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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-52779
PROSPECTUS
PHARMERICA, INC. (PHARMERICA, INC. LOGO)
OFFER TO EXCHANGE ALL OUTSTANDING
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
($325,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
($325,000,000 PRINCIPAL AMOUNT)
OF
PHARMERICA, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY 23,
1998, UNLESS EXTENDED
PharMerica, Inc., a Delaware corporation (the "Company"), hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $325,000,000
of its 8 3/8% Senior Subordinated Notes due 2008 (the "New Senior Notes" or "New
Notes") for an equal principal amount of its outstanding 8 3/8% Senior
Subordinated Notes due 2008 (the "Senior Notes" or "Notes"), in integral
multiples of $1,000. The terms of the New Notes are identical in all material
respects to those of the Notes, except for certain transfer restrictions and
registration rights relating to the Notes. The New Notes will be issued pursuant
to, and be entitled to the benefits of, the Indenture (as defined) governing the
Notes.
The New Notes will mature on April 1, 2008. Interest on the New Notes will
be payable semiannually in arrears on April 1 and October 1 of each year,
commencing October 1, 1998. The New Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or after April 1, 2003 at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, to the date of redemption. Upon the
occurrence of a Change of Control (as defined), each holder of the New Notes
will have the right to require the Company to purchase such holder's New Notes
at a cash price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of purchase.
In addition, at any time prior to April 1, 2001, the Company may on one or more
occasions, use net cash proceeds received by it from one or more public
offerings of PharMerica common stock to redeem up to 33 1/3% of the aggregate
principal amount of the New Notes originally issued at a redemption price of
108.375% of principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of redemption; provided that,
immediately after giving effect to any such redemption, at least $200 million
aggregate principal amount of the New Notes remains outstanding. See
"Description of the Notes." There can be no assurance that sufficient funds will
be available at the time of any Change of Control to make any required
repurchase of the New Notes tendered. See "Risk Factors."
The New Notes will be unsecured senior subordinated obligations of the
Company, subordinated in right of payment to all existing and future Senior Debt
(as defined) of the Company, including indebtedness pursuant to the Bank Credit
Facility (as defined). The New Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on an unsecured senior subordinated basis,
by each of the Company's Restricted Subsidiaries (as defined) (the
"Guarantors"). The Subsidiary Guarantees will be subordinated in right of
payment to all existing and future Senior Debt of the Guarantors, including
guarantees by the Guarantors of the Company's Bank Credit Facility. At May 31,
1998, the Company and the Guarantors had approximately $198 million of Senior
Debt outstanding which would have ranked senior to the New Notes. The indenture
governing the Notes (the "Indenture") permits the Company and its subsidiaries
to incur additional Indebtedness (as defined), including Senior Debt of the
Company and the Guarantors, subject to certain limitations. See "Description of
the Notes -- Certain Covenants."
The Notes were sold to the Initial Purchasers (as defined below) by the
Company on March 31, 1998 in a transaction not registered under the Securities
Act of 1933 (the "Securities Act") in reliance upon the exemption provided in
Section 4(2) of the Securities Act. A portion of the Notes were subsequently
resold to qualified institutional buyers in reliance upon Rule 144A under the
Securities Act, to a limited number of institutional accredited investors in a
manner exempt from registration under the Securities Act and to persons outside
the United States in reliance on Regulation S under the Securities Act.
Accordingly, the Notes may not be reoffered, resold or otherwise transferred in
the United States unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement by and among,
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc.,
BancAmerica Robertson Stephens, Chase Securities Inc. and CIBC Oppenheimer Corp.
(the "Initial Purchasers") the Company and the Subsidiary Guarantors (the
"Registration Rights Agreement"). See "The Exchange Offer."
Based on an interpretation by the staff of the Commission (as defined
herein) set forth in no-action letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange Offer in exchange for
Notes may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and that such holder does not intend to participate in the
distribution of such New Notes.
(continued on next page)
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF EXISTING NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is June 23, 1998.
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Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivery of a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Notes where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of two years after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Any Holder who tenders in the Exchange Offer with the intention to
participate, or for purpose of participating, in a distribution of the New Notes
cannot rely on the position of the staff of the Securities and Exchange
Commission (the "Commission") enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989), or Morgan Stanley & Co., Inc. (available June 5,
1991) or similar no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the resale of the New
Notes. Failure to comply with such requirements in such instance may result in
such Holder incurring liability under the Securities Act for which the Holder is
not indemnified by the Company.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. The Company
will accept for exchange any and all validly tendered Notes on or prior to 5:00
p.m. New York City time, on July 23, 1998, unless the Exchange Offer is extended
(the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to
5:00 p.m. New York City time, on the Expiration Date; otherwise such tenders are
irrevocable. Harris Trust and Savings will act as Exchange Agent with respect to
the Senior Subordinated Notes (in such capacity, the "Exchange Agent") in
connection with the Exchange Offer. The Exchange Offer is not conditioned upon
any minimum principal amount of Notes being tendered for exchange, but is
otherwise subject to certain customary conditions.
Prior to the Exchange Offer, there has been no public market for the
Existing Notes. If a market for the New Notes should develop, such New Notes
could trade at a discount from their principal amount. The Company currently
does not intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system, and no active
public market for the New Notes is currently anticipated. The Initial Purchasers
have advised the Company that they intend to make a market in the New Notes;
however, they are not obligated to do so and any market-making may be
discontinued at any time. As a result, the Company cannot determine whether an
active public market will develop for the New Notes.
ANY NOTES NOT TENDERED AND ACCEPTED IN THE EXCHANGE OFFER WILL REMAIN
OUTSTANDING. TO THE EXTENT ANY NOTES ARE TENDERED AND ACCEPTED IN THE EXCHANGE
OFFER, A HOLDER'S ABILITY TO SELL UNTENDERED NOTES COULD BE ADVERSELY AFFECTED.
FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER, THE HOLDERS OF NOTES WILL CONTINUE
TO BE SUBJECT TO THE EXISTING RESTRICTIONS UPON TRANSFER THEREOF AND THE COMPANY
WILL HAVE FULFILLED ONE OF ITS OBLIGATIONS UNDER THE REGISTRATION RIGHTS
AGREEMENT. HOLDERS OF NOTES WHO DO NOT TENDER THEIR NOTES GENERALLY WILL NOT
HAVE ANY FURTHER REGISTRATION RIGHTS UNDER THE REGISTRATION RIGHTS AGREEMENT OR
OTHERWISE.
The New Notes issued pursuant to this Exchange Offer generally will be
issued in the form of Global New Notes (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depositary"
or "DTC") and registered in its name or in the name of Cede & Co., its nominee.
Beneficial interests in the Global New Notes representing the New Notes will be
shown on, and transfers thereof will be effected through, records maintained by
the Depository and its participants. Notwithstanding the foregoing, Notes held
in certificated form will be exchanged solely for New Notes in certificated
form. After the initial issuance of the Global New Notes, New Notes in
certificated form will be issued in exchange for the Global New Notes only on
the terms set forth in the Indenture.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE NEW NOTES TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL SEPTEMBER 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission relating to
its business, financial position, results of operations and other matters. Such
reports, proxy statements and other information can be inspected and copied at
the Public Records Section maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located
at The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained at the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Company's common stock is listed on the Nasdaq Stock Market's National Market
System (the "Nasdaq Stock Market"), 1735 K Street, N.W., Washington, D.C. 20006.
Such reports, proxy statements and other information can be reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's Web Site (http://www.sec.gov).
The Company has filed with the Commission a Registration Statement on Form
S-4 (as amended, the "Registration Statement") under the Securities Act with
respect to the New Notes offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the Rules and Regulations of the Commission. Reference is made
to the Registration Statement and to the exhibits relating thereto for further
information with respect to the Company and the Exchange Notes offered hereby.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated or the
context requires otherwise, all references herein to the "Company" or
"PharMerica" refer to PharMerica, Inc. and its direct and indirect subsidiaries.
The merger (the "Merger") involving the predecessors to PharMerica, Pharmacy
Corporation of America, Inc. ("PCA") and Capstone Pharmacy Services, Inc.
("Capstone"), closed on December 3, 1997 and was effective as of December 1,
1997. Unless otherwise indicated or the context requires otherwise, for the
period prior to December 1, 1997, references to the "Company" and "PharMerica"
refer to the combined operations of PCA and Capstone on a pro forma combined
basis as if the Merger had taken place prior to the period being discussed.
Information provided herein on a "pro forma basis" gives effect to (i) the
Merger, (ii) the Offering (as defined herein) and the application of the net
proceeds therefrom and (iii) all acquisitions, other than certain insignificant
acquisitions, made by Capstone and PCA since January 1, 1997 as though they
occurred on January 1, 1997. As a result of the accounting treatment of the
Merger, the historical financial statements of the Company are those of PCA.
THE COMPANY
PharMerica is a leading provider of institutional pharmacy services to the
elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
specialty hospitals and the home. The Company is also a leading provider of mail
order pharmacy services to the workers' compensation and catastrophic care
markets. As of May 31, 1998, PharMerica provided pharmacy services to
approximately 365,000 long-term care residents in 37 states and to over 106,000
workers' compensation claimants nationwide. For the three months ended March 31,
1998 and the year ended December 31, 1997, the Company generated, on a pro forma
basis, net sales of approximately $277.6 million and $1.0 billion and EBITDA (as
defined herein) of approximately $37.0 million and $126.2 million, respectively.
PharMerica is the largest institutional pharmacy provider in four of the
five states with the highest population of elderly people, and its network of
approximately 120 institutional pharmacies covers a geographic area that
includes over 80% of the nation's long-term care beds. The Company operates ten
large scale "mega-pharmacies," each serving over 8,000 beds, and many of its
pharmacies are open 24 hours, seven days a week. As a result of its national
scope, the Company has been able to enter into preferred provider agreements
with regional and national long-term care providers, the most significant of
which are Beverly Enterprises, Inc. ("Beverly") and Integrated Health Services,
Inc. ("IHS"). The Company provides services to approximately 58,000 Beverly
long-term care beds and 17,000 IHS long-term care beds.
The Company purchases, repackages and dispenses pharmaceuticals and
provides its clients' long-term facilities with related management services,
regulatory assistance and third-party billing. The Company also provides
specialty services, including infusion therapy, clinical consulting and
comprehensive catastrophic care. In addition, PharMerica has developed
specialized information technology and clinical initiatives to offer its clients
additional value-added services such as computerized medical record keeping,
on-line formulary, drug therapy evaluation and disease state management, which
the Company believes will position it to successfully compete in managed care
and prospective payment systems.
Industry analysts estimate that the United States pharmacy industry's total
annual revenues for 1997 for the markets served by the Company exceeded $16
billion. These revenues were comprised of sales of approximately $7 billion to
individuals that live at home, $5 billion to residents of long-term care
facilities, $2.7 billion to residents of assisted living and retirement
communities and $2 billion to patients in rehabilitation and other specialty
hospitals. Institutional pharmacy companies such as PharMerica have
traditionally focused on servicing the $5 billion long-term care facility
segment of the industry, which industry analysts estimate is growing by
approximately 10% annually. The Company also believes that changes in the
institutional pharmacy industry are providing large institutional pharmacies
with the opportunity to serve elderly, chronically ill and disabled patients in
settings across the healthcare continuum. These changes include: (i) an increase
in the acuity level and number of residents in assisted living facilities; (ii)
increased
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operating and cost efficiencies, regulatory expertise and national market
presence of large institutional providers; and (iii) an increase in outsourcing
of pharmacy services by specialty hospitals.
The Company intends to continue to increase its sales and improve its
profitability by capitalizing on its position as a leading provider of pharmacy
services. Key elements of the Company's strategy are to: (i) grow through
strategic acquisitions; (ii) pursue internal growth opportunities by increasing
market penetration and cross-selling specialty services such as infusion therapy
to its existing customer base; (iii) expand the markets it serves to include
elderly, chronically ill and disabled patients across a broader range of
settings; (iv) enhance operating margins by leveraging economies of scale and
creating larger regional pharmacies in key metropolitan areas; and (v) utilize
clinical and information capabilities to provide value-added services and to
provide information to position the Company to maximize profitability in a
managed care environment.
PharMerica was formed as a result of a merger involving PCA, a subsidiary
of Beverly, and Capstone. In connection with the Merger, Beverly entered into a
preferred provider agreement that gives PharMerica, subject to certain
conditions, including quality of services and competitive pricing, the right to
service Beverly's long-term care beds, including any subsequently added beds,
for a five-year period with a five-year renewal period at the Company's option.
In addition, Beverly agreed not to compete in the institutional pharmacy
industry for five years.
The Company believes that, when fully realized, the synergies from the
Merger will be approximately $25 million annually. This includes savings
primarily from the consolidation of 19 institutional pharmacies, 11 of which
have already occurred, more favorable pricing terms in the Company's new primary
purchasing contracts and corporate and regional overhead reductions. It also
includes additional income generated through expanded market coverage of
available beds under the Company's existing preferred provider agreements with
regional and national long-term care providers. The Company expects to realize
approximately $16 million of these synergies in 1998 and the full $25 million in
anticipated annual synergies (including approximately $2 million of additional
income as described above) beginning in 1999.
RECENT DEVELOPMENTS
The Company recently reached an agreement in principle with Integrated
Health Services, Inc. ("IHS") regarding a lawsuit filed by the Company against
IHS. The lawsuit alleges certain breaches of contracts and torts by IHS.
PharMerica has reached an agreement in principle with IHS to purchase National
Institutional Pharmacy Services, Inc. ("NIPSI") from IHS and to dismiss the
pending lawsuit. NIPSI operates 35 pharmacies in 15 states, serving
approximately 38,000 beds.
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THE OFFERING
THE NOTES..................... The Notes were sold to the Initial Purchasers
by the Company on March 31, 1998 and were
subsequently resold to qualified institutional
buyers pursuant to Rule 144A under the
Securities Act, to institutional investors that
are accredited investors in a manner exempt
from registration under the Securities Act and
to persons in transactions outside the United
States in reliance on Regulation S under the
Securities Act (the "Offering").
REGISTRATION RIGHTS
AGREEMENT................... In connection with the Offering, the Company
entered into the Registration Rights Agreement,
which grants Holders of the Notes certain
exchange and registration rights, which
generally terminate upon the consummation of
the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED............ $325,000,000 in aggregate principal amount of
the Company's 8 3/8% New Notes due 2008.
THE EXCHANGE OFFER............ $1,000 principal amount of New Senior Notes in
exchange for each $1,000 principal amount of
Senior Notes. As of the date hereof,
$325,000,000 aggregate principal amount of
Senior Notes are outstanding. The Company will
issue the New Notes to Holders on or promptly
after the Expiration Date.
EXPIRATION DATE............... 5:00 p.m., New York City time on July 23, 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended.
INTEREST ON THE NEW NOTES AND
THE NOTES................... The New Notes will bear interest from the later
of (i) April 1, 1998 (the date of issuance of
the Notes that are tendered in exchange for the
New Notes) or (ii) the most recent Interest
Payment Date (as defined below in
"Summary -- The New Notes") for which interest
on such Notes has been paid. Accordingly,
Holders of Notes that are accepted for exchange
will not receive interest on the Notes that is
accrued but unpaid at the time of tender, but
such interest will be payable with respect to
the New Notes on the first Interest Payment
Date after the Expiration Date.
CONDITIONS TO THE EXCHANGE
OFFER....................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
PROCEDURES FOR TENDERING
NOTES....................... Each Holder of Notes wishing to accept the
Exchange Offer must complete, sign and date the
relevant accompanying Letter of Transmittal, or
a facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
the Notes and any other required documentation
to the Exchange Agent at the address set forth
in the Letter of Transmittal. The Letter of
Transmittal should be used to tender Notes. By
executing the Letter of Transmittal, each
Holder will represent to the Company that,
among other things, the Holder or the person
receiving such New
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Notes, whether or not such person is the
Holder, is acquiring the New Notes in the
ordinary course of business and that neither
the Holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such New
Notes. In lieu of physical delivery of the
certificates representing Notes, tendering
Holders may transfer Notes pursuant to the
procedure for book-entry transfer as set forth
under "The Exchange Offer -- Procedures for
Tendering Notes."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........... Any beneficial owner whose Notes are registered
in the name of a broker, dealer, commercial
bank, trust company or other nominee and who
wishers to tender should contact such
registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such beneficial owner's own
behalf, such beneficial owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Notes, either
make appropriate arrangements to register
ownership of the Notes in such beneficial
owner's name or obtain a properly completed
bond power from the registered Holder. The
transfer of registered ownership may take
considerable time.
GUARANTEED DELIVERY
PROCEDURES.................. Holders of Notes who wish to tender their Notes
and whose Notes are not immediately available
or who cannot deliver their Notes, the Letter
of Withdrawal Transmittal or any other
documents required by the Letter of Transmittal
to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to
the Expiration Date must tender their Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
WITHDRAWAL RIGHTS............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date pursuant to the procedures
described under "The Exchange Offer -- Terms of
the Exchange Offer."
ACCEPTANCE OF NOTES AND
DELIVERY OF NEW NOTES....... The Company will accept for exchange any and
all Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
FEDERAL INCOME TAX
CONSEQUENCES................ The issuance of the New Notes to Holders of the
Notes pursuant to the terms set forth in this
Prospectus will not constitute an exchange for
federal income tax purposes. Consequently, no
gain or loss would be recognized by Holders of
the Notes upon receipt of the New Notes. See
"Certain Tax Considerations."
USE OF PROCEEDS............... There will be no proceeds to the Company from
the exchange of Notes for New Notes pursuant to
the Exchange Offer.
EFFECT ON HOLDERS OF NOTES.... As a result of the making of this Exchange
Offer, the Company will have fulfilled certain
of its obligations under the Registration
Rights Agreement, and Holders of Notes who do
not tender their Notes will
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generally not have any further registration
rights under the Registration Rights Agreement
or otherwise. Such Holders will continue to
hold the untendered notes and will be entitled
to all the rights and subject to all the
limitations applicable thereto under the
Indentures, except to the extent such rights or
limitations, by their terms, terminate or cease
to have further effectiveness as a result of
the Exchange Offer. All untendered Notes will
continue to be subject to certain restrictions
on transfer. Accordingly, if any Notes are
tendered and accepted in the Exchange Offer,
the trading market for the untendered Notes
could be adversely affected.
EXCHANGE AGENT................ Harris Trust and Savings is serving as exchange
agent in connection with the Exchange Offer.
See "The Exchange Offer -- Exchange Agent."
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THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Notes (which they will replace) except that: (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof; and (ii) the Holders of the New Notes
generally will not be entitled to further registration rights under the
Registration Rights Agreement. The New Notes will evidence the same debt as the
Notes and will be entitled to the benefits of the Indenture. See "Description of
New Notes."
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ISSUER................................. PharMerica, Inc.
NOTES OFFERED.......................... $325.0 million in the aggregate principal amount of
8 3/8% Senior Subordinated Notes due 2008.
MATURITY DATE.......................... April 1, 2008.
INTEREST PAYMENT DATES................. April 1 and October 1 of each year, commencing October 1,
1998.
MANDATORY REDEMPTION................... The Company will not be required to make mandatory
redemption or sinking fund payments with respect to the
New Notes.
OPTIONAL REDEMPTION.................... The New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
April 1, 2003 at the redemption prices set forth herein,
plus accrued and unpaid interest and Liquidated Damages,
if any, to the date of redemption. In addition, at any
time prior to April 1, 2001, the Company may, on one or
more occasions, redeem up to 33 1/3% of the aggregate
principal amount of the New Notes originally issued at a
redemption price of 108.375% of principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the date of redemption, with the net
cash proceeds received by the Company of one or more
Public Offerings of Common Stock of the Company within 60
days of any such Public Offering; provided that
immediately after giving effect to any such redemption,
at least $200 million aggregate principal amount of the
New Notes remains outstanding.
CHANGE OF CONTROL...................... Upon the occurrence of a Change of Control, each holder
of the New Notes will have the right to require the
Company to purchase such holder's New Notes at a cash
price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase.
SUBSIDIARY GUARANTEES.................. The New Notes will be jointly and severally guaranteed by
the Guarantors pursuant to the Subsidiary Guarantees. The
Subsidiary Guarantees will be general unsecured senior
subordinated obligations of the Guarantors, subordinated
in right of payment to all existing and future Senior
Debt of the Guarantors, including the guarantees by the
Guarantors of the Company's indebtedness under the Bank
Credit Facility.
RANKING................................ The New Notes will be general unsecured senior
subordinated obligations of the Company, subordinated in
right of payment to all existing and future Senior Debt
of the Company, including indebtedness pursuant to the
Bank Credit Facility. At May 31, 1998, on a pro forma
basis, the Company had approximately $198.0 million of
Senior Debt outstanding.
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<TABLE>
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CERTAIN COVENANTS...................... The Indenture contains covenants that, among other
things: (i) limit the incurrence of additional
indebtedness and the issuance of preferred stock by the
Company and its Restricted Subsidiaries; (ii) restrict
the ability of the Company and its Restricted
Subsidiaries to pay dividends or make other restricted
payments or investments; (iii) limit the ability of the
Company and its Restricted Subsidiaries to enter into
sale-leaseback transactions; (iv) limit transactions by
the Company and its Restricted Subsidiaries with
affiliates; (v) limit the ability of the Company and its
Restricted Subsidiaries to make asset sales; (vi) limit
the ability of the Company and its Restricted
Subsidiaries to incur certain liens; (vii) limit the
ability of the Company to consolidate or merge with or
into, or to transfer all or substantially all of its
assets to, another person; (viii) prohibit the Company
and the Guarantors from incurring any indebtedness that
is junior to Senior Debt and senior to the New Notes or
the Subsidiary Guarantees, as applicable; and (ix) limit
the ability of the Company to change its line of
business.
FORM AND DENOMINATION.................. The New Notes will be represented by Global New Notes (as
defined herein) in fully registered form, deposited with
a custodian for, and registered in the name of, a nominee
of the Depositary. Beneficial interests in the Global
Notes will be shown on, and transfers thereof will be
effected through, records maintained by the Depositary
and its participants.
</TABLE>
RISK FACTORS
Prospective investors in the New Notes should carefully consider the
matters set forth herein under "Risk Factors."
---------------------
The principal address of the Company is 3611 Queen Palm Drive, Tampa,
Florida 33619, and its telephone number at that address is (813) 626-7788.
7
<PAGE> 11
SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA FINANCIAL DATA
The following summary consolidated statement of income data and summary
consolidated balance sheet data for the years ended and as of December 31, 1995,
1996, and 1997 have been derived from the audited consolidated financial
statements of the Company. The consolidated statement of income data for the
three months ended March 31, 1997 and 1998 and consolidated balance sheet data
as of March 31, 1998 have been derived from the unaudited consolidated financial
statements of the Company. As a result of the accounting treatment of the
Merger, the historical financial statements of the Company are those of PCA. The
following summary unaudited pro forma combined statement of income for the year
ended December 31, 1997 is based on the respective historical financial
statements of Capstone and PCA adjusted to give effect to: (i) the Merger; (ii)
the Offering and the application of the net proceeds therefrom; and (iii) all
the acquisitions, other than certain insignificant acquisitions, made by
Capstone and PCA since January 1, 1997 (the "Acquisitions"), as though they
occurred on January 1, 1997. Anticipated synergies from the combined businesses
have not been included, although the Company believes the Merger will generate
annual synergies of approximately $25 million when fully realized. The summary
unaudited pro forma financial data are not necessarily indicative of the
operating results that would have been achieved had the Merger, the Offering and
the Acquisitions been consummated as of January 1, 1997, nor are they
necessarily indicative of future operating results. The March 31, 1997 and 1998
financial statement data are unaudited and, in the opinion of the Company's
management, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information for the
unaudited periods. This information should be read in conjunction with the
unaudited pro forma financial statements, the consolidated financial statements,
related notes thereto, the other financial information herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
------------ --------------
YEAR ENDED DECEMBER 31, THREE MONTHS THREE MONTHS YEAR ENDED THREE MONTHS
------------------------------------ ENDED ENDED DECEMBER 31, ENDED
1995 1996 1997 MARCH 31, 1997 MARCH 31, 1998 1997 MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF INCOME
DATA:
Net sales............ $ 451,685 $ 516,400 $ 652,179 $ 147,592 $ 274,677 $1,019,349 $ 277,555
Cost of sales........ 242,761 280,468 355,577 80,087 152,802 569,596 154,392
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit....... 208,924 235,932 296,602 67,505 121,875 449,753 123,163
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general
and
administrative... 175,794 184,751 216,087 49,229 85,528 323,540 86,144
Depreciation and
amortization..... 13,219 16,392 21,408 4,826 8,524 36,601 8,603
Restructuring
charges.......... -- -- 5,780 -- -- -- --
Impairment of long-
lived assets..... 9,543 -- 5,155 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
operating
expenses... 198,556 201,143 248,430 54,055 94,052 360,141 94,747
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income... 10,368 34,789 48,172 13,450 27,823 89,612 28,416
Interest expense,
net................ (195) (166) 2,483 46 7,795 36,190 9,508
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
provision for
income taxes....... 10,563 34,955 45,689 13,404 20,028 53,422 18,908
Provision for income
taxes.............. 5,977 14,668 18,992 5,576 8,698 23,954 8,196
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........... $ 4,586 $ 20,287 $ 26,697 $ 7,828 $ 11,330 $ 29,468 $ 10,712
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------ AS OF
1995 1996 1997 MARCH 31, 1998
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................................... $ 77,512 $ 92,134 $ 201,588 $ 242,494
Total assets.......................................... 428,872 441,576 1,114,248 1,221,942
Long-term obligations................................. 755 2,302 435,422 531,353
Stockholders' equity.................................. 71,318 91,605 528,878 543,423
</TABLE>
8
<PAGE> 12
RISK FACTORS
Holders of the Notes offered hereby should consider carefully the factors
set forth below, as well as certain other information set forth in this
Prospectus before tendering Notes in the Exchange Offer. This Prospectus
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, statements
containing the words "believes," "anticipates," "intends," "expects" and words
of similar import. Such statements include statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations, legislative proposals for healthcare
reform, the ability to enter into arrangements with managed care providers on an
acceptable basis, changes in reimbursement policies and demographic changes.
Such statements are subject to various risks and uncertainties. The Company's
actual results may differ materially from the results discussed in such
forward-looking statements because of a number of factors, including those
identified in this "Risk Factors" section and elsewhere in this Prospectus. See
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business." The forward-looking statements are made
as of the date of this Prospectus, and the Company assumes no obligation to
update the forward-looking statements or to update the reasons that actual
results could differ from those projected in the forward-looking statements.
SIGNIFICANT LEVERAGE
The Company has had and will continue to have substantial indebtedness and
significant debt service obligations. As of March 31, 1998, the Company had
approximately $531.4 million of indebtedness outstanding, approximately $359.4
million committed under the Bank Credit Facility (of which approximately $12.9
million was available), approximately $1.2 billion of total assets,
approximately $354.9 million of net tangible assets and approximately $543.4
million of stockholders' equity. See "Capitalization," "Unaudited Pro Forma
Consolidated Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The availability of funds under
the Bank Credit Facility during 1998 is predicated on the Company maintaining an
adjusted leverage ratio of 4:1. As a result, the availability under the line of
credit may vary based upon the Company's operating results. There can be no
assurance that the Company's operating performance will be adequate to have
available as needed all of the committed funds under the Bank Credit Facility.
In addition, subject to the restrictions in the Bank Credit Facility and the
Indenture, the Company may incur substantial additional senior or other
indebtedness (which may be secured) from time to time to finance acquisitions or
capital expenditures or for other general corporate purposes. There can be no
assurance that the Company's operating results, cash flow and capital resources
will be sufficient for payment of its indebtedness, including the New Notes, in
the future. All or a portion of the principal payments at maturity on the New
Notes may require refinancing, and there can be no assurance that refinancing
would be available on commercially reasonable terms or at all. Reimbursement
rates, the consummation and integration of acquisitions, the regulatory
environment and prevailing economic conditions, certain of which are beyond the
Company's control, and the other factors described in "Risk Factors" could
significantly affect the Company's cash flow.
The level of the Company's indebtedness could have important consequences
to the holders of the New Notes, including: (i) a significant portion of the
Company's cash flow from operations will be committed to the payment of the
Company's interest expense and principal repayment obligations, thereby reducing
the funds available to the Company for its operations and future business
opportunities; (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other purposes
may be limited; (iii) the Company may be more highly leveraged than certain of
its competitors, which may place it at a competitive disadvantage, limit the
Company's flexibility in reacting to changes in its business and make it more
vulnerable to downturns in general economic conditions; (iv) certain of the
Company's borrowings are at variable rates of interest, which could result in
higher interest expense in the event of an increase in interest rates; and (v)
the Indenture and the Bank Credit Facility contain financial and restrictive
covenants that, if not complied with, could lead to a default that could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of
9
<PAGE> 13
Operations -- Liquidity and Capital Resources," "Description of the New Notes"
and "Description of Bank Credit Facility."
INTEGRATION
The effective integration of PCA and Capstone and the realization of the
economic benefits of the Merger are particularly critical to the Company's
success. Potential obstacles to successful integration include, but are not
limited to: (i) retaining and integrating the Company's management team; (ii)
consolidating pharmacies without losing any customer relationships; (iii)
achieving operating efficiencies; (iv) consolidating departmental functions; (v)
achieving anticipated purchasing efficiencies; (vi) consolidating management
information systems; (vii) coordinating field managerial activities with
corporate management; (viii) retaining and expanding the Company's customer
base; (ix) introducing new products and services to existing facilities; and (x)
adding and integrating key personnel. There can be no assurance that PCA and
Capstone will be successfully integrated, or that the effects of the Merger will
not have a material adverse effect upon the Company's results of operations,
financial condition, or prospects. See "Business" and "Management."
DEPENDENCE ON KEY CONTRACTS
On a pro forma basis, sales to Beverly facilities and their residents would
have accounted for approximately 16.0% of the Company's net sales for the three
months ended March 31, 1998. Prior to the Merger, Beverly owned PCA. See
"Certain Transactions." Two of the Company's directors are presently officers
and directors of Beverly. The Company has entered into non-competition and
preferred provider agreements with Beverly and IHS to provide for the delivery
of pharmacy services and products and ancillary services and products by the
Company to Beverly's and IHS's long-term care facilities. However, such
agreements contain certain provisions allowing for pricing adjustments and
termination under certain circumstances, and there can be no assurance that
either the pricing will not be adjusted or all or part of such agreement or
agreements will not be terminated at some future date. At March 31, 1998, the
Company serviced approximately 58,000 and 17,000 Beverly and IHS long-term care
beds, respectively.
The Company filed a lawsuit against IHS alleging certain breaches of
contracts and related torts. PharMerica recently reached an agreement in
principle to settle the lawsuit in connection with the purchase of National
Institutional Pharmacy Services, Inc. ("NIPSI") from IHS. There can be no
assurances that the proposed transaction and settlement will be completed.
Any material loss of revenues or business from Beverly or IHS could have a
material adverse impact on the Company's future operations. See
"Business -- Operations -- Preferred Provider Agreements."
GROWTH STRATEGY; NEED FOR ADDITIONAL FINANCING
The Company has experienced rapid growth since 1995 and intends to continue
its growth strategy. The Company's successful implementation of its growth
strategy depends upon its ability to identify, consummate and integrate
acquisitions and to attract and retain qualified personnel. The Company will
compete for acquisition candidates with buyers who may have greater financial
and other resources and may be able to pay higher acquisition prices than the
Company. No assurance can be given that the Company will be able to identify
suitable acquisition candidates or to consummate acquisitions on terms
acceptable to it or on terms consistent with past acquisitions or that
acquisitions of a substantial size will be available. No assurance can be given
that the Company will be able to complete the proposed acquisition of NIPSI from
IHS. To the extent that the Company is unable to acquire institutional pharmacy
companies, or to integrate such acquisitions successfully, its ability to expand
its business would be reduced significantly. The ability to integrate any such
acquisitions on an effective basis will also be subject to the risks as
described under " -- Integration." In addition, the Bank Credit Facility
contains certain restrictions on the Company's ability to make acquisitions. See
"Description of Bank Credit Facility."
The Company's acquisition strategy requires substantial capital resources.
To fund its acquisition strategy, the Company will incur, from time to time,
additional indebtedness (both short and long-term), including indebtedness under
the Bank Credit Facility, and the amount of such indebtedness could be
10
<PAGE> 14
significant. See " -- Significant Leverage" and " -- Fraudulent Conveyance
Risk." The Company may also fund acquisitions through the issuance, in public or
private transactions, of equity or debt securities. The availability and terms
of such equity or debt securities will depend on market and other conditions
existing at the time, and there can be no assurance that any such additional
financing will be available on terms acceptable to the Company, if at all. In
addition, the Bank Credit Facility and the Indenture contain limitations on the
ability of the Company and its Restricted Subsidiaries to incur indebtedness and
issue certain preferred stock. Availability of commitments under the Bank Credit
Facility is subject to the Company complying with certain financial covenants
and other provisions. See "-- Significant Leverage," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Description of the New Notes" and "Description of Bank
Credit Facility."
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company derives, directly or indirectly, a majority of its net sales
from government-sponsored reimbursement programs. The Company's revenues and
profitability will be affected by the efforts of all payors to continue to
reduce the costs of healthcare by lowering reimbursement 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. See
"Business -- Government Regulation."
HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the institutional pharmacy industry. In
recent years, several comprehensive national healthcare reform proposals were
introduced in the United States Congress. While none of the proposals were
adopted, healthcare reform may again be addressed by the United States Congress.
Several states also are considering healthcare reforms through Medicaid managed
care demonstration projects. Although these projects generally exempt
institutional pharmacy services and long-term care facilities, no assurance can
be given that such projects or other proposals will not change the Medicaid
reimbursement system in a manner that would affect the Company's operations. The
Company cannot predict which, if any, federal or state modifications or reform
proposals will be adopted, when they may be adopted or what their impact on the
Company may be if adopted. There can be no assurance that the adoption of
certain modifications or proposals will not have a material adverse effect on
the Company's results of operations, financial condition or prospects. See
"Business -- Government Regulation."
MANAGEMENT
In connection with the Merger, the management of PCA and Capstone were
combined such that two executive officers from each of PCA and Capstone became
executive officers of PharMerica. The management team now includes eleven former
PCA officers and twelve former Capstone officers. In addition, the Company's
Board of Directors was modified such that five former Capstone directors
continued to serve on the Board along with five directors nominated by Beverly,
including PharMerica's President and Chief Executive Officer, C. Arnold
Renschler, M.D. There can be no assurances that the Company will retain the
members of the combined management team or that the combined management team
will be as effective as the former management teams of Capstone or PCA, which
could have a material adverse effect on the Company's results of operations,
financial condition or prospects. PharMerica has entered into employment
contracts with each of its executive officers that contain non-compete clauses
with the Company, but there can be no assurance that such individuals will
remain with the Company. See "Business" and "Management."
11
<PAGE> 15
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.
See "Business."
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 service workers' compensation division comes primarily
from regional and local competitors and, occasionally, from national managed
care companies. The Company's competition in the correctional pharmacy market
comes primarily from other large providers. The Company believes that the
primary competitive factor in its industry is breadth and quality of service.
Additional competitive factors include reputation, ease of doing business with
the specific providers, ability to develop and to maintain relationships with
general medical contractors, and competitive pricing. Some of the present and
potential competitors including retail pharmacies, captive pharmacies and
pharmaceutical distributors are, or may become, larger than the Company and
have, or may obtain, greater financial and marketing resources. See
"Business -- Competition."
GOVERNMENT REGULATION
The Company is subject to extensive federal, state and local regulation.
Federal laws governing the Company's activities include regulations covering the
repackaging, storing and dispensing of drugs, Medicare reimbursement, and
certain financial relationships with physicians and other healthcare providers.
The Company is subject to state laws governing Medicaid, workers' compensation,
professional training, pharmacy licensure, payment in exchange for patient
referrals and the dispensing and storage of pharmaceuticals. The pharmacies
operated by the Company must comply with all applicable laws, regulations and
licensing standards. Many of the Company's employees must maintain certain
licenses in order to provide services. The long-term care facilities that
contract for pharmacy services are also subject to federal and state regulations
and are required to be licensed in the states in which they are located. The
failure by these institutions to comply with such regulations or to obtain or
renew any required licenses could result in the loss of the Company's ability to
provide pharmacy services to their residents. There can be no assurance that
federal, state or local governments will not change existing standards or impose
additional standards, compliance with which may require the Company to incur
significant additional expense. Any significant additional expense incurred in
connection with such compliance or any failure to comply with existing or future
standards could have a material adverse effect upon the Company's results of
operations, financial condition or prospects. In addition, any restrictions on
pharmaceutical 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. See "Business -- Government
Regulation."
12
<PAGE> 16
LIABILITY AND ADEQUACY OF INSURANCE
The provision of healthcare services entails an inherent risk of liability.
The Company currently maintains product and professional liability insurance
intended to cover such claims in amounts which it believes are consistent with
industry standards. There can be no assurance, however, that claims in excess of
the insurance coverage or claims not covered by insurance will not arise. A
successful claim in excess of the Company's insurance coverage could have a
material adverse effect upon the Company's results of operations, financial
condition and future prospects. Claims, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's ability to
attract customers, to maintain its insurance policies or to expand its business.
There can be no assurance that the Company will be able to obtain adequate
liability insurance coverage in the future on acceptable terms, if at all.
SUBORDINATION
The payment of principal, premium, if any, interest, and Liquidated Damages
(as defined herein), if any, on the New Notes will be subordinated to the prior
payment in full of all existing and future Senior Debt of the Company, including
indebtedness under the Company's Bank Credit Facility and, therefore, in the
event of the bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will not be available to pay obligations under the New
Notes until all such Senior Debt has been paid in full. As a result, there may
not be sufficient assets remaining after any such bankruptcy, liquidation, or
reorganization to pay amounts due on the New Notes. In addition, a significant
portion of the Company's total assets are goodwill. At March 31, 1998, the
Company had total assets of $1.2 billion and net tangible assets of $354.9
million. Furthermore, any payment with respect to a Subsidiary Guarantee also
will be subordinated to the payment of any Senior Debt of that Guarantor,
including the Guarantor's guarantee of the Company's obligations under the Bank
Credit Facility. At March 31, 1998, the Company had approximately $119.5 million
of Senior Debt outstanding, in the aggregate, and the Company had commitments,
subject to availability, of approximately $359.4 million of additional borrowing
capacity pursuant to the Bank Credit Facility. In addition, the New Notes will
also be effectively subordinated to all secured indebtedness of the Company or
any of its subsidiaries to the extent of the assets securing such indebtedness.
The Company may not pay principal or premium or Liquidated Damages, if any,
or interest on the New Notes if any amount owing under the Senior Debt is not
paid when due or any other default on any Senior Debt occurs and the maturity of
such Senior Debt is accelerated in accordance with its terms, unless, in either
case, such amounts have been paid in full or the default has been cured or
waived and such acceleration has been rescinded. Moreover, if any non-payment
default occurs with respect to certain Senior Debt and certain other conditions
are satisfied, the Company may not make any payments on the New Notes for a
designated period of time. See "Description of the New Notes -- Subordination."
SUBSIDIARY OPERATIONS AND SUBSIDIARY GUARANTEES
Substantially all of the Company's operations are conducted, and
substantially all of the Company's assets are owned, by its subsidiaries. The
Company's ability to make required interest payments on the New Notes depends on
its ability to receive funds from such subsidiaries. The Bank Credit Facility
does not limit the Company's subsidiaries from paying dividends to the Company.
