<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997
REGISTRATION NO. 333-34463
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PRIORITY HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
INDIANA 5122 35-1927379
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S.
JURISDICTION OF CLASSIFICATION CODE NUMBER) EMPLOYER
INCORPORATION OR IDENTIFICATION
ORGANIZATION) NO.)
285 WEST CENTRAL PARKWAY
ALTAMONTE SPRINGS, FLORIDA 32714
(407) 869-7001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT L. MYERS
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PRIORITY HEALTHCARE CORPORATION
285 WEST CENTRAL PARKWAY
ALTAMONTE SPRINGS, FLORIDA 32714
(407) 869-7001
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
JAMES A. ASCHLEMAN, ESQ. REBECCA R. ORAND, ESQ.
BAKER & DANIELS GREENBERG TRAURIG HOFFMAN LIPOFF
300 NORTH MERIDIAN STREET ROSEN & QUENTEL, P.A.
SUITE 2700 1221 BRICKELL AVENUE
INDIANAPOLIS, INDIANA 46204-1782 MIAMI, FLORIDA 33131
(317) 237-0300 (305) 579-0500
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
is practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Class B Common Stock, $.01 par value...... 2,300,000 shares $15.00 $34,500,000 $10,455
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</TABLE>
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(1) Includes 300,000 shares subject to an over-allotment option granted to the
Underwriters.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(3) Included in amount previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 20, 1997
PROSPECTUS
2,000,000 SHARES
LOGO
CLASS B COMMON STOCK
-----------
All of the shares of Class B Common Stock offered hereby are being sold by
Priority Healthcare Corporation ("Priority" or the "Company"). Prior to this
offering, there has been no public market for the Company's Class A Common
Stock or Class B Common Stock (collectively, the "Common Stock"). It is
currently estimated that the initial public offering price will be between
$13.00 and $15.00 per share. See "Underwriting" for the factors considered in
determining the initial public offering price. The Class B Common Stock has
been approved for listing on the Nasdaq National Market under the symbol
"PHCC."
The Company currently has outstanding 10,214,286 shares of Class A Common
Stock, representing all of the outstanding shares of Common Stock. The holders
of the Class A Common Stock and Class B Common Stock are entitled to three
votes per share and one vote per share, respectively, and generally vote
together as a single class on all matters submitted to a vote of the
shareholders of the Company. Following this offering, Bindley Western
Industries, Inc. ("BWI"), through its ownership of all of the outstanding
shares of Class A Common Stock, will beneficially own 83.6% of the Common
Stock, will have 93.9% of the voting power of the outstanding Common Stock and
will continue to control the Company. BWI has advised the Company that,
following this offering, BWI will evaluate whether to distribute its shares of
Class A Common Stock to BWI's shareholders. See "Principal Shareholder,"
"Relationship with BWI" and "Description of Capital Stock."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................... $ $ $
Total (3)........................... $ $ $
</TABLE>
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(1) The Company and BWI have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $790,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Class B Common Stock on the same terms as set
forth above solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Class B Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to certain other conditions including the right of the Underwriters to
withdraw, cancel, modify or reject any order in whole or in part. It is
expected that delivery of the shares of Class B Common Stock will be made at
the offices of Raymond James & Associates, Inc., St. Petersburg, Florida, on or
about , 1997.
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
[PHOTO OF WOMAN IN PHARMACY]
[PHOTO OF PHARMACIST ON PHONE]
The Company's JCAHO-accredited
pharmacy strives toward continuous The Company's pharmacists and
quality improvement through a registered nurses are available for
Quality Assessment and Quality ongoing consultation with the
Improvement Program. patient and prescribing physician
regarding the patient's therapy and
progress seven days a week, 24 hours
a day.
[PHOTO OF BIOPHARMACEUTICALS]
The Company specializes in the distribution and overnight delivery of
biopharmaceuticals nationwide.
[PHOTO OF PATIENT RECEIVING [PHOTO OF WOMAN AT COMPUTER]
INJECTION]
State-of-the-art systems provide
The Company provides innovative important outcomes data, cross-
nursing- and pharmacy-supported selling lead generation, and
disease treatment management customer efficiencies in ordering
programs. products or services.
[PHOTO OF EMPLOYEE FILLING ORDER FROM WAREHOUSE SHELVES]
The Company's expanding distribution network has maintained a 98% fill rate to
its nationwide customers with next day deliveries of biopharmaceuticals.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS B COMMON
STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
THE COMPANY WILL FURNISH ITS SHAREHOLDERS WITH ANNUAL REPORTS CONTAINING
AUDITED FINANCIAL STATEMENTS CERTIFIED BY AN INDEPENDENT AUDITING FIRM AND
INTENDS TO DISTRIBUTE QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH
FISCAL YEAR CONTAINING UNAUDITED FINANCIAL INFORMATION.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes thereto
appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of
certain factors to be considered by prospective investors.
Priority Healthcare Corporation ("Priority" or the "Company") is a national
distributor of specialty pharmaceuticals and related medical supplies to the
alternate site healthcare market and is a provider of patient-specific, self-
injectable biopharmaceuticals and disease treatment programs to individuals
with chronic diseases. Through its Priority Healthcare Distribution division
("Priority Distribution"), the Company sells over 3,500 SKUs of specialty
pharmaceuticals and medical supplies to outpatient renal care centers and
office-based physicians in the oncology and infectious disease markets. With
the recent acquisition of Grove Way Pharmacy, Priority Distribution has entered
the vaccine market. Priority Distribution offers value-added services to meet
the specific needs of these markets by shipping refrigerated pharmaceuticals
overnight in special packaging to maintain appropriate temperatures, offering
automated order entry services and offering customized distribution for group
accounts. From distribution centers in Altamonte Springs, Florida and Santa
Ana, California, Priority Distribution services over 2,000 customers in all 50
states and Puerto Rico, including approximately 550 office-based oncologists
and 800 renal dialysis clinics.
Through its Priority Pharmacy Services division ("Priority Pharmacy"), the
Company fills individual patient prescriptions for self-injectable
biopharmaceuticals for over 1,400 patients. These patient-specific
prescriptions are filled at two licensed pharmacies in Altamonte Springs,
Florida, where the Company reconstitutes in syringes the components of the
biopharmaceuticals, according to manufacturer's instructions, and ships these
products directly to the patient overnight in specialized packages. Priority
Pharmacy also provides disease treatment programs for hepatitis, melanoma,
cancer, human growth deficiency and the complications of HIV. Management
believes that it is the only provider that offers this range of services on a
nationwide basis.
Priority sells the majority of its products and services into two large and
growing markets--oncology and chronic renal dialysis. Frost & Sullivan
estimated the U.S. market for oncology pharmaceuticals to be $4.1 billion in
1996 and projected it to grow at a compound annual rate of 13.2% from 1996
through 2003. The Company believes that the office-based segment of the
oncology pharmaceutical market represents approximately 25% of such market and
has been growing faster than the overall market. According to the Health Care
Financing Administration, the number of patients who received renal dialysis
treatments grew from approximately 157,000 in 1992 to approximately 200,000 in
1995, representing a compound annual growth rate of approximately 8%. The
Company also sells products and services into the infectious disease market,
principally for the treatment of hepatitis C. The National Institutes of Health
estimates that approximately 30,000 new acute hepatitis C infections occur
annually.
Priority's net sales have increased from $79.6 million in 1993 to $158.2
million in 1996. In the same period, operating income has increased from $2.1
million in 1993 to $7.7 million in 1996. The Company's objective is to continue
to grow rapidly and enhance its market position as a leading specialty
distributor by capitalizing on its business strengths and pursuing the
following strategy: (i) continue to focus on and further penetrate the
alternate site market; (ii) enter new markets by distributing new product
categories and patient-specific biopharmaceuticals; (iii) accelerate growth of
its higher margin, patient-specific pharmacy business by leveraging
relationships with existing distribution customers; (iv) maintain intense cost
control while investing in infrastructure; and (v) pursue acquisitions to
complement existing product offerings or further penetrate markets.
3
<PAGE>
RELATIONSHIP WITH BWI
The Company is a wholly-owned subsidiary of BWI. Following this offering, BWI
will beneficially own 10,214,286 shares of Class A Common Stock, representing
83.6% of the Common Stock (81.6% if the Underwriters' over-allotment option is
exercised in full), and will have 93.9% of the voting power of the outstanding
Common Stock (93.0% if the Underwriters' over-allotment option is exercised in
full). As a result, BWI will be able to determine any corporate action
requiring approval of holders of the Common Stock, including the election of
the entire Board of Directors of the Company, without the approval of the other
shareholders of the Company.
BWI has advised the Company that, following this offering, BWI will evaluate
whether to distribute its shares of Class A Common Stock to BWI shareholders.
Unless and until such distribution is completed, BWI will retain control of the
Company. Currently, three of the Company's directors are directors and
executive officers of BWI. In connection with this offering, BWI and the
Company have entered into a series of agreements, including a Revolving Credit
Promissory Note, an Indemnification and Hold Harmless Agreement, a Tax Sharing
Agreement and an Administrative Services Agreement, governing certain aspects
of the relationship between the Company and BWI subsequent to this offering.
See "Risk Factors," "Management," "Relationship with BWI" and "Principal
Shareholder."
THE OFFERING
<TABLE>
<C> <S>
Class B Common Stock being offered.................. 2,000,000 shares(1)
Class B Common Stock outstanding after the offering. 2,000,000 shares(1)(2)
Class A Common Stock outstanding after the offering. 10,214,286 shares(3)
Total Common Stock outstanding after the offering... 12,214,286 shares(1)(2)
Use of proceeds..................................... To repay certain
indebtedness to BWI and
for working capital and
general corporate
purposes, including
potential acquisitions.
See "Use of Proceeds."
Nasdaq National Market Symbol....................... PHCC
</TABLE>
- --------
(1) Excludes up to 300,000 shares of Class B Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Excludes (i) 10,214,286 shares of Class B Common Stock issuable upon
conversion of outstanding shares of Class A Common Stock and (ii) an
aggregate of 1,275,000 shares of Class B Common Stock reserved for issuance
upon the exercise of options granted or available for grant, or upon the
issuance of restricted stock, pursuant to the Company's stock option plans,
of which options to purchase 455,050 shares with an exercise price equal to
the initial public offering price set forth on the cover page of this
Prospectus have been granted. See "Management--Compensation of Directors"
and "Executive Compensation--1997 Stock Option and Incentive Plan" and
"Description of Capital Stock."
(3) The Class A Common Stock is identical to the Class B Common Stock, except
that the Class A Common Stock is entitled to three votes per share and the
Class B Common Stock is entitled to one vote per share. The holders of the
Class A Common Stock and the Class B Common Stock generally vote together
as a single class on all matters submitted to a vote of the holders of
Common Stock. The Class A Common Stock will automatically convert into
Class B Common Stock on a share-for-share basis upon certain transfers
following any distribution of such Class A Common Stock by BWI to its
shareholders. See "Risk Factors--Relationship with and Benefits to BWI" and
"Description of Capital Stock."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA (1)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ----------------------------
1994 1995 1996 1996 1997
-------- -------- -------------------- ------- --------------------
PRO FORMA PRO FORMA
ACTUAL ACTUAL ACTUAL (2) ACTUAL ACTUAL (2)
-------- -------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Net sales.............. $107,449 $123,990 $158,247 $158,247 $65,348 $108,597 $108,597
Cost of products sold.. 100,254 111,448 141,074 141,074 57,947 97,449 97,449
Gross profit........... 7,195 12,542 17,173 17,173 7,401 11,148 11,148
Selling, general and
administrative
expense............... 4,394 7,836 8,443 8,923 4,009 4,960 5,200
Depreciation and
amortization.......... 512 998 1,009 1,009 500 656 656
Earnings from
operations............ 2,289 3,708 7,721 7,241 2,892 5,532 5,292
Interest expense, net.. 200 511 437 464 170 498 237
Earnings before
income taxes.......... 2,089 3,197 7,284 6,777 2,722 5,034 5,055
Provision for income
taxes................. 835 1,311 2,915 2,712 1,089 2,013 2,021
Net earnings........... 1,254 1,886 4,369 4,065 1,633 3,021 3,034
Pro forma earnings
per share (2)(3)...... $0.38 $0.27
Pro forma weighted
average shares
outstanding (2)....... 10,740,465 11,152,346
<CAPTION>
JUNE 30, 1997
--------------------
AS ADJUSTED
ACTUAL (4)
-------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $24,022 $49,272
Total assets........................................................... 68,118 79,583
Payable to parent...................................................... 13,785 --
Long-term debt......................................................... 6,365 6,365
Total liabilities...................................................... 41,697 27,912
Shareholders' equity................................................... 26,421 51,671
</TABLE>
- --------
(1) During the periods presented, the Company made two acquisitions. See "The
Company--Acquisition History." These acquisitions were accounted for under
the purchase method of accounting and, accordingly, the results of
operations of the acquired entities are included in the Company's financial
statements from their respective dates of acquisition. As a result, period-
to-period comparisons of financial position and results of operations are
not necessarily meaningful.
(2) Adjusted to give effect to the pro forma adjustments described under
"Unaudited Pro Forma Consolidated Financial Data" commencing on page 18.
(3) Historical earnings per share data are not meaningful as the Company's
historical capital structure is not comparable to periods subsequent to
this offering.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Class B Common
Stock offered by the Company at an assumed offering price of $14.00 per
share and the application of the net proceeds therefrom. See "Use of
Proceeds."
----------------
Unless otherwise indicated, information in this Prospectus (i) assumes no
exercise of the Underwriters' option to purchase from the Company up to 300,000
additional shares of Class B Common Stock to cover over-allotments, if any and
(ii) gives effect to a recapitalization of the Company's Common Stock on August
25, 1997, resulting in the issuance of 10,214,286 shares of Class A Common
Stock to BWI.
5
<PAGE>
RISK FACTORS
The shares of Class B Common Stock offered hereby involve a high degree of
risk, including the risks described below. Prospective investors should
carefully consider the specific factors set forth below, as well as the other
information contained in this Prospectus, before deciding to invest in the
Class B Common Stock offered hereby.
This Prospectus contains certain forward-looking statements which represent
the Company's expectations or beliefs, and which involve certain risks and
uncertainties, including but not limited to, changes in interest rates,
competitive pressures, changes in customer mix, financial stability of major
customers, investment procurement opportunities and changes in governmental
regulations or the interpretation thereof, which could cause actual results to
differ from those in the forward-looking statements. For this purpose, any
statement contained in this Prospectus that is not a statement of historical
fact may be deemed to be a forward-looking statement. These statements by
their nature involve substantial risks and uncertainties, certain of which are
beyond the Company's control, and actual results may differ materially
depending on a variety of important factors, including those described below
under this "Risk Factors" Section and elsewhere in this Prospectus.
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, prior to
making an investment in the Class B Common Stock.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY; LIMITED RELEVANCE OF HISTORICAL
FINANCIAL INFORMATION
To date, the Company has been operated as a subsidiary of BWI. After this
offering, the Company will continue to be a majority-owned subsidiary of BWI,
but will operate as a stand-alone company. BWI will have no obligation to
provide assistance to the Company except as provided in certain agreements
between the Company and BWI. See "Relationship With BWI--Relationship and
Transactions Following the Offering. There can be no assurance that the
Company will be viable as a stand-alone company or that this change will not
have an adverse effect on the Company. The financial information included in
this Prospectus is not necessarily indicative of the Company's future results
of operations, financial position and cash flows or what the Company's results
of operations, financial position and cash flows would have been had it been a
separate, stand-alone entity during the periods presented. See "Unaudited Pro
Forma Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Relationship With BWI."
ABSENCE OF LONG-TERM CONTRACTS WITH SUPPLIERS; DEPENDENCE UPON SINGLE SOURCE
FOR A KEY PRODUCT
The Company has few long-term contracts with its suppliers. The Company's
arrangements with most of its suppliers may be cancelled by either party,
without cause, on minimal notice. Many of these arrangements are not governed
by written agreements. During 1996, approximately 36% of the Company's
revenues were attributable to sales of erythropoietin ("EPO") to the renal
care market. EPO for the renal care market is available from only one
manufacturer, Amgen, Inc. ("Amgen"), with which the Company must maintain good
working relations. The Company's purchases from Amgen are currently guaranteed
by BWI, and there can be no assurance that the Company, as a stand-alone
entity, would be able to purchase products from Amgen on terms as favorable.
The Company is involved in a lawsuit in which this supplier is an adverse
party. See "Business--Legal Proceedings." Any termination of or adverse change
in the Company's commercial relationships with its key suppliers could have a
material adverse effect on the Company.
Bristol-Myers Squibb Company ("Bristol-Myers Squibb"), a major
pharmaceutical manufacturer, has purchased a distributor to market oncology-
related products to the office-based oncologist market, which is a market from
which the Company derives substantial revenues. As a result, that distributor
has a significant price advantage on Bristol-Myers Squibb products. There can
be no assurance that other pharmaceutical manufacturers, including those whose
products account for a significant portion of the Company's revenues, will not
seek to limit the availability or change the terms of supply of such products
in the future.
COMPETITION
The alternate site segment of the healthcare industry in which the Company
competes is highly competitive and is experiencing both horizontal and
vertical consolidation. All of the products which the Company sells are
6
<PAGE>
available from sources other than the Company. Current and potential
competitors of the Company include regional and national full-line, full-
service medical supply distributors; independent specialty distributors;
national full-line, full-service wholesale drug distributors, such as Bergen
Brunswig Corporation and Cardinal Health, Inc., that operate their own
specialty distribution businesses; institutional pharmacies; hospital-based
pharmacies; home healthcare agencies; mail order distributors that distribute
medical supplies on a regional or national basis; and certain manufacturers,
such as Bristol-Myers Squibb, that own distributors or that sell their
products both to distributors and directly to users, including clinics and
physician offices. These competitive pressures continue to exert pressure on
margins, particularly those of Priority Distribution. Some of the Company's
competitors have greater financial, technical, marketing and managerial
resources than the Company. There can be no assurance that competitive
pressures will not have a material adverse effect on the Company. See
"Business--Competition."
RISKS RELATED TO GOVERNMENT REGULATION
The Company, its customers and its suppliers are subject to extensive
regulation by federal, state and local government agencies. The Company's
distribution business is required to register for permits and/or licenses
with, and comply with certain operating and security standards of, the United
States Drug Enforcement Administration (the "DEA"), the Food and Drug
Administration (the "FDA"), and appropriate state agencies. The Company's
Altamonte Springs, Florida and Santa Ana, California distribution centers are
licensed to distribute pharmaceuticals in accordance with the Prescription
Drug Marketing Act of 1987. The Altamonte Springs location is also licensed to
distribute or dispense certain controlled substances in accordance with the
requirements of the Controlled Substances Act of 1970. Similarly, the
Company's provider businesses are subject to licensing by the DEA as well as
by the state boards of pharmacy, state health departments, and other state
agencies where they operate. In addition, the Company is subject to federal
and state regulations which govern financial and other arrangements between
healthcare providers, including the federal anti-kickback statute and other
fraud and abuse laws. The fraud and abuse laws impose criminal and civil
sanctions, are broad in scope, are subject to frequent modification and varied
interpretation, and recently have been expanded by the Health Insurance
Portability and Accountability Act of 1996. Failure to comply with these laws
and regulations could subject the Company to significant civil sanctions,
especially under the strict liability standards imposed by the Controlled
Substances Act of 1970 and the broad scope of coverage imposed by the fraud
and abuse laws and could result in suspension of the Company's operations.
On November 14, 1995, an investigator for the FDA, accompanied by an
inspector from the State of Florida Board of Pharmacy, inspected the Company's
pharmacy in Altamonte Springs, Florida. At the end of the inspection, the FDA
investigator issued an FDA Form-483, which is the form used by FDA
investigators to identify any observed or suspected noncompliance with the
laws administered by the agency. The FDA Form-483 identified the facility as a
pharmacy/repackager and listed three observations related to certain
requirements that the FDA typically imposes on manufacturers of sterile
products. The Company advised the FDA in December 1995 that the Company
believes it is not, within the statutory or regulatory meaning of these terms,
a repackager or a manufacturer. A second inspection of the same facility
occurred on June 26, 1997, in which the FDA investigator was again accompanied
by Florida pharmacy authorities. The FDA investigator issued a substantially
identical FDA Form-483 at the end of that inspection. The Florida State Board
of Pharmacy did not issue any deficiencies regarding the operations of the
Altamonte Springs pharmacy in either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug manufacturing
regulated by the FDA. The Company's response to the FDA in December 1995 cited
this CPG and explained the Company's contention that, according to the FDA's
own criteria, the Altamonte Springs facility is a pharmacy properly regulated
under state and local laws.
The FDA has indicated publicly that it expects to further clarify and
explain through rulemaking the distinction between pharmaceutical
manufacturing and pharmacy operations. Legislation has been introduced in
7
<PAGE>
this session of Congress that would clarify this distinction. Thus, the
distinction between a pharmacy and a pharmaceutical manufacturer currently is
a subject of activity by policymakers in the Federal government.
While this activity may clarify matters in the future, the criteria that
differentiate drug manufacturing from pharmacy operations are uncertain under
the current state of the law. If the Company is correct and its operations are
limited to those engaged in by pharmacies, there should be no material adverse
effect from the FDA Form-483s because the Company believes it is currently in
compliance in all material respects with applicable state and local laws. If
the Company is deemed to be a sterile product manufacturer or a sterile
product repackager, the Company would be subject to additional regulatory
requirements. Because the FDA does not currently have clear guidance or
regulations on this subject, the FDA or other legal authorities could decide
that the Company must file for approval of a New Drug Application. Such an
event could have a material adverse effect on the Company.
Alternatively, the FDA could determine that the Company is a sterile
products repackager and promulgate regulations or publish guidance respecting
such entities. In that event, the Company would likely have to comply with
that portion of the FDA requirements that covers the packaging operations of
sterile product manufacturers. These requirements may include stability
validation, expiration dating, sterility control, sterile product
environmental monitoring, and good manufacturing practices including
appropriate employee training related to the foregoing. The Company believes
that the cost of compliance with such requirements would not be material to
the Company's operations. However, there can be no assurance that other
conditions or requirements would not be imposed that would have a material
adverse effect on the Company.
There can be no assurance that future legislation, future rulemaking, or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
The State of Florida Board of Pharmacy regulates the compounding activities
of Florida pharmacies, including certain activities of the Company. The
Company has obtained a Community/Special Parenteral/Enteral Compounding
Pharmacy Permit. Over the past several years, the Florida Board of Pharmacy
has proposed certain changes to its compounding requirements. The Company
believes that it is in compliance with such current requirements, but there
can be no assurance that other conditions or requirements would not be imposed
in the future that would have a material adverse effect on the Company.
Additionally, state laws prohibit the practice of medicine and nursing
without a license. Many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
patients and providers in helping patients comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine or nursing. There can be no assurance that the Company's operations
will not be challenged as constituting the unlicensed practice of medicine or
nursing. If such a challenge were made successfully in any state, the Company
could be subject to civil and criminal penalties under such state's law and
could be required to restructure its business in that state. Such results or
the inability to successfully restructure its business could have a material
adverse effect on the Company.
The Company is also subject to federal and state laws governing the
confidentiality of patient information. In addition, recent federal
legislation will result in new national standards for the protection of
patient information in electronic health information transactions. Failure to
comply with all applicable laws and regulations regarding medical information
privacy could have a material adverse effect on the Company.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the activities of many of the Company's customers that
depend upon Medicare and Medicaid reimbursement in their businesses. There can
be no assurance that such increased enforcement activities will not indirectly
have a material adverse effect on the Company.
8
<PAGE>
Because the healthcare industry will continue to be subject to substantial
regulations, the Company can give no assurance that its activities will not be
reviewed or challenged by regulatory agencies in the future. Any such action
could have a material adverse effect on the Company. See "Business--Government
Regulation."
DEVELOPMENT OF ALTERNATIVE DELIVERY SYSTEMS FOR BIOPHARMACEUTICALS
The Company's pharmacy program provides biopharmaceuticals in syringes
pursuant to patient-specific prescriptions. At present, most biopharmaceuticals
must be injected subcutaneously to be effective. The development of alternative
delivery systems for biopharmaceuticals by methods other than subcutaneous
injection could have a material adverse effect on the Company.
RISKS RELATED TO CHANGES IN THE HEALTHCARE INDUSTRY
In recent years, the healthcare industry has undergone significant change
driven by various efforts to reduce costs, including potential national
healthcare reform, trends toward managed care, cuts in Medicare, and horizontal
and vertical consolidation within the healthcare industry. The Company's
inability to react effectively to these and other changes in the healthcare
industry could adversely affect its operating results. The Company cannot
predict whether any healthcare reform efforts will be enacted and what effect
any such reforms may have on the Company or its customers and suppliers.
DEPENDENCE ON PAYORS AND REIMBURSEMENT RELATED RISKS
The profitability of the Company's Priority Pharmacy division depends in part
on reimbursement provided by third-party payors. Competition for patients,
efforts by traditional third-party payors to contain or reduce healthcare costs
and the increasing influence of managed care payors such as health maintenance
organizations in recent years have resulted in reduced rates of reimbursement.
If these trends continue, they could adversely affect the Company's results of
operations unless the Company can implement measures to offset the loss of
revenues and decreased profitability. The ability to collect from third-party
payors also depends on the timely and accurate filing of claims. The passage of
time makes missing documentation required for billing and payment difficult or
impossible to obtain or replace, and can delay claim submission past deadlines
imposed by certain payors. In 1996, reimbursement from Medicare and Medicaid
accounted for less than 0.1% of the Company's revenues. The profitability of
the Company's Priority Distribution division also depends, indirectly, on
reimbursement provided by third-party payors insofar as the Company's office-
based physician and clinic customers seek reimbursement from third-party payors
for the cost of pharmaceuticals and related medical supplies distributed by the
Company. As a result, changes in reimbursement policies of private and
governmental third-party payors, including policies relating to the Medicare
and Medicaid programs, could reduce the amounts reimbursed to these customers
for the Company's products and consequently, the amount these customers would
be willing to pay for the products. See "Business--Reimbursement."
The U.S. Health Care Financing Administration ("HCFA") recently adopted new
reimbursement guidelines, which prohibit Medicare reimbursement for EPO
furnished to a patient having an hematocrit level exceeding 36.5% based on a 90
day rolling average basis. Previously, Medicare policy provided for payment for
EPO for hematocrit levels exceeding such level if supported by medical
documentation. This change in Medicare reimbursement policy could have an
adverse effect on the sales of EPO by the Company in the future.
Additionally, the Balanced Budget Act of 1997 (the "Budget Act"), which was
enacted in August 1997, contained numerous provisions related to Medicare and
Medicaid reimbursement. Although many of the details will not be solidified for
the next one to six years, the general thrust of the provisions dealing with
Medicare and Medicaid contained in the Budget Act is intended to provide
incentives to providers to deliver services at lower costs. The Budget Act
contains changes to reimbursement rates for certain Medicare and Medicaid
covered services, as well as certain limitations on the coverage of such
services. Although less than 0.1% of the Company's revenues in 1996 were
derived from Medicare and Medicaid reimbursement, the Budget Act may affect the
Company's suppliers and customers, which in turn could have an adverse effect
on the Company.
9
<PAGE>
RELIANCE ON TELEPHONE AND COMPUTER SYSTEMS
Because the Company believes that its success depends, in part, upon its
telesales and direct marketing efforts and its ability to provide prompt,
accurate and complete service to its customers on a price-competitive basis,
any continuing disruption in either its computer system or its telephone system
could adversely affect its ability to receive and process customer orders and
ship products on a timely basis, and could adversely affect the Company's
relations with its customers.
RISKS RELATED TO SHIPPING
Shipping is a significant expense in the operation of the Company's business.
The Company ships most of its orders by overnight courier or other delivery
services, and typically bears the cost of shipment. Accordingly, any
significant increase in shipping rates could have an adverse effect on the
Company's results of operations. Similarly, strikes or other service
interruptions by such couriers would adversely affect the Company's ability to
deliver products on a timely basis.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company's current business is the result of five acquisitions and the
Company expects to pursue acquisitions of complementary businesses in the
future. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations of the acquired company, the diversion of
management's attention from other business concerns, risks of entering new
geographic or product markets in which the Company has limited or no direct
prior experience, the potential loss of key employees of the acquired company
and the assumption of undisclosed liabilities. In addition, future acquisitions
may result in dilutive issuances of equity securities, the incurrence of
additional debt and the amortization of expenses related to goodwill and
intangible assets, any of which could have a material adverse effect on the
Company.
DEPENDENCE ON KEY EMPLOYEES
The Company's future performance will depend, in part, upon the efforts and
abilities of certain key employees, including Robert L. Myers, President and
Chief Executive Officer, Guy F. Bryant, Executive Vice President-Priority
Healthcare Distribution, Steven D. Cosler, Executive Vice President-Priority
Pharmacy Services and Melissa E. McIntyre, Vice President-Clinical Services.
The loss of the services of one or more of these persons could have an adverse
effect on the Company's business. For an interim period (not expected to exceed
18 months), Mr. Cosler and Ms. McIntyre may spend up to 20% and 5%,
respectively, of their time on BWI matters, and the Company will be reimbursed
by BWI for such time. The Company has no key man life insurance policies on any
of its employees. See "Executive Compensation--Employment Agreements,
Termination of Employment and Change in Control Agreements."
CONCENTRATION OF CUSTOMERS
During 1996, the Company's largest 20 customers accounted for approximately
30% of the Company's revenues and one customer, Everest Healthcare Services
Corporation, accounted for 12% of the Company's revenues. As is customary in
its industry, the Company generally does not have long-term contracts with its
customers. Significant declines in the level of purchases by one or more of
these customers could have a material adverse effect on the Company's business
and results of operations. Additionally, an adverse change in the financial
condition of any of these customers, including an adverse change as a result of
a change in governmental or private reimbursement programs, could have a
material adverse effect on the Company. See "Business--Customers."
RELATIONSHIP WITH AND BENEFITS TO BWI
BWI is currently the only shareholder of the Company. Upon completion of this
offering, BWI will beneficially own 100% of the outstanding Class A Common
Stock, representing approximately 93.9% of the
10
<PAGE>
combined voting power of all classes of the Company's voting stock. The Class A
Common Stock is entitled to three votes per share on all matters submitted to a
vote of the shareholders of the Company. The holders of the Class A Common
Stock and the Class B Common Stock generally vote together as a single class on
all matters submitted to a vote of the holders of Common Stock. As a result,
BWI will be able to elect the entire Board of Directors of the Company and
control the business and affairs of the Company, including any determinations
with respect to mergers or other combinations involving the Company, the
acquisition or disposition of assets by the Company, the incurrence of
indebtedness by the Company, the issuance of additional Common Stock or other
equity securities by the Company and the payment of dividends with respect to
the Common Stock. Similarly, BWI will have the power to determine matters
submitted to a vote of the Company's shareholders, will have the power to
delay, defer or prevent a change in control of the Company and could take other
actions that might be favorable to BWI but not to the shareholders of the
Company generally.
On March 31, 1997, the Company paid a dividend in the form of a subordinated
promissory note with a principal amount of $6.0 million to BWI to return a
portion of BWI's equity investment in the Company. The Company intends to use a
portion of the net proceeds of this offering to repay advances made by BWI to
the Company, which advances aggregated approximately $14.5 million at August
31, 1997. See "Use of Proceeds."
The Company currently has, and will continue to have, a variety of
contractual relationships with BWI and its affiliates, including a Revolving
Credit Promissory Note by which BWI will lend the Company funds to finance
working capital requirements, an Indemnification and Hold Harmless Agreement by
which BWI and the Company will indemnify and hold harmless the other from
certain obligations and contingent liabilities, a Tax Sharing Agreement
relating to the allocation of tax liabilities between BWI and the Company, and
an Administrative Services Agreement relating to certain services to be
provided by BWI to the Company. There can be no assurance that BWI's interests
under these contracts will not be adverse to those of the Company or that BWI
will not use its control position in a manner adverse to the other shareholders
of the Company, either in the context of these contracts or otherwise. See
"Management," "Relationship with BWI" and "Principal Shareholder."
EVALUATION OF BWI'S DISTRIBUTION OF ITS OWNERSHIP INTEREST IN THE COMPANY
Immediately following this offering, the Company will continue to be
controlled by BWI, which will own more than 80% of the outstanding Common
Stock. BWI has advised the Company that, following this offering, BWI will
continue to evaluate whether to distribute the Class A Common Stock to
shareholders of BWI as a dividend (the "Distribution"). The Distribution is
unlikely to be completed before 1998. In making its evaluation, BWI is expected
to consider such matters as the need for an employee stock ownership plan and
other equity-based compensation incentives to attract and retain qualified
personnel, the relative trading prices of the Class B Common Stock and BWI
common stock after this offering, the results of operations of the Company and
BWI, and the relative prospects of BWI and the Company on a stand-alone basis.
