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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-20606
PHARMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2310352
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3611 QUEEN PALM DRIVE,
TAMPA, FLORIDA 33619
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 626-7788
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(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 the
filing requirements for the past 90 days.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of March
17, 1998, was $1,034,160,075.
On March 17, 1998, 88,518,192 shares of the registrant's $0.01 par
value Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Part III,
Items 10, 11, 12 and 13 of this Form 10-K: Portions of the Registrant's
definitive proxy materials for its 1998 Annual Meeting of stockholders.
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PART I
ITEM 1. BUSINESS
OVERVIEW
PharMerica, Inc. ("PharMerica" or the "Company") is a leading provider
of institutional pharmacy services to the elderly, chronically ill and disabled
in long-term care and alternate site settings, including skilled nursing
facilities, assisted living facilities, specialty hospitals and the home. The
Company is also a leading provider of mail order pharmacy benefit services to
the workers' compensation and catastrophic care markets. As of March 1, 1998,
PharMerica provided pharmacy services to approximately 345,000 long-term care
residents in 36 states and to over 106,000 workers' compensation claimants
nationwide.
PharMerica is the largest institutional pharmacy provider in four of
the five states with the highest population of elderly people, and its network
of 120 institutional pharmacies covers a geographic area that includes over 80%
of the nation's long-term care beds. The Company operates six large scale
"mega-pharmacies," each serving over 10,000 beds, and many of its pharmacies are
open 24 hours, 7 days a week. The Company intends to create five additional
mega-pharmacies in 1998 in connection with pharmacy consolidations resulting
from the Merger (defined herein). As a result of its national scope, the Company
has been able to enter into preferred provider agreements with regional and
national long-term care providers, the most significant of which are Beverly
Enterprises, Inc. ("Beverly") and Integrated Health Services, Inc. ("IHS"). The
Company provides services to approximately 58,000 Beverly long-term care beds
and 17,000 IHS long-term care beds.
The Company purchases, repackages and dispenses pharmaceuticals and
provides its clients' long-term facilities with related management services,
regulatory assistance and third-party billing. The Company also provides
specialty services including infusion therapy, clinical consulting and
comprehensive catastrophic care. In addition, PharMerica has developed
specialized information technology and clinical initiatives to offer its clients
additional value-added services such as computerized medical record keeping,
on-line formulary, drug therapy evaluation and disease state management.
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RECENT CORPORATE DEVELOPMENTS
MERGER
On December 3, 1997, pursuant to an Agreement and Plan of Merger dated
April 15, 1997 (the "Merger Agreement"), by and between Beverly Enterprises,
Inc., a Delaware corporation ("Beverly"), and the Company (then known as
Capstone Pharmacy Services, Inc.("Capstone")), whereby Beverly, whose sole
remaining business consisted of the institutional pharmacy business conducted
through its wholly-owned subsidiary Pharmacy Corporation of America ("PCA"),
merged with and into the Company (the "Merger"). Based on the closing price of
the Company's common stock, par value $.01 per share ("Common Stock"), on such
date, the transaction is valued at approximately $840 million, including 50
million shares of Common Stock and assumption of $275 million in debt. The
assumed debt was paid off using funds from a new bank credit facility that
closed simultaneously with the Merger. The Merger was accounted for under the
purchase method of accounting and was treated as a reverse merger/acquisition of
Capstone by PCA for accounting and financial reporting purposes. As a result of
this treatment, the historical financial statements of PharMerica are those of
PCA rather than those of Capstone. Certain information contained herein on a
"pro forma basis" gives effect to the Merger as though it occurred on January 1,
1997.
ACQUISITIONS
From December 3, 1997 until December 31, 1997, the Company acquired
three institutional pharmacy businesses. The aggregate purchase price was $24.3
million in cash, notes payable and shares of the Company's common stock. The
cash amounts were funded from operations and draws on the bank credit facility.
In the aggregate, the acquired businesses serve approximately 9,450 long-term
care beds, with annualized revenues of approximately $33.7 million.
From January 1, 1998 until March 19, 1998, the Company acquired seven
institutional pharmacy businesses through asset and stock purchases. The
aggregate purchase price was $61.6 million in cash, assumed liabilities, and
notes payable. The cash amounts have been funded from operations and draws on
the bank credit facility. In the aggregate, the acquired businesses serve
approximately 16,313 long-term care beds and 42,000 workers' compensation
patients, with annualized revenues of approximately $66.7 million.
CREDIT FACILITY
In December 1997, the Company entered into a $550 million credit
facility with a syndicate of banks (the "Credit Facility"). Approximately $114.9
million of the Credit Facility was used to retire amounts outstanding under the
Company's prior credit facility and approximately $275 million was used to
retire PCA debt assumed in connection with the Merger. As of March 1, 1997 the
Company had outstanding borrowings of approximately $498.6 million under the
Credit Facility.
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SUPPLIERS
PharMerica purchases substantially all of its pharmaceutical
inventories from wholesalers and manufacturers. Following the Merger, PharMerica
negotiated a new primary wholesaler agreement with Bergen Brunswig and 16 other
agreements with drug manufacturers and other suppliers with terms that are more
favorable to PharMerica than its previous contracts.
THE COMPANY
INDUSTRY OVERVIEW
Industry analysts estimate that the United States pharmacy industry's
total annual revenues for 1997 for the markets served by the Company exceeded
$16 billion. These revenues were comprised of sales of approximately $7 billion
to individuals that live at home, $5 billion to residents of long-term care
facilities, $2.7 billion to residents of assisted living and retirement
communities and $2 billion to patients in rehabilitation and other specialty
hospitals. Institutional pharmacy companies such as PharMerica have
traditionally focused on servicing the $5 billion long-term care facility
segment of the industry, which industry analysts estimate is growing by
approximately 10% annually. The Company believes that changes in the
institutional pharmacy industry are providing large institutional pharmacies
with the opportunity to serve elderly, chronically ill and disabled patients in
settings across the healthcare continuum. These changes include: (i) an increase
in the acuity level and number of residents in assisted living facilities; (ii)
increased operating and cost efficiencies, regulatory expertise and national
market presence of large institutional providers; and (iii) an increase in
outsourcing of pharmacy services by specialty hospitals.
Institutional Pharmacy. Institutional pharmacies purchase prescription
and nonprescription pharmaceuticals and other medical supplies from wholesale
distributors and manufacturers, and repackage and distribute these products to
residents in nursing homes, assisted living facilities, retirement centers and
other institutional settings. Institutional pharmacies generally provide
consultant pharmacist services that include, among other things, individual
patient drug therapy evaluation and the monitoring of the control,
administration and storage of prescribed medications within the institution to
ensure compliance with state and federal regulations. Unlike hospitals, most
long-term care institutions do not have an on-site pharmacy to dispense
prescription drugs; institutional pharmacies accordingly play an integral role
in long-term care by providing a high quality, cost-effective means of
dispensing and monitoring patient medication. In addition, institutional
pharmacies often provide further services such as infusion therapy and Medicare
Part B services as part of administering daily care.
The provision of pharmacy services to long-term care residents is
fragmented, with independent public institutional pharmacy companies serving, on
a revenue basis, approximately 59% of long-term care facilities, retail and
small institutional pharmacy providers serving approximately 19% of long-term
care facilities, and institutional pharmacies owned by long-term care companies
(commonly referred to as "captive pharmacies") serving the remaining 22% of such
facilities. Over the past five years, the proportion of sales by independent
public institutional pharmacies has increased. The Company believes that
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institutional pharmacy companies are better positioned to serve the changing
market demands than local providers and that the proportion of the long-term
care pharmacy market served by retail pharmacies should continue to decline. The
Company also believes that consolidation of the market will accelerate as some
long-term care companies divest themselves of captive pharmacies and owners of
smaller institutional pharmacies are encouraged to sell their business because
of various competitive factors, including: (i) the advantages of economies of
scale in pharmaceutical purchasing; (ii) the benefits of national market
presence in competing for managed care contracts and preferred provider
agreements with owners of multi-site facilities; (iii) the efficiencies created
by being able to provide a broad range of services; and (iv) the demands created
by the need for specialized regulatory expertise and complex information
systems.
Workers' Compensation. The workers' compensation market is driven by
workers' compensation laws that require employers to provide medical disability
benefits to employees who suffer job-related injuries and disabilities.
Employers provide these benefits through self-insurance, participation in state
run funds or purchase of insurance. Workers' compensation claimants generally
have not been served as part of the institutional pharmacy industry, relying,
instead, primarily upon local retail pharmacy outlets. This is because state
laws generally provide workers' compensation claimants with freedom of choice in
selecting healthcare providers. The Company believes that this segment of the
pharmacy industry, while currently highly fragmented, is likely to consolidate
as the benefit providers increasingly seek to control costs, reduce expenses and
standardize services related to claimants.
STRATEGY
The Company intends to continue to increase its sales and improve its
profitability by capitalizing on its position as a leading provider of pharmacy
services. Key elements of the Company's strategy are to: (i) grow through
strategic acquisitions; (ii) pursue internal growth opportunities by increasing
market penetration and cross-selling specialty services such as infusion therapy
to its existing customer base; (iii) expand the markets it serves to include
elderly, chronically ill and disabled patients across a broader range of
settings; (iv) enhance operating margins by leveraging economies of scale and
creating larger regional pharmacies in key metropolitan areas; and (v) utilize
clinical and information capabilities to provide value-added services and to
provide information to position the Company to maximize profitability.
SERVICES
Long-Term Care Services. PharMerica's long-term care services consist
of: (i) providing pharmacy services in the long-term care setting; (ii)
specialty services including infusion therapy services and Medicare Part B
benefits; and (iii) pharmacy consulting services. For the year ended December
31, 1997, on a pro forma basis, long-term care pharmacy services represented
approximately 84.5% of PharMerica's revenues.
Pharmacy Services. PharMerica's core business consists of providing a
full range of institutional pharmacy services to the elderly, chronically ill
and disabled in long-term care and alternate care settings, including long-term
care facilities, assisted living facilities, specialty hospitals and the home.
PharMerica purchases pharmaceuticals in bulk quantities from wholesalers and
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manufacturers and dispenses both prescription and non-prescription drugs in
patient-specific packaging in accordance with physician orders. Prescription and
non-prescription medications are delivered at least daily to long-term care
facilities for administration to residents by the nursing staffs of such
facilities. PharMerica's pharmacists package drugs to meet each patient's needs
for either single-day or multi-day dosage requirements. PharMerica can customize
the timing and packaging of its delivery system to meet specific client needs.
Specialty Services. With cost-containment pressures in healthcare
forcing providers and payors to seek the most efficient setting for care,
long-term care facilities are more often providing higher acuity care more cost
effectively than hospitals. PharMerica provides long-term care facilities with
specialty services and products, including infusion therapy services and
services reimbursed under Medicare Part B.
The Company's infusion therapy services consists of the intravenous
delivery or administration by tube, catheter or IV, of medication or
introduction of parenteral and enteral nutritional formulas, including nutrients
and other fluids, to patients. The Company also offers infusion services under
its "IV Express" program which provides nationwide, next-day delivery service
for facilities that fall outside PharMerica's traditional service area. Patients
can receive infusion therapies at home or in a long-term or other subacute care
facility at a cost which is substantially less than hospital-based care. The
trend toward delivery of healthcare in the lowest cost setting and the
increasing ability to treat certain illnesses outside of hospitals or other
acute care settings represents an opportunity for long-term care facilities to
attract infusion therapy patients. The Company prepares the product to be
administered, delivers the product to the patient setting and trains nursing
facility personnel in administering infusion therapy, but it does not administer
the therapy except in limited circumstances. The Company offers a full range of
premixed, ready-to-handle solutions, and related products, supplies and
equipment, as well as a policy and procedure manual detailing appropriate
intravenous practices and clinical pharmacist support. These infusion therapies
include enteral nutrition therapy, parenteral nutrition therapy, antibiotic
infusion therapy and chemotherapy, AIDS therapy, pain management and hydration
therapy. PharMerica has established an infusion therapy distribution network
which allows next-day delivery and eliminates the need for customer product
storage. Because the proper administration of infusion products requires a
trained and experienced pharmacist and nursing staff and because the level of
such training varies among nursing facilities, the Company has developed a
multi-tiered education and training
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program. The program ranges from basic education and information for trained
facility nurses to the complete range of skilled nursing services training made
available to customers through hands-on clinical support, including patient
assessment, advanced IV line placement and dose administration.
As a part of its specialty services, PharMerica also provides services
and products reimbursed under Medicare Part B. Medicare Part B provides benefits
covering, among other things, outpatient treatment, physicians' services,
durable medical equipment, orthotics, prosthetic devices and medical supplies.
Products and services covered for Medicare Part B eligible residents in the
long-term care facility include but are not limited to, enteral feeding
products, ostomy supplies, urological products, orthotics, prosthetics, surgical
dressings and tracheostomy care supplies. PharMerica either bills Medicare
directly for Part B covered products or, alternatively, assists the long-term
care facility in meeting Medicare Part B eligibility requirements and prepares
bills on behalf of the facility.
Pharmacy Consulting Services. State and local regulations mandate that
long-term care facilities, in addition to providing a source of pharmaceuticals,
retain consultant pharmacist services to monitor and report on prescription drug
therapies in order to maintain and improve the quality of patient care.
PharMerica provides value-added consulting services that help clients comply
with federal and state regulations, manage medication costs and maximize the
therapeutic efficacy of drug regimens. These pharmacy consulting services
include: (i) regular review of each patient's medical record and drug regimen;
(ii) recommendation of therapeutic alternatives, where appropriate; (iii)
monthly evaluation of facility-wide drug usage and drug costs; (iv) maintenance
of drug administration records that assist the long-term care facility with
regulatory compliance; (v) participating on certain key committees of client
facilities as well as periodic involvement in staff meetings; (vi) monthly
inspection of facility's medication carts and drug storage rooms; and (vii)
providing training programs.
PharMerica's consultant pharmacists also employ formulary management
techniques designed to assist physicians in making the best cost-effective
clinical choice of drug therapy for residents. Using PharMerica's proprietary
formulary program, introduced in 1995 and published annually in conjunction with
the American Medical Directors Association and the University of Arizona School
of Pharmacy, PharMerica pharmacists assist prescribing physicians in designating
the use of particular drugs from among therapeutic alternatives (including
generic substitutions) and in the use of more cost-effective delivery systems
and dose forms. The PharMerica formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the elderly population of long-term
care facilities. PharMerica's formulary guidelines also provide relative
pharmaceutical cost information to residents, their insurers or other payors.
Adherence to the PharMerica formulary guidelines is intended to improve drug
therapy results, lower costs for residents and strengthen PharMerica's
purchasing power with drug manufacturers.
PharMerica's proprietary Consultware program is customized for pharmacy
consulting practices and is designed to help consultant pharmacists efficiently
generate communications to nursing facility professionals, produce professional
and informative quality assurance reports,
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monitor responses to their recommendations, such as therapeutic interchange
requests, and help document the clinical and economic value of their services.
Mail Order Services. PharMerica provides a broad array of mail order
pharmacy products and services, including prescription and non-prescription
pharmaceuticals, medical supplies and medical equipment, primarily to workers'
compensation claimants and correctional facilities nationwide. The Company also
provides mail order pharmacy services to catastrophically ill or injured
claimants requiring long-term pharmacy services. For the year ended December 31,
1997, on a pro forma basis, mail order services represented approximately 14.2%
of PharMerica's revenues.
Workers' Compensation. The Company's workers' compensation services
include: home delivery of prescription drugs and medical supplies and medical
equipment to injured workers who are receiving workers' compensation benefits;
an array of computer software solutions to reduce a payor's administrative
costs; and an on-line retail prescription drug card service that enables injured
workers to obtain prescription drugs at no direct cost to the claimant from a
network of over 30,000 participating retail pharmacies throughout the country.
PharMerica provides mail order services to approximately 106,000 workers'
compensation claimants nationwide.
PharMerica works directly with workers' compensation payors to provide
their claims representatives with the appropriate training and on-site
assistance to identify potential claimants who would benefit from PharMerica's
services. After identifying these claimants, PharMerica coordinates with the
claims representative, the claimant's treating physician and rehabilitation
nurse to determine the prescription drugs, medical supplies and medical
equipment that are required for the care and treatment of the claimant's injury
and the requisite schedule for supplying those items.
Correctional Facilities. The Company provides pharmacy services to
approximately 135,000 inmates, making it the largest independent provider of
pharmacy services to correctional institutions in the United States. The Company
enters into contracts with state agencies or general medical contractors to whom
the provision of healthcare services to correctional institutions has been
outsourced. The Company services substantially all of its correctional
institution contracts from a central distribution facility in Baltimore,
Maryland.
Catastrophic Care. The Company provides comprehensive catastrophic care
as a part of its specialty services. PharMerica has introduced a proprietary
program, PharmaCare Complete, to provide a comprehensive package of healthcare
products and services to its homebound catastrophic care customers who generally
have significant and continuing needs for pharmaceutical services and healthcare
products. At December 31, 1997, the Company provided these products and services
to approximately 3,000 customers.
Specialty Hospitals. The Company also provides pharmacy services to
specialty and rural hospitals. For the year ended December 31, 1997, on a pro
forma basis, these services represented approximately 1.3% of PharMerica's
revenues.
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OPERATIONS
Organization. PharMerica's long-term care operations are divided into
four geographic regions. The Company believes this regional organizational
structure provides the flexibility to accommodate continued growth while
providing standardized regional care. PharMerica believes that the institutional
pharmacy business is dependent in large part on personal service and encourages
its pharmacists to develop personal relationships and to be responsive to local
market demands. PharMerica uses more centralized financial and inventory control
systems support than is typically available to small, independent pharmacy
operators. Additional services performed at the corporate level include quality
improvement oversight, financial and accounting functions, clinical program
development, group purchasing, marketing, acquisitions and corporate development
activities. Where possible, the Company establishes mega-pharmacies serving over
10,000 beds. These mega-pharmacies allow the Company to lower overhead per bed,
to use advanced distribution technology that increases efficiency and accuracy
of services and to make greater investments in clinical and information systems.
The Company currently operates six mega-pharmacies and intends to create five
additional mega-pharmacies in 1998.
Pharmacy Distribution Model. In the institutional pharmacy business,
PharMerica typically provides services through regional pharmacies that have the
capability to serve long-term care facilities within a 150-mile radius. These
regional pharmacies are generally open 24 hours, seven days a week and are
staffed with clinical pharmacists, registered nurses and pharmacy technicians.
PharMerica ships products to workers' compensation claimants from two
distribution facilities in Tampa, Florida. In the correctional business,
PharMerica dispenses pharmaceuticals primarily from a centralized mail service
pharmacy operation located in Baltimore, Maryland.
Marketing and Sales. PharMerica's pharmacy services marketing efforts
are directed at long-term care facility operators. While pricing is an important
factor in the selection of pharmacy providers, PharMerica's experience is that
the primary factor, particularly among long-term care operators, is the quality
and range of services offered. Consequently, PharMerica strives to provide
high-quality services that are tailored to each client's needs. Once a
relationship is established, PharMerica then attempts to expand the range of
services it provides. PharMerica's marketing efforts are conducted by regional
vice presidents with support from local pharmacy managers and regional
salespersons. PharMerica's 300 consultant pharmacists and 100 nurse consultants
also are integral to the marketing effort because of their daily contact with
the facility managers and the residents in those facilities.
The Company's mail order services marketing and sales efforts are
directed to workers' compensation insurance adjusters and managers at regional
and local insurance offices throughout the country. Referrals of claimants
meeting certain injury profiles are forwarded to the Company's internal sales
force who contact claimants to explain the benefits of using the Company's
services. For claimants electing to use the Company's programs, Company
representatives then obtain the necessary information regarding the patients'
medications and supplies and put the claimant on service.
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JCAHO Accreditation. As one component of its commitment to quality
assurance, PharMerica is pursuing accreditation of its pharmacies by JCAHO, a
professional, nonprofit organization dedicated to improving the quality of care
in healthcare facilities. To receive JCAHO accreditation, pharmacies must be in
compliance with JCAHO's requirements, which focus primarily on quality control.
As of February 1, 1998, 46 of the Company's pharmacies had received
accreditation. The Company intends to pursue JCAHO accreditation for all of its
long-term care pharmacies. JCAHO accreditation, while not mandated for
pharmacies, is increasingly important to managed care organizations and Medicaid
programs and is also important for entering into preferred provider arrangements
with national and regional providers looking for consistent quality. The Company
believes that its pursuit of accreditation from JCAHO will help it provide
quality services and will assist it in competing on a nationwide basis.
CUSTOMERS
The primary customers of PharMerica are long-term care facilities,
workers' compensation payors, correctional facilities, and specialty hospitals.
The Company has entered into preferred provider agreements with regional and
national long-term care providers, the most significant of which are Beverly and
IHS. The Company provides services to approximately 58,000 Beverly long-
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term care beds and 17,000 IHS long-term care beds. Sales to Beverly and its
residents accounted for approximately 16.0% of revenues for the year ended
December 31, 1997 on a pro forma basis. Other than Beverly, no customer
represented more than 10% of PharMerica's revenue on a pro forma basis.
Preferred Provider Agreements. The Company has preferred provider
agreements with eight national and regional long-term care operators, including
Beverly and IHS. These agreements give PharMerica the right to provide pharmacy
services to the operator's facilities subject to certain conditions, including
conditions related to competitive pricing and quality service. The agreements
also generally give the Company the right, subject to competitive pricing and
services and freedom of choice laws, to service beds in facilities subsequently
acquired by the long-term care company or in facilities that subsequently become
serviceable by the Company when pharmacies are opened or acquired by the
Company. As a result of the Merger, the Company is seeking expanded market
coverage under existing preferred provider agreements through servicing of
additional beds in areas in which Capstone or PCA, as the case may be, did not
have institutional pharmacy capabilities.
COMPETITION
The institutional pharmacy market is fragmented and competition varies
significantly from market to market. PharMerica's competitors include small
retail pharmacies, large chains of retail pharmacies, in-house captive
pharmacies and national institutional pharmacies. The Company believes that the
competitive factors most important in PharMerica's lines of business are quality
and range of service offered, competitive prices, reputation with referral
sources, ease of doing business with the provider, and the ability to develop
and maintain relationships with referral sources. Some of PharMerica's present
and potential competitors, including retail pharmacies, captive pharmacies and
pharmaceutical distributors, are significantly larger than PharMerica and have,
or may obtain, greater financial and marketing resources than PharMerica. In
addition, there are relatively few barriers to entry in the local markets served
by PharMerica, and it may encounter substantial competition from local market
entrants. In acquiring institutional pharmacy providers, the Company competes
with several other companies with similar acquisition strategies, some of which
may have greater resources than the Company.
REIMBURSEMENT AND BILLING
For the year ended December 31, 1997, the Company's payor mix, on a
revenue basis, was approximately 37.3% directly from long-term care facilities
that receive reimbursement from private pay residents and under Medicare Part A
(including revenues from private residents billed through such facilities),
31.8% Medicaid, 26.0% private pay and third party insurance and 4.9% Medicare
Part B. Medicare and Medicaid are highly regulated. The failure of PharMerica to
comply with applicable reimbursement regulations could adversely affect the
Company's business.
Medicare/Long-Term Care Facilities. The Medicare program is a federally
funded and administered health insurance program for individuals age 65 and over
or for certain individuals who are disabled. The Medicare program consists of
two parts: Medicare Part A, which covers, among other things, inpatient
hospital, skilled long-term care facility, home healthcare and certain other
types of healthcare services; and Medicare Part B, which covers physicians'
services, outpatient services and certain items and services provided by medical
suppliers. Medicare Part B also covers
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a limited number of specifically designated prescription drugs such as enteral
nutrition and urologic supplies. Medicare intermediaries for Medicare Part A
require long-term care facilities to submit all of their costs for patient care,
including pharmaceutical costs, in a unified bill. Thus, fees for
pharmaceuticals provided to Medicare Part A residents are paid to the Company by
the long-term care facility on a monthly basis. Pricing is consistent with that
of private pay residents or is set between private pay rates and Medicaid
minimums. Medicare Part A has cost-sharing arrangements under which
beneficiaries must pay a portion of their costs. These non-covered co-payments
are billed by the facility directly to residents or the state Medicaid plan, as
the case may be.
Medicaid. The Medicaid program is a federal-state program designed to
enable states to provide medical assistance to aged, blind or disabled
individuals, or to member of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of Health and Human Services for approval. The federal Medicaid
statute specifies a variety of requirements which the state plan must meet,
including requirements relating to eligibility, coverage of services, payment
and administration. For residents eligible for Medicaid, the Company bills the
individual state Medicaid program. Medicaid programs are funded jointly by the
federal government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
prescription drugs under Medicaid. In most states, pharmacy services are priced
at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. In addition, most states establish a fixed
dispensing fee which is adjusted to reflect associated costs on an annual or
less frequent basis. Certain states including Georgia, Maine, Michigan and
Nebraska, have "lowest charge legislation" or "most favored nation provisions"
which require the Company to charge Medicaid no more than its lowest charge to
other consumers in the state.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. As managed care organizations
continue to demand lower prices, revenues from Medicaid patients in states with
"lowest charge legislation" may be adversely effected. The annual increase in
the federal share would vary from state to state based on a variety of factors.
Such changes, if ultimately signed into law, could adversely affect the
Company's business.
Private Pay/Third Party Insurance. For those residents who are not
covered by government-sponsored programs or private insurance, PharMerica
generally bills the patient or the patient's insuror or other responsible party
on a monthly basis. Depending upon local market practices, PharMerica may
alternately bill private residents through the long-term care facility. Pricing
for private pay residents is based on prevailing regional market rates or "usual
and customary" charges. Third-party insurance includes funding for residents
covered by private plans, veterans benefits,
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workers' compensation and other programs. When applicable, the resident's
individual insurance plan is billed monthly, and rates are consistent with those
for private pay residents.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations delineate qualifications required for day-to-day operations,
reimbursement and documentation of select activities. PharMerica continuously
monitors the effects of regulatory activity on its operations.
States require that companies operating a pharmacy within the state be
licensed by the state board of pharmacy. PharMerica currently has its pharmacies
licensed in each state in which it operates a pharmacy. In addition, PharMerica
currently delivers prescription drugs from its licensed pharmacies to many
states in which PharMerica does not operate a pharmacy. Most of these states
regulate the delivery of prescription drugs by out of state pharmacies to
residents in such states. PharMerica's pharmacies hold these requisite licenses.
In addition, PharMerica's pharmacies are registered with the appropriate state
and federal authorities pursuant to statutes governing the regulation of
controlled substances.
Long-term care facilities are required to be licensed in the states in
which they operate and, if serving Medicare or Medicaid residents, must be
certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to state and federal
nursing home regulations which impose strict compliance standards relating to
quality of care for long-term care facilities operations, including extensive
documentation and reporting requirements. In addition, pharmacists, nurses and
other healthcare professionals who provide services on PharMerica's behalf are
in most cases required to obtain and maintain professional licenses and are
subject to state regulation regarding professional standards of conduct.
Federal and state laws impose certain repackaging, labeling, and
packing insert requirements on pharmacies that repackage drugs for distribution
beyond the regular practice of dispensing or selling drugs directly to retail
customers. A drug repackager must be registered with the Food and Drug
Administration. PharMerica holds all required registrations and licenses, and
its repackaging operations are in material compliance with applicable state and
federal requirements.
The long-term care pharmacy business operates under regulatory and cost
containment pressures from state and federal legislation primarily affecting
Medicaid and, to a lesser extent, Medicare. As is the case for nursing home
services generally, PharMerica receives reimbursement from both the Medicaid and
Medicare programs, directly from individual residents (private pay), and from
other payors such as third-party insurers. PharMerica believes that its
reimbursement mix is in line with long-term care expenditures nationally.
Federal regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given broad
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practices. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
requirements for long-term care
13
<PAGE> 14
facilities relating to drug regimen reviews for Medicaid residents in such
facilities. Recent regulations clarify that, under federal law, a pharmacy is
not required to meet the general standards for drugs dispensed to long-term care
facility residents if the long-term care facility complies with the drug regimen
review requirements. However, the regulations indicate that states may
nevertheless require pharmacies to comply with the general standards, regardless
of whether the long-term care facility satisfies the drug regimen review
requirement, and the states in which PharMerica operates currently do require
its pharmacies to comply therewith. Third, federal regulations impose certain
requirements relating to reimbursement for prescription drugs furnished to
Medicaid residents.
In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect
PharMerica's operations. For example, some states have enacted "freedom of
choice" requirements which may prohibit a long-term care facility from requiring
its residents to purchase pharmacy or other ancillary medical services or
supplies from particular providers. Such limitations may increase the
competition which PharMerica faces in providing services to long-term care
residents. Five states (Florida, Georgia, Louisiana, Texas, and Virginia) in
which PharMerica operates have freedom of choice requirements. PharMerica does
not believe these requirements have, or will have, a material impact on its
operations.
PharMerica is subject to federal and state laws that govern financial
and other arrangements between healthcare providers. These laws include the
federal anti-kickback statute and physician self-referral prohibitions. The
anti-kickback statute prohibits, among other things, knowingly and willfully
soliciting, receiving, offering or paying any remuneration directly or
indirectly in return for or to induce the referral of an individual to a person
for the furnishing of any item or service for which payment may be made in whole
or in part under Medicare or Medicaid. Many states have enacted similar statutes
which are not necessarily limited to items and services for which payment is
made by Medicare or Medicaid. Violations of these laws may result in fines,
imprisonment, and exclusion from the Medicare and Medicaid programs or other
state-funded programs. Federal and state court decisions interpreting these
statutes are limited, but have generally construed the statutes to apply if "one
purpose" of remuneration is to induce referrals or other conduct within the
statute. In August 1994, the Office of Inspector General ("OIG") of the
Department of Health and Human Services, issued a Special Fraud Alert regarding
prescription drug marketing schemes which it believes may violate the
anti-kickback statute. Among the specific activities identified in the Fraud
Alert were a "product conversion" program in which a drug company offered cash
awards to pharmacies who changed from another company's drug product to their
product. The Fraud Alert also targets marketing programs in which drug companies
offer cash or other benefits to pharmacists in exchange for marketing tasks in
the course of pharmacy practice related to Medicare or Medicaid. In the fall of
1997, an assistant U.S. attorney gave a speech in which he stated the industry
wide practice of drug manufacturers granting volume-related rebates to pharmacy
companies is an improper payment under the federal anti-kickback statutes. The
pharmaceutical industry has taken this position under advisement and PharMerica
continues to monitor the situation. PharMerica is not aware of any OIG or
Department of Justice investigations or actions against it. However, it is
impossible to predict whether the OIG or another governmental or regulatory
agency may threaten or bring such an action against PharMerica in the future.
14
<PAGE> 15
The physician self-referral prohibition, commonly referred to as the
"Stark" law, prohibits a physician from referring Medicare or Medicaid residents
to "designated health services" in which the physician (or family member) has a
financial interest, either through ownership or compensation arrangements.
Prohibited referrals will not be reimbursed by Medicare or Medicaid, and the
statute makes it illegal to seek reimbursement from any other source. In
addition, violations may result in fines and/or civil penalties and exclusion
from the Medicare and Medicaid programs. The list of "designated health
services" includes outpatient prescription drugs. Some states have also passed
similar "anti-self referral" legislation. PharMerica does not believe that the
Stark law or similar state laws, have had, or will have, a significant adverse
impact on the operations of PharMerica and PharMerica is not aware of any
financial arrangements between it, or any of its pharmacies, and physicians
which violate the Stark law.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arose
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like. Further, a number of states involved in
these enforcement actions have requested that the U.S. Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, either
the state enforcement efforts or the FDA involvement would have on PharMerica's
operations.
The United States government frequently seeks to enforce the health
care laws discussed above, and to ensure accurate billing of federally-financed
health care, through bringing actions against health care providers under the
False Claims Act ("FCA"). The FCA provides for recovery of treble damages to the
federal government, plus penalties, for the submission of false or fraudulent
claims for payment to the federal government. The FCA also authorizes private
citizens to bring such actions on behalf of the Untied States, and provides an
incentive to private plaintiffs by granting them between 15% and 30% of any
recoveries in actions they initiate. In addition, many states have also enacted
their own false claims statutes modeled on the FCA and are using such statutes
in actions against health care providers whom they believe have submitted false
or fraudulent claims for payment under the Medicaid program or other
state-financed programs. PharMerica is not aware of any FCA or state false
claims investigations or actions against it or any of its pharmacies. However,
it is impossible to predict whether the federal government or a state may
threaten or bring such an action against PharMerica in the future.
PharMerica believes its contract arrangements with other healthcare
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with PharMerica's
interpretation and application.
EMPLOYEES
As of March 1, 1998, PharMerica had approximately 6,376 full-time
employees and approximately 1,120 part-time employees. PharMerica believes its
relationship with its employees is good. None of PharMerica's employees are
represented by labor unions under any collective bargaining agreement.
15
<PAGE> 16
ITEM 2. PROPERTIES.
The Company's headquarters are located in approximately 100,000 square
feet of leased space in the Sabal Industrial Park in Tampa, Florida. The Company
also leases an aggregate of approximately 60,000 square feet for its workers'
compensation business distribution facility in Tampa, Florida and approximately
22,000 square feet for its correctional facility business distribution facility
in Baltimore, Maryland. The Company also leases an aggregate of approximately
7,700 square feet for regional and corporate facilities in Dallas, Texas.
PharMerica leases space required for its 120 pharmacy locations. A typical
pharmacy occupies between 7,000 and 10,000 square feet. Lease terms on most of
the leased centers range from 3 to 5 years. The Company considers that, in
general, its physical properties are well maintained, in good operating
condition and adequate for their intended purposes. Management believes that the
Company's leased properties are adequate for its present needs and that suitable
additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
PharMerica is from time to time subject to claims and suits arising in
the ordinary course of business, including claims for repayment of monies paid
to PharMerica under Medicare or Medicaid. The provision of healthcare services
entails an intrinsic risk of liability. As of March 1, 1998, there were no
material legal proceedings pending against PharMerica that the Company believes
could reasonably be expected to have a material adverse effect on the Company
nor, to PharMerica's knowledge, were any material proceedings against it
contemplated by any governmental authority. There can be no assurance that
PharMerica will not become involved in such litigation in the future. In
addition, the Company has brought an action against IHS for breach of certain
agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1997, the following matters were
submitted to a vote of the Company's securityholders in a special meeting
related to the Merger held November 18, 1997:
(1) To approve and adopt an Agreement and Plan of Merger by and
between Beverly Enterprises, Inc. and the Company.
19,348,636 - FOR 72,131 - AGAINST 16,804 - ABSTAIN
68.2877% 0.2062% 0.0480%
16
<PAGE> 17
(2) To approve and adopt an Amendment to the Company's Certificate of
Incorporation.
14,855,033 - FOR 4,636,551 - AGAINST 15,104 - ABSTAIN
54.5647% 14.1323% 0.0432%
(3) To approve and adopt an Amendment to the Company's 1995 Incentive
and Nonqualified Stock Option Plan for Key Personnel and
Directors.
18,952,428 - FOR 455,484 - AGAINST 29,659 - ABSTAIN
67.1278% 1.3286% 0.0862%
(4) To approve and adopt an Amended and Restated Capstone 1996 Employee
Stock Purchase Plan.
19,272,836 - FOR 206,055 - AGAINST 27,797 - ABSTAIN
68.0433% 0.6154% 0.0809%
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Shares are traded on the NASDAQ National Market System
(the "Nasdaq Stock Market") under the designation "DOSE." The following table
indicates high and low sales quotations for the periods indicated based upon
information supplied by the Nasdaq Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
BID QUOTATIONS
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ----------------------------------- ------ -----
<S> <C> <C>
1st Quarter $ 9.25 $7.00
2nd Quarter 13.38 8.50
3rd Quarter 13.63 9.75
4th Quarter 13.13 9.38
FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------
1st Quarter $13.25 $10.00
2nd Quarter 12.00 7.75
3rd Quarter 12.75 10.00
4th Quarter 12.94 9.00
</TABLE>
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<PAGE> 18
As of March 17, 1998, the number of record holders of the Company's
shares was approximately 2,082, which does not include individual participants
in security position listings. The number of beneficial owners of the Company's
shares exceeds 400, the minimum number required by the Nasdaq Stock Market. On
March 17, 1998, the closing bid quotation for the Company's common stock was
$15.00, as reported by the Nasdaq Stock Market.
The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. THE COMPANY'S LOAN
ARRANGEMENTS PROHIBIT THE PAYMENT OF DIVIDENDS.
In the past year the Company has sold the following securities without
registration under the Securities Act:
On November 10, 1997, the Company sold 811,341 shares of its Common
Stock, valued at $9,100,000, to the shareholders of Resident Care
Pharmacy, Inc. as consideration for the acquisition of its
institutional pharmacy business through a merger.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated statement of income and balance sheet data
for the years ended and as of December 31, 1994, 1995, 1996 and 1997 have been
derived from the audited consolidated financial statements of the Company. As a
result of the accounting treatment of the Merger, the historical financial
statements of the Company are those of PCA. The consolidated statement of income
and balance sheet data for the year ended and as of December 31, 1993 have been
derived from the Company's internal records. The December 31, 1993 financial
statement data are unaudited and, in the opinion of the Company's management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information for the unaudited periods.
This information should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere herein, the other
financial information included elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
(Dollars and shares in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales................................ $201,670 $247,512 $451,685 $516,400 $ 652,179
Cost of sales............................ 90,262 117,045 242,761 280,468 355,577
-------- -------- -------- -------- ----------
Gross profit........................... 111,408 130,467 208,924 235,932 296,602
-------- -------- -------- -------- ----------
Operating expenses:
Selling, general and administrative.... 82,201 99,271 175,794 184,751 216,087
Depreciation and amortization.......... 3,741 5,734 13,219 16,392 21,408
Restructuring charges.................. -- -- -- -- 5,780
Impairment of long-lived assets....... -- -- 9,543 -- 5,155
-------- -------- -------- -------- ----------
Total operating expenses............. 85,942 105,005 198,556 201,143 248,430
-------- -------- -------- -------- ----------
Operating income....................... 25,466 25,462 10,368 34,789 48,172
Interest expense, net.................... 110 113 (195) (166) 2,483
-------- -------- -------- -------- ----------
Income before provision for income taxes. 25,356 25,349 10,563 34,955 45,689
Provision for income taxes............... 10,281 10,291 5,977 14,668 18,992
-------- -------- -------- -------- ----------
Net income............................... $ 15,075 $ 15,058 $ 4,586 $ 20,287 $ 26,697
======== ======== ======== ======== ==========
OTHER FINANCIAL DATA:
Capital expenditures..................... 8,918 7,407 13,098 9,616 15,600
CONSOLIDATED BALANCE SHEET DATA:
Working capital.......................... $ 24,537 $ 71,794 $ 77,512 $ 92,134 $ 201,588
Total assets............................. 69,443 327,287 428,872 441,576 1,114,248
Long-term obligations.................... 1,300 1,147 755 2,302 435,422
Stockholders' equity..................... 51,674 66,732 71,318 91,605 528,878
</TABLE>
- -----------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion should be read in conjunction with the
information contained in the consolidated financial statements, including the
related notes, and the other financial information incorporated by reference
herein.
This Annual Report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import. Such statements include
statements concerning the Company's business strategy, acquisition strategy,
operations, cost savings initiatives, industry, economic performance, financial
condition, liquidity and capital resources, existing government regulations and
changes in, or the failure to comply with, governmental regulations, legislative
proposals for healthcare reform, the ability to enter into arrangements with
managed care providers on an acceptable basis, changes in reimbursement policies
and demographic changes. Such statements are subject to various risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements because of a number of
factors, including those identified in the "Risk Factors" section and elsewhere
in this Annual Report. The forward-looking statements are made as of the date of
this Annual Report and the Company assumes no obligation to update the
forward-looking statements or to update the reasons that actual results could
differ from those projected in the forward-looking statements.
18
<PAGE> 19
GENERAL
PharMerica is a leading provider of institutional pharmacy services to
the elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
specialty hospitals and the home. The Company is also a leading provider of mail
order pharmacy services to the workers' compensation and catastrophic care
markets. As of March 1, 1998, PharMerica provided pharmacy services to
approximately 345,000 long-term care residents in 36 states and to over 106,000
workers' compensation claimants nationwide. For the year ended December 31,
1997, the Company generated, on a pro forma basis, net sales of approximately
$1.0 billion and EBITDA of approximately $126.2 million.
PharMerica was formed as a result of the Merger involving PCA, a
subsidiary of Beverly, and Capstone. Capstone issued 50 million shares of its
common stock and assumed approximately $275.0 million of debt to acquire all of
the outstanding stock of Beverly. Immediately prior to this transaction, Beverly
distributed its long-term care business to New Beverly Holdings, Inc. ("New
Beverly") leaving only its institutional pharmacy business, PCA, to be acquired
by Capstone. Because Beverly's shareholders owned a majority of the Company
after the Merger, for accounting purposes, the transaction was treated as an
acquisition of Capstone by PCA.
Since the Merger was treated as a reverse merger transaction for
accounting purposes, the shares of Capstone at the date of close plus the fair
value of Capstone's outstanding options and warrants, represent the
consideration for the Merger. In accordance with EITF 95-19, the purchase price
in the Merger for accounting purposes was determined using the fair value of
Capstone's common stock over a reasonable period of time before and after the
transaction was agreed to and announced. After the Merger was consummated, the
historical financial statements of the Company became those of PCA. Therefore,
the Company's 1997 historical financial results reflect a full year of PCA
operations and one month of Capstone operations.
The Company believes that, when fully realized, the synergies from the
Merger will be approximately $25 million annually. This includes savings
primarily from the consolidation of 19 institutional pharmacies, seven of which
have already occurred, more favorable pricing terms in the Company's new primary
purchasing contracts and corporate and regional overhead reductions. It also
includes additional income generated through expanded market coverage of
available beds under the Company's existing preferred provider agreements with
regional and national long-term care providers. The Company expects to realize
approximately $16 million of these synergies in 1998 and the full $25 million in
anticipated annual synergies (which includes approximately $2 million of
additional income as described above) beginning in 1999.
In pursuit of its acquisition strategy, the Company routinely reviews
potential pharmacy and pharmacy services provider acquisitions. At any given
time, the Company may be in discussions with one or more such pharmacy and
pharmacy services provider owners, some of which may be material. There can be
no assurance that any of these or other negotiations will lead to definitive
agreements or, if agreements were reached, that any transactions would be
consummated.
19
<PAGE> 20
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net Sales. The Company's net sales increased approximately $135.8
million, or 26.3%, to $652.2 million in 1997 from $516.4 million in 1996. This
increase consisted of approximately $72.0 million of same store growth and
approximately $57.8 million related to acquisitions, principally the January 1,
1997 acquisition of Interstate Pharmacy Corp. and the December 1997 acquisition
of Capstone. Same store growth was attributable to increased infusion therapy of
approximately $19.0 million, increased mail order and other workers'
compensation services of approximately $10.8 million and growth in the core
institutional pharmacy business of approximately $42.2 million, primarily due to
marketing and customer retention initiatives. The Company's revenues from sales
to Beverly facilities increased approximately $17.4 million, or 21.2%, to $99.5
million, or 15.3% of net sales, in 1997 from $82.1 million, or 15.9% of net
sales, in 1996. This increase in sales was primarily attributable to additional
Beverly facilities and its residents being serviced by newly opened or acquired
pharmacies.
Cost of Sales. The Company's cost of sales increased approximately
$75.1 million, or 26.7%, to $355.6 million in 1997 from $280.5 million in 1996.
As a percentage of net sales, cost of sales was 54.5% in 1997 as compared to
54.3% in 1996. Cost of sales as a percentage remained stable from 1996 to 1997,
primarily due to increased purchasing efficiencies related to renegotiated
vendor contracts which were partially offset by competitive pricing pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include wages and related expenses, facility expenses,
and other administrative overhead. Selling, general and administrative expenses
increased approximately $31.5 million, or 17.1%, to $216.1 million in 1997 from
$184.6 million in 1996. Approximately $19.3 million of this increase was
attributable to acquisitions completed during 1997. The remaining increase in
selling, general and administrative expenses was related to the increase in same
store revenues discussed above. As a percentage of net sales, selling, general
and administrative expenses decreased to 33.1% in 1997 from 35.7% in 1996. This
decrease was primarily the result of implementing certain cost reduction
initiatives and spreading the costs across a larger revenue base. Additionally,
selling, general and administrative expenses include $3.2 million and $1.8
million in 1997 and 1996, respectively, related to management fees allocated
from Beverly. These amounts do not necessarily reflect the actual cost the
Company would have incurred on a stand-alone basis.
Depreciation and Amortization. Depreciation and amortization increased
approximately $5.0 million, or 30.6%, to $21.4 million in 1997 from $16.4
million in 1996. Approximately $2.7 million of this increase was related to
acquisitions during such period. The remaining increase was attributable to
investments in medical carts and other equipment as well as leasehold
improvements.
Restructuring Charges. During December 1997, in connection with the
Merger, the Company adopted a plan to restructure its long-term care pharmacy
operations. In connection with
20
<PAGE> 21
this plan, the Company intends to close six former PCA pharmacies and has
recorded restructuring costs of $5.8 million related to these closures,
consisting of $3.6 million of severance covering approximately 180 pharmacy
employees, $739,000 of lease termination costs and $1.4 million of other costs.
Impairment of Long-Lived Assets. In December 1997, the Company recorded
an impairment loss of approximately $5.2 million related to the planned closure
of certain pharmacies as a result of the Merger. The impairment loss includes
the write-off of various fixed assets, such as leasehold improvements and
furniture and fixtures, which are specific to the pharmacies to be closed.
Additionally, the Company wrote down certain capitalized software costs to their
estimated fair values.
Interest Expense. Prior to the Merger, the Company financed its
acquisition and working capital needs through intercompany borrowings from
Beverly. The Company did not incur interest on these intercompany advances.
Subsequent to the Merger, the Company entered into the Credit Facility with
a syndicate of commercial banks. Interest expense of approximately $2.5 million
was incurred under the Credit Facility from the date of the Merger through
December 31, 1997. At year end, the Company had outstanding borrowings of
approximately $424.5 million. Proceeds of these borrowings were used to repay
$275 million of PCA debt in connection with the Merger, refinance Capstone's
existing credit facility, fund acquisitions closed in December 1997 and pay
transaction costs related to the Merger.
Provision for Income Taxes. The Company had an annual effective rate of
41.6% in December 31, 1997, compared to 42.0% in 1996. Management believes that
the Company's tax rate will remain higher than the statutory federal tax rate in
future years due to the non-deductibility of the goodwill recorded on certain
stock acquisitions, including the Merger.
Year 2000. The Company has assessed and continues to assess the impact
of the Year 2000 issue on its reporting system and operations. The Year 2000
issue exists because many computer systems and applications currently use
two-digit date fields to designate a year such that, as the century date occurs,
date sensitive systems will recognize the year 2000 as 1900 or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process critical financial and operational information incorrectly. During 1997,
the Company incurred approximately $250,000 to modify existing computer systems
and applications and estimates that approximately $1.7 million in the aggregate
will be incurred in 1998 and 1999. If the Company's remediation plan is not
successful, there could be a significant disruption of the Company's ability to
transact business with its major customers and suppliers. The Company is not
aware of any Year 2000 problems of any of its significant customers or
suppliers.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales increased approximately $64.7
million, or 14.3%, to $516.4 million in 1996, from $451.7 million in 1995. This
increase was primarily related to the 1995 acquisition of a mail service
pharmacy business, Pharmacy Management Services, Inc. ("PMSI"), and other
acquisitions, which added approximately $54.1 million to revenues, and, to a
lesser extent, internal growth.
21
<PAGE> 22
The Company's revenues from sales to Beverly facilities and its
residents decreased approximately $2.3 million, or 1.4%, to $160.7 million, or
31.1% of net sales in 1996 from $163.0 million, or 36.1% of net sales, in 1995.
This decrease was primarily attributable to Beverly's disposition of
approximately 83 nursing facilities in 1996 and 29 nursing facilities in 1995.
Cost of Sales. The Company's cost of sales increased approximately
$37.7 million, or 15.5%, to $280.5 million in 1996 from $242.8 million in 1995.
As a percentage of net sales, cost of sales was 54.3% in 1996 as compared to
53.7% in 1995, primarily related to the full year impact of the lower gross
margin mail service business purchased from PMSI.
Selling, General and Administrative Expenses. The Company's total
selling, general and administrative expenses increased approximately $9.0
million, or 5.1%, to $184.6 million in 1996 from $175.6 million in 1995.
Approximately $5.2 million of this increase was related to the mid-1995 purchase
of PMSI with the remainder of the increase attributable to increased same store
revenues and severance and relocation expenses associated with the 1996
reorganization and relocation of the Company's corporate offices.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $3.2 million, or 24.0%, to $16.4 million in 1996 from
$13.2 million in 1995, primarily related to the amortization of goodwill
associated with the PMSI transaction completed in mid-1995.
Income Taxes. The Company had an annual effective tax rate of 42.0% in
1996, compared to 56.6% in 1995. The annual effective tax rate for 1996 was
higher than the federal statutory rate primarily due to the impact of
non-deductible goodwill associated with the acquisition of PMSI. The annual
effective tax rate in 1995 was higher than the federal statutory rate primarily
due to the impact of non-deductible goodwill included in the adjustments
resulting from the adoption of SFAS No. 121.
IMPACT OF INFLATION
Inflation has not materially affected the Company's profitability,
primarily because price increases have generally been obtained to cover
inflationary drug cost increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for acquiring institutional
pharmacy companies, financing working capital requirements and purchasing
equipment for existing pharmacies. The Company anticipates its future capital
requirements will primarily be needed to finance the acquisition of
institutional pharmacy operations.
For the year ended December 31, 1997, on a pro forma basis, the Company
completed 13 acquisitions for an aggregate purchase price of approximately
$133.0 million in cash and stock. At the time of their acquisition, these
businesses had aggregate annual revenues of approximately $124.0 million and
serviced approximately 49,000 long term care beds.