The holders of the New Notes will have no direct claims against the subsidiaries
of the Company other than the claim created by the Subsidiary Guarantees. The
Subsidiary Guarantees will be subordinated in the right of payment to all
existing and future Senior Debt of the Guarantors, including the guarantees of
the Guarantors of the Company's obligations under the Bank Credit Facility. As
of May 31, 1998, the aggregate principal amount of outstanding Senior Debt of
the Guarantors was approximately $198.0 million (including guarantees by the
Guarantors of the Company's obligations under the Bank Credit Facility). See
"Description of Bank Credit Facility." In addition, the Subsidiary Guarantees
may be subject to legal challenge under applicable provisions of the United
States Bankruptcy Code or comparable provisions of state fraudulent transfer or
conveyance laws. See "-- Fraudulent Conveyance Risk." If such a challenge were
upheld, the Subsidiary Guarantees would be invalidated and unenforceable, and it
is possible that holders of the New Notes would be ordered by a court to turn
over to other creditors of the Guarantors, or to their trustees in bankruptcy,
all or a portion of the
13
<PAGE> 17
payments made to them pursuant to the Subsidiary Guarantees. The terms of the
Guarantees provide that they are only enforceable to the extent permitted by
law, including fraudulent transfer laws. To the extent that the Subsidiary
Guarantees are not enforceable in amounts sufficient to satisfy the claims of
the holders of the New Notes, the rights of holders of the New Notes to
participate in any distribution of assets of any Guarantor upon liquidation,
bankruptcy, reorganization or otherwise would be subject to prior claims of
creditors of that Guarantor.
FRAUDULENT CONVEYANCE RISK
PharMerica used the net proceeds of the Offering to repay indebtedness
incurred by it under the Bank Credit Facility, a substantial portion of which
was incurred to finance acquisitions by the Company and its subsidiaries. Based
upon financial and other information currently available to it, the Company
believes that the indebtedness under the Bank Credit Facility was incurred, and
that the indebtedness represented by the New Notes is being incurred, for proper
purposes and in good faith and that, based on forecasts, asset valuations and
other financial information, the Company was at each time it incurred
indebtedness under the Bank Credit Facility, currently is, and after the
consummation of the Offering will be, solvent, will have sufficient capital for
carrying on its business and will be able to pay its debts as they mature.
Notwithstanding the Company's belief, however, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that,
at the time of the incurrence of indebtedness under the Bank Credit Facility or
the issuance of the New Notes, the Company was insolvent, was rendered insolvent
by reason of such issuance, was engaged in a business or transaction for which
its remaining assets constituted unreasonably small capital, intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, or intended to hinder, delay or defraud its creditors or was a
defendant in an action for money damages, or had a judgement for money damages
docketed against it (if, in either case, after final judgment, the judgment is
unsatisfied), and that the indebtedness was incurred for less than reasonably
equivalent value, then such court could, among other things: (i) void all or a
portion of the Company's obligations to the holders of the New Notes, the effect
of which would be that the holders of the New Notes may not be repaid in full or
at all; or (ii) subordinate the Company's obligations to the holders of the New
Notes to other existing and future indebtedness of the Company, the effect of
which would be to entitle such other creditors to be paid in full before any
payment could be made on the New Notes. The measure of insolvency for purposes
of the foregoing considerations will vary depending upon the federal or local
law that is being applied in any such proceeding. See "Description of the New
Notes."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Notes may
require the Company to repurchase all or a portion of such holder's New Notes at
101% of the principal amount of the New Notes, together with accrued and unpaid
interest, if any, and Liquidated Damages, if any, to the date of repurchase. The
Indenture requires that prior to such a repurchase, the Company must either
repay all outstanding indebtedness under the Senior Debt or obtain any required
consent to such repurchase. The Bank Credit Agreement does not permit such a
repurchase. If a Change of Control were to occur, the Company may not have the
financial resources to repay all of its obligations under the Senior Debt, the
New Notes and the other indebtedness that would become payable upon such event.
See "Description of the New Notes -- Repurchase at the Option of Holders."
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES; RESTRICTIONS ON TRANSFERS
The Notes are currently owned by a relatively small number of beneficial
owners. The Notes have not been registered under the Exchange Act and will
continue to be subject to restrictions on transferability to the extent that
they are not exchanged for the New Notes. The New Notes will constitute a new
issue of securities with no established trading market. The New Notes will
generally be permitted to be resold or otherwise transferred by Holders who are
not affiliates of the Company without compliance with the registration
requirements under the Securities Act. The Company does not intend to list the
New Notes on any securities exchange or to seek approval for quotation through
one automated quotation system. There can be no
14
<PAGE> 18
assurance as to the liquidity of any market that may develop for the New Notes,
the ability of Holders of the New Notes to sell their New Notes or the price at
which Holders would be able to sell their New Notes. Future trading prices of
the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. Although the Initial Purchasers have advised the Company
that they currently intend to make a market in the New Notes, they are not
obligated to do so and may discontinue such market-making at any time without
notice. If a trading market does not develop or is not maintained, holders of
the New Notes may experience difficulty in reselling the New Notes or may be
unable to sell them at all. If a market for the New Notes develops, any such
market may be discontinued at any time. See "Notice to Investors." In addition,
such market-making activity will be subject to the limits imposed by the
Exchange Act. See "Description of New Notes -- Registration Rights; Liquidated
Damages." Accordingly, there can be no assurance as to the development or
liquidity of any market for the New Notes.
COMPLIANCE WITH EXCHANGE OFFER PROCEDURES; RESTRICTIONS ON RESALES; CONSEQUENCES
OF FAILURE TO EXCHANGE
Issuance of New Notes in exchange for Notes pursuant to the Exchange Offer
will be made only after a timely receipt by the Exchange Agent of such Notes, a
properly completed and duly executed Letter of Transmittal with respect to such
Notes and all other required documents. Therefore, Holders of the Notes that
want to tender their Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Notes
for exchange.
Holders of Notes who do not exchange their Notes for New Notes pursuant to
the Exchange Offer will continue to be subject to the restrictions on transfer
of such Notes as set forth in the restrictive legend thereon. In general, the
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not intend
to register the Notes under the Securities Act. No Holder of Notes will be
entitled to receive any Liquidated Damages with respect to such Notes, if a
Holder of such Notes was, at any time while the Exchange Offer is pending,
eligible to exchange, and did not validly tender, such Notes for New Notes in
the Exchange Offer. The Company expects that substantially all of the Notes will
be exchanged for New Notes pursuant to the Exchange Offer, which will negatively
affect the market for the Notes. Based on interpretations by the staff of the
Commission, New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by Holders (other than any such Holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such Holders' business and such Holders have no
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer. Any Holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes (i) will not be able to rely on the applicable interpretations of the
staff of the Commission and (ii) is required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. The Company has agreed, subject to certain
specified limitations, to register or qualify the New Notes for offer or sale
under the state securities laws of such jurisdictions as any holder of the New
Notes reasonably requests in writing. See "The Exchange Offer."
15
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated capitalization of
PharMerica as of March 31, 1998, and as adjusted to give effect to the Offering
and the application of the net proceeds therefrom. This table should be read in
conjunction with the consolidated financial statements of the Company, and the
Unaudited Pro Forma Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 40,503 $ 40,503
========== ==========
Current portion of long-term debt........................... $ 12,986 $ 12,986
========== ==========
Long-term debt, less current portion:
Bank Credit Facility...................................... $ 190,589 $ 190,589
Senior Subordinated Notes................................. 325,000 325,000
Other..................................................... 2,778 2,778
---------- ----------
Total long-term debt (excluding current
portion)........................................ 518,367 518,367
Stockholders' Equity:
Common stock, $0.01 par value; 300,000,000 shares
authorized; 88,134,800 shares issued and outstanding... 882 882
Preferred stock, $0.01 par value; 500,000 shares
authorized; 0 shares issued and outstanding............ -- --
Additional paid-in capital................................ 416,776 416,776
Retained earnings......................................... 125,765 125,765
---------- ----------
Total stockholders' equity........................ 543,423 543,423
---------- ----------
Total capitalization........................................ $1,061,790 $1,061,790
========== ==========
</TABLE>
16
<PAGE> 20
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combining statements of income give
effect to the Merger, the Offering and the Acquisitions as though they occurred
on January 1, 1997. This pro forma information has been prepared utilizing the
audited historical consolidated financial statements of PharMerica for the year
ended December 31, 1997, the unaudited historical consolidated financial
statements of PharMerica for the three months ended March 31, 1998 and the
unaudited historical consolidated financial statements of Capstone for the
eleven months ended November 30, 1997. The Merger was accounted for under the
purchase method of accounting and was treated as a reverse merger/acquisition of
Capstone by PCA for accounting and financial reporting purposes. Therefore, this
pro forma information reflects the adjustment of Capstone's assets and
liabilities to their fair values in accordance with the purchase method of
accounting. As a result of this treatment, the historical financial statements
of PharMerica are those of PCA rather than those of Capstone. This information
should be read in conjunction with the historical consolidated financial
statements and notes thereto that appear elsewhere herein. The pro forma
financial data are provided for comparative purposes only and are not
necessarily indicative of the results which would have occurred had the Merger,
the Offering and the Acquisitions been consummated on January 1, 1997, nor are
they necessarily indicative of future results.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------
ACQUISITION PRO FORMA
PHARMERICA ADJUSTMENTS(1) ADJUSTMENTS(2) TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................................... $274,677 $ 2,878 $ -- $ 277,555
Cost of sales................................ 152,802 1,590 -- 154,392
-------- ------- ------- ----------
Gross profit................................. 121,875 1,288 -- 123,163
-------- ------- ------- ----------
Operating expenses:
Selling, general and administrative........ 85,528 616 -- 86,144
Depreciation and amortization.............. 8,524 79 -- 8,603
-------- ------- ------- ----------
Total operating expenses................ 94,052 695 -- 94,747
-------- ------- ------- ----------
Income from operations....................... 27,823 593 -- 28,416
Interest expense, net........................ 7,795 190 1,523(3) 9,508
-------- ------- ------- ----------
Income before provision for income taxes..... 20,028 403 (1,523) 18,908
Provision for income taxes................... 8,698 161 (609)(4) 8,250
-------- ------- ------- ----------
Net income................................... $ 11,330 $ 242 $ (914) $ 10,658
======== ======= ======= ==========
Earnings per share data:
Basic...................................... $ 0.13 $ 0.12
======== ==========
Diluted.................................... $ 0.13 $ 0.12
======== ==========
Weighted average shares:
Basic...................................... 87,797 87,797
======== ==========
Diluted.................................... 90,275 90,275
======== ==========
Pro forma ratio of earnings to fixed
charges.................................... 2.7
==========
</TABLE>
- ---------------
(1) Represents the pro forma effects of all material acquisitions made by
PharMerica, other than certain insignificant acquisitions, since January 1,
1998, as though they occurred on January 1, 1998. The financial statements
underlying a significant number of these acquisitions were not audited or
reviewed by independent public accountants, and, therefore, the information
included herein is generally based on internally prepared financial
statements by the selling entity. The pro forma results do not reflect any
17
<PAGE> 21
anticipated operating efficiencies or synergies and are not necessarily
indicative of actual results which might have occurred had the operations
and management teams of the Company and the acquired companies been combined
in prior years.
(2) Represents the pro forma effects of the Offering as if it occurred on
January 1, 1998.
(3) Represents the incremental interest expense incurred as a result of the
Offering (and use of the proceeds thereof) at a rate of 8.375%.
(4) Represents the tax effect of the pro forma adjustments using an incremental
tax rate of 43.5%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
ACQUISITION PRO FORMA
PHARMERICA CAPSTONE(1) ADJUSTMENTS(2) ADJUSTMENTS(3) TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $652,179 $284,407 $82,763 $ -- $1,019,349
Cost of sales..................... 355,577 160,081 53,938 -- 569,596
-------- -------- ------- ------- ----------
Gross profit...................... 296,602 124,326 28,825 -- 449,753
-------- -------- ------- ------- ----------
Operating expenses:
Selling, general and
administrative............... 216,087 91,869 18,784 (3,200)(4) 323,540
Depreciation and amortization... 21,408 9,094 2,799 3,300(5) 36,601
Restructuring costs............. 5,780 -- -- (5,780)(6) --
Merger related costs............ -- 5,061 -- (5,061)(6) --
Impairment of long-lived
assets....................... 5,155 -- -- (5,155)(6) --
-------- -------- ------- ------- ----------
Total operating expenses..... 248,430 106,024 21,583 (15,896) 360,141
-------- -------- ------- ------- ----------
Income from operations............ 48,172 18,302 7,242 15,896 89,612
Interest expense, net............. 2,483 6,136 5,092 22,479(7) 36,190
-------- -------- ------- ------- ----------
Income before provision for income
taxes........................... 45,689 12,166 2,150 (6,583) 53,422
Provision for income taxes........ 18,992 5,415 -- (453)(8) 23,954
-------- -------- ------- ------- ----------
Net income........................ $ 26,697 $ 6,751 $ 2,150 $(6,130) $ 29,468
======== ======== ======= ======= ==========
Pro forma ratio of earnings to
fixed charges................... 1.8
==========
</TABLE>
18
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME
(1) Represents Capstone's actual results of operations for the eleven months
ended November 30, 1997. The remaining month of Capstone's actual results
is included as part of PharMerica's year end results.
(2) Represents the pro forma effects of all material acquisitions made by
Capstone and PCA, other than certain insignificant acquisitions, since
January 1, 1997 as though they occurred on January 1, 1997. The financial
statements underlying a significant number of these acquisitions were not
audited or reviewed by independent public accountants, and, therefore, the
information included herein is generally based on internally prepared
financial statements by the selling entity. The pro forma results do not
reflect any anticipated operating efficiencies or synergies and are not
necessarily indicative of actual results which might have occurred had the
operations and management teams of the Company and the acquired companies
been combined in prior years.
(3) Represents the pro forma effects of the Merger and the Offering as though
they occurred on January 1, 1997.
(4) Represents the elimination of management fees paid by the Company to
Beverly which will not continue post-Merger.
(5) Represents amortization associated with the excess of purchase price over
the estimated fair value of net assets acquired in the Merger calculated on
a straight line basis over 40 years.
(6) Represents elimination of Merger costs recognized in the operations of
Capstone during the period through the date of Merger and restructuring
charges and impairments of long-lived assets directly related to the Merger
recognized in the operations of the Company during the year ended December
31, 1997.
(7) Represents interest expense on $275.0 million of borrowings under the Bank
Credit Facility used to partially repay PCA's intercompany balance to
Beverly at an effective interest rate of 6.5% plus the incremental interest
expense incurred as a result of the Offering (and use of the proceeds
thereof) at a rate of 8.375%.
(8) Represents the tax effect on the acquisition and pro forma adjustments,
using an incremental tax rate of 40%, after adjusting for permanent
differences.
19
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
The following consolidated statement of income and balance sheet data for
the years ended and as of December 31, 1994, 1995, 1996 and 1997 have been
derived from the audited consolidated financial statements of the Company. The
consolidated statement of income and balance sheet data for the year ended and
as of December 31, 1993 have been derived from the Company's internal records.
The consolidated statement of income data for the three months ended March 31,
1997 and 1998 and consolidated balance sheet data as of March 31, 1998 have been
derived from the unaudited consolidated financial statements of the Company. The
December 31, 1993, March 31, 1997 and 1998 financial statement data are
unaudited and, in the opinion of the Company's management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information for the unaudited periods. In computing
the ratio of earnings to fixed charges: (a) earnings have been based on net
income before income taxes and fixed charges and (b) fixed charges consist of
interest and the estimated interest portion of rents. This information should be
read in conjunction with the consolidated financial statements and related notes
thereto included elsewhere herein, the other financial information included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales............................ $ 201,670 $ 247,512 $ 451,685 $ 516,400 $ 652,179 $ 147,592 $ 274,677
Cost of sales........................ 90,262 117,045 242,761 280,468 355,577 80,087 152,802
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit....................... 111,408 130,467 208,924 235,932 296,602 67,505 121,875
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative................... 82,201 99,271 175,794 184,751 216,087 49,229 85,528
Depreciation and amortization...... 3,741 5,734 13,219 16,392 21,408 4,826 8,524
Restructuring charges.............. -- -- -- -- 5,780 -- --
Impairment of long-lived assets.... -- -- 9,543 -- 5,155 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..... 85,942 105,005 198,556 201,143 248,430 54,055 94,052
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income................... 25,466 25,462 10,368 34,789 48,172 13,450 27,823
Interest expense, net................ 110 113 (195) (166) 2,483 46 7,795
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes.............................. 25,356 25,349 10,563 34,955 45,689 13,404 20,028
Provision for income taxes........... 10,281 10,291 5,977 14,668 18,992 5,576 8,698
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................... $ 15,075 $ 15,058 $ 4,586 $ 20,287 $ 26,697 $ 7,828 $ 11,330
========== ========== ========== ========== ========== ========== ==========
Diluted earnings per common share.... $ 0.16 $ 0.13
Pro forma earnings per common
share.............................. $ 0.50
========== ========== ==========
Ratio of earnings to fixed charges... 11.9 10.1 3.4 9.6 7.5 3.1
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 24,537 $ 71,794 $ 77,512 $ 92,134 $ 201,588 $ 242,494
Total assets......................... 69,443 327,287 428,872 441,576 1,114,248 1,221,942
Long-term obligations................ 1,300 1,147 755 2,302 435,422 531,353
Stockholders' equity................. 51,674 66,732 71,318 91,605 528,878 543,423
</TABLE>
20
<PAGE> 24
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.
GENERAL
PharMerica is a leading provider of institutional pharmacy services to the
elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
specialty hospitals and the home. The Company is also a leading provider of mail
order pharmacy services to the workers' compensation and catastrophic care
markets. As of May 31, 1998, PharMerica provided pharmacy services to
approximately 365,000 long-term care residents in 37 states and to over 106,000
workers' compensation claimants nationwide. For the three months ended March 31,
1998 and the year ended December 31, 1997, the Company generated, on a pro forma
basis, net sales of approximately $277.6 million and $1.0 billion and EBITDA of
approximately $37.0 million and $126.2 million, respectively.
PharMerica was formed as a result of the Merger involving PCA, a subsidiary
of Beverly, and Capstone. Capstone issued 50 million shares of its common stock
and assumed approximately $275.0 million of debt to acquire all of the
outstanding stock of Beverly. Immediately prior to this transaction, Beverly
distributed its long-term care business to New Beverly Holdings, Inc. ("New
Beverly") leaving only its institutional pharmacy business, PCA, to be acquired
by Capstone. Because Beverly's shareholders owned a majority of the Company
after the Merger, for accounting purposes, the transaction was treated as an
acquisition of Capstone by PCA.
Since the Merger was treated as a reverse merger transaction for accounting
purposes, the shares of Capstone at the date of close plus the fair value of
Capstone's outstanding options and warrants, represent the consideration for the
Merger. In accordance with EITF 95-19, the purchase price in the Merger for
accounting purposes was determined using the fair value of Capstone's common
stock over a reasonable period of time before and after the transaction was
agreed to and announced. After the Merger was consummated, the historical
financial statements of the Company became those of PCA. Therefore, the
Company's 1997 historical financial results reflect a full year of PCA
operations and one month of Capstone operations.
The Company believes that, when fully realized, the synergies from the
Merger will be approximately $25 million annually. This includes savings
primarily from the consolidation of 19 institutional pharmacies, 11 of which
have already occurred, more favorable pricing terms in the Company's new primary
purchasing contracts and corporate and regional overhead reductions. It also
includes additional income generated through expanded market coverage of
available beds under the Company's existing preferred provider agreements with
regional and national long-term care providers. The Company expects to realize
approximately $16 million of these synergies in 1998 and the full $25 million in
anticipated annual synergies (which includes approximately $2 million of
additional income as described above) beginning in 1999.
In pursuit of its acquisition strategy, the Company routinely reviews
potential pharmacy and pharmacy services provider acquisitions. At any given
time, the Company may be in discussions with one or more such pharmacy and
pharmacy services provider owners, some of which may be material. There can be
no assurance that any of these or other negotiations will lead to definitive
agreements or, if agreements were reached, that any transactions would be
consummated.
RECENT DEVELOPMENTS
The Company recently reached an agreement in principle with IHS regarding a
lawsuit filed by the Company against IHS. The lawsuit alleges certain breaches
of contracts and torts by IHS. PharMerica has reached an agreement in principle
with IHS to purchase NIPSI from IHS and to dismiss the pending lawsuit. NIPSI
operates 35 pharmacies in 15 states, serving approximately 38,000 beds. See
"Risk Factors -- Dependence on Key Contracts."
21
<PAGE> 25
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998, COMPARED WITH THE THREE MONTHS ENDED MARCH
31, 1997
Net Sales. Net sales increased to $274.7 million in the 1998 period from
$147.6 million in the 1997 period, an increase of $127.1 million or 86.1%. Of
this increase, approximately $95.2 million is attributable to the operations of
the acquisitions completed between April 1, 1997 and March 31, 1998. The
additional increase is attributable to marketing and customer retention as well
as increased IV service penetration and long-term care beds serviced. The
Company did not experience any material change in reimbursement levels in the
1998 period.
Cost of Sales. Cost of sales includes the cost of pharmaceuticals sold to
patients and institutions. Cost of sales increased to $152.8 million in the 1998
period from $80.1 million in the 1997 period, an increase of $72.7 million or
90.8%. As a percentage of net sales, cost of sales increased to 55.6% in the
1998 period from 54.3% in the 1997 period as a result of less favorable
reimbursement in the markets of the acquired companies.
Selling, General And Administrative Expenses. Selling, general and
administrative expenses include salaries, benefits, facility expenses and other
administrative overhead. Selling, general and administrative expenses increased
to $85.5 million in the 1998 period from $49.2 million in 1997 period, an
increase of $36.3 million or 73.7%. As a percentage of net sales, selling,
general and administrative expenses were 31.1% in the 1998 period, compared to
33.4% in the 1997 period. The decrease as a percentage of net sales was a result
of the restructuring and consolidation plans initiated as part of the Merger as
well as operational synergies achieved as a result of the acquisitions.
Depreciation And Amortization. Depreciation and amortization increased to
$8.5 million in the 1998 period from $4.8 million in the 1997 period, an
increase of $3.7 million or 76.6%. This increase is due mainly to the increased
amortization expense incurred as a result of the acquisitions.
Interest Expense, Net. Interest expense, net increased $7.7 million, to
$7.8 million in the 1998 period due to increased bank borrowings related to
acquisitions. Additionally, the Company did not incur interest charges on its
intercompany payable to Beverly Enterprises, Inc.
Year 2000. The Company has assessed and continues to assess the impact of
the Year 2000 issue on its reporting systems and operations. The Year 2000 issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year such that, as the century date occurs, date
sensitive systems will recognize the year 2000 as 1900 or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process critical financial and operational information incorrectly. During 1997,
the Company incurred approximately $250,000 to modify existing computer systems
and applications and estimates that approximately $1.7 million in the aggregate
will be incurred in 1998 and 1999.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net Sales. The Company's net sales increased approximately $135.8 million,
or 26.3%, to $652.2 million in 1997 from $516.4 million in 1996. This increase
consisted of approximately $72.0 million of same store growth and approximately
$57.8 million related to acquisitions, principally the January 1, 1997
acquisition of Interstate Pharmacy Corp. and the December 1997 acquisition of
Capstone. Same store growth was attributable to increased infusion therapy of
approximately $19.0 million, increased mail order and other workers'
compensation services of approximately $10.8 million and growth in the core
institutional pharmacy business of approximately $42.2 million, primarily due to
marketing and customer retention initiatives. The Company's revenues from sales
to Beverly facilities increased approximately $17.4 million, or 21.2%, to $99.5
million, or 15.3% of net sales, in 1997 from $82.1 million, or 15.9% of net
sales, in 1996. This increase in sales was primarily attributable to additional
Beverly facilities and its residents being serviced by newly opened or acquired
pharmacies.
Cost of Sales. The Company's cost of sales increased approximately $75.1
million, or 26.7%, to $355.6 million in 1997 from $280.5 million in 1996. As a
percentage of net sales, cost of sales was 54.5% in 1997 as
22
<PAGE> 26
compared to 54.3% in 1996. Cost of sales as a percentage remained stable from
1996 to 1997, primarily due to increased purchasing efficiencies related to
renegotiated vendor contracts and competitive pricing pressures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include wages and related expenses, facility expenses,
and other administrative overhead. Selling, general and administrative expenses
increased approximately $31.5 million, or 17.1%, to $216.1 million in 1997 from
$184.6 million in 1996. Approximately $19.3 million of this increase was
attributable to acquisitions completed during 1997. The remaining increase in
selling, general and administrative expenses was related to the increase in same
store revenues discussed above. As a percentage of net sales, selling, general
and administrative expenses decreased to 33.1% in 1997 from 35.7% in 1996. This
decrease was primarily the result of implementing certain cost reduction
initiatives and spreading the costs across a larger revenue base. Additionally,
selling, general and administrative expenses include $3.2 million and $1.8
million in 1997 and 1996, respectively, related to management fees allocated
from Beverly. These amounts do not necessarily reflect the actual cost the
Company would have incurred on a stand-alone basis.
Depreciation and Amortization. Depreciation and amortization increased
approximately $5.0 million, or 30.6%, to $21.4 million in 1997 from $16.4
million in 1996. Approximately $2.7 million of this increase was related to
acquisitions during such period. The remaining increase was attributable to
investments in medical carts and other equipment as well as leasehold
improvements.
Restructuring Charges. During December 1997, in connection with the
Merger, the Company adopted a plan to restructure its long-term care pharmacy
operations. In connection with this plan, the Company intends to close six
former PCA pharmacies and has recorded restructuring costs of $5.8 million
related to these closures, consisting of $3.6 million of severance covering
approximately 180 pharmacy employees, $739,000 of lease termination costs and
$1.4 million of other costs.
Impairment of Long-Lived Assets. In December 1997, the Company recorded an
impairment loss of approximately $5.2 million related to the planned closure of
certain pharmacies as a result of the Merger. The impairment loss includes the
write-off of various fixed assets, such as leasehold improvements and furniture
and fixtures, which are specific to the pharmacies to be closed. Additionally,
the Company wrote down certain capitalized software costs to their estimated
fair values.
Interest expense. Prior to the Merger, the Company financed its
acquisition and working capital needs through intercompany borrowings from
Beverly. The Company did not incur interest on these intercompany advances.
Subsequent to the Merger, the Company entered into the Bank Credit Facility with
a syndicate of commercial banks. Interest expense of approximately $2.5 million
was incurred under the Bank Credit Facility from the date of the Merger through
December 31, 1997. At year end, the Company had outstanding borrowings of
approximately $424.5 million. Proceeds of these borrowings were used to repay
$275 million of PCA debt in connection with the Merger, refinance Capstone's
existing credit facility, fund acquisitions closed in December 1997 and pay
transaction costs related to the Merger.
Provision for Income Taxes. The Company had an annual effective rate of
41.6% in December 31, 1997, compared to 42.0% in 1996. Management believes that
the Company's tax rate will remain higher than the statutory federal tax rate in
future years due to the non-deductibility of the goodwill recorded on certain
stock acquisitions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales increased approximately $64.7 million,
or 14.3%, to $516.4 million in 1996, from $451.7 million in 1995. This increase
was primarily related to the 1995 acquisition of a mail service pharmacy
business, Pharmacy Management Services, Inc. ("PMSI"), and other acquisitions,
which added approximately $54.1 million to revenues, and, to a lesser extent,
internal growth. On a same store basis, revenues increased approximately $10.6
million, primarily due to increased sales of infusion therapy products and
services. The Company's revenues from sales to Beverly facilities and its
residents decreased approximately $2.3 million, or 1.4%, to $160.7 million, or
31.1% of net sales in 1996 from $163.0 million, or 36.1% of
23
<PAGE> 27
net sales, in 1995. This decrease was primarily attributable to Beverly's
disposition of approximately 83 nursing facilities in 1996 and 29 nursing
facilities in 1995.
Cost of Sales. The Company's cost of sales increased approximately $37.7
million, or 15.5%, to $ 280.5 million in 1996 from $242.8 million in 1995. As a
percentage of net sales, cost of sales was 54.3% in 1996 as compared to 53.7% in
1995, primarily related to the full year impact of the lower margin mail service
business purchased from PMSI.
Selling, General and Administrative Expenses. The Company's total selling,
general and administrative expenses increased approximately $9.0 million, or
5.1%, to $184.6 million in 1996 from $175.6 million in 1995. Approximately $5.2
million of this increase was related to the mid-1995 purchase of PMSI with the
remainder of the increase attributable to increased same store revenues and
severance and relocation expenses associated with the 1996 reorganization and
relocation of the Company's corporate offices.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $3.2 million, or 24.0%, to $16.4 million in 1996 from
$13.2 million in 1995, primarily related to the amortization of goodwill
associated with the PMSI transaction completed in mid-1995.
Income Taxes. The Company had an annual effective tax rate of 42.0% in
1996, compared to 56.6% in 1995. The annual effective tax rate for 1996 was
higher than the federal statutory rate primarily due to the impact of
non-deductible goodwill associated with the acquisition of PMSI. The annual
effective tax rate in 1995 was higher than the federal statutory rate primarily
due to the impact of non-deductible goodwill included in the adjustments
resulting from the adoption of SFAS No. 121.
IMPACT OF INFLATION
Inflation has not materially affected the Company's profitability,
primarily because price increases have generally been obtained to cover
inflationary drug cost increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for acquiring institutional pharmacy
companies, financing working capital requirements and purchasing equipment for
existing pharmacies. The Company anticipates its future capital requirements
will primarily be needed to finance the acquisition of institutional pharmacy
operations.
Since January 1, 1998 the Company has completed nine acquisitions for an
aggregate purchase price of approximately $70.0 million in cash and stock.
In connection with the Merger in December 1997, the Company entered into a
revolving $550.0 million credit facility (the "Bank Credit Facility") with a
syndicate of banks for which The Chase Manhattan Bank ("Chase") acts as
administrative agent. Approximately $113.7 million of the Bank 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. The Bank Credit Facility bears interest,
at the option of the Company, at (a) the greater of Chase's base CD rate,
Chase's prime rate (plus an applicable margin) or the federal funds rate plus an
applicable margin, or (b) the London interbank market rate, plus an applicable
margin based upon the Company's leverage ratio. Availability under the Bank
Credit Facility is subject to the Company's leverage ratio and other provisions
and covenants. The Company used the net proceeds of the Offering to repay
indebtedness under the Bank Credit Facility, which amounts may be subsequently
reborrowed. As of May 31, 1998, the Company had approximately $198 million
outstanding under the Bank Credit Facility. Of the additional $352 million
committed under the Bank Credit Facility, approximately $5 million was available
as of such date. See "Description of Bank Credit Facility."
In December 1997, the Company received approximately $8.9 million from the
exercise of certain warrants and anticipates receiving an additional
approximately $7.0 million from the exercise of outstanding warrants over the
next twelve months.
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The Company believes its liquidity and capital resources are adequate to
meet its operating needs for the foreseeable future. In order to implement its
growth strategy, the Company will require substantial capital resources and will
need to incur, from time to time, additional indebtedness. Availability under
the Bank Credit Facility will be used primarily to fund the Company's future
acquisitions of institutional pharmacy operations. Availability of funds under
the Bank Credit Facility is limited by the financial covenants described in
"Description of Bank Credit Facility." In the event the funding requirements in
connection with the potential future acquisitions exceed the funds available
pursuant to the Bank Credit Facility, the Company also may need to issue, in
public or in private transactions, equity or debt securities, the availability
and terms of which will depend on market and other conditions. There can be no
assurance that any such additional financing will be available on terms
acceptable to the Company, if at all. See "Description of Bank Credit Facility"
and "Risk Factors -- Leverage Ratio."
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City
time, on July 23, 1998; provided, however, that if the Company extends the
period of time for which the Exchange Offer is open, the term "Expiration Date"
means the latest time and date to which the Exchange Offer is extended. This
Prospectus, together with the Letter of Transmittal, is first being sent on or
about June 25, 1998 to all holders of Notes known to the Company. The Company's
obligation to accept Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions set forth below. See "-- Certain Conditions to the
Exchange Offer."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Notes, by giving notice of such
extension to the Holders thereof. During any such extension, all Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Notes not accepted for exchange for
any reason will be returned without expense to the tendering Holder as promptly
as practicable after the expiration or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Notes not accepted for exchange, upon
the occurrence of any of the conditions of the Exchange Offer specified below
under "-- Certain Conditions to the Exchange Offer." The Company will give
notice of any extension, amendment, non-acceptance or termination to the holders
of the Notes as promptly as practicable.
Holders of Notes do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law in connection with the Exchange Offer.
PROCEDURES FOR TENDERING NOTES
The tender to the Company of Notes by a Holder and the acceptance thereof
by the Company will constitute a binding agreement between the tendering Holder
and the Company upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal. Except as set forth
below, a Holder who wishes to tender Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, and all other documents required by such Letter of Transmittal, to
Harris Trust and Savings at the address set forth below under "-- Exchange
Agent" on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. In addition, either (i) certificates for such Notes must
be received by the Exchange Agent along with the Letter of Transmittal, or (ii)
a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Notes, if such procedure is available, into the Exchange Agent's account at
DTC pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date. THE METHOD OF
DELIVERY OF NOTES, LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. DO NOT SEND LETTERS OF TRANSMITTAL OR NOTES TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Notes who has
not completed the box entitled "Special Issuance Instruction" or "Special
Delivery Instruction" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm that is a member of
a registered national
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securities exchange or a member of the National Association of Securities
Dealers, Inc. or by a commercial bank or trust company having an office or
correspondent in the United States (collectively, "Eligible Institutions"). If
Notes are registered in the name of a person other than the party signing the
Letter of Transmittal, the Notes surrendered for exchange must be endorsed by,
or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by the Company in its sole
discretion, duly executed by, the registered Holder with the signature thereon
guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Notes tendered for exchange will be determined by the
Company in its sole discretion, and its determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Notes not properly tendered or to not accept any particular
Notes where acceptance might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Notes
either before or after the Expiration Date. The interpretation of the terms and
conditions of the Exchange Offer as to any particular Notes either before or
after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal or any Notes or powers of attorney are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
By tendering, each Holder of Notes represents to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the Holder and any beneficial
Holder, that neither the Holder nor any such beneficial Holder has an
arrangement or understanding with any person to participate in the distribution
of such New Notes and that neither the Holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company. If
the Holder is not a broker-dealer, the Holder must represent that it is not
engaged in, and does not intend to engage in, a distribution of the New Notes.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes and other
required documents to the Exchange Agent, or cannot complete the procedure for
book-entry transfer prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes (if available) and the principal amount of Old Notes
tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within five business days after the Expiration Date, the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer (or a confirmation of a book-entry transfer into the Exchange
Agent's account at the Depositary of Old Notes delivered electronically)
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such certificate(s) representing all tendered Old Notes in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days
after the Expiration Date.
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Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders of Old Notes who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
For each Note accepted for exchange, the Holder of such Note will receive a
New Note having a principal amount equal to that of the surrendered Note. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Notes for exchange when, as and if the Company has given oral
and written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes in exchange for Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Notes or a timely
Book-Entry Confirmation of such Notes into the Exchange Agent's account at DTC,
a properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Notes are
submitted for a greater principal amount than the Holder desires to exchange,
such unaccepted or non-exchanged Notes will be returned without expense to the
tendering holder thereof (or, in the case of Notes tendered by book-entry
transfer into the Exchange Agent's account at DTC pursuant to the book-entry
transfer procedures described below, such non-exchanged Notes will be credited
to an account maintained with DTC by or on behalf of such Holder) as promptly as
practicable after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in DTC's systems may make
book-entry delivery of Notes by causing DTC to transfer such Notes into the
Exchange Agent's account at DTC in accordance with DTC's procedures for
transfer. In addition to book-entry transfer at DTC, the Letter of Transmittal
or facsimile thereof with any required signature guarantees and any other
required documents must be transmitted to and received by the Exchange Agent at
the address set forth below under "-- Exchange Agent" on or prior to the
Expiration Date.
WITHDRAWAL RIGHTS
Tenders of Notes may be withdrawn at any time prior to the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Notes to be withdrawn, the Notes to be withdrawn (including the
principal amount of such Notes), and (where certificates for Notes have been
transmitted) the name in which such Notes are registered, if different from that
of the withdrawing holder. If certificates for Notes have been delivered or
otherwise identified to the Exchange Agent then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the DTC to be credited with the withdrawn
Notes and otherwise comply with the procedures of such facility. All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Notes so withdrawn will be deemed to be not
validly tendered for exchange for purposes of the Exchange Offer. Any Notes that
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Notes tendered by book-entry transfer into the Exchange Agent's account at
DTC pursuant to the book-entry transfer procedures described above, will be
credited to an account maintained with DTC by or on behalf of such Holder) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Notes may be retendered by following one of
the procedures described under "-- Procedures for Tendering Notes" above at any
time on or prior to the Expiration Date.
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CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company is
not required to accept for exchange, or to issue New Notes in exchange for, any
Notes and may terminate or amend the Exchange Offer if at any time before the
acceptance or the exchange, the Company determines that the Exchange Offer
violates applicable law or any applicable interpretation of the staff of the
Commission. These conditions are for the sole benefit of the Company and may be
asserted or waived by the Company in whole or in part at any time and from time
to time in its sole discretion. The failure by the Company at any time to
exercise any of its rights will not be deemed a waiver of such right and each
such right shall be deemed an ongoing right that may be asserted at any time and
from time to time.
In addition, the Company will not accept for exchange any Notes tendered,
and no New Notes will be issued in exchange for any such Notes, if at such time
any stop order shall be threatened or in effect with respect to the Registration
Statement of which this Prospectus is a part or the qualification of the
Indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
EXCHANGE AGENT
Harris Trust and Savings has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
BY MAIL, OVERNIGHT COURIER OR HAND:
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
88 Pine Street, 19th Floor
New York, NY 10005
Attention: Reorganization Department
BY FACSIMILE (for Eligible Institutions only):
(212) 701-7636
CONFIRM BY TELEPHONE (for Eligible Institutions only):
(212) 701-7624
Delivery other than as set forth above will not constitute a valid
delivery.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company will solicit offers to
exchange by mail and additional solicitations may be made in person or by
telephone by officers and employees of the Company. The expenses to be incurred
in connection with the Exchange Offer will be paid by the Company.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The debt issuance costs will be capitalized for
accounting purposes.
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TRANSFER TAXES
Holders who tender their Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that Holders who instruct the
Company to register New Notes in the name of, or request that Notes not tendered
or not accepted in the Exchange Offer be returned to, a person other than the
registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Notes who do not exchange their Notes for New Notes pursuant to
the Exchange Offer will continue to be subject to the restrictions on transfer
of such Notes as set forth in the legend thereon as a consequence of the
issuance of the Notes pursuant to the exemptions from, or in transactions not
subject to, the registration requirements of, the Securities Act and applicable
state securities laws. Notes not exchanged pursuant to the Exchange Offer will
continue to accrue interest at 8 3/8% per annum and will otherwise remain
outstanding in accordance with their terms. In general, the Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Notes under the Securities Act. However, the Company may be obligated to file
with the Commission a shelf registration statement to cover resales of the Notes
or Transfer Restricted Securities by the Holders thereof who satisfy certain
conditions relating to the provision of information in connection with the shelf
registration statement. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until the earlier of (i) the date on which such Note
has been exchanged by a person other than a broker-dealer for a New Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of this Prospectus, (iii) the date on which such Note has been
effectively registered under the Securities Act and disposed of in accordance
with such registration statement or (iv) the date on which such Note is
distributed to the public pursuant to Rule 144 under the Act.
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company is of the view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Notes. If any
holder has any arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange Offer, such holder (i)
could not rely on the applicable interpretations of the staff of the Commission
and (ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction. A
broker-dealer who holds Notes that were acquired for its own account as a result
of market-making or other trading activities may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of New Notes. Each such broker-dealer that receives
New Notes for its own account in exchange for Notes, where such Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge in the Letter of Transmittal that it will
deliver a prospectus in connection with any resale of such New Notes. See "Plan
of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, subject to certain limitations, to register or qualify the New Notes for
offer or sale under the securities laws of such jurisdictions as any holder of
the Notes reasonably requests in writing.
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BUSINESS
GENERAL
PharMerica is a leading provider of institutional pharmacy services to the
elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
specialty hospitals and the home. The Company is also a leading provider of mail
order pharmacy benefit services to the workers' compensation and catastrophic
care markets. As of May 31, 1998, PharMerica provided pharmacy services to
approximately 365,000 long-term care residents in 37 states and to over 106,000
workers' compensation claimants nationwide. For the three months ended March 31,
1998 and the year ended December 31, 1997, the Company generated, on a pro forma
basis, net sales of approximately $277.6 million and $1.0 billion and EBITDA of
approximately $37.0 million and $126.2 million, respectively.