The Distribution will also be subject to the receipt of a favorable ruling from
the Internal Revenue Service as to the tax-free nature of the transaction, and
the absence of any change in market conditions or other circumstances that
causes the Board of Directors of BWI to conclude that the Distribution is not
in the best interests of the shareholders of BWI. BWI is not legally obligated
to effect the Distribution, and there can be no assurance as to whether or when
BWI will distribute its shares of Class A Common Stock to its shareholders. If
BWI does not effect the Distribution, BWI will continue to own a majority of
the Company's Common Stock and will be able to control the Company. See
"Relationship With BWI."
EFFECTIVE VOTING CONTROL BY BWI MANAGEMENT IF DISTRIBUTION IS COMPLETED
If the Class A Common Stock is distributed by BWI to its shareholders, based
on the number of BWI shares held (excluding options) as of June 30, 1997,
William E. Bindley and the other current directors and executive officers of
BWI would beneficially own approximately 22.0% of the Common Stock (21.5% if
the Underwriters' over-allotment option is exercised in full) and will have
approximately 24.7% of the voting power of the outstanding Common Stock (24.5%
if the Underwriters' over-allotment option is exercised in full) immediately
11
<PAGE>
after the distribution. See "Principal Shareholder." As a result, they would be
able to significantly affect the outcome of any corporate transaction or other
matter submitted to the Company's shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's
assets, and may be able to prevent or cause a change in control of the Company.
POTENTIAL CONFLICTS OF INTEREST WITH BWI
Upon consummation of this offering and the election of two independent
directors, the Company will have a Board of Directors consisting of six
members. In light of its ownership of the Class A Common Stock, BWI will have
the ability to change the size and composition of the Company's Board of
Directors and committees of the Board of Directors. In addition, three of the
Company's directors, including its Chairman of the Board of Directors, are
executive officers and directors of BWI. The performance by these persons of
their duties to BWI and the Company may give rise to conflicts of interest and
conflicting demands on the amount of time these individuals will have available
for the Company's affairs. There can be no assurance that any such conflicts
will be resolved in the Company's favor. See "Management--Directors and
Executive Officers" and "Relationship with BWI."
RISK OF PROFESSIONAL LIABILITY; AVAILABILITY OF INSURANCE
The Company's business exposes it to risks that are inherent in the
distribution or provision of pharmaceuticals and the provision of ancillary
services. Although the Company currently maintains professional liability and
products liability insurance, there can be no assurance that the coverage
limits of such insurance will be adequate to protect the Company against future
claims. In addition, there can be no assurance that the Company will be able to
maintain professional liability insurance in the future on acceptable terms or
with adequate coverage against potential liabilities.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 10,214,286 shares of Class A
Common Stock and 2,000,000 shares of Class B Common Stock outstanding. Except
in limited circumstances, shares of Class A Common Stock will convert
automatically upon any sale or other transfer into shares of Class B Common
Stock on a share-for-share basis. The Class B Common Stock sold pursuant to
this offering will be freely tradeable without restrictions by persons other
than "affiliates" of the Company. If BWI completes the Distribution,
substantially all of the 10,214,286 shares of Class A Common Stock, when
converted into Class B Common Stock, will also be freely tradeable without
restrictions by persons other than "affiliates" of the Company. No prediction
can be made as to the effect, if any, that future sales of shares of Class B
Common Stock, or the availability of shares of Class B Common Stock for future
sales, will have on the market price of the shares of Class B Common Stock
prevailing from time to time. Sales of substantial amounts of Class B Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Class B Common Stock. The Company, its
executive officers and directors and BWI have agreed, subject to certain
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
shares of Class B Common Stock, or any securities convertible into or
exercisable or exchangeable for shares of Class B Common Stock, for a period of
180 days after the date of this Prospectus without the prior written consent of
Raymond James & Associates, Inc. See "Shares Eligible for Future Sale" and
"Underwriting."
RISKS ASSOCIATED WITH DISTRIBUTION BY BWI; SUITABILITY OF INVESTMENT FOR BWI
SHAREHOLDERS
The Class B Common Stock may not be a suitable or desirable investment for
shareholders of BWI that would receive shares of Class A Common Stock if BWI
determines to conduct the Distribution. If the Distribution is completed and a
large number of BWI shareholders were to determine that an investment in the
Company was not suitable or desirable, such holders may seek to sell some or
all of such shares, thereby creating downward pressure on the market price of
the Class B Common Stock.
12
<PAGE>
SUBSTANTIAL DILUTION
The proposed initial public offering price is substantially higher than the
book value per share of the Class B Common Stock at June 30, 1997. Accordingly,
purchasers in this offering will incur immediate and substantial net tangible
book value dilution of $10.43 per share (assuming an initial public offering
price of $14.00 per share). See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Class B
Common Stock. Although the Class B Common Stock will be listed on the Nasdaq
National Market, there can be no assurance that an active trading market will
develop or be sustained or that the market price for the Class B Common Stock
will not decline below the public offering price set forth on the cover page of
this Prospectus. The initial public offering price has been determined by
negotiations between the Company and the Representative of the Underwriters.
For a description of the factors considered in determining the initial public
offering price, see "Underwriting." Future developments concerning the Company
or its competitors, including operating results, governmental regulation and
other factors, could have a significant impact on the market price of the Class
B Common Stock. In addition, in recent years the stock market has experienced a
high level of price and volume volatility, and market prices for the stock of
many companies (particularly small and emerging growth companies) have
experienced wide price fluctuations which have not necessarily been related to
the operating performance of such companies. These broad market fluctuations
could have a material adverse effect on the market price of the Class B Common
Stock.
ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Articles of Incorporation and
By-Laws may have the effect of delaying, deferring or preventing a change of
control of the Company without further action by the shareholders, may
discourage bids for the Class B Common Stock at a premium over the market price
of the Class B Common Stock and may adversely affect the market price of, and
the voting and other rights of the holders of, the Class B Common Stock. In
addition, certain "anti-takeover" provisions of the Indiana Business
Corporation Law, among other things, restrict the ability of shareholders to
effect a merger or business combination or obtain control of the Company, and
may be considered disadvantageous by a shareholder. See "Description of Capital
Stock--Certain Provisions of Restated Articles of Incorporation and By-Laws"
and "--Certain Provisions of Indiana Law."
13
<PAGE>
THE COMPANY
GENERAL
The Company was formed by BWI on June 23, 1994 as an Indiana corporation to
focus on the distribution of products and provision of services to the
alternate site segment of the healthcare industry. The Company conducts the
business activities of alternate site healthcare companies acquired by BWI or
the Company in five transactions since February 1993. The principal executive
offices of the Company are located at 285 West Central Parkway, Altamonte
Springs, Florida 32714 and its telephone number at that address is (407) 869-
7001. Unless otherwise indicated, "Priority" and the "Company" refer to
Priority Healthcare Corporation and its subsidiaries, and "BWI" refers to
Bindley Western Industries, Inc. and its subsidiaries other than the Company.
ACQUISITION HISTORY
Effective as of February 28, 1993, BWI acquired substantially all of the
assets of Charise Charles, Ltd., Inc. ("Charise Charles"), a specialty
wholesale distributor of oncology and renal care biopharmaceuticals located in
Altamonte Springs, Florida. On October 6, 1993, BWI acquired substantially all
of the assets of PRN Medical, Inc. ("PRN"), a specialty wholesale distributor
of renal care supplies and dialysis equipment located in Orlando, Florida. In
August 1994, PRN was combined with Charise Charles as part of the formation of
the Company. On October 31, 1994, the Company acquired the stock of 3C
Medical, Inc. ("3C"), a specialty distributor of acute dialysis products
located in Santa Ana, California. Effective January 1, 1995, the Company
acquired all of the outstanding stock of IV-1, Inc., IV-One Services, Inc. and
National Pharmacy Providers, Inc. (collectively, the "IV One Companies"),
three related companies located in Altamonte Springs, Florida that provided
specialty pharmacy and other related healthcare services. On August 6, 1997,
the Company acquired substantially all of the assets of Grove Way Pharmacy,
Inc. ("Grove Way Pharmacy"), a specialty distributor of vaccines located in
Castro Valley, California.
The operations of Charise Charles, PRN, 3C and Grove Way Pharmacy are now
included in the Company's Priority Distribution division. The IV One Companies
now comprise the Priority Pharmacy division.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Class B
Common Stock offered hereby are estimated to be approximately $25.2 million
(approximately $29.1 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $14.00 per
share and after deducting the estimated underwriting discounts and offering
expenses payable by the Company. The Company intends to use a portion of the
net proceeds to repay the then outstanding working capital advances made by
BWI to support the Company's operating activities. The advances at August 31,
1997 aggregated approximately $14.5 million, bear interest at the rate paid by
BWI on incremental borrowings in effect from time to time under its line of
credit agreement (6.4% as of August 31, 1997) and are due on demand. The
Company estimates that the amount of working capital advances to be
outstanding at the closing of this offering will not differ materially from
the amount outstanding at August 31, 1997. The balance of the net proceeds
will be used for working capital and general corporate purposes, including
potential acquisitions of alternate site healthcare businesses, although there
are currently no definitive agreements or letters of intent with respect to
any material acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Pending the use of the net
proceeds as described above, the Company intends to invest the net proceeds in
short-term, interest-bearing, investment grade securities.
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<PAGE>
DIVIDEND POLICY
The Company does not intend to pay cash dividends on the Common Stock in the
foreseeable future, but rather intends to use future earnings principally to
support operations and to finance expansion and possible acquisitions. The
payment of cash dividends in the future will be at the discretion of the
Company's Board of Directors and will depend on a number of factors, including
the Company's financial condition, capital requirements, future business
prospects, the terms of any documents governing indebtedness of the Company,
and such other factors as the Board of Directors of the Company may deem
relevant. Subject to the terms of any Preferred Stock created by the Company's
Board of Directors, each outstanding share of Common Stock will be entitled
equally to such dividends as may be declared from time to time by the Board of
Directors. See "Description of Capital Stock."
On March 31, 1997, the Company paid a dividend in the form of a subordinated
promissory note (the "Dividend Note") with a principal amount of $6.0 million
to BWI to return to BWI a portion of its equity investment in the Company. The
Dividend Note bears interest at the rate of 7.25% per annum. Interest on the
Dividend Note must be paid by the Company on a quarterly basis, with the
principal amount due in a single payment on March 31, 1999. See "Relationship
with BWI."
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997, and as adjusted to give effect to the sale of the shares of Class B
Common Stock offered hereby (at an assumed initial public offering price of
$14.00 per share) and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Long-term and related party debt:
Working capital advances payable to parent............ $13,785 $ --
Subordinated note payable to parent (Dividend Note)... 6,000 6,000
Other long-term debt.................................. 365 365
------- -------
Shareholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; none issued or outstanding............... -- --
Class A Common Stock, $0.01 par value; 15,000,000
shares authorized; 10,214,286 shares issued and
outstanding, actual and as adjusted.................. 102 102
Class B Common Stock, $0.01 par value; 40,000,000
shares authorized; none issued or outstanding,
actual; and 2,000,000 shares issued and outstanding,
as adjusted.......................................... -- 20
Additional paid-in capital............................ 22,598 47,828
Retained earnings..................................... 3,721 3,721
------- -------
Total shareholders' equity.......................... 26,421 51,671
------- -------
Total capitalization................................ $46,571 $58,036
======= =======
</TABLE>
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<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1997 was $18,343,000,
or $1.80 per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value (total tangible assets less
total liabilities) of the Company by the number of shares of Common Stock
outstanding. Without taking into account any changes in the net tangible book
value of the Company, other than to give effect to the sale of the shares of
Class B Common Stock offered hereby (assuming an initial public offering price
of $14.00 per share) and the receipt of the net proceeds therefrom, the
adjusted net tangible book value of the Company at June 30, 1997 would have
been $43,593,000, or $3.57 per share of Common Stock. This represents an
immediate dilution in net tangible book value of $10.43 per share to new
investors purchasing shares in this offering and an immediate increase in net
tangible book value of $1.77 per share to BWI. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $14.00
Net tangible book value per share at June 30, 1997............ $1.80
Increase per share attributable to new investors (1).......... 1.77
-----
Net tangible book value after the offering...................... 3.57
------
Dilution per share to new investors (2)(3)...................... $10.43
======
</TABLE>
- --------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses to be paid by the Company.
(2) Determined by subtracting the adjusted net tangible book value per share
after the offering from the amount of cash paid by a new investor for one
share of Class B Common Stock.
(3) The foregoing information does not give effect to the issuance of an
aggregate of 1,575,000 shares of Class B Common Stock reserved for
issuance as follows: (i) 300,000 shares reserved for issuance upon the
exercise of the Underwriters' over-allotment option; (ii) 25,000 shares
reserved for issuance under the Company's Outside Directors Stock Option
Plan; and (iii) 1,250,000 shares reserved for issuance under the Company's
1997 Stock Option and Incentive Plan. See "Management--Compensation of
Directors," "Executive Compensation--1997 Stock Option and Incentive Plan"
and "Underwriting."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for the ten
months ended December 31, 1993 and for the years ended December 31, 1994, 1995
and 1996 have been derived from the audited consolidated financial statements
of the Company, which have been audited by Price Waterhouse LLP, independent
accountants. The historical financial data as of and for the six-month periods
ended June 30, 1996 and 1997 have been derived from unaudited consolidated
financial statements of the Company. In the opinion of management, the
unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the consolidated financial position and consolidated results of operations of
the Company. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the entire
year. The historical financial data for the two months ended February 28, 1993
were derived from the unaudited financial statements of Charise Charles, Ltd.,
Inc. (the "Predecessor Company"). The historical financial data for the year
ended December 31, 1992 were derived from the audited financial statements of
the Predecessor Company, which were audited by independent accountants to the
Predecessor Company. Effective February 28, 1993, BWI acquired substantially
all of the assets of the Predecessor Company. The following data should be
read in conjunction with "Unaudited Pro Forma Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and related
notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
TWO TEN ------------------------------------- -----------------------------
YEAR MONTHS MONTHS 1994 1995 1996 1996 1997
ENDED ENDED ENDED -------- -------- ------------------- ------- ---------------------
DECEMBER 31, FEBRUARY 28, DECEMBER 31, PRO FORMA PRO
1992 1993 1993 ACTUAL ACTUAL ACTUAL (2) ACTUAL ACTUAL FORMA (2)
------------ ------------ ------------ -------- -------- -------- ---------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
(1)
Net sales....... $75,804 $11,728 $67,823 $107,449 $123,990 $158,247 $158,247 $65,348 $108,597 $108,597
Cost of products
sold........... 71,020 10,911 63,161 100,254 111,448 141,074 141,074 57,947 97,449 97,449
Gross profit.... 4,784 817 4,662 7,195 12,542 17,173 17,173 7,401 11,148 11,148
Selling, general
and
administrative
expense........ 3,079 508 2,498 4,394 7,836 8,443 8,923 4,009 4,960 5,200
Depreciation and
amortization... 87 14 333 512 998 1,009 1,009 500 656 656
Earnings from
operations..... 1,618 295 1,831 2,289 3,708 7,721 7,241 2,892 5,532 5,292
Interest
expense, net... 152 60 (21) 200 511 437 464 170 498 237
Earnings before
income taxes... 1,466 235 1,852 2,089 3,197 7,284 6,777 2,722 5,034 5,055
Provision for
income taxes... 11 3 741 835 1,311 2,915 2,712 1,089 2,013 2,021
Net earnings.... 1,455 232 1,111 1,254 1,886 4,369 4,065 1,633 3,021 3,034
Pro forma
earnings per
share (2)(3)... $0.38 $0.27
Pro forma
weighted
average shares
outstanding
(2)............ 10,740,465 11,152,346
<CAPTION>
DECEMBER 31, JUNE 30, 1997
--------------------------------------- ---------------------
DECEMBER 31, FEBRUARY 28, AS
1992 1993 1993 1994 1995 1996 ACTUAL ADJUSTED (4)
------------ ------------ ------------ -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA: (1)
Working capital. $3,736 $3,744 $11,599 $12,955 $16,000 $20,792 $24,022 $49,272
Total assets.... 18,199 11,897 26,705 36,849 41,584 57,220 68,118 79,583
Payable to
parent......... -- -- 985 8,345 3,873 9,290 13,785 --
Long-term debt.. -- -- -- 113 751 560 6,365 6,365
Total
liabilities.... 14,144 7,822 8,853 16,610 16,553 27,820 41,697 27,912
Shareholders'
equity......... 4,055 4,075 17,852 20,239 25,031 29,400 26,421 51,671
</TABLE>
- -------
(1) During the periods presented, four acquisitions were made by or on behalf
of the Company. See "The Company--Acquisition History." These acquisitions
were accounted for under the purchase method of accounting and,
accordingly, the results of operations of the acquired entities are
included in the Company's financial statements from their respective dates
of acquisition. As a result, period-to-period comparisons of financial
position and results of operations are not necessarily meaningful.
(2) Adjusted to give effect to the pro forma adjustments described under
"Unaudited Pro Forma Consolidated Financial Data" commencing on page 18.
(3) Historical earnings per share data are not meaningful as the Company's
historical capital structure is not comparable to periods subsequent to
this offering.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Class B Common
Stock offered by the Company at an assumed offering price of $14.00 per
share and the application of the net proceeds therefrom. See "Use of
Proceeds."
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
prepared to reflect adjustments to the Company's historical financial position
and results of operations to give effect to certain transactions, as if such
transactions had been consummated at earlier dates, as described herein.
The unaudited pro forma consolidated balance sheet reflects the issuance and
use of the proceeds from this offering of Class B Common Stock as if it had
occurred on June 30, 1997. The unaudited pro forma consolidated statements of
earnings adjust the historical statements of earnings to reflect the impact of
certain items as if they had occurred on January 1, 1996, including an
adjustment to reflect certain estimated costs necessary to present the Company
as a stand-alone entity, to reflect a reduction in interest expense based upon
the expected use of proceeds to repay certain indebtedness, and to reflect
additional interest expense on the $6.0 million note payable on the dividend
declared March 31, 1997.
The unaudited pro forma consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes, as well as "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this Prospectus. The pro
forma consolidated financial data are not necessarily indicative of the
results that would have been reported had such events actually occurred on the
dates specified, nor are they indicative of the Company's future results.
18
<PAGE>
PRIORITY HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
-------------------------------- --------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $158,247 $ 158,247 $108,597 $ 108,597
Cost of products sold... 141,074 141,074 97,449 97,449
-------- ----- ---------- -------- ----- ----------
Gross profit............ 17,173 17,173 11,148 11,148
-------- ----- ---------- -------- ----- ----------
Selling, general and
administrative expense. 8,443 480 (1) 8,923 4,960 240 (1) 5,200
Depreciation and
amortization........... 1,009 1,009 656 656
-------- ----- ---------- -------- ----- ----------
Earnings from
operations............. 7,721 (480) 7,241 5,532 (240) 5,292
Interest expense, net... 437 (408)(2) 498 (370)(2)
435 (3) 464 109 (3) 237
-------- ----- ---------- -------- ----- ----------
Earnings before income
taxes.................. 7,284 (507) 6,777 5,034 21 5,055
Provision for income
taxes.................. 2,915 (203)(4) 2,712 2,013 8 (4) 2,021
-------- ----- ---------- -------- ----- ----------
Net earnings............ $ 4,369 $(304) $ 4,065(5) $ 3,021 $ 13 $ 3,034(5)
======== ===== ========== ======== ===== ==========
Pro forma earnings per
share.................. $ 0.38(5)(6) $ 0.27(5)(6)
========== ==========
Pro forma weighted
average shares
outstanding............ 10,740,465 11,152,346
========== ==========
</TABLE>
(See accompanying notes to unaudited pro forma consolidated financial data)
19
<PAGE>
PRIORITY HEALTHCARE CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
ASSETS:
<S> <C> <C> <C>
Current assets:
Cash...................... $ 185 $ 11,465 (7) $11,650
Accounts receivable, less
allowance
for doubtful accounts.... 40,178 40,178
Finished goods inventory.. 18,174 18,174
Deferred income taxes..... 470 470
Other current assets...... 194 194
------- -------- -------
59,201 11,465 70,666
------- -------- -------
Fixed assets, at cost..... 2,424 2,424
Less: accumulated
depreciation............. 1,115 1,115
------- -------- -------
1,309 1,309
------- -------- -------
Intangibles, net.......... 7,608 7,608
------- -------- -------
Total assets............ $68,118 $ 11,465 $79,583
======= ======== =======
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
<S> <C> <C> <C>
Current liabilities:
Payable to parent......... $13,785 $(13,785)(7) --
Accounts payable.......... 19,809 19,809
Other current liabilities. 1,585 1,585
------- -------- -------
35,179 (13,785) 21,394
------- -------- -------
Long-term obligations....... 365 365
------- -------- -------
Deferred income taxes....... 153 153
------- -------- -------
Note payable to parent...... 6,000 6,000
------- -------- -------
Shareholders' equity:
Class A Common Stock...... 102 102
Class B Common Stock...... -- 20 (7) 20
Additional paid in
capital.................. 22,598 25,230 (7) 47,828
Retained earnings......... 3,721 3,721
------- -------- -------
Total shareholders'
equity................. 26,421 25,250 51,671
------- -------- -------
Commitments and
contingencies
------- -------- -------
Total liabilities and
shareholders' equity... $68,118 $ 11,465 $79,583
======= ======== =======
</TABLE>
(See accompanying notes to unaudited pro forma consolidated financial data)
20
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) The Company has operated as a wholly owned subsidiary of BWI and as a
result has not incurred all costs necessary to operate on a stand-alone
basis. The pro forma consolidated financial data have been adjusted to
include certain additional costs required to present the Company as if it
had operated on a stand-alone basis, and include incremental legal, audit,
risk management and administrative costs.
(2) The Company intends to use a portion of the net proceeds of this offering
to liquidate the payable to BWI. The pro forma consolidated financial data
have been adjusted to eliminate the interest expense associated with this
indebtedness.
(3) Adjustment reflects additional interest expense on the $6.0 million note
payable on the dividend declared March 31, 1997, as if the note was
outstanding January 1, 1996. Interest is calculated based on the 7.25%
face rate of the note payable.
(4) The effective rate derived from the income tax expense for the Company's
historical statements of earnings for 1996 and the six months ended June
30, 1997 was applied to the pro forma adjustments to determine income tax
expense or benefit associated with those adjustments.
(5) Upon completion of this offering, the Company will grant to a consultant
of the Company a 10-year option to purchase 50,000 shares of the Company's
Class B Common Stock at the initial public offering price. The grant of
this option will result in a non-recurring compensation expense of
approximately $350,000 in the period the offering closes and is not
reflected in this unaudited pro forma consolidated financial data. See
"Executive Compensation--Consulting Agreement."
(6) Pro forma earnings per share was calculated assuming that all of the
shares of the Class A Common Stock and the number of shares of Class B
Common Stock required to be issued (i) to liquidate the average interest
bearing payable to BWI and (ii) to replace the amount in capital by which
the dividend declared to BWI exceeded the most recent twelve-month
earnings were outstanding as of January 1, 1996. The number of shares
required to be issued to liquidate the payable to BWI was calculated by
dividing the average balance of the interest bearing payable to BWI by the
estimated net proceeds per share of this offering. The number of shares
required to be included as a result of the dividend was calculated by
dividing the amount by which the dividend exceeded cumulative net income
for the twelve-month period ended June 30, 1997 by the estimated net
proceeds per share of this offering. For purposes of these calculations,
the net proceeds per share is estimated to be $12.625.
(7) Represents the net cash proceeds to the Company from the sale of the Class
B Common Stock offered hereby (assuming an initial public offering price
of $14.00 per share) after deducting underwriting discounts and
commissions and estimated offering expenses and application of proceeds as
described under "Use of Proceeds" as follows:
<TABLE>
<S> <C>
Proceeds from sale........................................... $28,000,000
Underwriting discounts and commissions and estimated offering
expenses.................................................... 2,750,000
-----------
25,250,000
Repayment of payable to BWI.................................. 13,785,000
-----------
Net cash proceeds............................................ $11,465,000
===========
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and related notes contained elsewhere in
this Prospectus.
INTRODUCTION
The Company was formed in June 1994 to succeed to the business operations of
companies previously acquired by BWI, as described below. Since its formation,
the Company has operated as a wholly owned subsidiary of BWI, and has procured
a number of services from, and engaged in a number of financial and other
transactions with, BWI. Following this offering, the Company will continue to
be controlled by BWI, but will operate on a stand-alone basis. Accordingly,
the Company expects that after this offering it will incur incremental
recurring legal, audit, risk management and administrative costs related to
operating as a stand-alone entity that it did not experience as a wholly owned
subsidiary of BWI. See "Unaudited Pro Forma Consolidated Financial Data." The
financial information included in this Prospectus is not necessarily
indicative of the Company's future results of operations, financial position
and cash flows.
The Company provides specialty pharmaceuticals and related medical supplies
as well as disease treatment services to the office-based physician,
outpatient renal dialysis and homecare markets. The Company's operations are
derived from the acquisition by BWI of substantially all of the assets of
Charise Charles, a specialty wholesale distributor of oncology and renal care
biopharmaceuticals, in February 1993 and of PRN, a specialty wholesale
distributor of renal care supplies and dialysis equipment, in October 1993.
The Company subsequently acquired 3C, a specialty distributor of acute
dialysis products, in October 1994, the IV One Companies, three related
companies that provided specialty pharmacy and related healthcare services, in
January 1995, and Grove Way Pharmacy, a vaccine and injectable drug
distributor, in August 1997. These acquisitions were accounted for under the
purchase method of accounting and, accordingly, the results of operations of
the acquired companies are included in the Company's financial statements from
their respective dates of acquisition. As a result, period-to-period
comparisons of financial position and results of operations are not
necessarily meaningful.
The operations of Charise Charles, PRN, 3C and the recently acquired Grove
Way Pharmacy are now included in the Company's Priority Distribution division,
and the IV One Companies comprise the Priority Pharmacy division. During 1995
and 1996 and the six months ended June 30, 1996 and 1997, Priority
Distribution represented 93%, 92%, 92% and 93% of net sales, respectively, and
Priority Pharmacy represented the balance. Historically, Priority Pharmacy has
generated substantially higher margins than Priority Distribution and has
contributed a significant portion of the Company's earnings.
Upon completion of this offering, the Company will grant a consultant of the
Company a 10-year option to purchase 50,000 shares of the Company's Class B
Common Stock at the initial public offering price. The grant of this option
will result in a one-time compensation expense of approximately $350,000 in
the period the offering closes. See "Executive Compensation--Consulting
Agreement."
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Sales. Net sales increased to $108.6 million in the first six months of
1997 from $65.3 million in the first six months of 1996, an increase of 66%.
This increase was generated from internal growth that included a 54% increase
in sales by Priority Pharmacy and a 67% increase in sales by Priority
Distribution. The growth
22
<PAGE>
reflected primarily the addition of new customers, new product introductions,
additional sales to existing customers and, to a lesser extent, inflationary
price increases of approximately 4%.
Gross Margin. Gross margin increased to $11.1 million in the first six
months of 1997 from $7.4 million in the first six months of 1996, an increase
of 51%. The increase in gross margin reflected increased sales by both
Priority Distribution and Priority Pharmacy. Gross margin as a percentage of
net sales decreased in the first six months of 1997 to 10.3% from 11.3% in the
first six months of 1996. This decrease was primarily attributable to the
change in sales mix resulting from the significant increase in sales by
Priority Distribution which generated lower gross margins than those of
Priority Pharmacy. Competition continues to exert pressure on margins,
particularly those of Priority Distribution.
Selling, General and Administrative Expense. Selling, general and
administrative ("SGA") expense increased to $5.0 million in the first six
months of 1997 from $4.0 million in the first six months of 1996, an increase
of 24%. However, SGA expense as a percentage of net sales decreased to 4.6% in
the first six months of 1997 from 6.1% in the first six months of 1996. Of the
$1.0 million increase in SGA expense, approximately 55% was attributed to the
hiring of additional employees, approximately 23% to warehouse and delivery
expenses and approximately 22% to other costs and inflationary price
increases. Management continually monitors SGA expense and remains focused on
controlling these increases through improved technology and efficient asset
management. The decrease in SGA expense as a percentage of net sales resulted
from the revenue growth in excess of the fixed portion of SGA expense.
Depreciation and Amortization. Depreciation and amortization increased to
$656,000 in the first six months of 1997 from $500,000 in the first six months
of 1996, an increase of 31%. The increase was primarily the result of
depreciation of new equipment, particularly in management information systems.
Interest Expense. Interest expense increased to $504,000 in the first six
months of 1997 from $182,000 in the first six months of 1996. This expense is
primarily related to financing provided to the Company by BWI. The first six
months of 1997 also includes $109,000 of interest due on the Dividend Note
issued to BWI on March 31, 1997. The interest expense on the intercompany
borrowings was calculated by applying the BWI average incremental borrowing
rate to the average outstanding borrowings. During the first six months of
1997 and 1996, the average outstanding balances were $11.6 million and $4.9
million, respectively, and the average incremental borrowing rate charged was
6.4% in both periods.
Income Taxes. The Company participates in the consolidated federal and state
income tax returns filed by BWI. BWI charges federal and state income tax
expense to the Company as if the Company filed its own separate federal and
state income tax returns. During the first six months of 1997 and 1996, the
provision for income taxes represented 40.0% of earnings before taxes in both
periods.
1996 Compared to 1995
Net Sales. Net sales increased to $158.2 million in 1996 from $124.0 million
in 1995, a 28% increase. All of the increase was generated from internal
growth, including a 56% increase in sales by Priority Pharmacy and a 26%
increase in sales by Priority Distribution. The internal growth reflected
primarily the addition of new customers, new product introductions, additional
sales to existing customers and, to a lesser extent, inflationary price
increases of approximately 4%.
Gross Margin. Gross margin increased to $17.2 million in 1996 from $12.5
million in 1995, an increase of 37%. The increase in gross margin reflected
increased sales by both Priority Distribution and Priority Pharmacy. Gross
margin as a percentage of net sales had a slight increase in 1996 to 10.9%
from 10.1% in 1995. Margins were enhanced by the increase in the sales mix of
the higher margin sales of Priority Pharmacy. Competition continually exerted
pressure on margins.
Selling, General and Administrative Expense. SGA expense increased to $8.4
million in 1996 from $7.8 million in 1995, an increase of 8%. SGA expense as a
percentage of net sales decreased from 6.3% in 1995 to 5.3% in 1996. Of the
$600,000 increase in SGA expense, approximately 52% was attributed to the
hiring of
23
<PAGE>
additional employees, approximately 23% to warehouse and delivery expenses and
approximately 25% to other costs and inflationary price increases. The
decrease in SGA expense as a percentage of net sales resulted from the revenue
growth, principally at Priority Distribution, in excess of the fixed portion
of SGA expense.
Depreciation and Amortization. Depreciation and amortization remained
relatively constant in 1996 and 1995.
Interest Expense. Interest expense decreased to $457,000 in 1996 from
$526,000 in 1995, a decrease of 13%. Interest expense primarily relates to
financing provided to the Company by BWI. The interest expense on these
intercompany borrowings was calculated by applying the BWI average incremental
borrowing rate to the average outstanding borrowings. During 1996 and 1995,
the average outstanding balances were $6.4 million and $6.4 million and the
average incremental borrowing rates charged were 6.4% and 7.1%, respectively.
Income Taxes. The Company participates in the consolidated federal and state
income tax returns filed by BWI. BWI charges federal and state income tax
expense to the Company as if the Company filed its own separate federal and
state income tax returns. The provision for income taxes in 1996 represented
40.0% of earnings before taxes as compared to 41.0% for 1995.
1995 Compared to 1994
Net Sales. Net sales increased to $124.0 million in 1995 from $107.4 million
in 1994, an increase of 15%. The increase resulted from internal growth of 7%,
with the remaining 8% attributable to the acquisitions of 3C and the IV One
Companies. The internal growth reflected primarily the addition of new
customers, new product introductions, additional sales to existing customers
and, to a lesser extent, inflationary price increases of approximately 4%.