22
<PAGE> 23
In connection with the Merger in December 1997, the Company entered
into a revolving $550.0 million credit facility (the "Credit Facility") with a
syndicate of banks for which The Chase Manhattan Bank ("Chase") acts as
administrative agent. Approximately $113.7 million of the Credit Facility was
used to retire principal amounts outstanding under the Company's prior credit
facility and fund transaction costs related to the Merger and approximately
$275.0 million was used to retire PCA debt assumed in connection with the
Merger. The Credit Facility bears interest, at the option of the Company, at (a)
the greater of Chase's base CD rate, Chase's prime rate (plus an applicable
margin) or the federal funds rate plus an applicable margin, or (b) the London
interbank market rate, plus an applicable margin based upon the Company's
leverage ratio. Availability under the Credit Facility is subject to the
Company's leverage ratio and other provisions and covenants.
In December 1997, the Company received approximately $8.9 million from
the exercise of certain warrants and anticipates receiving an additional
approximately $7.0 million from the exercise of outstanding warrants over the
next twelve months.
The Company believes its liquidity and capital resources are adequate
to meet its operating needs for the foreseeable future. In order to implement
its growth strategy, the Company will require substantial capital resources and
will need to incur, from time to time, additional indebtedness. Availability
under the Credit Facility will be used primarily to fund the Company's
future acquisitions of institutional pharmacy operations. In the event the
funding requirements in connection with the potential future acquisitions exceed
the funds available pursuant to the Credit Facility, the Company also may need
to issue, in public or in private transactions, equity or debt securities, the
availability and terms of which will depend on market and other conditions .
There can be no assurance that any such additional financing will be available
on terms acceptable to the Company, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are attached hereto,
following page 27, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1998 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1998 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL HOLDERS
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1998 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning this Item is incorporated herein by reference
to the Company's definitive proxy materials for the Company's 1998 Annual
Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)&(2) and (d) Financial Statements and Financial Statement
Schedules. See Index to Financial Statements included elsewhere in this Annual
Report.
(a)(3) and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K dated within the
fourth quarter of the twelve month period ended December 31, 1997:
1. Form 8-K, dated October 15, 1997, filed with respect to the
acquisition of the assets of Med-Tec Pharmaceutical Services,
Inc.
24
<PAGE> 25
2. Form 8-K, dated December 12, 1997, filed with respect to the
completion of the Merger and the change of Registrant's name.
3. Form 8-K, dated November 16, 1997, filed with respect to
financial statements for the acquisition of Pennsylvania
Prescriptions, Inc., Med-Tec Pharmaceutical Services, Inc., and
certain pro forma financial data.
4. Form 8-K/A, dated December 3, 1997, filed with respect to certain
financial data for the Merger.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPSTONE PHARMACY SERVICES, INC.
By: /s/ James D. Shelton
---------------------------------
James D. Shelton,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. Arnold Renschler, M.D. President, Chief Executive Officer and March 27, 1998
- ----------------------------------- Director (Principal Executive Officer)
C. Arnold Renschler, M.D.
/s/ James D. Shelton Chief Financial Officer, Executive Vice March 27, 1998
- ----------------------------------- President and Secretary (Principal
James D. Shelton Financial and Accounting Officer)
/s/ David R. Banks Director March 27, 1998
- -----------------------------------
David R. Banks
/s/ Cecil S. Harrell Director March 27, 1998
- -----------------------------------
Cecil S. Harrell
/s/ Boyd W. Hendrickson Director March 27, 1998
- -----------------------------------
Boyd W. Hendrickson
/s/ Morris A. Perlis Director March 27, 1998
- -----------------------------------
Morris A. Perlis
/s/ Frederick C. Powell Director March 27, 1998
- -----------------------------------
Frederick C. Powell
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C>
/s/ Albert Reichmann Director March 27, 1998
- -----------------------------------
Albert Reichmann
/s/ Allan C. Silber Chairman March 27, 1998
- -----------------------------------
Allan C. Silber
/s/ Edward Sonshine, Q.C. Director March 27, 1998
- -----------------------------------
Edward Sonshine, Q.C.
/s/ Gail Wilensky Director March 27, 1998
- -----------------------------------
Gail Wilensky
</TABLE>
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PHARMERICA, INC.
Report of Independent Public Accountants.................... F-2
Report of Ernst & Young LLP, Independent Auditors........... F-3
Audited Financial Statements and Schedule:
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-4
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997....................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997........... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997....................... F-7
Notes to Consolidated Financial Statements................ F-8
Schedule II -- Valuation and Qualifying Accounts.......... F-23
Quarterly Financial Data.................................. F-24
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of PharMerica, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheet of PharMerica,
Inc. and subsidiaries (a Delaware corporation and formerly Pharmacy Corporation
of America and subsidiaries) as of December 31, 1997, and the related
consolidated statements of income, 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. The financial statements of PharMerica,
Inc. and subsidiaries as of December 31, 1996 and 1995, were audited by other
auditors whose report dated April 18, 1997, expressed an unqualified opinion on
those statements.
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 consolidated 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 PharMerica, Inc. and
subsidiaries as of December 31, 1997, 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
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 9, 1998
F-2
<PAGE> 30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PharMerica, Inc.
We have audited the accompanying consolidated balance sheets of PharMerica,
Inc. as of December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PharMerica, Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
April 18, 1997
F-3
<PAGE> 31
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,575 $ 34,215
Accounts receivable, net of allowance for doubtful
accounts of $13,890 and $22,096........................ 94,461 205,225
Inventories............................................... 22,025 51,766
Prepaid expenses and other current assets................. 335 6,307
Deferred tax asset........................................ -- 35,360
-------- ----------
Total current assets.............................. 124,396 332,873
Equipment and leasehold improvements, net................... 36,784 46,599
Goodwill, net of accumulated amortization of $17,865 and
$26,653................................................... 276,430 723,954
Other assets, net........................................... 3,966 10,822
-------- ----------
Total assets...................................... $441,576 $1,114,248
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 31,294 $ 109,483
Current portion of long-term debt......................... 968 7,533
Accrued restructuring charges............................. -- 14,269
-------- ----------
Total current liabilities......................... 32,262 131,285
Deferred income taxes....................................... 3,980 21,216
Long-term debt, net of current portion...................... 1,334 427,889
Due to former parent........................................ 312,395 --
Accrued restructuring charges, net of current portion....... -- 4,980
-------- ----------
Total liabilities................................. 349,971 585,370
-------- ----------
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.01 par value; 1,000 shares authorized at
December 31, 1996; and 300,000,000 shares authorized at
December 31, 1997; and 1,000 shares issued and
outstanding as of December 31, 1996 and 87,930,184
shares issued and 87,591,722 shares outstanding as of
December 31, 1997...................................... 1 876
Preferred stock, $.01 par value; and 0 shares authorized
at December 31, 1996; 500,000 shares authorized at
December 31, 1997; 0 shares issued and outstanding as
of December 31, 1996 and 1997.......................... -- --
Additional paid-in capital................................ 3,866 413,567
Retained earnings......................................... 87,738 114,435
-------- ----------
Total stockholders' equity........................ 91,605 528,878
-------- ----------
Total liabilities and stockholders' equity........ $441,576 $1,114,248
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 32
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................. $ 451,685 $ 516,400 $ 652,179
Cost of sales.............................................. 242,761 280,468 355,577
---------- ---------- ----------
Gross profit............................................. 208,924 235,932 296,602
---------- ---------- ----------
Operating expenses:
Selling, general and administrative expenses............. 175,599 184,585 216,087
Depreciation and amortization............................ 13,219 16,392 21,408
Restructuring charges.................................... -- -- 5,780
Impairment of long-lived assets.......................... 9,543 -- 5,155
---------- ---------- ----------
Total operating expenses......................... 198,361 200,977 248,430
---------- ---------- ----------
Operating income................................. 10,563 34,955 48,172
Interest expense, net...................................... -- -- 2,483
---------- ---------- ----------
Income before provision for income taxes......... 10,563 34,955 45,689
Provision for income taxes................................. 5,977 14,668 18,992
---------- ---------- ----------
Net income....................................... $ 4,586 $ 20,287 $ 26,697
========== ========== ==========
Pro forma earnings per common share........................ $ 0.50
==========
Shares used in computing pro forma earnings per common
share.................................................... 52,896
==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 33
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS
------ ------ --------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995............................ 1 $ 1 $ 3,866 $ 62,865
Net income............................................ -- -- -- 4,586
------ ---- -------- --------
Balance at December 31, 1995.......................... 1 1 3,866 67,451
Net income............................................ -- -- -- 20,287
------ ---- -------- --------
Balance at December 31, 1996.......................... 1 1 3,866 87,738
Recapitalization in connection with the acquisition of
Capstone Pharmacy Services, Inc..................... 49,999 499 (499) --
Capital contribution from Beverly Enterprises,
Inc. ............................................... -- -- 15,076 --
Issuance of common stock:
Stock issued in connection with acquisition of
Capstone Pharmacy Services, Inc. ................ 34,980 350 377,150 --
Stock issued in connection with acquisition of
Resident Care Pharmacy, Inc. .................... 811 8 9,092 --
Stock issued in connection with exercise of
warrants......................................... 1,800 18 8,882 --
Net income............................................ -- -- -- 26,697
------ ---- -------- --------
Balance at December 31, 1997.......................... 87,591 $876 $413,567 $114,435
====== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 34
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 4,586 $ 20,287 $ 26,697
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization.......................... 13,219 16,392 21,408
Restructuring charges.................................. -- -- 5,780
Impairment of long-lived assets........................ 9,543 -- 5,155
Gain on dispositions of assets......................... -- (250) --
Deferred income taxes (benefit)........................ (909) 4,159 (4,879)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (4,810) (7,974) (30,471)
Inventories.......................................... 2,282 3,510 (10,581)
Prepaid expenses and other current assets............ 614 (44) 5,419
Accounts payable and accrued expenses................ (2,836) (7,498) 14,202
Accrued restructuring charges........................ -- -- (273)
--------- -------- --------
Total adjustments................................. 17,103 8,295 5,760
--------- -------- --------
Net cash flows from operating activities.................... 21,689 28,582 32,457
--------- -------- --------
Cash Flows from Investing Activities:
Payments for acquisitions, net of cash acquired........... (2,151) (10,835) (19,178)
Proceeds from dispositions................................ -- 2,152 --
Purchases of property and equipment....................... (13,098) (9,616) (15,600)
Other, net................................................ 1,852 329 (4,299)
--------- -------- --------
Net cash flows from investing activities.................... (13,397) (17,970) (39,077)
--------- -------- --------
Cash Flows from Financing Activities:
Advances (to) from former Parent, net..................... (9,716) (5,064) (275,000)
Proceeds from exercise of warrants........................ -- -- 8,900
Proceeds from issuance of long-term obligations........... 143 -- 424,524
Repayments of long-term obligations....................... (877) (1,288) (125,164)
--------- -------- --------
Net cash flows from financing activities.................... (10,450) (6,352) 33,260
--------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (2,158) 4,260 26,640
Cash and cash equivalents, beginning of year................ 5,473 3,315 7,575
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 3,315 $ 7,575 $ 34,215
========= ======== ========
Supplemental Schedule of Cash Flow Information:
Cash paid during the year for:
Interest............................................... $ 35 $ 11 $ 2,716
========= ======== ========
Taxes.................................................. $ -- $ -- $ 6,792
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 35
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PharMerica, Inc., (the surviving company of the merger (the "Merger") of
Capstone Pharmacy Services, Inc. (Capstone) and Pharmacy Corporation of America
(PCA)) together with its subsidiaries (the "Company"), is a Delaware corporation
(Note 2).
The Company is one of the nation's largest institutional pharmacies
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals and
health maintenance organizations. The Company also provides mail service
pharmacy services, including the delivery of drugs and medical equipment to
workers' compensation payors, claimants and employers. As of December 31, 1997,
the Company operated 124 pharmacies and pharmacy related outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PharMerica,
Inc. and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues,
expenses, gains and losses during the reporting periods. Actual results could
differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist principally of purchased pharmaceuticals.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives or, with respect to leasehold improvements, over the term
of the lease if shorter:
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... 3-15 years
Software and computer equipment............................. 3-5 years
Leasehold improvements...................................... 5 years
</TABLE>
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining useful lives
at the acquisition date.
F-8
<PAGE> 36
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Goodwill
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over 40 years.
Amortization of goodwill amounted to approximately $6,414,000, $7,279,000, and
$8,795,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1997, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board 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," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
In 1995, the Company recorded an impairment loss of approximately
$5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to
recording this loss were as follows: two pharmacies, purchased by the Company in
late 1994, had operating losses in 1995, and the Company anticipated future
operating losses for these facilities primarily related to Beverly's lack of
presence in the markets; one pharmacy, located in a state where Beverly had
recently sold all of its interest, began to lose the contracts that had been
assumed by the new owners, and it became apparent that the operations would not
recover to their previous level; and, lastly, the Company operates a medical
records servicing business which lost approximately half of its business in 1995
when Beverly pursued a different vendor for this service. Accordingly,
management estimated the undiscounted future cash flows to be generated by each
business. The undiscounted future cash flow estimates were less than the
carrying value of such businesses, so management estimated the fair value of
such businesses based on such cash flows and wrote the carrying values down to
their estimates of fair value. Management calculated the fair values of the
impaired businesses by using the present values of estimated future cash flows.
In addition to the SFAS No. 121 charge, the Company recorded an impairment
loss in 1995 of approximately $4,151,000 primarily related to the write-off of
software costs. In conjunction with the Company's 1995 acquisition of Pharmacy
Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice President of
Management Information Systems assumed the management information systems'
functions for the Company and redirected the Company's systems development
initiatives, which caused a write-off of certain software and systems
development costs.
In 1997, the Company recorded an impairment loss of approximately
$5,155,000 related to the planned closure of certain pharmacies as a result of
the merger with Capstone (see Note 2). The impairment loss includes the
write-off of various fixed assets, such as leasehold improvements and furniture
and fixtures, which are specific to the pharmacies to be closed. Additionally,
the Company has capitalized software costs which have also been included in the
SFAS 121 loss. These assets have been written-down to their estimated fair
value, and management anticipates the disposal of these assets will occur during
the next year.
F-9
<PAGE> 37
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company was previously insured for general liability and workers'
compensation risks through the self-insurance programs of Beverly. Beverly
allocated expense to the Company based on the relative percentage of insurance
costs incurred by Beverly on behalf of the Company. Total insurance allocations
to the Company were approximately $1,409,000, $1,829,000 and $2,558,000 for the
years ended December 31, 1995, 1996 and 1997, respectively. Management believes
these charges represent a reasonable allocation of the costs incurred by Beverly
on behalf of the Company.
401(K) BENEFIT PLAN
The Company sponsors a supplemental retirement program established under
Section 401(k) of the Internal Revenue Code, as amended. Contributions by the
Company may be made to the plan subject to the discretion of the Board of
Directors. No Company contribution was made for the years ended December 31,
1995, 1996 and 1997.
REVENUE RECOGNITION
Revenues are recorded as products are shipped and services rendered. A
portion of the Company's sales are covered by various state and Federal
reimbursement programs, which are subject to review and/or audit. Reimbursement
programs are also subject to change from time to time. Revenues are reported at
the estimated net amounts to be received from individuals, third party payors,
nursing facilities and others. Approximately 41%, 37% and 37% of the Company's
operating revenues for 1995, 1996 and 1997, respectively, were derived from
funds under federal and state medical assistance programs.
The Company also recognizes revenue under certain capitated arrangements.
However, these revenues are insignificant and any losses related to these
contracts are accrued as they are incurred.
CONCENTRATION OF CREDIT RISK
A significant portion of the Company's revenue and related receivables are
reimbursed from two primary payors, Medicaid and Medicare. Collectively,
Medicaid and Medicare accounted for 43% and 34%, respectively, of accounts
receivable reported on the consolidated balance sheets at December 31, 1996 and
1997.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for stock option grants. See
Note 8 for the pro forma effects on the Company's reported net income assuming
the election had been made to recognize compensation expense on stock-based
awards in accordance with SFAS No. 123.
INCOME TAXES
The Company files a consolidated Federal income tax return. Income tax
expense is based on reported earnings before income taxes. Deferred taxes on
income are provided for those items for which the reporting period and methods
used for income tax purposes differ from those used for financial statement
purposes, using the asset and liability method. Deferred income taxes are
recognized for the tax consequences of
F-10
<PAGE> 38
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"temporary differences" by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.
PRO FORMA EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings Per Share."
It replaces the presentation of primary and fully-diluted EPS with a
presentation of basic and diluted EPS and requires a reconciliation of the
numerator and denominator of the basic EPS calculation to the numerator and
denominator of the diluted EPS calculation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to primary EPS pursuant to APB Opinion No. 15. SFAS No. 128
was effective for fiscal years ending after December 15, 1997.
As a result of the significant change in the Company's capital structure
during the year, caused by the Merger, the Company has reported pro forma
earnings per share. Pro forma earnings per share is computed using the weighted
average number of shares of common stock outstanding giving effect to the
issuance of 50,000,000 shares in connection with the Merger for all of 1997.
F-11
<PAGE> 39
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
1997 Acquisitions
In January 1997, the Company acquired Interstate Pharmacy Corp., which
provides institutional pharmacy services from twelve pharmacies throughout the
state of Hawaii. The purchase price was $20,138,000, and goodwill at the date of
acquisition was $12,000,000.
In March 1997, the Company acquired the assets of Intramed, Inc. and
Black-Hills Pharmaceutical Services, Inc., providers of institutional pharmacy
and infusion therapy services in the state of South Dakota. The total purchase
price was $2,429,000, and goodwill at the date of acquisition was $1,669,000.
In April 1997, the Company acquired the assets of River City Pharmacy,
Inc., an Indiana based Institutional pharmacy. The purchase price was
$5,407,000, and goodwill at the date of acquisition was $4,450,000.
On December 3, 1997, Capstone issued 50,000,000 shares of its common stock
and paid $15,732,000 to acquire all of the outstanding stock of Beverly
Enterprises, Inc. Immediately prior to this transaction, Beverly had completed a
distribution of its long-term care business to New Beverly Holdings, Inc. (New
Beverly) leaving only its institutional pharmacy business, PCA, to be acquired
by Capstone. Because Beverly's shareholders own a majority of the surviving
corporation, for accounting purposes, the transaction has been treated as an
acquisition of Capstone by PCA.
In accordance with EITF 95-19, the purchase price has been determined using
the fair value of Capstone's common stock over a reasonable period of time
before and after the transaction was agreed to and announced. In a reverse
merger transaction, the shares of Capstone at the date of close represent the
consideration for the merger, plus the fair value of Capstone's outstanding
options and warrants, calculated using the Black-Scholes option pricing model.
After the merger was consummated, the historical financial statements of the
Company became those of PCA.
In December 1997, the Company acquired Hollins Manor I, LLC, which provides
institutional pharmacy services to long-term care facilities in the state of
Virginia. The purchase price was $7,700,000 and goodwill at the date of
acquisition was $7,398,000.
In December 1997, the Company purchased Family Center Pharmacy, Inc., a
Pittsburgh, Pennsylvania based provider of institutional pharmacy services doing
business as Medical Arts Pharmacy. The purchase price was $9,216,000. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Goodwill at the date of acquisition was
$8,384,000.
Also, in December 1997, the Company purchased Resident Care Pharmacy, Inc.
(Resident Care), a North Carolina based institutional pharmacy. The total
consideration was $12,967,000, including $9,100,000 representing the issuance of
811,341 shares of the Company's common stock, a non-compete note payable of
$1,444,000, assumed debt of $1,592,000 and a cash payment of $831,000. Goodwill
at the date of acquisition was $13,610,000.
1996 Acquisitions
During 1996, the Company acquired three institutional pharmacies for cash
of approximately $10,835,000 and disposed of one institutional pharmacy for cash
proceeds of approximately $2,152,000.
1995 Acquisitions
In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI")
in exchange for approximately 12,361,000 shares of Beverly common stock, plus
closing and related costs, for a total purchase price of approximately
$162,900,000. As a leading independent nationwide provider of medical cost
F-12
<PAGE> 40
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
containment and managed care services to workers' compensation payors and
claimants, PMSI's services included pharmacy benefit management through both a
national retail pharmacy network and home delivery of prescription drugs,
medical supplies and medical equipment (the "mail service business") as well as
a workers' compensation preferred provider organization (the "PPO business").
The mail service business was contributed by Beverly to the Company in June 1995
and has been operated by the Company since that time. The PPO business was
transferred to another of Beverly's wholly-owned subsidiaries. Beverly's
acquisition of PMSI resulted in additional goodwill to Beverly of approximately
$139,600,000. Based on the fair value of the mail service net assets, Beverly
allocated approximately $97,700,000 of the PMSI purchase price to the Company,
including goodwill of approximately $83,800,000. The Company also purchased one
institutional pharmacy during 1995 for cash of approximately $2,492,000.
All business acquisitions described above have been accounted for by the
purchase method of accounting with the assets and liabilities of the acquirees
recorded at their estimated fair market values at the date of acquisition. The
operations of the acquirees, since the dates of acquisition, are included in the
accompanying consolidated statements of income. Goodwill for these business
acquisitions is being amortized over forty years.
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1996 and 1997, are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions described above
and previous acquisitions of Capstone had been made as of January 1, 1996 (in
thousands, except per share data).
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net sales................................................... $ 883,619 $1,019,349
Income before taxes, interest, depreciation and
amortization.............................................. 86,522 126,213
Income before extraordinary items........................... $ 20,098 $ 35,524
========== ==========
Diluted income per share.................................... $ 0.24 $ 0.42
========== ==========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) the per share effect of stock issued
as part of the acquisitions, and (4) the related income tax effects and exclude
certain nonrecurring and restructuring costs. The pro forma results do not
reflect any anticipated operating efficiencies or synergies and are not
necessarily indicative of actual results which might have occurred had the
operations and management teams of the Company and the acquired companies been
combined in prior years.
F-13
<PAGE> 41
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1996 and 1997, are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment........................... $ 32,691 $ 41,409
Software and computer equipment............................. 21,225 25,457
Leasehold improvements...................................... 11,460 13,022
Construction in progress.................................... 345 1,376
-------- --------
65,721 81,264
Accumulated depreciation and amortization................... (28,937) (34,665)
-------- --------
Equipment and leasehold improvements, net................... $ 36,784 $ 46,599
======== ========
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $4,534,000, $6,737,000 and $9,452,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
To finance the repayment of the intercompany debt between Beverly and the
Company as well as provide capital for future acquisitions, Capstone
extinguished its outstanding debt under its credit facility with five commercial
banks just prior to the merger and replaced it with a new $550,000,000 credit
agreement with several commercial banks. Extinguishment of the existing debt,
including the payoff of the outstanding balance of $113,700,000 and the
write-off of $1,074,000 in deferred financing costs was reflected in the
purchase price allocation. The Company incurred approximately $840,000 in debt
acquisition costs associated with the new credit agreement, which are to be
amortized over the life of the debt. The credit agreement allows PharMerica to
obtain loans at any time and matures on December 3, 2002.
Under the new credit agreement, the Company has the option to borrow under
an alternate base rate or a Eurodollar loan rate. Interest rates on the
alternate base rate loans are at the greatest of (a) the prime rate, (b) the
base certificate of deposit rate plus 1% or (c) the federal funds effective rate
on the date of the loan. Interest on the alternate base rate loans is due
quarterly in arrears. Interest rates on the Eurodollar loans are calculated
using the adjusted LIBOR rate for the interest period in effect, plus the
applicable rate. The adjusted LIBOR rate is the LIBOR rate for such interest
period multiplied by the statutory reserve rate. The applicable rate and the
statutory reserve rate are defined in the credit agreement. Interest on the
Eurodollar loans is due on the last day of the interest period applicable to the
borrowing. As of December 31, 1997, the Company's outstanding borrowings total
$424,524,000 under a Eurodollar loan at an effective interest rate, including
the amortization of deferred financing costs of 7.3%. The weighted average and
the highest outstanding balance under this agreement for the period outstanding
through December 31, 1997 was $416,776,000 and $424,524,000, respectively.
The new credit agreement stipulates certain covenants relating to various
financial ratios, including a leverage ratio and a minimum net worth
requirement, among other restrictive covenants.
In connection with the acquisition of Capstone, the Company assumed all the
long-term obligations that had previously existed under Capstone.
On November 1, 1995, Capstone elected not to make a scheduled installment
payment on a note payable to former stockholders of a subsidiary in the
aggregate principal amount of $1,000,000, due to a dispute with these former
stockholders. This amount is recorded as current portion of long-term debt in
the accompanying consolidated balance sheets as of December 31, 1997.
F-14
<PAGE> 42
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt at December 31, 1996 and 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Borrowings under a $550,000 credit agreement with a group of
several commercial banks, interest at varying rates based
on the type of borrowing, secured by substantially all
assets of the Company, due at scheduled maturity in
December 2002............................................. $ -- $424,524
Unsecured notes payable to former stockholders of a previous
Capstone acquiree, interest at 6%, currently payable...... -- 1,000
Unsecured note payable to former owners of a previous
Capstone acquiree, non-interest bearing, payable in
monthly installment of $20 beginning in March 1998,
remaining balance due January 1999........................ -- 1,100
Unsecured note payable to former stockholders of Hollins
Manor, non-interest bearing with $1,000 installments due
and payable on June 3, 1998 and December 7, 1998.......... 2,000
Assumed note payable from Resident Care acquisition, due
currently................................................. -- 1,592
Non-Compete payable to eight individuals, payable in
installments ranging from $25 to $128, through 2001....... -- 1,644
Capital lease obligations (Note 7).......................... 2,262 3,224
Other....................................................... 40 338
-------- --------
2,302 435,422
Less: Current portion....................................... 968 7,533
-------- --------
Long-term portion........................................... $ 1,334 $427,889
======== ========
</TABLE>
Future maturities of long-term debt, exclusive of capital lease obligations
at December 31, 1997, follow (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 5,975
1999........................................................ 1,599
2000........................................................ 50
2001........................................................ 50
2002........................................................ 424,524
--------
$432,198
========
</TABLE>
Interest expense for the years ended December 31, 1995, 1996 and 1997, was
approximately $35,000, $11,000 and $2,754,000, respectively. These amounts
include amortization of deferred financing costs of approximately $0, $0 and
$113,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Based on the borrowing rates currently available to the Company, the fair
value of long-term debt, exclusive of capital lease obligations, as of December
31, 1997, is not materially different than the recorded value.
5. RESTRUCTURING CHARGES
During December 1997, in connection with the merger with Capstone, the
Company adopted a plan to restructure its long-term care pharmacy operations. In
connection with this plan, management intends to close 6 former PCA pharmacies,
14 former Capstone pharmacies, and will relocate Capstone's corporate
headquarters from Irving, Texas to Tampa, Florida. Management anticipates that
the restructuring activities in connection with the merger will be substantially
completed within the next fiscal year.
F-15
<PAGE> 43
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recorded restructuring costs of $5,780,000 related to the
closure of the former PCA pharmacies, consisting of $3,621,000 of severance
covering approximately 180 pharmacy employees, $739,000 of lease termination
costs and $1,420,000 of other exit costs.
The Company has also assumed liabilities, included in the Capstone purchase
price allocation, of $9,583,000 related to the closure of the former Capstone
pharmacies and the relocation of Capstone's former headquarters, consisting of
$5,036,000 of severance covering approximately 260 employees, $3,059,000 of
lease termination costs and $1,488,000 of relocation costs. The terminated
positions were comprised primarily of pharmacy employees and several regional
and corporate positions.
As of December 31, 1997, approximately $200,000 has been charged against
these restructuring accruals.
In connection with the Capstone acquisition, the Company assumed
approximately $3,886,000 of liabilities from previous Capstone restructurings
consisting primarily of remaining lease termination costs.
6. INCOME TAXES
Prior to the merger with Capstone and the spin-off of the Beverly nursing
home business, the Company was included in the consolidated federal income tax
returns of Beverly. The tax provisions for Beverly subsidiaries, including the
Company, were determined on a separate company basis. The resultant income taxes
payable to, or tax benefit receivable from, Beverly flowed through the "Due to
Former Parent" account. The Company's provision for income taxes consists of the
following for the years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Federal:
Current............................................... $5,667 $ 8,649 $12,963
Deferred.............................................. (748) 3,423 2,668
State:
Current............................................... 1,219 1,860 2,788
Deferred.............................................. (161) 736 573
------ ------- -------
$5,977 $14,668 $18,992
====== ======= =======
</TABLE>
The actual income tax expense for the years ended December 31, 1995, 1996
and 1997, is different from the amounts computed by applying the statutory
Federal income tax rates to income before taxes. The reconciliation of these
differences follow:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Tax benefit at statutory rate............................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax effect........ 6.5 4.8 4.6
Tax effect of permanent differences......................... 14.4 1.6 2.0
Other items, net............................................ 0.7 0.6 --
----- ---- ------
Provision for income taxes.................................. 56.6% 42.0% 41.6%
===== ==== ======
</TABLE>
F-16
<PAGE> 44
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of cumulative temporary differences at December 31, 1996 and
1997 follow (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Current Deferred Taxes:
Accounts receivable allowances............................ $ 5,014 $11,568
Inventory................................................. 363 686
Accrued restructuring charges............................. -- 1,537
Other accrued liabilities................................. 212 21,569
------- -------
Net current deferred tax asset.............................. $ 5,589 $35,360
======= =======
Non-Current Deferred Taxes:
Goodwill.................................................. $ -- $14,784
Accumulated depreciation and other........................ 9,569 6,432
------- -------
Net non-current deferred tax liability...................... $ 9,569 $21,216
======= =======
</TABLE>
As of December 31, 1996, due to former parent includes cumulative amounts
for current and deferred taxes payable of $56,700,000 and $3,980,000,
respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and warehouse space, automobiles and equipment.
Rental expense under these leases aggregated approximately $13,005,000,
$12,142,000 and $13,642,000 for the years ended December 31, 1995 and 1996, and
1997, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1998..................................................... $1,787 $ 9,676
1999..................................................... 1,145 5,112
2000..................................................... 425 3,206
2001..................................................... 224 2,153
2002..................................................... 33 1,306
2003 and thereafter...................................... -- 3,129
------ -------
Total minimum lease payments............................. 3,614 $24,582
=======
Less: amount representing interest....................... 390
------
Present value of net minimum lease payments.............. 3,224
Less: current portion.................................... 1,557
------
Long-term portion........................................ $1,667
======
</TABLE>
CONTINGENCIES
The Company is subject to various claims and litigation in the ordinary
course of its business. In the opinion of management and outside counsel, the
ultimate settlement of these claims and litigation will not have a material
adverse effect on the financial position or future operating results of the
Company.
As of December 31, 1997, the Company has recorded $4,880,000 of accrued
liabilities related to certain loss contingencies that are both probable and
reasonably estimable.
F-17
<PAGE> 45
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has eight stock option plans and an employee stock purchase
plan covering up to 12,385,000 shares of the Company's common stock, pursuant to
which officers, directors and employees of the Company are eligible to receive
either incentive or non-qualified options. Stock options generally expire five
or ten years from the date of grant. The exercise price of an incentive stock
option is equal to the fair market value of the Company's common shares on the
date such option was granted. The exercise price of non-qualified stock options
may be less than the fair market value on the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its fixed option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
pro forma earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Net income:
As reported.......................................... $4,586 $20,287 $26,697
Pro forma............................................ 4,577 20,019 25,083
Pro forma earnings per share:
As reported.......................................... 0.50
Pro forma............................................ 0.47
</TABLE>
A summary of option transactions during the years ended December 31, 1995,
1996 and 1997 follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1996 1997
-------------------------- ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year....... 89,000 $6.41 92,000 $6.26 753,000 $7.99
Granted................... 3,000 1.03 661,000 8.23 5,207,000 8.68
--------- ----- ------- ----- --------- -----
Options outstanding, end
of year................. 92,000 $6.26 753,000 $7.99 5,960,000 $8.60
Shares available for
future grant............ 3,952,500
Options exercisable at end
of year................. 92,000 $6.26 753,000 $7.99 3,818,000 $8.06
Weighted average fair
value of options
granted................. $8.70 $4.56 $5.34
===== ===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following key assumptions were used
in the Black-Scholes option pricing model:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- --------
<S> <C> <C> <C>
Risk-free interest rate............................. 6.0% 6.5% 6.5%
Expected life....................................... 10 years 10 years 10 years
Volatility.......................................... 35% 34% 34%
</TABLE>
F-18
<PAGE> 46
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ---------------------------------
------------------------------------------------------- NUMBER
NUMBER EXERCISABLE AT
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.03 - $ 5.00...... 895,000 6.9 years $ 4.10 870,000 $ 4.09
$ 5.00 - $ 7.50...... 293,000 7.1 years 6.46 286,000 6.48
$ 7.50 -$10.00....... 3,804,000 9.7 years 9.33 1,916,000 9.14
$10.00 - $11.50...... 968,000 8.8 years 10.52 746,000 10.53
--------- ---------
$ 1.03 -$11.50....... 5,960,000 9.0 years $ 8.60 3,818,000 $ 8.06
========= =========
</TABLE>
WARRANTS
As part of the Capstone acquisition, warrants for 1,665,293 shares were
assumed and are outstanding at December 31, 1997. The weighted average exercise
price of these warrants is $5.93.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments. The carrying amount of cash
and cash equivalents reported in the consolidated balance sheets approximates
its fair value. Estimated fair value for other current assets and current
liabilities are stated at the carrying amount because of the short maturity of
these instruments. The fair value of long-term obligations was estimated using
discounted cash flow analyses based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash & cash equivalents............. $ 7,575 $ 7,575 $ 34,215 $ 34,215
Other current assets................ 116,821 116,821 263,298 263,298
Current portion of long-debt debt... 968 956 7,533 7,533
Other current liabilities........... 31,294 31,294 109,483 109,483
Long-term debt, net of current
portion........................... 1,334 1,318 427,889 427,889
</TABLE>
F-19
<PAGE> 47
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its pharmaceutical
purchases. Purchases of inventory under primary supplier relationships during
the years ended December 31, 1995, 1996 and 1997, were approximately 90%, 92%
and 94% of total inventory purchases, respectively.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 18,017 $ 46,386
Accrued salaries, payroll taxes and benefits................ 6,656 12,109
Other accrued expenses...................................... 6,621 50,988
-------- --------
Total............................................. $ 31,294 $109,483
======== ========
</TABLE>
12. RELATED PARTIES
The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $74,021,000, $82,083,000, and $91,228,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Prior to the merger with Capstone, Beverly provided certain administrative
services to the Company. These services included, among others, cash management,
finance, legal, tax, financial reporting, executive management, payroll and
payables processing and employee benefit plans maintenance. The responsibility
for certain of these services, including finance, tax and payables processing
was transferred to the Company in mid-1996 as part of a consolidation and
reorganization of the Company's accounting and related functions. Substantially
all cash received by the Company was deposited daily and wired to Beverly's
corporate cash account. In turn, all of the Company's operating expenses,
capital expenditures and other cash needs were paid by Beverly, and charged back
to the Company along with a management fee for handling such services. Fees for
these services amounted to approximately $2,844,000, $1,820,000 and $3,186,000
for the years ended December 31, 1995, 1996 and 1997, respectively. See Note 1
for a description of the charges for insurance. The Company believes that the
charges for services provided by Beverly to the Company are a reasonable
allocation of the costs incurred by Beverly on behalf of the Company in
providing these services; however, such costs are not necessarily indicative of
the costs that would have been incurred if the Company operated as a stand-alone
entity.
The net result of all intercompany transactions between the Company and
Beverly are recorded in the "Due to Former Parent" account in the accompanying
consolidated balance sheets. As of December 31, 1996 and 1997, the Company's
intercompany balances were $312,395,000 and $0, respectively. The average of
such intercompany balances was approximately $272,900,000, $315,500,000 and
$327,172,000, for the years ended December 31, 1995, 1996 and 1997,
respectively. There were no required repayment terms for this account nor did
such amounts bear interest. As part of the merger with Capstone, Beverly
accepted a payment of $275,000,000 in satisfaction of the Company's intercompany
payable. The difference between the amount of this payment and the intercompany
payable of $15,076,000 (net of certain obligations assumed by the Company), at
the date of the merger has been recorded as a capital contribution by Beverly.
The net increase in the Company's intercompany balance for the year ended
December 31, 1995 was due to the following: approximately $100,200,000 due to
the pushdown of the PMSI acquisition and the acquisition of one institutional
pharmacy; approximately $6,000,000 due to the allocation of current and
F-20
<PAGE> 48
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred income taxes; and approximately $2,800,000 due to fees charged by
Beverly for certain administrative and management services provided to the
Company. These increases in the Company's intercompany balance were partially
offset by approximately $15,400,000 due primarily to net cash transfers from the
Company to Beverly and fees charged to Beverly's nursing facilities for products
and services provided by the Company.
The net decrease in the Company's intercompany balance for the year ended
December 31, 1996 was due to the following: approximately $31,300,000 due
primarily to net cash transfers from the Company to Beverly and fees charged to
Beverly's nursing facilities for products and services provided by the Company,
and approximately $2,200,000 due to the disposition of one institutional
pharmacy. These decreases in the Company's intercompany balance were partially
offset by approximately $10,800,000 due to the pushdown of the acquisition of
three institutional pharmacies; approximately $14,700,000 due to the allocation
of current and deferred income taxes; and approximately $1,800,000 due to fees
charged by Beverly for certain administrative and management services provided
to the Company.
As a result of Capstone's acquisition of Symphony Pharmacy Services, Inc.
("Symphony") in 1996, Symphony's former parent company, IHS, was a significant
Company stockholder. The Company provides institutional pharmacy services to a
significant number of long-term care facilities owned and managed by IHS
pursuant to a preferred provider agreement.
13. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. The
Statement requires that all items that are to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Statement establishes standards for the
way that public companies report information about operating segments in their
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Operating
segments are components of the business about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. For the Company, this would result in reporting of regional
operating segments.
SFAS No. 131 will require the Company to report a measure of segment profit
or loss, certain specific revenue and expense items and segment assets. It
requires reconciliations of total segment revenues, profit, assets and other
amounts disclosed for segments to corresponding totals in the Company's
financial statements. SFAS No. 131 will also require the Company to report
information about the revenues derived from its products and services and about
major customers, regardless of whether that information is used in making
operating decisions.
F-21
<PAGE> 49
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. Comparative information is also to be provided for
earlier years.
14. SUBSEQUENT EVENTS
In January 1998, the Company acquired Express Pharmacy Services, Inc., a
Tampa, Florida mail-order pharmacy company. The purchase price was approximately
$22,000,000.
In January 1998, the Company acquired the stock of Goot's Goodies, Inc. and
Southwest Pharmacies, Inc. The purchase price was approximately $3,800,000.
F-22
<PAGE> 50
PHARMERICA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT ACQUISITIONS BALANCE
BEGINNING CHARGED TO WRITE-OFFS, AND AT END OF
DESCRIPTION OF YEAR OPERATIONS NET DISPOSITIONS OTHER YEAR
----------- ----------- ---------- ----------- ------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful
accounts....................... $ 11,561 $ 17,679 $(10,791) $ 459 $ -- $ 18,908*
=========== ========== ======== ========== ===== ==========
Year ended December 31, 1996:
Allowance for doubtful
accounts....................... $ 18,908 $ 13,500 $(17,675) $ (8) $ -- $ 14,725*
=========== ========== ======== ========== ===== ==========
Year ended December 31, 1997:
Allowance for doubtful
accounts....................... $ 14,725 $ 10,809 $(13,984) $ 11,178 $ -- $ 22,728*
=========== ========== ======== ========== ===== ==========
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
F-23
<PAGE> 51
QUARTERLY FINANCIAL DATA
(IN THOUSANDS)
1997
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales..................................... $147,592 $153,738 $155,555 $195,294
Cost of sales................................. 80,087 82,310 84,894 108,287
-------- -------- -------- --------
Gross profit........................ 67,505 71,428 70,661 87,007
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative
expenses................................. 49,229 52,210 51,900 62,748
Depreciation and amortization............... 4,827 5,082 5,022 6,478
Restructuring charges....................... -- -- -- 5,780
Impairment of long-lived assets............. -- -- -- 5,155
-------- -------- -------- --------
Total operating expenses....... 54,056 57,292 56,922 80,161
-------- -------- -------- --------
Operating income............... 13,449 14,136 13,739 6,846
Interest Expense, net......................... 46 3 70 2,364
Income before provision income
taxes........................ 13,403 14,133 13,669 4,482
Provision for income taxes.................... 5,576 5,845 5,675 1,897
-------- -------- -------- --------
Net income..................... $ 7,827 $ 8,288 $ 7,994 $ 2,585
======== ======== ======== ========
</TABLE>
1996
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales..................................... $124,376 $124,855 $130,373 $136,796
Cost of sales................................. 65,672 67,498 70,506 76,792
-------- -------- -------- --------
Gross profit........................ 58,704 57,357 59,867 60,004
-------- -------- -------- --------
Operating Expenses:
Selling, general and administrative
expenses................................. 44,687 43,380 44,291 52,227
Depreciation and amortization............... 3,807 3,975 4,210 4,400
Restructuring charges....................... -- -- -- --
Impairment of long-lived assets............. -- -- -- --
-------- -------- -------- --------
Total operating expenses....... 48,494 47,355 48,501 56,627
-------- -------- -------- --------
Operating income............... 10,210 10,002 11,366 3,377
Interest Expense, net......................... -- -- -- --
Income before provision income
taxes........................ 10,210 10,002 11,366 3,377
Provision for income taxes.................... 4,284 4,197 4,771 1,416
-------- -------- -------- --------
Net income..................... $ 5,926 $ 5,805 $ 6,595 $ 1,961
======== ======== ======== ========
</TABLE>
F-24
<PAGE> 52
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated December 3, 1997 by and among Capstone
Pharmacy Services, Inc. and Beverly Enterprises, Inc. (incorporated by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-4 (Reg. No. 333-28517)).
3.1 Certificate of Incorporation of Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.1 to Form 10-Q for period ending August 30, 1995).
3.2 Certificate of Ownership and Merger Merging Choice Mergeco, Inc. into Choice Drug
Systems, Inc. (incorporated by reference to Exhibit 3.2 to Form 10-Q for period ending
August 30, 1995).
3.3 Certificate of Amendment (incorporated by reference to Exhibit A to the Company's
Proxy Statement for Special Meeting of Stockholders on August 15, 1996).
3.4 Certificate of Amendment to Certificate of Incorporation of Capstone Pharmacy
Services, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed December
12, 1997).
3.5 Bylaws of Choice Drug Systems, Inc. (incorporated by reference to Exhibit 3.3 to Form
10-Q for period ending August 30, 1995).
10.1 1995 Nonqualified Stock Option Plan for Directors of the Company (incorporated by
reference to Exhibit A to Schedule 14A filed August 2, 1995).
10.2 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel and Directors of
the Company (incorporated by reference to Exhibit B to Schedule 14A filed August 2, 1995).
10.3 Amendment to 1995 Incentive and Nonqualified Stock Option Plan for Key Personnel
and Directors of the Company (incorporated by reference to Annex H to the Company's Registration
Statement on Form S-4 (Reg. No. 333-28517)).
10.4 1996 Employee Stock Purchase Plan of the Company (incorporated by reference to
Exhibit D to Schedule 14A filed August 2, 1995).
10.5 Amended and Restated 1996 Employee Stock Purchase Plan (incorporated by reference
to Annex K to the Company's Registration Statement on Form S-4 (Reg. No. 333-28517)).
10.6 Non-Qualified Deferred Compensation Plan for Executives (incorporated by reference
to Exhibit 4 to the Company's S-8 filed on November 21, 1997).
10.7 Adirondack Consulting Agreement dated June 25, 1996 (incorporated by reference to Exhibit 10.23
to Form 10-K for year ending December 31, 1996).
</TABLE>
<PAGE> 53
<TABLE>
<S> <C>
10.8 Agreement and Plan of Distribution by and among Beverly Enterprises, Inc., New
Beverly Holdings, Inc. and the Company, dated April 15, 1997 (incorporated by
reference to Annex C to the Company's Registration Statement on Form S-4 (Reg. No. 333-28517)).
10.9 Senior Subordinated Credit Agreement dated December 3, 1997 by and between the
Company and Chase Manhattan Bank.
10.10 Preferred Provider Agreement by and among Beverly Enterprises, Inc. and the Company,
dated December 3, 1997.
10.11 Adirondack Engagement Letter dated December 10, 1996.
10.12 Form of Employment Agreement with Officers
10.13 Form of Employment Agreement with Officers
21 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule (for SEC use only).
27.2 Financial Data Schedule (for SEC use only).
99 Risk Factors
</TABLE>
* Denotes a management contract or compensatory plan, contract or arrangement.
<PAGE> 1
Exhibit 10.9
===============================================================================
CREDIT AGREEMENT
dated as of
December 3, 1997
among
PHARMACY CORPORATION
OF AMERICA,
CAPSTONE PHARMACY SERVICES, INC.,
The Lenders Party Hereto,
CIBC OPPENHEIMER CORP.,
as Syndication Agent
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Documentation Agent
and
THE CHASE MANHATTAN BANK,
as Administrative Agent
---------------------------
CHASE SECURITIES INC.,
CIBC OPPENHEIMER CORP.,
BANCAMERICA ROBERTSON STEPHENS,
as Co-Arrangers
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Definitions
SECTION 1.01. Defined Terms....................................................1
SECTION 1.02. Terms Generally.................................................13
SECTION 1.03. Accounting Terms; GAAP..........................................13
ARTICLE II
The Credits
SECTION 2.01. Commitments.....................................................13
SECTION 2.02. Loans and Borrowings............................................13
SECTION 2.03. Requests for Borrowings.........................................14
SECTION 2.04. Funding of Borrowings...........................................14
SECTION 2.05. Interest Elections..............................................15
SECTION 2.06. Termination and Reduction of Commitments........................16
SECTION 2.07. Repayment of Loans; Evidence of Debt............................16
SECTION 2.08. Prepayment of Loans.............................................17
SECTION 2.09. Fees............................................................17
SECTION 2.10. Interest........................................................18
SECTION 2.11. Alternate Rate of Interest......................................18
SECTION 2.12. Increased Costs.................................................19
SECTION 2.13. Break Funding Payments..........................................19
SECTION 2.14. Taxes...........................................................20
SECTION 2.15. Payments Generally; Pro Rata Treatment;
Sharing of Set-offs.............................................20
SECTION 2.16. Mitigation Obligations; Replacement of Lenders..................21
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers............................................22
SECTION 3.02. Authorization; Enforceability...................................22
SECTION 3.03. Governmental Approvals; No Conflicts............................22
SECTION 3.04. Financial Condition; No Material Adverse Change.................22
SECTION 3.05. Properties......................................................23
SECTION 3.06. Litigation and Environmental Matters............................23
SECTION 3.07. Compliance with Laws and Agreements.............................23
SECTION 3.08. Investment and Holding Company Status...........................23
SECTION 3.09. Taxes...........................................................24
SECTION 3.10. ERISA...........................................................24
SECTION 3.11. Disclosure......................................................24
SECTION 3.12. Representations and Warranties of Capstone......................24
</TABLE>
<PAGE> 3
2
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE IV
Conditions
SECTION 4.01. Effective Date..................................................24
SECTION 4.02. Each Credit Event...............................................26
SECTION 4.03. Subsequent Credit Events........................................26
ARTICLE V
Affirmative Covenants
SECTION 5.01. Financial Statements and Other Information......................26
SECTION 5.02. Notices of Material Events......................................27
SECTION 5.03. Existence; Conduct of Business..................................27
SECTION 5.04. Payment of Obligations..........................................28
SECTION 5.05. Maintenance of Properties; Insurance............................28
SECTION 5.06. Books and Records; Inspection Rights............................28
SECTION 5.07. Compliance with Laws............................................28
SECTION 5.08. Use of Proceeds.................................................28
SECTION 5.09. Additional Subsidiaries.........................................28
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness....................................................29
SECTION 6.02. Liens...........................................................30
SECTION 6.03. Fundamental Changes.............................................30
SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions.......31
SECTION 6.05. Hedging Agreements..............................................31
SECTION 6.06. Restricted Payments.............................................31
SECTION 6.07. Transactions with Affiliates....................................31
SECTION 6.08. Restrictive Agreements..........................................31
SECTION 6.09. Adjusted Leverage Ratio.........................................32
SECTION 6.10. Consolidated Interest Expense Coverage Ratio....................32
SECTION 6.11. Net Worth.......................................................32
ARTICLE VII
Events of Default
ARTICLE VIII
The Administrative Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices.........................................................36
SECTION 9.02. Waivers; Amendments.............................................36
SECTION 9.03. Expenses; Indemnity; Damage Waiver..............................37
SECTION 9.04. Successors and Assigns..........................................37
SECTION 9.05. Survival........................................................39
SECTION 9.06. Counterparts; Integration; Effectiveness........................39
</TABLE>
<PAGE> 4
3
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 9.07. Severability....................................................40
SECTION 9.08. Right of Setoff.................................................40
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process......40
SECTION 9.10. WAIVER OF JURY TRIAL............................................40
SECTION 9.11. Headings........................................................41
SECTION 9.12. Confidentiality.................................................41
SECTION 9.13. Interest Rate Limitation........................................41
SECTION 9.14. Borrower Upon Merger............................................41
</TABLE>
SCHEDULES:
Schedule 1.01 -- Guarantors
Schedule 2.01 -- Commitments
Schedule 3.06 -- Disclosed Matters
Schedule 6.01 -- Existing Indebtedness
Schedule 6.02 -- Existing Liens
Schedule 6.08 -- Existing Restrictions
EXHIBITS:
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Opinion of PCA's Deputy General Counsel
Exhibit C -- Form of Opinion of Capstone's Counsel
Exhibit D -- Form of 368(a) Reorganization Opinion
Exhibit E -- Form of Guarantee Agreement
Exhibit F -- Form of Indemnity, Subrogation and Contribution Agreement
<PAGE> 5
CREDIT AGREEMENT dated as of December 3,
1997, among PHARMACY CORPORATION OF AMERICA, a
California corporation ("PCA"), CAPSTONE PHARMACY
SERVICES, INC., a Delaware corporation which, upon
the Merger referred to below, will change its name to
PharMerica, Inc. ("Capstone"), the LENDERS party
hereto, CIBC OPPENHEIMER CORP., as Syndication Agent,
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Documentation Agent and THE CHASE
MANHATTAN BANK, as Administrative Agent.
