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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 CHECK ONE:
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER
31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-20606
PHARMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2310352
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
175 KELSEY LANE 33619
TAMPA, FL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (813) 626-7788
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of
February 25, 1999, was $494,594,893.
On February 25, 1999, 89,667,106 shares of the registrant's $0.01 par
value common stock were outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
PharMerica, Inc. ("PharMerica" or the "Company") is a leading
independent provider of institutional pharmacy products and services to the
elderly, chronically ill and disabled in long-term care and alternate site
settings, including skilled nursing facilities, assisted living facilities,
residential and independent living communities, specialty hospitals and the
home. The Company also is a leading independent provider of home delivery
pharmacy products and services to the workers' compensation and catastrophic
care markets. As of February 25, 1999, PharMerica provided pharmacy products
and services to approximately 500,000 patients in long-term care and
alternative site settings.
The Company purchases and dispenses prescription and non-prescription
pharmaceuticals and other medical supplies and provides its clients'
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 PharMerica believes will
improve its ability to compete in managed care and prospective payment
systems.
BACKGROUND
On December 3, 1997, Beverly Enterprises, Inc., a Delaware
corporation ("Beverly"), whose sole remaining business consisted of the
institutional pharmacy business conducted through its wholly-owned subsidiary,
Pharmacy Corporation of America ("PCA"), merged with and into the Company
(then known as Capstone Pharmacy Services, Inc. ("Capstone") (the "PCA/
Capstone Merger"). The PCA/Capstone 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,
after the PCA/Capstone Merger was consummated, the historical financial
statements of the Company became those of PCA. Accordingly, the historical
financial statements for all periods prior to December 3, 1997, are comprised
of PCA only.
RECENT DEVELOPMENTS
On January 11, 1999, Bergen Brunswig Corporation ("Bergen") and
PharMerica entered into an Agreement and Plan of Merger (the "Bergen Merger
Agreement)", pursuant to which PharMerica will be merged into, and will
thereby become, a wholly-owned subsidiary of Bergen (the "Bergen Merger").
Under the terms of the Bergen Merger Agreement, upon consummation of the
Bergen Merger, shareholders of PharMerica will receive 0.275 of a share of
Bergen Class A Common Stock in exchange for each share of PharMerica common
stock they hold. The Bergen Merger is intended to be tax-free and will be
treated as a purchase by Bergen for financial reporting purposes. Consummation
of the transaction is subject to the satisfaction of certain conditions,
including approvals by the shareholders of record on March 12, 1999 of Bergen
and PharMerica at shareholder meetings for each company on April 22, 1999.
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MARKET OVERVIEW
INSTITUTIONAL PHARMACY. Institutional pharmacies purchase prescription and
nonprescription pharmaceuticals and other medical supplies from wholesale
distributors and manufacturers, and repackage and distribute these products to
residents in long-term care facilities such as skilled nursing facilities,
assisted living facilities, residential and independent living communities and
other institutional health care settings. Unlike hospitals, most long-term
care facilities do not have on-site pharmacies to dispense prescription drugs,
but depend instead on institutional pharmacies to provide the necessary
pharmacy products and services and to play an integral role in monitoring
patient medication. In addition to providing pharmaceuticals, institutional
pharmacies provide consultant pharmacy services, which include monitoring the
control, distribution and administration of drugs within the long-term care
facility and assisting in compliance with applicable regulations, as well as
therapeutic monitoring and drug utilization review services.
Based on data from industry sources, the Company estimates that the
U.S. market for pharmacy services (including consulting services and related
supplies) in long-term care and assisted living facilities approximated
$7-8 billion for 1998. The Company believes that the size of its market may be
affected by factors such as demographic trends and the acuity level of
patients in long-term care facilities. In addition, the Company believes that
the market is substantially larger to the extent it includes pharmacy services
provided in rural and specialty hospitals and pharmacy services provided at
home to elderly, chronically ill or disabled patients.
WORKERS' COMPENSATION PHARMACY MANAGEMENT SERVICES. Workers' compensation is
an employee benefit that is mandated and delineated by state law. Workers'
compensation laws require employers to provide medical disability benefits to
employees who suffer job-related injuries and disabilities, without
cost-sharing by the injured employee. Although they vary from state to state,
workers' compensation laws usually require the employer to compensate an
injured worker for lost wages and to pay all the costs of remedial medical care
and treatment, including prescription drugs, medical supplies and medical
equipment. Employers provide these statutory benefits to their employees
through self-insurance, participation in state-run funds, or the purchase of
insurance from commercial insurance companies.
Workers' compensation laws cover a broad spectrum of job-related
injuries ranging from less severe injuries, such as cuts and bruises, to acute
injuries, such as paralysis, severe burns, dismemberment and lower back pain.
Injured employees sometimes suffer significant emotional and physical trauma
and are absent from work for several days or even months or years, depending on
the severity of the injury. Workers who suffer long-term injuries typically
incur substantial out-of-pocket expenses each month for the prescription drugs,
medical supplies and medical equipment required for the remedial care and
treatment of their injury. The injured worker submits a claim for
reimbursement of these expenses to the local office of the applicable insurer
or to the other payor of workers' compensation benefits.
Employers, insurance companies and other payors of workers'
compensation benefits seek ways to control the escalating volume and costs of
workers' compensation claims. Although most states prohibit employers from
restricting a claimant's choice of healthcare provider, many states allow
employers to direct employees to a specific primary healthcare provider at the
onset of medical treatment, subject to an employee's right to change
physicians after a specified period of time. These restrictions impede an
employer's ability to use a health maintenance organization, a preferred
provider organization or similar managed care arrangement. In addition,
workers' compensation laws differ from
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state to state, making it difficult for payors and multi-state employers to
adopt uniform policies to manage, control and administer medical and pharmacy
benefits and their associated costs. Consequently, managing the cost of
workers' compensation requires methods that are tailored to each employer's
applicable medical benefits and regulatory environment.
Workers' compensation claimants generally have not been served as
part of the institutional pharmacy industry, relying instead primarily upon
local retail pharmacy outlets and certain home delivery providers. 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.
SERVICES
PharMerica provides institutional pharmacy services to the elderly,
chronically ill and disabled in long-term care and alternative site settings.
These services consist of: (i) providing pharmacy products and services in the
long-term and alternate care setting; (ii) providing specialty services
including infusion therapy services and Medicare Part B products and services;
and (iii) pharmacy consulting services. For the year ended December 31, 1998,
institutional pharmacy services represented approximately 84% of PharMerica's
consolidated revenues. PharMerica also provides home delivery pharmacy
products and services to the workers' compensation and catastrophic care
markets. For the year ended December 31, 1998, these home delivery products
and services represented approximately 12% of the Company's revenues. The
remaining revenues are derived from specialty hospital and ancillary service
business.
INSTITUTIONAL 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 skilled nursing 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. The Company typically serves
facilities within a 150-mile radius of its pharmacy locations and provides
24-hour on-call pharmacist service, 365 days per year, for emergency
dispensing and delivery or for consultation with the facility's staff or the
patient's attending physician.
Upon receipt of a physician's order, the information is entered into
the Company's management information system, which automatically reviews the
order for patient-specific allergies, for refill limitations, for food
interactions, and for potentially adverse interactions with other medications
the patient is receiving. Following this analysis, a report on each order is
produced for review by a Company pharmacist, who performs a prospective drug
utilization analysis of the order and, if appropriate, substitutes generic
drugs approved for equivalence by the U.S. Food and Drug Administration
("FDA"). In addition, subject to the prescribing physician's approval, the
pharmacist may make therapeutic substitutions based on guidelines established
by an independent P & T (Pharmacy and Therapeutics) committee of physicians
who are experts in geriatric medicine and specifically the prescription of
pharmaceuticals in the aging and chronically disabled population. Upon entry,
the prescription becomes part of the permanent patient record, and a label is
printed for application to the
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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 to the facility.
