<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
------------------------
Commission file number 0-20606
PHARMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2310352
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3611 QUEEN PALM DRIVE 33619
TAMPA, FL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 626-7788
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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding for each of the issuer's
classes of common stock, as of the close of the latest practicable date.
Class Outstanding at November 2, 1998
----- -------------------------------
COMMON STOCK, $.01 PAR VALUE 89,326,126
<PAGE> 2
PHARMERICA, INC. AND SUBSIDIARIES
INDEX
PART 1: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 27
PART 2: OTHER INFORMATION
Item 1. Legal Procedures................................................. 28
Item 2. Changes in Securities............................................ 28
Item 3. Defaults upon Senior Securities.................................. 28
Item 4. Submission of Matters to Vote of Security Holders................ 28
Item 5. Other Information................................................ 28
Item 6. Exhibits and Reports on Form 8-K................................. 28
SIGNATURES ......................................................... 29
INDEX OF EXHIBITS.......................................................... 30
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PharMerica, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of December 31, 1997 and September 30, 1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 34,215 $ 35,856
Accounts receivable, net of allowance for doubtful accounts of
$22,096 and $66,442, respectively 205,225 224,498
Inventories 51,766 56,688
Prepaid expenses and other current assets 6,307 2,594
Deferred tax assets 35,360 49,056
---------- ----------
Total Current Assets 332,873 368,692
Equipment and leasehold improvements, net 46,599 63,279
Goodwill, net of accumulated amortization of $ 26,653
and $38,873, respectively 723,954 701,607
Other assets 10,822 15,749
---------- ----------
Total Assets $1,114,248 $1,149,327
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 109,483 $ 96,948
Current portion of long term debt 7,533 10,225
Current portion of accrued restructuring charges 14,269 5,272
---------- ----------
Total Current Liabilities 131,285 112,445
Deferred income taxes 21,216 26,262
Long term debt, net of current portion 427,889 570,968
Restructuring charges, net of current portion 4,980 12,640
---------- ----------
Total Liabilities 585,370 722,315
STOCKHOLDERS' EQUITY
Common stock $.01 par value; 300,000,000 shares authorized; 876 894
87,930,184 shares issued and 87,591,722 shares outstanding as of
December 31, 1997 and 89,326,126 shares issued and outstanding
as of September 30, 1998
Preferred stock, $.01 par value; and 500,000 shares authorized and
none outstanding -- --
Additional paid-in capital 413,567 417,114
Retained earnings 114,435 9,004
---------- ----------
Total Stockholders' Equity 528,878 427,012
---------- ----------
Total Liabilities and Stockholders' Equity $1,114,248 $1,149,327
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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PharMerica, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1997 and 1998
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 155,555 $ 289,767 $ 456,885 $ 852,116
COSTS OF REVENUES 84,894 172,219 247,291 485,883
--------- --------- --------- ---------
Gross profit 70,661 117,548 209,594 366,233
OPERATING EXPENSES:
Selling, general and
administrative expenses 49,395 88,072 145,657 256,478
Bad debt expense 2,505 42,221 7,682 48,794
Depreciation and amortization 5,022 9,327 14,930 26,744
Loss on disposition -- 4,500 -- 4,500
Asset impairment
and restructuring charges -- 108,215 -- 108,215
--------- --------- --------- ---------
Operating income (loss) 13,739 (134,787) 41,325 (78,498)
INTEREST EXPENSE, NET 70 10,656 118 28,039
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAX 13,669 (145,443) 41,207 (106,537)
PROVISION (BENEFIT)
FOR INCOME TAXES 5,675 (18,000) 17,096 (1,106)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 7,994 $(127,443) $ 24,111 $(105,431)
========= ========= ========= =========
Earnings (loss) per common and
common equivalent share:
Basic $ 0.16 ($ 1.42) $ 0.48 ($ 1.19)
========= ========= ========= =========
Diluted $ 0.16 ($ 1.42) $ 0.48 ($ 1.19)
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic 50,000 89,661 50,000 88,626
========= ========= ========= =========
Diluted 50,051 89,661 50,051 88,626
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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PharMerica, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30,1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Stockholders'
Shares Amount Paid-in Capital Earnings Equity
------ ------ --------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 87,591 $ 876 $ 413,567 $ 114,435 $ 528,878
Shares released from escrow 332 3 (3) -- --
Common stock issued in connection with
exercise of stock options and warrants 1,941 20 10,062 -- 10,082
Common stock received in connection
with disposition and retired (538) (5) (6,512) -- (6,517)
Net loss for the nine months ended
September 30, 1998 -- -- -- (105,431) (105,431)
--------- --------- --------- --------- ---------
Balance, September 30, 1998 89,326 $ 894 $ 417,114 $ 9,004 $ 427,012
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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PharMerica, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 24,111 $(105,431)
--------- ---------
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 14,930 26,744
Loss on disposition -- 4,500
Asset impairment and restructuring charges -- 108,215
Changes in operating assets and liabilities,
net of acquisitions and disposition
Accounts receivable, net (15,785) (26,494)
Inventories (4,066) (3,423)
Prepaid expenses and other current assets 139 4,137
Deferred income taxes 1,272 (8,650)
Accounts payable and accrued expenses 713 (22,015)
Accrued restructuring charges -- (11,090)
Other assets (542) (4,563)
--------- ---------
Total adjustments (3,339) 67,361
--------- ---------
Net cash flows from operating activities 20,772 (38,070)
--------- ---------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (11,514) (25,074)
Payments for acquisitions, net of cash acquired (27,589) (84,530)
--------- ---------
Net cash flows from investing activities (39,103) (109,604)
--------- ---------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings -- 143,825
Net proceeds from issuance of long-term debt 172 --
Net proceeds from issuance of subordinated debt -- 316,875
Advances from Beverly Enterprises, Inc. 12,812 --
Proceeds from exercise of stock options and warrants -- 10,082
Repayment of long-term debt -- (321,467)
--------- ---------
Net cash flows from financing activities 12,984 149,315
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,347) 1,641
Cash and cash equivalents, beginning of period 7,575 34,215
--------- ---------
Cash and cash equivalents, end of period $ 2,228 $ 35,856
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 219 $ 12,903
========= =========
Taxes $ -- $ 20,599
========= =========
Supplemental disclosure of noncash investing and financing activities:
Receipt of common stock in connection with disposition $ -- $ 6,517
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - PharMerica, Inc. ("PharMerica" or the
"Company"), a Delaware corporation, was formed as a result of the merger
involving Capstone Pharmacy Services, Inc. ("Capstone") and Pharmacy
Corporation of America ("PCA"), a wholly-owned subsidiary of Beverly
Enterprises, Inc. ("Beverly"), on December 3, 1997 (the "Merger").
PharMerica is a leading provider of pharmacy products and services serving
approximately 500,000 patients in long-term care and alternate site
settings. The Company provides services to patients in skilled nursing
facilities, assisted living facilities, residential and independent living
communities, specialty hospitals and the home setting. The Company
currently operates 168 pharmacies in 41 states serving approximately
380,000 long-term care residents and more than 106,000 workers'
compensation patients through its mail service and on-line pharmacy
programs. In addition, PharMerica currently serves over 4,300 patients
enrolled in its Pharma Complete chronic and catastrophic care program.
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission ("SEC")
and, therefore, omit or condense footnote disclosures and certain other
information normally included in financial statements prepared in
accordance with generally accepted accounting principles. The accounting
policies followed for quarterly financial reporting conform with the
accounting policies disclosed in Note 1 of the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. In the opinion of management, all
adjustments that are necessary for a fair presentation of the financial
information for the interim periods reported have been made.
In connection with the Merger, the transaction has been treated as an
acquisition of Capstone by PCA for accounting purposes since, at the date
of the Merger, Beverly's shareholders owned a majority of the surviving
company. Accordingly, the historical financial statements for the three and
nine months ended September 30, 1997 are comprised of PCA only.
The results of operations for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of results to be expected
for the entire year ending December 31, 1998. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K, as filed with the Securities and
Exchange Commission, for the year ended December 31, 1997. The condensed
consolidated balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
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PRINCIPLES OF CONSOLIDATION - The unaudited condensed consolidated
financial statements include the accounts of PharMerica, Inc. and its
wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
ACCOUNTING 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 the
disclosures of contingent assets and liabilities at the date of the
financial statements. Also affected are the reported amounts of revenues,
expenses, and 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:
Furniture, fixtures and equipment...................3-15 years
Software and computer equipment.....................3-5 years
Leasehold improvements..............................5 years
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining useful
lives at the acquisition date.
GOODWILL AND IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," 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.
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over 40 years. 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
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<PAGE> 9
cannot be recovered, calculated based on undiscounted cash flows over the
remaining amortization period, the carrying value of the intangible asset
will be reduced to its fair value. Fair value is determined by using the
present value of estimated future cash flows over the remaining
amortization period.
In 1997, the Company recorded an impairment loss of approximately $5.2
million related to the planned closure of certain Capstone pharmacies as a
result of the Merger (see Note 2). The impairment loss included the
write-off of various fixed assets, such as leasehold improvements and
furniture and fixtures, which are specific to the pharmacies closed.
These pharmacies were closed during 1998. Additionally, the Company had
capitalized software costs which were also written-down to their estimated
fair value.
During the third quarter of 1998, the Company recorded an impairment loss
of approximately $99.0 million. This loss related primarily to five
pharmacies, each of which has had negative operating cash flows during
1998. The Company closed one of the pharmacies during the third quarter of
1998 and has identified three of the other pharmacies as "assets to be
disposed of" and has recorded write-downs to reflect management's opinion
of estimated net realizable value for these pharmacies. The fifth pharmacy
has had deteriorating operating results which required the Company to
record the FAS 121 charge.
REVENUE RECOGNITION - Revenues are recorded as products are shipped and
services rendered. A portion of the Company's revenues are covered by
various state and federal reimbursement programs which are subject to
review and 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.
The Company also recognizes revenue under certain capitated arrangements.
However, these revenues are insignificant and any estimated gains or 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.
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 items in 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 consequence of "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.
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
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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
and was adopted by the Company in the first quarter of 1998.
The weighted average basic and diluted shares used for the three and nine
month periods ended September 30, 1998 were approximately 89.7 million and
88.6 million, respectively.
The financial statements for the three and nine months ended September 30,
1997, represent those of PCA before the Merger with Capstone since the
Merger was recorded for accounting purposes as a purchase of Capstone by
PCA, effective December 3, 1997. PCA did not have separate identifiable
outstanding common stock as it was a wholly owned subsidiary of Beverly
Holdings, Inc. ("Beverly"). In connection with the Merger, 50 million
shares of common stock were issued relative to the PCA business.
NOTE 2 - ACQUISITIONS AND DIVESTITURES
1998 ACQUISITIONS AND DIVESTITURES - During January 1998, the Company
acquired the stock of Express Pharmacy Services, Inc., and Tmesys, Inc.,
which are based in Tampa, Florida and provide workers' compensation related
mail order and on-line pharmacy services . The purchase price was
approximately $19.7 million, and goodwill at the date of acquisition was
$18.6 million.
During February 1998, the Company acquired the assets of Kentucky Health
Services, Inc. d/b/a Med Source, a Kentucky based provider of institutional
pharmacy services. The purchase price was approximately $25.0 million, and
goodwill at the date of acquisition was $23.3 million. The agreement also
provides for an earnout based on the future adjusted earnings of the
business.
On July 2, 1998, the Company sold its Department of Corrections business to
Stadtlanders Drug Distribution Co., Inc., an affiliate of Counsel
Corporation ("Counsel"), the Company's largest shareholder. In exchange for
substantially all net assets of the business, the Company received 537,500
shares of PharMerica common stock previously owned by Counsel. The Company
recorded a pre-tax loss on the sale of this business of approximately $4.5
million during the three months ended September 30, 1998.
During August 1998, the Company acquired certain assets of National
Institutional Pharmacy Services, Inc. ("NIPSI"), a New Mexico based
provider of institutional pharmacy services, from Integrated Health
Services, Inc. The purchase price was approximately $20.9 million, plus
related transaction costs of approximately $7.4 million, and goodwill
recorded at the date of acquisition was approximately $26.4.
Also, during the nine months ended September 30, 1998, the Company acquired
the assets or stock of nine additional companies. The total purchase price
was approximately $23.4 million and total goodwill recorded was
approximately $21.1 million. Certain acquisitions include provisions for
earnouts based on adjusted future earnings for the respective business.
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
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price was approximately $20.1 million, and goodwill recorded at the date of
acquisition was $12.0 million.
In March 1997, the Company acquired the assets of Intramed, Inc. and
Black-Hills Pharmaceutical Services, Inc. which provide institutional
pharmacy and infusion therapy services in the state of South Dakota. The
total purchase price was $2.4 million, and goodwill recorded at the date of
acquisition was approximately $1.7 million.
In April 1997, the Company acquired the assets of River City Pharmacy,
Inc., an Indiana-based institutional pharmacy. The purchase price was $5.4
million and goodwill recorded at the date of acquisition was $4.5 million.