Pursuant to an Agreement and Plan of Merger dated as of April 15, 1997
(the "Merger Agreement"), between Capstone and Beverly Enterprises, Inc., a
Delaware corporation ("Beverly"), Capstone will combine its business with the
institutional pharmacy business of Beverly. To effect such combination, (a) PCA,
a wholly owned subsidiary of Beverly, will, in its capacity as the Borrower
(such term and each other capitalized term used but not defined herein having
the meaning given to it in Article I), borrow hereunder to repay an intercompany
loan (the "Intercompany Loan") from Beverly in an outstanding principal amount
equal to approximately $275,000,000, (b) Beverly will transfer (the
"Restructuring") to New Beverly Holdings, Inc. ("NBHI") its Remaining Health
Care Assets and its Remaining Health Care Liabilities (as each such term is
defined in the Merger Agreement), (c) all the capital stock of NBHI will be
distributed to the stockholders of Beverly (the "Distribution"), (d) Beverly
will merge (the "Merger") with and into Capstone, with Capstone being the
surviving corporation of the Merger on the terms set forth in the Merger
Agreement, (e) Capstone will assume the obligations of PCA hereunder and become
the Borrower hereunder pursuant to and in accordance with Section 9.14 and (f)
Capstone will borrow hereunder to refinance the Credit Agreement dated as of
December 6, 1996, among Capstone, Bankers Trust Company and the banks named
therein (the "Existing Credit Agreement" and, together with the Intercompany
Loan, the "Existing Indebtedness"), in the outstanding amount of approximately
$109,000,000. The transactions described in this paragraph are collectively
referred to herein as the "Transactions".
The Borrower has requested the Lenders to extend credit in the form of
Loans at any time and from time to time prior to the Maturity Date, in an
aggregate principal amount at any time outstanding not in excess of
$550,000,000. The proceeds of the Loans are to be used (a) on the Closing Date,
to refinance the Intercompany Loan, (b) on and after the Closing Date, to pay
fees and expenses in connection with the Transactions, (c) substantially
simultaneously with the consummation of the Merger, to repay any loans
outstanding under the Existing Credit Agreement and (d) upon and after the
consummation of the Merger, for general corporate purposes, including Permitted
Acquisitions.
The Lenders are willing to extend such credit to the Borrower on the
terms and subject to the conditions set forth herein. Accordingly, the parties
hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.
"Acquired EBITDA" shall mean, with respect to any Acquired Entity or
Business or any Sold Entity or Business for any period, the sum of the amounts
for such period of net income or loss of
<PAGE> 6
2
such Acquired Entity or Business or Sold Entity or Business determined on a
consolidated basis in accordance with GAAP, plus, without duplication and to the
extent deducted from revenues in determining such consolidated net income or
loss, the sum of (a) the aggregate amount of interest expense, both expensed
and capitalized (including the interest component in respect of Capital Lease
Obligations), accrued or paid during such period, in each case as determined on
a consolidated basis in accordance with GAAP, (b) the aggregate amount of income
tax expense for such period, (c) all amounts attributable to depreciation and
amortization for such period, (d) all extraordinary charges during such period
and (e) non-cash expenses or losses during such period, and minus, without
duplication and to the extent added to revenues in determining such consolidated
net income or loss for such period, (i) all interest income for such period,
(ii) all extraordinary gains during such period and (iii) all non-cash income or
non-cash gains during such period, all as determined on a consolidated basis
with respect to such Acquired Entity or Business or Sold Entity or Business in
accordance with GAAP; provided that Acquired EBITDA shall include an adjustment
on a pro forma basis to reflect identifiable net cost savings as agreed to by
the Administrative Agent and the Borrower.
"Acquired Entity or Business" has the meaning assigned to such term in
the definition of Adjusted Consolidated EBITDA.
"Adjusted Consolidated EBITDA" means, for any period, Consolidated
EBITDA for such period, calculated by (a) including in the determination thereof
the Acquired EBITDA of any Person, property, business or asset in the Borrower's
or any Subsidiary's line of business acquired pursuant to a Permitted
Acquisition and not subsequently sold, transferred or otherwise disposed of by
the Borrower or any of the Subsidiaries during such period (each such Person,
property, business or asset, an "Acquired Entity or Business"), based on the
Acquired EBITDA of such Acquired Entity or Business for such period (including
the portion thereof occurring prior to such acquisition) and (b) excluding in
the determination thereof the Acquired EBITDA of any Person, property, business
or asset sold, transferred or otherwise disposed of by the Borrower or any of
the Subsidiaries during such period (each such Person, property, business or
asset, a "Sold Entity or Business") based on the Acquired EBITDA of such Sold
Entity or Business for such period (including the portion thereof occurring
prior to such sale, transfer or disposition).
"Adjusted Leverage Ratio" means, on any date, the ratio of (a) Total
Debt as of such date to (b) Adjusted Consolidated EBITDA for the period of four
consecutive fiscal quarters of the Borrower most recently ended as of such date,
all determined on a consolidated basis in accordance with GAAP.
"Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest
Period multiplied by (b) the Statutory Reserve Rate.
"Administrative Agent" means The Chase Manhattan Bank, in its capacity
as administrative agent for the Lenders hereunder.
"Administrative Questionnaire" means an Administrative Questionnaire in
a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
"Alternate Base Rate" means, for any day, a rate per annum equal to the
greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in
effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on
such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change
in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate
<PAGE> 7
3
shall be effective from and including the effective date of such change in the
Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" means, with respect to any Lender, the
percentage of the total Commitments represented by such Lender's Commitment. If
the Commitments have terminated or expired, the Applicable Percentages shall be
determined based upon the Commitments most recently in effect, giving effect to
any assignments.
"Applicable Rate" means, for any day, with respect to any Eurodollar
Loan or with respect to the facility fees payable hereunder, as the case may be,
the applicable rate per annum set forth below under the caption "Eurodollar
Spread" or "Facility Fee Rate", as applicable, based upon the Adjusted Leverage
Ratio as of the most recent determination date; provided that (a) until the
delivery to the Administrative Agent, pursuant to Section 5.01(b), of the
Borrower's consolidated financial statements for the Borrower's fiscal quarter
ending September 30, 1998, the "Applicable Rate" shall be deemed to be in
Category 2 and (b) in the event that the Merger shall not have been consummated
on or prior to the fifth Business Day following the Closing Date, then from and
including the Effective Date to but excluding the date on which the Merger is
consummated, the "Applicable Rate" with respect to any Eurodollar Loan shall be
2.3125% per annum:
<TABLE>
<CAPTION>
===============================================================================
Eurodollar Facility Fee
Adjusted Leverage Ratio: Spread Rate
<S> <C> <C>
- -------------------------------------------------------------------------------
Category 1
Greater than 3.50 to 1.00 0.3750% 0.2500%
- -------------------------------------------------------------------------------
Category 2
Greater than 3.00 to 1.00 but less
than or equal to 3.50 to 1.00 0.3125% 0.1875%
- -------------------------------------------------------------------------------
Category 3
Greater than 2.50 to 1.00 but less
than or equal to 3.00 to 1.00 0.2500% 0.1500%
- -------------------------------------------------------------------------------
Category 4
Greater than 2.00 to 1.00 but less
than or equal to 2.50 to 1.00 0.2250% 0.1250%
===============================================================================
Category 5
Less than or equal to 2.00 to 1.00 0.2000% 0.1000%
===============================================================================
</TABLE>
Each change in the Applicable Rate resulting from a change in the
Adjusted Leverage Ratio shall be effective with respect to all Loans and
Commitments outstanding on and after the date of delivery to the Administrative
Agent of the financial statements and certificates required by Section 5.01(a)
or (b) indicating such change until the date immediately preceding the next date
of delivery of such financial statements and certificates indicating another
such change. Notwithstanding the foregoing, (i) at any time after the occurrence
and during the continuance of an Event of Default, the Adjusted Leverage Ratio
shall be deemed to be in Category 1 for purposes of determining the Applicable
Rate and (ii) if upon the delivery to the Administrative Agent, pursuant to
Section 5.01(b), of the Borrower's consolidated financial statements for the
Borrower's fiscal quarter ending September 30, 1998, such financial statements
indicate the Applicable Rate is in Category 1, then the Applicable Rate for the
period (the "Adjustment Period") commencing on and including August 30, 1997,
through but excluding the date of delivery of such financial statements (the
"Delivery Date") shall be deemed to have been in Category 1 and the Borrower
shall, within three Business Days of the Delivery Date, pay to the
Administrative Agent for the accounts of the Lenders
<PAGE> 8
4
entitled thereto an amount equal to the difference between the amount of
interest and facility fees that would have been paid during the Adjustment
Period had the Applicable Rate been in Category 1 and the amount of interest and
facility fees during the Adjustment Period.
"Assessment Rate" means, for any day, the annual assessment rate in
effect on such day that is payable by a member of the Bank Insurance Fund
classified as "well-capitalized" and within supervisory subgroup "B" (or a
comparable successor risk classification) within the meaning of 12 C.F.R. Part
327 (or any successor provision) to the Federal Deposit Insurance Corporation
for insurance by such Corporation of time deposits made in dollars at the
offices of such member in the United States; provided that if, as a result of
any change in any law, rule or regulation, it is no longer possible to determine
the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual
rate as shall be determined by the Administrative Agent to be representative of
the cost of such insurance to the Lenders.
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 9.04), and accepted by the Administrative Agent, in the form
of Exhibit A or any other form approved by the Administrative Agent.
"Availability Period" means the period from and including the Effective
Date to but excluding the earlier of the Maturity Date and the date of
termination of the Commitments.
"Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate
multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate.
"Beverly" has the meaning assigned to such term in the preamble to this
Agreement.
"Board" means the Board of Governors of the Federal Reserve System of
the United States of America.
"Borrower" means (i) prior to the date of the consummation of the
Merger, PCA and (ii) from and after the date of the consummation of the Merger,
Capstone.
"Borrowing" means Loans of the same Type, made, converted or continued
on the same date and, in the case of Eurodollar Loans, as to which a single
Interest Period is in effect.
"Borrowing Request" means a request by the Borrower for a Borrowing in
accordance with Section 2.03.
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required by law
to remain closed; provided that, when used in connection with a Eurodollar Loan,
the term "Business Day" shall also exclude any day on which banks are not open
for dealings in dollar deposits in the London interbank market.
"Capital Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such Person under GAAP, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with GAAP.
"Change in Control" means, after giving effect to the consummation of
the Merger, (a) the acquisition of ownership, directly or indirectly,
beneficially or of record, by any Person or group (within the meaning of the
Securities Exchange Act of 1934 and the rules of the Securities and Exchange
Commission thereunder as in effect on the date hereof), of shares representing
more than 25% of the aggregate ordinary voting power represented by the issued
and outstanding capital stock
<PAGE> 9
5
of Capstone; (b) occupation of a majority of the seats (other than vacant seats)
on the board of directors of Capstone by Persons who were neither (i) nominated
by such board of directors of Capstone nor (ii) appointed by directors so
nominated; or (c) the occurrence of any change in control (or similar event,
however denominated) with respect to Capstone or any of its Subsidiaries under
and as defined in any indenture or agreement in respect of Material Indebtedness
to which Capstone or any Subsidiary is a party.
"Change in Law" means (a) the adoption of any law, rule or regulation
after the date of this Agreement, (b) any change in any law, rule or regulation
or in the interpretation or application thereof by any Governmental Authority
after the date of this Agreement or (c) compliance by any Lender (or, for
purposes of Section 2.12(b), by any lending office of such Lender or by such
Lender's holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the date of this Agreement.
"Closing Date" shall mean the date of the first Borrowing.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commitment" means, with respect to each Lender, the commitment of such
Lender to make Loans hereunder, as such commitment may be (a) reduced from time
to time pursuant to Section 2.06 and (b) reduced or increased from time to time
pursuant to assignments by or to such Lender pursuant to Section 9.04. The
initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in
the Assignment and Acceptance pursuant to which such Lender shall have assumed
its Commitment, as applicable. The initial aggregate amount of the Lenders'
Commitments is $550,000,000.
"Consolidated EBITDA" means, for any period, Consolidated Net Income
for such period, plus, without duplication and to the extent deducted from
revenues in determining Consolidated Net Income, the sum of (a) the aggregate
amount of Consolidated Interest Expense for such period, (b) the aggregate
amount of income tax expense for such period, (c) all amounts attributable to
depreciation and amortization for such period, (d) all extraordinary charges
during such period, (e) non-cash expenses, losses or charges during such period
and (f) restructuring charges taken in the fourth quarter of 1997 and/or the
first quarter of 1998 in connection with the Transactions in an aggregate amount
not to exceed $35,000,000, and minus, without duplication and to the extent
added to revenues in determining Consolidated Net Income for such period, (i)
all interest income for such period, (ii) all extraordinary gains during such
period, (iii) all non-cash income or non-cash gains during such period and (iv)
all cash expenditures during such period in respect of non-cash charges taken in
one or more prior periods, all as determined on a consolidated basis with
respect to the Borrower and the Subsidiaries in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the interest
expense, both expensed and capitalized (including the interest component in
respect of Capital Lease Obligations), accrued or paid by the Borrower and the
Subsidiaries during such period, determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, for any period, net income or loss of
the Borrower and the Subsidiaries for such period determined on a consolidated
basis in accordance with GAAP, provided that there shall be excluded (a) the
income of any Person in which any other person (other than the Borrower or any
of the Subsidiaries or any director holding qualifying shares in accordance with
applicable law) has a joint interest, except to the extent of the amount of
dividends or other distributions actually paid to the Borrower or any wholly
owned Subsidiary by such person during such period, (b) the income (or loss) of
any Person accrued prior to the date it becomes a Subsidiary or is merged into
or consolidated with the Borrower or any of the Subsidiaries or the date that
Person's assets are acquired by the Borrower or any of the Subsidiaries and (c)
the income of any Subsidiary of the Borrower to the extent that the declaration
or payment of dividends or similar
<PAGE> 10
6
distributions by the Subsidiary of that income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary.
"Consolidated Net Worth" means, as of any date of determination, the
consolidated stockholders' equity of the Borrower and the Subsidiaries, as
determined on a consolidated basis in accordance with GAAP.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise.
"Controlling" and "Controlled" have meanings correlative thereto.
"Default" means any event or condition which constitutes an Event of
Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Disclosed Matters" means the actions, suits and proceedings and the
environmental matters disclosed in Schedule 3.06.
"Distribution" has the meaning given to such term in the preamble to
this Agreement.
"dollars" or "$" refers to lawful money of the United States of
America.
"Effective Date" means the date on which the conditions specified in
Section 4.01 are satisfied (or waived in accordance with Section 9.02).
"Environmental Laws" means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or otherwise
(including any liability for damages, costs of environmental remediation, fines,
penalties or indemnities), of the Borrower or any Subsidiary directly or
indirectly resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials,
(d) the release or threatened release of any Hazardous Materials into the
environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in Section
4043 of ERISA or the regulations issued thereunder with respect to a Plan (other
than an event for which the 30-day notice period is waived); (b) the existence
with respect to any Plan of an "accumulated funding deficiency" (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any
Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any
liability under Title IV of ERISA
<PAGE> 11
7
with respect to the termination of any Plan; (e) the receipt by the Borrower or
any ERISA Affiliate from the PBGC or a plan administrator of any notice relating
to an intention to terminate any Plan or Plans or to appoint a trustee to
administer any Plan; (f) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability with respect to the withdrawal or partial withdrawal
from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any
ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the
Borrower or any ERISA Affiliate of any notice, concerning the imposition of
Withdrawal Liability or a determination that a Multiemployer Plan is, or is
expected to be, insolvent or in reorganization, within the meaning of Title IV
of ERISA.
"Eurodollar", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.
"Event of Default" has the meaning assigned to such term in
Article VII.
"Excluded Taxes" means, with respect to the Administrative Agent, any
Lender or any other recipient of any payment to be made by or on account of any
obligation of the Borrower hereunder, (a) income or franchise taxes imposed on
(or measured by) its net income by the United States of America, or by the
jurisdiction under the laws of which such recipient is organized or in which its
principal office is located or, in the case of any Lender, in which its
applicable lending office is located, (b) any branch profits taxes imposed by
the United States of America or any similar tax imposed by any other
jurisdiction in which the Borrower is located and (c) in the case of a Foreign
Lender (other than an assignee pursuant to a request by the Borrower under
Section 2.16(b)), any withholding tax that is imposed on amounts payable to such
Foreign Lender at the time such Foreign Lender becomes a party to this Agreement
(or designates a new lending office) or is attributable to such Foreign Lender's
failure to comply with Section 2.14(e), except to the extent that such Foreign
Lender (or its assignor, if any) was entitled, at the time of designation of a
new lending office (or assignment), to receive additional amounts from the
Borrower with respect to such withholding tax pursuant to Section 2.14(a).
"Existing Credit Agreement" has the meaning assigned to such term in
the preamble to this Agreement.
"Existing Indebtedness" has the meaning assigned to such term in the
preamble to this Agreement.
"Federal Funds Effective Rate" means, for any day, the weighted average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.
"Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or controller of the Borrower.
"Foreign Lender" means any Lender that is organized under the laws of a
jurisdiction other than that in which the Borrower is located. For purposes of
this definition, the United States of America, each State thereof and the
District of Columbia shall be deemed to constitute a single jurisdiction.
"GAAP" means generally accepted accounting principles in the United
States of America.
<PAGE> 12
8
"Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government.
"Guarantee" of or by any Person (the "guarantor") means any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation of any other Person
(the "primary obligor") in any manner, whether directly or indirectly, and
including any obligation of the guarantor, direct or indirect, (a) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation or to purchase (or to advance or supply funds
for the purchase of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of assuring the owner of
such Indebtedness or other obligation of the payment thereof, (c) to maintain
working capital, equity capital or any other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay such
Indebtedness or other obligation or (d) as an account party in respect of any
letter of credit or letter of guaranty issued to support such Indebtedness or
obligation; provided, that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business.
"Guarantee Agreement" means the Guarantee Agreement, substantially in
the form of Exhibit E, made by the Guarantors in favor of the Administrative
Agent for the benefit of the Lenders.
"Guarantors" means (a) each of the Persons listed on Schedule 1.01 and
(b) each other Person that becomes a party to the Guarantee Agreement as a
Guarantor thereunder.
"Hazardous Materials" means all explosive or radioactive substances or
wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.
"Hedging Agreement" means any interest rate protection agreement,
foreign currency exchange agreement, commodity price protection agreement or
other interest or currency exchange rate or commodity price hedging arrangement.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations (other than
accounts payable incurred in the ordinary course of business) of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding accounts
payable incurred in the ordinary course of business), (f) all Indebtedness of
others secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien on property owned or
acquired by such Person, whether or not the Indebtedness secured thereby has
been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h)
all Capital Lease Obligations of such Person, (i) all obligations, contingent or
otherwise, of such Person as an account party in respect of letters of credit
and letters of guaranty and (j) all obligations, contingent or otherwise, of
such Person in respect of bankers' acceptances. The Indebtedness of any Person
shall include the Indebtedness of any other entity (including any partnership in
which such Person is a general partner) to the extent such Person is liable
therefor as a result of such Person's ownership interest in or other
relationship with such entity, except to the extent the terms of such
Indebtedness provide that such Person is not liable therefor. Notwithstanding
the foregoing, the term
<PAGE> 13
9
"Indebtedness" shall not include the obligation to pay additional purchase price
in connection with an acquisition under a contingent "earnout" agreement,
whether or not evidenced by a note.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Indemnity, Subrogation and Contribution Agreement" means the
Indemnity, Subrogation and Contribution Agreement, substantially in the form of
Exhibit F, among the Capstone, the Guarantors and the Administrative Agent.
"Information Memorandum" means the Confidential Information Memorandum
dated October 1997 relating to the Capstone, PCA and the Transactions.
"Intercompany Loan" has the meaning assigned to such term in the
preamble to this Agreement.
"Interest Election Request" means a request by the Borrower to convert
or continue a Borrowing in accordance with Section 2.05.
"Interest Payment Date" means (a) with respect to any ABR Loan, the
last day of each March, June, September and December and (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing
of which such Loan is a part and, in the case of a Eurodollar Borrowing with an
Interest Period of more than three months' duration, each day prior to the last
day of such Interest Period that occurs at intervals of three months' duration
after the first day of such Interest Period.
"Interest Period" means with respect to any Eurodollar Borrowing, the
period commencing on the date of such Borrowing and ending on the numerically
corresponding day in the calendar month that is one, two, three or six months
thereafter, as the Borrower may elect; provided, that (i) if any Interest Period
would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day and (ii) any Interest Period
that commences on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the last calendar month of
such Interest Period) shall end on the last Business Day of the last calendar
month of such Interest Period. For purposes hereof, the date of a Borrowing
initially shall be the date on which such Borrowing is made and thereafter shall
be the effective date of the most recent conversion or continuation of such
Borrowing.
"Lenders" means the Persons listed on Schedule 2.01 and any other
Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Acceptance.
"LIBO Rate" means, with respect to any Eurodollar Borrowing for any
Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on
any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
<PAGE> 14
10
"Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Loan Documents" means this Agreement, the Guarantee Agreement and the
Indemnity, Subrogation and Contribution Agreement.
"Loan Parties" means the Borrower and the domestic Subsidiaries.
"Loans" means the loans made by the Lenders to the Borrower pursuant to
this Agreement.
"Material Adverse Effect" means a material adverse effect on (a) the
business, assets, operations, prospects or condition, financial or otherwise, of
the Borrower and the Subsidiaries taken as a whole, (b) the ability of the
Borrower to perform any of its obligations under this Agreement or the ability
of the Guarantors, taken as a whole, to perform their obligations under the
Guarantee Agreement or (c) the rights of or benefits available to the Lenders
under this Agreement or the Guarantee Agreement.
"Material Indebtedness" means Indebtedness (other than the Loans), or
obligations in respect of one or more Hedging Agreements, of any one or more of
the Borrower and its Subsidiaries in an aggregate principal amount exceeding
$10,000,000. For purposes of determining Material Indebtedness, the "principal
amount" of the obligations of the Borrower or any Subsidiary in respect of any
Hedging Agreement at any time shall be the maximum aggregate amount (giving
effect to any netting agreements) that the Borrower or such Subsidiary would be
required to pay if such Hedging Agreement were terminated at such time.
"Maturity Date" means December 3, 2002.
"Merger" has the meaning assigned to such term in the preamble to this
Agreement.
"Merger Agreement" has the meaning assigned to such term in the
preamble to this Agreement.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan as defined in Section
4001(a)(3) of ERISA.
"NBHI" has the meaning assigned to such term in the preamble to this
Agreement.
"Other Taxes" means any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made hereunder or from the execution, delivery or enforcement
of, or otherwise with respect to, this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA and any successor entity performing similar functions.
"Permitted Acquisition" means any non-hostile acquisition of all or
substantially all the assets of, or 100% of the shares or other equity interests
in, a Person or division or line of business of a Person engaged in the same
line of business as the Borrower or a line of business reasonably incidental
thereto if, immediately after giving effect thereto, (i) no Default or Event of
Default has occurred and is continuing or would result therefrom, (ii) if such
acquisition results in the creation
<PAGE> 15
11
or acquisition of one or more Subsidiaries, such Subsidiary or Subsidiaries
shall become a Guarantor or Guarantors, to the extent required by Section 5.09,
and (iii)(A) the Borrower and the Subsidiaries are in compliance, on a pro forma
basis after giving effect to such acquisition or formation, with the covenants
contained in Sections 6.01, 6.09, 6.10 and 6.11, recomputed as at the last day
of the most recently ended fiscal quarter of the Borrower as if such acquisition
had occurred on the first day of each relevant period for testing such
compliance and (B) the Borrower has delivered to the Administrative Agent an
officers' certificate confirming compliance with clauses (i) and (iii) above,
together with all relevant financial information for such subsidiary or assets
being acquired.
"Permitted Encumbrances" means:
(a) Liens imposed by law for taxes that are not yet due or are
being contested in compliance with Section 5.04;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's and other like Liens imposed by law, arising in the
ordinary course of business and securing obligations that are not
overdue by more than 30 days or are being contested in compliance with
Section 5.04;
(c) pledges and deposits made in the ordinary course of
business in compliance with workers' compensation, unemployment
insurance and other social security laws or regulations;
(d) deposits to secure the performance of bids, trade
contracts, leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature, in each case
in the ordinary course of business;
(e) judgment liens in respect of judgments that do not
constitute an Event of Default under clause (k) of Article VII; and
(f) easements, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary
course of business that do not secure any monetary obligations and do
not materially detract from the value of the affected property or
interfere with the ordinary conduct of business of the Borrower or any
Subsidiary;
provided that the term "Permitted Encumbrances" shall not include any Lien
securing Indebtedness for borrowed money.
"Permitted Investments" means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States
of America (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States of America),
in each case maturing within one year from the date of acquisition
thereof;
(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from S&P or from
Moody's;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money
market deposit accounts issued or offered by, any domestic office of
any commercial bank organized under the laws of the United States of
America or any State thereof which has a combined capital and surplus
and undivided profits of not less than $500,000,000; and
<PAGE> 16
12
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and
entered into with a financial institution satisfying the criteria
described in clause (c) above.
"Person" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Prime Rate" means the rate of interest per annum publicly announced
from time to time by The Chase Manhattan Bank as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as being
effective.
"Register" has the meaning set forth in Section 9.04.
"Related Parties" means, with respect to any specified Person, such
Person's Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person's Affiliates.
"Required Lenders" means, at any time, Lenders having Loans and unused
Commitments representing more than 50% of the sum of the total Loans and unused
Commitments at such time.
"Restricted Payment" means any dividend or other distribution (whether
in cash, securities or other property) with respect to any shares of any class
of capital stock of the Borrower or any Subsidiary, or any payment (whether in
cash, securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, retirement, acquisition,
cancelation or termination of any such shares of capital stock of the Borrower
or any option, warrant or other right to acquire any such shares of capital
stock of the Borrower.
"Restructuring" has the meaning assigned to such term in the preamble
to this Agreement.
"S&P" means Standard & Poor's.
"Sold Entity or Business" has the meaning assigned to such term in the
definition of Adjusted Consolidated EBITDA.
"Statutory Reserve Rate" means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject (a) with
respect to the Base CD Rate, for new negotiable nonpersonal time deposits in
dollars of over $100,000 with maturities approximately equal to three months and
(b) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently
referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such
reserve percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to any Lender
under such Regulation D or any comparable regulation. The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change in
any reserve percentage.
<PAGE> 17
13
"subsidiary" means, with respect to any Person (the "parent") at any
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as any
other corporation, limited liability company, partnership, association or other
entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or, in the
case of a partnership, more than 50% of the general partnership interests are,
as of such date, owned, controlled or held, or (b) that is, as of such date,
otherwise Controlled, by the parent or one or more subsidiaries of the parent or
by the parent and one or more subsidiaries of the parent.
"Subsidiary" means any subsidiary of the Borrower.
"Taxes" means any and all present or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Three-Month Secondary CD Rate" means, for any day, the secondary
market rate for three-month certificates of deposit reported as being in effect
on such day (or, if such day is not a Business Day, the next preceding Business
Day) by the Board through the public information telephone line of the Federal
Reserve Bank of New York (which rate will, under the current practices of the
Board, be published in Federal Reserve Statistical Release H.15(519) during the
week following such day) or, if such rate is not so reported on such day or such
next preceding Business Day, the average of the secondary market quotations for
three-month certificates of deposit of major money center banks in New York City
received at approximately 10:00 a.m., New York City time, on such day (or, if
such day is not a Business Day, on the next preceding Business Day) by the
Administrative Agent from three negotiable certificate of deposit dealers of
recognized standing selected by it.
"Total Debt" means, as of any date of determination, without
duplication, the aggregate principal amount of Indebtedness of the Borrower and
the Subsidiaries outstanding as of such date, determined on a consolidated basis
in accordance with GAAP (other than Indebtedness of the type referred to in
clause (i) of the definition of the term "Indebtedness", except to the extent of
any unreimbursed drawings thereunder).
"Transactions" has the meaning assigned to such term in the preamble
to this Agreement.
"Type", when used in reference to any Loan or Borrowing, refers to
whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate
Base Rate.
"wholly owned Subsidiary" means a Subsidiary of which securities
(except for directors' qualifying shares) or other ownership interests
representing 100% of the equity or 100% of the ordinary voting power or 100% of
the general partnership interests are, at the time any determination is being
made, owned, controlled or held by the Borrower or one or more wholly owned
Subsidiaries or by the Borrower and one or more wholly owned Subsidiaries.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Terms Generally. The definitions of terms herein shall
apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the
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context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors and
assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to
any particular provision hereof, (d) all references herein to Articles,
Sections, Exhibits and Schedules shall be construed to refer to Articles and
Sections of, and Exhibits and Schedules to, this Agreement and (e) the words
"asset" and "property" shall be construed to have the same meaning and effect
and to refer to any and all tangible and intangible assets and properties,
including cash, securities, accounts and contract rights.
SECTION 1.03. Accounting Terms; GAAP. Except as otherwise expressly
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP, as in effect from time to time; provided
that, if the Borrower notifies the Administrative Agent that the Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if the Administrative Agent notifies the
Borrower that the Required Lenders request an amendment to any provision hereof
for such purpose), regardless of whether any such notice is given before or
after such change in GAAP or in the application thereof, then such provision
shall be interpreted on the basis of GAAP as in effect and applied immediately
before such change shall have become effective until such notice shall have been
withdrawn or such provision amended in accordance herewith.
ARTICLE II
The Credits
SECTION 2.01. Commitments. Subject to the terms and conditions set
forth herein, each Lender agrees to make Loans to the Borrower from time to time
during the Availability Period in an aggregate principal amount that will not
result in (a) such Lender's Loans exceeding such Lender's Commitment or (b) the
sum of the total Loans exceeding the total Commitments. Within the foregoing
limits and subject to the terms and conditions set forth herein, the Borrower
may borrow, prepay and reborrow Loans.
SECTION 2.02. Loans and Borrowings. (a) Each Loan shall be made as part
of a Borrowing consisting of Loans made by the Lenders ratably in accordance
with their respective Commitments. The failure of any Lender to make any Loan
required to be made by it shall not relieve any other Lender of its obligations
hereunder.
(b) Subject to Section 2.13, each Borrowing shall be comprised entirely
of ABR Loans or Eurodollar Loans as the Borrower may request in accordance
herewith. Each Lender at its option may make any Eurodollar Loan by causing any
domestic or foreign branch or Affiliate of such Lender to make such Loan;
provided that any exercise of such option shall not affect the obligation of the
Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar
Borrowing, such Borrowing shall be in an aggregate amount that is an integral
multiple of $1,000,000 and not less than $2,000,000. At the time that each ABR
Borrowing is made, such Borrowing shall be in an aggregate amount that is an
integral multiple of $1,000,000 and not less than $2,000,000; provided that an
ABR Borrowing may be in an aggregate amount that is equal to the entire unused
balance of the total Commitments. Borrowings of more than one Type may be
outstanding at the same time; provided that there shall not at any time be more
than a total of 10 Eurodollar Borrowings outstanding.
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(d) Notwithstanding any other provision of this Agreement, the Borrower
shall not be entitled to request, or to elect to convert or continue, any
Borrowing if the Interest Period requested with respect thereto would end after
the Maturity Date.
SECTION 2.03. Requests for Borrowings. To request a Borrowing, the
Borrower shall notify the Administrative Agent of such request by telephone (a)
in the case of a Eurodollar Borrowing, not later than 11:30 a.m., New York City
time, three Business Days before the date of the proposed Borrowing or (b) in
the case of an ABR Borrowing, not later than 11:30 a.m., New York City time, on
the date of the proposed Borrowing. Each such telephonic Borrowing Request shall
be irrevocable and shall be confirmed promptly by hand delivery or telecopy to
the Administrative Agent of a written Borrowing Request in a form approved by
the Administrative Agent and signed by the Borrower. Each such telephonic and
written Borrowing Request shall specify the following information in compliance
with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business
Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial
Interest Period to be applicable thereto, which shall be a period
contemplated by the definition of the term "Interest Period"; and
(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of
Section 2.06.
If no election as to the Type of Borrowing is specified, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period is specified with
respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed
to have selected an Interest Period of one month's duration. Promptly following
receipt of a Borrowing Request in accordance with this Section, the
Administrative Agent shall advise each Lender of the details thereof and of the
amount of such Lender's Loan to be made as part of the requested Borrowing.
SECTION 2.04. Funding of Borrowings. (a) Each Lender shall make each
Loan to be made by it hereunder on the proposed date thereof by wire transfer of
immediately available funds by 2:00 p.m., New York City time, to the account of
the Administrative Agent most recently designated by it for such purpose by
notice to the Lenders. The Administrative Agent will make such Loans available
to the Borrower by promptly crediting the amounts so received, in like funds, to
an account of the Borrower maintained with the Administrative Agent in New York
City and designated by the Borrower in the applicable Borrowing Request.
(b) Unless the Administrative Agent shall have received notice from a
Lender prior to the proposed date of any Borrowing that such Lender will not
make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of this Section
and may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. In such event, if a Lender has not in fact made its share
of the applicable Borrowing available to the Administrative Agent, then the
applicable Lender and the Borrower severally agree to pay to the Administrative
Agent forthwith on demand such corresponding amount with interest thereon, for
each day from and including the date such amount is made available to the
Borrower to but excluding the date of payment to the Administrative Agent, at
(i) in the case of such Lender, the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation or (ii) in the case of the
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Borrower, the interest rate applicable to ABR Loans. If such Lender pays such
amount to the Administrative Agent, then such amount shall constitute such
Lender's Loan included in such Borrowing.
SECTION 2.05. Interest Elections. (a) Each Borrowing initially shall be
of the Type specified in the applicable Borrowing Request and, in the case of a
Eurodollar Borrowing, shall have an initial Interest Period as specified in such
Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing
to a different Type or to continue such Borrowing and, in the case of a
Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in
this Section. The Borrower may elect different options with respect to different
portions of the affected Borrowing, in which case each such portion shall be
allocated ratably among the Lenders holding the Loans comprising such Borrowing,
and the Loans comprising each such portion shall be considered a separate
Borrowing.
(b) To make an election pursuant to this Section, the Borrower shall
notify the Administrative Agent of such election by telephone by the time that a
Borrowing Request would be required under Section 2.03 if the Borrower were
requesting a Borrowing of the Type resulting from such election to be made on
the effective date of such election. Each such telephonic Interest Election
Request shall be irrevocable and shall be confirmed promptly by hand delivery or
telecopy to the Administrative Agent of a written Interest Election Request in a
form approved by the Administrative Agent and signed by the Borrower.
(c) Each telephonic and written Interest Election Request shall specify
the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request
applies and, if different options are being elected with respect to
different portions thereof, the portions thereof to be allocated to
each resulting Borrowing (in which case the information to be specified
pursuant to clauses (iii) and (iv) below shall be specified for each
resulting Borrowing);
(ii) the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR
Borrowing or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the
Interest Period to be applicable thereto after giving effect to such
election, which shall be a period contemplated by the definition of the
term "Interest Period".
If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Borrower shall be deemed to have
selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election Request, the
Administrative Agent shall advise each Lender of the details thereof and of such
Lender's portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election Request
with respect to a Eurodollar Borrowing prior to the end of the Interest Period
applicable thereto, then, unless such Borrowing is repaid as provided herein, at
the end of such Interest Period such Borrowing shall be converted to an ABR
Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default
has occurred and is continuing and the Administrative Agent, at the request of
the Required Lenders, so notifies the Borrower, then, so long as an Event of
Default is continuing (i) no outstanding Borrowing may be converted to or
continued as a Eurodollar Borrowing and (ii) unless
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repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the
end of the Interest Period applicable thereto.
SECTION 2.06. Termination and Reduction of Commitments. (a) Unless
previously terminated, the Commitments shall terminate on the Maturity Date.
(b) The Borrower may at any time terminate, or from time to time
reduce, the Commitments; provided that (i) each reduction of the Commitments
shall be in an amount that is an integral multiple of $1,000,000 and not less
than $5,000,000 and (ii) the Borrower shall not terminate or reduce the
Commitments if, after giving effect to any concurrent prepayment of the Loans in
accordance with Section 2.08, the aggregate amount of the outstanding Loans
would exceed the total Commitments.
(c) The Borrower shall notify the Administrative Agent of any election
to terminate or reduce the Commitments under paragraph (b) of this Section at
least three Business Days prior to the effective date of such termination or
reduction, specifying such election and the effective date thereof. Promptly
following receipt of any notice, the Administrative Agent shall advise the
Lenders of the contents thereof. Each notice delivered by the Borrower pursuant
to this Section shall be irrevocable; provided that a notice of termination of
the Commitments delivered by the Borrower may state that such notice is
conditioned upon the effectiveness of other credit facilities, in which case
such notice may be revoked by the Borrower (by notice to the Administrative
Agent on or prior to the specified effective date) if such condition is not
satisfied. Any termination or reduction of the Commitments shall be permanent.
Each reduction of the Commitments shall be made ratably among the Lenders in
accordance with their respective Commitments.
SECTION 2.07. Repayment of Loans; Evidence of Debt. (a) The Borrower
hereby unconditionally promises to pay to the Administrative Agent for the
account of each Lender the then unpaid principal amount of each Loan on the
Maturity Date.
(b) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrower to such Lender
resulting from each Loan made by such Lender, including the amounts of principal
and interest payable and paid to such Lender from time to time hereunder.
(c) The Administrative Agent shall maintain accounts in which it shall
record (i) the amount of each Loan made hereunder, the Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrower to each Lender
hereunder and (iii) the amount of any sum received by the Administrative Agent
hereunder for the account of the Lenders and each Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to paragraph
(b) or (c) of this Section shall be prima facie evidence of the existence and
amounts of the obligations recorded therein; provided that the failure of any
Lender or the Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to repay
the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced by a
promissory note. In such event, the Borrower shall prepare, execute and deliver
to such Lender a promissory note payable to the order of such Lender (or, if
requested by such Lender, to such Lender and its registered assigns) and in a
form approved by the Administrative Agent. Thereafter, the Loans evidenced by
such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).
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SECTION 2.08. Prepayment of Loans. (a) The Borrower shall have the
right at any time and from time to time to prepay any Borrowing in whole or in
part, subject to prior notice in accordance with paragraph (b) of this Section.
(b) The Borrower shall notify the Administrative Agent by telephone
(confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Borrowing, not later than 12:00 (noon), New York City
time, three Business Days before the date of prepayment or (ii) in the case of
prepayment of an ABR Borrowing, not later than 12:00 (noon), New York City time,
on the date of prepayment. Each such notice shall be irrevocable and shall
specify the prepayment date and the principal amount of each Borrowing or
portion thereof to be prepaid; provided that, if a notice of prepayment is given
in connection with a conditional notice of termination of the Commitments as
contemplated by Section 2.06, then such notice of prepayment may be revoked if
such notice of termination is revoked in accordance with Section 2.06. Promptly
following receipt of any such notice relating to a Borrowing, the Administrative
Agent shall advise the Lenders of the contents thereof. Each partial prepayment
of any Borrowing shall be in an amount that would be permitted in the case of an
advance of a Borrowing of the same Type as provided in Section 2.02. Each
prepayment of a Borrowing shall be applied ratably to the Loans included in the
prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the
extent required by Section 2.10.
SECTION 2.09. Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a facility fee, which shall
accrue at the Applicable Rate on the daily amount of the Commitment of such
Lender (whether used or unused) during the period from and including the
Effective Date to but excluding the date on which such Commitment terminates;
provided that, if such Lender continues to have any Loans outstanding after its
Commitment terminates, then such facility fee shall continue to accrue on the
daily amount of such Lender's Loans outstanding from and including the date on
which its Commitment terminates to but excluding the date on which such Lender
ceases to have any Loans outstanding. Accrued facility fees shall be payable in
arrears on the last day of March, June, September and December of each year and
on the date on which the Commitments terminate, commencing on the first such
date to occur after the date hereof; provided that any facility fees accruing
after the date on which the Commitments terminate shall be payable on demand.
All facility fees shall be computed on the basis of a year of 360 days and shall
be payable for the actual number of days elapsed (including the first day but
excluding the last day).
(b) The Borrower agrees to pay to the Administrative Agent for the
account of each Lender a utilization fee which shall accrue at a rate of 0.10%
per annum on such Lender's Applicable Percentage of the amount of the Loans
outstanding hereunder on and in respect of each day on which the aggregate Loans
outstanding exceed 50% of the aggregate amount of the Lenders' Commitments on
such day; provided that, if such Lender continues to have any Loans outstanding
after its Commitment terminates, then such utilization fee shall continue to
accrue on the daily amount of such Lender's Loans outstanding from and including
the date on which its Commitment terminates to but excluding the date on which
such Lender ceases to have any Loans outstanding. The utilization fee shall be
payable in arrears on the last day of March, June, September and December for
each year and on the date on which the Commitments have been terminated and all
outstanding Loans repaid, commencing on the first such date to occur after the
date hereof. All utilization fees shall be computed on the basis of a year of
360 days and shall be payable for the actual number of days elapsed (including
the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative Agent, the
Documentation Agent and the Syndication Agent, for their own respective
accounts, fees payable in the amounts and at the times specified in the Fee
Letters dated September 19, 1997, between PCA, Capstone and the Administrative
Agent, the Documentation Agent and the Syndication Agent, respectively.
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(d) All fees payable hereunder shall be paid on the dates due, in
immediately available funds, to the Administrative Agent for distribution, in
the case of facility fees, to the Lenders. Fees paid shall not be refundable
under any circumstances.
SECTION 2.10. Interest. (a) The Loans comprising each ABR Borrowing
shall bear interest at the Alternate Base Rate; provided that, in the event that
the Merger shall not have been consummated on or prior to the fifth Business Day
following the Closing Date, then from and including the Effective Date to but
excluding the date on which the Merger is consummated, the Loans comprising each
ABR Borrowing outstanding during such period shall bear interest at the
Alternate Base Rate plus 1.3125% per annum.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest
at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing
plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of or interest on
any Loan or any fee or other amount payable by the Borrower hereunder is not
paid when due, whether at stated maturity, upon acceleration or otherwise, such
overdue amount shall bear interest, after as well as before judgment, at a rate
per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the
rate otherwise applicable to such Loan as provided in the preceding paragraphs
of this Section or (ii) in the case of any other amount, 2% plus the Alternate
Base Rate.
(d) Accrued interest on each Loan shall be payable in arrears on each
Interest Payment Date for such Loan and upon termination of the Commitments;
provided that (i) interest accrued pursuant to paragraph (c) of this Section
shall be payable on demand, (ii) in the event of any repayment or prepayment of
any Loan (other than a prepayment of an ABR Loan prior to the end of the
Availability Period), accrued interest on the principal amount repaid or prepaid
shall be payable on the date of such repayment or prepayment and (iii) in the
event of any conversion of any Eurodollar Loan prior to the end of the current
Interest Period therefor, accrued interest on such Loan shall be payable on the
effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of
360 days, except that interest computed by reference to the Alternate Base Rate
at times when the Alternate Base Rate is based on the Prime Rate shall be
computed on the basis of a year of 365 days (or 366 days in a leap year), and in
each case shall be payable for the actual number of days elapsed (including the
first day but excluding the last day). The applicable Alternate Base Rate,
Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent,
and such determination shall be conclusive absent manifest error.
SECTION 2.11. Alternate Rate of Interest. If prior to the commencement
of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination
shall be conclusive absent manifest error) that adequate and reasonable
means do not exist for ascertaining the LIBO Rate for such Interest
Period; or
(b) the Administrative Agent is advised by the Required
Lenders that the Adjusted LIBO Rate for such Interest Period will not
adequately and fairly reflect the cost to such Lenders of making or
maintaining their Loans included in such Borrowing for such Interest
Period;
then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective
and (ii) if any
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Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made
as an ABR Borrowing; provided that if the circumstances giving rise to such
notice affect only one Type of Borrowings, then the other Type of Borrowings
shall be permitted.
SECTION 2.12. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for
the account of, or credit extended by, any Lender (except any such
reserve requirement reflected in the Adjusted LIBO Rate); or
(ii) impose on any Lender or the London interbank market any
other condition affecting this Agreement or Eurodollar Loans made by
such Lender;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to reduce the amount of any sum received or
receivable by such Lender hereunder (whether of principal, interest or
otherwise), then the Borrower will pay to such Lender such additional amount or
amounts as will compensate such Lender for such additional costs incurred or
reduction suffered.
(b) If any Lender determines that any Change in Law regarding capital
requirements has or would have the effect of reducing the rate of return on such
Lender's capital or on the capital of such Lender's holding company, if any, as
a consequence of this Agreement or the Loans made by such Lender, to a level
below that which such Lender or such Lender's holding company could have
achieved but for such Change in Law (taking into consideration such Lender's
policies and the policies of such Lender's holding company with respect to
capital adequacy), then from time to time the Borrower will pay to such Lender
such additional amount or amounts as will compensate such Lender or such
Lender's holding company for any such reduction suffered.
(c) A certificate of a Lender setting forth the amount or amounts
necessary to compensate such Lender or its holding company, as the case may be,
as specified in paragraph (a) or (b) of this Section shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.
(d) Failure or delay on the part of any Lender to demand compensation
pursuant to this Section shall not constitute a waiver of such Lender's right to
demand such compensation; provided that the Borrower shall not be required to
compensate a Lender pursuant to this Section for any increased costs or
reductions incurred more than 270 days prior to the date that such Lender
notifies the Borrower of the Change in Law giving rise to such increased costs
or reductions and of such Lender's intention to claim compensation therefor;
provided further that, if the Change in Law giving rise to such increased costs
or reductions is retroactive, then the 270-day period referred to above shall be
extended to include the period of retroactive effect thereof.
SECTION 2.13. Break Funding Payments. In the event of (a) the payment
of any principal of any Eurodollar Loan other than on the last day of an
Interest Period applicable thereto (including as a result of an Event of
Default), (b) the conversion of any Eurodollar Loan other than on the last day
of the Interest Period applicable thereto, (c) the failure to borrow, convert,
continue or prepay any Loan on the date specified in any notice delivered
pursuant hereto (regardless of whether such notice may be revoked under Section
2.08(b) and is revoked in accordance therewith) or (d) the assignment of any
Eurodollar Loan other than on the last day of the Interest Period applicable
thereto as a result of a request by the Borrower pursuant to Section 2.16, then,
in any such event, the Borrower shall compensate each Lender for the loss, cost
and expense attributable to such event. In the case of a Eurodollar Loan, such
loss, cost or expense to any Lender shall be deemed to include an amount
determined by such Lender to be the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount of such Loan had such
event not occurred, at the
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Adjusted LIBO Rate that would have been applicable to such Loan, for the period
from the date of such event to the last day of the then current Interest Period
therefor (or, in the case of a failure to borrow, convert or continue, for the
period that would have been the Interest Period for such Loan), over (ii) the
amount of interest which would accrue on such principal amount for such period
at the interest rate which such Lender would bid were it to bid, at the
commencement of such period, for dollar deposits of a comparable amount and
period from other banks in the eurodollar market. A certificate of any Lender
setting forth any amount or amounts that such Lender is entitled to receive
pursuant to this Section shall be delivered to the Borrower and shall be
conclusive absent manifest error. The Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt thereof.
SECTION 2.14. Taxes. (a) Any and all payments by or on account of any
obligation of the Borrower hereunder shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes; provided that if the
Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from
such payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section) the Administrative Agent or Lender
(as the case may be) receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Borrower shall make such deductions
and (iii) the Borrower shall pay the full amount deducted to the relevant
Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent and each
Lender within 10 days after written demand therefor, for the full amount of any
Indemnified Taxes or Other Taxes paid by the Administrative Agent or such
Lender, as the case may be, on or with respect to any payment by or on account
of any obligation of the Borrower hereunder (including Indemnified Taxes or
Other Taxes imposed or asserted on or attributable to amounts payable under this
Section) and any penalties, interest and reasonable expenses arising therefrom
or with respect thereto, whether or not such Indemnified Taxes or Other Taxes
were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate as to the amount of such payment or liability delivered
to the Borrower by a Lender, or by the Administrative Agent on its own behalf or
on behalf of a Lender, shall be conclusive absent manifest error.
(d) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes by the Borrower to a Governmental Authority, the Borrower shall
deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.
(e) Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrower is located, or any treaty to which such jurisdiction is a party, with
respect to payments under this Agreement shall deliver to the Borrower (with a
copy to the Administrative Agent), at the time or times prescribed by applicable
law, such properly completed and executed documentation prescribed by applicable
law or reasonably requested by the Borrower as will permit such payments to be
made without withholding or at a reduced rate.
SECTION 2.15. Payments Generally; Pro Rata Treatment; Sharing of
Set-offs. (a) The Borrower shall make each payment required to be made by it
hereunder (whether of principal, interest or fees, or of amounts payable under
Section 2.12, 2.13 or 2.14, or otherwise) prior to 12:00 noon, New York City
time, on the date when due, in immediately available funds, without set-off or
counterclaim. Any amounts received after such time on any date may, in the
discretion of the Administrative Agent, be deemed to have been received on the
next succeeding Business Day for
<PAGE> 26
22
purposes of calculating interest thereon. All such payments shall be made to the
Administrative Agent at its offices at One Chase Manhattan Plaza, New York, New
York, except that payments pursuant to Sections 2.12, 2.13, 2.14 and 9.03 shall
be made directly to the Persons entitled thereto. The Administrative Agent shall
distribute any such payments received by it for the account of any other Person
to the appropriate recipient promptly following receipt thereof. If any payment
hereunder shall be due on a day that is not a Business Day, the date for payment
shall be extended to the next succeeding Business Day, and, in the case of any
payment accruing interest, interest thereon shall be payable for the period of
such extension. All payments hereunder shall be made in dollars.
