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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-5118
SYSTEMED INC.
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(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 95-2544661
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
970 West 190th Street, Suite 400
Torrance, California 90502
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 538-5300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
8% Convertible Preferred Stock, $.001 par value
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(Title of Class)
10% Senior Secured Convertible Notes Due 2002
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation of S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
The aggregate market value of Registrant's voting stock held by
non-affiliates as of February 29, 1996 was $94,544,061 based on 21,610,071 such
shares outstanding on such date and a last sale price for the Common Stock on
such date of $4.375 as reported on the NASDAQ National Market System.
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the definitive proxy
statement for the Registrant's Annual Meeting of Stockholders to be held on May
24, 1996 and to be filed within 120 days after December 31, 1995.
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PART I
ITEM 1. BUSINESS
GENERAL
Substantially all of the business of Systemed Inc. and its subsidiaries
("Company") is derived from acting as an integrated, full service pharmacy
benefits manager serving corporations, insurers, and other benefit plan
sponsors ("Clients") throughout the United States. The Company's benefit
programs offer prescription drug benefits to approximately seven million
eligible employees, retirees and dependents ("Participants") who receive funded
benefits through their employers and other sponsors.
The Company is engaged, through its Newport Pharmaceuticals subsidiary
located in Costa Rica, in the distribution of pharmaceutical products in Latin
America, Mexico, South America and the Far East. This subsidiary represents
approximately 2 percent of consolidated net operating revenues. It is
anticipated that this business will be sold in the near future.
In March 1995, the Company entered into a definitive sales agreement
whereby the Company's Ireland operation was sold to the principal managers of
that operation. (See Note 10 of the Notes to Consolidated Financial Statements.)
The Company's principal executive office is located at 970 West 190th
Street, Suite 400, Torrance, California, 90502, and its telephone number is
(310) 538-5300.
The Private Litigation Reform Act of 1995 provides a "safe harbor" for
forward looking statements. Certain information included in this Annual Report
on Form 10-K is forward looking, such as information relating to competition,
pricing, trends in the industry and potential for growth. Investors are
cautioned that all forward looking statements involve risks and uncertainties,
including but not limited to the ability to obtain new or retain existing
accounts, the timely availability and acceptance of new products, the impact of
competitive pricing and products and other risks detailed in the Annual Report
and in the Company's other filings with the Securities and Exchange Commission.
Description of Pharmacy Benefits Management Business
The Company develops and administers client-specific pharmacy benefit
programs ("Programs") on behalf of more than 900 clients throughout the United
States. The Company's Programs are customized to meet the Clients' particular
benefits strategy, combining a number of managed care features to cost
effectively manage the Client's entire prescription benefits program. The
Programs combine mail service pharmacy features such as therapeutic alternative
programs, enhanced generic substitution and the convenience of home delivery,
with the features of retail network pharmacy such as automated claims
adjudication, real time electronic networking of retail pharmacies and card
programs. Clients can choose a Program which incorporates on-line electronic
claims processing, drug utilization review, and an electronic network linking
more than 67 percent of the retail pharmacies in the U. S. to the Company, as
well as features of a mail service pharmacy program. As an alternative, Clients
can choose either a mail service pharmacy program or network claims processing
program to combine with the Client's other existing prescription benefits.
Mail Service Pharmacy Programs
The Company's mail service pharmacy prescription benefit programs
("Mail Service Programs") are provided to Clients throughout the United States
through the Company's dispensing operations located in Des Moines, Iowa. The
Mail Service Programs offer the convenience of home delivery for maintenance,
chronic care drugs at significant cost savings when compared to amounts paid
under traditional prescription drug benefit plans which rely on retail
pharmacies as the primary source for dispensing covered prescriptions. Through
an emphasis on generic substitution and the use of less costly therapeutic
alternatives, the Mail Service Programs can provide Clients with cost savings of
10 to 35 percent over traditional prescription benefit plans.
Participants who start in these Mail Service Programs mail in their
prescription order requests, their prescriptions and a completed patient profile
questionnaire which sets forth their known drug allergies and current medical
condition. In most instances, the orders are accompanied by a co-payment, which
is determined by the specific terms of each participant's Mail Service Program
and can be a fixed dollar amount per prescription or may vary as a percentage of
the total cost of the prescription.
Clients provide the Company with updates of eligible Participants on a
regular basis. Upon receipt of the Participant's prescriptions and patient
profile questionnaire, all pertinent information is entered into the Company's
management information
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system to verify the Participant's eligibility, screen for any program
restrictions and conduct a predispensing screening for allergies and drug
interactions which may occur with the prescribed medication. If the
Participant's patient profile questionnaire indicates potential drug
interactions or allergic reactions, the Company's registered pharmacists, after
review of the problem, will consult with the prescribing physician if necessary.
The Company's sophisticated management information system integrates
the drug dispensing process with the prescription order entry function and
assists the Company in monitoring the progress of the prescriptions through each
stage of the dispensing process. Each filled prescription is inspected by the
Company's registered pharmacists who verify it against the physician's written
prescription and the prescription label. Required warning labels are affixed to
the prescription container and appropriate patient counseling and reorder
information is provided to the patient.
Serving the Cost Containment Needs of the Client
The Company's Mail Service Programs are designed to provide Clients
with the ability to better understand and control their maintenance prescription
drug benefit costs. Key features of the Mail Service Programs include:
o Customized Programs. Programs are customized to facilitate their
integration into the Client's existing health care benefits plan and to
meet the Client's particular benefits strategy. Incentives, such as
reduced or eliminated co-payments, encourage maximum utilization of a
Mail Service Program by eligible Participants. The Company's benefit
professionals regularly review Mail Service Program design and
utilization with each Client to evaluate opportunities for additional
cost savings.
o Prescription Dispensing Policies. The Mail Service Programs emphasize
the use of generic substitution and the use of therapeutic alternatives
to increase cost savings. The Company's management information system
alerts the Company's pharmacy staff to opportunities for generic and
therapeutic substitution at the time prescriptions are dispensed.
Higher order quantities reduce the number of repetitive dispensing and
administrative fees typically charged at retail pharmacy alternatives.
o Management Reports. The Company's management information system
provides Client benefits managers with monthly management reports
setting forth Mail Service Program activity and costs. The reports also
assist the Company's benefits professionals in identifying
opportunities for further cost savings.
o Drug Utilization Review System. A computerized patient profile
monitoring system allows the Company to conduct drug utilization review
on prescription drugs dispensed under the Mail Service Programs to
screen for potential abuse such as the duplication of medication from
multiple physicians and excessive dosages.
o Refill Notification. A refill notification system automatically
notifies prescribing physicians when Participants have used their last
refill, reducing the need for unnecessary physician visits.
Providing a Convenient Alternative to the Participant
The Company's Mail Service Programs also afford many benefits to
Participants, who appreciate convenience, safety, and confidentiality. These
benefits include:
o Home Delivery. The Company's Mail Service Programs offer the
convenience of home delivery--which is especially advantageous to
elderly or disabled Participants or those who live in rural areas who
are unable to travel to a retail pharmacy for their drug purchases.
o Higher Order Limits. As compared with typical retail drug stores, the
higher order limits offered by the Company's Mail Service Programs
provide a larger drug supply on hand and reduce the number of refill
requests otherwise necessary.
o Access to Confidential Professional Consultation. Participants are
provided with convenient and confidential access to the professional
advice of the Company's registered pharmacists through toll-free
telephone lines. The Company's toll-free lines are also available to
assist Participants requesting refills, seeking information on their
individual prescriptions or making other inquiries about their Mail
Service Program.
o Dispensing Standards. The Company's commitment to patient safety
requires that each prescription be reviewed by registered pharmacists
to ensure the accuracy and appropriateness of the prescription. Written
guidance from drug manufacturers regarding the proper use of the
medication is included with patient prescription orders.
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o Patient Monitoring System. The Company's computerized patient
monitoring system screens each new drug order against the patient's
known drug sensitivities and allergies. The system allows the Company's
staff pharmacists to analyze the patient's other known prescription
medications for potentially harmful drug interactions. If, in the
opinion of the screening pharmacist, a possibility exists of an adverse
reaction from the medication prescribed, the pharmacist contacts the
prescribing physician to discuss resolution of the problem.
o Refill Notification. The Company's Mail Service Programs include a
refill notification feature which automatically notifies the
prescribing physician when the last refill on a prescription has been
dispensed and requests written refill authorization. This feature
facilitates continuity in the supply of medication and eliminates the
cost and inconvenience of unnecessary physician refill appointments.
o Alternate Delivery Arrangements. Participants may request that their
prescriptions be delivered to alternate locations to coincide with
travel, sabbatical or retirement plans. This feature is particularly
appreciated by retirees who divide their time among several homes.
o Advantageous Claims Procedures. Participants in the Company's Mail
Service Programs are not required to submit claim forms to their
insurance provider prior to receiving a reimbursement for their
prescription purchases. Unlike traditional indemnity health plans, a
Participant in the Company's Mail Service Programs does not have to pay
for the prescription at the time it is filled and then await
reimbursement. Mail Service Programs may either require a small
co-payment or no co-payment at the time of purchase, with the Client or
a third-party payor paying the balance directly to the Company.
Dispensing Facilities:
In the fiscal year ended December 31, 1995, the Company filled
approximately 1.7 million prescriptions at its dispensing facility located in
Des Moines, Iowa. The facility, established in late 1992, features
state-of-the-art automation technology to further enhance the Company's
efficiency, quality control and customer responsiveness. The facility features a
computer imaging system which stores and retrieves prescription orders to
improve order accessibility and quality control, an automated robotic-enhanced
dispensing system which utilizes Baker counting and dispensing units and bar
coding to provide more accurate and efficient order filling, and an automated
conveyor belt and shipping manifest system to increase the speed, accuracy and
efficiency of order handling. In addition, the facility is equipped with a
state-of-the-art automated voice response unit for use by patients desiring to
make telephonic refill order requests. Continuing enhancements and expansion of
the facility's management information system have been designed to further
improve the order processing, inventory control, customer service and Client
reporting functions.
While the Company currently purchases most of its prescription drug
inventory needs from a single major wholesaler, it believes that multiple
sources exist for all of its inventory needs, and that the loss of its current
primary supplier would not materially adversely impact its business. The Company
considers its relationships with its suppliers to be excellent. The Company
maintains an appropriate inventory of drugs to ensure the timely filling of most
orders. In the infrequent case when the Company receives a prescription for a
drug which it does not have in inventory, the Company generally can obtain the
required item from a wholesaler within one or two business days.
Retail Pharmacy Claims Processing Programs
The Company's retail pharmacy claims processing programs ("Claims
Programs") are sponsor-specific benefit programs through which the Company
processes and adjudicates paper and electronic prescription drug claims
generated through a network of participating retail pharmacies. The pharmacy
network includes more than 67 percent of the retail pharmacies in the United
States, each of which contracts with the Company to provide prescription
dispensing at contracted rates.
The Company's Claims Programs utilize point-of-sale electronic data
transmission and automated claims adjudication to manage over $485 million in
claims paid annually, covering over 3.5 million eligible Participants
nationwide. Claims data is transmitted to the Company electronically from
pharmacies, or by mail from beneficiaries, for adjudication and payment in
accordance with the Client's particular plan design specifications.
The Claims Programs are designed to maximize the Client's control and
cost savings opportunities by combining a number of managed care program
features. The utilization control mechanisms and claims processing efficiencies
of these Programs, as well as the price reductions the Company negotiates from
retail pharmacies, reduce the benefit and administrative costs associated with
providing retail pharmacy-based prescription drug benefits coverage. Claims
Programs design features also encourage the dispensing of less expensive generic
drugs and formulary products and incorporate a review of pharmaceutical therapy
patterns. The Company estimates that the implementation of its Claims Programs
reduces the Clients' cost of providing retail-based prescription drug benefits
by 10 to 25 percent compared to coverage which does not include any cost
containment features.
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The Claims Programs are offered either on a stand-alone basis or are
integrated into major medical plans. In addition, as discussed below, the Claims
Programs are offered in conjunction with the Company's mail service pharmacy
programs as an integral part of an integrated prescription benefits program. See
"Fully Integrated Pharmacy Benefits Programs" below.
Description of the Retail Pharmacy Claims Processing Programs
The Company currently pays more than $485 million in net prescription
drug claims annually from its 30,000 square foot operations center located in
Independence, Ohio, a suburb of Cleveland. Under the Claims Programs, Clients
provide the Company with periodically updated Participant eligibility data,
which is integrated into the Company's management information system. The
Company is then able to process prescription claims submitted either directly by
eligible Participants by mail, or through the Company's nationwide network of
retail pharmacies utilizing point-of-sale electronic data submission.
Upon receipt of paper claim submissions, the claims are microfilmed for
cost effective storage and retrieval and entered into the Company's management
information system, which then accesses the Participant eligibility and Claims
Programs design databases to determine the appropriate adjudication criteria to
apply to the claims. Approximately 94 percent of claims submitted are fully
adjudicated through system-based processing. The remaining claims are forwarded
to various internal departments for special handling.
Once the Company's system determines the adjudication of the claim,
reimbursement checks and an Explanation of Benefits form are generated and
mailed to Participants. The Company strives to process 75 percent of all claims
within five calendar days of receipt and the remaining claims within ten
calendar days of their receipt, although during many periods of the year, the
turnaround time is faster.
The process of electronic point-of-sale submissions through the
Company's network of retail pharmacies is identical to the paper claims process
described above, except that claims data is received electronically by the
Company and processed automatically upon receipt by the Company's management
information system. The retail pharmacy network can access the Company's
processing system 24 hours a day, seven days a week.
For those Claims Programs which provide eligible Participants with a
mail service pharmacy feature through a third party provider, the Company
provides eligibility data directly to the mail service pharmacy, which then
submits claims data to the Company.
The Company provides its Clients with regular management reports
describing overall Claims Programs activity and utilization trends. The
Company's account executives regularly analyze Client utilization data and make
recommendations for additional opportunities for cost containment. In some
cases, the Company produces management reports which are designed to highlight
aberrant utilization patterns which may indicate that clinical intervention or
fraud and abuse detection may be warranted. The Company's management reports
include all Participant prescription drug utilization resulting from use of both
the retail network and mail service pharmacies.
The Company's Claims Programs are structured to provide Clients with
the ability to better understand and control the cost of their entire
pharmaceutical benefits program. Features of the Company's Claims Programs
include:
o Flexible Plan Design. Program designs are flexible to meet the Client's
particular benefits strategy and cost containment objectives. The
Claims Programs include incentives to encourage Participants to use the
most cost effective retail network or mail service dispensing location
and to purchase the least expensive drug available, including an
emphasis on generic substitution. Claims Programs are regularly
reviewed with Clients in order to target additional areas of savings.
o Comparison of Expected Results to Actual Activity. The Company
regularly analyzes a Claims Program's projected savings associated with
its plan design features, the use of the retail pharmacy network, and
mail service pharmacy activity relative to the costs experienced by the
Client. If deviations from savings expectations are evident, program
modifications are recommended.
o Management Reports. The Company's database enables the Company to
provide Clients with regular detailed management reports of claims
activity and costs. The reports are designed to illustrate program
results and opportunities for additional cost savings.
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o Commitment to Service. Although the primary objective of the Company's
Clients is to reduce pharmaceutical benefit costs, Clients also require
the accurate and rapid processing of claims. The Company produces a
variety of service level reports which provide Clients with an
assessment of critical claims processing success indicators.
Fully Integrated Pharmacy Benefits Programs
The Company's fully integrated prescription pharmacy programs combine
the cost savings and convenience of its mail service pharmacy programs with its
retail network-based claims administration programs. With the programs, Clients
can achieve cost savings of from 10 to 35 percent compared with traditional
pharmacy benefit programs which lack managed care cost controls.
The integrated programs offer a variety of additional benefits which
are designed to provide comprehensive plan design and maximize cost savings and
control:
o Convenient, user-friendly programs with a single point of service and
accountability to ensure rapid problem resolution.
o Coordination of dispensing data collection and analysis from all
aspects of the benefits programs, whether generated from retail network
pharmacies or the Company's mail service pharmacy. This ensures ready
access to all information necessary to monitor program activity and
develop further cost saving strategies without relying on the
coordination among third party benefits providers.
o A drug utilization review system that detects potential adverse drug
interactions, allergies, overuse and abuse in all areas of the
prescription benefits system, whether the drugs are dispensed through
mail service or through a retail network pharmacy.
o Prescription dispensing policies that encourage the use of less
expensive, therapeutically equivalent generic or brand name drugs
regardless of the dispensing location.
o Automated on-line administration of retail pharmacy prescription claims
that emphasizes accurate claims review, rapid turn around time,
informative utilization data and a reduction in manual review
decisions.
o Regular and comprehensive management reports to provide the Client's
benefits manager with an understanding of usage trends and costs for
the entire pharmacy benefits program.
The Company believes that clients find that the Company's benefit
programs afford many advantages over programs which use multiple pharmacy
benefits providers. The fully integrated plan designs, comprehensive data
collection and analysis, single point of service and accountability and improved
cost controls achieved by the Company's programs yield maximum cost savings
without sacrificing the quality of care. Through the programs, Clients can
directly influence the prescription benefit habits of their beneficiaries while
maintaining or improving therapeutic outcomes.
Clinical Products and Services
The Company has or is in the process of developing clinical products
and services which can be incorporated into the mail service pharmacy or retail
pharmacy claims processing activities in various forms. The Company's clinical
products include Drug Formulary Management, Drug Utilization Evaluation,
Therapeutic Alternatives, Shared Savings and Disease State Management programs.
All of the clinical programs are aimed at controlling drug use through
education and evaluation, with the goal of optimizing drug therapy.