On December 3, 1997, Capstone issued 50,000,000 shares of its common stock
and paid approximately $291.0 million 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. leaving only its institutional pharmacy business,
PCA, to be acquired by Capstone. Because Beverly's shareholders own a
majority of the surviving corporation, the transaction has been treated as
an acquisition of Capstone by PCA for accounting purposes.
In accordance with EITF 95-19, the purchase price for the Beverly
acquisition 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. 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 $7.7 million, and goodwill recorded at
the date of acquisition was $7.4 million.
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 at closing was
$9.2 million and the agreement also provided for an earn-out based on the
future adjusted earnings of the business. Goodwill recorded at the date of
acquisition was $8.4 million.
Also, in December 1997, the Company purchased Resident Care Pharmacy, Inc.
("Resident Care"), a North Carolina-based institutional pharmacy. The total
consideration was approximately $13.0 million, including $9.1 million
representing the issuance of 811,341 shares of the Company's common stock,
a non-compete note payable of $1.4 million, assumed debt of $1.6 million
and a cash payment of $.8 million. Goodwill at the date of acquisition was
$13.6 million.
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 unaudited condensed
consolidated statements of operations. Goodwill, representing the
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<PAGE> 12
excess of acquisition cost over the fair value of net assets acquired, for
these business acquisitions is being amortized over forty years.
UNAUDITED PRO FORMA FINANCIAL INFORMATION - Unaudited pro forma combined
consolidated results of operations of the Company for the three and nine
month periods ended September 30, 1997 and 1998 are presented below. Such
pro forma presentation has been prepared assuming that the acquisitions and
divestitures discussed above had been made as of January 1, 1997:
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<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $271,228 $ 294,878 $794,792 $875,062
COSTS OF REVENUES 148,875 174,518 435,172 492,344
-------- --------- -------- --------
Gross profit 122,353 120,360 359,620 382,718
OPERATING EXPENSES
Selling, general and
administrative expenses 82,668 89,631 244,377 263,862
Bad debt expense 3,244 42,221 9,900 48,794
Depreciation and Amortization 9,726 9,458 28,867 27,678
-------- --------- -------- --------
OPERATING INCOME (LOSS) 26,715 (20,950) 76,476 42,384
Interest Expense, net 10,178 10,716 29,541 29,987
-------- --------- -------- --------
INCOME (LOSS) BEFORE
PROVISION FOR
INCOME TAX 16,537 (31,666) 46,935 12,397
INCOME TAX PROVISION (BENEFIT) 7,221 (13,659) 20,178 5,331
-------- --------- -------- --------
NET INCOME (LOSS) $ 9,316 $ (18,007) $ 26,757 $ 7,066
======== ========= ======== ========
Primary and Diluted income
(loss) per share $ 0.10 $ (0.20) $ 0.30 $ 0.08
======== ========= ======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) exclusion of
non-recurring asset impairment and restructuring charges, (2) depreciation
and amortization of the acquired identifiable tangible and intangible
assets based on the new cost basis of the acquisitions, (3) the interest
expense resulting from the financing of the acquisitions, (4) incremental
interest charges on intercompany balances with Beverly Enterprises, Inc. at
an effective rate of 6.5%, (5) the per share effect of stock issued as part
of the acquisitions, and (6) the related income tax effects. 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 of the Company and the acquired
companies been combined in prior years.
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<PAGE> 14
NOTE 3 - LONG-TERM DEBT
The Company maintains a $550 million Bank Credit Facility with several
commercial banks (the "Credit Facility"). The Credit Facility stipulates
certain covenants relating to various financial ratios, including a
leverage ratio and a minimum net worth requirement, among other restrictive
covenants. The Company was in compliance with all such covenants as of
September 30, 1998. The Credit Facility allows PharMerica to obtain loans
at any time, subject to compliance with certain covenants, and matures on
December 3, 2002.
Under the Credit Facility, 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, plus 1/2 of 1%. 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 Facility. Interest on the Eurodollar loans is due on
the last day of the interest period applicable to the borrowing. As of
September 30, 1998, the Company had $246,650,000 outstanding under a
Eurodollar loan at an effective interest rate, including the amortization
of deferred financing costs, of approximately 6.25%.
In March 1998, the Company sold $325 million of Senior Subordinated Notes
(the "Notes") in a private placement offering. The Notes bear interest at 8
3/8% and mature in 2008. Net -proceeds of the Notes were used to repay a
portion of the outstanding borrowings under the Credit Facility. In
accordance with the terms of the Notes, in July 1998 the Company exchanged
the private placement notes for publicly registered notes with
substantially the same terms.
NOTE 4 - 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 this plan, management intended to close six former PCA pharmacies, 14
former Capstone pharmacies, and relocate Capstone's corporate headquarters
from Irving, Texas to Tampa, Florida. The restructuring activities
discussed above in connection with the Merger were substantially completed
during the first nine months of 1998.
In connection with the Capstone acquisition, the Company assumed
approximately $3.9 million of liabilities from previous Capstone
restructurings consisting primarily of remaining lease termination costs.
The Company recorded restructuring costs of approximately $5.8 million in
1997 related to the closure of certain former PCA pharmacies, consisting of
$3.6 million of severance covering approximately 180 pharmacy employees,
$.8 million of lease termination costs and $1.4 million of other exit
costs.
The Company also assumed liabilities, included in the Capstone purchase
price allocation of $9.6 million related to the closure of the former
Capstone pharmacies and the relocation of Capstone's former
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headquarters, consisting of $5.0 million of severance covering
approximately 260 employees, $3.1 million of lease termination costs and
$1.5 million of relocation costs. The terminated positions were comprised
primarily of pharmacy employees and several regional and corporate
positions.
During the nine months ended September 30, 1998, approximately $5.6 million
has been charged against these restructuring accruals consisting of
approximately $2.7 million paid as severance to approximately 106
terminated employees and approximately $2.9 million paid for relocation,
terminated leases and other exit costs. In September 1998, management
determined that approximately $6.8 million of these original accrued Merger
restructuring charges, exceeded the estimated amount required to complete
the planned restructuring. Accordingly, the restructuring accrual was
reduced by a reduction of asset impairment and restructuring charges of
$3.8 million on the condensed consolidated statements of operations, and a
reduction in goodwill of $3.0 million on the condensed consolidated balance
sheet.
In September 1998, the Company recorded approximately $13.0 million in new
restructuring charges, consisting of approximately $2.1 million of
severance covering 46 corporate positions and approximately $10.9 million
relating to future rents and related exit costs in connection with the
relocation of the Company's corporate office and its mail service pharmacy
facility in Tampa. The Company is consolidating and relocating its
corporate office and the mail service pharmacy operating unit to a new
location in Tampa.
NOTE 5 - RELATED PARTY TRANSACTION
During the three months ended September 30, 1998, the Company paid
approximately $5.9 million to Counsel Corporation, which owns approximately
9% of the Company's outstanding common stock, for investment banking
services in connection with the Company's acquisition of NIPSI and the
settlement of related litigation with Integrated Health Services, Inc.
These payments have been included in the total cost of the NIPSI
acquisition.
NOTE 6 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 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.
SFAS No. 131 requires the Company to report a measure of segment profit or
loss, certain specific revenue and expense items and segment assets. It
also 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.
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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. Management does not believe that the adoption of SFAS No.
131 will have a material impact on its consolidated financial statements.
NOTE 7 - 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 consolidated financial position or future
operating results of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Certain statements contained in or incorporated by reference into this
Form 10-Q, including but not limited to those regarding the Company's financial
position, business strategy, and other plans and objectives for future
operations and any other statements that are not historical facts constitute
forward-looking statements which are subject to certain risks and uncertainties
that could cause actual results to differ materially from these statements. Such
factors include, but are not limited to: the continued availability of
acceptable acquisition candidates, the Company's ability to complete its
acquisition integration strategy, the effect of changes in government regulation
and reimbursement policies and in the interpretation and application of such
policies, the failure of the Company to obtain or maintain required regulatory
approvals or licenses, and other risks and uncertainties as described in the
Risk Factors section below and in the Company's previous filings with the SEC.
OVERVIEW
PharMerica is a leading provider of pharmacy products and services
serving approximately 500,000 patients in long-term care and alternate site
settings. The Company provides its services to patients in skilled nursing
facilities, assisted living facilities, residential and independent living
communities, specialty hospitals and the home setting. PharMerica currently
operates 168 pharmacies in 41 states serving approximately 380,000 long-term
care residents and more than 106,000 workers' compensation patients via mail
service and on-line pharmacy programs.
PharMerica was formed as a result of the Merger involving PCA, formerly
a subsidiary of Beverly, and Capstone. Capstone issued 50 million shares of its
common stock and paid approximately $291.0 million in connection with the
Merger. 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. For accounting
purposes, the transaction was treated as an acquisition of Capstone by PCA since
Beverly's shareholders owned a majority of the Company after the Merger.
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 for accounting
purposes was determined using the fair value for Capstone's common stock over a
reasonable period of time before and after the transaction was announced. After
the Merger was consummated, the historical financial statements of the Company
became those of PCA. Accordingly, the historical financial statements for the
three and nine months ended September 30, 1997 are comprised of PCA only.
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The Company has previously estimated potential cost savings from the Merger,
including savings related to consolidation of pharmacies, better pricing terms
in the Company's primary purchasing contracts and other overhead related vendor
contracts, and expanded market coverage of available beds under existing
preferred provider agreements. As a result of previous cost savings realized and
the recently announced corporate overhead reductions of approximately $10
million annually, the Company believes it has substantially completed the
actions necessary to achieve the estimated potential cost savings identified at
the time of the Merger.
PRO FORMA THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE PRO FORMA
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The unaudited pro forma results for the three and nine months ended
September 30, 1998 and 1997, as discussed below, include the actual results of
Capstone and PCA as though the Merger, which occurred on December 3, 1997, had
taken place on January 1, 1997. The pro forma results also reflect all
acquisitions and divestitures since December 3, 1997 as if they had occurred on
January 1, 1997. In addition, the unaudited pro forma results include the
historical accounts of the Company and the acquired businesses adjusted to
reflect (1) exclusion of non-recurring asset impairment and restructuring
charges, (2) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (3) the
interest expense resulting from the financing of the acquisitions, (4)
incremental interest charges on intercompany balances with Beverly Enterprises,
Inc. at an effective rate of 6.5%, (5) the per share effect of stock issued as
part of the acquisitions, and (6) the related income tax effects. 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 of the Company and the acquired companies been
combined in prior years.
REVENUES Pro forma revenues for the three months ended September 30,
1998 were approximately $294.9 million, or an 8.7% increase, compared to pro
forma revenues of approximately $271.2 million during the same period in 1997.
Pro forma revenues for the nine months ended September 30, 1998 were
approximately $875.1 million, or a 10.1% increase, compared to pro forma
revenues of approximately $794.8 million for the nine months ended September 30,
1997. These increases reflect internal growth from all of the facilities owned
by the Company at September 30, 1998 over the same facilities' prior year
performance. The internal revenue growth is primarily due to increased volumes
from new and existing customers.
COSTS OF REVENUES Pro forma costs of revenues for the three months
ended September 30, 1998 were approximately $174.5 million, or 59.2% of pro
forma revenues, compared to pro forma costs of revenues for the three months
ended September 30, 1997 of approximately $148.9 million, or 54.9% of pro forma
revenues. Pro forma costs of revenues for the nine months ended September 30,
1998 were approximately $492.3 million, or 56.3% of pro forma revenues, compared
to pro forma costs of revenues for the nine months ended September 30, 1997 of
approximately $435.2 million, or 54.8% of pro forma revenues. The increase in
pro forma costs of revenues as a percentage of pro forma revenues is primarily
due to a change in the mix of products and services sold. The percentage of
infusion therapy products and services as a percentage of pro forma revenues
decreased significantly from 1997 to 1998.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Pro forma selling, general
and administrative expenses for the three months ended September 30, 1998 were
approximately $89.6 million, or 30.4% of pro forma revenues, compared to
approximately $82.7 million, or 30.5% of pro forma revenues, for the comparable
pro forma period in 1997. The increase in pro forma selling, general and
administrative expenses is due, in part, to increased consulting and travel
costs related to evaluation of restructuring plans for the Company and its
execution of the reductions in corporate overhead. Pro forma selling, general
and administrative expenses for the nine months ended September 30, 1998 were
approximately $263.9 million, or 30.2% of pro forma revenues, compared to
approximately $244.4 million or 30.7% of pro forma revenues, for the comparable
period in 1997. The decrease in pro forma selling, general and administrative
expenses as a percentage of pro forma revenues is primarily due to overhead
efficiencies realized as revenues have grown.
BAD DEBT EXPENSE The Company's bad debt expense was increased by a
pre-tax charge of $37.0 million during the third quarter of 1998 to increase its
allowance for doubtful accounts because it has adopted a more conservative
accounting method of estimating the allowance necessary for accounts receivable.
Three of the Company's large non-preferred provider agreement customers have
experienced financial difficulty during the third quarter of 1998, which caused
management to re-evaluate the method of estimating the allowances necessary for
these and other customers. Management also believes that cash flows of some of
its long-term care customers may be impacted by the lower reimbursement rates
under the Medicare prospective payment system, which was partially implemented
on July 1, 1998.