(b) If at any time insufficient funds are received by and available to
the Administrative Agent to pay fully all amounts of principal, interest and
fees then due hereunder, such funds shall be applied (i) first, towards payment
of interest and fees then due hereunder, ratably among the parties entitled
thereto in accordance with the amounts of interest and fees then due to such
parties, and (ii) second, towards payment of principal then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Loans resulting in such Lender receiving payment of a
greater proportion of the aggregate amount of its Loans and accrued interest
thereon than the proportion received by any other Lender, then the Lender
receiving such greater proportion shall purchase (for cash at face value)
participations in the Loans of other Lenders to the extent necessary so that the
benefit of all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued interest on
their respective Loans; provided that (i) if any such participations are
purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price
restored to the extent of such recovery, without interest, and (ii) the
provisions of this paragraph shall not be construed to apply to any payment made
by the Borrower pursuant to and in accordance with the express terms of this
Agreement or any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Loans to any assignee or
participant, other than to the Borrower or any Subsidiary or Affiliate thereof
(as to which the provisions of this paragraph shall apply). The Borrower
consents to the foregoing and agrees, to the extent it may effectively do so
under applicable law, that any Lender acquiring a participation pursuant to the
foregoing arrangements may exercise against the Borrower rights of set-off and
counterclaim with respect to such participation as fully as if such Lender were
a direct creditor of the Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Administrative
Agent for the account of the Lenders hereunder that the Borrower will not make
such payment, the Administrative Agent may assume that the Borrower has made
such payment on such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders the amount due. In such event, if the
Borrower has not in fact made such payment, then each of the Lenders severally
agrees to repay to the Administrative Agent forthwith on demand the amount so
distributed to such Lender with interest thereon, for each day from and
including the date such amount is distributed to it to but excluding the date of
payment to the Administrative Agent, at the greater of the Federal Funds
Effective Rate and a rate determined by the Administrative Agent in accordance
with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by
it pursuant to Section 2.04(b) or 2.15(d), then the Administrative Agent may, in
its discretion (notwithstanding any contrary provision hereof), apply any
amounts thereafter received by the Administrative Agent for the account of such
Lender to satisfy such Lender's obligations under such Sections until all such
unsatisfied obligations are fully paid.
<PAGE> 27
23
SECTION 2.16. Mitigation Obligations; Replacement of Lenders. (a) If
any Lender requests compensation under Section 2.12, or if the Borrower is
required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.14, then such
Lender shall use reasonable efforts to designate a different lending office for
funding or booking its Loans hereunder or to assign its rights and obligations
hereunder to another of its offices, branches or affiliates, if, in the judgment
of such Lender, such designation or assignment (i) would eliminate or reduce
amounts payable pursuant to Section 2.12 or 2.14, as the case may be, in the
future and (ii) would not subject such Lender to any unreimbursed cost or
expense and would not otherwise be disadvantageous to such Lender. The Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.
(b) If any Lender requests compensation under Section 2.12, or if the
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.14,
or if any Lender defaults in its obligation to fund Loans hereunder, then the
Borrower may, at its sole expense and effort, upon notice to such Lender and the
Administrative Agent, require such Lender to assign and delegate, without
recourse (in accordance with and subject to the restrictions contained in
Section 9.04), all its interests, rights and obligations under this Agreement to
an assignee that shall assume such obligations (which assignee may be another
Lender, if a Lender accepts such assignment); provided that (i) the Borrower
shall have received the prior written consent of the Administrative Agent, which
consent shall not unreasonably be withheld, (ii) such Lender shall have received
payment of an amount equal to the outstanding principal of its Loans, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts) and (iii)
in the case of any such assignment resulting from a claim for compensation under
Section 2.12 or payments required to be made pursuant to Section 2.14, such
assignment will result in a reduction in such compensation or payments. A Lender
shall not be required to make any such assignment and delegation if, prior
thereto, as a result of a waiver by such Lender or otherwise, the circumstances
entitling the Borrower to require such assignment and delegation cease to apply.
ARTICLE III
Representations and Warranties
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Organization; Powers. Each of the Borrower and the
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, has all requisite power and
authority to carry on its business as now conducted and, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect, is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required.
SECTION 3.02. Authorization; Enforceability. The Transactions are
within the Borrower's corporate powers and have been duly authorized by all
necessary corporate and, if required, stockholder action. This Agreement has
been duly executed and delivered by the Borrower and constitutes a legal, valid
and binding obligation of the Borrower, enforceable in accordance with its
terms.
SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions
(a) do not require any consent or approval of, registration or filing with, or
any other action by, any Governmental Authority, except such as have been
obtained or made and are in full force and effect, (b) will not violate any
applicable law or regulation or the charter, by-laws or other organizational
<PAGE> 28
24
documents of the Borrower or any of its Subsidiaries or any order of any
Governmental Authority, (c) will not violate or result in a default under any
indenture, agreement or other instrument binding upon the Borrower or any of the
Subsidiaries or its assets, or give rise to a right thereunder to require any
payment to be made by the Borrower or any of the Subsidiaries, and (d) will not
result in the creation or imposition of any Lien on any asset of the Borrower or
any of the Subsidiaries.
SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The
Borrower has heretofore furnished to the Lenders its consolidated balance sheet
and statements of income, stockholders equity and cash flows (i) as of and for
the fiscal year ended December 31, 1996, reported on by Ernst & Young LLP,
independent public accountants, and (ii) as of and for the fiscal quarter and
the portion of the fiscal year ended June 30, 1997, certified by its chief
financial officer. Such financial statements present fairly, in all material
respects, the financial position and results of operations and cash flows of the
Borrower and the consolidated Subsidiaries as of such dates and for such periods
in accordance with GAAP, subject to year-end audit adjustments and the absence
of footnotes in the case of the statements referred to in clause (ii) above.
(b) The Borrower has heretofore delivered to the Lenders its unaudited
pro forma consolidated financial statements as of June 30, 1997, prepared giving
effect to the Merger and the other Transactions as if they had occurred on such
date. Such pro forma financial statements have been prepared in good faith by
the Borrower, based on the assumptions used to prepare the pro forma financial
information contained in the Information Memorandum (which assumptions are
believed by the Borrower on the date hereof to be reasonable), are based on the
best information available to the Borrower as of the date of delivery thereof,
accurately reflect all adjustments required to be made to give effect to the
Merger and the other Transactions and present fairly on a pro forma basis the
estimated consolidated financial position of the Borrower and its consolidated
Subsidiaries as of June 30, 1997, assuming that the Merger and the other
Transaction had actually occurred at June 30, 1997.
(c) Since December 31, 1996, there has been no material adverse change
in or affecting the business, operations, property, prospects or condition,
financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole.
SECTION 3.05. Properties. (a) Each of the Borrower and the Subsidiaries
has good title to, or valid leasehold interests in, all its real and personal
property material to its business, except for minor defects in title that do not
interfere with its ability to conduct its business as currently conducted or to
utilize such properties for their intended purposes.
(b) Each of the Borrower and the Subsidiaries owns, or is licensed to
use, all trademarks, tradenames, copyrights, patents and other intellectual
property material to its business, and the use thereof by the Borrower and the
Subsidiaries does not infringe upon the rights of any other Person, except for
any such infringements that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
SECTION 3.06. Litigation and Environmental Matters. (a) There are no
actions, suits or proceedings by or before any arbitrator or Governmental
Authority pending against or, to the knowledge of the Borrower, threatened
against or affecting the Borrower or any of the Subsidiaries (i) as to which
there is a reasonable possibility of an adverse determination and that, if
adversely determined, could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect (other than the Disclosed
Matters) or (ii) that involve this Agreement or the Transactions.
(b) Except for the Disclosed Matters and except with respect to any
other matters that, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect, neither the Borrower nor any of
the Subsidiaries (i) has failed to comply with any Environmental Law or to
obtain, maintain or comply with any permit, license or other approval
<PAGE> 29
25
required under any Environmental Law, (ii) has become subject to any
Environmental Liability, (iii) has received notice of any claim with respect to
any Environmental Liability or (iv) knows of any basis for any Environmental
Liability.
(c) Since the date of this Agreement, there has been no change in the
status of the Disclosed Matters that, individually or in the aggregate, has
resulted in, or materially increased the likelihood of, a Material Adverse
Effect.
SECTION 3.07. Compliance with Laws and Agreements. Each of the Borrower
and the Subsidiaries is in compliance with all laws, regulations and orders of
any Governmental Authority applicable to it or its property and all indentures,
agreements and other instruments binding upon it or its property, except where
the failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect. No Default has occurred and is
continuing.
SECTION 3.08. Investment and Holding Company Status. Neither the
Borrower nor any of the Subsidiaries is (a) an "investment company" as defined
in, or subject to regulation under, the Investment Company Act of 1940 or (b) a
"holding company" as defined in, or subject to regulation under, the Public
Utility Holding Company Act of 1935.
SECTION 3.09. Taxes. Each of the Borrower and the Subsidiaries has
timely filed or caused to be filed all Tax returns and reports required to have
been filed and has paid or caused to be paid all Taxes required to have been
paid by it, except (a) Taxes that are being contested in good faith by
appropriate proceedings and for which the Borrower or such Subsidiary, as
applicable, has set aside on its books adequate reserves or (b) to the extent
that the failure to do so could not reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events for
which liability is reasonably expected to occur, could reasonably be expected to
result in a Material Adverse Effect. The present value of all accumulated
benefit obligations under each Plan (based on the assumptions used for purposes
of Statement of Financial Accounting Standards No. 87) did not, as of the date
of the most recent financial statements reflecting such amounts, exceed the fair
market value of the assets of such Plan, and the present value of all
accumulated benefit obligations of all underfunded Plans (based on the
assumptions used for purposes of Statement of Financial Accounting Standards No.
87) did not, as of the date of the most recent financial statements reflecting
such amounts, exceed the fair market value of the assets of all such underfunded
Plans.
SECTION 3.11. Disclosure. Each of Capstone and PCA has disclosed to the
Lenders all agreements, instruments and corporate or other restrictions to which
it or any of its subsidiaries is subject, and all other matters known to it,
that, individually or in the aggregate, could reasonably be expected to result
in a Material Adverse Effect. Neither the Information Memorandum nor any of the
other reports, financial statements, certificates or other information furnished
by or on behalf of Capstone or PCA to the Administrative Agent or any Lender in
connection with the negotiation of this Agreement or delivered hereunder (as
modified or supplemented by other information so furnished) contains any
material misstatement of fact or omits to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided that, with respect to projected financial
information, the Borrower represents only that such information was prepared in
good faith based upon assumptions believed to be reasonable at the time.
SECTION 3.12. Representations and Warranties of Capstone. On the date
the Merger is consummated, Capstone hereby represents and warrants to the
Lenders that each of the representations and warranties set forth in this
Article III are true and correct with respect to Capstone and its subsidiaries,
as if Capstone were named as the Borrower therein; provided,
<PAGE> 30
26
however, that for purposes of this Section 3.12, the dates referred to in
clauses (i) and (ii) of Section 3.04(a) shall be deemed to be June 30, 1997 and
September 30, 1997, respectively, and the independent public accountants
referred to in Section 3.04(a) shall be deemed to be Arthur Andersen LLP.
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the Lenders to make
Loans hereunder shall not become effective until the date on which each of the
following conditions is satisfied (or waived in accordance with Section 9.02):
(a) The Administrative Agent (or its counsel) shall have
received from each party hereto either (i) a counterpart of this
Agreement signed on behalf of such party or (ii) written evidence
satisfactory to the Administrative Agent (which may include telecopy
transmission of a signed signature page of this Agreement) that such
party has signed a counterpart of this Agreement.
(b) The Administrative Agent shall have received favorable
written opinions (addressed to the Administrative Agent and the Lenders
and dated the Effective Date) of (i) John W. MacKenzie, deputy general
counsel for PCA, substantially in the form of Exhibit B and (ii)
Harwell, Howard, Hyne, Gabbert & Manner, counsel for Capstone,
substantially in the form of Exhibit C, and in each case covering such
other matters relating to such Persons, this Agreement or the
Transactions as the Required Lenders shall reasonably request. PCA and
Capstone hereby request such counsel to deliver such opinions.
(c) The Administrative Agent shall have received such
documents and certificates as the Administrative Agent or its counsel
may reasonably request relating to the organization, existence and good
standing of PCA and Capstone, the authorization of the Transactions and
any other legal matters relating to PCA and Capstone, this Agreement or
the Transactions, all in form and substance satisfactory to the
Administrative Agent and its counsel.
(d) The Administrative Agent shall have received a
certificate, dated the Effective Date and signed by the President, a
Vice President or a Financial Officer of PCA, confirming compliance
with the conditions set forth in paragraphs (a) and (b) of Section
4.02.
(e) The shareholders of Capstone and Beverly shall have
approved the consummation of the Merger and any items or actions that
are conditions precedent to the Merger submitted for the approval of
such shareholders.
(f) The Lenders shall have received (i) a copy of a private
letter ruling by the Internal Revenue Service confirming the tax-free
status of the Restructuring and the Distribution and (ii) an opinion
(addressed to PCA and Capstone and dated the Effective Date) of Ernst &
Young LLP or Caplin & Drysdale, Chartered, to the effect that the
Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code and substantially in the form of Exhibit D.
(g) All applicable waiting periods (including under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976) shall have
expired and there shall be no litigation or administrative proceedings,
actual or threatened, that, in the reasonable judgment of the
<PAGE> 31
27
Lenders, involve a reasonable possibility of prohibiting or imposing
burdensome conditions on the Transactions.
(h) The Restructuring and the Distribution shall have occurred
or shall occur substantially simultaneously with the making of the
first Loan and the Intercompany Loan shall have been repaid in full or
otherwise discharged.
(i) Each of the other conditions precedent to the Merger
contained in the Merger Agreement or any other documents relating
thereto shall have been satisfied or waived in writing by Beverly or
Capstone or both, as appropriate; the Merger shall be scheduled to
close within two Business Days after the Effective Date, as
contemplated by Section 9.01 of the Merger Agreement; and the Merger
Agreement shall not have been modified or waived in any material
respect from the form previously provided to the Lenders without the
consent of the Lenders.
(j) The Lenders shall have received a pro forma consolidated
balance sheet of the Borrower as of a recent date (which date shall be
no earlier than June 30, 1997), after giving effect to the Transactions
and the consummation of the other transactions contemplated hereby,
which shall not be materially inconsistent with the forecasts
previously provided to the Lenders.
(k) The Administrative Agent shall have received all fees and
other amounts due and payable on or prior to the Effective Date,
including, to the extent invoiced, reimbursement or payment of all
out-of-pocket expenses required to be reimbursed or paid by the
Borrower hereunder.
(l) The Guarantee Agreement shall have been duly executed by
the parties thereto and delivered to the Administrative Agent.
(m) The Indemnity, Subrogation and Contribution Agreement
shall have been duly executed by the parties thereto and delivered to
the Administrative Agent.
The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding. Notwithstanding
the foregoing, the obligations of the Lenders to make Loans hereunder shall not
become effective unless each of the foregoing conditions is satisfied (or waived
pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on
December 31, 1997 (and, in the event such conditions are not so satisfied or
waived, the Commitments shall terminate at such time).
SECTION 4.02. Each Credit Event. The obligation of each Lender to make
a Loan on the occasion of any Borrowing is subject to the satisfaction of the
following conditions:
(a) The representations and warranties set forth in this
Agreement shall be true and correct on and as of the date of such
Borrowing.
(b) At the time of and immediately after giving effect to such
Borrowing, no Default shall have occurred and be continuing.
Each Borrowing shall be deemed to constitute a representation and warranty by
the Borrower on the date thereof as to the matters specified in paragraphs (a)
and (b) of this Section.
SECTION 4.03. Subsequent Credit Events. The obligation of each Lender
to make a Loan on the occasion of any Borrowing occurring after the Effective
Date is subject to the conditions that the Merger shall have been consummated
and that all amounts due and payable in respect of the Existing Credit Agreement
shall have been, or shall simultaneously be, repaid and the commitments,
<PAGE> 32
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if any, of the lenders thereunder shall have terminated and all liens in
connection therewith shall have been discharged and released.
ARTICLE V
Affirmative Covenants
Until the Commitments have expired or been terminated and the principal
of and interest on each Loan and all fees payable hereunder shall have been paid
in full, the Borrower covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information. The Borrower
will furnish to the Lenders through the Administrative Agent:
(a) within 90 days after the end of each fiscal year of the
Borrower, its audited consolidated balance sheet and related statements
of operations, stockholders' equity and cash flows as of the end of and
for such year, setting forth in each case in comparative form the
figures for the previous fiscal year, all reported on by Arthur
Andersen, L.L.P. or other independent public accountants of recognized
national standing (without a "going concern" or like qualification or
exception and without any qualification or exception as to the scope of
such audit) to the effect that such consolidated financial statements
present fairly in all material respects the financial condition and
results of operations of the Borrower and the consolidated Subsidiaries
on a consolidated basis in accordance with GAAP consistently applied;
(b) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year of the Borrower, its consolidated
balance sheet and related statements of operations, stockholders'
equity and cash flows as of the end of and for such fiscal quarter and
the then elapsed portion of the fiscal year, setting forth in each case
in comparative form the figures for the corresponding period or periods
of (or, in the case of the balance sheet, as of the end of) the
previous fiscal year, all certified by one of its Financial Officers as
presenting fairly in all material respects the financial condition and
results of operations of the Borrower and the consolidated Subsidiaries
on a consolidated basis in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments and the absence of
footnotes;
(c) concurrently with any delivery of financial statements
under clause (a) or (b) above, a certificate of a Financial Officer of
the Borrower (i) certifying as to whether a Default has occurred and,
if a Default has occurred, specifying the details thereof and any
action taken or proposed to be taken with respect thereto, (ii) setting
forth reasonably detailed calculations demonstrating compliance with
Sections 6.09, 6.10 and 6.11 and (iii) stating whether any change in
GAAP or in the application thereof has occurred since the date of the
audited financial statements referred to in Section 3.04(a) and, if any
such change has occurred, specifying the effect of such change on the
financial statements accompanying such certificate;
(d) concurrently with any delivery of financial statements
under clause (a) above, a certificate of the accounting firm that
reported on such financial statements stating whether they obtained
knowledge during the course of their examination of such financial
statements of any Default (which certificate may be limited to the
extent required by accounting rules or guidelines);
(e) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials
filed by the Borrower or any Subsidiary with the Securities and
Exchange Commission, or any Governmental Authority succeeding
<PAGE> 33
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to any or all of the functions of said Commission, or with any
national securities exchange, or distributed by the Borrower to its
shareholders generally, as the case may be; and
(f) promptly following any request therefor, such other
information regarding the operations, business affairs and financial
condition of the Borrower or any Subsidiary, or compliance with the
terms of this Agreement, as the Administrative Agent or any Lender may
reasonably request.
SECTION 5.02. Notices of Material Events. The Borrower will furnish to
the Administrative Agent and each Lender prompt written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or
proceeding by or before any arbitrator or Governmental Authority
against or affecting the Borrower or any Affiliate thereof that, if
adversely determined, could reasonably be expected to result in a
Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together
with any other ERISA Events that have occurred, could reasonably be
expected to result in liability of the Borrower and the Subsidiaries in
an aggregate amount exceeding $10,000,000; and
(d) any other development that results in, or could reasonably
be expected to result in, a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business. The Borrower will, and
will cause each of the Subsidiaries to, do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges and franchises material
to the conduct of its business; provided that the foregoing shall not prohibit
any merger, consolidation, liquidation or dissolution permitted under Section
6.03.
SECTION 5.04. Payment of Obligations. The Borrower will, and will cause
each of the Subsidiaries to, pay its obligations, including Tax liabilities,
that, if not paid, could result in a Material Adverse Effect before the same
shall become delinquent or in default, except where (a) the validity or amount
thereof is being contested in good faith by appropriate proceedings, (b) the
Borrower or such Subsidiary has set aside on its books adequate reserves with
respect thereto in accordance with GAAP and (c) the failure to make payment
pending such contest could not reasonably be expected to result in a Material
Adverse Effect.
SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will,
and will cause each of the Subsidiaries to, (a) keep and maintain all property
material to the conduct of its business in good working order and condition,
ordinary wear and tear excepted, and (b) maintain, with financially sound and
reputable insurance companies, insurance in such amounts and against such risks
as are customarily maintained by companies engaged in the same or similar
businesses operating in the same or similar locations.
SECTION 5.06. Books and Records; Inspection Rights. The Borrower will,
and will cause each of the Subsidiaries to, keep proper books of record and
account in which full, true and correct entries are made of all dealings and
transactions in relation to its business and activities. The Borrower will, and
will cause each of the Subsidiaries to, permit any representatives designated by
the Administrative Agent or any Lender, upon reasonable prior notice, to visit
and inspect its
<PAGE> 34
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properties, to examine and make extracts from its books and records, and to
discuss its affairs, finances and condition with its officers and independent
accountants, all at such reasonable times and as often as reasonably requested.
SECTION 5.07. Compliance with Laws. The Borrower will, and will cause
each of the Subsidiaries to, comply with all laws, rules, regulations and orders
of any Governmental Authority applicable to it or its property, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
SECTION 5.08. Use of Proceeds. The proceeds of the Loans will be used
only for the purposes described in the preamble to this Agreement. No part of
the proceeds of any Loan will be used, whether directly or indirectly, for any
purpose that entails a violation of any of the Regulations of the Board,
including Regulations G, U and X.
SECTION 5.09. Additional Subsidiaries. (a) Substantially simultaneously
with the consummation of the Merger, Capstone will cause each domestic
Subsidiary that is not a party to the Guarantee Agreement (including PCA) to
become a party to the Guarantee Agreement by executing and delivering to the
Administrative Agent a supplement thereto in the manner provided therein.
(b) If any additional Subsidiary is formed or acquired after the
Effective Date, the Borrower will notify the Administrative Agent and the
Lenders thereof and if such Subsidiary is a domestic Subsidiary, the Borrower
will cause such Subsidiary to become a party to the Guarantee Agreement by
executing and delivering to the Administrative Agent a supplement thereto in the
manner provided therein within ten Business Days after such Subsidiary is formed
or acquired.
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and the principal of
and interest on each Loan and all fees payable hereunder have been paid in full,
the Borrower and Capstone covenant and agree with the Lenders that:
SECTION 6.01. Indebtedness. The Borrower will not, and will not permit
any Subsidiary to, create, incur, assume or permit to exist any Indebtedness,
except:
(a) Indebtedness created hereunder;
(b) Indebtedness of the Borrower, any Subsidiary, Capstone or
any of its subsidiaries existing on the date hereof and set forth in
Schedule 6.01 and extensions, renewals and replacements of any such
Indebtedness that do not increase the outstanding principal amount
thereof;
(c) Indebtedness of the Borrower to any wholly owned
Subsidiary and of any Subsidiary to the Borrower or any other wholly
owned Subsidiary;
(d) Guarantees by the Borrower of Indebtedness of any
Subsidiary permitted hereunder and by any Subsidiary of Indebtedness
permitted hereunder of the Borrower or any other Subsidiary;
(e) Indebtedness of the Borrower or any Subsidiary incurred to
finance the acquisition, construction or improvement of any fixed or
capital assets, including Capital Lease Obligations and any
Indebtedness assumed in connection with the acquisition of any such
assets or secured by a Lien on any such assets prior to the acquisition
thereof, and
<PAGE> 35
31
extensions, renewals and replacements of any such Indebtedness that do
not increase the outstanding principal amount thereof; provided that
(i) such Indebtedness is incurred prior to or within 90 days after
such acquisition or the completion of such construction or improvement
and (ii) the aggregate principal amount of Indebtedness permitted by
this clause (e) shall not exceed $20,000,000 at any time outstanding;
(f) Indebtedness of any Person that becomes a Subsidiary after
the date hereof and extensions, renewals and replacements of any such
Indebtedness that do not increase the outstanding principal amount
thereof; provided that (i) such Indebtedness exists at the time such
Person becomes a Subsidiary and is not created in contemplation of or
in connection with such Person becoming a Subsidiary and (ii) the
aggregate principal amount of Indebtedness permitted by this clause (f)
shall not exceed $10,000,000 at any time outstanding;
(g) Indebtedness of the Borrower or any Subsidiary as an
account party in respect of trade letters of credit;
(h) Indebtedness of Beverly in an aggregate principal amount
not to exceed $62,500,000 in respect of the 7-5/8% Convertible
Subordinated Debentures due March 15, 2003 of Beverly (the "Beverly
Debentures"), which have been irrevocably called for redemption on
December 22, 1997, provided that: (i) Beverly Health and Rehabilitation
Services, Inc., an Affiliate of Beverly, shall have deposited with the
trustee (the "Trustee") under the indenture relating to the Beverly
Debentures (the "Indenture") an amount in cash sufficient to redeem the
Beverly Debentures on December 22, 1997 and to pay all accrued and
unpaid interest thereon through such date and (ii) the Trustee shall
have delivered to Beverly a certificate discharging Beverly of its
obligations pursuant to the Indenture; and
(i) other unsecured Indebtedness in an aggregate principal
amount not exceeding $20,000,000 at any time outstanding.
SECTION 6.02. Liens. The Borrower will not, and will not permit any
Subsidiary to, create, incur, assume or permit to exist any Lien on any property
or asset now owned or hereafter acquired by it, or assign or sell any income or
revenues (including accounts receivable) or rights in respect of any thereof,
except:
(a) Permitted Encumbrances;
(b) any Lien on any property or asset of the Borrower, any
Subsidiary, Capstone or any of its subsidiaries existing on the date
hereof and set forth in Schedule 6.02; provided that (i) such Lien
shall not apply to any other property or asset of the Borrower, any
Subsidiary, Capstone or any of its subsidiaries and (ii) such Lien
shall secure only those obligations which it secures on the date hereof
and extensions, renewals and replacements thereof that do not increase
the outstanding principal amount thereof;
(c) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary or existing on
any property or asset of any Person that becomes a Subsidiary after the
date hereof prior to the time such Person becomes a Subsidiary;
provided that (i) such Lien is not created in contemplation of or in
connection with such acquisition or such Person becoming a Subsidiary,
as the case may be, (ii) such Lien shall not apply to any other
property or assets of the Borrower or any Subsidiary and (iii) such
Lien shall secure only those obligations which it secures on the date
of such acquisition or the date such Person becomes a Subsidiary, as
the case may be and extensions, renewals and replacements thereof that
do not increase the outstanding principal amount thereof; and
<PAGE> 36
32
(d) Liens on fixed or capital assets acquired, constructed or
improved by the Borrower or any Subsidiary; provided that (i) such
security interests secure Indebtedness permitted by clause (e) of
Section 6.01, (ii) such security interests and the Indebtedness secured
thereby are incurred prior to or within 90 days after such acquisition
or the completion of such construction or improvement, (iii) the
Indebtedness secured thereby does not exceed 85% of the cost of
acquiring, constructing or improving such fixed or capital assets and
(iv) such security interests shall not apply to any other property or
assets of the Borrower or any Subsidiary.
SECTION 6.03. Fundamental Changes. (a) The Borrower will not, and will
not permit any Subsidiary to, merge into or consolidate with any other Person,
or permit any other Person to merge into or consolidate with it, or sell,
transfer, lease or otherwise dispose of (in one transaction or in a series of
transactions) all or any substantial part of its assets, or all or substantially
all of the stock of any of the Subsidiaries (in each case, whether now owned or
hereafter acquired), or liquidate or dissolve, except that, if at the time
thereof and immediately after giving effect thereto no Default shall have
occurred and be continuing (i) any Subsidiary may merge into the Borrower in a
transaction in which the Borrower is the surviving corporation, (ii) any
Subsidiary may merge into any other Subsidiary in a transaction in which the
surviving entity is a Subsidiary, (iii) any Subsidiary may sell, transfer, lease
or otherwise dispose of its assets to the Borrower or to another Subsidiary,
(iv) any Person may merge into a Subsidiary to effect a Permitted Acquisition
and (v) any Subsidiary may liquidate or dissolve if the Borrower determines in
good faith that such liquidation or dissolution is in the best interests of the
Borrower and is not materially disadvantageous to the Lenders; provided that (A)
any such merger involving a Person that is not a wholly owned Subsidiary
immediately prior to such merger shall not be permitted unless such merger is
also permitted by Section 6.04 and (B) Beverly and Capstone may consummate the
Merger.
(b) The Borrower will not, and will not permit any of the Subsidiaries
to, engage to any material extent in any business other than businesses of the
type conducted by the Borrower, the Subsidiaries, Capstone and its subsidiaries
on the date of execution of this Agreement and businesses reasonably related
thereto.
SECTION 6.04. Investments, Loans, Advances, Guarantees and
Acquisitions. The Borrower will not, and will not permit any of the Subsidiaries
to, purchase, hold or acquire (including pursuant to any merger with any Person
that was not a wholly owned Subsidiary prior to such merger) any capital stock,
evidences of indebtedness or other securities (including any option, warrant or
other right to acquire any of the foregoing) of, make or permit to exist any
loans or advances to, Guarantee any obligations of, or make or permit to exist
any investment or any other interest in, any other Person, or purchase or
otherwise acquire (in one transaction or a series of transactions) any assets of
any other Person constituting a business unit, except:
(a) Permitted Investments;
(b) investments by the Borrower and the Subsidiaries in the
capital stock of wholly owned Subsidiaries;
(c) loans or advances made by the Borrower to any wholly owned
Subsidiary and made by any Subsidiary to the Borrower or any other
wholly owned Subsidiary;
(d) Guarantees constituting Indebtedness permitted by
Section 6.01;
(e) Permitted Acquisitions;
(f) the Merger; and
<PAGE> 37
33
(g) other investments not described in clauses (a) through (f)
above and not exceeding, in the aggregate, $20,000,000.
SECTION 6.05. Hedging Agreements. The Borrower will not, and will not
permit any of the Subsidiaries to, enter into any Hedging Agreement, other than
Hedging Agreements entered into in the ordinary course of business to hedge or
mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct
of its business or the management of its liabilities.
SECTION 6.06. Restricted Payments. The Borrower will not, and will not
permit any of the Subsidiaries to, declare or make, or agree to pay or make,
directly or indirectly, any Restricted Payment, except (a) the Borrower may
declare and pay dividends with respect to its capital stock payable solely in
additional shares of its common stock and, (b) Subsidiaries may declare and pay
dividends ratably with respect to their capital stock and (c) the Borrower may
make Restricted Payments pursuant to and in accordance with stock option plans
or other benefit plans for management or employees of the Borrower and the
Subsidiaries.
SECTION 6.07. Transactions with Affiliates. The Borrower will not, and
will not permit any of the Subsidiaries to, sell, lease or otherwise transfer
any property or assets to, or purchase, lease or otherwise acquire any property
or assets from, or otherwise engage in any other transactions with, any of its
Affiliates, except (a) in the ordinary course of business at prices and on terms
and conditions not less favorable to the Borrower or such Subsidiary than could
be obtained on an arm's-length basis from unrelated third parties, (b)
transactions between or among the Borrower and its wholly owned Subsidiaries not
involving any other Affiliate, (c) any Restricted Payment permitted by Section
6.06 and (d) the Distribution and the transactions contemplated by the Merger
Agreement.
SECTION 6.08. Restrictive Agreements. The Borrower will not, and will
not permit any of the Subsidiaries to, directly or indirectly, enter into, incur
or permit to exist any agreement or other arrangement that prohibits, restricts
or imposes any condition upon (a) the ability of the Borrower or any Subsidiary
to create, incur or permit to exist any Lien upon any of its property or assets,
or (b) the ability of any Subsidiary to pay dividends or other distributions
with respect to any shares of its capital stock or to make or repay loans or
advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of
the Borrower or any other Subsidiary; provided that (i) the foregoing shall not
apply to restrictions and conditions imposed by law or by this Agreement, (ii)
the foregoing shall not apply to restrictions and conditions existing on the
date hereof identified on Schedule 6.08 (but shall apply to any extension or
renewal of, or any amendment or modification expanding the scope of, any such
restriction or condition), (iii) the foregoing shall not apply to customary
restrictions and conditions contained in agreements relating to (x) the sale of
a Subsidiary pending such sale, provided such restrictions and conditions apply
only to the Subsidiary that is to be sold and such sale is permitted hereunder,
or (y) investments in joint ventures permitted hereby, (iv) clause (a) of the
foregoing shall not apply to restrictions or conditions imposed by any agreement
relating to secured Indebtedness permitted by this Agreement if such
restrictions or conditions apply only to the property or assets securing such
Indebtedness and (v) clause (a) of the foregoing shall not apply to customary
provisions in leases and other contracts restricting the assignment thereof.
SECTION 6.09. Adjusted Leverage Ratio. The Borrower will not permit the
ratio of (a) Total Debt as of the end of any four-fiscal-quarter period ending
during any period set forth
<PAGE> 38
34
below to (b) Adjusted Consolidated EBITDA for such four-fiscal-quarter period to
be in excess of the ratio set forth below opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Effective Date 4.00 to 1.0
through and including
December 31, 1998
March 31, 1999 3.75 to 1.0
through and including
December 31, 1999
March 31, 2000 3.25 to 1.0
through and including
December 31, 2000
Thereafter 2.50 to 1.0
</TABLE>
SECTION 6.10. Consolidated Interest Expense Coverage Ratio. The
Borrower will not permit the ratio of (a) Consolidated EBITDA of the Borrower
and the Subsidiaries to (b) Consolidated Interest Expense for any
four-fiscal-quarter period to be less than 2.50 to 1.00.
SECTION 6.11. Net Worth. The Borrower will not permit Consolidated Net
Worth at any date on or after the consummation of the Merger to be less than the
sum of (a) $760,000,000, (b) 50% of Consolidated Net Income for each fiscal
quarter with positive Consolidated Net Income ending on or after the Effective
Date and on or prior to the date as to which compliance with this Section 6.11
is being determined and (c) 100% of the net proceeds in respect of any issuance
of equity securities of the Borrower or any Subsidiary after the Effective Date.
ARTICLE VII
Events of Default
If any of the following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay any principal of any Loan
when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan or
any fee or any other amount (other than an amount referred to in clause
(a) of this Article) payable under this Agreement, when and as the
same shall become due and payable, and such failure shall continue
unremedied for a period of three Business Days;
(c) any representation or warranty made or deemed made by or
on behalf of the Borrower or any Subsidiary in or in connection with
this Agreement or any amendment or modification hereof or waiver
hereunder, or in any report, certificate, financial statement or other
document furnished pursuant to or in connection with this Agreement or
any amendment or modification hereof or waiver hereunder, shall prove
to have been incorrect when made or deemed made;
<PAGE> 39
35
(d) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in Section 5.02, 5.03 (with
respect to the Borrower's existence) or 5.08 or in Article VI;
(e) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in this Agreement (other
than those specified in clause (a), (b) or (d) of this Article), and
such failure shall continue unremedied for a period of 30 days after
notice thereof from the Administrative Agent to the Borrower (which
notice will be given at the request of any Lender);
(f) the Borrower or any Subsidiary shall fail to make any
payment (whether of principal or interest and regardless of amount) in
respect of any Material Indebtedness, when and as the same shall become
due and payable;
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that
enables or permits (with or without the giving of notice, the lapse of
time or both) the holder or holders of any Material Indebtedness or any
trustee or agent on its or their behalf to cause any Material
Indebtedness to become due, or to require the prepayment, repurchase,
redemption or defeasance thereof, prior to its scheduled maturity;
provided that this clause (g) shall not apply to secured Indebtedness
that becomes due as a result of the voluntary sale or transfer of the
property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of the Borrower or any
Subsidiary or its debts, or of a substantial part of its assets, under
any Federal, state or foreign bankruptcy, insolvency, receivership or
similar law now or hereafter in effect or (ii) the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar
official for the Borrower or any Subsidiary or for a substantial part
of its assets, and, in any such case, such proceeding or petition shall
continue undismissed for 90 days or an order or decree approving or
ordering any of the foregoing shall be entered;
(i) the Borrower or any Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking liquidation,
reorganization or other relief under any Federal, state or foreign
bankruptcy, insolvency, receivership or similar law now or hereafter in
effect, (ii) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or petition described in
clause (h) of this Article, (iii) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or
for a substantial part of its assets, (iv) file an answer admitting the
material allegations of a petition filed against it in any such
proceeding, (v) make a general assignment for the benefit of creditors
or (vi) take any action for the purpose of effecting any of the fore
going;
(j) the Borrower or any Subsidiary shall become unable, admit
in writing its inability or fail generally to pay its debts as they
become due;
(k) one or more judgments for the payment of money in an
aggregate amount in excess of $10,000,000 (to the extent not adequately
covered by insurance as to which the insurance company has
acknowledged coverage pursuant to a writing reasonably satisfactory to
the Administrative Agent) shall be rendered against the Borrower, any
Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be
legally taken by a judgment creditor to attach or levy upon any assets
of the Borrower or any Subsidiary to enforce any such judgment;
<PAGE> 40
36
(l) an ERISA Event shall have occurred that, in the opinion of
the Required Lenders, when taken together with all other ERISA Events
that have occurred, could reasonably be expected to result in liability
of the Borrower and its Subsidiaries in an aggregate amount exceeding
$10,000,000; or
(m) a Change in Control shall occur;
then, and in every such event (other than an event with respect to the Borrower
described in clause (h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take either or
both of the following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately, and (ii)
declare the Loans then outstanding to be due and payable in whole (or in part,
in which case any principal not so declared to be due and payable may thereafter
be declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of the Borrower accrued hereunder, shall become due
and payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower; and in case of any
event with respect to the Borrower described in clause (h) or (i) of this
Article, the Commitments shall automatically terminate and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
other obligations of the Borrower accrued hereunder, shall automatically become
due and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.
ARTICLE VIII
The Administrative Agent
Each of the Lenders hereby irrevocably appoints the Administrative
Agent as its agent and authorizes the Administrative Agent to take such actions
on its behalf and to exercise such powers as are delegated to the Administrative
Agent by the terms hereof, together with such actions and powers as are
reasonably incidental thereto.
The bank serving as the Administrative Agent hereunder shall have the
same rights and powers in its capacity as a Lender as any other Lender and may
exercise the same as though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of business with the Borrower or any Subsidiary or other Affiliate
thereof as if it were not the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or obligations
except those expressly set forth herein. Without limiting the generality of the
foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or
other implied duties, regardless of whether a Default has occurred and is
continuing, (b) the Administrative Agent shall not have any duty to take any
discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby that the Administrative Agent is
required to exercise in writing by the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.02), and (c) except as expressly set forth herein, the
Administrative Agent shall not have any duty to disclose, and shall not be
liable for the failure to disclose, any information relating to the Borrower or
any of its Subsidiaries that is communicated to or obtained by the bank serving
as Administrative Agent or any of its Affiliates in any capacity. The
Administrative Agent shall not be liable for any action taken or not taken by it
with the consent or at the request of the Required Lenders (or such other number
or percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.02) or in the absence of its own gross negligence or
wilful misconduct. The Administrative Agent shall be deemed not to have
knowledge of any Default unless and until written notice thereof is given to the
Administrative Agent by the
<PAGE> 41
37
Borrower or a Lender, and the Administrative Agent shall not be responsible for
or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement, (ii) the contents
of any certificate, report or other document delivered hereunder or in
connection herewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth herein, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement or any
other agreement, instrument or document, or (v) the satisfaction of any
condition set forth in Article IV or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and shall not
incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper Person. The Administrative Agent
also may rely upon any statement made to it orally or by telephone and believed
by it to be made by the proper Person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal counsel (who
may be counsel for the Borrower), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it
in accordance with the advice of any such counsel, accountants or experts.
The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such subagent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor Administrative
Agent as provided in this paragraph, the Administrative Agent may resign at any
time by notifying the Lenders and the Borrower. Upon any such resignation, the
Required Lenders shall have the right, in consultation with the Borrower, to
appoint a successor reasonably acceptable to the Borrower. If no successor shall
have been so appointed by the Required Lenders and shall have accepted such
appointment within 30 days after the retiring Administrative Agent gives notice
of its resignation, then the retiring Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent which shall be a bank with an
office in New York, New York, or an Affiliate of any such bank. Upon the
acceptance of its appointment as Administrative Agent hereunder by a successor,
such successor shall succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. The fees payable by the Borrower to a successor Administrative Agent
shall be the same as those payable to its predecessor unless otherwise agreed
between the Borrower and such successor. After the Administrative Agent's
resignation hereunder, the provisions of this Article and Section 9.03 shall
continue in effect for the benefit of such retiring Administrative Agent, its
sub-agents and their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while it was acting as Administrative
Agent.
Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any related agreement or any document furnished hereunder or thereunder.
<PAGE> 42
38
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to PCA, to it at Pharmacy Corporation of America, 3611
Queen Palm Drive, Tampa, FL 33619, Attention of Mr. Gerald Gerlach
(Telecopy No. 813-623-1167);
(b) if to Capstone, to it at 9901 East Valley Ranch Parkway,
Suite 3001, Irving, TX 75063, Attention of James Shelton (Telecopy No.
972-753-0721);
(c) if to the Administrative Agent, to The Chase Manhattan
Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th
Floor, New York, New York 10081, Attention of Mr. Jesse Huff (Telecopy
No. (212) 552-7500), with a copy to The Chase Manhattan Bank, 270 Park
Avenue, New York 10017, Attention of Ms. Joan Garvin (Telecopy
No. (212) 270-5135);
(d) if to any other Lender, to it at its address (or telecopy
number) set forth in its Administrative Questionnaire.
Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the
Administrative Agent or any Lender in exercising any right or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
the exercise of any other right or power. The rights and remedies of the
Administrative Agent and the Lenders hereunder are cumulative and are not
exclusive of any rights or remedies that they would otherwise have. No waiver of
any provision of this Agreement or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be permitted by
paragraph (b) of this Section, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Without limiting the generality of the foregoing, the making of a Loan shall not
be construed as a waiver of any Default, regardless of whether the
Administrative Agent or any Lender may have had notice or knowledge of such
Default at the time.
(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Required Lenders or by the Borrower and the
Administrative Agent with the consent of the Required Lenders; provided that no
such agreement shall (i) increase the Commitment of any Lender without the
written consent of such Lender, (ii) reduce the principal amount of any Loan or
reduce the rate of interest thereon, or reduce any fees payable hereunder,
without the written consent of each Lender affected thereby, (iii) postpone the
scheduled date of payment of the principal amount of any Loan or any interest
thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse
any such payment, or postpone the scheduled date of expiration of any
Commitment, without the written consent of each Lender affected thereby, (iv)
change Section 2.15(b) or (c) in a manner that would
<PAGE> 43
39
alter the pro rata sharing of payments required thereby, without the written
consent of each Lender, or (v) change any of the provisions of this Section or
the definition of "Required Lenders" or any other provision hereof specifying
the number or percentage of Lenders required to waive, amend or modify any
rights hereunder or make any determination or grant any consent hereunder,
without the written consent of each Lender; provided further that no such
agreement shall amend, modify or otherwise affect the rights or duties of the
Administrative Agent hereunder without the prior written consent of the
Administrative Agent.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower
shall pay (i) all reasonable out-of-pocket expenses incurred by the
Administrative Agent and its Affiliates, including the reasonable fees, charges
and disbursements of counsel for the Administrative Agent, in connection with
the syndication of the credit facilities provided for herein, the preparation
and administration of this Agreement or any amendments, modifications or waivers
of the provisions hereof (whether or not the transactions contemplated hereby or
thereby shall be consummated) and (ii) all reasonable out-of-pocket expenses
incurred by the Administrative Agent or any Lender, including the reasonable
fees, charges and disbursements of any counsel for the Administrative Agent or
any Lender, in connection with the enforcement or protection of its rights in
connection with this Agreement, including its rights under this Section, or in
connection with the Loans made hereunder, including all such out-of-pocket
expenses incurred during any workout, restructuring or negotiations in respect
of such Loans.
(b) The Borrower shall indemnify the Administrative Agent and each
Lender, and each Related Party of any of the foregoing Persons (each such Person
being called an "Indemnitee") against, and hold each Indemnitee harmless from,
any and all losses, claims, damages, liabilities and related expenses, including
the fees, charges and disbursements of any counsel for any Indemnitee, incurred
by or asserted against any Indemnitee arising out of, in connection with, or as
a result of (i) the execution or delivery of this Agreement or any agreement or
instrument contemplated hereby, the performance by the parties hereto of their
respective obligations hereunder or the consummation of the Transactions or any
other transactions contemplated hereby, (ii) any Loan or the use of the proceeds
therefrom, (iii) any actual or alleged presence or release of Hazardous
Materials on or from any property owned or operated by the Borrower or any of
the Subsidiaries, or any Environmental Liability related in any way to the
Borrower or any of the Subsidiaries, or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether based on contract, tort or any other theory and regardless of whether
any Indemnitee is a party thereto; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or wilful misconduct of such Indemnitee.
(c) To the extent that the Borrower fails to pay any amount required to
be paid by it to the Administrative Agent under paragraph (a) or (b) of this
Section, each Lender severally agrees to pay to the Administrative Agent such
Lender's Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower shall not
assert, and hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement or any agreement or instrument contemplated hereby, the
Transactions, any Loan or the use of the proceeds thereof.
(e) All amounts due under this Section shall be payable promptly after
written demand therefor.
<PAGE> 44
40
SECTION 9.04. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns permitted hereby, except that the
Borrower may not assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of each Lender (and any attempted
assignment or transfer by the Borrower without such consent shall be null and
void). Nothing in this Agreement, expressed or implied, shall be construed to
confer upon any Person (other than the parties hereto, their respective
successors and assigns permitted hereby and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent and
the Lenders) any legal or equitable right, remedy or claim under or by reason of
this Agreement.
(b) Any Lender may assign to one or more assignees all or a portion of
its rights and obligations under this Agreement (including all or a portion of
its Commitment and the Loans at the time owing to it); provided that (i) except
in the case of an assignment to a Lender or an Affiliate of a Lender, each of
the Borrower and the Administrative Agent must give their prior written consent
to such assignment (which consent shall not be unreasonably withheld), (ii)
except in the case of an assignment to a Lender or an Affiliate of a Lender or
an assignment of the entire remaining amount of the assigning Lender's
Commitment, the amount of the Commitment of the assigning Lender subject to each
such assignment (determined as of the date the Assignment and Acceptance with
respect to such assignment is delivered to the Administrative Agent) shall not
be less than $5,000,000 unless each of the Borrower and the Administrative Agent
otherwise consent, (iii) each partial assignment shall be made as an assignment
of a proportionate part of all the assigning Lender's rights and obligations
under this Agreement, (iv) the parties to each assignment shall execute and
deliver to the Administrative Agent an Assignment and Acceptance, together with
a processing and recordation fee of $3,500, and (v) the assignee, if it shall
not be a Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire; and provided further that any consent of the Borrower otherwise
required under this paragraph shall not be required if an Event of Default under
clause (h) or (i) of Article VII has occurred and is continuing. Subject to
acceptance and recording thereof pursuant to paragraph (d) of this Section, from
and after the effective date specified in each Assignment and Acceptance the
assignee thereunder shall be a party hereto and, to the extent of the interest
assigned by such Assignment and Acceptance, have the rights and obligations of a
Lender under this Agreement, and the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and Acceptance, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all of the assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto but shall continue
to be entitled to the benefits of Sections 2.12, 2.13, 2.14 and 9.03). Any
assignment or transfer by a Lender of rights or obligations under this Agreement
that does not comply with this paragraph shall be treated for purposes of this
Agreement as a sale by such Lender of a participation in such rights and
obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose as an agent of
the Borrower, shall maintain at one of its offices in The City of New York a
copy of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans owing to, each Lender pursuant to the terms
hereof from time to time (the "Register"). The entries in the Register shall be
conclusive, and the Borrower, the Administrative Agent and the Lenders may treat
each Person whose name is recorded in the Register pursuant to the terms hereof
as a Lender hereunder for all purposes of this Agreement, notwithstanding notice
to the contrary. The Register shall be available for inspection by the Borrower
and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.
(d) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, the assignee's completed
Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b) of
this Section and any written consent to such assignment required by paragraph
(b) of this Section, the Administrative Agent shall accept such Assignment and
Acceptance and record
<PAGE> 45
41
the information contained therein in the Register. No assignment shall be
effective for purposes of this Agreement unless it has been recorded in the
Register as provided in this paragraph.
(e) Any Lender may, without the consent of the Borrower or the
Administrative Agent, sell participations to one or more banks or other entities
(a "Participant") in all or a portion of such Lender's rights and obligations
under this Agreement (including all or a portion of its Commitment and the Loans
owing to it); provided that (i) such Lender's obligations under this Agreement
shall remain unchanged, (ii) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations and (iii) the
Borrower, the Administrative Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement. Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement; provided that such
agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, modification or waiver
described in the first proviso to Section 9.02(b) that affects such Participant.
Subject to paragraph (f) of this Section, the Borrower agrees that each
Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 to
the same extent as if it were a Lender and had acquired its interest by
assignment pursuant to paragraph (b) of this Section. To the extent permitted by
law, each Participant also shall be entitled to the benefits of Section 9.08 as
though it were a Lender, provided such Participant agrees to be subject to
Section 2.15(c) as though it were a Lender.
(f) A Participant shall not be entitled to receive any greater payment
under Section 2.12 or 2.14 than the applicable Lender would have been entitled
to receive with respect to the participation sold to such Participant, unless
the sale of the participation to such Participant is made with the Borrower's
prior written consent. A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section 2.14 unless the Borrower
is notified of the participation sold to such Participant and such Participant
agrees, for the benefit of the Borrower, to comply with Section 2.14(e) as
though it were a Lender.
(g) Any Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement to secure obligations of
such Lender, including any pledge or assignment to secure obligations to a
Federal Reserve Bank, and this Section shall not apply to any such pledge or
assignment of a security interest; provided that no such pledge or assignment of
a security interest shall release a Lender from any of its obligations hereunder
or substitute any such pledgee or assignee for such Lender as a party hereto.
SECTION 9.05. Survival. All covenants, agreements, representations and
warranties made by the Borrower herein and in the certificates or other
instruments delivered in connection with or pursuant to this Agreement shall be
considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of this Agreement and the making of any
Loans, regardless of any investigation made by any such other party or on its
behalf and notwithstanding that the Administrative Agent or any Lender may have
had notice or knowledge of any Default or incorrect representation or warranty
at the time any credit is extended hereunder, and shall continue in full force
and effect as long as the principal of or any accrued interest on any Loan or
any fee or any other amount payable under this Agreement is outstanding and
unpaid and so long as the Commitments have not expired or terminated. The
provisions of Sections 2.12, 2.13, 2.14 and 9.03 and Article VIII shall survive
and remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans, the expiration or
termination and the Commitments or the termination of this Agreement or any
provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement and any
separate letter agreements with respect to fees payable to the
<PAGE> 46
42
Administrative Agent constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 4.01, this Agreement shall become effective when it shall
have been executed by the Administrative Agent and when the Administrative Agent
shall have received counterparts hereof which, when taken together, bear the
signatures of each of the other parties hereto, and thereafter shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Delivery of an executed counterpart of a signature page
of this Agreement by telecopy shall be as effective as delivery of a manually
executed counterpart of this Agreement.