PharMerica is the largest institutional pharmacy provider in four of the
five states with the highest population of elderly people, and its network of
120 institutional pharmacies covers a geographic area that includes over 80% of
the nation's long-term care beds. The Company operates ten large scale "mega-
pharmacies", each serving over 10,000 beds, and many of its pharmacies are open
24 hours, 7 days a week. As a result of its national scope, the Company has been
able to enter into preferred provider agreements with regional and national
long-term care providers, the most significant of which are Beverly and IHS. The
Company provides services to approximately 58,000 Beverly long-term care beds
and 17,000 IHS long-term care beds.
The Company purchases, repackages and dispenses pharmaceuticals and
provides its clients' long-term facilities with related management services,
regulatory assistance and third-party billing. The Company also provides
specialty services including infusion therapy, clinical consulting and
comprehensive catastrophic care. In addition, PharMerica has developed
specialized information technology and clinical initiatives to offer its clients
additional value-added services such as computerized medical record keeping,
on-line formulary, drug therapy evaluation and disease state management, which
the Company believes will position it to successfully compete in managed care
and prospective payment systems.
RECENT DEVELOPMENTS
PharMerica was formed as a result of a merger involving PCA, a subsidiary
of Beverly, and Capstone. In connection with the Merger, Beverly entered into a
preferred provider agreement that gives PharMerica, subject to certain
conditions, including quality of services and competitive pricing, the right to
service Beverly's long-term care beds, including any subsequently added beds,
for a five-year period with a five-year renewal period at the Company's option.
In addition, Beverly agreed not to compete in the institutional pharmacy
industry for five years.
The Company believes that, when fully realized, the synergies from the
Merger will be approximately $25 million annually. This includes savings
primarily from the consolidation of 19 institutional pharmacies, 11 of which
have already occurred, more favorable pricing terms in the Company's new primary
purchasing contracts and corporate and regional overhead reductions. It also
includes additional income generated through expanded market coverage of
available beds under the Company's existing preferred provider agreements with
regional and national long-term care providers. The Company expects to realize
approximately $16 million of these synergies in 1998 and the full $25 million in
anticipated annual synergies (including approximately $2 million of additional
income as described above) beginning in 1999.
The Company recently reached an agreement in principle with IHS regarding a
lawsuit filed by the Company against IHS. The lawsuit alleges certain breaches
of contracts and torts by IHS. PharMerica has reached an agreement in principle
with IHS to purchase NIPSI from IHS and to dismiss the pending lawsuit. NIPSI
operates 35 pharmacies in 15 states, serving approximately 38,000 beds. See
"Risk Factors -- Dependence on Key Contracts."
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INDUSTRY OVERVIEW
Industry analysts estimate that the United States pharmacy industry's total
annual revenues for 1997 for the markets served by the Company exceeded $16
billion. These revenues were comprised of sales of approximately $7 billion to
individuals that live at home, $5 billion to residents of long-term care
facilities, $2.7 billion to residents of assisted living and retirement
communities and $2 billion to patients in rehabilitation and other specialty
hospitals. Institutional pharmacy companies such as PharMerica have
traditionally focused on servicing the $5 billion long-term care facility
segment of the industry, which industry analysts estimate is growing by
approximately 10% annually. The Company also believes that changes in the
institutional pharmacy industry are providing large institutional pharmacies
with the opportunity to serve elderly, chronically ill and disabled patients in
settings across the healthcare continuum. These changes include: (i) an increase
in the acuity level and number of residents in assisted living facilities; (ii)
increased operating and cost efficiencies, regulatory expertise and national
market presence of large institutional providers; and (iii) an increase in
outsourcing of pharmacy services by specialty hospitals.
Institutional Pharmacy. Institutional pharmacies purchase both
prescription and nonprescription pharmaceuticals and other medical supplies from
wholesale distributors and manufacturers, and repackage and distribute these
products to residents in nursing homes, assisted living facilities, retirement
centers and other institutional settings. Institutional pharmacies generally
provide consultant pharmacist services that include, among other things,
individual patient drug therapy evaluation and the monitoring of the control,
administration and storage of prescribed medications within the institution to
ensure compliance with state and federal regulations. Unlike hospitals, most
long-term care institutions do not have an on-site pharmacy to dispense
prescription drugs; institutional pharmacies accordingly play an integral role
in long-term care by providing a high quality, cost-effective means of
dispensing and monitoring patient medication. In addition, institutional
pharmacies often provide further support services such as infusion therapy,
Medicare Part B services and consultant pharmacist services as a part of
administering daily care in high acuity settings.
The provision of pharmacy services to long-term care residents is
fragmented, with independent institutional pharmacy companies serving, on a
revenue basis, approximately 59% of long-term care facilities, retail pharmacies
serving approximately 19% of long-term care facilities, and institutional
pharmacies owned by long-term care companies (commonly referred to as "captive
pharmacies") serving the remaining 22% of such facilities. Over the past five
years, the proportion of sales by independent institutional pharmacies has
increased. The Company believes that institutional pharmacy companies are better
positioned to serve the changing market demands than local retail pharmacies and
that the proportion of the long-term care pharmacy market served by retail
pharmacies should continue to decline. The Company also believes that
consolidation of the market will accelerate as some long-term care companies
divest themselves of captive pharmacies and owners of smaller institutional
pharmacies are encouraged to sell their business because of various competitive
factors, including: (i) the advantages of economies of scale in pharmaceutical
purchasing; (ii) the benefits of national market presence in competing for
managed care contracts and preferred provider agreements with multi-site
facilities; (iii) the efficiencies created by being able to provide a broad
range of services; and (iv) the demands created by the need for specialized
regulatory expertise and complex information systems.
Workers' Compensation. The workers' compensation market is driven by
workers' compensation laws that require employers to provide medical disability
benefits to employees who suffer job-related injuries and disabilities.
Employers provide these benefits through self-insurance, participation in state
run funds or purchase of insurance. Workers' compensation claimants generally
have not been served as part of the institutional pharmacy industry, relying,
instead, primarily upon local retail pharmacy outlets. This is because state
laws generally provide workers' compensation claimants with freedom of choice in
selecting healthcare providers. The Company believes that this segment of the
pharmacy industry, while currently highly fragmented, is likely to consolidate
as the benefit providers increasingly seek to control costs, reduce expenses and
standardize services related to claimants.
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GROWTH STRATEGY
The Company intends to continue to increase its sales and improve its
profitability by capitalizing on its position as a leading provider of pharmacy
services. Key elements of the Company's growth strategy are to:
GROW THROUGH STRATEGIC ACQUISITIONS. The acquisition of high-quality
institutional pharmacy companies in targeted markets has been the primary
contributor to the Company's growth. The Company seeks to acquire independent
and captive institutional pharmacy providers that: (i) expand its service area
into regions that have either high concentrations of elderly people or include
beds operated by parties to the Company's preferred provider agreements; (ii)
increase market share in currently served markets; or (iii) provide services or
products complementary to those currently offered by the Company. Since January
1, 1996, in addition to consummating the Merger, the Company has completed over
30 acquisitions, which at the time of acquisition were generating combined
annualized revenues of over $300 million.
PURSUE INTERNAL GROWTH OPPORTUNITIES. The Company intends to increase
revenues and profitability from existing operations by: (i) increasing its
market share within its currently served markets; (ii) cross-selling specialty
services such as infusion therapy to its existing customer base, particularly
the long-term care facilities served by the Capstone-related pharmacies which
historically have had lower infusion therapy use rates than those of PCA; (iii)
entering into additional preferred provider agreements with regional and
national long-term care and alternate site providers; and (iv) capitalizing on
the Company's national presence, lower costs and value-added clinical and
information services to contract with managed care and other third-party payors
to provide institutional and mail-order pharmacy services to their customers. On
a pro forma basis, the Company added over 25,000 long-term care beds through
internal growth in 1997 and achieved revenue growth of over 15% from existing
operations.
EXPAND INTO ADDITIONAL HEALTHCARE SETTINGS. The Company seeks to serve
elderly, chronically ill and disabled patients in settings such as assisted
living and retirement communities, specialty hospitals and the home, all of
which are outside of the traditional long-term care setting in which
institutional pharmacies historically have operated. The Company has introduced
several proprietary programs designed to attract new customers in a wide variety
of settings, including PharmaCare Complete, which offers comprehensive
healthcare products and services to its homebound catastrophic care customers,
and WellCare, which offers monitoring, training and information services to
providers of assisted living services. In addition, the Company seeks to
increase sales of pharmacy services to elderly residents in the home setting
through marketing efforts directed towards case managers of managed care
providers and other payor sources as well as discharge planners of sub-acute
hospitals and long-term care facilities.
ENHANCE OPERATING MARGINS BY LEVERAGING ECONOMIES OF SCALE. PharMerica
intends to achieve significant benefits from the increased scale and scope of
its operations in areas such as purchasing, overhead and pharmacy operations.
The Company's increased purchasing volumes, resulting primarily from the Merger,
have enabled it to achieve more favorable pricing terms with its suppliers,
which is particularly significant since the costs of drugs and other products
account for more than 50% of the Company's costs. Since the Merger, the Company
has renegotiated and reduced the pricing terms of its contracts with its primary
pharmaceutical wholesaler and 16 other drug manufacturers and distributors. The
Company also believes that its network of 120 institutional pharmacies, which
covers a geographic area that includes over 80% of the nation's long-term care
beds, provides it with the opportunity to achieve significant cost savings
through the acquisition, integration and consolidation of existing pharmacies.
Since the Merger, the Company has identified 19 pharmacies that the Company
intends to consolidate during 1998, 11 of which have already occurred. In
geographic areas in which it has a high customer concentration, the Company's
strategy is to consolidate several of its smaller pharmacies into a single
"mega-pharmacy" serving over 10,000 beds. The size of these mega-pharmacies
allows the Company to reduce overhead per bed, use advanced distribution
technology that increases efficiency and accuracy of services and make greater
investments in clinical and information systems.
UTILIZE CLINICAL AND INFORMATION CAPABILITIES TO PROVIDE VALUE-ADDED
SERVICES. The Company is developing information technology and clinical
initiatives that it believes are valuable to long-term care providers, third
party payors and managed care providers. The Company believes that these
capabilities will
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become increasingly important to its customers and partners and will help
position the Company as a leading provider of comprehensive pharmacy solutions
as the industry moves toward managed care and other prospective pay systems and
customers increasingly demand advanced clinical programs and information
management to help improve patient outcomes and control costs. These efforts
have resulted in the creation of the Company's centralized database, DataMart,
which currently contains over 50 million transaction records. As an additional
component of its information systems the Company has developed a clinical
software package called Consultware, which includes an on-line formulary, for
use by its consulting pharmacists.
SERVICES
Long-Term Care Services. PharMerica's long-term care services consist of :
(i) providing pharmacy services in the long-term care setting; (ii) specialty
services including infusion therapy services and Medicare Part B benefits; and
(iii) pharmacy consulting services. For the year ended December 31, 1997, on a
pro forma basis, long-term care services represented approximately 84.5% of
PharMerica's revenues.
Pharmacy Services. PharMerica's core business consists of providing a full
range of institutional pharmacy services to the elderly, chronically ill and
disabled in long-term care and alternate care settings, including long-term care
facilities, assisted living facilities, specialty hospitals and the home.
PharMerica purchases pharmaceuticals in bulk quantities from wholesalers and
manufacturers and dispenses both prescription and non-prescription drugs in
patient-specific packaging in accordance with physician orders. Prescription and
non-prescription medications are delivered at least daily to long-term care
facilities for administration to residents by the nursing staffs of such
facilities. PharMerica's pharmacists package drugs to meet each patient's needs
for either single-day or multi-day dosage requirements. PharMerica can customize
the timing and packaging of its delivery system to meet specific client needs.
PharMerica uses an order processing system that enables its long-term care
clients to order pharmaceuticals using either a pre-printed label or monthly
order forms. While clients generally require delivery of routine orders within
24 hours, many of PharMerica's pharmacies are open 24 hours, seven days a week
to provide emergency services as needed. Once a physician's order is received by
PharMerica, it is entered into a pharmacy computer system where information is
screened for drug and food interactions, allergies and refill limitations. Upon
entry, the prescription becomes part of the permanent patient record, and a
label is printed for application to the packaging. The package label contains
specific patient information as well as physician name, medication, dosage
information and cautionary messages. Prior to delivery, the completed
prescription is reviewed by one of PharMerica's pharmacists and verified against
the original order entry data. Following this final quality assurance check, the
prescription is delivered by courier service to the facility.
Specialty Services. With cost-containment pressures in healthcare forcing
providers and payors to seek the most efficient setting for care, long-term care
facilities are more often providing higher acuity care more cost effectively
than hospitals. PharMerica provides long-term care facilities with specialty
services and products, including infusion therapy services and services
reimbursed under Medicare Part B.
The Company's infusion therapy services consists of the intravenous
delivery or administration by tube, catheter or IV, of medication or
introduction of parenteral and enteral nutritional formulas, including nutrients
and other fluids, to patients. The Company also offers infusion services under
its "IV Express" program which provides nationwide, next-day delivery service
for facilities that fall outside PharMerica's traditional service area. Patients
can receive infusion therapies at home or in a long-term or other subacute care
facility at a cost which is substantially less than hospital-based care. The
trend toward delivery of healthcare in the lowest cost setting and the
increasing ability to treat certain illnesses outside of hospitals or other
acute care settings represents an opportunity for long-term care facilities to
attract infusion therapy patients. The Company prepares the product to be
administered, delivers the product to the patient setting and trains nursing
facility personnel in administering infusion therapy, but it does not administer
the therapy except in limited circumstances. The Company offers a full range of
premixed, ready-to-handle solutions, and related products, supplies and
equipment, as well as a policy and procedure manual detailing appropriate
intravenous practices and clinical pharmacist support. These infusion therapies
include enteral nutrition therapy, parenteral nutrition therapy, antibiotic
infusion therapy and chemotherapy, AIDS therapy, pain management and hydration
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therapy. PharMerica has established an infusion therapy distribution network
which allows next-day delivery and eliminates the need for customer product
storage. Because the proper administration of infusion products requires a
trained and experienced pharmacist and nursing staff and because the level of
such training varies among nursing facilities, the Company has developed a
multi-tiered education and training program. The program ranges from basic
education and information for trained facility nurses to the complete range of
skilled nursing services training made available to customers through hands-on
clinical support, including patient assessment, advanced IV line placement and
dose administration.
As a part of its specialty services, PharMerica also provides services and
products reimbursed under Medicare Part B. Medicare Part B provides benefits
covering, among other things, outpatient treatment, physicians' services,
durable medical equipment, orthotics, prosthetic devices and medical supplies.
Products and services covered for Medicare Part B eligible residents in the
long-term care facility include but are not limited to, enteral feeding
products, ostomy supplies, urological products, orthotics, prosthetics, surgical
dressings and tracheostomy care supplies. These products and services are
submitted to and paid by four regional carriers which establish coverage
guidelines, allowable utilization frequencies and billing procedures for such
products. PharMerica, as an eligible supplier, either bills Medicare directly
for Part B covered products or, alternatively, assists the long-term care
facility in meeting Medicare Part B eligibility requirements and prepares bills
on behalf of the facility.
Pharmacy Consulting Services. State and local regulations mandate that
long-term care facilities, in addition to providing a source of pharmaceuticals,
retain consultant pharmacist services to monitor and report on prescription drug
therapies in order to maintain and improve the quality of patient care.
PharMerica provides value-added consulting services that help clients comply
with federal and state regulations, manage medication costs and maximize the
therapeutic efficacy of drug regimens. These pharmacy consulting services
include: (i) regular review of each patient's medical record and drug regimen;
(ii) recommendation of therapeutic alternatives, where appropriate; (iii)
monthly evaluation of facility-wide drug usage and drug costs; (iv) maintenance
of drug administration records that assist the long-term care facility with
regulatory compliance; (v) participating on certain key committees of client
facilities as well as periodic involvement in staff meetings; (vi) monthly
inspection of facility's medication carts and drug storage rooms; and (vii)
providing training programs.
PharMerica's consultant pharmacists also employ formulary management
techniques designed to assist physicians in making the best cost-effective
clinical choice of drug therapy for residents. Using PharMerica's proprietary
formulary program, introduced in 1995 and published annually in conjunction with
the American Medical Directors Association and the University of Arizona School
of Pharmacy, PharMerica pharmacists assist prescribing physicians in designating
the use of particular drugs from among therapeutic alternatives (including
generic substitutions) and in the use of more cost-effective delivery systems
and dose forms. The PharMerica formulary takes into account such factors as
pharmacology, safety and toxicity, efficacy, drug administration, quality of
life and other considerations specific to the elderly population of long-term
care facilities. PharMerica's formulary guidelines also provide relative
pharmaceutical cost information to residents, their insurers or other payors.
Adherence to the PharMerica formulary guidelines is intended to improve drug
therapy results, lower costs for residents and strengthen PharMerica's
purchasing power with drug manufacturers.
PharMerica's proprietary Consultware program is customized for pharmacy
consulting practices and is designed to help consultant pharmacists efficiently
generate communications to nursing facility professionals, produce professional
and informative quality assurance reports, monitor responses to their
recommendations, such as therapeutic interchange requests, and help document the
clinical and economic value of their services.
Mail Order Services. PharMerica provides a broad array of mail order
pharmacy products and services, including prescription and non-prescription
pharmaceuticals, medical supplies and medical equipment, primarily to workers'
compensation claimants and correctional facilities nationwide. The Company also
provides mail order pharmacy services to catastrophically ill or injured
claimants requiring long-term pharmacy services. For the year ended December 31,
1997, on a pro forma basis, mail order services represented approximately 14.2%
of PharMerica's revenues.
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Workers' Compensation. The Company's workers' compensation services
include: home delivery of prescription drugs and medical supplies and medical
equipment to injured workers who are receiving workers' compensation benefits;
an array of computer software solutions to reduce a payor's administrative
costs; and an on-line retail prescription drug card service that enables injured
workers to obtain prescription drugs at no direct cost to the claimant from a
network of over 30,000 participating retail pharmacies throughout the country.
PharMerica provides mail order services to approximately 106,000 workers'
compensation claimants nationwide.
PharMerica works directly with workers' compensation payors to provide
their claims representatives with the appropriate training and on-site
assistance to identify potential claimants who would benefit from PharMerica's
services. After identifying these claimants, PharMerica coordinates with the
claims representative, the claimant's treating physician and rehabilitation
nurse to determine the prescription drugs, medical supplies and medical
equipment that are required for the care and treatment of the claimant's injury
and the requisite schedule for supplying those items.
Correctional Facilities. The Company also provides pharmacy services to
approximately 135,000 inmates, making it the largest provider of pharmacy
services to correctional institutions in the United States. The Company enters
into capitated and other contracts with state agencies or general medical
contractors to whom the provision of healthcare services to correctional
institutions has been outsourced. The Company services all of its correctional
institution contracts from a central distribution facility in Baltimore,
Maryland.
Catastrophic Care. The Company also provides comprehensive catastrophic
care as a part of its specialty services. PharMerica has introduced a
proprietary program, PharmaCare Complete, to provide a comprehensive package of
healthcare products and services to its homebound catastrophic care customers
who generally have significant and continuing needs for pharmaceutical services
and healthcare products. At December 31, 1997, the Company provided these
products and services to approximately 3,000 customers.
Specialty Hospitals. The Company also provides pharmacy services to
specialty and rural hospitals. For the year ended December 31, 1997, on a pro
forma basis, these services represented approximately 1.3% of PharMerica's
revenues.
OPERATIONS
Organization. PharMerica's long-term care operations are divided into four
geographic regions, each headed by a regional senior vice president. The Company
believes this regional organizational structure provides the flexibility to
accommodate continued growth while providing standardized regional care.
PharMerica believes that the institutional pharmacy business is dependent in
large part on personal service and encourages its pharmacists to develop
personal relationships and to be responsive to local market demands. PharMerica
uses more centralized financial and inventory control systems support than
typically available to small, independent pharmacy operators. Additional
services performed at the corporate level include quality improvement oversight,
financial and accounting functions, clinical program development, group
purchasing, marketing, acquisitions and corporate development activities. Where
possible, the Company establishes mega-pharmacies serving over 10,000 beds.
These mega-pharmacies allow the Company to lower overhead per bed, to use
advanced distribution technology that increases efficiency and accuracy of
services and to make greater investments in clinical and information systems
that PharMerica expects will further enhance the operating margins of these
pharmacies. The Company currently operates ten mega-pharmacies.
Pharmacy Distribution Model. In the institutional pharmacy business,
PharMerica typically provides services through regional pharmacies that have the
capability to serve long-term care facilities within a 150-mile radius. These
regional pharmacies are generally open 24 hours, seven days a week and are
staffed with clinical pharmacists, registered nurses and pharmacy technicians.
PharMerica ships products to workers' compensation claimants from two
distribution facilities in Tampa, Florida. In the correctional business,
PharMerica dispenses pharmaceuticals primarily from a centralized mail service
pharmacy operation located in Baltimore, Maryland.
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Marketing and Sales. PharMerica's pharmacy services marketing efforts are
directed at long-term care facility operators. While pricing is an important
factor in the selection of pharmacy providers, PharMerica's experience is that
the primary factor, particularly among long-term care operators, is the quality
and range of services offered. Consequently, PharMerica strives to provide
high-quality services that are tailored to each client's needs. Once a
relationship is established, PharMerica then attempts to expand the range of
services it provides. PharMerica's marketing efforts are conducted by regional
vice presidents with support from local pharmacy managers and regional
salespersons. PharMerica's 300 consultant pharmacists and 100 nurse consultants
also are integral to the marketing effort because of their daily contact with
the facility managers and the residents in those facilities.
The Company's mail order services marketing and sales efforts are directed
to workers' compensation insurance adjusters and managers at regional and local
insurance offices throughout the country. Referrals of claimants meeting certain
injury profiles are forwarded to the Company's internal salesforce of
approximately 40 individuals who contact claimants to explain the benefits of
using the Company's services. For claimants electing to use the Company's
programs, Company representatives then obtain the necessary information
regarding the patients' medications and supplies and put the claimant on
service.
Suppliers. PharMerica purchases substantially all of its pharmaceutical
inventories from wholesalers and manufacturers. Since the Merger, PharMerica
negotiated a new primary wholesaler agreement with Bergen Brunswig and 16 other
agreements with drug manufacturers and other suppliers with terms that are more
favorable to PharMerica than its previous contracts. PharMerica also has in
place secondary wholesaler agreements to minimize its purchasing channels while
maximizing inventory quality and cost savings. Although Capstone and PCA
purchased approximately 94% of pharmaceutical supplies from McKesson and Bergen
Brunswig in 1997, because of readily available alternatives, PharMerica does not
believe it is dependent on any one supplier.
Customers. The primary customers of PharMerica are long-term care
facilities, workers' compensation payors, correctional facilities, and specialty
hospitals. Sales to Beverly and its residents accounted for approximately 16.0%
of revenues for the year ended December 31, 1997 on a pro forma basis. Other
than Beverly, no customer represented more than 10% of PharMerica's revenue on a
pro forma basis.
Preferred Provider Agreements. The Company has preferred provider
agreements with eight national and regional long-term care operators, including
Beverly and IHS. These agreements give PharMerica the right to provide pharmacy
services to the operator's facilities subject to certain conditions, including
conditions related to competitive pricing and quality service. The agreements
also generally give the Company the right, subject to competitive pricing and
services and freedom of choice laws, to service beds in facilities subsequently
acquired by the long-term care company or in facilities that subsequently become
serviceable by the Company when pharmacies are opened or acquired by the
Company. As a result of the Merger, the Company is seeking expanded market
coverage under existing preferred provider agreements through servicing of
additional beds in areas in which Capstone or PCA, as the case may be, did not
have institutional pharmacy capabilities.
Upon the closing of the Merger, Beverly and the Company entered into a
Preferred Provider Agreement for Pharmaceutical and Related Services (the
"Beverly PPA") that gives PharMerica the right, for a five-year term, with a
five-year renewal right upon meeting certain competitive pricing criteria, to
provide certain pharmacy and related products and services in Beverly long-term
care facilities where PCA had previously provided such services. Beverly is
required under certain conditions to cause additional long-term care facilities
now or hereafter operated by Beverly to enter into similar provider agreements
for such services for up to a five-year term, with similar renewal rights.
Under the Beverly PPA, if Beverly sells or otherwise disposes of any
long-term care facility under contract with the Company to a third party,
Beverly will be obligated to cause the third party to assume Beverly's
obligation to obtain the services at that facility from the Company. A default
by either party with respect to its obligations under provider agreements
covering 10% of the total number of long-term facilities at the time under
contract with the Company will constitute a default under the Beverly PPA,
entitling the non-
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defaulting party to, among other remedies, terminate the entire relationship.
See "Risk Factors -- Dependence on Key Customers."
JCAHO Accreditation. As one component of its commitment to quality
assurance, PharMerica is pursuing accreditation of its pharmacies by JCAHO, a
professional, nonprofit organization dedicated to improving the quality of care
in healthcare facilities. To receive JCAHO accreditation, pharmacies must be in
compliance with JCAHO's requirements, which focus primarily on quality control.
As of May 1, 1998, approximately 46 of the Company's pharmacies had received
accreditation. The Company intends to pursue JCAHO accreditation for all of its
long-term care pharmacies. JCAHO accreditation, while not mandated for
pharmacies, is increasingly important to managed care organizations and Medicaid
programs and is also important for entering into preferred provider arrangements
with national and regional providers looking for consistent quality. The Company
believes that its pursuit of accreditation from JCAHO will help it provide
quality services and will assist it in competing on a nationwide basis.
COMPETITION
The institutional pharmacy market is fragmented and competition varies
significantly from market to market. PharMerica's competitors include small
retail pharmacies, large chains of retail pharmacies, in-house captive
pharmacies and national institutional pharmacies. The Company believes that the
competitive factors most important in PharMerica's lines of business are quality
and range of service offered, competitive prices, reputation with referral
sources, ease of doing business with the provider, and the ability to develop
and maintain relationships with referral sources. Some of PharMerica's present
and potential competitors, including retail pharmacies, captive pharmacies and
pharmaceutical distributors, are significantly larger than PharMerica and have,
or may obtain, greater financial and marketing resources than PharMerica. In
addition, there are relatively few barriers to entry in the local markets served
by PharMerica, and it may encounter substantial competition from local market
entrants. In acquiring institutional pharmacy providers, the Company competes
with several other companies with similar acquisition strategies, some of which
may have greater resources than the Company. See "Risk Factors -- Competition."
TECHNOLOGY AND INFORMATION SYSTEMS
The Company believes that certain technologies and management informations
systems will result in improved pharmacy performance and will allow the
Company's pharmacies to provide value-added services and clinical initiatives
that it believes are valuable to long-term care providers, third party payors
and managed care providers. These initiatives have resulted in the creation of
the Company's centralized database, DataMart, which currently contains over 50
million transaction records. DataMart allows the Company to sort and search data
by, among other things, diagnosis code, pharmaceutical product, facility and
doctor. DataMart also allows the Company to generate customer specific reports
and offers new services, including disease state management and drug
interaction. These new services allow the Company to assist its clients in
assessing patient risks, predict therapeutic outcomes and manage costs for a
particular disease state. The information accessible through DataMart positions
the Company to compete in managed care and risk sharing environments.
PharMerica has also implemented Consultware, a proprietary drug regimen
review system. Consultware assists the consultant pharmacists in producing high
quality, concise and updated drug therapy recommendations to physicians and
nurses, enables the consultant to track provider's responses to recommendations,
generates quality assurance reports for the customer on drug usage, and
generates internal reports for Company management on the consultant's
performance. Consultware is linked to and usable with other consultant
pharmacist software tools such as disease management protocols, pharmacokinetic
dosing formulas, data collection forms for drug usage evaluation projects and
reports to facilities and payors on reductions in drug costs. This positions the
Company to provide its facilities and their medical professionals critical
therapeutic alternatives to provide more effective and cost-efficient
treatments.
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Approximately 50% of the Company's pharmacies are connected by a wide area
network, which the Company intends to expand to its remaining pharmacies during
1998. The wide area network facilitates corporate-wide communications and allows
for more timely transfer of information to the DataMart.
REIMBURSEMENT AND BILLING
For the three months ended March 31, 1998, the Company's payor mix, on a
revenue basis, was approximately 16% directly from long-term care facilities,
43% Medicaid, 36% private pay and third party insurance and 5% Medicare Part B.
Medicare and Medicaid are highly regulated. The failure of PharMerica to comply
with applicable reimbursement regulations could adversely affect the Company's
business.
Medicare/Long-Term Care Facilities. The Medicare program is a federally
funded and administered health insurance program for individuals age 65 and over
or for certain individuals who are disabled. The Medicare program consists of
two parts: Medicare Part A, which covers, among other things, inpatient
hospital, skilled long-term care facility, home healthcare and certain other
types of healthcare services; and Medicare Part B, which covers physicians'
services, outpatient services and certain items and services provided by medical
suppliers. Medicare Part B also covers a limited number of specifically
designated prescription drugs such as enteral nutrition and urologic supplies.
Medicare intermediaries for Medicare Part A require long-term care facilities to
submit all of their costs for patient care, including pharmaceutical costs, in a
unified bill. Thus, fees for pharmaceuticals provided to Medicare Part A
residents are paid to the Company by the long-term care facility on a monthly
basis. Pricing is consistent with that of private pay residents or is set
between private pay rates and Medicaid minimums. Medicare Part A has
cost-sharing arrangements under which beneficiaries must pay a portion of their
costs. These non-covered co-payments are billed by the facility directly to
residents or the state Medicaid plan, as the case may be.
Medicaid. The Medicaid program is a federal-state program designed to
enable states to provide medical assistance to aged, blind or disabled
individuals, or to member of families with dependent children whose income and
resources are insufficient to meet the costs of necessary medical services.
State participation in the Medicaid program is voluntary. To become eligible to
receive federal funds, a state must submit a Medicaid "state plan" to the
Secretary of Health and Human Services for approval. The federal Medicaid
statute specifies a variety of requirements which the state plan must meet,
including requirements relating to eligibility, coverage of services, payment
and administration. For residents eligible for Medicaid, the Company bills the
individual state Medicaid program. Medicaid programs are funded jointly by the
federal government and individual states and are administered by the states. The
reimbursement rates for pharmacy services under Medicaid are determined on a
state-by-state basis subject to review by the Health Care Financing
Administration and applicable federal law. Federal regulations and the
regulations of certain states establish "upper limits" for reimbursement for
prescription drugs under Medicaid. In most states, pharmacy services are priced
at the lower of "usual and customary" charges or cost (which generally is
defined as a function of average wholesale price and may include a profit
percentage) plus a dispensing fee. In addition, most states establish a fixed
dispensing fee which is adjusted to reflect associated costs on an annual or
less frequent basis. Certain states including Georgia, Maine, Michigan and
Nebraska, have "lowest charge legislation" or "most favored nation provisions"
which require the Company to charge Medicaid no more than its lowest charge to
other consumers in the state.
State Medicaid programs generally have long-established programs for
reimbursement which have been revised and refined over time and have not had a
material adverse effect on the pricing policies or receivables collection for
long-term care facility pharmacy services. Any future changes in such
reimbursement programs or in regulations relating thereto, such as reductions in
the allowable reimbursement levels or the timing of processing of payments,
could adversely affect the Company's business. As managed care organizations
continue to demand lower prices, revenues from Medicaid patients in states with
"lowest charge legislation" may be adversely effected. The annual increase in
the federal share would vary from state to state based on a variety of factors.
Such changes, if ultimately signed into law, could adversely affect the
Company's business.
Private Pay/Third Party Insurance. For those residents who are not covered
by government-sponsored programs or private insurance, PharMerica generally
bills the patient or the patient's insuror or other
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responsible party on a monthly basis. Depending upon local market practices,
PharMerica may alternately bill private residents through the long-term care
facility. Pricing for private pay residents is based on prevailing regional
market rates or "usual and customary" charges. Third-party insurance includes
funding for residents covered by private plans, veterans benefits, workers'
compensation and other programs. When applicable, the resident's individual
insurance plan is billed monthly, and rates are consistent with those for
private pay residents.
GOVERNMENT REGULATION
Institutional pharmacies, as well as the long-term care facilities they
serve, are subject to extensive federal, state and local regulation. These
regulations delineate qualifications required for day-to-day operations,
reimbursement and documentation of select activities. PharMerica continuously
monitors the effects of regulatory activity on its operations.
States require that companies operating a pharmacy within the state be
licensed by the state board of pharmacy. PharMerica currently has its pharmacies
licensed in each state in which it operates a pharmacy. In addition, PharMerica
currently delivers prescription drugs from its licensed pharmacies to many
states in which PharMerica does not operate a pharmacy. Most of these states
regulate the delivery of prescription drugs by out of state pharmacies to
residents in such states. PharMerica's pharmacies hold these requisite licenses.
In addition, PharMerica's pharmacies are registered with the appropriate state
and federal authorities pursuant to statutes governing the regulation of
controlled substances.
Long-term care facilities are required to be licensed in the states in
which they operate and, if serving Medicare or Medicaid residents, must be
certified to be in compliance with applicable program participation
requirements. Long-term care facilities are also subject to state and federal
nursing home regulations which impose strict compliance standards relating to
quality of care for long-term care facilities operations, including extensive
documentation and reporting requirements. In addition, pharmacists, nurses and
other healthcare professionals who provide services on PharMerica's behalf are
in most cases required to obtain and maintain professional licenses and are
subject to state regulation regarding professional standards of conduct.
Federal and state laws impose certain repackaging, labeling, and packing
insert requirements on pharmacies that repackage drugs for distribution beyond
the regular practice of dispensing or selling drugs directly to retail
customers. A drug repackager must be registered with the Food and Drug
Administration. PharMerica holds all required registrations and licenses, and
its repackaging operations are in material compliance with applicable state and
federal requirements.
The long-term care pharmacy business operates under regulatory and cost
containment pressures from state and federal legislation primarily affecting
Medicaid and, to a lesser extent, Medicare. As is the case for nursing home
services generally, PharMerica receives reimbursement from both the Medicaid and
Medicare programs, directly from individual residents (private pay), and from
other payors such as third-party insurers. PharMerica believes that its
reimbursement mix is in line with long-term care expenditures nationally.
Federal regulations contain a variety of requirements relating to the
furnishing of prescription drugs under Medicaid. First, states are given broad
authority, subject to certain standards, to limit or specify conditions to the
coverage of particular drugs. Second, federal Medicaid law establishes standards
affecting pharmacy practices. These standards include general requirements
relating to patient counseling and drug utilization review and more specific
requirements for long-term care facilities relating to drug regimen reviews for
Medicaid residents in such facilities. Recent regulations clarify that, under
federal law, a pharmacy is not required to meet the general standards for drugs
dispensed to long-term care facility residents if the long-term care facility
complies with the drug regimen review requirements. However, the regulations
indicate that states may nevertheless require pharmacies to comply with the
general standards, regardless of whether the long-term care facility satisfies
the drug regimen review requirement, and the states in which PharMerica operates
currently do require its pharmacies to comply therewith. Third, federal
regulations impose certain requirements relating to reimbursement for
prescription drugs furnished to Medicaid residents.
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In addition to requirements imposed by federal law, states have substantial
discretion to determine administrative, coverage, eligibility and payment
policies under their state Medicaid programs which may affect PharMerica's
operations. For example, some states have enacted "freedom of choice"
requirements which may prohibit a long-term care facility from requiring its
residents to purchase pharmacy or other ancillary medical services or supplies
from particular providers. Such limitations may increase the competition which
PharMerica faces in providing services to long-term care residents. Five states
(Florida, Georgia, Louisiana, Texas, and Virginia) in which PharMerica operates
have freedom of choice requirements. PharMerica does not believe these
requirements have, or will have, a material impact on its operations.
PharMerica is subject to federal and state laws that govern financial and
other arrangements between healthcare providers. These laws include the federal
anti-kickback statute and physician self-referral prohibitions. The
anti-kickback statute prohibits, among other things, knowingly and willfully
soliciting, receiving, offering or paying any remuneration directly or
indirectly in return for or to induce the referral of an individual to a person
for the furnishing of any item or service for which payment may be made in whole
or in part under Medicare or Medicaid. Many states have enacted similar statutes
which are not necessarily limited to items and services for which payment is
made by Medicare or Medicaid. Violations of these laws may result in fines,
imprisonment, and exclusion from the Medicare and Medicaid programs or other
state-funded programs. Federal and state court decisions interpreting these
statutes are limited, but have generally construed the statutes to apply if "one
purpose" of remuneration is to induce referrals or other conduct within the
statute. In August 1994, the Office of Inspector General ("OIG") of the
Department of Health and Human Services, issued a Special Fraud Alert regarding
prescription drug marketing schemes which it believes may violate the
anti-kickback statute. Among the specific activities identified in the Fraud
Alert were a "product conversion" program in which a drug company offered cash
awards to pharmacies who changed from another company's drug product to their
product. The Fraud Alert also targets marketing programs in which drug companies
offer cash or other benefits to pharmacists in exchange for marketing tasks in
the course of pharmacy practice related to Medicare or Medicaid. In the fall of
1997, an assistant U.S. attorney gave a speech in which he stated the industry
wide practice of drug manufacturers granting volume-related rebates to pharmacy
companies is an improper payment under the federal anti-kickback statutes. The
pharmaceutical industry has taken this position under advisement and PharMerica
continues to monitor the situation. PharMerica is not aware of any OIG or
Department of Justice investigations or actions against it. However, it is
impossible to predict whether the OIG or another governmental or regulatory
agency may threaten or bring such an action against PharMerica in the future.
The physician self-referral prohibition, commonly referred to as the
"Stark" law, prohibits a physician from referring Medicare or Medicaid residents
to "designated health services" in which the physician (or family member) has a
financial interest, either through ownership or compensation arrangements.
Prohibited referrals will not be reimbursed by Medicare or Medicaid, and the
statute makes it illegal to seek reimbursement from any other source. In
addition, violations may result in fines and/or civil penalties and exclusion
from the Medicare and Medicaid programs. The list of "designated health
services" includes outpatient prescription drugs. Some states have also passed
similar "anti-self referral" legislation. PharMerica does not believe that the
Stark law or similar state laws, have had, or will have, a significant adverse
impact on the operations of PharMerica and PharMerica is not aware of any
financial arrangements between it, or any of its pharmacies, and physicians
which violate the Stark law.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical marketing
programs, including programs containing incentives to pharmacists to dispense
one particular product rather than another. These enforcement actions arose
under state consumer protection laws which generally prohibit false advertising,
deceptive trade practices, and the like. Further, a number of states involved in
these enforcement actions have requested that the U.S. Food and Drug
Administration ("FDA") exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, either
the state enforcement efforts or the FDA involvement would have on PharMerica's
operations.
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<PAGE> 45
The United States government frequently seeks to enforce the health care
laws discussed above, and to ensure accurate billing of federally-financed
health care, through bringing actions against health care providers under the
False Claims Act ("FCA"). The FCA provides for recovery of treble damages to the
federal government, plus penalties, for the submission of false or fraudulent
claims for payment to the federal government. The FCA also authorizes private
citizens to bring such actions on behalf of the United States, and provides an
incentive to private plaintiffs by granting them between 15% and 30% of any
recoveries in actions they initiate. In addition, many states have also enacted
their own false claims statutes modeled on the FCA and are using such statutes
in actions against health care providers whom they believe have submitted false
or fraudulent claims for payment under the Medicaid program or other
state-financed programs. PharMerica is not aware of any FCA or state false
claims investigations or actions against it or any of its pharmacies. However,
it is impossible to predict whether the federal government or a state may
threaten or bring such an action against PharMerica in the future.
PharMerica believes its contract arrangements with other healthcare
providers, its pharmaceutical suppliers and its pharmacy practices are in
compliance with these laws. There can be no assurance that such laws will not,
however, be interpreted in the future in a manner inconsistent with PharMerica's
interpretation and application.
EMPLOYEES
As of May 31, 1998, PharMerica had approximately 6,500 full-time employees
and approximately 1,200 part-time employees. The Company believes PharMerica's
relationship with its employees is good. None of PharMerica's employees are
represented by labor unions under any collective bargaining agreement.
