a
discounted basis.
Debt issuance costs are included in other assets and are amortized using
the effective interest method over the life of the related debt.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 9, the alternative fair value accounting provided under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
EARNINGS PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Under this accounting standard, basic earnings per share
are computed based on the weighted average number of shares of Class A and Class
B shares outstanding during the period. Diluted earnings per share include the
dilutive effect of stock options and subordinated convertible debentures.
32
<PAGE> 36
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of all financial instruments of the Company approximates
the amounts presented on the consolidated balance sheet with the exception of
the $100 million convertible subordinated debt. As of June 30, 1999 and 1998,
the fair value of the $100 million convertible subordinated debt was $45
million and $108 million, respectively, based on quoted market prices.
START-UP COSTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities", which requires the Company to expense start-up costs as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998, does not require restatement of prior periods and is applied
as of the beginning of the fiscal year in which the SOP is first adopted. The
Company early adopted SOP 98-5 effective as of July 1, 1998 and has reported the
initial adoption as a cumulative effect of a change in accounting principle
in the Consolidated Statement of Operations for the year ended June 30, 1999. In
accordance with the adoption requirements of SOP 98-5, the Company has also
restated its previously filed 1999 quarterly results to record the cumulative
effect adjustment in the first quarter and expense in the respective quarterly
results, those costs incurred and previously deferred in the first, second and
third quarters of fiscal 1999 (see Note 14 Quarterly Data, unaudited).
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This statement, which
becomes effective for the Company in fiscal 2000, requires that certain costs of
developing or obtaining software for internal use be capitalized. The
Corporation presently capitalizes the costs required to be capitalized under SOP
98-1 as well as certain conversion related costs that will be required to be
expensed on a prospective basis upon the adoption of SOP 98-1. The Company does
not expect to incur significant amounts of these conversion related costs in
future periods and consequently does not expect the statement to have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
which requires that an enterprise report the change in its equity during the
period from nonowner sources as other comprehensive income. The Company has
evaluated the statement and determined that there are no reportable other
comprehensive income items.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results can differ from these estimates.
SOP 94-6 MATERIAL RISKS AND UNCERTAINTIES
The Company has observed significant industry and customer trends during
the last three months of the fiscal year ended June 30, 1999. These trends
primarily relate to increased bankruptcies and significant financial
difficulties recently experienced by the Company's skilled nursing facilities
primarily as a result of greater than expected adverse impact with regard to
the implementation of the Medicare Prospective Payment System (PPS) under the
Balanced Budget Act of 1997. As a result of these negative trends, the Company
has substantially increased its allowance for doubtful accounts as of June 30,
1999 (see Note 11 Special and Nonrecurring Charges). Should the negative trends
continue in future periods at levels significantly exceeding those currently
estimated by the Company, additional provisions for the accounts receivable
recorded as of June 30, 1999 could be required.
2. LINE OF CREDIT
In June 1998, the Company entered into a four-year, $150 million revolving
credit facility (the credit facility) with a bank, which replaced the existing
$135 million revolving credit facility. Under the credit facility, the Company
also has available a $10 million swing line revolving facility (swing line).
Also in June 1998, the Company entered into a $50 million bridge facility
agreement (bridge facility) due December 31, 1998. Effective July 13, 1998, the
credit facility was amended increasing the total commitment from $150 million to
$245 million and was syndicated to a consortium of 11 banks. Also effective July
13, 1998, the bridge facility was paid with funds under the amended credit
facility and was terminated. The credit facility bears interest at a variable
rate (6.375% at June 30, 1999) based upon the Eurodollar rate plus a spread of
37.5 to 162.5 basis points, dependent upon the Company's Interest Coverage
Ratio. The swing line bears interest at a money market rate (6.725% at June 30,
1999). At June 30, 1999 the credit facility contains certain debt covenants
including an Interest Coverage Ratio and minimum consolidated net worth
requirements. As of June 30, 1999 the Company had $214,700 outstanding under the
credit facility, and no balance outstanding under the swing line.
Effective August 3, 1999, the credit facility was amended to reduce the
available commitment from $245 million to $235 million, provide all of the
Company assets as security, limit the availability of the facility to use for
working capital only, require Lender approval on future acquisitions, and modify
covenants and the variable interest rate basis. The amended credit facility
bears interest at a variable rate based upon the Eurodollar rate plus a spread
of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded
Debt to EBITDA.
33
<PAGE> 37
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1999
---- ----
<S> <C> <C>
Notes payable to former owners of acquired companies
maturing through July, 2001, at interest rates
ranging from 5% to 8% $3,666 $2,788
2% note payable to Pennsylvania Industrial Development
Authority due in monthly installments through
June, 2010, and secured through an interest 543 505
in a building of the Company
Collateralized lease obligations with interest ranging
from 7% to 16% due monthly through April, 2004 685 1,709
Other 533 414
-------- -------
Total long-term debt 5,427 5,416
Less current portion 1,548 3,480
------- ------
Long-term debt, excluding current portion $3,879 $1,936
====== ======
</TABLE>
The aggregate maturities of the long-term debt for each of the five years
subsequent to June 30, 1999 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
- --------------------------- ------
2000 $3,480
2001 635
2002 447
2003 249
2004 136
Thereafter 469
------
$5,416
======
34
<PAGE> 38
4. INCOME TAX EXPENSE
Income tax expense (benefit), including the income tax benefit related to
the cumulative effect of accounting change, for each of the three years ended
June 30, 1999 consists of:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal $5,614 $ 887 $6,501 $6,792 $ 55 $6,847 $(3,994) $(3,218) $(7,212)
State and local 1,894 260 2,154 2,175 (8) 2,167 (1,929) (447) (2,376)
------ ------- ------ ------ ------ ------ ------- ------- -------
$7,508 $ 1,147 $8,655 $8,967 $ 47 $9,014 $(5,923) $(3,665) $(9,588)
====== ======= ====== ====== ====== ====== ======= ======= =======
</TABLE>
Reconciliations of income taxes at the United States Federal statutory
rate to the effective income tax rate for the three years ended June 30, 1999
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income taxes at the United States statutory rate $6,974 $7,121 $(9,070)
State and local income taxes 1,231 1,414 (1,544)
Goodwill amortization 521 604 640
Tax exempt interest (13) -- --
Other - net (58) (125) 386
------ ------ -------
Total provision for income tax expense (benefit) 8,655 9,014 (9,588)
Income tax benefit from cumulative effect of accounting change -- -- 1,948
------ ------ -----
Net provision excluding benefit related to cumulative effect of accounting change $8,655 $9,014 $(7,640)
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 6,872 $ 15,440
Accrued expenses and other 5,141 6,090
Loss carryforwards 2,064 1,963
Depreciable assets and other (551) (3,122)
Intangibles (12,195) (18,678)
--------- ---------
Net deferred tax assets $ 1,331 $ 1,693
========= =========
</TABLE>
At June 30, 1999 the Company has net operating loss carryforwards of $4.9
million for income tax purposes that expire in years 2010 through 2012. U.S. tax
laws limit the annual utilization of tax loss carryforwards of acquired
entities.
35
<PAGE> 39
5. OPERATING LEASES
The Company is obligated under operating leases primarily for office
facilities and equipment. Future minimum lease payments under noncancelable
operating leases as of June 30, 1999 are as follows:
FISCAL YEAR ENDING JUNE 30, AMOUNT
- --------------------------- ------
2000 $5,514
2001 3,987
2002 3,122
2003 2,144
2004 1,339
Thereafter 2,133
-------
$18,239
=======
Total rent expense under all operating leases for the years ended June 30,
1997, 1998 and 1999 was $2,338, $6,577 and $9,214, respectively.
6. PROFIT-SHARING PLAN
The Company maintains a profit sharing plan with an Internal Revenue Code
Section 401(k) feature covering substantially all of its employees. Under the
terms of the plan, the Company will match up to 20% of the first 10% of eligible
employee contributions. Effective January 1, 1999 the Company amended the profit
sharing plan to provide for the Company match to be contributed as the Company's
common stock.
The Company's aggregate contributions to the plan and related expense were
$437, $740 and $1,035 for the years ended June 30, 1997, 1998 and 1999,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company leases 16 of its facilities from entities affiliated with
former owners of certain businesses acquired, who are employees of the Company.
The buildings are used for operations of the Company. Rent expense of $1,004,
$1,128 and $1,340 was incurred under these leasing arrangements in the years
ended June 30, 1997, 1998 and 1999, respectively.
36
<PAGE> 40
8. STOCKHOLDER'S EQUITY
On October 4, 1996, the Company completed a public offering of 4,235,000
shares of Class A Common Stock at $31 per share. The offering raised
approximately $123,600 (net of underwriting discounts and expenses). A portion
of the net proceeds from the stock issuance was used to repay approximately
$7,000 of outstanding indebtedness under short-term borrowings.
Holders of Class A Common Stock and holders of Class B Common Stock are
entitled to one and ten votes, respectively, in corporate matters requiring
approval of the shareholders of the Company. No dividend may be declared or paid
on the Class B Common Stock unless a dividend of equal or greater amount is
declared or paid on the Class A Common Stock.
On August 3, 1999 the Company amended its line of credit agreement
entering into several restrictive covenants including a restriction on
declaration and payment of cash dividends to shareholders.
During fiscal 1995, the Company issued $1,900 of 8% convertible
subordinated debentures (1995 debentures) due 1997. The 1995 debentures were
converted into 188,952 shares of Class A Common Stock during fiscal 1996. During
fiscal 1996, the Company issued $7,000 of 8% and $925 of 7% convertible
subordinated debentures due 1998 and $5,000 of 10% convertible subordinated
debentures due 1996 (collectively, 1996 debentures). During fiscal 1996, $6,375
of the 1996 debentures were converted into 493,357 shares of Class A Common
Stock. During fiscal 1997, $1,736 of the 1996 debentures were converted into
172,569 shares of Class A Common Stock. During fiscal 1998, $2,061 of the 1996
debentures were converted into 204,880 shares of Class A Common Stock. The
remaining $2,754 of the 1996 debentures were converted into 273,707 shares of
Class A Common Stock during fiscal 1999.
On August 13, 1997, the Company issued $100,000 of convertible
subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company
were approximately $97,250, net of underwriting discounts and expenses. The 1998
debentures carry an interest rate of 5 3/4% and are convertible into shares of
Class A Common Stock at any time prior to maturity at $32.70 per share. A
portion of the proceeds from the debenture offering was used to repay
approximately $21,000 of outstanding indebtedness under short-term borrowings.
The debentures are obligations of the Company. The operations of the
Company are currently conducted principally through subsidiaries, which are
separate and distinct legal entities. Each of the Company's wholly-owned
subsidiaries has unconditionally guaranteed, jointly and severally, the
Company's payment obligations under the 1998 debentures. Accordingly, summarized
financial information regarding the guarantor subsidiaries has not been
presented because management of the Company believes that such information would
not be meaningful to investors.
During fiscal 1998, notes payable due to former owners of $3,884 were
exchanged for 173,499 shares of Class A Common Stock.
37
<PAGE> 41
9. STOCK OPTIONS
During the period from 1987 through 1995, the Company granted stock
options to certain directors and key employees which provide for the purchase of
1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71
to $6.19 per share, which represented fair market values on the dates the grants
were made. For options granted in 1987 with a tax-offset cash bonus feature, the
Company recognized compensation expense of $175 for the year ended June 30,
1996. During the year ended June 30, 1996, options were exercised for the
purchase of 890,333 shares of Class B Common Stock.
During fiscal 1995, the Company adopted an Employee Stock Purchase and
Option Plan which authorized 100,000 shares of Class A Common Stock for awards
of stock options to certain key employees. During fiscal 1995 and 1996 the
Company granted 11,520 and 7,458 options, respectively, at an exercise price of
$6.19 and $7.33 per share, respectively, under the provisions of this plan.
These exercise prices represented fair market values on the dates the grants
were made.
In January 1996, the Company adopted a Long Term Incentive Plan (the Plan)
to provide up to 700,000 shares of Class A Common Stock for awards of incentive
and nonqualified stock options to officers and key employees of the Company.
During fiscal 1996 the Company granted 56,500 nonqualified stock options and
27,540 incentive stock options, all at $16.50 per share, the price at the
initial public offering. The nonqualified stock options have a term of five
years and become exercisable in thirds on February 1, 1998, 1999 and 2000. The
incentive stock options have a term of six years and become exercisable in
fifths of each year on February 1, 1997, 1998, 1999, 2000 and 2001. During
fiscal 1997 and 1999 the Company granted 301,250 and 345,250 nonqualified stock
options, respectively, at an exercise price of $20.00 and $15.00 per share,
respectively, the market values of the stock on the dates of the grant. The
fiscal 1997 nonqualified stock options have a term of five years and become
exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal 1999 options
have a term of five years and become exercisable in thirds on November 1, 2000,
2001, and 2002.
In October 1998, the Company adopted the 1998 Performance Plan
(the Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock
for awards of incentive and nonqualified stock options to directors, officers
and key employees of the Company. During fiscal 1999, the Company granted
85,000 nonqualified stock options at an exercise price of $18.50 per share,
the market value of the stock on the date of the grant. These nonqualified
stock options have a term of five years and become exercisable in thirds on
January 1, 2001, 2002 and 2003.
The Company's stock option activity and related information for the years
ended June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 267,575 $ 8.84 566,825 $ 14.74 535,188 $14.64
Granted 301,250 20.00 - -- 430,250 15.69
Exercised -- -- (2,637) 7.49 (73,237) 4.87
Forfeited (2,000) 16.50 (29,000) 19.64 (45,507) 18.63
------- -------- -------- ------- ------- ------
Outstanding at
end of year 566,825 $ 14.74 535,188 $14.64 846,694 $15.82
======= ======== ======== ======= ======= ======
Exercisable at
end of year 141,658 185,604 237,872
======= ======= =======
</TABLE>
The weighted average fair value of options granted during fiscal 1997 and
1999 was $8.89 and $7.65 per share, respectively. Exercise prices for options
outstanding as of June 30, 1999 ranged from $7.33 to $20.00 for the options
granted in fiscal 1996, 1997, and 1998 and are $6.19 for the options granted
during the period from 1987 through 1995. The weighted-average remaining
contractual life of those options is 3.6 years for the options granted during
the fiscal years 1996, 1997, and 1999 and 5.2 years for the options granted
during the fiscal years 1987 through 1995 and 1999.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a
volatility factor of the expected market price of the Company's Class A Common
Stock ranging from .482 to .520; and a weighted-average expected option life
ranging from 4 to 4.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
38
<PAGE> 42
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the three years ended June 30, 1999 is as follows (in
thousands except for earnings per share information):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - basic $11,120 $10,876 $(17,029)
Net income (loss) - diluted $11,400 $10,876 $(17,029)
Earnings per share - basic $ 0.70 $ 0.57 $ (0.84)
Earnings per share - diluted $ 0.68 $ 0.56 $ (0.84)
</TABLE>
10. ACQUISITIONS
Significant acquisitions completed by the Company during fiscal 1997
include Advanced Rx Services, Inc. in Northfield, New Jersey, IPAC Pharmacy,
Inc. in Portland, Oregon, Medical Arts Pharmacy in Grand Rapids, Michigan,
Northside Pharmacy, Inc. and Thrifty Medical Supply, Inc. in Oklahoma City,
Oklahoma, Thrifty Medical of Tulsa L.L.C. in Tulsa, Oklahoma, Hudson Pharmacy of
Wichita, Inc. in Wichita, Kansas, Spectrum Health Services, Inc. in Tampa,
Florida, Clinical Health Systems in Vancouver, Washington, Rescot Systems Group,
Inc. in Philadelphia, Pennsylvania, W.P. Malone, Inc. in Arkadelphia, Arkansas,
Long Term Care Pharmacy Services in East Greenwich, Rhode Island, Eakles Drug
Store, Inc. in Hagerstown, Maryland, Pharmacare in Glendale, California,
Advanced Pharmaceutical Services, Inc. in Tujunga, California, Dahlin Pharmacy,
Inc. in Paramount, California, Stoll Services, Inc. in Modesto, California,
Cooper Hall Pharmacy, Inc. in Mount Pleasant, South Carolina, Hammer
Incorporated in Des Moines, Iowa, Daven Drug in Los Angeles, California,
Medi-Centre Pharmacy in Lansing, Michigan, Vangard Labs, Inc. in Glasgow,
Kentucky, Long Term Care, Inc. in Williston, Vermont, Look Drug Store, Inc. in
Kaukauna, Wisconsin and HLF Adult Home Pharmacy in Rochester, New York.
Significant acquisitions completed by the Company during fiscal 1998
include Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource
Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings,
Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood Pharmacy
and Managed Pharmacy Services, affiliates of Eckerd Corporation based in Sharon,
Pennsylvania, Medical Pharmacy in Bakersfield, California, Robcin Enterprises,
Inc. in Independence, Missouri, Apple Institutional Services in Salisbury,
Maryland and the institutional pharmacy assets of Walgreen Co., an Illinois
corporation.
The Look Drug Store, Inc., HLF Adult Home Pharmacy, Cheshire LTC Pharmacy,
Inc. and MedStar Pharmacy, Inc. acquisitions were accounted for as pooling of
interests transactions, however the impact of these transactions on the
Company's historical financial statements is not material; consequently, prior
period financial statements have not been restated for these transactions. All
other acquisitions have been accounted for as purchase transactions.
Certain of the Company's acquistion agreements provide for contingent
purchase price arrangements under which the purchase price paid may be
subsequently increased upon the achievement of specific operating performance
targets during post acquisition periods. The additional purchase price, payable
in cash or Company stock is recorded, if earned, upon resolution of the
contingent factors. Depending on the outcome of various contingent factors, the
purchase price contingently payable could have a material effect on the
Company's financial condition and results of operations.
There were no significant acquisitions during the fiscal year ended
June 30,1999. The following table summarizes the aggregate purchase price for
all businesses acquired during the fiscal years ended:
YEAR ENDED JUNE 30,
-------------------
1997 1998
---- ----
Cash $137,080 $171,083
Debt 3,804 959
Class A Common Stock 25,492 16,812
-------- --------
Total $166,376 $188,854
======== ========
The results of operations of all businesses acquired have been included in
the consolidated financial statements of the Company from the dates of the
respective acquisitions. All of the businesses acquired provide substantially
similar services as the existing company.
39
<PAGE> 43
Unaudited pro forma data as though the Company had completed its secondary
public offering and had purchased all businesses at the beginning of the fiscal
year ended June 30, 1998 is set forth below:
1998*
-----
Revenues $608,186
Net income $ 10,433
Earnings per share - basic $ 0.53
Earnings per share - diluted $ 0.52
* Includes a one time nonrecurring charge of $8,862 ($5,317 net of tax).
(see Note 11)
The pro forma information does not intend to be indicative of operating
results which would have occurred had the acquisitions been made at the
beginning of the respective periods or of results which may occur in the future.
The primary pro forma adjustments reflect amortization of goodwill acquired and
interest costs. The pro forma information does not give effect to any potential
synergies anticipated by the Company as a result of the acquisitions such as
improvements in gross margin attributable to the Company's purchasing leverage
and increased operating efficiencies.
11. SPECIAL AND NONRECURRING CHARGES
During the fourth quarter of fiscal 1999, the Company recorded special and
nonrecurring charges of $40.5 million ($24.3 million net of tax). A special
charge of $32.4 million before tax was recorded to increase the allowance for
doubtful accounts, and nonrecurring charges of $8.1 million before tax were
recorded in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items.
The special charge to increase the allowance for doubtful accounts
resulted from significant changes observed in industry and customer trends
during the last three months of the fiscal year ended June 30, 1999, and items
encountered from recent acquisitions. The circumstances of the customer and
industry trends primarily relate to increased bankruptcies and significant
financial difficulties recently experienced by the Company's customers primarily
as a result of the Medicare Prospective Payment System implementation. The
acquisition items encountered pertain to specific accounts receivable
collectibility issues identified relating to previous utilization of "legacy"
systems, and other nonrecurring issues which have resulted in potentially
uncollectible accounts receivable.
During the fourth quarter of fiscal 1999, the Company adopted a new plan
of restructuring to consolidate certain pharmacy sites in similar geographies.
The plan is a continuation of the plan adopted in fiscal 1998 to combine
pharmacies in close proximity in order to improve operating efficiencies. As a
result of the new exit plan, 4 additional pharmacy sites will be consolidated
into either a new or existing location. During the year ended June 30, 1999, the
Company recorded nonrecurring charges of $4.7 million related to the new site
consolidations and additional costs incurred on the site consolidations
announced in the prior year. These costs consist of $2.1 million related to
employee severance and other compensation related expenses, $0.6 million related
to lease termination costs and $2.0 million related to asset impairments and
other miscellaneous costs. As of June 30, 1999, three site consolidations had
been completed with the remainder expected to be completed by the end of fiscal
2000.
40
<PAGE> 44
The remaining $3.4 million of the nonrecurring charge primarily relates to
severance incurred during the fourth quarter associated with the Company's
expense reduction initiatives, additional acquisition related and other
miscellaneous expenses.
Employee severance costs included in the nonrecurring charge relate to the
termination of 120 employees.
Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as
follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve
Description Cash/Non-cash Charge Activity At 6/30/99
----------- ------------- ------------ -------- ----------
<S> <C> <C> <C>
Site Consolidations
Severance/compensation related Cash $ 2,100 $ (1,500) $ 600
Lease terminations Cash 600 (100) 500
Asset impairments Non-cash 1,500 (1,500) --
Other Cash 500 (500) --
Special increase to allowance Non-cash 32,400 (32,400) --
Other Cash 3,400 (2,700) 700
--------- -------- ---------
Total $ 40,500 $(38,700) $ 1,800
========= ======== =========
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $8.9 million ($5.3 million net of tax) related to
restructuring and other nonrecurring expenses in connection with the
implementation and execution of strategic restructuring and consolidation
initiatives of certain operations and other nonrecurring items. The components
of the nonrecurring charge are described below.
During the fourth quarter of fiscal 1998, the Company adopted a formal
plan of restructuring to consolidate certain pharmacy sites in similar
geographies. The plan combined pharmacies in close proximity in order to
improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites
will be consolidated into either a new or existing location. The Company
recorded nonrecurring charges of $5,300 related to the site consolidations which
consisted of $500 related to employee severance costs in relation to the
termination of 149 employees, $700 related to lease termination costs and $4,100
related to asset impairments and other miscellaneous costs. As of June 30, 1999,
fourteen site consolidations had been completed with the remainder expected to
be completed by the end of fiscal 2000. All employee terminations under the plan
have occurred as of June 30, 1999.
Approximately $900 of the nonrecurring charge relates to the buyout of
existing employment agreements with the prior owners of certain acquired
businesses.
In June 1998, the Company's new credit facility and bridge facility
replaced the existing $135 million revolving credit facility. The new credit
facility and bridge facility were replaced in July 1998 by a $245 million
revolving credit facility (see Note 2). Approximately $1.3 million of the
nonrecurring charge relates to the write-off of deferred financing fees on the
$135 million revolving credit facility and certain financing fees associated
with the new credit facility and bridge facility.
The remaining $1.4 million of the nonrecurring charge primarily relates to
additional acquisition related expenses.
41
<PAGE> 45
The Company anticipates that the activities related to the costs included
in the reserve as of June 30, 1999 will be completed in fiscal 2000.
Details of the fourth quarter fiscal 1998 nonrecurring charge and activity
through June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Nonrecurring Reserve Reserve
Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99
----------- ------------- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Site Consolidations
Severance packages Cash $ 500 $ -- $ 500 $ (500) $ --
Lease terminations Cash 700 -- 700 (400) 300
Asset impairments Non-cash 3,500 (3,500) -- -- --
Other Cash 600 (400) 200 (200) --
Buyout of employment agreements Cash 900 (200) 700 (600) 100
Write-off financing fees Non-cash 1,300 (1,300) -- -- --
Other
Cash 1,000 (800) 200 (100) 100
Non-cash 400 (400) -- -- --
------ ------- -------- ------- -------
Total $8,900 $(6,600) $ 2,300 $(1,800) $ 500
====== ======= ======== ======= =======
</TABLE>
42
<PAGE> 46
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per share - net income $11,272 $11,331 $ (16,325)
Effect of dilutive securities:
Convertible debentures 280 -- --
------- ------- ----------
Numerator for diluted earnings per share $11,552 $11,331 $ (16,325)
======= ======= ==========
Denominator:
Denominator for basic earnings per share -
weighted average common shares 15,991 19,100 20,200
Effect of dilutive securities:
Stock options 207 272 --
Convertible debentures 645 -- --
------- ------- ----------
Dilutive potential common shares 852 272 --
------- ------- ----------
Denominator for diluted earnings per share 16,843 19,372 20,200
======= ======= ==========
Basic earnings per share:
Income (loss) before accounting change $ 0.70 $ 0.59 $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
------- ------- ----------
Net income (loss) per share $ 0.70 $ 0.59 $ (0.81)
======= ======= ==========
Diluted earnings per share:
Income (loss) before accounting change $ 0.69 $ 0.58 $ (0.66)
Cumulative effect of change in accounting principle -- -- (0.15)
------- ------- ----------
Net income (loss) per share $ 0.69 $ 0.58 $ (0.81)
======= ======= ==========
</TABLE>
At June 30, 1999 the Company has $100,000 of convertible subordinated debentures
outstanding that are convertible into 3,058,104 shares of Class A Common Stock
and 846,694 of employee stock options that are potentially dilutive that were
not included in the computation of diluted earnings per share as their effect
would be antidilutive. The Company had $102,753 of convertible subordinated
debentures outstanding at June 30, 1998 that are convertible into 3,331,937
shares of Class A Common Stock that were not included in the computation of
diluted earnings per share as their effect would be antidilutive.
13. CONTINGENCIES
The Company's facility in Indianapolis, Indiana has been the subject of
an investigation by federal authorities, and the Company has engaged in
discussions with representatives of the U.S. Attorney's office concerning the
alleged violations of federal law at that facility. It is possible that the
imposition of significant times or other remedies in connection with the Indiana
matter could have a material effect on the Company's financial condition and
results of operations.
The Company is involved from time to time in other litigation and
regulatory investigations on various matters relating to the conduct of its
business and acquisition related events. The Company is unable to predict the
ultimate outcome of these other various current litigation and regulatory
investigation matters. The Company intends to vigorously defend actions
currently pending. However, if the Company is unsuccessful in defending such
matters and insurance is unavailable or insufficient, the resolution of certain
lawsuits and regulatory investigations could have a material effect on the
Company's consolidated financial position, results of operations, and cash
flows.
43
<PAGE> 47
14. QUARTERLY DATA (UNAUDITED)
Selected quarterly data for the years ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 103,711 $ 114,508 $ 137,669 $ 153,177 $ 509,064
Gross profit 26,226 29,039 34,857 38,725 128,847
Nonrecurring charge (b) -- -- -- 8,862 8,862
Operating income 6,873 7,810 9,467 1,940 26,090
Net income (loss) $ 3,632 $ 4,022 $ 4,365 $ (689) $ 11,331
Earnings per share - basic (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.59
Earnings per share - diluted (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.58
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 (AS ORIGINALLY REPORTED)
-------------------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- ------- -------
<S> <C> <C> <C>
Revenues $172,846 $178,030 $184,611
Gross profit 43,856 45,400 47,444
Operating income (c) 12,812 13,594 14,629
Net income $ 4,750 $ 5,343 $ 5,874
Earnings per share - basic (a) $ 0.24 $ 0.27 $ 0.29
Earnings per share - diluted (a) $ 0.24 $ 0.26 $ 0.29
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 (AS RESTATED)
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 172,846 $ 178,030 $ 184,611 $ 182,338 $ 717,825
Gross profit 43,856 45,400 47,444 40,578 177,278
Special charge to increase allowance
for doubtful accounts (d) -- -- -- 32,384 32,384
Nonrecurring charge (d) -- -- -- 8,115 8,115
Operating income (loss) (c) 11,055 11,111 11,354 (36,263) (2,743)
Cumulative effect of accounting change (c) (2,921) -- -- -- (2,921)
Net income (loss) $ 827 $ 3,915 $ 3,959 $ (25,026) $ (16,325)
Earnings per share - basic (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81)
Earnings per share - diluted (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81)
</TABLE>
(a) Earnings per share is calculated independently for each quarter and the sum
of the quarters may not necessarily be equal to the full year earnings per
share amount.
(b) A nonrecurring charge of $8,862 before taxes and $5,317 after taxes, or
$0.28 per basic share and $0.27 per diluted share, was recorded during the
fourth quarter of 1998 related to restructuring and other nonrecurring
expenses in connection with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items. For the year ended June 30, 1998, net income, excluding
this nonrecurring charge, was $16,648 or $0.87 per basic share and $0.86
per diluted share.
(c) Selling, general and administrative expenses as originally reported for the
first, second and third quarters of 1999 include pre-tax costs of $1,757,
$2,483 and $3,275, respectively, that would have been capitalized prior to
the adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities."
The $2,921 cumulative effect of accounting change represents start-up
costs, net of tax, that were previously capitalized as of June 30, 1998.
(d) Special and nonrecurring charges of $40,499 before taxes and $24,299 after
taxes, or $1.20 for both basic and diluted share, were recorded during the
fourth quarter of 1999. The special charges consists of an increase to the
allowance for doubtful accounts, and other nonrecurring charges in
association with the implementation and execution of strategic
restructuring and consolidation initiatives of certain operations and other
nonrecurring items. For the year ended June 30, 1999, net income, excluding
these nonrecurring charges and the effects of adopting SOP 98-5, was
$17,909 or $0.88 per basic and diluted share.
44
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information regarding Directors appearing under the caption "Election
of Directors" in the Company's Definitive Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held in 1999 (the "1999
Proxy Statement") is incorporated herein by reference, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A. Information required by this item as to the executive officers of the
Company is included as Item 4A of Part I of this Annual Report on Form 10-K as
permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information
required by Item 405 of Regulation S-K is set forth in the 1999 Proxy Statement
under the heading "Section 16(a) Beneficial Ownership Reporting Compliance,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to "Executive Compensation" in the 1999 Proxy Statement, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the Company's fiscal year pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to "Stock Ownership of Principal Holders and Management" in the 1999 Proxy
Statement, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's
fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 1999 Proxy Statement,
since such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year
pursuant to Regulation 14A.
45
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The 1999 Consolidated Financial Statements of NCS HealthCare,
Inc. are included in Part II, Item 8.
2. Financial Statement Schedules. All financial statement
schedules for the Company and its subsidiaries have been
included in the consolidated financial statements or the
related footnotes, or they are either inapplicable or not
required.
3. Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
46
<PAGE> 50
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NCS HEALTHCARE, INC.