Gross Margin. Gross margin increased to $12.5 million in 1995 from $7.2
million, an increase of 74%. The primary reason for the increase was the
addition of the higher margin business associated with the acquisition of the
IV One Companies and the increase in sales. Gross margin as a percentage of
net sales increased to 10.1% in 1995 from 6.7% in 1994. Margins were enhanced
by the increase in the sales mix of the higher margin sales of the IV One
Companies. Competition continually exerted pressure on margins.
Selling, General and Administrative Expense. SGA expense increased to $7.8
million in 1995 from $4.4 million in 1994, an increase of 78%. SGA expense as
a percentage of net sales increased from 4.1% in 1994 to 6.3% in 1995. The
amount of the increase in actual SGA expense associated with the acquisition
of the IV One Companies was approximately $2.8 million. Of the remaining
$600,000 increase in SGA expense, approximately 65% was attributed to the
hiring of additional employees, approximately 16% to warehouse and delivery
expenses and approximately 19% to other costs and inflationary price
increases.
Depreciation and Amortization. Depreciation and amortization increased to
$998,000 in 1995 from $512,000 in 1994, an increase of 95%. These increases
were primarily the result of the amortization of intangible assets related to
acquired entities and the depreciation of new equipment, particularly in
management information systems.
Interest Expense. Interest expense increased to $526,000 in 1995 from
$218,000 in 1994, an increase of 141%. Interest expense primarily relates to
financing provided to the Company by BWI. The interest expense on these
intercompany borrowings was calculated by applying the BWI average incremental
borrowing rate to the average outstanding borrowings. During 1995 and 1994,
the average outstanding balances were $6.4 million and $3.6 million, and the
average incremental borrowing rates charged were 7.1% and 5.9%, respectively.
Income Taxes. The Company participates in the consolidated federal and state
income tax returns filed by BWI. BWI charges federal and state income tax
expense to the Company as if the Company filed its own separate federal and
state income tax returns. The provision for income taxes in 1995 represented
41.0% of earnings before taxes as compared to 40.0% for 1994.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's principal capital requirements have been to fund working
capital needs to support internal growth, for acquisitions and for capital
expenditures. The Company's principal working capital needs are for inventory
and accounts receivable. Management controls inventory levels in order to
minimize carrying costs and maximize purchasing opportunities. The Company
sells inventory to its customers on various payment terms. This requires
significant working capital to finance inventory purchases and entails
accounts receivable exposure in the event any of its major customers encounter
financial difficulties. Although the Company monitors closely the
creditworthiness of its major customers, there can be no assurance that the
Company will not incur some collection loss on major customer accounts
receivable in the future.
Six Months Ended June 30, 1997
The Company had cash and working capital of $185,000 and $24.0 million,
respectively.
Net Cash Used by Operating Activities. The Company's operations required
$5.5 million in cash for the six months ended June 30, 1997. Accounts
receivable increased $10.6 million, primarily to support the increase in sales
and the extension of credit terms to meet competitive conditions. Inventory
increased $2.0 million due to incremental purchases necessary to serve the
increased customer base and to maximize purchasing opportunities. The $3.4
million increase in accounts payable partially reduced the cash requirements
for accounts receivable and inventory; this increase is attributable to the
timing of payments and the increase in inventory. The Company anticipates that
its operations will continue to require cash to fund its growth. Depreciation
and amortization totaled $656,000.
Net Cash Used by Investing Activities. The Company purchased $285,000 in
fixed assets, primarily computer hardware and software.
Net Cash Provided by Financing Activities. The Company's payable to parent
increased by $4.5 million, primarily to fund the cash used by operating
activities.
Year Ended December 31, 1996
The Company had cash and working capital of $1.7 million and $20.8 million,
respectively.
Net Cash Used by Operating Activities. The Company's operations required
$4.5 million in cash for the year ended December 31, 1996. Accounts receivable
increased $12.2 million, primarily to support the increase in sales and the
extension of credit terms to meet competitive conditions. Inventory increased
$3.5 million due to incremental purchases necessary to serve the increased
customer base and to maximize purchasing opportunities. The $5.7 million
increase in accounts payable partially reduced the cash requirements for
accounts receivable and inventory; this increase is attributable to the timing
of payments and the increase in inventory. Depreciation and amortization
totaled $1.0 million.
Net Cash Used by Investing Activities. The Company purchased $405,000 in
fixed assets, primarily computer hardware and software.
Net Cash Provided by Financing Activities. The Company's payable to parent
increased by $5.4 million, primarily to fund the cash used by operating
activities.
Year Ended December 31, 1995
The Company had cash and working capital of $1.4 million and $16.0 million,
respectively.
Net Cash Provided by Operating Activities. The Company's operations provided
$6.0 million in cash for the year ended December 31, 1995, primarily due to a
reduction in accounts receivable and inventory. Accounts receivable decreased
$560,000 due to a reduction of the average receivables aging and a decrease in
the Company's rate of growth in operations. Inventory decreased $426,000, due
primarily to the reduction of
25
<PAGE>
inventory necessitated by the slower rate of growth. The $2.4 million increase
in accounts payable is attributable to the timing of payments. Depreciation
and amortization totaled $1.0 million.
Net Cash Used by Investing Activities. The Company acquired the stock of the
IV One Companies for $2.5 million and purchased $474,000 in fixed assets,
primarily computer hardware and software, furniture, fixtures and leasehold
improvements.
Net Cash Used by Financing Activities. The Company's payable to parent
decreased by $4.5 million as a result of a partial repayment of advances
accumulated through December 31, 1995. BWI contributed $2.9 million to fund
the purchase of the IV One Companies.
Year Ended December 31, 1994
The Company had cash and working capital of $150,000 and $13.0 million,
respectively.
Net Cash Used by Operating Activities. The Company's operations required
$6.6 million in cash for the year ended December 31, 1994. Accounts receivable
increased $4.2 million, primarily as a result of the increase in sales.
Inventory increased $4.0 million due to incremental purchases necessary to
serve the increased customer base and to maximize purchasing opportunities.
Depreciation and amortization totaled $512,000.
Net Cash Used by Investing Activities. The Company acquired the stock of 3C
for $1.2 million and purchased fixed assets of $511,000, primarily computer
hardware and software.
Net Cash Provided by Financing Activities. The Company's payable to parent
increased by $7.4 million, primarily to fund the cash used by operating
activities. BWI contributed $1.1 million to fund the purchase of 3C.
CAPITAL RESOURCES
Capital expenditures during the first six months of 1997 totalled $285,000.
The Company expects that capital expenditures during the last six months of
1997 will be $400,000 and during 1998 will be $550,000. The Company
anticipates that these expenditures will relate primarily to the opening of
the Grove City, Ohio distribution center and to the purchase of computer
hardware and software and telecommunications equipment.
Historically, the Company has financed its operations through capital
contributions and advances from BWI. The Company intends to use a portion of
the net proceeds of this offering to repay the amount of the working capital
advances outstanding at the time of the closing of this offering, which amount
the Company expects to not differ materially from the approximately $14.5
million outstanding at August 31, 1997. In connection with this offering, BWI
will make available to the Company a $30.0 million line of credit, which the
Company may utilize for working capital purposes and possible acquisitions.
The maturity date for the line is December 31, 1998. Outstanding principal
amounts under the line will bear interest, payable quarterly, at a rate equal
to the rate then paid by BWI under its primary line of credit agreement.
Management believes that the net proceeds of this offering, together with
cash from operations and borrowings from BWI, will be sufficient to meet the
Company's working capital needs for at least two years.
INFLATION
The Company's financial statements are prepared on the basis of historical
costs and are not intended to reflect changes in the relative purchasing power
of the dollar. Because of its ability to take advantage of forward purchasing
opportunities, the Company believes that its gross profits generally increase
as a result of manufacturers' price increases in the products it distributes.
Gross profits may decline if the rate of price increases by manufacturers
declines.
Generally, price increases are passed through to customers as they are
received by the Company and therefore they reduce the negative effect of
inflation. Other non-inventory cost increases, such as payroll, supplies and
services, have been partially offset during the past three years by increased
volume and productivity.
26
<PAGE>
BUSINESS
GENERAL
The Company is a national distributor of specialty pharmaceuticals and
related medical supplies to the alternate site healthcare market and is a
provider of patient-specific, self-injectable biopharmaceuticals and disease
treatment programs to individuals with chronic diseases. Through Priority
Distribution, the Company sells over 3,500 SKUs of specialty pharmaceuticals
and medical supplies to outpatient renal care centers and office-based
physicians in the oncology and infectious disease markets. With the recent
acquisition of Grove Way Pharmacy, Priority Distribution has entered the
vaccine market. Priority Distribution offers value-added services to meet the
specific needs of these markets by shipping refrigerated pharmaceuticals
overnight in special packaging to maintain appropriate temperatures, offering
automated order entry services and offering customized distribution for group
accounts. From distribution centers in Altamonte Springs, Florida and Santa
Ana, California, Priority Distribution services over 2,000 customers in all 50
states and Puerto Rico, including approximately 550 office-based oncologists
and 800 renal dialysis clinics.
Through Priority Pharmacy, the Company fills individual patient
prescriptions for self-injectable biopharmaceuticals for over 1,400 patients.
These patient-specific prescriptions are filled at two licensed pharmacies in
Altamonte Springs, Florida, where the Company reconstitutes in syringes the
components of the biopharmaceuticals, according to manufacturer's
instructions, and ships these products directly to the patient overnight in
specialized packages. Priority Pharmacy also provides disease treatment
programs for hepatitis, melanoma, cancer, human growth deficiency and the
complications of HIV. Management believes that it is the only provider that
offers this range of services on a nationwide basis.
INDUSTRY AND MARKET OVERVIEW
Priority sells the majority of its products and services into two large and
growing markets--oncology and chronic renal dialysis. The Company also
operates in certain segments of the infectious disease market and, with the
recent acquisition of Grove Way Pharmacy, has entered the vaccine market. The
common characteristics of these markets is that most products are administered
in an alternate site setting by physicians or the patients themselves and
require specialized shipping and support services.
Industry Overview. The alternate site supply market is fragmented with many
public and private companies focusing on different product or customer niches.
Few companies offer a wide range of pharmaceuticals and related supplies
targeted to multiple customer groups, specifically renal dialysis clinics and
office-based physicians. Historically, cancer therapy, renal dialysis and most
other treatments for chronic and life-threatening medical conditions were
administered almost exclusively in a hospital inpatient setting. During the
1990s, the frequency with which these treatments have been administered
outside the hospital has increased dramatically in response to cost
containment efforts and the introduction of new biopharmaceutical products,
such as interferon, EPO and cancer drugs.
The service needs of office-based physicians and clinics differ markedly
from those of the hospital market, creating logistical challenges and
increasing administrative costs for those offices. Office-based physicians and
clinics generally order relatively small quantities of drugs at irregular
intervals and do not have inventory management systems or sufficient pharmacy
staffing. Challenges facing these caregivers include providing necessary
administrative and financial resources, managing relationships with multiple
suppliers, managing inventories, billing patients and third-party payors, and
monitoring new clinical developments. The Company believes that the shift from
hospital-based to office-based or home-based care delivery has created a
significant opportunity, particularly in the oncology, renal dialysis, vaccine
and homecare markets.
Oncology. According to the American Cancer Society, in 1996 approximately
1.3 million new cases of cancer were diagnosed and approximately 550,000
deaths were attributed to cancer in the United States. The principal
treatments for cancer are surgery and a regimen of pharmaceutical treatments.
Surgery typically involves hospitalization, but radiation and chemotherapy are
increasingly being delivered in alternate site settings such as the physician
office and the home.
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The National Cancer Institute estimates that direct medical costs for the
treatment of cancer in the United States totaled $35 billion in 1996. Frost &
Sullivan estimated the U.S. market for oncology pharmaceuticals to be $4.1
billion in 1996 and projected it to grow at a compound annual rate of 13.2%
from 1996 through 2003. The Company believes that the office-based segment of
the cancer pharmaceutical market represents approximately 25% of such market
and has been growing faster than the cancer pharmaceutical market. Growth in
the cancer pharmaceutical market is expected to be driven by the continued
introduction of new pharmaceuticals and increases in the incidence of cancer.
In 1995, over 200 drugs for cancer and cancer-related conditions were in
development and in 1996, 30 diagnostic or therapeutic biopharmaceuticals
(including biopharmaceuticals other than cancer biopharmaceuticals) received
FDA approval for marketing in the United States as compared to the previous
record number of eight in 1995. In addition, the overall incidence of cancer
is expected to increase as the average age of the U.S. population continues to
increase. According to the National Institutes of Health ("NIH") , over 50% of
all cancers are diagnosed in people age 65 or over.
Renal Dialysis. End stage renal disease ("ESRD") is characterized by the
irreversible loss of kidney function and requires kidney transplantation or
routine dialysis treatment (either periodialysis or hemodialysis), which
involves removing waste products and excess fluids from the blood. According
to HCFA, as of December 31, 1995 over 80% of dialysis patients were receiving
hemodialysis in outpatient treatment centers. Hemodialysis typically utilizes
various specialty pharmaceuticals and related medical supplies as part of the
treatment. Hemodialysis treatments usually last three hours and are performed
three times a week at over 3,000 outpatient facilities in the United States.
According to the HCFA, the number of patients in the United States that
received renal dialysis treatments grew from approximately 157,000 in 1992 to
approximately 200,000 at the end of 1995, a compound annual growth rate of
approximately 8%. The medication most frequently prescribed to hemodialysis
patients is EPO, which stimulates the production of red blood cells, as well
as Calcijex (calcium), INFeD (iron), hepatitis vaccine and other nutrient
compounds. The Company estimates that in 1996 the United States market for EPO
alone exceeded $1 billion. Growth in this market is driven by the general
aging of the population, favorable reimbursement trends and proposed
regulatory changes, expansion of ancillary services, and increased managed
care contracts.
Vaccine Market. The worldwide vaccine market currently exceeds $3 billion
annually, and is expected to grow to $7 billion by 2001, according to
SmithKline Beecham, one of the leading vaccine manufacturers. The Company
estimates that pediatric vaccines represent 40% of the world market, and
hepatitis vaccines represent over 20% of the world market.
The Omnibus Budget Reconciliation Act of 1993 created the Vaccines for
Children ("VFC") program, which was implemented on October 1, 1994. The VFC
program provides vaccines at no cost for children up to 18 years of age who
are Medicaid enrolled, have no health insurance or are native American Indian
or Alaskan. In addition, children who have health insurance that does not
cover immunizations are eligible if they receive vaccines at a Federally
Qualified Health Center or a Rural Health Clinic. Since most states have
already established contracts for VFC distribution, the Company intends to
focus its efforts initially on the estimated 40% of pediatric vaccines
administered by private practice physicians and on the adult vaccine market,
particularly hepatitis vaccines.
Growth in the vaccine market is expected to be driven by the growth of
combination pediatric vaccines, travelers' vaccines, vaccines for adolescent
protection, vaccines for the elderly and vaccines to treat chronic infectious
disease and cancer.
Infectious Disease. Priority operates in the infectious disease market,
principally through the sale of interferon for the treatment of hepatitis C.
NIH estimates that nearly four million Americans are infected with hepatitis C
and that approximately 30,000 new acute hepatitis C infections occur each
year. According to NIH, the incidence of hepatitis C infection appears to be
declining from its peak in 1989. However, because only 25% to 30% of new
hepatitis C infections are currently diagnosed, as estimated by NIH, the
Company believes the treated portion of this population is likely to increase
as awareness of hepatitis disease management programs increases. According to
NIH, hepatitis C is responsible for 8,000 to 10,000 deaths annually and is
currently the leading reason for liver transplantation in the United States.
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BUSINESS STRENGTHS
Priority believes the following represent the Company's business strengths
and have been the principal factors in the Company's business success to date.
Knowledgeable Sales, Marketing and Support Staff. The Company has a well-
trained, knowledgeable telemarketing and sales support staff of 32 full-time
associates, with over five years of experience on average. The Company's sales
support staff and telemarketers are most experienced in the areas of renal
care and oncology. Priority holds frequent meetings and training sessions with
its suppliers to enable the sales and support staff to be well-informed about
current and new biopharmaceuticals. The sales and support staff provides not
only superior and knowledgeable customer service, but also promotes the sale
of new products.
Clinical Expertise. The Company provides disease treatment programs to
patients and physicians through its highly trained clinical staff of patient
care coordinators, pharmacists and nurses. These personnel are available for
ongoing consultation with the patient and the dispensing physician regarding
the patient's therapy and progress seven days a week, 24 hours a day. In order
to serve the specific needs of its customers, Priority operates two licensed
pharmacies, one of which has been accredited with commendation by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO").
Broad Product Offerings to Targeted Markets. Priority sells over 3,500 SKUs
of pharmaceuticals and medical supplies which enable the Company to provide
"one-stop shopping" to its customers. Priority targets its selling efforts of
this broad range of products and services to customers in alternate site
settings, such as office-based physicians and renal dialysis clinics. The
Company continually evaluates new products that it can add to its offerings to
continue to meet the needs of these specialized markets.
Commitment to Customer Service. The Company is committed to providing
superior customer service that includes shipping products ordered before 6
p.m. for delivery the next day and filling 99% of its orders within one day of
being ordered. Priority's software enables its salespeople to quickly
determine product availability, pricing, customer order history and billing
information. In addition, Priority Pharmacy provides patient education,
counseling and follow-up with 24-hour on-call nurses to assist its patients in
better understanding and complying with their treatments.
Efficient Infrastructure. In the last two years, Priority has focused
considerable time and expense on building an infrastructure, including
computer systems and training, that would enable the Company to operate
efficiently and manage rapid growth. Management also focuses on tightly
controlling expenses and is constantly re-evaluating the efficiency of its
operations, including purchasing and distribution.
GROWTH STRATEGY
The Company's objective is to continue to grow rapidly and enhance its
market position as a leading specialty distributor by capitalizing on its
business strengths and pursuing the following strategy.
Continue to focus on and further penetrate the alternate site market. By
focusing on the alternate site market, the Company has targeted growth
segments of the health care industry. The Company intends to increase its
alternate site market presence by expanding its product and service offerings,
increasing its sales and marketing personnel and focusing on group accounts.
Enter new markets by distributing new product categories and patient-
specific biopharmaceuticals. The Company plans to selectively enter new
markets through new program offerings, such as its disease treatment programs
for melanoma and human growth hormone. In addition, by targeting chronic
disease therapies that require patient-specific, self-injectable
biopharmaceuticals, the Company continues to expand its markets.
Accelerate growth of its higher margin, patient-specific pharmacy business
by leveraging relationships with existing distribution customers. The Company
has over 2,000 customers, including physicians focusing on renal care,
oncology, infectious disease and human growth hormone deficiency. The Company
believes that a number of physicians that order supplies from the Company also
treat patients who require patient-specific, self-injectable
biopharmaceuticals. The Company's information database identifies these cross-
selling opportunities, and Priority believes it is well-positioned to capture
incremental revenue from these customers.
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Maintain intense cost control while investing in infrastructure. The
Company's goal is to remain a low cost provider of specialty distribution
products yet increase the value-added services it provides to customers such
as 24-hour on-call nurse support, patient counseling, specialized shipping and
software to its larger customers. The Company's selling, general and
administrative expense was only 5.3% of revenues in 1996 even as the Company
continued to invest in its infrastructure.
Pursue acquisitions to complement existing product offerings or further
penetrate markets. The Company believes that the highly fragmented specialty
distribution industry affords it an opportunity to grow through selective
acquisitions. By acquiring complementary businesses, the Company can increase
its customer base, expand its product and geographic scope and leverage its
existing infrastructure. For example, the recent acquisition of Grove Way
Pharmacy will enable the Company to target the distribution of vaccines into
the alternate site market.
PRODUCTS AND SERVICES
Priority Distribution. Priority Distribution provides a broad range of
services and supplies to meet the needs of the alternate site market,
including the outpatient renal care market, office-based oncology market and
other physician office specialty markets such as infectious disease. Priority
Distribution offers value-added services to meet the specialized needs of
these markets by shipping refrigerated pharmaceuticals overnight in special
packaging to maintain appropriate temperatures and offering automated order
entry services and customized group account distribution. Priority
Distribution distributes its products from distribution centers in Altamonte
Springs, Florida and Santa Ana, California. Priority Distribution also expects
to begin shipping medical supplies from a distribution center in Grove City,
Ohio later this year. The Company sells over 3,500 SKUs of pharmaceuticals
such as EPO, Calcijex and INFeD and related medical supplies such as
dialyzers, blood tubing, fistula needles, IV sets, transducers, tape and
sponges. During 1996, approximately 36% of the Company's revenues were
attributable to sales of EPO to the renal care market. EPO for the renal care
market is available from only one manufacturer, Amgen. Priority Distribution
services over 2,000 customers located in all 50 states and Puerto Rico,
including approximately 550 office-based oncologists and 800 renal dialysis
clinics.
Priority believes its knowledgeable salesforce provides a competitive
advantage when selling into the alternate site market. Since a majority of
customer orders are placed by telephone, the Company offers its customers a
toll-free telephone number and fax line and is beginning to use electronic
data interchange ("EDI") ordering capability to accept electronically
transmitted orders. Orders typically are received by the Company's
telemarketing sales and service personnel who use PC-based computer systems to
enter customer orders, and to access product information, product
availability, pricing, promotions and the customer's buying or referral
history. As part of the Company's commitment to superior customer service, the
Company offers its customers ease of order placement. Once an order is
received, it is electronically sent to the appropriate distribution center
where it is filled and shipped. The Company estimates that approximately 98%
of all items are shipped without back ordering, and that 99% of all orders
received before 6 p.m. are shipped on the same day that the order is received.
See "--Sales and Marketing."
Priority Distribution recently licensed comprehensive catalog ordering and
inventory management software from a national software company. The license
allows Priority Distribution to use the software in the Company's facilities
and to place the software in customer offices. Priority has already placed
this software on the systems of almost one dozen customers. This software
allows a customer to determine product availability and transmit orders via
EDI directly to the Company's computers, which the Company believes should
increase ordering efficiencies and accuracy. Management intends to customize
the software to further enhance its value to its customers and its own
operations. The Company believes that the installation of these information
systems within customers' facilities should, over time, solidify Priority
Distribution's long-term relationship with its customers.
Priority Pharmacy. Priority Pharmacy provides patient-specific, self-
injectable biopharmaceuticals and related disease treatment programs to
individuals with chronic diseases. Through two licensed pharmacies in
Altamonte Springs, Florida, Priority Pharmacy fills patient-specific
prescriptions by reconstituting the
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biopharmaceuticals into syringes and shipping them via overnight delivery in
special shipping containers to maintain appropriate temperatures. These
services are provided in combination with the Company's disease treatment
programs, through which the Company's pharmacy and nursing staff provide
education, counseling and other services to patients. Management is not aware
of any other provider that offers the same services as Priority Pharmacy on a
nationwide basis.
Priority Pharmacy currently provides disease treatment programs for various
diseases, including hepatitis and cancer, with biopharmaceuticals that
primarily consist of interferon, a synthetic biopharmaceutical used to treat
hepatitis B and C, Octreotide, a synthetic hormone used to treat diarrhea
associated with intestinal peptide tumors, and Epoetin Alfa, a synthetic
biopharmaceutical used to treat anemia. Priority Pharmacy also recently began
dispensing Filgrastin, Saragramostin and human growth hormone and continues to
evaluate adding more products.
The disease treatment programs provided by the Company offer a number of
advantages to patients, physicians, third-party payors and drug manufacturers.
The advantages include: (i) increasing patient compliance with the recommended
therapy, thereby avoiding more costly future treatments; (ii) facilitating
patient education required to prepare and administer the products; (iii)
reducing the potential for patient errors in dosing or wastage of product;
(iv) decreasing patient or caregiver anxiety; (v) reducing the overall cost of
delivery; and (vi) collecting better outcomes data.
The Company's telemarketing efforts focus on marketing to physician offices
where new patient referrals occur. Upon referral, patients are contacted via
telephone by the Company's intake nurses who explain the program and provide
education on self-injection techniques, side effects and potential drug
interactions. Following the initial prescription delivery, patients are
contacted by patient care coordinators who assess patient compliance and
progress, inquire regarding any potential side effects, arrange the next
scheduled prescription delivery, verify the shipping address, listen to
patient concerns and direct questions to the Company's clinical staff. The
Company's pharmacists and registered nurses are available for ongoing
consultation with the patient and the dispensing physician regarding the
patient's therapy and progress seven days a week, 24 hours a day.
All parenteral, or injectable, prescriptions are prepared in sterile
conditions under class 100 laminar flow hoods. Licensed pharmacists verify the
prescription with the prescribing physician and recheck the prescription
before shipping. In order to ensure the safe delivery of prescriptions to the
patient, the Company telephones the patient several days before shipping to
confirm that the patient or another person will be at home to receive the
package immediately upon delivery. In addition, the Company requires the
overnight delivery service to obtain a signed receipt before leaving the drugs
at a residence.
In order to respond to the specific needs of its customers, Priority
Pharmacy maintains two licensed pharmacies. One pharmacy is accredited with
commendation by JCAHO. The JCAHO pharmacy responds to the needs of customers
and payors that require JCAHO-accredited services. The Company's IV-1, Inc.
nursing program is also accredited with commendation by JCAHO. The Company's
pharmacy and nursing programs maintain a planned and systematic Quality
Assessment and Quality Improvement ("QAQI") Program, which provides a means
for monitoring and evaluating the care and services provided to patients.
Through the QAQI Program, the Company strives to promote continuous quality
improvement. A multi-departmental QAQI Committee meets quarterly and is
responsible for the collection and review of quality data, which it presents
on a quarterly basis to the Company's Medical Advisory Board and on an annual
basis to the Company's Chairman of the Board.
SALES AND MARKETING
The Company employs approximately 32 full-time telemarketing and sales
support staff personnel with an average of five years of experience. The
Company strives to generate new customers and solidify existing customer
relationships through frequent direct marketing contact that emphasizes the
Company's broad product lines in specialty markets, competitive prices,
responsive service and ease of order placement. The Company
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telemarkets to dialysis centers, oncology clinics and physician offices. The
Company also has five key account managers who target larger customers. The
Company also links the Priority Distribution and Priority Pharmacy databases
to facilitate cross-selling efforts between the two divisions. The Company
believes that there is a significant opportunity to provide its specialty
pharmacy services to patients of physicians that currently order supplies from
Priority Distribution.
The Company's sales personnel service both in-bound and out-bound calls and
are responsible for assisting customers in purchasing decisions, answering
questions and placing orders. Sales personnel also initiate out-bound calls to
market the Company's services to those customer accounts identified by the
Company as being high volume accounts, high order frequency accounts or cross-
selling opportunity accounts. The Company's sales personnel use PC-based
computer systems to enter customer orders and to access information about
products, product availability, pricing, promotions and customer buying and
referral history. All telemarketing sales personnel work to establish long-
term relationships with the Company's customers through regularly scheduled
phone contact and personalized service.
The Company's five key account managers work with selected large accounts to
develop customized distribution programs. The key account managers are
equipped with laptop computers and software to facilitate sales presentations,
customer communications and proposals, and, through synchronization software,
on-line changes with customer accounts.
Training for sales personnel is provided on a regular basis through in-
service meetings, seminars and field training and is supported by print and
video materials. Initial and ongoing training focuses on industry and product
information, selling skills, ethics and compliance requirements and computer
software skills. The Company believes that its investment in training is
critical to establishing its competitive position in the marketplace.
CUSTOMERS
Priority Distribution serves over 2,000 customers located in all 50 states
and Puerto Rico, including approximately 550 office-based oncologists and 800
renal dialysis clinics. Priority Pharmacy serves approximately 1,400 patients
nationwide.
During 1996, the Company's largest 20 customers accounted for approximately
30% of the Company's revenues and one customer, Everest Healthcare Services
Corporation, accounted for 12% of the Company's revenues. Significant declines
in the level of purchases by one or more of the Company's largest customers
could have a material adverse effect on the Company's business and results of
operations. As is customary in its industry, the Company generally does not
have long-term contracts with its customers. Management believes that the
retention rate for the Company's customers is very favorable. Although the
Company has not to date experienced any failure to collect accounts receivable
from its largest customers, an adverse change in the financial condition of
any of these customers, including an adverse change as a result of a change in
governmental or private reimbursement programs, could have a material adverse
effect on the Company.
PURCHASING
Management believes that effective purchasing is key to both profitability
and maintaining market share. In 1994, 1995 and 1996, the Company's single
largest supplier, Amgen, accounted for approximately 46%, 44% and 42%,
respectively, of the Company's revenues. The Company's purchases from Amgen
are currently guaranteed by BWI, and there can be no assurance that the
Company, as a stand-alone entity, would be able to purchase products from
Amgen on terms as favorable. The Company continually evaluates its purchase
requirements and likely increases in manufacturer prices in order to obtain
products at the most advantageous cost. It has negotiated several partnership
relationships with manufacturers that offer favorable pricing, volume-based
incentives and opportunities to reduce supply chain costs for both parties.
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COMPETITION
The alternate site specialty pharmaceutical and medical supply industry is
highly competitive and is experiencing both horizontal and vertical
consolidation. The industry is fragmented, with many public and private
companies focusing on different product or customer niches. Some of the
Company's current and potential competitors include regional and national
full-line, full-service medical supply distributors; independent speciality
distributors; national full-line, full-service wholesale drug distributors,
such as Bergen Brunswig Corporation and Cardinal Health, Inc., that operate
their own specialty distribution businesses; institutional pharmacies;
hospital-based pharmacies; home healthcare agencies; mail order distributors
that distribute medical supplies on a regional or national basis; and certain
manufacturers, such as Bristol-Myers Squibb, that own distributors or that
sell their products both to distributors and directly to users, including
clinics and physician offices. Some of the Company's competitors have greater
financial, technical, marketing and managerial resources than the Company.
While competition is primarily price and service oriented, it can also be
affected by depth of product line, technical support systems, specific patient
requirements and reputation. There can be no assurance that competitive
pressures will not have a material adverse effect on the Company.
GOVERNMENT REGULATION
As a provider of healthcare services and products, the Company is subject to
extensive regulation by federal, state and local government agencies.
Licensing. The Company is required to register with the DEA, the FDA, and
appropriate state agencies for various permits and/or licenses, and it also
must comply with the operating and security standards of such agencies. The
Company's Altamonte Springs and Santa Ana distribution centers are licensed to
distribute pharmaceuticals in accordance with the Prescription Drug Marketing
Act of 1987. The Altamonte Springs location is also licensed to distribute or
dispense certain controlled substances in accordance with the requirements of
the Controlled Substances Act of 1970. Similarly, the Company's pharmacy
program and provider businesses are subject to licensing by the DEA as well as
by the state boards of pharmacy, state health departments, and other state
agencies where they operate. The Company also has one subsidiary that is
licensed as a home health agency.
On November 14, 1995, an investigator for the FDA, accompanied by an
inspector from the State of Florida Board of Pharmacy, inspected the Company's
pharmacy in Altamonte Springs, Florida. At the end of the inspection, the FDA
investigator issued an FDA Form-483, which is the form used by FDA
investigators to identify any observed or suspected noncompliance with the
laws administered by the agency. The FDA Form-483 identified the facility as a
pharmacy/repackager and listed three observations related to certain
requirements that the FDA typically imposes on manufacturers of sterile
products. The Company advised the FDA in December 1995 that the Company
believes it is not, within the statutory or regulatory meaning of these terms,
a repackager or a manufacturer. A second inspection of the same facility
occurred on June 26, 1997, in which the FDA investigator was again accompanied
by Florida pharmacy authorities. The FDA investigator issued a substantially
identical FDA Form-483 at the end of that inspection. The Florida State Board
of Pharmacy did not issue any deficiencies regarding the operations of the
Altamonte Springs pharmacy in either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug manufacturing
regulated by the FDA. The Company's response to the FDA in December 1995 cited
this CPG and explained the Company's contention that, according to the FDA's
own criteria, the Altamonte Springs is a pharmacy properly regulated under
state and local laws.
The FDA has indicated publicly that it expects to further clarify and
explain through rulemaking the distinction between pharmaceutical
manufacturing and pharmacy operations. Legislation has been introduced in this
session of Congress that would clarify this distinction. Thus, the distinction
between a pharmacy and a pharmaceutical manufacturer currently is a subject of
activity by policymakers in the Federal government.
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While this activity may clarify matters in the future, the criteria that
differentiate drug manufacturing from pharmacy operations are uncertain under
the current state of the law. If the Company is correct and its operations are
limited to those engaged in by pharmacies, there should be no material adverse
effect from the FDA Form-483s because the Company believes it is currently in
compliance in all material respects with applicable state and local laws. If
the Company is deemed to be a sterile product manufacturer or a sterile
product repackager, the Company would be subject to additional regulatory
requirements. Because the FDA does not currently have clear guidance or
regulations on this subject, the FDA or other legal authorities could decide
that the Company must file for approval of a New Drug Application. Such an
event could have a material adverse effect on the Company.