LEGAL PROCEEDINGS
PharMerica is from time to time subject to claims and suits arising in the
ordinary course of business, including claims for repayment of monies paid to
PharMerica under Medicare or Medicaid. The provision of healthcare services
entails an intrinsic risk of liability. As of May 31, 1998, there were no
material legal proceedings pending against PharMerica that the Company believes
could reasonably be expected to have a material adverse effect on the Company
nor, to PharMerica's knowledge, were any material proceedings against it
contemplated by any governmental authority. There can be no assurance that
PharMerica will not become involved in such litigation in the future. In
addition, as described under "Risk Factors -- Dependence on Key Contracts", the
Company has brought an action against IHS for breach of certain agreements which
the Company has reached an agreement in principle to settle.
42
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following section sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
C. Arnold Renschler, M.D.(3)................. 56 President, Chief Executive Officer and Director
James D. Shelton............................. 43 Executive Vice President, Chief Financial Officer
and Secretary
Robert Della Valle, Pharm. D................. 46 Executive Vice President and Chief Operating
Officer
R. Scott Jones............................... 39 Senior Vice President, Marketing and Sales
Curtis B. Johnson............................ 45 Senior Vice President, General Counsel
David R. Banks(3)............................ 61 Director
Cecil S. Harrell(1).......................... 64 Director
Boyd W. Hendrickson(2)....................... 53 Director
Morris A. Perlis(2).......................... 49 Director
Fredrick C. Powell(2)........................ 57 Director
Albert Reichmann(1).......................... 69 Director
Allan C. Silber(3)........................... 49 Chairman of the Board of Directors
Edward Sonshine, Q.C.(2)..................... 51 Director
Gail Wilensky, Ph.D.(1)...................... 54 Director
</TABLE>
- ---------------
(1) Class 1 director.
(2) Class 2 director.
(3) Class 3 director.
The Certificate of Incorporation and Bylaws provide for the Board of
Directors of the Company to be divided into three classes, as nearly equal in
number as possible. The term of the Class 1 directors will expire at the 2001
annual meeting of stockholders; the term of the Class 2 directors will expire at
the 1999 annual meeting of stockholders; and the term of the Class 3 directors
will expire at the 2000 annual meeting of stockholders (and in all cases when
their respective successors are duly elected and qualified). At each annual
meeting of stockholders, successors to the class of directors whose terms expire
at such meeting will be elected to serve for three-year terms or until their
successors are duly elected and qualified.
For the purposes of this section, references to the Company for the period
prior to December 1997 refer to Capstone, rather than PCA, since Capstone was
the corporation surviving the Merger.
Dr. Renschler joined the Company as President, Chief Executive Officer and
Director in December 1997 in connection with the Merger. From June 1996 to
December 1997, Dr. Renschler was Executive Vice President of Beverly and
President of PCA. From 1990 to June 1996, Dr. Renschler was Senior Vice
President and Chief Clinical Officer, as well as President of three operating
divisions of NovaCare, Inc. and a member of its board of directors. Prior to
that time, he held a series of key executive positions at both Manor Care, Inc.
("Manor Care") and its wholly-owned subsidiary, Manor Healthcare Corp. ("Manor
Healthcare"), including President and Chief Executive Officer of Manor
Healthcare and Chief Operating Officer and director of Manor Care. Dr. Renschler
has served as a director of Ameripath, Inc. since April 1997.
Mr. Shelton has served as Executive Vice President, Chief Financial Officer
and Secretary of the Company since February 1997. Mr. Shelton served as Vice
President-Chief Financial Officer of Allied Pharmacy Management Inc.,
("Allied"), a pharmacy subsidiary of Cardinal Health, Inc. from December 1993 to
January 1997. Mr. Shelton served as Vice President of Evergreen Healthcare,
Inc., a long-term care company, from October 1992 to December 1993, and as Vice
President-Chief Financial Officer of its predecessor, National Heritage, Inc.,
from February 1990 to October 1992.
43
<PAGE> 47
Dr. Della Valle joined the Company as Executive Vice President and Chief
Operating Officer in July 1996. Prior to joining the Company, Dr. Della Valle
was employed by Allied since June 1987 and held the position of President and
Chief Executive Officer from July 1993 to July 1996 and Chief Operating Officer
from 1991 to 1993.
Mr. Jones joined the Company as Senior Vice President, Marketing and Sales
in December 1997 in connection with the Merger. Mr. Jones served as Vice
President, Marketing and Sales of PCA from January 1997 to December 1997. Prior
to joining PCA, he was employed by General Electric Medical Systems, a global
manufacturer of medical imaging equipment, from 1988 to 1997. From 1991 to 1993,
Mr. Jones was Manager, Business Development and Product Manager -- Surgical
Products. From 1993 to 1995, he held the position of Manager, Americas X-Ray
Business and from 1995 to 1997 he was Director, Multi-Hospital Systems
Operations.
Mr. Johnson joined the Company as Senior Vice President, General Counsel in
March 1998. Mr. Johnson served as General Counsel of DCAmerica, Inc., a U.S.
subsidiary of Counsel, from April 1995 to February 1998. From November 1994 to
April 1995, Mr. Johnson served as Technology Counsel for American Express Travel
Related Services Company, Inc. ("American Express"). From January 1993 to
November 1994 he served as Litigation Counsel to American Express.
Mr. Banks became a Director of PharMerica in December 1997 in connection
with the Merger. Mr. Banks has been a director of Beverly since 1979 and has
served as Chief Executive Officer since May 1989 and Chairman of the Board since
March 1990. Mr. Banks was President of Beverly from 1979 to September 1995. Mr.
Banks is a director of Nationwide Health Properties, Inc., Ralston Purina
Company and Wellpoint Health Networks, Inc., and trustee for Occidental College.
Mr. Harrell became a Director of PharMerica in December 1997 in connection
with the Merger. Mr. Harrell has served as President and as a Director of The
Harrell Corporation of Tampa, Inc., a management company, since July 1995. Mr.
Harrell founded Pharmacy Management Services, Inc. in 1972 and served as its
President, Chairman and Chief Executive Officer until its merger in July 1995
with and into Beverly. He serves on the board of directors of National
Healthcare Resources, Inc., a medical cost containment company, the board of
trustees of the University of Tampa, the board of directors for the Auburn
University Foundation and the Florida Health Sciences Center, Inc., the holding
company of Tampa General Hospital. Mr. Harrell served on the board of directors
for NationsBank South from 1992 to 1997.
Mr. Hendrickson became a Director of PharMerica in December 1997 in
connection with the Merger. Mr. Hendrickson joined Beverly in 1988 as a Division
President and was elected Vice President of Marketing in May 1989, Executive
Vice President of Operations and Marketing in February 1990, and to his current
positions as President, Chief Operating Officer and a director of Beverly in
September 1995.
Mr. Perlis has been Vice Chairman of the Company since May 1995 and a
Director since December 1994. Mr. Perlis served as interim chief executive
officer of the Company from December 1994 to May 1995. He has served as a
director of and consultant to Counsel Corporation, a Canadian corporation
primarily engaged in the healthcare industry ("Counsel"), since September 1992,
and as President of Counsel since January 1994. Mr. Perlis has served as a
director of American HomePatient since March 1993, and as its Chairman since May
1994. He served as a director of NOMA, Inc., a manufacturer of consumer wire and
cable, from September 1993 to June 1996. Mr. Perlis was President of Morris A.
Perlis & Assoc., an executive management consulting firm, from September 1992
until January 1994 and President of American Express Canada, Inc. from September
1988 until September 1992. Mr. Perlis served as interim President of Stadtlander
Drug Co., Inc., a mail order pharmacy company ("Stadtlander"), from September
1996 to December 1996. He has served as director of Stadtlander since July 1996
and as Chief Executive Officer since September 1996.
Mr. Powell became a Director of PharMerica in December 1997 in connection
with the Merger. Mr. Powell was the founder and has been President of OMNI
Interactive Systems since 1993 and has served as a consultant to Lister Bestcare
since 1996. Mr. Powell founded Rehab Systems Company in 1987 and served as its
Chairman of the Board, President and Chief Executive Officer until 1991 when the
company
44
<PAGE> 48
merged with NovaCare Inc. and from 1993 to 1995, he served as a consultant to
NovaCare Inc. He currently serves as a board member of Alfred University in New
York and Wesley Theological Seminary in Washington, D.C., as well as a board
member of several private companies.
Mr. Reichmann has served as a Director of the Company since August 1995. He
has served as Chairman and a Director of Olympia & York Developments, Limited, a
privately held Canadian real estate company, for at least five years prior to
February 1993. Mr. Reichmann currently participates in major philanthropic
activities in addition to serving on the boards of several major hospitals in
Canada.
Mr. Silber has served as Chairman since February 1995 and a director of the
Company since December 1994. Mr. Silber has been Chairman, Chief Executive
Officer and a director of Counsel since August 1979. He served as President of
Counsel from August 1979 until January 1994. Mr. Silber has served as a director
of American HomePatient since September 1991. Mr. Silber served as chairman of
American HomePatient from September 1991 to May 1994. He has served as director
of Stadtlander since July 1996 and as Chairman since September 1996. Mr. Silber
is also a member of the Board of Trustees of RioCan Real Estate Investment Trust
since December 1993.
Mr. Sonshine has served as a Director of the Company since December 1994.
He has been President and Chief Executive Officer of RioCan Real Estate
Investment Trust of Toronto, Canada since July 1995. He has been a director of
RioCan Real Estate Investment Trust since December 1993. Mr. Sonshine has served
as a director of American HomePatient since September 1991. Mr. Sonshine has
served as Vice Chairman of Counsel since January 1994. He served as a director
of Counsel Management Services, Inc. from October 1993 until July 1995. Mr.
Sonshine served as Executive Vice President of Counsel from February 1987 until
January 1994. Mr. Sonshine served as President and Chief Executive Officer of
Icarus Realty Corp. from February 1987 until September 1993. He has served as a
director of Stadtlander since July 1996. He served as a director of Advocat,
Inc. from May 1995 to November 1996.
Dr. Wilensky has served as a Director of the Company since August 1995. She
has served as the John M. Olin Senior Fellow, Project HOPE since January 1993,
and as Chair, Medicare Payment Advisory Commission since October 1997. Dr.
Wilensky served as Deputy Assistant to the President for Policy Development from
March 1992 to January 1993. She was Administrator of the Health Care Financing
Administration of the Department of Health and Human Services from January 1990
to March 1992. Dr. Wilensky also serves as a director for Advanced Tissue
Sciences, Neopath Inc., Quest Diagnostics, St. Jude Medical, Syncor
International, SMS Corporation and United Healthcare.
CERTAIN TRANSACTIONS
Set forth below is a summary of various transactions involving PharMerica
and certain of its directors, officers, stockholders or other affiliates.
Joseph F. Furlong, III is a former director of the Company and a principal
of Adirondack Capital Advisors, LLC. The Company entered into an agreement with
Adirondack, as of June 1996, pursuant to which Adirondack agreed to assist the
Company in identifying and negotiating transactions with acquisition targets.
Adirondack receives as compensation 3.0% of the first $10.0 million of aggregate
transaction value plus 0.7% of aggregate transaction value in excess thereof as
well as a number of warrants to buy the Company's common stock set according to
a formula, not to exceed 200,000 shares in the aggregate, at a strike price of
$12.00. The Company has issued warrants to Adirondack to purchase 200,000 shares
of PharMerica Common Stock and since June 1996 has paid approximately $1.8
million in connection with this agreement.
Adirondack and the Company also entered into an agreement, as of December
1996, pursuant to which Adirondack served as financial advisor to the Company in
connection with the Merger. Pursuant to that agreement, Adirondack earned $4.0
million.
Directors Banks and Hendrickson are directors and officers of Beverly, the
Company's largest customer. On a pro forma basis, Beverly and its residents
accounted for approximately 16.0% of the Company's 1997 revenues. Revenues from
sales directly to Beverly facilities were approximately $74.0 million, $82.1
million
45
<PAGE> 49
and $99.5 million for 1995, 1996 and 1997, respectively. In connection with the
Merger, Beverly and the Company entered into various agreements including: (i) a
Non-Competition Agreement from Beverly; (ii) a Preferred Provider Agreement; and
(iii) an Interim Services Agreement pursuant to which each party agreed to
provide services to the other on a temporary basis to facilitate the Merger.
These agreements were negotiated on an arms length basis and the Company
believes it both pays and receives fair market value for services provided
pursuant to these agreements. Directors Banks and Hendrickson received options
to purchase 50,000 and 25,000 shares of PharMerica Common Stock at the fair
market value on the date of grant in recognition of their contributions to the
successful completion of the Merger.
Prior to the Merger, Beverly provided certain administrative services to
PCA. These services included, among others, cash management, finance, legal,
tax, financial reporting, executive management, payroll and payables processing
and employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to PCA
in mid-1996 as part of a consolidation and reorganization of the Company's
accounting and related functions. Fees for the services amounted to
approximately $3.2 million, $1.8 million and $2.8 million for the years ended
December 31, 1997, 1996, and 1995, respectively. Beverly also allocated
insurance expense to PCA of approximately $2.6 million, $1.8 million and $1.4
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
Company believes that the charges for services provided by Beverly to the
Company were a reasonable allocation of the costs incurred by Beverly on behalf
of the Company in providing these services; however, such costs are not
necessarily indicative of the costs that would have been incurred if the Company
operated as a stand-alone entity. For additional information related thereto and
in relation to the net balance sheet results of intercompany transactions
between PCA and Beverly, see Notes 1 and 12 to the Company's Consolidated
Financial Statements.
At the time the Company entered a preferred provider agreement with IHS in
1996, IHS was a significant stockholder of the Company. The Company provides
institutional pharmacy services to a significant number of long-term care
facilities owned and managed by IHS pursuant to a preferred provider agreement.
Revenues from sales to IHS facilities and their residents were over $20.0
million and $25.0 million in 1996 and 1997, respectively.
Directors Silber, Perlis and Sonshine are affiliates of Counsel, the
Company's largest shareholder. On July 29, 1996, Counsel purchased from the
Company in a private placement transaction, 2,112,490 shares of common stock at
a price of approximately $11.83 per share, resulting in proceeds to the Company
of approximately $25 million. The proceeds were used as part of the purchase
price for the Symphony acquisition. Counsel and its affiliates have from time to
time in the past provided routine services to the Company without compensation.
Directors Silber and Perlis received $600,000 and $400,000, respectively, in
connection with finding, negotiating and closing a 1996 acquisition. Directors
Silber and Perlis received options to purchase 100,000 and 25,000 shares of
PharMerica Common Stock, respectively, at the fair market value on the date of
grant in recognition of their contributions to the successful completion of the
Merger. The Company entered into an agreement with Counsel as of February 1998
pursuant to which Counsel will assist the Company with a specific targeted
acquisition. Counsel will receive, if the transaction closes, a fee equal to
approximately 1.0% of the aggregate transaction value.
An affiliate of Director Reichmann received fees of $445,000 in connection
with two 1996 acquisitions.
PharMerica and R. Dirk Allison, the Company's former chief executive
officer, are parties to a Separation Agreement dated August 15, 1997 pursuant to
which (i) Mr. Allison resigned from all positions with the Company and its
affiliates; (ii) the Company paid Mr. Allison approximately $468,000; and (iii)
previously issued options covering 392,500 shares of PharMerica Common Stock (of
which 167,500 shares were vested on such date) held by Mr. Allison (at exercise
prices ranging from $4.44 to $11.25 per share) immediately vested and became
exercisable through February 15, 1999, providing an estimated benefit to Mr.
Allison, based on the closing price of PharMerica Common Stock on December 31,
1997, of approximately $250,000.
For a description of certain transactions between Capstone and certain of
its affiliates, see Note 15 to Capstone's Consolidated Financial Statements.
46
<PAGE> 50
The Company believes that any past transactions with its affiliates have
been at prices and on terms no less favorable to the Company than transactions
with independent third parties. The Company may enter into transactions with its
affiliates in the future. However, the Company intends to enter into such
transactions only at prices and on terms no less favorable to the Company than
transactions with independent third parties and with approval of the
disinterested members of the board of directors or a committee thereof. In
addition, the Indenture contains certain restrictions on transactions with
affiliates. See "Description of the Notes -- Certain Covenants -- Transactions
with Affiliates."
47
<PAGE> 51
STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The table below sets forth, as of June 3, 1998, the number and percentage
of outstanding shares of the Company's Common Stock owned by all persons known
to the Company to be holders of 5% or more of such securities, by all directors,
by each of the executive officers of the Company and by all directors and
executive officers of the Company as a group. Unless otherwise indicated, all
holdings are of record and beneficial.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OWNED(1) TOTAL SHARES(2)
<S> <C> <C>
Counsel Corporation(3)...................................... 8,356,815 9.4%
Exchange Tower, Suite 1300
130 King Street West
Toronto, Ontario M5X 1E3
Franklin Resources, Inc(4).................................. 5,056,843 5.7
777 Mariners Island Blvd
San Mateo, California 94404
Mellon Bank Corporation(4).................................. 4,388,672 5.0
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
C. Arnold Renschler, M.D.(5)................................ 641,247 *
James D. Shelton(6)......................................... 113,333 *
Robert Della Valle(7)....................................... 183,333 *
R. Scott Jones(8)........................................... 78,070 *
Curtis B. Johnson(9)........................................ 60,000 *
David R. Banks(10).......................................... 175,227 *
Cecil S. Harrell(11)........................................ 2,052,729 2.3
Boyd W. Hendrickson(12)..................................... 134,045 *
Morris A. Perlis(13)........................................ 606,666 *
Fredrick C. Powell(14)...................................... 22,500 *
Albert Reichmann(15)........................................ 37,500 *
Allan C. Silber(16)......................................... 484,166 *
Edward Sonshine, Q.C.(17)................................... 40,000 *
Gail Wilensky, Ph.D.(18).................................... 30,000 *
All directors and executive officers as a group
(14 persons)(19).......................................... 4,658,816 5.1%
</TABLE>
- ---------------
* Indicates less than 1.0%
(1) Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws,
where applicable.
(2) The percentages shown are based on 88,525,258 shares of Common Stock
outstanding on June 3, 1998, plus, as to each individual and group listed,
the number of shares of Common Stock deemed to be owned by such holder
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), which includes shares subject to stock options and
warrants held by such holder that are exercisable within sixty (60) days of
such date.
(3) Directors Silber, Sonshine and Perlis are directors of Counsel and director
Silber beneficially owns or controls approximately 18% of the common stock
of Counsel, a majority of which is pledged to a lender. Directors Sonshine
and Perlis own in the aggregate less than 5% of Counsel's common stock. All
of the directors listed in this footnote (3) disclaim beneficial ownership
of shares of Common Stock in their capacity as directors of Counsel, and
Mr. Silber disclaims beneficial ownership of shares of Common Stock in his
capacity as a significant stockholder of Counsel.
48
<PAGE> 52
(4) Based solely upon information set forth in a Schedule 13G filed by such
person pursuant to the Exchange Act.
(5) Includes 52,193, 238,596, 74,561, 59,649, and 186,667 shares issuable upon
exercise of options at $8.21, $8.47, $8.47, $8.55, and $9.56, respectively.
(6) Includes 13,333 and 100,000 shares issuable upon exercise of options at
$11.50 and $9.56 per share, respectively.
(7) Includes 16,667, 66,666 and 100,000 shares issuable upon the exercise of
options at $10.13, $10.50 and $9.56 per share, respectively.
(8) Includes 44,737 and 33,333 shares issuable upon exercise of options at
$8.38 and $9.56 per share, respectively.
(9) Includes 25,000 and 35,000 shares issuable upon exercise of options at
$4.31 and $10.19 per share, respectively.
(10) Includes 72,500 shares issuable upon exercise of options at $9.56 per share
and includes 3,991 shares held by his children.
(11) Includes 20,000 shares issuable upon exercise of options at $9.56 per share
and includes 269 shares held by his spouse.
(12) Includes 47,500 shares issuable upon exercise of options at $9.56 per share
and includes 636 shares held by his children.
(13) Includes 15,000, 2,500, 250,000, 75,000, 166,666, 2,500 and 45,000 shares
issuable upon the exercise of options at $4.44, $7.50, $4.31, $8.50,
$10.50, $11.25, and $9.56 per share, respectively.
(14) Includes 22,500 shares issuable upon exercise of options at $9.56 per
share.
(15) Includes 15,000, 2,500 and 20,000 shares issuable upon the exercise of
options at $4.44, $11.25 and $9.56 per share, respectively.
(16) Includes 15,000, 2,500, 75,000, 166,666, 2,500, and 127,500 shares issuable
upon the exercise of options at $4.44, $7.50, $8.50, $10.50, $11.25, and
$9.56 per share, respectively.
(17) Includes 15,000, 2,500, 2,500 and 20,000 shares issuable upon the exercise
of options at $4.44, $7.50, $11.25 and $9.56 per share, respectively.
(18) Includes 5,000, 2,500, 20,000 and 2,500 shares issuable upon the exercise
of options at $4.44, $11.25, $9.56 and $12.06 per share, respectively.
(19) Includes 2,317,434 shares issuable upon the exercise of options.
49
<PAGE> 53
DESCRIPTION OF THE NEW NOTES
GENERAL
Except as otherwise indicated, the following description relates both to
the Notes issued in the Offering and the New Notes to be issued in exchange for
the Notes in connection with the Exchange Offer. The form and terms of the New
Notes are the same as the form and terms of the Notes, except that the New Notes
have been registered under the Securities Act and therefore will not bear
legends restricting the transfer thereof. The description of the New Notes
contained herein assumes that all Notes will be exchanged for New Notes in the
Exchange Offer. To the extent that Notes remain outstanding after the
consummation of the Exchange Offer, references to the New Notes and the holders
thereof will apply collectively to the New Notes, the remaining, outstanding
Notes and the holders thereof.
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Notes, and will be entitled to the benefits of the same
indenture, dated as of March 31, 1998, among the Company, the Guarantors and
Harris Trust and Savings Bank, as trustee. The terms of the New Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act as in effect on the date of the Indenture.
The following is a summary of the material terms and provisions of the New
Notes. This summary does not purport to be a complete description of the New
Notes and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the New Notes and the Indenture (including the
definitions contained therein). A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
definitions of certain capitalized terms are set forth under "-- Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have meanings assigned to them in the Indenture
and such definitions are incorporated herein by reference. For purposes of this
Section, references to the Company include only the Company and not its
Subsidiaries. Additionally, for purposes of this Section, any reference to a
"Holder" means a holder of the Notes or the New Notes, as the context may
require.
The New Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt of the
Company, including Indebtedness pursuant to the Bank Credit Facility. See
"-- Subordination." The New Notes will be guaranteed (the "Subsidiary
Guarantees"), jointly and severally, on a full and unconditional senior
subordinated basis by the Guarantors. Each Subsidiary Guarantee is a guarantee
of payment and not a guarantee of collection. The Subsidiary Guarantees are
subordinated in right of payment to all existing and future Senior Debt of the
Guarantors, including the guarantees of the Guarantors of the Company's
obligations under the Bank Credit Facility. See "-- Subsidiary Guarantees." At
May 31, 1998, the Company and the Guarantors had approximately $198 million of
Senior Debt outstanding and the Company would have had approximately $352
million of availability under the Bank Credit Facility. The Indenture provides
that the obligations of the Guarantors are limited to amounts that will not
result in the Subsidiary Guarantees being fraudulent conveyances under
applicable law.
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries are not subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be limited in aggregate principal amount to $325.0
million and will mature on April 1, 2008. Interest on the New Notes will accrue
at the rate of 8 3/8% per annum and will be payable semi-annually in arrears on
April 1 and October 1 of each year, commencing October 1, 1998, to Holders of
record on the immediately preceding March 15 and September 15, respectively.
Interest on the New Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest and
Liquidated Damages, if any, on the New Notes will be payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the Holders of
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the New Notes at their respective addresses set forth in the register of Holders
of New Notes. Until otherwise designated by the Company, the Company's office or
agency in New York is the office of the Trustee maintained for such purpose. The
New Notes will be issued in denominations of $1,000 and integral multiples
thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the New Notes will be jointly and
severally guaranteed pursuant to the Subsidiary Guarantees on a full and
unconditional senior subordinated basis by the Guarantors. Each Subsidiary
Guarantee is a guarantee of payment and not a guarantee of collection. Each
Guarantor has waived diligence, presentment, demand of payment, filing of claims
with a court in the event of the insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company, protest, notice and all
demands whatsoever. The Subsidiary Guarantee of each Guarantor is subordinated
to the prior payment in full of all existing and future Senior Debt of such
Guarantor on substantially the same terms as the New Notes are subordinated to
the Senior Debt of the Company. The obligations of each Guarantor under its
Subsidiary Guarantee are limited so as not to constitute a fraudulent conveyance
under applicable law. See "Risk Factors -- Fraudulent Conveyance Risk."
The Guarantors are Capstone Med., Inc., MediDyne Corp., Premier Pharmacy,
Inc., Compuscript, Inc., DOC Pharmacy, Inc., PharMerica Drug Systems, Inc.,
Rombro's Drug Center, Inc., Capstone Pharmacy of Delaware, Inc., Family Center
Pharmacy, Inc., Hollins Manor I, LLC, Goot's Goodies, Inc., Southwest
Pharmacies, Inc., Goot Westbridge Pharmacy, Inc., Goot Nursing Home Pharmacy,
Inc., Goot's Pharmacy & Orthopedic Supply, Inc., Management Systems of America,
Inc., Pharmacy Corporation of America, Medical Health Industries, Inc.,
Insta-Care Holdings, Inc., Insta-Care Pharmacy Services Corporation, Pharmacy
Dynamics Group, Inc., Healthcare Prescription Services, Inc., Dunnington Drug,
Inc., Dunnington Rx Services of Massachusetts, Inc., DD Wholesale, Inc.,
Pharmacy Corporation of America -- Massachusetts, Inc., Dunnington Rx Services
of Rhode Island, Inc., Computran Systems, Inc., Beverly Acquisition Corporation,
Alliance Health Services, Inc., Alliance Home Health Care, Inc., Brownstone
Pharmacy, Inc., Omni Med B, Inc., Express Pharmacy Services, Inc., Tmesys, Inc.,
Management Systems of America, Inc., any other Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another Person
whether or not affiliated with such Guarantor unless, among other things: (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Guarantor) is a
corporation and assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the New Notes and the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; and (iii) the
Company would be permitted by virtue of the Company's pro forma Fixed Charge
Coverage Ratio, immediately after giving effect to such transaction, to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the Fixed Charge Coverage Ratio set forth in "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
capital stock of such Guarantor) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Asset
Sales." In addition, the Guarantee by any Guarantor will be released if such
Guarantor does not guarantee any other Indebtedness of the Company. See "Certain
Covenants -- Limitations on Issuances of Guarantees of Indebtedness."
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SUBORDINATION
The payment of principal of, premium, if any, and interest or Liquidated
Damages, if any, on the New Notes will be subordinated in right of payment, as
set forth in the Indenture, to the prior payment in full of all Senior Debt,
whether outstanding on the date of the Indenture or thereafter incurred.
Upon any payment or distribution of assets to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
liquidation, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not
such interest is in an allowed claim under applicable law) before the Holders of
New Notes will be entitled to receive any payment or distribution with respect
to the New Notes, and until all Obligations with respect to Senior Debt are paid
in full, any payment or distribution to which the Holders of New Notes would be
entitled shall be made to the holders of Senior Debt (except that Holders of New
Notes may receive Permitted Junior Securities and any other Permitted Junior
Securities issued in exchange for any Permitted Junior Securities and payments
made from the trust described below under "-- Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the New
Notes (except in such Permitted Junior Securities, Permitted Junior Securities
issued in exchange for such Permitted Junior Securities or from the trust
described below under "-- Legal Defeasance and Covenant Defeasance") if (i) any
amount of principal, premium, if any, or interest or other payments due under
any Designated Senior Debt is not paid when due and remains outstanding or (ii)
any other default occurs and is continuing with respect to Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from a representative of the holders of
any Designated Senior Debt. Payments on the New Notes may and shall be resumed
(a) in the case of a payment default, upon the date on which such payment
default is cured or waived or such Designated Senior Debt is discharged or paid
in full and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or such Designated Senior Debt
is discharged or paid in full or 179 days after the date on which the applicable
Payment Blockage Notice is received, unless the maturity of any Designated
Senior Debt has been accelerated. No new period of payment blockage may be
commenced unless and until (i) 360 consecutive days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the New Notes
that have come due have been paid in full. No nonpayment default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or can be, made the basis for a subsequent Payment Blockage
Notice whether or not within a period of 360 consecutive days, unless such
default has been cured or waived for a period of not less than 90 consecutive
days.
Nothing in the Indenture or in the New Notes affects the obligations of the
Company, which is absolute and unconditional, to pay principal of and premium,
if any, and interest on the New Notes. The failure to make any payment on the
New Notes by reason of the provisions of the Indenture described under this
"-- Subordination" section will not be construed as preventing the occurrence of
an Event of Default with respect to the New Notes arising from any such failure
to make payment.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of the New Notes may recover less
ratably than creditors of the Company who are holders of Senior Debt. See "Risk
Factors -- Subordination."
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the New Notes will not be
redeemable at the Company's option prior to April 1, 2003. Thereafter, the New
Notes will be subject to redemption at the option of the Company, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, together
with accrued and unpaid interest and
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Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on April 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003........................................................ 104.19%
2004........................................................ 102.79%
2005........................................................ 101.40%
2006 and thereafter......................................... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time prior to April 1, 2001, the
Company may on one or more occasions redeem up to 33 1/3% of the aggregate
principal amount of the New Notes originally issued with the net cash proceeds
from one or more Public Offerings of Common Stock of the Company within 60 days
of any such Public Offering at a redemption price of 108.375% of principal
amount, together with accrued and unpaid interest and Liquidated Damages, if
any, thereon to the applicable redemption date; provided that immediately after
giving effect to any such redemption, at least $200 million aggregate principal
amount of the New Notes remains outstanding.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make any mandatory redemption or sinking fund
payments with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Upon the occurrence of a Change of Control, each Holder of New Notes will
have the right to require the Company to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's New Notes pursuant to
the offer described below (the "Change of Control Offer") at a purchase price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, and Liquidated Damages, if any, thereon to the date of purchase
(the "Change of Control Payment"). The source of funds for any such purchase
will be dependent upon the Company's available cash or cash generated from
operating or other sources, including borrowing, sales of assets, sales of
equity or funds provided by a new controlling person. There can be no assurance,
however, that sufficient funds will be available at the time of any Change of
Control to make the required repurchases of New Notes tendered, or that, if
applicable, restrictions in the Bank Credit Facility will allow the Company to
make such required repurchases. See "Risk Factors -- Payment upon a Change of
Control."
Within ten days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase New Notes pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the New Notes as
a result of a Change of Control.
On or prior to the Change of Control Payment Date, the Company will, to the
extent lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the paying
agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an officers' certificate
stating the aggregate principal amount of New Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
New Notes so tendered the Change of Control Payment for such New Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new Note equal in principal amount to any unpurchased
portion of the New Notes surrendered, if any; provided that each such new Note
will be in a principal amount of $1,000 or an integral multiple thereof.
The Indenture provides that, prior to being required to comply with the
provisions of this covenant, but in any event within 90 days following a Change
of Control, the Company will either repay all outstanding Senior
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Debt or obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt to permit the repurchase of New Notes required by this
covenant. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the New Notes to require that the Company
repurchase or redeem the New Notes in the event of a takeover, recapitalization
or similar restructuring.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precisely established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of New Notes to require the
Company to repurchase such New Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (x) any Senior Debt of the
Company or any Restricted Subsidiary that is assumed by the transferee of any
such asset pursuant to a customary novation agreement that releases the Company
or such Subsidiary from such liability and (y) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are immediately converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received), will be deemed to be cash for
purposes of this provision; provided that any Designated Noncash Consideration
received by the Company or any Restricted Subsidiary in an Asset Sale having an
aggregate fair market value, taken together with all other Designated Noncash
Consideration received pursuant to this provision that is at that time
outstanding, not in excess of $20 million (with the fair market value of each
item of Designated Noncash Consideration being measured at the time received and
without giving effect to subsequent changes in value), shall be deemed to be
cash for the purposes of this covenant.
Pursuant to the Indenture, within 365 days after the receipt of any Net
Proceeds from an Asset Sale, the Company or such Restricted Subsidiary may apply
such Net Proceeds (i) to purchase one or more Related Businesses and/or a
controlling interest in the Capital Stock of a Person owning one or more Related
Businesses (and no other material assets), or to invest in a Permitted Joint
Venture (provided such Investment is otherwise permitted under the Indenture);
(ii) to make a capital expenditure or to acquire other long-term tangible
assets, in each case, that are used or useful in any Related Business; or (iii)
to permanently reduce Senior Debt (and in the case of revolving Indebtedness, to
permanently reduce the commitments with respect thereto). Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10 million, the
Company will be required to make an offer to all Holders and holders of any
other Indebtedness of the Company ranking senior to or pari passu with the New
Notes with similar provisions requiring the Company to make an offer to purchase
or to redeem such Indebtedness with the proceeds from any Asset Sales pro rata
in proportion to the respective principal amounts of New Notes and such other
Indebtedness then outstanding (collectively, an "Asset Sale Offer") to purchase
the maximum principal amount of the New Notes and such other Indebtedness that
may be purchased out of the Excess Proceeds, at an offer price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest thereon
and Liquidated Damages, if any, to the date of purchase (the
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<PAGE> 58
"Asset Sale Payment"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate principal amount of New Notes and
such other Indebtedness tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes not prohibited at the time under the Indenture. If
the aggregate principal amount of New Notes and such other Indebtedness
surrendered by holders thereof exceeds the amount of Excess Proceeds, the New
Notes and such other Indebtedness will be purchased on a pro rata basis. Upon
completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset
at zero.
The Bank Credit Facility prohibits the Company, except in certain
circumstances, from prepaying the indebtedness evidenced by the New Notes and
also provides that certain change of control events with respect to the Company
and certain asset sales will constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs or the Company is required to make an Asset Sale Offer
at a time when the Company is prohibited from purchasing New Notes, the Company
could seek the consent of its lenders to the purchase of New Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing New Notes. In such case, the Company's
failure to purchase tendered New Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute a default under the Bank
Credit Facility. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of the New Notes. See
"Risk Factors -- Subordination."
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time, selection
of New Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
New Notes are listed or, if the New Notes are not so listed, on a pro rata
basis, by lot or by such other method as the Trustee deems fair and appropriate,
provided that no New Notes with a principal amount of $1,000 or less shall be
redeemed in part. Notice of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
New Notes to be redeemed at its registered address. If any New Note is to be
redeemed in part only, the notice of redemption that relates to such New Note
shall state the portion of the principal amount thereof to be redeemed. A new
New Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original New
Note. On and after the redemption date, interest will cease to accrue on New
Notes or portions thereof called for redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any distribution (including in connection with any merger
or consolidation) on account of any Equity Interests of the Company or any of
its Restricted Subsidiaries (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Restricted Subsidiary
of the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company, any of its Restricted Subsidiaries or any
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Restricted Subsidiary of the Company); (iii)
make any principal payment on, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is subordinated in right of payment to
the New Notes or a Subsidiary Guarantee, except at the original final maturity
thereof or in accordance with the scheduled mandatory redemption or scheduled
repayment provisions set forth in the original documentation governing such
Indebtedness (but not pursuant to any mandatory offer to repurchase upon the
occurrence of any event); or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through
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(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, and
(b) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii) and (v) of the next succeeding paragraph), is less than
the sum of (1) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, minus 100% of
such deficit), plus (2) 100% of the aggregate net cash proceeds received by
the Company from contributions of capital or the issue or sale since the
date of the Indenture of Equity Interests of the Company or of debt
securities of the Company issued after the date of the Indenture that have
been converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (3) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment; provided
that no cash proceeds received by the Company from the issue or sale of any
Equity Interests issued by the Company will be counted in determining the
amount available for Restricted Payments under this clause (b) to the
extent such proceeds were used to redeem, repurchase, retire or acquire any
Equity Interests of the Company pursuant to clause (ii) of the next
succeeding paragraph, to defease, redeem or repurchase any subordinated
Indebtedness pursuant to clause (iii) of the next succeeding paragraph or
to repurchase, redeem or acquire any Equity Interests of the Company
pursuant to clause (iv) of the next succeeding paragraph, and
(c) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant entitled "-- Incurrence of
Indebtedness and Issuance of Preferred Stock."
The foregoing provisions do not prohibit any or all of the following (each
and all of which: (1) constitutes an independent exception to the foregoing
provisions and (2) may occur in addition to any action permitted to occur under
any other exception): (i) the payment of any dividend within 60 days after the
date of declaration thereof, if at such date of declaration such payment would
have complied with the provisions of the Indenture; (ii) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company in exchange for, or out of the net cash proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause (b)(2)
of the preceding paragraph; and (iii) the defeasance, redemption or repurchase
of subordinated Indebtedness with the net proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale (other
than to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (b)(2) of the preceding paragraph;
(iv) a Restricted Payment to fund the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company held
by any member of the Company's or any of its Restricted Subsidiaries' management
pursuant to any management equity subscription agreement or stock option
agreement; provided that (A) the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $5 million in
any twelve-month period plus the aggregate cash proceeds received by the Company
during such twelve-month period
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from any reissuance of Equity Interests by the Company to members of management
of the Company and its Restricted Subsidiaries and (B) no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction; (v) the payment of dividends by a Restricted Subsidiary on any
class of common stock of such Restricted Subsidiary if such dividend is paid pro
rata to all holders of such class of common stock; (vi) the repurchase of any
joint venture interests in a Permitted Joint Venture; and (vii) the repurchase
or other acquisition of the common stock of a Restricted Subsidiary in an
aggregate amount not to exceed $10 million during the term of the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such designation, all Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such Investments will be deemed to
constitute Restricted Investments in an amount equal to the greater of (i) the
net book value of such Investments at the time of such designation and (ii) the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Investments would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed, which calculations shall be based upon
the Company's latest available financial statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness (including Acquired Debt) and the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of Preferred Stock; provided, however, that the Company and any
Guarantor may Incur Indebtedness or issue shares of Disqualified Stock, if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is Incurred
or such Disqualified Stock is issued would have been at least 2.5 to 1, in each
case, determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The foregoing provisions will not apply to any of the following ("Permitted
Indebtedness"):
(i) the incurrence by the Company or any Guarantor of Indebtedness and
letters of credit pursuant to any Bank Credit Facility (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company or the relevant Guarantor thereunder) in
an aggregate principal amount outstanding at any one time not to exceed
$550 million less the aggregate amount of all repayments of the principal
of any Indebtedness under the Bank Credit Facility that permanently reduces
the amount of Indebtedness (and, in the case of revolving Indebtedness, the
commitments thereunder) under the Bank Credit Facility;
(ii) the incurrence by the Company and any Guarantor of Indebtedness
represented by the New Notes and any Subsidiary Guarantee;
(iii) Existing Indebtedness;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indenture;
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(v) the incurrence by Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (a) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinate to
the payment in full of all obligations with respect to the New Notes and
(b) any subsequent issuance or transfer of Equity Interests and any
subsequent sale or other transfer of such Indebtedness, in each case, that
results in any such Indebtedness being held by a Person other than the
Company or any of its Restricted Subsidiaries shall be deemed to constitute
an incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, not permitted pursuant to this clause (v);
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging (a) interest rate risk with respect to any floating rate
Indebtedness of such Person so long as such floating rate Indebtedness is
permitted by the terms of the Indenture to be outstanding or (b) exchange
rate risk with respect to agreements or indebtedness of such Person payable
or denominated in a currency other than U.S. dollars;
(vii) Obligations in respect of performance and surety bonds provided
by the Company or any Guarantor in the ordinary course of business;
(viii) Indebtedness evidenced by letters of credit issued in the
ordinary course of business of the Company to secure workers compensation
and other insurance coverages;
(ix) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or Purchase Money Obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Restricted Subsidiary, in an aggregate principal amount at any time
outstanding not to exceed $10 million;
(x) the guarantee by the Company of Indebtedness of any Restricted
Subsidiary permitted under the Indenture and the guarantee by a Guarantor
of Indebtedness of the Company permitted in accordance with the Indenture;
and
(xi) the incurrence by the Company and any Guarantor of Indebtedness
in an aggregate principal amount at any time outstanding not to exceed $50
million.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company and any Guarantor may enter into a sale
and leaseback transaction if (i) the Company or such Guarantor could have
incurred Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction pursuant to the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock," (ii) the Lien to
secure such Indebtedness does not extend to or cover any assets of the Company
or such Guarantor other than the assets which are the subject of the sale and
leaseback transaction, (iii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors of the Company and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iv) the transfer of assets in such sale
and leaseback transaction is permitted by, and the proceeds of such transaction
are applied in compliance with, the covenant entitled "Asset Sales."