By: /s/ JON H. OUTCALT
Jon H. Outcalt
Chairman of the Board of Directors
Date: September 28, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title
/s/ JON H. OUTCALT Chairman of the Board of Directors
Jon H. Outcalt
KEVIN B. SHAW President, Chief Executive Officer and Director
Kevin B. Shaw (Principal Executive Officer)
GERALD D. STETHEM Chief Financial Officer (Principal Financial
Gerald D. Stethem and Accounting Officer)
PHYLLIS K. WILSON Director
Phyllis K. Wilson
Director
A. Malachi Mixon III
Director
Boake A. Sells
Director
Richard L. Osborne
Date: September 28, 1999
47
<PAGE> 51
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
2.1 Asset Purchase Agreement, dated as of July 31, 1996, by and
among the Company, NCS HealthCare of Oregon, Inc., IPAC
Pharmacy, Inc. and Prestige Care, Inc. (A)
2.2 Agreement of Merger, dated August 13, 1996, by and among the
Company, Northside Pharmacy, Inc., Willis V. Smith, The
Willis Vernon Smith Unitrust, dated as of August 8, 1996,
Charles Oliver and NCS HealthCare of Oklahoma, Inc. (B)
2.3 Asset Purchase Agreement, dated August 13, 1996, by an among
NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation,
Med-Equip Homecare Equipment Service, Inc., an Oklahoma
corporation, Gail Benjamin, Willis V. Smith and John Tarr (B)
2.4 Asset Purchase Agreement, dated August 13, 1996, by and
among Thrifty Medical of Tulsa, L.L.C., an Oklahoma limited
liability company, Willis V. Smith, Charles Oliver and NCS
HealthCare of Oklahoma, Inc., an Oklahoma corporation (B)
2.5 Stock Purchase Agreement, dated August 13, 1996, by and among
the Willis Vernon Smith Unitrust Dated August 8, 1996,
Charles Oliver, Willis V. Smith and the Registrant (B)
2.6 Asset Purchase Agreement, dated December 29, 1997, by and
among the Company, NCS HealthCare of New York, Inc., Thrift
Drug, Inc., Fay's Incorporated and Eckerd Corporation (C)
2.7 Asset Purchase Agreement, dated April 10, 1998, among the
Company, NCS Acquisition Sub, Inc., Walgreens Advance Care,
Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D)
3.1 Amended and Restated Certificate of Incorporation of the
Company (E)
3.2 Amended By-Laws of the Company (E)
4.1 Specimen certificate of the Company's Class A Common Stock (E)
4.2 Specimen certificate of the Company's Class B Common Stock (E)
4.3 Form of 53/4% Convertible Subordinated Debentures due 2004 (F)
4.4 Indenture, dated August 13, 1997, between the Company and National
City Bank, as Trustee (F)
* 10.1 Deferred Compensation Agreement, dated as of January 1, 1994,
by and between Modern Pharmacy Consultants, Inc. and
Phyllis K. Wilson (E)
* 10.2 1996 Long Term Incentive Plan (C)
* 10.3 Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock
Purchase and Option Plan (C)
</TABLE>
E-1
<PAGE> 52
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
* 10.4 Amended and Restated Stock Option Agreement, dated as of
December 3, 1993, by and between Aberdeen Group, Inc. and
Richard L. Osborne (E)
* 10.5 Amended and Restated Stock Option Agreement, dated as of
December 29, 1994, by and between Aberdeen Group, Inc. and
Jeffrey R. Steinhilber (E)
10.6 Lease Agreement, dated as of July 16, 1990, by and among
Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group,
Inc. and Van Cleef Properties, Inc. (E)
10.7 Lease Agreement, dated as of January 1, 1996, by and between
PR Realty and Nursing Center Services, Inc. (E)
10.8 Industrial Lease Agreement dated as of May 28, 1993 by and
between Industrial Developments International, Inc. and
Corinthian Pharmaceutical Systems, Inc. (E)
10.9 Lease Agreement, dated as of January 17, 1995, by and among
Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E)
10.10 Form of Indemnity Agreement by and between the Company and
each of its Directors and Executive Officers (E)
*10.11 Employment and Noncompetition Agreement, dated as of
September 1, 1996, by and between Aberdeen Group, Inc. and
William B. Bryum (E)
10.12 Credit Agreement, dated as of June 1, 1998, among the Company, (G)
the lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.13 Letter Agreement, dated June 1, 1998, between the Company (G)
and KeyBank national Association regarding Capital Markets
Bridge Facility
10.14 Amendment No. 1, dated as of July 13, 1998, to the Credit (G)
Agreement, dated as of June 1, 1998, among the Company, the
lending institutions named therein and KeyBank National
Association, as the Swing Line Lender, Letter of Credit Issuer
and Administrative Agent
10.15 Amendment No. 2, dated March 3, 1999, to the Credit Agreement (H)
dated as of June 1, 1998, among the Company and the Lenders
named therein, NBD Bank and National City Bank, as co-agents,
and KeyBank National Association, as a Lender, the Swing Line
Lender, the Letter of Credit Issuer and as Administrative Agent
10.16 Amendment No. 3, dated August 3, 1999, to the Credit Agreement
dated as of June 1, 1998, among the Company and the Lenders
named therein, NBD Bank and National City Bank, as co-agents,
and KeyBank National Association, as a Lender, the Swing Line
Lender, the Letter of Credit Issuer and as Administrative Agent
10.17 Security Agreement, dated as of August 3, 1999, among the
Company, its subsidiaries and KeyBank National Association
* 10.18 Separation Agreement, effective as of June 11, 1999, between
Jeffery R. Steinhilber and the Company
</TABLE>
E-2
<PAGE> 53
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report in Form 8-K, dated August 1, 1996 (File No.
0-027602).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated August 15, 1996 (File No.
0- 027602).
(C) Incorporated herein by reference to the appropriate exhibit to the
Company's Current report on Form 8-K, dated January 30, 1998.
(D) Incorporated herein by reference to the appropriate exhibit to the
Company's Current report on Form 8-K, dated June 1, 1998.
(E) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-1 declared effective on
February 13, 1996 (Reg. No. 33-80455).
(F) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-3, as amended (Reg. No.
333-35551).
(G) Incorporated herein by reference to the appropriate exhibit to the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
(H) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999.
E-3
<PAGE> 1
Exhibit 10.16
================================================================================
================================================================================
NCS HEALTHCARE, INC.
AS BORROWER
THE LENDERS NAMED HEREIN
AS LENDERS
BANK ONE, MICHIGAN
BANK ONE, NA
NATIONAL CITY BANK
AS CO-AGENTS
AND
[LOGO KEYBANK]
KEYBANK NATIONAL ASSOCIATION
AS A LENDER,
THE SWING LINE LENDER, THE LETTER OF CREDIT ISSUER
AND AS THE ADMINISTRATIVE AGENT AND THE COLLATERAL AGENT
---------------------
AMENDMENT NO. 3
DATED AS OF
AUGUST 3, 1999
TO
CREDIT AGREEMENT
DATED AS OF
JUNE 1, 1998
---------------------
================================================================================
================================================================================
<PAGE> 2
AMENDMENT NO. 3 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT, dated as of August 3, 1999
("THIS AMENDMENT"), among the following:
(i) NCS HEALTHCARE, INC., a Delaware corporation (herein,
together with its successors and assigns, the "BORROWER");
(ii) the Lenders party hereto;
(iii) BANK ONE, MICHIGAN; BANK ONE, NA; and NATIONAL CITY
BANK, as Lenders and as Co-Agents; and
(iv) KEYBANK NATIONAL ASSOCIATION, a national banking
association, as a Lender, the Swing Line Lender, the Letter of Credit
Issuer, and as the Administrative Agent and the Collateral Agent under
the Credit Agreement:
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders named therein, the Swing Line Lender
and the Administrative Agent entered into the Credit Agreement, dated as of June
1, 1998, as amended by Amendment No. 1 thereto, dated as of July 13, 1998, and
Amendment No. 2 thereto, dated as of March 3, 1999 (as so amended and in effect
immediately prior to the effective date of this Amendment, the "CREDIT
AGREEMENT"; with the terms defined therein, or the definitions of which are
incorporated therein, being used herein as so defined).
(2) The parties hereto desire to change certain of the terms and
provisions of the Credit Agreement, all as more fully set forth below.
NOW, THEREFORE, the parties hereby agree as follows:
1. SECTION AMENDMENTS, ETC.
1.1. PERMANENT REDUCTION IN TOTAL GENERAL REVOLVING COMMITMENT.
Effective on the Effective Date of this Amendment provided for in section 4
hereof, (i) the Total General Revolving Commitment is permanently reduced from
$245,000,000 to $235,000,000, and (ii) the Lenders party hereto waive any
requirement for prior notice of such reduction under section 4.2 or any other
applicable provision of the Credit Agreement.
1.2. CHANGE IN CERTAIN DEFINITIONS. Effective on the Effective Date
of this Amendment provided for in section 4 hereof, section 1.1 of the Credit
Agreement is amended by deleting therefrom the definitions of the terms
"CONSOLIDATED NET INCOME", "CONSOLIDATED EBIT", "INTEREST COVERAGE RATIO",
"MATERIAL ADVERSE EFFECT", "TOTAL INCOME TAX EXPENSE" and "TOTAL INTEREST
EXPENSE", and by inserting therein the following defined terms in appropriate
alphabetic order:
"CONSOLIDATED AMORTIZATION EXPENSE" shall mean, for any
period, all amortization expenses of the Borrower and its Subsidiaries,
all as determined for the Borrower and its Subsidiaries on a
consolidated basis in accordance with GAAP.
<PAGE> 3
"CONSOLIDATED DEPRECIATION EXPENSE" shall mean, for any
period, all depreciation expenses of the Borrower and its Subsidiaries,
all as determined for the Borrower and its Subsidiaries on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED INCOME TAX EXPENSE" shall mean, for any period,
all provisions for taxes based on the net income of the Borrower or any
of its Subsidiaries (including, without limitation, any additions to
such taxes, and any penalties and interest with respect thereto), and
all franchise taxes of the Borrower and its Subsidiaries, all as
determined for the Borrower and its Subsidiaries on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" shall mean, for any period,
total interest expense (including that which is capitalized and that
which is attributable to Capital Leases, in accordance with GAAP) of
the Borrower and its Subsidiaries on a consolidated basis with respect
to all outstanding Indebtedness of the Borrower and its Subsidiaries
including, without limitation, all commissions, discounts and other
fees and charges owed with respect to letters of credit and net costs
under Hedge Agreements, all as determined in accordance with GAAP.
"CONSOLIDATED NET INCOME" shall mean for any period, the net
income (or loss), without deduction for minority interests, of the
Borrower and its Subsidiaries on a consolidated basis for such period
taken as a single accounting period determined in conformity with GAAP.
"CONSOLIDATED EBITDA" shall mean, for any period, Consolidated
Net Income for such period; PLUS (A) the sum (without duplication) of
the amounts for such period of (i) Consolidated Interest Expense, (ii)
Consolidated Income Tax Expense, (iii) Consolidated Depreciation
Expense, (iv) Consolidated Amortization Expense, (v) amortization or
write-off of deferred financing costs and charges for prepayment
penalties on prepayment of Indebtedness, and (v) extraordinary and
other non-recurring non-cash losses and charges; LESS (B) gains on
sales of assets and other extraordinary and non-recurring gains; all as
determined for the Borrower and its Subsidiaries on a consolidated
basis in accordance with GAAP, EXCEPT that in computing Consolidated
Net Income for purposes of this definition, there shall be excluded
therefrom (x) the income, (or loss) of any entity (other than
Subsidiaries of the Borrower) in which the Borrower or any of its
Subsidiaries has a joint or minority interest, except to the extent of
the amount of dividends or other distributions actually paid to the
Borrower or any of its Subsidiaries during such period, and (y) the
income of any Subsidiary of the Borrower to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted by operation of
the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to
that Subsidiary.
Notwithstanding anything to the contrary contained herein, (1)
in computing the Borrower's Consolidated EBITDA for any Testing Period,
in no event shall any extraordinary or non-recurring charges or
write-offs with respect to trade receivables or bad debts, even if
commonly considered "non-cash" items, be added to Consolidated Net
Income, and (2) in computing the Borrower's Consolidated EBITDA for any
Testing Period which includes the fiscal quarter ended on or nearest to
June 30, 1999, the extraordinary and non-recurring losses and charges
of up to $40,000,000 during such fiscal quarter shall be an addition
under clause (v) above, even though a portion of such losses and
charges may be considered cash items.
Notwithstanding anything to the contrary contained herein, in
computing the Borrower's Consolidated EBITDA for any Testing Period,
such Consolidated EBITDA shall (x) include the appropriate financial
items for any person or business unit which has been acquired by the
2
<PAGE> 4
Borrower for any portion of such Testing Period prior to the date of
acquisition, and (y) exclude the appropriate financial items for any
person or business unit which has been disposed of by the Borrower, for
the portion of such Testing Period prior to the date of disposition.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of, when used with reference to
the Borrower or any of its Subsidiaries, the Borrower and its
Subsidiaries, taken as a whole, or when used with reference to any
other person, such person and its Subsidiaries, taken as a whole, as
the case may be; PROVIDED that a Material Adverse Effect with respect
to the Borrower and its Subsidiaries, taken as a whole, shall not be
considered to have occurred solely as a result of the occurrence (under
the circumstances therein described) of any of the events identified in
the letter dated as of August 3, 1999, from the Borrower to the Lenders
which specifically refers to this definition.
1.3. ADDITION OF APPLICABLE PRIME RATE MARGIN TO PRIME RATE LOANS.
Effective on the Effective Date of this Amendment provided for in section 4
hereof, sections 2.8(a) and 2.8(b) of the Credit Agreement are amended to read
in their entirety as follows:
2.8. INTEREST. The unpaid principal amount of each General
Revolving Loan which is a Prime Rate Loan shall bear interest from the
date of the Borrowing thereof until maturity (whether by acceleration or
otherwise) at a fluctuating rate per annum which shall at all times be
equal to the Prime Rate in effect from time to time PLUS the Applicable
Prime Rate Margin (as defined below); and a Eurodollar Loan shall bear
interest from the date of the Borrowing thereof until maturity (whether
by acceleration or otherwise) at a rate per annum which shall at all
times be the Applicable Eurodollar Margin (as defined below) for such
General Revolving Loan PLUS the relevant Eurodollar Rate.
(b) The unpaid principal amount of each Swing Line Revolving
Loan which is a Prime Rate Loan shall bear interest from the date of the
Borrowing thereof until maturity (whether by acceleration or otherwise)
at a fluctuating rate per annum which shall at all times be equal to the
Prime Rate in effect from time to time PLUS the Applicable Prime Rate
Margin; and a Money Market Rate Loan shall bear interest from the date
of the Borrowing thereof until maturity (whether by acceleration or
otherwise) at a rate per annum which shall be equal to the Quoted Rate
therefor.
1.4. CHANGE IN INTEREST RATE MARGINS. Effective on the Effective Date
of this Amendment provided for in section 4 hereof, section 2.8(g) of the Credit
Agreement is amended to read in its entirety as follows:
(g) As used herein the terms "APPLICABLE PRIME RATE MARGIN" and
"APPLICABLE EURODOLLAR MARGIN" shall mean the particular rate per annum
determined by the Administrative Agent in accordance with the Pricing
Grid Table which appears below, based on the Borrower's ratio of Total
Indebtedness to Consolidated EBITDA, as computed in accordance with
section 9.6(a) hereof, and such Pricing Grid Table, and the following
provisions:
(i) Initially, until changed hereunder in accordance
with the following provisions, the Applicable Prime Rate Margin
will be 25.00 basis points per annum and the Applicable
Eurodollar Margin will be 225.00 basis points per annum.
3
<PAGE> 5
(ii) Commencing with the fiscal quarter of the Borrower
ended on or nearest to December 31, 1999, and continuing with
each fiscal quarter thereafter, the Administrative Agent will
determine the Applicable Prime Rate Margin and the Applicable
Eurodollar Margin in accordance with the Pricing Grid Table,
based on the Borrower's ratio of (x) Total Indebtedness as of
the end of the fiscal quarter, to (y) Consolidated EBITDA for
the Testing Period ended on the last day of the fiscal quarter,
as computed in accordance with section 9.6(a) hereof, and
identified in such Pricing Grid Table. Changes in the Applicable
Prime Rate Margin and/or the Applicable Eurodollar Margin based
upon changes in such ratio shall become effective on the first
day of the month following the receipt by the Administrative
Agent pursuant to section 8.1(a) or (b) of the financial
statements of the Borrower, accompanied by the certificate and
calculations referred to in section 8.1(c), demonstrating the
computation of such ratio, based upon the ratio in effect at the
end of the applicable period covered (in whole or in part) by
such financial statements.
(iii) Notwithstanding the above provisions, during any
period when (1) the Borrower has failed to timely deliver its
consolidated financial statements referred to in section 8.1(a)
or (b), accompanied by the certificate and calculations referred
to in section 8.1(c), (2) a Default under section 10.1(a) has
occurred and is continuing, or (3) an Event of Default has
occurred and is continuing, the Applicable Prime Rate Margin and
the Applicable Eurodollar Margin shall each be the highest rate
per annum indicated therefor in the Pricing Grid Table,
regardless of the Borrower's ratio of Total Indebtedness to
Consolidated EBITDA at such time.
(iv) Any changes in the Applicable Prime Rate Margin
and/or the Applicable Eurodollar Margin shall be determined by
the Administrative Agent in accordance with the above provisions
and the Administrative Agent will promptly provide notice of
such determinations to the Borrower and the Lenders. Any such
determination by the Administrative Agent pursuant to this
section 2.8(g) shall be conclusive and binding absent manifest
error.
PRICING GRID TABLE
(EXPRESSED IN BASIS POINTS)
<TABLE>
<CAPTION>
====================================================================================================================
RATIO OF APPLICABLE APPLICABLE APPLICABLE
TOTAL INDEBTEDNESS EURODOLLAR PRIME RATE FACILITY FEE
TO MARGIN MARGIN RATE
CONSOLIDATED EBITDA
====================================================================================================================
<S> <C> <C> <C>
greater than 5.00 to 1.00 225.00 25.00 50.00
- --------------------------------------------------------------------------------------------------------------------
greater than 4.50 to 1.00 and # 5.00 to 1.00 200.00 12.50 50.00
- --------------------------------------------------------------------------------------------------------------------
greater than 4.00 to 1.00 and # 4.50 to 1.00 175.00 -0- 50.00
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
====================================================================================================================
RATIO OF APPLICABLE APPLICABLE APPLICABLE
TOTAL INDEBTEDNESS EURODOLLAR PRIME RATE FACILITY FEE
TO MARGIN MARGIN RATE
CONSOLIDATED EBITDA
====================================================================================================================
<S> <C> <C> <C>
greater than 3.50 to 1.00 and # 4.00 to 1.00 162.50 -0- 37.50
- --------------------------------------------------------------------------------------------------------------------
greater than 3.00 to 1.00 and # 3.50 to 1.00 137.50 -0- 37.50
- --------------------------------------------------------------------------------------------------------------------
less than or equal to 3.00 to 1.00 112.50 -0- 37.50
====================================================================================================================
</TABLE>
For the avoidance of doubt, it is agreed that the above changes in section
2.8(g) of the Credit Agreement shall (i) be effective from and after the
Effective Date of this Amendment provided for in section 4 hereof, as to all
Loans then or thereafter outstanding; and (ii) in no event result in a lower
Applicable Eurodollar Margin than would have been applicable if this Amendment
had not been executed and delivered.
1.5. CHANGE IN APPLICABLE FACILITY FEE RATE. Effective on the
Effective Date of this Amendment provided for in section 4 hereof, section
4.1(a) of the Credit Agreement is amended to read in its entirety as follows:
4.1. FEES. (a) The Borrower agrees to pay to the
Administrative Agent a Facility Fee ("FACILITY FEE") for the account of
each Non-Defaulting Lender which has a General Revolving Commitment for
the period from and including the Effective Date to but not including
the date the Total General Revolving Commitment has been terminated and
no Loans, Letters or Credit or Unpaid Drawings remain outstanding , on
the average daily amount of the Total General Revolving Commitment,
whether used or unused, at the Applicable Facility Fee Rate, payable
quarterly in arrears on the last Business Day of each March, June,
September and December and the date the Total General Revolving
Commitment is terminated.
As used herein, the term "APPLICABLE FACILITY FEE RATE" means
the particular rate per annum determined by the Administrative Agent in
accordance with the Pricing Grid Table which appears in section 2.8(g)
hereof, based on the Borrower's ratio of Total Indebtedness to
Consolidated EBITDA, as computed in accordance with section 9.6(a)
hereof, and such Pricing Grid Table, and the following provisions:
(i) Initially, until changed hereunder in
accordance with the following provisions, the Applicable
Facility Fee Rate will be 50 basis points per annum.
(ii) Commencing with the fiscal quarter of the
Borrower ended on or nearest to December 31, 1999, and
continuing for each fiscal quarter thereafter, the
Administrative Agent will determine the Applicable Facility
Fee Rate in accordance with the Pricing Grid Table, based on
the Borrower's ratio of Total Indebtedness to Consolidated
EBITDA, as computed in accordance with section 9.6(a) hereof,
and such Pricing Grid Table. Changes in the Applicable
Facility Fee Rate shall be made and effective as of the same
date as is provided in section 2.8(g) in the case of the
5
<PAGE> 7
determination or re-determination of the Applicable Eurodollar
Margin. If any such change in the Applicable Facility Fee Rate
is retroactive to a date in a period for which the Facility
Fee has already been paid, the Borrower will immediately pay
to the Administrative Agent for the account of the Lenders all
additional Facility Fee due by reason of such increased
Applicable Facility Fee Rate.
(iii) Notwithstanding the above provisions, during
any period when (1) the Borrower has failed to timely deliver
its consolidated financial statements referred to in section
8.1(a) or (b), accompanied by the certificate and calculations
referred to in section 8.1(c), (2) a Default under section
10.1(a) has occurred and is continuing, or (3) an Event of
Default has occurred and is continuing, the Applicable
Facility Fee Rate shall be the highest rate per annum
indicated therefor in the Pricing Grid Table, regardless of
the Borrower's ratio of Total Indebtedness to Consolidated
EBITDA at such time.
(iv) Any changes in the Applicable Facility Fee
Rate shall be determined by the Administrative Agent in
accordance with the above provisions and the Administrative
Agent will promptly provide notice of such determinations to
the Borrower and the Lenders. Any such determination by the
Administrative Agent pursuant to this section 4.1(a) shall be
conclusive and binding absent manifest error.
For the avoidance of doubt, it is agreed that the above changes in section
4.1(a) of the Credit Agreement shall in no event result in a lower Applicable
Facility Fee Rate than would have been applicable if this Amendment had not been
executed and delivered.
1.6. ADDITIONAL MANDATORY REDUCTION OF TOTAL GENERAL REVOLVING
COMMITMENT---CERTAIN PROCEEDS OF EQUITY SALES. Effective on the Effective Date
of this Amendment provided for in section 4 hereof, a new section 4.3(d) is
added to the Credit Agreement, reading in its entirety as follows:
(d) The Total General Revolving Commitment shall be
permanently reduced, without premium or penalty, at the time that any
mandatory prepayment of General Revolving Loans would be made pursuant
to section 5.2(f) if General Revolving Loans were then outstanding in
the full amount of the Total General Revolving Commitment, in an amount
at least equal to the required prepayment of principal of General
Revolving Loans which would be required to be made in such
circumstance; PROVIDED that in no event shall the Total General
Revolving Commitment be required to be reduced pursuant to this section
4.3(d) to an amount which, when taken together with the aggregate
principal amount of Indebtedness, other than the Obligations, included
in Total Senior Indebtedness then outstanding, would be less than 3.50
times the Borrower's Consolidated EBITDA for its most recent fiscal
quarter or quarters ended June 30, 1999 or subsequent thereto
(annualized to a period of 4 fiscal quarters in the case of any such
period which consists of less than 4 consecutive fiscal quarters all of
which end June 30, 1999 or later). Any such reduction shall apply to
proportionately and permanently reduce the General Revolving Commitment
of each of the affected Lenders, and any partial reduction of the Total
General Revolving Commitment pursuant to this section 4.3(d) shall be
in the amount of at least $1,000,000 (or, if greater, in integral
multiples of $1,000,000). The Borrower will provide at least three (or
such lesser number as the Administrative Agent may permit in the
exercise of reasonable discretion) Business Days' prior written notice
(or telephonic notice confirmed in writing) to the Administrative Agent
at its Notice Office (which notice the Administrative Agent shall
promptly transmit to each of the Lenders), of any reduction of the
Total General Revolving Commitment pursuant to this section 4.3(d),
specifying the date and amount of the reduction.
6
<PAGE> 8
1.7. MANDATORY PREPAYMENTS. (a) Effective on the Effective Date of this
Amendment provided for in section 4 hereof, section 5.2(d) of the Credit
Agreement is amended to read in its entirety as follows:
(d) CERTAIN PROCEEDS OF ASSET SALES. If during the fiscal year of
the Borrower beginning on July 1, 1999, or any subsequent fiscal year,
the Borrower and its Subsidiaries have received any Cash Proceeds during
such fiscal year from one or more Asset Sales (other than the Excluded
Asset Sales), not later than the third Business Day following the date of
receipt of any such Cash Proceeds an amount, conforming to the
requirements as to the amount of partial prepayments contained in section
5.1, at least equal to 100% of the Net Cash Proceeds then received from
any such Asset Sale shall be applied as a mandatory prepayment of
principal of, FIRST, the then outstanding General Revolving Loans, if
any, and SECOND, after all outstanding General Revolving Loans have been
paid in full, the then outstanding Swing Line Revolving Loans, if any. As
used herein, the term "EXCLUDED ASSET SALES" shall mean any Asset Sale of
the business and assets which, for purposes of identification, were
operated as of June 30, 1999 as (i) the Vanguard Packaging operations,
(ii) the Medical Supply Division, and/or (iii) the Durable Medical
Equipment Division.
(b) Effective on the Effective Date of this Amendment provided for in
section 4 hereof, section 5.2(f) of the Credit Agreement is redesignated as
section 5.2(g) and a new section 5.2 (f) is added to the Credit Agreement,
reading in its entirety as follows:
(f) MANDATORY PREPAYMENT---CERTAIN PROCEEDS OF EQUITY SALES. Not
later than the Business Day following the date of the receipt by the
Borrower and/or any Subsidiary of the cash proceeds (net of underwriting
discounts and commissions, placement agent fees and other customary fees
and costs associated therewith) from any sale or issuance of equity
securities by the Borrower or any Subsidiary after June 30, 1999 (other
than (i) any inter-company sale to the Borrower or any Subsidiary and
(ii) any sale or issuance to management, employees (or key employees) or
directors pursuant to stock option, stock purchase or similar plans for
the benefit of management, employees (key employees) or directors
generally), the Borrower will prepay the principal of FIRST, the
outstanding General Revolving Loans, if any, and SECOND, after no General
Revolving Loans are outstanding, the outstanding Swing Line Revolving
Loans, if any, in an aggregate amount, conforming to the requirements as
to the amounts of partial prepayments contained in section 5.1, which is
not less than (x) 100% of such net proceeds, or (y) if less, an amount
equal to the then aggregate outstanding principal amount of the
outstanding Loans, if any.
1.8. NO MATERIAL ADVERSE CHANGE. Effective on the Effective Date of
this Amendment provided for in section 4 hereof, section 7.9 of the Credit
Agreement is amended to read in its entirety as follows:
7.9. NO MATERIAL ADVERSE CHANGE. Since June 30, 1999, there has
been no change in the condition, business or affairs of the Borrower and
its Subsidiaries taken as a whole, or their properties and assets
considered as an entirety, except for changes, none of which,
individually or in the aggregate, has had or could reasonably be expected
to have, a Material Adverse Effect.
1.9. ADDITIONAL MONTHLY AND OTHER REPORTING REQUIREMENTS.. Effective on
the Effective Date of this Amendment provided for in section 4 hereof, section
8.1 of the Credit Agreement is amended by adding a new paragraph (k) at the end
thereof, reading in its entirety as follows:
7
<PAGE> 9
(k) CERTAIN MONTHLY AND OTHER REPORTS. (i) As soon as practicable
and in any event within 20 working days after the end of each calendar
month, commencing with July 1999 and continuing for the next 12 calendar
months, a written report certified by a responsible financial or
accounting officer of the Borrower, reasonably satisfactory in form,
scope and detail to the Administrative Agent, as to (i) the consolidated
condensed balance sheet, and related consolidated condensed income
statement and statement of cash flows of the Borrower and its
consolidated Subsidiaries for such month, (ii) the amounts and specific
financial or investment institution accounts in which the same are held
of all cash and Cash Equivalent balances of the Borrower and its
consolidated Subsidiaries as at the end of such month, and (iii) the
aging of the accounts receivable of the Borrower and its Subsidiaries on
a consolidated basis, displayed for the principal categories or
classifications of account debtors (such as Medicare, Medicaid, Private
Pay, etc.).
(ii) As soon as practicable and in any event within one month
following each fiscal quarter, a written report certified by a
responsible financial or accounting officer of the Borrower, reasonably
satisfactory in form, scope and detail to the Administrative Agent, as to
(x) the aging of the accounts receivable of the Borrower and its
Subsidiaries on a consolidated basis, (y) charge-offs or write-offs of
accounts receivable and any increases or decreases in reserves for
delinquent or unrecoverable accounts receivable, and (z) the amounts of
the accounts receivable of the Borrower and its Subsidiaries on a
consolidated basis, which is owed by (x) the principal categories or
classifications of account debtors (such as Medicare, Medicaid, Private
Pay, etc.), and (y) the 10 account debtors with the largest outstanding
balances.
1.10. SENIOR DEBT. Effective on the Effective Date of this Amendment
provided for in section 4 hereof, section 8.13 of the Credit Agreement is
amended to read in its entirety as follows:
8.13. SENIOR DEBT. The Borrower will at all times ensure that the
claims of the Lenders in respect of the Obligations of the Borrower will
in all respects rank prior to the claims of every unsecured creditor of
the Borrower, and any Indebtedness of the Borrower which is subordinated
in any manner to the claims of any other creditor of the Borrower will be
subordinated in like manner to such claims of the Lenders.
1.11. ADDITIONAL SECURITY DOCUMENTS. Effective on the Effective Date of
this Amendment provided for in section 4 hereof, section 8.11 of the Credit
Agreement is amended to read in its entirety as follows:
8.11. ADDITIONAL SECURITY; FURTHER ASSURANCES. In the event
that at any time after June 30, 1999 the Borrower or any of its
Subsidiaries owns or holds an interest in any Real Property, assets,
stock, securities or any other property or interest, located within or
outside of the United States or arising out of business conducted from
any location within or outside the United States, which is not at the
time included in the Collateral and is not subject to a Permitted Lien
securing Indebtedness (all of the foregoing, "UNCOLLATERALIZED
PROPERTY"), the Borrower will notify the Administrative Agent in writing
of such event, identifying the Uncollateralized Property in question and
referring specifically to the rights of the Administrative Agent and the
Lenders under this section 8.11; PROVIDED that notwithstanding the
foregoing, (x) the Borrower need not notify the Administrative Agent
under this section 8.11(a) of any leasehold interest which is acquired or
held by the Borrower or any Subsidiary unless the same involves a nominal
or bargain purchase price option, and (y) the Borrower need not notify
the Administrative Agent under this section 8.11(a) of the ownership by
the Borrower or any of its Subsidiaries of any Real Property if such Real
Property was owned by the Borrower or any of its Subsidiaries as of June
30, 1999.