Alternatively, the agency could determine that the Company is a sterile
products repackager and promulgate regulations or publish guidance respecting
such entities. In that event, the Company would likely have to comply with
that portion of the FDA requirements that covers the packaging operations of
sterile product manufacturers. These requirements may include stability
validation, expiration dating, sterility control, sterile product
environmental monitoring, and good manufacturing practices including
appropriate employee training related to the foregoing. The Company believes
that the cost of compliance with such requirements would not be material to
the Company's operations. However, there can be no assurance that other
conditions or requirements would not be imposed that would have a material
adverse effect on the Company.
There can be no assurance that future legislation, future rulemaking, or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
The State of Florida Board of Pharmacy regulates the compounding activities
of Florida pharmacies, including certain activities of the Company. The
Company has obtained a Community/Special Parenteral/Enteral Compounding
Pharmacy Permit. Over the past several years, the Florida Board of Pharmacy
has proposed certain changes to its compounding requirements. The Company
believes that it is in compliance with such current requirements, but there
can be no assurance that other conditions or requirements would not be imposed
in the future that would have a material adverse effect on the Company.
Referral Restrictions. The Company is subject to federal and state laws
which govern financial and other arrangements between healthcare providers.
These laws include the federal anti-kickback statute, which was originally
enacted in 1977 and amended in 1987, and which prohibits, among other things,
knowingly and willfully soliciting, receiving, offering or paying any
remuneration directly or indirectly in return for or to induce the referral of
an individual to a person for the furnishing of any item or service for which
payment may be made in whole or in part under Medicare or Medicaid. Many
states have enacted similar statutes which are not necessarily limited to
items and services for which payment is made by Medicare or Medicaid.
Violations of these laws may result in fines, imprisonment and exclusion from
the Medicare and Medicaid programs or other state-funded programs. Federal and
state court decisions interpreting these statutes are limited, but have
generally construed the statutes to apply if "one purpose" of remuneration is
to induce referrals or other conduct within the statute.
In July 1991 and November 1992, in part to address concerns regarding the
anti-kickback statute, the federal government published regulations that
provide exceptions, or "safe harbors," for transactions that will be deemed
not to violate the anti-kickback statute. Proposed regulations to clarify
these safe harbors and to provide additional safe harbors were published in
July 1994 and in September 1993, respectively. Final regulations have not yet
been published. Although the Company believes that it is not in violation of
the anti-kickback statute, its operations do not fit within any of the
existing or proposed safe harbors. Until recently, there were no procedures
for obtaining binding interpretations or advisory opinions from the Health and
Human Services Office of the Inspector General ("OIG") on the application of
the federal anti-kickback statute to an arrangement or its qualification for a
safe harbor upon which the Company can rely. However, the Health Insurance
Portability and Accountability Act of 1996 requires the Secretary of Health
and Human Services to issue 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.
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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 healthcare
providers. The OIG recently has 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.
Significant prohibitions against physician referrals were enacted by Congress
in 1993. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically
enlarging the field of physician-owned or physician-interested entities to
which the referral prohibitions apply. Effective on January 1, 1995, Stark II
prohibits a physician from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest, or with which the physician has entered into a
compensation arrangement. Stark II also prohibits the entity from billing the
government for services rendered pursuant to a prohibited referral. The
designated health services include clinical laboratory services, radiology
services, radiation therapy services and supplies, physical and occupational
therapy services, durable medical equipment and supplies, parenteral and
enteral nutrients, equipment, and supplies, prosthetic devices, orthotics and
prosthetics, outpatient prescription drugs, home health services, and inpatient
and outpatient hospital services. The penalties for violating Stark II include
a prohibition on payment by these government programs, civil penalties of as
much as $15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme," and exclusion from further participation in Medicare or
Medicaid.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the activities of many of the Company's customers.
There can be no assurance that increased enforcement activities will not
indirectly have a material adverse effect on the Company.
Other Regulatory Issues. Certain states have adopted, or are considering
adopting, restrictions similar to those contained in the federal anti-kickback
and physician self-referral laws. Although the Company believes that its
operations do not violate applicable state laws, there can be no assurance that
state regulatory authorities will not challenge the Company's activities under
such laws or challenge the dispensing of patient-specific, self-injectable
biopharmaceuticals by the Company as being subject to state laws regulating
out-of-state pharmacies.
The Company believes that its pharmacy practices and its contract
arrangements with other healthcare providers and pharmaceutical suppliers are
in compliance with these laws. To address the risks presented by such laws, the
Company has appointed an employee trained as a lawyer as Vice President of
Administration, arranged for compliance reviews conducted by outside advisors,
and implemented an ethics and corporate compliance program. 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.
REIMBURSEMENT
A substantial portion of the sales of Priority Pharmacy is derived from
third-party payors, including private insurers and managed care organizations
such as HMOs and PPOs. Similar to other medical service providers, the Company
experiences lengthy reimbursement collection periods as a result of third party
payment procedures. Consequently, management of accounts receivable through
effective patient registration, billing, collection and reimbursement
procedures is critical to financial success.
35
<PAGE>
Private payors typically reimburse a higher amount for a given service and
provide a broader range of benefits than governmental payors, although net
revenue and gross profits from private payors have been affected by the
continuing efforts to contain or reduce the costs of healthcare. A portion of
the Company's revenue has been derived in recent years from agreements with
HMOs, PPOs and other managed care providers. Although these agreements often
provide for negotiated reimbursement at reduced rates, they generally result in
lower bad debts, provide for faster payment terms and provide opportunities to
generate greater volumes than traditional indemnity referrals.
In 1996, reimbursement from Medicare and Medicaid accounted for less than
0.1% of the Company's revenues. Nevertheless, due to the reliance of office-
based oncologists and renal dialysis clinics on Medicare and Medicaid
reimbursement, changes in such governmental programs could have a material
effect on the Company's financial condition and results of operations.
HCFA recently adopted new reimbursement guidelines, which prohibit Medicare
reimbursement for EPO furnished to a patient having an hematocrit level
exceeding 36.5% based on a 90 day rolling average basis. Previously, Medicare
policy provided for payment for EPO for hematocrit levels exceeding such level
if supported by medical documentation. This change in Medicare reimbursement
policy could have an adverse effect on the sales of EPO by the Company in the
future.
Because the Medicare program represents a substantial portion of the federal
budget, Congress takes action in almost every legislative session to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers. Legislation or regulations may be enacted
in the future that may significantly modify the end stage renal dialysis
program or substantially reduce the amount paid for dialysis or oncology
treatments. Further, statutes or regulations may be adopted which impose
additional requirements in order for the Company's customers to be eligible to
participate in the federal and state payment programs. Such new legislation or
regulations could adversely affect the Company's business operations.
Additionally, the Budget Act, which was enacted in August 1997, contained
numerous provisions related to Medicare and Medicaid reimbursement. Although
many of the details will not be solidified for the next one to six years, the
general thrust of the provisions dealing with Medicare and Medicaid contained
in the Budget Act is intended to provide incentives to providers to deliver
services at lower costs. The Budget Act contains changes to reimbursement rates
for certain Medicare and Medicaid covered services, as well as certain
limitations on the coverage of such services. Although less than 0.1% of the
Company's revenues in 1996 were derived from Medicare and Medicaid
reimbursement, the Budget Act may affect the Company's suppliers and customers,
which in turn could have an adverse effect on the Company.
In addition, the Company expects that private payors will continue their
efforts to contain or reduce healthcare costs through reductions in
reimbursement rates or other cost-containment measures. The continuation of
such efforts could have a material adverse effect on the Company's financial
condition and results of operations.
EMPLOYEES
At September 30, 1997, the Company had approximately 130 full-time equivalent
employees. None of the Company's employees is currently represented by a labor
union or other labor organization. Approximately 16% of the employees are
pharmacists or nurses. The Company believes that its relationship with its
employees is good.
FACILITIES
The Company's headquarters are located in Altamonte Springs, Florida, and
consist of approximately 14,800 square feet of office space and an 18,000
square foot distribution center leased through December 1999. Priority
Distribution has an 11,900 square foot distribution center in Santa Ana,
California, which is leased through February 1998. The Company may renew such
lease for an additional three years or may decide to
36
<PAGE>
lease a new distribution center in the same vicinity. Priority Distribution
also has a 24,000 square foot distribution center in Grove City, Ohio, which is
leased through July 2002. The lease for the Grove City, Ohio, distribution
center will provide an additional 12,000 square feet beginning January 1, 1998.
The Company's distribution centers have been constructed or adapted to the
Company's specifications for climate control, alarm systems and, where
required, segregated security areas for controlled substances.
The Company intends to expand its distribution capabilities to further
enhance service and provide for continued growth. The Company expects to begin
distributing medical supplies from its newly-leased facility in Grove City,
Ohio during the last quarter of 1997. By locating closer to a large share of
its current customers and potential new customers, the Company believes that it
can lower distribution costs, while increasing its appeal to certain national
and regional customers. Overall, the Company believes that its facilities are
suitable and adequate for its current needs, and for projected internal growth
through at least 1999.
LEGAL PROCEEDINGS
IV-1, Inc. ("IV-1") and IV-One Services, Inc. ("IV-One Services") have been
named as defendants in a second amended counterclaim filed by Amgen, Inc.
("Amgen") on May 14, 1996, in the Circuit Court of the Eighteenth Judicial
District of Seminole County, Florida. Amgen has asserted that these entities
tortiously interfered with a license agreement (the "License Agreement")
between Amgen and Ortho Pharmaceutical Corporation ("Ortho"). Pursuant to this
agreement, Amgen licensed Ortho to sell EPO for use in the treatment of non-
dialysis patients, while Amgen reserved the exclusive right to sell EPO for use
in the treatment of dialysis patients. Amgen has asserted that, prior to the
purchase of IV-1 and IV-One Services by the Company, these entities induced
Ortho to sell EPO to them for resale in the dialysis market in contravention of
the License Agreement. Amgen has also alleged that IV-1 and IV-One Services
were involved in a civil conspiracy to circumvent the terms of the License
Agreement to allow the resale of EPO to the dialysis market. Furthermore, Amgen
has asserted unfair competition claims against IV-1, including that IV-1
manufactured and distributed unapproved prefilled syringes of EPO and another
product manufactured by Amgen in container systems unapproved by Amgen. Amgen
did not specify a time frame for the acts complained of in the civil conspiracy
and unfair competition allegations. In each count, Amgen has demanded an
unspecified amount of compensatory damages, including costs and interest.
The Company believes that the sellers of IV-1, IV-One Services and Charise
Charles are contractually obligated to provide legal defense and to indemnify
the Company for losses and liabilities with respect to this litigation, to the
extent that the alleged acts occurred prior to the purchase of such entities by
the Company. To date, the sellers have provided the legal defense for IV-1 and
IV-One Services in the litigation. Indemnification from the sellers of IV-1 and
IV-One Services is limited to no more than $1.5 million and indemnification
from the sellers of Charise Charles is limited to no more than $2.0 million. As
of September 5, 1997, approximately $89,000 of claims for indemnification had
been submitted to the sellers. The Company does not expect the Amgen litigation
to be material to the Company's results of operations, financial condition or
cash flows; however, no assurance can be given that this litigation will not
have a material adverse effect on the Company. In addition, Amgen is the
Company's largest supplier. Consequently, this litigation presents the risk of
adversely affecting the Company's business relationship with Amgen, which could
have a material adverse effect on the Company. See "Business--Purchasing."
On August 29, 1997, the Company received a preliminary report of field audit
issued by the California State Board of Equalization notifying the Company of a
proposed sales and use tax deficiency of approximately $2.4 million for the
period ended December 31, 1995. Management believes the California tax
authorities are inappropriately proposing to assess tax on the sale of certain
pharmaceutical products and medical supplies that are exempt from such tax.
Although discussions with the taxing authority are in the preliminary stages,
management, after discussions with its state tax consultants, believes that the
ultimate resolution of the pending claim and any other claims for periods not
audited will not be material to the Company's financial position, results of
operations or cash flows.
The Company is also subject to ordinary and routine litigation incidental to
its business, none of which is material to the Company's results of operations,
financial condition or cash flows.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William E. 57 Chairman of the Board
Bindley
Robert L. 52 President, Chief Executive Officer and Director
Myers
Guy F. 38 Executive Vice President--Priority Healthcare Distribution
Bryant
Steven D. 42 Executive Vice President--Priority Pharmacy Services
Cosler
Donald J. 51 Vice President, Chief Financial Officer and Treasurer
Perfetto
Melissa E. 37 Vice President--Clinical Services
McIntyre
Barbara J. 57 Vice President--Administration
Luttrell
William M. 39 Vice President--Marketing
Woodard
Michael D. 49 Secretary and Director
McCormick
Thomas J. 58 Director
Salentine
Richard W. 50 Director designee (1)
Roberson
Rebecca M. 43 Director designee (1)
Shanahan
</TABLE>
- --------
(1) The Board of Directors has elected Mr. Roberson and Ms. Shanahan to, and
they have agreed to become members of, the Board of Directors, effective
upon consummation of the offering.
William E. Bindley is the Chairman of the Board, Chief Executive Officer and
President of BWI, positions he has held since founding BWI in 1968. He is also
a director of BWI and Shoe Carnival, Inc., a shoe retailer. Mr. Bindley was
the Chief Executive Officer of the Company from July 1994 until May 1997 and
the President of the Company from May 1996 until July 1996. He has served as a
director of the Company since June 1994.
Robert L. Myers has been the President of the Company since July 1996 and
the Chief Executive Officer of the Company since May 1997. From July 1996 to
May 1997, he was the Chief Operating Officer of the Company. From June 1995
through June 1996, Mr. Myers was a consultant to the healthcare industry. From
1971 to June 1995, he was employed by Eckerd Corporation, a retail drug store
chain, where he served as a corporate officer from 1981 through 1995 and as
senior vice president of pharmacy from 1990 to 1995. Mr. Myers has served as a
director of the Company since May 1997. Mr. Myers is a registered pharmacist.
Guy F. Bryant serves as the Executive Vice President--Priority Healthcare
Distribution, a position that he has held since September 1995. Prior to
joining the Company, he was employed in sales management positions by Major
Pharmaceuticals, a distributor of generic pharmaceuticals, since September
1992 and was vice president of sales from August 1994 to August 1995. Until
September 1992, Mr. Bryant was a branch manager for Durr Medical, a
distributor of medical supplies.
Steven D. Cosler became Executive Vice President--Priority Pharmacy Services
of the Company in August 1997. Prior to that time and since July 1996, he was
Senior Vice President and General Manager of Priority Healthcare Services
Corporation, a subsidiary of BWI. From January 1992 to June 1996, he was
senior vice president of sales and operations for Coresource, a managed care
and third party administrator.
Donald J. Perfetto has been the Vice President, Chief Financial Officer and
Treasurer of the Company since June 1997. From 1986 to May 1997, he was
employed by Bimeco, Inc., a distributor of medical products. During such time,
Mr. Perfetto held the positions of vice president of finance and operations
and secretary/treasurer of Bimeco, Inc.
38
<PAGE>
Melissa E. McIntyre, RN, OCN, is the Vice President--Clinical Services, a
position that she has held since August 1997. She has also been President and
Chief Operating Officer of IV-1, Inc., IV-One Services, Inc. and National
Pharmacy Providers, Inc., subsidiaries of the Company since February 1995 and
was Director of Clinical Services of IV-1, Inc. from June 1994 to January
1995. Prior to joining the Company, and since June 1991, she was employed by
Intracare, an outpatient infusion center, as clinical director of nursing.
Barbara J. Luttrell is the Vice President--Administration of the Company, a
position she has held since May 1997. Prior to joining the Company in January
1997, she was employed by Physician's Alliance, a physician group, as director
of human resources since September 1996. She attended law school from May 1993
to December 1995 and practiced as an attorney from May 1996 to September 1996.
From December 1995 to May 1996, Ms. Luttrell prepared for the bar examination.
From July 1992 to February 1993, she was a human resources consultant employed
by Infusion Therapy, Inc. Prior to July 1992, she was employed by Semoran
Management Corporation as vice president human resources. Ms. Luttrell has 15
years of experience in human resource management.
William M. Woodard is the Vice President--Marketing of the Company, a
position that he has held since May 1997. From February 1995 to May 1997, he
was Executive Vice President of Sales of IV-1, Inc., IV-One Services, Inc.,
and National Pharmacy Providers, Inc.; from July 1994 to February 1995, he was
President of National Pharmacy Providers, Inc.; and from April 1993 to
February 1995, he was President of IV-1, Inc. From March 1990 until April
1993, Mr. Woodard was a sales representative for Tri State Hospital Supply, a
distributor of medical supplies.
Michael D. McCormick is the Secretary of the Company, a position that he has
held since July 1994. He is also the Executive Vice President, General Counsel
and Secretary of BWI, positions he has held for more than the past five years,
and a director of BWI. Mr. McCormick was the Executive Vice President and
General Counsel of the Company from July 1994 until May 1997 and has served as
a director of the Company since June 1994.
Thomas J. Salentine is the Executive Vice President and Chief Financial
Officer of BWI, positions he has held for more than the past five years. He is
also a director of BWI. Mr. Salentine was the Executive Vice President of the
Company from July 1994 until May 1997, the Chief Financial Officer of the
Company from July 1994 until May 1995 and the Treasurer of the Company from
May 1997 to June 1997. He has served as a director of the Company since July
1994.
Richard W. Roberson is the president of Sand Dollar Partners, Inc., an
investment and consulting firm, a position which he has held since November
1996. Prior to that time, Mr. Roberson served as president and chief executive
officer of Visionworks, Inc., a retail superstore optical chain, from March
1993 to September 1996. From 1978 to March 1993, Mr. Roberson held various
positions with Eckerd Corporation, including chief executive officer of Insta-
Care Pharmacy Services, Inc. and president of Eckerd Vision Group from 1988 to
1993. Mr. Roberson is also a director of C.H. Heist Corporation, an industrial
cleaning and maintenance company.
Rebecca M. Shanahan became vice president, managed care of the University of
Chicago Hospitals and Health Systems in September 1997, where she is
responsible for the development and implementation of managed care programs
and products. From December 1996 until assuming her present position, she
performed legal and consulting services as an independent contractor for
various entities in the health care industry. From 1991 until December 1996,
she held executive officer positions with Methodist Medical Group and Beltway
Services, a 600 member physician practice group affiliated with Methodist
Hospital in Indianapolis, Indiana, with her latest position being senior vice
president and chief operating officer. From 1986 to 1991 she was vice
president and general counsel of Community Hospitals of Indiana, Inc.
Directors of the Company are divided into three classes with staggered
three-year terms. The term of the first class will expire at the annual
meeting of shareholders in 1998 and the terms of the second and third classes
39
<PAGE>
will expire at the annual meetings of shareholders in 1999 and 2000,
respectively. The terms of the Company's current and proposed Directors will
expire as follows: Messrs. McCormick and Salentine--1998; Messrs. Myers and
Roberson--1999; and Mr. Bindley and Ms. Shanahan--2000.
Executive officers of the Company serve at the discretion of the Board of
Directors. There is no family relationship between any of the Directors or
executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will have two committees: an Audit, Ethics and
Compliance Committee and a Compensation Committee.
The functions of the Audit, Ethics and Compliance Committee include making
recommendations to the Board of Directors as to the selection of the firm of
independent public accountants to examine the books and accounts of the
Company for each fiscal year, the proposed engagement arrangements for the
independent public accountants for each fiscal year, and the advisability of
having the independent public accountants make specified studies and reports
regarding auditing matters, accounting procedures, tax or other matters. The
Audit, Ethics and Compliance Committee will also review the results of the
audit for each fiscal year, such accounting policies of the Company as are
deemed appropriate for review by the Committee, and the coordination between
the independent public accountants and the Company's chief accounting officer.
The Audit, Ethics and Compliance Committee is also responsible for reviewing
all related party transactions and for monitoring corporate policies and
procedures with respect to the Company's ethics and compliance program. Upon
consummation of this offering, the members of the Audit, Ethics and Compliance
Committee will be Mr. Roberson and Ms. Shanahan, each of whom will be an
"independent director" within the meaning of the rules of the Nasdaq National
Market.
The functions of the Compensation Committee include considering and
recommending to the Board of Directors and Company management the overall
compensation programs of the Company, reviewing and approving the compensation
payable to the senior management personnel of the Company, and reviewing and
monitoring the executive development efforts of the Company to assure
development of a pool of management and executive personnel adequate for
orderly management succession. The Committee will also review significant
changes in employee benefits plans and stock related plans and serve as the
"Committee" under the Company's 1997 Stock Option and Incentive Plan. The
members of the Compensation Committee will be Mr. Roberson and Ms. Shanahan,
each of whom is a "non-employee director" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and an "outside director" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code").
The Board of Directors may, from time to time, establish certain other
committees to facilitate its work.
COMPENSATION OF DIRECTORS
No compensation was paid during 1996 to any director of the Company for
services as a director of the Company. The Company will pay directors who are
not employees of the Company or BWI an annual retainer of $15,000 and a fee of
$1,000 for each Board meeting or committee meeting attended. The annual
retainer will be paid 50% in cash and 50% in the form of shares of Class B
Common Stock, valued at 100% of the fair market value of such shares on the
date of grant. Such shares will not be registered and will be subject to the
resale limitations of Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"). Directors who are full-time employees of the Company or BWI
will not receive any additional compensation for serving as directors or for
attending meetings, but all directors will be reimbursed for all reasonable
out-of-pocket expenses incurred in connection with attendance at meetings.
40
<PAGE>
The Company has adopted an Outside Directors Stock Option Plan (the
"Directors Plan"). The Directors Plan reserves for issuance 25,000 shares of
the Company's Class B Common Stock, subject to adjustment in certain events.
Pursuant to the Directors Plan, each non-employee director ("Eligible
Director") will be automatically granted an option to purchase 1,000 shares of
Class B Common Stock on June 1 of each year beginning June 1, 1998. The option
exercise price per share will be the fair market value of one share of Class B
Common Stock on the date of grant. Each option becomes exercisable six months
following the date of grant and expires ten years following the date of grant.
Subject to certain exceptions, options may be exercised by the holder only if
he has been in continuous service on the Board of Directors at all times since
the grant of the option. There will initially be two Eligible Directors, Mr.
Roberson and Ms. Shanahan. The Eligible Directors are not eligible for grants
or awards under any other stock, bonus or benefit plans of the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by the Company for services
rendered in all capacities to the Company during 1996, to the individual who
served as the Company's Chief Executive Officer during 1996, and to each of
the Company's four other most highly compensated executive officers, based on
salary and bonus earned during 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- ------------
SECURITIES
NAME AND PRINCIPAL BONUS UNDERLYING ALL OTHER
POSITION SALARY (1) OPTIONS COMPENSATION
----------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
William E. Bindley
Chairman of the
Board(2).............. $ --(3) $ --(3) --(3) $ --(3)
Robert L. Myers
President and Chief
Executive Officer(4).. 105,000 130,000 -- 121(5)
Guy F. Bryant
Executive Vice
President--
Priority Healthcare
Distribution.......... 125,735 55,500 -- 11,861(6)
Melissa E. McIntyre
Vice President--
Clinical Services..... 110,923 55,500 -- 12,080(7)
William M. Woodard
Vice President--
Marketing............. 101,119 50,600 -- 12,111(8)
</TABLE>
- --------
(1) Reflects bonus earned during the specified year, but paid in the following
year.
(2) Mr. Bindley served as the Chief Executive Officer of the Company from July
1994 until May 1997, but he did not receive or earn any compensation for
his services rendered as Chief Executive Officer.
(3) Does not include compensation paid by BWI to Mr. Bindley as an officer of
BWI.
(4) Mr. Myers became the Chief Executive Officer of the Company in May 1997.
(5) Represents $121 in group life insurance premiums.
(6) Consists of $11,782 in Company contributions to BWI's qualified profit
sharing plan (the "BWI Profit Sharing Plan") and $79 in group life
insurance premiums.
(7) Consists of $12,000 in Company contributions to the BWI Profit Sharing
Plan and $80 in group life insurance premiums.
(8) Consists of $12,000 in Company contributions to the BWI Profit Sharing
Plan and $111 in group life insurance premiums.
41
<PAGE>
1997 STOCK OPTION AND INCENTIVE PLAN
On August 25, 1997, the Board of Directors and BWI, as sole shareholder of
the Company, adopted the 1997 Stock Option and Incentive Plan (the "1997 Stock
Option Plan"). Under the 1997 Stock Option Plan, the Company may award stock
options and shares of restricted stock to officers, key employees, and
consultants of the Company. The aggregate number of shares of Class B Common
Stock that may be awarded under the 1997 Stock Option Plan is 1,250,000,
subject to adjustment in certain events. No individual participant may receive
awards for more than 300,000 shares in any calendar year.
The 1997 Stock Option Plan is currently administered by the Board of
Directors of the Company. After consummation of the offering, the 1997 Stock
Option Plan will be administered by the Compensation Committee. Subject to the
terms of the 1997 Stock Option Plan, the Compensation Committee will have the
sole discretion and authority to select those officers and key employees to
whom awards will be made, to designate the number of shares to be covered by
each award, to establish vesting schedules, to specify all other terms of the
awards (subject to certain restrictions) and to interpret the 1997 Stock
Option Plan. Awards of options and shares of restricted stock as to which
restrictions have not lapsed are not transferable other than pursuant to the
laws of descent and distribution.
With respect to stock options under the 1997 Stock Option Plan that are
intended to qualify as "incentive stock options" under Section 422 of the
Code, the option price must be at least 100% (or, in the case of a holder of
more than 10% of the total combined voting power of the Company's stock, 110%)
of the fair market value of a share of Class B Common Stock on the date of the
grant of the stock option. The Compensation Committee will establish the
exercise price of options that do not qualify as incentive stock options
("non-qualified stock options") at the time the options are granted. No
incentive stock option granted under the 1997 Stock Option Plan may be
exercised more than ten years (or, in the case of a holder of more than 10% of
the total combined voting power of the Company's stock, five years) from the
date of grant or such shorter period as the Compensation Committee may
determine from the date it is granted. Non-qualified stock options may be
exercised during such period as the Compensation Committee determines at the
time of grant, which period may not be more than ten years from the date of
grant. Under the 1997 Stock Option Plan, the Compensation Committee may grant
awards of restricted shares, in which case the grantee would be granted shares
of Class B Common Stock, subject to such forfeiture provisions and transfer
restrictions as the Compensation Committee determines.
Subject to the discretion of the Compensation Committee, generally if the
employment of a grantee of stock options or restricted shares is terminated
for cause or voluntarily by the grantee for any reason other than death,
disability or retirement, such grantee's options expire and any restricted
shares are forfeited at the date of termination. The Board of Directors may
terminate or amend the 1997 Stock Option Plan at any time; however,
shareholder approval must be obtained to the extent necessary to comply with
Rule 16b-3 under the Exchange Act, Section 422 of the Code, or any other
applicable law or regulation, including the requirements of any stock exchange
or quotation system on which the Class B Common Stock is listed or quoted. The
1997 Stock Option Plan provides for accelerated vesting of outstanding options
in the event of a change in control or the dissolution or liquidation of the
Company. The 1997 Stock Option Plan also provides for accelerated vesting of a
grantee's restricted shares upon the involuntary termination of such grantee
within 12 months following a change in control of the Company or upon the
dissolution or liquidation of the Company.
On August 25, 1997, the Company's Board of Directors granted a combination
of incentive and non-qualified stock options to employees under the 1997 Stock
Option Plan for an aggregate of 405,050 shares of Class B Common Stock,
effective at the closing date of the offering. The Board of Directors also
granted a non-qualified stock option to a consultant of the Company for 50,000
shares of Class B Common Stock, effective at the closing date of the offering.
See "--Consulting Agreement." Each of such options has an exercise price equal
to the initial public offering price set forth on the cover page of this
Prospectus and has a term of 10 years. The incentive stock options vest on
January 1, 1999 and the non-qualified stock options vest 25% on each January
1, in the years 1999 through 2002. Included in these grants were grants to Ms.
McIntyre and Messrs. Myers, Bryant and Woodard of options for 40,000 shares,
100,000 shares, 40,000 shares and 15,000 shares, respectively.
42
<PAGE>
No employees of the Company will be eligible to receive options under any
BWI stock option plan for 1997 or any future year. In the event of a
Distribution by BWI of its Class A Common Stock, employees of the Company who
have exercisable stock options from BWI may elect to waive all of their rights
under those BWI options, in which case the Company will grant the employee
substitute options for shares of Class B Common Stock with equivalent economic
value.
ESOP
If BWI effects the Distribution of its Class A Common Stock to its
shareholders, the Company will establish an employee stock ownership plan
("ESOP") for its employees. The ESOP would acquire shares of Class B Common
Stock from the Company which would be equal to approximately 5% of the then
outstanding Common Stock. See "Relationship With BWI."
PROFIT SHARING PLAN
The Company's eligible employees participate in the BWI Profit Sharing Plan.
All employees are generally eligible to participate in the BWI Profit Sharing
Plan as of the first January 1, April 1, July 1 or October 1 after having
completed at least one year of service (as defined in the BWI Profit Sharing
Plan) and having reached age 21.
The annual contribution of the Company to the BWI Profit Sharing Plan is at
the discretion of the Board of Directors of BWI and is generally 8% of a
participant's compensation for the year. The employer contribution for a year
is allocated among participants employed on the last day of the year in
proportion to their relative compensation for the year. Subject to limitations
imposed by the Code, a participant may, in addition to receiving a share of
the employer contribution, have a whole percentage (ranging from 1% to 13%) of
his or her compensation withheld from pay and contributed to the BWI Profit
Sharing Plan. Subject to applicable Code requirements, employees may make
"rollover" contributions to the BWI Profit Sharing Plan of qualifying
distributions from other employers' qualified plans.
If BWI effects the Distribution of its Class A Common Stock to its
shareholders, the Company's employees would no longer be eligible to
participate in the BWI Profit Sharing Plan. In lieu of this benefit, the
Company would establish the ESOP.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
The Company has entered into a Termination Benefits Agreement with Mr.
Myers. The purpose of the agreement is to encourage him to remain with the
Company by assuring him of certain benefits in the event of a "Change in
Control" of the Company.
The Termination Benefits Agreement provides for payments to Mr. Myers upon
the occurrence of certain events. The Termination Benefits Agreement has an
initial term through December 31, 1998 and is automatically extended annually
for an additional one-year period unless notice is given by the Company or Mr.
Myers. The Termination Benefits Agreement is designed to protect Mr. Myers
against termination of his employment following a "Change in Control" of the
Company. For purposes of the Termination Benefits Agreement, "Change in
Control" is broadly defined to include, among other things, the acquisition by
a person or group of persons of 25% or more of the combined voting power of
the stock of the Company, the replacement of a majority of the current Board
of Directors, the approval by the shareholders of the Company of a
reorganization, merger or consolidation, or the approval by shareholders of a
liquidation or dissolution of the Company or the sale or disposition of all or
substantially all of the assets of the Company. Any Distribution by BWI of its
Class A Common Stock would not constitute a "Change in Control."
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Following a "Change in Control," Mr. Myers is entitled to the benefits
provided by the Termination Benefits Agreement in the event his employment is
terminated within three years for any reason other than for cause or due to
his death, disability, or normal retirement.
In addition, Mr. Myers is entitled to the benefits of the Termination
Benefits Agreement if, after a "Change in Control," he terminates his
employment with the Company within three years in response to certain actions
by the Company which include, among other things, a substantial reduction in
his duties or responsibilities, reduction in the level of salary payment to
him, the failure by the Company to continue to provide him with benefits
substantially similar to those previously provided to him, the required
relocation of Mr. Myers, or the breach by the Company of any of the provisions
of the Termination Benefits Agreement.
Upon termination of employment, if Mr. Myers is entitled to the benefits
payable under the Termination Benefits Agreement, he shall receive within 30
days following the termination all earned but unpaid salary, bonus and
incentive payments through the date of his termination. In addition, he shall
be entitled to a lump-sum payment of an amount equal to 2.9 times his average
annual compensation paid by the Company for the past five years. Any lump sum
payment will be grossed up in an amount sufficient to cover any excise tax
imposed upon such payment pursuant to Section 4999 of the Code.
On June 1, 1997, the Company entered into an employment agreement with each
of Guy F. Bryant, Steven D. Cosler, Melissa E. McIntyre and William M.