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur or
assume any Lien (other than Permitted Liens) on any property or asset now owned
or hereafter acquired, or on any income or profits therefrom or assign or convey
any right to receive income therefrom, to secure any Indebtedness that is pari
passu with or subordinate in right of payment to the New Notes or any Subsidiary
Guarantee, as applicable, unless the New Notes and the Subsidiary Guarantees, as
applicable, are either (i) secured by a Lien on such property, assets, income or
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profits, if such other Indebtedness is subordinated in right of payment to the
New Notes and/or the Subsidiary Guarantees, that is senior in priority to the
Lien securing such other Indebtedness or (ii) equally and ratably secured by a
Lien on such property, assets, income or profits with the Lien securing such
other Indebtedness, if such other Indebtedness is pari passu in right of payment
to the New Notes and/or the Subsidiary Guarantees; provided that any Liens on
any such property, asset, income or profits granted pursuant to this provision
shall be released if no other Indebtedness that is pari passu with or
subordinated in right of payment to the New Notes is secured by any Lien on such
property, assets, income or profits.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause to become effective any encumbrance or consensual restriction on the
ability of any Restricted Subsidiary to: (i)(x) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on their
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits or (y) pay any Indebtedness owed to the Company or any
of its Restricted Subsidiaries; (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries; (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries; or (iv) guarantee
any Indebtedness of the Company or any Restricted Subsidiary, except for such
encumbrances or restrictions existing under or by reasons of (a) Existing
Indebtedness, as in effect on the date of the Indenture; (b) the Bank Credit
Facility, as in effect on the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those contained in
the Bank Credit Facility (or, if more restrictive, than those contained in the
Indenture) as in effect on the date of the Indenture; (c) the Indenture and the
New Notes; (d) applicable law; (e) any instrument governing Indebtedness or
Capital Stock of a Person acquired by the Company or any of its Restricted
Subsidiaries, as in effect at the time of acquisition (except to the extent such
Indebtedness was incurred in connection with, or in contemplation of, such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired; provided that in the case of
Indebtedness, such Indebtedness would be permitted by the terms of the Indenture
to be incurred if deemed to be incurred on the date of acquisition; (f)
customary non-assignment provisions in leases and other agreements entered into
in the ordinary course of business and consistent with past practices; (g)
Purchase Money Obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired; (h) Permitted Refinancing Indebtedness; provided
that, the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive in the aggregate than those
contained in the agreements governing the Indebtedness being refinanced; or (i)
an agreement that has been entered into for the sale or disposition of all or
substantially all of the Equity Interests or property or assets of a Restricted
Subsidiary; provided that such restrictions are limited to (A) the Restricted
Subsidiary that is the subject of such agreement and (B) six months following
the execution of such agreement.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, another Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all the obligations
of the Company under the New Notes and the Indenture pursuant to a supplemental
indenture in form reasonably satisfactory to the Trustee;
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(iii) immediately after giving effect to such transaction on a pro forma basis,
no Default or Event of Default exists; (iv) immediately after giving effect to
such transaction on a pro forma basis, the Consolidated Net Worth of the Company
is equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; and (v) the Company or the Person formed
by or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been
made, will, at the time of such transaction after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) if such Affiliate
Transaction involves aggregate payments in excess of $1 million, the Company
delivers to the Trustee a resolution of the Board of Directors of the Company
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and either (x) such Affiliate Transaction is
approved by a majority of the disinterested members of the Board of Directors of
the Company or (y) the Company delivers to the Trustee a written opinion of an
investment banking firm of national standing or other recognized independent
expert with experience appraising the terms and conditions of the type of
transaction contemplated thereby stating that the Affiliate Transaction is fair
to the Company from a financial point of view; provided, however, that (a) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business of the Company or such
Restricted Subsidiary in accordance with the past practice, (b) transactions
between or among the Company and/or its Wholly Owned Restricted Subsidiaries and
(c) any agreements regarding indemnification of directors or payment of employee
benefits, including bonuses, retirement plans and stock options, and director
fees in the ordinary course of business in accordance with the past practice of
the Company or such Restricted Subsidiary, shall not be deemed Affiliate
Transactions.
Anti-layering
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is both
(a) subordinate or junior in right of payment to any Senior Debt and (b) senior
in any respect in right of payment to the New Notes; and (ii) no Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is both (a) subordinate or junior in right of payment to its
Senior Debt and (b) senior in any respect in right of payment to its Subsidiary
Guarantee.
Line of Business
The Company will not, and will not permit any of its Restricted
Subsidiaries to, engage in any line of business other than (i) the same or a
similar line of business as the Company and its Restricted Subsidiaries are
engaged in on the date of the Indenture and (ii) such business activities as are
complementary to, or are incidental, ancillary or related to, the foregoing.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture provides that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness of the Company
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unless either such Restricted Subsidiary (x) is a Guarantor or (y)
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for the Guarantee of the payment of the New Notes by such Restricted
Subsidiary.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the New Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged (i) upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's stock in, or all or substantially all the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the Indenture or (ii) if such Restricted
Subsidiary does not guarantee any other Indebtedness of the Company or have
guarantees outstanding with respect to any undrawn commitments of the Company.
The form of such Guarantee will be attached as an exhibit to the Indenture.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Company will furnish to the Holders of New Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that describes the financial condition and results of
operations of the Company and its Restricted Subsidiaries and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, from and after the consummation of the Exchange Offer or the
effectiveness of the Shelf Registration Statement, the Company will file a copy
of all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Guarantors have agreed that, for so long as any
New Notes remain outstanding, they will furnish to Holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an "Event of
Default":
(i) default for 30 days in the payment when due of interest with
respect to or Liquidated Damages with respect to the New Notes (whether or
not prohibited by the subordination provisions of the Indenture);
(ii) default in payment when due of principal or premium, if any, on
the New Notes at maturity, upon redemption or otherwise including pursuant
to a Change of Control Offer or an Asset Sale Offer (whether or not
prohibited by the subordination provisions of the Indenture);
(iii) failure by the Company or any Guarantor to comply with the
provisions described under the covenants entitled "Change of Control,"
"Asset Sales" or "Merger, Consolidation or Sale of Assets" (in any case
whether or not prohibited by the subordination provisions of the
Indenture);
(iv) failure by the Company or any Guarantor for 60 days after notice
from the Trustee or the Holders of at least 25% in principal amount of the
New Notes then outstanding to comply with its other agreements in the
Indenture or the New Notes;
(v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (A)
(i) is caused by a failure to pay when due at final stated maturity
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principal of (a "Payment Default") or (ii) results in the acceleration of
such Indebtedness prior to its express maturity and (B) in each case, the
principal amount of any such Indebtedness due to be paid, together with the
principal amount of any other such Indebtedness under which there has been
a Payment Default or the maturity of which has been accelerated as a result
of any matter contemplated in clause (v)(A)(i) or (v)(A)(ii), aggregates
$15 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments (to the extent not covered by insurance and as to which
the insurer has not acknowledged coverage in writing) aggregating in excess
of $15 million, which judgments are not paid, fully bonded, discharged or
stayed within 60 days after their entry;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary of the Company that is a Significant
Subsidiary or group of Restricted Subsidiaries of the Company that,
together, would constitute a Significant Subsidiary; and
(viii) the termination of the Subsidiary Guarantee(s) of either a
Guarantor that is a Significant Subsidiary or group of Guarantors that
together constitute a Significant Subsidiary for any reason not permitted
by the Indenture, or the denial of any Person acting on behalf of any such
Guarantor or group of Guarantors of its Obligations under any such
Subsidiary Guarantee(s).
To the extent that the last day of the period referred to in clauses (i),
(iv) or (vi) of the immediately preceding paragraph is not a Business Day, then
the first Business Day following such day shall be deemed to be the last day of
the period referred to in such clauses. Any "day" will be deemed to end as of
11:59 p.m., New York City time.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding New Notes
may declare all the New Notes to be due and payable by notice in writing to the
Company and the Trustee. Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency with respect
to the Company, any Significant Subsidiary or any group of Subsidiaries that,
taken together, would constitute a Significant Subsidiary, all outstanding New
Notes will become due and payable without further action or notice. Holders of
the New Notes may not enforce the Indenture or the New Notes except as provided
in the Indenture. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding New Notes may direct the Trustee in its
exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding, by notice to the Trustee, may on behalf of the Holders of all
of the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture, except a continuing Default or Event of
Default in the payment of interest or premium on, or principal of, the New
Notes. The Trustee may withhold from Holders of the New Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal, premium or interest) if it determines that
withholding notice is in such Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement within five days of so becoming aware specifying such Default or Event
of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company under the New Notes, any Subsidiary Guarantee or the Indenture or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of New Notes by accepting a New Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the New Notes and the Subsidiary Guarantees. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guarantors discharged with respect to the
outstanding New Notes and the Subsidiary Guarantees ("Legal Defeasance"). Such
Legal Defeasance means that the Company will be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding New Notes,
except for (a) the rights of Holders of outstanding New Notes to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages on the New Notes when such payments are due, or on the
redemption date, as the case may be, (b) the Company's obligations with respect
to the New Notes concerning issuing temporary New Notes, registration of New
Notes, mutilated, destroyed, lost or stolen New Notes and the maintenance of an
office or agency for payment and money for security payments held in trust, (c)
the rights, powers, trust, duties and immunities of the Trustee and the
Company's obligations in connection therewith and (d) the legal defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company and the Guarantors
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the New Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "-- Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the New Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants
selected by the Trustee, to pay the principal of, premium and Liquidated
Damages, if any, and interest on the outstanding New Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the New Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding New Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding New Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
day of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result
in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of New Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Note selected for redemption. Also, the Company is not required to
transfer or exchange any New Note for a period of 15 days before a selection of
New Notes to be redeemed. The registered Holder of a New Note will be treated as
the owner of such New Note for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture, the New Notes
or the Subsidiary Guarantees may be amended or supplemented with the consent of
the Holders of a majority in principal amount of the New Notes then outstanding
(including consents obtained in connection with a tender offer or exchange offer
for New Notes), and any existing default or compliance with any provision of the
Indenture, the New Notes or the Subsidiary Guarantees may be waived with the
consent of the Holders of a majority in principal amount of the then outstanding
New Notes (including consents obtained in connection with a tender offer or
exchange offer for New Notes).
Without the consent of each Holder affected, however, an amendment or
waiver may not (with respect to any New Note held by a non-consenting Holder):
(i) reduce the principal amount of New Notes whose Holders must consent to an
amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any New Note or alter the provisions with respect to the
redemption of the New Notes or any Change of Control Offer or any of the
definitions related thereto; (iii) reduce the rate of or change the time for
payment of interest on any New Notes; (iv) waive a Default or Event of Default
in the payment of principal of or premium, if any, or interest or Liquidated
Damages, if any, on the New Notes (except a rescission of acceleration of the
New Notes by the Holders of a majority in aggregate principal amount of the New
Notes and a waiver of the payment default that resulted from such acceleration);
(v) make any New Note payable in money other than that stated in the New Notes;
(vi) waive a redemption or repurchase payment with respect to any New Note or
alter the redemption provisions thereof; (vii) make any change in the foregoing
amendment and waiver provisions; or (viii) except as provided under " -- Legal
Defeasance and Covenant Defeasance" or the third paragraph under " -- Subsidiary
Guarantees," release any of the Guarantors from their obligations under the
Subsidiary Guarantees or make any change in the Subsidiary Guarantees that would
adversely affect the Holders. Notwithstanding the foregoing, the provisions with
respect to Asset Sales or any of the definitions related thereto may be amended
or supplemented with the consent of the Holders of at least two-thirds in
principal amount of the New Notes then outstanding (including consents obtained
in connection with a tender offer or exchange offer for the New Notes). In
addition, any amendment to the provisions of Article 10 of the Indenture (which
relate to subordination) will require the consent of the Holders of at least 75%
in aggregate principal amount of New Notes then outstanding if such amendment
would adversely affect the rights of Holders of New Notes.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees or the New Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated New Notes in addition to
or in place of certificated New Notes, to provide for the assumption of the
Company's or a Guarantor's obligations to Holders of the New Notes in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of the New Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or to allow any
Guarantor to guarantee the New Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property
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received in respect of any such claim as security or otherwise. The Trustee will
be permitted to engage in other transactions with the Company; however, if the
Trustee acquires any conflicting interest, it must eliminate such conflict
within 90 days, apply to the Commission for permission to continue as Trustee or
resign.
The Holders of a majority in principal amount of the then outstanding New
Notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of New Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to the Company, 3611 Queen Palm Drive, Tampa, Florida
33619, Attention: Corporate Secretary.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one registered note in global form without coupons (the "Global Note").
Upon issuance, the Global Note will be deposited with, or on behalf of, the DTC
and registered in the name of Cede & Co., as nominee of the Depository.
If a holder tendering Existing Notes so requests, such holder's New Notes
will be issued as described below under "Certificated Securities" in registered
form without coupons (the "Certificated Securities").
EXCEPT AS SET FORTH BELOW, THE GLOBAL NOTES MAY BE TRANSFERRED, IN WHOLE
AND NOT IN PART, ONLY TO ANOTHER NOMINEE OF DTC OR TO A SUCCESSOR OF DTC OR ITS
NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL NOTES MAY NOT BE EXCHANGED FOR NEW
NOTES IN CERTIFICATED FORM EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED BELOW.
SEE "-- CERTIFICATED NEW NOTES."
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of any beneficial interest in a security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit the
accounts of Participants who elect to exchange Existing Notes with an interest
in the Global Note and (ii) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that securities interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the New Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial
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interests in the Global Note will not be entitled to have New Notes represented
by such Global Note registered in their names, will not receive or be entitled
to receive physical delivery of Certificated Securities, and will not be
considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instruction or approval
to the Trustee thereunder. As a result, the ability of a person having a
beneficial interest in New Notes represented by the Global Note to pledge such
interest to persons or entities that do not participate in the Depository's
system, or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
The Company understands that under existing industry practice, in the event
the Company requests any action of holders or an owner of a beneficial interest
in the Global Note desires to take any action that the Depository, as the holder
of such Global Note, is entitled to take, the Depository would authorize the
Participants to take such action and the Participant would authorize persons
owning through such Participants to take such action or would otherwise act upon
the instruction of such persons. Neither the Company nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such New
Notes.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS
OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium, if any, and interest on a
Global Note registered in the name of DTC or its nominee will be payable by the
Trustee to DTC or its nominee in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the New Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, none of the Company,
the Trustee nor any agent of the Company or the Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC, upon
receipt of any payment in respect of securities such as the New Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security such as the Global Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of New Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or its Participants in
identifying the beneficial owners of the New Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee as the registered owner of the New Notes
for all purposes.
Except for trades involving only Euroclear and Cedel participants,
interests in the Global Notes will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
Participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the New
Notes described herein, cross-market transfers between Participants in DTC, on
the one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as
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the case may be, by their respective depositories; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as the
case may be, by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such system.
Euroclear or Cedel, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its depository to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant Global Note in DTC, and making or receiving payment in accordance
with normal procedures for same-day fund settlement applicable to DTC. Euroclear
participants and Cedel participants may not deliver instructions directly to the
depositaries for Euroclear or Cedel.
Because of time zone differences, the securities accounts of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear or Cedel) immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales
of interests in a Global Note by or through a Euroclear or Cedel participant to
a Participant in DTC will be received with value on the settlement date of DTC
but will be available in the relevant Euroclear or Cedel cash account only as of
the business day for Euroclear or Cedel following DTC's settlement date.
The Company expects that pursuant to procedures established by DTC that DTC
will take any action permitted to be taken by a holder of Notes only at the
direction of one or more participants to whose account DTC has credited
interests in the Global Notes and only in respect of such portion of the
aggregate principal amount of the Notes as to which such Participant or
Participants have given direction. However, if there is an Event of Default
under the Notes, DTC reserves the right to exchange Global Notes for legended
Notes in certificated form, and to distribute such Notes to its Participants.
The information in this section concerning DTC, Euroclear and Cedel and
their book-entry systems has been obtained from sources that the Company
believes to be reliable but the Company takes no responsibility for the accuracy
thereof.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Notes among Participants in
DTC, and participant in Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Certificated New Notes
A Global Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the New
Notes in certificated form or (iii) there shall have occurred and be continuing
to occur a Default or an Event of Default with respect to the New Notes. In
addition, beneficial interests in a Global Note may be exchanged for
certificated New Notes upon request but only upon at least 20 days' prior
written notice given to the Trustee by or on behalf of DTC in accordance with
DTC's customary procedures. In all cases, certificated New Notes delivered in
exchange for any Global Note or beneficial interest therein will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of the depositary (in accordance with its customary procedures).
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
certificated Notes, the Company will make all payments of principal, premium, if
any, and interest by wire transfer of
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immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Company expects that secondary trading in the
certificated Notes will be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person's merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
notwithstanding the foregoing, beneficial ownership of 5% or more of the voting
securities of a Person shall be deemed to be control of such Person.
"ASSET SALE" means (i) the sale, lease, conveyance, or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than in the ordinary course of business (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole will be governed by the provisions
of the Indenture described above under the covenant entitled "Change of Control"
and/or the provisions described above under the covenant entitled "Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sales
covenant), and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of clauses (i) and (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following shall not be deemed Asset
Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary or by a Restricted Subsidiary to the Company or to a Wholly Owned
Restricted Subsidiary; (ii) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary; and (iii) the sale of property or equipment that has become worn
out, obsolete or damaged or otherwise unusable in connection with the business
of the Company or any Restricted Subsidiary, as the case may be.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"BANK CREDIT FACILITY" means that certain credit agreement, dated as of
December 3, 1997 by and among the Company, the lenders party thereto, CIBC
Oppenheimer Corp., as Syndication Agent, Bank of America National Trust and
Savings Association, as Documentation Agent and The Chase Manhattan Bank as
Administrative Agent, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time (together with any amendment, modification, renewal, refunding,
replacement or refinancing to or of any of the foregoing (collectively, a
"Modification") or to any Modification, ad infinitum), including, without
limitation, any agreement modifying the maturity or amortization schedule of or
refinancing or refunding all or any portion of the Indebtedness thereunder or
increasing the
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amount that may be borrowed under such agreement or any successor agreement,
whether or not among the same parties.
"BANK INDEBTEDNESS" means (i) the Indebtedness outstanding or arising under
the Bank Credit Facility, (ii) all obligations and other amounts owing to the
holders of such Indebtedness or any agent or representative thereof outstanding
or arising under the Bank Credit Facility (including, but not limited to,
interest (including interest accruing on or after the filing of any petition in
bankruptcy, reorganization or similar proceeding relating to the Company or any
Restricted Subsidiary, whether or not a claim for such interest is allowed in
such proceeding), fees, charges, indemnities, expense reimbursement obligations
and other claims under the Bank Credit Facility), and (iii) all Hedging
Obligations arising in connection therewith to any party to the Bank Credit
Facility (or any affiliate thereof).
"CAPITAL LEASE OBLIGATION" means, with respect to any obligation of any
Person at the time any determination thereof is to be made, the amount of the
liability in respect of a capital lease that would at such time be so required
to be capitalized on a balance sheet of such Person in accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited).
"CHANGE OF CONTROL" means the occurrence of any of the following events:
(i) any sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act); (ii)
the adoption of a plan for the liquidation or dissolution of the Company; (iii)
the Company consolidates with, or merges with or into, another "person" (as
defined above) or "group" (as defined above) in a transaction or series of
related transactions in which the Voting Stock of the Company is converted into
or exchanged for cash, securities or other property, other than any transaction
where (A) the outstanding Voting Stock of the Company is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee corporation and (B) either (1) the "beneficial owners" (as defined in
Rule 13d-3 under the Exchange Act) of the outstanding Voting Stock of the
Company immediately prior to such transaction own beneficially, directly or
indirectly through one or more Subsidiaries, not less than a majority of the
total outstanding Voting Stock of the surviving or transferee corporation
immediately after such transaction or (2) if, immediately prior to such
transaction the Company is a direct or indirect Subsidiary of any other Person
(each such other Person, the "Holding Company"), the "beneficial owners" (as
defined above) of the outstanding Voting Stock of such Holding Company
immediately prior to such transaction own beneficially, directly or indirectly
through one or more Subsidiaries, not less than a majority of the outstanding
Voting Stock of the surviving or transferee corporation immediately after such
transaction; (iv) the consummation of any transaction or series of related
transactions (including, without limitation, by way of merger or consolidation)
the result of which is that any "person" (as defined above) or "group" (as
defined above) becomes the "beneficial owner" (as defined above) of more than
40% of the voting power of the Voting Stock of the Company; or (v) during any
consecutive two-year period, the first day on which a majority of the members of
the Board of Directors of the Company who were members of the Board of Directors
at the beginning of such period are not Continuing Directors. For purposes of
this definition, any transfer of an equity interest of any entity that was
formed for the purpose of acquiring Voting Stock of the Company will be deemed
to be a transfer of such portion.
"COMMON STOCK" means the common stock, par value $.01 per share, of the
Company.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period, plus, to the extent deducted in computing Consolidated Net Income,
(i) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, (ii) Consolidated Interest Expense of
such Person for such period, (iii) depreciation and amortization (including
amortization of goodwill and other intangibles) and all other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve
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for cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted Subsidiaries
for such period, (iv) any extraordinary loss and any net loss realized in
connection with either an Asset Sale or the extinguishment of Indebtedness, in
each case, on a consolidated basis determined in accordance with GAAP less any
cash payments related to non-cash charges in prior periods which were previously
added back in the calculation of Consolidated Cash Flow in prior periods and (v)
restructuring charges taken in the fourth quarter of 1997 and/or the first
quarter of 1998 in connection with the merger between Capstone Pharmacy
Services, Inc. and Pharmacy Corporation of America in an aggregate amount not to
exceed $35 million. Notwithstanding the foregoing, the provision for taxes based
on the income or profits of, and the depreciation and amortization and other
non-cash charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in the same proportion) that the Net Income of such Restricted Subsidiary
was included in calculating the Consolidated Net Income of such Person and only
if a corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Subsidiary without governmental approval (that
has not been obtained) and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the interest expense of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount and deferred financing costs,
non-cash interest payments, the interest component of all payments associated
with Capital Lease Obligations, net payments, if any, pursuant to Hedging
Obligations, imputed interest with respect to Attributable Debt), all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers acceptance financings.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (i) the Net Income (but not loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of cash dividends
or distributions paid to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, (iii) the cumulative effect of a change
in accounting principles shall be excluded, and (iv) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
Net Income is not, at the date of determination, permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary.
"CONSOLIDATED NET WORTH" means for any Person, as of any date of
determination, the consolidated stockholders equity (excluding Disqualified
Stock) of such Person and its Restricted Subsidiaries as determined in
accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of the relevant Person who (i) was a member of such
Board of Directors on the date of the Indenture or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the fair market value of non-cash
consideration received by the Company or a Restricted Subsidiary in connection
with an Asset Sale that is so designated as Designated Noncash Consideration
pursuant to an officers' certificate, setting forth the basis of such valuation,
executed by the principal executive officer and the principal financial officer
of the Company.
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"DESIGNATED SENIOR DEBT" means (i) so long as any Bank Indebtedness is
outstanding, the Bank Indebtedness, and (ii) thereafter, any other Senior Debt
permitted under the Indenture the principal amount of which is $50 million or
more and that has been designated by the Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, except to the extent such Capital Stock is exchangeable into
indebtedness at the option of the issuer thereof and only subject to the terms
of any debt instrument to which such issuer is a party), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, or convertible or exchangeable into Indebtedness on or prior
to date that is 91 days after the date on which the Notes mature; provided,
however that any Capital Stock that would not qualify as Disqualified Stock but
for change of control provisions shall not constitute Disqualified Stock if the
provisions are not more favorable to the holders of such Capital Stock than the
provisions described under "-- Change of Control" applicable to the holders of
the Notes.
"ELIGIBLE INSTITUTION" means a commercial banking institution that has
combined capital and surplus of not less than $500.0 million or its equivalent
in foreign currency, whose short-term debt is rated "A-1" (or higher) according
to Standard & Poor's Ratings Group ("S&P") or "P-1" or higher according to
Moody's Investors Service, Inc. ("Moody's") or carrying an equivalent rating by
a nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries (other than Indebtedness under the Bank Credit Facility)
in existence on the date of the Indenture until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum
of (i) the Consolidated Interest Expense of such Person for such period, plus
(ii) any interest expense on Indebtedness of another Person that is (A)
Guaranteed by the referent Person or one of its Restricted Subsidiaries (whether
or not such Guarantee is called upon) or (B) secured by a Lien on assets of such
Person or one of its Restricted Subsidiaries (whether or not such Lien is called
upon), plus (iii) the product of (a) all cash dividend payments (and non-cash
dividend payments in the case of a Person that is a Subsidiary) on any series of
Preferred Stock of such Person, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a decimal, in
each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
Preferred Stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but on or prior to the date on which
the event occurred for which the calculation of the Fixed Charge Coverage Ratio
is required (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption, Guarantee
or redemption of Indebtedness, or such issuance or redemption of Preferred
Stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period. For purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and shall give pro forma effect to the Indebtedness and the
Consolidated Cash Flow of the Person which is the subject of any such
acquisition for such period and shall give pro forma effect to all other pro
forma adjustments which would be made in accordance with Rule 11-02 of
Regulation S-X under the Securities Act
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of 1933 or any successor provision (provided that any cost savings included in
such adjustments are set forth in an officer's certificate delivered to the
Trustee), and (ii) the Consolidated Cash Flow attributable to operations or
businesses disposed of prior to the Calculation Date shall be excluded.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, the Securities and Exchange Commission
or in such other statements by such other entity as may be approved by a
significant segment of the accounting profession of the United States, which are
in effect from time to time.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR" means any Restricted Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the terms of the Indenture and each of
their respective successors and assigns unless and until any successor replaces
any such Guarantor in accordance with the Indenture and thereafter includes each
such successor.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates and (iii) indemnity agreements and arrangements
entered into in connection with the agreements and arrangements described in
clauses (i) and (ii).
"INCUR" means, with respect to any Indebtedness (including Acquired Debt),
to create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable for or with respect to, or become responsible for, the payment
of such Indebtedness (including Acquired Debt); provided that (i) neither the
accrual of interest nor the accretion of original issue discount shall be
considered an incurrence of Indebtedness and, (ii) the issuance of any New Notes
in exchange for a like principal amount of Notes shall not be deemed to be an
Incurrence of Indebtedness. The term "incurrence" has corresponding meaning.
"INDEBTEDNESS" means, with respect to any Person without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or representing
Capital Lease Obligations or Purchase Money Obligations or the deferred and
unpaid balance of the purchase price of any property, excluding any such balance
that constitutes an accrued expense or trade payable, or representing any
Hedging Obligations if and to the extent any of the foregoing indebtedness
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all indebtedness of others secured by a Lien on any asset of such
Person (whether or not such indebtedness is assumed by such Person), the maximum
fixed repurchase price of Disqualified Stock issued by such Person and the
liquidation preference of Preferred Stock issued by such Person, in each case if
held by any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company, and, to the extent not otherwise included, the
Guarantee by such Person of any such indebtedness of any other Person.
"ISSUE DATE" means the date the Notes are initially issued under the
Indenture.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans (including
guarantees), advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, and all other items that are or would be
classified as investments on a balance sheet prepared in
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accordance with GAAP. If the Company or any Restricted Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company, or any Restricted Subsidiary of the
Company issues Equity Interests, such that, after giving effect to any such
sale, disposition or issuance, such Person is no longer a Wholly Owned
Restricted Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale, disposition or issuance equal to the
fair market value of the Equity Interests of such Person held by the Company or
such Restricted Subsidiary immediately following any such sale, disposition or
issuance.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in such asset and any filing of an agreement or any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"MARKETABLE SECURITIES" means (i) Government Securities, (ii) any
certificate of deposit maturing not more than 180 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution or any lender
under the Bank Credit Facility, (iii) commercial paper maturing not more than
180 days after the date of acquisition of an issuer (other than an Affiliate of
the Company) with a rating, at the time as of which any investment therein is
made, of "A-1" (or higher) according to S&P or "P-1" (or higher) according to
Moody's or carrying an equivalent rating by a nationally recognized rating
agency if both of the two named rating agencies cease publishing ratings of
investments, (iv) any bankers acceptances or money market deposit accounts
issued by an Eligible Institution and (v) any fund investing exclusively in
investments of the types described in clauses (i) through (iv) above.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the extinguishment of any Indebtedness of such Person or any of its
Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, amounts
required to be applied to the repayment of Indebtedness (other than long-term
Indebtedness of a Restricted Subsidiary of such Person and Indebtedness under
the Bank Credit Facility) secured by a Lien on the asset or assets that are the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity
and (ii) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided in the documentation with respect thereto, whether or not such interest
is an allowed claim under applicable law), penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
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"PERMITTED INVESTMENTS" means (i) Investments in the Company or in a Wholly
Owned Restricted Subsidiary of the Company (including, without limitation,
Guarantees of the Indebtedness and/or other Obligations of the Company and/or
any Wholly Owned Restricted Subsidiary of the Company, so long as such
Indebtedness and/or other Obligations are permitted under the Indenture), (ii)
Investments in Marketable Securities, (iii) Investments by the Company or any
Restricted Subsidiary of the Company in, or the purchase of the securities of, a
Person if, as a result of such Investment, (a) such person becomes a Wholly
Owned Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company, (iv) Investments in accounts and notes
receivable acquired in the ordinary course of business, (v) any non-cash
consideration received in connection with an Asset Sale that complies with the
covenant entitled "Asset Sales," (vi) Investments in connection with Hedging
Obligations permitted to be incurred under the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock," (vii) Investments in Permitted
Joint Ventures in an amount not to exceed $20 million in the aggregate at any
one time outstanding and (viii) other Investments in an amount not to exceed $10
million in the aggregate at any one time outstanding.
"PERMITTED JOINT VENTURE" means a Person (i) which owns, leases, operates
or services a Related Business or manufactures or markets healthcare products
and (ii) of which the Company, directly or indirectly, beneficially owns at
least a majority of the Equity Interests.
"PERMITTED JUNIOR SECURITIES" means (i) equity securities of the Company
and (ii) debt securities of the Company that are unsecured and subordinated at
least to the same extent as the Notes to Senior Debt of the Company and
guarantees of any such debt by any Guarantor that are unsecured and subordinated
at least to the same extent as the Guarantee of such Guarantor to the Senior
Debt of such Guarantor, as the case may be, and has a final maturity date at
least as late as the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Notes.
"PERMITTED LIENS" means; (i) Liens in favor of the Company or any of its
Restricted Subsidiaries, (ii) Liens on property of a Person existing at the time
such Person is merged with or into or consolidated with the Company or any
Restricted Subsidiary of the Company; provided, that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation and do not extend to any assets of the Company or any Restricted
Subsidiary of the Company other than the assets acquired in such merger or
consolidation; (iii) Liens on property of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company; provided that such Liens
were not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary and do not extend to any assets of the Company
or any other Restricted Subsidiary of the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any Restricted
Subsidiary of the Company; provided that such Liens were not incurred in
connection with, or in contemplation of, such acquisition and do not extend to
any assets of the Company or any of its Restricted Subsidiaries other than the
property so acquired; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds or performance bonds, or landlords',
carriers', warehousemen's, mechanics', suppliers', materialmen's or other like
Liens, in any case incurred in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
process of law, provided that a reserve or other appropriate provision, if any,
as is required by GAAP shall have been made therefor; (vi) Liens existing on the
date of the Indenture; (vii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded; provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (viii) Liens to
secure Indebtedness (including Capital Lease Obligations) permitted by clause
(iii) or clause (ix) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" covering only the
assets acquired, constructed or improved with such Indebtedness or the assets
which are the subject of the sale and leaseback transaction, as the case may be,
(ix) Liens securing Indebtedness incurred to refinance Indebtedness that has
been secured by a Lien permitted under the Indenture; provided that (a) any such
Lien shall not extend to or cover any assets or property not securing the
Indebtedness so
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refinanced and (b) the refinancing Indebtedness secured by such Lien shall have
been permitted to be incurred under the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock;" (x) Liens in favor of the lessee
on instruments which are the subject of leases entered into in the ordinary
course of business; provided that any such Lien shall not extend to or cover any
assets or property of the Company and its Restricted Subsidiaries that is not
the subject of any such lease; (xi) Liens to secure Attributable Debt that is
permitted to be incurred pursuant to the covenant entitled "Sale and Leaseback
Transactions;" provided that any such Lien shall not extend to or cover any
assets of the Company or any Guarantor other than the assets which are the
subject of the sale leaseback transaction in which the Attributable Debt is
incurred; (xii) judgment and attachment Liens not giving rise to a Default;
(xiii) easements, rights-of-way, zoning or other restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the business of the Company or any of
its Restricted Subsidiaries incurred in the ordinary course of business; (xiv)
pledges or deposits to secure obligations under workers' compensation laws or
similar legislation or to secure public or statutory obligations; and (xv) liens
to secure Purchase Money Obligations.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of premiums and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date at least as late as
the final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"PUBLIC OFFERING" means an underwritten offer and sale of Common Stock of
the Company pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act of 1933, as amended
(other than a registration statement on Form S-8 or otherwise related to equity
securities issuable upon any employee benefit plan of the Company).
"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of the Company and its Restricted Subsidiaries
and any additions and accessions thereto, which are purchased by the Company and
its Restricted Subsidiaries at any time after the Notes are issued; provided
that (i) the security agreement or conditional sales or other title retention
contract pursuant to which the lien on such assets is created (collectively a
"Purchase Money Security Agreement") shall be entered into within 90 days after
the purchase or substantial completion of the construction of such assets and
shall at all times be confined solely to the assets so purchased or acquired,
any additions and accessions thereto and any proceeds therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii) (A) the aggregate outstanding principal
amount of Indebtedness secured thereby (determined on a per asset basis in the
case of
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any additions and accessions) shall not at the time such Purchase Money Security
Agreement is entered into exceed 100% of the purchase price to the Company and
its Restricted Subsidiaries of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"RELATED BUSINESS" means any business in the same or similar business as
the Company and its Restricted Subsidiaries are engaged in on the date of the
Indenture and such business activities as are complementary to, or are
incidental, ancillary or related to, the foregoing.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SENIOR DEBT" means (a) with respect to the Company, (i) all Indebtedness
permitted to be incurred pursuant to the Indenture under or in respect of the
Bank Credit Facility and (ii) any other Indebtedness permitted to be incurred by
the Company under the terms of the Indenture and any Hedging Obligation
permitted to be incurred under the terms of the Indenture, unless the instrument
under which the foregoing is incurred expressly provides that the Indebtedness
thereunder is on a parity with or subordinated in right of payment to the Notes
and (b) with respect to any Guarantor, (i) all guarantees of such Guarantor
permitted to be incurred pursuant to the Indenture under or in respect of the
Bank Credit Facility and (ii) any other Indebtedness permitted to be incurred by
such Guarantor under the terms of the Indenture and any Hedging Obligation
permitted to be incurred under the terms of the Indenture, unless the instrument
under which the foregoing is incurred expressly provides that the Indebtedness
thereunder is on parity with or subordinated in right of payment to the
Subsidiary Guarantee of such Guarantor. Notwithstanding anything to the contrary
in the foregoing, Senior Debt of the Company will not include (i) Indebtedness
evidenced by the Notes; (ii) Indebtedness of the Company that is expressly
subordinated in right of payment to any Indebtedness of the Company; (iii)
Indebtedness of the Company that by operation of law is subordinate to any
general unsecured obligation of the Company; (iv) Indebtedness which when
incurred and without respect to any election under Section 1111(b) of Title 11
of the United States Code is without recourse to the Company or any of its
Subsidiaries; (v) any liability for federal, state, local or other taxes; (vi)
any Indebtedness of the Company or any Guarantor to the Company or any
Subsidiary of the Company or any of their respective Affiliates; (vii) any trade
payables; or (viii) any Indebtedness that is incurred in violation of the
Indenture.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole general
partner or the managing general partner of which is such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only if such Subsidiary: (i) has no Indebtedness other
than Non-Recourse Debt; (ii) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (iii) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (a) to subscribe for additional Equity Interests or (b) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and (iv) has not guaranteed or
otherwise directly or indirectly provided credit support for
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any Indebtedness of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the covenant entitled "Restricted Payments." If,
at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock," the Company shall be in default of such
covenant from the date of such incurrence). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock" and (ii) no Default
or Event of Default would be in existence following such designation.
"VOTING STOCK" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
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DESCRIPTION OF BANK CREDIT FACILITY
The Company is the borrower under the Bank Credit Facility, which provides
for a $550 million revolving credit facility, that matures on December 3, 2002.
The Chase Manhattan Bank is the administrative agent for the lenders under the
Bank Credit Facility. All obligations under the Bank Credit Facility are
guaranteed by the Company's subsidiaries. The Bank Credit Facility is unsecured.
Interest is payable on borrowings under the Bank Credit Facility, at the
election of the Company, at either (a) the Alternate Base Rate (the greater of
the prime rate, the federal funds effective rate plus 50 basis points or a three
month secondary CD rate plus 100 basis points), or (b) the Adjusted LIBOR Rate
plus a margin of from 0.2000% to 0.3750%, based upon the Company's leverage
ratio. As of May 31, 1998, the weighted average borrowing rate was approximately
6.8%. A facility fee of from 0.1000 to 0.2500% per annum (0.1875% as of May 31,
1998) is payable by the Company on the daily amount of the commitment of each
lender. The amount of the facility fee is based upon the Company's leverage
ratio.
The Bank 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 Bank Credit Facility). The Adjusted
Leverage Ratio, which is the ratio of principal indebtedness of the Company to
the cash flow of the Company, subject to certain adjustments, cannot be in
excess of 4:1. The Consolidated Interest Expense Coverage Ratio, which is the
ratio of the cash flow of the Company to the interest expense of the Company,
cannot be less than 2.5:1 for any four fiscal quarter period. The Net Worth of
the Company cannot be less than the sum of $394.2 million plus 50% of positive
net income plus 100% of the proceeds of an equity offering.
The Bank 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. The Company is generally
restricted from making acquisitions of less than all of the equity interests or
all or substantially all of the assets of an acquired entity. The Company also
is restricted from making acquisitions while a Default or Event of Default (as
defined therein) has occurred and is continuing or an acquisition that would
result in a breach of certain financial covenants.
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CERTAIN TAX CONSIDERATIONS
GENERAL
The following is a general discussion of certain material federal income
tax consequences to Holders of Notes of the Exchange Offer and the purchase,
ownership and disposition of the Exchange Notes. The summary is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect as of the date hereof and all of which
are subject to change (possibly on a retroactive basis). The following
discussion does not purport to deal with all aspects of federal income taxation
that may be relevant to a particular investor in light of such investor's
personal investment circumstances. Nor does the discussion address special rules
applicable to certain types of investors subject to special treatment under the
Code (including, without limitation, financial institutions, broker-dealers,
regulated investment companies, life insurance companies, tax-exempt
organizations, foreign corporations and non-resident aliens). Moreover, the
description is generally limited to investors who will hold the Exchange Notes
as capital assets (generally, property held for investment) within the meaning
of Section 1221 of the Code. No consideration of any aspects of state, local or
foreign taxation is included herein.
EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES OF A PURCHASE OF NOTES IN LIGHT OF SUCH HOLDER'S OWN
PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF THE CODE, AS
WELL AS STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
THE EXCHANGE OFFER
The exchange of Notes for New Notes pursuant to the Exchange Offer will not
constitute a material modification of the terms of the Notes and, accordingly,
such exchange will not constitute an exchange for federal income tax purposes.
Accordingly, such exchange will have no federal income tax consequences to a
Holder, regardless of whether such Holder participates in the Exchange Offer,
and a Holder will continue to be required to include interest on such Note or
New Note in its gross income in accordance with such Holder's method of
accounting for federal income tax purposes. The Company intends, to the extent
required, to treat the Exchange Offer for federal income tax purposes in
accordance with the position described above.