8
<PAGE> 10
(b) The Borrower will, or will cause an applicable Subsidiary to,
within 30 days following request by the Collateral Agent (who may make
such request only upon written instructions from the Required Lenders,
issued by the Required Lenders, in their sole respective discretion,
following review of any monthly, quarterly or annual financial
information regarding the Borrower and its Subsidiaries which is
furnished pursuant to section 8.1 of this Agreement for any period
subsequent to June 30, 1999), grant the Collateral Agent for the benefit
of the Secured Creditors (as defined in the Security Documents) security
interests and mortgages or deeds of trust, pursuant to new documentation
(each an "ADDITIONAL SECURITY DOCUMENT") or joinder in any existing
Security Document to which it is not already a party, in all of the
Uncollateralized Property as to which the Administrative Agent has
notified the Borrower that the same is required to be included in the
Collateral, SUBJECT to obtaining any required consents from third parties
(including third party lessors and co-venturers) necessary to be obtained
for the granting of a Lien on any particular Uncollateralized Property
(with the Borrower hereby agreeing to use, and to cause its Subsidiaries
to use, reasonable best efforts to obtain such consents), and ALSO
SUBJECT to the provisions of section 8.10(b).
(c) Each Additional Security Document (i) shall be granted
pursuant to documentation reasonably satisfactory in form and substance
to the Administrative Agent, which documentation shall in the case of
Real Property owned in fee be accompanied by such Phase I environmental
reports or assessments, a mortgage policy of title insurance (subject to
a standard survey exception), and other supporting documentation
requested by and reasonably satisfactory in form and substance to the
Administrative Agent; and (ii) shall constitute a valid and enforceable
perfected Lien upon the interests or properties so included in the
Collateral, subject to no other Liens except those permitted by section
9.3 or otherwise agreed to by the Administrative Agent at the time of
perfection thereof and (in the case of Real Property or interests
therein) such other encumbrances as may be set forth in the mortgage
policy, if any, relating to such Additional Security Document which shall
be delivered to the Collateral Agent together with such Additional
Security Document and which shall be satisfactory in form and substance
to the Collateral Agent and the Administrative Agent. The Borrower, at
its sole cost and expense, will cause each Additional Security Document
or instruments related thereto to be duly recorded or filed in such
manner and in such places as are required by law to establish, perfect,
preserve and protect the Liens created thereby required to be granted
pursuant to the Additional Security Document, and will pay or cause to be
paid in full all taxes, fees and other charges payable in connection
therewith. Furthermore, if so requested in writing by the Collateral
Agent (who may make such request only upon written instructions from the
Required Lenders, issued by the Required Lenders, in their sole
respective discretion, following review of any monthly, quarterly or
annual financial information regarding the Borrower and its Subsidiaries
which is furnished pursuant to section 8.1 of this Agreement for any
period subsequent to June 30, 1999), the Borrower shall cause to be
delivered to the Collateral Agent such opinions of local counsel,
appraisals (if required under section 8.11(e) below), title insurance,
environmental assessments and other related documents as may be
reasonably requested by the Collateral Agent in connection with the
execution, delivery and recording of any Additional Security Document,
all of which documents shall be in form and substance reasonably
satisfactory to the Collateral Agent and the Administrative Agent, except
that no leasehold mortgage or title insurance shall be required for any
leasehold properties (unless the lessee has a nominal or bargain purchase
option).
(d) The Borrower will, and will cause each of its Subsidiaries
to, at the expense of the Borrower, make, execute, endorse, acknowledge,
file and/or deliver to the Collateral Agent from time to time such
conveyances, financing statements, transfer endorsements, powers of
attorney, certificates, and other assurances or instruments and take such
further steps relating to the
9
<PAGE> 11
Collateral covered by any of the Security Documents as the Collateral
Agent may reasonably require. If at any time the Collateral Agent
determines, based on applicable law, that all applicable taxes
(including, without limitation, mortgage recording taxes or similar
charges) were not paid in connection with the recordation of any mortgage
or deed of trust, the Borrower shall promptly pay the same upon demand.
(e) The Borrower will if requested by any Lender at any time, in
order to meet any legal requirement applicable to such Lender, provide to
the Collateral Agent and the Lenders, at the sole cost and expense of the
Borrower, appraisals and other supporting documentation relating to any
mortgage or deed of trust delivered as an Additional Security Document
hereunder, as specified by any Lender, meeting the appraisal and other
documentation requirements of the Real Estate Reform Amendments of the
Financial Institution Reform, Recovery and Enforcement Act of 1989, as
amended, or any other legal requirements applicable to any Lender, which
in the case of any such appraisal shall be prepared by one or more
valuation firms of national standing, acceptable to the Required Lenders,
utilizing appraisal standards satisfying such Amendments, Act or other
legal requirements.
(f) For the avoidance of doubt, the Borrower shall have no
obligation to cause to be delivered any survey of a Real Property
subjected to a mortgage or deed of trust so as to permit a title company
to eliminate by endorsement the "survey exception" to the title policy
for such Real Property.
(g) Notwithstanding the foregoing provisions of this section
8.11, in the event the Administrative Agent notifies the Borrower that
the Required Lenders have determined on the basis of an environmental
report or assessment delivered by the Borrower pursuant to the provisions
of section 8.11(c) that an Additional Security Document encumbering any
particular Real Property should not be delivered under this section 8.11,
the Borrower shall be relieved of its obligation in this section 8.11 to
deliver or cause to be delivered an Additional Security Document in the
form of a mortgage, deed of trust or similar instrument covering such
Real Property, SUBJECT to any later determination by the Required Lenders
notified to the Borrower by the Administrative Agent that an Additional
Security Document in the form of a mortgage, deed of trust or similar
instrument covering such Real Property should be executed and delivered
hereunder.
(h) As promptly as practicable after the date (i) any Credit
Party has any Collateral located in a jurisdiction as to which the
Administrative Agent shall not previously have received a lien search
report listing all effective UCC financing statements and other Liens
filed against such Credit Party in such jurisdiction and containing
copies of all such effective UCC financing statements and other Lien
documents, (ii) any person first becomes a Credit Party, or (iii) any UCC
financing statement or Security Document is filed against any Credit
Party to perfect security interests granted pursuant to the Security
Agreement or any other Security Document, the Borrower will, at its
expense, cause to be delivered to the Administrative Agent and the
Lenders search reports listing all effective UCC financing statements and
other Lien documents filed against such person or Credit Party in each
applicable jurisdiction and containing copies of all such effective UCC
financing statements and other Lien documents. In addition, whenever
requested by the Administrative Agent, but not more frequently than once
in any 12-month period, the Borrower will promptly provide the
Administrative Agent and the Lenders with such new or updated title,
lien, judgment, patent, trademark and UCC financing statement searches or
reports as to the Borrower or any of its Subsidiaries, or any Collateral
of any Credit Party, as the Administrative Agent may specify to the
Borrower in its request.
10
<PAGE> 12
(i) The Collateral Agent is authorized, without the consent of any
of the Lenders, to enter into any modification of any Security Document
which the Collateral Agent reasonably believes is required to conform to
the mandatory requirements of local law, or to local customs followed by
financial institutions with respect to similar collateral documents
involving property located in any particular jurisdiction, in the case of
any Security Document relating to property located in a particular
jurisdiction which imposes a tax with respect to such Security Document
based on the amount of the obligations secured thereby, expressly limit
the amount of such secured obligations which are secured by such property
to such amount as, in the Collateral Agent's good faith judgment, is
appropriate so that the amount of such tax is reasonable in light of the
estimated value of the property located in such jurisdiction, and/or
designate the amount of title insurance coverage for any title insurance
policy provided hereunder in an amount reasonably believed by the
Collateral Agent to be representative of the fair value of the property
covered thereby.
(j) The Borrower will provide the Administrative Agent with
sufficient copies of each Additional Security Document and any additional
supporting documents delivered in connection therewith for distribution
of copies thereof to the Lenders, and the Administrative Agent will
promptly so distribute such copies.
1.12. ACQUISITIONS. Effective on the Effective Date of this Amendment
provided for in section 4 hereof, section 9.2(d) of the Credit Agreement is
amended to read in its entirety as follows:
(d) ACQUISITIONS: if no Default or Event of Default shall have
occurred and be continuing or would result therefrom, the Borrower or any
Subsidiary may make any Acquisition which has been approved in writing by
the Required Lenders, PROVIDED that no Acquisition may be consummated
which is actively opposed by the Board of Directors (or similar governing
body) of the selling person or the person whose equity interests are to
be acquired unless all of the Lenders consent in writing to such
Acquisition;
1.13. INDEBTEDNESS. Effective on the Effective Date of this Amendment
provided for in section 4 hereof, section 9.4 of the Credit Agreement is amended
to read in its entirety as follows:
9.4. INDEBTEDNESS. The Borrower will not, and will not permit any
of its Subsidiaries to, contract, create, incur, assume or suffer to
exist any Indebtedness of the Borrower or any of its Subsidiaries,
EXCEPT:
(a) Indebtedness incurred under this Agreement and the
other Credit Documents;
(b) Indebtedness of the Borrower or any Subsidiary in
respect of Capital Leases; PROVIDED that the aggregate Capitalized
Lease Obligations of the Borrower and its Subsidiaries, plus the
aggregate outstanding principal amount of Indebtedness permitted
under clause (c) below, shall not exceed $5,000,000 in the
aggregate at any time outstanding, and at the time of any
incurrence thereof after the date hereof, and after giving effect
thereto, no Event of Default shall have occurred and be continuing
or would result therefrom;
(c) Indebtedness of the Borrower or any Subsidiary subject
to Liens permitted by section 9.3(j), including any guaranty by
the Borrower of any such Indebtedness; PROVIDED that the aggregate
principal amount of such Indebtedness shall not exceed
11
<PAGE> 13
$2,000,000 in the aggregate at any time outstanding, and at the
time of any incurrence thereof after the date hereof, and after
giving effect thereto, no Event of Default shall have occurred and
be continuing or would result therefrom;
(d) the Subordinated Indebtedness evidenced by the
Convertible Subordinated Debentures due 2004 in the aggregate
principal amount of $100,000,000;
(e) any refinancing, extension, renewal or refunding of any
Subordinated Indebtedness permitted by the foregoing clause (d)
not involving an increase in the principal amount thereof, a
reduction of more than 10% in the remaining weighted average life
to maturity thereof (computed in accordance with standard
financial practice), or any changes in the terms of subordination
applicable thereto which is adverse to the interests of the
Lenders;
(f) the subordinated guaranties of Subsidiaries of the
Borrower with respect to the Subordinated Indebtedness referred to
in clauses (d) and (e) above, PROVIDED the terms of such
subordination are substantially the same as contained in the
subordinated guaranties originally issued in support of the
Convertible Subordinated Debentures due 2004;
(g) Existing Indebtedness, and any refinancing, extension,
renewal or refunding of any such Existing Indebtedness not
involving an increase in the principal amount thereof or a
reduction of more than 10% in the remaining weighted average life
to maturity thereof (computed in accordance with standard
financial practice);
(h) Indebtedness of the Borrower or any Subsidiary under
Hedge Agreements entered into in the ordinary course of business;
(i) Indebtedness of the Borrower to any of its
Subsidiaries, and Indebtedness of any of the Borrower's
Subsidiaries to the Borrower or to another Subsidiary of the
Borrower, in each case to the extent permitted under section 9.5;
(j) Guaranty Obligations permitted under section 9.5; and
(k) additional unsecured Indebtedness of the Borrower not
in excess of $2,000,000 aggregate principal amount outstanding at
any time, to the extent not otherwise permitted pursuant to the
foregoing clauses, PROVIDED that at the time of incurrence
thereof, and after giving effect thereto, the Borrower will be in
compliance with sections 9.6, 9.7 and 9.8, and no Event of Default
shall have occurred and be continuing or would result therefrom.
1.14. ADDITIONAL SCHEDULED EXISTING INDEBTEDNESS. Effective on the
Effective Date of this Amendment provided for in section 4 hereof, Annex III of
the Credit Agreement is amended to add thereto an appropriate reference to
miscellaneous Capital Leases outstanding at June 30, 1999, in the aggregate
amount of not more than $4,000,000.
1.15. GUARANTEES. Effective on the Effective Date of this Amendment
provided for in section 4 hereof, section 9.5(p) of the Credit Agreement is
amended to read in its entirety as follows:
12
<PAGE> 14
(p) if no Event of Default shall have occurred and be continuing,
or would result therefrom, unsecured Guaranty Obligations not otherwise
permitted by the foregoing clauses, made after June 30, 1999, covering up
to $2,000,000 aggregate principal amount of Indebtedness outstanding at
any time, shall be permitted to be incurred.
1.16. ADDITIONAL SCHEDULED GUARANTEES. Effective on the Effective Date
of this Amendment provided for in section 4 hereof, Annex V of the Credit
Agreement is amended to add the following item:
2. Miscellaneous guaranties outstanding at June 30, 1999, in the
aggregate amount of not more than $3,000,000.
1.17. FINANCIAL COVENANTS. Effective on the Effective Date of this
Amendment provided for in section 4 hereof, sections 9.6, 9.7, 9.8 and 9.9 of
the Credit Agreement are amended to read in their entirety as follows:
9.6. LEVERAGE RATIOS. (a) TOTAL LEVERAGE RATIO. The Borrower will
not at any time permit the ratio of (i) the amount of its Total
Indebtedness at such time to (ii) its Consolidated EBITDA for its Testing
Period most recently ended, to exceed the ratio specified below for any
Testing Period:
<TABLE>
<CAPTION>
==================================================================================
TESTING PERIOD RATIO
==================================================================================
<S> <C>
Testing Period ended on or nearest to September 30, 4.85 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to December 31, 5.10 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 5.45 to 1.00
March 31, 2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 5.25 to 1.00
June 30, 2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to September 30, 5.00 to 1.00
2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to December 31, 4.75 to 1.00
2000 and any Testing Period thereafter
==================================================================================
</TABLE>
(b) SENIOR LEVERAGE RATIO. The Borrower will not at any time
permit the ratio of (i) the amount of its Total Senior Indebtedness at
such time to (ii) its Consolidated EBITDA for its Testing Period most
recently ended, to exceed the ratio specified below for any Testing
Period:
13
<PAGE> 15
<TABLE>
<CAPTION>
==================================================================================
TESTING PERIOD RATIO
==================================================================================
<S> <C>
Testing Period ended on or nearest to September 30, 3.400 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to December 31, 3.575 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 3.825 to 1.00
March 31, 2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 3.675 to 1.00
June 30, 2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to September 30, 3.500 to 1.00
2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to December 31, 3.250 to 1.00
2000 and any Testing Period thereafter
==================================================================================
</TABLE>
9.7. COVERAGE RATIO. The Borrower will not at any time permit the
ratio of (i) its Consolidated EBITDA for any Testing Period, minus the
amount of its Consolidated Capital Expenditures for such Testing Period,
to (ii) its Consolidated Interest Expense for such Testing Period, to
exceed the ratio specified below for any applicable Testing Period;
PROVIDED, that in computing Consolidated Capital Expenditures for any
Testing Period ended on or prior to March 31, 2000, the Consolidated
Capital Expenditures for such Testing Period shall be determined on an
annualized basis using the Consolidated Capital Expenditures for the
period from July 1, 1999 through the end of such Testing Period as the
basis for such annualization:
<TABLE>
<CAPTION>
==================================================================================
TESTING PERIOD RATIO
==================================================================================
<S> <C>
Testing Period ended on or nearest to September 30, 2.200 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to December 31, 1.950 to 1.00
1999
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 1.675 to 1.00
March 31, 2000
----------------------------------------------------------------------------------
Testing Period ended on or nearest to 1.725 to 1.00
June 30, 2000
----------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
==================================================================================
TESTING PERIOD RATIO
==================================================================================
<S> <C>
Testing Period ended on or nearest to September 30, 1.800 to 1.00
2000 and any Testing Period thereafter
==================================================================================
</TABLE>
9.8. MINIMUM CONSOLIDATED EBITDA. The Borrower will not permit its
Consolidated EBITDA for any Testing Period consisting of its fiscal
quarter then most recently ended to be less than the amount indicated
below for such Testing Period:
<TABLE>
<CAPTION>
==================================================================================
MINIMUM CONSOLIDATED EBITDA
TESTING PERIOD
==================================================================================
<S> <C>
Testing Period consisting of single fiscal quarter $14,250,000
ended on or nearest to September 30, 1999
----------------------------------------------------------------------------------
Testing Period consisting of single fiscal quarter $14,500,000
ended on or nearest to December 31, 1999
----------------------------------------------------------------------------------
Testing Period consisting of single fiscal quarter $14,750,000
ended on or nearest to
March 31, 2000
----------------------------------------------------------------------------------
Testing Period consisting of single fiscal quarter $15,000,000
ended on or nearest to
June 30, 2000
----------------------------------------------------------------------------------
Testing Period consisting of single fiscal quarter $15,250,000
ended on or nearest to September 30, 2000 and any
Testing Period consisting of any single fiscal
quarter thereafter
==================================================================================
</TABLE>
The amounts specified in the above table shall be subject to adjustment
in accordance with the following provisions:
(i) In the event the Borrower and/or its Subsidiaries
completes any Acquisition after June 30, 1999 and before the
beginning of any Testing Period identified in the above table, the
amounts for such Testing Period and for all subsequent Testing
Periods in such table shall each be increased by 94% of the
consolidated earnings before interest, income taxes, depreciation
and amortization attributable to the business and assets acquired
in each such Acquisition for its most recent fiscal quarter
preceding the date such
15
<PAGE> 17
Acquisition is completed. Promptly after it completes an
Acquisition referred to in the preceding sentence, the Borrower
will provide to the Administrative Agent such financial statements
and other information as may be required by the Administrative
Agent to determine the amount of any such increase. The amount of
any such increase shall be determined by the Administrative Agent
in good faith and the Administrative Agent will promptly provide
notice of such determination to the Borrower and the Lenders. Any
such determination by the Administrative Agent pursuant to this
paragraph (i) shall be conclusive and binding absent manifest
error.
(ii) In the event the Borrower and/or its Subsidiaries
completes any sale or disposition of a Subsidiary or other Asset
Sale after June 30, 1999, the amounts for the then current and any
subsequent Testing Periods in such table shall each be decreased
by an amount equal to 94% of the consolidated earnings before
interest, income taxes, depreciation and amortization attributable
to the business and assets so sold or disposed of, for the
remaining portion of the Testing Period in which such sale or
disposition occurs and for any subsequent Testing Period, based on
the appropriate financial information for the most recent fiscal
quarter preceding the date such sale or disposition is completed.
Promptly after it completes a sale or disposition referred to in
the preceding sentence, the Borrower will provide to the
Administrative Agent such financial statements and other
information as may be required by the Administrative Agent to
determine the amount of any such decrease. The amount of any such
decrease shall be determined by the Administrative Agent in good
faith and the Administrative Agent will promptly provide notice of
such determination to the Borrower and the Lenders. Any such
determination by the Administrative Agent pursuant to this
paragraph (ii) shall be conclusive and binding absent manifest
error.
9.9. MINIMUM CONSOLIDATED NET WORTH; NO DIVIDENDS, ETC. The
Borrower will not permit its Consolidated Net Worth at any time to be
less than $268,000,000, EXCEPT that (i) effective as of the end of the
Borrower's fiscal quarter ended December 31, 1999, and as of the end of
each fiscal quarter thereafter, the foregoing amount (as it may from time
to time be increased as herein provided), shall be increased by 50% of
the Consolidated Net Income of the Borrower and its Subsidiaries for the
fiscal quarter ended on such date, if any, without deduction for minority
interests, as determined in conformity with GAAP (there being no
reduction in the case of any such Consolidated Net Income which reflects
a deficit), and (ii) the foregoing amount (as it may from time to time be
increased as herein provided), shall be increased by (A) an amount equal
to 100% of the cash proceeds (net of underwriting discounts and
commissions and other customary fees and costs associated therewith) from
any sale or issuance of equity by the Borrower after June 30, 1999 (other
than any sale or issuance to management or employees pursuant to employee
benefit plans of general application), plus (B) the principal amount of
any Indebtedness which after June 30, 1999 is converted or exchanged into
equity securities of the Borrower.
(b) The Borrower will not directly or indirectly declare, order,
pay or make any dividend (other than dividends payable solely in common
stock of the Borrower) or other distribution on or in respect of any
capital stock of any class of the Borrower, whether by reduction of
capital or otherwise, or directly or indirectly make, or permit any of
its Subsidiaries to directly or indirectly make, any purchase,
redemption, retirement or other acquisition of any capital stock of any
class of the Borrower (other than for a consideration consisting solely
of capital stock of the same class of the Borrower) or of any warrants,
rights or options to acquire or any securities convertible into or
exchangeable for any capital stock of the Borrower, except that the
Borrower may make any cash payments in lieu of fractional shares in
connection with the
16
<PAGE> 18
conversion into common stock of the Borrower of any of the Borrower's
Convertible Subordinated Debentures due 2004.
1.18. RELEASE OF COLLATERAL. Effective on the Effective Date of this
Amendment provided for in section 4 hereof, the reference to "section 8.11(b)"
in clause (iv) of section 12.12 of the Credit Agreement is changed to "this
Agreement".
1.19. CONCERNING THE FORMER INTEREST COVERAGE RATIO FINANCIAL COVENANT.
For the avoidance of doubt, and in light of the elimination of the financial
covenant which had been contained in section 9.8 of the Credit Agreement, and
which had required that the Borrower's Interest Coverage Ratio not be less than
the required minimum Interest Coverage Ratios specified therein, which
elimination is being effected by this Amendment, the Lenders party hereto hereby
confirm and agree that (i) compliance with section 9.8 of the Credit Agreement
for the period ending June 30, 1999, is waived, and (ii) during the period from
June 30, 1999 to the Effective Date of this Amendment provided for in section 4
hereof, no Default or Event of Default solely attributable to section 9.8 of the
Credit Agreement shall be deemed to have occurred.
1.20. PLEDGE AGREEMENT. Effective on the Effective Date of this Amendment
provided for in section 4 hereof, section 18(b) of the Pledge Agreement, which
had provided for termination of the Pledge Agreement at the option of the
Borrower under certain circumstances, shall be of no further force or effect.
Except as expressly modified and superseded by the preceding sentence, the terms
and provisions of the Pledge Agreement are ratified and confirmed and shall
continue in full force and effect. If required by the Administrative Agent, the
Borrower will, and will cause any other Credit Party which is a party to the
Pledge Agreement to, enter into a separate amendment of the Pledge Agreement
which gives effect to the foregoing.
2. SECTION REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants as follows:
2.1. AUTHORIZATION AND VALIDITY OF AMENDMENT, ETC. This Amendment has
been duly authorized by all necessary corporate action on the part of the
Borrower, has been duly executed and delivered by a duly authorized officer of
the Borrower, and constitutes the valid and binding agreement of the Borrower,
enforceable against the Borrower in accordance with its terms, except to the
extent that the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws generally affecting
creditors' rights and by equitable principles (regardless of whether enforcement
is sought in equity or at law).
2.2. REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Credit Parties contained in the Credit Agreement or in the other Credit
Documents are true and correct in all material respects on and as of the date
hereof as though made on and as of the date hereof, except to the extent that
such representations and warranties expressly relate to an earlier specified
date, in which case such representations and warranties are hereby reaffirmed as
true and correct in all material respects as of the date when made.
2.3. NO EVENT OF DEFAULT. No condition or event has occurred or exists
which constitutes or which, after notice or lapse of time or both, would
constitute an Event of Default.
17
<PAGE> 19
2.4. COMPLIANCE. The Borrower is in full compliance with all covenants
and agreements contained in the Credit Agreement, as amended hereby, and the
other Credit Documents to which it is a party; and without limitation of the
foregoing, each Subsidiary of the Borrower which, as of the date hereof, is
required to be a Subsidiary Guarantor, has as on or prior to the date hereof
become a Subsidiary Guarantor under the Subsidiary Guaranty.
2.5. FINANCIAL STATEMENTS, ETC. The Borrower has furnished to the
Lenders and the Administrative Agent complete and correct copies of:
(a) the audited consolidated balance sheets of the Borrower and
its consolidated subsidiaries as of June 30, 1997, and June 30, 1998, and
the related audited consolidated statements of income, stockholders'
equity, and cash flows for the fiscal years then ended, accompanied by
the unqualified report thereon of the Borrower's independent accountants;
and
(b) the unaudited condensed consolidated balance sheets of the
Borrower and its consolidated subsidiaries as of March 31, 1999, and the
related unaudited condensed consolidated statements of income and of cash
flows of the Borrower and its consolidated subsidiaries for the fiscal
quarter or quarters then ended, as contained in the Form 10-Q Quarterly
Report of the Borrower filed with the SEC.
All such financial statements have been prepared in accordance with GAAP,
consistently applied (except as stated therein), and fairly present the
financial position of the Borrower and its consolidated subsidiaries as of the
respective dates indicated and the consolidated results of their operations and
cash flows for the respective periods indicated, subject in the case of any such
financial statements which are unaudited, to the absence of footnotes and to
normal audit adjustments which the Borrower reasonably believes will not involve
a Material Adverse Effect.
2.6. RECENT FINANCIAL PROJECTIONS, ETC. The Borrower has delivered or
caused to be delivered to the Lenders, prior to the execution and delivery of
this Amendment, financial projections prepared by management of the Borrower for
the Borrower and its Subsidiaries consisting of, among other things, a projected
balance sheet, income statement and cash flow statement for its fiscal year
ended June 30, 2000, and projected income statements for its fiscal years ended
June 30, 2001 and 2002 (the "RECENT FINANCIAL PROJECTIONS"). The Recent
Financial Projections were prepared on behalf of the Borrower in good faith
after taking into account the existing and historical levels of business
activity of the Borrower and its Subsidiaries, trends known to the Borrower,
including general economic trends, and all other information, assumptions and
estimates considered by management of the Borrower and its Subsidiaries to be
pertinent thereto. The Recent Financial Projections were considered by
management of the Borrower, as of such date of preparation, to be realistically
achievable; PROVIDED, that no representation or warranty is made as to the
impact of future general economic conditions or as to whether the Borrower's
projected consolidated results as set forth in the Recent Financial Projections
will actually be realized. No material facts have become known to the Borrower
subsequent to the date of preparation of the Recent Financial Projections and
prior to the date hereof which, if they had been appropriately reflected in the
Recent Financial Projections, would have resulted in a material adverse change
in the assets, liabilities, results of operations or cash flows reflected
therein.
2.7. FEE OWNERSHIP OF REAL PROPERTY. At the date of this Amendment,
neither the Borrower nor any of its Subsidiaries is the fee owner of any Real
Property, other than the 5 facilities located at (i) 90 Glade Drive, Kittaning,
Pennsylvania (the Borrower), (ii) 12 East Second Street, Kaukauna, Wisconsin
(NCS HealthCare of Wisconsin, Inc.), (iii) 90 Glade Drive, Kittaning,
Pennsylvania (NCS HealthCare of Pennsylvania, Inc.), (iv) 110 Davis Farm Road,
Portland, Maine (Uni-Care Health Services of Maine, Inc.)
18
<PAGE> 20
and (v) 835 North L. Rogers Wells Blvd., Glasgow, Kentucky (NCS HealthCare of
Kentucky, Inc.), which in the aggregate have a net book value on the
consolidated financial statements of the Borrower of less than $2,500,000. (For
the avoidance of doubt, it is noted that the Lenders have determined at the
present time not to require that any such Real Property be subjected to a
mortgage or deed of trust as security for the Obligations, SUBJECT to any later
determination by the Required Lenders or the Administrative Agent in accordance
with section 8.11 of the Credit Agreement, as amended hereby, to require that
any such Real Property be so subjected to a mortgage or deed of trust as
security for the Obligations.)
SECTION 3. RATIFICATIONS.
Except as expressly modified and superseded by this Amendment, the terms
and provisions of the Credit Agreement are ratified and confirmed and shall
continue in full force and effect.
SECTION 4. BINDING EFFECT.
This Amendment shall become effective on a date (the "EFFECTIVE DATE"),
on or before August 3, 1999, if the following conditions shall have been
satisfied on and as of such date:
(a) EXECUTION OF AMENDMENT. This Amendment shall have been
executed by the Borrower and the Administrative Agent, and counterparts
hereof as so executed shall have been delivered to the Administrative
Agent; the Acknowledgment and Consent appended hereto shall have been
executed by the Credit Parties named therein, and counterparts thereof as
so executed shall have been delivered to the Administrative Agent; and
the Administrative Agent shall have been notified by the Required Lenders
that such Lenders have executed this Amendment (which notification may be
by facsimile or other written confirmation of such execution).
(b) FEES. The Borrower shall have paid to the Administrative
Agent, in immediately available funds, such nonrefundable fees as have
previously been agreed between the Borrower and the Administrative Agent.
In addition, the Administrative Agent shall have paid to the Lenders who
have entered into this Amendment such fees as have been previously
communicated to such Lenders by the Administrative Agent.
(c) SECURITY AGREEMENT. The Credit Parties named therein shall
have duly executed and delivered and there shall be in full force and
effect, and original counterparts shall have been delivered to the
Administrative Agent, in sufficient quantities for the Lenders, of the
Security Agreement (as modified, amended or supplemented from time to
time in accordance with the terms thereof and hereof, the "SECURITY
AGREEMENT"), substantially in the form of Exhibit A attached hereto.
(d) CORPORATE RESOLUTIONS AND APPROVALS. The Administrative
Agent shall have received, in sufficient quantity for the Administrative
Agent and the Lenders, certified copies of the resolutions of the Board
of Directors of the Borrower and each other Credit Party, approving the
Credit Documents to which the Borrower or any such other Credit Party, as
the case may be, is or may become a party, and of all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to the execution, delivery and performance by the
Borrower or any such other Credit Party of the Credit Documents to which
it is or may become a party.
19
<PAGE> 21
(e) INCUMBENCY CERTIFICATES. The Administrative Agent shall have
received, in sufficient quantity for the Administrative Agent and the
Lenders, a certificate of the Secretary or an Assistant Secretary of the
Borrower and of each other Credit Party, certifying the names and true
signatures of the officers of the Borrower or such other Credit Party, as
the case may be, authorized to sign the Credit Documents to which the
Borrower or such other Credit Party is a party and any other documents to
which the Borrower or any such other Credit Party is a party which may be
executed and delivered in connection herewith.