Woodard. The Company also entered into an employment agreement with Donald J.
Perfetto on June 23, 1997. Each of the agreements is for a term to expire on
February 28, 1999. Under the terms of these agreements, Mr. Bryant, Mr.
Cosler, Ms. McIntyre, Mr. Woodard and Mr. Perfetto are entitled to receive
base salaries of $11,050 per month, $12,283 per month, $10,600 per month,
$9,583 per month and $9,167 per month, respectively, subject to annual review
for potential increase. These employment agreements provide that Mr. Bryant,
Mr. Cosler, Ms. McIntyre, Mr. Woodard and Mr. Perfetto are eligible to receive
an annual bonus based on individual and company performance, up to 60% of
annualized monthly salary for Mr. Bryant, Mr. Cosler or Ms. McIntyre, up to
50% of annualized monthly salary for Mr. Woodard and up to 48% of annualized
monthly salary for Mr. Perfetto. Pursuant to the employment agreements, if the
Company terminates Mr. Bryant, Mr. Cosler, Ms. McIntyre, Mr. Woodard or Mr.
Perfetto, as the case may be, without cause prior to the expiration of the
employment agreement, the Company shall pay to Mr. Bryant, Mr. Cosler, Ms.
McIntyre, Mr. Woodard or Mr. Perfetto, as the case may be, the aggregate
amount of regular compensation that he or she would be entitled to receive
under the agreement for a six-month period.
The Company also entered into a non-compete agreement with each of Mr.
Bryant, Mr. Cosler, Ms. McIntyre and Mr. Woodard on June 1, 1997 and with Mr.
Perfetto on June 23, 1997. These non-compete agreements contain
confidentiality provisions and provide that, for one year after termination of
employment with the Company for any reason other than termination by the
Company without cause, in which event the period shall be six months, Mr.
Bryant, Mr. Cosler, Ms. McIntyre, Mr. Woodard or Mr. Perfetto, as the case may
be, may not compete with the Company, solicit the Company's customers or
induce the Company's employees to terminate their employment.
CONSULTING AGREEMENT
In connection with the Company's acquisition of the IV One Companies, the
Company entered into a four-year consulting agreement with one of the sellers,
Martin A. Nassif. Pursuant to the agreement, which expires December 31, 1998,
Mr. Nassif receives a fee of $10,000 per month and is entitled to receive as
additional compensation an amount equal to 3% of Pre-Tax Net Profit (as
defined in the agreement) of the Company for calendar years 1995 through 1998,
with a guaranteed aggregate minimum amount of $1.0 million payable as
additional compensation. Under the consulting agreement, Mr. Nassif is also
entitled to and will receive a 10-year option to acquire 50,000 shares of
Class B Common Stock at the initial public offering price.
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RELATIONSHIP WITH BWI
CURRENT RELATIONSHIP
The Company was incorporated in June 1994 as a wholly-owned subsidiary of
BWI to operate the alternate site healthcare businesses acquired by BWI.
Currently, the Company is a wholly-owned subsidiary of BWI and three of the
four members of the Company's Board of Directors are directors and executive
officers of BWI.
CERTAIN TRANSACTIONS
BWI has provided management and consulting services to the Company which
included, but were not limited to, legal, human resources, payroll and tax.
The Company was charged $49,000, $75,000 and $65,000 for 1994, 1995 and 1996,
respectively. These amounts were based on an allocation of the actual services
rendered by BWI.
The Company's eligible employees participate in BWI's Profit Sharing Plan.
BWI's contributions to the plan for Company employees for 1994, 1995 and 1996
were $69,344, $119,283 and $229,990, respectively.
The Company was also provided coverage under the BWI insurance plans. The
expenses of these plans were charged to the Company based on a combination of
a pro rata allocation and the push-down of actual expenses incurred, depending
on the type of expenditure. The insurance expense allocated to the Company was
$38,000, $100,000 and $132,000 for 1994, 1995 and 1996, respectively.
At December 31, 1995 and December 31, 1996 the Company owed BWI $3.9 million
and $9.3 million, respectively. This liability represents the cost of certain
transactions undertaken by the Company that were paid or financed by BWI. The
interest expense attributable to the related party borrowings was $211,000,
$455,000 and $408,000 for 1994, 1995 and 1996, respectively. This interest
expense was calculated by applying the BWI average incremental borrowing rate
to the average outstanding borrowings. For 1994, 1995 and 1996 the average
outstanding borrowings were $3.6 million, $6.4 million and $6.4 million,
respectively. The average incremental borrowing rates applied to these
borrowings were 5.9%, 7.1% and 6.4% for 1994, 1995 and 1996, respectively.
The Company has purchased inventory from BWI at the price paid by BWI for
such inventory. Intercompany purchases of inventory from BWI were $9.4
million, $8.3 million and $1.8 million in 1994, 1995 and 1996, respectively.
The Company believes that each of the above transactions was on terms no
less favorable to the Company than those that could have been obtained from
unaffiliated third parties.
On March 31, 1997, the Company paid a dividend to BWI in the form of a
subordinated promissory note with a principal amount of $6.0 million. The
Dividend Note bears interest at the rate of 7.25% per annum. Interest on the
Dividend Note must be paid by the Company on a quarterly basis, with the
principal amount due on March 31, 1999. The dividend returned a portion of
BWI's equity investment in the Company. After giving effect to the dividend,
BWI's aggregate investment in the Company on March 31, 1997 was approximately
$24.9 million.
RELATIONSHIP AND TRANSACTIONS FOLLOWING THE OFFERING
Immediately following this offering, the Company will continue to be
controlled by BWI, which will own more than 80% of the outstanding Common
Stock of the Company. BWI has advised the Company that, following this
offering, BWI will continue to evaluate whether to distribute its ownership
interest in the Company to its shareholders by means of a spin-off. The
Distribution is unlikely to be completed before 1998. In making the
evaluation, BWI is expected to consider such matters as the need for an ESOP
and other equity-based compensation incentives to attract and retain qualified
personnel for the Company, the relative trading prices of the Class B Common
Stock and BWI common stock after this offering, the results of operations of
the Company and BWI, and the relative prospects of BWI and the Company on a
stand-alone basis. The Distribution will also be subject to the receipt of a
favorable ruling from the Internal Revenue Service as to the tax-free nature
of the transaction.
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Set forth below are descriptions of certain agreements between the Company
and BWI which will be in place following the consummation of this offering.
The Company has adopted a policy that, following the offering made hereby, all
future agreements, including any amendments to those set forth herein, between
the Company and BWI and its affiliates will be subject to the review of the
Company's Audit, Ethics and Compliance Committee and will be on terms that the
Audit, Ethics and Compliance Committee believes are no less favorable to the
Company than terms that would be available from unaffiliated parties. The
Audit, Ethics and Compliance Committee will be composed entirely of
"independent directors" within the meaning of the rules of the Nasdaq National
Market.
Revolving Credit Promissory Note. BWI will make available to the Company a
$30.0 million line of credit. The Company may utilize the line for working
capital purposes and for possible acquisitions. The maturity date for the line
is December 31, 1998. Outstanding principal amounts under the line will bear
interest, payable quarterly, at a rate equal to the rate then paid by BWI
under its primary line of credit agreement.
Indemnification and Hold Harmless Agreement. The Company and BWI have
entered into an Indemnification and Hold Harmless Agreement (the
"Indemnification Agreement"), in which each party agrees to indemnify and hold
harmless the other from and against certain obligations and contingent
liabilities. Specifically, the Indemnification Agreement provides that the
Company will indemnify and hold harmless BWI from obligations related to a
guarantee which BWI made in favor of the Company and from certain indemnity
and other obligations which BWI assumed, or which could be charged against
BWI, in connection with the five acquisitions by or on behalf of the Company.
The Indemnification Agreement also provides that BWI will indemnify and hold
harmless the Company from and against contingent liabilities in connection
with certain litigation to which the Company is not a party.
Tax Sharing Agreement. Unless and until the Distribution of the Class A
Common Stock to shareholders of BWI occurs, the results of operations of the
Company and its domestic subsidiaries that are at least 80% owned by the
Company (the "Company Group") will be included in BWI's consolidated federal
income tax returns and in BWI's consolidated or combined state tax returns. In
connection with this offering, BWI and the Company have entered into a Tax
Sharing Agreement that provides, among other things, for the allocation
between BWI and the Company of federal, state, local and foreign tax
liabilities for all periods through the date that any Distribution occurs (the
"Distribution Date"). Generally, the Company will be responsible for the
portion of any tax deficiencies of BWI assessed with respect to all periods up
to and including the Distribution Date that give rise to a tax benefit to the
Company in a post-Distribution period. The Company will also be entitled to
tax refunds received by BWI that result in a tax detriment to the Company for
those post-Distribution periods. The Company will also be responsible for all
income taxes imposed on the Company Group during the taxable period or portion
thereof beginning on January 1, 1998 and ending on or before the Distribution
Date. Furthermore, the Tax Sharing Agreement provides that, if the
Distribution fails to qualify as a tax-free distribution as a result of any
event occurring prior to the second anniversary of the Distribution Date that
results from the breach of certain covenants made by the Company in the Tax
Sharing Agreement or involves either the stock or assets (or any combination
thereof) of any member of the Company Group, then the Company must indemnify
and hold BWI harmless, on an after-tax basis, from any tax liability imposed
upon it in connection with the Distribution. The Tax Sharing Agreement also
prohibits the Company from entering into certain transactions or disposing of
substantially all of its assets prior to the second anniversary of the
Distribution Date in the absence of a prior opinion of independent tax counsel
or the receipt of a private letter ruling from the Internal Revenue Service
that such transaction or disposition will not cause the Distribution to be a
taxable transaction.
Administrative Services Agreement. The Company and BWI have entered into an
Administrative Services Agreement (the "Services Agreement") relating to the
provision of certain services by BWI to the Company. The services covered by
the Services Agreement will include administrative services for employee
benefits and risk management, legal, tax and treasury services. The Company
anticipates that it will pay BWI a total of $80,000 in the first twelve months
following this offering for such services.
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PRINCIPAL SHAREHOLDER
Prior to this offering, the only shareholder of the Company is BWI, whose
address is 10333 North Meridian Street, Indianapolis, Indiana 46290. As of the
date of this Prospectus, BWI owns beneficially and of record 10,214,286 shares
of Class A Common Stock, representing all of the shares of Common Stock
outstanding prior to this offering. Upon completion of this offering, BWI will
own beneficially and of record 10,214,286 shares of Class A Common Stock, or
83.6% of the outstanding Common Stock (81.6% if the Underwriters' over-
allotment option is exercised in full), and will have 93.9% of the voting
power of the outstanding Common Stock (93.0% if the Underwriters' over-
allotment option is exercised in full). Accordingly, BWI, acting alone, will
be able to elect the entire Board of Directors of the Company and to control
the vote on matters submitted to a vote of the Company's shareholders,
including extraordinary corporate transactions. See "Risk Factors."
The following table sets forth as of June 30, 1997 the number of shares of
BWI common stock owned by each director or nominee for director of the
Company, by each of the Named Executive Officers, and by all current directors
and executive officers of the Company as a group. Unless otherwise indicated
in a footnote, each individual or group possesses sole voting and investment
power with respect to the shares indicated as beneficially owned.
<TABLE>
<CAPTION>
BWI COMMON STOCK
------------------------------
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
---- ------------------ --------
<S> <C> <C>
William E. Bindley(1)...................... 3,291,034(2)(3) 27.4%
Robert L. Myers............................ 19,910(2)(4) *
Guy F. Bryant.............................. 9,340(2)(5) *
Melissa E. McIntyre........................ 3,608(2)(6) *
William M. Woodard......................... 3,656(2)(7) *
Michael D. McCormick....................... 272,322(2)(8) 2.3%
Thomas J. Salentine........................ 320,425(2)(9) 2.7%
Richard W. Roberson........................ -- *
Rebecca M. Shanahan........................ -- *
All current directors and executive
officers as a group (12 persons).......... 3,925,495(2)(10) 31.2%
</TABLE>
- --------
*Less than one percent.
(1) The address of this shareholder is 10333 North Meridian Street, Suite
300, Indianapolis, Indiana 46290.
(2) Does not include shares subject to stock options which are not
exercisable within 60 days.
(3) Includes presently exercisable stock options to purchase 222,905 shares
granted by BWI. Also includes 1,000 shares held by Mr. Bindley's spouse;
Mr. Bindley disclaims beneficial ownership of such shares.
(4) Includes presently exercisable stock options to purchase 11,088 shares
granted by BWI. Also includes 300 shares held by Mr. Myers' minor child.
(5) Includes presently exercisable stock options to purchase 8,424 shares
granted by BWI.
(6) Includes presently exercisable stock options to purchase 3,608 shares
granted by BWI.
(7) Includes presently exercisable stock options to purchase 2,983 shares
granted by BWI.
(8) Includes presently exercisable stock options to purchase 255,000 shares
granted by BWI.
(9) Includes presently exercisable stock options to purchase 281,500 shares
granted by BWI.
(10) Includes presently exercisable stock options to purchase 790,508 shares
granted by BWI.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
The Company's authorized shares consist of 15,000,000 shares of Class A
Common Stock, $0.01 par value, 40,000,000 shares of Class B Common Stock,
$0.01 par value, and 5,000,000 shares of Preferred Stock, without par value.
Based on the number of shares of Class A Common Stock outstanding as of August
25, 1997, after giving effect to the sale of the 2,000,000 shares of Class B
Common Stock offered hereby, there will be 10,214,286 shares of Class A Common
Stock and 2,000,000 shares of Class B Common Stock, or an aggregate of
12,214,286 shares of Common Stock, outstanding upon completion of the
offering. No shares of Preferred Stock have been issued as of the date of this
Prospectus.
COMMON STOCK
The two classes of Common Stock entitle holders to the same rights and
privileges, except that holders of shares of Class A Common Stock are entitled
to three votes per share on all matters submitted to a vote of holders of
Common Stock, and holders of shares of Class B Common Stock are entitled to
one vote per share on such matters. The two classes of Common Stock vote
together as a single class on all matters except as otherwise required by
applicable law.
The Class A Common Stock will automatically be converted into shares of
Class B Common Stock on a share-for-share basis upon any transfer or purported
transfer to any person other than: (i) a dividend or other distribution of the
shares of Class A Common Stock to the shareholders of BWI; or (ii) family
members of the transferee, or trusts for the benefit of or entities controlled
by the transferee or family members of the transferee.
Except as set forth below (and as provided by law), all matters submitted to
a vote of shareholders will be voted on by holders of Class A Common Stock and
Class B Common Stock voting together as a single class. Holders of outstanding
shares of Class A Common Stock and Class B Common Stock, respectively, vote
separately as a class with respect to certain amendments to the Company's
Restated Articles of Incorporation. These amendments would include changes in
the aggregate number of authorized shares of a class, an exchange or
reclassification of shares of one class into another class, or other changes
to the designation, rights, preferences or limitations of a class.
Subject to any preferential rights of any Preferred Stock created by the
Company's Board of Directors, each outstanding share of Common Stock will be
entitled to such dividends as may be declared from time to time by the Board
of Directors. Holders of shares of Class A Common Stock and holders of shares
of Class B Common Stock will be treated equally with respect to such
dividends, except that in the case of dividends payable in Common Stock,
holders of Class A Common Stock may only receive shares of Class A Common
Stock and holders of Class B Common Stock may only receive shares of Class B
Common Stock. See "Dividend Policy." Holders of Common Stock are not entitled
to cumulate their votes in an election of directors; therefore, the holders of
a majority of the votes cast in an election of the Board of Directors of the
Company can elect all the directors up for election, if they so choose. In the
event of liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to receive on a pro rata basis any assets remaining
after provision for payment of creditors and after payment of any liquidation
preferences to holders of Preferred Stock.
PREFERRED STOCK
The authorized Preferred Stock is available for issuance from time to time
at the discretion of the Board of Directors without shareholder approval. The
Board of Directors has the authority to prescribe for each series of Preferred
Stock it establishes the number of shares in that series, the number of votes
(if any) to which such shares in that series are entitled, the consideration
for such shares in that series and the designations, powers, preferences and
relative, participating, option or other special rights, and such
qualifications, limitations or
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restrictions of the shares in that series. Depending upon the rights of such
Preferred Stock, the issuance of Preferred Stock could have an adverse effect
on holders of Common Stock by delaying or preventing a change in control of
the Company, making removal of the present management of the Company more
difficult or resulting in restrictions upon the payment of dividends and other
distributions to the holders of Common Stock.
AUTHORIZED BUT UNISSUED SHARES
Indiana law does not require shareholder approval for any issuance of
authorized shares. These additional shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of unissued and unreserved shares may be to enable the Board
of Directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of the Company's management and
possibly deprive the shareholders of opportunities to sell their shares of
Common Stock at prices higher than prevailing market prices.
NO PREEMPTIVE RIGHTS
No holder of any class of authorized shares of the Company has any
preemptive right to subscribe to any securities of the Company of any kind or
class.
CERTAIN PROVISIONS OF RESTATED ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of the Company's Restated Articles of Incorporation and
By-Laws may delay or make more difficult unsolicited acquisitions or changes
of control of the Company. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change in control of the Company, although such proposals, if
made, might be considered desirable by a majority of the Company's
shareholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of the current management
of the Company without the concurrence of the Board of Directors. These
provisions include: (i) the division of the Board of Directors into three
classes, each class serving "staggered" terms of office of three years (see
"Management--Directors and Executive Officers"); (ii) the availability of
authorized shares of stock for issuance from time to time at the discretion of
the Board of Directors (see "--Authorized But Unissued Shares"); (iii)
provisions allowing the removal of directors only for cause and only upon a 66
2/3% shareholder vote, taken at a meeting called for that purpose; (iv)
provisions which require the participation of 80% of the voting power of the
outstanding Common Stock in order for the shareholders to demand the calling
of a special meeting of shareholders; and (v) requirements for advance notice
for raising business or making nominations at shareholders' meetings.
The Company's By-Laws establish an advance notice procedure with regard to
business to be brought before an annual or special meeting of shareholders of
the Company and with regard to the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors.
Although the Company's By-Laws do not give the Board of Directors any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal without regard to whether consideration
of such nominees or proposals might be harmful or beneficial to the Company
and its shareholders.
The Restated Articles of Incorporation provide that, in the case of a
merger, sale of assets, issuance of securities, liquidation or
reclassification (a "business combination") involving a beneficial owner of
10% or more of the voting power of the Company's capital stock (a "Related
Person"), or any affiliate or associate of a Related Person, such business
combination must be approved by (i) 66 2/3% of the voting power of the
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outstanding voting stock of the Company and (ii) a majority of the then
outstanding voting power of the voting stock held by shareholders other than
the Related Person, unless the business combination is approved in advance by
the Continuing Directors (as defined in the Restated Articles of
Incorporation) or the consideration to be received by shareholders in the
business combination is at least equal to the highest price paid by the
Related Person in acquiring its interest in the Company, with certain
adjustments, and certain other requirements are met. The term Related Person
does not include any person who beneficially owned more than 20% of the voting
power of the Company's capital stock or of BWI on August 25, 1997. See
"Principal Shareholder."
CERTAIN PROVISIONS OF INDIANA LAW
The Indiana Business Corporation Law (the "IBCL") applies to the Company as
an Indiana corporation. Under certain circumstances, the following provisions
of the IBCL may delay, prevent or make more difficult unsolicited acquisition
or changes of control of the Company. Such provisions also may have the effect
of preventing changes in the management of the Company. It is possible that
such provisions could make it more difficult to accomplish transactions which
shareholders may otherwise deem to be in their best interests.
Control Share Acquisitions. Pursuant to Sections 23-1-42-1 to 23-1-42-11 of
the IBCL, an "acquiring person" who makes a "control share acquisition" in an
"issuing public corporation" may not exercise voting rights on any "control
shares" unless such voting rights are conferred by a majority vote of the
disinterested shareholders of the issuing corporation at a special meeting of
such shareholders held upon the request and at the expense of the acquiring
person. In the event that control shares acquired in a control share
acquisition are accorded full voting rights and the acquiring person acquires
control shares with a majority or more of all voting power, all shareholders
of the issuing corporation have dissenters' rights to receive the fair value
of their shares. Under the IBCL, "control shares" means shares acquired by a
person that, when added to all other shares of the issuing public corporation
owned by that person or in respect to which that person may exercise or direct
the exercise of voting power, would otherwise entitle that person to exercise
voting power of the issuing public corporation in the election of directors
within any of the following ranges: (i) one-fifth or more but less than one-
third; (ii) one-third or more but less than a majority; or (iii) a majority or
more. "Control share acquisition" means, subject to certain exceptions, the
acquisition, directly or indirectly, by any person of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding control shares. Shares acquired within 90 days or pursuant to a
plan to make a control share acquisition are considered to have been acquired
in the same acquisition. "Issuing public corporation" means a corporation
which is organized in Indiana, has 100 or more shareholders, its principal
place of business, its principal office or substantial assets within Indiana
and either (i) more than 10% of its shareholders resident in Indiana, (ii)
more than 10% of its shares owned by Indiana residents or (iii) 10,000
shareholders resident in Indiana. The above provisions do not apply if, before
a control share acquisition is made, the corporation's articles of
incorporation or by-laws (including a board adopted by-law) provide that said
provisions do not apply. The Company's Restated Articles of Incorporation and
By-Laws do not exclude the Company from the restrictions imposed by such
provisions.
Certain Business Combinations. Sections 23-1-43-1 to 23-1-43-23 of the IBCL
restrict the ability of a "resident domestic corporation" to engage in any
combinations with an "interested shareholder" for five years after the
interested shareholder's date of acquiring shares unless the combination or
the purchase of shares by the interested shareholder on the interested
shareholder's date of acquiring shares is approved by the board of directors
of the resident domestic corporation before that date. If the combination was
not previously approved, the interested shareholder may effect a combination
after the five-year period only if such shareholder receives approval from a
majority of the disinterested shares or the offer meets certain fair price
criteria. For purposes of the above provisions, "resident domestic
corporation" means an Indiana corporation that has 100 or more shareholders.
"Interested shareholder" means any person, other than the resident domestic
corporation or its subsidiaries, who is (i) the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding voting
shares of the resident domestic corporation or (ii) an affiliate or associate
of the resident domestic corporation and at any time within the five-year
period immediately before the date in question was the beneficial owner of 10%
or more of the voting power of the then outstanding shares of the resident
domestic
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corporation. The above provisions do not apply to corporations that so elect
in an amendment to their articles of incorporation approved by a majority of
the disinterested shares. Such an amendment, however, would not become
effective until 18 months after its passage and would apply only to stock
acquisitions occurring after its effective date. The Company's Restated
Articles of Incorporation do not exclude the Company from the restrictions
imposed by such provisions.
Directors' Duties and Liability. Under Section 23-1-35-1 of the IBCL,
directors are required to discharge their duties: (i) in good faith; (ii) with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances; and (iii) in a manner the directors reasonably believe
to be in the best interests of the Company. However, the IBCL also provides
that a director is not liable for any action taken as a director, or any
failure to act, unless the director has breached or failed to perform the
duties of the director's office and the action or failure to act constitutes
willful misconduct or recklessness. The exoneration from liability under the
IBCL does not affect the liability of directors for violations of the federal
securities laws.
Section 23-1-35-1 of the IBCL also provides that a board of directors, in
discharging its duties, may consider, in its discretion, both the long-term
and short-term best interests of the corporation, taking into account, and
weighing as the directors deem appropriate, the effects of an action on the
corporation's shareholders, employees, suppliers and customers and the
communities in which offices or other facilities of the corporation are
located and any other factors the directors consider pertinent. If a
determination is made with the approval of a majority of the disinterested
directors of the board, that determination is conclusively presumed to be
valid unless it can be demonstrated that the determination was not made in
good faith after reasonable investigation. Once the board has determined that
the proposed action is not in the best interests of the corporation, it has no
duty to remove any barriers to the success of the action, including a rights
plan. Section 23-1-35-1 specifically provides that certain judicial decisions
in Delaware and other jurisdictions, which might be looked upon for guidance
in interpreting Indiana law, including decisions that propose a higher or
different degree of scrutiny in response to a proposed acquisition of the
corporation, are inconsistent with the proper application of that section.
TRANSFER AGENT
The Transfer Agent for the Class B Common Stock is Harris Trust and Savings
Bank.
SHARES ELIGIBLE FOR FUTURE SALE
The 2,000,000 shares of Class B Common Stock sold in this offering
(2,300,000 if the Underwriters exercise their over-allotment option in full)
will be freely tradable without restriction under the Securities Act, except
for any such shares which may be acquired by an "affiliate" of the Company (an
"Affiliate") as that term is defined in Rule 144 ("Rule 144") promulgated
under the Securities Act, which shares will remain subject to the resale
limitations of Rule 144.
The 10,214,286 shares of Class A Common Stock that will continue to be held
by BWI after the offering will constitute "restricted securities" within the
meaning of Rule 144, and will be eligible for sale in the open market after
the offering, after conversion to shares of Class B Common Stock, subject to
certain contractual lockup provisions and to the applicable requirements of
Rule 144, both of which are described below. So long as BWI is able to elect a
majority of the Board of Directors, it will also be able to cause the Company
at any time to register under the Securities Act all or a portion of the Class
A Common Stock owned by it (whether or not converted into Class B Common
Stock), in which event BWI would be able to sell such shares upon the
effectiveness of any such registration.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year will be entitled to sell on the
open market in broker's transactions within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares and (ii) the average weekly trading volume on the open market during
the four calendar weeks preceding such sale. Sales under Rule
51
<PAGE>
144 are also subject to certain notice requirements and the availability of
current public information about the Company. Shares properly sold in reliance
upon Rule 144 to persons who are not Affiliates are thereafter freely
tradeable without the restriction or registration under the Securities Act.
Sales of substantial amounts of Class B Common Stock in the open market, or
the availability of such shares for sale, could adversely affect prevailing
market prices. If BWI effects the Distribution, the shares of Class A Common
Stock distributed by BWI will convert automatically into shares of Class B
Common Stock upon certain transfers and will be eligible for immediate resale
in the public market without restrictions by persons other than Affiliates of
the Company. Any Affiliates would be subject to the restrictions of Rule 144
other than the one-year holding period requirement.
See "Underwriting" for certain limitations on the ability of the Company,
its executive officers and directors, and BWI to dispose of shares of Class B
Common Stock.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Raymond James & Associates, Inc. and Wheat, First Securities, Inc. (the
"Representatives"), have severally agreed to purchase from the Company the
following respective numbers of shares of Class B Common Stock at the initial
public offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Raymond James & Associates, Inc.................................
Wheat, First Securities, Inc....................................
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Class B Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Class B Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. The
Representatives have advised the Company that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority. This offering of Class B Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of this offering without notice. The
Underwriters reserve the right to reject an order for the purchase of shares
in whole or in part.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Class B Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to
52
<PAGE>
purchase approximately the same percentage thereof that the number of shares
of Class B Common Stock to be purchased by it shown in the above table bears
to total shown, and the Company will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Class B Common Stock offered hereby. If purchased, the Underwriters will offer
such additional shares on the same terms as those on which the shares are
being offered.
The Company and BWI have agreed to indemnify the Underwriters and certain
controlling persons against certain liabilities, including liabilities under
the Securities Act.
The Company, its executive officers and directors, and BWI, prior to the
consummation of the offering, have agreed not to sell, offer to sell, contract
to sell, pledge or otherwise dispose of or transfer any shares of Class B
Common Stock or any securities convertible into, or exercisable or
exchangeable for, or any rights to purchase or acquire Class B Common Stock
for a period of 180 days following the date of this Prospectus without the
prior written consent of Raymond James & Associates, Inc., other than, in the
case of the Company, in certain limited circumstances and, in the case of BWI,
in the Distribution.
Prior to the Offering, there has been no public market for the Class B
Common Stock of the Company. Consequently, the initial public offering price
of the Class B Common Stock was determined by negotiations between the Company
and the Representatives. Among the factors considered in such negotiations
were prevailing market conditions, the value of publicly traded companies
believed to be comparable to the Company, the results of operations of the
Company in recent periods, estimates of the business potential of the Company,
the present stage of the Company's development and other factors deemed
relevant. The estimated initial public offering price range set forth on the
cover page of this Prospectus is subject to change as a result of market
conditions and other factors.
Until the distribution of Class B Common Stock in this offering is
completed, rules of the Securities and Exchange Commission (the "Commission")
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the Class B Common Stock. As an exception to these rules,
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Class B Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Class B Common Stock. If the Underwriters create a short position in
the Class B Common Stock in connection with this offering, i.e., if they sell
more shares of Class B Common Stock than are set forth on the cover page of
this Prospectus, the Representatives may reduce the short position by
purchasing Class B Common Stock in the open market. The Representatives may
also elect to reduce any short position by exercising all or part of the over-
allotment option described above. The Representatives may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives purchase shares of Class B Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Class B Common Stock, they may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those
shares as part of this offering. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price
of the security to be higher than it might be in the absence of such
purchases. The imposition of a penalty bid might also have an effect on the
price of a security to the extent that it discouraged resales of any security.
Neither the Company nor any of the Underwriters makes any representation or
predictions as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Class B Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The foregoing includes a summary of certain principal terms of the
Underwriting Agreement and does not purport to be complete. Reference is made
to the copy of the Underwriting Agreement that is on file as an exhibit to the
Registration Statement on Form S-1 (together with all amendments thereto, the
"Registration Statement") under the Securities Act and filed by the Company
with the Commission with respect to the shares of Class B Common Stock offered
hereby, of which this Prospectus is a part.
53
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the legality of the issuance of the shares
of Class B Common Stock being offered hereby will be passed upon for the
Company by Baker & Daniels, Indianapolis, Indiana. Certain legal matters will
be passed upon for the Underwriters by Greenberg Traurig Hoffman Lipoff Rosen
& Quentel, P.A., Miami, Florida.