DEPRECIATION AND AMORTIZATION Pro forma depreciation and amortization
for the three and nine months ended September 30, 1998 were $9.5 million and
$27.7 million, respectively compared to $9.7 million and $28.9 million,
respectively, for the comparable periods in 1997. This decrease in the
respective periods is due primarily to the impairment write-down of goodwill and
the related reduction in amortization in the third quarter of 1998.
INTEREST EXPENSE, NET The Company's pro forma net interest expense
during the three and nine months ended September 30, 1998 was approximately
$10.7 million and $30.0 million, respectively, compared to approximately $10.2
million and $29.5 million, respectively, for the comparable periods in 1997. The
increased interest expense was primarily due to a higher effective interest rate
in 1998 compared to 1997.
INCOME TAXES The Company had a pro forma income tax benefit of $13.7
million, or 43.1% of the pro forma pre tax loss, for the three months ended
September 30, 1998. The Company had a pro forma income tax expense for the nine
months ended September 30, 1998 of approximately $5.3 million or 43.0% of the
pro forma pre-tax income. The pro forma income taxes for the three and nine
months ended September 30, 1997 were approximately $7.2 million and $20.2
million or 43.7% and 43.0% of pre-tax income. The rates for all periods are
higher than the federal and state statutory rate primarily due to the impact of
pro-forma non-deductible goodwill amortization associated with the Company's
acquisition activities and the Merger.
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<PAGE> 20
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES Revenues for the three months ended September 30, 1998
increased to $289.8 million from $155.6 million for the three months ended
September 30, 1997, an increase of $134.2 million or 86.2%. Revenues for the
nine months ended September 30, 1998 increased to $852.1 million compared to
$456.9 million for the nine months ended September 30, 1997, an increase of
$395.2 million or 86.5%. The increases for both periods are primarily
attributable to the operations of Capstone and other acquisitions which have
been reflected since the date of the respective acquisitions and internal
revenue growth from existing and new customers.
COSTS OF REVENUES Costs of revenues includes the cost of
pharmaceuticals sold to patients and institutions. Costs of revenues for the
three months ended September 30, 1998 increased to $172.2 million, or 59.4% of
revenues compared to $84.9 million or 54.6% of revenues, in the comparable 1997
period. Costs of revenues for the nine months ended September 30, 1998 increased
to $485.9 million or 57.0% of revenues, compared to $247.3 million, or 54.1% of
revenues, for the comparable period in 1997. The increase in costs of revenues
as a percentage of revenues is primarily due to the impact of a change in the
mix of products and services sold as a result of the Merger, principally from
the impact of a significant reduction in infusion therapy products and services
as a percentage of revenues from 1997 to 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses for the
three and nine months ended September 30, 1998 were $88.1 million and $256.5
million, respectively, compared to $49.4 million and $145.7 million,
respectively, for the comparable periods in 1997. As a percentage of revenues,
selling, general and administrative expenses for the three and nine months ended
September 30, 1998 were 30.4% and 30.1%, respectively, compared to 31.8% and
31.9% for the comparable periods in 1997. The decrease as a percentage of
revenues is primarily due to efficiencies realized in these expenses in
connection with the Merger and efficiencies in overhead as revenues have grown.
ASSET IMPAIRMENT AND RESTRUCTURING CHARGES The Company recorded non-
cash, pre-tax charges of $99.0 million in the third quarter of 1998 to reflect
write-downs of certain tangible and intangible assets in accordance with FASB
Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for
the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed of.
FAS 121 requires companies to periodically review long-lived assets, including
related goodwill, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based on the expected future
cash flows.
Substantially all of the FAS 121 write-downs relate to five pharmacies,
each of which has had negative operating cash flows during 1998. The Company has
closed one of these pharmacies during the third quarter of 1998 and has
identified three of the other pharmacies as "assets to be disposed of" and has
recorded write-downs to reflect their estimated net realizable value. The fifth
pharmacy has had deteriorating operating results which required the Company to
record the FAS 121 charge.
The Company also recorded approximately $13.0 million in new
restructuring charges during the third quarter of 1998 offset by the reversal of
$3.8 million in excess Merger restructuring costs for a net
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charge in the quarter of $9.2 million. Substantially all of these charges
related to future rents and related costs at its present corporate office and
its mail service pharmacy facility in Tampa. The Company is consolidating and
relocating its corporate office and the mail service pharmacy operating unit to
a new location in Tampa.
BAD DEBT EXPENSE The Company's bad debt expense was increased by a
pre-tax charge of $37.0 million during the third quarter of 1998 to increase its
allowance for doubtful accounts because it has adopted a more conservative
accounting method of estimating the allowance necessary for accounts receivable.
Three of the Company's large non-preferred provider agreement customers have
experienced financial difficulty during the third quarter of 1998, which caused
management to re-evaluate the method of estimating the allowances necessary for
these and other customers. Management also believes that cash flows of some of
its long-term care customers may be impacted by the lower reimbursement rates
under the Medicare prospective payment system, which was partially implemented
on July 1, 1998.
DEPRECIATION AND AMORTIZATION Depreciation and amortization for the
three and nine months ended September 30, 1998 were $9.3 million and $26.7
million, respectively compared to $5.0 million and $14.9 million, respectively,
for the comparable periods in 1997. This increase is due mainly to the increased
amortization expense incurred as a result of the Merger and subsequent
acquisitions.
LOSS ON DISPOSITION The Company recorded a pre-tax charge of
approximately $4.5 million during the third quarter of 1998 in connection with
the sale of its Department of Corrections business to Stadtlanders Drug
Company, an affiliate of Counsel Corporation which owns approximately 9% of the
Company's outstanding common stock.
INTEREST EXPENSE, NET Interest expense for the three and nine months
ended September 30, 1998 was approximately $10.7 million and $28.0 million,
respectively. The 1998 amount primarily relates to bank borrowings to fund the
Merger and other acquisitions. During 1997, the Company had nominal interest
expense because PCA did not incur interest charges on its intercompany payable
to Beverly Enterprises, Inc.
INCOME TAXES The income tax benefits for the three and nine months
ended September 30, 1998 were $18.0 million and $1.1 million, respectively. The
income tax benefit was less than the federal and state statutory rates because a
substantial portion of the asset impairment charges during the third quarter of
1998 are not deductible for tax purposes. The income tax provisions for the
three and nine months ended September 30, 1997 were $5.7 million and $17.1
million, respectively. The effective income tax rate for these periods was
higher than the federal and state statutory rate primarily due to the impact of
non-deductible goodwill associated with the Company's acquisitions.
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LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company requires capital primarily to finance strategic pharmacy
acquisitions, to finance its working capital requirements, and to finance the
acquisition of computer and other operating equipment. The Company anticipates
its future cash flows will be used to purchase computer equipment and equipment
for pharmacies, to finance strategic pharmacy acquisitions, to repay debt and
related interest charges, and, to meet, to the extent required, working capital
requirements.
The Company's net cash provided by (used in) operating activities for the nine
months ended September 30, 1998 and 1997 was approximately $(38.1) million and
approximately $20.8 million, respectively. Cash flows from operating activities
decreased in 1998 due to increased working capital requirements, which were
primarily due to the increase in accounts receivable of approximately $26.5
million and to the decrease of approximately $22.0 million in accounts payable
and accrued expenses. These additional working capital requirements were
attributable to approximately $76.0 million in increased revenues, an
approximately $8 million increase in accounts receivable associated with Beverly
Enterprises, Inc. pursuant to the terms of the Merger, and an approximately $8
million net decrease in working capital for entities acquired since December
1997. These additional working capital requirements from acquisitions relates
primarily from the terms in certain asset purchase agreements regarding minimum
working capital requirements at closing.
The Company's net cash outflows from investing activities were approximately
$109.6 million and $39.1 million for the nine months ended September 30, 1998
and 1997, respectively. Net cash flows from investing activities were impacted
by acquisitions previously discussed and investments in new pharmacy locations
and information systems during both periods.
Net cash inflows from financing activities were approximately $149.3 million and
$13.0 million for the nine months ended September 30, 1998 and 1997,
respectively. Net cash flows from financing activities were impacted by
borrowings to fund acquisitions and working capital requirements.
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 approximately $275.0 million was used to retire PCA debt assumed in
connection with the Merger. Under the Credit Facility, 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 greater 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, plus 1/2 of 1%. 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
Facility. Interest on the Eurodollar loans is due on the last day of the
interest period applicable to the borrowing. As of September 30, 1998, the
Company had $246.7 million outstanding under a Eurodollar loan at an effective
interest rate, including the amortization of deferred financing costs, of
approximately 6.25%. The Credit Facility contains various financial covenants,
including an adjusted leverage ratio, a consolidated interest expense coverage
ratio and a net worth covenant (each as defined in the Credit Facility). As of
September 30, 1998, the Company was in compliance with all covenants of the
Credit Facility. Because the Company is close to the maximum ratio under certain
covenants, the Company is presently discussing modifications to such covenants
with the Credit Facility lenders. There can be no assurance that such
modifications, if necessary, will be approved by the Credit Facility lenders on
terms acceptable to the Company.
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The Credit Facility also contains certain covenants which, among other things,
impose certain limitations or prohibitions on the Company with respect to the
incurrence of certain indebtedness, the creation of security interests on the
assets of the Company, certain mergers or consolidations, certain investments,
loans or guarantees, certain hedging agreements not entered into to mitigate
risk, payment of cash dividends and the redemption or repurchase of securities
of the Company, sales of all or substantially all of the assets or stock of the
Company, non-arm's length transactions with affiliates, and entering into
certain restrictive agreements.
In March 1998, the Company sold $325 million of Senior Subordinated Notes in a
private placement offering. The notes bear interest at 8 3/8% and mature in
2008. The Company used the net proceeds of the notes to partially repay
indebtedness under the Credit Facility, which amounts may be subsequently
reborrowed subject to borrowing restrictions outlined in the loan covenants
described above. In accordance with the provisions of the notes, new registered
notes, which may now be publicly traded, were issued in July 1998 with
substantially the same terms as the original notes. The indenture governing the
notes contains certain limitations or prohibitions on the Company including the
incurrence of certain indebtedness, the creation of security interests, certain
acquisitions and dispositions and certain investments. As of September 30, 1998,
the Company was in compliance with such covenants.
The Company has implemented measures to improve cash flows generated from
operating activities, including a greater emphasis on internal growth,
reductions in corporate overhead, and more aggressive collection efforts. The
Company believes these strategies should be adequate to meet its operating needs
for the foreseeable future. However, the Company may require substantial capital
resources for acquisitions or to meet working capital needs and may need to
incur additional indebtedness. The availability of funds under the Credit
Facility is limited by certain financial covenants as described above and there
can be no assurances that additional funds will be available.
YEAR 2000
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. The Company is in the process of formulating and implementing a
program designed to address any Year 2000 problems. As a result, a project team
has performed an initial review of all internal computer systems and is
developing and implementing a more detailed assessment to include internal and
external compliance audits and performance of various validation and testing
procedures. The Company intends to replace or correct through programming
modifications and/or software upgrades systems critical to the Company's
business identified as non-Year 2000 compliant. In addition, third parties such
as suppliers, customers and payor sources (including Medicare and Medicaid) will
be asked to verify, through a compliance assurance questionnaire, their Year
2000 readiness. The Company has incurred approximately $0.5 million to date to
modify existing computer systems and applications and estimates that
approximately $2.8 million in the aggregate will be incurred in 1998 and 1999.
Management of the Company believes it has an effective program in place to
resolve its internal year 2000 issue and is on target with its estimated
timeline to complete the modifications before the end of 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 suppliers, customers
and payors. The Company is not aware of any significant Year 2000 problems with
any of its major suppliers, customers or payors. However, there can be no
assurance that all problems will be foreseen or corrected, including the ability
of Medicare and Medicaid to become Year 2000 compliant.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures About
Segments of an Enterprise and Related Information."
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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.
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 reconciliation 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.
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. Management does not believe that the adoption of SFAS No. 131
will have a material impact on its consolidated financial statements.
RISK FACTORS
SIGNIFICANT LEVERAGE; CAPITAL RESOURCES
The Company has had and will continue to have substantial indebtedness
and significant debt service obligations. As of September 30, 1998, the Company
had approximately $581 million of indebtedness outstanding, including
approximately $247 million committed under its $550 million Credit Facility. The
Company's acquisition strategy and working capital needs require substantial
capital resources. To fund its needs, the Company may 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 availability of funds under the Credit Facility is conditioned on the
Company maintaining certain financial ratios contained in the Credit Facility.
As of September 30, 1998 the Company was in compliance with all covenants of the
Credit Facility. Because the Company is close to the maximum ratio under certain
covenants, the Company is presently discussing modifications to such covenants
with the Credit Facility lenders. There can be no assurance that such
modifications, if necessary, will be approved by the Credit Facility lenders on
terms acceptable to the Company. 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. There
can be no assurance that the Company's operating results, cash flow and capital
resources will be sufficient for payment of its indebtedness in the future. The
consummation and integration of acquisitions, the regulatory and reimbursement
environment and prevailing economic conditions and other factors, some of which
are beyond the Company's control, could significantly affect the Company's cash
flow.