(f) OPINION OF COUNSEL. On or prior to the Effective Date of this
Amendment, the Administrative Agent shall have received an opinion,
addressed to the Administrative Agent and each of the Lenders and dated
on or prior to the Effective Date of this Amendment, from Calfee, Halter
& Griswold LLP, special counsel to the Borrower, satisfactory in form and
substance satisfactory to the Administrative Agent, to the effect that
(i) this Amendment, the Acknowledgment and Consent appended
hereto and the Security Agreement have been duly authorized by all
necessary corporate or other organizational action on the part of,
and have been duly executed and delivered by, the Borrower and
each other Credit Party which is a party thereto;
(ii) the execution, delivery and performance by the
Borrower and the other Credit Parties of this Amendment and the
Security Documents will not
(A) conflict with or result in any breach of, any of
the terms, covenants, conditions or provisions of,
(B) constitute a default under, or
(C) result in the creation or imposition of (or the
obligation to create or impose) any Lien (other than the
Liens created pursuant to the Security Documents) upon any
of the property or assets of the Borrower or any of its
Subsidiaries pursuant to the terms of,
the Indenture relating to the Convertible Subordinated Debentures
due 2004;
(iii) the Security Agreement is effective as between the
parties thereto to create a security interest, in favor of the
Collateral Agent, as security for the Secured Obligations (as
defined therein) in all Collateral (as defined therein) of the
Borrower and each other Credit Party which is a party thereto in
which a security interest is purported to be created by the
Security Agreement, to the extent that such Collateral consists of
the type of property in which a security interest may be created
under the Uniform Commercial Code as in effect in the State of
Ohio; and
(iv) no order, consent, approval, license, authorization,
or validation of, or filing, recording or registration with, or
exemption by, any United States federal or Ohio governmental or
public body, agency or authority, is required to authorize or is
required under the federal laws of the United States or the laws
of the State of Ohio as a condition to (A) the execution, delivery
and performance by any Credit Party of any Credit Document to
which it is a party, or (B) the legality, validity, binding effect
or enforceability as against any Credit Party of any Credit
Document to which any Credit Party is a party, EXCEPT for (1) the
filing and recording of financing statements and other
20
<PAGE> 22
documents necessary in order to perfect the Liens created by the
Security Documents, and (2) such filings, orders, consents,
approvals or other actions as may be required to be obtained or
effected with governmental or public bodies, agencies or
authorities, including courts, in connection with any actual or
attempted grant or perfection or enforcement of a security
interest in, or realization upon, any type of Collateral the
possession or alienability of which is subject to specific federal
or state requirements or limitations under published laws,
regulations, rules or directives, now or hereafter in effect.
(g) RECORDATION OF SECURITY DOCUMENTS, DELIVERY OF COLLATERAL,
TAXES, ETC. The Security Documents (or proper notices or financing
statements in respect thereof) shall have been duly recorded, published
and filed in such manner and in such places as is required by law to
establish, perfect, preserve and protect the rights and security
interests of the parties thereto and their respective successors and
assigns, all collateral items required to be physically delivered to the
Collateral Agent thereunder shall have been so delivered, accompanied by
any appropriate instruments of transfer, and all taxes, fees and other
charges then due and payable in connection with the execution, delivery,
recording, publishing and filing of such instruments and the issue and
delivery of the Notes shall have been paid in full.
(h) EVIDENCE OF INSURANCE. The Collateral Agent shall have
received certificates of insurance and other evidence, satisfactory to
it, of compliance with the insurance requirements of this Agreement and
the Security Documents.
(i) SEARCH REPORTS. The Administrative Agent shall have received
completed requests for information on Form UCC-11, or search reports from
one or more commercial search firms acceptable to the Administrative
Agent, listing all of the effective financing statements filed against
any Credit Party which is a party to any Security Document in any
jurisdiction in which such Credit Party maintains an office or in which
any Collateral of such Credit Party is located, together with copies of
such financing statements.
(j) PROCEEDINGS AND DOCUMENTS. All corporate and other
organizational proceedings of the Credit Parties incident to this
Amendment and the transactions contemplated hereby shall be satisfactory
in form and substance to the Administrative Agent and the Administrative
Agent shall have received from the Credit Parties such documents incident
to the transactions completed hereby as it may require.
Thereafter this Amendment shall be binding upon and inure to the benefit of the
Borrower, the Administrative Agent, and each Lender and their respective
permitted successors and assigns. After this Amendment becomes effective, the
Administrative Agent will promptly furnish a copy of this Amendment to each
Lender and the Borrower and advise them of the Effective Date.
5. SECTION MISCELLANEOUS.
5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Amendment shall survive the execution and delivery
of this Amendment, and no investigation by the Administrative Agent or any
Lender or any subsequent Loan or other Credit Event shall affect the
representations and warranties or the right of the Administrative Agent or any
Lender to rely upon them.
5.2. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and
all other agreements, instruments or documentation now or hereafter executed and
delivered pursuant to the terms
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<PAGE> 23
of the Credit Agreement as amended hereby, are hereby amended so that any
reference therein to the Credit Agreement shall mean a reference to the Credit
Agreement as amended hereby.
5.3. EXPENSES. As provided in the Credit Agreement, but without
limiting any terms or provisions thereof, the Borrower shall pay on demand all
reasonable costs and expenses incurred by the Administrative Agent in connection
with the preparation, negotiation, and execution of this Amendment, including
without limitation the reasonable costs and fees of the Administrative Agent's
special legal counsel, regardless of whether this Amendment becomes effective in
accordance with the terms hereof, and all reasonable costs and expenses incurred
by the Administrative Agent or any Lender in connection with the enforcement or
preservation of any rights under the Credit Agreement, as amended hereby.
5.4. SEVERABILITY. Any term or provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the term or provision so held to be invalid or unenforceable.
5.5. APPLICABLE LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of Ohio.
5.6. HEADINGS. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
5.7. ENTIRE AGREEMENT. This Amendment is specifically limited to the
matters expressly set forth herein. This Amendment and all other instruments,
agreements and documentation executed and delivered in connection with this
Amendment embody the final, entire agreement among the parties hereto with
respect to the subject matter hereof and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the matters covered by this Amendment, and may not be
contradicted or varied by evidence of prior, contemporaneous or subsequent oral
agreements or discussions of the parties hereto. There are no oral agreements
among the parties hereto relating to the subject matter hereof or any other
subject matter relating to the Credit Agreement.
5.8. JURY TRIAL WAIVER. EACH OF THE PARTIES TO THIS AMENDMENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE OTHER CREDIT
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY HERETO
HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER
PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.
5.9. COUNTERPARTS. This Amendment may be executed by the parties hereto
separately in one or more counterparts, each of which when so executed shall be
deemed to be an original, but all of which when taken together shall constitute
one and the same agreement.
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<PAGE> 24
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
as of the date first above written.
<TABLE>
<CAPTION>
<S> <C>
NCS HEALTHCARE, INC. KEYBANK NATIONAL ASSOCIATION,
INDIVIDUALLY AS A LENDER, THE SWING LINE
LENDER, THE LETTER OF CREDIT ISSUER, AND
BY: /S/ GERALD D. STETHEM AS THE ADMINISTRATIVE AGENT AND THE
------------------------------ COLLATERAL AGENT
CHIEF FINANCIAL OFFICER
BY: /S/ THOMAS J. PURCELL
----------------------------
VICE PRESIDENT
BANK ONE, MICHIGAN NATIONAL CITY BANK,
(FORMERLY NBD BANK), AS A LENDER AND AS CO-AGENT
AS A LENDER AND AS CO-AGENT
BY: /S/ GARY C. WILSON BY: /S/ CHRIS D. THORNTON
------------------------------ ----------------------------
FIRST VICE PRESIDENT VICE PRESIDENT
BANK ONE, NA, FIRST UNION NATIONAL BANK
AS A LENDER AND AS CO-AGENT
BY: /S/ GARY C. WILSON BY: /S/ J. PAUL SOLITARIO
------------------------------ ----------------------------
FIRST VICE PRESIDENT VICE PRESIDENT
COMERICA BANK MELLON BANK, N. A.
BY: /S/ CRAIG F. DURNO BY: /S/ THOMAS E. CONSTANTINE
------------------------------ ----------------------------
ASSISTANT VICE PRESIDENT VICE PRESIDENT
HARRIS TRUST AND SAVINGS BANK FIRSTAR BANK, NATIONAL ASSOCIATION
(FORMERLY STAR BANK, N. A.)
BY: /S STAN C. ROSENDAHL BY: /S/ DAVID J. DANNEMILLER
------------------------------ ----------------------------
VICE PRESIDENT VICE PRESIDENT
AMSOUTH BANK BANK HAPOALIM B. M.,
CHICAGO BRANCH
BY: /S/ DAVID C. STYLES BY: /S/ PHILIP E. GANSCH
------------------------------ ----------------------------
VICE PRESIDENT VICE PRESIDENT
AND: /S/ AZARYA D. RESSLER
----------------------------
SVP & BRANCH MANAGER
</TABLE>
23
<PAGE> 25
ACKNOWLEDGMENT AND CONSENT
For the avoidance of doubt, and without limitation of the intent and
effect of sections 6 and 10 of the Subsidiary Guaranty (as such term is defined
in the Credit Agreement referred to in the Amendment No. 3 to Credit Agreement
(the "AMENDMENT"), to which this Acknowledgment and Consent is appended), each
of the undersigned hereby unconditionally and irrevocably (i) acknowledges
receipt of a copy of the Credit Agreement and the Amendment, and (ii) consents
to all of the terms and provisions of the Credit Agreement as amended by the
Amendment. To the extent any of the undersigned is not already a party to the
Subsidiary Guaranty, it hereby joins in and agrees to be bound by the Subsidiary
Guaranty as a Guarantor thereunder.
Capitalized terms which are used herein without definition shall have
the respective meanings ascribed thereto in the Credit Agreement referred to
herein. This Acknowledgment and Consent is for the benefit of the Lenders, the
Administrative Agent, the Collateral Agent and any Hedge Creditor (as defined in
the Subsidiary Guaranty) which may be a third party beneficiary of the
Subsidiary Guaranty or the Pledge Agreement, in its capacity as such third party
beneficiary under any Credit Document, and their respective successors and
assigns. No term or provision of this Acknowledgment and Consent may be modified
or otherwise changed without the prior written consent of the Administrative
Agent, given as provided in the Credit Agreement. This Acknowledgment and
Consent shall be binding upon the successors and assigns of each of the
undersigned. This Acknowledgment and Consent may be executed by any of the
undersigned in separate counterparts, each of which shall be an original and all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, each of the undersigned has duly executed and
delivered this Acknowledgment and Consent as of the date of the Amendment
referred to herein.
<TABLE>
<CAPTION>
<S> <C> <C>
NCS HEALTHCARE OF OKLAHOMA, INC. NCS SERVICES, INC. NCS HEALTHCARE OF MASSACHUSETTS, INC.
NCS HEALTHCARE OF RHODE ISLAND, INC. NCS HEALTHCARE OF IOWA, INC. NCS HEALTHCARE OF ARIZONA, INC.
NCS HEALTHCARE OF KANSAS, INC. NCS HEALTHCARE OF KENTUCKY, INC. NCS HEALTHCARE OF MONTANA, INC.
NCS HEALTHCARE OF SOUTH CAROLINA, INC. NCS HEALTHCARE OF VERMONT, INC. NCS HEALTHCARE OF MISSOURI, INC.
NCS HEALTHCARE OF OREGON, INC. NCS HEALTHCARE OF BEACHWOOD, INC. NCS HEALTHCARE OF NEW YORK, INC.
NCS HEALTHCARE OF MARYLAND, INC. NCS HEALTHCARE OF OHIO, INC. PHARMASOURCE HEALTHCARE, INC.
NCS HEALTHCARE OF ARKANSAS, INC. NCS HEALTHCARE OF MICHIGAN, INC. NCS HEALTHCARE OF TEXAS, INC.
NCS HEALTHCARE OF CALIFORNIA, INC. NCS HEALTHCARE OF INDIANA, INC. NCS HEALTHCARE OF TENNESSEE, INC.
RESCOT SYSTEMS GROUP, INC. NCS HEALTHCARE OF ILLINOIS, INC. NCS HEALTHCARE OF MINNESOTA, INC.
UNI-CARE HEALTH SERVICES, INC. NCS HEALTHCARE OF PENNSYLVANIA, INC. NCS HEALTHCARE OF WISCONSIN, INC.
UNI-CARE HEALTH SERVICES OF MAINE, INC. NCS HEALTHCARE OF CONNECTICUT, INC. NCS HEALTHCARE OF NEBRASKA, INC.
NCS HEALTHCARE OF NEW JERSEY, INC. NCS HEALTHCARE OF NEW MEXICO, INC.
NCS HEALTHCARE OF FLORIDA, INC. BEACHWOOD HEALTHCARE MANAGEMENT, INC.
NCS HEALTHCARE OF WASHINGTON, INC.
MANAGEMENT & NETWORK SERVICES, INC.
</TABLE>
BY: /S/ MICHAEL J. MASCALI
-------------------------------------------
MICHAEL J. MASCALI, VICE PRESIDENT,
ON BEHALF OF EACH OF
THE ABOVE CORPORATIONS
NCS HEALTHCARE OF NORTH CAROLINA, INC.
BY: /S/ KEVIN B. SHAW
----------------------------------
KEVIN B. SHAW, PRESIDENT
<PAGE> 1
Exhibit 10.17
================================================================================
================================================================================
NCS HEALTHCARE, INC.
AS AN ASSIGNOR
ITS SUBSIDIARIES WHICH ARE OR
HEREAFTER BECOME A PARTY HERETO
AS ASSIGNORS
WITH
[LOGO KEYBANK]
KEYBANK NATIONAL ASSOCIATION,
AS COLLATERAL AGENT
--------------------------
SECURITY AGREEMENT
DATED AS OF
AUGUST 3, 1999
--------------------------
================================================================================
================================================================================
<PAGE> 2
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of August 3, 1999 (as amended, modified,
or supplemented from time to time, "THIS AGREEMENT"), among (i) NCS HEALTHCARE,
INC., a Delaware corporation (herein, together with its successors and assigns,
the "BORROWER" or an "ASSIGNOR"); (ii) each of the Subsidiaries of the Borrower
which is now or hereafter becomes a party hereto (each, together with its
successors and assigns, an "ASSIGNOR"; all of the Assignors are collectively
referred to as the "ASSIGNORS"); and (ii) KEYBANK NATIONAL ASSOCIATION, a
national banking association, as collateral agent (herein, together with its
successors and assigns in such capacity, the "COLLATERAL AGENT"), for the
benefit of the Secured Creditors (as defined below):
PRELIMINARY STATEMENTS:
(1) Except as otherwise defined herein, terms used herein and defined
in the Credit Agreement (as defined below) shall be used herein as therein
defined. Certain terms are defined in section 1 hereof.
(2) This Agreement is made pursuant to the Credit Agreement, dated as
of June 1, 1998, as amended by Amendment No. 1 thereto, dated as of July 13,
1998, Amendment No. 2 thereto, dated as of March 3, 1999, and Amendment No. 3
thereto, dated as of August 3, 1999 (herein, as so amended and as hereafter
amended or otherwise modified, restated or replaced from time to time, the
"CREDIT AGREEMENT"), among the Borrower, the financial institutions named as
lenders therein (herein, together with their successors and assigns, the
"LENDERS"), and KeyBank National Association, as the Administrative Agent (the
"ADMINISTRATIVE AGENT") for the Lenders under the Credit Agreement.
(3) The Credit Agreement provides, among other things, for loans or
advances or other extensions of credit to or for the benefit of the Borrower of
up to $235,000,000, with such loans or advances being evidenced by promissory
notes (the "NOTES", such term to include all notes and other securities issued
in exchange therefor or in replacement thereof). The Credit Agreement also
provides that one or more Letter of Credit Issuers may issue Letters of Credit
for the benefit of the Borrower and/or any of its Subsidiaries, and that the
Lenders will risk participate in such Letters of Credit.
(4) The Borrower or any of its Subsidiaries may from time to time be
party to one or more Designated Hedge Agreements (as defined in the Credit
Agreement) and other Designated Hedge Documents (as defined herein). Any
institution or other person that participates, and in each case their successors
and assigns, as a counterpart to the Borrower or any of its Subsidiaries or
Affiliates pursuant to any Designated Hedge Document is referred to herein
individually as a "DESIGNATED HEDGE CREDITOR" and collectively as the
"DESIGNATED HEDGE CREDITORS".
(5) This Agreement is made for the benefit of the Administrative
Agent, the Collateral Agent, each Letter of Credit Issuer, the Lenders and the
Designated Hedge Creditors (any or all of the foregoing, together with their
respective successors and assigns, individually a "SECURED CREDITOR" and
collectively, the "SECURED CREDITORS").
(6) Pursuant to the Subsidiary Guaranty, each Subsidiary Guarantor
has jointly and severally guaranteed to the Secured Creditors the payment when
due of the Guaranteed Obligations (as defined in the Subsidiary Guaranty). The
Subsidiary Guaranty and this Agreement are each a Credit Document.
(7) It is a condition precedent to the making of Loans and the
issuance of, and participation in, Letters of Credit under the Credit Agreement
that each Assignor shall have executed and delivered to the Collateral Agent
this Agreement.
(8) Each Assignor will obtain benefits from the incurrence of the
Credit Document Obligations and the Designated Hedge Document Obligations (as
such terms are hereafter defined) and, accordingly, desires to execute this
Agreement in order to satisfy the condition described in the preceding paragraph
and to induce the Secured Creditors to extend the Credit Document Obligations
and the Designated Hedge Document Obligations.
NOW, THEREFORE, in consideration of the benefit accruing to each
Assignor, the receipt and sufficiency of which are hereby acknowledged, each
Assignor hereby makes the following representations and warranties to the
<PAGE> 3
Collateral Agent and the other Secured Creditors and hereby covenants and agrees
with the Collateral Agent and the other Secured Creditors as follows:
1. DEFINITIONS AND TERMS.
1.1. DEFINED TERMS. Except as otherwise defined herein, terms used
herein and defined in the Credit Agreement shall be used herein as therein
defined. The following terms shall have the meanings herein specified unless the
context otherwise requires:
"ACCOUNT" shall mean any "account", as such term is now or hereafter
defined in the UCC.
"ACCOUNT DEBTOR" shall mean any "account debtor", as such term is now
or hereafter defined in the UCC.
"ACCOUNTS RECEIVABLE" shall mean (i) all Accounts, now existing or
hereafter arising; and (ii) without limitation of the foregoing, in any event
shall include, but shall not be limited to, (1) all right to a payment, whether
or not earned by performance, for Goods or other property (other than money)
that has been or is to be sold, consigned, leased, licensed, assigned or
otherwise disposed of, for services rendered or to be rendered, for a policy of
insurance issued or to be issued, for a suretyship obligation incurred or to be
incurred, for energy provided or to be provided, or for the use or hire of a
vessel under a charter or other contract whether due or to become due, whether
or not it has been earned by performance, and whether now existing or hereafter
acquired or arising in the future, including Accounts Receivable from employees
and Affiliates of any Assignor, (2) all rights evidenced by an Account, invoice,
purchase order, requisition, bill of exchange, note, contract, security
agreement, lease, chattel paper, or any evidence of indebtedness or security
related to the foregoing, (3) all security pledged, assigned, hypothecated or
granted to or held by an Assignor to secure the foregoing, (4) all guarantees,
letters of credit, banker's acceptances, drafts, endorsements, credit insurance
and indemnifications on, for or of, any of the foregoing, including all rights
to make drawings, claims or demands for payment thereunder, and (5) all powers
of attorney for the execution of any evidence of indebtedness, guaranty, letter
of credit or security or other writing in connection therewith.
"AGREEMENT" shall mean this Security Agreement as the same may be
modified, supplemented or amended from time to time in accordance with its
terms.
"AS-EXTRACTED COLLATERAL" shall mean any "as-extracted collateral", as
such term is now or hereafter defined in the UCC.
"ASSIGNOR" shall have the meaning specified in the first paragraph of
this Agreement.
"BLOCKED ACCOUNT AGREEMENT" shall mean an agreement, satisfactory in
form and substance to the Collateral Agent, among an Assignor, the Collateral
Agent and the financial institution in which an Assignor has a Deposit Account,
pursuant to which, among other things, (i) the Collateral Agent shall have sole
dominion and control over all funds held to the credit of, and all disbursements
from, such Deposit Account, and (y) all of the funds on deposit in such Deposit
Account (other than, in the discretion of the Collateral Agent, balances of
$1,000 or less) shall be transferred to the Collateral Concentration Account on
a daily or other basis specified by the Collateral Agent.
"BLOCKED DEPOSIT ACCOUNT" shall mean a Deposit Account subject to a
Blocked Account Agreement.
"BUSINESS DAY" means any day excluding Saturday, Sunday and any day
which shall be at the Payment Office of the Administrative Agent a legal holiday
or a day on which banking institutions are authorized by law to close.
"CHATTEL PAPER" shall mean any "chattel paper", as such term is now or
hereafter defined in the UCC.
"COLLATERAL" shall have the meaning provided in section 2.1.
"COLLATERAL AGENT" shall have the meaning specified in the first
paragraph of this Agreement.
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"COLLATERAL CONCENTRATION ACCOUNT" shall mean a cash collateral Deposit
Account established in the name of the Collateral Agent, and under the sole
dominion and control of the Collateral Agent, for the benefit of the Secured
Creditors, at an office of the Administrative Agent.
"CONTRACT RIGHTS" shall mean all rights of an Assignor under or in
respect of a Contract, including, without limitation, all rights to payment,
damages, liquidated damages, and enforcement.
"CONTRACTS" shall mean all contracts between an Assignor and one or
more additional parties.
"COPYRIGHTS" shall mean any U.S. copyright to which an Assignor now or
hereafter has title, as well as any application for a U.S. copyright hereafter
made by such Assignor.
"CREDIT AGREEMENT" shall have the meaning provided in the Preliminary
Statements of this Agreement.
"CREDIT DOCUMENT OBLIGATIONS" shall mean and include:
(i) the principal of and interest on the Notes issued by,
and the Loans made to, the Borrower under the Credit Agreement,
(ii) all reimbursement obligations and Unpaid Drawings with
respect to Letters of Credit issued under the Credit Agreement,
and
(iii) all other obligations and liabilities owing by the
Borrower and the other Credit Parties to the Administrative Agent,
the Collateral Agent, any Letter of Credit Issuer or any of the
Lenders under the Credit Agreement and the other Credit Documents
to which the Borrower or any other Credit Party is now or may
hereafter become a party (including, without limitation,
indemnities, Fees and other amounts payable thereunder), whether
primary, secondary, direct, contingent, fixed or otherwise,
in all cases whether now existing, or hereafter incurred or arising, including
any such interest or other amounts incurred or arising during the pendency of
any bankruptcy, insolvency, reorganization, receivership or similar proceeding,
regardless of whether allowed or allowable in such proceeding or subject to an
automatic stay under section 362(a) of the Bankruptcy Code.
"DEPOSIT ACCOUNT" shall mean any "deposit account", as such term is now
or hereafter defined in the UCC.
"DESIGNATED HEDGE DOCUMENT" shall mean and include (i) each Designated
Hedge Agreement to which the Borrower or any of its Subsidiaries or Affiliates
is now or may hereafter become a party, and (ii) each confirmation, transaction
statement or other document executed and delivered in connection therewith to
which the Borrower or any of its Subsidiaries or Affiliates is now or may
hereafter become a party.
"DESIGNATED HEDGE DOCUMENT OBLIGATIONS" shall mean and include all
obligations and liabilities owing by the Borrower or any of its Subsidiaries or
Affiliates under all existing and future Designated Hedge Documents, in all
cases whether now existing, or hereafter incurred or arising, including any such
amounts incurred or arising during the pendency of any bankruptcy, insolvency,
reorganization, receivership or similar proceeding, regardless of whether
allowed or allowable in such proceeding or subject to an automatic stay under
section 362(a) of the Bankruptcy Code.
"DESIGNATED HEDGE CREDITORS" shall have the meaning provided in the
Preliminary Statements of this Agreement.
"DOCUMENT" shall mean any "document", as such term is now or hereafter
defined in the UCC.
"EQUIPMENT" shall mean any "equipment", as such term is now or
hereafter defined in the UCC.
"EVENT OF DEFAULT" shall mean any Event of Default under, and as
defined in, the Credit Agreement, or any payment default, after any applicable
grace period, under any Designated Hedge Document.
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"FIXTURES" shall mean any "fixtures", as such term is now or hereafter
defined in the UCC.
"GENERAL INTANGIBLES" shall mean any "general intangibles", as such
term is now or hereafter defined in the UCC.
"GOODS" shall mean any "goods", as such term is now or hereafter
defined in the UCC.
"INSTRUMENT" shall mean any "instrument", as such term is now or
hereafter defined in the UCC.
"INVENTORY" shall mean (i) any "inventory", as such term is now or
hereafter defined in the UCC; and (ii) without limitation of the foregoing, in
any event shall include, but shall not be limited to, all merchandise and other
Goods held for sale or lease, or furnished or to be furnished under contracts
for service, including, without limitation, (1) raw materials, (2) work in
process, (3) finished goods, (4) products made or processed, (5) intermediates,
(6) packing materials, (7) shipping materials, (8) labels, (9) semi-finished
inventory, (10) scrap inventory, (11) spare parts inventory, (12) manufacturing
supplies, (13) consumable supplies, (14) other substances commingled therewith
or added thereto, and (15) all such Goods that have been returned, reclaimed,
repossessed or exchanged.
"INVESTMENT PROPERTY" shall mean any "investment property", as such
term is now or hereafter defined in the UCC.
"LENDER" shall have the meaning provided in the Preliminary Statements
of this Agreement.
"MARKS" shall mean any trademarks and service marks now held or
hereafter acquired by an Assignor, which are registered in the United States
Patent and Trademark Office, as well as any unregistered marks used by an
Assignor in the United States and trade dress including logos and/or designs in
connection with which any of these registered or unregistered marks are used.
"MINERALS" shall mean any "minerals", as such term is now or hereafter
defined in the UCC.
"MONEY" shall mean any "money", as such term is now or hereafter
defined in the UCC.
"PATENTS" shall mean any U.S. patent to which an Assignor now or
hereafter has title, as well as any application for a U.S. patent now or
hereafter made by an Assignor.
"PERMITS" shall mean all licenses, permits, rights, orders, variances,
franchises or authorizations of or from any governmental authority or agency.
"PROCEEDS" shall mean (i) any "proceeds", as such term is now or
hereafter defined in the UCC; and (ii) without limitation of the foregoing, in
any event, shall include, but not be limited to, (1) whatever is acquired upon
the sale, lease, license, exchange, or other disposition of any Collateral, (2)
whatever is collected on, or distributed on account of, any Collateral, (3)
rights arising out of any Collateral, (4) claims arising out of the loss or
nonconformity of, defects in, or damage to any Collateral, (5) claims and rights
to any proceeds of any insurance, indemnity, warranty or guaranty payable to an
Assignor (or the Collateral Agent, as assignee, loss payee or an additional
insured) with respect to any of the Collateral, (6) claims and rights to
payments (in any form whatsoever) made or due and payable to an Assignor from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any governmental
authority (or any person acting under color of governmental authority), (7) all
cash, money, checks and negotiable instruments received or held on behalf of the
Collateral Agent pursuant to any lockbox or similar arrangement relating to the
payment of Accounts Receivable or other Collateral, and (8) any and all other
amounts from time to time paid or payable under or in connection with any of the
Collateral.
"PRODUCTS" shall mean any "products", as such term is now or hereafter
defined in the UCC.
"PROPRIETARY INFORMATION" means all information and know-how worldwide,
including, without limitation, technical data; manufacturing data; research and
development data; data relating to compositions, processes and formulations,
manufacturing and production know-how and experience; management know-how;
training programs;
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<PAGE> 6
manufacturing, engineering and other drawings; specifications; performance
criteria; operating instructions; maintenance manuals; technology; technical
information; software; computer programs; engineering and computer data and
databases; design and engineering specifications; catalogs; promotional
literature; financial, business and marketing plans; inventions and invention
disclosures.
"SECURED CREDITORS" shall have the meaning provided in the Preliminary
Statements of this Agreement.
"SECURED OBLIGATIONS" shall mean and include
(i) in the case of the Borrower as one of the Assignors,
(A) its primary obligations in respect of all Credit Document
Obligations as to which it is a primary obligor; (B) its surety
obligations as a guarantor in respect of all Credit Document
Obligations as to which any of its Subsidiaries or Affiliates is a
primary obligor; (C) its primary obligations in respect of all
Designated Hedge Document Obligations as to which it is a primary
obligor; and (D) its surety obligations as a guarantor in respect
of all Designated Hedge Document Obligations as to which any of
its Subsidiaries or Affiliates is a primary obligor;
(ii) in the case of any Subsidiary Guarantor as one of the
Assignors, (A) its primary obligations in respect of all Credit
Document Obligations as to which it is a primary obligor; (B) its
surety obligations as a Subsidiary Guarantor under the Subsidiary
Guaranty; and (C) its primary obligations in respect of all
Designated Hedge Document Obligations as to which it is a primary
obligor;
(iii) in the case of any Assignor, any and all sums
advanced by the Collateral Agent in compliance with the provisions
of this Agreement or any of the other Credit Documents in order to
preserve the Collateral of such Assignor or to preserve or protect
its Security Interest in such Collateral, including, without
limitation, sums advanced to pay or discharge insurance premiums,
taxes, Liens and claims; and
(iv) in the case of any Assignor, in the event of any
proceeding for the collection or enforcement of any indebtedness,
obligations, or liabilities of such Assignor referred to in
clauses (i), (ii) and (iii) above, after an Event of Default shall
have occurred and be continuing, the reasonable expenses of
re-taking, holding, preparing for sale or lease, selling or
otherwise disposing of or realizing on the Collateral of such
Assignor, or of any exercise by the Collateral Agent of its rights
hereunder in respect of such Assignor or its Collateral, together
with reasonable attorneys' fees and court costs.
"SECURITY INTEREST" shall mean the security interest granted by an
Assignor and/or by all Assignors, as applicable, pursuant to section 2.1 hereof.
"SIGNIFICANT MARK" shall have the meaning provided in section 6.3 of
this Agreement.
"SIGNIFICANT PATENT" shall have the meaning provided in section 7.3 of
this Agreement.
"TRADE SECRETS" means any secretly held existing engineering and other
data, information, production procedures and other know-how relating to the
design, manufacture, assembly, installation, use, operation, marketing, sale and
servicing of any products or business of an Assignor worldwide whether written
or not written.
"UCC" shall mean the Uniform Commercial Code, as at any time adopted
and in effect in any jurisdiction, specifically including and taking into
account all amendments, supplements, revisions and other modifications of the
Uniform Commercial Code which hereafter are adopted or otherwise take effect.
1.2 TERMS GENERALLY. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect
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<PAGE> 7
as the word "shall". Unless the context requires otherwise, any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
any reference herein to any person shall be construed to include such person's
successors and assigns, the words "herein", "hereof" and "hereunder", and words
of similar import, shall be construed to refer to this Agreement in its entirety
and not to any particular provision hereof, and unless otherwise specified, all
references herein to sections, Annexes and Exhibits shall be construed to refer
to sections of, and Annexes and Exhibits to, this Agreement.