PharMerica provides pharmaceuticals to its clients through a modified
unit dose distribution system. The Company divides the pharmaceuticals
received in bulk form from its suppliers into modified unit dose packages for
its customers. The modified unit dose format is designed to reduce errors,
improve control over the distribution of pharmaceuticals and save nursing
administration time relative to the vial-based systems traditionally used by
retail pharmacies.
As an additional service, PharMerica furnishes its clients with
information captured by its computerized medical records and documentation
system. This system captures patient care information which is used to create
monthly management and quality assurance reports. The Company believes that
this system of information management, combined with the modified unit dose
delivery system, improves the efficiency and controls in nursing
administration and reduces the likelihood of drug-related adverse
consequences.
INSTITUTIONAL 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 the 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 policy and procedure manuals
detailing appropriate intravenous practices and clinical pharmacist support.
These infusion therapies include enteral nutrition therapy, parenteral
nutrition therapy, antibiotic infusion therapy and chemotherapy, AIDS therapy,
pain management and hydration therapy. PharMerica has established an infusion
therapy distribution network which allows next-day delivery and eliminates the
need for customer product storage. Because the proper administration of
infusion products requires a trained and experienced pharmacist and nursing
staff and because the level of such training varies among nursing facilities,
the Company has developed a multi-tiered education and training program. The
program includes skilled nursing services training made available to customers
through hands-on clinical support, 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
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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 tracheotomy care supplies. PharMerica either bills
Medicare directly for Part B covered products or, alternatively, assists the
long-term care facility in meeting Medicare Part B eligibility requirements
and prepares bills on behalf of the facility.
INSTITUTIONAL 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. The Omnibus Budget Reconciliation Act ("OBRA") implemented in
1990 seeks to further upgrade and standardize care by setting forth more
stringent standards relating to planning, monitoring and reporting on the
progress of prescription drug therapy as well as facility-wide drug use.
Noncompliance with the regulations may result in monitoring sanctions as well
as the potential loss of the facility's ability to participate in Medicare and
Medicaid reimbursement programs. PharMerica provides value-added consulting
services that help clients comply with such federal and state regulations,
manage medication costs and maximize the therapeutic efficacy of drug regimens.
These pharmacy consulting services include: (i) comprehensive drug regimen
review for each patient in the facility to assess the appropriateness and
efficacy of drug therapies, including a review of the resident's medical
records, monitoring drug reactions to other drugs or foods, monitoring lab
results and recommending alternative therapies or discontinuing unnecessary
drugs; (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, including pharmacy and therapeutics and quality assurance, of
client facilities as well as periodic involvement in staff meetings; (vi)
monthly inspection of a 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 revised in 1998 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 has developed a clinical software package called
ConsultWare, which includes an on-line formulary, for use by its consulting
pharmacists. The 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. It also provides a platform
for consistent data retrieval for outcomes research and management.
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WORKERS' COMPENSATION PHARMACY MANAGEMENT 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 worker's compensation claimants nationwide.
The Company's services for workers' compensation patients 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 45,000 participating retail pharmacies throughout the country. PharMerica
currently provides these 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.
A claimant orders prescribed items from the Company using a toll-free
telephone number. The order is processed by the Company's team of registered
pharmacists and medical equipment supply technicians who determine the
following: (i) whether the prescribing physician is authorized by the payor;
(ii) whether the ordered item is related to the claimant's injury; (iii)
whether the order is excessive or the refill is earlier than prescribed; and
(iv) whether any prescription drug that is ordered is duplicative of any other
drug being provided to the claimant. Medical goods are shipped to the
claimants for home delivery primarily by Federal Express, United Parcel
Service or United States mail.
The Company's screening procedures identify requested items that
have not been prescribed by an authorized physician, have not been prescribed
at the frequency or in the quantity requested by the claimant, or are
unrelated to the claimant's work-related injury. These items are not sent to
the claimant or billed to the payor and are reported to the payor as avoided
costs.
The Company's order fulfillment procedures also include a series of
medical quality control checks to verify all pertinent claimant information,
the method and timing of the shipment, that the prescribed items are
consistent with the diagnosis and any special instructions, and that the
requested medication will not cause a drug interaction that could be harmful
to the claimant. In addition, a pharmacist reviews each drug prescription to
assure that it complies with all documentation requirements of applicable
pharmacy law.
The Company's home delivery service benefits both the payor and the
claimant. This service helps the payor contain costs by providing
competitively priced goods and controlling unauthorized or excessive use of
prescription drugs, medical supplies and medical equipment. The Company's
single monthly invoice per claimant helps reduce the payor's processing costs,
and the Company provides the payor with comprehensive reports on each claimant
that enable the payor to identify usage trends and estimate future costs.
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The Company's home delivery service offers convenience to a claimant
by eliminating cash payments, avoiding the delay and inconvenience of
submitting claims for reimbursement, delivering products directly to the
claimant's home, responding promptly to claimant inquiries, and offering
substantially all the medical goods needed by the claimant from a single,
readily accessible source.
CATASTROPHIC CARE. The Company also provides mail order pharmacy services to
catastrophically ill or injured claimants requiring long-term pharmacy
services. The Company provides comprehensive catastrophic care as a part of its
home delivery specialty services. PharMerica has introduced a proprietary
program, Pharma 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, 1998, the Company provided these
products and services to approximately 4,300 customers.
SPECIALTY HOSPITALS. The Company also provides pharmacy services to specialty
hospitals, including rehabilitation, psychiatric and long-term care hospitals.
For the year ended December 31, 1998, these services represented approximately
1.7% of PharMerica's revenues.
OPERATIONS
ORGANIZATION. PharMerica's long-term care operations are divided into two
geographic regions with five sub-regions in each region. The Company believes
this regional organizational structure provides the flexibility to accommodate
continued growth while providing standardized clinical and operational
processes and procedures. PharMerica believes that the institutional pharmacy
business is dependent in large part on personal service and encourages its
pharmacists to develop personal relationships and to be responsive to local
market demands. PharMerica uses more centralized financial and inventory
control systems support than is typically available to small, independent
pharmacy operators. Additional services performed at the corporate level
include quality improvement oversight, financial and accounting functions,
clinical program development, group purchasing, marketing, acquisitions and
corporate development activities. Where possible, the Company establishes
mega-pharmacies serving over 7,000 beds. These mega-pharmacies allow the
Company to lower overhead per bed, to use advanced distribution technology
that increases efficiency and accuracy of services and to make greater
investments in clinical and information systems. The Company currently
operates 15 mega-pharmacies.
MARKETING AND SALES. PharMerica's pharmacy services marketing efforts are
directed at long-term care facility operators. While pricing has become a more
important factor in the selection of pharmacy providers since the
implementation of the Prospective Payment System under Medicare Part A,
PharMerica's experience and the quality and range of services offered are the
key factors, particularly among long-term care operators. 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 approximately 300 consultant
pharmacists and 100 nurse consultants also are integral to the marketing
effort because of their daily contact with the facility managers and the
residents in those facilities.
The Company's mail order services marketing and sales efforts are
directed to workers' compensation insurance adjusters and managers at regional
and local insurance offices throughout the country. Referrals of claimants
meeting certain injury profiles are forwarded to the Company's internal sales
force who contact claimants to explain the benefits of using the Company's
services. For
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claimants electing to use the Company's programs, Company representatives then
obtain the necessary information regarding the patient's medications and
supplies and put the claimant on service.