INTEREST
Interest paid or accrued on the New Notes will be taxable to a Holder as
ordinary income in accordance with the holder's method of accounting for federal
income tax purposes.
DISPOSITION OF THE NEW NOTES
Generally, any sale or redemption of an New Note will result in taxable
gain or loss equal to the difference between the amount of cash or other
property received by the Holder in exchange for such New Note and the Holder's
adjusted tax basis in such New Note. Any gain or loss upon a sale or other
disposition of a New Note will generally be capital gain or loss, which will be
long term if the New Note has been held by the Holder for more than one year.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31 percent rate with respect to payments received with respect to New
Notes. This withholding generally applies only if the Holder (i) fails to
furnish its social security or taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the Internal Revenue Service
that it has failed to report properly payments of interest and dividends and the
service has notified the Company that the Holder is subject to withholding, or
(iv) fails under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
it is not subject to backup withholding. Any amount withheld from a
79
<PAGE> 83
payment to a Holder under the backup withholding rules is allowable as a credit
against such Holder's federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service. Certain Holders
(including, among others, corporations and foreign individuals who comply with
certain certification requirements described below under "Foreign Holders") are
not subject to backup withholding. Holders should consult their tax advisors as
to their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption.
FOREIGN HOLDERS
The following discussion is a summary of certain U.S. federal income tax
consequences to a Foreign Person that holds a New Note. The term "Foreign
Person" means a nonresident alien individual or foreign corporation, but only if
such person's income or gain on the New Note would not be "effectively connected
with the conduct of a trade or business within the United States." If such
person's income or gain on the New Note would be "effectively connected with the
conduct of a trade or business within the United States," then such person will
generally be subject to tax on such income or gain in essentially the same
manner as a U.S. citizen or resident or a domestic corporation, as discussed
above, and in the case of a foreign corporation, may also be subject to U.S.
branch profits tax.
Under the "portfolio interest" exception to the general rules for the
withholding of tax on interest paid to a Foreign Person, a Foreign Person will
not be subject to U.S. tax (or to withholding) on interest on a New Note,
provided that (i) the Foreign Person does not actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (ii) the Foreign Person is not a controlled foreign
corporation with respect to the United States that is related to the Company
through stock ownership, (iii) the Foreign Person is not a bank receiving
interest on a loan entered into in the ordinary course of business, and (iv) the
Company, its paying agent, or the person who would otherwise be required to
withhold tax receives either (A) a statement (an "Owner's Statement") signed
under penalties of perjury by the beneficial owner of the New Note in which the
owner certifies that the owner is not a U.S. person and which provides the
owner's name and address, or (B) a statement signed under penalties of perjury
by the "Financial Institution" holding the New Note on behalf of the beneficial
owner to the effect that an Owner's Statement has been filed on behalf of the
beneficial owner, together with a copy of the Owner's Statement. The term
"Financial Institution" means a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business and that holds a New Note on behalf of the owner of the
New Note. A Foreign Person who does not qualify for the "portfolio interest"
exception would generally be subject to U.S. withholding tax at a flat rate of
30% (or a lower applicable treaty rate) on interest payments (including
redemption proceeds) attributable to the New Notes.
In general, gain recognized by a Foreign Person upon the redemption, sale
or exchange of a New Note will not be subject to U.S. tax. However, a Foreign
Person may be subject to United States tax at a flat rate of 30% (unless exempt
by applicable treaty) on any such gain if the Foreign Person is an individual
present in the United States for 183 days or more during the taxable year in
which the New Note is redeemed, sold or exchanged, and certain other
requirements are met.
A New Note held by a Foreign Person will not be includible in such person's
gross estate subject to U.S. federal estate tax as a result of such person's
death provided that the individual did not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote.
Information reporting and backup withholding will not apply to payments
made on a New Note to a Foreign Person provided that the certification described
in clause (iv) of the second paragraph in this section is received, and provided
further that the payor does not have actual knowledge that the information is
false.
80
<PAGE> 84
PLAN OF DISTRIBUTION
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of the holders' business and such holders have no arrangement or
understanding with any person to participate in a distribution of such New Notes
and are not participating in, and do not intend to participate in, the
distribution of such New Notes. In addition, to comply with the securities laws
of certain jurisdictions, if applicable, the New Notes may not be offered or
sold unless they have been registered or qualified for sale in such jurisdiction
or an exemption from registration or qualification is available and complied
with. The Company has agreed, subject to certain specified limitations therein,
to register or qualify the New Notes for offer or sale under the state
securities laws of such jurisdictions as any holder of the New Notes reasonably
requests in writing.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Existing Notes
where such Existing Notes were acquired as a results of market-making activities
or other trading activities. The Company has agreed that, for a period of two
years, it will make this Prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the close of the Exchange Offer, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer and will indemnify the Holders of the New Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the New Notes will
be passed upon for the Company by Harwell Howard Hyne Gabbert & Manner, P.C.,
Nashville, Tennessee.
81
<PAGE> 85
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements and schedules of PharMerica, Inc. as of December
31, 1997 and for the year then ended, included in this prospectus and elsewhere
in the registration statement, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
The financial statements and schedules of Capstone Pharmacy Services, Inc.
as of December 31, 1996 and 1995 and for the year ended December 31, 1996, the
ten months ended December 31, 1995 and the year ended February 28, 1995,
included in this prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as stated
in their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
The consolidated financial statements and schedule of PharMerica, Inc.
(formerly the consolidated financial statements of PCA) as of December 31, 1996
and for the two years then ended, included in this Prospectus, have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein.
AVAILABLE INFORMATION
The Company has agreed pursuant to the Indenture that, whether or not
required by the rules and regulations of the Commission, so long as any Notes
are outstanding, the Company will furnish to the Holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its Restricted
Subsidiaries and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not required
by the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, the Company and the Guarantors have agreed that, for so long as any
Notes remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. See
"Description of the Notes."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference into this Prospectus all documents
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the closing
of the Offering.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in any
other document subsequently filed with the SEC which is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
82
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PHARMERICA, INC.
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998......................................... F-2
Consolidated Statements of Income for the three months
ended March 31, 1997 and 1998.......................... F-3
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1998...................... F-4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1998.......................... F-5
Notes to Unaudited Consolidated Financial Statements...... F-6
Report of Independent Public Accountants.................... F-9
Report of Ernst & Young LLP, Independent Auditors........... F-10
Audited Financial Statements and Schedule:
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-11
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997....................... F-12
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997........... F-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997....................... F-14
Notes to Consolidated Financial Statements................ F-15
Schedule II -- Valuation and Qualifying Accounts.......... F-30
CAPSTONE PHARMACY SERVICES, INC.
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997..................................... F-31
Consolidated Statements of Income for the nine months
ended September 30, 1996 and 1997...................... F-32
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1997........... F-33
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997...................... F-34
Notes to Unaudited Consolidated Financial Statements...... F-35
CAPSTONE PHARMACY SERVICES, INC.
Report of Independent Public Accountants.................... F-40
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-41
Consolidated Statements of Operations for the year ended
February 28, 1995, the ten months ended December 31,
1995 and the year ended December 31, 1996.............. F-42
Consolidated Statements of Changes in Stockholders' Equity
for the year ended February 28, 1995, the ten months
ended December 31, 1995 and the year ended December 31,
1996................................................... F-43
Consolidated Statements of Cash Flows for the year ended
February 28, 1995, the ten months ended December 31,
1995 and the year ended December 31, 1996.............. F-44
Notes to Consolidated Financial Statements................ F-45
</TABLE>
F-1
<PAGE> 87
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND MARCH 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 34,215 $ 40,503
Accounts receivable, net of allowance for doubtful
accounts of $22,096 and $23,287........................ 205,225 247,077
Inventories............................................... 51,766 52,981
Prepaid expenses and other current assets................. 6,307 4,306
Deferred tax asset........................................ 35,360 29,403
---------- ----------
Total Current Assets.............................. 332,873 374,270
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net................... 46,599 52,381
GOODWILL, net of accumulated amortization of $26,653 and
$32,380................................................... 723,954 777,220
OTHER ASSETS................................................ 10,822 18,071
---------- ----------
Total Assets...................................... $1,114,248 $1,221,942
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 109,483 $ 107,080
Current portion of long-term debt......................... 7,533 12,986
Accrued restructuring charges............................. 14,269 11,710
---------- ----------
Total Current Liabilities......................... 131,285 131,776
DEFERRED TAX LIABILITY...................................... 21,216 23,396
LONG-TERM DEBT, net of current portion...................... 427,889 518,367
ACCRUED RESTRUCTURING CHARGES, net of current portion....... 4,980 4,980
---------- ----------
Total Liabilities................................. 585,370 678,519
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 300,000,000 shares
authorized at December 31, 1997 and March 31, 1998;
87,930,184 shares issued and 87,591,722 outstanding as
of December 31, 1997 and 88,134,800 shares issued and
outstanding as of March 31, 1998....................... 876 882
Preferred Stock, $.01 par value; 500,000 shares
authorized; $0 outstanding at December 31, 1997 and
March 31, 1998......................................... -- --
Additional paid-in capital................................ 413,567 416,776
Retained earnings......................................... 114,435 125,765
---------- ----------
Total Stockholders' Equity........................ 528,878 543,423
---------- ----------
Total Liabilities and Stockholders' Equity........ $1,114,248 $1,221,942
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
<PAGE> 88
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $147,592 $274,677
COST OF SALES............................................... 80,087 152,802
-------- --------
Gross profit...................................... 67,505 121,875
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 49,229 85,528
Depreciation and amortization............................. 4,826 8,524
-------- --------
Operating income.................................. 13,450 27,823
INTEREST EXPENSE, NET....................................... 46 7,795
-------- --------
Income before provision for income taxes.......... 13,404 20,028
PROVISION FOR INCOME TAXES.................................. 5,576 8,698
-------- --------
Net income........................................ $ 7,828 $ 11,330
======== ========
Earnings per common and common equivalent share:
Basic..................................................... $ .16 $ .13
======== ========
Diluted................................................... $ .16 $ .13
======== ========
Weighted average number of common and common equivalent
shares outstanding:
Basic..................................................... 50,000 87,797
======== ========
Diluted................................................... 50,051 90,275
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 89
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ --------------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997............................. 87,591 $876 $413,567 $114,435
Common stock issued in connection with exercise of
stock options and warrants........................ 543 6 3,209 --
Net income for the three months ended March 31,
1998.............................................. -- -- -- 11,330
------ ---- -------- --------
BALANCE, March 31, 1998................................ 88,134 $882 $416,776 $125,765
====== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement.
F-4
<PAGE> 90
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,828 $ 11,330
Adjustments to reconcile net income to net cash flows from
operating activities: Depreciation and amortization.... 4,826 8,524
Change in assets and liabilities, net of acquisitions
Accounts receivable.................................. (4,978) (35,566)
Inventories.......................................... (318) 1,388
Prepaid expenses and other current assets............ (60) 2,150
Deferred income taxes................................ 1,046 8,137
Accounts payable and accrued expenses................ 2,067 (8,263)
Accrued restructuring charges........................ -- (2,560)
Other................................................ -- 1,280
-------- --------
Total adjustments................................. 2,583 (24,910)
-------- --------
Net cash flows from operating activities.......... 10,411 (13,580)
-------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.......... (3,710) (7,522)
Payments for acquisitions, net of cash acquired........... (22,144) (57,334)
-------- --------
Net cash flows from investing activities.......... (25,854) (64,856)
-------- --------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings.............. -- 82,900
Net proceeds from issuance of subordinated debt........... -- 316,875
Advances (to) from Beverly Enterprises, Inc............... 13,852 --
Proceeds from exercise of stock options and warrants...... -- 3,215
Repayment of long-term debt............................... (313) (318,266)
-------- --------
Net cash flows from financing activities.......... 13,539 84,724
-------- --------
Net (decrease) increase in cash and cash equivalents........ (1,904) 6,288
Cash and cash equivalents, beginning of period.............. 7,575 34,215
-------- --------
Cash and cash equivalents, end of period.................... $ 5,671 $ 40,503
======== ========
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest............................................... $ 93 $ 3,778
======== ========
Taxes.................................................. $ -- $ 2,451
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE> 91
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS:
PharMerica, Inc., (the surviving company of the merger (the "Merger")
involving Capstone Pharmacy Services, Inc. (Capstone) and Pharmacy Corporation
of America (PCA)) (together with its subsidiaries, the "Company"), is a Delaware
corporation (Note 4).
The Company is one of the nation's largest institutional pharmacies
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals and
health maintenance organizations. The Company also provides mail service
pharmacy services, including the delivery of drugs and medical equipment to
workers' compensation payors, claimants and employers. As of March 31, 1998, the
Company operated approximately 160 pharmacies and pharmacy related outlets.
2. EARNINGS PER SHARE:
Earnings per share is based upon the weighted average number of the
Company's common and common equivalent shares outstanding for the three months
ended March 31, 1997 and 1998. The amount of common stock equivalents
outstanding was computed using the treasury stock method.
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 No. 15, "Earnings Per Share." It
replaces the presentation of primary and fully diluted EPS with a presentation
of basic and diluted EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.
Earnings per share information for the three months ended March 31, 1997
reflect the historical operating results of PCA, the shares issued by Capstone
in the Merger and the dilutive effect of stock options of the PCA employees
assumed (Note 4).
3. BASIS OF PRESENTATION:
The interim consolidated financial statements of the Company for the three
months ended March 31, 1997 and 1998, included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company at March 31, 1998, and the results
of its operations and cash flows for the three months ended March 31, 1997 and
1998.
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
The results of operations for the three months ended March 31, 1997 and
1998, are not necessarily indicative of results to be expected for the full
year. These interim consolidated financial statements should be read in
conjunction with the audited 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 dated December 31, 1997. The balance sheet at
December 31, 1997, has been derived from the audited financial statements at
that date.
F-6
<PAGE> 92
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS:
During January 1998, the Company acquired the stock of Express Pharmacy
Services, Inc., a Tampa, Florida mail order pharmacy company. The purchase price
was approximately $19,676, and goodwill at the date of acquisition was $18,622.
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 $25,000, and goodwill at
the date of acquisition was $23,335.
Also, during the three months ended March 31, 1998, the Company acquired
the assets or stock of five additional companies. The total purchase price was
approximately $13,359, and total goodwill was approximately $12,387.
All of the businesses described above have been accounted for using the
purchase method of accounting, with the assets and liabilities of the acquired
companies recorded at their estimated fair market values at the dates of
acquisition. The operations of the acquired companies, since the dates of
acquisition, are included in the accompanying unaudited consolidated statements
of income. Goodwill, representing the excess of acquisition cost over the fair
value of the net assets acquired, is amortized over 40 years.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION:
The results of operations of acquired businesses are included in the
Company's consolidated results from the date of acquisition. Had the
acquisitions discussed in Note 4 occurred on January 1, 1997, management
estimates that the unaudited pro forma results of operations for the three
months ended March 31, 1997 and 1998 would have been:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
NET SALES................................................... $242,831 $277,555
COST OF SALES............................................... 135,698 154,392
-------- --------
Gross profit........................................... 107,133 123,163
OPERATING EXPENSES
Selling, general and administrative expenses........... 78,391 86,144
Depreciation and Amortization.......................... 8,884 8,603
-------- --------
Operating Income..................................... 19,858 28,416
Interest Expense, net....................................... 7,252 7,985
-------- --------
Income before provision for income tax................. 12,606 20,431
INCOME TAX PROVISION........................................ 5,471 8,859
-------- --------
Net income........................................ $ 7,135 $ 11,572
======== ========
Diluted income per share.......................... $ .08 $ .13
======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (4) incremental interest charges on
intercompany balances with Beverly Enterprises, Inc at an effective rate of
6.5%. (4) the per share effect of stock issued as part of the acquisitions, and
(5) 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 teams of the Company and the acquired companies been combined in
prior years.
F-7
<PAGE> 93
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
The Company maintains a $550,000 Bank Credit Facility with several
commercial banks (the "Credit Facility"). Interest rates under the Credit
Facility vary based on the type of borrowing. The Credit Facility matures on
December 3, 2002.
In March 1998, the Company sold $325,000 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.
7. 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 intends to close 6 former PCA pharmacies, 14 former
Capstone pharmacies, and will relocate Capstone's corporate headquarters from
Irving, Texas to Tampa, Florida. Management anticipates that the restructuring
activities in connection with the Merger will be substantially completed within
the current year.
The Company has recorded restructuring costs of $5,780 related to the
closure of the former PCA pharmacies, consisting of $3,621 of severance covering
approximately 180 pharmacy employees, $739 of lease termination costs and $1,420
of other exit costs.
The Company has also assumed liabilities, included in the Capstone purchase
price allocation of $9,583 related to the closure of the former Capstone
pharmacies and the relocation of Capstone's former headquarters, consisting of
$5,036 of severance covering approximately 260 employees, $3,059 of lease
termination costs and $1,488 of relocation costs. The terminated positions were
comprised primarily of pharmacy employees and several regional and corporate
positions.
As of March 31, 1998, approximately $2,560 has been charged against these
restructuring accruals.
In connection with the Capstone acquisition, the Company assumed
approximately $3,886 of liabilities from previous Capstone restructurings
consisting primarily of remaining lease termination costs.
8. MAJOR VENDOR:
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. Purchases under primary supplier relationships during the three
months ended March 31, 1997 and 1998 were approximately 94% and 82% of total
inventory purchases, respectively.
9. SUBSEQUENT EVENTS:
In April 1998, the Company acquired the assets of the Chamberlain Group
LLC, a geriatric pharmaceutical care management organization headquartered in
Chesapeake, Virginia.
F-8
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of PharMerica, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheet of PharMerica,
Inc. and subsidiaries (a Delaware corporation and formerly Pharmacy Corporation
of America and subsidiaries) as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of PharMerica,
Inc. and subsidiaries as of December 31, 1996 and 1995, were audited by other
auditors whose report dated April 18, 1997, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PharMerica, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations, and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 9, 1998
F-9
<PAGE> 95
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PharMerica, Inc.
We have audited the accompanying consolidated balance sheet of PharMerica,
Inc. and subsidiaries (formerly Pharmacy Corporation of America) as of December
31, 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1996. Our audits also included the financial statement schedule II-Valuation
and Qualifying Accounts for each of the two years in the period ended December
31, 1996. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PharMerica, Inc. and subsidiaries at December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
April 18, 1997
F-10
<PAGE> 96
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,575 $ 34,215
Accounts receivable, net of allowance for doubtful
accounts of $13,890 and $22,096........................ 94,461 205,225
Inventories............................................... 22,025 51,766
Prepaid expenses and other current assets................. 335 6,307
Deferred tax asset........................................ -- 35,360
-------- ----------
Total current assets.............................. 124,396 332,873
Equipment and leasehold improvements, net................... 36,784 46,599
Goodwill, net of accumulated amortization of $17,865 and
$26,653................................................... 276,430 723,954
Other assets, net........................................... 3,966 10,822
-------- ----------
Total assets...................................... $441,576 $1,114,248
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 31,294 $ 109,483
Current portion of long-term debt......................... 968 7,533
Accrued restructuring charges............................. -- 14,269
-------- ----------
Total current liabilities......................... 32,262 131,285
Deferred income taxes....................................... 3,980 21,216
Long-term debt, net of current portion...................... 1,334 427,889
Due to former parent........................................ 312,395 --
Accrued restructuring charges, net of current portion....... -- 4,980
-------- ----------
Total liabilities................................. 349,971 585,370
-------- ----------
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.01 par value; 1,000 shares authorized at
December 31, 1996; and 300,000,000 shares authorized at
December 31, 1997; and 1,000 shares issued and
outstanding as of December 31, 1996 and 87,930,184
shares issued and 87,591,722 shares outstanding as of
December 31, 1997...................................... 1 876
Preferred stock, $.01 par value; and 0 shares authorized
at December 31, 1996; 500,000 shares authorized at
December 31, 1997; 0 shares issued and outstanding as
of December 31, 1996 and 1997.......................... -- --
Additional paid-in capital................................ 3,866 413,567
Retained earnings......................................... 87,738 114,435
-------- ----------
Total stockholders' equity........................ 91,605 528,878
-------- ----------
Total liabilities and stockholders' equity........ $441,576 $1,114,248
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-11
<PAGE> 97
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................. $ 451,685 $ 516,400 $ 652,179
Cost of sales.............................................. 242,761 280,468 355,577
---------- ---------- ----------
Gross profit............................................. 208,924 235,932 296,602
---------- ---------- ----------
Operating expenses:
Selling, general and administrative expenses............. 175,599 184,585 216,087
Depreciation and amortization............................ 13,219 16,392 21,408
Restructuring charges.................................... -- -- 5,780
Impairment of long-lived assets.......................... 9,543 -- 5,155
---------- ---------- ----------
Total operating expenses......................... 198,361 200,977 248,430
---------- ---------- ----------
Operating income................................. 10,563 34,955 48,172
Interest expense, net...................................... -- -- 2,483
---------- ---------- ----------
Income before provision for income taxes......... 10,563 34,955 45,689
Provision for income taxes................................. 5,977 14,668 18,992
---------- ---------- ----------
Net income....................................... $ 4,586 $ 20,287 $ 26,697
========== ========== ==========
Pro forma earnings per common share........................ $ 0.50
==========
Shares used in computing pro forma earnings per common
share.................................................... 52,896
==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE> 98
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS
------ ------ --------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995............................ 1 $ 1 $ 3,866 $ 62,865
Net income............................................ -- -- -- 4,586
------ ---- -------- --------
Balance at December 31, 1995.......................... 1 1 3,866 67,451
Net income............................................ -- -- -- 20,287
------ ---- -------- --------
Balance at December 31, 1996.......................... 1 1 3,866 87,738
Recapitalization in connection with the acquisition of
Capstone Pharmacy Services, Inc..................... 49,999 499 (499) --
Capital contribution from Beverly Enterprises,
Inc. ............................................... -- -- 15,076 --
Issuance of common stock:
Stock issued in connection with acquisition of
Capstone Pharmacy Services, Inc. ................ 34,980 350 377,150 --
Stock issued in connection with acquisition of
Resident Care Pharmacy, Inc. .................... 811 8 9,092 --
Stock issued in connection with exercise of
warrants......................................... 1,800 18 8,882 --
Net income............................................ -- -- -- 26,697
------ ---- -------- --------
Balance at December 31, 1997.......................... 87,591 $876 $413,567 $114,435
====== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE> 99
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 4,586 $ 20,287 $ 26,697
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization.......................... 13,219 16,392 21,408
Restructuring charges.................................. -- -- 5,780
Impairment of long-lived assets........................ 9,543 -- 5,155
Gain on dispositions of assets......................... -- (250) --
Deferred income taxes (benefit)........................ (909) 4,159 (4,879)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (4,810) (7,974) (30,471)
Inventories.......................................... 2,282 3,510 (10,581)
Prepaid expenses and other current assets............ 614 (44) 5,419
Accounts payable and accrued expenses................ (2,836) (7,498) 14,202
Accrued restructuring charges........................ -- -- (273)
--------- -------- --------
Total adjustments................................. 17,103 8,295 5,760
--------- -------- --------
Net cash flows from operating activities.................... 21,689 28,582 32,457
--------- -------- --------
Cash Flows from Investing Activities:
Payments for acquisitions, net of cash acquired........... (2,151) (10,835) (19,178)
Proceeds from dispositions................................ -- 2,152 --
Purchases of property and equipment....................... (13,098) (9,616) (15,600)
Other, net................................................ 1,852 329 (4,299)
--------- -------- --------
Net cash flows from investing activities.................... (13,397) (17,970) (39,077)
--------- -------- --------
Cash Flows from Financing Activities:
Advances (to) from former Parent, net..................... (9,716) (5,064) (275,000)
Proceeds from exercise of warrants........................ -- -- 8,900
Proceeds from issuance of long-term obligations........... 143 -- 424,524
Repayments of long-term obligations....................... (877) (1,288) (125,164)
--------- -------- --------
Net cash flows from financing activities.................... (10,450) (6,352) 33,260
--------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (2,158) 4,260 26,640
Cash and cash equivalents, beginning of year................ 5,473 3,315 7,575
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 3,315 $ 7,575 $ 34,215
========= ======== ========
Supplemental Schedule of Cash Flow Information:
Cash paid during the year for:
Interest............................................... $ 35 $ 11 $ 2,716
========= ======== ========
Taxes.................................................. $ -- $ -- $ 6,792
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE> 100
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PharMerica, Inc., (the surviving company of the merger (the "Merger") of
Capstone Pharmacy Services, Inc. (Capstone) and Pharmacy Corporation of America
(PCA)) together with its subsidiaries (the "Company"), is a Delaware corporation
(Note 2).
The Company is one of the nation's largest institutional pharmacies
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals and
health maintenance organizations. The Company also provides mail service
pharmacy services, including the delivery of drugs and medical equipment to
workers' compensation payors, claimants and employers. As of December 31, 1997,
the Company operated 124 pharmacies and pharmacy related outlets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PharMerica,
Inc. and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues,
expenses, gains and losses during the reporting periods. Actual results could
differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist principally of purchased pharmaceuticals.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives or, with respect to leasehold improvements, over the term
of the lease if shorter:
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... 3-15 years
Software and computer equipment............................. 3-5 years
Leasehold improvements...................................... 5 years
</TABLE>
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining useful lives
at the acquisition date.
F-15
<PAGE> 101
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Goodwill
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over 40 years.
Amortization of goodwill amounted to approximately $6,414,000, $7,279,000, and
$8,795,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1997, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
In 1995, the Company recorded an impairment loss of approximately
$5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to
recording this loss were as follows: two pharmacies, purchased by the Company in
late 1994, had operating losses in 1995, and the Company anticipated future
operating losses for these facilities primarily related to Beverly's lack of
presence in the markets; one pharmacy, located in a state where Beverly had
recently sold all of its interest, began to lose the contracts that had been
assumed by the new owners, and it became apparent that the operations would not
recover to their previous level; and, lastly, the Company operates a medical
records servicing business which lost approximately half of its business in 1995
when Beverly pursued a different vendor for this service. Accordingly,
management estimated the undiscounted future cash flows to be generated by each
business. The undiscounted future cash flow estimates were less than the
carrying value of such businesses, so management estimated the fair value of
such businesses based on such cash flows and wrote the carrying values down to
their estimates of fair value. Management calculated the fair values of the
impaired businesses by using the present values of estimated future cash flows.
In addition to the SFAS No. 121 charge, the Company recorded an impairment
loss in 1995 of approximately $4,151,000 primarily related to the write-off of
software costs. In conjunction with the Company's 1995 acquisition of Pharmacy
Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice President of
Management Information Systems assumed the management information systems'
functions for the Company and redirected the Company's systems development
initiatives, which caused a write-off of certain software and systems
development costs.
In 1997, the Company recorded an impairment loss of approximately
$5,155,000 related to the planned closure of certain pharmacies as a result of
the merger with Capstone (see Note 2). The impairment loss includes the
write-off of various fixed assets, such as leasehold improvements and furniture
and fixtures, which are specific to the pharmacies to be closed. Additionally,
the Company has capitalized software costs which have also been included in the
SFAS 121 loss. These assets have been written-down to their estimated fair
value, and management anticipates the disposal of these assets will occur during
the next year.
F-16
<PAGE> 102
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company was previously insured for general liability and workers'
compensation risks through the self-insurance programs of Beverly. Beverly
allocated expense to the Company based on the relative percentage of insurance
costs incurred by Beverly on behalf of the Company. Total insurance allocations
to the Company were approximately $1,409,000, $1,829,000 and $2,558,000 for the
years ended December 31, 1995, 1996 and 1997, respectively. Management believes
these charges represent a reasonable allocation of the costs incurred by Beverly
on behalf of the Company.
401(K) BENEFIT PLAN
The Company sponsors a supplemental retirement program established under
Section 401(k) of the Internal Revenue Code, as amended. Contributions by the
Company may be made to the plan subject to the discretion of the Board of
Directors. No Company contribution was made for the years ended December 31,
1995, 1996 and 1997.
REVENUE RECOGNITION
Revenues are recorded as products are shipped and services rendered. A
portion of the Company's sales are covered by various state and Federal
reimbursement programs, which are subject to review and/or audit. Reimbursement
programs are also subject to change from time to time. Revenues are reported at
the estimated net amounts to be received from individuals, third party payors,
nursing facilities and others. Approximately 41%, 37% and 37% of the Company's
operating revenues for 1995, 1996 and 1997, respectively, were derived from
funds under federal and state medical assistance programs.
The Company also recognizes revenue under certain capitated arrangements.
However, these revenues are insignificant and any losses related to these
contracts are accrued as they are incurred.
CONCENTRATION OF CREDIT RISK
A significant portion of the Company's revenue and related receivables are
reimbursed from two primary payors, Medicaid and Medicare. Collectively,
Medicaid and Medicare accounted for 43% and 34%, respectively, of accounts
receivable reported on the consolidated balance sheets at December 31, 1996 and
1997.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for stock option grants. See
Note 8 for the pro forma effects on the Company's reported net income assuming
the election had been made to recognize compensation expense on stock-based
awards in accordance with SFAS No. 123.
INCOME TAXES
The Company files a consolidated Federal income tax return. Income tax
expense is based on reported earnings before income taxes. Deferred taxes on
income are provided for those items for which the reporting period and methods
used for income tax purposes differ from those used for financial statement
purposes, using the asset and liability method. Deferred income taxes are
recognized for the tax consequences of
F-17
<PAGE> 103
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"temporary differences" by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.
PRO FORMA EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings Per Share."
It replaces the presentation of primary and fully-diluted EPS with a
presentation of basic and diluted EPS and requires a reconciliation of the
numerator and denominator of the basic EPS calculation to the numerator and
denominator of the diluted EPS calculation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to primary EPS pursuant to APB Opinion No. 15. SFAS No. 128
was effective for fiscal years ending after December 15, 1997.
As a result of the significant change in the Company's capital structure
during the year, caused by the Merger, the Company has reported pro forma
earnings per share. Pro forma earnings per share is computed using the weighted
average number of shares of common stock outstanding giving effect to the
issuance of 50,000,000 shares in connection with the Merger for all of 1997.
F-18
<PAGE> 104
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
1997 Acquisitions
In January 1997, the Company acquired Interstate Pharmacy Corp., which
provides institutional pharmacy services from twelve pharmacies throughout the
state of Hawaii. The purchase price was $20,138,000, and goodwill at the date of
acquisition was $12,000,000.
In March 1997, the Company acquired the assets of Intramed, Inc. and
Black-Hills Pharmaceutical Services, Inc., providers of institutional pharmacy
and infusion therapy services in the state of South Dakota. The total purchase
price was $2,429,000, and goodwill at the date of acquisition was $1,669,000.
In April 1997, the Company acquired the assets of River City Pharmacy,
Inc., an Indiana based Institutional pharmacy. The purchase price was
$5,407,000, and goodwill at the date of acquisition was $4,450,000.
On December 3, 1997, Capstone issued 50,000,000 shares of its common stock
and paid $15,732,000 to acquire all of the outstanding stock of Beverly
Enterprises, Inc. Immediately prior to this transaction, Beverly had completed a
distribution of its long-term care business to New Beverly Holdings, Inc. (New
Beverly) leaving only its institutional pharmacy business, PCA, to be acquired
by Capstone. Because Beverly's shareholders own a majority of the surviving
corporation, for accounting purposes, the transaction has been treated as an
acquisition of Capstone by PCA.
In accordance with EITF 95-19, the purchase price has been determined using
the fair value of Capstone's common stock over a reasonable period of time
before and after the transaction was agreed to and announced. In a reverse
merger transaction, the shares of Capstone at the date of close represent the
consideration for the merger, plus the fair value of Capstone's outstanding
options and warrants, calculated using the Black-Scholes option pricing model.
After the merger was consummated, the historical financial statements of the
Company became those of PCA.
In December 1997, the Company acquired Hollins Manor I, LLC, which provides
institutional pharmacy services to long-term care facilities in the state of
Virginia. The purchase price was $7,700,000 and goodwill at the date of
acquisition was $7,398,000.
In December 1997, the Company purchased Family Center Pharmacy, Inc., a
Pittsburgh, Pennsylvania based provider of institutional pharmacy services doing
business as Medical Arts Pharmacy. The purchase price was $9,216,000. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Goodwill at the date of acquisition was
$8,384,000.
Also, in December 1997, the Company purchased Resident Care Pharmacy, Inc.
(Resident Care), a North Carolina based institutional pharmacy. The total
consideration was $12,967,000, including $9,100,000 representing the issuance of
811,341 shares of the Company's common stock, a non-compete note payable of
$1,444,000, assumed debt of $1,592,000 and a cash payment of $831,000. Goodwill
at the date of acquisition was $13,610,000.
1996 Acquisitions
During 1996, the Company acquired three institutional pharmacies for cash
of approximately $10,835,000 and disposed of one institutional pharmacy for cash
proceeds of approximately $2,152,000.
1995 Acquisitions
In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI")
in exchange for approximately 12,361,000 shares of Beverly common stock, plus
closing and related costs, for a total purchase price of approximately
$162,900,000. As a leading independent nationwide provider of medical cost
F-19
<PAGE> 105
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
containment and managed care services to workers' compensation payors and
claimants, PMSI's services included pharmacy benefit management through both a
national retail pharmacy network and home delivery of prescription drugs,
medical supplies and medical equipment (the "mail service business") as well as
a workers' compensation preferred provider organization (the "PPO business").
The mail service business was contributed by Beverly to the Company in June 1995
and has been operated by the Company since that time. The PPO business was
transferred to another of Beverly's wholly-owned subsidiaries. Beverly's
acquisition of PMSI resulted in additional goodwill to Beverly of approximately
$139,600,000. Based on the fair value of the mail service net assets, Beverly
allocated approximately $97,700,000 of the PMSI purchase price to the Company,
including goodwill of approximately $83,800,000. The Company also purchased one
institutional pharmacy during 1995 for cash of approximately $2,492,000.
All business acquisitions described above have been accounted for by the
purchase method of accounting with the assets and liabilities of the acquirees
recorded at their estimated fair market values at the date of acquisition. The
operations of the acquirees, since the dates of acquisition, are included in the
accompanying consolidated statements of income. Goodwill for these business
acquisitions is being amortized over forty years.
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1996 and 1997, are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions described above
and previous acquisitions of Capstone had been made as of January 1, 1996 (in
thousands, except per share data).
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net sales................................................... $ 883,619 $1,019,349
Income before taxes, interest, depreciation and
amortization.............................................. 86,522 126,213
Income before extraordinary items........................... $ 20,098 $ 35,524
========== ==========
Diluted income per share.................................... $ 0.24 $ 0.42
========== ==========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) the per share effect of stock issued
as part of the acquisitions, and (4) the related income tax effects and exclude
certain nonrecurring and restructuring costs. The pro forma results do not
reflect any anticipated operating efficiencies or synergies and are not
necessarily indicative of actual results which might have occurred had the
operations and management teams of the Company and the acquired companies been
combined in prior years.
F-20
<PAGE> 106
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1996 and 1997, are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment........................... $ 32,691 $ 41,409
Software and computer equipment............................. 21,225 25,457
Leasehold improvements...................................... 11,460 13,022
Construction in progress.................................... 345 1,376
-------- --------
65,721 81,264
Accumulated depreciation and amortization................... (28,937) (34,665)
-------- --------
Equipment and leasehold improvements, net................... $ 36,784 $ 46,599
======== ========
</TABLE>
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $4,534,000, $6,737,000 and $9,452,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
To finance the repayment of the intercompany debt between Beverly and the
Company as well as provide capital for future acquisitions, Capstone
extinguished its outstanding debt under its credit facility with five commercial
banks just prior to the merger and replaced it with a new $550,000,000 credit
agreement with several commercial banks. Extinguishment of the existing debt,
including the payoff of the outstanding balance of $113,700,000 and the
write-off of $1,074,000 in deferred financing costs was reflected in the
purchase price allocation. The Company incurred approximately $840,000 in debt
acquisition costs associated with the new credit agreement, which are to be
amortized over the life of the debt. The credit agreement allows PharMerica to
obtain loans at any time and matures on December 3, 2002.
Under the new credit agreement, the Company has the option to borrow under
an alternate base rate or a Eurodollar loan rate. Interest rates on the
alternate base rate loans are at the greatest of (a) the prime rate, (b) the
base certificate of deposit rate plus 1% or (c) the federal funds effective rate
on the date of the loan. Interest on the alternate base rate loans is due
quarterly in arrears. Interest rates on the Eurodollar loans are calculated
using the adjusted LIBOR rate for the interest period in effect, plus the
applicable rate. The adjusted LIBOR rate is the LIBOR rate for such interest
period multiplied by the statutory reserve rate. The applicable rate and the
statutory reserve rate are defined in the credit agreement. Interest on the
Eurodollar loans is due on the last day of the interest period applicable to the
borrowing. As of December 31, 1997, the Company's outstanding borrowings total
$424,524,000 under a Eurodollar loan at an effective interest rate, including
the amortization of deferred financing costs of 7.3%. The weighted average and
the highest outstanding balance under this agreement for the period outstanding
through December 31, 1997 was $416,776,000 and $424,524,000, respectively.
The new credit agreement stipulates certain covenants relating to various
financial ratios, including a leverage ratio and a minimum net worth
requirement, among other restrictive covenants.
In connection with the acquisition of Capstone, the Company assumed all the
long-term obligations that had previously existed under Capstone.
On November 1, 1995, Capstone elected not to make a scheduled installment
payment on a note payable to former stockholders of a subsidiary in the
aggregate principal amount of $1,000,000, due to a dispute with these former
stockholders. This amount is recorded as current portion of long-term debt in
the accompanying consolidated balance sheets as of December 31, 1997.
F-21
<PAGE> 107
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt at December 31, 1996 and 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Borrowings under a $550,000 credit agreement with a group of
several commercial banks, interest at varying rates based
on the type of borrowing, secured by substantially all
assets of the Company, due at scheduled maturity in
December 2002............................................. $ -- $424,524
Unsecured notes payable to former stockholders of a previous
Capstone acquiree, interest at 6%, currently payable...... -- 1,000
Unsecured note payable to former owners of a previous
Capstone acquiree, non-interest bearing, payable in
monthly installment of $20 beginning in March 1998,
remaining balance due January 1999........................ -- 1,100
Unsecured note payable to former stockholders of Hollins
Manor, non-interest bearing with $1,000 installments due
and payable on June 3, 1998 and December 7, 1998.......... 2,000
Assumed note payable from Resident Care acquisition, due
currently................................................. -- 1,592
Non-Compete payable to eight individuals, payable in
installments ranging from $25 to $128, through 2001....... -- 1,644
Capital lease obligations (Note 7).......................... 2,262 3,224
Other....................................................... 40 338
-------- --------
2,302 435,422
Less: Current portion....................................... 968 7,533
-------- --------
Long-term portion........................................... $ 1,334 $427,889
======== ========
</TABLE>
Future maturities of long-term debt, exclusive of capital lease obligations
at December 31, 1997, follow (in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 5,975
1999........................................................ 1,599
2000........................................................ 50
2001........................................................ 50
2002........................................................ 424,524
--------
$432,198
========
</TABLE>
Interest expense for the years ended December 31, 1995, 1996 and 1997, was
approximately $35,000, $11,000 and $2,754,000, respectively. These amounts
include amortization of deferred financing costs of approximately $0, $0 and
$113,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Based on the borrowing rates currently available to the Company, the fair
value of long-term debt, exclusive of capital lease obligations, as of December
31, 1997, is not materially different than the recorded value.
5. RESTRUCTURING CHARGES
During December 1997, in connection with the merger with Capstone, the
Company adopted a plan to restructure its long-term care pharmacy operations. In
connection with this plan, management intends to close 6 former PCA pharmacies,
14 former Capstone pharmacies, and will relocate Capstone's corporate
headquarters from Irving, Texas to Tampa, Florida. Management anticipates that
the restructuring activities in connection with the merger will be substantially
completed within the next fiscal year.
F-22
<PAGE> 108
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recorded restructuring costs of $5,780,000 related to the
closure of the former PCA pharmacies, consisting of $3,621,000 of severance
covering approximately 180 pharmacy employees, $739,000 of lease termination
costs and $1,420,000 of other exit costs.