SECTION 9.07. Severability. Any provision of this Agreement held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by such Lender or Affiliate to or for the credit or the account of the
Borrower against any of and all the obligations of the Borrower now or hereafter
existing under this Agreement held by such Lender, irrespective of whether or
not such Lender shall have made any demand under this Agreement and although
such obligations may be unmatured. The rights of each Lender under this Section
are in addition to other rights and remedies (including other rights of setoff)
which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of
Process. (a) This Agreement shall be construed in accordance with and governed
by the law of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of the Supreme Court
of the State of New York sitting in New York County and of the United States
District Court of the Southern District of New York, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such New
York State or, to the extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Administrative Agent or any Lender may otherwise have
to bring any action or proceeding relating to this Agreement against the
Borrower or its properties in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement in any court referred to in
paragraph (b) of this Section. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
<PAGE> 47
43
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the Administrative Agent and the
Lenders agrees to maintain the confidentiality of the Information (as defined
below), except that Information may be disclosed (a) to its and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested
by any regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other party
to this Agreement, (e) in connection with the exercise of any remedies hereunder
or any suit, action or proceeding relating to this Agreement or the enforcement
of rights hereunder, (f) subject to an agreement containing provisions
substantially the same as those of this Section, to any assignee of or
Participant in, or any prospective assignee of or Participant in, any of its
rights or obligations under this Agreement, (g) with the consent of the Borrower
or (h) to the extent such Information (i) becomes publicly available other than
as a result of a breach of this Section or (ii) becomes available to the
Administrative Agent or any Lender on a nonconfidential basis from a source
other than the Borrower. For the purposes of this Section, "Information" means
all information received from the Borrower relating to the Borrower or its
business, other than any such information that is available to the
Administrative Agent or any Lender on a nonconfidential basis prior to
disclosure by the Borrower; provided that, in the case of information received
from the Borrower after the date hereof, such information is clearly identified
at the time of delivery as confidential. Any Person required to maintain the
confidentiality of Information as provided in this Section shall be considered
to have complied with its obligation to do so if such Person has exercised the
same degree of care to maintain the confidentiality of such Information as such
Person would accord to its own confidential information.
SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein
to the contrary, if at any time the interest rate applicable to any Loan,
together with all fees, charges and other amounts which are treated as interest
on such Loan under applicable law (collectively the "Charges"), shall exceed the
maximum lawful rate (the "Maximum Rate") which may be contracted for, charged,
taken, received or reserved by the Lender holding such Loan in accordance with
applicable law, the rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be limited to the
Maximum Rate and, to the extent lawful, the interest and Charges that would have
been payable in respect of such Loan but were not payable as a result of the
operation of this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall be increased
(but not above the Maximum Rate therefor) until such cumulated amount, together
with interest thereon at the Federal Funds Effective Rate to the date of
repayment, shall have been received by such Lender.
<PAGE> 48
44
SECTION 9.14. Borrower Upon Merger. Upon and after the consummation of
the Merger, Capstone shall automatically and without further action assume all
the obligations and shall be entitled to all the rights of the Borrower
hereunder (including the right to request Borrowings) and PCA shall no longer
have the right to request Borrowings; provided, however, that Capstone shall not
be deemed to be a party to this Agreement until the consummation of the Merger.
Upon PCA's becoming a Guarantor, PCA shall automatically and without further
action be released from its obligations as the Borrower hereunder and shall no
longer be entitled to any rights of the Borrower hereunder.
<PAGE> 49
45
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
PHARMACY CORPORATION OF AMERICA,
by
/s/ C. Arnold Renschler
--------------------------------------------
Name: C. Arnold Renschler
Title: President and CEO
CAPSTONE PHARMACY SERVICES, INC.,
by
/s/ James Shelton
--------------------------------------------
Name: James Shelton
Title: Executive Vice President and CFO
THE CHASE MANHATTAN BANK, individually and as
Administrative Agent,
by
/s/ Joan F. Garvin
--------------------------------------------
Name: Joan F. Garvin
Title: Managing Director
CIBC INC.,
by
/s/ Elizabeth Fischer
--------------------------------------------
Name: Elizabeth Fischer
Title: Executive Director
CIBC OPPENHEIMER CORP., as Syndication Agent,
by
/s/ Elizabeth Fischer
--------------------------------------------
Name: Elizabeth Fischer
Title: Executive Director
<PAGE> 50
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Documentation Agent,
by
/s/ Anthony L. Trunzo
--------------------------------------
Name: Anthony L. Trunzo
Title: Managing Director
NATIONSBANK OF TEXAS N.A.,
by
/s/ F. Scott Singhoff
--------------------------------------
Name: F. Scott Singhoff
Title: Senior Vice President
BANK OF MONTREAL,
by
/s/ Peter W. Steelman
--------------------------------------
Name: Peter W. Steelman
Title: Director
BARNETT BANK, N.A. TAMPA,
by
/s/ Kimberly A. Bruce
--------------------------------------
Name: Kimberly A. Bruce
Title: Vice President
THE FIRST NATIONAL BANK OF CHICAGO
by
/s/ Susan M. Giertych
--------------------------------------
Name: Susan M. Giertych
Title: Corporate Banking Officer
<PAGE> 51
BANK OF TOKYO-MITSUBISHI TRUST COMPANY,
by
/s/ Douglas J. Weir
----------------------------------
Name: Douglas J. Weir
Title: Vice President
BANQUE PARIBAS,
by
/s/ Larry Robinson
----------------------------------
Name: Larry Robinson
Title: Vice President
by
/s/ Scott Clingan
----------------------------------
Name: Scott Clingan
Title: Vice President
THE BANK OF NEW YORK,
by
/s/ David C. Siegel
----------------------------------
Name: David C. Siegel
Title: Vice President
CORESTATES BANK, N.A.,
by
/s/ Deidre L. McAleer
----------------------------------
Name: Deidre L. McAleer
Title: Vice President
FLEET NATIONAL BANK,
by
/s/ Lynn Wiatrowski
----------------------------------
Name: Lynn Wiatrowski
Title: Senior Vice President
<PAGE> 52
CREDIT LYONNAIS,
by
/s/ John C. Oberle
--------------------------------------
Name: John C. Oberle
Title: Vice President
COOPERATIEVE CENTRALERAIFFEISEN-
BOERENLEEENBANK B.A. RABOBANK
NEDERLAND NEW YORK BRANCH,
by
/s/ J. Walter Bland
--------------------------------------
Name: J. Walter Bland
Title: Vice President
by
/s/ W. Jeffrey Vollack
--------------------------------------
Name: W. Jeffrey Vollack
Title: Senior Credit Officer and
Senior Vice President
SUNTRUST BANK, CENTRAL FLORIDA, N.A.,
by
/s/ Janet P. Sammons
--------------------------------------
Name: Janet P. Sammons
Title: Vice President
<PAGE> 1
Exhibit 10.10
FORM OF PREFERRED PROVIDER AGREEMENT
FOR
PHARMACEUTICAL AND RELATED SERVICES
AGREEMENT, dated as of __________, 1997, between Beverly Enterprises,
Inc., a Delaware corporation ("Company"), formerly known as New Beverly
Holdings, Inc., and PharMerica Corporation, a Delaware corporation ("Provider"),
formerly known as Capstone Pharmacy Services, Inc. ("Capstone").
WHEREAS, Company directly or through its subsidiaries, Beverly Health
and Rehabilitation Services, Inc. and American Transitional Hospitals, Inc., or
any other Subsidiary (as defined) or Affiliate (as defined) of Company (the
applicable "Facility Operator"), operates (by reason of its ownership thereof,
or its lease thereof, or by reason of management agreements or investments in
joint ventures) long term care nursing facilities, assisted living facilities
and/or certain transitional hospital facilities (all of such facilities
currently operated being listed on Exhibit "A" hereto, and herein referred to as
the "Company LTC Facilities"); and
WHEREAS, Provider is engaged in the business of providing
pharmaceutical and related services as an independent contractor for health care
facilities; and
WHEREAS, certain of the Company LTC Facilities prior to the effective
date of this Agreement have had in effect one or more provider agreements
relating to the provision of pharmaceutical and/or related services to such
facilities ("Pre-Existing Provider Agreements") by Provider or one of Provider's
predecessors, while certain other Company LTC Facilities currently have
agreements with other providers for the provision of pharmaceutical and/or
related services ("Other Provider Agreements"); and
WHEREAS, Company has found using several different providers of
pharmaceutical product, distribution and dispensing services to service the
Company LTC Facilities to be inefficient in many cases and believes it to be in
its best interest to enter into an agreement pursuant to which such services
will be available to it from a single provider; and
WHEREAS, Company has extensive knowledge of the quality of Provider's
pharmaceutical product, distribution and dispensing services pursuant to the
Pre-Existing Provider Agreements; and
WHEREAS, Company believes that due to the quality of Provider's
operations and Provider's experience, size and national presence, Provider will
be able to provide pharmaceutical product, distribution and dispensing services,
as well as the other services which may be provided under this Agreement, to the
Company LTC Facilities in a consistent manner and on terms and conditions more
favorable to the Company LTC Facilities than are being rendered under Other
Provider Agreements, and Provider desires to provide said services, in each case
on the terms and subject to the conditions specified in this Agreement; and
<PAGE> 2
WHEREAS, Provider desires to provide the services described herein to
the Company LTC Facilities and in consideration of its status as a preferred
provider is willing to make certain long-term commitments to the Company LTC
Facilities and their residents and patients as provided herein;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the parties hereto agree as follows:
1. AGREEMENTS.
(a) Replacement of Pre-Existing Provider Agreements. As soon
as practicable after the execution of this Agreement, Company and Provider will
cooperate to assure the execution of, and Company shall cause the applicable
Facility Operator to replace the Pre-Existing Provider Agreements in each
Company LTC Facility with, counterpart agreements, as applicable in the case of
each Company LTC Facility which previously had one or more of such agreements,
in the respective forms set forth as Exhibits "B," "C," "D" and "E" (such forms
of agreement being referred to individually as a "Facility Agreement" and
collectively as the "Facility Agreements"), so that after such counterpart
Facility Agreements shall have been executed, Provider will continue to serve
for the duration of the term of this Agreement, subject to the terms and
conditions of this Agreement and the applicable Facility Agreements, as the
provider in the applicable Company LTC Facility of the pharmaceutical and/or
related services previously covered by the Pre-Existing Provider Agreements, all
on the terms and conditions set forth therein, except that the pricing of
pharmaceutical products and services to be in effect with respect to such
Facility Agreements shall be as set forth on a schedule to be attached thereto.
Upon such execution, each such Facility Agreement shall thereafter be referred
to under this Agreement as an "Existing Facility Agreement."
(b) Addition of New Provider Agreements. If, during the term
of this Agreement:
(i) any Other Provider Agreement shall expire or be
terminated for any reason at a Company LTC Facility or a New Facility (as
hereinafter defined);
(ii) any Existing Provider Agreement shall expire or
be terminated for any reason at a Company LTC Facility other than for cause as
provided therein or as a result of the circumstances described in Paragraph
7(h), below; or
(iii) any long term care or assisted living facility
or transitional hospital which is not a Company LTC Facility on the effective
date of this Agreement is hereafter acquired, owned, operated or managed
(collectively, an "Acquisition") by the Company or a Facility Operator (a "New
Facility"), which New Facility at the time at the time of Acquisition is not
served by an Other Provider Agreement required pursuant to contractual
obligations;
then the Company or the applicable Facility Operator and Provider shall, upon
the terms and subject to the conditions and procedures of this Agreement,
negotiate in good faith to enter into
2
<PAGE> 3
one or more Facility Agreements in the form and substance attached as Exhibits
"B" through "E" inclusive (each, a "New Provider Agreement") pursuant to which
Provider shall agree to provide such Qualifying Competitive Services (as
hereinafter defined) as may be covered by the particular Facility Agreement for
a term of years commencing on the date of said Facility Agreement, subject to
renewal as provided therein; provided, that no such New Provider Agreement shall
have a term exceeding the then remaining and unexpired term of this Agreement,
without regard for renewal or extension of the term described herein. The
foregoing agreement to enter into one or more New Provider Agreements is subject
to the following proviso: if either the Company or Provider reasonably
determines in good faith that, due to legitimate business reasons, it is not
feasible to enter into New Provider Agreements with respect to an Acquisition as
described in Section 1(b)(iii) herein, the party making such determination of
non-feasibility shall promptly notify the other party of its reasons for such
determination, and the parties shall thereupon cooperate in good faith to the
extent feasible to: (1) eliminate or cure the conditions adversely affecting the
reasonability of entering into the New Provider Agreements with respect to the
New Facility, or (2) concur that the New Facility should be excused from the
requirement to enter into a New Provider Agreement.
(c) Certain Definitions. As used in this Agreement:
(i) "Affiliate" of any person means any person or
entity which on the date in question, directly or indirectly is controlled by
such person; and, for such purposes, a person shall be deemed to "control"
another person or entity if is the "beneficial owner" (as that term is defined
in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended)
of greater than twenty percent (20%) of any class of voting securities (or other
voting interests) of a controlled entity which is a publicly-traded entity, or
forty percent (40%) of an privately-held entity, or if such person possesses,
directly or indirectly, the power to direct or cause the direction of the
management of policies of the controlled entity with respect to the matters
covered by this Agreement, whether through ownership of stock, by contract or
otherwise.
(ii) "Material Number" when used in connection with
an aggregation of Pre-Existing Provider Agreements or, as applicable, Existing
Provider Agreements and New Provider Agreements, means at any time of
determination a number of long term care facilities equal to ten percent (10%)
of the aggregate of the Company's long term care facilities at the time
(including both Company LTC Facilities and New Facilities) having Pre-Existing
Provider Agreements or, as applicable, Existing Provider Agreements and New
Provider Agreements.
(iii) "Qualifying Competitive Services" means
Services offered by Provider with respect to a Company LTC Facility or a New
Facility which at the time are equivalent to or more competitive (in terms of
price, terms and conditions, quality, timeliness and the range and type of
services and products) than those then being provided to the Company LTC
Facility or New Facility, as determined by the Facility Operator in its good
faith judgment. During the initial term of this Agreement, the price, terms and
conditions with respect to contracts for Services provided under Existing
Provider Agreements to any Company LTC Facility shall be deemed to be Qualifying
Competitive Services.
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(iv) "Services" means any one or more pharmaceutical
and related services, consulting services, clinical laboratory services,
intravenous ("IV") services, enteral/urological services, wound care services,
the provision of medical-surgical supplies and participating in clinical trials
research activities.
(v) "Subsidiary" of any party means any entity if
such party possesses, directly or indirectly, greater than a 50% ownership
interest thereof.
(d) Restriction on Certain Activities. Company for itself and
its Subsidiaries and Affiliates agrees that during the initial term hereof
neither Company, any Subsidiary or any Affiliate will engage in the provision of
Services to any person or entity; provided, that this covenant shall be subject
to and shall not be construed to limit, inhibit or restrict the Company, any
Subsidiary or Affiliate at any time or in any way from engaging in any conduct
or activity permitted by the terms of the Non-competition Agreement of even date
between Company and Capstone, a true copy of which is attached hereto as
Exhibit "F."
2. PROCEDURE.
During the term of this Agreement, thirty (30) days prior to
the scheduled expiration of, or as promptly as practicable prior to, or, if not
practicable prior to, then promptly following the termination of any Other
Provider Agreement with any Company LTC Facility which continues to be operated
by Company or one of its Subsidiaries or Affiliates, or in the case of
Acquisition by the Company of a New Facility, within thirty (30) days after such
Acquisition:
(a) Notice. Company shall give notice to Provider of such
expiration or termination of an Other Provider Agreement at a Company LTC
Facility or the Acquisition of a New Facility described in Paragraph 1(b)(iii),
such notice to include a statement as to whether or not such New Facility will
continue to be covered by an Other Provider Agreement pursuant to Paragraph
1(b)(iii), and expressing the reasons therefor (any Company LTC Facility or New
Facility as to which an Other Provider Agreement is contemplated to terminate or
expire or has terminated or expired being referred to as an "Available
Facility");
(b) Completion of New Provider Agreement. Provider and the
applicable Facility Operator shall in good faith negotiate to complete, with
respect to a proposed New Provider Agreement for such Available Facility, any
items which remain blank on the applicable Facility Agreement providing for such
Services as the parties may agree upon, and any other terms or conditions
necessary to provide Qualifying Competitive Services, including, without
limitation, the pricing of services and products to be supplied pursuant to said
Facility Agreement;
(c) Required Approvals Obtained. The applicable Facility
Operator shall diligently pursue obtaining any customary consent or approval of
any person or entity, or of any Federal, state, local or other governmental or
quasi-governmental agency, bureau, board, administrator, court, commission,
department, instrumentality, body or other authority having jurisdiction over it
or the operation of its business or its assets, and if applicable, of the owner
of any Available Facility managed by Company or the applicable Subsidiary or
Affiliate, in each
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case, necessary or appropriate to entering into the proposed New Provider
Agreement and the performance of the transactions contemplated thereby
("Required Approvals");
(d) Representations and Warranties Reaffirmed. Provider and
Company each automatically shall be deemed to have remade each of their
representations and warranties made in this Agreement as of the date of the
execution and delivery of the applicable proposed New Provider Agreement; and
(e) Execution of New Provider Agreement. The applicable
Facility Operator and Provider shall execute and deliver the applicable proposed
New Provider Agreement and such New Provider Agreement shall become effective
immediately upon termination (or expiration) of the applicable Other Provider
Agreement, or if such Other Provider Agreement already shall have been
terminated, then immediately upon execution and delivery of the New Provider
Agreement, or upon such other date as the applicable Facility Operator and
Provider shall agree.
3. CONDITIONS.
(a) Satisfaction of Conditions. Neither Company or any
Facility Operator, on the one hand, nor Provider on the other hand, shall have
any obligation to enter into any proposed New Provider Agreement with respect to
any Available Facility unless the following conditions shall have been satisfied
within thirty (30) days after delivery by Company to Provider of the notice
required pursuant to Paragraph 2(a), above:
(i) the applicable New Provider Agreement shall
provide for Qualifying Competitive Services, and shall provide that said
Services shall continue thereafter to be Qualifying Competitive Services within
the meaning of Paragraph 1(c)(iii) hereof; and
(ii) all Required Approvals shall have been obtained.
(b) Provider Breach of Representations and Warranties. Neither
Company nor any Facility Operator shall be obligated to enter into any proposed
New Provider Agreement with respect to any Available Facility if Provider shall
have breached, which breach shall be continuing, any of its material
representations, warranties or obligations under this Agreement or under a
Material Number, in the aggregate, of Pre-Existing Provider Agreements, or as
applicable, Existing Provider Agreements and New Provider Agreements.
(c) Company or Facility Operator Breach of Representations and
Warranties. Provider shall not be obligated to enter into any proposed New
Provider Agreement if Company or any Facility Operator shall have breached,
which breach shall be continuing, any of its material representations,
warranties or obligations under this Agreement or under a Material Number of
Pre-Existing Provider Agreements or, as applicable, Existing Provider Agreements
and New Provider Agreements.
4. CONFLICTING PROVISIONS. If any of the provisions of this Agreement
shall conflict with or be inconsistent with any of the provisions of any New
Provider Agreement, the
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provisions of such New Provider Agreement shall govern with respect to the
subject matter of such New Provider Agreement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY.
(a) Corporate Power and Authority. Company has the full
corporate power and authority to make, execute, deliver and perform its
obligations under this Agreement, including all Schedules and Exhibits hereto,
and the other agreements, instruments, certificates and documents required or
contemplated hereby or thereby to be executed or delivered by it ("Company
Transaction Documents"), and all of the transactions contemplated hereby and
thereby to be performed by it. Such execution, delivery, performance and
consummation have been duly authorized by all necessary action, corporate or
otherwise, on the part of Company, its directors and stockholders.
(b) No Conflicts or Breaches. Neither the execution or
delivery of this Agreement or any of the Company Transaction Documents by
Company nor the performance by Company of the transactions contemplated hereby
and thereby, conflicts with, or constitutes a breach of or a default under (i)
its certificate of incorporation or by-laws; or (ii) any applicable judgment,
order, writ, injunction, or decree of any court.
(c) Agreements in Full Force and Effect. Each of the
Pre-Existing Provider Agreements or, as applicable, Existing Provider Agreements
and New Provider Agreements in effect on the date this representation and
warranty is made is in full force and effect and Company and the Facility
Operators are not in material default under a Material Number of such
agreements.
(d) Authority to Bind Subsidiaries, etc. Company has the
requisite authority to cause this Agreement to be binding on its Subsidiaries,
Affiliates and Facility Operators.
6. REPRESENTATIONS AND WARRANTIES OF PROVIDER.
(a) Corporate Power and Authority. Provider has the full
corporate power and authority to make, execute, deliver and perform its
obligations under this Agreement, including all Schedules and Exhibits hereto,
and the other agreements, instruments, certificates and documents required or
contemplated hereby or thereby to be executed or delivered by it ("Provider
Documents"), and all of the transactions contemplated hereby and thereby to be
performed by it. Such execution, delivery, performance and consummation have
been duly authorized by all necessary action, corporate or otherwise, on the
part of Provider, its directors and stockholders.
(b) No Conflicts or Breaches. Neither the execution or
delivery of this Agreement or any of the Provider Documents by Provider nor the
performance by Provider of the transactions contemplated hereby and thereby,
conflicts with, or constitutes a breach of or a default under (i) its
certificate of incorporation or by-laws; or (ii) any applicable judgment, order,
writ, injunction, or decree of any court.
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(c) Agreements in Full Force and Effect. Each of the
Pre-Existing Provider Agreements or, as applicable, Existing Provider Agreements
and New Provider Agreements in effect on the date of this representation and
warranty is made is in full force and effect and Provider is not in material
default under a Material Number of any such agreements.
7. TERM.
(a) Length of Agreement. This Agreement shall commence as of
the date hereof (the "Commencement Date") and shall terminate on the fifth
anniversary of the Commencement Date (the "Scheduled Termination Date"), unless
sooner terminated as hereinafter provided.
(b) Right of First Refusal. In order to encourage continuity
and uniformity in the provision of quality Services, that parties agree that
Provider shall be granted a right of first refusal with respect to renewal of
this Agreement for one subsequent five year renewal term, subject to all of the
terms and conditions of this Paragraph 7.
(c) Negotiation for Renewal. Within 180 days, but not less
than 120 days prior to the Scheduled Termination Date, Provider shall, if it
desires to renew this Agreement, submit to Company and the applicable Facility
Operator, Provider's proposed prices with respect to each category of Services
proposed to be provided at the Company LTC Facilities and the New Facilities
(the "Proposed Prices"), which Provider shall certify in Provider's best
judgment as being, together with other terms and conditions set forth in the
applicable agreements, Qualifying Competitive Services. The parties shall
thereafter negotiate in good faith regarding adoption of such Proposed Prices to
be in effect during the proposed renewal term of this Agreement under the
Existing Facility Agreements and New Facility Agreements. If the parties are
able to reach agreement on the Proposed Prices, this Agreement and each Existing
Facility Agreement and New Facility Agreement shall thereupon be renewed on the
Scheduled Termination Date for a term of five years.
(d) Qualifying Alternative Bids. If the parties are unable to
reach agreement on the Proposed Prices, and in any event at the Company's
option, not later than 90 days prior to the Scheduled Termination Date, the
Company may solicit proposals (each a "Qualifying Alternative Bid" and
collectively, the "Qualifying Alternative Bids") from any other national
pharmacy provider for it to provide the Services to the Company and covering at
least 75% of the Company LTC Facilities and New Facilities then being served by
Provider (such number of facilities being collectively referred to in this
Paragraph 7 as the "Requisite Facilities") during the ensuing five year period.
As used herein, "national pharmacy provider" means a provider of institutional
pharmacy services which alone or with Affiliates has the capability of servicing
at least 75% of the Company's LTC Facilities and New Facilities then being
served by Provider.
(e) Procedure for Renewal. Upon receipt of such Qualifying
Alternative Bids to provide the Services to the Company and the Requisite
Facilities during the ensuing five years, if such Qualifying Alternative Bid or
Bids are equal to or greater than the Proposed Prices offered by the Provider,
this Agreement, the Existing Provider Agreements and the New Provider Agreements
shall thereupon be renewed with Provider for a five year term, commencing on the
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Scheduled Termination Date, on the terms and conditions set forth herein and
therein, except that the prices for the Services shall be the Proposed Prices
during such renewal term. If such Qualifying Alternative Bid or Bids are less
than the Proposed Prices with respect to the provision of the Services, Company
shall provide such Qualifying Alternative Bids to Provider, not less than 45
days prior to the Scheduled Termination Date. Provider shall thereupon have the
opportunity to revise its offer to provide the Services and adjust its Proposed
Prices in all Company LTC Facilities and New Facilities then being served by
Provider for the ensuing five year period to an amount (the "Average Alternative
Prices") equal to (i) the average of the three lowest Qualifying Alternative
Bids received by the Company with respect to such Requisite Facilities, or (ii)
if there are less than three national pharmacy providers at the time which
submit Qualifying Alternative Bids, the average of the two Qualifying
Alternative Bids received by the Company with respect to such Requisite
Facilities, or (iii) if there are less than two national pharmacy providers at
the time which submit Qualifying Alternative Bids, the Qualifying Alternative
Bid received by the Company with respect to the Requisite Facilities.
(f) Notification of Exercise of First Refusal Right. If
Provider elects to meet the Qualifying Alternative Bid or Bids, as applicable,
with respect to the Requisite Facilities, it shall notify Company not less than
30 days prior to the Scheduled Termination Date of Provider's election to
continue to provide the Services at the Average Alternative Prices to the
Company LTC Facilities and New Facilities then being served by Provider for the
ensuing five years, and this Agreement, the Existing Provider Agreements and the
New Provider Agreements shall thereupon be renewed on such terms and conditions
as are set forth herein and therein, subject to the modifications as to prices
for the Services as hereinabove set forth.
(g) Expiration of Agreement Upon Failure to Exercise First
Refusal Right. If Provider does not elect to provide the Services at the Average
Alternative Prices as hereinabove set forth, then this Agreement, the Company
LTC Agreements and the New Provider Agreements shall expire and terminate on the
Scheduled Termination Date.
(h) Termination. This Agreement may be terminated and, except
as to liabilities or claims of either party hereto which shall have theretofore
accrued or arisen, the obligations of the parties hereto with respect to this
Agreement may be terminated, upon the happening of any of the following events:
(i) (A) if a Bankruptcy Event (as hereinafter defined)
shall occur with respect to Provider; or
(B) if Provider, after written notice thereof by
Company to Provider, shall fail to keep, observe, or perform any of the material
covenants, agreements, terms or provisions of this Agreement (and such default
shall continue for a period of sixty (60) days after notice of such default) or
of an aggregate Material Number of Pre-Existing Provider Agreements or, as
applicable, Existing Provider Agreements and New Provider Agreements to be kept,
observed, or performed by Provider (and such default shall continue uncured
during any appropriate grace period set forth in such agreements); or
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(C) if Provider shall, in any material respect,
breach (as of the date made) any representations or warranty contained in this
Agreement, or if Provider shall in any material respect breach (as of the date
made) any representation or warranty contained in a Material Number of
Pre-Existing Provider Agreements or, as applicable, Existing Provider Agreements
and New Provider Agreements;
then in case of any such event and upon the expiration of the period of grace
applicable thereto (if any), the term of this Agreement shall be terminated, at
the option of Company, upon written notice to Provider.
(ii) (A) if a Bankruptcy Event shall occur with
respect to Company; or
(B) if Company shall fail to keep, observe, or
perform any material covenant, agreement, term or provision of this Agreement to
be kept, observed, or performed by it (and such default shall continue for a
period of sixty (60) days after notice of such default) or if Company and/or the
Facility Operators shall fail to keep, observe, or perform any of the material
covenants, agreements, terms or provisions of an aggregate Material Number of
Pre-Existing Provider Agreements or, as applicable, Existing Provider Agreements
and New Provider Agreements to be kept, observed, or performed by Company and/or
Facility Operators (and such default shall continue uncured during any
applicable grace period set forth in such agreements); or
(C) If Company shall, in any material respect,
breach (as of the date made) any representation or warranty contained in this
Agreement, or if Company and/or the Facility Operators shall breach, in any
material respect, any representation or warranty contained in an aggregate
Material Number of any Pre-Existing Provider Agreements or, as applicable,
Existing Provider Agreements and New Provider Agreements;
then in case of any such event and upon the expiration of the period of grace
applicable thereto (if any), the term of this Agreement shall be terminated, at
Provider's option upon written notice to Company.
(i) Change in Law or Regulation.
(i) If, during the term of this Agreement, there
shall be (A) a change in the Medicare or Medicaid statute, regulations, or
general instructions (or in the application thereof), or any governmental payor
system, including but not limited to the Veterans Administration ("VA"), or (B)
the adoption of new legislation or regulations applicable to this Agreement or
any Pre-Existing Provider Agreement, Existing Provider Agreement or New Provider
Agreement (collectively, for purposes of this Paragraph 7, "Affected
Agreements"), or (C) a change in any other third party reimbursement system, or
(D) the initiation of enforcement action with respect to legislation,
regulations, or instructions applicable to any Affected Agreements, any of which
changes, legislation, regulations or action affects the continuing legality of
any Affected Agreements or the ability of Company to obtain reimbursement for
the full cost of any Services at the levels then in effect, as provided to
Company by Provider,
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Company may, at any time within one year of the effective date as to Company, of
such changes, legislation, regulation or action, upon written notice as provided
herein, propose an amendment to any such Affected Agreement, modifying the same
to the minimum extent necessary to assure the continuing legality of such
Affected Agreement or to eliminate the future impediment or impairment to
reimbursement. For periods beginning January 1, 1998, in the event that
reimbursement is denied for any facility covered by an Affected Agreement for
covered items or Services under the Medicare program because Provider's charges
exceed the usual, customary and reasonable charges for such Services or covered
items, as evidenced by a Notice of Medicare Reimbursement ("NPR"), any change to
such Affected Agreement effectuated for the purpose of obtaining reimbursement
shall be made applicable only for reimbursement periods subsequent to the period
to which the NPR related, for the remainder of the term of such Affected
Agreement. In the event that Provider is unable or unwilling to supply the items
or Services at price levels sufficient to assure such reimbursement, then
Company may, at its sole option, elect to obtain such items or Services from
other sources or to accept the prices offered by Provider.
(ii) If, during the term of this Agreement, the
system of reimbursement under which Medicare, Medicaid or any other third party
governmental payor reimburses providers of health care services such as Company
for covered items and Services (hereinafter, the "Affected Services") shall be
changed by law or regulation, from an existing cost-based reimbursement system
to any other system, including but not limited to a prospective payment system,
under which Company, its Affiliates or any Facility Operator is placed at risk
for full reimbursement of the Affected Services covered by an Affected
Agreement, then the parties agree that, at any time within one year of the
effective date of such change as to Company, upon written notice of such change
as provided herein, they shall prospectively renegotiate the pricing terms with
respect to the Affected Services under any such Affected Agreement to reflect
the impact of such risk-based reimbursement for the remainder of the term of
this Agreement or, at their option, the parties may elect to negotiate a
risk-based pricing structure for any such Affected Agreement. In either event,
the parties agree that they shall negotiate in good faith to achieve a fair
distribution of any adverse impact of such change in the reimbursement system as
it impacts the Affected Services. In the event the parties are unable to reach
agreement on modified pricing terms with respect to Affected Services
(hereinafter, the "Adjusted Pricing Structure"), Company on written notice to
Provider may elect to take the following procedures:
(A) Company may solicit proposals (each a
"Proposed Alternative Bid" and collectively, the "Proposed Alternative Bids")
from any other qualified pharmacy provider for it to provide the Affected
Services to the Company LTC Facilities and New Facilities, if any, then being
served by Provider and which are affected by such changes in the reimbursement
system (such facilities being collectively referred to in this Paragraph 7(i) as
the "Affected Facilities") during the remainder of the term of the Affected
Agreement then in effect. As used herein, "qualified pharmacy provider" means a
provider of institutional pharmacy services which alone or with Affiliates has
the capability of servicing at least 75% of the Affected Facilities then being
served by Provider.
(B) Upon receipt of such Proposed Alternative
Bids to provide the Affected Services to the Company and the Affected
Facilities, if all such Proposed Alternative Bid or Bids are equal to or greater
than the Adjusted Pricing Structure last offered by
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the Provider, Company shall forthwith notify Provider of that fact, and the
Adjusted Pricing Structure last offered by Provider shall thereupon be in effect
for the duration of the term of the Affected Agreement with respect to the
Affected Services, subject to the continuing application of all the other terms
and conditions of the Affected Agreement, including the provisions of this
Paragraph 7(i). If any of such Proposed Alternative Bid or Bids is less than the
Adjusted Pricing Structure last offered by Provider for the Affected Services,
Company shall provide such Proposed Alternative Bids to Provider within 30 days
after receipt of the last of such Bid or Bids. Provider shall thereupon have the
opportunity to revise its Adjusted Pricing Structure to provide the Affected
Services in all the Affected Facilities then being served by Provider for the
duration of the term of the Affected Agreement then in effect to an amount (the
"Average Adjusted Pricing Structure") equal to (i) the average of the three
lowest Proposed Alternative Bids received by Company with respect to such
Affected Facilities, or (ii) if there are less than three qualified pharmacy
providers at the time which submit Proposed Alternative Bids, the average of the
two Proposed Alternative Bids received by Company with respect to the Affected
Facilities, or (iii) if there are less than two qualified pharmacy providers at
the time which submit Proposed Alternative Bids, the Proposed Alternative Bid
received by Company with respect to the Affected Facilities.
(C) If Provider elects to meet the Proposed
Alternative Bid or Bids, as applicable, with respect to the Affected Facilities,
as set forth in subparagraph (B) above, it shall notify Company not less than 30
days after receipt of all the Proposed Alternative Bids by Provider of
Provider's election to continue to provide the Affected Services under the
Average Adjusted Pricing Structure to the Affected Facilities for the duration
of the term of the Affected Agreement then in effect, subject to the continuing
application of all the other terms and conditions of the Affected Agreement,
including the provisions of this Paragraph 7(i).
(D) If Provider does not elect to provide the
Affected Services under the Average Adjusted Pricing Structure as hereinabove
set forth, then Company may, at its sole option, elect to obtain such Affected
Services from any of the qualified pharmacy providers whose Proposed Bid is
equal to or less than the Average Adjusted Pricing Structure or accept the
Adjusted Pricing Structure last offered by Provider for the duration of the term
of the Affected Agreement then in effect.
(iii) If, during the term of this Agreement, the
system of reimbursement under which Medicare, Medicaid or any other governmental
third-party payor reimburses providers of health care services such as the
Company for Affected Services shall be changed, by law or regulation, from an
existing cost-based reimbursement system to any other system, including but not
limited to a Prospective Payment System, under which Company is required to
absorb, as part of an all-inclusive rate or payment, the cost of Affected
Services covered by any Affected Agreement which were previously billed by
Provider directly to Medicare, Medicaid or other governmental third-party payor,
then the parties agree that, at any time within one year of the effective date
of such change as to Company, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under any such Affected Agreement to reflect the impact of
such risk-based reimbursement for the remainder of the term of this Agreement,
and this Agreement and any other Affected Agreement shall be amended to reflect
the new prices for those Affected Services.
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In the event the parties are unable to reach agreement on modified pricing terms
with respect to Affected Services, Company on written notice to Provider may
elect to follow the procedures set forth in subparagraphs 7(i)(ii)(A) through
(D), inclusive, to determine the Adjusted Pricing Structure for the Affected
Services to be in effect with Provider or other qualifying pharmacy providers
for the duration of the term of the Affected Agreement then in effect.
(j) Bankruptcy Event Defined. A "Bankruptcy Event" shall be
deemed to occur with respect to a party if it shall apply for or consent to the
appointment of a receiver, trustee, or liquidator or for all or a substantial
part of its assets, file a voluntary petition in bankruptcy, make a general
assignment for the benefit of creditors, file a petition or an answer seeking
reorganization or arrangement with creditors or take advantage of any insolvency
law, or if an order, judgment or decree shall be entered by any court of
competent jurisdiction, on the application of a credit, adjudicating it as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
its assets, and other such order, judgment or decree shall continue unstayed and
in effect for any period of ninety (90) consecutive days.
(k) No Limit on Right to Damages. Termination of this
Agreement by default by either party shall not limit the rights of the
non-defaulting party to damages or otherwise.
8. CONFIDENTIALITY.
(a) Confidential Information.
(i) Provider recognizes and acknowledges that, by
virtue of entering into this Agreement and providing services to Company and the
Facility Operators hereunder and under the Pre-Existing Provider Agreements,
Existing Provider Agreements and the New Provider Agreements, Provider and its
staff will have access to certain information of Company and the Facility
Operators that is confidential and constitutes valuable, special and unique
property of Company and the Facility Operators ("Confidential Information").
Provider agrees that, except as otherwise required by applicable law, neither it
nor any of its staff will at any time, either during or subsequent to the term
of this Agreement, disclose to others, use, copy or permit to be copied, without
the express prior written consent of Company, except pursuant to its duties
under the Pre-Existing Provider Agreements, Existing Provider Agreements and New
Provider Agreements, any Company Confidential Information including but not
limited to, information which concerns any Company LTC Facility's or New
Facility's patients, costs, prices, or treatment methods at any time used,
developed or made by Company or any Facility Operator and which is not otherwise
available to the public (otherwise than through Provider).
(ii) Company recognizes and acknowledges that, by
virtue of entering into this Agreement and accepting services from Provider
hereunder and under the Pre-Existing Provider Agreements, Existing Provider
Agreements and New Provider Agreements, Company, Facility Operators and their
respective staffs will have access to certain information of Provider that is
confidential and constitutes valuable, special and unique property of Provider
("Provider Confidential Information"). Company agrees that, except as otherwise
required by applicable
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law, it, the Facility Operators and their respective staffs will not at any
time, either during or subsequent to the term of this Agreement, disclose to
others, use, copy or permit to be copied, without the express prior written
consent of Provider, except pursuant to its duties under the Pre-Existing
Provider Agreements, Existing Provider Agreements and New Provider Agreements,
any Provider Confidential Information.
(b) No Disclosure of Agreement. Except for disclosure to their
legal counsel, accountants, or financial advisors, Provider and its staff, on
the one hand, and Company, the Facility Operators and their staff, on the other
hand, shall not disclose the terms of this Agreement to any person who is not a
party or signatory to this Agreement, unless disclosure thereof is required by
law or otherwise authorized by this Agreement or except in connection with the
proposed sale of one or more of the Available Facilities. Notwithstanding the
foregoing, both parties recognize and acknowledge that this Agreement (but not
necessarily the exhibits) may be required to be filed as an exhibit to certain
registration statements and reports filed by both parties with the Securities
and Exchange Commission, and that any such filings shall not be deemed to result
in a breach of the terms of this Agreement.
(c) Patient Records Confidential. Neither Provider nor any of
its staff shall disclose to any third party, except where permitted or required
by law or where such disclosure is expressly approved by Company in writing, any
patient or medical record information regarding any Company LTC Facility or New
Facility patients, and Provider and all of its staff shall comply with all
Federal and state laws and regulations, and all reasonable rules, regulations,
and policies of each Company LTC Facility and New Facility regarding the
confidentiality of such information.
(d) Return of Confidential Information. Upon termination of
this Agreement by either party for any reason whatsoever, each party shall
forthwith return to the other, all material constituting or containing
Confidential Information and the returning party will not thereafter use,
appropriate or reproduce such information or disclose such information to any
third party.
(e) Public Information. Confidential information shall not
include information which is or becomes public or which was in possession of the
party prior to receiving it from the other party or which was developed by the
party disclosing or using it.
(f) Strict Compliance. Failure to strictly comply with the
provisions of this Paragraph 8 shall be a material breach of this Agreement.
Each party acknowledges that this is a continuing obligation and that such
obligation shall survive the termination of this Agreement. Each party further
acknowledges that the restrictions contained in this Paragraph 8 are reasonable
and necessary to protect the legitimate business interests of the other party
and that any violation thereof by one party would result in irreparable harm to
the other party. Accordingly, in the event of an actual or a threatened breach
by either party of the provisions of this Paragraph 8, the other party shall be
entitled to obtain from any court of competent jurisdiction a preliminary or
permanent injunction enjoining the breaching party from disclosing such
information. Nothing herein shall be construed as prohibiting either party from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages.
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<PAGE> 14
9. Miscellaneous Provisions.
(a) No Advertising. No party hereto shall use the name of the
other party in any advertising publication, or prospectus without prior written
approval of such party.
(b) Notices. Any notice, demand, or communication required,
permitted, or desired to be given hereunder, shall be deemed sufficiently given
when personally delivered or mailed by prepared certified mail, return receipt
requested, or sent by nationally-recognized overnight courier, or by facsimile
transmission (receipt confirmed), addressed as follows:
to Company: Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Attention: David R. Banks
Chairman of the Board
Fax No.: 501-452-6712
With copies to: Robert W. Pommerville, Esq.
Executive Vice President, Secretary and
General Counsel
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Fax No.: 501-452-3760
and
H. Watt Gregory, III, Esq.
Giroir, Gregory, Holmes & Hoover, PLC
111 Center Street - Suite 1900
Little Rock, AR 72201
Fax No.: 501-374-2380
to Provider: PharMerica Corporation
3611 Queen Palm Drive
Tampa, FL 33619
Attention: _________________
Fax No.: 813-623-1167
with copies to: ________________________
or to such other or additional addresses as may be provided by either party from
time to time in the manner described above.
(c) No Partnership or Joint Venture Created. Nothing contained
in this Agreement shall constitute or be construed to be or create a partnership
or joint venture between
14
<PAGE> 15
Company, any Facility Operator, any of their respective successors or assigns on
the one part, and Provider, its successors, or assigns on the other party.
(d) Governing Law. The validity of this Agreement, the
interpretation of the rights and duties of the parties hereunder and the
construction of the terms hereof, shall be governed in accordance with the laws
of the State of Delaware applicable to contracts executed, delivered and to be
fully performed in said state without giving effect to contrary principles of
conflict of laws, except to the extent that any additional written agreement
entered into pursuant to this Agreement by both parties may otherwise
specifically provide.
(e) No Waiver. A waiver by either party of a breach or failure
to perform shall not constitute a waiver of any subsequent breach or failure.
(f) Severability. If any part of this Agreement should be held
to be void or unenforceable, such part will be treated as severable, leaving
valid the remainder of this Agreement notwithstanding the part or parts found
void or unenforceable.
(g) Binding Agreement. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, and each of their
respective successors and permitted assigns, but shall not be assigned by any
party without the prior written consent of the other party. Any change in
control of Provider shall be deemed an assignment of this Agreement to the new
party in control for this purpose. Notwithstanding the foregoing, Provider shall
be permitted to delegate or subcontract any of its obligations under this
Agreement or under any Existing Provider Agreement or New Provider Agreement to
any Subsidiary or Affiliate of Provider other than in the event of a change in
control. This Agreement is intended solely for the benefit of the parties hereto
and there is no intention, expressed or otherwise, to create rights of interest
for any party or person other than Provider, Company and the Facility Operators.
This Agreement shall be enforceable only by the parties hereto and their
successors in interest by virtue of an assignment which is not prohibited under
the terms of this Agreement, and except as set forth in the preceding sentence,
no other person shall have the right to enforce any of the provisions contained
herein.
(h) Headings for Reference Only. The Paragraph and other
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
(i) No Modifications Except in Writing. This Agreement cannot
be changed or modified except by another agreement in writing signed by the
other party sought to be charged therewith or by its duly authorized agent.
(j) Construction. Any ambiguities contained in this Agreement
shall not in any way be construed in a manner which would interpret such
ambiguities against the drafter of this Agreement.
(k) Entire Agreement. This Agreement supersedes all previous
contracts and agreements between the parties and constitutes the entire
agreement between the parties. No oral
15
<PAGE> 16
statements or prior written material not specifically incorporated herein shall
be of any force and effect, and no changes in or additions to this Agreement
shall be recognized unless incorporated herein by written amendment, such
amendment(s) to become effective on the date(s) stipulated therein.
(l) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which, when
taken together, shall constitute one and the same agreement.
(m) Disposition of Facilities. Nothing contained in this
Agreement shall be deemed to prohibit the right of Company or any Facility
Operator to sell or otherwise dispose of any Company LTC Facility or New
Facility or to assign any lease or a management agreement with respect thereto
so long as any such acquiror of such Company LTC Facility or New Facility
assumes the liabilities and obligations of this Agreement or any Pre-Existing
Provider Agreement, Existing Provider Agreement or New Provider Agreement then
in effect. Notwithstanding any provision in the foregoing sentence to the
contrary, nothing in this Agreement shall be construed to require Company to
operate or continue to operate any Company LTC Facility or New Facility for any
length of time, to make any payment under this Agreement to Provider for failure
to continue to operate any such facility, or to otherwise be required to deal
further with Provider in respect of any facility where the Company's right to
operate such facility under lease or management agreement with a third party
expires or terminates pursuant to the terms thereof.
(n) Maintenance of Records. Provider shall keep and maintain
such records relating to its services rendered hereunder and under any Existing
Provider Agreement or New Provider Agreement in accordance with accepted
professional standards and practices, and as may be required by Company and by
any fiscal intermediary, federal, state or local governmental agency or
authority, or any other party to whom billings for Provider's services are
rendered. Provider further agrees to make all such records available upon
request for inspection or copying by Company, subject to any federal or state
laws relating to confidentiality of such records. Without limiting the
generality of the foregoing, until the expiration of four (4) years after the
termination of this Agreement, Provider shall make available, upon request of
the Comptroller General of the United States General Accounting Office or the
Office of the Inspector General of the United States Department of Health and
Human Services, or any of their duly authorized representatives, a copy of this
Agreement, any Existing Provider Agreement and any New Provider Agreement, and
such books, documents and records as are necessary to certify the nature and
extent of the costs of the services provided by Provider under this Agreement,
any Existing Provider Agreement and New Provider Agreement at any time in force
during the term of this Agreement.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Preferred Provider Agreement effective as of the day and year first above
written.
PHARMERICA CORPORATION BEVERLY ENTERPRISES, INC.
By: By:
--------------------------------- -------------------------
Name: Name:
------------------------------- -----------------------
Title: Title:
----------------------------- ----------------------
17
<PAGE> 18
Exhibit to PPA
CONSULTANT PHARMACIST SERVICES AGREEMENT
THIS CONSULTANT PHARMACIST SERVICES AGREEMENT (this "Agreement"), in
accordance with the terms of that certain Preferred Provider Agreement for
Pharmaceutical and Related Services between Beverly Enterprises, Inc. and
PharMerica Corporation (the "PPA") is made effective this ____ day of
_____________199__ by and between *_________________________ d/b/a
**____________________________, located at _________________________________
(the "FACILITY"), and ________________________, a Delaware corporation with its
principal place of business at PharMerica Corporation, d/b/a
___________________________________, duly licensed as a pharmacy in this state,
located at ______________________________________ ("PROVIDER"). In consideration
of the mutual promises set forth below in the body of this Agreement, the
parties agree as follows:
1. TERM
The term of this Agreement shall commence on ___________, 1997, and
shall continue in full force and effect for a period of five (5) years
thereafter. This Agreement shall be renewed at the end of the initial term by
written agreement of both parties in accordance with the terms of the PPA. This
Agreement, may, however, be terminated immediately for cause upon the occurrence
of one of the following events: (a) dissolution and/or bankruptcy of either
party; (b) the making of a general assignment for the benefit of creditors by
either party, (c) after written notice by Facility of a default by PROVIDER and
a reasonable time, not to exceed sixty (60) days for Provider to cure such
default, the failure of PROVIDER to provide the services agreed to in this
Agreement in a manner not reasonably satisfactory to FACILITY or that causes
FACILITY to be out of compliance with federal, state or local licensure and/or
certification requirements; or (d) PROVIDER's becoming insolvent or having a
receiver appointed because of insolvency.
2. CONSULTANT PHARMACIST SERVICES
The parties agree that PROVIDER is to provide consultant services under
the terms and conditions of this Agreement and in accordance with any applicable
requirements of federal, state or local laws, rules and/or regulations,
including provisions of the Omnibus Budget Reconciliation Acts (OBRA) of 1937
and 1990. Also, the parties agree that PROVIDER is to provide consultant
services under the general supervision of a qualified Pharmacist who is
responsible to FACILITY's Administrator for developing, coordinating,
supervising and reviewing all pharmaceutical services. PROVIDER may employ
suitable and lawfully authorized ancillary personnel, including, but not limited
to, licensed nurses to provide such authorized ancillary personnel, including,
but not limited to, licensed nurses to provide such services. PROVIDER shall
serve as FACILITY's exclusive provider of services specified herein so long as
PROVIDER is not in breach of this Agreement.
- ------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
<PAGE> 19
PROVIDER agrees to:
a. Review the drug regime of each resident in FACILITY at the
time of PROVIDER's visit at least once a month and report in writing any
irregularity to FACILITY's Administrator, Director of Nursing Services, arid
where appropriate, the individual resident's physician.
b. Serve on FACILITY's Quality Assurance Committee or
committees of similar function.
c. Submit, at least quarterly, a written report to FACILITY's
Quality Assurance Committee or committee of similar function on the status of
FACILITY pharmaceutical service and staff performance.
d. Prepare and maintain FACILITY's Pharmacy Policy and
Procedure Manual.
e. Assist FACILITY in the accounting, destruction and
reconciliation of unused controlled substances as prescribed by. law, rule or
regulation.
f. Assist FACILITY's administrative staff in establishing and
implementing policies and procedures for the safe and effective distribution,
control and use of drugs.
g. Participate as required in FACILITY's in service training
program for the licensed nursing staff.
h. Meet all other responsibilities required of a consultant
pharmacist as set forth in federal, state and local news, rules and regulations.