MATERIALS/SUPPLY
PharMerica purchases substantially all of its pharmaceuticals through
Bergen, a wholesale distributor with whom it has a prime vendor contact and,
on an increasing basis, under contracts negotiated directly with
pharmaceutical manufacturers. The Company has numerous sources of supply
available to it and has not experienced any difficulty in obtaining
pharmaceuticals or other products and supplies used in the conduct of its
business.
CUSTOMERS
The primary customers of PharMerica are patients in long-term care
facilities, workers' compensation payors, and specialty hospitals. The Company
has entered into preferred provider agreements with regional and national
long-term care providers, the most significant of which are Beverly and
Integrated Health Services, Inc. ("IHS"). The Company provides services to
approximately 58,000 Beverly long-term care beds and 22,000 IHS long-term care
beds. Sales to Beverly and its residents accounted for approximately 18% of
revenues for the year ended December 31, 1998. Other than Beverly, no customer
represents more than 10% of PharMerica's revenues. At December 31, 1998,
PharMerica served approximately 500,000 patients in long-term care and
alternate settings.
PREFERRED PROVIDER AGREEMENTS. The Company has preferred provider agreements
with ten national and regional long-term care operators, including Beverly and
IHS. These agreements give PharMerica the right to provide 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.
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, long-term care
company-owned 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 national independent institutional
pharmacies, are significantly larger 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. The Company's home delivery pharmacy
business competes primarily with local retail pharmacies and local medical
equipment supply companies. In the home delivery pharmacy business, the
Company competes primarily on the basis of the effectiveness of its managed
care and cost containment services.
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REIMBURSEMENT AND BILLING
For the year ended December 31, 1998, the Company's payor mix, on a
revenue basis, was approximately 23% directly from long-term care facilities
that receive reimbursement from private pay residents and under Medicare Part
A (including revenues from private residents billed through such facilities),
42% Medicaid, 30% 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 and supplies such as enteral nutrition and
urologic products. Fiscal 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.
Medicare Part B provides benefits covering, among other things,
outpatient treatment, physicians' services, durable medical equipment ("DME"),
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, tracheotomy
care supplies and a limited number of other medical supplies. All claims for
medical supplies ("DMEPOS") are submitted to and paid by four regional
carriers known as Durable Medical Equipment Regional Carriers "("DMERCS"). The
DMERCS establish coverage guidelines, allowable utilization frequencies and
billing procedures for DMEPOS. Payment is based on a fee schedule, which
varies depending on the state in which the patient receiving the items
resides. Payments for Medicare Part B products to eligible suppliers, which
include long-term care facilities and suppliers such as PharMerica, are made
on a per-item basis directly to the supplier. In order to receive Medicare
Part B reimbursement payments, suppliers must meet certain conditions set by
the federal government. PharMerica, as an eligible supplier, either bills
Medicare directly for Part B covered products for each patient or,
alternatively, assists the long-term care facility in meeting Medicare Part B
eligibility requirements and prepares bills on behalf of the facility.
Medicare Part B also has an annual deductible as well as a co-payment
obligation on behalf of the patient, and the portion not covered by Medicare
is billed directly to the patient or appropriate secondary payor.
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 members 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
-10-
<PAGE> 11
residents eligible for Medicaid, the Company bills the individual state
Medicaid program, or in certain instances, state designated managed care or
other similar organizations. 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, Massachusetts, 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 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 insurer or other responsible party on a monthly
basis. Depending upon local market practices, PharMerica may alternately bill
private residents through the long-term care facility. Pricing for private pay
residents is based on prevailing regional market rates or "usual and
customary" charges. Third party insurance includes funding for residents
covered by private plans, veterans benefits, 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.
WORKERS' COMPENSATION PHARMACY MANAGEMENT SERVICES. Substantially all of the
revenues in the workers' compensation Pharmacy Management Services division of
the Company are billed directly to the insurance companies, third party
administrators or the employer of the injured worker receiving the products
and services.
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.
-11-
<PAGE> 12
LICENSURE, CERTIFICATION AND REGULATION. 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 and require that out-of-state pharmacies obtain an out-of-state or mail
order pharmacy license. 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. Various federal and state pharmacy associations and some
boards of pharmacy have attempted to promote laws or regulations directed at
restricting the activities of out-of-state pharmacies, thereby benefiting
local pharmacies with which PharMerica may compete from time to time. In
addition, a number of states have laws or regulations which, if successfully
enforced, would effectively limit some of the financial incentives available
to third-party payors that offer managed care prescription drug programs. To
the extent such laws or regulations are applicable to PharMerica, there is no
assurance PharMerica could comply, and noncompliance could adversely affect
PharMerica's pharmacy operations.
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 AFFECTING THE REPACKAGING, LABELING AND INTERSTATE
SHIPPING OF DRUGS. 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. In addition, to the extent PharMerica may use
the U.S. Postal Service, Federal Trade Commission and U.S. Postal Service
regulations require mail order sellers to engage in truthful advertising, to
stock a reasonable supply of drugs, to fill mail orders within thirty days,
and if that is impossible, to inform consumers of their right to a refund.
PharMerica believes that it holds all required registrations and licenses, and
that its repackaging and mail order operations are in material compliance with
applicable state and federal requirements.
MEDICARE AND MEDICAID. 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 private 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
-12-
<PAGE> 13
relating to drug regimen reviews for Medicaid residents in such facilities.
Recent regulations clarify that, under federal law, a pharmacy is not required
to meet the general standards for drugs dispensed to long-term care facility
residents if the long-term care facility complies with the drug regimen review
requirements. However, the regulations indicate that states may nevertheless
require pharmacies to comply with the general standards, regardless of whether
the long-term care facility satisfies the drug regimen review requirement, and
the states in which PharMerica operates currently do require its pharmacies to
comply therewith. Third, federal regulations impose certain requirements
relating to reimbursement for prescription drugs furnished to Medicaid
residents.
In addition to requirements imposed by federal law, states have
substantial discretion to determine administrative, coverage, eligibility and
payment policies under their state Medicaid programs which may affect
PharMerica's operations. For example, some states have enacted "freedom of
choice" requirements which may prohibit a long-term care facility from
requiring its residents to purchase pharmacy or other ancillary medical
services or supplies from particular providers. Such limitations may increase
the competition which PharMerica faces in providing services to long-term care
residents. A number of states 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.
REFERRAL RESTRICTIONS. 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
the 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
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<PAGE> 14
and/or civil penalties and exclusion from the Medicare and Medicaid programs.
The list of "designated health services" includes outpatient prescription
drugs. Some states have also passed similar "anti self-referral" legislation.
PharMerica does not believe that the Stark law or similar state laws, have
had, or will have, a significant adverse impact on the operations of
PharMerica and PharMerica is not aware of any financial arrangements between
it, or any of its pharmacies, and physicians which violate the Stark law.
In addition, a number of states have recently undertaken enforcement
actions against pharmaceutical manufacturers involving pharmaceutical
marketing programs, including programs containing incentives to pharmacists to
dispense one particular product rather than another. These enforcement actions
arose under state consumer protection laws which generally prohibit false
advertising, deceptive trade practices, and the like. Further, a number of
states involved in these enforcement actions have requested that the U.S. Food
and Drug Administration ("FDA") exercise greater regulatory oversight in the
area of pharmaceutical promotional activities by pharmacists. It is not
possible to determine whether the FDA will act in this regard or what effect,
if any, either the state enforcement efforts or the FDA involvement would have
on PharMerica's operations.