DEPENDENCE ON KEY CONTRACTS
On a pro forma basis, revenues from Beverly and IHS facilities and
their residents would have accounted for approximately 15.0% of the Company's
revenues for the three months ended September 30, 1998. 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. 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 not be adjusted or all or part of such
agreements will
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not be terminated at some future date. Any material loss of revenues or business
from Beverly or IHS could have a material adverse impact on the Company's future
operations.
ACQUISITION AND INTEGRATION RISKS
The Company has experienced rapid growth since 1995 principally from
acquisitions. The Company may acquire additional businesses in the future. No
assurance can be given that the Company will be able to identify suitable
acquisition candidates, finance such acquisitions or consummate acquisitions on
terms acceptable to it or on terms consistent with past acquisitions or that
acquisitions of a substantial size will be available. In addition, the Credit
Facility and the indenture governing the notes contain certain restrictions on
the Company's ability to make acquisitions. See "-- Significant Leverage;
Capital Resources." The ability to integrate past and any future acquisitions
will continue to be important to the Company's success. Obstacles to successful
integration include, but are not limited to: (i) retaining and integrating key
personnel; (ii) consolidating pharmacies without losing a material amount of
customer relationships; and (iii) achieving operating efficiencies. There can be
no assurance that acquisitions will be successfully integrated, or that the
effects of such acquisitions will not have a material adverse effect upon the
Company's results of operations, financial condition, or prospects.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company derives, directly or indirectly, a majority of its
revenues from government-sponsored reimbursement programs. The Company's
revenues and profitability may be affected by the efforts of all payors to
continue to reduce the costs of healthcare by lowering reimbursement 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. In
addition, implementation has begun of the prospective pay system (PPS) for
skilled nursing facilities providing care for Medicare part A patients, whereby
certain of the Company's Medicare part A and part B goods and services will be
incorporated into the nursing component of the federal per diem payment made to
such facilities to cover virtually all of its services. There can be no
assurance that PPS will not have a material adverse effect on the Company's
results of operations, financial condition and prospects.
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,
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<PAGE> 26
healthcare reform continues to be addressed at the state level. Several states
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.
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, 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 care 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 order workers' compensation division comes primarily
from regional and local competitors and, occasionally, from national managed
care companies. 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 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
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<PAGE> 27
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 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. The
practice of giving rebates in the pharmaceutical industry is common; however, it
is currently under scrutiny and could be determined to violate federal law. Such
a result could have a material adverse effect upon the Company's results of
operations, financial condition or prospects.
YEAR 2000 COMPLIANCE
The Company is in the process of formulating and implementing a program
designed to identify and address any Year 2000 problems with its systems and the
computer systems of its vendors, customers and third party payor sources. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000." While management believes the Company's computer
systems will be Year 2000 compliant, the Company can give no assurance that it
will not encounter unanticipated Year 2000 problems or that third parties with
which it does business will adequately address their Year 2000 problems. Any
failure of such systems could have a material adverse effect on the Company's
results of operations, financial condition or prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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<PAGE> 28
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
In August 1998, in connection with the NIPSI acquisition, the
Company and Integrated Health Services, Inc. settled an action
brought by the Company to enforce certain agreements.
ITEM 2. Changes in Securities
On August 12, 1998, the Company declared a dividend payable August 24,
1998 of Rights pursuant to a Stockholder Protection Rights Agreement
dated August 13, 1998, as more fully described in the Company's
Periodic Report on Form 8-K, dated August 24, 1998 that is incorporated
herein by reference.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a) The exhibits filed as a part of this Report are listed in the
Exhibit Index immediately following the signature page.
b) The following Reports on Form 8-K were filed in the reporting
period:
c) Form 8-K dated July 24, 1998 containing Item 5 disclosures,
including a press release which announced second quarter
results and discussed their impact.
d) Form 8-K dated August 24, 1998 containing Item 5 disclosures,
including the declaration of certain dividends.
e) Form 8-K dated September 3, 1998 containing Item 5
disclosures, including the announcement of the acquisition of
the assets of NIPSI.
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<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998 PHARMERICA, INC.
-------------------
By: /s/ David L. Redmond
-------------------------------------
Executive Vice President and
Chief Financial Officer
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<PAGE> 30
INDEX OF EXHIBITS
Exhibit
Number Description
------ -----------
2.1 Asset Purchase Agreement dated August 19, 1998 by and between
the Company, NIPSI and Integrated Health Services, Inc.
(incorporated by reference to Exhibit 2 to the Company's Form
8-K filed September 3, 1998.
3.1 Certificate of Incorporation of Choice Drug Systems, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's
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 the Company's 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 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.1 to the Company's Form 8-K filed August 24, 1998).
4.1 Warrant to purchase shares of Common Stock dated January 1,
1996, for the purchase of 75,000 shares of Common Stock
(incorporated by reference to Exhibit 4.9 to the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
1996).
4.2 Warrant to purchase shares of Common Stock dated December 20,
1995 for the purchase of 15,000 shares of Common Stock
(incorporated by reference to, Exhibit 4.10 to the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
1996).
4.3 Form of ACA Investors Warrant for purchase of 200,000 shares
of Common Stock (incorporated by reference to Exhibit 4.11 to
the Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1996).
4.4 Indenture dated March 31, 1998 related to 8 3/8% Senior
Subordinated Notes (incorporated by reference to Exhibit 4.9
to the Company's Registration Statement on Form S-4 filed May
15, 1998).
4.5 Stockholder Protection Rights Agreement dated August 13, 1998
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K filed August 24, 1998).
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)).
<PAGE> 31
Exhibit
Number Description
------ -----------
10.4 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)).
10.5 Non-Qualified Deferred Compensation Plan for Executives
(incorporated by Adirondack Consulting Agreement dated June
25, 1996.
10.6 Adirondack Consulting Agreement dated June 25, 1996
(incorporated by reference to Exhibit 10.23 to Form 10-K for
year ending December 31, 1996).
10.7 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.
333-28417)).
10.8 Senior Subordinated Credit Agreement dated December 3, 1997 by
and between the Company and Chase Manhattan Bank (incorporated
by reference to Exhibit 10.9 to the Company's 10-K filed on
March 31, 1998).
10.9 Preferred Provider Agreement by and among Beverly Enterprises,
Inc. and the Company, dated December 3, 1997 (incorporated by
reference to Exhibit 10.10 to the Company's 10-K filed on
March 31, 1998).
10.10 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.13 to the Company's 10-K filed on
March 31, 1998).
10.11 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.13 to the Company's 10-K filed on
March 31, 1998).
10.12 Purchase Agreement dated March 24, 1998 by and among
PharMerica, Inc., the Guarantors, Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Brothers Inc., BancAmerica
Robertson Stephens, Chase Securities Inc. and CIBC Oppenheimer
Corp. (incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-4/A filed June 22, 1998).
10.13 Form of Employment Agreement with Officers.
10.14 Form of Separation and Change of Control Agreements with
Officers.
10.15 Form of Amendment of Employment Agreement with Officers.
10.16 Form of Indemnification Agreement with Officers and Directors.
27 Financial Data Schedule (for SEC use only).
99 Company's Periodic Report on Form 8-K dated August 24, 1998.
<PAGE> 1
Exhibit 10.13
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") made effective as of
_______________ 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 consistent with those positions as may be assigned
to the Executive from time to time by the Board of Directors of the Company
including, but not limited to, evaluating and responding to the Company's
finance, accounting, treasury, tax, investor relations, and mergers and
acquisitions issues.
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
substantially 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. This agreement does not restrict Executive's right while
employed by the Company to make passive investments in other businesses that do
not require any active services or participation on his part or to engage in the
<PAGE> 2
business activities described on Appendix A to this Agreement or any other
business activities approved by the Board of Directors or the Compensation
Committee of the Board of Directors, so long as those authorized business
activities do not interfere with the performance of his employment duties in
this Agreement. Schedule A will be updated to reflect any additional business
activities that are approved by the Board of Directors or the Compensation
Committee of the Board of Directors. The Company does not have any interest in
the gains, profits, or income the Executive derives from his passive investments
or authorized business activities.
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 _______________ Dollars ($__________) per year, subject to
increases approved by the Board of Directors or the Compensation Committee of
the Board of Directors. 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") for each fiscal year during the Period of
Employment with a target amount equal to __% of the Executive's then current
Base Salary and tied to objective criteria to be established annually by the
Board of Directors or the Compensation Committee by agreement with the
Executive. The Company shall pay to Executive his Annual Incentive Award in cash
within five day after it is approved by the Board of Directors or the
Compensation Committee of the Board of Directors, but in no event later than the
90th day after the end of each fiscal year. For the period ending December 31,
1998 the Company guarantees that the Executive's Annual Incentive Award will be
_________ Dollars ($_______) and will be paid on December 31, 1998. As an
inducement to enter into this Agreement, the Company shall extend to the
Executive a one-time interest-free loan through December 31, 1998 of __________
Dollars ($________). The loan will be canceled, discharged and forgiven on the
earlier of (a) December 31, 1998 but only if Executive is employed by the
Company on that date, (b) the effective date of the termination of Executive's
employment with the Company, if Executive's employment under this Agreement is
terminated by the Company Without Cause (as defined in subsection VIII.D below)
or by Executive for Good Reason (as defined in subsection VIII.D below), or (c)
on the effective date of a Change in Control (as defined in subsection XI.C
below). If Executive resigns his employment with the Company before December 31,
1998, Executive shall repay the loan to the Company on the last of employment.
2
<PAGE> 3
C. Options
The Company will take all actions necessary to grant to Executive,
promptly after the date of this Agreement, non-qualified options to purchase
________ shares of the Company common stock, $.001 par value. The options will
be exercisable as to one-third of the shares on the grant date, an additional
one-third of the shares on the first anniversary of the grant date, and the
remaining one-third of the shares on the second anniversary of the grant date.
The options shall be in the form attached as Appendix B to this Agreement 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").
Each option will allow all or any part of the exercise price and any applicable
tax withholding for any shares to be purchased pursuant to exercise of the
options to be paid by any combination of the following methods: (a) by a cash
payment to the Company; (b) by Executive delivering to the Company his written
election for the Company to withhold a portion of the shares otherwise issuable
to Executive pursuant to the exercise of the option; (c) by transferring to the
Company outstanding shares of Employer's common stock that have been owned by
Executive for more than six months on the exercise date of the option; or (d) to
the extent approved in advance by the committee that administers the Plan, by
delivering to the Company a copy of irrevocable instructions that have been
provided by Executive to a financial institution or a securities broker-dealer
to pay promptly to the Company all or a portion of the proceeds from either a
sale of the share to be purchased pursuant to the exercise of the option or a
loan to be secured by a pledge of all or a portion of those shares. Share that
are transferred to, or withheld by, the Company in payment of the exercise price
or any tax withholding will be valued for purposes of payment at their market
value on the exercise date of the option.
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 that
are provided to the Chief Executive Officer of the Company and also 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
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. To the extent that periods of service are relevant for purposes of
eligibility, vesting accrual, or determining the level of benefits payable under
any employee benefit, welfare, or compensation plan, trust, program, practice,
agreement, or arrangement that is sponsored or maintained by Company and
provides benefits to Executive, other than the Plan (a "Company Benefit Plan"),
the Company shall use its best
3
<PAGE> 4
efforts to cause Executive to be given full credit for his respective periods of
previous service with Pharmacy Corporation of America and Pharmacy Management
Services, Inc. In addition, the Company shall use commercially reasonable
efforts to assure that any Company Benefit Plan that provides dental, vision,
medical, or other healthcare benefits to Executive (a) gives Executive full
credit toward its deductibles and co-insurance amounts for deductibles and
co-insurance payments incurred or satisfied by the employee for the same period
under any similar plan under which Executive participated before becoming
employed by the Company, and (b) waives any preexisting condition limitation for
Executive or any dependent of Executive to the extent that the person was
covered for that condition under any plan providing healthcare benefits under
which Executive and his dependents participated before becoming employed by the
Company. The Executive will be entitled to an annual paid vacation of four weeks
per year, which will be accrued ratably during each year. Any unused annual
vacation time will accumulate in accordance with the Company's vacation policy.
Upon termination of Executive's employment with the Company, the Company shall
compensate Executive for accumulated but unused vacation time in accordance with
Company policy. In addition to vacation time, Executive may have additional days
of paid holiday or absence as determined in accordance with the Company's policy
or as approved by the Board of Directors or the Compensation Committee of the
Board of Directors.
E. Automobile Allowance
Executive shall receive an automobile allowance of $_____ per month,
beginning in August, 1998. Executive shall maintain an automobile of his choice
for his use in the conduct of the Company's business.
F. Professional Dues, Fee and Memberships
The Company shall pay or promptly reimburse Executive for all
professional dues, fees, and costs, including all costs of continuing
professional education required to maintain his license as a certified public
accountant and memberships in professional associations and organizations.