Drug Formulary Management programs consist of a list of drugs and a process
that ensures appropriate drug use and cost effectiveness. The formulary is a
continually revised compilation of pharmaceuticals which reflects the current
clinical judgment of prescribers. The selection process is overseen by an
expert panel of medical and pharmacological professionals, comprising a
Pharmacy and Therapeutics Committee, which ensures that optimal medications are
selected for patient care.
Drug Utilization Evaluation is a review process that is conducted on a
retrospective, concurrent and prospective basis to evaluate and analyze
physician, pharmacist and patient prescription patterns and compliance.
Systemed has enstablished a retrospective Drug Utilization Evaluation product
that reviews pharmacy claims data and identifies areas where changes in drug
treatment can therapeutically and financially benefit the patient and the payor.
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Therapeutic Alternative programs provide patients with the most appropriate and
cost effective medication. It allows for the recommendation of a drug
substitution where critical analysis has identified optimal alternatives for
greater efficacy and cost effectiveness in the same therapeutic class or drug
category as the originally prescribed medication. These programs are supported
by Systemed's independence from drug manufacturers, which enables it to provide
the best selection of pharmaceuticals from a wide range of drug companies.
Shared Savings programs encourage Systemed to implement drug utilization
evaluation procedures that generate prescription cost savings, which are shared
with the client.
Disease State Management programs focus on effecting a positive, cost efficient
outcome for specific disease entities. From a clinical perspective, this means
achieving a quality outcome by proactively providing patient education and
monitoring patient behavior. From a financial perspective, these programs
decrease customers' overall health care costs by attempting to minimize
additional physician and hospitalization expenses which could result from
patient non-compliance.
Customers
The Company's Programs are presently provided to Clients comprised
principally of medium sized and smaller corporations. The Company directs its
marketing efforts principally to Clients whose current prescription drug
benefits are supported by major medical insurance plans. The Company believes
that it is this segment which is most likely to value the plan design
consultative role and commitment to customer service and responsiveness which it
strives to provide.
The Company enters into written agreements with its mail service
pharmacy Clients, which can consist of either an employer corporation, its
sponsoring insurer or another benefits administrator of the corporation's
health benefits. The agreements may be subject to annual renewal and may be
terminated by either party after a brief notification period. They do not
preclude the Client from simultaneously using other mail service drug programs
for the same Participants, although this is usually not done. The Company has
agreements with two mail service clients that accounted for approximately 30
percent of the Company's revenues in 1995.
In 1995, the Company processed and paid more than $485 million in net
prescription claims on behalf of administrators or plan sponsors covering over
3.5 million Participants nationwide. The Company enters into written agreements
for claims processing services with either the employer corporation, its
sponsoring insurer, or a medical benefits administrator of the plan sponsor's
health benefits. The claims processing agreements generally cover one to three
year terms and are normally subject to termination by either party following
brief notification periods.
Marketing & Sales
The Company's pharmacy benefit programs are marketed nationally
through the Company's internal sales organization of experienced benefits
professionals and a marketing support staff.
A significant portion of new accounts are generated by marketing
Programs through existing relationships with insurers, third party benefits
administrators and other independent benefits consultants, who offer the
Programs, sometimes on a commission basis, to their commercial customers as part
of an overall benefits package. The remainder of new accounts are generated by
direct solicitation of corporate accounts, usually through telemarketing, direct
mail marketing, trade shows and referrals.
Revenues of the Company depend upon the extent to which its Programs
are utilized by the Clients' eligible Participants. Accordingly, the Company's
benefits professionals work with Client benefit managers on an ongoing basis
continually to assess utilization levels in the Programs and, where necessary,
to incorporate additional incentives, sometimes in the form of more advantageous
Program terms, to promote increased utilization among Participants.
Government Regulation
There are extensive state and federal laws applicable to the dispensing
of prescription drugs. Since sanctions may be imposed for violation of these
laws, compliance is a significant operational requirement for the Company.
In general, the Company's mail service pharmacy operations are
regulated by the laws of Iowa, where the Company maintains its dispensing
facilities and where it is licensed as a pharmacy. Iowa has detailed laws
governing a wide range of matters relating to the operation of pharmacies, and
the Company believes that it is in substantial compliance with these laws. These
laws are administered by the Iowa Board of Pharmacy, which is empowered to
impose sanctions, including license revocation for non-compliance. The laws
include, among others, provisions requiring pharmacies and pharmacists to be
licensed, as well as provisions specifying who may write and dispense
prescriptions, how prescriptions must be filled, what records must be
maintained, and when generic drugs may be substituted.
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Most of the other states into which the Company mails pharmaceuticals
also have laws governing the operation of pharmacies and the dispensing of
prescription drugs in their states. In many cases, these laws include provisions
which purport to regulate out-of-state mail service pharmacies that mail drugs
into the state. The regulations are administered by an administrative body in
each state (typically, a pharmacy board) which is empowered to impose sanctions,
which may include license revocation for non-compliance. In those states where
they exist, state laws regulating out-of-state pharmacies essentially can be
divided into three categories: "disclosure laws," "licensing laws," and laws
prohibiting the mail service delivery of pharmaceuticals.
States with disclosure laws generally require that out-of-state
pharmacies register with the local board of pharmacy, follow certain procedures
and make certain disclosures, but generally permit the mail service pharmacy to
operate in accordance with the laws of the state in which the pharmacy
operations are located.
States with licensing laws generally impose the same licensing
requirements on out-of-state pharmacies as are applicable to in-state
pharmacies. The Company understands that at least one state has adopted such
laws by statute or regulation and that the pharmacy board staffs in at least one
additional state interpret their licensing laws to cover out-of-state
pharmacies. Should enforcement of any of these laws be attempted, however, the
Company believes that these laws would be subject to challenge under the
Commerce Clause of the United States Constitution, and the Company would
consider formal action challenging the specific law or regulation where
compliance with the law or regulation is unduly burdensome or impractical. In
the event that licensing or disclosure laws are found to be enforceable against
the Company notwithstanding any challenges on Constitutional grounds, the
Company believes that it could substantially comply with these laws, although
such compliance might, in some cases, be expensive and burdensome on its
operations.
In addition to the above-described laws, which directly apply to the
Company, a number of states have also enacted laws and regulations which purport
to limit some of the financial incentives available to benefits plan sponsors
that offer mail service pharmacy programs. This so-called "freedom-of-choice"
legislation generally prohibits a benefits plan sponsor from requiring its
Participants to purchase prescription drugs from a single source or from
furnishing financial incentives to Participants to do so. The U. S. Department
of Labor has opined that in some instances, freedom-of-choice laws applicable to
self-funded sponsors are preempted by the Employee Retirement Income Security
Act of 1974 (ERISA). The Attorney General in one state has reached a similar
conclusion and raised additional constitutional issues. Finally, the Bureau of
Competition of the Federal Trade Commission has stated that such legislation may
reduce competition and raise prices to consumers, to the extent it impedes or
prevents benefit plan sponsors from offering programs that take advantage of the
economies of scale associated with single sourcing of pharmaceuticals from a
mail service pharmacy.
To the Company's knowledge, there have been no formal administrative or
judicial efforts to enforce any freedom-of-choice laws against the Company's
Clients since the Company's acquisition of its mail service pharmacy business in
1987, and the Company believes that any future attempt to enforce these laws
against self-funded Clients would be subject to challenge under the Supremacy
Clause of the United States Constitution. However, the enforcement of such laws
against Clients of the Company which are not self-funded could, to the extent
that they limit the financial incentives available under the Company's Programs,
render the Programs less desirable to those Clients and their Participants and
thus adversely affect the Company's revenues.
The Company is aware that various national and state retail pharmacy
associations and some boards of pharmacy are attempting to further promote laws
and regulations designed to restrict the activities of mail service pharmacies.
The Company attempts to monitor these regulatory issues and supports trade
associations which lobby on the federal and state levels on behalf of the mail
service pharmacy industry.
In addition to the above-described laws and regulations, there are
federal statutes and regulations which establish standards for all pharmacies
and pharmacists concerning the labeling, packaging, advertising, and
adulteration of prescription drugs and the dispensing of "controlled" substances
and prescription drugs. The Federal Trade Commission and the United States
Postal Service regulations require mail order sellers to engage in truthful
advertising, to stock a reasonable supply of drugs, fill mail orders within
thirty days and, if that is impossible, to inform the consumer of his or her
right to a refund. The Company believes that it is in substantial compliance
with the above requirements. Further, the United States Postal Service has
statutory authority to restrict the transmission through the mails of drugs and
medicines to a degree that could have an adverse effect on the Company's mail
service operations. To date, the United States Postal Service has not exercised
this statutory authority.
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Competition
The sector of the prescription drug benefit business in which the
Company competes is highly competitive. The Company's principal competitors in
this segment are other mail service pharmacy companies, including Merck/Medco
Caremark, Express Pharmacy Services, Value Health, and other prescription drug
benefit providers/processors, including PCS, Diversified Pharmaceutical
Services, and a number of smaller companies. Many of these competitors have
greater financial, marketing and other resources than the Company, and no
assurance can be given that such competitors will not be able to design and
offer programs or services which are different than those of the Company, or
which are offered at lower price levels.
The Company competes for the business of both Clients and individual
Participants. The principal competitive factors, with respect to Clients, are
price and service levels, especially to the extent a prescription drug benefit
provider's services yield lower health care costs for the Client, as well as the
provider's reputation and industry contacts. These factors affect not only the
industry's competition for new Clients, but also affect the ability of a
pharmacy benefits provider to retain existing Clients.
With respect to Participants, the Company competes against other
prescription drug benefit programs, retail drug stores, and to a lesser extent,
with physician dispensing programs. The principal competitive factors relating
to competition for Participants are price, convenience and service features. In
this respect, the Company works closely with its Clients in an effort to provide
incentives for increased utilization of the Programs by Participants.
During the latter part of 1995, in competitive bid situations, the
Company encountered certain changes in the market place. The Company began to
experience a rise in large clients requesting that they participate to some
extent in or retain drug purchase and market performance discounts. In addition,
certain dominant pharmacy benefit management companies have been aggressively
discounting their products and services to gain additional market share. These
developments are consistent with current trends seen throughout the pharmacy
benefit management industry and are expected to continue.
Recent Events
Recently, the Company was informed that certain Clients will not be
renewing their contracts with the Company in 1996 due to competitive pricing,
the effect of which will negatively impact future quarterly revenues by
approximately $6 to $8 million for fiscal 1996. Further, it is anticipated that
the pharmacy benefits management industry will continue to experience ongoing
competitive pricing pressure. The Company regularly bids on customer accounts of
various sizes, with its success ratio varying based upon a multitude of factors
and market forces then in effect. The Company was recently informed that it was
not awarded the business from a sizeable, potential account that would have
commenced mid-1996. The Company continues to maintain its policy of pricing its
bids at a profit, therefore electing not to buy certain accounts in the
marketplace.
Insurance
The dispensing of pharmaceutical and other products may subject the
Company to claims for personal injuries, including those resulting from
dispensing errors, package tampering and product defects. The Company carries
the type of insurance customary in the industry, including general liability
(which integrates product liability coverage) and professional liability
insurance. The Company believes that its insurance protection is appropriate for
its present business operations. Although wholesale and retail pharmacies in
general have not, as yet, experienced any unusual or extraordinary difficulty in
obtaining insurance at an affordable cost, there can be no assurance that the
Company will be able to maintain its coverage in the future or, if it does, that
the amount of such coverage would be sufficient to cover any potential claims.
Pharmaceuticals Distribution
The Company is engaged, through its Newport Pharmaceuticals subsidiary
located in Costa Rica, in the distribution of pharmaceutical products in Latin
America, Mexico, South America, and the Far East. This subsidiary generates
approximately 2 percent of consolidated net operating revenues. It is
anticipated that this business will be sold in the near future.
In December 1992, the Company announced its intent to sell Newport
Synthesis, Ltd. (NSL), its pharmaceutical compound and fine chemical
manufacturing operations located in Ireland. Accordingly, the Company's
consolidated financial statements for the years ended December 1994 and 1993
reflect those operations as discontinued. In March 1995, the Company entered
into a definitive sales agreement whereby the Company's Ireland operation was
sold to the principal managers of that operation.
9
<PAGE> 10
The international operations of the Company are subject to certain
risks which are inherent in conducting business in foreign countries, including
possible nationalization or expropriation, price and exchange controls,
limitations on foreign participation in local enterprises and other restrictive
governmental actions. The Company does not carry insurance against such risks.
In addition, changes in the relative value of currencies occur from time to time
and their effects may be materially favorable or unfavorable to the Company's
financial results.
Employees
As of December 31, 1995, the Company had 574 full and part-time
employees, consisting of 313 employees at its Des Moines, Iowa facility, 134
employees at its Independence, Ohio facility, 92 employees at the wholly-owned
subsidiary in Costa Rica, 18 employees at its Torrance, California executive
offices and 17 employees at its Illinois and Connecticut offices. In the opinion
of management, the Company enjoys a good relationship with its employees and
provides them with benefits which are competitive in the marketplace.
ITEM 2. PROPERTIES
The principal operating properties of the Company are as follows:
<TABLE>
<CAPTION>
Approximate Ownership or
Area Expiration
Location Use (square Feet) of Leases
- -------- --- ------------- ---------
<S> <C> <C> <C>
Torrance,
California Principal Executive offices 7,400 November 1999
Des Moines, Mail service
Iowa dispensing operations 56,000 May 2002
Independence, Claims processing and
Ohio retail network operations 30,000 June 1997
San Jose, Production facility, and
Costa Rica administrative offices of Newport
Pharmaceuticals de Costa Rica 17,000 October 1996
Glastonbury,
Connecticut Clinical offices 3,300 August 1998
Itasca,
Illinois Sales and Marketing offices 4,300 April 1997
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In August of 1994, a shareholder of the Company filed a class action
lawsuit in the Court of Chancery of the State of Delaware against the Company,
certain of its officers and its Board of Directors. The suit alleged unfair
dealing and breach of fiduciary duty arising from the adoption of an amendment
to the Company's Bylaws and the adoption of a Stockholders' Rights Plan by the
Company. The suit sought to order the defendants to carry out their fiduciary
duties of cooperating fully with any group having a bona fide interest in the
acquisition of the Company, to rescind the aforementioned amendment, enjoin the
adoption of any future "Poison Pill" amendment and unspecified monetary damages,
costs and attorneys fees. At fiscal year end, there had been no plaintiff
activity regarding this suit and, on March 7, 1996, the court approved an
agreement of the parties to dismiss this action without prejudice.
In December 1994, Biomed Healthcare, Inc., a Nevada corporation, filed
a lawsuit in Los Angeles County Superior Court in the State of California
against the Company and certain officers. The suit alleges breach of contract,
fraud, breach of the covenant of good faith and unfair business practices. The
suit was filed by a proposed purchaser of the Company's Irish and Costa Rican
subsidiaries. The suit seeks damages in the alleged amount of $2,000,000,
unspecified punitive damages, an injunction enjoining and prohibiting the
Company to close, sell or materially encumber the Irish or Costa Rican
subsidiaries. In early March 1995, the Company filed a Demurrer to the lawsuit.
In response to such, the Court has ruled in favor of the Company as to several
of the causes of action including the injunction against the closure, sale or
encumbrance of the foreign subsidiaries. The Company and its legal counsel
believe that it has meritorious defenses to the remaining causes of action and
that the resultant liability, if any, should not have a material adverse effect
on the financial position of the Company and its results of operations.
10
<PAGE> 11
In November 1995, four retail pharmacies filed a complaint on behalf of
all retail pharmacies in Georgia similarly situated in the Superior Court of
Chatham County, state of Georgia against Blue Cross and Blue Shield of Georgia,
Inc., and Systemed Pharmacy Inc., a subsidiary of the Company. The pharmacies
allege that prescription discounts were improperly awarded to patients under a
"pharmacy discount program". The suit sought equitable relief including a
Temporary Restraining Order and an Injunction and alleges fraud, tortious
interference with contractual relations and Georgia Racketeer Influenced and
Corrupt Organization Act violations. The suit seeks punitive damages of $12
million and compensatory damages established at trial. In December 1995, the
court denied the motion for a Temporary Restraining Order. The Company and its
legal counsel believe it has meritorious defenses to this action and that the
resultant liability, if any, should not have a material adverse effect on the
financial position of the Company and its results of operations.
In addition, certain other claims, suits and complaints, which arise in
the ordinary course of business, have been filed or are pending against the
Company. Management believes that these matters, and the matters discussed
above, are either adequately reserved for, covered by insurance, or would not
have a material adverse effect on the financial position of the Company and its
results of operations if disposed of unfavorably.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT:
The executive officers of the Company are as follows. All officers
serve at the discretion of the Board of Directors:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Sam Westover President and Chief Executive Officer
Perry Cohen Senior Vice President, Sales
Kenneth J. Kay Senior Vice President, Finance and Administration, and Chief Financial Officer
Robert T. Nishimura Senior Vice President, Chief Information Officer, of Systemed Pharmacy Inc.
James J. Brehany Vice President, Mail Service Operations, of Systemed Pharmacy Inc.
Paul H. Hayase Vice President, General Counsel and Human Resources, and Secretary
Dennis K. Tsuyuki Vice President, Controller
</TABLE>
Sam Westover, 40, has served as President and Chief Executive Officer
of the Company since August 1993, and as a Director of the Company since July
1992. From January 1993, until joining the Company, Mr. Westover served as Chief
Financial Officer and Senior Vice President, Corporate Financial Services of
Wellpoint Health Networks, the largest publicly traded managed health care
company in the United States. Prior to joining Wellpoint, Mr. Westover served as
Chief Financial Officer and Senior Vice President, Corporate Financial Services
of Blue Cross of California, a position to which he was named in May 1990.