FACILITY agrees to:
a. Designate employees(s) responsible for implementing
services contemplated in this Agreement who will be coordinator(s) with
PROVIDER.
b. Provide space for PROVIDER's consultants to perform duties
listed herein.
c. Assist PROVIDER's consultants in gaining access to storage
areas, reports, records and personnel necessary to carry out duties listed
herein.
d. Whenever possible, coordinate in services and meetings
listed herein with PROVIDER so that PROVIDER'S consultants can provide such
services efficiently with a minimum number of on-site visits to FACILITY.
To assist PROVIDER, FACILITY shall provide space for PROVIDER to
perform the on-site duties listed herein and designate FACILITY employee(s) who
shall act as coordinator with PROVIDER regarding services provided by PROVIDER
to FACILITY. In addition, FACILITY will
2
<PAGE> 20
attempt to coordinate in service training and all the FACILITY committee
meetings listed herein with PROVIDER to minimize the number of on-site visits
required of PROVIDER to FACILITY.
3. COMPENSATION
PROVIDER and FACILITY shall agree to a Schedule of Rates prior to the
effective date of this Agreement Such Schedule of Rates shall be attached to and
incorporated by reference into this Agreement as Exhibit A. PROVIDER agrees to
devote a sufficient number of hours based upon FACILITY's needs, during
regularly scheduled visits to carry out PROVIDER's responsibilities. FACILITY
shall pay PROVIDER for all rendered services within sixty (60) days following
the day on which PROVIDER's invoices have been received by FACILITY for the
applicable billing period. FACILITY shall review each invoice and use its
reasonable efforts to notify PROVIDER of any credit adjustments determined by
FACILITY to be due FACILITY from PROVIDER on such invoice within four (4)
business days after receipt of PROVIDER'S invoice if FACILITY is on a weekly
billing cycle and within fifteen (15) business days if FACILITY is on a monthly
billing cycle. PROVIDER shall accordingly issue a credit in the amount of any
such adjustment on the invoice due in the next billing cycle after receipt by
PROVIDER of notice of such adjustment by FACILITY. If FACILITY does not notify
PROVIDER of adjustments within such applicable four (4) or fifteen (15) business
day period, PROVIDER shall issue an appropriate credit in the amount of any such
adjustment on the next invoice after receipt of such notice of adjustment.
4. CIVIL RIGHTS
PROVIDER shall comply with Titles VI and VII of the Civil Rights Act of
1964, Section 503 and 504 of the Rehabilitation Act of 1973, and all
requirements imposed by or pursuant to the regulations of the Department of
Health and Human Services issued pursuant to these Acts.
5. RECORDS
Pursuant to Section 1395(V)(l)(i) of Title 42 of the United States
Code, with respect to any services furnished under this Agreement, the value or
cost of which is Ten Thousand Dollars ($10,000) or more over a twelve (12) month
period, until the expiration of four (4) years after the termination of this
Contract, PROVIDER shall make available upon written request from the Secretary
of the United States Department of Health and Human Services, or upon written
request from the Comptroller General of the United States General Accounting
Office, or any of their duly authorized representatives, a copy of this Contract
and such books, documents, and records as are necessary to certify the nature
and extent of the costs of the services provided by PROVIDER under this
Agreement. PROVIDER further agrees to provide any records to FACILITY as may be
required under the Omnibus Budget Reconciliation Acts of 1987 or 1990.
PROVIDER further agrees that in the event PROVIDER carries out any of
his duties under this Agreement through a subcontract with a value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to such
subcontract, the subcontractor shall make available, upon written request from
the Secretary of the United States Department of Health and Human Services, or
upon written request from the Comptroller General
3
<PAGE> 21
of the United States General Accounting Office, or any of their duly authorized
representatives, the subcontract and such books, documents and records of such
organization are necessary to verify the nature and extent of such costs.
PROVIDER agrees to save, indemnity and hold. harmless FACILITY of and
from all liability, loss. costs or expenses incurred directly or indirectly
because of failure to comply with the obligations set forth above in Paragraph 5
or for any inaccurate or fraudulent claims submitted to FACILITY by PROVIDER for
billing purposes.
6. CHANGE IN LAW OR REGULATION
a. If, during the term of this Agreement, there shall be (i) a
change in the Medicare or Medicaid statute, regulations, or general instructions
(or in the application thereof), or any governmental payor system, including but
not limited to the Veterans Administration ("VA"), or (ii) the adoption of new
legislation or regulations applicable to this Agreement (for purposes of this
Paragraph 6 (an "Affected Agreement", and together with any other similarly
affected agreement for pharmaceutical and/or related services between Beverly
Enterprises, Inc. and PharMerica Corporation or their respective subsidiaries or
Affiliates, the "Affected Agreements"), or (iii) a change in any other third
party reimbursement system, & (iv) the initiation of enforcement action with
respect to legislation, regulations, or instructions applicable to this
Agreement, any of which changes, legislation, regulations or action affects the
continuing legality of this Agreement or the ability of FACILITY to obtain
reimbursement for the full cost of any consultant pharmacist services
(collectively, for purposes of this Paragraph 6, the "Services") at the levels
then in effect, as charged to FACILITY by PROVIDER, FACILITY may, at any time
within one year of the effective date as to FACILITY, of any such changes,
legislation, regulation or action, upon written notice as provided herein,
propose an amendment to this Agreement, modifying the same to the minimum extent
necessary to assure the continuing legality of this Agreement or to eliminate
the future impediment or impairment to reimbursement. For periods beginning
January 1, 1998, in the event that reimbursement is denied for the FACILITY
covered by this Agreement for covered items or Services under the Medicare
program because PROVIDER'S charges exceed the usual, customary and reasonable
charges for such Services or covered items, as evidenced by a Notice of Medicare
Reimbursement ("NPR"), FACILITY shall provide PROVIDER as promptly as
practicable with a copy of such NPR, and any change to this Agreement
effectuated for the purpose of obtaining reimbursement shall be made applicable
to all reimbursement periods subsequent to the period to which the NPR related,
for the remainder of the term of this Agreement. In the event that PROVIDER is
unable or unwilling to supply the items or Services at price levels sufficient
to assure such reimbursement, then FACILITY may, at its sole option, elect to
obtain such items or Services from other sources or to accept the prices offered
by PROVIDER.
b. If; during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other third party
governmental payor reimburses providers of health care services such as FACILITY
for covered Services (hereinafter, the "Affected Services") shall be changed by
law or regulation, from an existing cost-based reimbursement system to any other
system, including but not limited to a prospective payment system, under which
FACILITY or its Affiliates (as hereinafter defined) is placed at risk for full
reimbursement of the Affected Services covered by this Agreement, then the
parties agree that, at any time within one year of the
4
<PAGE> 22
effective date as to FACILITY, of any such change, upon written notice of such
change as provided herein, they shall prospectively renegotiate the pricing
terms with respect to the Affected Services under this Agreement to reflect the
impact of such risk-based reimbursement for the remainder of the term of this
Agreement or, at their option, the parties may elect to negotiate a risk-based
pricing structure for this Agreement. In either event, the parties agree that
they shall negotiate in good faith to achieve a fair distribution of any adverse
impact of such change in the reimbursement system as it impacts the Affected
Services. in the event the parties are unable to reach agreement on modified
pricing terms with respect to Affected Services (hereinafter, the "Adjusted
Pricing Structure"), FACILITY on written notice to PROVIDER may elect to take
the following procedures;
(1) FACILITY, acting alone if it has the only
Affected Agreement with PROVIDER for similarly situated Services being provided
by PROVIDER, or in concert with any other Affiliates having Affected Agreements
with PROVIDER for similarly situated Services, may solicit proposals (each a
"Proposed Alternative Bid" and collectively, the "Proposed Alternative Bids")
from any other qualified pharmacy provider for it or them, as applicable, to
provide the Affected Services to it or them, as applicable, which are affected
by such changes in the reimbursement system (such facilities, whether one or
more, being referred to in this Paragraph 6 collectively as the "Affected
Facilities") during the remainder of the term of the Affected Agreement then in
effect As used herein, "qualified pharmacy provider" means a provider of
institutional pharmacy services which alone or with Affiliates has the
capability of servicing the FACILITY and at least 75% of the other Affected
Facilities then being served by PROVIDER.
(2) Upon receipt of such Proposed Alternative Bids to
provide the Affected Services to the FACILITY and the other Affected Facilities,
if any, if all such Proposed Alternative Bids are equal to or greater than the
Adjusted Pricing Structure last offered by the PROVIDER, FACILITY shall
forthwith notify PROVIDER of that fact, and the Adjusted Pricing Structure last
offered by PROVIDER shall thereupon be in effect for the duration of the term of
this Agreement with respect to the Affected Services, subject to the continuing
application of all the other terms and conditions of this Agreement, including
the provisions of this Paragraph 6. If any of such Proposed Alternative Bids is
less than the Adjusted Pricing Structure last offered by PROVIDER for the
Affected Services, FACILITY shall provide such Proposed Alternative Bids to
PROVIDER within 30 days after receipt of the last of such Bid or Bids. PROVIDER
shall thereupon have the opportunity to revise its Adjusted Pricing Structure to
provide the Affected Services in the FACILITY and in all other similarly
situated Affected Facilities, if any, then being served by PROVIDER for the
duration of the term then in effect of this Agreement and such other Affected
Agreements, as applicable, to an amount (the "Average Adjusted Pricing
Structure") equal to (i) the average of the three lowest Proposed Alternative
Bids received by FACILITY with respect to such Affected Services, or (ii) if
there are less than three qualified pharmacy providers at the time which submit
Proposed Alternative Bids, the average of the two Proposed Alternative Bids
received by FACILITY with respect to the Affected Services, or (iii) if there
are less than two qualified pharmacy providers at the time which submit Proposed
Alternative Bids, the Proposed Alternative Bid received by FACILITY with respect
to the Affected Services.
(3) If PROVIDER elects to meet the Proposed
Alternative Bid or Bids, as applicable, with respect to the Affected Services,
as set forth in subparagraph (2) above, it shall notify FACILITY not less than
30 days after receipt of all the Proposed Alternative Bids by
5
<PAGE> 23
PROVIDER of PROVIDER's election to continue to provide the Affected Services
under the Average Adjusted Pricing Structure to the Facility for the duration of
the term of this Agreement then in effect, subject to the continuing application
of all the other terms and conditions of this Agreement, including the
provisions of this Paragraph 6.
(4) If PROVIDER does not elect to provide the
Affected Services under the Average Adjusted Pricing Structure as hereinabove
set forth, then FACILITY may, at its sole option, elect to obtain such Affected
Services from any of the qualified pharmacy providers whose Proposed Bid is
equal to or less than the Average Adjusted Pricing Structure or accept the
Adjusted Pricing Structure last offered by PROVIDER for the duration of the term
of this Agreement then in effect.
c. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other governmental
third-party payor reimburses providers of health care services such as the
FACILITY for Affected Services shall be changed, by law or regulation, from an
existing cost-based reimbursement system to any other system, including but not
limited to a Prospective Payment System, under which FACILITY is required to
absorb, as part of an all-inclusive rate or payment, the cost of Affected
Services covered by this Agreement which were previously billed by PROVIDER
directly to Medicare, Medicaid or other governmental third-party payor, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect the impact of such
risk-based reimbursement for the remainder of the term of this Agreement, and
this Agreement shall be amended to reflect the new prices for those Affected
Services. In the event the parties are unable to reach agreement on modified
pricing terms with respect to Affected Services, FACILITY on written notice to
PROVIDER may elect to follow the procedures set forth in subparagraphs 6 b (1)
through (4), inclusive, to determine the Adjusted Pricing Structure for the
Affected Services to be in effect with PROVIDER or other qualifying pharmacy
providers for the duration of the term of this Agreement then in effect.
d. FACILITY shall have sole discretion as to any election to
appeal, settle or compromise the amounts denied, disallowed or recouped by
Medicare, Medicaid or any other third party reimbursement source.
7. QUALIFICATIONS
PROVIDER represents and warrants that it and any and all of its
employees, agents or servants which will provide services under this Agreement
have all the necessary qualifications, certifications and/or licenses required
by federal, state and local laws and regulations to provide the services
required under this Agreement. Each individual providing services under this
Agreement will provide FACILITY with a copy of his/her current license in effect
on the effective date of this Agreement and at each successive renewal.
6
<PAGE> 24
8. INSURANCE AND INDEMNITY
Subject to the minimum coverage requirements set forth below, PROVIDER
shall procure and maintain at all times throughout the term of this Agreement
such insurance as will fully protect PROVIDER from all acts, errors or omissions
while performing the services provided for in this Agreement.
PROVIDER shall submit to FACILITY prior to the effective date of this
Agreement, a certificate of insurance issued by an insurer authorized to conduct
insurance business in this state and reasonably acceptable to FACILITY,
indicating that PROVIDER has complete liability insurance coverage, including
coverage for any acts of professional malpractice Such insurance shall be in
amounts reasonably satisfactory to FACILITY or in amounts required by the laws
of this state, whichever is greater, but shall not be in amounts less than
$1,000,000 aggregate per year for injuries or incidents to persons and $100,000
each occurrence property damage coverage. Coverage less than stated amounts must
be approved in writing in advance by FACILITY's Corporate Risk Management
Department Said certificate shall provide that the insurer will not cancel said
policy of insurance without giving FACILITY thirty (30) days advance written
notice. Further, PROVIDER shall provide FACILITY thirty (30) days advance
written notice.(or as soon as practicable) as to any material restriction,
limitation, modification or revision to coverage contemplated herein.
PROVIDER shall save, indemnify and hold FACILITY harmless of and from
any and all liability, loss, costs and expenses incurred directly or indirectly
from any acts, errors or Omissions by PROVIDER, its agents, employees or
invitees from any cause arising from or relating to PROVIDER's performance under
this Agreement.
Within the limits of its applicable insurance coverage, and to the
extent not otherwise inconsistent with state law, FACILITY shall save, indemnify
and hold PROVIDER harmless of and from any and all liability, loss, costs and
expenses incurred directly or indirectly from any acts, errors or omissions by
FACILITY, its agents, employees or invitees from any cause arising from or
related to FACILITY's performance under this Agreement.
9. EQUIPMENT AND SUPPLIES
When PROVIDER uses equipment and/or supplies provided by FACILITY,
PROVIDER shall use such equipment and supplies properly and be solely
responsible for injuries or damages resulting from any misuse. In addition,
PROVIDER shall notify FACILITY promptly in writing whenever equipment or
supplies provided by FACILITY and used by PROVIDER for providing services need
repair or replacement. When PROVIDER uses his/her own equipment and supplies,
PROVIDER agrees to save, indemnify and hold FACILITY harmless of and from the
use, misuse or failure of such equipment and supplies. PROVIDER shall maintain
his/her own equipment and supplies in good operating condition and repair and in
accordance with manufacturer's recommendations and all applicable federal, state
and local laws.
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<PAGE> 25
10. INDEPENDENT CONTRACTOR
This Agreement does not constitute a hiring of PROVIDER as an employee
of FACILITY. It is the parties' intention that PROVIDER shall be an independent
contractor and not FACILITY's employee. PROVIDER shall retain discretion and
judgment regarding the manner and means of providing services to FACILITY
subject to all applicable laws, regulations and FACILITY's policies. FACILITY
assumes professional and administrative responsibility for the services rendered
only to the extent that FACILITY will assure itself that (1) PROVIDER is
qualified by education and/or experience to render the services contracted for;
and (2) PROVIDER is satisfying the obligation set forth herein in a timely
manner. This Agreement shall not be construed as a partnership and FACILITY
shall not be liable for any obligations incurred by PROVIDER.
11. CONFIDENTIALITY
PROVIDER agrees to respect and abide by all federal, state and local
laws pertaining to confidentiality and disclosure with regard to all information
and records obtained or reviewed in the course of providing services to FACILITY
and/or its residents. In the course of the relationship established between
PROVIDER and FACILITY, certain confidential information about each party and/or
its parent organization may be disclosed to the other party. Such information
includes, without limitation, FACILITY resident names, medical records, business
information and similar information of any kind whatsoever (collectively
referred to as "Confidential Information"). PROVIDER and FACILITY shall hold
Confidential Information in the strictest confidence as fiduciaries and shall
not, voluntarily or involuntarily, sell, transfer, publish, disclose or
otherwise make available to others, any portion of the Confidential Information
or related materials without the express written consent of the other party
except as provided for under paragraph 5 herein. PROVIDER and FACILITY shall use
their best efforts to protect the Confidential Information consistent with the
manner in which they protect their most confidential business and client
information.
12. ATTORNEY'S FEES
If suit is brought to enforce any of the terms or conditions of this
Agreement, the prevailing party shall be entitled to recover such sums as the
court may fix as costs and reasonable attorney's fees, in addition to any other
relief to which it may be entitled.
13. NOTICES
Any notice required to be provided to any party to this Agreement shall
be in writing and shall be considered effective three (3) days after date of
deposit with the United States Postal Service by certified or registered mail,
first class postage prepaid, return receipt requested, or by facsimile
transmission (receipt confirmed) and addressed to the party as follows:
FACILITY:
------------------------------
------------------------------
------------------------------
Attention:
-------------------
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<PAGE> 26
and to: Beverly Enterprises, Inc.
5111 Rogers Ave., Suite 40-A
Fort Smith, AR 72919-1000
Attention: David R. Banks, Chairman of the Board
Facsimile: 501-452-6712
with copies to: Robert W. Pommerville, Esq.
Executive Vice President, Secretary and General Counsel
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Facsimile: 501452-3760
and
H. Watt Gregory, III, Esq.
Giroir, Gregory, Holmes & Hoover, PLC
111 Center Street - Suite 1900
Little Rock, AR 72201
Facsimile: 501-374-2330
PROVIDER: PharMerica Corporation
3611 Queen Palm Drive
Tampa, FL 33619
Attention: ____________________
Facsimile: 313-623-1167
with copies to:
--------------------------------
--------------------------------
--------------------------------
or to such other or additional addresses as may be provided by either party from
time to time in the manner described above.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
15. BINDING ON SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
any and all successors, trustees, assignees, agents, heirs, executors,
administrators, personal representatives, and any other successor in interest of
the parties to this Agreement.
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<PAGE> 27
16. NON-ASSIGNABILITY
Neither this Agreement nor any of the duties or obligations of PROVIDER
hereunder shall be assigned or delegated by PROVIDER without prior written
consent of FACILITY.
17. INTEGRATION
This Agreement supersedes all previous agreements, oral or written,
between the parties and embodies the complete Agreement between the parties.
This Agreement may only be amended or modified by written agreement signed by
both parties.
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have entered into this Agreement as of the date first above
written.
FACILITY: *
-----------------------------------
d/b/a **
----------------------------
By:
--------------------------------
Title:
-----------------------------
PROVIDER: PHARMERICA CORPORATION
By:
--------------------------------
Title:
-----------------------------
- ------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
10
<PAGE> 28
EXHIBIT A
SCHEDULE OF RATES
11
<PAGE> 29
Exhibit to PPA
INTRAVENOUS THERAPY SERVICES AND PRODUCTS AGREEMENT
THIS INTRAVENOUS THERAPY SERVICES AND PRODUCTS AGREEMENT (the
"Agreement"), in accordance with the terms of that certain Preferred Provider
Agreement for Pharmaceutical and Related Services between Beverly Enterprises,
Inc. and PharMerica Corporation (the "PPA") is made effective this ____ day of
________________199___ by and between *_________________________ d/b/a
**____________________________, located at PharMerica Corporation (the
"FACILITY"), and ________________________, a Delaware corporation with its
principal place of business at _______________________________________________
d/b/a ___________________________________, duly licensed as a pharmacy in this
state, located at ______________________________________ ("PROVIDER"). In
consideration of the mutual promises set forth below in the body of this
Agreement, the parties agree as follows:
1. TERM
The term of this Agreement shall commence on ___________, 1997, and
shall continue in full force and effect for a period of five (5) years
thereafter unless terminated earlier pursuant to this Paragraph. This Agreement
shall be renewed at the end of the stated term by written agreement of both
parties in accordance with the PPA. This Agreement may, however, be terminated
immediately for cause upon the occurrence of any one of the following events:
(a) dissolution and/or bankruptcy of either party; ('))the making of a general
assignment for the benefit of creditors by either party; (c) after written
notice by Facility of a default by PROVIDER and a reasonable time, not to exceed
sixty (60) days for PROVIDER to cure such default, the failure of PROVIDER to
provide the health care products and/or services agreed to in this Agreement in
a manner reasonably satisfactory to FACILITY or that causes FACILITY to be out
of compliance with federal, state or local licensure or certification
requirements; or (d) PROVIDER's becoming insolvent or having a receiver
appointed because of insolvency.
"Infusion therapy services" in this Agreement means all drugs,
equipment and supplies needed to carry out a physician's order for intravenous
or continuous subcutaneous infusion therapy, with the assistance of a registered
pharmacist.
The parties agree that PROVIDER is to provide infusion therapy services
under the terms and conditions of this Agreement and in accordance with any
applicable requirements of Federal, State, or Local laws, rules, and/or
regulations, including provisions of the Omnibus Budget Reconciliation Acts
(OBRA) of 1987 and 1990. PROVIDER shall have the right to serve as FACILITY's
exclusive provider of such services subject to the right of patients, patients'
payors or insurers, and patients' physicians to choose another provider.
- --------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
<PAGE> 30
PROVIDER agrees to:
a. Supply and replenish a separate inflision therapy emergency
kit.
b. Label inflision therapy supplies in accordance with
Federal, State and local laws, rules and regulations.
c. Provide routine inlusion therapy services six (6) days a
week, and emergency inflision therapy services to FACILITY twenty-four (24)
hours per day, seven (7) days a week.
d. Provide routine inlusion therapy Policy and Procedure
manual.
e. Provide and maintain inlusion pumps as necessary for
inlusion services. All such pumps remain the property of the PROVIDER.
f. Maintain a clinical profile on each inflision therapy
patient and monitor for allergies, drug interaction, and other therapeutic
concerns on an ongoing basis.
g. Bill patients or third party payers for inlusion therapy
services provided, including drugs, solutions, supplies and inlusion pump use.
h. Provide to FACILITY a copy of all billed charges from
PROVIDER to payors other than the FACILITY for all residents of FACILITY.
FACILITY agrees to:
a. Provide proper billing information such as admission data,
source of payment status changes, and Medicaid information on. a prompt and
timely basis.
b. Designate the employee(s) responsible for implementing the
services contemplated in this Agreement who shall act as coordinator(s) with
PROVIDER.
2. SERVICES
Subject to the terms and conditions herein and in accordance with any
applicable federal, state or local laws, rule and/or regulations, PROVIDER
agrees to provide FACILITY with intravenous solutions, medications and related
services as are consistent with the FACILITY resident's plan of care and
according to physician orders and on an accurate and timely basis. Other
specific services to be provided by PROVIDER are set forth in Exhibit A, which
is attached to and incorporated by reference into this Agreement.
3. COMPENSATION
FACILITY agrees to pay PROVIDER for the intravenous therapy services
and products according to the Schedule of Rates or Methodology for Determining
Payment Rates set forth in Exhibit B, which is attached to and incorporated by
reference into this Agreement.
2
<PAGE> 31
PROVIDER will receive payment by one or more of the following methods:
(Both parties must initial the choice(s) selected).
_____ 3.1 PROVIDER will be compensated for intravenous therapy services and
products provided to FACILITY residents by directly billing the
resident, the resident's responsible party, Medicare, Medicaid, a
managed care organization or any other third party reimbursement
source (collectively referred to as the "Appropriate Parry").
PROVIDER will not look to FACILITY for payment, in whole or in
part. In the event, PROVIDER fails to receive payment in whole or
in part, from any Appropriate Payor for health care products
and/or related services provided to FACILITY residents, PROVIDER
will not look to FACILITY for payment, in whole or in part, and
PROVIDER will have no right of recovery against FACILITY.
Notwithstanding the foregoing, it is agreed that PROVIDER
reserves the right to discontinue the provision of intravenous
therapy services and products for nonpayment by or on behalf
of any patient or third party payer, upon not less than thirty
(30) days' notice, unless FACILITY elects prior to the end of
such thirty (30) day period to have PROVIDER bill FACILITY for
such services and products in the luture and to reimburse
PROVIDER for unpaid prior services and products billed to such
patient or third party payor.
_____ 3.2 Notwithstanding paragraph 3.1 above, FACILITY may agree to provide
PROVIDER's intravenous therapy services and products to certain
FACILITY residents where such services will be paid for as part
of a per diem, all-inclusive rate or other direct payment to
FACILITY by an Appropriate. Payor. Under such circumstances,
FACILITY will give PROVIDER written notice of those residents and
the services and/or products for which FACILITY has agreed to
receive direct payment prior to the provision of the services
and/or products to FACILITY resident(s). (In the absence of such
written notice from FACILITY to PROVIDER, PROVIDER will look only
to an Appropriate Payor, if any, for payment.) PROVIDER will then
submit to FACILITY on a monthly basis an invoice for those
services and/or products received by FACILITY residents in
accordance with the Schedule of Rates or Methodology for
Determining Payment Rates set forth in Exhibit B and which will
remain in effect for the term of this Agreement. In those
instances in which PROVIDER bills FACILITY for services or
products pursuant to this paragraph, PROVIDER shall bill FACILITY
on a weekly basis if FACILITY is on the A5400 dispensing system;
if FACILITY is not on such system, PROVIDER shall bill FACILITY
on a monthly basis. The invoice will reflect the services and/or
products received from the first day of the applicable billing
period to the last day of the applicable billing period and will
be submitted to FACILITY within ______ days of the end of the
applicable billing period. FACILITY agrees to pay PROVIDER within
sixty (60) days of receipt of PROVIDER's invoices. FACILITY shall
review each invoice and use its reasonable efforts to notify
PROVIDER of any credit adjustments determined by FACILITY to be
due FACILITY from PROVIDER on such invoice within four (4)
business days after receipt of PROVIDER's invoice if FACILITY is
on a weekly billing cycle and within fifteen (15) business days
if
3
<PAGE> 32
FACILITY is on a monthly billing cycle. PROVIDER shall
accordingly issue a credit in the amount of any such adjustment
on the invoice due in the next billing cycle after receipt by
PROVIDER of notice of such adjustment by FACILITY. If FACILITY
does not notify PROVIDER of adjustments within such applicable
four (4) or fifteen (15) business day period, PROVIDER shall
issue an appropriate credit in the amount of any such adjustment
on the next invoice after receipt of such notice of adjustment.
PROVIDER shall give FACILITY thirty (30) days' written notice
prior to changing FACILITY's applicable billing period under this
paragraph.
_____ 3.3 Notwithstanding paragraph 3.1 above, FACILITY may order or
request PROVIDER'S intravenous therapy services and products to
be provided directly to FACILITY (and not to or on behalf of a
particular resident) where such services and/or products will be
paid for directly by FACILITY. Under such circumstances FACILITY
will give PROVIDER written notice of those services and/or
products for which FACILITY will pay PROVIDER directly. PROVIDER
will submit to FACILITY on a monthly basis an invoice for such
services and/or products in accordance with the Schedule of Rates
or Methodology for Determining Payment Rates set out in Exhibit
B. In those instances in which PROVIDER bills FACILITY for
services or products pursuant to this paragraph, PROVIDER shall
bill FACILITY on a weekly basis if FACILITY is on the A5400
dispensing system; if FACILITY is not on such system, PROVIDER
shall bill FACILITY on a monthly basis. The invoice will reflect
the services and/or products received by FACILITY from the first
day of the applicable billing period to the last day of the
applicable billing period, will be in the form required by
FACILITY and will be submitted to FACILITY within days of the end
of the applicable billing period. FACILITY agrees to pay PROVIDER
within sixty (60) days of receipt of PROVIDER's invoices.
FACILITY shall review each invoice and use its reasonable efforts
to notify PROVIDER of any credit adjustments determined by
FACILITY to be due FACILITY from PROVIDER on such invoice within
four (4) business days after receipt of PROVIDER's invoice if
FACILITY is on a weekly billing cycle and within fifteen (15)
business days if FACILITY is on a monthly billing cycle. PROVIDER
shall accordingly issue a credit in the amount of any such
adjustment on the invoice due in the next billing cycle after
receipt by PROVIDER of notice of such adjustment by FACILITY. If
FACILITY does not notify PROVIDER of adjustments within such four
(4) or fifteen (15) business day period, PROVIDER shall issue an
appropriate credit in the amount of any such adjustment on the
next invoice after receipt of such notice of adjustment. PROVIDER
shall give FACILITY thirty (30) days' written notice prior to
changing FACILITY's applicable billing period under this
paragraph.
Except in the circumstances set out in paragraphs 3.2 and 3.3 above
where FACILITY has the obligation to provide PROVIDER with written notice of the
intravenous therapy services and products which will be provided by PROVIDER to
FACILITY or to certain FACILITY residents, PROVIDER will be solely responsible
for determining the Appropriate Payor for each FACILITY resident. FACILITY will
make reasonably available any information it may have regarding any FACILITY
resident's Appropriate Payor, provided that PROVIDER will have no recourse
against FACILITY in the event the information made available is inaccurate,
incomplete or misleading.
4
<PAGE> 33
4. CIVIL RIGHTS
PROVIDER will comply with Titles VI and VII of the Civil Rights Act of
1964, Sections 503 and 504 of the Rehabilitation Act of 1973, and all
requirements imposed by or pursuant to the regulations of the Department of
Health and Human Services issued pursuant to these Acts.
5. RECORDS
Pursuant to Section l395x(V)(l)(i) of Title 42 of the United States
Code, with respect to any services lurm shed under this Agreement, the value or
cost of which is more than Ten Thousand Dollars ($10,000) or more over a twelve
(12) month period, until the expiration of four (4) years after the termination
of this contract, PROVIDER shall make available promptly upon written request to
the Secretary of the United States Department of Health and Human Services, the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to verify the nature and extent to the
costs of the products and/or related services provided under this Agreement.
PROVIDER further agrees to provide promptly to FACILITY any records as may be
required under the Omnibus Budget Reconciliation Acts of 1987 and 1990.
PROVIDER further agrees that in the event PROVIDER carries out any of
its duties under this Agreement through a subcontract with the value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) year after the lurnishing of such,services under such subcontract, the
subcontractor shall make available promptly upon written request to the
Secretary of the United States Department of Health and Human Services, the
Comptroller General of the United States General Accounting Office or any of
their duly authorized representative, the subcontract and such books, documents
and records as are necessary to verify the nature and extent of such costs of
the products and/or related services provided under the subcontract.
PROVIDER agrees to save, indemnify and hold harmless FACILITY of and
from any and all liability, loss, costs and expenses incurred directly or
indirectly because of failure of PROVIDER to comply with the obligations set
forth above in paragraph 5 or for any inaccurate or fraudulent claims submitted
to FACILITY by PROVIDER for billing purposes.
6. CHANGE IN LAW OR REGULATION
a. If, during the term of this Agreement, there shall be (i) a
change in the Medicare or Medicaid statute, regulations, or general instructions
(or in the application thereof), or any governmental payor system, including but
not limited to the Veterans Administration ("VA"), or (ii) the adoption of new
legislation or regulations applicable to this Agreement (for purposes of this
Paragraph 6 (an "Affected Agreement", and together with any other similarly
affected agreement for pharmaceutical and/or related services between Beverly
Enterprises, Inc. and PharMerica Corporation or their respective subsidiaries or
Affiliates, the "Affected Agreements"), or (iii) a change in any other third
party reimbursement system, or (iv) the initiation of enforcement action with
respect to legislation, regulations, or instructions applicable to this
Agreement, any of which changes, legislation, regulations or action affects the
continuing legality of this Agreement or the
5
<PAGE> 34
ability of FACILITY to obtain reimbursement for the lull cost of any intravenous
therapy services and products (collectively, for purposes of this Paragraph 6,
the "Services") at the levels then in effect, as charged to FACILITY by
PROVIDER, FACILITY may, at any time within one year of the effective date as to
FACILITY, of any such changes, legislation, regulation or action, upon written
notice as provided herein, propose an amendment to this Agreement, modifying the
same to the minimum extent necessary to assure the continuing legality of this
Agreement or to eliminate the luture impediment or impairment to reimbursement.
For periods beginning January 1, 1998, in the event that reimbursement is denied
for the FACILITY covered by this Agreement for covered items or Services under
the Medicare program because PROVIDER's charges exceed the usual, customary and
reasonable charges for such Services or covered items, as evidenced by a Notice
of Medicare Reimbursement ("NPR"), FACILITY shall provide PROVIDER as promptly
as practicable with a copy of such NPR, and any change to this Agreement
effectuated for the purpose of obtaining reimbursement shall be made applicable
only for reimbursement periods subsequent to the period to which the NPR
related, for the remainder of the term of this Agreement. In the event that
PROVIDER is unable or unwilling to supply the items or Services at price levels
sufficient to assure such reimbursement, then FACILITY may, at its sole option,
elect to obtain such items or Services from other sources or to accept the
prices offered by PROVIDER.
b. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other third party
governmental payor reimburses providers of health care services such as
FACILITY for covered Services (hereinafter, the "Affected Services") shall be
changed by law or regulation, from an existing cost-based reimbursement system
to any other system, including but not limited to a prospective payment system,
under which FACILITY or its Affiliates (as hereinafter defined) is placed at
risk for lull reimbursement of the Affected Services covered by this Agreement,
then the parties agree that, at any time within one year of the effective date
as to FACILITY, of any such change, upon written notice of such change as
provided herein, they shall prospectively renegotiate the pricing terms with
respect to the Affected Services under this Agreement to reflect the impact of
such risk-based reimbursement for the remainder of the term of this Agreement
or, at their option, the parties may elect to negotiate a risk-based pricing
structure for this Agreement. In either event, the parties agree that they shall
negotiate in good faith to achieve a fair distribution of any adverse impact of
such change in the reimbursement system as it impacts the Affected Services. In
the event the parties are unable to reach agreement on modified pricing terms
with respect to Affected Service's (hereinafter, the "Adjusted Pricing
Structure"), FACILITY on written notice to PROVIDER may elect to take the
following procedures:
(1) FACILITY, acting alone if it has the only
Affected Agreement with Provider for similarly situated Services being provided
by PROVIDER, or in concert with any other Affiliates having Affected Agreements
with PROVIDER for similarly situated Services, may solicit proposals (each a
"Proposed Alternative Bid" and collectively, the "Proposed Alternative Bids")
from any other qualified pharmacy provider for it or them, as applicable, to
provide the Affected Services to it or them, as applicable, which are affected
by such changes in the reimbursement system (such facilities, whether one or
more, being referred to in this Paragraph 6 collectively as the "Affected
Facilities") during the remainder of the term of the Affected Agreement then in
effect As used herein, "qualified pharmacy provider" means a provider of
institutional pharmacy services which alone or with Affiliates has the
capability of servicing the FACILITY and at least 75% of the other Affected
Facilities then being served by PROVIDER.
6
<PAGE> 35
(2) Upon receipt of such Proposed Alternative Bids to
provide the Affected Services to the FACILITY and the other Affected Facilities,
if any, if all such Proposed Alternative Bids are equal to or greater than the
Adjusted Pricing Structure last offered by the PROVIDER, FACILITY shall
forthwith notify PROVIDER of that fact, and the Adjusted Pricing Structure last
offered by PROVIDER shall thereupon be in effect for the duration of the term of
this Agreement with respect to the Affected Services, subject to the continuing
application of all the other terms and conditions of this Agreement, including
the provisions of this Paragraph 6. If any of such Proposed Alternative Bids is
less than the Adjusted Pricing Structure last offered by PROVIDER for the
Affected Services, FACILITY shall provide such Proposed Alternative Bids to
PROVIDER within 30 days after receipt of the last of such Bid or Bids. PROVIDER
shall thereupon have the opportunity to revise its Adjusted Pricing Structure to
provide the Affected Services in the FACILITY and in all other similarly
situated Affected Facilities, if any, then being served by PROVIDER for the
duration of the term then in effect of this Agreement and such other Affected
Agreements, as applicable, to an amount (the "Average Adjusted Pricing
Structure") equal to (i) the average of the three lowest Proposed Alternative
Bids received by FACILITY with respect to such Affected Services, or (ii) if
there are less than three qualified pharmacy providers at the time which submit
Proposed Alternative Bids, the average of the two Proposed Alternative Bids
received by FACILITY with respect to the Affected Services, or (iii) if there
are less than two qualified pharmacy providers at the time which submit Proposed
Alternative Bids, the Proposed Alternative Bid received by FACILITY with respect
to the Affected Services.
(3) If PROVIDER elects to meet the Proposed
Alternative Bid or Bids, as applicable, with respect to the Affected Services,
as set forth in subparagraph (2) above, it shall notify FACILITY not less than
30 days after receipt of all the Proposed Alternative Bids by PROVIDER of
PROVIDER's election to continue to provide the Affected Services under the
Average Adjusted Pricing Structure to the Facility for the duration of the term
of this Agreement then in effect, subject to the continuing application of all
the other terms and conditions of this Agreement, including the provisions of
this Paragraph 6.
(4) If PROVIDER does not elect to provide the
Affected Services under the Average Adjusted Pricing Structure as hereinabove
set forth, then FACILITY may, at its sole option, elect to obtain such Affected
Services from any of the qualified pharmacy providers whose Proposed Bid is
equal to or less than the Average Adjusted Pricing Structure or accept the
Adjusted Pricing Structure last offered by PROVIDER for the duration of the term
of this Agreement then in effect.
c. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other governmental
third-party payor reimburses providers of health care services such as the
FACILITY for Affected Services shall be changed, by law or regulation, from an
existing cost-based reimbursement system to any other system, including but not
limited to a Prospective Payment System, under which FACILITY is required to
absorb, as part of an all-inclusive rate or payment, the cost of Affected
Services covered by this Agreement which were previously billed by PROVIDER
directly to Medicare, Medicaid or other governmental third-party payor, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect
7
<PAGE> 36
the impact of such risk-based reimbursement for the remainder of the term of
this Agreement, and this Agreement shall be amended to reflect the new prices
for those Affected Services. In the event the parties are unable to reach
agreement on modified pricing terms with respect to Affected Services, FACILITY
on written notice to PROVIDER may elect to follow the procedures set forth in
subparagraphs 6 b (1) through (4), inclusive, to determine the Adjusted Pricing
Structure for the Affected Services to be in effect with PROVIDER or other
qualifying pharmacy providers for the duration of the term of this Agreement
then in effect.
d. FACILITY shall have sole discretion as to any election to
appeal, settle or compromise the amounts denied, disallowed or recouped by
Medicare, Medicaid or any other third party reimbursement source.
7. QUALIFICATIONS
PROVIDER represents and warrants that PROVIDER, its employees and
agents have all the necessary qualifications, certifications and licenses
required under federal, state or local laws and regulations to provide the
intravenous therapy services and products under this Agreement. PROVIDER will
provide to FACILITY a copy of the appropriate certifications and/or licenses in
effect at the effective date of this Agreement and at each successive renewal.
8. INSURANCE AND INDEMNIFICATION
Subject to the minimum coverage requirements set forth below, PROVIDER
shall procure and maintain at all times throughout the term of this Agreement
such insurance as will fully protect PROVIDER from all acts, errors or omissions
while providing the intravenous therapy services and products under this
Agreement.
PROVIDER shall submit to FACILITY prior to the effective date of this
Agreement, a certificate of insurance issued by an insurer authorized to conduct
insurance business in this state and reasonably acceptable to FACILITY,
indicating that PROVIDER has complete liability insurance coverage, including
coverage for any acts of professional malpractice. Such insurance shall be in
amounts reasonably satisfactory to FACILITY or in amounts required by the laws
of this state, whichever is greater, but shall not be less than $1,000,000 per
injury or incident to persons and $3,000,000 aggregate per year and $100,000
each occurrence property damage coverage. Coverage in amounts less than stated
must be approved in writing in advance by FACILITY's Corporate Risk Management
Department. Said certificate shall provide that the insurer will not cancel said
policy of insurance without giving FACILITY thirty (30) days advance written
notice. Further, PROVIDER shall provide to FACILITY thirty (30) days advance
written notice (or as soon as practicable) as to any material restriction,
limitation, modification or revision to the coverage contemplated herein.
PROVIDER shall save, indemnify and hold FACILITY harmless of and from
any and all liability, loss, costs and expenses incurred directly or indirectly
from any acts, errors or omissions by PROVIDER, its agents, employees, invitees
from any cause arising from or relating to PROVIDER's performance under this
Agreement.
8
<PAGE> 37
Within the limits of its applicable insurance coverage and to the
extent not otherwise inconsistent with state law, FACILITY shall save, indemnify
and hold PROVIDER harmless of and from any and all liability, loss, costs and
expenses incurred directly or indirectly by FACILITY, its agents, employees or
invitees from any cause arising from or relating to FACILITY's performance under
this Agreement.
9. INDEPENDENT CONTRACTOR
This Agreement does not constitute hiring of PROVIDER as an employee of
FACILITY. It is the parties' intention that PROVIDER shall be an independent
contractor and not FACILITY's employee. PROVIDER shall retain discretion and
judgment regarding the manner and means of providing intravenous therapy
services and products to FACILITY subject to all applicable laws, regulations
and FACILITY's policies. FACILITY assumes professional and administrative
responsibility for the services rendered under this Agreement only to the extent
that FACILITY will assure itself that (1) PROVIDER and each of its employees,
agents and servants providing services under this Agreement are qualified to
render the services contracted for; and (2) PROVIDER is satisfying the
obligations set forth herein in a timely manner. This Agreement shall not be
construed as a partnership and FACILITY shall not be liable for any obligations
incurred by PROVIDER.
10. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
11. BINDING ON SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
any and all successors, trustees, assignees, agents, heirs, executors,
administrators, personal representatives, and any other successor in interest of
the parties to this Agreement.
12. CONFIDENTIALITY OF INFORMATION
In the course of the relationship established between PROVIDER and
FACILITY, certain confidential information about each party and/or its parent
organization may be disclosed to the other party. Such information includes,
without limitation, FACILITY resident names, medical records, business
information and similar information of any kind whatsoever (collectively
referred to as "Confidential Information"). PROVIDER and FACILITY shall hold
Confidential Information in the strictest confidence as fiduciaries and shall
not, voluntarily or involuntarily, sell, transfer, publish, disclose or
otherwise make available to others, any portion of the Confidential Information
or related materials without the express written consent of the other party
except as provided for under paragraph 5 herein or as required for the
performance of this Agreement. PROVIDER and FACILITY shall use their best
efforts to protect the Confidential Information consistent with the manner in
which they protect their most confidential business and client information.
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<PAGE> 38
13. ATTORNEY'S FEES
If suit is brought to enforce any of the terms or conditions of this
Agreement, the prevailing party shall be entitled to recover such sums as the
court may fix as costs and reasonable attorney's fees, in addition to any other
relief to which it may be entitled.
14. NOTICES
Any notice required to be provided to any party to this Agreement shall
be in writing and shall be considered effective three (3) days after the date of
deposit with the United States Postal Service by certified or registered mail,
first class postage prepaid, return receipt requested, and addressed to the
party as follows:
Any notice required to be provided to any party to this Agreement shall
be in writing and shall be considered effective three (3) days after the date of
deposit with the United States Postal Service by certified or registered mail,
first class postage prepaid, return receipt requested, or by facsimile
transmission (receipt confirmed) and addressed to the party as follows:
FACILITY:
----------------------------------
----------------------------------
----------------------------------
Attention:
-----------------------
and to: Beverly Enterprises, Inc.
5111 Rogers Ave., Suite 40-A
Fort Smith, AR 72919-1000
Attention: David R. Banks, Chairman of the Board
Facsimile: 501-452-6712
with copies to: Robert W. Pommerville, Esq.
Executive Vice President, Secretary and General Counsel
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Facsimile: 501452-3760
and
H. Watt Gregory, III, Esq.
Giroir, Gregory, Holmes & Hoover, PLC
111 Center Street - Suite 1900
Little Rock, AR 72201
Facsimile: 501-374-2330
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<PAGE> 39
PROVIDER: PharMerica Corporation
3611 Queen Palm Drive
Tampa, FL 33619
Attention:_____________________________
Facsimile: 313-623-1167
with copies to:
---------------------------------------
---------------------------------------
---------------------------------------
15. INTEGRATION
This Agreement supersedes all previous agreements, oral or written,
between the parties and embodies the complete Agreement between the parties.
This Agreement may only be amended or modified by written agreement signed by
both parties.
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have entered into this Agreement as of the date first above
written.
FACILITY: *
----------------------------------
d/b/a **
---------------------------
By:
-------------------------------
Title:
----------------------------
PROVIDER: PHARMERICA CORPORATION
By:
-------------------------------
Title:
-----------------------------
- -----------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
11
<PAGE> 40
EXHIBIT A
OTHER SPECIFIC SERVICES
12
<PAGE> 41
EXHIBIT B
SCHEDULE OF RATES OR METHODOLOGY FOR DETERMINING PAYMENT RATES
13
<PAGE> 42
Exhibit to PPA
HEALTH CARE PRODUCTS AND RELATED SERVICES AGREEMENT
THIS HEALTH CARE PRODUCTS AND RELATED SERVICES AGREEMENT (this
"Agreement"), in accordance with the terms of that certain Preferred Provider
Agreement for Pharmaceutical and Related Services between Beverly Enterprises,
Inc. and PharMerica Corporation (the "PPA") is made effective this ____ day of
_____________199__ by and between *_________________________ d/b/a
**____________________________, located at ______________________________ (the
"FACILITY"), and PharMerica Corporation, a Delaware corporation with its
principal place of business at ____________________________________ d/b/a
___________________________________, duly licensed as a pharmacy in this state,
located at ______________________________________ ("PROVIDER"). In consideration
of the mutual promises set forth below in the body of this Agreement, the
parties agree as follows:
1. TERM
The term of this Agreement shall commence on ___________, 1997, and
shall continue in full force and effect for a period of five (5) years
thereafter unless terminated earlier pursuant to this Paragraph. This Agreement
shall be renewed at the end of the stated term by written agreement of both
parties in accordance with the PPA. This Agreement may, however, be terminated
immediately for cause upon the occurrence of any one of the following events:
(a) dissolution and/or bankruptcy of either party; (b) the making of a general
assignment for the benefit of creditors by either party; (c) after written
notice by Facility of a default by PROVIDER and a reasonable time, not to exceed
sixty (60) days for PROVIDER to cure such default, the failure of PROVIDER to
provide the health care products and/or services agreed to in this Agreement in
a manner reasonably satisfactory to FACILITY or that causes FACILITY to be out
of compliance with federal, state or local licensure or certification
requirements; or (d) PROVIDER's becoming insolvent or having a receiver
appointed because of insolvency.
2. SERVICES
The parties agree that PROVIDER is to provide health care product
services under the terms and conditions of this Agreement and in accordance with
any applicable requirements of Federal, State or Local laws, rules and/or
regulations, including provisions of the Omnibus Budget Reconciliation Acts of
1987 and 1990. PROVIDER shall have the right to serve as FACILITY's exclusive
provider of the services specified therein as long as PROVIDER is not in breach
of this Agreement, subject to the rights of patients, patients' insurers or
payors and patients' physicians to select other providers.
- ------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
<PAGE> 43
PROVIDER agrees to:
a. Set up automatic shipments for items used by patients with
specific patient orders.
b. Adjust FACILITY's current inventory to a two-to three week
supply based on current usage.
c. Provide a complete procedural inservice to all FACILITY
staff involved with program.
d. Pay weekly delivery and postage charges.
e. Obtain Enteral Certification and/or diagnosis verifications
from the patient's physician.
f. Provide to FACILITY a copy of all billed charges from
PROVIDER to payors other than the FACILITY for all residents of FACILITY.
FACILITY agrees to:
a. Provide all requested patient billing information by
filling out Patient Information Form completely on each person using PROVIDER
and returning the forms within forty-eight (48) hours of receipt to PROVIDER.
The patient disclosure portion of the form must be signed by the patient or
authorized person.
b. Retain all administrative duties.
c. One of the following for Medicare Part A patients who also
qualify for Part B enteral program:
_________ FACILITY will bill Medicare Part A directly to its
intermediary. FACILITY will provide PROVIDER with a status report whenever
patient is eligible for Part A and pay PROVIDER for items used within that
period.
_________ PROVIDER will bill the enteral items to Part B carrier when
the item and the patient are qualified under Medicare prosthetic clause.
Notwithstanding the foregoing, it is agreed that PROVIDER reserves the
right to discontinue the provision of services for nonpayment by or on behalf of
any patient or third party payer, upon not less than thirty (30) days' notice,
unless FACILITY elects prior to the end of such thirty (30) day period to have
PROVIDER bill FACILITY for such services in the future and to reimburse PROVIDER
for unpaid prior services billed to such patient or third party payor.
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<PAGE> 44
3. COMPENSATION
PROVIDER will be compensated by FACILITY for services rendered from the
______ day of a calendar month to the ______ day of the calendar month ("BILLING
PERIOD") according to invoices submitted by PROVIDER to FACILITY in accordance
with the price list set forth in Exhibit A attached hereto. FACILITY agrees to
pay for all health care products and supplies furnished by PROVIDER to FACILITY
for all floor stock (HOUSE SUPPLY), including non-Part B covered items and/or
residents, inventory lost or wasted, any co-payment and/or deductible, if
applicable, within sixty (60) days following the date of which PROVIDER's
invoices are received by FACILITY. FACILITY shall review each invoice and use
its reasonable efforts to notify PROVIDER of any credit adjustments determined
by FACILITY to be due FACILITY from PROVIDER on such invoice within four (4)
business days after receipt of PROVIDER's invoice if FACILITY is on a weekly
billing cycle and within fifteen (15) business days if FACILITY is on a monthly
billing cycle. PROVIDER shall accordingly issue a credit in the amount of any
such adjustment on the invoice due in the next billing cycle after receipt by
PROVIDER of notice of such adjustment by FACILITY. If FACILITY does not notify
PROVIDER of adjustments within such applicable four (4) or fifteen (15) business
day period, PROVIDER shall issue an appropriate credit in the amount of any such
adjustment on the next invoice after receipt of such notice of adjustment.