The United States government frequently seeks to enforce the health
care laws discussed above, and to ensure accurate billing of federally-
financed health care, through bringing actions against health care providers
under the False Claims Act ("FCA"). The FCA provides for recovery of treble
damages to the federal government, plus penalties, for the submission of false
or fraudulent claims for payment to the federal government. The FCA also
authorizes private citizens to bring such actions on behalf of the 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 targeting 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.
PROSPECTIVE PAYMENT SYSTEM. The Balanced Budget Act of 1997 ("BBA")
signed into law on August 5, 1997, seeks to achieve a balanced federal budget
by, among other things, reducing federal spending on Medicare and Medicaid
programs. With respect to Medicare, the law mandates establishment of a
prospective payment system ("PPS") for Medicare skilled nursing facilities
("SNFs") under which facilities will be paid a federal daily ("per diem") rate
for virtually all covered SNF services. PPS will be phased-in over three cost
reporting periods and started with cost reporting periods beginning on or after
July 1, 1998.
Under PPS, PharMerica's skilled nursing facility customers receive a
federal per diem rate to cover the costs of all eligible goods and services
provided to Medicare Part A patients, which may include certain pharmaceutical
and other goods and services provided by PharMerica that were previously
reimbursed separately under Medicare Part A and Medicare Part B. While
PharMerica continues to bill SNF facilities on a negotiated fee schedule, the
costs of certain PharMerica products (including pharmaceuticals) are no longer
a "pass-through" cost to the SNF facilities. Since the amount
-14-
<PAGE> 15
of SNF reimbursement is limited by PPS, facility customers now have an
increased incentive to negotiate with PharMerica to minimize the costs of
providing goods and services to patients covered under Medicare Part A.
Implementation of PPS may have a material adverse effect on the business,
financial condition or results of operations of PharMerica.
PHARMERICA NATIONAL PHARMACY AND THERAPEUTICS COMMITTEE
In response to an industry-wide concern, PharMerica has taken
proactive measures and established a National Pharmacy and Therapeutics (P&T)
Committee. The committee is composed of ten external members (7 physicians and
3 doctors of pharmacy) recognized nationally for their expertise in managing
the health care needs of geriatric patients and three internal members (2
doctors of pharmacy and 1 nurse) who are familiar with our patient population
and factors related to specialty programs including infusion therapy and
disease management. The P&T Committee evaluates drugs by therapeutic response,
indication, side effect profile, bio-equivalence, pharmacokinetics, and special
consideration in the elderly. Each product's acceptability within the category
is rated as either therapeutically Acceptable, Acceptable with Advantages,
Acceptable with Caution or Not Acceptable. A cost and pharmacoeconomic
analysis is then performed to select preferred products. This commitment was
made by PharMerica reflective of the core value to "do what is right" in
protecting the patient and optimizing pharmaceutical care.
EMPLOYEES
As of February 19, 1999, PharMerica had approximately 5,824 full-time
employees and approximately 1,658 part-time employees, all of which are
located in the United States. PharMerica believes its relationship with its
employees is good. None of PharMerica's employees are represented by labor
unions under any collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 89,000 square
feet of leased space in the Silo Bend Industrial Park in Tampa, Florida.
PharMerica also leases space required for its 159 pharmacy locations. A
typical pharmacy occupies between 7,000 and 10,000 square feet. Lease terms on
most of the leased centers range from 3 to 5 years. The Company considers
that, in general, its physical properties are well maintained, in good
operating condition and adequate for their intended purposes. Management
believes that the Company's leased properties are adequate for its present
needs and that suitable additional or replacement space will be available as
required.
ITEM 3. LEGAL PROCEEDINGS
In November 1998, a putative securities class action was filed against
PharMerica, C. Arnold Renschler, M.D. (the Company's Chief Executive Officer),
Robert Della Valle, Pharm.D (the Company's former Chief Operating Officer) and
James D. Shelton (the Company's former Chief Financial Officer) in the United
States District Court for the Middle District of Florida. The proposed class
consists of all persons who purchased or acquired stock of PharMerica between
January 7, 1998 and July 24, 1998. The complaint seeks monetary damages but does
not specify an amount. In general, the complaint alleges that the defendants
made material omissions by withholding from the market information related to
the costs associated with certain acquisitions. The complaint alleges claims
under Sections 10(b) and 20(a)
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<PAGE> 16
of the Securities Exchange Act of 1934. PharMerica believes the complaint is
without merit and intends to defend the case vigorously. The potential outcome
of the litigation cannot be predicted with certainty, however, management
believes the litigation will not have a material impact on the financial
position or results of operations of the Company given a preliminary
investigation and its existing insurance coverages.
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 February 26, 1999, there were no
other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Shares are traded on the Nasdaq National Market under
the designation "DOSE." The following table indicates high and low sales
quotations for the periods indicated based upon information supplied by the
Nasdaq Stock Market. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions. Quotations for periods before
the PCA/Capstone Merger on December 3, 1997, represent historical quotations
of Capstone:
Bid Quotations
--------------
Fiscal Year Ended December 31, 1998 High Low
- ----------------------------------- ---- ---
1st Quarter $ 16.00 $ 9.75
2nd Quarter 16.00 10.31
3rd Quarter 12.44 3.56
4th Quarter 6.19 2.88
Bid Quotations
Fiscal Year Ended December 31, 1997 High Low
- ----------------------------------- ---- ---
1st Quarter $ 13.25 $ 10.00
2nd Quarter 12.00 7.75
3rd Quarter 12.75 10.00
4th Quarter 12.94 9.00
As of February 25, 1999, the number of record holders of the
Company's shares was approximately 6,602, which does not include individual
participants in security position listings. The number of beneficial owners of
the Company's shares was approximately 28,800. On February 25, 1999, the
closing bid quotation for the Company's common stock was $5.656, as reported
by the Nasdaq Stock Market.
The Company has never paid cash dividends on its common stock. The
Company currently intends to retain any earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The Company's current credit facility prohibits the payment of
dividends.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated statements of operations and balance
sheets data as of and for the years ended December 31, 1994, 1995, 1996, 1997
and 1998, have been derived from the audited consolidated financial statements
of the Company. As a result of the accounting treatment of the PCA/Capstone
Merger, the historical financial statements of the Company prior to December
3, 1997 are those of PCA. 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>
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net revenues $ 247,512 $ 451,685 $ 516,400 $ 652,179 $1,145,928
Costs of revenues 117,045 242,761 280,468 355,577 656,589
--------- --------- --------- ---------- ----------
Gross profit 130,467 208,924 235,932 296,602 489,339
--------- --------- --------- ---------- ----------
Operating expenses:
Selling, general and
administrative 91,883 158,115 171,085 205,278 344,734
Bad debt 7,388 17,679 13,500 10,809 52,937
Depreciation and amortization 5,734 13,219 16,392 21,408 36,398
Loss on disposition -- -- -- -- 4,500
Asset impairment and
restructuring charges -- 9,543 -- 10,935 108,215
--------- --------- --------- ---------- ----------
Total operating expenses 105,005 198,556 200,977 248,430 546,784
--------- --------- --------- ---------- ----------
Operating income (loss) 25,462 10,368 34,955 48,172 (57,445)
Interest expense (income), net 113 (195) -- 2,483 39,133
--------- --------- --------- ---------- ----------
Income (loss) before provision
for income taxes 25,349 10,563 34,955 45,689 (96,578)
Provision for income taxes 10,291 5,977 14,668 18,992 3,030
--------- --------- --------- ---------- ----------
Net income (loss) $ 15,058 $ 4,586 $ 20,287 $ 26,697 $ (99,608)
========= ========= ========= ========== ==========
Earnings (loss) per share $ 0.30 $ 0.09 $ 0.41 $ 0.50 $ (1.12)
========= ========= ========= ========== ==========
Shares used in computing
earnings (loss) per share 50,000 50,000 50,000 53,060 89,221
========= ========= ========= ========== ==========
OTHER FINANCIAL DATA:
Capital expenditures $ 7,407 $ 13,098 $ 9,616 $ 15,600 $ 23,982
========= ========= ========= ========== ==========
CONSOLIDATED BALANCE
SHEETS DATA:
Working capital $ 71,794 $ 77,512 $ 92,134 $ 201,588 $ 283,142
Total assets 327,287 428,872 441,576 1,114,248 1,164,325
Long-term obligations
(net of current portion) 1,147 755 2,302 427,889 591,552
Stockholders' equity 66,732 71,318 91,605 528,878 432,835
</TABLE>
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<PAGE> 19
ITEM 7. 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.