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.
4
<PAGE> 5
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.
B. Assistance to the Company
Following a termination of Executive's employment attributable to his
disability, and for so long as he is physically and mentally able to do so and
is continuing to receive payment of his Base Salary and/or disability insurance
benefits as provided above, 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
Annual Incentive Awards which will be paid on a pro-rated basis for that year
(based on the ratio of the number of days in the year on and before the date of
his death to the number of days in the year after the date of his death). The
Executive's designated beneficiary will be entitled to receive the proceeds of
any life or other death benefit programs provided in this Agreement.
5
<PAGE> 6
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 on or before the effective date of the termination of Executive's
employment (the "Severance Date") the following: (i) any and all earned but
unpaid Base Salary and Annual Incentive Award that is owed to Executive through
the Severance date; plus (ii) compensation for any accumulated but unused
vacation time as of the Severance Date according to Company policy; plus (iii)
severance compensation in an amount equal to 150% of Executive's Base Salary as
of the Severance Date, plus (iv) a pro rata portion of Executive's target Annual
Incentive Award for the fiscal year ending on or after the Severance Date (based
on the ratio of the number of days in the fiscal year on and before the
Severance Date to the number of days in the fiscal year after the Severance
Date). Furthermore, the Company shall contribute to its retirement plan for the
account of Executive for the year ending on or after the Severance date the
entire amount that it would have contributed for that year in the absence of the
termination of Executive's employment (but in no event less than the percentage
contribution that it made for Executive in the immediately preceding year),
increased to reflect the additional year of service and taking into account
Executive's annualized rate of compensation for purposes of the retirement plan,
the percentage of that compensation that Executive was contributing to the
retirement plan as of the Severance Date, and the Company's matching
contribution rate for that year (or, if greater the preceding year). The amounts
payable to Executive pursuant to this subsection VIII.A will not be reduced by
the amount of any income that Executive earns or could earn from alternative
employment during the remainder of the Employment Period. The Company waives any
duty that Executive might have under law to mitigate his damages by seeking
alternative employment. In addition, the Company shall continue to provide to
Executive for eighteen (18) consecutive months following the Severance Date the
benefits and perquisites described in this Agreement as in effect at the
Severance Date. If the Executive's employment terminates Without Cause, or for
Good Reason, or pursuant to Section XI, all stock options granted to the
Executive under the Plan or any other stock option program ("Options") shall be
deemed fully vested and immediately exercisable, and the Company shall cause the
Options to remain exercisable for twelve (12) months from the Severance Date.
B. Termination With Cause
If Executive resigns or the Company terminates Executive With Cause,
the Company shall pay to Executive on or before the Severance Date the
following: (i) any and all earned but unpaid Base Salary that is owed to
Executive through the Severance Date; plus (ii) compensation for any accumulated
but unused vacation time as of the
6
<PAGE> 7
Severance Date according to Company policy. No other payments will be made or
benefits provided by the Company.
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 written notice by the Company 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, that 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 a Change in Control as described in
Section XI.
(3) Termination for "Good Reason" means either (i) the
Executive is removed or not elected, reelected or otherwise continued in the
office of the Company or any of its subsidiaries which he held immediately prior
to his removal or failure to be elected, reelected, or otherwise continued in
that office, (ii) 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; (iii) 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, not to
exceed 15%; (iv) the Company reduces the potential earnings of the Executive
under any performance-based bonus or incentive plan of the Company that remains
in effect; (v) without his written consent, the Company compels that the
Executive's employment be based other than at Tampa, Florida, whether the change
in the location of Executive's principal place of work is mandated by the
Company or required to avoid continual commuting to perform corporate duties and
responsibilities assigned to him by the Company; (vi) any successor in interest
of the Company or all or substantially all 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
7
<PAGE> 8
all of the duties and obligations of the Company hereunder pursuant to Section
XIV hereof, (vii) the Company breaches any of the provisions of this Agreement,
any stock option or other agreement with Executive, (viii) the Company fails to
furnish to Executive during the Employment Period furnished office space, a
full-time secretary who is acceptable to him and such other services, amenities,
facilities, and clerical support as are adequate for the performance of his
duties and commensurate with his positions with the Company; (ix) the Company
assigns to Executive or asks him to perform, without his written approval, any
employment duties that are materially inconsistent with those customarily
associated with the responsibilities of an executive vice president and chief
financial officer of a publicly held Corporation.
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 for five (5) years
thereafter, 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 or to comply with a request by a court or a governmental authority to be
disclosed (pursuant to a subpoena or otherwise), but only if Executive promptly
notifies the Company of the required or requested disclosure so the Company may
seek a protective order to prevent disclosure of the information, and except for
information that (i) has been disclosed by the Company to anyone else on a
non-confidential basis, (ii) is generally available to the public other than as
a result of a disclosure by Executive or any person to whom Executive disclosed
the information in violation of this Agreement or (iii) is available to
Executive on a non- confidential basis from a source other than the Company, a
person acting on behalf of the Company, or a person who has a legal duty (by
agreement or otherwise) to keep the information confidential, so long as
Executive does not provide to anyone (by access or photocopy) any document that
was obtained from the Company. The Executive will not make use of this type of
information for his own purposes or for the benefit of any person
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or organization other than the Company. The Executive will also use commercially
reasonable 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, subject to the exceptions provided
above.
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 for the
purpose of diverting, soliciting, or accepting any business in competition with
the Company or discuss with any employee of the Company information or operation
of any business intended to compete with the Company for the purpose of
terminating her or his employment to work for a competitor of 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 to work for a competitor of the Company or solicit or encourage any
such employee to leave the employ of the Company for the purpose of working for
a competitor 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, except as otherwise required by law. The Executive hereby acknowledge
the necessity of protection against the competition of, and certain
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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 a breach by the Company of any material obligations under this
Agreement that is to be performed upon or after termination of Executive's
employment with the Company or if Executive's employment under this Agreement is
terminated by the Company Without Cause or by Executive for Good Reason (other
than pursuant to section XI).
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. In addition, the Company shall enter into a
separate indemnity agreement with Executive in substantially the form attached
as Appendix D to this Agreement.
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 With Cause or
Without Cause or Executive elects to resign for Good Reason, or within the six
(6) month period following such event Executive elects to resign with or without
Good Reason, the Company shall pay to the Executive within ten days after the
termination of his employment with the Company the amounts described in (1),
(2), and (3) below.
(1) The Company shall pay to the Executive in a lump sum upon
such termination or resignation an amount equal to 150% of the sum of his Base
Salary on the date of resignation or termination (or, if higher, on the date of
the Change in Control) plus 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 pursuant to the Plan prior to his resignation
or termination will become fully vested and immediately exercisable upon a
Change in Control whether or not the Executive is terminated or resigns and
shall remain exercisable for one year following the Change in Control. The
benefits and
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<PAGE> 11
perquisites described in this Agreement as in effect at the date of resignation
or termination of employment (or at the date of the Change in Control, if the
benefits and perquisites are reduced thereafter) will also be continued for
thirty-six (36) months from the effective date of Executive's termination or
resignation pursuant to a Change of Control. Executive shall also have COBRA
continuation rights for healthcare coverage, beginning after the end of such
thirty-six (36) month period and the Company shall pay all premiums or other
costs of healthcare coverage for Executive and his dependents during the COBRA
continuation period. The obligation of Company to pay for Executive's COBRA
healthcare coverage costs 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. The 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 resignation
or 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 50% of the sum of
his Base Salary on the date of resignation or termination (or, if higher, on the
date of the Change in Control) 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 resignation
or termination, in exchange for Executive agreeing not to solicit any of the
then current customers or employees of the Company on behalf of any competitor
of the Company for a period of twelve (12) months following his resignation or
termination of employment, a lump sum payment equal to 100% of the sum of his
Base Salary on the date of resignation or termination (or, if higher, on the
date of the Change in Control) 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.
B. Excise Tax Indemnification.
If the Internal Revenue Service asserts, or if Executive or the Company
is advised in writing by a "Big Five" accounting firm, that any payment in the
nature of compensation to, or for the benefit of, Executive from the Company (or
any successor in interest) constitutes an "excess parachute payment" under
section 280G of the Code, whether paid pursuant to this Agreement or any other
agreement, and including property transfers pursuant to stock options and other
employee benefits that vest upon a change in the ownership of effective control
of the Company (collectively, the "Excess Parachute Payments") the Company shall
pay to Executive, on demand, a cash sum sufficient (on a grossed-up basis) to
indemnify Executive and hold him harmless from the following (the "Tax Indemnity
Payment"):
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(i) The amount of excise tax under section 4999 of the Code on
the entire amount of the Excess Parachute Payments and all Tax
Indemnity Payments to Executive pursuant to this subsection B:
(ii) The amount of all estimated local, state, and federal
income taxes on all Tax Indemnity Payments to Executive
pursuant to this subsection B (determined in each case at the
highest marginal tax rate);
(iii) The amount of any fines, penalties, or interest that
have been or potentially will be, assessed in respect of any
excise or income tax described in the preceding clauses (a) or
(b);
so the amounts of Excess Parachute Payments received by Executive will not be
diminished by an excise tax imposed under section 4999 of the Code or by any
local, state, or federal income tax payable in respect of the Tax Indemnity
Payments received by Executive pursuant to this subsection B.
C. 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.
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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, except for the Indemnity
Agreement between Executive and the Company that is dated the same date as this
Agreement, the Agreement dated December 8, 1995, between Executive and Beverly
Enterprises, Inc. ("Beverly") (which provides for indemnification of Executive),
Section 3.12 of the Agreement and Plan of Merger dated December 26, 1994, as
amended May 19, 1995 between Beverly and Pharmacy Management Services, Inc,
(which provides for indemnification of Executive), and the Change in Control
Severance Agreement dated as of December 5, 1995, between Executive and Beverly,
as amended by the First Amendment to Change in Control Severance Agreement
between Executive and Beverly.
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.
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<PAGE> 14
SECTION XVI
GOVERNING LAW; ARBITRATION
This Agreement has been executed and delivered in the State of Florida
and its validity, interpretation, performance and enforcement shall be governed
by the laws of that state, excluding the laws of those jurisdictions pertaining
to resolution of conflicts with laws of other jurisdictions. If any dispute
arises between Executive and the Company with respect to this Agreement, either
party may elect (but is not obligated) to submit the dispute to arbitration
before a panel of arbitrators in accordance with the Florida Arbitration Code by
giving the other party a written notice of arbitration in accordance with
section XVII of this Agreement. If a party elects to arbitrate a dispute before
a lawsuit is filed with respect to the subject matter of the dispute,
arbitration will be the sole and exclusive method of resolving the dispute, the
other party must arbitrate the dispute, and each party will be barred from
filing a lawsuit concerning the subject matter of the arbitration, except to
obtain an equitable remedy. A party's right to submit a dispute to arbitration
does not restrict its right to institute litigation to obtain any legal or
equitable remedy. The filing of a lawsuit by either party before the other party
has elected that a dispute be submitted to arbitration will bar and preclude
both Executive and the Company from submitting the subject matter of the lawsuit
to arbitration while the lawsuit is pending.
The arbitration panel will consist of one arbitrator who is mutually
acceptable to Executive and the Company, or if they cannot agree on a single
arbitrator within ten days after the effective date of the written demand for
arbitration, three arbitrators, with one arbitrator selected by the Company, the
second selected by Executive, and the third, neutral arbitrator selected by
agreement of the first two arbitrators. If the arbitration panel will consist of
three arbitrators, each party shall select an arbitrator and notify the other
party of the selection within 15 days after the effective date of the notice of
arbitration and the two arbitrators selected by the parties shall select the
third arbitrator within 30 days after the effective date of the notice of
arbitration. A party who fails to select an arbitrator within the prescribed
15-day period waives the right to select an arbitrator or to have an additional,
neutral arbitrator selected by the arbitrator selected by the other party, and
the arbitrator chosen by the other party will constitute the "arbitration panel"
for purposes of the Agreement.
Every arbitrator must be independent (not a relative of Executive or an
officer, director, employee, or shareholder of the Company or any subsidiary)
without any economic or financial interest of any kind in the outcome of the
arbitration. Each arbitrator's conduct will be governed by the Code of Ethics
for Arbitrators in Commercial Disputes (1985) that has been approved and
recommended by the American Bar Association and the America Arbitration
Association.
Within 120 days after the effective date of the notice arbitration, the
arbitration panel shall convene a hearing for the dispute to be held on such
date and at such time and place in Tampa, Florida, as the arbitration panel
designates upon 60 days' advance notice to Executive and the Company. The
arbitration panel shall render its decision within 30 days
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<PAGE> 15
after the conclusion of the hearing. The decision of the arbitration panel will
be binding and conclusive as to Executive and the Company and, upon the pleading
of either party, any court having jurisdiction may enter a judgment of any award
rendered in the arbitration, which may include an award of damages. The
arbitration panel shall hear and decide the dispute based on the evidence
produced, notwithstanding the failure or refusal to appear by a party who has
been duly notified of the date, time and place of the hearing.