2. SECURITY INTERESTS.
2.1. GRANT OF SECURITY INTERESTS. As security for the prompt and
complete payment and performance when due of the Secured Obligations, each
Assignor does hereby sell, assign and transfer unto the Collateral Agent, and
does hereby grant to the Collateral Agent, for the benefit of the Secured
Creditors, a continuing security interest in, all of the right, title and
interest of such Assignor in, to and under all of the following, whether now
existing or hereafter from time to time arising or acquired and wherever located
(collectively, the "COLLATERAL"):
(1) all Accounts, including, without limitation, each and every
Account Receivable;
(2) all Goods;
(3) all Inventory;
(4) all Equipment;
(5) all Documents;
(6) all Instruments;
(7) all Chattel Paper;
(8) all Money;
(9) the Collateral Concentration Account, all Blocked Deposit
Accounts, and all other Deposit Accounts, together with all monies,
securities and instruments at any time deposited in any such Account or
otherwise held for the credit thereof;
(10) all Investment Property;
(11) all Fixtures;
(12) all As-Extracted Collateral, including, without limitation,
all Minerals;
(13) all General Intangibles;
(14) all of each of the following: (A) all Contracts, together
with all Contract Rights arising thereunder; (B) all rights to any letter
of credit, including, without limitation, all rights to "proceeds of a
letter of credit", as such term is now or hereafter defined in the UCC;
(C) any "support obligation", as such term is now or hereafter defined in
the UCC; (D) all rights, claims and interests in or under any policy of
insurance; (E) any "commercial tort claim", as such term is now or
hereafter defined in the UCC; (F) any claim arising out of any other
tort; and (G) all rights represented by a judgment;
(15) all of each of the following: (A) all Marks, together with
the registrations and right to all renewals thereof, and the goodwill of
the business of such Assignor symbolized by the Marks; (B) all Patents
and Copyrights; (C) all computer programs and software of such Assignor
and all intellectual property rights
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<PAGE> 8
therein and all other Proprietary Information of such Assignor,
including, but not limited to, Trade Secrets; and (D) all Permits;
(16) all other items, kinds and types of personal property,
tangible or intangible, of whatever nature, whether similar or dissimilar
to any or all of the foregoing, and regardless of whether the creation or
perfection or effect of perfection or nonperfection of a security
interest therein is governed by the UCC of any particular jurisdiction or
by any other applicable treaty, convention, statute, law or regulation of
any applicable jurisdiction;
(17) all additions, modifications, alterations, improvements,
upgrades, accessions, components, parts, appurtenances, substitutions
and/or replacements of, to or for any of the foregoing; and
(18) all Proceeds and Products of any and all of the foregoing;
TO HAVE AND HOLD unto and be dealt with by the Collateral Agent, for the
benefit of the Secured Creditors, upon the terms and conditions set forth in
this Agreement;
PROVIDED, HOWEVER, that there is specifically excluded from the Security
Interest, and the term Collateral shall not include:
(A) any Investment Property or other related Collateral of an
Assignor that is subjected to the security interest of the Pledge
Agreement;
(B) any Equipment or Goods that is subject to a "purchase money
security interest", as such term is now or hereafter defined in the UCC,
which (x) constitutes a Permitted Lien under the Credit Agreement; and
(y) prohibits the creation by an Assignor of a junior security interest
therein, unless the holder thereof has consented to the creation of such
a junior security interest; or
(C) any Account, Account Receivable, Contract, Permit,
Proprietary Information or General Intangible, or the Proceeds or
Products of any of the foregoing, IF AND ONLY TO THE EXTENT THAT:
(1) in the case of any such item of Collateral, (x) any
Contract evidencing such item of Collateral contains a valid and
effective contractual restriction or limitation which prohibits
the grant or creation of a security interest therein, or (y) a
valid and effective restriction or limitation imposed by
applicable law, regulation, rule, order or other directive of any
governmental body, agency or authority, or the order of any court
of competent jurisdiction, prohibits the grant or creation of a
security interest in such item of Collateral, or
(2) in the case of any such item of Collateral, such item
of Collateral would be subject to loss or forfeiture upon the
grant or creation of a security interest therein by reason of (x)
a valid and effective contractual restriction or limitation
contained in any Contract evidencing such item of Collateral, or
(y) a valid and effective restriction or limitation imposed by
applicable law, regulation, rule, order or other directive of any
governmental body, agency or authority, or the order of any court
of competent jurisdiction.
The inclusion of any item or type of property in any of the foregoing
clauses or in any of the defined terms used therein does not imply the exclusion
of such item or type of property from any of the other clauses of this section
2.1 or any of the definitions used in such clauses. The Security Interest of the
Collateral Agent under this Agreement extends to all Collateral of any kind
and/or nature which any Assignor may acquire at any time during the continuation
of this Agreement.
2.2. NO ASSUMPTION OF LIABILITY. The Security Interest of any Assignor is
granted as security only and shall not subject the Collateral Agent or any other
Secured Creditor to, or in any way alter or modify, any obligation or liability
of such Assignor with respect to or arising out of any of the Collateral.
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2.3. POWER OF ATTORNEY. Each Assignor hereby irrevocably constitutes and
appoints the Collateral Agent its true and lawful agent and attorney-in-fact,
after the occurrence of and during the continuance of an Event of Default, and
in such capacity the Collateral Agent shall have the right, with full power of
substitution, in the name of such Assignor or otherwise, for the use and benefit
of the Collateral Agent and the other Secured Creditors, but subject to any
mandatory requirements or limitations of applicable law at the time in effect,
to receive, endorse, present, assign, deliver and/or otherwise deal with any and
all notes, acceptances, letters of credit, checks, drafts, money orders, or
other evidences of payment relating to the Collateral of such Assignor or any
part thereof; to demand, collect, receive payment of, and give receipt for and
give credits, allowances, discounts, discharges, releases and acquittances of
and for any or all of the Collateral of such Assignor; to sign the name of such
Assignor on any invoice or bill of lading relating to any of the Collateral of
such Assignor; to send verifications of any or all of the Accounts Receivable of
such Assignor to its Account Debtors; to commence and prosecute any and all
suits, actions or proceedings at law or in equity in or before any court or
other tribunal (including any arbitration proceedings) to collect or otherwise
realize on all or any of the Collateral of such Assignor, or to enforce any
rights of such Assignor in respect of any of its Collateral; to settle,
compromise, compound, adjust or defend any actions, suits or proceedings
relating to any or all of the Collateral of such Assignor; to notify, or require
such Assignor to notify or cause to be notified, its Account Debtors to make
payment directly to the Collateral Agent or to a Blocked Deposit Account; and/or
to use, sell, assign, transfer, pledge, make any agreement with respect to or
otherwise deal with any or all of the Collateral of such Assignor, and to do all
other acts and things necessary or appropriate to carry out the intent and
purposes of this Agreement, as fully and completely as though the Collateral
Agent were the absolute owner of the Collateral of such Assignor for all
purposes; PROVIDED, HOWEVER, that nothing herein contained shall be construed as
requiring or obligating the Collateral Agent or any other Secured Creditor to
make any commitment or to make any inquiry as to the nature or sufficiency of
any payment received by the Collateral Agent or any other Secured Creditor, or
to present or file any claim or notice, or to take any action with respect to
the Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby, and no action taken or omitted to be
taken by the Collateral Agent or any other Secured Creditor with respect to the
Collateral or any part thereof shall give rise to any defense, counterclaim or
offset in favor of any Assignor or to any claim or action against the Collateral
Agent or any other Secured Creditor. It is understood and agreed that the
appointment of the Collateral Agent as the agent and attorney-in-fact of each of
the Assignors for the purposes set forth above is a presently effective
appointment, is coupled with an interest and is irrevocable. The provisions of
this section shall in no event relieve any Assignor of any of its obligations
under this Agreement or any of the other Credit Documents with respect to the
Collateral or any part thereof or impose any obligation on the Collateral Agent
or any other Secured Creditor to proceed in any particular manner with respect
to the Collateral or any part thereof, or in any way limit the exercise by the
Collateral Agent or any other Secured Creditor of any other or further right it
may have on the date of this Agreement or hereafter, whether hereunder, under
any other Credit Document, by law or otherwise.
3. REPRESENTATIONS AND WARRANTIES.
Each Assignor represents and warrants to the Collateral Agent and the
other Secured Creditors, which representations and warranties shall survive
execution and delivery of this Agreement, as follows:
3.1. AUTHORITY. Such Assignor has full organizational power and authority
to grant to the Collateral Agent the Security Interest in such Collateral
pursuant hereto and to execute, deliver and perform its obligations in
accordance with the terms of this Agreement.
3.2 ABSENCE OF OTHER LIENS, ETC. There is no financing statement (or
similar statement or instrument of registration under the law of any
jurisdiction) covering or purporting to cover any interest of any kind of such
Assignor in the Collateral, EXCEPT as disclosed in Annex A hereto (the
"PERMITTED FILINGS"), and for financing statements and continuation statements
filed to perfect or continue the perfection of the Security Interest.
(b) Such Assignor has, and as to any Collateral acquired by it from time
to time after the date hereof such Assignor will have, (i) good title to all
tangible items of Collateral owned by it (except for any items which in the
aggregate are of immaterial value in regard to the Collateral of all Assignors
considered as an entirety), and (ii) good and sufficient rights in all other
items and types of its Collateral (except for any items which in the aggregate
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are of immaterial value in regard to the Collateral of all Assignors considered
as an entirety), in each case free and clear of any Lien, EXCEPT FOR Permitted
Liens.
3.3. EFFECTIVE AND ENFORCEABLE SECURITY INTEREST. The Security Interest
of such Assignor constitutes, as between such Assignor and the Collateral Agent,
an effective and enforceable security interest in all of the Collateral of such
Assignor, securing the payment and performance of the Secured Obligations.
3.4. PERFECTION OF SECURITY INTEREST UNDER UCC. All notifications and
other actions, including, without limitation,
(1) all deposits of certificates and instruments evidencing any
Collateral (duly endorsed or accompanied by appropriate instruments of
transfer),
(2) all notices to and acknowledgments of any bailee or other
person,
(3) all acknowledgments and agreements respecting the right of the
Collateral Agent to "control" any Collateral, as such term is now or
hereafter defined in the UCC, and
(4) all filings, registrations and recordings,
which are (x) required by the terms of this Agreement to have been given, made,
obtained, done and accomplished, and (y) necessary to create, preserve, protect
and perfect the Security Interest granted by such Assignor to the Collateral
Agent hereby in respect of its portion of the Collateral, have been given, made,
obtained, done and accomplished.
(b) After giving effect to all such actions, the Security Interest
granted by such Assignor to the Collateral Agent pursuant to this Agreement in
and to its portion of the Collateral will be perfected, to the extent a security
interest in such Assignor's portion of the Collateral can be perfected under the
UCC of any applicable jurisdiction.
3.5. PLACES OF BUSINESS, LOCATIONS OF COLLATERAL, ETC. At and as of the
date hereof, the principal place of business of such Assignor, or its chief
executive office (and the registered office of any Assignor which is a
corporation) if it has more than one place of business, is located at the
address indicated on Annex B hereto; the U.S. Federal Tax I.D. Number of such
Assignor is set forth on Annex B hereto; and all Inventory and Equipment of such
Assignor is located at one of the locations shown on Annex C attached hereto.
4. GENERAL COVENANTS.
4.1. NO OTHER LIENS; DEFENSE OF TITLE, ETC. No Assignor will make or
grant, or suffer or permit to exist, any Lien on any of its Collateral, OTHER
than the Permitted Liens.
(b) Each Assignor, at its sole cost and expense, will take any and all
actions reasonably necessary to defend title to its Collateral against any and
all persons and to defend the validity, perfection, effectiveness and priority
of the Security Interest of the Collateral Agent therein against any Lien other
than Permitted Liens.
4.2. FURTHER ASSURANCES; FILINGS AND RECORDINGS, ETC. Each Assignor, at
its sole cost and expense, will duly execute, acknowledge and deliver all such
agreements, instruments and other documents and take all such actions
(including, without limitation, (1) physically pledging Instruments, Documents,
Chattel Paper and certificates evidencing Investment Property, with the
Collateral Agent, (2) obtaining from other persons Blocked Account Agreements in
accordance with section 5.2(a), (3) obtaining from other persons lien waivers
and bailee letters in accordance with section 4.4(c), (4) obtaining from other
persons agreements evidencing the exclusive control and dominion of the
Collateral Agent over any Investment Property, in instances where confirmation
of the "control" of the Collateral Agent over the particular Investment Property
is required in order to perfect a security interest therein and such actions are
required under the circumstances contemplated by section 4.2(e)(iv),and (5)
making filings, recordings and registrations), as the Collateral Agent may from
time to time request in order to better assure, preserve, protect and perfect
the Security Interest of the Collateral Agent in the Collateral of such
Assignor, and the
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rights and remedies of the Collateral Agent hereunder, or otherwise to further
effectuate the intent and purposes of this Agreement and to carry out the terms
hereof.
(b) Each Assignor, at its sole cost and expense, will at all times cause
this Agreement (and/or proper notices, financing or other statements in respect
hereof, and supplemental collateral assignments or collateral security
agreements in respect of any portion of the Collateral) to be duly filed,
recorded, registered and published, and re-filed, re-recorded, re-registered and
re-published in such manner and in such places as may be required under the UCC
or other applicable law in order to establish, perfect, preserve and protect the
rights, remedies and Security Interest of the Collateral Agent in or with
respect to the Collateral of such Assignor, and pay all taxes, fees and charges
and comply with all statutes and regulations, applicable to such filing,
recording, registration and publishing and such re-filing, re-recording,
re-registration and re-publishing. Each Assignor irrevocably authorizes the
Collateral Agent to file any financing statements with respect to the Collateral
of such Assignor without the signature of such Assignor where the Collateral
Agent is permitted by applicable law to do so.
(c) When requested from time to time by the Collateral Agent to do so,
each Assignor will promptly furnish to the Collateral Agent such information
concerning itself and the location of its Collateral, in order that the
Collateral Agent may determine whether all filings, recordings and registrations
have been made in all jurisdictions in which such filing, recording or
registration is necessary under the UCC or other applicable law in order to
establish, perfect, preserve and protect the rights, remedies and Security
Interest of the Collateral Agent in or with respect to the Collateral of such
Assignor.
(d) When requested from time to time by the Collateral Agent to do so,
each Assignor will promptly furnish to the Collateral Agent such information and
copies of documents as may be requested concerning any item or type of
Collateral as to which a security interest may not be perfected by the filing of
a financing statement under the UCC of any applicable jurisdiction, in order
that the Collateral Agent may determine whether to require such Assignor to take
any actions under section 4.2(a) with regard thereto.
(e) Notwithstanding the foregoing or anything to the contrary contained
in this Agreement:
(i) no Assignor shall be required to file any UCC financing
statement as a "fixture filing" which includes the legal description of
any real property, in order to perfect the Security Interest in any
Fixtures included in the Collateral, unless and until required to do so
on not less than 15 days' prior written notice from the Collateral Agent
to such effect (such notice to be given by the Collateral Agent only upon
written instructions from the Required Lenders, issued by the Required
Lenders, in their sole respective discretion, following review of any
monthly, quarterly or annual financial information regarding the Borrower
and its Subsidiaries which is furnished pursuant to section 8.1 of the
Credit Agreement for any period subsequent to June 30, 1999);
(ii) no Assignor shall be required to file this Agreement or any
separate collateral document with the United States Patent and Trademark
Office or with the United States Copyright Office, in order to perfect
the Security Interest in any Patents, Trademarks, Copyrights or similar
Collateral, unless and until required to do so on not less than 10 days'
prior written notice from the Collateral Agent to such effect (such
notice to be given by the Collateral Agent only upon written instructions
from the Required Lenders, issued by the Required Lenders, in their sole
respective discretion, following review of any monthly, quarterly or
annual financial information regarding the Borrower and its Subsidiaries
which is furnished pursuant to section 8.1 of the Credit Agreement for
any period subsequent to June 30, 1999);
(iii) an Assignor shall not be obligated to physically deliver
to, or deposit with, the Collateral Agent, any of its Collateral in order
to perfect the Security Interest therein unless and until the Collateral
Agent shall have given such Assignor written notice requiring the same to
be done (such notice to be given by the Collateral Agent only upon
written instructions from the Required Lenders, issued by the Required
Lenders, in their sole respective discretion, following review of any
monthly, quarterly or annual financial information regarding the Borrower
and its Subsidiaries which is furnished pursuant to section 8.1 of the
Credit Agreement for any period subsequent to June 30, 1999), and if any
such notice is given the applicable Assignor will immediately, and in any
event within two Business Days following its receipt of such notice,
effect such deposit with or delivery to the Collateral Agent; and
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(iv) an Assignor shall not be obligated to obtain an agreement
evidencing the exclusive control of the Collateral Agent over any of its
Investment Property in order to perfect the Security Interest therein
unless and until the Collateral Agent shall have given such Assignor
written notice requiring the same to be done (such notice to be given by
the Collateral Agent only upon written instructions from the Required
Lenders, issued by the Required Lenders, in their sole respective
discretion, following review of any monthly, quarterly or annual
financial information regarding the Borrower and its Subsidiaries which
is furnished pursuant to section 8.1 of the Credit Agreement for any
period subsequent to June 30, 1999), and if any such notice is given the
applicable Assignor will promptly, and in any event within 10 Business
Days following its receipt of such notice, obtain and deliver any such
agreement to the Collateral Agent.
4.3. CONTINUING OBLIGATIONS OF THE ASSIGNORS IN RESPECT OF THE
COLLATERAL. Each Assignor shall remain liable to duly pay, observe, perform and
satisfy all of the obligations, terms, covenants, provisions and conditions to
be paid, observed, performed and satisfied by it under each contract, agreement
and instrument relating to its Collateral, all in accordance with the terms,
covenants, provisions and conditions thereof, and each Assignor will indemnify
and hold harmless the Collateral Agent and the other Secured Creditors from and
against any and all loss, liability, cost, expense or claim in any way relating
to or arising therefrom.
4.4 USE AND DISPOSITION OF THE COLLATERAL. Unless and until an Event of
Default shall have occurred and be continuing and the Collateral Agent shall
have notified the Assignors thereof in writing and that the rights of any or all
of the Assignors under this section 4.4(a) are suspended during the continuance
of such Event of Default, an Assignor may use and dispose of its Collateral in
any lawful manner not inconsistent with the provisions of this Agreement, the
Credit Agreement or any other Credit Documents.
(b) No Assignor will consign any of its Inventory to any person unless
all filings of financing statements under the UCC and other actions and filings,
registrations and recordings required under other applicable laws have been made
in order to perfect the rights and interests of such Assignor in the consigned
Inventory against creditors of and purchasers from the consignee; PROVIDED that
unless and until the Collateral Agent shall have notified the Assignors in
writing to the contrary (which notice may be given by the Collateral Agent only
upon the written instructions of the Required Lenders, issued by the Required
Lenders, in their sole respective discretion, following review of any monthly,
quarterly or annual financial information regarding the Borrower and its
Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement
for any period subsequent to June 30, 1999), no Assignor shall be required to
comply with this section 4.4(b) until the aggregate book value of all Inventory
consigned by the Assignors exceeds $500,000.
(c) If so requested by the Collateral Agent in a written notice to an
Assignor (which notice may be given by the Collateral Agent only upon written
instructions from the Required Lenders, issued by the Required Lenders, in their
sole respective discretion, following review of any monthly, quarterly or annual
financial information regarding the Borrower and its Subsidiaries which is
furnished pursuant to section 8.1 of the Credit Agreement for any period
subsequent to June 30, 1999),
(i) commencing 30 days after any such notice is received by such
Assignor, such Assignor will not thereafter permit any of its Inventory
or Equipment having a value in excess of $100,000 (or such larger amount
as shall be acceptable to the Collateral Agent, in its discretion) to be
in the possession or control of any single warehouseman, bailee,
processor, supplier or agent at any time, UNLESS such warehouseman,
bailee, processor, supplier or agent shall have been notified of the
Security Interest and shall have agreed in writing to hold such
Collateral subject to the Security Interest and the instructions of the
Collateral Agent and to waive and release any Lien held by it with
respect to such Collateral, whether arising by operation of law or
otherwise; and
(ii) commencing 30 days after any such notice is received by such
Assignor, such Assignor will not thereafter permit any of its Inventory
or Equipment having a value in excess of $100,000 (or such larger amount
as shall be acceptable to the Collateral Agent, in its discretion) to be
located on any leased property at any time, UNLESS the landlord shall
have been notified of the Security Interest, shall have agreed in writing
to waive and release any Lien held by it with respect to such Collateral,
whether arising by operation of law or otherwise, and shall have granted
the Collateral Agent such reasonable access and cure rights with respect
to such leased property and lease as the Collateral Agent may reasonably
require.
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4.5. DELIVERY OR MARKING OF CHATTEL PAPER; ASSIGNMENT OF SECURITY FROM
ACCOUNT DEBTORS AND CONSIGNMENTS; ETC. Without limitation of any of the
provisions of section 4.2(a) hereof:
(a) If any amount payable to an Assignor under or in connection
with any of the Collateral shall be or become evidenced by any Chattel
Paper, Document or Instrument, such Assignor will, if requested by the
Collateral Agent (which request may be made by the Collateral Agent only
upon the written instructions of the Required Lenders, issued by the
Required Lenders, in their sole respective discretion, following review
of any monthly, quarterly or annual financial information regarding the
Borrower and its Subsidiaries which is furnished pursuant to section 8.1
of the Credit Agreement for any period subsequent to June 30, 1999),
cause such Chattel Paper, Document or Instrument to be delivered to the
Collateral Agent and pledged as part of the Collateral hereunder,
accompanied by any appropriate instruments or endorsements or transfer.
In the case of any Chattel Paper, the Collateral Agent may require, in
lieu of the delivery thereof to the Collateral Agent, that the writings
evidencing the Chattel Paper be legended to reflect the Security Interest
of the Collateral Agent therein, all in a manner acceptable to the
Collateral Agent.
(b) If at any time any Assignor shall take and perfect a security
interest in any property of an Account Debtor, as security for the
Accounts Receivable owed by such Account Debtor and/or any of its
Affiliates, or take and perfect a security interest arising out of the
consignment to any person of any Inventory or other Collateral, such
Assignor shall, if requested by the Collateral Agent (which request may
be made by the Collateral Agent only upon the written instructions of the
Required Lenders, issued by the Required Lenders, in their sole
respective discretion, following review of any monthly, quarterly or
annual financial information regarding the Borrower and its Subsidiaries
which is furnished pursuant to section 8.1 of the Credit Agreement for
any period subsequent to June 30, 1999), promptly execute and deliver to
the Collateral Agent a separate assignment of all financing statements
and other filings made to perfect the same. Such separate assignment need
not be filed of public record unless necessary to continue the perfected
status of the security interest of such Assignor against creditors of any
transferees from the Account Debtor or consignee.
4.6. MODIFICATION OF TERMS OF ACCOUNTS AND CONTRACTS, ETC. No Assignor
will enter into any material modification of the terms or provisions of any of
its Accounts Receivable or Contracts, or grant any extension of time for the
payment of any of its Accounts Receivable or Contracts, or compromise or settle
the same for less than the full amount thereof, or release, wholly or partially,
any person liable for the payment thereof or any guaranty, letter of credit,
collateral or other obligation supporting or securing the payment thereof, or
allow any credit or discount whatsoever thereon, OTHER than modifications,
extensions, compromises, settlements, credits and discounts granted or made in
the ordinary course of the business of the Assignors (considered as an entirety)
or in accordance with reasonable business judgment of an Assignor (considered in
light of the business of the Assignors as an entirety) when the Collateral Agent
is not exercising its rights under section 8 hereof during the continuance of an
Event of Default.
4.7. MAINTENANCE OF RECORDS, ETC. Each Assignor will at its own cost and
expense keep proper books of record and account, in which full and correct
entries shall be made with respect to all assets comprising its Collateral and
of all financial transactions relating thereto, in accordance with GAAP, in the
case of the Borrower as an Assignor, or which are reconcilable to GAAP, in the
case of any other Assignor. All billings and invoices issued by an Assignor with
respect to its Accounts Receivable will, in all material respects, be in
compliance with and conform to the requirements of all applicable federal, state
and local laws and any applicable laws of any relevant foreign jurisdiction. If
an Event of Default shall have occurred and be continuing and the Collateral
Agent so directs, each Assignor shall legend, in form and manner reasonably
satisfactory to the Collateral Agent, its Accounts Receivable and Contracts, as
well as books, records and documents of such Assignor evidencing or pertaining
thereto with an appropriate reference to the fact that such Accounts Receivable
and Contracts have been assigned to the Collateral Agent and that the Collateral
Agent has a security interest therein.
4.8. COLLATERAL REPORTS. Whenever requested to do so by the Collateral
Agent, each Assignor will promptly, at its own sole cost and expense, deliver to
the Collateral Agent, in written hard copy form or on magnetic tape or other
computer or machine readable form, as specified by the Collateral Agent, such
listings, agings, descriptions, schedules and other reports with respect to its
Accounts Receivable, Inventory, Equipment and other Collateral as the Collateral
Agent may reasonably request, all of the same to be in such scope, categories
and detail
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as the Collateral Agent may have reasonably requested and to be accompanied by
copies of invoices and other documentation as and to the extent reasonably
requested by the Collateral Agent.
4.9. INSPECTIONS AND VERIFICATION. The Collateral Agent and such persons
as the Collateral Agent may reasonably designate shall have the right, at any
Assignor's own cost and expense, to inspect the Collateral of such Assignor, all
books and records related thereto (and to make extracts and copies thereof) and
the premises upon which any of such Collateral is located, to discuss such
Assignor's affairs with the officers of such Assignor and its independent
accountants, and to verify under reasonable procedures the validity, amount,
quality, quantity, value, condition and status of, or any other matter relating
to, such Collateral, including, in the case of Accounts or other Collateral in
the possession of any third person, by contacting Account Debtors or the third
person possessing such Collateral (after not less than two days' prior notice to
the applicable Assignor) for the purpose of making such verification. Any
procedures or actions taken, prior to the occurrence and continuance of an Event
of Default, in order to verify Accounts by contacting Account Debtors, shall be
effected by the Borrower's independent accountants, acting at the direction of
the Collateral Agent, in such manner so as not to reveal the identity of the
Collateral Agent or the existence of the Security Interest to the Account
Debtors. The Borrower will instruct its independent accountants to undertake any
such verification when and as requested by the Collateral Agent, but not more
frequently than once in any 12 month period, unless an Event of Default shall
have occurred and be continuing, in which case more frequent verifications may
be required. The results of any such verification by independent accountants
shall be reported by such independent accountants to both the Collateral Agent
and the Borrower. In the event the Collateral Agent conducts at any premises of
an Assignor, through the use of its own audit or collateral monitoring staff
employees, any procedures to verify or analyze the validity, amount, quality,
quantity, value, condition or status of, or any other matter relating to, any
Collateral, the Collateral Agent shall be entitled to per diem compensation for
each staff employee so utilized at a rate specified by the Collateral Agent not
to exceed the rate then currently being charged for such employees for similar
examinations of collateral of other borrowers (which rate is currently $600 per
day per employee), and reimbursement of any out-of pocket travel expenses. The
aggregate compensation payable pursuant to the preceding sentence shall not
exceed $10,000 in any 12 month period, and there shall be not more than one
collateral monitoring examination by the Collateral Agent for which compensation
is payable pursuant to the preceding sentence in any 12 month period, in each
case unless an Event of Default shall have occurred and be continuing. The
Collateral Agent shall have the absolute right to share any information it gains
from any such inspection or verification or from collateral reports furnished to
it by an Assignor with the other Secured Creditors (it being understood that any
such information shall be subject to the confidentiality provisions of the
Credit Agreement).
4.10. PAYMENT OF TAXES AND CLAIMS. Each Assignor will pay and discharge
all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits, or upon any Collateral or other properties belonging
to it, prior to the date on which penalties attach thereto, and all lawful
claims which, if unpaid, might become a Lien or charge upon any of its
Collateral or any other properties belonging to it; provided that no Assignor
shall be required to pay any such tax, assessment, charge, levy or claim which
is being contested in good faith and by proper proceedings if it has maintained
adequate reserves with respect thereto in accordance with GAAP; and PROVIDED,
FURTHER, that an Assignor will not be considered to be in default of any of the
provisions of this sentence if such Assignor fails to pay any such amount which,
individually or in the aggregate, is immaterial. Without limiting the generality
of the foregoing, each Assignor will pay in full all of its wage obligations to
its employees in accordance with the Fair Labor Standards Act (29 U.S.C.
sections 206-207) and any comparable provisions of applicable law.
4.11. CONDITION OF COLLATERAL. Each Assignor will in all material
respects maintain (i) its Equipment in good condition, ordinary wear and tear
excepted, (ii) its finished goods Inventory in compliance with all applicable
legal requirements (including labeling laws and regulations) and industry
standards, and otherwise in good and saleable condition, and (iii) all other
tangible items of its Collateral, taken as an entirety, in such condition as is
consistent with good business practices, ordinary wear and tear excepted.
4.12. INSURANCE. Each Assignor, without any cost or expense to the
Collateral Agent or any other Secured Creditor, will at all times keep its
business and its Collateral insured against fire, theft, other casualties,
liability for damage to other persons or property, and other insurable risks, as
and to the extent contemplated by the Credit Agreement. Such insurance shall be
written by financially responsible companies selected by the applicable Assignor
and having an A.M. Best rating of "A-" or better and being in a financial size
category of "VII" or larger, or by other companies acceptable to the Collateral
Agent, and shall name the Collateral Agent as loss payee ( in the case of
casualty insurance) or as an additional named insured as its interests may
appear (in the case of liability insurance).
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Each policy referred to in this section shall provide that it will not be
canceled or reduced or expire except after not less than 30 days' written notice
to the Collateral Agent and shall also provide that the interests of the
Collateral Agent shall not be invalidated by an act or negligence of an Assignor
or any person having an interest in any facility owned, leased or used by an
Assignor nor by occupancy or use of any facility owned, leased or used by an
Assignor for purposes more hazardous than permitted by such policy nor by any
foreclosure or other proceedings relating to any facility owned, leased or used
by an Assignor. Each Assignor will advise the Collateral Agent promptly of any
policy cancellation, reduction or amendment. All of such insurance shall be
primary and non-contributing with any insurance which may be carried by the
Collateral Agent. At or prior to the time of the initial Borrowing under the
Credit Agreement, each Assignor will provide to the Collateral Agent (x)
certificates or endorsements naming the Collateral Agent as an additional
insured or loss payee with respect to the casualty and liability insurance
maintained as required hereby, and (y) if requested to do so, copies of all
insurance policies maintained by it as required hereby. Each Assignor shall
deliver to the Collateral Agent contemporaneously with the expiration or
replacement of any policy of insurance required to be maintained hereunder a
certificate as to the new or renewal policy.