Perry Cohen, 41, has served as President and Chief Operating Officer of
INSURx, Inc. (now known as Systemed Pharmacy Inc.) from January to December
1994, as Senior Vice President of the Company's wholesale market unit since
January 1995 and as Senior Vice President, Sales of Systemed Pharmacy Inc. from
January 1996. Mr. Cohen served as Chief Operating Officer of Aetna Pharmacy
Management from November 1990, until joining the Company, where he was
responsible for Pharmacy Benefit Programs for the 13 million lives covered by
Aetna Health Plans. From August 1984, to October 1990, Mr. Cohen served as Vice
President, Pharmacy Services of MaxiCare Health Plans, Inc., a multi-regional
health maintenance organization. Mr. Cohen is a past President of the Academy of
Managed Care Pharmacy and a graduate of the University of the Pacific School of
Pharmacy with a Doctor of Pharmacy degree.
11
<PAGE> 12
Kenneth J. Kay, 40, has served as Senior Vice President, Finance and
Administration, and Chief Financial Officer of the Company since July 1994.
Previously Mr. Kay served, from 1990 until 1994, as Group Vice President and
Senior Vice President-Finance and Administration at Ameron, Inc., a $450 million
NYSE multi-national manufacturing company. From 1988 to 1990 he served as
President, CEO and a member of the Board of Directors of Bishop Incorporated, a
$15 million manufacturer and distributor of engineering design products and
computer workstation systems. Mr. Kay is a Certified Public Accountant and holds
an MBA in finance and marketing.
Robert T. Nishimura, 55, has served as Senior Vice President, Chief
Information Officer, of Systemed Pharmacy Inc. since September 1995. Previously,
Mr. Nishimura was a Senior Network Design Consultant for Isuzu Motors of America
from 1994 to September 1995 and Senior Technical Management Consultant with Taco
Bell Corporation from 1993 to September 1995. From 1991 to 1993, Mr. Nishimura
was Director of Management Information Systems at Knapp Communications
Corporation. Mr. Nishimura was Vice President of Management Information Systems
at First Interstate Bank from 1984 to 1991.
James J. Brehany, 41, has served as Vice President, Mail Service
Operations, of Systemed Pharmacy Inc. since September 1995 and previously served
as acting General Counsel of the Company from September 1994 to August 1995, and
as Director, Pharmaceutical Purchasing from March 1994 to September 1994.
Previously, Mr. Brehany was a Pharmacy Consultant for the California Physician
Management Group from 1979 to 1994. Mr. Brehany was also a Pharmacy Manager for
FHP, an HMO, from 1990 to 1994, and holds Doctor of Pharmacy and Juris Doctor
degrees.
Paul H. Hayase, 41, has served as Vice President, General Counsel and
Human Resources, and Secretary since August 1995. From November 1993 to August
1995, Mr. Hayase was Senior Counsel at Ralphs Grocery Company. Mr. Hayase served
as Senior Vice President, General Counsel at Knapp Communications Corporation
from January 1985 to November 1993. Mr. Hayase has practiced law since 1980.
Dennis K. Tsuyuki, 43, has served as Vice President, Controller, since
August 1994. Previously, Mr. Tsuyuki was Senior Vice President, Finance at
Kennedy-Wilson Inc., a real estate broker and investment banking company from
June 1994 to August 1994. From 1990 to April 1994, Mr. Tsuyuki was with Ameron,
Inc. and served as Director of Information Systems.
12
<PAGE> 13
PART II
ITEM 5. MARKET REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock is quoted on the NASDAQ National Market
System under the symbol "SYSM". The following table sets forth the high and low
sales prices of the Common Stock as reported on the NASDAQ National Market
System for the calendar quarters and years indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
----
First Quarter $8 $6
Second Quarter 7-1/2 6-1/8
Third Quarter 7-1/4 5-3/4
Fourth Quarter 6-7/8 3-7/8
------ ------
Year $8 $3-7/8
1994
----
First Quarter $6-1/8 $3-7/8
Second Quarter 6-3/4 4-7/8
Third Quarter 9 5-1/4
Fourth Quarter 9-1/4 5
------ ------
Year $9-1/4 $3-7/8
</TABLE>
On February 29, 1996, there were 4,321 holders of record of the
Company's Common Stock.
Dividend Policy
The Company has not paid cash dividends on its Common Stock, and
management does not anticipate that it will do so in the foreseeable future. The
present policy of the Board of Directors is to retain earnings to provide funds
for use in the operation and expansion of the Company's businesses. The
Indenture covering the Company's outstanding Notes currently restricts the
payment of dividends. (See Note 5 of Notes to Consolidated Financial
Statements.)
The Company's class of 8 percent Convertible Preferred Stock bears
dividends at the rate of $0.80 per share per annum, payable annually to holders
of record, and has full priority over the Company's Common Stock with respect to
the payment of dividends. Dividends on the Preferred Stock are cumulative and
are payable only from legally available assets, as and when declared by the
Board of Directors. The Company has declared and paid dividends on all
outstanding shares of its Preferred Stock for each of its fiscal years ended
since April 30, 1982, and has accrued its Preferred Stock dividend requirement
for the fiscal year ended December 31, 1995.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company and
its subsidiaries as of and for each of the five years, as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations data:
Net operating revenues $152,384 $141,965 $134,235 $117,500 $89,856
Operating income (loss) 4,598 3,648 (5,149) 3,299 1,413
Income (loss) from continuing operations
before discontinued operations
and extraordinary loss 4,290 3,079 (5,746) 2,350 (339)
Income (loss) from discontinued operations,
net of income taxes - - - (4,000) 462
Extraordinary loss - - - (368) -
Net income (loss) 4,290 3,079 (5,746) (2,018) 123
Per common share:
Income (loss) from continuing operations .19 .14 (.28) .11 (.02)
Income (loss) from discontinued operations - - - (.18) .03
Extraordinary loss - - - (.02) -
Net income (loss) .19 .14 (.28) (.09) .01
Balance sheet data:
Working capital $ 27,912 $ 26,577 $ 21,675 $ 25,208 $26,327
Total assets 57,970 53,331 48,044 53,913 48,411
Long-term debt, less current portion 6,300 6,320 6,492 7,057 9,659
Stockholders' equity 39,888 33,575 28,965 34,435 29,375
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Health Care Reform
Employers, insurers, and government payor programs are continuing to
attempt to contain health care costs by limiting the price or reimbursement
levels of medical products and services or establishing managed care programs to
increase efficiency in medical care procurement and utilization. The Company
believes it should benefit from the increasing use of managed care programs
since it offers pharmacy benefits management services which are easily
adaptable into a variety of managed care programs and provide efficiencies and
cost savings in comparison to traditional indemnity health insurance programs
where insureds obtain prescriptions from local pharmacies at retail prices.
However, the announcement and progress of proposals to restructure the health
care system by the Federal government, industry consolidation and
restructurings resulting from actual and anticipated changes in the U.S.
health care delivery system, and the investment community's reaction thereto,
create an environment which could produce significant volatility in the trading
and market price of the Company's Common Stock.
Results of Operations
The following table summarizes, by segment, the operations of the
Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
(Amounts in 000's) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net operating revenues:
Pharmacy benefits management $148,555 $138,499 $130,401
Other 3,829 3,466 3,834
-------- -------- --------
Total net operating revenues $152,384 $141,965 $134,235
======== ======== ========
Operating income (loss):
Pharmacy benefits management $ 7,999 $ 8,247 $ 1,964
Corporate and other (3,401) (4,599) (2,213)
Restructuring and other charges - - (4,900)
-------- -------- --------
Total operating income (loss) 4,598 3,648 (5,149)
Non-operating expenses (9) (227) (574)
Provision for income taxes (299) (342) (23)
-------- -------- --------
Net income (loss) $ 4,290 $ 3,079 $ (5,746)
======== ======== ========
</TABLE>
15
<PAGE> 16
The following table sets forth certain financial data as a percentage
of consolidated net operating revenues of the Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Net operating revenues:
Pharmacy benefits management 97.5% 97.6% 97.1%
Other 2.5 2.4 2.9
----- ----- -----
Total net operating revenues 100.0 100.0 100.0
Cost of sales 83.3 82.7 87.8
Selling, marketing and customer service 8.0 6.4 6.6
General and administrative 5.7 8.3 5.8
Restructuring and other charges - - 3.7
----- ----- -----
Operating income (loss) 3.0 2.6 (3.9)
Non-operating expenses - (.2) (.4)
----- ----- -----
Income (loss) before
provision for income taxes 3.0 2.4 (4.3)
Provision for income taxes (.2) (.2) -
----- ----- -----
Net income (loss) 2.8% 2.2% (4.3)%
===== ===== =====
</TABLE>
Year ended December 31, 1995 compared with 1994
Consolidated net operating revenues for the year ended December 31,
1995 increased 7 percent or $10.4 million over the prior year. The Company's
consolidated operating income for 1995 was $4,598,000, which exceeded the
comparable 1994 amount by 26 percent. The Company had consolidated net income of
$4,290,000 in 1995, reflecting an increase of over 39 percent in relation to
last year's net income of $3,079,000.
The pharmacy benefits management revenue, which represents 98
percent of consolidated net operating revenues, increased 7 percent over the
prior year. This increase was primarily generated from a rise in mail service
pharmacy revenues of 7 percent due to an increase in prescriptions dispensed of
8 percent offset by a slight decline in the average revenue per prescription
processed. This higher volume of prescriptions was the result of the addition of
new Clients at the beginning of the year combined with increased utilization of
mail service pharmacy benefits from existing accounts. The nominal decline in
the average revenue per prescription was attributable to the impact of
competitive pricing pressure and changes in product mix. Claims processing
revenues for 1995 exceeded the prior year by 6 percent as a result of a 28
percent increase in the volume of claims offset by a reduction in the average
revenue per transaction processed. This change in revenues occurred primarily as
a result of a large portion of our customer base converting the majority of its
eligible members to lower-cost electronic claims processing products versus
traditional paper claims processing utilized in the past. Additionally, several
accounts were repriced downward during the year.
Other operating revenues reflect the sales from the Company's
pharmaceutical distribution subsidiary, Newport Pharmaceuticals de Costa Rica.
The Company believes its pharmacy benefits management segment offers greater
revenue growth potential and anticipates disposing of this subsidiary in the
near future.
Cost of sales as a percentage of consolidated net operating revenues
for 1995 increased slightly in relation to the prior year. The current year's
modest rise in the cost of sales percentage resulted mainly from one-time
start up costs associated with implementation of the new proprietary
prescription processing system and new automated dispensing technology at the
Iowa mail service pharmacy in the fourth quarter. Additionally, administrative
costs associated with the implementation of the therapeutic alternatives
programs, an increase in branded drug costs and continued pricing pressure
also contributed to the reduction in gross profit margin. The Company believes
that its operations are performing at levels which are competitive with
industry norms. The Company has met with moderate success in controlling its
cost of sales through aggressive drug procurement strategies, which include
higher purchase and market performance discounts, integration of operating
activities, on-going process improvements at both the mail service pharmacy
and claims processing operations and the Company's quality management program
started earlier this year. Nevertheless, management anticipates that the
pharmacy benefits management industry will continue to experience
competitive pricing pressure consistent with what has been experienced over
the last year, which could lead to an erosion of the gross profit margin in the
future. Therefore, the Company intends to continue its on-going process
improvement and quality management activities, pursue additional strategies
for the reduction of drug costs, leverage its new automated dispensing
technology and further invest in higher margin clinical and knowledge-based
products, in order to offset the impact of competition on pricing for
traditional product offerings.
Selling, marketing and customer service expenses for the current year
increased 32 percent over 1994. In the prior year, the Company benefited from
lower costs attained by the restructuring of its selling, marketing and customer
service activities in the first
16
<PAGE> 17
quarter. The initial aspects of this restructuring plan, which included staff
reductions, consolidation of selected activities and relocation of certain
functions, lowered selling, marketing and customer service costs below normal
levels. As this restructuring activity progressed further into 1994, the Company
began to upgrade staffing and facilities, and invest in new marketing and
product literature and information systems development designed to capitalize
on new marketing and customer service capabilities. In 1995, the Company
continued to add to the new marketing and sales organizations, as well as
further the development of advanced clinical and knowledge-based products for
the healthcare marketplace, thus leading to higher overall costs for the
selling, marketing and customer service functions.
General and administrative expenses for 1995 decreased 26 percent when
compared to the prior year. The decline these expenses primarily reflects the
Company's reorganization of certain management responsibilities at the beginning
of 1995, which included the transfer of personnel from general and
administrative positions to sales and operational roles, and substantial
improvements made in accounts receivable management thereby reducing expenses
associated with the collection of outstanding accounts. Additionally, the
inclusion in the prior year's expenses of non-recurring investment advisory fees
for implementation of the stockholder rights plan and corporate governance
matters, also contributed to the favorable variance.
Interest income increased $239,000 over the prior year due to the
Company's higher level of invested cash. Interest expense and other
non-operating expenses remained constant with the prior year amounts.
The 1995 provision for income taxes is comprised of amounts for state,
federal and foreign taxes. The Company has significant net operating loss
carryforwards available to offset future income tax liabilities. For the
foreseeable future, the Company anticipates that the effective tax rates will
be comprised primarily of state tax provisions.
In March 1995, the Company reached an agreement to sell NSL to the
principal management of NSL for a nominal value. Additionally, the agreement
requires NSL to repay its outstanding intercompany obligations of $2,710,000,
which were converted to a promissory note payable in equal annual installments
over 15 years with an additional balloon payment of $240,000 due in the fifth
year if certain profit thresholds are achieved (See Note 10 of Notes to
Consolidated Financial Statements).
Recent Events
Recently, the Company was informed that certain Clients will not be
renewing their contracts with the Company in 1996 due to competitive pricing,
the effect of which will negatively impact future quarterly revenues by
approximately $6 to $8 million for fiscal 1996. Further, it is anticipated that
the pharmacy benefits management industry will continue to experience ongoing
competitive pricing pressure. The Company regularly bids on customer accounts of
various sizes, with its success ratio varying based upon a multitude of factors
and market forces then in effect. The Company was recently informed that it was
not awarded the business from a sizeable, potential account that would have
commenced mid-1996. The Company continues to maintain its policy of pricing its
bids at a profit, therefore electing not to buy certain accounts in the
marketplace.
Management has already taken steps in the first quarter of 1996 to
appropriately size its overhead structure to match the newly expected volume of
prescriptions, thus minimizing to the extent possible, the reduction in future
profits from lower revenues. A restructuring charge to earnings of approximately
$1.6 million will be taken in the first quarter of 1996 as a result of these
organizational and facility changes.
Year ended December 31, 1994 compared with 1993
Consolidated net operating revenues for the year ended December 31,
1994 were $142 million, an increase of $7.7 million or 6 percent over 1993
revenues. The Company achieved consolidated operating income of $3.6 million for
1994, which surpassed the $5.1 million of consolidated operating losses incurred
in the prior year. This 1993 loss included a one-time $4.9 million fourth
quarter charge for restructuring and other non-recurring items. The Company's
consolidated net income for 1994 was $3.1 million versus a consolidated net loss
for 1993 of $5.7 million.
The pharmacy benefits management segment revenues, which comprised
98 percent of consolidated operating revenues, increased 6.2 percent over the
prior year. The Company's 1994 mail service pharmacy revenues increased 6.8
percent from 1993 revenues due to the increased number of prescriptions
dispensed (7 percent), which were partially offset by a nominal decline in the
average revenue per prescription processed. The increase in the volume of
prescriptions dispensed resulted from the addition of new customers and
increased utilization by existing clients, while the small decline in average
revenue per prescription was due to changes in the sales mix and competitive
pricing pressure. Systemed Pharmacy's 1994 claims processing revenues were
consistent with the prior year despite a transaction volume increase of 18
percent over the 1993 volume. This comparable revenue performance resulted as
higher volume levels of transactions processed were offset by the impact of the
repricing of a major account during the second quarter of 1993 and, to a lesser
degree, a change in the mix of claims processed during the year.
17
<PAGE> 18
Other operating revenues represent sales from the Company's
pharmaceutical distribution segment conducted through its subsidiary Newport
Pharmaceuticals de Costa Rica (NPCR). The decrease in 1994 revenues for this
segment reflected increased competition from products in NPCR's traditional
markets, somewhat offset by NPCR's expansion into the distribution of additional
product offerings in newer markets.
Cost of sales as a percent of consolidated net operating revenues
decreased in 1994 to 82.7 percent from the comparable 1993 percentage of 87.8
percent. This decrease in the cost of sales percentage was due to significant
operating efficiencies achieved during the year through on-going process
improvement activities at the Company's mail service pharmacy operations, and
the integration and streamlining of operating activities instituted within the
claims processing business. Additionally, the implementation of aggressive drug
purchasing strategies, which include purchase and market performance discounts,
and enhanced formulary management led to further cost of sales reductions.
Selling, marketing and customer service expenses increased 3.5 percent
from the prior year. However, as a percentage of net operating revenues, these
expenses remained constant. In early 1994, the Company benefited from lower
costs attained by consolidation of functions and generally lower spending levels
for these activities. As the year progressed, and as favorable projections for
new business became more tangible, additional investments were made in staffing
and facilities, and for marketing and product literature, and systems
development which were designed to enhance client service and position the
Company to capture new revenue opportunities.
General and administrative expenses for 1994 increased $4.0 million
over 1993 as a result of monies spent for the enhancement of information
systems, investments made in additional staffing to handle the anticipated
growth in future revenues, increased legal costs for fulfilling regulatory
compliance requirements, a higher allowance for potentially uncollectible
accounts and non-recurring investment advisory fees incurred for implementation
of the stockholder rights plan and other corporate governance matters.