EXPERTS
The Consolidated Financial Statements of Priority Healthcare Corporation at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., the
Registration Statement, under the Securities Act with respect to the Class B
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information, reference is made to the Registration Statement and exhibits
thereto. The information so omitted, including exhibits, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined, without charge, at public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. The Commission maintains a World Wide Web site
on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
54
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Statements of Earnings for each of the three years in the
period ended December 31, 1996 and (unaudited) for the six months ended
June 30, 1996 and June 30, 1997......................................... F-3
Consolidated Balance Sheets at December 31, 1995, December 31, 1996, and
(unaudited) June 30, 1997............................................... F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996 and (unaudited) for the six months ended
June 30, 1996 and June 30, 1997......................................... F-5
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1996 and (unaudited) for the six
months ended June 30, 1997.............................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholder of Priority Healthcare Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Priority
Healthcare Corporation (a wholly-owned subsidiary of Bindley Western
Industries, Inc.) and its subsidiaries at December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Indianapolis, Indiana
May 28, 1997, except as to
Note 1 and Note 11, which
are as of August 25, 1997
and the last paragraph in
Note 10, which is as of
October 1, 1997
F-2
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------- -----------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................. $107,449 $123,990 $158,247 $65,348 $108,597
Cost of products sold..... 100,254 111,448 141,074 57,947 97,449
-------- -------- -------- ------- --------
Gross profit.............. 7,195 12,542 17,173 7,401 11,148
-------- -------- -------- ------- --------
Selling, general and
administrative expense... 4,394 7,836 8,443 4,009 4,960
Depreciation and
amortization............. 512 998 1,009 500 656
-------- -------- -------- ------- --------
Earnings from operations.. 2,289 3,708 7,721 2,892 5,532
Interest expense, net
(primarily related
party)................... 200 511 437 170 498
-------- -------- -------- ------- --------
Earnings before income
taxes.................... 2,089 3,197 7,284 2,722 5,034
-------- -------- -------- ------- --------
Provision for income
taxes:
Current................. 1,033 1,301 3,061 1,188 1,999
Deferred................ (198) 10 (146) (99) 14
-------- -------- -------- ------- --------
835 1,311 2,915 1,089 2,013
-------- -------- -------- ------- --------
Net earnings.............. $ 1,254 $ 1,886 $ 4,369 $ 1,633 $ 3,021
======== ======== ======== ======= ========
</TABLE>
(See accompanying notes to consolidated financial statements)
F-3
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
DATA) --- ---
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash..................................... $ 1,359 $ 1,656 $ 185
Accounts receivable, less allowance for
doubtful accounts of $503, $815 and
$863, respectively...................... 17,333 29,541 40,178
Finished goods inventory................. 12,647 16,132 18,174
Deferred income taxes.................... 295 451 470
Other current assets..................... 58 152 194
------- ------- -------
31,692 47,932 59,201
------- ------- -------
Fixed assets, at cost.................... 1,734 2,138 2,424
Less: accumulated depreciation........... 487 804 1,115
------- ------- -------
1,247 1,334 1,309
------- ------- -------
Intangibles, net......................... 8,645 7,954 7,608
------- ------- -------
Total assets......................... $41,584 $57,220 $68,118
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Payable to parent........................ $ 3,873 $ 9,290 $13,785
Accounts payable......................... 10,792 16,449 19,809
Other current liabilities................ 1,027 1,401 1,585
------- ------- -------
15,692 27,140 35,179
------- ------- -------
Long-term obligations...................... 751 560 365
------- ------- -------
Deferred income taxes...................... 110 120 153
------- ------- -------
Subordinated note payable to parent........ -- -- 6,000
------- ------- -------
Shareholders' equity:
Preferred stock, no par value, 5,000,000
shares authorized, none issued and
outstanding............................. -- -- --
Common stock
Class A, $0.01 par value, 15,000,000
shares authorized, 10,214,286 issued
and outstanding....................... 102 102 102
Class B, $0.01 par value, 40,000,000
shares authorized, none issued and
outstanding........................... -- -- --
Additional paid in capital............. 22,598 22,598 22,598
Retained earnings...................... 2,331 6,700 3,721
------- ------- -------
Total shareholders' equity........... 25,031 29,400 26,421
------- ------- -------
Commitments and contingencies.............. -- -- --
------- ------- -------
Total liabilities and shareholders'
equity.............................. $41,584 $57,220 $68,118
======= ======= =======
</TABLE>
(See accompanying notes to consolidated financial statements)
F-4
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30
----------------------- -----------------------
1994 1995 1996 1996 1997
------ ------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flow from operating
activities:
Net income................. $1,254 $1,886 $ 4,369 $1,633 $ 3,021
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Depreciation and
amortization.............. 512 998 1,009 500 656
Deferred income taxes...... (198) 10 (146) (99) 14
Change in assets and
liabilities, net of
acquisitions:
Accounts receivable........ (4,153) 560 (12,208) (4,063) (10,637)
Finished goods inventory... (3,959) 426 (3,485) (1,272) (2,042)
Trade accounts payable..... (216) 2,384 5,657 3,222 3,360
Other current assets and
liabilities............... 164 (293) 280 (138) 142
------ ------ ------- ------ -------
Net cash provided (used)
by operating activities. (6,596) 5,971 (4,524) (217) (5,486)
------ ------ ------- ------ -------
Cash flow from investing
activities:
Purchase of fixed assets... (511) (474) (405) (120) (285)
Acquisition of businesses.. (1,189) (2,538) -- -- --
------ ------ ------- ------ -------
Net cash used by
investing activities.... (1,700) (3,012) (405) (120) (285)
------ ------ ------- ------ -------
Cash flow from financing
activities:
Net increase (decrease) in
payable to parent......... 7,359 (4,471) 5,417 1,398 4,495
Payments on long-term
obligations............... (47) (185) (191) 5 (195)
Contribution by parent..... 1,134 2,906 -- -- --
------ ------ ------- ------ -------
Net cash provided (used)
by financing activities. 8,446 (1,750) 5,226 1,403 4,300
------ ------ ------- ------ -------
Net increase (decrease) in
cash........................ 150 1,209 297 1,066 (1,471)
Cash at beginning of year.... -- 150 1,359 1,359 1,656
------ ------ ------- ------ -------
Cash at end of year.......... $ 150 $1,359 $ 1,656 $2,425 $ 185
====== ====== ======= ====== =======
Supplemental cash flow
information:
Interest paid.............. $ 218 $ 526 $ 445 $ 182 $ 385
Income taxes paid.......... $1,033 $1,301 $ 3,061 $1,188 $ 1,999
</TABLE>
(See accompanying notes to consolidated financial statements)
F-5
<PAGE>
PRIORITY HEALTHCARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
------------------ ADDITIONAL
SHARES INVESTMENT PAID IN RETAINED SHAREHOLDERS'
OUTSTANDING AMOUNT BY PARENT CAPITAL EARNINGS EQUITY
----------- ------ ---------- ---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993................... -- $ -- $16,741 $ -- $1,110 $17,851
Net earnings............ 1,254 1,254
Contribution by parent.. 1,134 1,134
Capitalization of
division's retained
earnings............... 1,919 (1,919) --
Capitalization of
investment by parent... 10,214,286 102 (16,741) 16,639 --
---------- ---- ------- ------- ------ -------
Balances at December 31,
1994................... 10,214,286 102 -- 19,692 445 20,239
Net earnings............ 1,886 1,886
Contribution by parent.. 2,906 2,906
---------- ---- ------- ------- ------ -------
Balances at December 31,
1995................... 10,214,286 102 -- 22,598 2,331 25,031
Net earnings............ 4,369 4,369
---------- ---- ------- ------- ------ -------
Balances at December 31,
1996................... 10,214,286 102 -- 22,598 6,700 29,400
Net earnings
(Unaudited)............ 3,021 3,021
Dividend to parent
(Unaudited)............ (6,000) (6,000)
---------- ---- ------- ------- ------ -------
Balances at June 30,
1997 (Unaudited)....... 10,214,286 $102 $ -- $22,598 $3,721 $26,421
========== ==== ======= ======= ====== =======
</TABLE>
(See accompanying notes to consolidated financial statements)
F-6
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. Priority Healthcare Corporation, (the "Company") was
formed by Bindley Western Industries, Inc. (BWI) on June 23, 1994, as an
Indiana corporation to focus on the distribution of products and provision of
services to the "alternate site" segment of the healthcare industry. On August
1, 1994, BWI transferred the net assets of its Charise Charles and PRN
divisions to the Company in exchange for 1,000 shares of common stock, no par
value. The Company now operates as a national distributor of specialty
pharmaceuticals and related medical supplies to the alternate site healthcare
market and is a provider of patient-specific, self-injectable
biopharmaceuticals and disease prevention programs to individuals with chronic
diseases.
On August 25, 1997 the Board of Directors and management of the Company
completed a recapitalization of the Company. Effective on that date, the
Company's capitalization consisted of: (i) 15,000,000 authorized shares of
Class A Common Stock, $0.01 par value, 10,214,286 shares of which were issued
and outstanding and owned by BWI, (ii) 40,000,000 shares of Class B Common
Stock, $0.01 par value, none of which are issued and outstanding
(approximately 2,000,000 shares of which the Company plans to issue in an
initial public offering) and (iii) 5,000,000 shares of Preferred Stock,
without par value, none of which are issued and outstanding. This
recapitalization has been given retroactive effect in these consolidated
financial statements.
The two classes of Common Stock entitle holders to the same rights and
privileges, except that holders of shares of Class A Common Stock are entitled
to three votes per share on all matters submitted to a vote of holders of
Common Stock and holders of Class B Common Stock are entitled to one vote per
share on such matters. The two classes of Common Stock vote together, as a
single class on all matters except as otherwise required by applicable law.
The Class A Common Stock will automatically be converted into shares of
Class B Common Stock on a share-for-share basis upon any transfer or purported
transfer to any person other than: (i) a dividend or other distribution of the
shares of Class A Common Stock to the shareholders of BWI; or (ii) family
members of the transferee, or trusts for the benefit of or entities controlled
by the transferee or family members of the transferee.
The consolidated financial statements of the Company include certain
allocations of corporate overhead and other expenses incurred by BWI on behalf
of the Company. These expenses and the basis of allocations are discussed in
Note 2--Related party transactions. The Company's financial statements are not
necessarily indicative of the results the Company would have reported had it
existed as a stand-alone public entity, or of the financial position, results
of operations and cash flows of the Company in the future.
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue recognition. Revenues are recognized when products are shipped to
unaffiliated customers with appropriate provisions recorded for estimated
discounts and allowances.
Interim unaudited consolidated financial statements. The accompanying
balance sheet as of June 30, 1997, the statements of earnings and cash flow
for the six months ended June 30, 1996 and 1997 and the statement of
shareholders' equity for the six months ended June 30, 1997 are unaudited. In
the opinion of management, these interim unaudited consolidated financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for fair presentation of the interim period. The
disclosures in these notes related to these unaudited consolidated financial
statements are also unaudited.
Inventories. Inventories are stated on the basis of lower of cost or market
using the first-in, first-out ("FIFO") method.
F-7
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed assets. Depreciation is computed on the straight-line method for
financial reporting purposes. Accelerated methods are primarily used for
income tax purposes. Assets, valued at cost, are generally being depreciated
over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE
(YEARS)
---------
<S> <C>
Furnishings.................... 5-7
Leasehold improvements......... 12
Transportation and other
equipment..................... 3-7
</TABLE>
In the event facts and circumstances indicate an asset could be impaired, an
evaluation of the undiscounted estimated future cash flows from operations is
compared to the asset's carrying amount to determine if a write-down is
required. At December 31, 1996 and June 30, 1997, no impairments existed.
Intangibles. The Company continually monitors its cost in excess of net
assets acquired (goodwill), covenants not to compete and its other intangibles
(customer lists and consulting agreements) to determine whether any impairment
of these assets has occurred. In making such determination, the Company
evaluates the expected future cash flows from operations, on an undiscounted
basis, of the underlying businesses which gave rise to such amounts. Goodwill
is being amortized on the straight-line method over 40 years. Other
intangibles are being amortized on the straight-line method over 6 to 15
years.
Earnings per share. Historical per share amounts have not been presented as
the Company's historical capital structure is not representative of the
prospective capital structure.
Income taxes. The Company participates in the consolidated federal and state
income tax returns filed by its parent company, BWI. BWI charges federal and
state income tax expense to the Company as if the Company filed its own
separate federal and state income tax returns.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes," the Company accounts
for income taxes using the asset and liability method. The asset and liability
method requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of temporary differences that currently exist
between the tax bases and financial reporting bases of the Company's assets
and liabilities.
Use of estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates made by
management. Actual results could differ from those estimates.
Fair value of financial instruments. The carrying values of cash, accounts
receivable, short-term borrowings, accounts payable and other current
liabilities approximate their fair market values due to the short-term
maturity of these instruments.
NOTE 2--RELATED PARTY TRANSACTIONS
The Company is a wholly owned subsidiary of BWI and, as such, has entered
into certain related party transactions which are described below. Had the
Company operated as a stand-alone, non-public entity for the periods
presented, management believes the costs and expenses incurred by the Company
would not have differed materially from those reported in the financial
statements. In addition, the Company has participated in the BWI profit
sharing plan which is discussed in Note 7--Profit sharing plan.
BWI provided management and consulting services to the Company which
included, but were not limited to legal, human resources, payroll and tax. The
Company was charged $49,000, $75,000 and $65,000 for 1994,
F-8
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 and 1996, respectively. For each of the six month periods ended June 30,
1996 and 1997, the Company was charged $32,500. These amounts were based on an
allocation of the actual services rendered by BWI and were calculated in a
manner considered reasonable by management.
The Company was also provided coverage under the BWI insurance plans. These
expenses were charged to the Company based on a combination of a pro rata
allocation and the push-down of actual expenses incurred, depending on the
type of expenditure. These methods are considered reasonable by management.
The insurance expense was $38,000, $100,000 and $132,000 for 1994, 1995 and
1996, respectively. For the six months ended June 30, 1996 and 1997, the
insurance expense was $66,000 and $76,000, respectively.
At December 31, 1995, December 31, 1996 and June 30, 1997, the Company owed
BWI $3.9 million, $9.3 million and $13.8 million, respectively. These
borrowings are due on demand and represent the financing and payment of
transactions by BWI on behalf of the Company, offset in part by cash
collections transferred to BWI. Interest expense attributable to the related
party borrowings was $211,000, $455,000 and $408,000 for 1994, 1995 and 1996,
respectively. This interest expense was calculated by applying the BWI average
incremental borrowing rate to the average outstanding borrowings. For 1994,
1995 and 1996 the average outstanding borrowings were $3.6 million, $6.4
million and $6.4 million, respectively. The average incremental borrowing
rates applied to these borrowings in 1994, 1995 and 1996 were 5.9%, 7.1% and
6.4%, respectively. The interest expense of $370,000 for the six months ended
June 30, 1997 was based on average outstanding borrowings of $11.6 million at
an average incremental borrowing rate of 6.4%.
For 1994, 1995 and 1996 and the six month periods ended June 30, 1996 and
1997, intercompany purchases of inventory from BWI (at the price paid by BWI)
totaled $9.4 million, $8.3 million, $1.8 million, $742,000 and $1.1 million,
respectively.
On March 31, 1997, the Company declared and paid a dividend to BWI in the
form of a $6.0 million subordinated promissory note that becomes due on March
31, 1999. The note carries an interest rate of 7.25% per annum. For the six
month period ended June 30, 1997, interest expense associated with this note
totaled $109,000.
Certain employees of the Company have been granted options to purchase BWI
stock under a BWI stock option plan. 66,500 and 155,750 such options were
granted to Company employees in 1995 and 1996, respectively, with exercise
prices equal to the market price of the BWI stock at the date of grant. No
compensation expense was recognized on these pursuant to Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". If the
Company had recognized compensation expense based on the grant date fair value
of those options as prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", pro forma net income for the years ended December 31, 1995 and
1996 would have been $1,840,000 and $4,089,000, respectively. The weighted
average fair value of each 1995 and 1996 BWI option granted of $5.90 and
$6.04, respectively, was estimated using the Black-Scholes option pricing
model, and certain assumptions relevant to those BWI options and the
underlying BWI common stock.
NOTE 3--ACQUISITIONS
During the three years ended December 31, 1996, the Company purchased 3C
Medical, Inc. ("3C") and IV-1, Inc., IV-One Services, Inc. and National
Pharmacy Providers, Inc. (collectively, the "IV One Companies"). Each of these
acquisitions was accounted for as a purchase and their results of operations
are included in the consolidated financial statements from their respective
dates of acquisition.
3C, a specialty distributor of acute dialysis products located in Santa Ana,
California, was acquired effective October 31, 1994. The Company paid 15,000
shares of BWI common stock (market value $195,000) and approximately $1.2
million in cash for 3C, which exceeded the fair value of the net assets
acquired and resulted
F-9
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in approximately $1.1 million of intangibles. These intangibles include a
three-year non-compete agreement with the prior owner. At December 31, 1995
and 1996, the balance owed under this agreement was $113,333 and $73,333,
respectively ($73,333 and $33,333, respectively, is included in long-term
obligations). 3C's results of operations for the initial ten months of 1994
were immaterial to the consolidated results of operations of the Company.
The acquisition of the IV One Companies was effective January 1, 1995. The
IV One Companies provide pharmacy and other healthcare services. The
consideration exchanged for the IV One Companies was approximately $2.9
million, which exceeded the fair value of net assets acquired and resulted in
approximately $2.6 million of intangibles. These intangibles include a four-
year consulting agreement with the prior owner. At December 31, 1995 and 1996,
the balance owed under this agreement was $878,031 and $726,931, respectively
($678,031 and $526,931, respectively, is included in long-term obligations).
If the acquisition of the IV One Companies had taken place at the beginning of
1994, the unaudited pro forma net sales and net earnings would have been
$112.0 million and $1.5 million, respectively. The pro forma data are not
necessarily indicative of the results of operations as they would have been
had the transaction occurred on the assumed date and are not necessarily
indicative of the results of operations which may occur in the future.
NOTE 4--FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Furnishings............................... $ 537 $ 574 $ 574
Leasehold improvements.................... 249 220 220
Transportation and other equipment........ 948 1,344 1,630
------ ------ ------
1,734 2,138 2,424
Less: Accumulated depreciation............ (487) (804) (1,115)
------ ------ ------
$1,247 $1,334 $1,309
====== ====== ======
</TABLE>
NOTE 5--INTANGIBLES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Goodwill.......................... $ 6,109 $ 6,109 $ 6,109
Accumulated amortization.......... (309) (457) (531)
------- ------- -------
Goodwill, net..................... 5,800 5,652 5,578
------- ------- -------
Other............................. 3,883 3,883 3,883
Accumulated amortization.......... (1,038) (1,581) (1,853)
------- ------- -------
Other, net........................ 2,845 2,302 2,030
------- ------- -------
Intangibles, net.................. $ 8,645 $ 7,954 $ 7,608
======= ======= =======
</TABLE>
NOTE 6--INCOME TAXES
The provision for income taxes includes state income taxes of $137,050,
$212,523 and $479,420 in 1994, 1995 and 1996, respectively.
F-10
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table indicates the significant elements contributing to the
difference between the U.S. federal statutory tax rate and the effective tax
rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Percentage of earnings before taxes:
U.S. federal statutory rate.......................... 35.0% 35.0% 35.0%
State and local taxes on income, net of federal
income tax benefit.................................. 4.3% 4.3% 4.3%
Other................................................ 0.7% 1.7% 0.7%
----- ----- -----
Effective rate......................................... 40.0% 41.0% 40.0%
===== ===== =====
</TABLE>
Presented below are the significant elements of the net deferred tax balance
sheet accounts at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Current:
Accounts receivable........................................ $203 $320
Inventories................................................ 92 131
---- ----
Subtotal................................................. 295 451
Long-term.................................................... -- --
---- ----
Total deferred tax assets................................ $295 $451
==== ====
Deferred tax liabilities:
Current...................................................... -- --
---- ----
Long-term:
Fixed assets............................................... $ 77 $ 95
Intangibles................................................ 33 25
---- ----
Subtotal................................................. 110 120
---- ----
Total deferred tax liabilities........................... $110 $120
==== ====
</TABLE>
NOTE 7--PROFIT SHARING PLAN
The Company's eligible employees participate in the BWI qualified Profit
Sharing Plan ("Profit Sharing Plan"). All employees are generally eligible to
participate in the Profit Sharing Plan as of the first January 1, April 1,
July 1 or October 1 after having completed at least one year of service (as
defined in the Profit Sharing Plan) and having reached age 21 ("Participant").
The annual contribution of the Company to the Profit Sharing Plan is at the
discretion of the Board of Directors of BWI and is generally 8% of the
Participant's compensation for the year. The employer contribution for a year
is allocated among the Participants employed on the last day of the year in
proportion to their relative compensation for the year. The BWI contributions
to the Profit Sharing Plan with respect to the Company which are included as
expense in the statement of earnings for 1994, 1995 and 1996 were $69,344,
$119,283 and $229,990, respectively.
Subject to limitations imposed by the Internal Revenue Code of 1986, as
amended, a Participant may have a whole percentage (ranging from 1% to 13%) of
his or her compensation withheld from pay and contributed to the Profit
Sharing Plan and make "rollover" contributions to the Profit Sharing Plan of
qualifying distributions from other employers' qualified plans.
F-11
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A Participant's interest in amounts withheld from his or her pay and
contributed to the Profit Sharing Plan or in rollover contributions and in the
earnings on those amounts are fully vested at all times. A Participant's
interest in employer contributions made on his or her behalf and the earnings
on those contributions become 20% vested after three years of service and an
additional 20% vested during each of the next four years. A Participant's
interest in employer contributions made on his or her behalf and the earnings
on those contributions also become fully vested when the employee retires at
age 65 or older, dies or becomes totally disabled.
All contributions to the Profit Sharing Plan are paid in cash to a
Cleveland, Ohio bank, as trustee, and are invested by the trustee until
distributed to Participants or their beneficiaries. Participants are permitted
to direct the trustee as to the investment of their accounts by choosing among
several investment funds that are offered under the Profit Sharing Plan,
including one fund consisting of BWI common stock. Participants may elect to
invest in one fund or a combination of the available funds according to their
investment goals. If a Participant does not make an investment election, his
or her Profit Sharing Plan accounts will be invested in a fund designated by
the Company.
Except in certain cases of financial hardship, a Participant (or his or her
beneficiary) receives his or her interest in the Profit Sharing Plan only at
death, retirement or termination of employment.
NOTE 8--COMMITMENTS
The Company leases warehouse and office space under noncancelable operating
leases expiring at various dates through 2002, with options to renew for
various periods. Minimum commitments under leases aggregate $561,000 for 1997,
$512,000 for 1998, $461,000 for 1999 and $101,000 for 2000 and 2001.
The consolidated rent expense for 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997 was $244,000, $490,000, $470,000, $236,000 and
$248,000, respectively, of which approximately $75,000 in 1996 pertained to
leases with terms of one year or less. In 1995 and 1994, all leases had terms
greater than one year.
NOTE 9--MAJOR CUSTOMERS AND OTHER CONCENTRATIONS
The Company services customers in 50 states and Puerto Rico. For the year
ended December 31, 1996 and the six months ended June 30, 1997, the Company
had one customer, Everest Healthcare Services Corporation, which accounted for
12% of the Company's revenues. For the six months ended June 30, 1996 and the
years ended December 31, 1994 and 1995, no customer accounted for greater than
10% of the Company's revenues. The Company sells goods and services to its
customers on various payment terms which entail accounts receivable exposure.
Although the Company monitors closely the creditworthiness of its customers,
there can be no assurance that the Company will not incur the write-off or
writedown of a significant account in the future.
The Company's largest vendor accounted for approximately 46% of total
revenues in 1994, 44% in 1995 and 42% in 1996. The same vendor accounted for
approximately 43% of total revenues for the six months ended June 30, 1996 and
41% for the six months ended June 30, 1997. In addition, the sale of one
product supplied by this vendor accounted for 36% of revenues in 1996. This
product is available from only one manufacturer, with which the Company must
maintain a good working relationship. The Company is a party in a lawsuit
involving this vendor. See Note 10--Legal Proceedings.
NOTE 10--LEGAL PROCEEDINGS
IV-1, Inc. ("IV-1") and IV-One Services, Inc. ("IV-One Services") have been
named as defendants in a second amended counterclaim filed by Amgen, Inc.
("Amgen") on May 14, 1996, in the Circuit Court of the Eighteenth Judicial
District of Seminole County, Florida. Amgen has asserted that these entities
tortiously
F-12
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interfered with a license agreement (the "License Agreement") between Amgen
and Ortho Pharmaceutical Corporation ("Ortho"). Pursuant to this agreement,
Amgen licensed Ortho to sell EPO for use in the treatment of non-dialysis
patients, while Amgen reserved the exclusive right to sell EPO for use in the
treatment of dialysis patients. Amgen has asserted that, prior to the purchase
of IV-1 and IV-One Services by the Company, these entities induced Ortho to
sell EPO to them for resale in the dialysis market in contravention of the
License Agreement. Amgen has also alleged that IV-1 and IV-One Services were
involved in a civil conspiracy to circumvent the terms of the License
Agreement to allow the resale of EPO to the dialysis market. Furthermore,
Amgen has asserted unfair competition claims against IV-1, including that IV-1
manufactured and distributed unapproved prefilled syringes of EPO and another
product manufactured by Amgen in container systems unapproved by Amgen. Amgen
did not specify a time frame for the acts complained of in the civil
conspiracy and unfair competition allegations. In each count, Amgen has
demanded an unspecified amount of compensatory damages, including costs and
interest.
The Company believes that the sellers of IV-1, IV-One Services and Charise
Charles are contractually obligated to provide legal defense and to indemnify
the Company for losses and liabilities with respect to this litigation, to the
extent that the alleged acts occurred prior to the purchase of such entities
by the Company. To date, the sellers have provided the legal defense for IV-1
and IV-One Services in the litigation. Indemnification from the sellers of IV-
1 and IV-One Services is limited to no more than $1.5 million and
indemnification from the sellers of Charise Charles is limited to no more than
$2.0 million. As of September 5, 1997, approximately $89,000 of claims for
indemnification had been submitted to the sellers. The Company does not expect
the Amgen litigation to be material to the Company's results of operations,
financial condition or cash flows; however, no assurance can be given that
this litigation will not have a material adverse effect on the Company. In
addition, Amgen is the Company's largest supplier. Consequently, this
litigation presents the risk of adversely affecting the Company's business
relationship with Amgen, which could have a material adverse effect on the
Company. See "Business--Purchasing."
The Company is also subject to ordinary and routine litigation incidental to
its business, none of which is material to the Company's results of
operations, financial condition, or cash flows.
On November 14, 1995, an investigator for the FDA, accompanied by an
inspector from the State of Florida Board of Pharmacy, inspected the Company's
pharmacy in Altamonte Springs, Florida. At the end of the inspection, the FDA
investigator issued an FDA Form-483, which is the form used by FDA
investigators to identify any observed or suspected noncompliance with the
laws administered by the agency. The FDA Form-483 identified the facility as a
pharmacy/repackager and listed three observations related to certain
requirements that the FDA typically imposes on manufacturers of sterile
products. The Company advised the FDA in December 1995 that the Company
believes it is not, within the statutory or regulatory meaning of these terms,
a repackager or a manufacturer. A second inspection of the same facility
occurred on June 26, 1997, in which the FDA investigator was again accompanied
by Florida pharmacy authorities. The FDA investigator issued a substantially
identical FDA Form-483 at the end of that inspection. The Florida State Board
of Pharmacy did not issue any deficiencies regarding the operations of the
Altamonte Springs pharmacy in either of these inspections.
On March 16, 1992, the FDA issued a Compliance Policy Guide (CPG 460.200),
which explains the criteria the FDA uses to distinguish between pharmacy
operations that are properly regulated under state law and drug manufacturing
regulated by the FDA. The Company's response to the FDA in December 1995 cited
this CPG and explained the Company's contention that, according to the FDA's
own criteria, the facility is a pharmacy properly regulated under state and
local laws.
The FDA has indicated publicly that it expects to further clarify and
explain through rulemaking the distinction between pharmaceutical
manufacturing and pharmacy operations. Legislation has been introduced in
F-13
<PAGE>
PRIORITY HEALTHCARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
this session of Congress that would clarify this distinction. Thus, the
distinction between a pharmacy and a pharmaceutical manufacturer currently is
a subject of activity by policymakers in the Federal government.
While this activity may clarify matters in the future, the criteria that
differentiate drug manufacturing from pharmacy operations are uncertain under
the current state of the law. If the Company is correct and its operations are
limited to those engaged in by pharmacies, there should be no material adverse
effect from the FDA Form-483s because the Company believes it is currently in
compliance in all material respects with applicable state and local laws. If
the Company is deemed to be a sterile product manufacturer or a sterile
product repackager, the Company would be subject to additional regulatory
requirements. Because the FDA does not currently have clear guidance or
regulations on this subject, the FDA or other legal authorities could decide
that the Company must file for approval of a New Drug Application. Such an
event could have a material adverse effect on the Company.
Alternatively, the agency could determine that the Company is a sterile
products repackager and promulgate regulations or publish guidance respecting
such entities. In that event, the Company would likely have to comply with
that portion of the FDA requirements that covers the packaging operations of
sterile product manufacturers. These requirements may include stability
validation, expiration dating, sterility control, sterile product
environmental monitoring, and good manufacturing practices including
appropriate employee training related to the foregoing. The Company believes
that the cost of compliance with such requirements would not be material to
the Company's operations. However, there can be no assurance that other
conditions or requirements would not be imposed that would have a material
adverse effect on the Company.
There can be no assurance that future legislation, future rulemaking, or
active enforcement by the FDA of a determination that the Company is a drug
manufacturer will not have a material adverse effect on the business of the
Company.
On August 29, 1997, the Company received a preliminary report of field audit
issued by the California State Board of Equalization notifying the Company of
a proposed sales and use tax deficiency of approximately $2.4 million for the
period ended December 31, 1995. Management believes the California tax
authorities are inappropriately proposing to assess tax on the sale of certain
pharmaceutical products and medical supplies that are exempt from such tax.
Although discussions with the taxing authority are in the preliminary stages,
management, after discussions with its state tax consultants, believes that
the ultimate resolution of the pending claim and any other claims for periods
not audited will not be material to the Company's financial position, results
of operations or cash flows.
NOTE 11--SUBSEQUENT EVENTS
On August 25, 1997, the Board of Directors of the Company approved the
filing of a registration statement on Form S-1 with the Securities and
Exchange Commission to register up to 2,300,000 shares of the Company's Class
B Common Stock, all of which shares will be issued and sold by the Company
(the "Offering"). The Company intends to use a portion of the net proceeds of
the Offering to repay the then outstanding working capital advances made by
BWI to support the Company's operating activities, which advances totaled
approximately $14.5 million at August 31, 1997. The balance of the net
proceeds will be used for working capital and general corporate purposes,
including potential acquisitions.
In connection with the Offering, BWI and the Company have entered into a
series of agreements, including a Revolving Credit Promissory Note, an
Indemnification and Hold Harmless Agreement, a Tax Sharing Agreement and an
Administrative Services Agreement, governing certain aspects of the
relationship between the Company and BWI subsequent to the Offering.
F-14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 14
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Unaudited Pro Forma Consolidated Financial Data........................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 27
Management................................................................ 38
Executive Compensation.................................................... 41
Relationship with BWI..................................................... 45
Principal Shareholder..................................................... 47
Description of Capital Stock.............................................. 48
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 52
Legal Matters............................................................. 54
Experts................................................................... 54
Additional Information.................................................... 54
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS B COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 SHARES
LOGO
CLASS B COMMON STOCK
---------------
PROSPECTUS
---------------
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT FIRST BUTCHER SINGER
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the issuance and
distribution of the Class B Common Stock being registered hereunder, other
than underwriting discounts and commissions:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
-------- --------
<S> <C>
Securities and Exchange Commission registration fee............. $ 10,455
Nasdaq National Market listing fee.............................. 15,000
NASD filing fee................................................. 3,950
Blue Sky fees and expenses (including fees of counsel).......... 7,500
Accounting fees and expenses.................................... 250,000
Legal fees and expenses......................................... 250,000
Printing and engraving expenses................................. 175,000
Transfer Agent and Registrar fees............................... 10,000
Miscellaneous................................................... 68,095
--------
Total....................................................... $790,000
========
</TABLE>
All amounts except the registration fee, Nasdaq listing fee and NASD filing
fee are estimated. Items which are not included will be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Indiana Business Corporation Law provides that a corporation, unless
limited by its Articles of Incorporation, is required to indemnify its
directors and officers against reasonable expenses incurred in the successful
defense of any proceeding to which the director or officer was a party because
of serving as a director or officer of the corporation.
As permitted by the Indiana Business Corporation Law, the Company's Restated
Articles of Incorporation provide for indemnification of directors, officers
and employees of the Company against any and all liability and reasonable
expense that may be incurred by them, arising out of any claim or action,
civil, criminal, administrative or investigative, in which they may become
involved by reason of being or having been a director, officer, or employee.
To be entitled to indemnification, those persons must have been wholly
successful in the claim or action or the Board of Directors must have
determined that such persons acted in good faith in what they reasonably
believed to be the best interests of the Company (or at least not opposed to
its best interests) and, in addition, in any criminal action, had reasonable
cause to believe their conduct was lawful (or had no reasonable cause to
believe that their conduct was unlawful).
Reference is also made to the Form of Underwriting Agreement filed as
Exhibit 1 hereto which provides for indemnification of the directors and
officers signing the Registration Statement and certain controlling persons of
the Registrant against certain liabilities including certain liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), in certain
instances by the Underwriters.
In addition, the Company has a directors' and officers' liability and
company reimbursement policy that insures against certain liabilities,
including liabilities under the Securities Act, subject to applicable
retentions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished as to securities of the Registrant
sold within the past three years that were not registered under the Securities
Act. All of the information is adjusted for the recapitalization of all of the
Registrant's 1,000 shares of outstanding Common Stock into 10,214,286 shares
of Class A Common Stock on August 25, 1997.
S-1
<PAGE>
(a) On August 25, 1997, the Registrant effected a recapitalization,
whereby all of the Registrant's 1,000 outstanding shares of Common Stock
were converted into 10,214,286 shares of Class A Common Stock.
(b) On August 25, 1997, the Registrant granted options for an aggregate
of 455,050 shares of Class B Common Stock to certain officers, key
employees and consultants, effective on the closing of this offering, at an
exercise price equal to 100% of the initial public offering price.
(c) On March 31, 1997, the Registrant paid a dividend in the form of a
subordinated promissory note with a principal amount of $6.0 million to
BWI.
The transaction described in paragraph (b) above is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. The transactions described in paragraph (a) and (c) above are exempt
from the registration requirements of the Securities Act because they did not
involve a "sale" of a security within the meaning of Section 2(3) of the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
The list of exhibits is incorporated by reference to the Index to
Exhibits beginning on page E-1.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because of the absence of conditions under
which they are required or because the information is included in the
consolidated financial statements or the Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
S-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN INDIANAPOLIS,
INDIANA ON OCTOBER 20, 1997.