4.13. PROCEEDS OF CASUALTY INSURANCE, CONDEMNATION OR TAKING. All amounts
recoverable under any policy of casualty insurance or any award for the
condemnation or taking by any governmental authority of any portion of the
Collateral are hereby assigned to the Collateral Agent.
(b) In the event any portion of the Collateral suffers a casualty loss or
is involved in any proceeding for condemnation or taking by any governmental
authority, THEN if an Event of Default has occurred and is continuing or if any
required prepayment of any of the Secured Obligations is required to be made at
such time or as a result thereof, the Collateral Agent is authorized and
empowered, at its option, to participate in, control, direct, adjust, settle
and/or compromise any such loss or proceeding, to collect and receive the
proceeds therefrom and, after deducting from such proceeds any expenses incurred
by it in connection with the collection or handling thereof, to apply the net
proceeds to the Secured Obligations in accordance with the provisions of the
Credit Agreement.
(c) If any proceeds are received by the Collateral Agent as a result of a
casualty, condemnation or taking involving the Collateral and the disposition of
such proceeds is not subject to section 4.13(b), the Collateral Agent will
promptly release the same to the applicable Assignor.
4.14. PROTECTIVE ADVANCES BY THE COLLATERAL AGENT. At its option, but
without being obligated to do so, the Collateral Agent may, upon not less than
two Business Days' prior written notice to any applicable Assignor, pay and
discharge past due taxes, assessments and governmental charges, at any time
levied on or with respect to any of the Collateral of such Assignor which such
Assignor has failed to pay and discharge in accordance with the requirements of
this Agreement or any of the other Credit Documents, pay and discharge any
claims of other creditors of such Assignor which are secured by any Lien on any
Collateral other than a Permitted Lien, pay for the maintenance, repair,
restoration and preservation of the Collateral to the extent such Assignor fails
to comply with its obligations in regard thereto under this Agreement and the
other Credit Documents or the Collateral Agent reasonably believes payment of
the same is necessary or appropriate to avoid a material loss or diminution in
value of the Collateral, and/or obtain and pay the premiums on insurance for the
Collateral which such Assignor fails to maintain in accordance with the
requirements of this Agreement and the other Credit Documents, and each Assignor
agrees to reimburse the Collateral Agent, on demand, for all reasonable payments
and expenses incurred by the Collateral Agent with respect to such Assignor or
any of its Collateral pursuant to the foregoing authorization, PROVIDED,
HOWEVER, that nothing in this section shall be construed as excusing any
Assignor from the performance of, or imposing any obligation on the Collateral
Agent or any other Secured Creditor to cure or perform, any covenants or other
agreements of any Assignor with respect to any of the foregoing matters as set
forth herein or in any of the other Credit Documents.
4.15. ADDITIONAL INFORMATION CONCERNING TRADE NAMES, ETC. Each Assignor
will from time to time promptly furnish the Collateral Agent upon its written
request a list of all trade, fictitious and other names (together with
applicable locations) under which it conducts business in any jurisdiction, or
under which it or any of its predecessors in interest conducted business at any
time within the preceding five years.
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5. SPECIAL PROVISIONS CONCERNING COLLECTION OF ACCOUNTS, ETC.
5.1. COLLECTION. Each Assignor shall, in a manner consistent with the
provisions of this section 5, endeavor to cause to be collected from the Account
Debtor named in each of its Accounts, as and when due (including, without
limitation, amounts which are delinquent, such amounts to be collected in
accordance with generally accepted lawful collection procedures), any and all
amounts owing under or on account of such Accounts, subject to any
modifications, extensions, compromises, settlements, releases, credits and
discounts granted or made in the ordinary course of the business as permitted
under section 4.6.
(b) Each Assignor shall, and the Collateral Agent hereby authorizes each
Assignor to, enforce and collect all amounts owing to it on its Inventory and
Accounts, for the benefit and on behalf of the Collateral Agent and the other
Secured Creditors, PROVIDED, HOWEVER, that such privilege may at the option of
the Collateral Agent, by notice to the Borrower (on behalf of all Assignors), be
terminated upon the occurrence and during the continuance of any Event of
Default.
(c) An Assignor may use and apply as it sees fit any and all amounts
collected by it in respect of its Inventory and Accounts, unless and until an
Event of Default shall have occurred and be continuing and such Assignor shall
have become obligated to take the actions contemplated by section 5.2.
5.2. COLLATERAL CONCENTRATION ACCOUNT, BLOCKED ACCOUNT AGREEMENTS, ETC.
As promptly as practicable and in any event within 10 days following the
occurrence and continuance of an Event of Default, the Collateral Agent will
establish the Collateral Concentration Account; and the Assignors shall enter
into Blocked Account Agreements with the Collateral Agent and each financial
institution in which an Assignor has a Deposit Account.
(b) Once established in accordance with the provisions of section 5.2(a),
the Collateral Concentration Account shall be, and shall remain, under the sole
dominion and control of the Collateral Agent, and the funds on deposit in the
Collateral Concentration Account shall be applied to the outstanding Credit
Document Obligations, in such order as the Collateral Agent may require, except
that if an Event of Default shall have occurred and be continuing, such funds
shall be applied as provided in section 8.4. Once a Deposit Account becomes a
Blocked Deposit Account, it shall be, and shall remain, under the sole dominion
and control of the Collateral Agent. Each Assignor acknowledges and agrees that
(i) such Assignor will have no right of withdrawal from the Collateral
Concentration Account or any of its Blocked Deposit Accounts, and (ii) the funds
on deposit in the Collateral Concentration Account and in its Blocked Deposit
Accounts shall continue to be collateral security for the Secured Obligations.
(c) In connection with the establishment of the Blocked Account
Agreements and at all times thereafter, each Assignor agrees (i) to cause all
payments by its Account Debtors to be immediately deposited in its Blocked
Deposit Accounts, and (ii) promptly to deposit all payments received by it from
any other sale of any of its Collateral, whether in the form of cash, checks,
notes, drafts, bills of exchange, money orders or otherwise, in its Blocked
Deposit Accounts in precisely the form in which received (but with any
endorsements of such Assignor necessary for deposit or collection). Until any
such payments are so deposited, such payments shall be held in trust by such
Assignor for and as the property of the Collateral Agent, for the benefit of the
Collateral Agent and the other Secured Creditors hereunder.
(d) Notwithstanding the foregoing, an Assignor shall not be required to
cause any payments by its Account Debtors under federal or state reimbursement
programs to be deposited in a Blocked Deposit Account if (i) such Assignor shall
have furnished to the Collateral Agent evidence establishing to the reasonable
satisfaction of the Collateral Agent that such deposit would be prohibited by
the terms of an applicable federal or state reimbursement program, and (ii)
contemporaneously with the receipt of any such payments the Obligations are
prepaid in a corresponding amount.
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6. SPECIAL PROVISIONS CONCERNING TRADEMARKS.
6.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents
and warrants that it is the true and lawful owner or licensee of the Marks
listed in Annex D attached hereto and that said listed Marks constitute all the
marks registered in the United States Patent and Trademark Office that such
Assignor now owns or uses in connection with its business. Each Assignor
represents and warrants that it owns or is licensed to use all Marks that it
uses, and that it owns all of the registrations listed on Annex D. Each Assignor
further warrants that it is aware of no third party claim that any aspect of
such Assignor's present or contemplated business operations infringes or will
infringe any trademark or service mark in a manner which could have a material
adverse effect on the financial condition, business or property of such
Assignor.
6.2. LICENSES AND ASSIGNMENTS. Each Assignor hereby agrees not to divest
itself of any right under a Mark other than in the ordinary course of business
absent prior written approval of the Collateral Agent.
6.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof,
to notify the Collateral Agent in writing of the name and address of, and to
furnish such pertinent information that may be available with respect to, any
party who may be infringing or otherwise violating any of such Assignor's rights
in and to any Mark that has a material adverse effect on the financial
condition, business or property of such Assignor taken as a whole (each such
Mark, a "SIGNIFICANT MARK"), or with respect to any party claiming that such
Assignor's use of any Significant Mark violates any property right of that
party, to the extent that such infringement or violation could have a material
adverse effect on the financial condition, business or property of such
Assignor. Each Assignor further agrees, unless otherwise directed by the
Collateral Agent, diligently to prosecute any person infringing any Significant
Mark in a manner consistent with its past practice and in the ordinary course of
business.
6.4. PRESERVATION OF MARKS. Each Assignor agrees to use or license the
use of its Significant Marks in interstate commerce during the time in which
this Agreement is in effect, sufficiently to preserve such Marks as trademarks
or service marks registered under the laws of the United States.
6.5. MAINTENANCE OF REGISTRATION. Each Assignor shall, at its own
expense, diligently process all documents required by the Trademark Act of 1946,
15 U.S.C. ss.ss.1051 ET SEQ. to maintain trademark registration which would
reasonably be expected to have a Material Adverse Effect, including but not
limited to affidavits of use and applications for renewals of registration in
the United States Patent and Trademark Office for all of its Marks pursuant to
15 U.S.C. ss.ss.1058(a), 1059 and 1065, and shall pay all fees and disbursements
in connection therewith, and shall not abandon any such filing of affidavit of
use or any such application of renewal prior to the exhaustion of all
administrative and judicial remedies without prior written consent of the
Collateral Agent, which consent shall not be unreasonably withheld.
6.6. FUTURE REGISTERED MARKS. If any mark registration issues hereafter to
an Assignor as a result of any application now or hereafter pending before the
United States Patent and Trademark Office, within 30 days of receipt of such
certificate such Assignor shall deliver a copy of such certificate, and a grant
of security in such mark to the Collateral Agent, confirming the grant thereof
hereunder, the form of such confirmatory grant to be substantially the same as
the form hereof.
6.7. REMEDIES. If an Event of Default shall occur and be continuing, the
Collateral Agent may, by written notice to the relevant Assignor, take any or
all of the following actions: declare the entire right, title and interest of
such Assignor in and to each of the Marks, together with all trademark rights
and rights of protection to the same, vested, in which event such rights, title
and interest shall immediately vest, in the Collateral Agent for the benefit of
the Secured Creditors, in which case such Assignor agrees to execute an
assignment in form and substance reasonably satisfactory to the Collateral
Agent, of all its rights, title and interest in and to the Marks to the
Collateral Agent for the benefit of the Secured Creditors; take and use or sell
the Marks and the goodwill of such Assignor's business symbolized by the Marks
and the right to carry on the business and use the assets of the Assignor in
connection with which the Marks have been used; and direct such Assignor to
refrain, in which event such Assignor shall refrain, from using the Marks in any
manner whatsoever, directly or indirectly, and, if requested by the Collateral
Agent, change such Assignor's corporate name to eliminate therefrom any use of
any Mark and execute such other and further documents that the Collateral Agent
may request to further confirm this and to transfer
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ownership of the Marks and registrations and any pending trademark application
in the United States Patent and Trademark Office to the Collateral Agent.
7. SPECIAL PROVISIONS CONCERNING
PATENTS AND COPYRIGHTS.
7.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents
and warrants that it is the true and lawful owner or licensee of all rights in
the Patents listed in Annex E attached hereto and in the Copyright registrations
listed in Annex F attached hereto, that said Patents constitute all the United
States patents and applications for United States patents that such Assignor now
owns and that said Copyrights constitute all the registered United States
copyrights that such Assignor now owns. Each Assignor represents and warrants
that it owns or is licensed to practice under all Patents and Copyright
registrations that it now owns, uses or practices under. Each Assignor further
warrants that it is aware of no third party claim that any aspect of such
Assignor's present or contemplated business operations infringes or will
infringe any patent or any copyright in a manner which could have a material
adverse effect on the financial condition, business or property of such
Assignor.
7.2. LICENSES AND ASSIGNMENTS. Each Assignor hereby agrees not to divest
itself of any right under a Patent or Copyright other than in the ordinary
course of business absent prior written approval of the Collateral Agent, which
such approval shall not be unreasonably withheld.
7.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof,
to furnish the Collateral Agent in writing with all pertinent information
available to such Assignor with respect to any infringement or other violation
of such Assignor's rights in any Patent that has a material adverse effect on
the financial condition, business or property of such Assignor taken as a whole
(each such Patent, a "SIGNIFICANT PATENT") or Copyright, or with respect to any
claim that practice of any Significant Patent or Copyright violates any property
right of that party, to the extent that such infringement or violation could
have a material adverse effect on the financial condition, business or property
of such Assignor. Each Assignor further agrees, absent direction of the
Collateral Agent to the contrary, diligently to prosecute any person infringing
any Significant Patent or Copyright about which it has knowledge in a manner
consistent with its past practice and in the ordinary course of business.
7.4. MAINTENANCE OF PATENTS. At its own expense, each Assignor shall make
timely payment of all post-issuance fees required pursuant to 35 U.S.C. ss. 41
to maintain in force rights under each Patent.
7.5. PROSECUTION OF PATENT APPLICATIONS. At its own expense, each
Assignor shall diligently prosecute all applications for United States patents
listed on Annex E hereto, and shall not abandon any such application, except in
favor of a continuation application based on such application, prior to
exhaustion of all administrative and judicial remedies, absent written consent
of the Collateral Agent, which such consent shall not be unreasonably withheld.
7.6. OTHER PATENTS AND COPYRIGHTS. Within 30 days of acquisition of a
United States Patent or Copyright, or of filing of an application for a United
States Patent or Copyright, the relevant Assignor shall deliver to the
Collateral Agent a copy of said Patent or Copyright, as the case may be, with a
grant of security as to such Patent or Copyright, as the case may be, confirming
the grant thereof hereunder, the form of such confirmatory grant to be
substantially the same as the form hereof.
7.7. REMEDIES. If an Event of Default shall occur and be continuing, the
Collateral Agent may by written notice to the relevant Assignor take any or all
of the following actions: declare the entire right, title and interest of such
Assignor in each of the Patents and Copyrights vested, in which event such
right, title and interest shall immediately vest in the Collateral Agent for the
benefit of the Secured Creditors, in which case such Assignor agrees to execute
an assignment in form and substance reasonably satisfactory to the Collateral
Agent of all its right, title, and interest to such Patents and Copyrights to
the Collateral Agent for the benefit of the Secured Creditors; take and practice
or sell the Patents and Copyrights; (iii) direct such Assignor to refrain, in
which event such Assignor shall refrain, from practicing the Patents and
Copyrights directly or indirectly, and such Assignor shall execute such other
and further documents as the Collateral Agent may request further to confirm
this and to transfer ownership of the Patents and Copyrights to the Collateral
Agent for the benefit of the Secured Creditors.
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8. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT.
8.1. REMEDIES GENERALLY; OBTAINING OF THE COLLATERAL. Each Assignor
agrees that, if any Event of Default shall have occurred and be continuing, THEN
and in every such case, subject to any mandatory requirements or limitations of
applicable law then in effect, the Collateral Agent, in addition to any rights
now or hereafter existing under applicable law, shall have all rights as a
secured creditor under the UCC in all relevant jurisdictions and may exercise
any or all of the following rights (all of which each Assignor hereby agrees is
commercially reasonable):
(a) personally, or by agents or attorneys, immediately retake
possession of the Collateral or any part thereof, from such Assignor or
any other person who then has possession of any part thereof with or
without notice or process of law, and for that purpose may enter upon
such Assignor's or such other person's premises where any of the
Collateral is located and remove the same and use in connection with such
removal any and all services, supplies, aids and other facilities of such
Assignor;
(b) instruct the obligor or obligors on any Account, agreement,
instrument or other obligation (including, without limitation, Account
Debtors) constituting the Collateral to make any payment required by the
terms of such Account, agreement, instrument or other obligation directly
to the Collateral Agent and/or directly to a Blocked Deposit Account;
(c) sell, assign or otherwise liquidate, or direct such Assignor
to sell, assign or otherwise liquidate, any or all of the Collateral or
any part thereof, and take possession of the proceeds of any such sale or
liquidation;
(d) direct any financial institution which maintains a Blocked
Deposit Account to transfer funds from such Blocked Deposit Account to
the Collateral Concentration Account pursuant to the provisions of the
applicable Blocked Account Agreement;
(e) withdraw any or all monies, securities and/or instruments in
the Collateral Concentration Account for application to the Secured
Obligations in accordance with section 8.4 hereof; and
(f) pay and discharge taxes, Liens or claims on or against any of
the Collateral;
(g) pay, perform or satisfy, or cause to be paid, performed or
satisfied, for the benefit of any Assignor, any of the obligations,
terms, covenants, provisions or conditions to be paid, observed,
performed or satisfied by such Assignor under any contract, agreement or
instrument relating to its Collateral, all in accordance with the terms,
covenants, provisions and conditions thereof, as and to the extent that
such Assignor fails or refuses to perform or satisfy the same;
(h) enter into any extension if, or any other agreement in any way
relating to, any of the Collateral;
(i) make any compromise or settlement the Collateral Agent deems
desirable or proper with respect to any of the Collateral; and/or
(j) take possession of the Collateral or any part thereof, by
directing such Assignor or any other person in possession thereof in
writing to deliver the same to the Collateral Agent at any place or
places designated by the Collateral Agent, in which event such Assignor
shall at its own expense;
(i) forthwith cause the same to be moved to the place or
places so designated by the Collateral Agent and there delivered
to the Collateral Agent,
(ii) store and keep any Collateral so delivered to the
Collateral Agent at such place or places pending further action by
the Collateral Agent as provided in section 8.2, and
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(iii) while the Collateral shall be so stored and kept,
provide such guards and maintenance services as shall be necessary
to protect the same and to preserve and maintain them in good
condition;
it being understood that such Assignor's obligation so to deliver the Collateral
is of the essence of this Agreement and that, accordingly, upon application to a
court of equity having jurisdiction, the Collateral Agent shall be entitled to a
decree requiring specific performance by such Assignor of said obligation.
8.2. DISPOSITION OF THE COLLATERAL. Upon the occurrence and continuance
of an Event of Default, any Collateral repossessed by the Collateral Agent under
or pursuant to section 8.1 and any other Collateral whether or not so
repossessed by the Collateral Agent, may be sold, assigned, leased or otherwise
disposed of under one or more contracts or as an entirety, and without the
necessity of gathering at the place of sale of the property to be sold, and in
general in such manner, at such time or times, at such place or places and on
such terms as the Collateral Agent may, in compliance with any mandatory
requirements or limitations of applicable law, determine to be commercially
reasonable. Any of the Collateral may be sold, leased or otherwise disposed of,
in the condition in which the same existed when taken by the Collateral Agent or
after any overhaul or repair which the Collateral Agent shall determine to be
commercially reasonable. Any such disposition which shall be a private sale or
other private proceedings permitted by such requirements shall be made upon not
less than 10 days' written notice to such Assignor specifying the time at which
such disposition is to be made and the intended sale price or other
consideration therefor, and shall be subject, for the 10 days after the giving
of such notice, to the right of the relevant Assignor or any nominee of the
relevant Assignor to acquire the Collateral involved at a price or for such
other consideration at least equal to the intended sale price or other
consideration so specified. Any such disposition which shall be a public sale
permitted by such requirements shall be made upon not less than 10 days' written
notice to the relevant Assignor specifying the time and place of such sale and,
in the absence of applicable requirements of law, shall be by public auction
(which may, at the Collateral Agent's option, be subject to reserve), after
publication of notice of such auction not less than 10 days prior thereto in two
newspapers in general circulation in the city where such Collateral is located.
To the extent permitted by any such requirement of law, the Collateral Agent on
behalf of the Secured Creditors (or certain of them) may bid for and become the
purchaser (by bidding in Secured Obligations or otherwise) of the Collateral or
any item thereof, offered for sale in accordance with this section without
accountability to the relevant Assignor (except to the extent of surplus money
received as provided in section 8.4). If, under mandatory requirements of
applicable law, the Collateral Agent shall be required to make disposition of
the Collateral within a period of time which does not permit the giving of
notice to the Assignor as hereinabove specified, the Collateral Agent need give
the relevant Assignor only such notice of disposition as shall be reasonably
practicable in view of such mandatory requirements of applicable law.
8.3. WAIVER OF CLAIMS. Except as otherwise provided in this Agreement,
EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE
AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION
OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING,
WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT
REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE ASSIGNOR WOULD OTHERWISE HAVE
UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and
each Assignor hereby further waives, to the extent permitted by law:
(i) all damages occasioned by such taking of possession except any
damages which are the direct result of the Collateral Agent's gross
negligence or wilful misconduct;
(ii) all other requirements as to the time, place and terms of
sale or other requirements with respect to the enforcement of the
Collateral Agent's rights hereunder; and
(iii) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable
law in order to prevent or delay the enforcement of this Agreement or the
absolute sale of the Collateral or any portion thereof, and each
Assignor, for itself and all who may claim under it, insofar as it or
they now or hereafter lawfully may, hereby waives the benefit of all such
laws.
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Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of the relevant Assignor therein and
thereto, and shall be a perpetual bar both at law and in equity against the
relevant Assignor and against any and all persons claiming or attempting to
claim the Collateral so sold, optioned or realized upon, or any part thereof,
from, through and under the relevant Assignor.
8.4. APPLICATION OF PROCEEDS. All Collateral and proceeds of Collateral
obtained and realized by the Collateral Agent in connection with the enforcement
of this Agreement pursuant to this section 8 shall be applied as follows:
(1) FIRST, to the payment to the Collateral Agent, for application
to the Secured Obligations as provided in section 10.3 of the Credit
Agreement; and
(2) SECOND, to the extent remaining after the application pursuant
to the preceding clause (i) and following the termination of this
Agreement pursuant to section 10.11 hereof, to the relevant Assignor or
to whomever may be lawfully entitled to receive such payment.
8.5. REMEDIES CUMULATIVE, ETC. Each and every right, power and remedy
hereby specifically given to the Collateral Agent shall be in addition to every
other right, power and remedy specifically given under this Agreement, any
Designated Hedge Agreement or the other Credit Documents or now or hereafter
existing at law or in equity, or by statute and each and every right, power and
remedy whether specifically herein given or otherwise existing may be exercised
from time to time or simultaneously and as often and in such order as may be
deemed expedient by the Collateral Agent. All such rights, powers and remedies
shall be cumulative and the exercise or the beginning of exercise of one shall
not be deemed a waiver of the right to exercise of any other or others. No delay
or omission of the Collateral Agent in the exercise of any such right, power or
remedy, or partial or single exercise thereof, and no renewal or extension of
any of the Secured Obligations, shall impair or constitute a waiver of any such
right, power or remedy or shall be construed to be a waiver of any Default or
Event of Default or an acquiescence therein. No notice to or demand on any
Assignor in any case shall entitle it to any other or further notice or demand
in similar or other circumstances or constitute a waiver of any of the rights of
the Collateral Agent to any other or further action in any circumstances without
notice or demand. In the event that the Collateral Agent shall bring any suit to
enforce any of its rights hereunder and shall be entitled to judgment, then in
such suit the Collateral Agent may recover reasonable expenses, including
attorneys' fees, and the amounts thereof shall be included in such judgment.
8.6. DISCONTINUANCE OF PROCEEDINGS. In case the Collateral Agent shall
have instituted any proceeding to enforce any right, power or remedy under this
Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall
have been discontinued or abandoned for any reason or shall have been determined
adversely to the Collateral Agent, then and in every such case the relevant
Assignor, the Collateral Agent and each holder of any of the Secured Obligations
shall be restored to their former positions and rights hereunder with respect to
the Collateral subject to the security interest created under this Agreement,
and all rights, remedies and powers of the Collateral Agent shall continue as if
no such proceeding had been instituted.
8.7. PURCHASERS OF COLLATERAL. Upon any sale of any of the Collateral by
the Collateral Agent hereunder (whether by virtue of the power of sale herein
granted, pursuant to judicial process or otherwise), the receipt of the
Collateral Agent or the officer making the sale shall be a sufficient discharge
to the purchaser or purchasers of the Collateral so sold, and such purchaser or
purchasers shall not be obligated to see to the application of any part of the
purchase money paid over to the Collateral Agent or such officer or be
answerable in any way for the misapplication or nonapplication thereof.
9. INDEMNITY.
9.1. INDEMNITY. The Assignors jointly and severally agree to indemnify,
reimburse and hold the Collateral Agent, each Secured Creditor and their
respective Affiliates, successors, assigns, employees, agents and servants (any
or all of the foregoing, individually an "INDEMNITEE" and collectively. the
"INDEMNITEES") harmless from and against any and all liabilities, obligations,
losses, costs, expenses, damages, penalties, fines, claims, demands, actions,
suits, proceedings, judgments, arbitration awards and appeals of whatsoever kind
and nature (all of the
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foregoing, collectively "INDEMNIFIABLE CLAIMS AND AMOUNTS"), at any time imposed
on, asserted (whether or not successfully) against, or suffered or incurred by,
any of the Indemnitees, in any way relating to or arising out of or otherwise
connected to:
(i) the execution, delivery or performance by any Assignor of this
Agreement or any of the contracts, agreements or instruments included in
its Collateral, including, without limitation, any actual or claimed
failure of any Assignor to duly pay, observe, perform or satisfy any of
the obligations, terms, covenants, provisions or conditions to be paid,
observed, performed or satisfied by it under any contract, agreement or
instrument included in, or otherwise related to, its Collateral;
(ii) any actual or claimed violation by any Assignor of, or any
liabilities or obligations of a Assignor arising under, any laws,
regulations, rules, orders or judgments of any country, state or other
governmental body, unit, agency or court, in any way related to any of
its Collateral;
(iii) the manufacture, ownership, ordering, purchase, delivery,
control, acceptance, lease, financing, possession, operation, condition,
sale, return or other disposition, or use of any of the Collateral
(including, without limitation, latent or other defects, whether or not
discoverable); and/or
(iv) any actual or claimed injury to any person or property, or
the death of any person, whether based on any actual or alleged tort
(including, without limitation, claims arising or imposed under the
doctrine of strict liability), breach of an express or implied warranty,
or other basis or theory of liability;
PROVIDED that no Indemnitee shall be indemnified pursuant to this section 9.1(a)
for Indemnifiable Claims and Amounts to the extent caused by the gross
negligence or wilful misconduct of such Indemnitee.
(b) If any action, suit or proceeding is commenced against any Indemnitee
which such Indemnitee believes is subject to indemnification hereunder, such
Indemnitee shall promptly notify the Borrower (who shall receive such notice on
behalf of all Assignors), and such Indemnitee may, and if requested by the
Borrower (on behalf of all Assignors) shall, in good faith, contest the
validity, applicability and amount of such action, suit or proceeding with
counsel selected by such Indemnitee, and shall permit the Borrower (on behalf of
all Assignors) to participate in such contest, subject to the overall control
and direction of such Indemnitee and its counsel. In addition, in connection
with the defense of any action, suit or proceeding covered by this section 9.1
against more than one Indemnitee, all such Indemnitees shall be represented by
the same legal counsel selected by such Indemnitees; PROVIDED, HOWEVER, that if
such legal counsel determines in good faith that representing all such
Indemnitees would or could result in a conflict of interest under the laws or
ethical principles applicable to such legal counsel or that a defense or
counterclaim is available to an Indemnitee that is not available to all such
Indemnitees, then to the extent reasonably necessary to avoid such a conflict of
interest or to permit unqualified assertion of such defense or counterclaim,
each Indemnitee shall be entitled to separate representation by a legal counsel
selected by that Indemnitee.
(c) The Assignors, jointly and severally, agree that upon written notice
by any Indemnitee of the incurrence or sufferance by such Indemnitee of any
Indemnifiable Claims and Amounts, the Assignors will pay, on demand, all
Indemnifiable Claims and Amounts, from time to time incurred or suffered by such
Indemnitee. Each Indemnitee agrees to use its best efforts to promptly notify
the Borrower (on behalf of all Assignors) of any written assertion of any
Indemnifiable Claims and Amounts of which such Indemnitee has actual knowledge.
(d) Without limitation of the foregoing, the Assignors jointly and
severally agree to pay, or reimburse the Collateral Agent for (if the Collateral
Agent shall have incurred fees, costs or expenses because an Assignor shall have
failed to comply with its obligations under this Agreement or any Credit
Document), any and all out-of-pocket fees, costs and expenses of whatever kind
or nature incurred in connection with the creation, preservation or protection
of the Security Interest of the Collateral Agent in the Collateral, including,
without limitation, all fees and taxes in connection with the recording or
filing of instruments and documents in public offices, payment or discharge of
any taxes or Liens upon or in respect of the Collateral, premiums for insurance
with respect to the Collateral and all other fees, costs and expenses in
connection with protecting, maintaining or preserving the Collateral and the
Collateral Agent's interest therein, whether through judicial proceedings or
otherwise, or in defending or prosecuting any actions, suits or proceedings
arising out of or relating to the Collateral.
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(e) In addition, and without limitation of the foregoing, the Assignors
jointly and severally agree to pay, indemnify and hold each Indemnitee harmless
from and against any loss, costs, damages and expenses which such Indemnitee may
suffer, expend or incur in consequence of or growing out of any material
misrepresentation by an Assignor in this Agreement, or in any statement or
writing contemplated by or made or delivered pursuant to or in connection with
this Agreement.
(f) If and to the extent that the obligations of any Assignor under this
section 9.1 are unenforceable for any reason, each Assignor hereby agrees to
make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.
9.2. INDEMNITY OBLIGATIONS SECURED BY COLLATERAL; SURVIVAL. Any amounts
paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement shall constitute Secured Obligations secured by the Collateral.
The indemnity obligations of the Assignors contained in this section 9 shall
continue in full force and effect notwithstanding the full payment of all the
Notes issued under the Credit Agreement and all of the other Secured Obligations
and notwithstanding the discharge thereof.
10. MISCELLANEOUS.
10.1. NOTICES. Except as otherwise expressly provided herein, all notices
and other communications provided for hereunder shall be in writing (including
telegraphic, telex, facsimile transmission or cable communication) and mailed,
telegraphed, telexed, transmitted, cabled or delivered, if to the Borrower, at
its address specified in or pursuant to the Credit Agreement, if to any Assignor
which is a Subsidiary of the Borrower, to it c/o the Borrower at its address
specified in or pursuant to the Credit Agreement, if to the Collateral Agent, to
it at the Notice Office of the Administrative Agent, if to any Lender, at its
address specified in or pursuant to the Credit Agreement, and if to any
Designated Hedge Creditor, at such address as such Designated Hedge Creditor
shall have specified in writing to each Assignor and the Collateral Agent; or in
any case at such other address as any of the persons listed above may hereafter
notify the others in writing. All such notices and communications shall be
mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight
courier, and shall be effective when received.
10.2. ENTIRE AGREEMENT. This Agreement, the other Credit Documents and
any Designated Hedge Documents represent the final agreement among the parties
and may not be contradicted by evidence of prior, contemporaneous or subsequent
oral agreements among the parties. There are no unwritten oral agreements among
the parties.