Interest income increased $204,000 over the prior year as a result of
higher interest rates earned on the increased amount of invested cash. Interest
expense for the same periods declined due to lower levels of debt outstanding.
Other non-operating expense includes a modest amount of foreign currency
exchange losses.
The Company's 1994 provision for income taxes increased $319,000 from
the prior year. This increase was the result of the Company's attainment of
profit for 1994 versus losses incurred last year. Federal and state income tax
expenses were primarily offset by the utilization of net operating loss
carryforwards. The Company continues to maintain significant net operating loss
carryforwards which should offset future tax liabilities.
Liquidity and Capital Resources
At the end of 1995, the Company had cash and cash equivalents of
$13.2 million which is sufficient to meet its operating and other cash needs.
The Company funds its operational and capital expenditure requirements through
cash flow from operations and periodically receives cash through the exercise
of stock options. Nevertheless, management is engaged in establishing new
credit facility arrangements which are designed to meet the anticipated future
growth requirements of the Company.
The Company's financial position remained solid throughout the year.
Working capital at December 31, 1995 was $27.9 million, an increase of $1.3
million over the prior year amount. Included in the prior year working capital
balance was $2 million of working capital from the Company's former Irish
subsidiary, Newport Synthesis Ltd., which was sold in March 1995. Consequently,
the actual rise in working capital for comparable year end balances was $3.3
million. This increase in working capital was mainly the result of higher cash
and cash equivalents attained through improved accounts receivable management,
and increased inventory at the mail service pharmacy attributable to the
implementation of the new mail service pharmacy automated dispensing technology.
Cash flow from operations in 1995 was $4.9 million, and was primarily comprised
of cash provided by earnings and depreciation, collections of accounts
receivable and the timing of accounts payable. The rise in accounts payable of
$783,000 was attributable to increased levels of inventory maintained, as noted
above.
During 1995, the Company spent $5.5 million in capital expenditures, a
133 percent increase over the prior year, primarily to further automate and
increase the capacity of the Company's mail service pharmacy in Iowa. In
addition, other capital spending included advanced data processing equipment,
and office furniture and equipment for core activities. Management believes
that its facilities maintain sufficient capacity to accommodate significant
growth. It is anticipated that capital expenditures in 1996 will return to
levels consistent with prior years. As of December 31, 1995, the Company had
no material commitments for capital expenditures.
The Company's cash requirements for 1996 are expected to be financed
through internally generated cash flows.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Company at December 31, 1995,
and 1994, and for the years ended December 31, 1995, 1994 and 1993, and the
independent public accountants reports thereon as referenced in Item 14 herein,
are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The change in selection of Independent Public Accountants which
occurred in 1995 appears on Form 8-K, filed on March 31, 1995, and as amended on
Form 8-K/A, filed on April 13, 1995, reporting the change in registrants'
certifying accounting firm, and is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company and management's
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, appears under the sections "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement to be filed within 120 days after December 31, 1995 with the
Securities and Exchange Commission relating to the Company's Annual Meeting of
Stockholders and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of the Company's executives
appears under the section "Executive Compensation" in the Company's Proxy
Statement to be filed within 120 days after December 31, 1995 with the
Securities and Exchange Commission relating to the Company's Annual Meeting of
Stockholders and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial security ownership of the Company's
equity securities appears under the section "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement to be filed
within 120 days after December 31, 1995 with the Securities and Exchange
Commission relating to the Company's Annual Meeting of Stockholders and is
incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the section "Election of Directors" and "Executive Compensation"
in the Company's Proxy Statement to be filed within 120 days after December 31,
1995 with the Securities and Exchange Commission relating to the Company's
Annual Meeting of Stockholders and is incorporated herein by reference thereto.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)1. Index to Consolidated Financial Statements Page
------------------------------------------ ----
<S> <C>
Report of Independent Public Accountants ............................................................. F-1
Report of Independent Auditors ....................................................................... F-2
Consolidated Balance Sheets --
December 31, 1995 and 1994 .................................................................. F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1995, 1994, and 1993 ......................................................... F-4
Consolidated Statements of Stockholders' Equity -- Years Ended
December 31, 1995, 1994, and 1993 ......................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1995, 1994, and 1993 ........................................................... F-6
Notes to Consolidated Financial Statements ........................................................... F-7
</TABLE>
2. The following schedules for the years 1995, 1994 and 1993 are submitted
herewith:
<TABLE>
<CAPTION>
Consolidated Financial Statement Schedules
------------------------------------------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts ..................................................... F-16
</TABLE>
All other schedules not listed above are omitted because they either
are not applicable, not required or because the required information is included
in the Consolidated Financial Statements or the accompanying notes.
3. Exhibits
3.1 Certificate of Incorporation of the Company, as amended to date.
(Incorporated herein by this reference to Exhibit 3.1 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1987.)
3.2 Agreement and Plan of Merger between Newport Pharmaceuticals
International, Inc. and Newport Pharmaceuticals International -
Delaware, Inc. (Incorporated herein by this reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K dated April 15, 1987.)
3.3 Certificate of Ownership and Merger merging Systemed Inc. into Newport
Pharmaceuticals International, Inc. (Incorporated herein by this
reference to Exhibit 3.3 of the Company's Registration Statement on
Form S-2, Registration No. 33-43590.)
3.4 Bylaws of Registrant, as amended. (Incorporated herein by this
reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
3.5 The Exhibits referenced in Exhibits 4.5, 4.6, 4.8 and 4.9 are
incorporated herein by this reference.
4.1 Indenture between Registrant and Trust Services of America dated
September 30, 1987. (Incorporated herein by this reference to Exhibit
4.1 to the Company's Registration Statement on Form S-2, Registration
No. 33-15748.)
4.2 Supplemental Indenture dated February 1, 1988. (Incorporated herein by
this reference to Exhibit 4.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1987.)
4.3 Supplemental Indenture dated September 26, 1991. (Incorporated herein
by this reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-2, Registration No. 33-43590.)
4.4 Supplemental Indenture dated November 29, 1993. (Incorporated herein by
this reference to Exhibit 4.4 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.)
4.5 Certificate of Designations, Preferences and Rights of Convertible
Preferred Stock, as filed December 22, 1987, as amended. (Incorporated
herein by this reference to Exhibit 4.3 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990.)
20
<PAGE> 21
4.6 Certificate of Correction to the Certificate of Designations,
Preferences and Rights of Convertible Preferred Stock as filed February
4, 1991. (Incorporated herein by this reference to Exhibit 4.6 of the
Company's Registration Statement on Form S-2, Registration No.
33-43590.)
4.7 Form of Underwriter's Warrant Agreement. (Incorporated herein by this
reference to Exhibit 4.7 of the Company's Registration Statement on
Form S-2, Registration No. 33-43590.)
4.8 Rights Agreement, dated as of August 17, 1994, between Systemed Inc.
and the First National Bank of Boston, as Rights Agent.
(Incorporated herein by this reference to Exhibit 1 to the
Registration Statement on Form 8-A dated August 23, 1994.)
4.9 Certificate of Designation, Preferences and Rights of Series C Junior
Participating Preferred Stock, as filed August 24, 1994 is attached as
Exhibit A to the Rights Agreement referenced in Exhibit 4.8 and is
incorporated herein by this reference.
10.1 Lease dated September 6, 1994 between Systemed Inc. and Nissan Real
Estate Corporation U.S.A. with respect to the premises at 970 West
190th Street, Suite 400, Torrance, California. (Incorporated herein by
this reference to Exhibit 10.1 of the Annual Report on Form 10-K for
the Fiscal year ended December 31, 1994.)
10.2 Employee Stock Option Plan -- 1987, as amended, and form of Stock
Option Agreement. (Incorporated herein by this reference to Exhibit
10.6 of the Annual Report on Form 10-K for the fiscal year ended
December 31, 1987.)
10.3 Non-Qualified Stock Option Plan -- 1986 and form of Stock Option
Agreement. ( Incorporated herein by this reference to Exhibit 10.7 of
the Annual Report on Form 10-K for the fiscal year ended December 31,
1987.)
10.4 Amendment to Employee Stock Option Plan -- 1987. ( Incorporated herein
by this reference to Exhibit 10.14 of the Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.)
10.5 Amendments to Non-Qualified Stock Option Plan -- 1986. (Incorporated
herein by this reference to Exhibit 10.15 of the Annual Report on Form
10-K for the fiscal year ended December 31, 1988.)
10.6 Amendments to Employee Stock Option Plan -- 1987. (Incorporated herein
by this reference to Exhibit 10.6 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.)
10.7 Amendments to Non-Qualified Stock Option Plan -- 1986. (Incorporated
herein by this reference to Exhibit 10.7 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992.)
10.8 Stock Purchase Plan -- 1990. (Incorporated herein by this referenced to
Exhibit 10.11 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.)
10.9 Credit Agreement and Guaranty dated September 4, 1991 by and among the
Company, America's Pharmacy, Inc., The Daiwa Bank, Limited and Brenton
Bank, National Association. (Incorporated herein by this reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-2,
Registration No. 33-43590.)
10.10 Lease dated February 28, 1992 between America's Pharmacy, Inc. and
Mid-America Development Company with respect to premises at 6109
Willowmere Drive Parkway, Des Moines, Iowa. (Incorporated herein by
this reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.)
10.11 Lease dated August 10, 1989 between INSURx, Inc. and Summit One, Ltd.
with respect to premises at 4700 Rockside Road, Independence, Ohio.
(Incorporated herein by this reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.)
10.12 Agreement and Plan of Reorganization dated June 30, 1992 between the
Company, IIX Corp. and INSURx, Inc. (Incorporated herein by this
reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
10.13 1993 Non-Employee Director Stock Option Plan. (Incorporated herein by
this reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.)
21
<PAGE> 22
10.14 1993 Employee Stock Option Plan. (Incorporated herein by this reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.)
10.15 Amendment to Office Lease (Independence, Ohio facility), dated March
12, 1993. (Incorporated herein by this reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.)
10.16 Employment Letter dated August 10, 1993 with respect to Sam Westover.
(Incorporated herein by this reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the Fiscal year ended December
31, 1994.)
10.17 Employment Letter dated December 23, 1993 with respect to Perry Cohen.
(Incorporated herein by this reference to Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the Fiscal year ended December
31, 1994.)
10.18 Employment Letter dated January 24, 1994 with respect to Mark P.
Hanrahan. (Incorporated herein by this reference to Exhibit 10.18
to the Company's Annual Report on Form 10-K for the Fiscal year ended
December 31, 1994.)
10.19 Employment Letter dated July 1, 1994 with respect to Kenneth J. Kay.
(Incorporated herein by this reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the Fiscal year ended December
31, 1994.)
10.20 Change of Control Severance Agreement dated September 29, 1995 between
the Company and Sam Westover.*
10.21 Change of Control Severance Agreement dated September 29, 1995 between
the Company and Kenneth J. Kay.*
10.22 Employment Agreement dated June 30, 1992, between Insurx, Inc. (now
Systemed Pharmacy Inc.) and Michael J. Barone.*
10.23 Employment Letter dated September 15, 1995 with respect to Robert T.
Nishimura.*
10.24 Employment Letter dated August 17, 1995 with respect to Jerry Brehany.*
10.25 Employment Letter dated August 1, 1995 with respect to Paul H. Hayase.*
10.26 Employment Letter dated July 22, 1994 with respect to Dennis K.
Tsuyuki.*
10.27 Separation Agreement and General Release dated February 16, 1996
between the Company and Mark P. Hanrahan.*
10.28 Amendment Number One to 1993 Employee Stock Option Plan.
(Incorporated herein by this Reference to the Company's Registration
Statement on Form S-8, Registration No. 33-61865.)*
11 Statement Regarding Computation of Earnings Per Share.*
21 Subsidiaries of Registrant.*
23.1 Consent of Independent Public Accountants.*
23.2 Consent of Independent Auditors.*
- ---------------
* Filed herewith
All Exhibits incorporated by reference are filed under the Company's securities
and Exchange commission file number 0-5118.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the last quarter
of the period covered by this report.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 27th day of
March 1996.
SYSTEMED INC.
By: /s/ Kenneth J. Kay
-----------------------------------------
Kenneth J. Kay, Senior Vice President,
Finance and Administration, and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Sam Westover Director, President and March 27, 1996
- ------------------------------------------------------- Chief Executive Officer --------------
Sam Westover (Principal Executive Officer)
/s/Kenneth J. Kay Senior Vice President, Finance and March 27, 1996
- ------------------------------------------------------- Administration, and Chief Financial Officer --------------
Kenneth J. Kay (Principal Financial Officer and Principal
Accounting Officer)
/s/J. Roberts Fosberg Director and Chairman of the Board March 27, 1996
- ------------------------------------------------------- --------------
J. Roberts Fosberg
/s/John E. Flood, Jr. Director and Vice Chairman of the Board March 27, 1996
- ------------------------------------------------------- --------------
John E. Flood, Jr.
/s/ Ronald P. Arrington Director March 27, 1996
- ------------------------------------------------------- --------------
Ronald P. Arrington
/s/James F. Doherty Director March 27, 1996
- ------------------------------------------------------- --------------
James F. Doherty
/s/Craig L. McKnight Director March 27, 1996
- ------------------------------------------------------- --------------
Craig L. McKnight
/s/Frederick M. Myers Director March 27, 1996
- ------------------------------------------------------- --------------
Frederick M. Myers
/s/ Jon C. Thorson Director March 27, 1996
- ------------------------------------------------------- --------------
Jon C. Thorson
</TABLE>
<PAGE> 24
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Systemed Inc.:
We have audited the accompanying consolidated balance sheet of Systemed Inc. (a
Delaware corporation) and its subsidiaries, as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Systemed Inc. and its
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and regulations and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Los Angeles, California ARTHUR ANDERSEN LLP
February 28, 1996
F-1
<PAGE> 25
Report of Independent Auditors
Board of Directors and Stockholders
Systemed Inc.