Priority Healthcare Corporation
/s/ Robert L. Myers
By: _________________________________
Robert L. Myers,
President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED BELOW ON OCTOBER 20, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*/s/ William E. Bindley Chairman of the Board
___________________________________________
William E. Bindley
/s/ Robert L. Myers President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
Robert L. Myers
*/s/ Donald J. Perfetto Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
Donald J. Perfetto
*/s/ Michael D. McCormick Director
___________________________________________
Michael D. McCormick
*/s/ Thomas J. Salentine Director
___________________________________________
Thomas J. Salentine
</TABLE>
/s/ Robert L. Myers
*By _________________________________
Robert L. Myers
Attorney-in-Fact
S-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
------- -------------------- ----------
<C> <S> <C>
1* Form of Underwriting Agreement.
3-A Restated Articles of Incorporation of the Registrant.
3-B By-Laws of the Registrant, as amended to date.
3-C Articles of Restatement of the Restated Articles of In-
corporation of the Registrant.
5 Opinion of Baker & Daniels.
10-A Administrative Services Agreement between the Regis-
trant and BWI.
10-B Tax Sharing Agreement between the Registrant and BWI.
10-C 1997 Stock Option and Incentive Plan of the Registrant.
10-D Outside Directors Stock Option Plan of the Registrant.
10-E Termination Benefits Agreement between the Registrant
and Robert L. Myers dated July 1, 1996.
10-F (i) Employment Agreement between the Registrant and Me-
lissa E. McIntyre dated June 1, 1997; and (ii)
Noncompete Agreement between the Registrant and Melissa
E. McIntyre dated June 1, 1997.
10-G (i) Employment Agreement between the Registrant and
William M. Woodard dated June 1, 1997; and (ii)
Noncompete Agreement between the Registrant and William
M. Woodard dated June 1, 1997.
10-H (i) Employment Agreement between the Registrant and Guy
F. Bryant dated June 1, 1997; and (ii) Noncompete
Agreement between the Registrant and Guy F. Bryant
dated June 1, 1997.
10-I (i) Employment Agreement between the Registrant and
Donald J. Perfetto dated June 23, 1997; and (ii)
Noncompete Agreement between the Registrant and Donald
J. Perfetto dated June 23, 1997.
10-J (i) Employment Agreement between the Registrant and
Steven D. Cosler dated June 1, 1997; and (ii)
Noncompete Agreement between the Registrant and Steven
D. Cosler dated June 1, 1997.
10-K Subordinated Promissory Note between the Registrant and
BWI.
10-L Indemnification and Hold Harmless Agreement between the
Registrant and BWI.
10-M Consulting Agreement dated as of January 1, 1995, by
and among the Registrant, BWI and Martin A. Nassif.
10-N Revolving Credit Promissory Note between the Registrant
and BWI.
11 Computation of Pro Forma Earnings Per Share.
21 Subsidiaries of the Registrant.
23-A* Consent of Price Waterhouse LLP.
23-B Consent of Baker & Daniels (contained in Exhibit 5).
23-C Consent of Richard W. Roberson.
23-D Consent of Rebecca M. Shanahan.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
- --------
*Filed with this amendment.
E-1
<PAGE>
DRAFT 10/17/97
--------------
2,000,000 Shares*
PRIORITY HEALTHCARE CORPORATION
Class B Common Stock
-----------------
UNDERWRITING AGREEMENT
St. Petersburg, Florida
, 1997
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.
As Representatives of the Several Underwriters
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
Priority Healthcare Corporation, an Indiana corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell an aggregate of 2,000,000 shares of Class B Common Stock, $.01
par value per share (the "Class B Common Stock"), of the Company, to the several
Underwriters named in Schedule I hereto (the "Underwriters"), subject to the
terms and conditions stated herein (such 2,000,000 aggregate shares to be sold
by the Company are hereinafter referred to as the "Firm Shares"). In addition,
the Company has agreed to sell to the Underwriters, upon the terms and
conditions set forth herein, up to an additional 300,000 shares (the "Additional
Shares") of the Class B Common Stock to cover over-allotments by the
Underwriters, if any. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares."
Bindley Western Industries, Inc. ("BWI") owns all of the issued and
outstanding shares of Class A Common Stock of the Company and is entering into
this Agreement as an inducement to the Underwriters.
The Company wishes to confirm as follows its agreement with you and the
other several Underwriters, on whose behalf you are acting, in connection with
the several purchases of the Shares from the Company.
1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-34463), including a
prospectus subject to completion, relating to the Shares. Such registration
statement, as amended at the time when it becomes effective and as thereafter
amended by post-effective amendment, is referred to in this Agreement as the
"Registration Statement." The prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits
- ------------------
* Plus an additional 300,000 shares subject to Underwriters' over-allotment
option
<PAGE>
information in reliance upon Rule 430A under the Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b) under
the Act or as part of a post-effective amendment to the Registration Statement
after the Registration Statement becomes effective, the prospectus as so filed,
is referred to in this Agreement as the "Prospectus." If the Company elects to
rely on Rule 434 under the Act, all references to the Prospectus shall be deemed
to include, without limitation, the form of prospectus and the term sheet
contemplated by Rule 434, taken together, provided to the Underwriters by the
Company in reliance on Rule 434 under the Act (the "Rule 434 Prospectus"). If
the Company files another registration statement with the Commission to register
a portion of the Shares pursuant to Rule 462(b) under the Act (the "Rule 462
Registration Statement"), then any reference to "Registration Statement" herein
shall be deemed to include the registration statement on Form S-1 (File No. 333-
34463) and the Rule 462 Registration Statement, as each such registration
statement may be amended pursuant to the Act. The prospectus subject to
completion in the form included in the Registration Statement at the time of the
initial filing of such Registration Statement with the Commission and as such
prospectus is amended from time to time until the date of the Prospectus are
collectively referred to in this Agreement as the "Prepricing Prospectus."
2. Agreements to Sell and Purchase. The Company hereby agrees to sell
the Firm Shares to the Underwriters and, upon the basis of the representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions set forth herein, each Underwriter agrees, severally and
not jointly, to purchase from the Company at a purchase price of $_____ per
Share (the "purchase price per Share"), the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto.
The Company hereby also agrees to sell to the Underwriters, and upon
the basis of the representations, warranties and agreements of the Company
herein contained and subject to all the terms and conditions set forth herein,
the Underwriters shall have the right for 30 days from the date of the
Prospectus to purchase from the Company up to 300,000 Additional Shares at the
purchase price per Share for the Firm Shares. The Additional Shares may be
purchased solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the Firm Shares. If any Additional Shares are to
be purchased, each Underwriter, severally and not jointly, agrees to purchase
the number of Additional Shares (subject to such adjustments as you may
determine to avoid fractional shares) which bears the same proportion to the
total number of Additional Shares to be purchased by the Underwriters as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.
3. Terms of Public Offering. The Company has been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of the Firm Shares and payment therefor shall be made at the
offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St.
Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time, on
___________, 1997 (the "Closing Date"). The place of closing for the Firm Shares
and the Closing Date may be varied by agreement between the Representative and
the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Raymond
James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida, at
10:00 a.m., Florida time, on such date or dates (the "Additional Closing Date")
(which may be the same as the Closing Date but shall in no event be earlier than
the Closing Date nor earlier than three nor later than ten business days after
the giving of the notice hereinafter referred to) as shall be specified in a
written notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. Such notice may be given to the Company by you at any time
within 30 days after the date of the Prospectus. The place of closing for the
Additional Shares and the Additional Closing Date may be varied by agreement
between you and the Company.
2
<PAGE>
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 p.m., Florida time, not later than the second
full business day preceding the Closing Date or the Additional Closing Date, as
the case may be. Such certificates shall be made available to you in St.
Petersburg, Florida for inspection and packaging not later than 9:30 a.m.,
Florida time, on the business day immediately preceding the Closing Date or the
Additional Closing Date, as the case may be. The certificates evidencing the
Firm Shares and any Additional Shares to be purchased hereunder shall be
delivered to you on the Closing Date or the Additional Closing Date, as the case
may be, against payment of the purchase price therefor by certified or official
bank check or checks payable in New York Clearing House (next day) funds.
Payment for the Firm Shares sold by the Company hereunder shall be delivered by
the Representative to the Company.
5. Covenants and Agreements of the Company and BWI. (a) The Company
covenants and agrees with the several Underwriters as follows:
(i) The Company will use its best efforts to cause
the Registration Statement and any amendments thereto to become
effective, if it has not already become effective, and will advise you
promptly and, if requested by you, will confirm such advice in writing
(i) when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (ii) if Rule 430A
under the Act is employed, when the Prospectus has been timely filed
pursuant to Rule 424(b) under the Act, (iii) of any request by the
Commission for amendments or supplements to the Registration Statement,
any Prepricing Prospectus or the Prospectus or for additional
information, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction or the initiation of any proceeding for such purposes and
(v) within the period of time referred to in Section 5(e) below, of any
change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of any
event that comes to the attention of the Company that makes any
statement made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue in any material respect or that
requires the making of any additions thereto or changes therein in
order to make the statements therein not misleading in any material
respect, or of the necessity to amend or supplement the Prospectus (as
then amended or supplemented) to comply with the Act or any other law.
If at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make
every reasonable effort to obtain the withdrawal or lifting of such
order at the earliest possible time. If the Company elects to rely on
Rule 434 under the Act, the Company will provide the Underwriters with
copies of the form of Rule 434 Prospectus (including copies of a term
sheet that complies with the requirements of Rule 434 under the Act),
in such number as the Underwriters may reasonably request, and file
with the Commission in accordance with Rule 424(b) of the Act the form
of Prospectus complying with Rule 434(b)(2) of the Act before the close
of business on the first business day immediately following the date
hereof. If the Company elects not to rely on Rule 434 under the Act,
the Company will provide the Underwriters with copies of the form of
Prospectus, in such number as the Underwriters may reasonably request,
and file with the Commission such Prospectus in accordance with Rule
424(b) of the Act before the close of business on the first business
day immediately following the date hereof.
(ii) The Company will furnish to you, without
charge, two signed duplicate originals of the Registration Statement as
originally filed with the Commission and of each amendment thereto,
including financial statements and all exhibits thereto, and will also
furnish to you, without charge, such number of conformed copies of the
Registration Statement as originally filed and of each amendment
thereto as you may reasonably request.
(iii) The Company will not file any Rule 462
Registration Statement or any amendment to the Registration Statement
or make any amendment or supplement to the Prospectus unless (A) you
shall have previously been advised thereof and been given a reasonable
opportunity to review such filing, amendment or supplement, and (B) you
have not reasonably objected to such filing, amendment or supplement
after being so advised.
3
<PAGE>
(iv) Prior to the execution and delivery of this
Agreement, the Company has delivered or will deliver to you, without
charge, in such quantities as you have requested or may hereafter
reasonably request, copies of each form of the Prepricing Prospectus.
The Company consents to the use, in accordance with the provisions of
the Act and with the securities or Blue Sky laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing
Prospectus so furnished by the Company.
(v) As soon after the execution and delivery of
this Agreement as is practicable and thereafter from time to time for
such period as in the reasonable opinion of counsel for the
Underwriters a prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or a dealer, and for so long a
period as you may request for the distribution of the Shares, the
Company will deliver to each Underwriter and each dealer, without
charge, as many copies of the Prospectus (and of any amendment or
supplement thereto) as they may reasonably request. The Company
consents to the use of the Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Act and
with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale
of the Shares and for such period of time thereafter as the Prospectus
is required by the Act to be delivered in connection with sales by any
Underwriter or dealer. If at any time prior to the later of (i) the
completion of the distribution of the Shares pursuant to the offering
contemplated by the Registration Statement or (ii) the expiration of
prospectus delivery requirements with respect to the Shares under
Section 4(3) of the Act and Rule 174 thereunder, any event shall occur
that in the judgment of the Company or in the opinion of counsel for
the Underwriters is required to be set forth in the Prospectus (as then
amended or supplemented) or should be set forth therein in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with the Act or any other
law, the Company will forthwith prepare and, subject to Sections 5(a)
and 5(c) hereof, file with the Commission and use its best efforts to
cause to become effective as promptly as possible an appropriate
supplement or amendment thereto, and will furnish to each Underwriter
who has previously requested Prospectuses, without charge, a reasonable
number of copies thereof.
(vi) The Company will cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offering and sale by the several
Underwriters and by dealers under the securities or Blue Sky laws of
such jurisdictions as you may reasonably designate and will file such
consents to service of process or other documents as may be reasonably
necessary in order to effect and maintain such registration or
qualification for so long as required to complete the distribution of
the Shares; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general
service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now
so subject. In the event that the qualification of the Shares in any
jurisdiction is suspended, the Company shall so advise you promptly in
writing.
(vii) The Company will make generally available
to its security holders a consolidated earnings statement (in form
complying with the provisions of Rule 158), which need not be audited,
covering a twelve-month period commencing after the effective date of
the Registration Statement and the Rule 462 Registration Statement, if
any, and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.
(viii) During the period ending three years from
the date hereof, the Company will furnish to you and, upon your
request, to each of the other Underwriters, (i) as soon as available, a
copy of each proxy statement, quarterly or annual report or other
report of the Company mailed to stockholders or filed with the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or The Nasdaq Stock Market or any securities exchange and (ii)
from time to time such other information concerning the Company as you
may reasonably request.
4
<PAGE>
(ix) If this Agreement shall terminate or shall be
terminated after execution pursuant to any provision hereof (except
pursuant to a termination under Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any inability,
failure or refusal on the part of the Company to perform in all
material respects any agreement herein or to comply in all material
respects with any of the terms or provisions hereof or to fulfill in
all material respects any of the conditions of this Agreement, the
Company agrees to reimburse you and the other Underwriters for all
out-of-pocket expenses (including travel expenses and reasonable fees
and expenses of counsel for the Underwriters but excluding wages and
salaries paid by you) reasonably incurred by you in connection
herewith.
(x) The Company will apply the net proceeds from
the sale of the Shares to be sold by it hereunder in accordance in all
material respects with the statements under the caption "Use of
Proceeds" in the Prospectus.
(xi) If Rule 430A under the Act is employed, the
Company will timely file the Prospectus pursuant to Rule 424(b) under
the Act.
(xii) For a period of 180 days after the date of
the Prospectus first filed pursuant to Rule 424(b) under the Act,
without your prior written consent, the Company will not, directly or
indirectly, issue, sell, offer or contract to sell or otherwise dispose
of or transfer any shares of Class B Common Stock or securities
convertible into or exchangeable or exercisable for shares of Class B
Common Stock (collectively, "Company Securities") or any rights to
purchase Company Securities, except to the Underwriters pursuant to
this Agreement and except for grants of options pursuant to the
Company's 1997 Stock Option and Incentive Plan described in the
Prospectus.
(xiii) Prior to the Closing Date or the
Additional Closing Date, as the case may be, the Company will furnish
to you, as promptly as possible, copies of any unaudited interim
consolidated financial statements of the Company and its subsidiaries
for any period subsequent to the periods covered by the financial
statements appearing in the Prospectus.
(xiv) The Company will comply with all provisions of
any undertakings contained in the Registration Statement.
(xv) The Company will not at any time, directly or
indirectly take any action designed, or which might reasonably be
expected to cause or result in, or which will constitute, stabilization
or manipulation of the price of the shares of Class B Common Stock to
facilitate the sale or resale of any of the Shares.
(xvi) The Company will use its best efforts to
qualify or register its Class B Common Stock for sale in non-issuer
transactions under (or obtain exemptions from the application of) the
Blue Sky laws of each state where necessary to permit market making
transactions and secondary trading, and will comply with such Blue Sky
laws and will continue such qualifications, registrations and
exemptions in effect for a period of five years after the date hereof.
(xvii) The Company will timely file with the
National Association of Securities Dealers Automated Quotation National
Market System ("NASDAQ/NMS") all documents and notices required by the
NASDAQ/NMS of companies that have or will issue securities that are
traded in the over-the-counter market and quotations for which are
reported by the NASDAQ/NMS.
(b) BWI covenants and agrees with the several Underwriters
that, in the event of a Distribution by BWI (as defined in the
Prospectus), BWI will structure the conversion of options to purchase
BWI common stock into options to purchase Class B Common Stock of the
Company, in accordance with "EITF 90-9", so that such conversion will
not result in a charge to earnings of the Company.
5
<PAGE>
6. Representations and Warranties.
6.1 Of the Company. The Company hereby, represents and
warrants to each Underwriter on the date hereof, and shall be deemed to
represent and warrant to each Underwriter on the Closing Date and the Additional
Closing Date, that:
(a) The Company satisfies all of the requirements of the Act
for use of Form S-1 for the offering of Shares contemplated hereby.
Each Prepricing Prospectus included as part of the Registration
Statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424(a) under the Act, complied when
so filed in all material respects with the provisions of the Act,
except that this representation and warranty does not apply to
statements in or omissions from such Prepricing Prospectus (or any
amendment or supplement thereto) made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you
expressly for use therein. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The Registration Statement (including any Rule 462
Registration Statement), in the form in which it becomes effective and
also in such form as it may be when any post-effective amendment
thereto shall become effective, and the Prospectus, and any supplement
or amendment thereto when filed with the Commission under Rule 424(b)
under the Act, will comply in all material respects with the provisions
of the Act and will not at any such times contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, except that this representation and warranty does not apply
to statements in or omissions from the Registration Statement or the
Prospectus (or any amendment or supplement thereto) made in reliance
upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by or on behalf of any Underwriter
through you expressly for use therein.
(c) The capitalization of the Company is and will be as set
forth in the Prospectus as of the date set forth therein. BWI owns all
the issued and outstanding shares of Class A Common Stock of the
Company. All the outstanding shares of Class A Common Stock of the
Company have been, and as of the Closing Date will be, duly authorized
and validly issued, are fully paid and nonassessable and are free of
any preemptive or similar rights; except as set forth in the
Prospectus, the Company is not a party to or bound by any outstanding
options, warrants, or similar rights to subscribe for, or contractual
obligations to issue, sell, transfer or acquire, any of its capital
stock or any securities convertible into or exchangeable for any of
such capital stock; the Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor
in accordance with the terms hereof will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; the
capital stock of the Company conforms to the description thereof in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto); and the delivery of certificates for the Shares
against payment therefor pursuant to the terms of this Agreement, will
pass valid title to the Shares, free and clear of any claim,
encumbrance or defect in title, to the several Underwriters) purchasing
such shares in good faith and without notice of any lien, claim or
encumbrance. The certificates for the Shares are in valid and
sufficient form.
(d) Each of the Company and its subsidiaries is a
corporation duly organized and validly existing as a corporation in
good standing under the laws of the state of its incorporation with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as presently conducted and as
described in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), and is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or
place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth,
results of operations or prospects of the Company and its subsidiaries
(a "Material Adverse Effect").
6
<PAGE>
(e) The issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable and are owned by the Company free and
clear of any security interests, liens, encumbrances, equities or
claims. The Company does not have any subsidiaries and does not own a
material interest in or control, directly or indirectly, any other
corporation, partnership, joint venture, association, trust or other
business organization, except those subsidiaries set forth in Exhibit
21 to the Registration Statement. As used in this Agreement,
subsidiaries shall mean direct and indirect subsidiaries of the
Company.
(f) There are no legal or governmental proceedings pending
or, to the best knowledge of the Company, threatened, against the
Company or its subsidiaries or to which the Company or its subsidiaries
or any of their properties are subject, that are required to be
described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) but are not described as required.
Except as described in the Prospectus, there is no action, suit,
inquiry, proceeding, or investigation by or before any court or
governmental or other regulatory or administrative agency or commission
pending or, to the best knowledge of the Company, threatened, against
or involving the Company or its subsidiaries, which might individually
or in the aggregate prevent or adversely affect the transactions
contemplated by this Agreement or result in a Material Adverse Effect,
nor is there any basis for any such action, suit, inquiry, proceeding,
or investigation. There are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act. All
such contracts to which the Company or any of its subsidiaries is a
party have been duly authorized, executed and delivered by the Company
or the applicable subsidiary, constitute valid and binding agreements
of the Company or the applicable subsidiary and are enforceable against
the Company or the applicable subsidiary in accordance with the terms
thereof, and neither the Company or the applicable subsidiary, nor to
the best of the Company's knowledge, any other party, is in breach of
or default under any of such contracts.
(g) Neither the Company nor any of its subsidiaries is (i)
in violation of (aa) its articles of incorporation or bylaws or (bb)
any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of its subsidiaries the violation of
which would have a Material Adverse Effect or (cc) of any decree of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries; or (ii) in default in any material
respect in the performance of any obligation, agreement or condition
contained in (aa) any bond, debenture, note or any other evidence of
indebtedness, or (bb) any material agreement, indenture, lease or other
material instrument to which the Company or any of its subsidiaries is
a party or by which any of their properties may be bound; and there
does not exist any state of facts which constitutes an event of default
on the part of the Company or any of its subsidiaries as defined in
such documents or which, with notice or lapse of time or both, would
constitute such an event of default.
(h) The Company's execution and delivery of this Agreement
and the performance by the Company of its obligations under this
Agreement have been duly and validly authorized by the Company, and
this Agreement has been duly executed and delivered by the Company, and
this Agreement constitutes a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except to the extent enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws relating to or affecting enforcement of creditors' rights
generally or by general equitable principles and public policy
exceptions.
(i) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company nor
the consummation by the Company of the transactions contemplated hereby
or thereby (i) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official
(except such as may be required for the registration of the Shares
under the Act, the registration of the Class B Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
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compliance with the securities or Blue Sky laws of various
jurisdictions, all of which will be, or have been, effected in
accordance with this Agreement and except for the NASD's clearance of
the underwriting terms of the offering contemplated hereby as required
under the NASD's Rules of Fair Practice), (ii) conflicts with or will
conflict with or constitutes or will constitute a breach of, or a
default under, the articles of incorporation or bylaws of the Company
or any agreement, indenture, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which any of its
properties may be bound, (iii) violates any statute, law, regulation,
ruling, filing, judgment, injunction, order or decree applicable to the
Company or any of its subsidiaries or any of their properties, or (iv)
results in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company.
(j) Except as described in the Prospectus, neither the
Company or any of its subsidiaries or BWI has outstanding and at the
Closing Date (and the Additional Closing Date, if applicable) will not
have outstanding any options to purchase, or any warrants to subscribe
for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Class B Common
Stock or any such warrants or convertible securities or obligations. No
holder of securities of the Company has rights to the registration of
any securities of the Company as a result of or in connection with the
filing of the Registration Statement or the consummation of the
transactions contemplated hereby that have not been satisfied or
heretofore waived in writing.
(k) Price Waterhouse LLP, the certified public accountants
who have certified the financial statements filed as part of the
Registration Statement and the Prospectus (or any amendment or
supplement thereto), are independent public accountants as required by
the Act.
(l) The financial statements, together with related
schedules and notes, included in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly
the financial position, results of operations and changes in financial
position of the Company on the basis stated in the Registration
Statement at the respective dates or for the respective periods to
which they apply; such statements and related schedules and notes have
been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except
as disclosed therein; and the other financial and statistical
information and data set forth in the Registration Statement and
Prospectus (and any amendment or supplement thereto) is accurately
presented and prepared on a basis consistent with such financial
statements and the books and records of the Company. No other financial
statements or schedules are required to be included in the Registration
Statement.
(m) Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to
the respective dates as of which such information is given in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto), (i) neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any transaction which
is not in the ordinary course of business or which could result in a
material reduction in the future earnings of the Company; (ii) neither
the Company nor any of its subsidiaries has sustained any material loss
or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by
insurance; (iii) neither the Company nor any of its subsidiaries has
paid or declared any dividends or other distributions with respect to
its capital stock and the Company is not in default under the terms of
any class of capital stock of the Company or any outstanding debt
obligations; (iv) there has not been any change in the authorized or
outstanding capital stock of the Company or any material change in the
indebtedness of the Company (other than in the ordinary course of
business); and (v) there has not been any material adverse change, or
any development involving or which may reasonably be expected to
involve a potential future material adverse change, in the condition
(financial or otherwise), business, properties, net worth, result of
operations or prospects of the Company.
(n) Each of the Company and its subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free and clear of all liens, claims,
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security interests or other encumbrances except (i) such as are
described in the financial statements included in, or elsewhere in, the
Prospectus or (ii) such as are not materially burdensome and do not
interfere in any material respect with the use of the property or the
conduct of the business of the Company. All property (real and
personal) held under lease by the Company and its subsidiaries is held
by it under valid, subsisting and enforceable leases with only such
exceptions as in the aggregate are not materially burdensome and do not
interfere in any material respect with the conduct of the business of
the Company or its subsidiaries.
(o) The Company has not distributed and will not distribute
any offering material in connection with the offering and sale of the
Shares other than the Prepricing Prospectus, the Prospectus, or other
offering material, if any, as permitted by the Act.
(p) The Company has not taken, directly or indirectly, any
action which constituted, or any action designed, or which might
reasonably be expected to cause or result in or constitute, under the
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares
or for any other purpose.
(q) The Company is not an "investment company," an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company within the meaning of the Investment Company Act of
1940, as amended.
(r) Each of the Company and its subsidiaries has all
permits, licenses, franchises, approvals, consents and authorizations
of governmental or regulatory authorities (hereinafter "permit" or
"permits") as are necessary to own its properties and to conduct its
business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus, except where the
failure to have obtained any such permit has not and will not have a
Material Adverse Effect; each of the Company and its subsidiaries has
fulfilled and performed in all material respects all of its obligations
with respect to each such permit and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or
termination of any such permit or result in any other material
impairment of the rights of the holder of any such permit, subject in
each case to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, such permits contain no
restrictions that are materially burdensome to the Company or any of
its subsidiaries.
(s) Each of the Company and its subsidiaries has complied
and will comply with wage and hour determinations issued by the U.S.
Department of Labor under the Service Contract Act of 1965 and the Fair
Labor Standards Act in paying its employees' salaries, fringe benefits,
and other compensation for the performance of work or other duties in
connection with contracts with the U.S. government, except where the
failure to comply has not had and will not have a Material Adverse
Effect. Each of the Company has complied and will comply in all
material respects with the terms of all certifications and
representations made to the U.S. government in connection with the
submission of any bid or proposal or any contract. The Company has
complied and will comply with the requirements of the American with
Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the
Employee Retirement Income Security Act, the Civil Rights Act of 1964
(Title VII), as amended, the Age Discrimination in Employment Act and
other applicable federal and state employment and labor laws, except
where the failure to comply has not had and will not have a Material
Adverse Effect.
(t) The Company, and its subsidiaries, maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
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<PAGE>
(u) Neither the Company, at any time, nor any of its
subsidiaries, since each has been held as a subsidiary of the Company,
has, directly or indirectly, (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
federal, state or foreign governmental official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof or applicable foreign jurisdictions.
(v) Each of the Company and its subsidiaries has obtained
all required permits, licenses, and other authorizations, if any, which
are required under federal, state, local and foreign statutes,
ordinances and other laws relating to pollution or protection of the
environment, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants,
chemicals, or industrial, hazardous, or toxic materials or wastes into
the environment (including, without limitation, ambient air, surface
water, ground water, land surface, or subsurface strata) or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of pollutants, contaminants,
chemicals, or industrial, hazardous, or toxic materials or wastes, or
any regulation, rule, code, plan, order, decree, judgment, injunction,
notice, or demand letter issued, entered, promulgated, or approved
thereunder ("Environmental Laws"), except where the failure to obtain
any such permit, license or other authorization has not resulted in and
will not result in a Material Adverse Effect. Each of the Company and
its subsidiaries is in material compliance with all terms and
conditions of all required permits, licenses, and authorizations, and
are also in material compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules, and timetables contained in the Environmental
Laws. There is no pending or, to the best knowledge of the Company
after due inquiry, threatened civil or criminal litigation, notice of
violation, or administrative proceeding relating in any way to the
Environmental Laws (including but not limited to notices, demand
letters, or claims under the Resource Conservation and Recovery Act of
1976, as amended ("RCRA"), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the
Emergency Planning and Community Right to Know Act of 1986, as amended
("EPCRA"), the Clean Air Act, as amended ("CAA"), or the Clean Water
Act, as amended ("CWA") and similar federal, foreign, state, or local
laws) involving the Company or any of its subsidiaries. There have not
been and there are not any past, present, or foreseeable future events,
conditions, circumstances, activities, practices, incidents, actions,
or plans which may interfere with or prevent continued compliance, or
which may give rise to any common law or legal liability, or otherwise
form the basis of any claim, action, demand, suit, proceeding, hearing,
study, or investigation, based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport,
or handling, or the emission, discharge, release, or threatened release
into the environment, of any pollutant, contaminant, chemical, or
industrial, hazardous, or toxic material or waste, including, without
limitation, any liability arising, or any claim, action, demand, suit,
proceeding, hearing, study, or investigation which may be brought,
under RCRA, CERCLA, EPCRA, CAA, CWA or similar federal, foreign, state
or local laws.
(w) The Company owns and has full right, title and interest
in and to, or has valid licenses to use, each material trade name,
trademark or service mark under which the Company conducts all or any
material part of its business, and the Company has created no lien or
encumbrance on, or granted any right or license with respect to, any
such trade name, trademark or service mark; there is no claim pending
against the Company with respect to any trade name, trademark or
service mark and the Company has not received notice or otherwise
become aware that any trade name, trademark or service mark which it
uses or has used in the conduct of its business infringes upon or
conflicts with the rights of any third party.
(x) All offers, sales, conversions and redemptions of the
Company's capital stock and other securities through the date hereof
were made in compliance with the Act and all other applicable state and
federal laws or regulations.
(y) The Shares have been duly authorized for trading on the
NASDAQ/NMS under the symbol "PHCC," subject to notice of issuance of
the Shares being sold by the Company, and upon
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<PAGE>
consummation of the offering contemplated hereby the Company will be in
compliance with the designation and maintenance criteria applicable to
Nasdaq National Market issuers.
(z) All federal, state, local and foreign tax returns
required to be filed by or on behalf of the Company and its
subsidiaries (and their predecessors) with respect to all periods ended
prior to the date of this Agreement have been filed (or are the subject
of valid extension) with the appropriate federal, state, local and
foreign authorities and all such tax returns, as filed, are accurate in
all material respects. All federal, state, local and foreign taxes
(including estimated tax and sales tax payments) required to be shown
on all such tax returns or claimed to be due from or with respect to
the business of the Company and its subsidiaries (and their
predecessors) have been paid or reflected as a liability on the
financial statements of the Company for appropriate periods, except for
those taxes or claims therefor which are being contested by the Company
in good faith and for which appropriate reserves are reflected in the
Company's financial statements. Except as disclosed in the Prospectus,
all deficiencies asserted as a result of any federal, state, local or
foreign tax audits have been paid or finally settled and no issue has
been raised in any such audit which, by application of the same or
similar principles, reasonably could be expected to result in a
proposed deficiency for any other period not so audited. There are no
outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state, local or foreign tax
return for any period. On the Closing Date, and Additional Closing
Date, if any, all stock transfer and other taxes which are required to
be paid in connection with the sale of the shares to be sold by the
Company to the Underwriters will have been fully paid by the Company
and all laws imposing such taxes will have been complied with.
(aa) Except as set forth in the Prospectus, there are no
transactions with "affiliates" (as defined in Rule 405 promulgated
under the Act) or any officer, director or security holder of the
Company (whether or not an affiliate) which are required by the Act and
the applicable rules and regulations thereunder to be disclosed in the
Registration Statement.
(bb) Except for the Distribution by BWI (as defined in the
Prospectus), the Company has procured the written agreement of each of
the Company's officers, directors, and BWI not to (i) directly or
indirectly sell, offer or contract to sell or otherwise dispose of or
transfer any shares of capital stock or securities of the Company
convertible into or exchangeable or exercisable for Class B Common
Stock, including, but not limited to, shares that may be received as
part of the Distribution (collectively, "Company Securities") owned or
controlled by such persons now or hereafter or any rights to purchase
Company Securities for a period of 180 days after the date of the
Prospectus first filed pursuant to Rule 424(b) under the Act (the
"Restriction Period"), without your prior written consent, or (ii)
exercise or seek to exercise or effectuate in any manner any rights of
any nature that such persons have or may hereafter have to require the
Company to register under the Act any such person's sale, transfer or
other disposition of any Company Securities or other securities of the
Company held by any such persons, or to otherwise participate as a
selling securityholder in any manner in any registration effected by
the Company under the Act, including the registration to which this
Agreement relates, before the expiration of the Restriction Period.