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in or incorporated by reference into
this Annual Report on Form 10-K, including, but not limited to, those
regarding the Company's financial position, business strategy, Year 2000
Compliance and other plans and objectives for future operations and any other
statements that are not historical facts constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes that
the expectations reflected in these forward-looking statements are reasonable,
there can be no assurance that the actual results or developments anticipated
by the Company will be realized or, even if substantially realized, that they
will have the expected effects on its business or operations. Among other
factors that could cause actual results to differ materially from the
Company's expectations include the availability and cost of attractive
acquisition candidates, the integration of acquired businesses, the loss of
large customers or of numerous small customers, the continuation of various
trends in the long-term care market (including the trends toward consolidation,
cost containment and the implementation of the Medicare Prospective Payment
System), competition among providers of long-term care pharmacy services, the
Company's level of indebtedness, the availability of capital, government audits
and investigations and reform of the health care delivery system and other risks
and uncertainties as described in the Safe Harbor Compliance Statement for
Forward-looking Statements section is included as Exhibit 99 hereto and
incorporated herein by reference and in the Company's previous filings with the
Securities and Exchange Commission ("SEC").
OVERVIEW
PharMerica, Inc. is a leading independent provider of institutional
pharmacy products and services to the elderly, chronically ill and disabled in
long-term care and alternate site settings, including skilled nursing
facilities, assisted living facilities, residential and independent living
communities, specialty hospitals and the home. The Company also is the leading
independent provider of home delivery pharmacy products and services to the
workers' compensation and catastrophic care markets. As of February 25, 1999,
PharMerica provided pharmacy products and services to approximately 500,000
patients in long-term care and alternate site settings.
The Company purchases and dispenses prescription and non-prescription
pharmaceuticals and other medical supplies and provides its clients' 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 PharMerica believes will improve its ability to compete in
managed care and prospective payment systems.
-19-
<PAGE> 20
During the year ended December 31, 1998, the Company made thirteen
acquisitions, twelve of which were institutional pharmacy companies, and the
other was a provider of workers' compensation mail order and on-line pharmacy
services. The total purchase price for these thirteen acquisitions was
approximately $97 million and the goodwill associated with these acquisitions
was approximately $90 million.
During the third quarter ended September 30, 1998, the Company
recorded pre-tax charges of $149.7 million, which included the following:
non-cash, pre-tax SFAS No. 121 charges of $99.0 million related to the
write-downs of certain tangible and intangible assets, a pre-tax charge of
$37.0 million to increase its allowance for doubtful accounts, a pre-tax loss
of $4.5 million resulting from the sale in July 1998 of its Department of
Corrections business and $9.2 million of net restructuring charges related
primarily to the relocation of its corporate office and mail service pharmacy
business.
On December 3, 1997, Beverly Enterprises, Inc., a Delaware corporation
("Beverly"), whose sole remaining business consisted of the institutional
pharmacy business conducted through its wholly-owned subsidiary, Pharmacy
Corporation of America ("PCA"), merged with and into the Company (then known as
Capstone Pharmacy Services, Inc. ("Capstone") (the "PCA/Capstone Merger"). The
PCA/Capstone 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, after the PCA/Capstone
Merger was consummated, the historical financial statements of the Company
became those of PCA. Accordingly, the historical financial statements for all
periods prior to December 3, 1997, are comprised of PCA only.
On January 11, 1999, Bergen Brunswig Corporation ("Bergen") and
PharMerica entered into an Agreement and Plan of Merger (the "Bergen Merger
Agreement"), pursuant to which PharMerica will be merged into, and will thereby
become, a wholly-owned subsidiary of Bergen (the "Bergen Merger"). Under the
terms of the Bergen Merger Agreement, upon consummation of the Bergen Merger,
shareholders of PharMerica will receive 0.275 of a share of Bergen Class A
Common Stock in exchange for each share of PharMerica common stock they hold.
The Bergen Merger is intended to be tax-free and will be treated as a purchase
for financial reporting purposes. Consummation of the transaction is subject to
the satisfaction of certain conditions, including approvals by the shareholders
of Bergen and PharMerica.
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<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's Consolidated Statements of Operations, expressed as
percentage of revenues.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Costs of revenues 54.3 54.5 57.3
----- ----- -----
Gross profit 45.7 45.5 42.7
Selling, general and administrative expenses 33.1 31.5 30.1
Bad debt expense 2.6 1.6 4.6
Depreciation and amortization 3.2 3.3 3.2
Loss on disposition -- -- .4
Asset impairment and restructuring charges -- 1.7 9.4
----- ----- -----
Operating income (loss) 6.8 7.4 (5.0)
Interest expense, net -- (.4) (3.4)
----- ----- -----
Income (loss) before income taxes 6.8 7.0 (8.4)
Income taxes 2.9 2.9 .3
----- ----- -----
Net income (loss) 3.9% 4.1% (8.7)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for the year ended December 31, 1998 increased to $1,145.9
million from $652.2 million for the year ended December 31, 1997, an increase
of $493.7 million or 75.7%. Approximately $284 million of the increase is
primarily attributable to the operations of Capstone for which a full year of
operating results is included for 1998, approximately $120 million is
attributable to acquisitions during 1998, and the remainder of approximately
$90 million represents internal revenue growth from existing and new customers.
COSTS OF REVENUES. Costs of revenues includes the cost of pharmaceuticals and
other related products sold to patients and institutions. Costs of revenues for
the year ended December 31, 1998 increased to $656.6 million, or 57.3% of
revenues compared to $355.6 million or 54.5% of revenues, in the comparable
1997 period. The increase in costs of revenues as a percentage of revenues is
primarily due to the impact of a change in the mix of products and services
sold as a result of the PCA/Capstone Merger, principally from the impact of a
reduction in infusion therapy products and services as a percentage of revenues
from 1997 to 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include salaries, benefits, facility expenses, delivery
expenses, rents and other administrative overhead. Selling, general and
administrative expenses for the year ended December 31, 1998 were $344.7
million compared to $205.3 million in 1997. As a percentage of revenues,
selling, general and administrative expenses for the year ended December 31,
1998 were 30.1%, compared to 31.5% in 1997.
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<PAGE> 22
The decrease as a percentage of revenues is primarily due to efficiencies
realized in these expenses in connection with the PCA/Capstone Merger and
efficiencies in corporate and regional overhead as revenues have grown.