The parties to this Agreement (a) consent to the personal jurisdiction
of the state and federal courts having jurisdiction over Hillsborough County,
Florida, (b) stipulate that the proper, exclusive, and convenient venue for
every legal proceeding arising out of Executive's employment with the Company is
Hillsborough County, Florida, in the case of state trial court proceedings, and
the Middle District of Florida, Tampa Division, in the case of federal district
court proceedings, and (c) waive any defense, whether asserted by motion or
pleading, that Hillsborough County, Florida, or the Middle District of Florida,
Tampa Division, is an improper or inconvenient venue. In an mediation,
arbitration or legal proceeding arising out of Executive's employment with the
Company, the losing party shall reimburse the prevailing party, on demand, for
all costs incurred by the prevailing party in enforcing, defending, or
prosecuting the Agreement or any claim arising out of Executive's employment
with the Company.
SECTION XVII
NOTICES
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made and effective on the
fifth business day after mailing, if delivered by first-class postage prepaid,
registered United States mail, with return receipt requested, or when received,
if delivered 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 in accordance with the notice provisions of this Section
XVII, with a 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
-------------------------
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or such other address as may have been furnished to the Company by the Executive
in writing in accordance with the notice provisions of the Section XVII.
SECTION XVIII
BINDING AGREEMENT
This Agreement shall be binding on the parties' successors, heirs and
assigns.
SECTION XIX
PAYMENTS AFTER DEFAULT
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 addition, if the Company fails to pay to Executive when due any
compensation or other cash sum provided in this Agreement, the Company shall pay
to Executive, on demand, interest on any portion of the unpaid amount that is
not paid to Executive when due, from the date when due until paid in full, at
the annual rate then provided by Florida law for the payment of interest on
judgments generally (the current annual rate of interest on judgments prescribed
by section 55.03, Florida Statutes, is 10%).
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 10.14
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT(the "Agreement"), dated as of _____________,
is by and between ___________ ("Officer") and PharMerica, Inc., a Delaware
corporation (the "Company").
RECITALS
I. Officer and the Company entered into an Employment Agreement dated
as of ____________ (the "Employment Agreement"). Defined terms used herein but
not defined herein shall have the meanings set forth in the Employment
Agreement.
II. Officer and the Company desire to document their agreement
regarding Officer's separation from employment with the Company and Officer's
resignation from any director or officer positions with the Company or its
affiliates, effective ___________ (the "Effective Date").
III. Officer and the Company entered into Nonqualified Stock Option
Agreements dated as of ____________, ____________ and ______________ (the
"Option Agreements"), pursuant to which Officer received options to purchase an
aggregate of _________ shares of the Company's common stock, which options shall
be deemed to be fully vested pursuant to the Employment Agreement and this
Agreement and shall not lapse or terminate as a result of this Agreement or the
transactions contemplated hereby.
IV. The parties acknowledge the costs, hazards, and risks of leaving
any uncertainty as to their relationships and desire to provide for an orderly
termination of the employment relationship between the Company and Officer and
to settle in the manner set forth in this Agreement any claims or controversies
which might arise between Officer and the Company with respect to Officer's
employment with the Company, Officer's separation from employment with the
Company, and any claims pursuant to the Employment Agreement or the Option
Agreements.
IT IS THEREFORE AGREED:
1. Consideration. The parties acknowledge the receipt and adequacy of
the consideration as expressed by the recitations and mutual covenants in this
Agreement, and other good and valuable consideration.
2. Resignation. Officer hereby resigns from all positions that he holds
as an officer or employee with the Company or its affiliates effective as of 10
a.m. on the
<PAGE> 2
Effective Date, and the Period of Employment shall cease as of such date and
time. Officer understands and agrees that the Company may change his title and
duties from the date hereof until the Effective Date.
3. Agreements with Respect to Certain Obligations. Officer and the
Company agree as follows:
(a) The Company hereby agrees (i) that all options issued to
Officer under the Option Agreements shall be fully vested as of November 30,
1998 and shall remain exercisable for twelve (12) months after the Effective
Date; (ii) to grant Officer access to outplacement assistance services of the
type Company normally provides until December 31, 1998; and (iii) to pay Officer
for all his vacation time and other paid time off accrued as of the Effective
Date, payable in a lump sum on the same date that Officer receives his first
Severance Payment, as defined below.
(b) The Company will indemnify and hold harmless Officer in
respect of acts or omissions as an officer occurring up to and including the
Effective Date to the fullest extent provided under the Delaware General
Corporation Law, the Company's certificate of incorporation and bylaws in effect
on the Effective Date.
(c) Officer hereby elects to exercise his right under Section
2.1(a) of the Employment Agreement to receive from the Company non-competition
severance pay, in payments made twice per month (the "Severance Payments"), in
an amount equal to __% of Officer's base salary in effect on the day before the
Effective Date, less appropriate deductions, plus health insurance benefits.
Such twice-monthly payments shall continue from December 1, 1998 through
November 30, 2001 (the "Noncompetition Period"). During the Noncompetition
Period Officer shall be bound by the provisions of Section 6.3 of the Employment
Agreement.
(d) Officer agrees to assist the Company periodically from the
Effective Date until _____________ on a full-time, as-needed basis in various
administrative functions and in supervising and participating in a smooth and
effective transition of officers and personnel of the Company. Company agrees to
continue to pay Officer his current monthly base salary as compensation for
duties Officer performs pursuant to this Section 3(c), in accordance with the
Company's normal payroll procedures, from the Effective Date until
_____________. After ____________, Officer will be available to assist the
Company on a consulting basis upon terms mutually agreeable to Officer and the
Company.
4. Releases. Officer and the Company agree as follows:
(a) Officer hereby releases, discharges and acquits the
Company from any causes of action, claims, demands, debts, liability, expense or
costs of court of any and every character and nature whatsoever, whether or not
previously asserted, whether
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known or unknown, either in or arising out of law of contracts, torts, property
rights, statutes or ordinances as to all wrongful discharge claims, all tort,
intentional tort, negligence, employee benefit claims and contract claims, any
claim for attorneys' fees, costs, or expenses or any claim arising from any
federal, state or local civil rights and/or employment law (including but not
limited to, Title VII of the Civil Rights Act of 1964, the Texas Commission on
Human Rights Act, The Age Discrimination in Employment Act, and the Americans
With Disabilities Act) and/or wages bonuses, commissions, at law or in equity,
arising out of any matter at any time up to and including the date of execution
of this Agreement; and any other matter whatsoever, it being the parties'
intention that the scope and breadth of this release be as broad and extensive
as lawfully possible in order to lay to rest forever any potential controversies
concerning any matters existing or occurring prior to the execution of this
Agreement.
(b) The Company hereby releases, discharges and acquits
Officer from any causes of action, claims, demands, debts, liability, expense or
costs of court of any and every character and nature whatsoever, whether or not
previously asserted, whether known or unknown, either in or arising out of the
law of contracts, torts, property rights, statutes or ordinances, all tort,
intentional tort, negligence, reimbursement claims, employee benefit claims and
contract claims, any claim for attorneys' fees, costs, or expenses, at law or in
equity, arising out of any matter at any time up to and including the date of
execution of this Agreement; and any other matter whatsoever, it being the
parties' intention that the scope and breadth of this release be as broad and
extensive as lawfully possible in order to lay to rest forever any potential
controversies concerning any matters existing or occurring prior to the
execution of this Agreement.
5. Comments. Each party agrees not to disparage or make comments of a
negative or unfavorable nature with respect to the other.
6. Notices. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice is
to be given, or on the third day after mailing if mailed to the party to whom
notice is to be given properly addressed, certified mail, return receipt
requested, postage prepaid as follows: if to the Company, to PharMerica, Inc.,
3611 Queen Palm Drive, Tampa, FL 33619, Attention: C. Arnold Renschler; and if
to Officer, at 4845 Sandy Pointe Court, Sarasota, Florida 34233.
7. Severability. In the event that any provision of this Agreement
shall be held invalid or illegal for any reason, any illegality or invalidity
shall not affect the remaining parts of this Agreement, but this Agreement shall
be construed and enforced as if the illegal or invalid provision had never been
inserted.
8. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
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<PAGE> 4
9. Entire Agreement. Except as set forth herein, this Agreement
constitutes the entire Agreement among the parties with respect to the
transactions contemplated in this Agreement and there are no understandings or
agreements relating to this Agreement that are not fully expressed in this
Agreement.
10. Waivers and Amendments. This Agreement may be amended, superseded,
canceled, renewed, or modified, and the terms hereof may be waived, only by a
written instrument signed by the parties, or in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising the
right, power or privilege hereunder shall authorize a waiver thereof.
11. Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and the respective successors and
permitted assigns and legal representatives. Neither this Agreement nor any
other rights, interest, or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties.
12. Arbitration. The parties agree to negotiate in good faith with
respect to any dispute with respect to this Agreement or the transactions
contemplated hereby. if the parties are not successful in resolving the dispute
through such negotiations, then the parties agree that the dispute shall be
settled by arbitration in accordance with the provisions of the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction.
13. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument.
14. Headings. The headings in this Agreement are for reference only,
and shall not effect the interpretation of this Agreement.
15. Authorization. The Company represents and warrants that the person
executing this Agreement on behalf of the Company is duly authorized to act for
and on behalf of the Company to execute and deliver this Agreement and that this
Agreement is a valid, binding and enforceable agreement of the Company.
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In witness whereof, the parties have signed this Agreement as of
____________, 1998.
-------------------------------------------
Officer
PHARMERICA, INC.
By:
---------------------------------------
Name:
-------------------------------------
Its:
---------------------------------------
5
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Exhibit 10.15
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is effective
as of the day of __________, by and between PHARMERICA, INC., a Delaware
corporation (the "Company"), and _________ (the "Executive").
WITNESSETH:
WHEREAS, Company and Executive have previously entered into an
Employment Agreement dated ___________ (the "Agreement"); and
WHEREAS, Company and Executive wish to amend the Agreement as set forth
below;
NOW, THEREFORE, in consideration of the mutual premises and agreements
made herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Extension of Period of Employment. Effective as of the date
hereof, Section II of the Agreement is amended and restated to
read as follows:
Term. The period of Executive's employment ("Period
of Employment") under this Agreement will commence as
of December 3, 1997 and shall continue through
December 3, 2000, subject to extension or termination
as provided in this Agreement.
2. Compensation. Effective as of the date hereof, Section IV.A of
the Agreement is amended and restated to read as follows:
A. Compensation. Effective as of November 1, 1998,
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 ______________ Dollars ($________)
through December 31, 1999. 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.
3. Change in Control. Effective as of the date hereof, Section
XI.A of the Agreement is amended and restated to read as
follows:
<PAGE> 2
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 resigns for Good Reason (as defined in
that certain Change in Control Severance Agreement
between Company and Executive dated September 22,
1998), 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 in Control.
4. Other Provisions Effective. The parties expressly agree and
acknowledge that all provisions of the Agreement except those
amended by this Amendment shall remain unchanged and in full
force and effect.
5. Governing Law. This Amendment will be interpreted, construed
and governed according to the laws of the State of Delaware.
PHARMERICA, INC.
By:
---------------------------------
Title:
-----------------------------
------------------------------------
<PAGE> 1
Exhibit 10.16
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") dated as
of_______________ is by and between PHARMERICA, INC., a Delaware corporation
(the "Company"), and ___________ ("Director").
R E C I T A L S
A. Director is a member of the Board of Directors of the Company and in
such capacity is performing a valuable service to the Company.
B. The Certificate of Incorporation of the Company (the "Certificate")
provides that the Company shall indemnify the directors of the Company, and may
indemnify the officers, employees and agents of the Company, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law (the
"Corporation Law").
C. The Corporation Law specifically provides that indemnification and
advancement of expenses provided in such statute shall not be exclusive of any
other rights under any agreement, and thereby contemplates that agreements may
be entered into between the Company and members of the Board of Directors of the
Company with respect to the indemnification of such directors.
D. In order to induce Director to serve as a member of the Board of
Directors of the Company for the current term and for any subsequent term to
which he is elected by the stockholders of the Company, the Company has deemed
it to be in its best interest to enter into this Agreement with Director.
NOW, THEREFORE, in consideration of Director's agreement to serve as a
member of the Board of Directors of the Company after the date hereof, the
parties hereto agree as follows:
1. Definitions. As used in this Agreement, capitalized terms not
otherwise defined will have the meaning ascribed to them in Section 26 below.
2. Indemnification of Director. The Company hereby agrees that it shall
hold harmless and indemnify Director to the fullest extent authorized and
permitted by the provisions of the Certificate and By-Laws of the Company (the
"By-Laws") and the provisions of the Corporation Law, or by any amendment
thereof, but in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than the
Certificate, By-Laws or Corporation Law permits the Company to provide prior to
such amendment, or other statutory provisions authorizing or permitting such
indemnification which is adopted after the date hereof.
<PAGE> 2
3. Insurance.
3.1 Insurance Policies. So long as Director may be subject to
any possible claim or threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that Director is or was a director, to the extent that the Company
maintains one or more insurance policy or policies providing directors' and
officers' liability insurance, Director shall be covered by such policy or
policies in accordance with its or their terms, to the maximum extent of the
coverage applicable to any director or officer then serving the Company.