The Company has also assumed liabilities, included in the Capstone purchase
price allocation, of $9,583,000 related to the closure of the former Capstone
pharmacies and the relocation of Capstone's former headquarters, consisting of
$5,036,000 of severance covering approximately 260 employees, $3,059,000 of
lease termination costs and $1,488,000 of relocation costs. The terminated
positions were comprised primarily of pharmacy employees and several regional
and corporate positions.
As of December 31, 1997, approximately $200,000 has been charged against
these restructuring accruals.
In connection with the Capstone acquisition, the Company assumed
approximately $3,886,000 of liabilities from previous Capstone restructurings
consisting primarily of remaining lease termination costs.
6. INCOME TAXES
Prior to the merger with Capstone and the spin-off of the Beverly nursing
home business, the Company was included in the consolidated federal income tax
returns of Beverly. The tax provisions for Beverly subsidiaries, including the
Company, were determined on a separate company basis. The resultant income taxes
payable to, or tax benefit receivable from, Beverly flowed through the "Due to
Former Parent" account. The Company's provision for income taxes consists of the
following for the years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Federal:
Current............................................... $5,667 $ 8,649 $12,963
Deferred.............................................. (748) 3,423 2,668
State:
Current............................................... 1,219 1,860 2,788
Deferred.............................................. (161) 736 573
------ ------- -------
$5,977 $14,668 $18,992
====== ======= =======
</TABLE>
The actual income tax expense for the years ended December 31, 1995, 1996
and 1997, is different from the amounts computed by applying the statutory
Federal income tax rates to income before taxes. The reconciliation of these
differences follow:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1995 1996 1997
------- ------ --------
<S> <C> <C> <C>
Tax benefit at statutory rate............................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax effect........ 6.5 4.8 4.6
Tax effect of permanent differences......................... 14.4 1.6 2.0
Other items, net............................................ 0.7 0.6 --
----- ---- ------
Provision for income taxes.................................. 56.6% 42.0% 41.6%
===== ==== ======
</TABLE>
F-23
<PAGE> 109
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of cumulative temporary differences at December 31, 1996 and
1997 follow (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Current Deferred Taxes:
Accounts receivable allowances............................ $ 5,014 $11,568
Inventory................................................. 363 686
Accrued restructuring charges............................. -- 1,537
Other accrued liabilities................................. 212 21,569
------- -------
Net current deferred tax asset.............................. $ 5,589 $35,360
======= =======
Non-Current Deferred Taxes:
Goodwill.................................................. $ -- $14,784
Accumulated depreciation and other........................ 9,569 6,432
------- -------
Net non-current deferred tax liability...................... $ 9,569 $21,216
======= =======
</TABLE>
As of December 31, 1996, due to former parent includes cumulative amounts
for current and deferred taxes payable of $56,700,000 and $3,980,000,
respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and warehouse space, automobiles and equipment.
Rental expense under these leases aggregated approximately $13,005,000,
$12,142,000 and $13,642,000 for the years ended December 31, 1995 and 1996, and
1997, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1998..................................................... $1,787 $ 9,676
1999..................................................... 1,145 5,112
2000..................................................... 425 3,206
2001..................................................... 224 2,153
2002..................................................... 33 1,306
2003 and thereafter...................................... -- 3,129
------ -------
Total minimum lease payments............................. 3,614 $24,582
=======
Less: amount representing interest....................... 390
------
Present value of net minimum lease payments.............. 3,224
Less: current portion.................................... 1,557
------
Long-term portion........................................ $1,667
======
</TABLE>
CONTINGENCIES
The Company is subject to various claims and litigation in the ordinary
course of its business. In the opinion of management and outside counsel, the
ultimate settlement of these claims and litigation will not have a material
adverse effect on the financial position or future operating results of the
Company.
As of December 31, 1997, the Company has recorded $4,880,000 of accrued
liabilities related to certain loss contingencies that are both probable and
reasonably estimable.
F-24
<PAGE> 110
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has eight stock option plans and an employee stock purchase
plan covering up to 12,385,000 shares of the Company's common stock, pursuant to
which officers, directors and employees of the Company are eligible to receive
either incentive or non-qualified options. Stock options generally expire five
or ten years from the date of grant. The exercise price of an incentive stock
option is equal to the fair market value of the Company's common shares on the
date such option was granted. The exercise price of non-qualified stock options
may be less than the fair market value on the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its fixed option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
pro forma earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Net income:
As reported.......................................... $4,586 $20,287 $26,697
Pro forma............................................ 4,577 20,019 25,083
Pro forma earnings per share:
As reported.......................................... 0.50
Pro forma............................................ 0.47
</TABLE>
A summary of option transactions during the years ended December 31, 1995,
1996 and 1997 follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1996 1997
-------------------------- ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year....... 89,000 $6.41 92,000 $6.26 753,000 $7.99
Granted................... 3,000 1.03 661,000 8.23 5,207,000 8.68
--------- ----- ------- ----- --------- -----
Options outstanding, end
of year................. 92,000 $6.26 753,000 $7.99 5,960,000 $8.60
Shares available for
future grant............ 3,952,500
Options exercisable at end
of year................. 92,000 $6.26 753,000 $7.99 3,818,000 $8.06
Weighted average fair
value of options
granted................. $8.70 $4.56 $5.34
===== ===== =====
</TABLE>
F-25
<PAGE> 111
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following key assumptions were used
in the Black-Scholes option pricing model:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- --------
<S> <C> <C> <C>
Risk-free interest rate............................. 6.0% 6.5% 6.5%
Expected life....................................... 10 years 10 years 10 years
Volatility.......................................... 35% 34% 34%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ---------------------------------
------------------------------------------------------- NUMBER
NUMBER EXERCISABLE AT
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.03 - $ 5.00...... 895,000 6.9 years $ 4.10 870,000 $ 4.09
$ 5.00 - $ 7.50...... 293,000 7.1 years 6.46 286,000 6.48
$ 7.50 -$10.00....... 3,804,000 9.7 years 9.33 1,916,000 9.14
$10.00 - $11.50...... 968,000 8.8 years 10.52 746,000 10.53
--------- ---------
$ 1.03 -$11.50....... 5,960,000 9.0 years $ 8.60 3,818,000 $ 8.06
========= =========
</TABLE>
WARRANTS
As part of the Capstone acquisition, warrants for 1,665,293 shares were
assumed and are outstanding at December 31, 1997. The weighted average exercise
price of these warrants is $5.93.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS No. 107) requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments. The carrying amount of cash
and cash equivalents reported in the consolidated balance sheets approximates
its fair value. Estimated fair value for other current assets and current
liabilities are stated at the carrying amount because of the short maturity of
these instruments. The fair value of long-term obligations was estimated using
discounted cash flow analyses based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.
F-26
<PAGE> 112
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash & cash equivalents............. $ 7,575 $ 7,575 $ 34,215 $ 34,215
Other current assets................ 116,821 116,821 263,298 263,298
Current portion of long-debt debt... 968 956 7,533 7,533
Other current liabilities........... 31,294 31,294 109,483 109,483
Long-term debt, net of current
portion........................... 1,334 1,318 427,889 427,889
</TABLE>
10. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its pharmaceutical
purchases. Purchases of inventory under primary supplier relationships during
the years ended December 31, 1995, 1996 and 1997, were approximately 90%, 92%
and 94% of total inventory purchases, respectively.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Trade accounts payable...................................... $ 18,017 $ 46,386
Accrued salaries, payroll taxes and benefits................ 6,656 12,109
Other accrued expenses...................................... 6,621 50,988
-------- --------
Total............................................. $ 31,294 $109,483
======== ========
</TABLE>
12. RELATED PARTIES
The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $74,021,000, $82,083,000, and $91,228,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Prior to the merger with Capstone, Beverly provided certain administrative
services to the Company. These services included, among others, cash management,
finance, legal, tax, financial reporting, executive management, payroll and
payables processing and employee benefit plans maintenance. The responsibility
for certain of these services, including finance, tax and payables processing
was transferred to the Company in mid-1996 as part of a consolidation and
reorganization of the Company's accounting and related functions. Substantially
all cash received by the Company was deposited daily and wired to Beverly's
corporate cash account. In turn, all of the Company's operating expenses,
capital expenditures and other cash needs were paid by Beverly, and charged back
to the Company along with a management fee for handling such services. Fees for
these services amounted to approximately $2,844,000, $1,820,000 and $3,186,000
for the years ended December 31, 1995, 1996 and 1997, respectively. See Note 1
for a description of the charges for insurance. The Company believes that the
charges for services provided by Beverly to the Company are a reasonable
allocation of the costs incurred by Beverly on behalf of the Company in
providing these services; however, such costs are not necessarily indicative of
the costs that would have been incurred if the Company operated as a stand-alone
entity.
F-27
<PAGE> 113
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net result of all intercompany transactions between the Company and
Beverly are recorded in the "Due to Former Parent" account in the accompanying
consolidated balance sheets. As of December 31, 1996 and 1997, the Company's
intercompany balances were $312,395,000 and $0, respectively. The average of
such intercompany balances was approximately $272,900,000, $315,500,000 and
$327,172,000, for the years ended December 31, 1995, 1996 and 1997,
respectively. There were no required repayment terms for this account nor did
such amounts bear interest. As part of the merger with Capstone, Beverly
accepted a payment of $275,000,000 in satisfaction of the Company's intercompany
payable. The difference between the amount of this payment and the intercompany
payable of $15,076,000 (net of certain obligations assumed by the Company), at
the date of the merger has been recorded as a capital contribution by Beverly.
The net increase in the Company's intercompany balance for the year ended
December 31, 1995 was due to the following: approximately $100,200,000 due to
the pushdown of the PMSI acquisition and the acquisition of one institutional
pharmacy; approximately $6,000,000 due to the allocation of current and deferred
income taxes; and approximately $2,800,000 due to fees charged by Beverly for
certain administrative and management services provided to the Company. These
increases in the Company's intercompany balance were partially offset by
approximately $15,400,000 due primarily to net cash transfers from the Company
to Beverly and fees charged to Beverly's nursing facilities for products and
services provided by the Company.
The net decrease in the Company's intercompany balance for the year ended
December 31, 1996 was due to the following: approximately $31,300,000 due
primarily to net cash transfers from the Company to Beverly and fees charged to
Beverly's nursing facilities for products and services provided by the Company,
and approximately $2,200,000 due to the disposition of one institutional
pharmacy. These decreases in the Company's intercompany balance were partially
offset by approximately $10,800,000 due to the pushdown of the acquisition of
three institutional pharmacies; approximately $14,700,000 due to the allocation
of current and deferred income taxes; and approximately $1,800,000 due to fees
charged by Beverly for certain administrative and management services provided
to the Company.
As a result of Capstone's acquisition of Symphony Pharmacy Services, Inc.
("Symphony") in 1996, Symphony's former parent company, IHS, was a significant
Company stockholder. The Company provides institutional pharmacy services to a
significant number of long-term care facilities owned and managed by IHS
pursuant to a preferred provider agreement.
13. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. The
Statement requires that all items that are to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Statement establishes standards for the
way that public companies report information about operating segments in their
F-28
<PAGE> 114
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Operating
segments are components of the business about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. For the Company, this would result in reporting of regional
operating segments.
SFAS No. 131 will require the Company to report a measure of segment profit
or loss, certain specific revenue and expense items and segment assets. It
requires reconciliations of total segment revenues, profit, assets and other
amounts disclosed for segments to corresponding totals in the Company's
financial statements. SFAS No. 131 will also require the Company to report
information about the revenues derived from its products and services and about
major customers, regardless of whether that information is used in making
operating decisions.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. Comparative information is also to be provided for
earlier years.
14. SUBSEQUENT EVENTS
In January 1998, the Company acquired Express Pharmacy Services, Inc., a
Tampa, Florida mail-order pharmacy company. The purchase price was approximately
$22,000,000.
In January 1998, the Company acquired the stock of Goot's Goodies, Inc. and
Southwest Pharmacies, Inc. The purchase price was approximately $3,800,000.
F-29
<PAGE> 115
PHARMERICA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT ACQUISITIONS BALANCE
BEGINNING CHARGED TO WRITE-OFFS, AND AT END OF
DESCRIPTION OF YEAR OPERATIONS NET DISPOSITIONS OTHER YEAR
----------- ----------- ---------- ----------- ------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful
accounts....................... $ 11,561 $ 17,679 $(10,791) $ 459 $ -- $ 18,908*
=========== ========== ======== ========== ===== ==========
Year ended December 31, 1996:
Allowance for doubtful
accounts....................... $ 18,908 $ 13,500 $(17,675) $ (8) $ -- $ 14,725*
=========== ========== ======== ========== ===== ==========
Year ended December 31, 1997:
Allowance for doubtful
accounts....................... $ 14,725 $ 10,809 $(13,984) $ 11,178 $ -- $ 22,728*
=========== ========== ======== ========== ===== ==========
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
F-30
<PAGE> 116
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1997
1996 (UNAUDITED)
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,407 $ 15,340
Accounts receivable, net of allowance for doubtful
accounts of $5,778 as of December 31, 1996, and $6,960
as of September 30, 1997, respectively................. 50,504 73,811
Inventories............................................... 13,542 23,272
Prepaid expenses and other current assets................. 1,523 3,701
Deferred tax asset........................................ 5,408 831
-------- --------
Total Current Assets................................... 80,384 116,955
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net................... 10,469 13,200
OTHER ASSETS................................................ 1,370 1,432
GOODWILL, net of accumulated amortization of $4,074 as of
December 31, 1996, and $8,723 as of September 30, 1997,
respectively.............................................. 178,778 256,419
-------- --------
Total Assets...................................... $271,001 $388,006
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 18,337 $ 20,081
Current portion of long-term debt......................... 3,557 2,288
Current portion of non-compete agreements................. 200 200
Accrued restructuring charges............................. 2,108 1,482
-------- --------
Total Current Liabilities......................... 24,202 24,051
NON-COMPETE AGREEMENTS, net of current portion.............. 200 150
LONG-TERM DEBT, net of current portion...................... 39,166 111,339
RESTRUCTURING CHARGES, net of current portion............... 2,687 2,509
-------- --------
Total Liabilities................................. 66,255 138,049
======== ========
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000 shares authorized at
December 31, 1996, and September 30, 1997; 31,135
shares issued and 30,796 outstanding as of December 31,
1996, and 34,983 shares issued and 34,644 outstanding
as of September 30, 1997............................... 308 347
Capital in excess of par.................................. 213,594 252,618
Accumulated deficit....................................... (9,156) (3,008)
-------- --------
Total Stockholders' Equity........................ 204,746 249,957
-------- --------
Total Liabilities and Stockholders' Equity........ $271,001 $388,006
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-31
<PAGE> 117
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1997
-------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
NET SALES................................................... $90,162 $228,048
COST OF SALES............................................... 54,370 127,355
------- --------
Gross profit...................................... 35,792 100,693
------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 29,243 73,481
Depreciation and amortization............................. 2,651 7,547
Costs relating to pharmacy closure........................ 246 --
Restructuring charges..................................... 2,825 --
Merger related costs...................................... -- 3,525
------- --------
Total operating expenses.......................... 34,965 84,553
------- --------
Operating income (loss)........................... 827 16,140
------- --------
NONOPERATING EXPENSE:
Interest expense, net..................................... 947 4,577
Acquisition financing fees and expenses................... 4,574 --
------- --------
Total nonoperating expense........................ 5,521 4,577
------- --------
Net income (loss) before income tax provision.......... (4,694) 11,563
INCOME TAX PROVISION........................................ (2,137) 5,415
------- --------
Net income (loss)...................................... $(2,557) $ 6,148
======= ========
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE:
Primary................................................... $ (0.16) $ 0.17
======= ========
Fully diluted............................................. $ (0.16) $ 0.17
======= ========
Weighted average number of common and common equivalent
shares outstanding:
Primary................................................... 16,298 36,576
======= ========
Fully diluted............................................. 16,298 37,055
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-32
<PAGE> 118
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------- CAPITAL IN ACCUMULATED
SHARES AMOUNT EXCESS OF PAR DEFICIT
------ ------ ------------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996............................ 30,796 $308 $213,594 $(9,156)
Common stock issued in connection with the exercise
of stock options................................. 503 6 2,698 --
Common stock issued in connection with
acquisitions..................................... 2,709 27 29,973 --
Common stock issued in connection with the
redemption of Series B warrants.................. 636 6 6,353 --
Net income for the nine months ended September 30,
1997............................................. -- -- -- 6,148
------ ---- -------- -------
BALANCE, September 30, 1997........................... 34,644 $347 $252,618 $(3,008)
====== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-33
<PAGE> 119
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (2,557) $ 6,148
Adjustments to reconcile net income (loss) to net cash
flows
from operating activities
Depreciation and amortization.......................... 2,651 7,547
Change in assets and liabilities, net of effects from
Acquisition/disposal of businesses:
Accounts receivable............................... (6,480) (14,133)
Inventories....................................... (650) (5,101)
Prepaid expenses and other current assets......... (319) (1,887)
Deferred tax asset................................ (1,812) 4,577
Other assets...................................... 432 (52)
Accounts payable and accrued expenses............. (3,612) (13,537)
Accrued restructuring charges..................... 2,271 (804)
-------- ---------
Net cash flows from operating activities.......... (10,076) (17,242)
-------- ---------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.......... (1,339) (3,663)
Acquisitions, net of cash acquired........................ (150,737) (51,553)
Repayments advances to affiliates......................... 2,243 --
-------- ---------
Net cash flows from investing activities.......... (149,833) (55,216)
-------- ---------
Cash flows from financing activities:
Net proceeds from commercial bank borrowings.............. 27,355 71,500
Net proceeds from acquisition financing................... 100,000 --
Net repayments from acquisition financing................. (100,000) --
Repayment of subsidiary pre-acquisition indebtedness...... (1,800) --
Proceeds from exercise of stock options................... -- 2,704
Proceeds from issuance of common stock.................... 144,929 6,359
Repayment of long-term debt and other long-term
obligations, net....................................... (1,206) (2,172)
-------- ---------
Net cash flows from financing activities.......... 169,278 78,391
-------- ---------
Net increase in cash and cash equivalents................... 9,369 5,933
Cash and cash equivalents, beginning of period.............. 2,763 9,407
-------- ---------
Cash and cash equivalents, end of period.................... $ 12,132 $ 15,340
======== =========
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest............................................... $ 2,665 $ 3,767
======== =========
Taxes.................................................. $ 313 $ 1,474
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE> 120
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PART 1: FINANCIAL INFORMATION
ITEM 1.
1. ORGANIZATION AND BUSINESS
Capstone Pharmacy Services, Inc., a Delaware corporation, (together with
its wholly-owned subsidiaries, the "Company") is principally engaged in the
business of providing institutional pharmacy services to long-term care
facilities, correctional institutions, hospitals and health maintenance
organizations throughout the United States.
2. EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of the
Company's common and common equivalent shares outstanding for the nine months
ended September 30, 1996 and 1997. The amount of common stock equivalents
outstanding was computed using the treasury stock method.
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 No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to primary EPS pursuant to APB
Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require restatement
of prior years' EPS. When adopted for the year ending December 31, 1997, the pro
forma EPS that would have been reported for the nine months periods ended
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1997
------ -----
<S> <C> <C>
Proforma Earnings per share:
Basic..................................................... $(0.16) $0.18
====== =====
Diluted................................................... $(0.16) $0.17
====== =====
</TABLE>
3. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of the Company for
the nine months ended September 30, 1996 and 1997, included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited interim consolidated financial statements reflect all
adjustments necessary to present fairly the financial position of the Company at
September 30, 1997, and the results of its operations and cash flows for the
nine months ended September 30, 1996 and 1997. Certain reclassifications
have been made to the prior period financial statements to conform with the
current period presentation.
The results of operations for the nine months ended September 30, 1996 and
1997, are not necessarily indicative of results to be expected for the full
year. These interim condensed consolidated financial statements should be read
in conjunction with the audited 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
F-35
<PAGE> 121
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dated December 31, 1996. The balance sheet at December 31, 1996, has been
derived from the audited financial statements at that date.
4. ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts
& Things, Inc. ("Geri-Care"), which provides institutional pharmacy services to
long-term care facilities in the New York metropolitan area. The purchase price
was approximately $6,000, payable $1,320 in cash and promissory notes, with the
remainder representing 669 shares of the Company's common stock. The agreement
also includes an additional 338 shares of the Company's common stock held in
escrow as a contingent incentive payment for certain new business to be
generated through 1998 by the selling shareholders of Geri-Care. Total goodwill
at the date of acquisition was $6,259.
In February 1996, the Company purchased IMD Corporation ("IMD") which
provides institutional pharmacy services to long-term care facilities in the
Chicago metropolitan area. The total purchase price was $15,882. Total goodwill
at the date of acquisition was $13,146.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned
subsidiary MediDyne Corporation (collectively, "MediDyne"), a provider of
Medicare Part B services, which consist of enteral nutrition and urologic
supplies, as well as counseling and assistance with regulatory compliance in
connection with such services. The total purchase price was $7,500. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Total goodwill at the date of acquisition was
$7,667.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000, including
$25,000 representing the issuance of 2,112 shares of the Company's common stock.
Total goodwill at the date of acquisition was $131,303.
In October 1996, the Company acquired the institutional pharmacy business
of Happy Harry's, Inc. a Delaware-based retail drug store operator. The total
purchase price was $3,695. Total goodwill at the date of acquisition was $2,407.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839. Total goodwill at the
date of acquisition was $4,068.
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1997
In January 1997, the Company acquired Clinical Care-SNF, Inc., Portaro
Pharmacies, Inc. and Alger Health Services. These three acquisitions expand the
Company's presence in the state of California and represent institutional
revenues of approximately $15,000, $15,000 and $8,500, respectively. The
purchase price for Clinical Care-SNF, Inc. was $20,000, payable $5,000 in cash
and the remainder representing 1,354 shares of the Company's common stock. The
purchase price for Portaro Pharmacies, Inc. was $20,000, payable $5,000 in cash
and the remainder representing 1,354 shares of the Company's common stock. The
purchase price for Alger Health Services was $4,200. Total goodwill at the date
of acquisition for these acquisitions amounted to $50,162.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania, institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200 and includes an earn-out provision
based upon future adjusted earnings of the Company after certain conditions
F-36
<PAGE> 122
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are met. Payments upon the satisfaction of the earn-out provision will be
recorded as an adjustment to goodwill. Total goodwill at the date of acquisition
was $4,123.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based
provider of institutional pharmacy services. The purchase price was
approximately $8,500. Total goodwill at the date of acquisition was $7,826.
Effective March 1997, the Company acquired Macromed, a New York-based
provider of Medicare Part B services. The total purchase price was approximately
$2,800. Total goodwill at the date of acquisition approximated $2,900.
In April 1997, the Company acquired Willowood Service, Inc., a
Massachusetts-based provider of institutional pharmacy services. The total
purchase price was $2,880. Total goodwill at the date of acquisition was $2,913.
In May 1997, the Company acquired Care Health Systems, Inc., a
Pennsylvania-based provider of institutional pharmacy services doing business as
Care Apothecary. The purchase price was $2,200. Total goodwill at the date of
acquisition was $1,862.
In August 1997, the Company acquired Med-Tec Pharmaceutical Services, Inc.,
a provider of institutional pharmacy services and Medicare Part B services, to
long term care facilities in the greater Philadelphia, Pennsylvania area. The
purchase price was $16,300. Total goodwill at the date of acquisition was
$14,342.
These acquisitions have been accounted for using the purchase method of
accounting, with the assets and liabilities of the acquired companies recorded
at their estimated fair market values at the dates of acquisition. Goodwill,
representing the excess of acquisition cost over the fair value of the net
assets acquired, is amortized over 20 to 40 years.
5. ACQUISITION PRO FORMA FINANCIAL STATEMENTS
The results of operations of acquired businesses are included in the
Company's consolidated results from the date of acquisition. Had the
acquisitions discussed in Note 4 occurred on January 1, 1996, management
estimates that the unaudited pro forma results of operations for the nine months
ended September 30, 1996 and 1997 would have been:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
NET SALES................................................... $213,195 $242,763
COST OF SALES............................................... 123,371 136,292
-------- --------
Gross profit.............................................. 89,824 106,471
OPERATING EXPENSES.......................................... 81,919 89,336
NON-OPERATING EXPENSES, net................................. 10,324 5,638
-------- --------
Income before income tax provision........................ (2,419) 11,997
INCOME TAX PROVISION........................................ (1,169) 5,383
-------- --------
Net income................................................ $ (1,250) $ 6,114
======== ========
Income per share.......................................... $ (0.04) $ 0.17
======== ========
</TABLE>
These pro forma operating results reflect certain adjustments, including
amortization of goodwill acquired, incremental interest expense and adjustments
for the provision of income taxes to reflect an effective tax rate of 36%. The
pro forma results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been consummated on January 1, 1996,
nor are they necessarily indicative of future results.
F-37
<PAGE> 123
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. MERGER WITH PHARMACY CORPORATION OF AMERICA
During April 1997, the company announced a proposed merger with Beverly
Enterprises, Inc. ("Beverly"), after it spins off all of its business other than
its institutional pharmacy unit, Pharmacy Corporation of America ("PCA"). In
conjunction with the transaction, the company will issue approximately 50,000
shares to existing Beverly stockholders and assume $275,000 in debt.
Additionally, the merger will be accounted for under the purchase method of
accounting and will be treated as a reverse merger/acquisition of the Company by
Beverly. Under this method of accounting, Beverly will be treated as the
acquiring entity and the assets and liabilities of the Company will be adjusted
to their fair values in accordance with the purchase method of accounting.
Additionally, all costs the Company incurs related to this merger will be
expensed as incurred. These costs are estimated to total approximately $10,000.
The amounts reported in the accompanying statements of income as merger related
costs represent investment banking, accounting and legal fees and other direct
costs incurred. Beverly and Capstone have set the date for the shareholder
meetings on November 20, 1997. The Company anticipates the merger to be
completed during the fourth quarter 1997. In conjunction with the merger the
Company will change its name to PharMerica, Inc.
7. CREDIT FACILITY
The Company maintains a Revolving Credit Facility with a syndicate of five
commercial banks under which borrowings of up to $125,000 are available.
Under the credit facility, the Company has the option to borrow under base
rate and eurodollar rate revolving loans, swing line loans and letters of
credit. Interest rates on base rate and swing line loans are at the higher of
the prime rate or 0.5% in excess of the federal funds effective rate, plus an
applicable margin based on the Company's leverage ratio at the time of
borrowing. The swing line loans are also adjusted for a commitment fee
percentage tied to the Company's leverage ratio. Interest on base rate and swing
line loans is due quarterly in arrears. Interest rates on eurodollar rate loans
are calculated at the eurodollar rate, plus an applicable margin based on the
Company's leverage ratio at the time of borrowing. Interest is due at the end of
the one, two or three-month interest period elected by the Company. If the
Company elects a nine-month eurodollar rate loan, interest is payable in arrears
at the end of the third and sixth month. Letter of credit fees are based on the
eurodollar loan margin, plus the greater of 0.25% of the maximum available to be
drawn for letters of credit, as defined in the agreement, or $500, and is to be
paid quarterly in arrears.
Scheduled reductions of the $125,000 maximum balance allowed under the
Revolving Credit Facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997........................................................ $ --
1998........................................................ 10,000
1999........................................................ 35,000
2000........................................................ 40,000
2001........................................................ 40,000
--------
$125,000
========
</TABLE>
The Revolving Credit Facility is secured by substantially all assets of the
Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions and sale of assets, as well as minimum
financial ratios. As of September 30, 1997, the Company is in compliance with
all debt covenants.
8. STOCKHOLDERS' EQUITY
The Company's Series A Warrants expired. Series A Warrants representing 643
of a total of 650 shares of common stock were exercised before expiring, at an
exercise price of $6.00 per share. During September 1997
F-38
<PAGE> 124
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
636 of the total 643 Series B Warrants were exercised at $10.00 per share and
the unexercised Series B Warrants expired.
9. RESTRUCTURING
During July 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations in Los
Angeles by consolidating two of its existing facilities into a new, more
centralized location. The Company has assumed liabilities, included in the
acquisition cost allocation, of approximately $1,600 for costs to involuntarily
terminate employees of Symphony and to close the pharmacy location. Included in
these liabilities are approximately $330 of severance costs related to the
termination of 79 employees, including pharmacists, technicians, IV nurses,
drivers and others. The remaining costs relate to the termination of lease
agreements.
During August 1996, the Company adopted a plan of restructuring to
consolidate its Aston, Pennsylvania and Baltimore, Maryland long-term care
pharmacies into one of its existing Mid-Atlantic pharmacies. The Company has
recorded restructuring costs of $450 for the year ended December 31, 1996 which
includes approximately $125 of employee severance costs with the remainder of
the costs for the termination of leases.
Also, during September 1996, the Company adopted a formal plan of
restructuring to close its Baltimore, Maryland corporate offices and
correctional pharmacy. The corporate offices were relocated to Irving, Texas and
the correctional pharmacy was relocated to another location in the Baltimore
area. The Company has recorded restructuring costs of $2,375 for the year ended
December 31, 1996, which primarily includes approximately $400 of employee
severance costs and approximately $1,800 of lease termination costs with the
remainder due to losses on asset impairments and disposals of assets. The
restructuring plan includes the termination of 32 accounting and clerical
personnel.
10. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its purchases of
pharmaceuticals. In light of the financial and operating significance of
purchases, the Company routinely monitors the performance of its primary
supplier and negotiates settlements and future service levels based thereon.
There were no settlements paid and no significant commitments entered into for
both periods as a result of changes in vendors. Changes in future service levels
negotiated include, among others, method of delivery, frequency of orders and
bar coding ability and are non-financial in nature. The Company changed its
primary supplier in December 1995 and 1996.
11. SUBSEQUENT EVENTS
During October 1997, the Company acquired the assets of Sweetwater
Pharmacy, Inc., a provider of institutional pharmacy services in the San Diego,
California area. Sweetwater has annualized revenues of approximately $4,500 and
services over 1400 beds, 560 of which are serviced through mail order. The
purchase price was approximately $1,200.
F-39
<PAGE> 125
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Capstone Pharmacy Services, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Capstone
Pharmacy Services, Inc. (a Delaware corporation and formerly Choice Drug
Systems, Inc.) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1996, the ten months ended
December 31, 1995 and the year ended February 28, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capstone
Pharmacy Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations, changes in stockholders' equity and their cash
flows for the year ended December 31, 1996, the ten months ended December 31,
1995 and the year ended February 28, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statement, and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Baltimore, Maryland
March 14, 1997 (except with respect
to the matters discussed in Note 18,
as to which the date is April 16,
1997)
F-40
<PAGE> 126
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 2,763,416 $ 9,407,354
Accounts receivable, net of allowance for doubtful
accounts of $1,294,000 and $5,778,000.................. 12,646,087 50,503,619
Inventories............................................... 5,023,008 13,541,511
Refundable income taxes................................... 828,628 --
Prepaid expenses and other current assets................. 688,549 1,523,194
Deferred tax asset........................................ -- 5,408,381
------------ ------------
Total Current Assets.............................. 21,949,688 80,384,059
Equipment and leasehold improvements, net................... 2,692,298 10,468,963
Goodwill, net of accumulated amortization of $1,554,000 and
$4,074,000................................................ 14,580,564 178,778,162
Advances to affiliates...................................... 2,242,841 --
Other assets................................................ 665,204 1,369,982
------------ ------------
Total Assets...................................... $ 42,130,595 $271,001,166
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 6,137,272 $ 18,337,485
Current portion of long-term debt......................... 4,222,608 3,557,199
Current portion of non-compete agreements................. 200,000 200,000
Accrued restructuring charges............................. 575,349 2,107,846
------------ ------------
Total Current Liabilities......................... 11,135,229 24,202,530
Deferred income taxes....................................... 542,787 --
Non-compete agreements, net of current portion.............. 400,000 200,000
Long-term debt, net of current portion...................... 2,692,202 39,165,739
Restructuring charges, net of current portion............... 520,640 2,687,068
------------ ------------
Total Liabilities................................. 15,290,858 66,255,337
============ ============
Commitments and Contingencies:
Stockholders' Equity
Common stock $.01 par value; 30,000,000 shares authorized
at December 31, 1995 and 50,000,000 shares authorized
at December 31, 1996; 13,610,810 issued and outstanding
as of December 31, 1995 and 31,134,221 shares issued
and 30,795,769 outstanding as of December 31, 1996..... 136,108 307,957
Additional paid-in capital................................ 38,985,006 213,593,829
Accumulated deficit....................................... (12,281,377) (9,155,957)
------------ ------------
Total Stockholders' Equity........................ 26,839,737 204,745,829
------------ ------------
Total Liabilities and Stockholders' Equity........ $ 42,130,595 $271,001,166
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-41
<PAGE> 127
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1995, THE TEN MONTHS
ENDED DECEMBER 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................................. $ 43,607,946 $48,841,443 $144,397,836
Cost of sales.......................................... 27,969,532 30,654,118 85,531,996
------------ ----------- ------------
Gross profit................................. 15,638,414 18,187,325 58,865,840
------------ ----------- ------------
Operating expenses:
Selling, general and administrative expenses......... 18,637,213 17,468,930 46,591,975
Depreciation and amortization........................ 988,974 1,102,892 4,633,787
Costs in connection with litigation.................. 4,389,163 -- --
Costs relating to pharmacy closure................... -- -- 246,446
Restructuring charges................................ 2,069,432 240,000 2,825,000
------------ ----------- ------------
Total operating expenses..................... 26,084,782 18,811,822 54,297,208
------------ ----------- ------------
Operating income (loss)...................... (10,446,368) (624,497) 4,568,632
------------ ----------- ------------
Non-operating expense (income):
Interest expense, net................................ 905,404 677,009 1,899,784
Acquisition financing fees and expenses.............. -- -- 4,573,530
Other income, net.................................... (104,076) (431,900) (149,206)
------------ ----------- ------------
Total non-operating expense (income), net.... 801,328 245,109 6,324,108
------------ ----------- ------------
Loss from continuing operations before income taxes,
discontinued operations and extraordinary items... (11,247,696) (869,606) (1,755,476)
Benefit for income taxes............................... (466,214) (225,082) (5,120,857)
------------ ----------- ------------
Income (loss) from continuing operations before
discontinued operations and extraordinary items... (10,781,482) (644,524) 3,365,381
Discontinued operations:
Gain (loss) from operations of discontinued business
segments.......................................... (135,430) 18,667 --
Gain (loss) on disposal of business segments, net.... (503,067) 564,844 --
------------ ----------- ------------
Net income (loss) before extraordinary items......... (11,419,979) (61,013) 3,365,381
Extraordinary items:
Discount on repayment of vendor debt................... 283,364
Loss on extinguishment of debt, net of tax benefit of
$123,616............................................. -- -- (239,961)
------------ ----------- ------------
Net income (loss)............................ $(11,419,979) $ 222,351 $ 3,125,420
============ =========== ============
Earnings (loss) per common and common equivalent share:
Primary Continuing operations.......................... $ (1.67) $ (0.06) $ 0.15
Discontinued operations.............................. (0.10) 0.05 --
Extraordinary items.................................. -- 0.03 (0.01)
------------ ----------- ------------
Net income (loss)............................ $ (1.77) $ 0.02 $ 0.14
============ =========== ============
Fully diluted Continuing operations.................... $ (1.67) $ (0.05) $ 0.14
Discontinued operations.............................. (0.10) 0.05 --
Extraordinary items.................................. -- 0.02 (0.01)
------------ ----------- ------------
Net income (loss)............................ $ (1.77) $ 0.02 $ 0.13
============ =========== ============
Weighted average common and common equivalent shares
outstanding:
Primary................................................ 6,458,891 11,337,997 22,916,764
============ =========== ============
Fully diluted.......................................... 6,458,891 12,398,401 23,214,767
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-42
<PAGE> 128
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995, THE TEN MONTHS ENDED
DECEMBER 31, 1995 AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, February 28, 1994................. 6,086,810 $ 60,868 $ 9,339,340 $ (1,083,749)
Issuance of common stock:
Stock issued to Counsel Corporation in
connection with stock purchase
agreement, net of related issuance
costs................................. 2,000,000 20,000 7,171,300 --
Stock issued in connection with exercise
of stock options...................... 34,000 340 89,410 --
Stock issued in connection with
settlement of litigation.............. -- -- 600,000 --
Net loss................................... -- -- -- (11,419,979)
---------- -------- ------------ ------------
Balance, February 28, 1995................. 8,120,810 81,208 17,200,050 (12,503,728)
Issuance of common stock:
Stock issued in connection with private
placements, net of related issuance
costs................................. 5,100,000 51,000 20,769,231 --
Stock issued in connection with the
acquisition of PremierPharmacy Inc.... 35,000 350 157,150 --
Stock issued in connection with exercise
of stock options...................... 355,000 3,550 858,575 --
Net income................................. -- -- -- 222,351
---------- -------- ------------ ------------
Balance, December 31, 1995................. 13,610,810 136,108 38,985,006 (12,281,377)
Issuance of common stock:
Stock issued in connection with private
placements, net of related issuance
costs................................. 3,147,490 31,475 33,350,784 --
Stock issued in connection with
settlement of litigation.............. 98,563 986 (986) --
Stock issued in connection with the
acquisitions of Symphony Pharmacy
Services, Inc., Geri-Care Systems,
Inc. and Scripts & Things, Inc........ 2,781,720 27,817 29,469,051 --
Stock issued in connection with
conversion of warrants................ 685,010 6,850 3,928,401 --
Stock issued in connection with public
offering.............................. 10,350,000 103,500 107,235,306 --
Stock issued in connection with exercise
of stock options, net................. 122,166 1,221 626,267 --
Net income................................. -- -- -- 3,125,420
---------- -------- ------------ ------------
Balance, December 31, 1996................. 30,795,759 $307,957 $213,593,829 $ (9,155,957)
========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-43
<PAGE> 129
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 28, 1995, THE TEN MONTHS ENDED
DECEMBER 31, 1995, AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(11,419,979) $ 222,351 $ 3,125,420
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization......................... 988,974 1,145,669 7,316,345
Gain on sale of pharmacies............................ -- -- (150,267)
(Gain) loss on disposal of business segments.......... 503,067 (564,844) --
Settlement of litigation.............................. 3,500,000 -- --
Change in assets and liabilities, net of effects of
acquisitions and dispositions:
Accounts receivable................................. 2,161,906 (2,644,719) (9,938,491)
Inventories......................................... 1,297,829 357,029 (109,400)
Refundable income taxes............................. (108,699) (238,168) 848,726
Prepaid expenses and other current assets........... 779,825 (51,870) (508,342)
Deferred tax asset.................................. -- -- (5,408,381)
Other assets........................................ (333,011) (133,629) (439,468)
Accounts payable and accrued expenses............... (145,061) (988,497) (3,734,342)
Accrued restructuring charges....................... 1,652,033 (691,200) 2,098,925
------------ ------------ -------------
Net cash flows from operating activities......... (1,123,116) (3,587,878) (6,899,275)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements........ (252,943) (1,076,976) (2,643,629)
Proceeds from sale of equipment and leasehold
improvements.......................................... -- -- 230,960
Acquisitions, net of cash acquired...................... -- (4,168,872) (158,702,741)
Proceeds from sale of business segment.................. -- 700,000 --
Advances to affiliates.................................. -- (2,242,841) --
Repayments of notes receivable.......................... 261,555 229,571 9,277
------------ ------------ -------------
Net cash flows from investing activities......... 8,612 (6,559,118) (161,106,133)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial bank borrowings............ -- 11,600,000 82,173,525
Net repayments of commercial bank borrowings............ -- (9,650,000) (46,922,852)
Net proceeds from acquisition bridge loan............... -- -- 100,000,000
Net repayments of acquisition bridge loan............... -- -- (100,000,000)
Payment of acquisition financing costs.................. -- -- (2,500,000)
Loan proceeds from affiliate............................ -- 1,268,250 --
Loan repayments to affiliate............................ -- (1,268,250) --
Non-compete agreement payments.......................... -- (200,000) (200,000)
Repayments of other long-term debt...................... (5,902,723) (10,884,850) (2,753,210)
Principal payments of capital lease obligations......... (160,183) (183,992) (196,224)
Proceeds from issuance of common stock, net............. 7,281,050 21,682,356 145,048,107
------------ ------------ -------------
Net cash flows from financing activities......... 1,218,144 12,363,514 174,649,346
------------ ------------ -------------
Net increase in cash and cash equivalents................. 103,640 2,216,518 6,643,938
CASH AND CASH EQUIVALENTS, beginning of period............ 443,258 546,898 2,763,416
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period.................. $ 546,898 $ 2,763,416 $ 9,407,354
============ ============ =============
Supplemental Disclosure of Cash Flows Information
Cash paid for:
Interest......................................... $ 887,691 $ 659,184 $ 3,678,922
============ ============ =============
Taxes............................................ $ 224,477 $ 144,149 $ 181,500
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-44
<PAGE> 130
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995, DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Capstone Pharmacy Services, Inc., (formerly known as Choice Drug Systems,
Inc.) together with its subsidiaries (the "Company"), a Delaware Corporation, is
principally engaged in the business of providing pharmaceuticals and related
services to long-term care facilities, correctional institutions, hospitals and
health maintenance organizations.