In the event monies remain due and unpaid to PROVIDER from FACILITY for
more than thirty (30) days after they become due, such amount shall bear
interest at the rate of eighteen percent (18%) per annum (or the maximum amount
permitted by law, whichever is less) from the due date of payment.
4. CIVIL RIGHTS
PROVIDER will comply with Titles VI and VII of the Civil Rights Act of
1964, Sections 503 and 504 of the Rehabilitation Act of 1973, and all
requirements imposed by or pursuant to the regulations of the Department of
Health and Human Services issued pursuant to these Acts.
5. RECORDS
Pursuant to Section 1395x(V)(l)(i) of Title 42 of the United States
Code, with respect to any services furnished under this Agreement, the value or
cost of which is more than Ten Thousand Dollars ($10,000) or more over a twelve
(12) month period, until the expiration of four (4) years after the termination
of this contract, PROVIDER shall make available promptly upon written request to
the Secretary of the United States Department of Health and Human Services, the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to verify the nature and extent to the
costs of the products and/or related services provided under this Agreement.
PROVIDER further agrees to provide promptly to FACILITY any records as may be
required under the Omnibus Budget Reconciliation Acts of 1987 and 1990.
PROVIDER further agrees that in the event PROVIDER carries out any of
its duties under this Agreement through a subcontract with the value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until
3
<PAGE> 45
the expiration of four (4) years after the furnishing of such services under
such subcontract, the subcontractor shall make available promptly upon written
request to the Secretary of the United States Department of Health and Human
Services, the Comptroller General of the United States General Accounting Office
or any of their duly authorized representative, the subcontract and such books,
documents and records as are necessary to verify the nature and extent of such
costs of the products and/or related services provided under the subcontract.
PROVIDER agrees to save, indemnify and hold harmless FACILITY of and
from any and all liability, loss, costs and expenses incurred directly or
indirectly because of failure of PROVIDER to comply with the obligations set
forth above in paragraph 5 or for any inaccurate or fraudulent claims submitted
to FACILITY by PROVIDER for billing purposes.
6. CHANGE IN LAW OR REGULATION
a. If, during the term of this Agreement, there shall be (i) a
change in the Medicare or Medicaid statute, regulations, or general instructions
(or in the application thereof), or any governmental payor system, including but
not limited to the Veterans Administration ("VA"), or (ii) the adoption of new
legislation or regulations applicable to this Agreement (for purposes of this
Paragraph 6 (an "Affected Agreement", and together with any other similarly
affected agreement for pharmaceutical and/or related services between Beverly
Enterprises, Inc. and PharMerica Corporation or their respective subsidiaries or
Affiliates, the "Affected Agreements"), or (iii) a change in any other third
party reimbursement system, or (iv) the initiation of enforcement action with
respect to legislation, regulations, or instructions applicable to this
Agreement, any of which changes, legislation, regulations or action affects the
continuing legality of this Agreement or the ability of FACILITY to obtain
reimbursement for the full cost of any health care products and services
(collectively, for purposes of this Paragraph 6, the "Services") at the levels
then in effect, as charged to FACILITY by PROVIDER, FACILITY may, at any time
within one year of the effective date as to FACILITY, of any such changes,
legislation, regulation or action, upon written notice as provided herein,
propose an amendment to this Agreement, modifying the same to the minimum extent
necessary to assure the continuing legality of this Agreement or to eliminate
the future impediment or impairment to reimbursement. For periods beginning
January 1, 1998, in the event that reimbursement is denied for the FACILITY
covered by this Agreement for covered items or Services under the Medicare
program because PROVIDER's charges exceed the usual, customary and reasonable
charges for such Services or covered items, as evidenced by a Notice of Medicare
Reimbursement ("NPR"), FACILITY shall provide PROVIDER as promptly as
practicable with a copy of such NPR, and any change to this Agreement
effectuated for the purpose of obtaining reimbursement shall be made applicable
only for reimbursement periods subsequent to the period to which the NPR
related, for the remainder of the term of this Agreement. In the event that
PROVIDER is unable or unwilling to supply the items or Services at price levels
sufficient to assure such reimbursement, then FACILITY may, at its sole option,
elect to obtain such items or Services from other sources or to accept the
prices offered by PROVIDER.
b. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other third party
governmental payor reimburses providers of health care services such as FACILITY
for covered Services (hereinafter, the "Affected Services") shall be changed by
law or regulation, from an existing cost-based reimbursement system to any
4
<PAGE> 46
other system, including but not limited to a prospective payment system, under
which FACILITY or its Affiliates (as hereinafter defined) is placed at risk for
full reimbursement of the Affected Services covered by this Agreement, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect the impact of such
risk-based reimbursement for the remainder of the term of this Agreement or, at
their option, the parties may elect to negotiate a risk-based pricing structure
for this Agreement. In either event, the parties agree that they shall negotiate
in good faith to achieve a fair distribution of any adverse impact of such
change in the reimbursement system as it impacts the Affected Services. In the
event the parties are unable to reach agreement on modified pricing terms with
respect to Affected Services (hereinafter, the "Adjusted Pricing Structure"),
FACILITY on written notice to PROVIDER may elect to take the following
procedures:
(1) FACILITY, acting alone if it has the only
Affected Agreement with Provider for similarly situated Services being provided
by PROVIDER, or in concert with any other Affiliates having Affected Agreements
with PROVIDER for similarly situated Services, may solicit proposals (each a
"Proposed Alternative Bid" and collectively, the "Proposed Alternative Bids")
from any other qualified pharmacy provider for it or them, as applicable, to
provide the Affected Services to it or them, as applicable, which are affected
by such changes in the reimbursement system (such facilities, whether one or
more, being referred to in this Paragraph 6 collectively as the "Affected
Facilities") during the remainder of the term of the Affected Agreement then in
effect. As used herein, "qualified pharmacy provider" means a provider of
institutional pharmacy services which alone or with Affiliates has the
capability of servicing the FACILITY and at least 75% of the other Affected
Facilities then being served by PROVIDER.
(2) Upon receipt of such Proposed Alternative Bids
to provide the Affected Services to the FACILITY and the other Affected
Facilities, if any, if all such Proposed Alternative Bids are equal to or
greater than the Adjusted Pricing Structure last offered by the PROVIDER,
FACILITY shall forthwith notify PROVIDER of that fact, and the Adjusted Pricing
Structure last offered by PROVIDER shall thereupon be in effect for the duration
of the term of this Agreement with respect to the Affected Services, subject to
the continuing application of all the other terms and conditions of this
Agreement, including the provisions of this Paragraph 6. If any of such Proposed
Alternative Bids is less than the Adjusted Pricing Structure last offered by
PROVIDER for the Affected Services, FACILITY shall provide such Proposed
Alternative Bids to PROVIDER within 30 days after receipt of the last of such
Bid or Bids. PROVIDER shall thereupon have the opportunity to revise its
Adjusted Pricing Structure to provide the Affected Services in the FACILITY and
in all other similarly situated Affected Facilities, if any, then being served
by PROVIDER for the duration of the term then in effect of this Agreement and
such other Affected Agreements, as applicable, to an amount (the "Average
Adjusted Pricing Structure") equal to (i) the average of the three lowest
Proposed Alternative Bids received by FACILITY with respect to such Affected
Services, or (ii) if there are less than three qualified pharmacy providers at
the time which submit Proposed Alternative Bids, the average of the two Proposed
Alternative Bids received by FACILITY with respect to the Affected Services, or
(iii) if there are less than two qualified pharmacy providers at the time which
submit Proposed Alternative Bids, the Proposed Alternative Bid received by
FACILITY with respect to the Affected Services.
5
<PAGE> 47
(3) If PROVIDER elects to meet the Proposed
Alternative Bid or Bids, as applicable, with respect to the Affected Services,
as set forth in subparagraph (2) above, it shall notify FACILITY not less than
30 days after receipt of all the Proposed Alternative Bids by PROVIDER of
PROVIDER's election to continue to provide the Affected Services under the
Average Adjusted Pricing Structure to the Facility for the duration of the term
of this Agreement then in effect, subject to the continuing application of all
the other terms and conditions of this Agreement, including the provisions of
this Paragraph 6.
(4) If PROVIDER does not elect to provide the
Affected Services under the Average Adjusted Pricing Structure as hereinabove
set forth, then FACILITY may, at its sole option, elect to obtain such Affected
Services from any of the qualified pharmacy providers whose Proposed Bid is
equal to or less than the Average Adjusted Pricing Structure or accept the
Adjusted Pricing Structure last offered by PROVIDER for the duration of the term
of this Agreement then in effect.
c. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other governmental
third-party payor reimburses providers of health care services such as the
FACILITY for Affected Services shall be changed, by law or regulation, from an
existing cost-based reimbursement system to any other system, including but not
limited to a Prospective Payment System, under which FACILITY is required to
absorb, as part of an all-inclusive rate or payment, the cost of Affected
Services covered by this Agreement which were previously billed by PROVIDER
directly to Medicare, Medicaid or other governmental third-party payor, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect the impact of such
risk-based reimbursement for the remainder of the term of this Agreement, and
this Agreement shall be amended to reflect the new prices for those Affected
Services. In the event the parties are unable to reach agreement on modified
pricing terms with respect to Affected Services, FACILITY on written notice to
PROVIDER may elect to follow the procedures set forth in subparagraphs 6b (1)
through (4), inclusive, to determine the Adjusted Pricing Structure for the
Affected Services to be in effect with PROVIDER or other qualifying pharmacy
providers for the duration of the term of this Agreement then in effect.
d. FACILITY shall have sole discretion as to any election to
appeal, settle or compromise the amounts denied, disallowed or recouped by
Medicare, Medicaid or any other third party reimbursement source.
7. QUALIFICATIONS
PROVIDER represents and warrants that PROVIDER, its employees and
agents have all the necessary qualifications, certifications and licenses
required under federal, state pr local laws and regulations to provide the
health care products and/or related services under this Agreement. PROVIDER will
provide to FACILITY a copy of the appropriate certifications and/or licenses in
effect at the effective date of this Agreement and at each successive renewal.
6
<PAGE> 48
8. INSURANCE AND INDEMNIFICATION
Subject to the minimum coverage requirements set forth below, PROVIDER
shall procure and maintain at all times throughout the term of this Agreement
such insurance as will fully protect PROVIDER from all acts, errors or omissions
while providing the products and/or related services under this Agreement.
PROVIDER shall submit to FACILITY prior to the effective date of this
Agreement, a certificate of insurance issued by an insurer authorized to conduct
insurance business in this state and reasonably acceptable to FACILITY,
indicating that PROVIDER has complete liability insurance coverage, including
coverage for any acts of professional malpractice. Such insurance shall be in
amounts reasonably satisfactory to FACILITY or in amounts required by the laws
of this state, whichever is greater, but shall not be less than $1,000,000 per
injury or incident to persons and $3,000,000 aggregate per year and $100,000
each occurrence property damage coverage. Coverage in amounts less than stated
must be approved in writing in advance by FACILITY's Corporate Risk Management
Department. Said certificate shall provide that the insurer will not cancel said
policy of insurance without giving FACILITY thirty (30) days advance written
notice. Further, PROVIDER shall provide to FACILITY thirty (30) days advance
written notice (or as soon as practicable) as to any material restriction,
limitation, modification or revision to the coverage contemplated herein.
PROVIDER shall save, indemnify and hold FACILITY harmless of and from
any and all liability, loss, costs and expenses incurred directly or indirectly
from any acts, errors or omissions by PROVIDER, its agents, employees, invitees
from any cause arising from or relating to PROVIDER'S performance under this
Agreement.
Within the limits of its applicable insurance coverage and to the
extent not otherwise inconsistent with state law, FACILITY shall save, indemnify
and hold PROVIDER harmless of and from any and all liability, loss, costs and
expenses incurred directly or indirectly by FACILITY, its agents, employees or
invitees from any cause arising from or relating to FACILITY's performance under
this Agreement.
9. INDEPENDENT CONTRACTOR
This Agreement does not constitute hiring of PROVIDER as an employee of
FACILITY. It is the parties' intention that PROVIDER shall be an independent
contractor and not FACILITY's employee. PROVIDER shall retain discretion and
judgment regarding the manner and means of providing health care products and/or
related services to FACILITY subject to all applicable laws, regulations and
FACILITY's policies. FACILITY assumes professional and administrative
responsibility for the services rendered under this Agreement only to the extent
that FACILITY will assure itself that (1) PROVIDER and each of its employees,
agents and servants providing services under this Agreement are qualified to
render the services contracted for; and (2) PROVIDER is satisfying the
obligations set forth herein in a timely manner. This Agreement shall not be
construed as a partnership and FACILITY shall not be liable for any obligations
incurred by PROVIDER.
7
<PAGE> 49
10. CONFIDENTIALITY OF INFORMATION
In the course of the relationship established between PROVIDER and
FACILITY, certain confidential information about each party and/or its parent
organization may be disclosed to the other party. Such information includes,
without limitation, FACILITY resident names, medical records, business
information and similar information of any kind whatsoever (collectively
referred to as "Confidential Information"). PROVIDER and FACILITY shall hold
Confidential Information in the strictest confidence as fiduciaries and shall
not, voluntarily or involuntarily, sell, transfer, publish, disclose or
otherwise make available to others, any portion of the Confidential Information
or related materials without the express written consent of the other party
except as provided for under paragraph 5 herein and except as required for the
performance of their duties under this Agreement PROVIDER and FACILITY shall use
their best efforts to protect the Confidential Information consistent with the
manner in which they protect their most confidential business and client
information.
11. ATTORNEY'S FEES
If suit is brought to enforce any of the terms or conditions of this
Agreement, the prevailing party shall be entitled to recover such sums as the
court may fix as costs and reasonable attorney's fees, in addition to any other
relief to which it may be entitled.
12. NOTICES
Any notice required to be provided to any party to this Agreement shall
be in writing and shall be considered effective three (3) days after the date of
deposit with the United States Postal Service by certified or registered mail,
first class postage prepaid, return receipt requested, or by facsimile
transmission (receipt confirmed) and addressed to the party as follows:
FACILITY:
-------------------------------------
-------------------------------------
-------------------------------------
Attention:
--------------------------
and to: Beverly Enterprises, Inc.
5111 Rogers Ave., Suite 40-A
Fort Smith, AR 72919-1000
Attention: David R. Banks, Chairman of the Board
Facsimile: 501-452-6712
with copies to: Robert W. Pommerville, Esq.
Executive Vice President, Secretary and General
Counsel
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Facsimile: 501452-3760
8
<PAGE> 50
and
H. Watt Gregory, III, Esq.
Giroir, Gregory, Holmes & Hoover, PLC
111 Center Street - Suite 1900
Little Rock, AR 72201
Facsimile: 501-374-2330
PROVIDER: PharMerica Corporation
3611 Queen Palm Drive
Tampa, FL 33619
Attention:___________________________
Facsimile: 313-623-1167
with copies to:
-------------------------------------
-------------------------------------
-------------------------------------
or to such other or additional addresses as may be provided by either party from
time to time in the manner described above.
13. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the
laws of the State of Delaware.
14. BINDING ON SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
any and all successors, trustees, assignees, agents, heirs, executors,
administrators, personal representatives and any other successor in interest of
the parties to this Agreement
15. INTEGRATION
This Agreement supersedes all previous agreements, oral or written,
between the parties and embodies the complete Agreement between the parties.
This Agreement may only be amended or modified by written agreement signed by
both parties.
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<PAGE> 51
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have entered into this Agreement as of the date first above
written.
FACILITY: *
---------------------------------
d/b/a **
--------------------------
By:
------------------------------
Title:
----------------------------
PROVIDER: PHARMERICA CORPORATION
By:
------------------------------
Title:
---------------------------
- -----------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
10
<PAGE> 52
EXHIBIT A
SCHEDULE OF RATES
11
<PAGE> 53
Exhibit to PPA
PHARMACEUTICAL SERVICES AGREEMENT
THIS PHARMACEUTICAL SERVICES AGREEMENT (the "Agreement"), in accordance
with the terms of that certain Preferred Provider Agreement for Pharmaceutical
and Related Services between Beverly Enterprises, Inc. and PharMerica
Corporation (the "PPA") is made effective this ____ day of ________________
199___ by and between *_______________________________ d/b/a
**________________________________, located at _________________________________
(the "FACILITY"), and PharMerica Corporation, a Delaware corporation which
operates a licensed pharmacy in this state, located at ________________________
(the "PHARMACY"). In consideration of the mutual promises set forth below in the
body of this Agreement, the parties agree as follows:
1. TERM
The term of this Agreement shall commence on ___________, 1997, and
shall continue in full force and effect for a period of five (5) years
thereafter. This Agreement shall be renewed at the end of the initial term by
written agreement of both parties in accordance with the terms of the PPA. This
Agreement, may, however, be terminated immediately for cause upon the occurrence
of one of the following events: (a) dissolution and/or bankruptcy of either
patty; (b) the making of a general assignment for the benefit of creditors by
either party, (c) after written notice by Facility of a default by PHARMACY and
a reasonable time, not to exceed sixty (60) days for PHARMACY to cure such
default, the failure of PHARMACY to provide the services agreed to in this
Agreement in a manner not reasonably satisfactory to FACILITY or that causes
FACILITY to be out of compliance with federal, state or local licensure and/or
certification requirements; or (d) PHARMACY's becoming insolvent or having a
receiver appointed because of insolvency.
2. PHARMACEUTICAL SERVICES
PHARMACY shall provide pharmaceutical services under the terms and
conditions of this Agreement and in accordance with any applicable requirements
of federal, state or local laws, rules and/or regulations, including provisions
of the Omnibus Budget Reconciliation Acts (OBRA) of 1987 and 1990. PHARMACY
shall have the right to serve as FACILITY's exclusive PHARMACY subject to the
rights of patients, patients' insurers or payors, and patients' physicians to
choose another PHARMACY.
PHARMACY agrees to:
a. Supply and replenish emergency drug kits in conformance
with the policies and procedures of FACILITY.
- -------------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
<PAGE> 54
b. Label all medications in accordance with Federal, State and
Local laws, regulations and rules.
c. Provide routine pharmaceutical services to FACILITY six (6)
days per week.
d. Provide emergency services to FACILITY twenty-four (24)
hours per day, seven (7) days per week.
e. Provide to FACILITY a copy of all billed charges from
PHARMACY to payors other than the FACILITY for all residents of FACILITY.
f. Provide medication carts for a mobile medication system.
(See Paragraph 9.) The carts shall remain the property of PHARMACY.
FACILITY agrees to:
a. Provide proper billing information such as admission data,
source of payment status changes, and Medicaid information on a prompt and
timely basis.
b. Designate the employee(s) responsible for implementing the
services contemplated in this Agreement who shall act as coordinator(s) with
PHARMACY.
3. COMPENSATION
PHARMACY and FACILITY shall agree to a Schedule of Rates or a
Methodology for Determining Payment Rates prior to the effective date of this
Agreement. Such Schedule of Rates or Methodology for Determining Payment Rates
shall be attached to and incorporated by reference into this Agreement as
Exhibit A.
PHARMACY will receive payment by one or more of the following methods:
(Both parties must initial the choice(s) selected).
_____ 3.1 PHARMACY will be compensated for services rendered to or on
behalf of FACILITY residents by directly billing the resident,
the resident's responsible party, Medicare, Medicaid, a managed
care organization or any other third party reimbursement source
(collectively referred to as the "Appropriate Payor"). PHARMACY
will not look to FACILITY for payment, in whole or in part, for
service or medications to FACILITY residents. In the event
PHARMACY fails to receive payment in whole or in part, from any
Appropriate Payor for a service or medication provided to or on
behalf of a FACILITY resident, PHARMACY will not look to FACILITY
for payment, in whole or in part, and PHARMACY will have no right
of recovery against FACILITY. Notwithstanding the foregoing, it
is agreed that PHARMACY reserves the right to discontinue the
provision of services for nonpayment by or on behalf of any
patient or third party payer, upon not less than thirty (30)
days' notice, unless FACILITY elects prior to the end of such
thirty (30) day period to have PHARMACY bill FACILITY for such
services in the future and
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<PAGE> 55
to reimburse PHARMACY for unpaid prior services billed to such
patient or third party payor.
_____ 3.2 Notwithstanding paragraph 3.1 above, FACILITY may agree to
provide PHARMACY's services to certain FACILITY residents where
such services will be paid for as part of a per diem,
all-inclusive rate or other direct payment to FACILITY by an
Appropriate Payor. Under such circumstances, FACILITY will give
PHARMACY written notice of those residents and services for which
FACILITY has agreed to receive direct payment prior to the
provision of services to FACILITY resident(s). (In the absence of
such written notice from FACILITY to PHARMACY, PHARMACY will look
only to an Appropriate Payor, if any, for payment) PHARMACY will
then submit to FACILITY on a monthly basis an invoice for those
services to FACILITY residents in accordance with the Schedule of
Rates or the Methodology for Determining Payment Rates agreed to
by FACILITY and PHARMACY prior to the effective date of this
Agreement. The Schedule of Rates or Methodology for Determining
Payment Rates is attached as Exhibit A and incorporated by
reference into this Agreement and will remain in effect for the
term of the Agreement. In those instances in which PROVIDER bills
FACILITY for services or products pursuant to this paragraph,
PROVIDER shall bill FACILITY on a weekly basis if FACILITY is on
the A5400 dispensing system; if FACILITY is not on such system,
PROVIDER shall bill FACILITY on a monthly basis. The invoice will
reflect services rendered from the first day of the applicable
billing period to the last day of the applicable billing period,
will be in the form required by FACILITY and will be submitted to
FACILITY within days of the end of the applicable billing period.
FACILITY agrees to pay PHARMACY within sixty (60) days of receipt
of PHARMACY's invoice. FACILITY shall review each invoice and use
its reasonable efforts to notify PROVIDER of any credit
adjustments determined by FACILITY to be due FACILITY from
PROVIDER on such invoice within four (4) business days after
receipt of PROVIDER's invoice if FACILITY is on a weekly billing
cycle and within fifteen (15) business days if FACILITY is on a
monthly billing cycle. PROVIDER shall accordingly issue a credit
in the amount of any such adjustment on the invoice due in the
next billing cycle after receipt by PROVIDER of notice of such
adjustment by FACILITY. If FACILITY does not notify PROVIDER of
adjustments within such four (4) or fifteen (15) business day
period, PROVIDER shall issue an appropriate credit in the amount
of any such adjustment on the next invoice after receipt of such
notice of adjustment. PROVIDER shall give FACILITY thirty (30)
days' written notice prior to changing FACILITY's applicable
hilling period under this paragraph.
_____ 3.3 Notwithstanding paragraph 3.1 above, FACILITY may order or
request PHARMACY's services to be provided directly to FACILITY
(and not to or on behalf of a particular resident) where such
services will be paid for directly by FACILITY. Under such
circumstances, FACILITY will give PHARMACY written notice of
those services for which FACILITY will pay PHARMACY directly
prior to the provision of services to FACILITY. PHARMACY will
submit to FACILITY
3
<PAGE> 56
on a monthly basis an invoice for such services in accordance
with the Schedule of Rates or Methodology for Determining Payment
Rates agreed to by FACILITY and PHARMACY prior to the effective
date of this Agreement and attached as Exhibit A. The Schedule of
Rates or the Methodology for Determining Payment Rates will be
attached to and incorporated by reference into this Agreement. In
those instances in which PROVIDER bills FACILITY for services or
products pursuant to this paragraph, PROVIDER shall bill FACILITY
on a weekly basis if FACILITY is on the A5400 dispensing system;
if FACILITY is not on such system, PROVIDER shall bill FACILITY
on a monthly basis. The invoice will reflect the services
rendered from the first day of the applicable billing period to
the last day of the applicable billing period, will be in the
form required by FACILITY and will be submitted to FACILITY
within _____ days of the end of the applicable billing period.
FACILITY agrees to pay PHARMACY within sixty (60) days of receipt
of PHARMACY's invoices. FACILITY shall review each invoice and
use its reasonable efforts to notify PROVIDER of any credit
adjustments determined by FACILITY to be due FACILITY from
PROVIDER on such invoice within four (4) business days after
receipt of PROVIDER's invoice if FACILITY is on a weekly billing
cycle and within fifteen (15) business days if FACILITY is on a
monthly billing cycle. PROVIDER shall accordingly issue a credit
in the amount of any such adjustment on the invoice due in the
next billing cycle after receipt by PROVIDER of notice of such
adjustment by FACILITY. If FACILITY does not notify PROVIDER of
adjustments within such applicable four (4) or fifteen (15)
business day period, PROVIDER shall issue an appropriate credit
in the amount of any such adjustment on the next invoice after
receipt of such notice of adjustment. PROVIDER shall give
FACILITY thirty (30) days' written notice prior to changing
FACILITY's applicable billing period under this paragraph.
Except in the circumstances set out in paragraphs 3.2 and 3.3 above
where FACILITY has the obligation to provide PHARMACY with written notice of
services being provided by PHARMACY to FACILITY or to certain FACILITY
residents, PHARMACY will be solely responsible for determining the Appropriate
Payor for each FACILITY resident. FACILITY will make reasonably available any
information it may have regarding any FACILITY resident's Appropriate Payor,
provided that PHARMACY will have no recourse against FACILITY in the event the
information made available by FACILITY to PHARMACY is inaccurate, incomplete or
misleading.
4. CIVIL RIGHTS
PHARMACY shall comply with Titles VI and VII of the Civil Rights Act of
1964, Sections 503 and 504 of the Rehabilitation Act of 1973, and all
requirements imposed by or pursuant to the regulations of the Department of
Health and Human Services issued pursuant to these Acts.
5. RECORDS
Pursuant to Section 1395x(V)(1)(i) of Title 42 of the United States
Code, with respect to any services furnished under this Agreement, the value' or
cost of which is Ten Thousand Dollars
4
<PAGE> 57
($10,000) or more over a twelve (12) month period, until the expiration of four
(4) years after the termination of this contract, PHARMACY shall make available
promptly upon written request to the Secretary of the United States Department
of Health and Human Services, the Comptroller General of the United States
General Accounting Office, or any of their duly authorized representatives, a
copy of this Agreement and such books, documents and records as are necessary to
verify the nature and extent of the costs of the services provided under this
Agreement. PHARMACY further agrees to provide promptly to FACILITY any records
as may be required under the Omnibus Budget Reconciliation Acts of 1987 and
1990.
PHARMACY further agrees that in the event PHARMACY carries out any of
its duties under this Agreement through a subcontract with a value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services under such subcontract, the
subcontractor shall make available promptly upon written request to the
Secretary of the United States Department of Health and Human Services, the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, the subcontract and such books, documents
and records as are necessary to verify the nature and extent of such costs.
PHARMACY agrees to save, indemnify and hold harmless FACILITY of and
from any and all liability, loss, costs and expenses incurred directly or
indirectly because of failure of PHARMACY to comply with the obligations set
forth above in paragraphs. or for any inaccurate or fraudulent claims submitted
to FACILITY by PHARMACY for billing purposes.
6. CHANGE IN LAW OR REGULATION
a. If, during the term of this Agreement, there shall be (i) a
change in the Medicare or Medicaid statute, regulations, or general instructions
(or in the application thereof), or any governmental payor system, including but
not limited to the Veterans Administration ("VA"), or (ii) the adoption of new
legislation or regulations applicable to this Agreement (for purposes of this
Paragraph 6 (an "Affected Agreement", and together with any other similarly
affected agreement for pharmaceutical and/or related services between Beverly
Enterprises, Inc. and PharMerica Corporation or their respective subsidiaries or
Affiliates, the "Affected Agreements"), or (iii) a change in any other third
party reimbursement system, or (iv) the initiation of enforcement action with
respect to legislation, regulations, or instructions applicable to this
Agreement, any of which changes, legislation, regulations or action affects the
continuing legality of this Agreement or the ability of FACILITY to obtain
reimbursement for the full cost of any pharmacy services and products
(collectively, for purposes of this Paragraph 6, the "Services") at the levels
then in effect, as charged to FACILITY by PROVIDER, FACILITY may, at any time
within one year of the effective date as to FACILITY, of any such changes,
legislation, regulation or action, upon written notice as provided herein,
propose an amendment to this Agreement, modifying the same to the minimum extent
necessary to assure the continuing legality of this Agreement or to eliminate
the future impediment or impairment to reimbursement. For periods beginning
January 1, 1998, in the event that reimbursement is denied for the FACILITY
covered by this Agreement for covered items or Services under the Medicare
program because PROVIDER'S charges exceed the usual, customary and reasonable
charges for such Services or covered items, as evidenced by a Notice of Medicare
Reimbursement ("NPR"), FACILITY shall provide PROVIDER as promptly as
practicable with a
5
<PAGE> 58
copy of such NPR, and any change to this Agreement effectuated for the purpose
of obtaining reimbursement shall be made applicable only for reimbursement
periods subsequent to the period to which the NPR related, for the remainder of
the term of this Agreement. In the event that PROVIDER is unable or unwilling to
supply the items or Services at price levels sufficient to assure such
reimbursement, then FACILITY may, at its sole option, elect to obtain such items
or Services from other sources or to accept the prices offered by PROVIDER.
b. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other third party
governmental payor reimburses providers of health care services such as FACILITY
for covered Services (hereinafter, the "Affected Services") shall be changed by
law or regulation, from an existing cost-based reimbursement system to any other
system, including but not limited to a prospective payment system, under which
FACILITY or its Affiliates (as hereinafter defined) is placed at risk for full
reimbursement of the Affected Services covered by this Agreement, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect the impact of such
risk-based reimbursement for the remainder of the term of this Agreement or, at
their option, the parties may elect to negotiate a risk-based pricing structure
for this Agreement. In either event, the parties agree that they shall negotiate
in good faith to achieve a fair distribution of any adverse impact of such
change in the reimbursement system as it impacts the Affected Services. In the
event the parties are unable to reach agreement on modified pricing terms with
respect to Affected Services (hereinafter, the "Adjusted Pricing Structure"),
FACILITY on written notice to PROVIDER may elect to take the following
procedures:
(1) FACILITY, acting alone if it has the only
Affected Agreement with Provider for similarly situated Services being provided
by PROVIDER, or in concert with any other Affiliates having Affected Agreements
with PROVIDER for similarly situated Services, may solicit proposals (each a
"Proposed Alternative Bid" and collectively, the "Proposed Alternative Bids")
from any other qualified pharmacy provider for it or them, as applicable, to
provide the Affected Services to it or them, as applicable, which are affected
by such changes in the reimbursement system (such facilities, whether one or
more, being referred to in this Paragraph 6 collectively as the "Affected
Facilities") during the remainder of the term of the Affected Agreement then in
effect. As used herein, "qualified pharmacy provider" means a provider of
institutional pharmacy services which alone or with Affiliates has the
capability of servicing the FACILITY and at least 75% of the other Affected
Facilities then being served by PROVIDER.
(2) Upon receipt of such Proposed Alternative Bids to
provide the Affected Services to the FACILITY and the other Affected Facilities,
if any, if all such Proposed Alternative Bids are equal to or greater than the
Adjusted Pricing Structure last offered by the PROVIDER, FACILITY shall
forthwith notify PROVIDER of that fact, and the Adjusted Pricing Structure last
offered by PROVIDER shall thereupon be in effect for the duration of the term of
this Agreement with respect to the Affected Services, subject to the continuing
application of all the other terms and conditions of this Agreement, including
the provisions of this Paragraph 6. If any of such Proposed Alternative Bids is
less than the Adjusted Pricing Structure last offered by PROVIDER for the
Affected Services, FACILITY shall provide such Proposed Alternative Bids to
PROVIDER within 30 days after receipt of the last of such Bid or Bids. PROVIDER
shall thereupon have the
6
<PAGE> 59
opportunity to revise its Adjusted Pricing Structure to provide the Affected
Services in the FACILITY and in all other similarly situated Affected
Facilities, if any, then being served by PROVIDER for the duration of the term
then in effect of this Agreement and such other Affected Agreements, as
applicable, to an amount (the "Average Adjusted Pricing Structure") equal to (i)
the average of the three lowest Proposed Alternative Bids received by FACILITY
with respect to such Affected Services, or (ii) if there are less than three
qualified pharmacy providers at the time which submit Proposed Alternative Bids,
the average of the two Proposed Alternative Bids received by FACILITY with
respect to the Affected Services, or (iii) if there are less than two qualified
pharmacy providers at the time which submit Proposed Alternative Bids, the
Proposed Alternative Bid received by FACILITY with respect to the Affected
Services.
(3) If PROVIDER elects to meet the Proposed
Alternative Bid or Bids, as applicable, with respect to the Affected Services,
as set forth in subparagraph (2) above, it shall notify FACILITY not less than
30 days after receipt of all the Proposed Alternative Bids by PROVIDER of
PROVIDER's election to continue to provide the Affected Services under the
Average Adjusted Pricing Structure to the Facility for the duration of the term
of this Agreement then in effect, subject to the continuing application of all
the other terms and conditions of this Agreement, including the provisions of
this Paragraph 6.
(4) If PROVIDER does not elect to provide the
Affected Services under the Average Adjusted Pricing Structure as hereinabove
set forth, then FACILITY may, at its sole option, elect to obtain such Affected
Services from any of the qualified pharmacy providers whose Proposed Bid is
equal to or less than the Average Adjusted Pricing Structure or accept the
Adjusted Pricing Structure last offered by PROVIDER for the duration of the term
of this Agreement then in effect.
c. If, during the term of this Agreement, the system of
reimbursement under which Medicare, Medicaid or any other governmental
third-party payor reimburses providers of health care services such as the
FACILITY for Affected Services shall be changed, by law or regulation, from an
existing cost-based reimbursement system to any other system, including but not
limited to a Prospective Payment System, under which FACILITY is required to
absorb, as part of an all-inclusive rate or payment, the cost of Affected
Services covered by this Agreement which were previously billed by PROVIDER
directly to Medicare, Medicaid or other governmental third-party payor, then the
parties agree that, at any time within one year of the effective date as to
FACILITY, of any such change, upon written notice of such change as provided
herein, they shall prospectively renegotiate the pricing terms with respect to
the Affected Services under this Agreement to reflect the impact of such
risk-based reimbursement for the remainder of the term of this Agreement, and
this Agreement shall be amended to reflect the new prices for those Affected
Services. In the event the parties are unable to reach agreement on modified
pricing terms with respect to Affected Services, FACILITY on written notice to
PROVIDER may elect !o follow the procedures set forth in subparagraphs 6 b (1)
through (4), inclusive, to determine the Adjusted Pricing Structure for the
Affected Services to be in effect with PROVIDER or other qualifying pharmacy
providers for the duration of the term of this Agreement then in effect.
7
<PAGE> 60
d. FACILITY shall have sole discretion as to any election to
appeal, settle or compromise the amounts denied, disallowed or recouped by
Medicare, Medicaid or any other third party reimbursement source.
7. QUALIFICATIONS
PHARMACY represents and warrants that PHARMACY has all the necessary
qualifications, certifications, and/or licenses required by federal, state and
local laws and regulations to provide the services under this Agreement PHARMACY
will provide FACILITY with a copy of its current license in effect on the
effective date of this Agreement and at each successive renewal.
8. INSURANCE AND INDEMNITY
Subject to the minimum coverage requirements set forth below, PHARMACY
shall procure and maintain at all times throughout the Term of this Agreement
such insurance as will fully protect both PHARMACY from all acts, errors or
omissions while performing the services provided for in this Agreement.
PHARMACY shall submit to FACILITY prior to the effective date of this
Agreement, a certificate of insurance issued by an insurer authorized to conduct
insurance business in this state and reasonably acceptable to FACILITY,
indicating that PHARMACY has complete liability insurance coverage, including
coverage for any acts of professional malpractice. Such insurance shall be in
amounts reasonably satisfactory to FACILITY or in amounts required by the laws
of this state, whichever is greater, but shall not be less than $1,000,000 per
injury or incident to persons and $3,000,000 aggregate per year and $100,000
each occurrence property damage coverage. Coverage in amounts less than stated
amounts must be approved in writing in advance by FACILITY's Corporate Risk
Management Department. Said certificate shall provide that the insurer will not
cancel said policy of insurance without giving FACILITY thirty (30) days advance
written notice. Further, PHARMACY shall provide to FACILITY thirty (30) days
advance written notice (or as soon as practicable) as to any material
restriction, limitation, modification or revision to coverage contemplated
herein.
PHARMACY shall save, indemnify and hold FACILITY harmless of and from
any and all liability, loss, costs and expenses incurred directly or indirectly
from any acts, errors or omissions by PHARMACY, its agents, employees or
invitees from any cause arising from or relating to PHARMACY's performance under
this Agreement.
Within the limits of its applicable insurance coverage, and to the
extent not otherwise inconsistent with state law, FACILITY shall save, indemnify
and hold PHARMACY harmless of and from any and all liability, loss, costs and
expenses incurred directly or indirectly from any acts, errors or omissions by
FACILITY, its agents, employees or invitees from any cause arising from or
relating to FACILITY's performance under this Agreement.
8
<PAGE> 61
9. EQUIPMENT AND SUPPLIES
When PHARMACY uses equipment and/or supplies provided by FACILITY,
PHARMACY shall use such equipment and supplies properly and be solely
responsible for injuries or damages resulting from any misuse. In addition,
PHARMACY shall notify FACILITY in writing whenever equipment or supplies
provided by FACILITY and used by PHARMACY for providing services need repair or
replacement.
PHARMACY and FACILITY agree that when PHARMACY provides mobile
medication cart(s) as part of PHARMACY's drug distribution system, both parties
agree the ownership remains with the PHARMACY. Necessary replacement as a result
of normal wear and use shall be the responsibility of PHARMACY. SHOULD the carts
require replacement as a result of misuse by FACILITY personnel, FACILITY agrees
to cover the reasonable costs of that replacement FACILITY is responsible for
keeping the carts clean and in normal working order. Two sets of keys will be
furnished by PHARMACY to FACILITY upon original delivery of each cart. Lost or
duplicate keys are the responsibility of FACILITY. The cart(s) are identified as
follows:
<TABLE>
<CAPTION>
QUANTITY MODEL NUMBER SERIAL NUMBER
-------- ------------ -------------
<S> <C> <C>
</TABLE>
10. INDEPENDENT CONTRACTOR
This Agreement does not constitute a hiring of PHARMACY as an employee
of FACILITY. It is the parties' intention that PHARMACY shall be an independent
contractor and not FACILITY's employee. PHARMACY shall retain discretion and
judgment regarding the manner and means of providing services to FACILITY
subject to all applicable laws, regulations and FACILITY's policies. FACILITY
assumes professional and administrative responsibility for the services rendered
only to the extent that FACILITY will assure itself that (1) PHARMACY and each
of its employees, agents or servants providing services under this Agreement is
qualified by education and experience to render the services contracted for; and
(2) PHARMACY is satisfying the obligations set forth herein in a timely manner.
This Agreement shall not be construed as a partnership and FACILITY shall not be
liable for any obligations incurred by PHARMACY.
11. CONFIDENTIALITY
PHARMACY agrees to respect and abide by all federal, state and local
laws pertaining to confidentiality and disclosure with regard to all information
and records obtained or reviewed in the course of providing services to FACILITY
and/or its residents. In the course of the relationship established between
PHARMACY and FACILITY, certain confidential information about each party and/or
its parent organization may be disclosed to the other party. Such information
includes, without limitation, FACILITY resident names, medical records, business
information and similar information of any kind whatsoever (collectively
referred to as "Confidential Information"). PHARMACY and FACILITY shall hold
Confidential Information in the strictest confidence as fiduciaries and shall
not, voluntarily or involuntarily, sell, transfer, publish, disclose or
otherwise make available to
9
<PAGE> 62
others, any portion of the Confidential Information or related materials without
the express written consent of the other party except as provided for under
paragraph 5 herein and except as required for the performance of their duties
under this Agreement. PHARMACY and FACILITY shall use their best efforts to
protect the Confidential Information consistent with the manner in which they
protect their most confidential business and client information.
12. ATTORNEY'S FEES
If suit is brought to enforce any of the terms or conditions of this
Agreement, the prevailing party shall be entitled to recover such sums as the
court may fix as costs and reasonable attorney's fees, in addition to any other
relief to which it may be entitled.
13. NOTICES
Any notice required to be provided to any party to this Agreement shall
be in writing and shall be considered effective three (3) days after the date of
deposit with the United States Postal Service by certified or registered mail,
first class postage prepaid, return receipt requested, or by facsimile
transmission (receipt confirmed) and addressed to the patty as follows:
FACILITY:
---------------------------------
---------------------------------
---------------------------------
Attention:
-----------------------
and to: Beverly Enterprises, Inc.
5111 Rogers Ave., Suite 40-A
Fort Smith, AR 72919-1000
Attention: David R. Banks, Chairman of the Board
Facsimile: 501-452-6712
with copies to: Robert W. Pommerville, Esq.
Executive Vice President, Secretary and General Counsel
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919-1000
Facsimile: 501452-3760
and
H. Watt Gregory, III, Esq.
Giroir, Gregory, Holmes & Hoover, PLC
111 Center Street - Suite 1900
Little Rock, AR 72201
Facsimile: 501-374-2330
10
<PAGE> 63
PROVIDER: PharMerica Corporation
3611 Queen Palm Drive
Tampa, FL 33619
Attention:_________________________
Facsimile: 313-623-1167
with copies to:
--------------------------------------
--------------------------------------
--------------------------------------
or to such other or additional addresses as may be provided by either patty from
time to time in the manner described above.
14. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
15. BINDING ON SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
any and all successors, trustees, assignees, agents heirs executors
administrators, personal representatives and other successors in interest of the
parties to this Agreement.
16. INTEGRATION
This Agreement supersedes all previous agreements, oral or written,
between parties and embodies the complete Agreement between the parties. This
Agreement may only be amended or modified by written agreement signed by both
parties.
11
<PAGE> 64
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have entered into this Agreement as of the date first above
written.
FACILITY: *
----------------------------------
d/b/a **
---------------------------
By:
--------------------------------
Title:
----------------------------
PROVIDER: PHARMERICA CORPORATION
By:
-------------------------------
Title:
----------------------------
- ----------------------
* Fill in name of correct Corporate Subsidiary.
**Fill in name of Facility.
12
<PAGE> 65
EXHIBIT A
SCHEDULE OF RATES OR METHODOLOGY FOR DETERMINING PAYMENT RATES
13
<PAGE> 1
Exhibit 10.11
December 10, 1996
Capstone Pharmacy Services, Inc.
2930 Washington Boulevard
Baltimore, Maryland 21230
Gentlemen:
The purpose of this letter is to confirm the engagement of Adirondack
Capital Advisors, LLC ("ACA") to act as financial advisor to Capstone Pharmacy
Services, Inc. (together with its affiliates and subsidiaries the "Company" or
"Capstone") in connection with a possible negotiated Transaction with Pharmacy
Corporation of America ("PCA") a wholly owned subsidiary of Beverly Enterprises,
Inc. ("Beverly"). Such Transaction may include a merger, acquisition of stock,
acquisition of assets, reorganization, recapitalization, minority investment,
joint venture or otherwise in one or a series of transactions.
1. In connection with this possible transaction, ACA to date, and in
consultation with Capstone and its legal advisors, has undertaken
the following:
a. Met with senior management of Beverly to review possible
transaction structures and determine their interest in
further discussions;
b. Coordinated the receipt of internal information regarding
PCA from Beverly;
c. Arranged for a subsequent meeting between senior Beverly
management and Capstone's Chairman.
2. Moving forward, in connection with its engagement hereunder, ACA
shall:
a. Review the business and operations of PCA and its
historical and projected financial condition and analyze
the pro forma financial impact on the Company of
alternative Transaction structures;
b. Evaluate and recommend financial alternatives to the
Transaction, and, if requested by the Company, participate
in negotiations relating thereto;
c. Advise the Company as to the timing structure and pricing
of a Transaction;
<PAGE> 2
December 10, 1996
Page Two
d. If requested by the Company, render an opinion to the
Board of Directors of the Company as to whether the
proposed Transaction is fair to the Company from a
financial point of view (an "Opinion"); and
e. Provide such other financial advisory and investment
banking services as are customary for similar transactions
and as may be mutually agreed upon by the Company and ACA.
3. As compensation for ACA's services hereunder, the Company hereby
agrees to pay ACA:
a. Opinion Fee
An opinion fee equal to 25% of the Transaction Fee defined
below (the "Opinion Fee") for each Transaction for which
an Opinion is rendered, payable in cash promptly upon
delivery by ACA of such Opinion (whether oral or written,
as requested by the Company).
b. Transaction Fee
A transaction fee equal to four million ($4,000,000.00)
payable in cash promptly upon consummation of a
Transaction if, during the term of this agreement or
within 12 months thereafter, a Transaction is consummated
or a definitive agreement is entered into that
subsequently results in a Transaction.
c. Termination Fee
A termination fee equal to 15% (a "Termination Fee") of
any "termination fee," "break-up fee," "topping fee" or
other form of compensation payable to the Company or of
the value of any securities or assets which the Company
has been granted an option to purchase if, after the
execution of an agreement in principle, letter of intent,
definitive agreement or similar agreement in connection
with a Transaction, the Transaction fails to close and the
Company receives or is entitled to receive any such
compensation or exercise any such option. The Termination
Fee shall be payable promptly in cash when any such
compensation becomes due and payable to the Company or any
such option becomes exercisable.
<PAGE> 3
December 10, 1996
Page Three
d. Certain Fee Credits
The Opinion Fee, to the extent previously paid, will be
credited against the Transaction Fee or the Termination
Fee, as the case may be, relating to the Transaction for
which an Opinion was rendered.
4. In addition to any fees that may be payable to ACA hereunder (and
regardless of whether a Transaction occurs), the Company hereby
agrees, from time to time upon request, to reimburse ACA promptly
for travel and other out-of-pocket expenses incurred in performing
its services hereunder, including the fees and expenses of its
legal counsel.
5. The term of ACA's engagement as financial advisor to the Company
shall commence on the date hereof and continue until the earlier
of the consummation of a Transaction and 12 months after the date
hereof, unless extended by mutual written consent or earlier
terminated by either party upon 30 days' prior written notice;
provided however, that no such termination shall affect the
indemnification, contribution and confidentially obligations of
the Company, the right of ACA to receive any fees payable
hereunder or fees that have accrued prior to such termination or
the right of ACA to receive reimbursement for its out-of-pocket
expenses as described above.
6. The Company agrees to indemnify ACA and related persons. In this
regard, Capstone will indemnify and hold harmless ACA and its
affiliates and each other person, if any, controlling ACA or any
of its affiliates from and against any losses, claims, damages or
liabilities (including reasonable counsel fees) or actions in
respect thereof related to or arising out of such engagement or
ACA's role in connection therewith. Capstone will not, however, be
responsible for any claims, liabilities, losses, damage or
expenses that result from the bad faith or negligence of ACA or
any other party indemnified hereunder. Capstone also agrees that
neither ACA, nor any of its affiliates, nor any person, director,
employee or agent of ACA or any of its affiliates, nor any
person controlling ACA or any of its affiliates shall have any
liability (whether direct or indirect, in contract or tort or
otherwise) to Capstone or in connection with such engagement
except for any such liability for losses, claims, damages,
liabilities or expenses incurred by Capstone that result from bad
faith or negligence of ACA or any other party indemnified
hereunder.
7. The Company recognizes and confirms that ACA in acting pursuant to
this engagement will be using information in reports and other
information provided by others including, without limitation,
information provided by or
<PAGE> 4
December 10, 1996
Page Four
on behalf of the Company and PCA and that ACA does not assume
responsibility for and may rely, without independent verification,
on the accuracy and completeness of any such reports and
information. The Company hereby warrants that any information
relating to the Company that is furnished to ACA by or on behalf
of the Company will be fair, accurate and complete and will not
contain any material omissions or misstatements of fact. The
Company agrees that any information or advice (including, without
limitation, any Opinion) rendered by ACA or its representatives in
connection with this engagement is for the confidential use of the
Company's Board of Directors only in its evaluation of a
Transaction and, except as otherwise required by law, the Company
will not and will not permit any third party to disclose or
otherwise refer to any such Opinion, advice or information in any
manner without ACA's prior written consent.
8. This agreement (a) has been duly authorized, executed and
delivered on behalf of the Company and constitutes a legal, valid
and binding obligation of the Company enforceable against the
Company in accordance with its terms, (b) shall be governed by
and construed in accordance with the laws of the State of New
York, regardless of the laws that might otherwise govern under
applicable principles of conflicts of law thereof, (c)
incorporates the entire understanding of the parties with respect
to the subject matter hereof and supersedes all previous
agreements should they exists with respect thereto, (d) may not
be amended or modified except in a writing executed by the
Company and ACA and (e) shall be binding upon and inure to the
benefit of the Company, ACA, the other indemnified parties and
their respective successors and assigns. The Company and ACA
agree to waive trial by jury in any action, proceeding or
counterclaim brought by or an behalf of either party with respect
to any matter whatsoever relating to or arising out of any actual
or proposed Transaction or the engagement of or performance by
ACA hereunder.
<PAGE> 5
December 10, 1996
Page Five
This agreement may be executed in two or more counterparts, each of which shall
be deemed to be an original, but all of which shall constitute one and the same
agreement. Please confirm that the foregoing is in accordance with your
understanding of our agreement by signing and returning to us a copy of this
letter.
Very truly yours,
ADIRONDACK CAPITAL ADVISORS LLC
By:
------------------------------
Joseph F. Furlong
Accepted and agreed to as of the
date set forth above:
CAPSTONE PHARMACY SERVICES, INC.
By:
---------------------------
<PAGE> 1
EXHIBIT 10.12
FORM OF EMPLOYMENT AGREEMENT WITH OFFICERS
This EMPLOYMENT AGREEMENT ("Agreement") made effective as of
____________, 19__ by and between PharMerica, Inc., a Delaware corporation (the
"Company"), and _________________________. (the "Executive").
In consideration of the mutual covenants contained in this Agreement,
the parties hereby agree as follows:
SECTION I
EMPLOYMENT
The Company agrees to employ the Executive, and the Executive agrees to
be employed by the Company for the Period of Employment as provided in Section
III.A. below upon the terms and conditions provided in the Agreement.
SECTION II
POSITION AND RESPONSIBILITIES
During the Period of Employment, the Executive agrees to serve as
______________________________ and to be responsible for the typical management
responsibilities expected of an officer holding such positions and such other
responsibilities as may be assigned to the Executive from time to time by the
Board of Directors of the Company.