We have audited the accompanying consolidated balance sheet of Systemed Inc. as
of December 31, 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1994. Our audits also included the financial statement
schedules listed in the Index at Item 14(a)(2), for years ended December 31,
1994 and 1993. These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Systemed Inc. at
December 31, 1994, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Orange County, California
February 17, 1995 ERNST & YOUNG LLP
except for Note 10, as to
which the date is March 29, 1995
F-2
<PAGE> 26
CONSOLIDATED BALANCE SHEETS
Systemed Inc.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,237,000 $12,849,000
Accounts receivable, less allowance of $268,000 and $655,000
at December 31, 1995 and 1994 16,697,000 19,141,000
Inventories 5,665,000 4,538,000
Prepaid expenses and other 4,078,000 3,454,000
----------- -----------
Total current assets 39,677,000 39,982,000
Property, plant and equipment, net 8,758,000 6,075,000
Goodwill, less accumulated amortization of $1,845,000 and
$1,649,000 at December 31, 1995 and 1994 6,198,000 6,394,000
Other, including deferred debt offering costs, less related
accumulated amortization of $548,000 and $496,000 at
December 31, 1995 and 1994 3,337,000 880,000
----------- -----------
$57,970,000 $53,331,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 40,000
Accounts payable 4,795,000 4,012,000
Other accrued liabilities 6,659,000 6,900,000
Accrued restructuring and other charges 311,000 1,113,000
Reserve for estimated loss on disposal of discontinued operations - 1,340,000
----------- -----------
Total current liabilities 11,765,000 13,405,000
Long-term debt, less current portion 6,300,000 6,320,000
Other liabilities 17,000 31,000
Commitments and contingencies (Notes 1 and 7)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 8% cumulative
and convertible; 161,325 and 163,325 shares issued and outstanding at
December 31, 1995 and 1994, respectively (liquidation
preference of $1,613,000) - -
Common stock, $.001 par value; 30,000,000 shares authorized;
22,324,773 and 21,706,488 shares issued and outstanding at
December 31, 1995 and 1994 22,000 22,000
Additional paid-in capital 73,803,000 72,437,000
Accumulated deficit (33,937,000) (38,227,000)
Foreign currency translation adjustment - (657,000)
----------- -----------
Total stockholders' equity 39,888,000 33,575,000
----------- -----------
$57,970,000 $53,331,000
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 27
CONSOLIDATED STATEMENTS OF OPERATIONS
Systemed Inc.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net operating revenues $152,384,000 $141,965,000 $134,235,000
Operating costs and expenses:
Cost of sales 126,974,000 117,380,000 117,909,000
Selling, marketing and customer service 12,115,000 9,168,000 8,862,000
General and administrative 8,697,000 11,769,000 7,713,000
Restructuring and other charges - - 4,900,000
------------ ------------ ------------
Total operating costs and expenses 147,786,000 138,317,000 139,384,000
------------ ------------ ------------
Operating income (loss) 4,598,000 3,648,000 (5,149,000)
Other income (expense):
Interest income 716,000 477,000 273,000
Interest expense (651,000) (670,000) (774,000)
Other non-operating, net (74,000) (34,000) (73,000)
------------ ------------ ------------
Total other expense (9,000) (227,000) (574,000)
------------ ------------ ------------
Income (loss) before provision for
income taxes 4,589,000 3,421,000 (5,723,000)
Provision for income taxes 299,000 342,000 23,000
------------ ------------ ------------
Net income (loss) $ 4,290,000 $ 3,079,000 $ (5,746,000)
============ ============ ============
Per common share information:
Net income (loss) per common and common
equivalent shares $ .19 $ .14 $ (.28)
============ ============ ============
Weighted average number of common and common
equivalent shares 22,990,000 22,641,000 21,240,000
============ ============ ============
</TABLE>
See accompanying notes
F-4
<PAGE> 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------- ------------------------ Paid-in
Shares Amount Shares Amount Capital
------- ------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 163,325 $ - 21,051,404 $21,000 $70,292,000
Net loss - - - - -
Foreign currency translation
adjustment - - - - -
Sales and other issuances of
common stock - - 254,368 - 983,000
Preferred stock dividend - - - - (131,000)
------- ------ ---------- ------- -----------
Balance at December 31, 1993 163,325 - 21,305,772 21,000 71,144,000
Net income - - - - -
Foreign currency translation
adjustment - - - - -
Issuance of common stock in
exchange for the Notes - - 29,298 - 172,000
Sales and other issuances of
common stock - - 371,418 1,000 1,252,000
Preferred stock dividend - - - - (131,000)
------- ------ ---------- ------- -----------
Balance at December 31, 1994 163,325 - 21,706,488 22,000 72,437,000
Net income - - - - -
Foreign currency translation
adjustment - - - - -
Conversion of preferred stock to
common stock (2,000) - 2,700 - -
Issuance of common stock in
exchange for the Notes - - 3,405 - 20,000
Sales and other issuances of
common stock, net of shares tendered - - 612,180 - 1,475,000
Preferred stock dividend - - - - (129,000)
------- ------ ---------- ------- -----------
Balance at December 31, 1995 161,325 $ - 22,324,773 $22,000 $73,803,000
======= ====== ========== ======= ===========
<CAPTION>
Foreign Currency
Accumulated Translation
Deficit Adjustment Total
------------ ---------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992 $(35,560,000) $(318,000) $34,435,000
Net loss (5,746,000) - (5,746,000)
Foreign currency translation
adjustment - (576,000) (576,000)
Sales and other issuances of
common stock - - 983,000
Preferred stock dividend - - (131,000)
------------ --------- -----------
Balance at December 31, 1993 (41,306,000) (894,000) 28,965,000
Net income 3,079,000 - 3,079,000
Foreign currency translation
adjustment - 237,000 237,000
Issuance of common stock in
exchange for the Notes - - 172,000
Sales and other issuances of
common stock - - 1,253,000
Preferred stock dividend - - (131,000)
------------ --------- -----------
Balance at December 31, 1994 (38,227,000) (657,000) 33,575,000
Net income 4,290,000 - 4,290,000
Foreign currency translation
adjustment - 657,000 657,000
Conversion of preferred stock to
common stock - - -
Issuance of common stock in
exchange for the Notes - - 20,000
Sales and other issuances of
common stock, net of shares tendered - - 1,475,000
Preferred stock dividend - - (129,000)
------------ --------- -----------
Balance at December 31, 1995 $(33,937,000) $ - $39,888,000
============ ========= ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
Systemed Inc.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 4,290,000 $ 3,079,000 $(5,746,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,003,000 1,718,000 1,887,000
Provision for losses on accounts receivable (387,000) 285,000 195,000
Restructuring and other charges not affecting cash - - 4,740,000
Other (284,000) 67,000 (90,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 1,212,000 (1,077,000) (2,735,000)
(Increase) decrease in inventory (2,637,000) 1,679,000 3,320,000
(Increase) decrease in prepaid expenses and other (475,000) (2,665,000) 2,185,000
(Increase) decrease in other assets (12,000) (29,000) 13,000
Net increase (decrease) in accounts payable and
other accruals 2,026,000 3,152,000 (462,000)
Increase (decrease) in reserve for estimated loss on
disposal of discontinued operations - 499,000 (178,000)
Decrease in accrued restructuring and other charges (802,000) (1,277,000) -
----------- ----------- -----------
Net cash provided by operating activities 4,934,000 5,431,000 3,129,000
Investing Activities:
Capital expenditures (5,512,000) (2,363,000) (1,590,000)
Net assets transferred (409,000) - -
Other 29,000 27,000 19,000
----------- ----------- -----------
Net cash used in investing activities (5,892,000) (2,336,000) (1,571,000)
Financing Activities:
Net repayments under line of credit agreements - (210,000) (1,302,000)
Repayment of long-term debt - (165,000) (568,000)
Proceeds from sales of common stock 1,475,000 1,253,000 983,000
Dividends paid on preferred stock (129,000) (131,000) (131,000)
Other - - (6,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,346,000 747,000 (1,024,000)
----------- ----------- -----------
Net increase in cash and cash equivalents 388,000 3,842,000 534,000
Cash and cash equivalents at beginning of year 12,849,000 9,007,000 8,473,000
----------- ----------- -----------
Cash and cash equivalents at end of year $13,237,000 $12,849,000 $ 9,007,000
=========== =========== ===========
</TABLE>
See accompanying notes
F-6
<PAGE> 30
SYSTEMED INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Business activity
Systemed Inc. is a Delaware corporation with substantially all of its
business derived from its activities in the pharmacy benefits management
(PBM) industry, through its mail service pharmacy and retail pharmacy claims
processing subsidiaries. In addition, approximately 2 percent of
consolidated net operating revenues are generated by the distribution of
pharmaceutical products through its subsidiary Newport Pharmaceuticals de Costa
Rica (NPCR).
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries, all of which are wholly-owned.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior years accounts have been reclassified to conform
with the current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Fair value of financial instruments
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures about the Fair Value of Financial Instruments,"
which requires the disclosure of the estimated fair value of financial
instruments. This statement defines fair value as the amount at which an
instrument could be exchanged in a current transaction between willing parties,
other than a forced liquidation. The Company's implementation of this
pronouncement did not have a material impact on its financial position, as the
fair value of such instruments approximated book value at December 31, 1995.
Restructuring and other charges (Cash, cash equivalents, receivables,
and debt)
In the fourth quarter of 1993, the Company recorded restructuring and
other charges associated with implementing the Company's strategy to better
serve its clients and more effectively compete in its primary business. The plan
provided for the replacement of key management positions, upgrading the
information systems, re-engineering of the mail service pharmacy prescription
dispensing facility and de-emphasizing business activities outside the Company's
primary operational focus. Adoption of the plan resulted in a restructuring
charge of $4,900,000 which included estimated amounts for impairment of certain
assets totaling $2,700,000, anticipated employee separation costs of $1,600,000
and other matters.
A substantial portion of the restructuring activities were completed in
1994 and 1995. During 1995 and 1994, cash expenditures of $802,000 and
$1,277,000, respectively, were charged against the reserve. The remaining
balance in Accrued Restructuring and Other Charges represents employee
separation costs and a reserve for the write down of the Company's carrying
value of NPCR, both of which are expected to be completed in the near future.
Statements of cash flows
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company places
its cash investments in certificates of deposit, money market account deposits
and the highest rated commercial paper and U.S. Treasury securities.
F-7
<PAGE> 31
Cash paid was as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest $631,000 $676,000 $799,000
Income taxes 303,000 45,000 140,000
</TABLE>
The exchange of Notes during 1995 and 1994 resulted in a transfer of
long-term debt to capital of $20,000 and $172,000, respectively. The sale of
NSL, during 1995, resulted in the conversion of NSL obligations of $2,710,000 to
Other Assets (see Note 10).
Credit risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
high credit quality financial institutions, corporations and securities backed
by the United States government and limits the amount of credit exposure to any
particular investment. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and their economic and geographic diversification. In
addition, the Company performs periodic credit evaluations of its customers and
generally does not require collateral. The Company does not believe significant
credit risk exists at December 31, 1995 with respect to its cash and cash
equivalents or accounts receivable. The Company has agreements with two mail
service clients that accounted for approximately 30, 27 and 23 percent of the
Company's revenues in 1995, 1994 and 1993, respectively.
Foreign currency translation
The Company uses the U.S. dollar as the functional currency of its
foreign subsidiary NPCR. Accordingly, the financial statements of NPCR are
remeasured in terms of the U.S. dollar and resulting gains and losses are
recognized in current operations. Losses included in the determination of net
income (loss) for the years ended December 31, 1995, 1994 and 1993 were
$111,000, $44,000 and $78,000, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally using the first-in, first-out method. Cost for inventories of NPCR
is determined using the last-in, first-out method (LIFO). LIFO costs were
$1,091,000 at December 31, 1995 and $961,000 at December 31, 1994, and
approximated current cost.
Prepaid expenses and other
Prepaid expenses and other consists primarily of deposits for the
purchase of inventory of $2,500,000 at December 31, 1995 and 1994 and prepaid
operating expenses.
Long-lived assets
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which the
Company will implement in fiscal year 1996. This statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management does not expect the implementation of this pronouncement
to have a material impact on the financial position or results of operations of
the Company.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation and amortization which is computed using the straight-line method
over estimated useful lives of 3 to 10 years for furniture, fixtures, equipment
and software. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the terms of the leases.
F-8
<PAGE> 32
Other assets
Other assets consists primarily of notes receivable related to the sale
of NSL (see Note 10).
Goodwill
Cost in excess of net assets acquired is amortized using the
straight-line method over a period of 40 years. The Company periodically
reviews whether events or circumstances have occurred or may occur that warrant
a re-evaluation of the remaining useful life of goodwill or the recoverability
of the remaining goodwill. When factors arise that would indicate that a review
of goodwill is necessary, the Company assesses the future recoverability of
such goodwill based upon a projection of related business' undiscounted net
income and cash flow.
Deferred offering costs
Costs incurred in connection with the public offering of 10 percent
Senior Secured Convertible Notes were capitalized in Other Assets and are being
amortized over the term of the related debt on the bonds outstanding method.
Other accrued liabilities
Other accrued liabilities at December 31, included the following
individual items greater than 5 percent:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accrued compensation $1,519,000 $1,168,000
Deferred revenue 706,000 1,016,000
Corporate governance matters 1,250,000 1,250,000
</TABLE>
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes.
Stock based compensation
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation." The company is
required to adopt the new statement for 1996. The Company plans to adopt the
statement through the disclosure method in 1996, accordingly, there will be no
impact on the future reported results of operations or financial position.
Per share data
Per share data have been computed by dividing the net income or loss,
after reduction for Preferred Stock dividend requirements in periods when
assumed conversion of the Preferred Stock would have been antidilutive, by the
weighted average number of common shares and equivalents outstanding during the
period. Common Stock equivalents include dilutive stock options and warrants and
the dilutive effects of Preferred Stock conversions. Fully diluted per share
calculations are not presented in the financial statements because the assumed
conversion of the convertible debt and any additional incremental issuance of
stock options or warrants would be antidilutive.
2. Inventories
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw material $ 366,000 $ 432,000
Work in progress 109,000 649,000
Finished goods 5,190,000 3,457,000
---------- ----------
$5,665,000 $4,538,000
========== ==========
</TABLE>
F-9
<PAGE> 33
Finished goods inventory included $4,574,000 and $2,067,000 of
pharmaceutical drugs at the Company's mail service pharmacy at December 31, 1995
and 1994, respectively.
3. Property, plant and equipment
Property, plant and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land, buildings and improvements $ 2,212,000 $ 2,522,000
Equipment and software 10,636,000 6,835,000
Furniture and fixtures 3,029,000 2,335,000
----------- -----------
15,877,000 11,692,000
Less accumulated depreciation and
amortization (7,119,000) (5,617,000)
----------- -----------
$ 8,758,000 $ 6,075,000
=========== ===========
</TABLE>
Equipment and software at December 31, 1995 included $3,096,000 of
construction in progress for the new pharmacy automation in Des Moines, Iowa,
which will be depreciated beginning in 1996.
4. Lines of credit
At December 31, 1995, the Company had foreign lines of credit with banks
under which it may borrow up to $100,000 with interest at prime plus 4 percent
and $150,000 at LIBOR plus 6 percent. Available credit under these lines was
$250,000 at December 31, 1995.
5. Long-term debt
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
10% Senior Secured Convertible Notes $6,300,000 $6,320,000
</TABLE>
The 10% Senior Secured Convertible Notes (the "Notes") mature in
September 2002, and are convertible into the Company's Common Stock at any time
prior to maturity at the option of the holder, unless previously redeemed, at a
conversion price subject to adjustment in certain circumstances. At December 31,
1995, the conversion price was $5.87 per share and 1,073,253 common shares have
been reserved for issuance upon conversion.
The Notes are secured by certain assets of the Company and all of the
capital stock of the Company's operating subsidiaries, but are effectively
subordinate in right of payment to present and future creditors of such
subsidiaries. Interest is payable semi-annually on September 15 and March 15.
The debt agreement contains certain covenants and provisions that require the
Company to: (a) limit dividends and distributions, (b) limit sales of assets,
(c) limit capital transactions by subsidiaries, (d) limit charter amendments of
subsidiaries, and (e) limit net intercompany subsidiary debt. At December 31,
1995, the Company was in compliance with these covenants.
The Notes are redeemable, in whole or in part, at the option of the
Company, at various redemption prices which range from 105.4 percent in 1995 to
100.8 percent in 2001, together with accrued interest. Notwithstanding the
above, redemption may be made, at par value plus accrued interest, at such time
as the closing price of the Company's Common Stock has been at least 180 percent
of the conversion price then in effect for a period of 30 consecutive trading
days ending on the fifth trading day prior to the date of notice of redemption.
The Note Indenture requires certain sinking fund payments such that substantial
amounts of the Notes are retired prior to the scheduled 2002 maturity date. The
first such sinking fund payment is scheduled for September 1997. Additional
mandatory redemptions may be required if the Company's consolidated tangible net
worth (as defined in the Indenture) on the last day of any two consecutive
fiscal quarters is less than $6,500,000. At December 31, 1995, the Company's
consolidated tangible net worth was $33,690,000.
F-10
<PAGE> 34
The required aggregate principal maturities of the Notes for years ending
subsequent to December 31, 1995 are as follows: 1996-$0; 1997-$268,000;
1998-$1,380,000; 1999-$1,380,000; 2000-$1,380,000 and thereafter $1,892,000.
6. Stockholders' equity
Preferred stock
The Company's 8 percent umulative Preferred Stock is convertible into
1.35 shares of Common Stock for each share of Preferred Stock and has full
voting rights. Dividends are cumulative and accrue at $.80 per share, payable
annually. Dividends were fully paid or accrued through December 31, 1995. This
Preferred Stock has a liquidation preference of $10 per preferred share. During
1995, 2,000 shares of Preferred Stock were converted into 2,700 shares of Common
Stock. The Company may at any time redeem, in amounts of at least $500,000,
these preferred shares by paying $10 per share in cash plus accrued but unpaid
dividends. The Company has reserved 217,789 shares of Common Stock for issuance
upon conversion.
Common stock
The Company has a stock purchase plan which authorizes the sale of up to
500,000 shares of Common Stock, at prices per share not less than the fair
market value at the date of sale, to qualified officers, directors and
employees. At December 31, 1995, a total of 124,766 shares had been purchased
under the plan and 375,234 shares of Common Stock has been reserved for future
issuance.
In August 1994, the Company implemented a stockholder rights plan. Under
the terms of the plan, the Company granted one right for each share of Common
Stock outstanding on August 27, 1994. Each right allows the holder to purchase
one unit, consisting initially of one share of a new class of preferred stock,
for $35 per unit, subject to adjustment. The rights become exercisable in the
event that a person or a group acquires beneficial ownership of 10 percent or
more of the Company's Common Stock or commences a tender or exchange offer
upon consummation of which such person or group would beneficially own 10
percent or more of the Company's Common Stock (except for a Board-approved
tender or exchange offer for all of the Company's Common Stock). In connection
with such an event, each right entitles the holder to purchase shares of the
Company's Common Stock having a value of two times the right's exercise price.
The rights expire on August 15, 2004.
Stock options and warrants
The Company's 1993 Employee Stock Option Plan authorizes the granting of
options to qualified individuals, as defined in the option plan, to purchase,
within a period of up to ten years from date of grant, up to 3,000,000 shares of
Common Stock at prices per share equal to the fair market value on the date of
grant. Options granted vest in such increments as the Board of Directors may
determine.
The Company's 1993 Non-employee Director Stock Option Plan authorizes the
granting of options to Non-employee Directors to purchase, within a period of
five years from the date of grant, up to 300,000 shares of Common Stock at
prices per share equal to the fair market value on the date of grant. All
options granted under the plan vest at time of grant.
In 1993, the Company terminated the 1987 Employee Stock Option Plan and
the 1986 Non-Qualified Stock Option Plan. Options granted prior to the
termination of the plans remain outstanding according to the terms of those
plans. At December 31, 1995 there were options for 408,000 and 156,250 shares
outstanding under the plans, respectively.
F-11
<PAGE> 35
The following summarizes transactions involving stock option plans during
the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
------ ---------
<S> <C> <C>
Outstanding at December 31, 1992 2,167,130 $1.94 - $6.38
Granted 540,000 3.63 - 4.63
Exercised (273,734) 2.13 - 5.50
Canceled (122,744) 2.13 - 6.06
---------
Outstanding at December 31, 1993 2,310,652 1.94 - 6.38
Granted 1,135,192 4.13 - 8.75
Exercised (311,418) 1.94 - 4.38
Canceled (642,600) 2.13 - 6.38
---------
Outstanding at December 31, 1994 2,491,826 1.94 - 8.75
Granted 999,333 4.63 - 7.25
Exercised (435,084) 1.94 - 5.88
Canceled (194,800) 3.63 - 7.13
---------
Outstanding at December 31, 1995 2,861,275 3.75 - 8.75
=========
</TABLE>
At December 31, 1995, options to purchase 1,472,575 shares were
exercisable, at a weighted average price of $4.86 per share and options for
847,775 shares of Common Stock were available for future grant.
At December 31, 1995, the Company had warrants, which were issued at fair
market value, outstanding and exercisable for the purchase of 168,750 shares of
the Company's Common Stock at prices ranging from $4.00 to $6.60 per share. All
warrants issued vest immediately and are exercisable for a period of up to five
years. Activity in 1995 included the exercise of 515,000 warrants at prices
ranging from $2.44 to $5.13 per share.