BAD DEBT EXPENSE. The Company's bad debt expense was increased by a pre-tax
charge of $37.0 million during the third quarter of 1998 to increase its
allowance for doubtful accounts because it has adopted a more conservative
accounting method of estimating the allowance necessary for accounts
receivable. Three of the Company's large non-preferred provider agreement
customers experienced financial difficulty during the third quarter of 1998,
which caused management to re-evaluate the method of estimating the allowances
necessary for these and other customers. Management also believes that cash
flows of some of its long-term care customers may be impacted by the lower
reimbursement rates under the Medicare prospective payment system, which was
partially implemented on July 1, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year ended
December 31, 1998 were $36.4 million compared to $21.4 million in 1997. This
increase is due mainly to the increased amortization expense incurred as a
result of the PCA/Capstone Merger and subsequent acquisitions during 1998.
LOSS ON DISPOSITION. The Company recorded a pre-tax charge of approximately
$4.5 million during the third quarter of 1998 in connection with the sale of
its Department of Corrections business to Stadtlanders Drug Company, a former
affiliate of Counsel Corporation which owns approximately 9% of the Company's
outstanding common stock. In January 1999, Stadtlanders Drug Company was
acquired by Bergen.
ASSET IMPAIRMENT AND RESTRUCTURING CHARGES. The Company recorded non-cash,
pre-tax charges of approximately $99.0 million in the third quarter of 1998 to
reflect write-downs of certain tangible and intangible assets in accordance
with FASB Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed of. SFAS No. 121 requires companies to periodically review
long-lived assets, including related goodwill, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable based on the expected future cash flows.
Substantially all of the SFAS No. 121 write-downs relate to five
pharmacies, each of which had negative operating cash flows during 1998. The
Company closed one of these pharmacies during the third quarter of 1998 and
identified three of the other pharmacies as "assets to be disposed of" and
recorded write-downs to reflect their estimated net realizable value. The fifth
pharmacy had deteriorating operating results which required the Company to
record the SFAS No. 121 charge. In February 1999, two of these pharmacies were
sold at amounts which approximated their net realizable values.
The Company also recorded approximately $13.0 million in additional
restructuring charges during the third quarter of 1998 offset by the reversal
of $3.8 million in excess PCA/Capstone Merger restructuring costs for a net
charge in the quarter of $9.2 million. Substantially all of these charges
related to future rents and related costs at its former corporate office and
its mail service pharmacy facility in Tampa. The Company consolidated and
relocated its corporate office and the mail service pharmacy operating unit to
a new location in Tampa.
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<PAGE> 23
INTEREST EXPENSE, NET. Interest expense for the year ended December 31, 1998
was approximately $39.1 million compared to $2.5 million in 1997. The 1998
amount primarily relates to bank borrowings and subordinated debt issued during
1998 to fund the PCA/Capstone Merger and other acquisitions since the
PCA/Capstone Merger. During 1997, the Company had nominal interest expense
because PCA did not incur interest charges on its intercompany payable to
Beverly.
INCOME TAXES. The income tax provision for the year ended December 31, 1998 was
approximately $3.0 million. The Company recorded an income tax provision in
1998 even though the Company had a pre-tax loss of $96.6 million. The
difference between the income tax provision recorded in 1998 and the income tax
benefit that would have been recorded if the federal and state statutory rates
had been applied to the loss is because a substantial portion of the asset
impairment charges during the third quarter of 1998 were not deductible for tax
purposes. The income tax provision for the year ended December 31, 1997 was
$19.0 million. The effective income tax rate for 1997 was higher than the
federal and state statutory rate primarily due to the impact of non-deductible
goodwill associated with the Company's acquisitions.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
REVENUES. The Company's revenues 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 1997 acquisition
of Interstate Pharmacy Corp. and the December 1997 acquisition of Capstone.
COSTS OF REVENUES. The Company's costs of revenues 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 revenues, costs of revenues was 54.5% in 1997 as
compared to 54.3% in 1996. Costs of revenues as a percentage of revenues
remained stable from 1996 to 1997, primarily due to increased purchasing
efficiencies related to renegotiated vendor contracts which were partially
offset by competitive pricing pressures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include wages and related expenses, facility expenses,
and other administrative overhead. Selling, general and administrative expenses
increased approximately $34.2 million, or 20.0%, to $205.3 million in 1997 from
$171.1 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 31.5 % in 1997 from 33.1% 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 30.5%, 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.
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<PAGE> 24
ASSET IMPAIRMENT AND RESTRUCTURING CHARGES. In December 1997, the Company
recorded an asset impairment loss of approximately $5.2 million related to the
closure of certain pharmacies as a result of the PCA/Capstone 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 closed. Additionally, the Company wrote down certain capitalized
software costs to their estimated fair values.
During December 1997, in connection with the PCA/Capstone Merger, the
Company adopted a plan to restructure its long-term care pharmacy operations.
In connection with this plan, the Company closed six former PCA pharmacies and
recorded restructuring costs of $5.8 million related to these closures,
consisting of $3.6 million of severance covering approximately 180 pharmacy
employees, $0.7 million of lease termination costs and $1.4 million of other
costs.
INTEREST EXPENSE, NET. Prior to the PCA/Capstone 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 PCA/Capstone Merger, the Company entered into a revolving $550
million credit facility with a syndicate of commercial banks (the "Credit
Facility"). Interest expense of approximately $2.5 million was incurred under
the Credit Facility from the date of the PCA/Capstone Merger through December
31, 1997. At year end, the Company had outstanding borrowings of approximately
$424.5 million under this Credit Facility. Proceeds of these borrowings were
used to repay $275 million of PCA debt in connection with the PCA/Capstone
Merger, refinance Capstone's existing credit facility, fund acquisitions closed
in December 1997 and pay transaction costs related to the PCA/Capstone Merger.
PROVISION FOR INCOME TAXES. The Company had an annual effective rate of 41.6%
for the year ended December 31, 1997, compared to 42.0% in 1996. Management
believes that the Company's tax rate will remain higher than the statutory
federal tax rate in future years due to the non-deductibility of the goodwill
recorded on certain stock acquisitions, including the PCA/Capstone Merger.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company requires capital primarily to finance strategic pharmacy
acquisitions, to finance its working capital requirements, and to finance the
acquisition of computer and other operating equipment. The Company anticipates
its future cash flows will be used to purchase computer equipment and equipment
for pharmacies, to finance strategic pharmacy acquisitions, to repay debt and
related interest charges, and, to meet, to the extent required, working capital
requirements.
The Company's net cash provided by (used in) operating activities for
the years ended December 31, 1998 and 1997 were approximately $(39.0) million
and approximately $28.2 million, respectively. Cash flows from operating
activities decreased in 1998 due to increased working capital requirements,
which were primarily due to the increase in accounts receivable of approximately
$48.1 million and to the decrease of approximately $27.8 million in net accounts
payable and accrued expenses. These additional working capital requirements were
attributable to approximately $493.7 million in increased revenues, an
approximately $8 million increase in accounts receivable associated with Beverly
because, as an unrelated party, the Company now has accounts receivable from
Beverly, offset in part by an approximately $8 million net decrease in working
capital for entities acquired since December 1997. These additional working
capital requirements from acquisitions relate primarily from the terms in
certain asset purchase agreements regarding minimum working capital requirements
at closing.
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<PAGE> 25
The Company's net cash outflows from investing activities were
approximately $112.1 million and $34.8 million for the years ended December 31,
1998 and 1997, respectively. Net cash flows from investing activities were
impacted by acquisitions ($88.1 million and $19.2 million, respectively), and
investments in new pharmacy locations and information systems ($24.0 million
and $15.6 million, respectively) during the periods.
Net cash flows from financing activities were approximately $149.2
million and $33.2 million for the years ended December 31, 1998 and 1997,
respectively. Net cash flows from financing activities were impacted by
borrowings to fund acquisitions and working capital requirements.