(cc) Neither the Company nor any of its subsidiaries (i)
conduct business or have affiliates which conduct business in or with
Cuba, (ii) plan to commence doing business in or with Cuba after the
effective date of the Registration Statement or (iii) are required by
Florida law to report a material change in information previously
reported to the State of Florida regarding business conducted in or
with Cuba.
(dd) No officer, director, nominee for director or
shareholder of the Company has a direct or indirect affiliation or
association with any member of the National Association of Securities
Dealers, Inc. (the "NASD").
6.2 Of BWI. BWI hereby, represents and warrants to each
Underwriter on the date hereof, and shall be deemed to represent and warrant to
each Underwriter on the Closing Date and the Additional Closing Date, that:
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(a) BWI owns all the issued and outstanding shares of Class
A Common Stock of the Company. To the best knowledge of BWI, (i) all
the outstanding shares of Class A Common Stock of the Company have
been, and as of the Closing Date will be, duly authorized and validly
issued, are fully paid and nonassessable and are free of any preemptive
or similar rights; (ii) except as set forth in the Prospectus, the
Company is not a party to or bound by any outstanding options,
warrants, or similar rights to subscribe for, or contractual
obligations to issue, sell, transfer or acquire, any of its capital
stock or any securities convertible into or exchangeable for any of
such capital stock; (iii) the Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor
in accordance with the terms hereof will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; the
capital stock of the Company conforms to the description thereof in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto); and (iv) the delivery of certificates for the
Shares against payment therefor pursuant to the terms of this
Agreement, will pass valid title to the Shares, free and clear of any
claim, encumbrance or defect in title, to the several Underwriters)
purchasing such shares in good faith and without notice of any lien,
claim or encumbrance. The certificates for the Shares are in valid and
sufficient form.
(b) BWI is a corporation duly organized and validly existing
as a corporation in good standing under the laws of the state of its
incorporation with full corporate power and authority to own, lease and
operate its properties and to conduct its business as presently
conducted and is duly registered and qualified to conduct its business
and is in good standing in each jurisdiction or place where the nature
of its properties or the conduct of its business requires such
registration or qualification, except where the failure to so register
or qualify does not have a material adverse effect, on the condition
(financial or otherwise), business, properties, net worth, results of
operations or prospects of BWI and its subsidiaries ("BWI Material
Adverse Effect").
(c) There are no legal or governmental proceedings pending
or, to the best knowledge of the BWI, threatened, against the Company
or its subsidiaries or BWI or to which the Company or its subsidiaries
or BWI or any of their properties are subject, that are required to be
described in the Registration Statement or the Prospectus (or any
amendment or supplement thereto) but are not described as required.
Except as described in the Prospectus, there is no action, suit,
inquiry, proceeding, or investigation by or before any court or
governmental or other regulatory or administrative agency or commission
pending or, to the best knowledge of BWI, threatened, against or
involving the Company or its subsidiaries or BWI, which might
individually or in the aggregate prevent or adversely affect the
transactions contemplated by this Agreement or result in a Material
Adverse Effect, nor is there any basis for any such action, suit,
inquiry, proceeding, or investigation. To the best knowledge of BWI,
there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or
to be filed as an exhibit to the Registration Statement that are not
described or filed as required by the Act. To the best knowledge of
BWI, all such contracts to which the Company or any of its subsidiaries
is a party have been duly authorized, executed and delivered by the
Company or the applicable subsidiary, constitute valid and binding
agreements of the Company or the applicable subsidiary and are
enforceable against the Company or the applicable subsidiary in
accordance with the terms thereof, and neither the Company or the
applicable subsidiary, nor any other party, is in breach of or default
under any of such contracts.
(d) BWI's execution and delivery of this Agreement and the
performance by BWI of its obligations under this Agreement have been
duly and validly authorized by BWI, and this Agreement has been duly
executed and delivered by BWI, and this Agreement constitutes a valid
and legally binding agreement of BWI, enforceable against BWI in
accordance with its terms, except to the extent enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws relating to or affecting enforcement
of creditors' rights generally or by general equitable principles and
public policy exceptions.
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<PAGE>
(e) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by BWI nor the
consummation by BWI of the transactions contemplated hereby or thereby
(i) requires any consent, approval, authorization or other order of or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as
may be required for the registration of the Shares under the Act, the
registration of the Class B Common Stock under the Exchange Act, as
amended, and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which will be, or have been, effected in
accordance with this Agreement and except for the NASD's clearance of
the underwriting terms of the offering contemplated hereby as required
under the NASD's Rules of Fair Practice), (ii) conflicts with or will
conflict with or constitutes or will constitute a breach of, or a
default under, the articles of incorporation or bylaws of BWI or any
agreement, indenture, lease or other instrument to which BWI is a party
or by which any of its properties may be bound, (iii) violates any
statute, law, regulation, ruling, filing, judgment, injunction, order
or decree applicable to BWI or any of its properties, or (iv) results
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of BWI.
(f) Except as described in the Prospectus, BWI does not have
outstanding and at the Closing Date (and the Additional Closing Date,
if applicable) will not have outstanding any options to purchase, or
any warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, any
shares of Class B Common Stock or any such warrants or convertible
securities or obligations. No holder of securities of the Company has
rights to the registration of any securities of the Company as a result
of or in connection with the filing of the Registration Statement or
the consummation of the transactions contemplated hereby that have not
been satisfied or heretofore waived in writing.
(g) To the best knowledge of BWI, all federal, state, local
and foreign tax returns required to be filed by or on behalf of the
Company and its subsidiaries (and their predecessors) with respect to
all periods ended prior to the date of this Agreement have been filed
(or are the subject of valid extension) with the appropriate federal,
state, local and foreign authorities and all such tax returns, as
filed, are accurate in all material respects. All federal, state, local
and foreign taxes (including estimated tax and sales tax payments)
required to be shown on all such tax returns or claimed to be due from
or with respect to the business of the Company and its subsidiaries
(and their predecessors) have been paid or reflected as a liability on
the financial statements of the Company for appropriate periods, except
for those taxes or claims therefor which are being contested by the
Company in good faith and for which appropriate reserves are reflected
in the Company's financial statements. All deficiencies asserted as a
result of any federal, state, local or foreign tax audits have been
paid or finally settled and no issue has been raised in any such audit
which, by application of the same or similar principles, reasonably
could be expected to result in a proposed deficiency for any other
period not so audited. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any federal,
state, local or foreign tax return for any period. On the Closing Date,
and Additional Closing Date, if any, all stock transfer and other taxes
which are required to be paid in connection with the sale of the shares
to be sold by the Company to the Underwriters will have been fully paid
by the Company and all laws imposing such taxes will have been complied
with.
7. Expenses. Whether or not the transactions contemplated hereby are
consummated or this Agreement becomes effective or is terminated, the Company
will pay or cause to be paid the following: (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement and the
Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof and of any Prepricing Prospectus to the Underwriters and
dealers; (ii) the printing and delivery (including, without limitation, postage,
air freight charges and charges for counting and packaging) of such copies of
the Registration Statement, the Prospectus, each Prepricing Prospectus, the Blue
Sky memoranda, the Master Agreement Among Underwriters, this Agreement, the
Selected Dealers Agreement and all amendments or supplements to any of them as
may be reasonably requested for use in connection with the offering and sale of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws or Blue Sky laws,
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<PAGE>
including the reasonable attorneys' fees and out-of-pocket expenses of the
counsel for the Underwriters in connection therewith; (iv) the filing fees
incident to securing any required review by the NASD of the terms of the sale of
the Shares and the reasonable fees and disbursements of the Underwriters'
counsel relating thereto; (v) the cost of preparing stock certificates; (vi) the
costs and charges of any transfer agent or registrar; (vii) the cost of the tax
stamps, if any, in connection with the issuance and delivery of the Shares to
the respective Underwriters; (viii) all other fees, costs and expenses referred
to in Item 13 of the Registration Statement, (ix) the transportation, lodging,
graphics and other expenses incidental to the Company's preparation for and
participation in the "roadshow" for the offering contemplated hereby, and (x)
all other costs and expenses incident to the performance of the obligations of
the Company hereunder which are not otherwise specifically provided for in this
Section 7. Notwithstanding the foregoing, in the event that the proposed
offering is terminated for the reasons set forth in Section 5(i) hereof, the
Company agrees to reimburse the Underwriters as provided in Section 5(i).
8. Indemnification and Contribution. Subject to the limitations in
this paragraph below, each of the Company and BWI, jointly and severally, agrees
to indemnify and hold harmless you and each other Underwriter, the directors,
officers, employees and agents of each Underwriter, and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses, including, without limitation, reasonable costs of
investigation and attorneys' fees and expenses (collectively, "Damages") arising
out of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except to the extent that any such Damages arise out of or are based upon an
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith, or (ii) any
inaccuracy in or breach of the representations and warranties of the Company or
BWI contained herein or any failure of the Company or BWI to perform its
obligations hereunder or under law; provided, however, that with respect to any
untrue statement or omission made in any Prepricing Prospectus, the indemnity
agreement contained in this paragraph shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) from
whom the person asserting any such losses, claims, damages or liabilities
purchased the Shares concerned if both (y) a copy of the Prospectus was not sent
or given to such person at or prior to the written confirmation of the sale of
such Shares to such person as required by the Act, and (z) the untrue statement
or omission in the Prepricing Prospectus was corrected in the Prospectus.
In addition to its other obligations under this Section 8, each of the
Company and BWI, jointly and severally, agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
inaccuracy in the representations and warranties of the Company herein or
failure to perform their obligations hereunder, all as set forth in this Section
8, it will reimburse each Underwriter on a quarterly basis for all reasonable
legal or other out-of-pocket expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligation of the Company and BWI to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the person(s) from whom
it was received, together with interest compounded daily determined on the basis
of the base lending rate announced from time to time by Chase Manhattan Bank,
N.A. (the "Prime Rate"). Any such interim reimbursement payments which are not
made to the Underwriters within 30 days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
If any action or claim shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
jointly and severally against the Company and BWI, such Underwriter or such
controlling person shall promptly notify in writing the party(s) against whom
indemnification is being sought (the "indemnifying party" or "indemnifying
parties"), and such indemnifying party(s) shall assume the defense thereof,
including the employment of counsel reasonably acceptable to such Underwriter or
such controlling person
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and payment of all fees and expenses. Such Underwriter or any such controlling
person shall have the right to employ separate counsel (but the Company and BWI
shall not be liable for the fees and expenses of more than one counsel) in any
such action and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such Underwriter or such controlling
person unless (i) the indemnifying party(s) has (have) agreed in writing to pay
such fees and expenses, (ii) the indemnifying party(s) has (have) failed to
assume the defense and employ counsel reasonably acceptable to the Underwriter
or such controlling person or (iii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party(s), and such Underwriter or such
controlling person shall have been advised by its counsel that one or more legal
defenses may be available to the Underwriter which may not be available to the
Company or BWI, or that representation of such indemnified party and any
indemnifying party(s) by the same counsel would be inappropriate under
applicable standards of professional conduct (whether or not such representation
by the same counsel has been proposed) due to actual or potential differing
interests between them (in which case the indemnifying party(s) shall not have
the right to assume the defense of such action on behalf of such Underwriter or
such controlling person (notwithstanding its (their) obligation to bear the fees
and expenses of such counsel)). The indemnifying party(s) shall not be liable
for any settlement of any such action effected without its (their) written
consent, but if settled with such written consent, or if there be a final
judgment for the plaintiff in any such action, the indemnifying party(s) agrees
to indemnify and hold harmless any Underwriter and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of such
settlement or judgment, but in the case of a judgment only to the extent stated
in the immediately preceding paragraph.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless BWI and the Company, its directors, and its officers who sign the
Registration Statement, and any person who controls BWI or the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company and BWI to each
Underwriter, but only with respect to information furnished in writing by or on
behalf of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action or claim shall be brought or asserted against
BWI or the Company, any of its directors, any such officers, or any such
controlling person based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this
paragraph, such Underwriter shall have the rights and duties given to the
Company and BWI by the preceding paragraph (except that if the Company and BWI
shall have assumed the defense thereof such Underwriter shall not be required to
do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and BWI and the Company, its directors, any such
officers, and any such controlling persons shall have the rights and duties
given to the Underwriters by the immediately preceding paragraph.
If the indemnification provided for in this Section 8 is unavailable or
insufficient for any reason whatsoever to an indemnified party under the first
or fifth paragraph of this Section 8 in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then an indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and BWI on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
BWI on the one hand and the Underwriters on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and BWI on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company or the Underwriters from the offering of the
Shares shall include the net proceeds (before deducting expenses) received by
the Company , and the underwriting discounts and commissions received by the
Underwriters, from the sale of
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such Additional Shares, in each case computed on the basis of the respective
amounts set forth in the notes to the table on the cover page of the Prospectus.
The relative fault of the Company and BWI on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and BWI and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8 was determined by
a pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 8 are several in proportion
to the respective numbers of Firm Shares set forth opposite their names in
Schedule I hereto (or such numbers of Firm Shares increased as set forth in
Section 10 hereof) and not joint.
Notwithstanding the second paragraph of this Section 8, any losses,
claims, damages, liabilities or expenses for which an indemnified party is
entitled to indemnification or contribution under this Section 8 shall be paid
by the indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred. The indemnity, contribution and
reimbursement agreements contained in this Section 8 and the representations and
warranties of the Company and BWI set forth in this Agreement shall remain
operative and in full force and effect, regardless of (i) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter,
the Company, its directors or officers or any person controlling the Company,
(ii) acceptance of any Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to BWI, the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
8.
It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in the second paragraph of this
Section 8, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration
must be commenced by service of a written demand for arbitration or written
notice of intention to arbitrate, therein electing the arbitration tribunal. In
the event the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding to said
demand or notice is authorized to do so. Such an arbitration would be limited to
the operation of the interim reimbursement provisions contained in the second
and fifth paragraphs of this Section 8, and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse expenses which is
created by the provisions of the second paragraph of this Section 8.
Notwithstanding the preceding paragraphs of this Section 8, if the
Distribution has been consummated, then the Underwriters must first proceed
against the Company for indemnification and contribution before proceeding
against BWI (it being understood, however, that (i) in such circumstances, the
Underwriters shall not be obligated to first exhaust all remedies against the
Company before proceeding against BWI; and (ii) in circumstances where such
Damages arise as a result of statements, facts, representations or warranties of
BWI, such Underwriters may first proceed against BWI.)
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9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) The Registration Statement shall have become effective
not later than 12:00 noon, New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you,
and all filings required by Rules 424(b), 430A and 462 under the Act
shall have been timely made.
(b) You shall be reasonably satisfied that since the
respective dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any change in
the capital stock of the Company or any material change in the
indebtedness (other than in the ordinary course of business) of the
Company, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no material oral or written agreement or
other transaction shall have been entered into by the Company which is
not in the ordinary course of business or which could reasonably be
expected to result in a material reduction in the future earnings of
the Company, (iii) no loss or damage (whether or not insured) to the
property of the Company shall have been sustained which had or could
reasonably be expected to have a Material Adverse Effect, (iv) no legal
or governmental action, suit or proceeding affecting the Company or any
of its properties which is material to the Company or which affects or
could reasonably be expected to affect the transactions contemplated by
this Agreement shall have been instituted or threatened, and (v) there
shall not have been any material change in the condition (financial or
otherwise), business, management, results of operations or prospects of
the Company or its subsidiaries which makes it impractical or
inadvisable in your judgment to proceed with the public offering or
purchase the Shares as contemplated hereby.
(c) You shall have received on the Closing Date (and the
Additional Closing Date, if any) an opinion of Baker & Daniels, counsel
to the Company, to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the
State of Indiana, with full corporate power and authority to
own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is
duly registered or otherwise qualified to conduct its business
as a foreign corporation and is in good standing in each
jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or
qualification, except where the failure to so register or
qualify does not have a Material Adverse Effect.
(ii) Each of the subsidiaries is a corporation
duly organized and validly existing in good standing under the
laws of the jurisdiction of its organization, with full
corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment
or supplement thereto); and is duly registered and qualified
to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or
qualification, except where the failure to so register or
qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net
worth or results of operation of the Company and the
subsidiaries taken as a whole; and all of the outstanding
shares of capital stock of each of the subsidiaries have been
duly authorized and validly issued, and are fully paid and
nonassessable, and are owned by the Company directly, or
indirectly through one of the other subsidiaries, free and
clear of any perfected security interest, or to the best
knowledge of such counsel after reasonable inquiry, any other
security interest, lien, adverse claim, equity or other
encumbrance.
(iii) The authorized and the outstanding capital
stock of the Company conforms in all (material) respects to
the description thereof contained in the Prospectus under the
captions "Capitalization" and "Description of Capital Stock."
Except as set forth in the Prospectus, to the
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best of such counsel's knowledge, the Company is not a party
to or bound by any outstanding options, warrants or similar
rights to subscribe for, or contractual obligations to issue,
sell, transfer or acquire, any of its capital stock or any
securities convertible into or exchangeable for any of such
capital stock.
(iv) All shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued
and sold by the Company hereunder, have been duly authorized
and validly issued, are fully paid and nonassessable and are
free of any preemptive or, to the best knowledge of such
counsel, similar rights that entitle or will entitle any
person to acquire any Shares upon the issuance thereof by the
Company, and no such rights will exist as of the Closing Date.
(v) All offers and sales of the Company's
securities have been made in compliance in all material
respects with the registration requirements of the Act and
other applicable state securities laws or regulations or
applicable exemptions therefrom.
(vi) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters
against payment therefor in accordance with the terms hereof,
(A) such Shares will be validly issued, fully paid and
nonassessable and free of any preemptive or, to the best
knowledge of such counsel, similar rights that entitle or will
entitle any person to acquire any Shares upon the issuance
thereof by the Company, and (B) good, valid and marketable
title to such Shares issued hereunder, free and clear of any
claim, encumbrance or defect in title of any nature (other
than any arising by or through the Underwriters), will pass to
each Underwriter that has purchased any portion of such Shares
in good faith and without knowledge of any such claim,
encumbrance or defect.
(vii) The form of certificates for the Shares
conforms in all material respects to the requirements of the
applicable corporate laws of the State of Indiana.
(viii) The Registration Statement has become
effective under the Act and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose are pending before or contemplated by the
Commission.
(ix) The Company has all requisite corporate power
and authority to enter into this Agreement and to issue, sell
and deliver the Shares to be sold by it to the Underwriters as
provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal
and binding agreement of the Company enforceable against the
Company in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other
similar laws relating to or affecting enforcement of
creditors' rights generally or by general equitable
principles, and except to the extent enforceability of the
provisions relating to indemnity and contribution for
liabilities under the Act may be limited by or under the Act,
or by public policy.
(x) Neither the Company nor any of the subsidiaries
is in violation of its certificate of incorporation or bylaws,
and, to the best knowledge of such counsel, the Company is not
in default in the performance of any obligation, agreement or
condition contained in any bond, indenture, note or other
evidence of indebtedness or any other agreement or obligation
of the Company, where the default would have, individually or
in the aggregate, a Material Adverse Effect.
(xi) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this
Agreement, compliance by the Company with all provisions
hereof nor consummation by the Company of the transactions
contemplated hereby (A) conflicts or will
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conflict with or constitutes or will constitute a breach of,
or a default under, the certificate of incorporation or bylaws
of the Company or any material agreement, indenture, lease or
other instrument known to such counsel to which the Company is
a party or by which any of its properties is bound, (B)
creates or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the
Company, or (C) violates or will result in any violation of
any existing law, statute, regulation, ruling (assuming
compliance with all applicable state securities and Blue Sky
laws), judgment, injunction, order or decree which is known to
such counsel and applicable to the Company or any of its
properties.
(xii) No consent, approval, authorization or
other order of, or registration or filing with, any court,
regulatory body, administrative agency or other governmental
body, agency or official is required on the part of the
Company (except such as have been obtained under the Act or
such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares)
for the valid issuance and sale of the Shares to the
Underwriters under this Agreement.
(xiii) The Registration Statement and the
Prospectus and any supplements or amendments thereto (except
for the financial statements and the notes thereto and the
schedules and other financial and statistical data included
therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the
requirements of the Act. Without limiting the generality of
the foregoing, any Rule 434 Prospectus conforms in all
material respects with the requirements of Rule 434 under the
Act.
(xiv) To the best knowledge of such counsel, (A)
there are no legal or governmental proceedings pending or
threatened against the Company or to which the Company or any
of its properties is subject, that are required to be
described in the Registration Statement or Prospectus (or any
amendment or supplement thereto) that are not described as
required therein, and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to
be described in the Registration Statement or the Prospectus
or to be filed as an exhibit to the Registration Statement
that are not described or filed as required, as the case may
be.
(xv) The properties described in the Prospectus as
held under lease by the Company are held under duly executed
leases.
(xvi) Such counsel has reviewed all agreements,
contracts, indentures, leases or other documents or
instruments described or referred to in the Registration
Statement and the Prospectus (other than routine contracts
entered into by the Company for the purchase of materials or
the sale of products entered into in the normal course of
business, although such counsel has reviewed the forms of such
routine contracts), and such agreements, contracts (and forms
of contracts), indentures, leases or other documents or
instruments are fairly summarized or disclosed in all material
respects therein, and filed as exhibits thereto as required,
and such counsel does not know of any agreements, contracts,
indentures, leases or other documents or instruments required
to be so summarized or disclosed or filed which have not been
so summarized or disclosed or filed.
(xvii) The descriptions in the Prospectus of
statutes, regulations or legal or governmental proceedings,
insofar as they purport to summarize certain of the provisions
thereof, are accurate and fairly present the information
required to be presented by the Act and the rules and
regulations thereunder.
(xviii) The Company is not an "investment
company" or an "affiliated person" of, or "promoter" or
"principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act of 1940, as
amended.
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In rendering such opinion, counsel may rely, to the extent
they deem such reliance proper, upon an opinion or opinions, each dated
the Closing Date, of other counsel as to matters governed by the laws
of jurisdictions other than the United States or the State of Indiana
provided that (1) each such local counsel is acceptable to you and your
counsel, (2) counsel shall state in their opinion that they believe
that they and you are justified in relying thereon, and (3) such
reliance is expressly authorized by each opinion so relied upon and a
copy of each such opinion is delivered to you and is in form and
substance satisfactory to you. In rendering such opinion, counsel may
rely, to the extent they deem such reliance proper, as to matters of
fact upon certificates of officers of the Company and of government
officials, provided that counsel shall state their belief that they and
you are justified in relying thereon. Copies of all such certificates
shall be furnished to you and your counsel on the Closing Date.
In rendering such opinion, in each case where such opinion is
qualified by "the best knowledge of such counsel" or "known to such
counsel", such counsel may rely as to matters of fact upon certificates
of executive and other officers and employees of the Company as you and
such counsel shall deem are appropriate and such other procedures as
you and such counsel shall mutually agree; provided, however, in each
such case, such counsel shall state that it has no knowledge contrary
to the information contained in such certificates or developed by such
procedures and knows of no reason why you should not reasonably rely
upon the information contained in such certificates or developed by
such procedures. Such counsel may state in such opinion that its
knowledge is limited to the knowledge of its attorneys and other
representatives and employees that have given attention to the
Company's matters in connection with the transactions contemplated by
this Agreement.
In addition to the opinion set forth above, such counsel shall state
that during the course of their participation in the preparation of the
Registration Statement and the Prospectus and the amendments thereto, nothing
has come to the attention of such counsel which has caused them to believe or
given them reason to believe that the Registration Statement or the Prospectus
or any amendment thereto (except for the financial statements and other
financial and statistical information contained therein or omitted therefrom as
to which no opinion need be expressed), at the date thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Registration Statement or the Prospectus as of the date of the opinion
(except as aforesaid), contains an untrue statement of a material fact or omits
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) You shall have received on the Closing Date (and the
Additional Closing Date, if any) an opinion of Baker & Daniels, as
special FDA counsel to the Company, substantially to the effect that
the FDA would not require the Company to file a New Drug Application
with respect to its Priority Pharmacy Division.
(e) You shall have received on the Closing Date (and the
Additional Closing, if any) an opinion of the General Counsel to BWI,
to the effect that the Company has such permits, licenses, franchises,
approvals, consents and authorizations of governmental or regulatory
authorities ("Permits"), as are necessary for the Company to own its
properties and to conduct its business in the manner described in the
Prospectus, except where the failure to have such Permits would not
individually or in the aggregate have a Material Adverse Effect; the
Company and its subsidiaries have performed all of their material
obligations with respect to such Permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation
or termination thereof or result in any other material impairment of
the rights of the holder of any such Permit; such Permits contain no
restrictions that are materially burdensome to the Company; and the
Company is not in violation of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or of any
decree of any court or governmental agency or body having jurisdiction
over the Company except where such violation does not and will not have
a Material Adverse Effect.
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(f) You shall have received on the Closing Date an opinion
of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., as counsel
for the Underwriters, dated the Closing Date with respect to the
issuance and sale of the Shares, the Registration Statement and other
related matters as you may reasonably request, and the Company and its
counsel shall have furnished to your counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(g) You shall have received letters addressed to you and
dated the date hereof and the Closing Date (and the Additional Closing
Date, if any) from (i) the firm of Price Waterhouse LLP, independent
certified public accountants, and (ii) the Chief Financial Officer of
the Company, substantially in the forms heretofore approved by you.
(h) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall be pending or, to the knowledge of the Company,
shall be threatened or contemplated by the Commission at or prior to
the Closing Date; (ii) no order suspending the effectiveness of the
Registration Statement or the qualification or registration of the
Shares under the securities or Blue Sky laws of any jurisdiction shall
be in effect and no proceeding for such purpose shall be pending or, to
the knowledge of the Company, threatened or contemplated by the
Commission or the authorities of any jurisdiction; (iii) any request
for additional information on the part of the staff of the Commission
or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities; (iv)
after the date hereof no amendment or supplement to the Registration
Statement or the Prospectus shall have been filed unless a copy thereof
was first submitted to you and you did not object thereto in good
faith; and (v) all of the representations and warranties of the Company
contained in this Agreement shall be true and correct in all respects
on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other
officers as are acceptable to you) to the effect set forth in this
Section 9(f) and in Sections 9(b) and 9(g) hereof.
(i) The Company shall not have failed in any material
respect at or prior to the Closing Date to have performed or complied
with any of its agreements herein contained and required to be
performed or complied with by it hereunder at or prior to the Closing
Date.
(j) The Company shall have furnished or caused to have been
furnished to you such further certificates and documents as you shall
have reasonably requested.
(k) At or prior to the Closing Date, you shall have received
the written commitment of each of the Company's officers and directors,
and BWI, not to (i) except for the Distribution by BWI, directly or
indirectly sell, offer or contract to sell, or otherwise dispose of or
transfer any shares of capital stock or securities of the Company
convertible into or exchangeable or exercisable for Class B Common
Stock (collectively, "Company Securities") owned or controlled by such
persons now or hereafter or any rights to purchase Company Securities,
for a period of 180 days after the date of the Prospectus first filed
pursuant to Rule 424(b) under the Act (the "Restriction Period"),
without your prior written consent, or (ii) exercise or seek to
exercise or effectuate in any manner any rights of any nature that such
persons have or may hereafter have to require the Company to register
under the Act any such person's sale, transfer or other disposition of
any Company Securities or other securities of the Company held by any
such persons, or to otherwise participate as a selling securityholder
in any manner in any registration effected by the Company under the
Act, including the registration to which this Agreement relates, before
the expiration of the Restriction Period.
(l) At or prior to the effective date of the Registration
Statement, you shall have received a letter from the Corporate
Financing Department of the NASD confirming that such Department has
determined to raise no objections with respect to the fairness or
reasonableness of the underwriting terms and arrangements of the
offering contemplated hereby.
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All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of the Additional
Closing Date of the conditions set forth in this Section 9, except that, if the
Additional Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (e) shall be dated as
of the Additional Closing Date and the opinions called for by paragraphs (c) and
(d) shall be revised to reflect the sale of Additional Shares.
If any of the conditions hereinabove provided for in this Section 9
shall not have been satisfied when and as required by this Agreement, this
Agreement may be terminated by you by notifying the Company of such termination
in writing or by telegram at or prior to such Closing Date, but you shall be
entitled to waive any of such conditions.
10. Effective Date of Agreement. This Agreement shall become
effective upon the later of (a) the execution and delivery hereof by the parties
hereto, and (b) release of notification of the effectiveness of the Registration
Statement by the Commission; provided, however, that the provisions of Sections
7, and 8 shall at all times be effective.
If any one or more of the Underwriters shall fail or refuse to purchase
Firm Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Firm Shares, each non-defaulting Underwriter
shall be obligated, severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I hereto bears to the aggregate number
of Firm Shares set forth opposite the names of all non-defaulting Underwriters
or in such other proportion as you may specify in the Agreement Among
Underwriters, to purchase the Firm Shares which such defaulting Underwriter or
Underwriters agreed, but failed or refused to purchase. If any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares and arrangements satisfactory
to you and the Company for the purchase of such Firm Shares are not made within
48 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
which does not result in termination of this Agreement, either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven (7) days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement.
11. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company by notice to the Company, if prior to the Closing
Date or the Additional Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, in your sole judgment,
(i) trading in the Company's Class B Common Stock shall have been suspended by
the Commission or the NASDAQ/NMS, (ii) trading in securities generally on the
New York Stock Exchange, American Stock Exchange or NASDAQ/NMS shall have been
suspended or materially limited, or minimum or maximum prices shall have been
generally established on such exchange, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by any such exchange or by order of
the Commission or any court or other governmental authority, (iii) a general
moratorium on commercial banking activities shall have been declared by either
federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions or
other material event the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
market the Shares or to enforce contracts for the sale of the Shares. Notice of
such cancellation shall be promptly given to the Company and its counsel by
telegraph, telecopy or telephone and shall be subsequently confirmed by letter.
22
<PAGE>
12. Information Furnished by the Underwriters. The Company
acknowledges that (i) the paragraph immediately following footnote (3) on the
cover page of the Prospectus, and (ii) the third and seventh paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you or on your behalf as such information is referred to in Sections
6(a), 6(b) and 9 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5 and 11
hereof, notice given pursuant to any of the provisions of this Agreement shall
be in writing and shall be delivered (i) if to the Company to the office of the
Company at 285 West Central Parkway, Suite 1704, Altamonte Springs, Florida
32714; Attention: Robert L. Myers (with copy to Baker & Daniels, 300 North
Meridian Street, Suite 2700, Indianapolis, Indiana 46204; Attention: James A.
Aschleman, Esq.), if to BWI, to the office of BWI at 10333 North Meridian
Street, Suite 300, Indianapolis, Indiana 46290. Attention: Michael D. McCormick,
or (iii) if to you, as Representative of the Underwriters, to Raymond James &
Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida 33716,
Attention: Craig A. Ascari, Managing Director (with copy to Greenberg Traurig
Hoffman Lipoff Rosen & Quentel, P.A., 1221 Brickell Avenue, Miami, Florida
33131; Attention: Rebecca R. Orand, Esq.).
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, and its respective directors and officers and
BWI.
14. Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of Florida without
reference to choice of law principles thereunder.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
This Agreement shall be effective when, but only when, at least one
counterpart hereof shall have been executed on behalf of each party hereto.
The Company, BWI and the Underwriters each hereby irrevocably waive any
right they may have to a trial by jury in respect to any claim based upon or
arising out of this Agreement or the transactions contemplated hereby.
23
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
PRIORITY HEALTHCARE CORPORATION
By:
------------------------------------
Robert L. Myers
President and Chief Executive Officer
BINDLEY WESTERN INDUSTRIES, INC.
By:
------------------------------------
William E. Bindley
President and Chief Executive Officer
CONFIRMED as of the date first above
mentioned, on behalf of the
Representatives and the other several
Underwriters named in Schedule I hereto.
By:
-------------------------------------
24
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Name Firm Shares
- --------------------------------------------------------------- -----------
<S> <C>
Raymond James & Associates, Inc................................
Wheat, First Securities, Inc...................................
- ---------------................................................
- ---------------................................................
- ---------------................................................
- ---------------................................................
TOTAL..........................................................
</TABLE>
<PAGE>
EXHIBIT 23-A
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 28, 1997, except as
to Note 1 and Note 11, which are as of August 25, 1997 and the last paragraph in
Note 10, which is as of October 1, 1997, relating to the consolidated financial
statements of Priority Healthcare Corporation, which appears in such Prospectus.
We also consent to the references to us under the headings "Experts" and
"Selected Consolidated Financial Data" in such Prospectus. However, it should be
noted that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data."
Price Waterhouse LLP
Indianapolis, Indiana
October 17, 1997