10.3. AMENDMENTS AND WAIVERS. None of the terms and conditions of this
Agreement may be changed, waived, modified or varied in any manner whatsoever
unless in writing duly signed by (i) each Assignor affected thereby (it being
understood that the addition or release of any Assignor hereunder shall not
constitute a change, waiver, modification or variance affecting any Assignor
other than the Assignor so added or released); and (ii) the Collateral Agent
(acting with the consent of the Required Lenders or, to the extent required by
section 12.12 of the Credit Agreement, all of the Lenders, or all of the Lenders
(other than any Defaulting Lender), as applicable), PROVIDED, HOWEVER, that
(a) no such change, waiver, modification or variance shall be made
to section 8.4, section 9, section 10.11 or this section 10.3 which
adversely affects any Secured Creditor without the written consent of
such Secured Creditor;
(b) any change, waiver, modification or variance which adversely
affects the rights and benefits of a single Class of Secured Creditors
(and not all Secured Creditors in a like or similar manner) shall require
the written consent of the Requisite Creditors of such Class of Secured
Creditors; and
(c) any change, waiver, modification or variance which adversely
affects the rights and benefits of less than all of the members of a
single Class of Secured Creditors (and not all Secured Creditors, nor all
Secured Creditors of the same Class, in a like or similar manner) shall
require the written consent of each of such members which is adversely
affected thereby.
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For the purpose of this Agreement, the term "CLASS" shall mean each class of
Secured Creditors, I.E., whether (x) the Administrative Agent, the Collateral
Agent, the Letter of Credit Issuers and the Lenders as holders of the Credit
Document Obligations or (y) the Designated Hedge Creditors as holders of the
Designated Hedge Obligations. For the purpose of this Agreement, the term
"REQUISITE CREDITORS" of any Class shall mean (x) with respect to the Credit
Document Obligations, the Required Lenders and (y) with respect to the
Designated Hedge Obligations, the holders of at least 51% of all Designated
Hedge Obligations outstanding from time to time under the Designated Hedge
Documents.
10.4. OBLIGATIONS ABSOLUTE. The obligations of each Assignor under this
Agreement shall be absolute and unconditional and shall remain in full force and
effect without regard to, and shall not be released, suspended, discharged,
terminated or otherwise affected by, any circumstance or occurrence whatsoever,
other than indefeasible payment in full of, and complete performance of, all of
the Secured Obligations, including, without limitation:
(a) any renewal, extension, amendment or modification of, or
addition or supplement to or deletion from other Credit Documents or any
Designated Hedge Document, or any other instrument or agreement referred
to therein, or any assignment or transfer of any thereof;
(b) any waiver, consent, extension, indulgence or other action or
inaction under or in respect of any such agreement or instrument or this
Agreement except as expressly provided in such renewal, extension,
amendment, modification, addition, supplement, assignment or transfer;
(c) any furnishing of any additional security to the Collateral
Agent or its assignee or any acceptance thereof or any release of any
security by the Collateral Agent or its assignee;
(d) any limitation on any person's liability or obligations under
any such instrument or agreement or any invalidity or unenforceability,
in whole or in part, of any such instrument or agreement or any term
thereof;
(e) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating to
an Assignor or any Subsidiary of an Assignor, or any action taken with
respect to this Agreement by any trustee or receiver, or by any court, in
any such proceeding, whether or not an Assignor shall have notice or
knowledge of any of the foregoing; or
(f) any other event or circumstance which, but for this provision,
might release or discharge a guarantor or other surety from its
obligations as such.
10.5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon each
Assignor and its successors and assigns and shall inure to the benefit of the
Collateral Agent and its successors and assigns, PROVIDED that no Assignor may
transfer or assign any or all of its rights or obligations hereunder without the
written consent of the Collateral Agent. All agreements, statements,
representations and warranties made by each Assignor herein or in any
certificate or other instrument delivered by such Assignor or on its behalf
under this Agreement shall be considered to have been relied upon by the Secured
Creditors and shall survive the execution and delivery of this Agreement, the
other Credit Documents and any Designated Hedge Document regardless of any
investigation made by the Secured Creditors on their behalf.
10.6. HEADINGS DESCRIPTIVE. The headings of the several sections of this
Agreement are inserted for convenience only and shall not in any way affect the
meaning or construction of any provision of this Agreement.
10.7. SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.8. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF OHIO.
23
<PAGE> 25
10.9. ENFORCEMENT EXPENSES, ETC. The Assignors hereby jointly and
severally agree to pay, to the extent not paid pursuant to section 12.1 of the
Credit Agreement, all reasonable out-of-pocket costs and expenses of the
Collateral Agent and each other Secured Creditor in connection with the
enforcement of this Agreement, the preservation of the Collateral, the
perfection of the Security Interest, and any amendment, waiver or consent
relating hereto (including, without limitation, the reasonable fees and
disbursements of counsel employed by the Collateral Agent or any of the other
Secured Creditors).
10.10. RELEASE OF PORTIONS OF COLLATERAL. So long as no payment default
on any of the Secured Obligations or Event of Default is in existence or would
exist after the application of proceeds as provided below, the Collateral Agent
shall, at the request of an Assignor, release any or all of the Collateral of
such Assignor, PROVIDED that (x) such release is permitted by the terms of the
Credit Agreement (it being agreed for such purposes that a release will be
deemed "PERMITTED BY THE TERMS OF THE CREDIT AGREEMENT" if the proposed
transaction constitutes an exception contained in section 9.2 of the Credit
Agreement) or otherwise has been approved in writing by the Required Lenders
(or, to the extent required by section 12.12 of the Credit Agreement, all of the
Lenders, or all of the Lenders (other than any Defaulting Lender), as
applicable) and (y) the proceeds of such Collateral are to be applied as
required pursuant to the Credit Agreement or any consent or waiver entered into
with respect thereto.
(b) At any time that an Assignor desires that the Collateral Agent take
any action to give effect to any release of Collateral pursuant to the foregoing
section 10.10(a), it shall deliver to the Collateral Agent a certificate signed
by a principal executive officer stating that the release of the respective
Collateral is permitted pursuant to section 10.10(a). In the event that any part
of the Collateral is released as provided in section 10.10(a), the Collateral
Agent, at the request and expense of an Assignor, will duly release such
Collateral and assign, transfer and deliver to such Assignor (without recourse
and without any representation or warranty) such of the Collateral as is then
being (or has been) so sold and as may be in the possession of the Collateral
Agent and has not theretofore been released pursuant to this Agreement. The
Collateral Agent shall have no liability whatsoever to any Secured Creditor as
the result of any release of Collateral by it as permitted by this section
10.10. Upon any release of Collateral pursuant to section 10.10(a), none of the
Secured Creditors shall have any continuing right or interest in such
Collateral, or the proceeds thereof.
10.11. TERMINATION. After the termination of the Total Commitment and all
Designated Hedge Documents, when no Note nor Letter of Credit is outstanding and
when all Loans and other Secured Obligations (other than unasserted indemnity
obligations) have been paid in full, this Agreement shall terminate, and the
Collateral Agent, at the request and expense of the Assignors, will execute and
deliver to the relevant Assignor a proper instrument or instruments (including
UCC termination statements on form UCC-3) acknowledging the satisfaction and
termination of this Agreement, and will duly assign, transfer and deliver to the
relevant Assignor (without recourse and without any representation or warranty)
such of the Collateral as may be in the possession of the Collateral Agent and
as has not theretofore been sold or otherwise applied or released pursuant to
this Agreement.
10.12. COLLATERAL AGENT. The Collateral Agent will hold in accordance
with this Agreement all items of the Collateral at any time received under this
Agreement. The acceptance by the Collateral Agent of this Agreement, with all
the rights, powers, privileges and authority so created, shall not at any time
or in any event obligate the Collateral Agent to appear in or defend any action
or proceeding relating to the Collateral to which it is not a party, or to take
any action hereunder or thereunder, or to expend any money or incur any expenses
or perform or discharge any obligation, duty or liability under the Collateral.
By accepting the benefits of this Agreement, each Secured Creditor acknowledges
and agrees that the rights and obligations of the Collateral Agent shall be as
set forth in section 11 of the Credit Agreement. Notwithstanding anything to the
contrary contained in section 10.3 of this Agreement or section 12.12 of the
Credit Agreement, this section 10.12, and the duties and obligations of the
Collateral Agent set forth in this section 10.12, may not be amended or modified
without the consent of the Collateral Agent.
10.13. ONLY COLLATERAL AGENT TO ENFORCE ON BEHALF OF SECURED CREDITORS.
The Secured Creditors agree by their acceptance of the benefits hereof that this
Agreement may be enforced on their behalf only by the action of the Collateral
Agent, acting upon the instructions of the Required Lenders (or, after all
Credit Document Obligations have been paid in full, instructions of the holders
of at least 51% of the outstanding Designated Hedge Obligations) and that no
other Secured Creditor shall have any right individually to seek to enforce or
to enforce this Agreement or to realize upon the security to be granted hereby,
it being understood and agreed that such rights and remedies may be exercised by
the Collateral Agent, for the benefit of the Secured Creditors, upon the terms
of this Agreement.
24
<PAGE> 26
10.14. OTHER CREDITORS, ETC. NOT THIRD PARTY BENEFICIARIES. No creditor
of any Assignor or any of its Affiliates, or other person claiming by, through
or under any Assignor or any of its Affiliates, other than the Collateral Agent
and the other Secured Creditors, and their respective successors and assigns,
shall be a beneficiary or third party beneficiary of this Agreement or otherwise
shall derive any right or benefit herefrom.
10.15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same agreement. A set of counterparts
executed by all the parties hereto shall be lodged with the Borrower and the
Collateral Agent.
10.16. EFFECTIVENESS. This Agreement shall be effective as to any
Assignor upon its execution and delivery to the Collateral Agent of a
counterpart of this Agreement manually executed on behalf of such Assignor,
regardless of the date of this Agreement or the date this Agreement is executed
and delivered by any other party hereto.
11. WAIVER OF JURY TRIAL.
EACH ASSIGNOR AND THE COLLATERAL AGENT EACH HEREBY IRREVOCABLY WAIVES
ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
EACH ASSIGNOR HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY SECURED CREDITOR HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH SECURED
CREDITOR WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION.
[The balance of this page is blank; the next page is the signature page.]
25
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
NCS HEALTHCARE, INC., KEYBANK NATIONAL ASSOCIATION,
AS AN ASSIGNOR AS COLLATERAL AGENT
BY: /S/ GERALD D. STETHEM BY: /S/ THOMAS J. PURCELL
----------------------------- --------------------------
CHIEF FINANCIAL OFFICER VICE PRESIDENT
<TABLE>
<CAPTION>
THE FOLLOWING ADDITIONAL ASSIGNORS
<S> <C> <C>
NCS HEALTHCARE OF OKLAHOMA, INC. NCS SERVICES, INC. NCS HEALTHCARE OF MASSACHUSETTS, INC.
NCS HEALTHCARE OF RHODE ISLAND, INC. NCS HEALTHCARE OF IOWA, INC. NCS HEALTHCARE OF ARIZONA, INC.
NCS HEALTHCARE OF KANSAS, INC. NCS HEALTHCARE OF KENTUCKY, INC. NCS HEALTHCARE OF MONTANA, INC.
NCS HEALTHCARE OF SOUTH CAROLINA, INC. NCS HEALTHCARE OF VERMONT, INC. NCS HEALTHCARE OF MISSOURI, INC.
NCS HEALTHCARE OF OREGON, INC. NCS HEALTHCARE OF BEACHWOOD, INC. NCS HEALTHCARE OF NEW YORK, INC.
NCS HEALTHCARE OF MARYLAND, INC. NCS HEALTHCARE OF OHIO, INC. PHARMASOURCE HEALTHCARE, INC.
NCS HEALTHCARE OF ARKANSAS, INC. NCS HEALTHCARE OF MICHIGAN, INC. NCS HEALTHCARE OF TEXAS, INC.
NCS HEALTHCARE OF CALIFORNIA, INC. NCS HEALTHCARE OF INDIANA, INC. NCS HEALTHCARE OF TENNESSEE, INC.
RESCOT SYSTEMS GROUP, INC. NCS HEALTHCARE OF ILLINOIS, INC. NCS HEALTHCARE OF MINNESOTA, INC.
UNI-CARE HEALTH SERVICES, INC. NCS HEALTHCARE OF PENNSYLVANIA, INC. NCS HEALTHCARE OF WISCONSIN, INC.
UNI-CARE HEALTH SERVICES OF MAINE, INC. NCS HEALTHCARE OF CONNECTICUT, INC. NCS HEALTHCARE OF NEBRASKA, INC.
NCS HEALTHCARE OF NEW JERSEY, INC. NCS HEALTHCARE OF NEW MEXICO, INC.
NCS HEALTHCARE OF FLORIDA, INC. BEACHWOOD HEALTHCARE MANAGEMENT, INC.
NCS HEALTHCARE OF WASHINGTON, INC.
MANAGEMENT & NETWORK SERVICES, INC.
</TABLE>
BY: /S/ MICHAEL J. MASCALI
----------------------------------------
MICHAEL J. MASCALI, VICE PRESIDENT,
ON BEHALF OF EACH OF
THE ABOVE CORPORATIONS
NCS HEALTHCARE OF NORTH CAROLINA, INC.
BY: /S/ KEVIN B. SHAW
- --------------------------------------
KEVIN B. SHAW, PRESIDENT
26
<PAGE> 28
ANNEX A
to
SECURITY AGREEMENT
SCHEDULE OF EXISTING FINANCING STATEMENTS
This information for this Schedule
was separately delivered to the parties.
<PAGE> 29
ANNEX B
to
SECURITY AGREEMENT
SCHEDULE OF CHIEF EXECUTIVE OFFICES
<TABLE>
<CAPTION>
====================================================================================================================
ASSIGNOR TAX I.D. NO. ADDRESS
====================================================================================================================
<S> <C> <C>
NCS HealthCare, Inc. 34-1816187 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Thrifty Medical Supply, Inc. 73-1291927 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of Oklahoma,
Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Rhode Island, Inc. 05-0429829 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Kansas, Inc. 34-1839712 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of South Carolina, 31-1508225 3201 Enterprise Parkway
Inc. Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Oregon, Inc. 34-1836971 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Maryland, Inc. 31-1496240 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Arkansas, Inc. 31-1490517 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of California, Inc. 31-1499819 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
RESCOT SYSTEMS GROUP, INC. 23-2589308 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Uni-Care Health Services, Inc. 02-0468190 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Uni-Care Health Services of Maine, 02-0468192 3201 Enterprise Parkway
Inc. Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of New Jersey, Inc. 22-3395391 3201 Enterprise Parkway
(formerly Advanced Rx Services, Inc.) Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Florida, Inc. 34-1843258 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Washington, Inc. 34-1844193 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Management & Network Services, Inc. 34-1819691 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
====================================================================================================================
ASSIGNOR TAX I.D. NO. ADDRESS
====================================================================================================================
<S> <C> <C>
NCS Services, Inc. 34-1837567 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Iowa, Inc. 31-1509013 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Modesto, Inc. 31-1510328 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of
California, Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS Quality Care Pharmacy, Inc. 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of
California, Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Kentucky, Inc. 31-1521217 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
KINETIC SERVICES, INC. 95-4346189 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of
California, Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS Daven Drug, Inc. 31-1508219 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of
California, Inc.)
- --------------------------------------------------------------------------------------------------------------------
JK Medical Services, Inc. 73-1461722 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of
Oklahoma, Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Vermont, Inc. 31-1526078 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Beachwood, Inc. 34-1881410 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
HLF Adult Home Pharmacy Corp. 16-1342819 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of New York,
Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Ohio, Inc. 31-1257307 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Michigan, Inc. 34-1777940 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Indiana, Inc. 35-1954599 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
====================================================================================================================
ASSIGNOR TAX I.D. NO. ADDRESS
====================================================================================================================
<S> <C> <C>
NCS HealthCare of Illinois, Inc. 37-1354510 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS Unlimited, Inc. 37-1360802 3201 Enterprise Parkway
Beachwood, Ohio 44122
(this entity was
dissolved)
- --------------------------------------------------------------------------------------------------------------------
NCS HEALTHCARE OF PENNSYLVANIA, INC. 23-2679334 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
CHESHIRE LONG TERM CARE PHARMACY, 3201 Enterprise Parkway
INC. Beachwood, Ohio 44122
(merged into NCS
HealthCare of Connecticut,
Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Massachusetts, Inc. 31-1571275 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Arizona, Inc. 31-1573985 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Montana, Inc. 34-1851710 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Missouri, Inc. 34-1855274 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
CS HealthCare of North Carolina, 56-1889643 3201 Enterprise Parkway
Inc. Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Optimal Acquisition Co., Inc. 3201 Enterprise Parkway
Beachwood, Ohio 44122
(merged into NCS
HealthCare of California,
Inc.)
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of New York, Inc. 34-1854267 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
PharmaSource Healthcare, Inc. 58-2066823 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Texas, Inc. 34-1866495 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Tennessee, Inc. 34-1866494 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Minnesota, Inc. 34-1866489 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of Wisconsin, Inc. 34-1866497 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 32
<TABLE>
<CAPTION>
====================================================================================================================
ASSIGNOR TAX I.D. NO. ADDRESS
====================================================================================================================
<S> <C> <C>
NCS HealthCare of Nebraska, Inc. 34-1866491 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
NCS HealthCare of New Mexico, Inc. 34-1866493 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Beachwood HealthCare Management, Inc. 34-1868886 3201 Enterprise Parkway
Beachwood, Ohio 44122
- --------------------------------------------------------------------------------------------------------------------
Kern Acquisition Corp. 34-1865336 3201 Enterprise Parkway
(merged into NCS Beachwood, Ohio 44122
HealthCare of California,
Inc.)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 33
ANNEX C
to
SECURITY AGREEMENT
SCHEDULE OF EQUIPMENT
AND INVENTORY LOCATIONS
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare,Inc 34-1816187 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NCS HealthCare of New Jersey, Inc. 22-3395391 3201 Enterprise Parkway
Beachwood, Ohio 44122
(formerly Advanced Rx Services, Inc.)
202 West Parkway Dr. Ste 2 Egg Harbor, NJ 08234
======================================================================================================================
Beachwood HealthCare Management, Inc. 34-1868886 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NCS HealthCare of Connecticut, Inc. 06-1330453 3201 Enterprise Parkway
Beachwood, Ohio 44122
288 Highland Ave. Cheshire, CT 06410
======================================================================================================================
HLF Adult Home Pharmacy Corp. 16-1342819 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
JK Medical Services, Inc. 73-1461722 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
Kinetic Services, Inc. 95-4346189 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
Management & Network Services, 34-1819691 3201 Enterprise Parkway
Inc. (MNSI) Beachwood, Ohio 44122
4936 Blazer Parkway Dublin, OH 43017
======================================================================================================================
NCS Daven Drug, Inc. 31-1508219 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NCS HealthCare of Arizona, Inc. 31-1573985 3201 Enterprise Parkway
Beachwood, Ohio 44122
2450 S. 4th Ave. Ste. 119 Yuma, AZ 85364
2323 East Magnolia St Ste. 103 Phoenix, AZ 85034
======================================================================================================================
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare of Arkansas, Inc. 31-1490517 3201 Enterprise Parkway
Beachwood, Ohio 44122
10620 Colonel Glenn Rd. Little Rock, AR 72204
10620 Colonel Glenn Rd. Little Rock, AR 72204
2890 B Walnut Rogers, AR 72756
4102 Jefferson Ave. Texarkana, AR 71854
======================================================================================================================
NCS HealthCare of California, Inc. 31-1499819 3201 Enterprise Parkway
Beachwood, Ohio 44122
7701 Haskell Ave. Van Nuys, CA 91406
8303 Alondra Blvd. Ste 111 Paramount, CA 90723
602 Scenic Dr. Modesto, CA 95350
1315 Boughton Dr. Bakerfield, CA 93380
16250 Gundry Ave. Paramount, CA 90723
3939 Guasti Road Unit B Ontario, CA 91761
======================================================================================================================
NCS HealthCare of Florida, Inc. 34-1843258 3201 Enterprise Parkway
Beachwood, Ohio 44122
2891 Gateway Centre Parkway Bld. C Pin. Park, FL 33782
3771 SW 42nd Ave. Ste. 5 Gainsville, FL 32608
======================================================================================================================
NCS HealthCare of Illinois, Inc. 37-1354510 3201 Enterprise Parkway
Beachwood, Ohio 44122
2363 Federal Dr. Decatur, IL 62526
113 North Park Ave. PO Box 278 Herrin, Il 62948
1510 Midway Ct. Ate. E107 Elk Grove Vil, IL 60007
911 Washington St. Highland, IL 62249
======================================================================================================================
NCS HealthCare of Indiana, Inc. 35-1954599 3201 Enterprise Parkway
Beachwood, Ohio 44122
Northwest Blvd. Indianapolis 822 Ste. 100 IN 46278
215 West State St. Princeton, IN 47670
211 West State St. Princeton, IN 47670
E52 Lake Ave.Fort Wayne, IN 46805
769 Madison Street, STE D Crown Point, IN 46307
======================================================================================================================
</TABLE>
2
<PAGE> 35
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare of Iowa, Inc. 31-1509013 3201 Enterprise Parkway
Beachwood, Ohio 44122
4131 109th St. Urbandale, IA 50322
2330 Transit Plaza, Ste. B Sioux City, IA 51106
1401 East Anson St. Box 474 Marshalltown, IA 50158
5217 Grand Ave. Davenport, IA 52807
======================================================================================================================
NCS HealthCare of Kansas, Inc. 34-1839712 3201 Enterprise Parkway
Beachwood, Ohio 44122
4999 S. LuLu Wichita, KS 67216
2003 SW Gage Blvd. Topeka, KS 66604
======================================================================================================================
NCS HealthCare of Kentucky, Inc. 31-1521217 3201 Enterprise Parkway
Beachwood, Ohio 44122
835 North L. Rogers Wells Blvd. Glascow, KY 42141
======================================================================================================================
NCS HealthCare of Maryland, Inc. 31-1496240 3201 Enterprise Parkway
Beachwood, Ohio 44122
201 North Burhans Blvd. Hagerstown, MD 21740
14300 Cherry Lane Ct, Ste 112 Laurel, MD 20707
1516 B South Salisbury Blvd. Salisbury, MD 21801
======================================================================================================================
NCS HealthCare of Massachusetts, Inc. 31-1571275 3201 Enterprise Parkway
Beachwood, Ohio 44122
50 D'Angelo Dr. Marlborough, MA 01752
======================================================================================================================
NCS HealthCare of Michigan, Inc. 34-1777940 3201 Enterprise Parkway
Beachwood, Ohio 44122
21811 Kelly Eastpoint, MI 48021
4025 Broadmoor S.E. Kentwood, MI 49512
4072 Market Place Rd. Flint, MI 48507
======================================================================================================================
NCS HealthCare of Minnesota, Inc. 34-1866489 3201 Enterprise Parkway
Beachwood, Ohio 44122
1285 Corporate Center Dr. Ste 120 Eagan, MN 55121
======================================================================================================================
NCS HealthCare of Missouri, Inc. 34-1855274 3201 Enterprise Parkway
Beachwood, Ohio 44122
11720 E. 23rd St. Independence, MO 64050
3413 Hollenberg Dr. Brigeton, MO 63044
======================================================================================================================
</TABLE>
3
<PAGE> 36
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare of Modesto, Inc. 31-1510328 3201 Enterprise Parkway
Beachwood, Ohio 44122
602 Scenic Dr. Modesto, CA 95350
======================================================================================================================
NCS HealthCare of Montana, Inc. 34-1851710 3201 Enterprise Parkway
Beachwood, Ohio 44122
1611 Alderson Ave. Billings, MT 59102
======================================================================================================================
NCS HealthCare of Nebraska, Inc. 34-1866491 3201 Enterprise Parkway
Beachwood, Ohio 44122
300 Oak Creek Dr. Lincoln, NE 68528
======================================================================================================================
NCS HealthCare of New Mexico, Inc. 34-1866493 3201 Enterprise Parkway
Beachwood, Ohio 44122
2835 FG Pan American Fwy. Albuquerque, NM 87107
======================================================================================================================
NCS HealthCare of New York, Inc. 34-1854267 3201 Enterprise Parkway
Beachwood, Ohio 44122
219 Seneca Turnpike New Hartford, NY 13413
4 British American Blvd. Latham, NY 12110
2470 Walden Ave. Buffalo, NY 14225
50 Carlson Rd. Rochester, NY 14610
1607 Route 300 Newburgh, NY 12550
621 E. Brighton Syracuse, NY 13210
St.Camillus 813 Fay Road Syracuse, NY 13219
======================================================================================================================
NCS HealthCare of North Carolina, Inc. 56-1889643 3201 Enterprise Parkway
Beachwood, Ohio 44122
164 Windchime Ct. Raleigh, NC 27615
609 E. Harnett Street Benson, NC 27504
4020 Capital Blvd. Ste 102 Raleigh, NC 27604
44 Buck Shoals Road Bld C Unit 5,6,7 Arden, NC 28704
======================================================================================================================
NCS HealthCare of Ohio, Inc. 31-1257307 3201 Enterprise Parkway
Beachwood, Ohio 44122
4700 Northwest Parkway Hilliard, Ohio 43026
3617 Center Park Dr. Westchester, OH 45069
34300 Lakeland Blvd. Eastlake, OH 44095
219 W. 12th St. Dover, OH 44622
======================================================================================================================
</TABLE>
4
<PAGE> 37
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare of Oklahoma, Inc. 73-1499934 3201 Enterprise Parkway
Beachwood, Ohio 44122
4400 North Lincoln Ste 220 Oaklahoma City, OK 73105
10838 Marshall Street, Ste 122 Tulsa, OK 74116
1300 W. Evengreen Durant, OK 74701
3200 East Reno Del City, OK 73117
6815 NW 10th St, Ste. 4 Ok. City, OK 73127
3168 North Portland Ok. City, OK 73112
======================================================================================================================
NCS HealthCare of Oregon, Inc. 34-1836971 3201 Enterprise Parkway
Beachwood, Ohio 44122
3104 Turner Road SE Salem, OR 97302
2725 NE Columbia Blvd. Portland, OR 97211
2620 Barnett Rd. Ste H Medford, OR 97504
======================================================================================================================
NCS HealthCare of Pennsylvania, Inc. 23-2679334 3201 Enterprise Parkway
Beachwood, Ohio 44122
4113 Birney Ave Moosic, PA 18507
90 Glade Dr. Kittanning, PA 16201
6330 Hedgewood Dr. Ste 280 Allentown, PA 18106
109 S. Sharpsville Ave. Sharon, PA 16146
110 East Broad St. Souderton, PA 18964
127 South Center St. Edensburg, PA 15931
100 Beta Dr. Pittsburgh, Pa 15238
3000 South Queen St. Dallastown, PA 17313
Telford - Distribution Ctr.
810 Tech Dr. Telford, PA 18969
=========================================-------------================================================================
NCS HealthCare of Rhode Island, Inc. 05-0429829 3201 Enterprise Parkway
Beachwood, Ohio 44122
NCS Long Term Care Pharmacy, 500 South Rd. East Greenwich
RI 02818
======================================================================================================================
NCS HealthCare of South Carolina, Inc. 31-1508225 3201 Enterprise Parkway
Beachwood, Ohio 44122
937 Bowman Rd. Mt Pleasant, SC 29464
======================================================================================================================
</TABLE>
5
<PAGE> 38
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
NCS HealthCare of Tennessee, Inc. 34-1866494 3201 Enterprise Parkway
Beachwood, Ohio 44122
5055 Covington Way, Ste 6 Memphis, TN 38134
======================================================================================================================
NCS HealthCare of Texas, Inc. 34-1866495 3201 Enterprise Parkway
Beachwood, Ohio 44122
1313 Valwood Parkway, Ste 150 Carrollton, TX 75006
5291 Langfield Rd. Houston, TX 77040
7619 South University Ave Lubbock, TX 79423
======================================================================================================================
NCS HealthCare of Vermont, Inc. 31-1526078 3201 Enterprise Parkway
Beachwood, Ohio 44122
16 Gregory Dr. Ste 3 S. Borlington, VT 05403
======================================================================================================================
NCS HealthCare of Washington, Inc. 34-1844193 3201 Enterprise Parkway
Beachwood, Ohio 44122
Kent Ofice
25502 74th Ave South Kent, WA 98032
3305 Main St. Ste 205 Vancouver, WA 98663
======================================================================================================================
NCS HealthCare of Wisconsin, Inc. 34-1866497 3201 Enterprise Parkway
Beachwood, Ohio 44122
3101 E. Enterprise Ave Appleton, WI 54913
2840 21st Place LaCrosse, WI 54601
1801 C-1 Airport Rd Waukesha, WI 53188
======================================================================================================================
NCS of Missouri, Inc. 34-1859330 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NCS Services, Inc. 34-1837567 3201 Enterprise Parkway
Beachwood, Ohio 44122
NCS Progressive Rehab.
696 1st Ave North, Ste 203, St. Petersburg, FL 33701
34300 Lakeland Blvd. Eastlake, OH 44095
4700 Northwest Parkway Hilliard, OH 43026
======================================================================================================================
NCS Unlimited, Inc. 37-1360802 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NDS Consulting Applied For 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
</TABLE>
6
<PAGE> 39
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
Rescot System Group, Inc. 23-2589308 3201 Enterprise Parkway
Beachwood, Ohio 44122
1 Neshaminy Interplex Ste 207 Trevose, PA 19053
======================================================================================================================
Thrifty Medical Supply, Inc. 73-1291927 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
Uni-Care Health Services, Inc. 02-0468190 3201 Enterprise Parkway
Beachwood, Ohio 44122
23 Perimeter Rd, South
Londonderry, New Hampshire NH 03053
======================================================================================================================
Uni-Care Health Services of Maine, Inc. 02-0468192 3201 Enterprise Parkway
Beachwood, Ohio 44122
105 York Street Ste 1 Kennebunk, ME 04043
110 Davis Farm Road Portland, ME 04103
124 High Street, Ste 2 Caribou, ME 04736
20 Freedom Parkway Bangor, ME 04401
======================================================================================================================
</TABLE>
7
<PAGE> 40
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
PharmaSource Healthcare, Inc. 58-2066823 3201 Enterprise Parkway, Beachwood, Ohio 44122
3500 Parkway Ln NW Ste 280 Norcross, GA 30092
100 Hopspital Ave Ozark, AL 36360
462 E. G. Mills Parkway Hinesville, GA 31313
393 Ridgecrest Circle Clayton, GA 30525
1600 Albany St Ste. 200 Beech Grove, IN 46107
600 Mary St. Ste 3213 Evansville, IN 47747
700 Broadway 8th Fl. East Ft. Wayne, IN 46802
5454 Hollman Ave. PO Box 189 Hammond, IN 46320
21 North Ave. Ste. 450 Kansas City, KS 66102
1700 SW 7th St. Ste 814 Topeka, KS 66606
5301 East Hudson River Rd. Ann Arbor, MI 48206
One Hurly Plaza 11th Fl. Flint, MI 46503
215 North Ave. Suite 200 Mount Clemens, MI 46043
1700 Clinton St. Muskegon, MI 49442
440 S. Market Springfield, MO 65305
101 Highwatch Rd. Effingham Falls, NH
1000 16th St. NW Mandan, ND 58554
155 5th St. Barberton, OH 44203
217 Clifton Ave. 15th Fl. Cincinnati, OH 45220
410 W. 100th Ave Columbus, OH 43210
3535 Olentangy River Rd. Columbus, OH 43214
300 Rockefeller Dr. Moskogee, OK 74401
3300 NW Expressway 5 East, Oklahoma City, OK 73112
1350 Locust St. Ste 104 Pittsburgh, PA 15219
800 East 21st St. Ste. 300 Sioux Falls, SD 57117
2000 N. Old Hickory Trail DeSoto, TX 75115
520 E. 6th St Loop 256 Odessa, TX 79761
======================================================================================================================
</TABLE>
8
<PAGE> 41
<TABLE>
<CAPTION>
======================================================================================================================
ASSIGNOR EI# SITES
======================================================================================================================
<S> <C> <C>
Kern Acquisition Co. Inc 34-1865336 3201 Enterprise Parkway
Beachwood, Ohio 44122
======================================================================================================================
NCS HealthCare of Beachwood, Inc. 34-1881410 3201 Enterprise Parkway
Beachwood, Ohio 44122
4936 Blazer Parkway Ste B Dublin, OH 43017
4700 Northwest Parkway Hilliard, Ohio 43026
X ALLIANCE?????