In connection with the PCA/Capstone Merger in December 1997, the
Company entered into the Credit Facility with a syndicate of banks for which The
Chase Manhattan Bank ("Chase") acts as administrative agent. The Credit Facility
was amended effective December 31, 1998. The amendment reduced the Credit
Facility to $325.0 million, increased the maximum ratios under certain leverage
covenants, adjusted the applicable borrowing rates for the ratios under the
leverage covenants and pledged the stock of all subsidiaries of the Company as
collateral. Under the Credit Facility, the Company has the option to borrow
under an alternate base rate or a Eurodollar loan rate. Interest rates on the
alternate base rate loans are calculated as the sum of the applicable rate, plus
the greater of (a) the prime rate, (b) the base certificate of deposit rate plus
1% or (c) the federal funds effective rate on the date of the loan, plus 1/2 of
1%. Interest on the Eurodollar loans are calculated using the adjusted LIBOR
rate for the interest period in effect, plus the applicable rate. The adjusted
LIBOR rate is the LIBOR rate for such interest period multiplied by the
statutory reserve rate. The applicable rate and the statutory reserve rate are
defined in the Credit Facility. Interest on the Eurodollar loans is due on the
last day of the interest period applicable to the borrowing. As of December 31,
1998, the Company had $259.7 million outstanding under a Eurodollar loan at an
effective interest rate, including the amortization of deferred financing costs,
of approximately 6.25%. Upon the occurrence of a change in control, all
borrowings under the Credit Facility become due and payable.
The Credit Facility contains various financial covenants, including an
adjusted leverage ratio, a consolidated interest expense coverage ratio and a
net worth covenant (each as defined in the Credit Facility). The Credit
Facility also contains certain covenants which, among other things, impose
certain limitations or prohibitions on the Company with respect to the
incurrence of certain indebtedness, the creation of security interests on the
assets of the Company, certain mergers or consolidations, certain investments,
loans or guarantees, certain hedging agreements not entered into to mitigate
risk, payment of cash dividends and the redemptions 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. As of December 31, 1998, the Company was in
compliance with all covenants of the Credit Facility.
In March 1998, the Company sold $325 million of Senior Subordinated
Notes in a private placement. The notes bear interest at 8 3/8% and mature in
2008. The Company used the net proceeds of the notes to partially repay
indebtedness under the Credit Facility, which amounts may be subsequently
reborrowed subject to borrowing restrictions outlined in the loan covenants
described above. In accordance with the provisions of the notes, new registered
notes, which are publicly traded, were issued in July 1998 with substantially
the same terms as the original notes. The indenture governing the notes
contains certain limitations or prohibitions on the Company including the
incurrence of certain indebtedness, the creation of security interests, certain
acquisitions and dispositions and certain investments. As of December 31, 1998,
the Company was in compliance with such covenants.
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The Company has implemented measures to improve cash flows generated
from operating activities, including a greater emphasis on internal growth,
reductions in corporate overhead, regionalization of billing and collections
and more aggressive collection efforts. The Company believes these strategies
should generate sufficient cash flows to meet its operating needs for the
foreseeable future. However, the Company may require capital resources for
acquisitions or to meet internal working capital needs and may need to incur
additional indebtedness. The availability of funds under the Credit Facility is
limited by certain financial covenants as described above and there can be no
assurances that additional funds will be available.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" is a term used to describe the problems created
by systems that are unable to accurately interpret dates after December 31,
1999. The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year such that, as the
century date occurs, date sensitive systems will recognize the year 2000 as
1900 or not at all. This inability to recognize or properly treat the year 2000
may cause systems to process critical financial and operational information
incorrectly. The Year 2000 Issue creates potential risks for the Company in the
Information Technology ("IT") and non-IT systems that the Company uses in its
business operations. The Company may also be exposed to risks from third
parties with whom the Company interacts who fail to adequately address their
own Year 2000 issues.
The Company has a program designed to address its Year 2000 issues. A
project team has performed a review of all internal computer systems and has
developed a more detailed assessment to include internal and external
compliance audits and performance of various validation and testing procedures.
The Company intends to replace or correct through programming modifications
and/or software upgrades systems critical to the Company's business identified
as non-Year 2000 compliant. In addition, third parties such as suppliers,
customers and payor sources (including Medicare and Medicaid) will be asked to
verify, through a compliance assurance questionnaire, their Year 2000
readiness. Management of the Company believes it has an effective program in
place to resolve its internal Year 2000 issues and is on target with its
estimated timeline to complete the modifications before the end of 1999. If the
Company's remediation plan is not successful, there could be a significant
disruption of the Company's ability to transact business with its major
suppliers, customers and payors. The Company is not aware of any significant
Year 2000 problems with any of its major suppliers, customers or payors.
However, there can be no assurance that all problems will be foreseen or
corrected, including the ability of Medicare and Medicaid to become Year 2000
compliant. Medicare has recently acknowledged that it is not fully Year 2000
compliant although it expects to have all major payment processing systems Year
2000 compliant by December 31, 1999.
THE COMPANY'S STATE OF READINESS. While the Company's Year 2000 efforts have
been underway for several years, the Company centralized its focus on
addressing the Year 2000 Issue in 1998 by forming a Y2K Executive Steering
Committee. The Y2K Executive Steering Committee is chaired by the Company's
Chief Information Officer, who reports directly to the Company's Chief
Financial Officer, and includes five senior officers from operations, sales and
marketing, finance and accounting, and information systems. The Y2K Executive
Steering Committee is charged with key decision making authority, including
corporate governance, corporate communications, budgets and related funding,
resource allocations and legal issues. The Audit Committee of the Board of
Directors is advised periodically on the status of the Company's Year 2000
compliance program by both the Company's Chief Financial Officer and Chief
Information Officer.
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<PAGE> 27
The Y2K Executive Steering Committee created a Y2K Project Management
Team. The Y2K Project Management Team, which consists primarily of
representatives of key information technology disciplines within the Company
and an outside consultant, is responsible for risk assessment, compliance
strategy, cost analysis, compliance work plans, project tracking and reporting,
vendor contact and coordination, resource allocation and coordination,
validation and execution of remediation strategy/plans and testing
strategy/plans, deployment and certification, and contingency planning. The Y2K
Project Management Team, working with the Y2K Executive Steering Committee,
created the following four groups within the Company: (1) computer systems; (2)
networks and desktop software; (3) business infrastructure; and (4) corporate
services/functions. The computer systems group assists the Y2K Project
Management Team in the preparation and execution of remediation strategy/plans,
testing its primary dispensing systems, business support applications,
corporate systems and other critical systems/applications. The networks and
desktop software group assists the Y2K Project Management Team in the
preparation and execution of remediation strategy/plans for network systems and
infrastructure, servers, PC-client operating systems and utilities, AS/400 and
RS/6000 operating system software and utilities, vision solutions, special
dispensing/labeling systems and time clock systems. The business infrastructure
group assists the Y2K Project Management Team in developing plans for
compliance verification and remediation of telecommunications, including phone
systems, fax systems, pagers and cellular phones, throughout a dispersed
geography and for compliance verification of environmental control systems,
building security systems, metering/packing systems and elevators. The
corporate services/functions group assists the Y2K Project Management Team with
legal and purchasing services, financial services, human resources and tax
issues.
The Y2K Executive Steering Committee has developed a phased approach
to identifying and remediating Year 2000 Issues, with many of these phases
overlapping with one another or conducted simultaneously.