On August 28, 1995, the Company changed its state of incorporation from New
York to Delaware. Effective October 2, 1995, the Company changed its name from
Choice Drug Systems, Inc. to Capstone Pharmacy Services, Inc. Additionally,
effective December 31, 1995, the Company changed its year-end from February 28
to December 31.
As of December 31, 1996, Counsel Corporation, an Ontario corporation
("Counsel"), owned approximately 6,020,000 shares of the Company's common stock
together with warrants to purchase approximately 2,337,000 additional shares.
Counsel is a management and business development company operating primarily in
the United States health care industry.
Principles of Consolidation
The consolidated financial statements include the accounts of Capstone
Pharmacy Services, Inc. and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues,
expenses, gains and losses during the reporting periods. Actual results could
differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
period 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.
F-45
<PAGE> 131
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the following
estimated useful lives or with respect to leasehold improvements, over the term
of the lease if shorter.
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... 3-10 years
Automobiles and trucks...................................... 3-4 years
Leasehold improvements...................................... 5-10 years
Equipment under capital leases.............................. 3-5 years
</TABLE>
Equipment and leasehold improvements obtained in acquisitions of
subsidiaries are depreciated or amortized based on their remaining useful lives
at the acquisition date.
Goodwill
Costs in excess of fair values of businesses acquired are recorded as
goodwill and amortized using the straight-line method over periods of twenty to
forty years. Amortization of goodwill amounted to approximately $384,000,
$417,000, and $2,474,000 for the year ended February 28, 1995, the ten months
ended December 31, 1995 and the year ended December 31, 1996, respectively.
The Company periodically reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of the goodwill from expected future operating cash flows on an
undiscounted basis. In management's opinion, no such impairment existed as of
December 31, 1996 or 1995.
401(k) Benefit Plan
Effective May 22, 1995, employees of the Company may participate in a
supplemental retirement program established under Section 401(k) of the Internal
Revenue Code, as amended. Contributions by the Company may be made to the plan
subject to the discretion of the Board of Directors. No Company contribution was
made for the ten months ended December 31, 1995, or the year ended December 31,
1996.
Revenue Recognition
Revenues are recorded as products are shipped and services rendered. A
portion of the Company's sales are covered by various state and Federal
reimbursement programs, which are subject to review and/or audit. Reimbursement
programs are also subject to change from time to time.
The Company also recognizes revenue under certain capitated arrangements.
However, these revenues are insignificant and any losses related to these
contracts are accrued as they are incurred.
Concentration of Credit Risk
A significant portion of the Company's revenue and related receivables are
reimbursable from two primary payors, Medicaid and Medicare. Collectively,
Medicaid and Medicare accounted for 20% and 32%, respectively, of accounts
receivable reported on the consolidated balance sheets at December 31, 1995 and
1996, respectively.
Income Taxes
The Company files a consolidated Federal income tax return. Income tax
expense is based on reported earnings before income taxes. Deferred taxes on
income are provided for those items for which the reporting period and methods
used for income tax purposes differ from those used for financial statement
purposes,
F-46
<PAGE> 132
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using the asset and liability method. Deferred income taxes are recognized for
the tax consequences 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
Net loss per common share for the year ended February 28, 1995, was
computed by dividing the net loss by the average weighted number of common
shares outstanding. For the ten months ended December 31, 1995, and the year
ended December 31, 1996, primary and fully diluted earnings per common share
were computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding. The amount of common
stock equivalents outstanding was computed using the treasury stock method.
2. ACQUISITIONS
Acquisitions during the year ended December 31, 1996
In January 1996, the Company purchased Geri-Care Systems, Inc. and Scripts
& Things, Inc. ("Geri-Care") which provide institutional pharmacy services to
long-term care facilities in the New York metropolitan area. The purchase price
was approximately $6,000,000, payable $1,320,000 in cash and promissory notes,
with the remainder representing 669,230 shares of the Company's common stock.
The agreement also includes an additional 338,462 shares of the Company's common
stock held in escrow as a contingent incentive payment for certain new business
to be generated through 1998 by the selling shareholders of Geri-Care. Total
goodwill at the date of acquisition was $6,259,000.
In February 1996, the Company purchased IMD Corporation ("IMD") which
provides institutional pharmacy services to long-term care facilities in the
Chicago metropolitan area. The total purchase price was $15,882,000. Total
goodwill at the date of acquisition was $13,146,000.
In July 1996, the Company acquired DCMed, Inc. and its wholly-owned
subsidiary MediDyne Corporation (collectively, "MediDyne"), a provider of
Medicare Part B services, which consist of enteral nutrition and urologic
supplies, as well as counseling and assistance with regulatory compliance in
connection with such services. The total purchase price was $7,500,000. The
agreement also provides for an earn-out based on the future adjusted earnings of
the business, payable in cash. Total goodwill at the date of acquisition was
$7,667,000.
In July 1996, the Company acquired the institutional pharmacy business of
Symphony Pharmacy Services, Inc. ("Symphony"), a subsidiary of Integrated Health
Services, Inc. ("IHS"). Symphony provides institutional pharmacy services,
including infusion therapy and Medicare Part B services, to long-term care
facilities in eight states. The total purchase price was $150,000,000, including
$25,000,000 representing the issuance of 2,112,490 shares of the Company's
common stock. Total goodwill at the date of acquisition was $131,303,000.
In October 1996, the Company acquired the institutional pharmacy business
of Happy Harry's, Inc., a Delaware based retail drug store operator. The total
purchase price was $3,695,000. Total goodwill at the date of acquisition was
$2,407,000.
In December 1996, the Company purchased Institutional Pharmacy, Inc., which
provides institutional pharmacy services to long-term care facilities in the
state of Tennessee. The total purchase price was $4,839,000. Total goodwill at
the date of acquisition was $4,068,000.
F-47
<PAGE> 133
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Acquisitions During the Ten Months Ended December 31, 1995
In May 1995, the Company acquired PremierPharmacy, Inc. ("Premier"), which
provides pharmacy services to long-term care facilities located in the New York
metropolitan area and hospitals located in the southeastern United States. The
total purchase price was $4,250,000. Total goodwill at the date of acquisition
was $10,494,000.
All business acquisitions described above have been accounted for by the
purchase method of accounting with the assets and liabilities of the acquirees
recorded at their estimated fair market values at the date of acquisition. The
operations of the acquirees, since the dates of acquisition, are included in the
accompanying consolidated statements of operations. Goodwill for these business
acquisitions is being amortized over twenty to forty years.
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined results of operations of the Company for the
ten months ended December 31, 1995, and the year ended December 31, 1996, are
presented below. Such pro forma presentation has been prepared assuming that the
acquisitions described above have been made as of March 1, 1995 (in thousands,
except per share data).
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Net revenues............................................... $188,488 $222,504
Gross profit............................................... 81,875 95,343
Net income before extraordinary item....................... 3,795 10,077
Net income................................................. 3,506 10,077
Primary and fully diluted, net income per share............ $ 0.11 $ 0.28
======== ========
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the acquired businesses adjusted to reflect (1) depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the acquisitions, (2) the interest expense resulting
from the financing of the acquisitions, (3) the per share effect of stock issued
as part of the acquisition and (4) the related income tax effects. The pro forma
results are not necessarily indicative of actual results which might have
occurred had the operations and management teams of the Company and the acquired
companies been combined in prior years.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1995 and 1996, are
comprised of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Leasehold improvements.................................... $ 544,272 $ 474,546
Furniture, fixtures and equipment......................... 3,945,149 12,471,101
Data processing equipment................................. 1,512,500 2,376,750
Automobiles and trucks.................................... 258,379 290,186
----------- -----------
6,260,300 15,612,583
Accumulated depreciation and amortization................. (3,568,002) (5,143,620)
----------- -----------
Equipment and leasehold improvements, net................. $ 2,692,298 $10,468,963
=========== ===========
</TABLE>
F-48
<PAGE> 134
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of equipment and leasehold improvements
amounted to approximately $605,000, $686,000 and $2,160,000 for the year ended
February 28, 1995, the ten months ended December 31, 1995 and the year ended
December 31, 1996, respectively.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long term debt at December 31, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Borrowings under a $125,000,000 revolving credit facility
with a group of five commercial banks, interest at varying
rates based on the type of borrowing, secured by
substantially all assets of the Company, due at scheduled
maturities through December 2001.......................... $ -- $37,200,000
Unsecured note payable to former owners of MediDyne,
non-interest bearing, payable quarterly based on
MediDyne's financial performance, due January 1998........ -- 1,651,086
Borrowings under a $10,000,000 revolving loan with
CreditAnstalt, interest at prime plus 0.5% secured by
substantially all assets of the Company, due on demand.... 1,950,000 --
Unsecured note payable to relative of former stockholder,
payable in quarterly installments with interest at 9%
through January 2000...................................... 297,938 215,319
Amounts due under a Medicare settlement with the United
States Government, payable in quarterly installments with
interest at 7.75% through 2001............................ 2,537,500 1,933,330
Unsecured notes payable to former stockholders of a Premier
subsidiary, interest at 6%, currently payable............. 1,000,000 1,000,000
Unsecured notes payable to former stockholders of a Premier
subsidiary, due in monthly installments of $14,898,
including interest at 6% through October 31, 1998......... 464,752 309,641
Unsecured note payable to a former stockholder of a Premier
subsidiary, interest at 7%, due August 11, 1996........... 153,334 --
Unsecured notes payable to former stockholders of a Premier
subsidiary, interest at 7%, due in annual installments of
$30,000 through June 30, 1999............................. 120,000 90,000
Capital lease obligations (Note 10)......................... 364,844 316,092
Other....................................................... 26,442 7,470
----------- -----------
6,914,810 42,722,938
Less: Current portion....................................... (4,222,608) (3,557,199)
----------- -----------
Long-term portion........................................... $ 2,692,202 $39,165,739
=========== ===========
</TABLE>
F-49
<PAGE> 135
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt, exclusive of capital lease obligations
at December 31, 1996, follow:
<TABLE>
<S> <C>
1997........................................................ $ 3,426,957
1998........................................................ 757,090
1999........................................................ 539,480
2000........................................................ 483,319
2001........................................................ 37,200,000
-----------
$42,406,846
===========
</TABLE>
To finance acquisitions, the Company extinguished its outstanding debt
under the revolving loan agreement with CreditAnstalt and replaced it with a
$125,000,000 revolving credit facility through a group of five commercial banks
("new credit facility") on December 6, 1996. Extinguishment of the existing debt
included payoff of the outstanding balance of $31,422,852 and an incurred loss
of $239,961, net of tax, resulting from the write-off of unamortized deferred
financing costs. The loss is recorded as an extraordinary item in the
accompanying consolidated statement of operations. The Company incurred
approximately $1,010,000 in debt acquisition costs associated with the new
credit facility, which are to be amortized over the life of the debt.
Under the new credit facility, the Company has the option to borrow under
base rate and eurodollar rate revolving loans, swing line loans, and letters of
credit. Interest rates on base rate and swing line loans are at the higher of
the prime rate or 0.5% in excess of the federal funds effective rate, plus an
applicable margin based on the Company's leverage ratio at the time of
borrowing. The swing line loans are also adjusted for a commitment fee
percentage tied to the Company's leverage ratio. Interest on base rate and swing
line loans is due quarterly in arrears. Interest rates on eurodollar rate loans
are calculated at the eurodollar rate plus an applicable margin based on the
Company's leverage ratio at the time of borrowing. Interest is due at the end of
the one, two, or three month interest period elected by the Company. If the
Company elects a six month eurodollar rate loan, interest is payable in arrears
at the end of the third and sixth month. Letter of credit fees are based on the
eurodollar loan margin, plus the greater of 0.25% of the maximum available to be
drawn for letters of credit, as defined in the agreement, or $500, and is to be
paid quarterly in arrears. As of December 31, 1996, the Company's outstanding
borrowings total $37,200,000 under a base rate loan at an effective interest
rate, including the amortization of deferred financing costs, of 8.29%.
Scheduled reductions of the $125,000,000 maximum balance allowed under the
new credit facility on December 1 of each year are as follows:
<TABLE>
<S> <C>
1997 $ --
1998 10,000,000
1999 35,000,000
2000 40,000,000
2001 40,000,000
------------
$125,000,000
============
</TABLE>
The new revolving credit facility is secured by substantially all assets of
the Company and stipulates certain covenants applicable to capital expenditures,
cash consideration on acquisitions, and sale of assets, as well as minimum
financial ratios. As of December 31, 1996, the Company is in compliance with all
debt covenants.
The average effective interest rate on amounts outstanding under the
CreditAnstalt agreement for the periods outstanding during 1995 and 1996 were
approximately 8.75% and 7.5%, respectively. A letter of credit fee at an annual
rate of 1.25% was paid on a monthly basis. Amounts available to be borrowed
under this
F-50
<PAGE> 136
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement were based upon levels of accounts receivable and inventories. The
weighted average and highest outstanding balance under this agreement for the
period outstanding through December 6, 1996 were $21,581,000 and $31,422,852,
respectively.
In connection with the Symphony acquisition, the Company entered into a
senior subordinated credit facility with a group of lenders pursuant to which
the lenders funded a $100 million bridge loan. The proceeds of the bridge loan
were used to pay a portion of the Symphony acquisition purchase price. The
bridge loan bore interest at a floating interest rate of LIBOR plus 6.01% to
6.25%. In connection with the bridge loan, the Company incurred a commitment fee
of $2,500,000, net of an early loan repayment discount. The bridge loan was
repaid in full by the Company on September 26, 1996, using the proceeds of the
September 1996 public offering.
Included as acquisition financing fees and expenses in the accompanying
consolidated statement of operations is the $2,500,000 commitment fee, bridge
loan interest of approximately $1,813,000 and bridge loan closing costs of
approximately $261,000. In connection with the acquisition of MediDyne (See Note
2), the Company incurred a $2,900,000 note payable to the former owners of
MediDyne in consideration for the purchase. The note is non-interest bearing and
is to be repaid quarterly based on MediDyne's earnings before taxes,
depreciation and amortization in excess of $600,000. As of December 31, 1996,
the outstanding balance of $1,651,084 is expected by management to be paid
within one year and, therefore, has been included in current portion of
long-term debt in the accompanying consolidated balance sheet.
On November 1, 1995, the Company elected not to make a scheduled
installment payment on a note payable to former stockholders of a Premier
subsidiary in the aggregate principal amount of $1,000,000, due to a dispute
with these former stockholders. This amount is recorded as current portion of
long-term debt in the accompanying consolidated balance sheets as of December
31, 1996 and 1995.
On October 31, 1994, the Company entered into an agreement with the United
States Government settling an investigation conducted by the U.S. Attorney for
the Eastern District of Pennsylvania into claims for reimbursement made by
certain of the Company's subsidiaries to the Medicare Program. The subject of
the investigation was the Company's claims documentation and Medicare
reimbursement practices for December 1993 and prior. Under the terms of the
settlement, without admitting any liability, the Company has agreed to repay, as
a return of revenue previously received, over a six-year period, $3,400,000 to
settle the Government's claims. Initially, $100,000 was paid upon the execution
of the agreement and $400,000 was paid on December 31, 1994. Thereafter,
$2,900,000 plus interest at an annual rate of 7.75% is payable in quarterly
installments over a six year period ending January 1, 2001. The full amount of
the settlement, including related legal fees, is included in costs in connection
with litigation in the accompanying consolidated statement of operations for the
year ended February 28, 1995.
Interest expense for the year ended February 28, 1995, the ten months ended
December 31, 1995, and the year ended December 31, 1996, was approximately
$905,000, $677,000 and $3,713,000, respectively. These amounts include
amortization of deferred financing costs of approximately $0, $43,000 and
$183,000, respectively.
Based on the borrowing rates currently available to the Company, the fair
value of long term debt, including the current portion but exclusive of capital
lease obligations, as of December 31, 1996, is approximately $42,410,000.
5. PUBLIC STOCK OFFERING
In September 1996, the Company completed an offering of 10,350,000 shares
of common stock to the public at a price of $11.00 per share. Net proceeds of
approximately $107,235,000 were received, net of direct costs of approximately
$6,615,000. Direct costs included the underwriters discount, accounting and
legal fees, printing and marketing expenses and other miscellaneous costs.
F-51
<PAGE> 137
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PRIVATE PLACEMENTS
In December 1994, the Company entered into a Stock Purchase Agreement with
Counsel. Pursuant to the Stock Purchase Agreement, Counsel acquired 2,000,000
shares of the Company's common stock for net proceeds of approximately
$7,191,000. Counsel was also granted two three-year warrants, the first of which
grants Counsel the right to purchase up to 1,000,000 shares of the Company's
common stock at an exercise price of $4.50 per share, and the second of which
grants Counsel the right to acquire up to 800,000 shares of the Company's common
stock at an exercise price of $5.50 per share.
In May 1995, the Company completed a private placement of 1,600,000 units
(the "Units"). Each Unit consisted of one share of common stock, a three year
warrant to acquire 0.5 shares of common stock at the exercise price of $4.50 per
share, and a three year warrant to acquire 0.4 shares of common stock at the
exercise price of $5.50 per share. The offering of Units raised proceeds of
approximately $5,759,000, net of related costs, at a price of $3.65 per Unit.
The proceeds of the private placement were used to fund the acquisition of
Premier and to retire the debt to a major vendor in the amount of approximately
$1,776,000, resulting in a gain on the discount of debt of approximately
$283,000. The gain on the discount of debt is reflected in the accompanying
consolidated statement of operations for the ten months ended December 31, 1995,
as an extraordinary item.
In August 1995, the Company completed a second private placement of its
common stock. This offering consisted of 3,500,000 shares at a price of $4.38
per share. The net proceeds of this private placement were approximately
$15,061,000, net of related costs including placement commissions. There were no
warrants issued in connection with this second private placement. The proceeds
of this private placement were used to retire outstanding debt of $9,650,000 due
to CreditAnstalt and for general working capital purposes.
In April 1996, the Company completed a third private placement of its
common stock. This offering consisted of 1,035,000 shares at a price of $8.50
per share. The net proceeds of this private placement were $8,400,000, net of
related costs. The proceeds from this private placement were used to fund
acquisitions and provide general working capital for the Company.
In July 1996, the Company completed a private placement of its common stock
with Counsel. Counsel acquired 2,112,490 shares of common stock for proceeds of
$25,000,000. The proceeds from this private placement were used to fund the
acquisition of Symphony.
7. RESTRUCTURING CHARGES
In February 1995, the Company adopted a formal plan of restructuring in
order to realign and consolidate businesses, concentrate resources, and better
position itself to achieve its strategic growth objectives. The exit plan
included the termination and sale of the medical/surgical supply operations of a
wholly owned subsidiary, B.T. Smith, Inc., and the closing of the Company's
long-term care pharmacy operation in Missouri, Choice Drug Systems of Missouri,
Inc., on June 30, 1995.
Prior to the closing and ultimate sale of its medical/surgical supply
operations, the Company consolidated the medical/surgical operation of B.T.
Smith, Inc. with the medical/surgical supply division of J & J Drug & Medical
Services, Inc. in its Baltimore, Maryland pharmacy location. Accounting and
administration functions previously based at the Inwood, New York and Teaneck,
New Jersey pharmacy locations were also consolidated and moved to the Baltimore
office location. The effect of this consolidation was to refocus the Inwood and
Teaneck pharmacies on the core long-term care business; to consolidate the
Company's medical/ surgical supply business in one location in anticipation of
its sale; and to consolidate accounting functions at the Baltimore headquarters
location. The Company initiated these actions to streamline and reduce the cost
of operating its medical/surgical supply business and its accounting function
and to exit the unprofitable Missouri long-term care market.
F-52
<PAGE> 138
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recorded restructuring charges of $2,069,432 included in the
operating expenses for the year ended February 28, 1995, which includes the
write-down of accounts receivable, inventories and fixed assets to net
realizable value and the accrual for the termination of leases, employee
severance costs, and the estimated administrative costs of terminating
operations. The restructuring charges include approximately $940,000 severance
costs which were accrued and expensed related to the termination of 15 pharmacy
employees and amounts due to former executives of the Company under severance
agreements that expire in May 1997. Also included in the restructuring costs is
$560,000 related to the termination of long-term leases with the remainder of
the charges due to disposal of assets. During the ten months ended December 31,
1995, the Company recorded, as a change in estimate, an additional $100,000
accounts receivable for the medical/ surgical supply operations. The
restructuring plan was completed by December 31, 1995.
In connection with the February 1995 restructuring, the Company made
severance payments of approximately $335,000 and $459,000 and paid other exit
costs of approximately $227,000 and $154,000 during the ten months ended
December 31, 1995 and the year ended December 31, 1996, respectively.
The net sales and loss from continuing operations of the medical/surgical
supply operations and the Missouri location are as follows:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED
FEBRUARY 28, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Net Sales................................................... $ 3,983,533 $ 854,018
=========== =========
Loss from continuing operations............................. $(2,406,438) $(157,218)
=========== =========
</TABLE>
In December 1995, the Company adopted a formal plan of restructuring in
order to consolidate certain of its satellite locations. As a result of the exit
plan, one pharmacy will be closed by June 1996. The Company recorded
restructuring costs of $140,000 as an operating expense for the ten months ended
December 31, 1995, which includes the write-down of fixed assets to net
realizable value, the accrual for employee severance costs and the termination
of leases. Approximately $60,000 of severance costs were accrued and expensed in
relation to the termination of 20 pharmacy employees. At December 31, 1996, all
severance costs have been paid. The Company completed this restructuring plan
during 1996.
During July 1996, in connection with the Symphony acquisition, the Company
adopted a plan to restructure its long-term care pharmacy operations in Los
Angeles by consolidating two of its existing facilities into a new, more
centralized location. The Company has assumed liabilities, included in the
acquisition cost allocation, of approximately $1,600,000 for costs to
involuntarily terminate employees of Symphony and to close the pharmacy
location. Included in these liabilities are approximately 330,000 of severance
costs related to the termination of 79 employees, including pharmacists,
technicians, IV nurses, drivers and others. The remaining costs relate to the
termination of lease agreements. As of December 31, 1996, no severance payments
have been made. Management anticipates the completion of this plan by December
1997.
During August 1996, the Company adopted a plan of restructuring to
consolidate its Aston, Pennsylvania and Baltimore, Maryland long-term care
pharmacies into one of its existing Mid-Atlantic pharmacies. The Company has
recorded restructuring costs of $450,000 for the year ended December 31, 1996
which includes approximately $125,000 of employee severance costs with the
remainder of the costs for the termination of leases. No severance costs have
been paid to the 48 pharmacy-related employees as of December 31, 1996. The
Company plans to complete this restructuring by December 1997.
Also, during September 1996, the Company adopted a formal plan of
restructuring to close its Baltimore, Maryland corporate offices and
correctional pharmacies. The corporate offices will be relocated to Irving,
Texas and the correctional pharmacy will be relocated to another location in the
Baltimore area. The Company has recorded restructuring costs of $2,375,000 for
the year ended December 31, 1996, which primarily includes approximately
$400,000 of employee severance costs and approximately $1,800,000 of lease
F-53
<PAGE> 139
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
termination costs with the remainder due to losses on asset impairments and
disposals of assets. The restructuring plan includes the termination of 32
accounting and clerical personnel. The Company made severance payments related
to the corporate office restructuring of approximately $107,000 during the year
ended December 31, 1996 and anticipates the completion of the plan by September
1997.
8. DISCONTINUED OPERATIONS
In February 1995, in connection with adoption of its formal restructuring
plan, the Company decided to discontinue the operations of its mail order and
computerized health care software businesses. The mail order business was closed
effective August 1, 1995 and the assets of the computerized health care software
business were sold to an unrelated party on June 30, 1995 for $700,000, which
resulted in a gain in the amount of $564,844, net of related income taxes of
$38,000.
The net gains or losses of these operations for the year ended February 28,
1995 and the ten months ended December 31, 1995 are included in the consolidated
statements of operations under gain (loss) from operations of discontinued
business segments. The loss on disposal of $503,067 reflected in the
consolidated statement of operations for the year ended February 28, 1995,
includes the write-down of the assets of the mail order and computer software
businesses to estimated net realizable value and the estimated costs of
disposing of these operations, including a pro-rata share of the Company's
expense for office space in Baltimore.
The Company had net sales from discontinued operations of approximately
$2,731,000 and $909,000 for the year ended February 28, 1995 and the ten months
ended December 31, 1995, respectively.
9. INCOME TAXES
The benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current..................................... $(466) $(219) $ --
Deferred.................................... -- (46) (5,510)
----- ----- -------
(466) (265) (5,510)
State and local............................... -- 40 389
----- ----- -------
$(466) $(225) $(5,121)
===== ===== =======
</TABLE>
For the year ended December 31, 1996, the Federal benefit for income taxes
is primarily due to the reversal of the valuation allowance recorded on the
Company's deferred tax assets. Based on the current operating profitability of
the Company and budgeted taxable income for 1997, management believes that it is
now more likely than not that the Company's deferred tax assets will be
realized. As a result of this change in estimate, the valuation allowance of
$5,186,000 on deferred tax assets was reversed during the year ended December
31, 1996.
F-54
<PAGE> 140
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual income tax benefit for the year ended February 28, 1995, the ten
months ended December 31, 1995 and the year ended December 31, 1996 is different
from the amounts computed by applying the statutory Federal income tax rates to
losses from continuing operations before income taxes. The reconciliation of
these differences follow:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at statutory rate................. $(3,824) $(296) $ (597)
Additional funds received..................... -- (219) --
Increase resulting from:
State income taxes, net of federal income
tax effect............................... -- 26 257
Current loss not available for carryback.... 3,206 172 --
Tax effect of permanent differences......... 152 68 276
Reduction of valuation allowance............ -- -- (5,186)
Other items, net............................ -- 24 129
------- ----- -------
Benefit for income taxes.................... $ (466) $(225) $(5,121)
======= ===== =======
</TABLE>
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $16,663,000 for Federal income tax purposes, expiring in
increments through 2011. The utilization of approximately $11,106,000 of such
losses is restricted to offset only future taxable income generated by Choice
Maryland and Premier.
The tax effect of cumulative temporary differences at December 31, 1995 and
1996 follow:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current Deferred Tax Assets:
Tax carryforwards........................................... $ 4,172 $ 5,665
Accounts receivable allowances.............................. 413 85
Accrued litigation costs.................................... 1,255 657
Accrued restructuring charges............................... 536 1,104
Accrued liabilities......................................... 280 440
Other....................................................... 254 1,178
------- -------
6,910 9,129
Less: Valuation allowance................................... (6,910) (1,724)
------- -------
Net deferred tax asset............................ $ -- $ 7,405
======= =======
Deferred Tax Liabilities:
Puerto Rico withholding tax................................. $ 425 $ 425
Goodwill amortization....................................... -- 1,330
Depreciation and other...................................... 118 242
------- -------
Net deferred tax liability........................ $ 543 $ 1,997
======= =======
</TABLE>
F-55
<PAGE> 141
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
Leases
The Company leases office and warehouse space, automobiles and equipment.
Rental expense under these leases aggregated approximately $719,000, $781,000,
and $1,664,000 for the year ended February 28, 1995, the ten months ended
December 31, 1995, and the year ended December 31, 1996, respectively.
Future minimum lease payments, follow:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ --------- ----------
<S> <C> <C>
1997................................................... $ 157,074 $1,741,995
1998................................................... 113,863 1,612,177
1999................................................... 74,538 1,411,448
2000................................................... 26,788 1,013,377
2001................................................... 6,571 933,803
2002 and Thereafter.................................... -- 1,938,370
--------- ----------
Total minimum lease payments................................ 378,834 $8,651,170
==========
Less: amount representing interest.......................... (62,742)
---------
Present value of net minimum lease payments............... 316,092
Less: current portion....................................... (130,242)
---------
Long-term portion........................................... $ 185,850
=========
</TABLE>
11. CONTINGENCIES
A lawsuit has been filed against the Company by the former shareholders of
a subsidiary of Premier. The plaintiffs sold their business to Premier in 1993
and claim that the company owes them approximately $1,000,000 under promissory
notes delivered to them as part of the consideration for their stock. (See Note
4). The plaintiffs also claim that the Company owes them an additional
$1,100,000 under an earn-out agreement. Finally, the plaintiffs claim the
Company is liable for tortiously interfering with their rights under the
purchase agreement and under the promissory notes. The plaintiffs seek total
judgments of $7,100,000, plus interest and costs against the Company. The
Company has answered the complaint and is vigorously contesting the plaintiff's
claims. In addition, the Company has filed a counterclaim against the plaintiffs
for breaches of certain representations and warranties in the agreement.
Management of the Company does not believe that this litigation is likely to
have a material adverse effect on its financial position and results of
operations.
The Company is subject to various claims and litigation in the ordinary
course of its business. In the opinion of management and outside counsel,
settlement of these claims and litigation will not have a material adverse
effect on the financial position or future operating results of the Company.
12. STOCKHOLDER'S EQUITY
Common Stock Authorized
On August 28, 1995, the Company's stockholders approved an increase in the
authorized common stock of the Company from 15,000,000 shares to 30,000,000
shares. On September 28, 1996 the Company's stockholders approved an increase in
the authorized common stock of the Company from 30,000,000 shares to 50,000,000
shares.
F-56
<PAGE> 142
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
The Company has eight stock option plans and an employee stock purchase
plan covering up to 3,029,168 shares of the Company's common stock, pursuant to
which officers, directors and employees of the Company are eligible to receive
either incentive or non-qualified options. Stock options generally expire five
or ten years from the date of grant. The exercise price of an incentive stock
option is equal to the fair market value of the Company's common shares on the
date such option was granted. The exercise price of non-qualified stock options
may be less than the fair market value on the date of grant.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its fixed stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
TEN MONTHS ENDED Year Ended
DECEMBER 31, December 31,
1995 1996
---------------- ------------
<S> <C> <C>
Net income:
As reported........................................... $ 222,351 $ 3,125,420
Pro forma............................................. (3,155,567) (7,763,229)
Primary earnings per share:
As reported........................................... 0.02 0.14
Pro forma............................................. (0.28) (0.34)
Fully-diluted earnings per share:
As reported........................................... 0.02 0.13
Pro forma............................................. (0.25) (0.33)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following key assumptions were used
in the Black-Scholes option pricing model:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED Year Ended
DECEMBER 31, 1995 December 31, 1996
----------------- -----------------
<S> <C> <C>
Risk-Free Interest Rate............................ 5.00% 5.00%
Expected Life...................................... 5-10 Years 5-10 Years
Volatility......................................... 73.90% 62.90%
</TABLE>
F-57
<PAGE> 143
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option transactions during the year ended February 28, 1995,
the ten months ended December 31, 1995 and the year ended December 31, 1996
follow:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1995 DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Under option:
Beginning of the
Year/Period.......... 918,500 $4.33 1,094,500 $3.73 1,564,000 $4.40
Granted.............. 564,000 3.23 949,500 4.41 1,589,000 9.99
Exercised............ (34,000) 2.64 (355,000) 2.43 (122,166) 3.02
Canceled............. (354,000) 4.15 (125,000) 3.81 (1,666) 4.31
End of the
Year/Period.......... 1,094,500 $3.73 1,564,000 $4.40 3,029,168 $7.39
Options
exercisable -- Year/
Period End.............. 1,094,500 $3.73 1,389,000 $4.40 1,828,149 6.02
Shares available for
grant -- Year/Period
End..................... 568,250 -- 693,750 -- 856,250 --
Weighted average fair
value of options
granted................. $3.56 $6.85
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
- -------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$2.85-$5.00.......................... 1,052,334 7.8 Years $ 4.10 968,998 $ 4.08
$5.00-$7.50.......................... 377,000 5.1 Years $ 5.65 350,332 $ 5.63
$7.50-$10.00......................... 400,834 9.2 Years $ 8.45 134,158 $ 8.41
$10.00-$11.25........................ 1,199,000 9.9 Years $10.48 374,661 $10.55
$2.85-$11.25......................... 3,029,168 8.5 Years $ 7.39 1,828,149 $ 6.02
</TABLE>
Warrants
During 1994, in exchange for consulting services, the Company issued
warrants exercisable for 40,000 shares of common stock with an exercise price of
$3.50.
In August 1995, the Company's Board of Directors extended the expiration
date of certain outstanding redeemable warrants issued as part of the Company's
initial public offering (The "IPO Warrants") to March 31, 1996, and subsequently
extended the expiration date to August 23, 1996. During August 1996, the Company
registered the shares underlying its outstanding Series A and B warrants. Series
A warrants representing 643,344 of a total of 650,000 shares of common stock
were exercised before expiring, at an exercise price of $6.00 per share. The
expiration date of the 643,344 Series B Warrants (which are exercisable at
$10.00 per share) issued upon exercise of the IPO Warrants is August 16, 1997.
In connection with the private placements discussed in Note 5, the Company
issued warrants to purchase 3,240,000 shares of stock at prices ranging from
$4.50 to $5.50 per share. These warrants expire through May 1998.
F-58
<PAGE> 144
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, as part of their debt agreement, the Company issued
warrants to CreditAnstalt which grants CreditAnstalt the right to purchase
15,000 shares of common stock at a price of $7.31 per share. These warrants
expire in December 2000.
In January 1996, as part of the acquisition of IMD Corporation, the Company
issued warrants to purchase 75,000 shares of common stock at a price of $7.50
per share. These warrants expire in January 1999.
Total warrants for 4,132,684 shares were outstanding at December 31, 1996,
including the IPO warrants, warrants issued in connection with private
placements and 100,000 warrants issued in connection with prior acquisitions, at
exercise prices ranging from $4.50 to $12.00 per share. 46,615 (excluding the
Series A warrants) warrants were exercised during the year, at exercise prices
ranging from $3.50 to $5.50 per share.
13. MAJOR VENDOR
The Company utilizes a primary supplier arrangement for its pharmaceutical
purchases. During both 1995 and 1996, the Company changed its primary supplier.
Purchases of inventory under primary supplier relationships during the year
ended February 28, 1995, the ten months ended December 31, 1995, and the year
ended December 31, 1996, were approximately 55%, 87% and 82% of total inventory
purchases, respectively.
14. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Trade accounts payable...................................... $4,671,435 $11,390,194
Accrued salaries, payroll taxes and benefits................ 669,860 4,172,362
Miscellaneous accrued expenses.............................. 795,977 2,385,929
---------- -----------
$6,137,272 $17,948,485
========== ===========
</TABLE>
15. RELATED PARTIES
As a result of the Company's acquisition of Symphony (See Note 2),
Symphony's former parent company, IHS, is a significant Company stockholder. The
Company provides institutional pharmacy services to several long-term care
facilities owned and managed by IHS. Since the Company's acquisition of Symphony
during 1996, net revenues of approximately $8,139,000 have been generated from
sales to IHS owned and managed long-term care facilities. Amounts due from IHS
owned and managed long-term care facilities of approximately $6,983,000 at
December 31, 1996 are included in accounts receivable, net in the accompanying
consolidated balance sheet.
To facilitate the timely purchase of MediDyne, an interim purchase of
MediDyne was made by Counsel Corporation, a significant stockholder of the
Company. The terms of the agreement are described in Note 2.
The Company entered into arrangements with a company which owns long-term
care facilities in the state of Minnesota to provide pharmacy services and
certain administrative functions in exchange for a monthly management fee. These
management fees, totaling approximately $58,000, have been included in other
income in the accompanying consolidated statement of operations for the year
ended December 31, 1996. In addition, the Company has provided working capital
funding. At December 31, 1996, amounts due of approximately $661,000 are
included in the accompanying consolidated balance sheet.
16. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires
F-59
<PAGE> 145
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 is effective for financial statements with fiscal
years beginning after December 15, 1995. The adoption of SFAS No. 121 as of
January 1, 1996 had no impact on the Company's financial position or results of
operations.
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 No. 15, "Earnings Per Share." It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires a reconciliation of the numerator and denominator of the basic EPS
calculation to the numerator and denominator of the diluted EPS calculation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant
to APB Opinion No. 15.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,
and early adoption is not permitted. When adopted, it will require restatement
of prior years' EPS. When adopted for the year ended December 31, 1997, the
Company will report basic EPS instead of primary EPS. The pro forma basic and
diluted EPS would be as follows:
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Pro forma earnings (loss) per common and common equivalent
share:
Basic Continuing operations................................. $(0.06) $ 0.17
Discontinued operations................................... 0.05 --
Extraordinary items....................................... 0.03 (0.01)
------ ------
Net income........................................ $ 0.02 $ 0.16
====== ======
Diluted Continuing operations............................... $(0.06) $ 0.15
Discontinued operations................................... 0.05 --
Extraordinary items....................................... 0.03 (0.01)
------ ------
Net income........................................ $ 0.02 $ 0.14
====== ======
</TABLE>
17. SUBSEQUENT EVENTS
In January 1997, the Company entered into purchase agreements with Clinical
Care-SNF Pharmacy, Inc., Portaro Pharmacies, Inc. and Alger Health Services,
Inc. These three acquisitions expand the Company's presence in the State of
California and represent institutional pharmacy revenues of approximately
$15,000,000, $15,000,000 and $8,500,000, respectively.
The purchase price for Clinical Care-SNF Pharmacy, Inc. was $20,000,000,
payable $5,000,000 in cash and the remainder representing 1,354,402 shares of
the Company's common stock. The purchase price for Portaro Pharmacies, Inc. was
$20,000,000, payable $5,000,000 in cash and the remainder representing 1,354,402
shares of the Company's common stock. The purchase price for Alger Health
Services, Inc. was $4,200,000.
In March 1997, the Company acquired Pennsylvania Prescriptions, Inc., a
Harrisburg, Pennsylvania institutional and retail pharmacy doing business as
Emerald Drugs. The purchase price was $6,200,000 and includes an earn-out
provision.
In March 1997, the Company acquired Pharmacare, Inc., a Virginia-based
provider of institutional pharmacy services. The purchase price was
approximately $8,500,000.
F-60
<PAGE> 146
CAPSTONE PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT -- PROPOSED MERGER
In April 1997, the Company announced a proposed merger with Beverly
Enterprises, Inc.,'s ("Beverly") pharmacy unit. After receipt of shareholder and
other required approvals, the Company will issue approximately 50,000,000 shares
to existing Beverly stockholders and assume approximately $275,000,000 in debt.
The Company anticipates that the transaction will be finalized during the fourth
quarter of 1997.
F-61
<PAGE> 147
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS OFFERING
MEMORANDUM, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INITIAL
PURCHASERS. THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
Capitalization........................ 16
Unaudited Pro Forma Financial
Statements.......................... 17
Selected Historical Financial Data.... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
The Exchange Offer.................... 26
Business.............................. 31
Management............................ 43
Certain Transactions.................. 45
Stock Ownership of Directors,
Executive Officers and Principal
Holders............................. 48
Description of the New Notes.......... 50
Description of Bank Credit Facility... 78
Certain Tax Considerations............ 79
Plan of Distribution.................. 81
Legal Matters......................... 81
Independent Public Accountants........ 82
Available Information................. 82
Incorporation of Certain Documents by
Reference........................... 82
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
PHARMERICA, INC. LOGO
PHARMERICA, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
($325,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
8 3/8% SENIOR SUBORDINATED NOTES DUE 2008
($325,000,000 PRINCIPAL AMOUNT)
---------------------
PROSPECTUS
---------------------
JUNE 23, 1998
======================================================