7. Commitments and contingencies
The Company leases certain premises and equipment. Payments under several
agreements were deferred during an initial specified period of the lease and,
accordingly, amounts have been recorded as deferred lease payments. Some leases
contain renewal options having substantially the same terms and conditions as
the original lease. Substantially all of the leases require the Company to pay
maintenance, insurance, taxes and certain other expenses in addition to the
stated rentals.
Future minimum lease payments, by year and in the aggregate, for
noncancelable operating leases with initial or remaining terms of one year or
more consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996 $1,385,000
1997 941,000
1998 618,000
1999 398,000
2000 292,000
----------
$3,634,000
==========
</TABLE>
Total rental expense for operating leases amounted to $1,749,000,
$1,638,000 and $1,840,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company accounts for rental payment concessions on a
straight-line basis over the term of the respective lease.
F-12
<PAGE> 36
The Company is involved in various legal proceedings incidental to the
normal course of business. While it is not feasible to predict the outcome of
such proceedings with certainty, management is of the opinion that their
ultimate disposition will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. Income taxes
The provision for income taxes consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Current:
Federal $ 407,000 $ 671,000 $ -
State 254,000 346,000 -
Utilization of Federal and
state net operating loss
carryovers (362,000) (705,000) -
Foreign - 30,000 23,000
--------- --------- -------
$ 299,000 $ 342,000 $23,000
========= ========= =======
</TABLE>
The provision (benefit) for income taxes from continuing operations
differs from that which would result from applying the U.S. statutory rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Expected provision (benefit) 34.0% 35.0% (35.0)%
Increase (decrease):
Provision for state income taxes 2.9 2.2 -
Goodwill amortization 1.5 2.0 3.4
Effect of foreign income taxes - (.8) (.1)
Increase (decrease) in
valuation allowance (33.1) (32.0) 31.7
Alternative minimum tax .4 - -
Other .8 3.6 -
----- ----- -----
Provision for income taxes 6.5% 10.0% - %
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets: 1995 1994
-------------------- ----------- -----------
<S> <C> <C>
Systemed net operating loss carryover $ 4,209,000 $ 5,590,000
Subsidiaries net operating loss carryovers 2,140,000 1,666,000
Reserve for uncollectible accounts receivable 92,000 245,000
Inventory costs capitalized for tax 101,000 86,000
General business credit carryover 240,000 240,000
Capital loss carryover - 206,000
Restructuring and related items 128,000 710,000
Other 485,000 402,000
----------- -----------
Total deferred tax assets 7,395,000 9,145,000
Valuation allowance for deferred tax assets (7,388,000) (9,095,000)
----------- -----------
Net deferred tax assets 7,000 50,000
Deferred Tax Liabilities:
Other deferred tax liabilities (7,000) (50,000)
----------- -----------
Net deferred tax items recorded $ - $ -
=========== ===========
</TABLE>
F-13
<PAGE> 37
At December 31, 1995, the Company had net operating loss carryovers for
Federal income tax purposes totaling approximately $18,674,000 which expire at
various dates beginning in 2000. The ultimate utilization of these carryovers is
dependent upon future profitable operations of the respective entities.
At December 31, 1995, Systemed Inc. also had investment tax credit
("ITC") carryovers for Federal income tax purposes of approximately $60,000
which will be accounted for on the flow-through method, and other credit
carryovers of approximately $180,000 which expire in various amounts through
2001 .
For financial reporting purposes, a valuation allowance has been recorded
to offset the entire deferred tax asset related to these carryovers. When
realized, future tax benefits from the carryovers of Systemed Inc. and
Systemed Pharmacy Inc. (Ohio) will be applied to reduce income tax expense.
Future tax benefit from the utilization of Systemed Pharmacy Inc. (Iowa)
losses will be recognized as an adjustment to goodwill.
Provisions of the 1986 Tax Reform Act could limit the use of loss
carryovers and other tax attributes if changes in ownership of the Company
aggregating more than 50 percent occur within any three-year period. The Company
has not experienced a change in ownership for the three-year period ended
December 31, 1995.
9. Related party transactions
In 1995, 1994 and 1993, the Company incurred legal fees of approximately
$12,000, $71,000 and $120,000 respectively, from a law firm which includes a
partner who presently serves as a member of the Company's Board of Directors.
Prior to his employment by the Company, a member of the Board of
Directors and senior executive of the Company was employed at a company that has
a significant contract with a subsidiary of the Company to manage and administer
a prescription drug plan for its subscribers. Revenues under this contract for
the processing of claims and other related services were $4,386,000, $4,266,000
and $5,104,000 in 1995, 1994, and 1993, respectively, of which $525,000,
$1,004,000 and $358,000, was included in accounts receivable at December 31,
1995, 1994, and 1993, respectively.
10. Sale of subsidiary
In March 1995, the Company sold its subsidiary, Newport Synthesis, Ltd
(NSL), to the principal management of NSL for a nominal value. The agreement
requires NSL to repay its outstanding intercompany obligations of $2,710,000,
which were converted to a promissory note payable in equal annual installments
of approximately $165,000 over 15 years, with interest at 8.1 percent, and a
balloon payment of $240,000 plus interest due in the fifth year if certain
profit thresholds are achieved. The principal amount of this promissory note is
equivalent to the Company's net investment in NSL. Therefore, no additional
provision for loss on disposal was required. Under the terms of the agreement,
the Company retains Board representation rights at NSL until the note is paid in
full. Due to the nature and structure of the transaction, generally accepted
accounting principles dictate that it should be reflected in the financial
statements as a transferred business and the net assets which constitute the
note receivable have been classified in Other assets. Payments received on the
note will be recorded as a reduction to the carrying value of the segregated
assets.
The consolidated statements of operations exclude revenues and expenses,
for all periods presented, of discontinued operations. Net operating revenues
for NSL were $2,920,000 for the three month period ended March 31, 1995, and
$6,812,000 and $6,201,000 for the years ended December 31, 1994 and 1993,
respectively. Net income from discontinued operations was $651,000 for the
three month period ended March 31, 1995, and $685,000 and $98,000 for the
years ended December 31, 1994 and 1993, respectively. The Company deferred
the income from discontinued operations as an addition to the Reserve for
Estimated Loss on Disposal of Discontinued Operations.
In prior years the Company negotiated grants relating to NSL from the
Industrial Development Agency (IDA) of the Republic of Ireland to be used for
product development, employee training and the acquisition of property and
equipment. Product development and employee training grants were recognized in
income in the year in which the costs to which they related were incurred by
NSL. Grants for the acquisition of property and equipment were deferred and
recognized as income on the same basis as the related property and equipment was
depreciated. The sale of NSL in March 1995, did not require the repayment of
grants received.
F-14
<PAGE> 38
11. Subsequent event
The Company was informed that certain accounts would not be renewing
their contracts for 1996 due to competitive pricing in the marketplace. The
effect of this will negatively impact future quarterly revenues by approximately
$6 to $8 million for fiscal year 1996. As a result, a restructuring charge
to earnings of approximately $1.6 million will be taken in the first quarter of
1996. The restructuring charge will consist of employee separation and
transition costs incurred in connection with organizational and facility
changes.
F-15
<PAGE> 39
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMED INC.
(Amounts in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Charged Charged to
Balance at to Costs Other
Beginning of and Accounts- Deductions- Balance at End
Description Period Expenses Describe Describe of Period
----------- ------------ --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
- ----------------------------
Accumulated amortization
of goodwill $1,649 $196 - - $1,845
Accumulated amortization of
deferred offering costs 496 52 - - 548
Allowance for doubtful accounts 655 - - $387(6) 268
Year ended December 31, 1994
- ----------------------------
Accumulated amortization
of goodwill 1,453 196 - - 1,649
Accumulated amortization of
deferred offering costs 452 44 - - 496
Accumulated amortization of
patents and trademarks 81 - - 81(1) -
Allowance for doubtful accounts 444 285 - 74(2) 655
Year ended December 31, 1993
- ----------------------------
Accumulated amortization
of goodwill 1,290 206 - 43(3) 1,453
Accumulated amortization of
deferred offering costs 409 43 - - 452
Accumulated amortization of
patents and trademarks 93 5 - 17(4) 81
Allowance for doubtful accounts 648 195 - 399(5) 444
</TABLE>
- ---------------
(1) Represents write off of accumulated amortization of trademarks charged
against accrued restructuring and other items.
(2) Net write off of receivables.
(3) Represents the write off of accumulated amortization of goodwill associated
with the Company's acquisition of DPS, in 1989, determined to have no
future value.
(4) Represents the effect of translating the account balance in accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation".
(5) Net write offs of receivables, a portion of which is included in
restructuring and other charges.
(6) Represents write off of receivables, and adjustments to the allowance for
doubtful accounts due to improved collectibility.
F-16
<PAGE> 1
[SYSTEMED LETTERHEAD]
Exhibit 10.20
September 29, 1995
Mr. Samuel L. Westover
[Home address deleted]
Re: Change of Control Severance Agreement
Dear Sam:
The purpose of this letter agreement ("Agreement") is to set forth in full the
terms of a severance arrangement between you and Systemed Inc. (The "Company").
This Agreement will be effective as of July 31, 1995 and shall fully supersede
any other prior actual or alleged oral, written and/or implied agreements
between you and the Company governing the termination of your employment on
or after a Change of Control.
If, within three years following a Change of Control, your employment by the
Company or any subsidiary or successor of the Company is subject to an
Involuntary Termination, then the Company will pay you 2.00 times your Annual
Base Compensation within fifteen days after the date of your Involuntary
Termination.
For purposes of this Agreement, "Annual Base Compensation" as determined on the
date of your Involuntary Termination, shall be equal to the greater of (a) your
annual base salary and target bonus on the date of the Change of Control, or
(b) your annual base salary and target bonus on the date of your Involuntary
Termination.
"Change of Control" shall have the same meaning as "Terminating Transaction"
under the Systemed Inc. 1993 Employee Stock Option Plan, as amended from time
to time.
"Involuntary Termination" shall mean a termination of your employment: (a) by
your discharge by the Company for any reason other than for Cause or (b) by
your resignation within six months of one of the following events: (i) any
reduction in annual base salary or target bonus you were receiving immediately
prior to the date on which a Change of Control occurred; (ii) any significant
reduction in the nature or scope of your duties and responsibilities from those
applicable to you immediately prior to the date on which a Change of Control
occurred; or (iii) any change in the location of your principal place of
employment by the Company (including its subsidiaries) by more than 20 miles
from the location where you were principally employed immediately prior to the
date on which a Change of Control occurred.
<PAGE> 2
[SYSTEMED LETTERHEAD]
Mr. Samuel L. Westover
September 29, 1995
Page 2
"Cause" shall mean (a) your conviction by a court of competent jurisdiction or
entry of a plea of nolo contendere for an act constituting a misdemeanor
involving moral turpitude or a felony, or (b) your commission of any act of
fraud, embezzlement, gross negligence, willful misconduct, or dishonesty
towards the Company.
You shall be entitled to no severance payment under this Agreement in the event
that your employment is terminated for Cause.
You and the Company agree that you shall not be entitled to receive any
severance payment under this Agreement which constitutes an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and any regulations thereunder. If the
independent accountants acting as auditors for the Company on the date of a
Change of Control (or another accounting firm designated by the Company and
acceptable to you) determine that a payment under this Agreement constitutes an
"excess parachute payment," the payment shall be reduced to the maximum which
may be paid without the payment being an "excess parachute payment."
If, for any reason, the aggregate amount of "parachute payments" under Section
280G of the Code which are payable to you under this Agreement and any other
plan or program of the Company is later determined to exceed the maximum amount
you are entitled to receive without incurring liability under Section 280G of
the Code, then the portion of the amount paid to you pursuant to this Agreement
which causes you to exceed the maximum amount you are entitled to receive
without liability under Section 280G shall be treated for all purposes as a
loan to you which you shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
This agreement shall be binding upon and inure to the benefit of the Company,
its successors and assigns (including, without limitation, any company into or
with which the Company may merge or consolidate). The Company agrees that it
will not affect the sale or other disposition of all, or substantially all, of
its assets under either (a) the person or entity acquiring the assets or a
substantial portion of the assets shall expressly assume by an instrument in
writing all duties and obligations of the Company under this Agreement, or (b)
the Company shall provide, for the establishment of a separate trust for the
payment in full of all amounts which are or may reasonably be expected to
become payable to you under this Agreement.
This agreement is entered into under, and shall be governed for all purposes
by, the laws of the State of Delaware. No modification or amendment of this
Agreement shall be effective unless it is made in a written document executed by
you and the Company.
<PAGE> 3
[SYSTEMED LETTERHEAD]
Mr. Samuel L. Westover
September 29, 1995
Page 3
The term of this Agreement shall be three years and it shall expire without
further action of either party on July 31, 1998. Neither party shall have an
obligation to renew, extend or negotiate a new agreement after the expiration
of this Agreement.
Please confirm your agreement of the foregoing by executing this Agreement in
the space provided for your signature and returning the executed copy to me.
Very truly yours,
SYSTEMED INC.
By: /s/ J. Roberts Fosberg
-----------------------------
J. Roberts Fosberg
Chairman of the Board of Directors
THE ABOVE TERMS AND CONDITIONS ARE HEREBY
ACCEPTED.
By: /s/ Samuel L. Westover
-----------------------------
Samuel L. Westover
<PAGE> 1
[SYSTEMED LETTERHEAD]
Exhibit 10.21
September 29, 1995
Mr. Kenneth J. Kay
[Home address deleted]
Re: Change of Control Severance Agreement
Dear Ken:
The purpose of this letter agreement ("Agreement") is to set forth in full the
terms of a severance arrangement between you and Systemed Inc. (The "Company").
This Agreement will be effective as of July 31, 1995 and shall fully supersede
any other prior actual or alleged oral, written and/or implied agreements
between you and the Company governing the termination of your employment on
or after a Change of Control.
If, within three years following a Change of Control, your employment by the
Company or any subsidiary or successor of the Company is subject to an
Involuntary Termination, then the Company will pay you 2.00 times your Annual
Base Compensation within fifteen days after the date of your Involuntary
Termination.
For purposes of this Agreement, "Annual Base Compensation" as determined on the
date of your Involuntary Termination, shall be equal to the greater of (a) your
annual base salary and target bonus on the date of the Change of Control, or
(b) your annual base salary and target bonus on the date of your Involuntary
Termination.
"Change of Control" shall have the same meaning as "Terminating Transaction"
under the Systemed Inc. 1993 Employee Stock Option Plan, as amended from time
to time.
"Involuntary Termination" shall mean a termination of your employment: (a) by
your discharge by the Company for any reason other than for Cause or (b) by
your resignation within six months of one of the following events: (i) any
reduction in annual base salary or target bonus you were receiving immediately
prior to the date on which a Change of Control occurred; (ii) any significant
reduction in the nature or scope of your duties and responsibilities from those
applicable to you immediately prior to the date on which a Change of Control
occurred; or (iii) any change in the location of your principal place of
employment by the Company (including its subsidiaries) by more than 20 miles
from the location where you were principally employed immediately prior to the
date on which a Change of Control occurred.
<PAGE> 2
[SYSTEMED LETTERHEAD]
Mr. Kenneth J. Kay
September 29, 1995
Page 2
"Cause" shall mean (a) your conviction by a court of competent jurisdiction or
entry of a plea of nolo contendere for an act constituting a misdemeanor
involving moral turpitude or a felony, or (b) your commission of any act of
fraud, embezzlement, gross negligence, willful misconduct, or dishonesty
towards the Company.
You shall be entitled to no severance payment under this Agreement in the event
that your employment is terminated for Cause.
You and the Company agree that you shall not be entitled to receive any
severance payment under this Agreement which constitutes an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and any regulations thereunder. If the
independent accountants acting as auditors for the Company on the date of a
Change of Control (or another accounting firm designated by the Company and
acceptable to you) determine that a payment under this Agreement constitutes an
"excess parachute payment," the payment shall be reduced to the maximum which
may be paid without the payment being an "excess parachute payment."
If, for any reason, the aggregate amount of "parachute payments" under Section
280G of the Code which are payable to you under this Agreement and any other
plan or program of the Company is later determined to exceed the maximum amount
you are entitled to receive without incurring liability under Section 280G of
the Code, then the portion of the amount paid to you pursuant to this Agreement
which causes you to exceed the maximum amount you are entitled to receive
without liability under Section 280G shall be treated for all purposes as a
loan to you which you shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
This agreement shall be binding upon and inure to the benefit of the Company,
its successors and assigns (including, without limitation, any company into or
with which the Company may merge or consolidate). The Company agrees that it
will not affect the sale or other disposition of all, or substantially all, of
its assets under either (a) the person or entity acquiring the assets or a
substantial portion of the assets shall expressly assume by an instrument in
writing all duties and obligations of the Company under this Agreement, or (b)
the Company shall provide, for the establishment of a separate trust for the
payment in full of all amounts which are or may reasonably be expected to
become payable to you under this Agreement.
This agreement is entered into under, and shall be governed for all purposes
by, the laws of the State of Delaware. No modification or amendment of this
Agreement shall be effective unless it is made in a written document executed by
you and the Company.
<PAGE> 3
[SYSTEMED LETTERHEAD]
Mr. Kenneth J. Kay
September 29, 1995
Page 3
The term of this Agreement shall be three years and it shall expire without
further action of either party on July 31, 1998. Neither party shall have an
obligation to renew, extend or negotiate a new agreement after the expiration
of this Agreement.
Please confirm your agreement of the foregoing by executing this Agreement in
the space provided for your signature and returning the executed copy to me.
Very truly yours,
SYSTEMED INC.
By: /s/ Samuel L. Westover
-----------------------------
Samuel L. Westover
President and Chief Executive Officer
THE ABOVE TERMS AND CONDITIONS ARE HEREBY
ACCEPTED.