======================================================================================================================
======================================================================================================================
PARTNERSHIPS
======================================================================================================================
NCS Mobile Diagnostic Gateway Center Parkway Pinellas. Park, FL 33782
2363 Federal Dr. Decatur, IL 62526
1245 Forest Ave. Des Plaines, IL 60018
113 North Park Ave. Herrin, IL 62948
3413 Hollenberg Dr. Bridgeton, MO 60344
618 Broadway St. Pitcalm, PA 15140
6950 Germantown Ave. Ste. 200 Philadelphia, PA 19119
34300 Lakeland Blvd. Eastlake 44095
3320 Bardaville Dr. Lansing, MI 48906
6317 Centre Park Dr. Westchester, OH 45069
======================================================================================================================
AAS Pharmacy 10203 Kotzebue Street, Ste 110 San Antonio, TX 78217
204 East Main St. Grayson, KY
10620 Colonel Glenn Rd. Ste B Little Rock, AR 72204
4936 Blazer Parkway Dublin, OH 43017
======================================================================================================================
</TABLE>
9
<PAGE> 42
ANNEX D
to
SECURITY AGREEMENT
SCHEDULE OF MARKS
----No material Marks----
<PAGE> 43
ANNEX E
to
SECURITY AGREEMENT
SCHEDULE OF PATENTS AND APPLICATIONS
-----No Material Patents-----
<PAGE> 44
ANNEX F
to
SECURITY AGREEMENT
SCHEDULE OF COPYRIGHTS AND APPLICATIONS
-----No material Copyrights-----
<PAGE> 1
EXHIBIT 10.18
EXECUTION COPY
SEPARATION AGREEMENT
--------------------
JEFFREY R. STEINHILBER ("Employee") and NCS HEALTHCARE, INC., a
Delaware corporation ("Company"), in exchange for their mutual covenants and
obligations set forth herein, hereby agree as follows:
1. As of June 11, 1999 ("Date of Resignation"), Employee, through his
signature below, voluntarily resigns his employment with the Company. Employee
understands that his employment records will reflect the voluntary nature of the
cessation of his employment, and expressly acknowledges that he has not been
"discharged" or "terminated" by the Company, constructively or otherwise. The
Company hereby consents to and accepts Employee's resignation.
2. Employee and the Company hereby agree that execution and acceptance
of this Agreement by the parties hereto constitutes a termination of that
certain Employment Agreement, dated December 1, 1998, between Company and
Employee, a copy of which has been attached hereto as EXHIBIT A (the "Employment
Agreement") as of the Date of Resignation. Employee and the Company hereby
acknowledge and agree that, pursuant to the terms of the Employment Agreement
and notwithstanding anything to the contrary contained herein or otherwise, the
obligations of the parties thereto set forth in Section 3 of the Employment
Agreement shall survive the termination thereof and Employee, by his signature
hereto, reaffirms his obligations as set forth in Section 3 of the Employment
Agreement. The Employee Noncompetition Agreement, dated February 13, 1996, is
hereby terminated in its entirety without the survival of any provisions.
3. In connection herewith, Employee will continue until November 30,
2001, to receive his $220, 000 annual salary, less such deductions and
withholdings as are required by law, payable in accordance with Company's
standard payroll practices (the "Salary Continuation"). In addition, Employee
will continue to until November 30, 2001, to receive reimbursement for club dues
and assessments for Mayfield Country Club and a $129.99 cellular telephone
allowance in addition to the medical, 401(k) and other benefits provided by the
Company to its executives and employees generally. Finally, Employee will be
entitled to a $725 bonus and to retain the notebook computer, computer monitor,
key board, and palm pilot previously provided to him by the Company and the
magazine subscriptions paid for by the Company in Employee's name will be
transferred to Employee's home address until renewal at the cost and choice of
Employee. If Jon Outcalt and Kevin Shaw cease to own or otherwise control, in
the aggregate, at least fifty percent (50%) of the voting control of the Company
(as a result of a sale, exchange or other transfer or as a result of a merger,
consolidation, reorganization or other transaction), then the "Salary
Continuation" and an amount equal to the maximum 401(k) match that would
otherwise have been paid by the Company will be immediately due in one lump sum
calculated using an annual discount rate of 6%.
4. After November 30, 2001, to the extent permitted by law, Employee
shall be entitled to continuation of coverage under the Company's health/medical
insurance plan at his own expense pursuant to any rights he may have under the
Federal
-1-
<PAGE> 2
Consolidated Omnibus Budget Reconciliation Act, as amended ("COBRA"), part VI of
Subtitle B of Title I of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended and Internal Revenue Code ss. 4980(B)(f). Such
continuation shall be afforded up to the maximum period provided by law so long
as Employee submits payments for elected coverage and otherwise complies with
conditions of continuation on a timely basis.
5. (a) Except as otherwise provided in this Agreement, Employee does
hereby for himself and for his heirs, executors, successors and assigns, release
and forever discharge the Company, its current and past subsidiaries, divisions,
and affiliated businesses, if any, together with its and their officers,
directors, management, representatives, employees, shareholders, agents,
successors, assigns, attorneys and other persons affiliated with the Company,
both known and unknown (collectively, the "Releasees"), of and from any and all
claims, demands, actions or causes of action, damages, or suits at law or
equity, of whatsoever kind or nature arising in connection with Employee's
employment or cessation of employment with the Company that has occurred prior
to the Effective Date of this Agreement, including, but not limited to, all
claims or demands for back pay, reinstatement, hire or re-hire, front pay, group
insurance or employee benefits of whatsoever kind (except on rights expressly
provided for herein), claims for moneys or expenses, any claims for failing to
obtain employment at any other company or with any other person or employer, any
claims relating to the Option Agreements (as defined in Section 7 below) or the
termination thereof, or demands for attorney's fees and legal expenses that
Employee has or may have by reason of any matter or thing arising out of, or in
any way connected with, directly or indirectly, any act or omission in
connection with Employee's employment or cessation of employment by the Company
that has occurred prior to the Effective Date of this Agreement.
(b) Except as otherwise provided in this Agreement, the Company hereby
releases and forever discharges Employee of and from any and all claims,
demands, actions or causes of action, damages, or suits at law or equity, of
whatsoever kind or nature arising out of or relating to Employee's employment
with Company, or demands for attorney's fees and legal expenses that the Company
has or may have by reason of any matter or thing arising out of, or in any way
connected with, directly or indirectly, any act or omission in connection with
Employee's employment by the Company that has occurred prior to the Effective
Date of this Agreement; provided, however, nothing herein shall be construed to
release Employee from any fraudulent or illegal conduct.
6. Employee recognizes and understands that, by executing this
Agreement, he shall be releasing the Releasees above from any claims that he now
has, may have, or subsequently may have under the Age Discrimination in
Employment Act of 1967, 29 U.S.C. Sections 621, ET SEQ., as amended (the
"ADEA"), by reason of any matter or thing arising out of, or in any way
connected with, directly or indirectly, any acts or omissions which have
occurred prior to and including the Effective Date of this Agreement. In other
words, Employee will have none of the legal rights against the aforementioned
parties that he would otherwise have under the ADEA by his signing this
Agreement.
7. The Company and Employee are parties to (i) an Amended and Restated
Stock Option Agreement dated as of December 7, 1995 (actually with the Company's
predecessor, Aberdeen Group, Inc. for 2,570 Aberdeen shares at $285.33 per
share, converted at 46.092647189 to 1 into 118,458 NCS shares at $6.19 per share
of which 23,600 were previously
-2-
<PAGE> 3
exercised, leaving a balance of 94,858) (the "December Agreement"), (ii) an
Incentive Stock Option Participation Agreement dated as of February 13, 1996
(the "February Agreement"), and (iii) a Nonqualified Stock Option Participation
Agreement dated as of April 22, 1997 (the "April Agreement"). Collectively, the
foregoing are referred to as the "Option Agreements." The parties agree that all
unvested options have been forfeited but that notwithstanding anything to the
contrary in the Option Agreements, Employee shall be entitled to exercise vested
options under the Option Agreements as follows:
<TABLE>
<CAPTION>
Option Price Last Date
Agreement Vested Options Per Share For Exercise
<S> <C> <C> <C>
December Agreement 94,858 $ 6.19 December 28, 2004
February Agreement 13,524 $16.50 December 28, 2004
April Agreement 5,000 $25.00 December 28, 2004
</TABLE>
The Company represents that the Human Resources Committee of the Board
of Directors has approved the extension of the exercise date of the Options
under the February and April Agreements to December 28, 2004. In addition the
provisions of the December Agreement relating to the "Share Purchase Agreement"
referred to therein are deemed deleted, the "Share Purchase Agreement" having
been terminated. Also Section 9 of the April Agreement shall be deemed to apply
to the December Agreement as well. The Company and Employee are also parties to
a Nonqualified Stock Option Participation Agreement dated October 23, 1998,
under which no options are vested and which is hereby terminated.
8. Employee and his heirs, executors, successors, assigns and
representatives shall hold the fact and terms of this Agreement in strict
confidence and shall not communicate, reveal, or disclose the terms of this
Agreement to any other persons except to Employee's immediate family, to legal
counsel, and to tax consultants, all of whom shall be instructed by Employee
similarly to hold the fact and terms of this Agreement in the strictest
confidence, and as required by law.
9. The Company hereby notifies Employee of his right to consult with
his chosen legal counsel before signing this Agreement. The Company shall
afford, and Employee acknowledges receiving, not less than twenty-one (21)
calendar days in which to consider this Agreement to insure that Employee's
execution of this Agreement is knowing and voluntary. In signing below, Employee
expressly acknowledges that he has had at least twenty-one (21) days to consider
this Agreement and that his execution of same is with full knowledge of the
consequences thereof and is of his own free will.
10. Employee warrants and represents that, prior to and including the
Effective Date of this Agreement, no claim, demand, cause of action, or
obligation which is subject to this Agreement has been assigned or transferred
to any other person or entity, and no other person or entity has or has had any
interest in said claims, demands, causes of action, or obligations, and that
Employee has the sole right to execute this Agreement.
-3-
<PAGE> 4
11. Both the Company and Employee agree and recognize that, for a
period of seven (7) calendar days following Employee's execution of this
Agreement, Employee may revoke this Agreement by providing written notice
revoking the same, within this seven (7) day period, to the Company at the
address set forth below. Such revocation of this Agreement by Employee will also
automatically revoke the acceptance of the offer set forth herein and Employee
will not be entitled to any amounts described herein.
Should Employee revoke this Agreement within this seven (7) day period,
Employee agrees immediately to return all moneys and other benefits that he has
received from the Company pursuant to this Agreement prior to the date of such
revocation.
12. All notices or other communications hereunder shall not be binding
on either party hereto unless in writing, and delivered to the other party
hereto at the following address:
If to the Company: NCS HEALTHCARE, INC.
3201 Enterprise Parkway, Suite 220
Beachwood, Ohio 44122
Attn: President
If to Employee: Jeffrey R. Steinhilber
300 Grey Fox Run
Bentleyville, Ohio 44022
Notices shall be deemed duly delivered upon hand delivery thereof at
the above addresses, one day after deposit with a nationally recognized
overnight delivery company or three days after deposit thereof in the United
States mails, postage prepaid, certified or registered mail. Either party may
change its address for notice by delivery of written notice thereof in the
manner provided.
13. This Agreement contains the entire agreement between the parties
hereto as to the subject matters addressed herein, and there are no
understandings between the parties other than those specifically and expressly
set forth in this Agreement. This Agreement shall not be amended or modified in
any manner except upon written agreement by the parties.
14. Employee acknowledges and agrees that his election to execute this
Agreement is entirely voluntary, and hereby acknowledges that he has not been
pressured, coerced, or otherwise unduly influenced by the Company to execute
this Agreement.
15. This Agreement shall be governed and interpreted pursuant to the
laws of the State of Ohio.
CAUTION TO EMPLOYEE: READ BEFORE SIGNING. THIS DOCUMENT CONTAINS A RELEASE OF
ALL CLAIMS AGAINST RELEASEES PRIOR TO THE EFFECTIVE DATE OF THIS AGREEMENT.
-4-
<PAGE> 5
IN WITNESS WHEREOF, Employee and the Company agree as set forth above:
Date of Receipt of Agreement Signature of Employee
by Employee: Acknowledging Date of Receipt
September 7, 1999 /s/ Jeffrey R. Steinhilber
- ----------------------------------- ------------------------------
Receipt Witnessed By:
/s/ Diane Steinhilber
------------------------------
Date of Execution by Employee:
(The "Effective Date of this Agreed To and Accepted By:
Agreement" is the Eighth (8th) day
After this Date.)
September 8, 1999 /s/ Jeffrey R. Steinhilber
- ----------------------------------- ------------------------------
Execution Witnessed By:
/s/ Diane Steinhilber
------------------------------
Date of Execution by Company:
September 10, 1999
- -----------------------------------
NCS HEALTHCARE, INC.
By:/s/ Kevin B. Shaw
---------------------------
Title: Chief Executive Officer
-----------------------
Execution Witnessed By:
/s/ Nancy Macklin
------------------------------
-5-
<PAGE> 6
EXHIBIT A
---------
[See attached]
---
-6-
<PAGE> 7
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is entered into this 1st day of December,
1998, by and between NCS HEALTHCARE, INC., a Delaware corporation (the
"Company"), and JEFFREY R. STEINHILBER, an individual ("Executive").
In consideration of and in reliance upon the covenants, obligations and
agreements herein contained, the Company and Executive hereby agree as follows:
1. EMPLOYMENT. Subject to the terms of this Agreement, for a period of
three (3) years commencing on the date hereof (the "Employment Period"), the
Company hereby agrees to employ Executive as Chief Operating Officer of the
Company, and Executive hereby accepts such employment. As such, Executive shall
report directly to the Chief Executive Officer (the "CEO") of the Company and
perform such reasonable and appropriate duties for the Company as may be
assigned to him by the CEO, including responsibility for organizing the
distribution and consulting functions of the Company. Specifically, during the
Employment Period, Executive's responsibility will include (i) completion of the
hub-and-spoke distribution model for the Company, (ii) achievement of certain
specific payroll and other expense targets as determined from time to time, and
(iii) completion of the Company's conversion to the DX System. Throughout the
Employment Period, Executive shall devote his efforts diligently and faithfully
on a full-time basis to the business and welfare of the Company in accordance
with and in furtherance of the policies and directives of the Company.
2. COMPENSATION AND BENEFITS.
2.1 SALARY. The Company shall pay Executive a base salary during his
employment at the rate of Two Hundred Twenty Thousand Dollars ($220,000) per
year, less such deductions and withholdings as are required by law, payable in
accordance with the Company's standard payroll practices. Such annual base
salary shall be reviewed by the CEO of the Company at least annually during the
Employment Period or within such other period as is consistent with the
Company's compensation review program in existence from time to time. Increases
in Executive's annual base salary shall be made at the discretion of the
Company's Board of Directors upon the recommendation of the CEO. Base salary
shall not be reduced after any such increase.
2.2 BONUS. As further consideration for the services to be rendered
by Executive to the Company during the Employment Period, Executive may receive
bonus compensation or other executive incentives based on Executive's and the
Company's performance. The amount of such bonus compensation or other executive
incentives, if any, shall be determined in the sole discretion of the Company's
Board of Directors upon recommendation of the CEO and may be comprised of a
combination of cash payments and the granting of options under the Company's
stock option program in existence from time to time. Any bonus shall be subject
to such deductions and withholdings as are required by law.
<PAGE> 8
2.3 BENEFITS. Executive shall be entitled to club dues and
assessments for Mayfield Country Club and a cellular telephone allowance in
addition to the medical, 401(k) and other benefits provided by the Company to
its executives or employees generally.
2.4 EXPENSES. The Company shall reimburse Executive for reasonable
expenses incurred by him on behalf of the Company in the performance of his
services during his employment. Executive shall furnish the Company with the
documentation in connection with such expenses required by the Internal Revenue
Code and the regulations promulgated thereunder.
3. NONDISCLOSURE AND NONSOLICITATION.
3.1 DEFINITIONS. For purposes of this Agreement, the terms "NCS
Group," "Competitor" and "Competitive Product or Service" are defined to
include:
(a) "NCS Group" means all business entities controlled by or under
common control with the Company.
(b) "Competitor" means any person or entity (or parent, subsidiary
or affiliate thereof) engaged in or about to become engaged in research on, or
the production, sale and/or performance of, any Competitive Product or Service
in the United States.
(c) "Competitive Product or Service" means a product or service
which is competitive with a product or service manufactured, sold or performed
by the NCS Group, or with respect to which the NCS Group has conducted research
and created a business plan, during the three (3) years immediately preceding
termination of Executive's employment with the Company.
3.2 NONCOMPETITION. During the Employment Period, and for a period
of eighteen (18) months following the termination for any reason of Executive's
employment with the Company (whether by expiration of the Employment Period or
otherwise), without the prior written consent of the Company, Executive will not
directly or indirectly render services to, act as an officer, director, partner,
consultant, agent or employee of, or otherwise assist or operate as a
Competitor. During the pendency of this noncompetition covenant, Executive will
immediately notify the Company of any change of his address and the name and
address of any subsequent employer. Nothing in this Section 3.2 shall prevent
Executive from being a member or officer of or from participating in the
activities of any trade or professional association, or from acquiring any
equity interest in the Company or of less than one percent (1%) in a Competitor
whose shares are traded on a national securities exchange or over-the-counter.
3.3 NONSOLICITATION. During the Employment Period and for a period
of eighteen (18) months following the termination for any reason of Executive's
employment with the Company (whether by expiration of the Employment Period or
otherwise), Executive will not directly or indirectly, without the prior written
approval of the Company, solicit, cause to be solicited or aid in soliciting,
any of the NCS Group's (i) customers as of the date of termination for the
purpose of selling to such customers Competitive Products or Services or (ii)
2
<PAGE> 9
employees as of the date of termination for the purpose of hiring any such
employees as an agent, consultant, employee or otherwise of another employer.
3.4 NONDISCLOSURE. Executive agrees that he shall not, at any time,
directly or indirectly, disseminate verbally or in writing or use for his
personal benefit, any Confidential Information, regardless of how it may have
been acquired, except for the disclosure of such information as may be necessary
for Executive to perform his duties hereunder, as required by law or otherwise
as authorized in writing by an officer of the Company. Executive further agrees
that, upon termination of his employment, he will return promptly to the Company
all memoranda, notes, records, reports, manuals and other documents (and all
copies thereof) relating to the NCS Group's business which he may then possess
or have under his control. For purposes of this Agreement, "Confidential
Information" means all information relating to the terms and conditions of this
Agreement and all information belonging to, used by, or which is in the
possession of, the NCS Group relating to the NCS Group's business, products,
services, strategies, pricing, customers, representatives, suppliers,
distributors, technology, programs, finances, costs, employee compensation,
marketing plans, developmental plans, computer software (including all operating
system and systems application software), inventions, developments or trade
secrets, all to the extent such information is not intended by the NCS Group to
be disseminated to the public or to other participants in its trade or business
or is otherwise not generally known to Competitors. Executive acknowledges that
all of the Confidential Information is and shall continue to be the exclusive
proprietary property of the NCS Group, whether or not prepared in whole or in
part by Executive and whether or not disclosed to or entrusted to the custody of
Executive.
3.5 REMEDIES. If Executive commits or threatens to commit a breach
of any of the provisions of this Section 3, the Company shall have the right to
have the provisions of this Agreement specifically enforced by any court having
jurisdiction, it being acknowledged by Executive and agreed by the parties that
any such breach or threatened breach will cause injury to the Company for which
money damages alone will not provide an adequate remedy. Therefore, if Executive
threatens to violate or violates any provisions of this Section 3, Executive
agrees that, in addition to its other remedies, the Company is entitled to
injunctive relief, including, but not limited to, temporary restraining orders
and/or preliminary or permanent injunctions to restrain or enjoin any violation
or threatened violation of this Agreement without having to post any bond. The
rights and remedies enumerated above shall be in addition to, and not in lieu
of, any other rights and remedies available to the Company at law or in equity.
3.6 REFORMATION OF AGREEMENT. If any of the covenants contained in
this Section 3, or any portion thereof, are found by a court of competent
jurisdiction to be invalid or unenforceable as against public policy or for any
other reason, such court shall exercise its discretion to reform such covenant
to the end that Executive shall be subject to nondisclosure, noncompetition and
nonsolicitation covenants that are reasonable under the circumstances and are
enforceable by the Company. In any event, if any provision of this Agreement is
found unenforceable for any reason, such provision shall remain in force and
effect to the maximum extent allowable and all nonaffected provisions shall
remain fully valid and enforceable.
3
<PAGE> 10
3.7 EXTENSION OF COVENANTS. If a court of competent jurisdiction
finds that Executive has violated any of the restrictions or covenants contained
in this Section 3, then the parties agree that the period of all restrictions
and covenants set forth in Section 3 automatically shall be extended by the
number of days that the court determines Executive to have been in violation of
such restriction or covenant.
3.8 REASONABLENESS OF TERMS. Both the Company and Executive
stipulate and agree that covenants and other terms contained in this Section 3
are reasonable in all respects, including time period, geographical area and
scope of restricted activities (it being acknowledged that the Company's
business is being carried on within a rapidly consolidating industry), and that
the restrictions contained herein are designed to protect the NCS Group's
business and ensure that Executive does not engage in unfair competition with
the NCS Group.
4. TERMINATION.
4.1 MANNER OF TERMINATION. This Agreement may be terminated prior to
the end of the Employment Period as follows:
(a) BY THE COMPANY FOR DISABILITY. At the option of and by written
notice from the Company, if Executive shall become disabled, which, for purposes
of this Agreement, shall be deemed to have occurred if Executive suffers from
any disability or impairment of health which continues for at least one hundred
twenty (120) consecutive days or one hundred twenty (120) days in any twelve
(12) month period and which, in the opinion of the Company, renders the
Executive unable to perform his duties on an active, full-time basis.
(b) BY THE COMPANY FOR GOOD CAUSE. At the option of and by written
notice from the Company, if the Company shall find "good cause" for termination,
which, for purposes of this Agreement, shall mean (i) a material breach by
Executive of his obligations under Section 3 of this Agreement or his fiduciary
obligations to the Company, (ii) commission by Executive of a felony or any
offense involving misappropriation of money or property, (iii) repeated
absenteeism, (iv) illegal drug use or excessive alcohol consumption on the part
of Executive, or (v) if Executive repeatedly fails, after notice and a
reasonable chance to cure, to observe the reasonable directives of the Board of
Directors of the Company or their designee to whom Executive reports.
(c) BY EXECUTIVE. By executive upon not less than ninety (90) days
notice upon which the Executive would receive a severance benefit of twelve (12)
months base pay and benefits.
(d) DEATH. As of the end of the month in which Executive dies.
4.2 CONSEQUENCES OF TERMINATION. The provisions of Section 3 will
survive termination of this Agreement. In addition, all rights of the parties to
seek damages and other relief for breaches of this Agreement occurring prior to
or on account of the termination hereof by the other of this Agreement will
survive termination. In addition, if Executive's employment is terminated by the
Company pursuant to Section 4.1(a) above, Executive shall be
4
<PAGE> 11
entitled to continue to receive his annual base salary and, to the extent
eligible for participation, to receive benefits under Section 2.3 above for a
period equal to the longer of (i) eighteen (18) months, or (ii) the number of
months remaining in the Employment Period. Except as set forth in this Section
4.2 and Section 4.3, all rights and obligations of the parties hereunder will
expire upon termination of this Agreement.
4.3 SEVERANCE BENEFITS. In addition to any other compensation or
benefit payable to Executive hereunder, if, at any time during the Employment
Period, (a) Jon Outcalt and Kevin Shaw cease to own or otherwise control, in the
aggregate, at least fifty percent (50%) of the voting control of the Company (as
a result of a sale, exchange or other transfer or as a result of a merger,
consolidation, reorganization or other transaction), (b) Kevin Shaw is no longer
the Chief Executive Officer of the Company, and thereafter, but within the
Employment Period or (c) the scope of Chief Operating Officer's responsibilities
are materially changed from historical practices, (y) Executive's employment
with the Company is terminated by the Company for any reason other than those
set forth in Section 4.1(a), (b) or (d) above or (z) Executive terminates his
employment pursuant to Section 4.1(c) above, Executive shall be entitled, as a
severance benefit, to continue to receive his annual base salary and benefits
under Section 2.3 above for a period equal to the longer of (i) eighteen (18)
months, or (ii) the number of months remaining in the Employment Period.
5. MISCELLANEOUS.
5.1 WAIVER. Failure of the Company at any time to enforce any
provision of this Agreement or to require performance by Executive of any
provision hereof shall in no way affect the validity of this Agreement or any
part hereof or the right of the Company thereafter to enforce its rights
hereunder; nor shall it be taken to constitute a condemnation or waiver by the
Company of that default or any other or subsequent default or breach.
5.2 NOTICES. All notices or other communications hereunder shall not
be binding on either party hereto unless in writing and delivered to the other
party hereto at the following address:
If to the Company: NCS HEALTHCARE, INC.
3201 Enterprise Parkway, Suite 220
Beachwood, Ohio 44122
Attn: Chief Financial Officer
If to Executive: Jeffrey R. Steinhilber
300 Grey Fox Run
Bentleyville, OH 44022
Notices shall be deemed duly delivered upon hand delivery thereof at the above
addresses or two (2) days after deposit thereof in the United States mails,
postage prepaid, certified or registered mail. Any notice delivered in any other
manner shall be effective upon receipt. Either party may change its address for
notice by delivery of written notice thereof in the manner provided.
5
<PAGE> 12
5.3 ASSIGNMENT. No rights of any kind under this Agreement shall,
without prior written consent of the Company, be transferable to or assignable
by Executive or any other person, or be subject to alienation, encumbrance,
garnishment, attachment, execution or levy of any kind, voluntary or
involuntary. This Agreement shall be binding upon and shall inure to the benefit
of the Company, its successors and assigns.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio without regard for the
conflicts of laws provisions thereof.
5.5 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document.
5.6 HEADINGS. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
5.7 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE
READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS. This
Agreement constitutes the entire understanding and agreement between the parties
hereto concerning the subject matter hereof. All negotiations by the parties
hereto concerning the subject matter hereof are merged into this Agreement and
there are no representations, warranties, covenants, understandings or
agreements, oral or otherwise, in relation thereto by the parties hereto other
than those incorporated herein. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by the parties hereto.
INTENDING TO BE LEGALLY BOUND, the parties or their duly authorized
representatives have signed this Agreement on the date first above written.
NSC HEALTHCARE, INC.
By: /s/Kevin B. Shaw
--------------------------
Title: Chief Executive Officer
-----------------------
EXECUTIVE
/s/Jeffrey R. Steinhilber
------------------------------
Jeffrey R. Steinhilber
6
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OF
INCORPORATION
CORPORATE NAME OR ORGANIZATION
Beachwood HealthCare Management, Inc. Delaware
Management & Network Services, Inc. Ohio
NCS HealthCare of Arizona, Inc. Ohio
NCS HealthCare of Arkansas, Inc. Ohio
NCS HealthCare of Beachwood, Inc. Ohio
NCS HealthCare of California, Inc. Ohio
NCS HealthCare of Connecticut, Inc. Connecticut
NCS HealthCare of Florida, Inc. Ohio
NCS HealthCare of Illinois, Inc. Illinois
NCS HealthCare of Indiana, Inc. Indiana
NCS HealthCare of Iowa, Inc. Ohio
NCS HealthCare of Kansas, Inc. Ohio
NCS HealthCare of Kentucky, Inc. Ohio
NCS HealthCare of Maryland, Inc. Ohio
NCS HealthCare of Massachusetts, Inc. Ohio
NCS HealthCare of Michigan, Inc. Ohio
NCS HealthCare of Minnesota, Inc. Ohio
NCS HealthCare of Missouri, Inc. Ohio
NCS HealthCare of Montana, Inc. Ohio
NCS HealthCare of Nebraska, Inc. Ohio
NCS HealthCare of New Jersey, Inc. New Jersey
NCS HealthCare of New Mexico, Inc. Ohio
NCS HealthCare of New York, Inc. Ohio
NCS HealthCare of North Carolina, Inc. Ohio
NCS HealthCare of Ohio, Inc. Ohio
NCS HealthCare of Oklahoma, Inc. Oklahoma
NCS HealthCare of Oregon, Inc. Ohio
NCS HealthCare of Pennsylvania, Inc. Pennsylvania
NCS HealthCare of Rhode Island. Inc. Rhode Island
NCS HealthCare of South Carolina, Inc. Ohio
NCS HealthCare of Tennessee, Inc. Ohio
NCS HealthCare of Texas, Inc. Ohio
NCS HealthCare of Vermont, Inc. Ohio
NCS HealthCare of Washington, Inc. Ohio
NCS HealthCare of Wisconsin, Inc. Ohio
NCS of Missouri, Inc. Delaware
NCS Services, Inc. Ohio
NCS Consulting Inc. Ohio
PharmaSource Healthcare, Inc. Georgia
Rescot Systems Group, Inc. Pennsylvania
Uni-Care Health Services, Inc. New Hampshire
Uni-Care Health Services of Maine, Inc. New Hampshire
E-3
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-72243; Form S-8 No. 333-70741; Form S-8 No. 333-49417; Form
S-3 No. 333-63437; Form S-3 No. 333-47293; Form S-3/A, No. 333-29565 and Form
S-3/A, No. 333-35551) of NCS HealthCare, Inc. and in the related prospectuses of
our report dated August 11, 1999, with respect to the consolidated financial
statements of NCS HealthCare, Inc. and subsidiaries included in its Annual
Report (Form 10-K) for the year ended June 30, 1999.
/s/ Ernst & Young LLP
Cleveland, Ohio
September 27, 1999
E-4
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