SECTION III
TERMS AND DUTIES
A. Period of Employment
The period of Executive's employment under this Agreement, will
commence as of ________________, and shall continue through _________________,
subject to extension or termination as provided in this Agreement (the "Period
of Employment").
B. Duties
During the Period of Employment, the Executive shall devote all of his
business time, attention and skill to the business and affairs of the Company
and its subsidiaries. The Executive will perform faithfully the duties which may
be assigned to him from time to time by the Board of Directors.
<PAGE> 2
SECTION IV
COMPENSATION AND BENEFITS
A. Compensation
For all services rendered by the Executive in any capacity during the
Period of Employment, the Company shall pay the Executive an annual base salary
("Base Salary") as follows: Of at least _____________________________ ($_______)
per year through _________________; ___________________________________
($_______) for the period from ________________ through _________________; and
_____________________________ ($_______) for the period from ________________
through _________________. Such Base Salary shall be payable according to the
customary payroll practices of the Company but in no event less frequently than
once each month.
B. Annual Incentive Award; Signing Bonus
The Executive will be eligible for an annual incentive compensation
award ("Annual Incentive Award") with a target range of __% of the Executive's
Base Salary tied to objective criteria to be established by the Board of
Directors or the Compensation Committee by agreement with the Executive. The
Company will pay the Executive a one time signing bonus of
_____________________________ ($______), payable by the Company upon signing of
this Agreement.
C. Options
The Company will take all actions necessary to grant to Executive, as
of the date of this Agreement (the "Grant Date") the Executive an option to
purchase at least _______ shares of the Company stock (total options including
converted Beverly options will equal at least ______________). One-third of the
options will vest on the Grant Date, one-third will vest on the first
anniversary of the Grant Date, and the remaining one-third will vest on the
second anniversary of the Grant Date. The option shall be in the form approved
by the Board of Directors or Compensation Committee of the Company and shall be
governed by the terms and provisions of the Company 1995 Incentive and
Nonqualified Stock Option Plan for Key Personnel and Directors (the "Plan").
D. Additional Benefits
The Executive will be entitled to participate in all compensation or
employee benefit plans or programs and receive all benefits and perquisites for
which any salaried employees are eligible under any existing or future plan or
program established by the Company for salaried employees. The Executive will
participate to the extent permissible under the terms and provisions of such
plans or programs in accordance with program provisions. These may include group
hospitalization, health, dental care, life or other insurance, tax qualified
pension, savings, thrift and profit sharing plans, termination pay programs,
sick leave plans, travel or accident insurance, disability insurance, and
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contingent compensation plans including capital accumulation programs,
restricted stock programs, stock purchase programs and stock option plans.
Nothing in this Agreement will preclude the Company from amending or terminating
any of the plans or programs applicable to salaried employees or senior
executives. The Executive will be entitled to an annual paid vacation of four
weeks per year.
E. Automobile Allowance
Executive shall receive an automobile allowance of $______ per month.
F. Continuing Medical Education
It is recognized that Executive must do 50 hours of Continuing Medical
Education in order to maintain licensure in good and regular standing. Company
agrees that such time and the expense connected therewith is a corporate
obligation.
G. Insurance
The Company shall provide Executive at least $________ of group term
life insurance under the Company's life insurance plans.
SECTION V
BUSINESS EXPENSES
The Company will reimburse the Executive for all reasonable travel and
other expenses incurred by the Executive in connection with the performance of
his duties and obligations under this Agreement. The Company will provide
Executive with a corporate credit card billed to the Company. Executive must
support all expenditures with customary receipts and expense reports subject to
review by the Chief Financial Officer.
SECTION VI
DISABILITY
A. Payments; Vesting of Options Upon Disability
In the event of disability of the Executive during the period of
Employment, the Company will continue to pay the Executive according to the
compensation provisions of this Agreement during the period of his disability,
until such time as the Executive's long-term disability insurance benefits are
available. However, in the event the Executive is disabled for a continuous
period of six (6) months after the Executive first becomes disabled, the Company
may terminate the employment of the Executive. Upon such termination, ordinary
compensation will no longer be paid, except for earned but unpaid Base Salary
and any Annual Incentive Award that would be payable on a pro-rated basis for
the year in which the disability occurred. In the event of such termination, all
unvested stock options held by the Executive shall be deemed fully vested on the
date of such termination. The term "disability" shall, for the purposes of this
Agreement, have the same
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meaning as under any disability insurance provided to the Executive pursuant to
this Agreement or otherwise.
B. Assistance to the Company
During the period the Executive is receiving payments of either regular
compensation or disability insurance described in this Agreement and as long as
he is physically and mentally able to do so, the Executive will furnish
information and assistance to the Company and from time to time will make
himself available to the Company to undertake assignments consistent with his
prior position with the Company and his physical and mental health.
SECTION VII
DEATH
In the event of the death of the Executive during the Period of
Employment, the Company's obligation to make payments under this Agreement shall
cease as of the date of death, except for earned but unpaid Base Salary and
Incentive Compensation Awards which will be paid on a pro-rated basis for that
year. The Executive's designated beneficiary will be entitled to receive the
proceeds of any life or other death benefit programs provided in this Agreement.
SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT
A. Termination Without Cause
If the Company terminates Executive's employment Without Cause, as
defined in this Agreement, or if Executive terminates his employment for Good
Reason, as defined in this Agreement, the Company will pay the Executive in a
lump sum upon such Termination an amount equal to _______% of his then current
Base Salary paid by the Company to Executive. Earned but unpaid Base Salary will
be paid in a lump sum at the time of such termination. The benefits and
perquisites described in this Agreement as in effect at the date of termination
of employment will be continued for twelve(12) months upon such termination. If
the Executive's employment terminates Without Cause, or for Good Reason, or
pursuant to Section XI, all stock options ("Options") granted to the Executive
under the Plan or any other stock option program shall be deemed vested, and the
Company shall cause the Options to remain exercisable for twelve (12) months
from the date of termination.
B. Termination With Cause
If the Company terminates Executive With Cause, earned but unpaid Base
Salary will be paid on a pro-rated basis for the year in which the termination
occurs. No other payments will be made or benefits provided by the Company.
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<PAGE> 5
C. Effect of Certain Terminations
Upon termination of the Executive's employment for reasons other than
due to death, disability, or pursuant to Paragraph A of this Section or Section
XI, or upon Executive's resignation (other than for Good Reason or in connection
with a Change in Control), the Period of Employment and the Company's obligation
to make payments under this Agreement will cease as of the date of the
termination except as expressly defined in this Agreement.
D. Definitions
For this Agreement, the following terms have the following meanings:
(1) Termination "With Cause" means termination of the
Executive's employment by the Company's Board of Directors acting in good faith
by the Company by written notice to the Executive specifying the event relied
upon for such termination, due to the Executive's serious, willful misconduct
with respect to his duties under this Agreement, including, but not limited to,
conviction for a felony or perpetration of a common law fraud, which has
resulted or is likely to result in material economic damage to the Company.
(2) Termination "Without Cause" means termination by the
Company of the Executive's employment other than due to death, disability,
termination With Cause, or pursuant to Section XI.
(3) Termination for "Good Reason" means either (i) the
Executive is not elected, reelected or otherwise continued in the office of the
Company or any of its subsidiaries which he held immediately prior to the Change
in Control Date, (ii) the Executive's duties, responsibilities or authority as
an employee are materially reduced or diminished from those in effect on the
Change in Control Date without the Executive's consent; (iii) the Executive's
duties, responsibilities or authority as an employee are materially reduced or
diminished from those in effect on the date hereof without the Executive's
consent; (iv) the Executive's compensation or benefits are reduced without the
Executive's consent, unless all executive officers have their salaries reduced
in the same percentage amount; (v) the Company reduces the potential earnings of
the Executive under any performance-based bonus or incentive plan of the Company
in effect immediately prior to the Change in Control Date; (vi) the Company
requires that the Executive's employment be based other than at Tampa, Florida,
without his consent; (vii) any purchaser, assign, surviving corporation, or
successor of the Company or its business or assets (whether by acquisition,
merger, liquidation, consolidation, reorganization, sale or transfer of assets
or business, or otherwise) fails or refuses to expressly assume in writing this
Agreement and all of the duties and obligations of the Company hereunder
pursuant to Section XIV hereof, or (viii) the Company breaches any of the
provisions of this Agreement.
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<PAGE> 6
SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT
A. Cooperation During and After Employment
The Executive will, with reasonable notice during or after the Period
of Employment, furnish information as may be in his possession and cooperate
with the Company as may reasonable be requested in connection with any claims or
legal actions in which the Company is or may become a party.
B. Confidential Information
The Executive recognizes and acknowledges that all information
pertaining to the affairs, business, clients, customers or other relationships
of the Company, as hereinafter defined, is confidential and is a unique and
valuable asset of the Company. Access to and knowledge of this information are
essential to the performance of the Executive's duties under this Agreement. The
Executive will not during the Period of Employment or after, except to the
extent reasonably necessary in performance of the duties under this Agreement,
give to any person, firm, association, corporation or governmental agency any
information concerning the affairs, business, clients, customers or other
relationships of the Company, except as required by law. The Executive will not
make use of this type of information for his own purposes or for the benefit of
any person or organization other than the Company. The Executive will also use
his best efforts to prevent the disclosure of this information by others. All
records, memoranda, etc, relating to the business of the Company, whether made
by the Executive or otherwise coming into his possession, are confidential and
will remain the property of the Company.
C. Certain Restricted Activities
During the Period of Employment and for a twelve (12) month period
thereafter, the Executive will not use his status with the Company to obtain
goods or services from another organization on terms that would not be available
to him in the absence of his relationship to the Company. During the Period of
Employment and for a twelve (12) month period following termination of the
Period of Employment, other than termination Without Cause or for Good Reason:
the Executive will not make any statements or perform any acts intended to
advance the interest of any existing or prospective competitors of the Company
in any way that will injure the interest of the Company; the Executive, without
prior express written approval by the Board of Directors of the Company, will
not directly or indirectly own or hold any proprietary interest in or be
employed by or receive compensation from any party engaged in the same or any
similar business in the same geographic areas the Company does business; and the
Executive, without express prior written approval from the Board of Directors,
will not solicit any members of the then current clients of the Company or
discuss with any employee of the Company information or operation of any
business intended to compete with the Company. For the purposes of the
Agreement, proprietary interest means legal or equitable ownership, whether
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<PAGE> 7
through stock holdings or otherwise, of a debt or equity interest (including
options, warrants, rights and convertible interest) in a business firm or
entity, or ownership of more than 5% of any class of equity interest in a
publicly-held company. The Executive acknowledges that the covenants contained
herein are reasonable as to geographic and temporal scope. For a twelve (12)
month period after termination of the Period of Employment for any reason, the
Executive will not directly or indirectly hire any employee of the Company or
solicit or encourage any such employee to leave the employ of the Company.
D. Remedies
The Executive acknowledges that his breach or threatened or attempted
breach of any provision of Section IX would cause irreparable harm to the
Company not compensable in monetary damages and that the Company shall be
entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for specific performance of the terms of
Section IX without being required to prove damages or furnish any bond or other
security. The Executive hereby acknowledge the necessity of protection against
the competition of, and certain other possible adverse actions by, the Executive
and that the nature and scope of such protection has been carefully considered
by the parties. The period provided and the area covered are expressly
represented and agreed to be fair, reasonable and necessary. If, however, any
court or arbitrator determines that the restrictions described herein are not
reasonable, the court or arbitration panel may modify, rewrite or interpret such
restrictions to include as much of their nature and scope as will render them
enforceable.
E. Effect of Material Default
The Executive shall not be bound by the provisions of Section IX in the
event of the material default by the Company in its obligations under this
Agreement which are to be performed upon or after termination of this Agreement.
SECTION X
INDEMNIFICATION, LITIGATION
The Company will indemnify the Executive to the fullest extent
permitted by the laws of the state of incorporation in effect at that time, or
certificate of incorporation and by-laws of the Company whichever affords the
greater protection to the Executive.
SECTION XI
CHANGE IN CONTROL
A. Effect of Change in Control
In the event there is a Change in Control and within the twenty-four
(24) month period following such event Executive is terminated or Executive
elects to resign for Good Reason, or within the six (6) month period following
such event Executive elects to resign
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<PAGE> 8
for other than Good Reason, the Company shall pay to the Executive the amounts
described in (1), (2), and (3) below.
(1) The Company shall pay to the Executive in a lump sum upon
such termination an amount equal to ___% of the sum of his Base Salary and the
greater of the most recent Annual Incentive Award paid or earned by Executive or
the current Annual Incentive Award target in effect at the time of such
termination or resignation. In addition, any stock options granted to the
Executive prior to termination pursuant to the Plan, but subject to vesting
restrictions, will be fully vested upon a Change in Control whether or not the
Executive is terminated or resigns and shall remain exercisable for one year
following vesting. The benefits and perquisites described in this Agreement as
in effect at the date of termination of employment will also be continued for
thirty-six (36) months from the effective date of termination or resignation
pursuant to a Change of Control, except for life insurance then in effect which
will be provided for lifetime and long term disability insurance coverage for
thirty-six (36) months. Executive shall also have COBRA continuation rights for
healthcare coverage, beginning after the end of such thirty-six (36) month
period. The obligation of Company to pay for Executive's COBRA premiums during
the thirty-six (36) month period shall terminate upon Executive obtaining other
employment to the extent such insurance is provided by Executive's new employer.
Company matching payments for corporate retirement plans will become fully
vested. Company will reimburse Executive for expenses in moving Executive to the
location of his choice in the United States under the terms and conditions of
the Company's Executive moving policy, within three (3) years from such
termination or resignation.
(2) The Company shall pay to Executive upon such termination,
as a retention bonus for services actually rendered on and after the date of the
Change in Control, a lump sum payment equal to __% of the sum of his Base Salary
and the greater of the most recent Annual Incentive Award paid or earned by
Executive or the current Annual Incentive Award target in effect at the time of
such termination or resignation.
(3) The Company shall pay to executive upon such termination,
in exchange for Executive agreeing not to solicit any of the then current
customers or employees of the Company for a period of twelve (12) months
following his termination of employment, a lump sum payment equal to ___% of the
sum of his Base Salary and the greater of the most recent Annual Incentive Award
paid or earned by Executive or the current Annual Incentive Award target in
effect at the time of such termination or resignation.
Notwithstanding the above, no amount shall be payable hereunder to the
extent that it would result in the imposition of an excise tax under Internal
Revenue Code Section 4999, and the payments otherwise due hereunder shall be
automatically reduced in order to avoid such result. The determination of any
reduction in the amounts otherwise payable hereunder pursuant to the foregoing
sentence shall be made by the Executive in good faith, and such determination
shall be conclusive and binding on the Company.
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B. Definition of Change In Control
A "Change in Control" shall be deemed to have occurred if (i) a tender
offer shall be made and consummated for the ownership of more than 50% of the
outstanding voting securities of the Company, (ii) the Company shall be merged
or consolidated with another corporation and as a result of such merger or
consolidation less than 50% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, as the same shall have existed immediately prior to
such merger or consolidation, (iii) the Company shall sell all or substantially
all of its assets to another corporation which is not a wholly-owned subsidiary
or affiliate, (iv) as the result of, or in connection with, any contested
election for the Board of Directors of the Company, or any tender or exchange
offer, merger or business combination or sale of assets, or any combination of
the foregoing (a "Transaction"), the persons who were Directors of the Company
before the Transaction shall cease to constitute a majority of the Board of
Directors of the Company, or any successor thereto, or (v) a person, within the
meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date
hereof) of the Securities and Exchange Act of 1934 ("Exchange Act"), other than
any employee benefit plan then maintained by the Company, shall acquire more
than 50% of the outstanding voting securities of the Company (whether directly,
indirectly, beneficially or of record). For purposes hereof, ownership of voting
securities shall take into account and shall include ownership as determined by
applying the provisions of Rule 13d-3(d)(1)(i)(as in effect on the date hereof)
pursuant to the Exchange Act.
SECTION XII
WITHHOLDING TAXES
The Company may directly or indirectly withhold from any payments under
this Agreement all federal, state, city or other taxes that shall be required
pursuant to any law or governmental regulation.
SECTION XIII
EFFECTIVE PRIOR AGREEMENTS
This Agreement contains the entire understanding between the Company
and the Executive with respect to the subject matter and supersedes any prior
employment, severance, or other similar agreements between the Company, its
predecessors and its affiliates, and the Executive.
SECTION XIV
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all or substantially all of its assets
to, another corporation which assumes this Agreement and all obligations and
undertakings of the company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term "the
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Company" as used will mean the other corporation and this Agreement shall
continue in full force and effect. This Section XIV is not intended to modify or
limit the rights of the Executive hereunder, including without limitation, the
rights of Executive under Section XI.
SECTION XV
MODIFICATION
This Agreement may not be modified or amended except in writing signed
by the parties. No term or condition of this Agreement will be deemed to have
been waived, except in Writing by the party charged with waiver. A waiver shall
operate only as to the specific term or condition waived and will not constitute
a waiver for the future or act on anything other than that which is specifically
waived.
SECTION XVI
GOVERNING LAW; ARBITRATION
This Agreement has been executed and delivered in the State of Delaware
and its validity, interpretation, performance and enforcement shall be governed
by the laws of that state.
Any dispute among the parties hereto shall be settled by arbitration in
accordance with the then applicable rules of the American Arbitration
Association and judgment upon the award rendered may be entered in any court
having jurisdiction thereof.
SECTION XVII
NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid by registered mail, return receipt requested,
or when delivered if by hand, overnight delivery service or confirmed facsimile
transmission, to the following:
(a) If to the Company, at:
PharMerica, Inc.
3611 Queen Palm Drive
Tampa, Florida 33619
or at such other address as may have been furnished to the Executive by the
Company in writing, copy to Mark Manner, Harwell, Howard, Hyne, Gabbert &
Manner, P.C., 1800 First American Center, 315 Deaderick Street, Nashville,
Tennessee 37238; or
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(b) If to the Executive, at
or such other address as may have been furnished to the Company by the Executive
in writing.
SECTION XVIII
BINDING AGREEMENT
This Agreement shall be binding on the parties' successors, heirs and
assigns.
SECTION XIX
Additional Payment Due to Dispute. Notwithstanding anything to the
contrary herein, and without limiting the Executive's rights at law or in
equity, if the Company fails or refuses to timely pay to the Executive the
benefits due under Section VIII or XI hereof, then the compensation under
Section VIII A. and XI A. shall be increased, and the benefits under Section
VIII A. and XI A. shall be continued, in each case, by one additional day for
each day of any such failure or refusal of the Company to pay.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY
--------
PHARMERICA, INC.
By:
----------------------------------
Title:
--------------------------------
EXECUTIVE
--------------------------------------
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Exhibit 10.13
FORM OF EMPLOYMENT AGREEMENT WITH OFFICERS
This EMPLOYMENT AGREEMENT ("Agreement") made effective as of
___________19__, by and between PharMerica, Inc., a Delaware corporation (the
"Company"), and __________________ (the "Executive").
In consideration of the mutual covenants contained in this Agreement,
the parties hereby agree as follows:
SECTION I
EMPLOYMENT
The Company agrees to employ the Executive, and the Executive agrees to
be employed by the Company for the Period of Employment as provided in Section
III.A. below upon the terms and conditions provided in the Agreement.
SECTION II
POSITION AND RESPONSIBILITIES
During the Period of Employment, the Executive agrees to serve as
_______________________________________ of the Company and to be responsible for
the typical management responsibilities expected of an officer holding such
positions and such other responsibilities as may be assigned to Executive from
time to time by the Chief Executive Officer and Board of Directors of the
Company.
SECTION III
TERMS AND DUTIES
A. Period of Employment
The period of Executive's employment under this Agreement, will
commence as of _______________, and shall continue through _________________,
subject to extension or termination as provided in this Agreement (the "Period
of Employment").
B. Duties
During the Period of Employment, the Executive shall devote
all of his business time, attention and skill to the business and affairs of the
Company and its subsidiaries. The Executive will perform faithfully the duties
which may be assigned to him from time to time by the Chief Executive Officer
and Board of Directors. The Executive must generally perform his duties at the
Company's headquarters in Tampa, Florida, but he may live elsewhere.
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SECTION IV
COMPENSATION AND BENEFITS
A. Compensation
For all services rendered by the Executive in any capacity during the
Period of Employment, the Company shall pay the Executive an annual base salary
("Base Salary") of ________________________________________ ($_______) per year.
Such Base Salary shall be payable according to the customary payroll practices
of the Company but in no event less frequently than once each month.
B. Annual Incentive Award; Signing Bonus
The Executive will be eligible for an annual incentive
compensation award ("Annual Incentive Award") in the range of __% to __% of the
Executive's Base Salary tied to objective criteria to be established by the
Board of Directors or the Compensation Committee by agreement with Executive.
The Company will pay Executive a one time signing bonus of
______________________ ($______), payable by the Company upon signing of this
Agreement.
C. Options
The Company will take all actions necessary to grant to
Executive, as of the date of this Agreement (the "Grant Date"), an option to
purchase ______________________ (_______) shares of the Company's stock.
One-third of the options will vest on the Grant Date, one-third will vest on the
first anniversary of the Grant Date, and the remaining one-third will vest on
the second anniversary of the Grant Date. The option shall be in the form
approved by the Board of Directors or Compensation Committee of the Company and
shall be governed by the terms and provisions of the Company 1995 Incentive and
Nonqualified Stock Option Plan for Key Personnel and Directors (the "Plan").
D. Additional Benefits
The Executive will be entitled to participate in all
compensation or employee benefit plans or programs and receive all benefits and
perquisites for which any salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive will participate to the extent permissible under the terms and
provisions of such plans or programs in accordance with program
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provisions. These may include group hospitalization, health, dental care, life
or other insurance, tax qualified pension, savings, thrift and profit sharing
plans, termination pay programs, sick leave plans, travel or accident insurance,
disability insurance, and contingent compensation plans including capital
accumulation programs, restricted stock programs, stock purchase programs and
stock option plans. Nothing in this Agreement will preclude the Company from
amending or terminating any of the plans or programs applicable to salaried
employees or senior executives. The Executive will be entitled to an annual paid
vacation of four weeks per year.
E. Automobile Allowance.
Executive shall receive an automobile allowance of $______ per
month.
SECTION V
BUSINESS EXPENSES
The Company will reimburse the Executive for all reasonable travel and
other expenses incurred by the Executive in connection with the performance of
his duties and obligations under this Agreement.
SECTION VI
DISABILITY
A. Payments; Vesting of Options Upon Disability
In the event of disability of the Executive during the period
of Employment, the Company will continue to pay the Executive according to the
compensation provisions of this Agreement during the period of his disability,
until such time as the Executive's long-term disability insurance benefits are
available. However, in the event the Executive is disabled for a continuous
period of six (6) months after the Executive first becomes disabled, the Company
may terminate the employment of the Executive. Upon such termination, ordinary
compensation will no longer be paid, except for earned but unpaid Base Salary
and any Annual Incentive Award that would be payable on a pro-rated basis for
the year in which the disability occurred. In the event of such termination, all
unvested stock options held by the Executive shall be deemed fully vested on the
date of such termination. The term "disability" shall, for the purposes of this
Agreement, have the same meaning as under any disability insurance provided to
the Executive pursuant to this Agreement or otherwise.
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B. Assistance to the Company
During the period the Executive is receiving payments of
either regular compensation or disability insurance described in this Agreement
and as long as he is physically and mentally able to do so, the Executive will
furnish information and assistance to the Company and from time to time will
make himself available to the Company to undertake assignments consistent with
his prior position with the Company and his physical and mental health.
SECTION VII
DEATH
In the event of the death of the Executive during the Period of
Employment, the Company's obligation to make payments under this Agreement shall
cease as of the date of death, except for earned but unpaid Base Salary and
Incentive Compensation Awards which will be paid on a pro-rated basis for that
year. The Executive's designated beneficiary will be entitled to receive the
proceeds of any life or other death benefit programs provided in this Agreement.
SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT
A. Termination Without Cause
If the Company terminates Executive's employment Without
Cause, as defined in this Agreement, the Company will pay the Executive in a
lump sum upon such Termination an amount equal to ___% of his annual Base
Salary. Earned but unpaid Base Salary will be paid in a lump sum at the time of
such termination. The benefits and perquisites described in this Agreement as in
effect at the date of termination of employment will be continued for twelve(12)
months upon such termination. If the Executive's employment terminates Without
Cause, or pursuant to Section XI, all stock options ("Options") granted to the
Executive under the Plan or under any other stock option program or plan shall
be deemed vested, and the Company shall cause the Options to remain exercisable
for twelve (12) months from the date of termination.
B. Termination With Cause.
If the Company terminates Executive With Cause, earned but
unpaid Base Salary will be paid on a pro-rated basis for the year in which the
termination occurs. No other payments will be made or benefits provided by the
Company.
4
<PAGE> 5
C. Effect of Certain Terminations
Upon termination of the Executive's employment for reasons
other than due to death, disability, or pursuant to Paragraph A of this Section
or Section XI, or upon Executive's resignation (other than in connection with a
Change in Control), the Period of Employment and the Company's obligation to
make payments under this Agreement will cease as of the date of the termination
except as expressly defined in this Agreement.
D. Definitions
For this Agreement, the following terms have the following
meanings:
1. Termination "With Cause" means termination
of the Executive's employment by the Company's Board of Directors acting in good
faith by the Company by written notice to the Executive specifying the event
relied upon for such termination, due to the Executive's serious, willful
misconduct with respect to his duties under this Agreement, including, but not
limited to, conviction for a felony or perpetration of a common law fraud, which
has resulted or is likely to result in material economic damage to the Company.
2. Termination "Without Cause" means
termination by the Company of the Executive's employment other than due to
death, disability, termination With Cause, or pursuant to Section XI.
SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT
A. Cooperation During and After Employment
The Executive will, with reasonable notice during or after the
Period of Employment, furnish information as may be in his possession and
cooperate with the Company as may reasonable be requested in connection with any
claims or legal actions in which the Company is or may become a party.
B. Confidential Information
The Executive recognizes and acknowledges that all information
pertaining to the affairs, business, clients, customers or other relationships
of the Company, as hereinafter defined, is confidential and is a unique and
valuable asset of the Company. Access to and knowledge of this information are
essential to the performance of the Executive's duties under this Agreement. The
Executive will not during the Period of
5
<PAGE> 6
Employment or after, except to the extent reasonably necessary in performance of
the duties under this Agreement, give to any person, firm, association,
corporation or governmental agency any information concerning the affairs,
business, clients, customers or other relationships of the Company, except as
required by law. The Executive will not make use of this type of information for
his own purposes or for the benefit of any person or organization other than the
Company. The Executive will also use his best efforts to prevent the disclosure
of this information by others. All records, memoranda, etc, relating to the
business of the Company, whether made by the Executive or otherwise coming into
his possession, are confidential and will remain the property of the Company.
C. Certain Restricted Activities
During the Period of Employment and for a twelve (12) month
period thereafter, the Executive will not use his status with the Company to
obtain loans, goods or services from another organization on terms that would
not be available to him in the absence of his relationship to the Company.
During the Period of Employment and for a twelve (12) month period following
termination of the Period of Employment, other than termination Without Cause:
the Executive will not make any statements or perform any acts intended to
advance the interest of any existing or prospective competitors of the Company
in any way that will injure the interest of the Company; the Executive, without
prior express written approval by the Board of Directors of the Company, will
not directly or indirectly own or hold any proprietary interest in or be
employed by or receive compensation from any party engaged in the same or any
similar business in the same geographic areas the Company does business; and the
Executive, without express prior written approval form the Board of Directors,
will not solicit any members of the then current clients of the Company or
discuss with any employee of the Company information or operation of any
business intended to compete with the Company. For the purposes of the
Agreement, proprietary interest means legal or equitable ownership, whether
through stock holdings or otherwise, of a debt or equity interest (including
options, warrants, rights and convertible interest) in a business firm or
entity, or ownership of more than 5% of any class of equity interest in a
publicly-held company. The Executive acknowledges that the covenants contained
herein are reasonable as to geographic and temporal scope. For a twelve (12)
month period after termination of the Period of Employment for any reason, the
Executive will not directly or indirectly hire any employee of the Company or
solicit or encourage any such employee to leave the employ of the Company.
D. Remedies
The Executive acknowledges that his breach or threatened or
attempted breach of any provision of Section IX would cause irreparable harm to
the Company not compensable in monetary damages and that the Company shall be
entitled, in addition to all other applicable remedies, to a temporary and
permanent injunction and a decree for
6
<PAGE> 7
specific performance of the terms of Section IX without being required to prove
damages or furnish any bond or other security. The Executive hereby acknowledge
the necessity of protection against the competition of, and certain other
possible adverse actions by, the Executive and that the nature and scope of such
protection has been carefully considered by the parties. The period provided and
the area covered are expressly represented and agreed to be fair, reasonable and
necessary. If, however, any court or arbitrator determines that the restrictions
described herein are not reasonable, the court or arbitration panel may modify,
rewrite or interpret such restrictions to include as much of their nature and
scope as will render them enforceable.
E. Effect of Material Default
The Executive shall not be bound by the provisions of Section
IX in the event of the material default by the Company in its obligations under
this Agreement which are to be performed upon or after termination of this
Agreement.
SECTION X
INDEMNIFICATION, LITIGATION
The Company will indemnify the Executive to the fullest extent
permitted by the laws of the state of incorporation in effect at that time, or
certificate of incorporation and by-laws of the Company whichever affords the
greater protection to the Executive.
SECTION XI
CHANGE IN CONTROL
A. Effect of Change in Control
In the event there is a Change in Control and within the six
month period following such event Executive is terminated, the Company shall pay
to the Executive in a lump sum upon such termination an amount equal to ___% of
his Base Salary in effect at the time of such termination and the greater of the
most recent Annual Incentive Award paid or earned by Executive or the Current
Annual Incentive Award target. In addition, any stock options granted to the
Executive prior to termination pursuant to the Plan, but subject to vesting
restrictions, will be fully vested upon a Change in Control whether or not the
Executive is terminated or resigns and shall remain exercisable for one year
following vesting. The benefits and perquisites described in this Agreement as
in effect at the date of termination of employment will also be continued for
twelve (12) months from the effective date of termination pursuant to a Change
of Control.
7
<PAGE> 8
B. Definition of Change in Control
A "Change in Control" shall be deemed to have occurred if (i)
a tender offer shall be made and consummated for the ownership of more than 50%
of the outstanding voting securities of the Company, (ii) the Company shall be
merged or consolidated with another corporation and as a result of such merger
or consolidation less than 50% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of the Company, as the same shall have existed immediately prior to
such merger or consolidation, (iii) the Company shall sell all or substantially
all of its assets to another corporation which is not a wholly-owned subsidiary
or affiliate, (iv) as the result of, or in connection with, any contested
election for the Board of Directors of the Company, or any tender or exchange
offer, merger or business combination or sale of assets, or any combination of
the foregoing (a "Transaction"), the persons who were Directors of the Company
before the Transaction shall cease to constitute a majority of the Board of
Directors of the Company, or any successor thereto, or (v) a person, within the
meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date
hereof) of the Securities and Exchange Act of 1934 ("Exchange Act"), other than
any employee benefit plan then maintained by the Company, shall acquire more
than 50% of the outstanding voting securities of the company (whether directly,
indirectly, beneficially or of record). For purposes hereof, ownership of voting
securities shall take into account and shall include ownership as determined by
applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof)
pursuant to the Exchange Act.
C. Special Change in Control
In the event there is a Special Change in Control (as defined
below) and (i) the Executive then remains with the Company for the greater of
(a) eighteen months from the date of this Agreement and (b) for six months
following the Distribution Date (as defined below), and (ii) the Executive
elects to resign after remaining with the Company for such period (such election
shall be made on or before the expiration of such period), the Company shall pay
to the Executive in a lump sum upon such resignation an amount equal to 100% of
his Base Salary in effect at the time of such self termination. The benefits and
perquisites described in this Agreement as in effect at the date of such
resignation will be continued for twelve (12) months from the effective date of
the resignation.
D. Definition of Special Change In Control
A "Special Change in Control" shall be deemed to have occurred
if Counsel Corporation sells or distributes all or substantially all of its
shares of Company stock and shall be deemed to have occurred upon the date of
completion of the distribution of the shares of Company stock (the "Distribution
Date").
8
<PAGE> 9
SECTION XII
WITHHOLDING TAXES
The Company may directly or indirectly withhold from any payments under
this Agreement all federal , state, city or other taxes that shall be required
pursuant to any law or governmental regulation.
SECTION XIII
EFFECTIVE PRIOR AGREEMENTS
This Agreement contains the entire understanding between the Company
and the Executive with respect to the subject matter and supersedes any prior
employment , severance, or other similar agreements between the Company, its
predecessors, and its affiliates, and the Executive.
SECTION XIV
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating
or merging into or with, or transferring all or substantially all of its assets
to, another corporation which assumes this Agreement and all obligations and
undertakings of the company hereunder. Upon such a Consolidation, Merger or Sale
of Assets, the term "the Company" as used will mean the other corporation and
this Agreement shall continue in full force and effect. This Section XIV is not
intended to modify or limit the rights of the Executive hereunder, including
without limitation, the rights of Executive under Section XI.
SECTION XV
MODIFICATION
This Agreement may not be modified or amended except in writing signed
by the parties. No term or condition of this Agreement will be deemed to have
been waived, except in Writing by the party charged with waiver. A waiver shall
operate only as to the specific term or condition waived and will not constitute
a waiver for the future or act on anything other than that which is specifically
waived.
9
<PAGE> 10
SECTION XVI
GOVERNING LAW; ARBITRATION
This Agreement has been executed and delivered in the State of Delaware
and its validity, interpretation, performance and enforcement shall be governed
by the laws of that state.
Any dispute among the parties hereto shall be settled by arbitration in
accordance with the then applicable rules of the American Arbitration
Association and judgment upon the award rendered may be entered in any court
having jurisdiction thereof.
SECTION XVII
NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid by registered mail, return receipt requested,
or when delivered if by hand, overnight delivery service or confirmed facsimile
transmission, to the following:
(a) If to the Company, at:
PharMerica, Inc.
3611 Queen Palm Drive
Tampa, Florida 33619
or at such other address as may have been furnished to the Executive by the
Company in writing, copy to Mark Manner, Harwell, Howard, Hyne, Gabbert &
Manner, P.C., 1800 First American Center, 315 Deaderick Street, Nashville,
Tennessee 37238; or
(b) If to the Executive, at
----------------------------
----------------------------
or such other address as may have been furnished to the Company by the Executive
in writing.
10
<PAGE> 11
SECTION XVIII
BINDING AGREEMENT
This Agreement shall be binding on the parties' successors, heirs and
assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY
PHARMERICA, INC.
By:
--------------------------------
Title:
-----------------------------
EXECUTIVE
-----------------------------------
11
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Capstone Med., Inc. f/k/a DCMED, Inc.
MediDyne Corp.
PharMerica Drug Systems, Inc.
DOC Pharmacy, Inc.
Hollins Manor I, LLC.
Goot's Goodies, Inc.
Southwest Pharmacies, Inc.
Goot Westbridge Pharmacy, Inc.
Goot Nursing Home Pharmacy, Inc.
Goot's Pharmacy and Orthopedic Supply, Inc.
Capstone Pharmacy of Delaware, Inc.
f/k/a B.T. Smith, Inc.
Rombro's Drug Center, Inc.
Family Center Pharmacy, Inc.
Compuscript, Inc.
Premier Pharmacy, Inc.
Pharmacy Corporation of America
Tmesys, Inc.
Express Pharmacy Services, Inc.
Alliance Health Services, Inc.
Beverly Acquisition Corporation
Computran Systems, Inc.
Dunnington Drug, Inc.
<PAGE> 2
Healthcare Prescription Services, Inc.
Insta-Care Holdings, Inc.
Medical Health Industries, Inc.
Alliance Home Health Care, Inc.
Brownstone Pharmacy, Inc.
Omni Med B, Inc.
Dunnington Rx Services of Rhode Island, Inc.
Dunnington Rx Services of Massachusetts, Inc.
DD Wholesale, Inc.
Pharmacy Corporation of America-Massachusetts, Inc.
Insta-Care Pharmacy Services Corporation
Pharmacy Dynamics Group, Inc.
<PAGE> 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this form 10-K into the Company's previously filed
Registration Statements (File No. 333-39497, File No. 33-62881, File No.
33-62883, File No. 333-40775, File No. 033-21995, File No. 033-29317, File No.
033-62867, File No. 033-62865, File No. 033-62877, File No. 033-62879, File No.
033-62881, File No. 033-62883, File No. 333-18477, File No. 333-21927 and File
No. 333-3643).
Arthur Andersen LLP
Baltimore, Maryland,
March 30, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements and amendments thereto:
Form S-8 No. 333-39497 401(k) Profit Sharing Plan
Form S-8 No. 033-62881 1995 Incentive and Nonqualified Stock Option Plan
for Key Personnel and Directors
Form S-8 No. 033-62883 1996 Employee Stock Purchase Plan
Form S-8 No. 333-40775 Nonqualified Deferred Compensation Plan for
Executives
Form S-8 No. 033-21995 1986 and 1987 Stock Option Plans
Form S-8 No. 033-29317 1986, 1987, 1988 Stock Option Plans-Outside
Directors Stock Option Plans
Form S-8 No. 033-62867 1989 Stock Option Plan
Form S-8 No. 033-62865 1991 Stock Option Plan
Form S-8 No. 033-62877 1992 Stock Option Plan
Form S-8 No. 033-62879 1995 Incentive and Nonqualified Stock Option Plan
for Key Personnel and Directors
Form S-8 No. 333-18477 1996 Compensation Plan for Kantor and Robbins
Form S-3 No. 333-21927 14,143,109 shares of common stock
Form S-3 No. 333-03643 6,478,367 shares of common stock and 650,000
Series B Warrants
of PharMerica, Inc. and in the related Prospectuses of our report dated April
18, 1997, with respect to the consolidated balance sheet of PharMerica, Inc. as
of December 31, 1996, and the related consolidated statements of stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1996 included in this Annual Report (Form 10-K) for the year ended December
31, 1997.
Ernst & Young LLP
Little Rock, Arkansas
March 25, 1998
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<OTHER-SE> 91,604
<TOTAL-LIABILITY-AND-EQUITY> 441,576
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<TOTAL-REVENUES> 516,400
<CGS> 280,468
<TOTAL-COSTS> 280,468
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<LOSS-PROVISION> 13,500
<INTEREST-EXPENSE> 0
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<INCOME-TAX> 14,668
<INCOME-CONTINUING> 20,287
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<PAGE> 1
Exhibit 99
RISK FACTORS
INTEGRATION
The effective integration of PCA and Capstone and the realization of
the economic benefits of the Merger are particularly critical to the Company's
success. Potential obstacles to successful integration include, but are not
limited to: (i) retaining and integrating the Company's management team; (ii)
consolidating pharmacies without losing any customer relationships; (iii)
achieving operating efficiencies; (iv) consolidating departmental functions; (v)
achieving anticipated purchasing efficiencies; (vi) consolidating management
information systems; (vii) coordinating field managerial activities with
corporate management; (viii) retaining and expanding the Company's customer
base; (ix) introducing new products and services to existing facilities; and (x)
adding and integrating key personnel. There can be no assurance that PCA and
Capstone will be successfully integrated, or that the effects of the Merger will
not have a material adverse effect upon the Company's results of operations,
financial condition, or prospects.
DEPENDENCE ON KEY CONTRACTS
On a pro forma basis, sales to Beverly facilities and their residents
would have accounted for approximately 16.0% of the Company's net sales for the
year ended December 31, 1997. Prior to the Merger, Beverly owned PCA. Two of the
Company's directors are presently officers and directors of Beverly. The Company
has entered into non-competition and preferred provider agreements with Beverly
and IHS to provide for the delivery of pharmacy services and products and
ancillary services and products by the Company to Beverly's and IHS's long-term
care facilities. However, such agreements contain certain provisions allowing
for pricing adjustments and termination under certain circumstances, and there
can be no assurance that either the pricing will
<PAGE> 2
not be adjusted or all or part of such agreement or agreements will not be
terminated at some future date. At December 31, 1997, the Company serviced
approximately 58,000 and 17,000 Beverly and IHS long-term care beds,
respectively.
The Company recently filed a lawsuit against IHS for breaches of
contracts and related torts. The lawsuit alleges that IHS's actions in
connection with its purchase of an institutional pharmacy business, including
its failure to offer to sell such business to the Company, and its causing the
acquired pharmacy, immediately prior to such sale, to enter into certain
provider agreements for long-term care pharmacy services is in violation of its
agreement signed in connection with its sale of its institutional pharmacy
business, Symphony Health Services, Inc. ("Symphony") to the Company and in
violation of the preferred provider agreement between IHS and the Company. The
Company cannot at this time predict the outcome or effect of this litigation.
Any material loss of revenues or business from Beverly or IHS could
have a material adverse impact on the Company's future operations.
GROWTH STRATEGY; NEED FOR ADDITIONAL FINANCING
The Company has experienced rapid growth since 1995 and intends to
continue its growth strategy. The Company's successful implementation of its
growth strategy depends upon its ability to identify, consummate and integrate
acquisitions and to attract and retain qualified personnel. The Company will
compete for acquisition candidates with buyers who may have greater financial
and other resources and may be able to pay higher acquisition prices than the
Company. No assurance can be given that the Company will be able to identify
suitable acquisition candidates or to consummate acquisitions on terms
acceptable to it or on terms consistent with past acquisitions or that
acquisitions of a substantial size will be available. To the extent that the
Company is unable to acquire institutional pharmacy companies, or to integrate
such acquisitions successfully, its ability to expand its business would be
reduced significantly. In addition, the Credit Facility contains certain
restrictions on the Company's ability to make acquisitions.
The Company's acquisition strategy requires substantial capital
resources. To fund its acquisition strategy, the Company will incur, from time
to time, additional indebtedness (both short and long-term), including
indebtedness under the Credit Facility, and the amount of such indebtedness
could be significant. The Company may also fund acquisitions through the
issuance, in public or private transactions, of equity or debt securities. The
availability and terms of such equity or debt securities will depend on market
and other conditions existing at the time, and there can be no assurance that
any such additional financing will be available on terms acceptable to the
Company, if at all. In addition, the Credit Facility contains limitations on
the ability of the Company and its subsidiaries to incur indebtedness and issue
certain preferred stock. Availability of commitments under the Credit Facility
is subject to the Company complying with certain financial covenants and other
provisions.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company derives, directly or indirectly, a majority of its net
sales from government-sponsored reimbursement programs. The Company's revenues
and profitability will be affected by the efforts of all payors to continue to
reduce the costs of healthcare by lowering reimbursement
<PAGE> 3
rates, narrowing the scope of covered services, increasing case management
review of services, and negotiating reduced or fixed contract pricing. Any
changes in reimbursement levels under Medicare, Medicaid, or private pay
programs, including managed care contracts, could have a material adverse effect
on the Company's results of operations, financial condition and prospects. In
addition, changes to reimbursement policies requiring payment on a
pre-negotiated basis, based on specific rates for certain medical conditions or
on a capitated basis, could have a material adverse impact on the Company.
Changes in the mix of residents among Medicare, Medicaid and different types of
private pay sources may materially adversely affect the Company's revenues and
profitability.
HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the institutional pharmacy industry. In
recent years, several comprehensive national healthcare reform proposals were
introduced in the United States Congress. While none of the proposals were
adopted, healthcare reform may again be addressed by the United States Congress.
Several states also are considering healthcare reforms through Medicaid managed
care demonstration projects. Although these projects generally exempt
institutional pharmacy services and long-term care facilities, no assurance can
be given that such projects or other proposals will not change the Medicaid
reimbursement system in a manner that would affect the Company's operations. The
Company cannot predict which, if any, federal or state modifications or reform
proposals will be adopted, when they may be adopted or what their impact on the
Company may be if adopted. There can be no assurance that the adoption of
certain modifications or proposals will not have a material adverse effect on
the Company's results of operations, financial condition or prospects.
MANAGEMENT
In connection with the Merger, the management of PCA and Capstone were
combined such that two executive officers from each of PCA and Capstone became
executive officers of PharMerica. The management team now includes eleven former
PCA officers and twelve former Capstone officers. In addition, the Company's
Board of Directors was modified such that five former Capstone directors
continued to serve on the Board along with five directors nominated by Beverly,
including PharMerica's President and Chief Executive Officer, C. Arnold
Renschler, M.D. There can be no assurances that the Company will retain the
members of the combined management team or that the combined management team
will be as effective as the former management teams of Capstone or PCA, which
could have a material adverse effect on the Company's results of operations,
financial condition or prospects. PharMerica has entered into employments
contracts with each of its executive officers that contain non-compete clauses
with the Company, but there can be no assurance that such individuals will
remain with the Company.
ROLE OF MANAGED CARE
As managed care assumes an increasing role in the healthcare industry,
the Company's future success will, in part, be dependent on obtaining and
retaining managed care contracts. Competition for such contracts is intense and,
in most cases, will require the Company to compete based on the breadth of
services offered, pricing, the ability to track and report patient outcomes and
cost data, and the provision of value-added pharmacy consulting services, among
other factors. In addition,
<PAGE> 4
reimbursement rates under managed care contracts typically are lower than those
paid by other private third-party payors and may be likely to be based on fixed
rates that will require the Company to accurately project costs and outcomes.
There can be no assurance that the Company will retain or continue to obtain
such managed care contracts or that the managed care contracts it obtains will
be on terms as favorable to the Company as those of its current managed care and
other contracts. To the extent reimbursement provisions in managed care or other
contracts or arrangements change to pre-negotiated prices for specific medical
conditions or to capitated rates, there can be no assurance that the Company
will be able to retain or continue to obtain such managed care contracts or
other arrangements, that the managed care contracts or other arrangements it
obtains will be on terms as favorable to the Company as those of its current
managed care and other contracts or that the Company will be able to service
such contracts or other arrangements profitably.
COMPETITION
The long-term care pharmacy markets in which the Company operates are
fragmented and highly competitive. Competition for each long-term facility is
generally on a local basis and in such markets comes from both small to mid-size
local operators and regional and national operators. The Company's competition
in its mail service workers' compensation division comes primarily from regional
and local competitors and, occasionally, from national managed care companies.
The Company's competition in the correctional pharmacy market comes primarily
from other large providers. The Company believes that the primary competitive
factor in its industry is breadth and quality of service. Additional competitive
factors include reputation, ease of doing business with the specific providers,
ability to develop and to maintain relationships with general medical
contractors, and competitive pricing. Some of the present and potential
competitors including retail pharmacies, captive pharmacies and pharmaceutical
distributors are, or may become, larger than the Company and have, or may
obtain, greater financial and marketing resources.
GOVERNMENT REGULATION
The Company is subject to extensive federal, state and local
regulation. Federal laws governing the Company's activities include regulations
covering the repackaging, storing and dispensing of drugs, Medicare
reimbursement, and certain financial relationships with physicians and other
healthcare providers. The Company is subject to state laws governing Medicaid,
workers' compensation, professional training, pharmacy licensure, payment in
exchange for patient referrals and the dispensing and storage of
pharmaceuticals. The pharmacies operated by the Company must comply with all
applicable laws, regulations and licensing standards. Many of the Company's
employees must maintain certain licenses in order to provide services. The
long-term care facilities that contract for pharmacy services are also subject
to federal and state regulations and are required to be licensed in the states
in which they are located. The failure by these institutions to comply with such
regulations or to obtain or renew any required licenses could result in the loss
of the Company's ability to provide pharmacy services to their residents. There
can be no assurance that federal, state or local governments will not change
existing standards or impose additional standards, compliance with which may
require the Company to incur significant additional expense. Any significant
additional expense incurred in connection with such compliance or any failure to
comply with existing or future standards could have a material adverse effect
upon the Company's results of operations, financial condition or prospects. In
addition, any restrictions on pharmaceutical
<PAGE> 5
companies marketing programs, including the ability of such companies to pay
incentives to dispense one particular product rather than another, could be
material to the Company.
LIABILITY AND ADEQUACY OF INSURANCE
The provision of healthcare services entails an inherent risk of
liability. The Company currently maintains product and professional liability
insurance intended to cover such claims in amounts which it believes are
consistent with industry standards. There can be no assurance, however, that
claims in excess of the insurance coverage or claims not covered by insurance
will not arise. A successful claim in excess of the Company's insurance coverage
could have a material adverse effect upon the Company's results of operations,
financial condition and future prospects. Claims, regardless of their merit or
eventual outcome, may also have a material adverse effect upon the Company's
ability to attract customers, to maintain its insurance policies or to expand
its business. There can be no assurance that the Company will be able to obtain
adequate liability insurance coverage in the future on acceptable terms, if at
all.
SIGNIFICANT LEVERAGE
The Company has had and will continue to have substantial indebtedness
and significant debt service obligations. As of December 31, 1997, the Company
would had approximately $435.4 million of indebtedness outstanding,
approximately $125.5 million committed under the Credit Facility (of which
approximately $47.0 million was available), approximately $1.1 billion of total
assets, approximately $379.8 million of net tangible assets and approximately
$528.9 million of stockholders' equity. The availability of funds under the
Credit Facility during 1998 is predicated on the Company maintaining an adjusted
leverage ratio of 4:1. As a result, the availability under the line of credit
may vary based upon the Company's operating results. There can be no assurance
that the Company's operating performance will be adequate to have available as
needed all of the committed funds under the Credit Facility.
The level of the Company's indebtedness could have important
consequences to the holders of the Company's debt, including: (i) a significant
portion of the Company's cash flow from operations will be committed to the
payment of the Company's interest expense and principal repayment obligations,
thereby reducing the funds available to the Company for its operations and
future business opportunities; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other purposes may be limited; (iii) the Company may be more highly leveraged
than certain of its competitors, which may place it at a competitive
disadvantage, limit the Company's flexibility in reacting to changes in its
business and make it more vulnerable to downturns in general economic
conditions; (iv) certain of the Company's borrowings are at variable rates of
interest, which could result in higher interest expense in the event of an
increase in interest rates; and (v) the Credit Facility contains financial and
restrictive covenants that, if not complied with, could lead to a default that
could have a material adverse effect on the Company.