3.2 Maintenance of Insurance. The Company shall not be
required to maintain the insurance or any policy or policies of comparable
insurance, as the case may be, if such insurance is not reasonably available or
if, in the reasonable business judgment of the Board of Directors of the Company
which shall be conclusively established by such determination by the Board of
Directors, or any appropriate committee thereof, either (i) the premium cost for
such insurance is disproportionate to the amount of coverage thereunder or (ii)
the coverage provided by such insurance is so limited by exclusions that there
is insufficient benefit from such insurance.
4. Additional Indemnification. Subject only to the exclusions set forth
in Section 5 hereof, the Company hereby agrees that it shall hold harmless and
indemnify Director:
(a) against any and all expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by Director in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including an action by or on behalf of
stockholders of the Company or by or in the right of the Company, to
which Director is, was or at any time becomes a party, or is threatened
to be made a party, by reason of the fact that Director is, was or at
any time becomes a director, officer, employee or agent of the Company,
or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise; and
(b) otherwise to the fullest extent as may be provided to
Director by the Company under the non-exclusivity provisions of the
Corporation Law.
5. Limitations on Additional Indemnification. No indemnification
pursuant to this Agreement shall be paid by the Company:
(a) in respect to any transaction if it shall be determined by
the Reviewing Party, or by final judgment or other final adjudication,
that Director derived an improper personal benefit;
2
<PAGE> 3
(b) in respect to the return by Director of any remuneration
paid to Director if it shall be determined by the Reviewing Party, or
by final judgment or other final adjudication, that such remuneration
was not approved by the stockholders of the Company and was thereby in
violation of law;
(c) on account of Director's conduct which is determined by
the Reviewing Party, or by final judgment or other final adjudication,
to have involved acts or omissions not in good faith, intentional
misconduct or a knowing violation of law; and
(d) if the Reviewing Party or a court having jurisdiction in
the matter shall determine that such indemnification is in violation of
the Certificate, the By-Laws or the law.
6. Advancement of Expenses. In the event of any threatened or pending
action, suit or proceeding in which Director is a party or is involved and which
may give rise to a right of indemnification under this Agreement, following
written request to the Company by Director, the Company shall promptly pay to
Director amounts to cover expenses incurred by Director in such proceeding in
advance of its final disposition upon the receipt by the Company of (i) a
written undertaking executed by or on behalf of Director to repay the advance if
it shall ultimately be determined that Director is not entitled to be
indemnified by the Company as provided in this Agreement and (ii) satisfactory
evidence as to the amount of such expenses.
7. Repayment of Expenses. Director agrees that Director shall reimburse
the Company for all reasonable expenses paid by the Company in defending any
civil, criminal, administrative or investigative action, suit or proceeding
against Director in the event and only to the extent that it shall be determined
by final judgment or other final adjudication that Director is not entitled to
be indemnified by the Company for such expenses under the provisions of the
Corporation Law or any applicable law.
8. Determination of Indemnification; Burden of Proof. With respect to
all matters concerning the rights of Director to indemnification and payment of
expenses under this Agreement or under the provisions of the Certificate and
By-Laws now or hereafter in effect, the Company shall appoint a Reviewing Party
and any determination by the Reviewing Party shall be conclusive and binding on
the Company and Director. If under applicable law, the entitlement of Director
to be indemnified under this Agreement depends on whether a standard of conduct
has been met, the burden of proof of establishing that Director did not act in
accordance with such standard of conduct shall rest with the Company. Director
shall be presumed to have acted in accordance with such standard and entitled to
indemnification or advancement of expenses hereunder, as the case may be,
unless, based upon a preponderance of the evidence, it shall be determined by
the Reviewing Party that Director did not meet such standard. For purposes of
this Agreement, unless otherwise expressly stated herein, the termination of any
action, suit or proceeding by judgment, order, settlement, whether with or
without court approval, or conviction, or upon a plea of nolo contendere or its
equivalent shall not create a presumption that Director did not meet any
particular standard of
3
<PAGE> 4
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
9. Effect of Change in Control. If there has not been a Change in
Control after the date of this Agreement, the determination of (i) the rights of
Director to indemnification and payment of expenses under this Agreement or
under the provisions of the Certificate and the By-Laws, (ii) standard of
conduct and (iii) evaluation of the reasonableness of amounts claimed by
Director shall be made by the Reviewing Party or such other body or persons as
may be permitted by the Corporation Law. If there has been a Change in Control
after the date of this Agreement, such determination and evaluation may instead
be made by a special, independent counsel who is retained by Director and
approved by the Company, which approval shall not be unreasonably withheld, and
who has not otherwise performed services for Director or the Company.
10. Continuation of Indemnification. All agreements and obligations of
the Company contained herein shall continue during the period that Director is
director, officer, employee or agent of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and shall
continue thereafter so long as Director shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that Director
was a director of the Company or serving in any other capacity referred to
herein.
11. Notification and Defense of Claim. Promptly after receipt by
Director of notice of the commencement of any action, suit or proceeding,
Director shall, if a claim in respect hereof is to be made against the Company
under this Agreement, notify the Company in writing of the commencement thereof;
provided, however, that a reasonable and insignificant delay in so notifying the
Company shall not constitute a waiver of release by Director of rights hereunder
and that omission by Director to so notify the Company shall not relieve the
Company from any liability which it may have to Director otherwise than under
this Agreement. With respect to any such action, suit or proceeding as to which
Director notifies the Company of the commencement thereof:
(a) The Company shall be entitled to participate therein at
its own expense;
(b) Except as otherwise provided below, to the extent that it
may wish, the Company, jointly with any other indemnifying party
similarly notified, shall be entitled to assume the defense thereof and
to employ counsel reasonably satisfactory to Director. After notice
from the Company to Director of its election to so assume the defense
thereof, the Company shall not be liable to Director under this
Agreement for any legal or other expenses subsequently incurred by
Director in connection with the defense thereof other than as otherwise
expressly provided below. Director shall have the right to employ
counsel of his own choosing in such action, suit or proceeding but the
fees and expenses of such counsel incurred after notice from the
Company of assumption by the Company of the defense thereof shall be at
the expense of Director unless (i) the employment of counsel by
Director
4
<PAGE> 5
has been specifically authorized by the Company, such authorization to
be conclusively established by action by disinterested members of the
Board of Directors though less than a quorum; (ii) representation by
the same counsel of both Director and the Company would, in the
reasonable judgment of Director and the Company, be inappropriate due
to an actual or potential conflict of interest between the Company and
Director in the conduct of the defense of such action, such conflict of
interest to be conclusively established by an opinion of such counsel
to the Company to such effect; or (iii) the Company shall not in fact
have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of counsel shall be paid by the
Company; provided that the Company reasonably approves of Director's
choice of counsel. The Company shall not be entitled to assume the
defense of any action, suit or proceeding brought by or on behalf of
the Company or as to which a conflict of interest has been established
as provided in (ii) hereof. Notwithstanding the foregoing, and subject
to the governing instruments of applicable insurance coverages, if an
insurance company has supplied directors' and officers' liability
insurance covering an action, suit or proceeding, then such insurance
company shall employ counsel to conduct the defense of such action,
suit or proceeding unless Director and the Company reasonably concur in
writing that such counsel is unacceptable; and
(c) The Company shall not be liable to indemnify Director
under this Agreement for any amounts paid in settlement of any action
or claim effected without its written consent. The Company shall not
settle any action or claim in any manner which would impose any
liability or penalty on Director without Director's written consent.
Neither the Company nor Director shall unreasonably withhold consent to
any proposed settlement.
12. Enforcement.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the
Company hereby in order to induce Director to serve as a director of
the Company and acknowledges that Director is relying upon this
Agreement in continuing in such capacity.
(b) If a claim for indemnification or advancement of expenses
is not paid in full by the Company within thirty (30) days after a
written claim by Director has been received by the Company (which claim
sets forth the exact amount of such indemnification or advancement and
provides reasonably suitable evidence of the incurrence of such
amount), Director may at any time assert the claim and bring suit
against the Company to recover the unpaid amount of the claim. In the
event Director is required to bring any action to enforce rights or to
collect moneys due under this Agreement and is successful in such
action, the Company shall reimburse Director for all of Director's
reasonable attorneys' fees and expenses in bringing and pursuing such
action.
13. Proceedings by Director. The Company shall not be liable to make
any payment under this Agreement in connection with any action, suit or
proceeding, or any part thereof, initiated
5
<PAGE> 6
by Director unless such action, suit or proceeding, or part thereof (i) was
authorized by the Company, such authorization to be conclusively established by
action by disinterested members of the Board of Directors though less than a
quorum or (ii) was brought by Director pursuant to Section 12(b) hereof.
14. Effectiveness. This Agreement is effective for, and shall apply to,
(i) any claim which is asserted or threatened before, on or after the date of
this Agreement but for which no action, suit or proceeding has been brought
prior to the date hereof and (ii) any action, suit or proceeding which is
threatened before, on or after the date of this Agreement but which is not
pending prior to the date hereof. This Agreement shall not apply to any action,
suit or proceeding which was brought before the date of this Agreement. So long
as the foregoing is satisfied, this Agreement shall be effective for, and be
applicable to, acts or omissions occurring prior to, on or after the date
hereof.
15. Non-exclusivity. The rights of Director under this Agreement shall
not be deemed exclusive, or in limitation of, any rights to which Director may
be entitled under any applicable common or statutory law, or pursuant to the
Certificate, the By-Laws, vote of stockholders or otherwise.
16. Other Payments. The Company shall not be liable to make any payment
under this Agreement in connection with any action, suit or proceeding against
Director to the extent Director has otherwise received payment of the amounts
otherwise payable by the Company hereunder.
17. Subrogation. In the event the Company makes any payment under this
Agreement, the Company shall be subrogated, to the extent of such payment, to
all rights of recovery of Director with respect thereto, and Director shall
execute all agreements, instruments, certificates or other documents and do or
cause to be done all things necessary or appropriate to secure such recovery
rights to the Company including, without limitation, executing such documents as
shall enable the Company to bring an action or suit to enforce such recovery
rights and assisting the Company in prosecuting the same.
18. Survival; Continuation. The rights of Director under this Agreement
shall inure to the benefit of Director, his heirs, executors, administrators,
personal representatives and assigns, and this Agreement shall be binding upon
the Company, its successors and assigns. The rights of Director under this
Agreement shall continue so long as Director may be subject to any action, suit
or proceeding because of the fact that Director is or was a director, officer,
employee or agent of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
19. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless made in writing
signed by both parties hereto.
6
<PAGE> 7
20. Headings. Section headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
21. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered personally,
mailed by certified mail (return receipt requested) or sent by overnight
delivery service, cable, telegram, facsimile transmission or telex to the
parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
(a) if to the Company:
PharMerica, Inc.
3611 Queen Palm Drive
Tampa, Florida 33619
with a copy to: C. Arnold Renschler, M.D.
Harwell Howard Hyne Gabbert & Manner, P.C.
1800 First American Center
315 Deaderick Street
Nashville, Tennessee 37238
Attn: Mark Manner
(b) if to the Director:
-------------
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by overnight delivery service, on the date of actual delivery
and, in the case of notice so given by cable, telegram, facsimile transmission,
telex or personal delivery, on the date of actual transmission or, as the case
may be, personal delivery.
22. Severability. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable under any applicable law, then such
contravention or invalidity shall not invalidate the entire Agreement. Such
provision shall be deemed to be automatically modified to the extent necessary
to render it legal, valid and enforceable, and if no such modification shall
render it legal, valid and enforceable, then this Agreement shall be construed
as if not containing the provision held to be invalid, and the rights and
obligations of the parties shall be construed and enforced accordingly.
23. Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or
7
<PAGE> 8
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
24. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
25. CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW,
AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE.
26. Definitions. As used in this Indemnification Agreement, the
following terms shall have the following meanings:
(a) Change in Control. A "Change in Control" shall be deemed
to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended),
other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company, is or becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Act), directly
or indirectly, of securities of the Company representing 25% or more of
the combined voting power of the outstanding securities of the Company,
or (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors
or nomination for election by the Company's stockholders was approved
by a vote of at least a majority of the directors then still in office
who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease
for any reason to constitute a majority thereof, or (iii) the
stockholders of the Company approve (x) a merger or consolidation of
the Company with any other entity (other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent, either by remaining
outstanding or by being converted into voting securities of the
surviving entity, at least 60% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation), (y) a plan of complete
liquidation of the Company or (z) an agreement or agreements for the
sale or disposition, in a single transaction or series of related
transactions, by the Company of all or substantially all of the
property and assets of the Company. Notwithstanding the foregoing,
events otherwise constituting a Change in Control in accordance with
the foregoing shall not constitute a Change in Control if such events
are solicited by the Company and are approved, recommended or supported
by a majority of the Board of Directors of the Company in actions taken
prior to, and with respect to, such events.