By: /s/ Kenneth J. Kay
-----------------------------
Kenneth J. Kay
<PAGE> 1
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
This Agreement is made at Cleveland, Ohio, as of this 30th day of June
1992 by and between INSURx, Inc., an Ohio corporation, which with its
successors and assigns is herein called "Corporation," and Michael J. Barone,
who is herein called Employee."
WITNESSETH:
WHEREAS, through employment with Corporation, Employee will acquire
special knowledge, experience and skill regarding Corporation's business
methods and operations and will have access to Corporation's trade secrets,
product specifications, pricing policies, customer lists, and other proprietary
documents and confidential information;
WHEREAS Employee and Corporation both desire to effect a written
employment arrangement under the terms and conditions stated in this Agreement;
WHEREAS, but for Employee's representations and covenants made in
Section 5 of this Agreement, Corporation would not employ Employee and,
therefore, expressly to induce Corporation to employ Employee, Employee
warrants that Employee fully understands and accepts the restrictive covenants
in Section 5 hereof and agrees to be bound thereby.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and promises made in this Agreement and for other valuable
consideration (the receipt and sufficiency of which are hereby acknowledged),
Corporation and Employee (herein collectively called the "Parties") hereby
agree as follows:
1. Employment. Upon the terms and conditions stated herein,
Corporation hereby employs Employee who hereby accepts such employment.
2. Term. The term of this Agreement (herein called the "Agreement
Term") commences on the 30th day of June 1992 and shall continue until
terminated as herein provided.
3. Compensation.
3.1 (a) For all services rendered hereunder by Employee,
Corporation shall pay Employee a basic annual salary (herein called the "Basic
Salary") of Eighty-Six Thousand Six Hundred Twenty-Five Dollars ($86,625.00).
In June, 1993 (and in each subsequent June if Employee remains in the employ of
the Corporation), a review will be conducted by Corporation relative to
Employee's performance and increases to Employee's Basic
1
<PAGE> 2
Salary for the succeeding calendar year will be considered at that time.
(b) Corporation shall also pay Employee a non-discretionary
bonus as determined by Corporation's Board of Directors.
(c) Corporation shall also provide Employee with a car
allowance of Two Hundred Fifty Dollars ($250.00) per month.
(d) Employee's reasonable and necessary business expenses
will be reimbursed.
3.2 In its sole discretion, Corporation may also pay Employee a
bonus or bonuses based upon Employee's performance, attitude, productivity and
overall contribution to the benefit of Corporation and the attainment of
Corporation's goals and based further upon Coproration's general cash and
financial position.
3.3 Corporation's obligations under this Section 3 are expressly
conditioned upon Employee's continued and faithful performance of and adherence
to each and every covenant, warranty, representation, duty and obligation
assigned to or made by Employee hereunder.
4. Employee's Duties, Responsibilities and Representations.
4.1 Employee shall service the United States of America and shall
serve as the Vice-President, Professional Relations and shall perform all
duties and responsibilities incident thereto. Employee shall further perform
all duties and responsibilities periodically assigned to Employee by
Corporation, its President or other designated agent and consistent with
Employee's position as an executive of Corporation.
4.2 Employee shall devote full-time efforts and substantially
Employee's entire business time, skill, labor, expertise and attention to
performing and rendering exclusively for Corporation such services as are
periodically required and assigned to Employee by Corporation, its President or
other designated agent. Employee's expenditure of reasonable time for personal
matters and/or charitable and other similar activities shall not constitute a
breach of this Agreement, if Corporation determines that such acitvities do not
interfere with the performance of Employee's duties and responsiblities
hereunder.
5. Employee's Restrictive Covenants.
5.1 Employee hereby acknowledges and agrees that:
2
<PAGE> 3
(a) In order to hire Employee as an employee under this
Agreement, Corporation must expend substantial funds for additional personnel
and office equipment;
(b) During Employee's Corporate employment, Employee will
acquire special knowledge, experience and skill regarding Corporation's sales
and business methods and activities, operations, services, products, customer
and customer lists, financial records, trade secrets, business techniques and
processes, price lists, product specifications, other Corporate documents, and
features which must remain confidential;
(c) Employee's restrictive covenants under this Section 5 do
not and shall not constitute an undue or unreasonable hardship to Employee,
since such coveants will not restrict Employee's inherent skills or Employee's
ability to obtain other employment;
(d) If employee breaches any or all of the restrictive
covenants in this Section 5, Corporation shall suffer immediate and irreparable
damage and harm, Corporation's remedies at law for Employee's breach will be
inadequate (and Employee hereby waives the claim or defense that an adequate
remedy at law is available), Corporation shall thereby be entitled to
injunctive relief against Employee, and Employee hereby waives any requirement
that Corporation post a bond or other security for such injunctive relief; and
(e) If Employee had not agreed to the restrictive covenants
in this Section 5, Corporation would not have signed and executed this
Agreement and would not have employed Employee hereunder.
5.2 During the Agreement Term, Employee shall not directly or
indirectly without Corporation's express prior approval:
(a) Disclose to any person, partnership or entity (other than
Corporation) any of corporation's trade secrets, business or sales techniques
or processes, product or service specifications, customer lists or customer
records, price lists, financial information, business records, confidential
documents, or any other proprietary or confidential information; or
(b) Own (partially or completely), operate, control, work or
render services for in any capacity, advise or consult, be employed or engaged
by, or represent any sole proprietorship, partnership, entity (other than
Corporation) or business who or which is or may be competitive with
Corporation's business and/or sales operations, services, products or methods.
3
<PAGE> 4
5.3 For a period of one (1) year from and after the termination of
this Agreement and the Agreement Term by either Party (for any reason, with or
without cause), Employee shall not directly or indirectly:
(a) Sell competing products or competing services to, solicit
the business of or render or perform any services to any sole proprietorship,
partnership, entity or business who or which, during said one-year period, is a
customer of Corporation;
(b) Own (partially or completely), operate, control, work for
in any capacity, advise or consult, be employed or engaged by, or represent any
sole proprietorship, partnership, entity or business who or which, during said
one-year period, is or may be: (i) competitive with Corporation's business
and/or sales operations, services, products or methods, and (ii) located within
the United States of America, constituting that area in which Corporation
presently performs substantial business transactions and activities; or
(c) Employ, engage, contract in any manner for the services
of, or solicit the services of any person who, or during said one-year period,
is an employee of Corporation.
5.4 After termination of this Agreement and the Agreement Term by
either Party (for any reason, with or without cause), Employee shall not
directly or indirectly use for any purpose or disclose to any person,
partnership or entity (other than Corporation) any of Corporation's trade
secrets, business or sales techniques or processes, pricing policies, product
or service specifications, customer lists or customer records, price lists,
financial information, business records, confidential documents, or any other
confidential or proprietary information. Employee acknowledges and agrees that,
at all times, Employee holds as a trustee and fiduciary for Corporation all the
documents, information and other items designated in this Section 5.4.
6. Vacations. During each calendar year of the Agreement Term,
Employee shall be entitled to three (3) weeks (120 hours) vacation, with full
Basic Salary; provided, however, that Employee shall recieve 107.16 hours of
accrued vacation through December 31, 1992; and provided further that:
(a) Without Corporation's prior approval, all vacation time shall
be non-cumulative and will be forfeited if not taken within eighteen (18)
months following the accrual thereof; and
(b) If Employee's employment is terminated prior to completion of
any calendar year of the Agreement Term, Employee's vacation to which Employee
is entitled hereunder shall be
4
<PAGE> 5
prorated in the same proportion that the number of months Employee actually
worked during such calendar year bears to twelve months.
7. Fringe Benefits and Bonus Stock.
7.1 During the Agreement Term, Employee may participate in
corporate fringe benefit programs and plans in accordance with their terms,
conditions and eligibility requirements which may be periodically changed by
Corporation in its sole discretion. Additionally, during the term of this
Agreement, the Corporation will pay the full annual premium on an annual
renewable term life insurance contract, of Employee's choosing, for a face
amount not to exceed $150,000.00. Employee acknowledges that said premium
amount may constitute taxable income to Employee.
8. Termination.
8.1 This Agreement and the Agreement Term shall be terminated upon
the expiration of ninety (90) days after written notice is mailed (by ordinary
United States mail) or personally delivered by the terminating Party to the
other Party; provided, however, that if Corporation terminates this Agreement
under this Section 8.1, during the twelve (12) month period commencing on the
execution of this Agreement, Corporation shall continue to pay Employee's
Basic Salary under Secton 3.1 and fringe benefits under Section 7.1 for a
period of nine (9) months following the delivery of such termination.
8.2 Notwithstanding any contrary provision herein, this Agreement
and the Agreement Term shall automatically and immediately terminate without
notice or demand upon Employee's death, permanent disability, or mental or
physical incapacity.
8.3 Corporation may immediately terminate this Agreement and the
Agreement Term at any time without notice or demand upon Employee's material
breach or violation of any of Employee's obligations, duties, covenants,
representations or warranties made in this Agreement, including (but not
limited to) the covenants designated in Section 5.
8.4 Upon termination of this Agreement by any Party for any
reason, neither Corporation nor Employee shall have any further obligations
hereunder except for duties, representations, promises or covenants herein
which expressly extend beyond the Agreement Term, including (but not limited
to) Employee's covenants designated in Section 5 and Employee's obligations
designated in Section 9.
5
<PAGE> 6
8.5 Employee acknowledges and agrees that the post
termination/severance benefits provided for pursuant to this Section 8 are
provided in lieu of any similar such benefits provided for under the Employment
Agreement (the "Prior Agreement") between Employee and its former employer
INSURx, Inc., an Ohio corporation, dated June 15, 1987. Accordingly, Employee
waives any and all rights which Employee may have with respect to any such
benefits under the Prior Agreement, which Prior Agreement the parties agree and
acknowledge has been terminated as of this date.
9. Corporate Documents and Other Property.
9.1 All documents, records, papers, inventions, discoveries,
patents, product design improvements, drawings, blueprints, data, letters,
financial information, ledgers, reports, customer lists, customer records and
any other written information regarding Corporation or its businesses
developed, acquired or conceived by Employee during the Agreement Term shall
(at all times) be and remain Corporation's exclusive property.
9.2 Upon termination of this Agreement and the Agreement Term by
either Party (for any reason, with or without cause) or upon Corporation's
request, Employee shall immediately disclose and deliver to Corporation all the
documents and items described in Section 9.1 and Employee shall neither make
nor retain any copies thereof.
10. Jurisdiction and Venue.
10.1 This Agreement is signed, executed and consummated in the
City of Cleveland, County of Cuyahoga, State of Ohio, and Ohio's laws shall
govern all disputes, controversies and litigation arising hereunder.
10.2 Corporation and Employee hereby agree that exclusive venue
for all disputes, controversies and litigation arising under this Agreement
lies with the courts of Cuyahoga County, Ohio.
10.3 For all disputes, controversies and litigation arising under
this Agreement, Corporation and Employee hereby (jointly and individually)
submit to the personal jurisdiction of the Cuyahoga County, Ohio Courts.
11. Prohibition Against Alienation.
11.1 Employee's duties, obligations and services rendered under
this Agreement are personal in nature and are unique to Employee. Therefore,
without Corporation's prior written consent, Employee shall not assign,
transfer, sell or
6
<PAGE> 7
encumber this Agreement or Employee's duties, obligations, rights or interests
hereunder.
11.2 If Employee attempts to effect any such sale, assignment,
encumbrance or transfer without Corporation's prior written approval,
Corporation shall thereupon have the continuing right and option to terminate
this Agreement at any time, without notice or demand.
12. Miscellaneous.
12.1 This Agreement constitutes the entire agreement between
Corporation and Employee regarding the subject matter hereof and all prior
written or oral negotiations, representations, arrangements and/or agreements
regarding the subject matter herein are merged into and superseded by this
Agreement. Corporation and Employee acknowledge that there are no oral or other
written understandings, arrangements and/or agreements between the Parties
relating to the suject matter of this Agreement.
12.2 All provisions of this Agreement are severable and no
provision hereof shall be affected by the invalidity of any other such
provision.
12.3 No action by Corporation or Employee and no refusal or neglect
of Corporation or Employee to exercise any right hereunder or to enforce
compliance with the terms of this Agreement shall constitute a waiver of any
provision herein with respect to any violations, actions or omissions
hereunder, unless such waiver is expressed in writing by the waiving party.
12.4 This Agreement may be amended, altered or changed only through
a written document signed by Employee and Corporation.
12.5 For purposes of this Agreement, the singular includes the
plural and vice-versa and the feminine, masculine and neuter include each
other.
------------------------------
7
<PAGE> 8
IN WITNESS WHEREOF, the Parties hereto have set their hands as of the
day and year first above written.
In the presence of: INSURx, INC.
/s/ Dennis D. Pijor By: /s/ Mark H. Emery
- -------------------------------- --------------------------
(Signature of First Witness)
Title: /s/ Asst. Treasurer
/s/ Mark Altieri -----------------------
- --------------------------------
(Signature of Second Witness)
/s/ Dennis D. Pijor
- -------------------------------- EMPLOYEE
(Signature of First Witness)
/s/ Rebecca L. Baumgardner /s/ Michael J. Barone
- -------------------------------- ------------------------------
(Signature of Second Witness) Michael J. Barone
8
<PAGE> 1
Exhibit 10.23
[SYSTEMED LETTERHEAD]
September 15, 1995
Mr. Robert T. Nishimura
[Home address deleted]
Dear Mr. Nishimura:
I am pleased to formalize and present the following employment offer for the
position of Senior Vice President, Chief Information Officer of Systemed
Pharmacy Inc. reporting to the President and Chief Executive Officer as we have
previously discussed:
Compensation: - Base Salary of $140,000 per year.
- Annual bonus equal to 50% of base salary upon the
achievement of Company targets established by the
Board of Directors and Management.
Stock Options: - A stock option grant for 85,000 shares of
Systemed Inc. common stock, vesting 25% on the
first day of employment and 25% on each
anniversary of such date.
Company Benefits: - Participation in all benefits currently available
to Systemed Pharmacy Inc. associates on the first
day of employment, subject to eligibility
requirements.
- Three weeks paid vacation after your first
anniversary date.
Relocation Expense: - The Company will provide you with a relocation
expense reimbursement allowance of up to $7,500
to assist you with the costs associated with
moving your family and household goods on a
temporary basis to the Cleveland area. This
amount will be disbursed as expenses are incurred
and appropriate receipts and documentation
submitted.
- The Company will reimburse you for reasonable and
pre-approved temporary living expenses (food,
lodging and car rental expenses) up to a maximum
of $15,000 upon submission of appropriate
receipts and documentation.
<PAGE> 2
[SYSTEMED LETTERHEAD]
Mr. Nishimura
September 15, 1995
Page 2
Travel Allowance: - The Company will provide you with a $10,000
allowance for travel for your immediate family
members to visit you in the Cleveland area.
This amount will be disbursed as expenses are
incurred and appropriate receipts and
documentation submitted.
Acquisition Protection: - Should Systemed be acquired at a price less than
$8.00 per share within the first two years of
your employment, then you will receive a payment
equal to the difference between the acquisition
price per share and $8.00 multiplied by the
number of unexercised and unexpired options from
this initial grant.
Start Date: - Monday, September 25, 1995, or earlier if
possible.
This offer is valid until Friday, September 22, 1995.
It is the policy of the Company that your employment will be on an at will
basis, and nothing contained herein should be construed as a contract of
employment. If these terms are acceptable, please sign in the space provided
below and return one copy of this letter to the undersigned.
Please do not hesitate to contact me if you should have any questions with
respect to this offer.
Sincerely yours,
/s/ Sam
Sam Westover
President and Chief Executive Officer
/jag
cc: Ken Kay
Colleen Hulce
Agreed to and accepted by: /s/ Robert T. Nishimura
--------------------------
Robert T. Nishimura
Date: September 15, 1995
<PAGE> 1
Exhibit 10.24
[SYSTEMED LETTERHEAD]
August 17, 1995
Mr. Jerry Brehany
20351 Densmore
Huntington Beach, California 92646
Dear Jerry:
I am pleased to confirm in writing the terms of your promotion to the position
of Vice President of Mail Service Operations for Systemed Pharmacy Inc.,
effective August 21, 1995, which you have already agreed to. The following are
the compensation terms that are connected with this promotion:
Compensation: - Base Salary of $114,000 per year.
- Annual bonus equal to 20% of base salary upon the
achievement of Company targets established by the
Board of Directors and Management.
Stock Options: - A stock option grant for 45,000 shares of
Systemed Inc. common stock, with a date of grant
of July 25, 1995, vesting 20% six months after
grant and 20% on each anniversary of such six
month date thereafter.
Relocation Expense: - The Company will provide you with a lump sum
relocation allowance of $15,000.
- The Company will pay a daily rate of $75.00 per
day for your temporary living expenses (food,
lodging and car rental expenses) for a period of
90 days.
Relocation Allowance: - Should your position be eliminated,
responsibilities significantly reduced, or
involuntarily relocated outside of Des Moines as
a result of a "Terminating Transaction" as
defined in the 1993 Employee Stock Option Plan,
you will be paid a relocation allowance of
$20,000.
<PAGE> 2
[SYSTEMED LETTERHEAD]
Mr. Brehany
August 17, 1995
Page 2
It is the policy of the Company that your employment will be on an at will
basis, and nothing contained herein should be construed as a contract of
employment.
Congratulations on your promotion, and the best of luck to you in your new
position.