(b) Reviewing Party. A "Reviewing Party" means (i) the Board
of Directors or a committee of directors of the Company, who are not
officers, appointed by the Board of Directors, provided that a majority
of such directors are not parties to the claim or (ii)
8
<PAGE> 9
special, independent counsel selected and appointed by the Board of
Directors or by a committee of directors of the Company who are not
officers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
COMPANY:
PHARMERICA, INC.
By:
---------------------------------
Its:
-------------------------------
------------------------------------
, Director
---------------
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMERICA INC. FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,856
<SECURITIES> 0
<RECEIVABLES> 290,940
<ALLOWANCES> 66,442
<INVENTORY> 56,688
<CURRENT-ASSETS> 368,692
<PP&E> 108,389
<DEPRECIATION> 45,110
<TOTAL-ASSETS> 1,149,327
<CURRENT-LIABILITIES> 112,445
<BONDS> 581,193
0
0
<COMMON> 894
<OTHER-SE> 426,118
<TOTAL-LIABILITY-AND-EQUITY> 1,149,327
<SALES> 284,723
<TOTAL-REVENUES> 289,767
<CGS> 172,219
<TOTAL-COSTS> 172,219
<OTHER-EXPENSES> 252,335
<LOSS-PROVISION> 42,221
<INTEREST-EXPENSE> 10,656
<INCOME-PRETAX> (145,443)
<INCOME-TAX> (18,000)
<INCOME-CONTINUING> (127,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,443)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
------------------------------------
Date of Report (Date of earliest
event reported) August 12, 1998
PHARMERICA, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20606 11-2310352
- - --------------------------------------------------------------------------------
(State of incorporation) (Commission File Number (IRS Employer
Identification No.)
3611 Queen Palm Drive, Tampa, Florida 33619
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(813) 626-7788
--------------------------------------------
(Registrant's telephone number,
including area code)
N/A
--------------------------------------------
(Former name or former address, if changed since last report)
Page 1 of 7
<PAGE> 2
Items 1-4. Not Applicable.
Item 5. Other Events.
On August 12, 1998, the Board of Directors of PharMerica, Inc., a
Delaware corporation (the "Company"), declared a dividend payable August 24,
1998 of one right (a "Right") for each outstanding share of common stock, par
value $0.01 per share ("Common Stock"), of the Company held of record at the
close of business on August 24, 1998 (the "Record Time"), or issued thereafter
and prior to the Separation Time (as hereinafter defined) and thereafter
pursuant to options and convertible securities outstanding at the Separation
Time. The Rights will be issued pursuant to a Stockholder Protection Rights
Agreement, dated as of August 13, 1998 (the "Rights Agreement"), between the
Company and Harris Trust and Savings Bank, as Rights Agent (the "Rights Agent").
Each Right entitles its registered holder to purchase from the Company, after
the Separation Time, one one-thousandth of a share of Participating Preferred
Stock, par value $0.01 per share ("Participating Preferred Stock"), for $30.00
(the "Exercise Price"), subject to adjustment.
The Rights will be evidenced by the Common Stock certificates until the
close of business on the earlier of (either, the "Separation Time") (i) the
tenth business day (or such later date as the Board of Directors of the Company
may from time to time fix by resolution adopted prior to the Separation Time
that would otherwise have occurred) after the date on which any Person (as
defined in the Rights Agreement) commences a tender or exchange offer which, if
consummated, would result in such Person's becoming an Acquiring Person, as
defined below, and (ii) the tenth day after the first date or such earlier or
later date as the Board of Directors of PharMerica, Inc. may from time to time
fix (the "Flip-in Date") of public announcement by the Company or any Person
that such Person has become an Acquiring Person (the date of such public
announcement being, the "Stock Acquisition Date"); provided that if the
foregoing results in the Separation Time being prior to the Record Time, the
Separation Time shall be the Record Time; and provided further that if a tender
or exchange offer referred to in clause (i) is cancelled, terminated or
otherwise withdrawn prior to the Separation Time without the purchase of any
shares of stock pursuant thereto, such offer shall be deemed never to have been
made. An Acquiring Person is any Person having Beneficial Ownership (as defined
in the Rights Agreement) of 15% or more of the outstanding shares of Common
Stock, which term shall not include (i) the Company, any wholly-owned subsidiary
of the Company or any employee stock ownership or other employee benefit plan of
the Company, (ii) any person who is the Beneficial Owner of 15% or more of the
outstanding Common Stock as of the date of the Rights Agreement or who shall
become the Beneficial Owner of 15% or more of the outstanding Common Stock
solely as a result of an acquisition of Common Stock by the Company, until such
time as such Person acquires additional Common Stock, other than through a
dividend or stock split, (iii) any
Page 2 of 7
<PAGE> 3
Person who becomes the Beneficial Owner of 15% or more of the outstanding Common
Stock without any plan or intent to seek or affect control of the Company if
such Person promptly divests sufficient securities such that such 15% or greater
Beneficial Ownership ceases or (iv) any Person who Beneficially Owns shares of
Common Stock consisting solely of (A) shares acquired pursuant to the grant or
exercise of an option granted by the Company in connection with an agreement to
merge with, or acquire, the Company entered into prior to a Flip-in Date, (B)
shares owned by such Person and its Affiliates and Associates at the time of
such grant and (C) shares, amounting to less than 1% of the outstanding Common
Stock, acquired by Affiliates and Associates of such Person after the time of
such grant. The Rights Agreement provides that, until the Separation Time, the
Rights will be transferred with and only with the Common Stock. Common Stock
certificates issued after the Record Time but prior to the Separation Time shall
evidence one Right for each share of Common Stock represented thereby and shall
contain a legend incorporating by reference the terms of the Rights Agreement
(as such may be amended from time to time). Notwithstanding the absence of the
aforementioned legend, certificates evidencing shares of Common Stock
outstanding at the Record Time shall also evidence one Right for each share of
Common Stock evidenced thereby. Promptly following the Separation Time, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of Common Stock at the Separation Time.
The Rights will not be exercisable until the Business Day (as defined
in the Rights Agreement) following the Separation Time. The Rights will expire
on the earliest of (i) the Exchange Time (as defined below), (ii) the close of
business on August 24, 2008, (iii) the date on which the Rights are terminated
as described below and (iv) upon the merger of the Company into another
corporation pursuant to an agreement entered into prior to a Stock Acquisition
Date (in any such case, the "Expiration Time").
The Exercise Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights, are
subject to adjustment from time to time to prevent dilution in the event of a
Common Stock dividend on, or a subdivision or a combination into a smaller
number of shares of, Common Stock, or the issuance or distribution of any
securities or assets in respect of, in lieu of or in exchange for Common Stock.
In the event that prior to the Expiration Time a Flip-in Date occurs,
the Company shall take such action as shall be necessary to ensure and provide
that each Right (other than Rights Beneficially Owned by the Acquiring Person or
any affiliate or associate thereof, which Rights shall become void) shall
constitute the right to purchase from the Company, upon the exercise thereof in
accordance with the terms of the Rights Agreement, that number of shares of
Common Stock of the Company having an aggregate Market Price (as defined in the
Rights Agreement), on the Stock Acquisition
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Date that gave rise to the Flip-in Date, equal to twice the Exercise Price for
an amount in cash equal to the then current Exercise Price. In addition, the
Board of Directors of the Company may, at its option, at any time after a
Flip-in Date and prior to the time that an Acquiring Person becomes the
Beneficial Owner of more than 50% of the outstanding shares of Common Stock,
elect to exchange all (but not less than all) the then outstanding Rights (other
than Rights Beneficially Owned by the Acquiring Person or any affiliate or
associate thereof, which Rights become void) for shares of Common Stock at an
exchange ratio of one share of Common Stock per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date of the Separation Time (the "Exchange Ratio"). Immediately upon such
action by the Board of Directors (the "Exchange Time"), the right to exercise
the Rights will terminate and each Right will thereafter represent only the
right to receive a number of shares of Common Stock equal to the Exchange Ratio.
Whenever the Company shall become obligated, as described in the
preceding paragraph, to issue shares of Common Stock upon exercise of or in
exchange for Rights, the Company, at its option, may substitute therefor shares
of Participating Preferred Stock, at a ratio of one one-thousandth of a share of
Participating Preferred Stock for each share of Common Stock so issuable.
In the event that prior to the Expiration Time the Company enters into,
consummates or permits to occur a transaction or series of transactions after
the time an Acquiring Person has become such in which, directly or indirectly,
(i) the Company shall consolidate or merge or participate in a binding share
exchange with any other Person if, at the time of the consolidation, merger or
share exchange or at the time the Company enters into an agreement with respect
to such consolidation, merger or share exchange, the Acquiring Person controls
the Board of Directors of the Company and (A) any term of or arrangement
concerning the treatment of shares of capital stock in such merger,
consolidation or share exchange relating to the Acquiring Person is not
identical to the terms and arrangements relating to other holders of Common
Stock or (B) the Person with whom such transaction or series of transactions
occurs is the Acquiring Person or an Affiliate or Associate thereof or (ii) the
Company shall sell or otherwise transfer (or one or more of its subsidiaries
shall sell or otherwise transfer) assets (A) aggregating more than 50% of the
assets (measured by either book value or fair market value) or (B) generating
more than 50% of the operating income or cash flow, of the Company and its
subsidiaries (taken as a whole) to any other Person (other than the Company or
one or more of its wholly owned subsidiaries) or to two or more such Persons
which are affiliated or otherwise acting in concert, if, at the time of such
sale or transfer of assets or at the time the Company (or any such subsidiary)
enters into an agreement with respect to such sale or transfer, the Acquiring
Person controls the Board of Directors of the Company (a "Flip-over Transaction
or Event"), the Company shall take such action as shall be necessary to ensure,
and shall not enter into, consummate or permit to occur such
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<PAGE> 5
Flip-over Transaction or Event until it shall have entered into a supplemental
agreement with the Person engaging in such Flip-over Transaction or Event or the
parent corporation thereof (the "Flip-over Entity"), for the benefit of the
holders of the Rights, providing, that upon consummation or occurrence of the
Flip-over Transaction or Event (i) each Right shall thereafter constitute the
right to purchase from the Flip-over Entity, upon exercise thereof in accordance
with the terms of the Rights Agreement, that number of shares of common stock of
the Flip-over Entity having an aggregate Market Price on the date of
consummation or occurrence of such Flip-over Transaction or Event equal to twice
the Exercise Price for an amount in cash equal to the then current Exercise
Price and (ii) the Flip-over Entity shall thereafter be liable for, and shall
assume, by virtue of such Flip-over Transaction or Event and such supplemental
agreement, all the obligations and duties of the Company pursuant to the Rights
Agreement. For purposes of the foregoing description, the term "Acquiring
Person" shall include any Acquiring Person and its Affiliates and Associates
counted together as a single Person.
The Board of Directors of the Company may, at its option, at any time
prior to the close of business on the Flip-in Date, terminate the Rights without
any payment to the holders thereof, as provided in the Rights Agreement.
Immediately upon the action of the Board of Directors of the Company electing to
terminate the Rights, without any further action and without any notice, the
right to exercise the Rights will terminate and each Right will thereafter be
null and void.
The holders of Rights will, solely by reason of their ownership of
Rights, have no rights as stockholders of the Company, including, without
limitation, the right to vote or to receive dividends.
The Rights will not prevent a takeover of the Company. However, the
Rights may cause substantial dilution to a person or group that acquires 15% or
more of the Common Stock unless the Rights are first terminated by the Board of
Directors of the Company. Nevertheless, the Rights should not interfere with a
transaction that is in the best interests of the Company and its stockholders
because the Rights can be terminated on or prior to the close of business on the
Flip-in Date, before the consummation of such transaction.
As of August 13, 1998 there were 89,924,626 shares of Common Stock
issued (of which 89,387,126 shares were outstanding and 537,500 shares were held
in treasury) and 12,465,000 shares reserved for issuance pursuant to employee
benefit plans. As long as the Rights are attached to the Common Stock, the
Company will issue one Right with each new share of Common Stock so that all
such shares will have Rights attached.
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<PAGE> 6
The Rights Agreement (which includes as Exhibit A the forms of Rights
Certificate and Election to Exercise and as Exhibit B the form of Certificate of
Designation and Terms of the Participating Preferred Stock) is attached hereto
as an exhibit and is incorporated herein by reference. The foregoing description
of the Rights is qualified in its entirety by reference to the Rights Agreement
and such exhibits thereto.
In addition, the Company amended and restated its bylaws to provide for
an advance notice provision for stockholder proposals and to conform other
provisions to the Company's Certificate of Incorporation.
Item 6. Not Applicable.
Item 7. Exhibits.
(3.1) Amended and Restated Bylaws.
(4.1) Rights Agreement, which includes as Exhibit A the forms of Rights
Certificate and Election to Exercise and as Exhibit B the form of
Certificate of Designation and Terms of the Participating Preferred
Stock.
(99.1) Press release, dated August 14, 1998, issued by the Company.
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<PAGE> 7
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMERICA, INC.
By /s/ Curtis B. Johnson
--------------------------------
Name: Curtis B. Johnson
Title: Legal Counsel
Date: August 24, 1998
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