Sincerely,
/s/ Ken
Kenneth J. Kay
Senior Vice President, Finance and Administration and
Chief Financial Officer
/jag
<PAGE> 1
Exhibit 10.25
[SYSTEMED LETTERHEAD]
August 1, 1995
Mr. Paul H. Hayase
[Home address deleted]
Dear Mr. Hayase:
I am pleased to formalize and present the following employment offer for the
position of Vice President, General Counsel and Human Resources of Systemed Inc.
reporting to the Senior Vice President of Finance and Administration and Chief
Financial Officer as we have previously discussed:
Compensation: - Base Salary of $132,500 per year.
- Annual bonus equal to 20% of base salary upon the
achievement of Company targets established by the
Board of Directors and Management.
Stock Options: - A stock option grant for 85,000 shares of
Systemed Inc. common stock, vesting 25% on the
first day of employment and 25% on each
anniversary of such date.
Company Benefits: - Participation in all benefits currently available
to Systemed Inc. employees on the first day of
employment, subject to eligibility requirements.
- Three weeks paid vacation after your first
anniversary date.
Start Date: - Approximately, Monday, August 14, 1995.
Severance Package: - Should your position be eliminated,
responsibilities significantly reduced, or
relocated outside of Southern California as a
result of a change in control of the Company, you
will be paid one year of severance pay which will
be based upon your then current base salary.
Acquisition Protection: - Should Systemed be acquired at a price less than
$8.00 per share then you will receive a payment
equal to the difference between the acquisition
price per share and $8.00 multiplied by the
number of unexercised and unexpired options from
this initial grant.
<PAGE> 2
[SYSTEMED LETTERHEAD]
Mr. Hayase
August 1, 1995
Page 2
It is the policy of the Company that your employment will be on an at will
basis, and nothing contained herein should be construed as a contract of
employment. If these terms are acceptable, please sign in the space provided
below and return one copy of this letter to the undersigned.
As we discussed on the telephone today, I am truly excited about your decision
to join the Company. I know that we will have an excellent working relationship.
Please do not hesitate to contact me if you should have any questions with
respect to this offer.
Sincerely yours,
/s/ Ken
Kenneth J. Kay
Senior Vice President, Finance and Administration
and Chief Financial Officer
/jag
cc: Colleen Hulce
Agreed to and accepted by: /s/ Paul H. Hayase
---------------------------
Paul H. Hayase
Date: August 1, 1995
<PAGE> 1
Exhibit 10.26
[SYSTEMED LETTERHEAD]
July 22, 1994
Mr. Dennis K. Tsuyuki
[Home address deleted]
Dear Dennis:
I am pleased to formalize and present the following employment offer for the
position of Corporate Controller of SysteMed, Inc. reporting to the Senior Vice
President and Chief Financial Officer as we have previously discussed:
Compensation - Base salary of $95,000 per year.
- Annual bonus equal to 20% of base salary upon the
achievement of Company targets established by the
Board of Directors, prorated for the length of
service during the year.
- Monthly car allowance of $400 for the period of time
that the offices are located in Laguna Hills.
Stock Options: - 15,000 shares of SysteMed, Inc., vesting 20% six (6)
months after the first date of employment and 20% on
each anniversary of such six month date.
Company Benefits - Participation in all benefits currently available to
SysteMed employees on the first day of employment.
Benefits information booklets for the group medical,
dental, life insurance and long term disability
are enclosed.
- 401(k) Plan: May begin tax deferred contributions
after 90 days of employment, with an entry date of
January 1, 1995.
- Three weeks paid vacation after one year of service.
<PAGE> 2
Mr. Tsuyuki
Page 2
Start Date: - To be mutually agreed upon at a later date. In no event
beyond 30 days from the date of this letter.
If these terms are acceptable, please sign in the space provided below and
return this letter to the undersigned.
Please do not hesitate to contact me if you should have any questions with
respect to this offer.
Very truly yours,
/s/ Kenneth J. Kay
Kenneth J. Kay
Senior Vice President and Chief Financial Officer
/jag
Approved /s/ Dennis Tsuyuki
-------------------------
Date: July 23, 1994
<PAGE> 1
Exhibit 10.27
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (collectively, "Agreement")
is dated February 16, 1996 and is entered into by Mark P. Hanrahan ("Hanrahan")
and Systemed Inc., ("Employer"), in light of the following facts:
A. Hanrahan understands that as of February 16, 1996 his active
employment by Employer shall end. After this date, Hanrahan shall continue
on inactive status until November 15, 1996 ("Inactive Status") when his
employment status with respect to Employer shall terminate finally. During
the period of Inactive Status, Hanrahan shall have no right or authority to
act or incur any obligations or liabilities on behalf of the Company.
B. Hanrahan has been informed that he has twenty-one (21) days from
this date (that is until March 8, 1996) to consider the terms of this
Agreement. Hanrahan has been advised to consult with an attorney before
signing this Agreement.
C. Hanrahan acknowledges that for a period of seven (7) days following
the signing of this Agreement, he may revoke this Agreement. This Agreement
shall not become effective or enforceable until such revocation period has
expired.
D. Hanrahan acknowledges that the Salary Payment referenced in
Paragraph 1 of this Agreement represents all compensation, including
salary, bonus and accrued vacation, due and payable to him through February
16, 1996. He also acknowledges that Employer has made or will make this
Salary Payment without regard to whether he signs this Agreement. The
Salary Payment does not constitute consideration for this Agreement.
E. Hanrahan acknowledges that the Additional Payment referenced in
Paragraph 2 of this Agreement is in excess of all amounts that are due and
owing to him as a result of his employment by Employer.
1. Receipt of Salary Payment. Company shall pay Hanrahan his regular base
salary and accrued vacation owed to him as of February 16, 1996 and Employer
shall also pay Hanrahan his bonus for 1995 under the Management Bonus Plan at
the same time that other bonuses are paid under such plan (collectively, the
"Salary Payment"). Hanrahan hereby acknowledges that he will return all of
Employer's property possessed by him, including without limitation, all bank
credit cards, files and records and the like on execution of this Agreement,
except that Hanrahan need not return the office keys and computer equipment
until the end of his Inactive Status.
2. Inactive Status Services and Additional Payment. During the period of
Hanrahan's Inactive Status with Employer, and following the execution of this
Agreement, Employer shall cause regular payments of salary (at the monthly rate
of $11,250.00), which will be reduced by the appropriate legal deductions, to be
mailed to Hanrahan's residence on the regular pay days of each calendar month
for a period of nine months until November 15, 1996. During that period,
Hanrahan will be entitled to participate in the Company's group health insurance
plan, Section 125 flexible
<PAGE> 2
benefits plan, and 401(k) plan, subject to his payment of any applicable
employee copayments, but will not accrue or be entitled to receive any other
benefits, including without limitation, bonus, vacation, sick leave and
termination benefits, provided, however, in the event that Hanrahan obtains
other health insurance coverage during his Inactive Status, then Hanrahan's
health benefits shall cease. The health benefits, together with the payments
made pursuant to this Paragraph 2 are referred to herein as "Additional
Payment". Hanrahan acknowledges that the Additional Payment is in excess of all
amounts due and owed to him as a result of his employment by Employer. It is the
intention of the parties that Hanrahan will not seek or receive unemployment
benefits until November 15, 1996. In the event Hanrahan seeks or receives
unemployment benefits prior to such date, then, to effectuate the intent of the
parties hereunder, Employer shall be entitled to reduce the amount of the
Additional Payment made pursuant to this Paragraph 2 to the extent of the
unemployment benefits Hanrahan receives. At the end of Hanrahan's Inactive
Status, Employer shall make a final payment to Hanrahan of $33,750.00, less
applicable legal deductions. During the Inactive Period, Hanrahan may use an
office at Employer's Itasca office, so long as a vacant office is available.
3. Stock Options. All stock options issued and outstanding as of this date
in favor of Hanrahan shall remain exercisable and shall continue to vest in
accordance with their terms until November 15, 1996.
4. General Release. In consideration of the Additional Payment to be made
to him hereunder, Hanrahan hereby releases and discharges Employer and its
officers, directors, shareholders, employees, representatives, agents, parent
and affiliated companies, from all rights, claims, causes of action, and
damages, both known and unknown, in law or in equity, concerning and/or arising
out of his employment with Employer which he now has, or ever had, including but
not limited to any rights, claims, causes of action or damages arising under
Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment
Act of 1967, the Fair Labor Standards Act of 1938, the Employee Retirement
Income Security Act, the Americans with Disabilities Act, and any other federal,
state or local employment practice legislation, provided, however, that nothing
herein shall prevent Hanrahan from making a claim for indemnification and
advancement of expenses under the terms of the Indemnification Agreement dated
September 9, 1994 between Hanrahan and Employer.
Hanrahan hereby waives and relinquishes all rights and benefits afforded by
Section 1542 of the Civil Code of California and any similar law. He understands
and acknowledges the significance and consequences of this specific waiver of
Section 1542, which states as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release and discharge of Employer and its
officers, directors, shareholders, employees, representatives, agents, parent
and affiliated companies, Hanrahan expressly acknowledges that this General
Release is intended to include in its effect, without limitation, all claims
which he does not know or suspect to exist in his favor. Hanrahan further
acknowledges that he has read this General Release and that he understands that
this is a general release, and that he intends to be legally bound by
<PAGE> 3
the same. Further, Hanrahan hereby specifically waives any rights which he may
have to reemployment by Employer and agrees not to seek future employment by
Employer or any affiliated entity.
5. Arbitration, Fees and Costs. Except for any claim brought by Employer in
breach of Section 6 herein, any disputes regarding the terms of this Agreement
shall be resolved in Torrance, California, through binding arbitration before an
experienced employment law arbitrator selected by the parties (or if they cannot
agree, in accordance with California Code of Civil Procedure Sections 1280 et.
seq.). Should either party pursue any legal, injunctive or administrative action
to enforce this agreement, the prevailing party shall be entitled to recover all
costs and attorney's fees incurred as a result of such action.
6. Miscellaneous. Hanrahan hereby promises not to (i) disparage Employer or
make any public statements regarding Employer's business, (ii) not to disclose
or utilize any confidential information or trade secrets which he may have
learned while employed by Employer, and (iii) for a period of one (1) year, not
to solicit or assist in the solicitation of any customer of Employer or the
employment of any employee of Employer. Hanrahan further promises not to
disclose to anyone the terms of this Agreement or the fact of, or any amount of,
payment made by Employer hereunder. Any violation of this Section 6 shall
constitute a material breach of this Agreement.
7. Complete Agreement. This is the entire agreement between Hanrahan and
Employer with respect to the subject matter hereof and supersedes all prior and
contemporaneous oral and written agreements and discussions except for the
Indemnification Agreement referenced in Section 4 above. The letter agreement
between Employer and Hanrahan dated January 24, 1994 is hereby terminated and is
no longer in force or effect in any manner. This Agreement may be amended only
by a writing signed by the parties.
8. Indemnification. As a further material inducement to Employer to enter
into this Agreement, Hanrahan hereby agrees to indemnify and hold each and all
of the Employer, its officers, directors, agents, employees, shareholders,
representatives and affiliates harmless from and against any and all loss, cost,
damage, or expense, including, without limitation, attorney's fees, incurred by
such parties, or any of them arising out of any breach of this Agreement by
Hanrahan or the fact that any representation made herein by Hanrahan was false
when made.
9. Tender of Proceeds as Condition to Challenging Enforceability of
Agreement. Both Employer and Hanrahan understand that this Agreement is final
and binding when executed by both Hanrahan and Employer, and both agree not to
thereafter challenge its enforceability. Should Hanrahan nevertheless attempt to
challenge the enforceability of this Agreement, as a further limitation on any
right to make such a challenge, Hanrahan shall initially tender to Employer, by
certified check delivered to Employer, all monies received pursuant to this
Agreement, plus interest, and invite Employer to retain such monies and agree
with Hanrahan to cancel this Agreement. In the event Employer accepts this
offer, Employer shall retain such monies and this Agreement shall be canceled.
In the event Employer does not accept such offer, Employer shall so notify
Hanrahan, and shall place such monies in an interest-bearing escrow account
pending resolution of the dispute between Hanrahan and Employer as to whether or
not this Agreement shall be set aside and/or otherwise rendered unenforceable.
<PAGE> 4
10. Applicable Law. This Agreement shall be governed by the laws of
Illinois. The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning and not strictly for or
against any of the parties.
11. Severability. The provisions of this Agreement are severable, and if
any part of it is found to be unenforceable, the other parts shall remain fully
valid and enforceable. This Agreement shall survive the termination of any
arrangement contained herein.
Dated: 2/20/96 MARK P. HANRAHAN
/s/ MARK P. HANRAHAN
----------------
Dated: 2/21/96 SYSTEMED INC.
By: /s/ Kenneth J. Kay
---------------------
Its: Sr. Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 10.28
Amendment Number One to Systemed Inc.
1993 Employee Stock Option Plan
-------------------------------
This Amendment Number One to the Systemed Inc. 1993 Employee Stock
Option Plan ("Plan") is dated as of May 26, 1995.
1. Except as otherwise provided herein, capitalized terms shall
have the same meaning as contained in the Plan.
2. The maximum aggregate number of Shares which may be optioned
and sold under the Plan is Three Million (3,000,000) shares of authorized but
unissued Common Stock of the Company.
3. Except as otherwise provided herein, the terms of the Plan
shall remain in full force and effect.
Date approved by shareholder: May 26, 1995
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
SYSTEMED INC.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1994 1993
-------------------------------------
(In thousands, except
per share amounts)
<S> <C> <C> <C>
Primary
- -------
Average common shares outstanding 22,024 21,523 21,240
Net effect of dilutive stock options and warrants - based on
the treasury stock method 748 898 -
Assumed conversion of 8% preferred stock 218 220 -
------- ------- -------
Total 22,990 22,641 21,240
======= ======= =======
Net income (loss) $ 4,290 $ 3,079 $(5,746)
Dividends on preferred stock - - (131)
------- ------- -------
Net income (loss) applicable to common stock $ 4,290 $ 3,079 $(5,877)
======= ======= =======
Per share amounts:
Net income (loss) per common and common equivalent share $ .19 $ .14 $ (.28)
======= ======= =======
</TABLE>
Income (loss) per common share and common equivalent share was calculated by
dividing net income (loss), after adjusting for Preferred Stock dividends when
the Preferred Stock was assumed not to be converted, by the weighted average
number of common shares and equivalents outstanding during the period. Common
stock equivalents include dilutive stock options and warrants and the dilutive
effects of Preferred Stock conversions.
Income (loss) per common share - assuming full dilution is not presented in the
financial statements because the assumed conversion of convertible debt and any
additional incremental issuance of stock options or warrants would be
antidilutive.
<PAGE> 2
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (continued)
SYSTEMED INC.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1994 1993
------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Fully diluted
- -------------
Average common shares outstanding 22,024 21,523 21,240
Net effect of dilutive stock options and warrants - based on
the treasury stock method 766 1,018 -
Assumed conversion of 8% preferred stock 218 220 -
------- ------- -------
Total 23,008 22,761 21,240
======= ======= =======
Income (loss) from operations $ 4,290 $ 3,079 $(5,746)
Dividends on preferred stock - - (131)
------- ------- -------
Net income (loss) applicable to common stock $ 4,290 $ 3,079 $(5,877)
======= ======= =======
Per share amounts:
Net income (loss) per common and common equivalent share $ .19 $ .14 $ (.28)
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction Percentage of
of Voting Securities
Subsidiary Incorporation Owned by Registrant
---------- ------------- -------------------
<S> <C> <C>
Systemed Pharmacy Inc. Delaware 100%
(Formerly "America's Pharmacy, Inc.")
Systemed Pharmacy Inc. Ohio 100%
(Formerly "INSURx, Inc.")
American Medical Outcomes Repository, Inc. Delaware 100%
Newport Pharmaceuticals de Costa Rica 100%
Costa Rica, S.A.
Laboratorios Barly, S.A.* Costa Rica 100%
Newport A.G. Zug Switzerland 100%
</TABLE>
* Laboratorios Barly, S.A. is wholly-owned by Newport Pharmaceuticals de
Costa Rica, S.A. a wholly-owned subsidiary of the Registrant.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed Form
S-3 Registration Statement No. 33-57894 and in the Form S-8 Registration
Statements (Registration No. 33-21811, 33-21812, 33-41026, 33-62341, 33-61865
and 33-60025).
ARTHUR ANDERSEN LLP
Los Angeles, California
February 28, 1996
<PAGE> 1
EXHIBIT 23.2 - AUDITORS CONSENT
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3, No. 33-57894 pertaining to the registration of shares of Common
Stock of Systemed Inc., and in the Registration Statements (Form S-8,
No. 33-21811, Post-effective Amendment No. 1, Form S-8, No. 33-21812,
Post-effective Amendment No. 1 and Form S-8, No. 33-41026) pertaining to the
Employee and Non-Qualified Stock Option Plans and Stock Purchase Plan of
Systemed Inc., and in the related Prospectuses of our report dated February
17, 1995, except for Note 10, as to which the date is March 29, 1995, with
respect to the consolidated financial statements and schedules of Systemed
Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1994.
ERNST & YOUNG, LLP
Orange County, California
March 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 13,237
<SECURITIES> 0
<RECEIVABLES> 16,965
<ALLOWANCES> 268
<INVENTORY> 5,665
<CURRENT-ASSETS> 39,677
<PP&E> 15,877
<DEPRECIATION> 7,119
<TOTAL-ASSETS> 57,970
<CURRENT-LIABILITIES> 11,765
<BONDS> 6,300
0
0
<COMMON> 22
<OTHER-SE> 39,866
<TOTAL-LIABILITY-AND-EQUITY> 57,970
<SALES> 152,384
<TOTAL-REVENUES> 152,384
<CGS> 126,974
<TOTAL-COSTS> 126,974
<OTHER-EXPENSES> 20,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 651
<INCOME-PRETAX> 4,589
<INCOME-TAX> 299
<INCOME-CONTINUING> 4,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,290
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