The first phase was to develop a corporate-wide, uniform strategy for
addressing the Year 2000 Issue and to assess the Company's current state of
Year 2000 readiness. The Y2K Project Management Team working with the four
groups within the Company, reviewed all IT and non-IT systems, including
Company products and internal operating systems for potential Year 2000 issues.
The Company completed this phase for the majority of its IT and non-IT systems
during 1998 and the balance in early 1999. In addition, during this phase the
Company developed its Year 2000 Policy Statement which was released to the
Company's customers, suppliers and business partners.
The second phase of the Company's Year 2000 compliance program (begun
simultaneously with the first phase) was to define a Year 2000 "Compliance"
standard and to develop uniform test plans and test methodologies. The Company
has engaged Year 2000 consultants to review the Company's test plans and
methodologies for the testing of its systems and products, as well as
third-party systems and products. Each of the Company's primary dispensing
systems is being assessed, repaired and remediated as necessary, tested and
deployed as Year 2000 compliant.
The third phase of the Company's Year 2000 compliance program is the
actual testing and remediation (if necessary) of the Company's IT and non-IT
products and systems. The Company has completed the assessment of each of its
primary dispensing systems. As of February 25, 1999, primary dispensing systems
supporting approximately 50% of its revenues have been repaired, tested and
deployed. The remaining dispensing systems are expected to be ready for testing
during April and May 1999 and deployed by July 1999. Updates to the network
systems for purposes of Year 2000 compliance are in progress and should be
completed by April 1999. The desktop remediation is in process and should be
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<PAGE> 28
completed by September 1999. The financial reporting systems have been
assessed, tested and should be fully deployed as Year 2000 compliant by May
1999.
The Company is presently evaluating each of its principal suppliers,
service providers and other business partners to determine each of such party's
Year 2000 status. The Company has developed a questionnaire and a Year 2000
certification for use with such third parties, and, as of December 31, 1998,
the Company had contacted approximately 150 vendors about their Year 2000
compliance, including many of the vendors that the Company has identified as
critical vendors. The Company anticipates that this evaluation will be on-going
through 1999.
The Company is working jointly with customers, strategic vendors and
business partners to identify and resolve any Year 2000 issues that may impact
the Company. However, there can be no assurance that the companies with which
the Company does business will achieve a Year 2000 conversion in a timely
fashion, or that a failure to convert by another company will not have a
material adverse effect on the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The total costs associated
with the Company's Year 2000 remediation are not expected to be material to the
Company's financial condition or results of operations. The estimated total
cost of the Company's Year 2000 remediation is expected to approximate $6.2
million. Through December 31, 1998, the Company has spent approximately $1.5
million in connection with Year 2000 Issues. The $4.7 million that the Company
expects to spend in 1999 includes $2 million of capital expenditures to upgrade
phone systems, desktop software and desktop hardware in pharmacies throughout
the United States. In addition, the Company will spend approximately $400,000
to install the new equipment. The Company will spend and expense an estimated
$1.5 million to convert its mail service and long-term care dispensing
applications to Year 2000 compliance. The remaining expenses are approximately
$800,000 to remediate various internal and external systems to Year 2000
readiness.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. Management of the Company believes
it has an effective program in place to resolve Year 2000 issues timely.
However, there can be no assurance that the Company will be successful in its
efforts to address Year 2000 issues. It is not possible to anticipate all
possible future outcomes, especially when third parties are involved. If some
of the Company's systems are not Year 2000 compliant, the Company could suffer
lost sales or other negative consequences, including, but not limited to,
delayed billings and collections, damage to the Company's reputation or
litigation, any of which could materially adversely affect the Company's
business operations or financial statements.
The Company is also dependent on third parties such as its customers,
suppliers, service providers, governmental and private third party payors and
other business partners. If these or other third parties fail to adequately
address Year 2000 Issues, the Company could experience a negative impact on its
business operations or financial statements. For example, the failure of the
Company's principal suppliers to have Year 2000 compliant internal systems
could impact the Company's ability to deliver its pharmaceutical products or to
maintain adequate inventory levels. Further, the failure of third party payors,
including Medicare and Medicaid, to be Year 2000 compliant could delay payment
for the Company's products and services, which could increase the Company's
working capital requirements or cause cash flow problems. In addition,
disruption in the economy in general resulting from the Year 2000 Issue could
adversely impact the Company.
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<PAGE> 29
THE COMPANY'S CONTINGENCY PLANS. The Company is developing a comprehensive
contingency plan to address situations that may result if the Company or any of
the third parties upon which the Company is dependent are unable to achieve
Year 2000 readiness. The Company's Year 2000 compliance program is ongoing and
its ultimate scope, as well as its contingency plans, will continue to be
evaluated as new information becomes available. The Company expects to have its
contingency plans completed by August 1999.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data are attached hereto,
following the signature pages, and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE
---- ---
<S> <C>
David R. Banks(3), (4), (8) 61
E. Martin Gibson(2), (8) 60
Cecil S. Harrell(1), (4), (5), (6) 64
Boyd W. Hendrickson(2), (6), (7) 54
Fredrick C. Powell(2), (4), (5) 58
Albert Reichmann(1), (7) 69
C. Arnold Renschler, M.D.(3), (8), (9) 57
Gail Wilensky, Ph.D.(1), (6), (7) 55
</TABLE>
- ---------------
(1) Class 1 director
(2) Class 2 director
(3) Class 3 director
(4) Member of Compensation Committee.
(5) Member of Disinterested Stock Option Plan Committee.
(6) Member of Quality/Compliance Committee.
(7) Member of Audit Committee.
(8) Member of Acquisition Committee.
(9) Chairman of the Board
Mr. Banks became a Director of PharMerica in December 1997. Mr. Banks
has been a director of Beverly since 1979 and has served as Chief Executive
Officer of Beverly since May 1989 and Chairman of the Board of Beverly since
March 1990. Mr. Banks was President of Beverly from 1979 to September 1995. Mr.
Banks is a director of Nationwide Health Properties, Inc., a real estate
investment company, Ralston Purina Company, a diversified food company, and
Wellpoint Health Networks, Inc., a managed healthcare company, and a trustee for
Occidental College.
Mr. Gibson became a Director of PharMerica in June 1998. Mr. Gibson
currently serves as a member of the board of directors of Hardinge Inc., a
manufacturer of machine tools, NovaCare, Inc., a company providing physical
rehabilitation and employee services, NovaCare Employee Services, Inc., a
professional employer organization specializing in providing outsourcing
solutions to human resources needs, and IT Group Inc., a company providing a
wide range of environmental services and technologies. Mr. Gibson served as the
Chief Executive Officer and Chairman of the Board of Corning Lab Services, Inc.
from January 1991 to December 1994.
Mr. Harrell became a Director of PharMerica in December 1997. 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.
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<PAGE> 31
Mr. Hendrickson became a Director of PharMerica in December 1997. 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. Powell became a Director of PharMerica in December 1997. 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 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.
Dr. Renschler joined the Company as President, Chief Executive Officer
and Director in December 1997. He has served as Chairman of the Company's Board
of Directors since July 1998. 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.
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.
Directors who are not officers, employees or consultants of the Company
(currently all directors except Dr. Renschler) receive a cash retainer of
$10,000 per year, a fee of $500 for each telephonic meeting of the Board of
Directors or any Committee, a fee of $1,000 for each meeting of the Board of
directors attended in person and a fee of $750 for each Committee meeting
attended in person. Each Director receives options to purchase 20,000 shares
upon initially joining the Board, options to purchase 5,000 shares per year
thereafter and additional options to purchase 2,500 shares per year for each
Committee Chairman. All directors are reimbursed for actual expenses incurred in
connection with attendance at meetings of the Board of Directors or committees
of the Board.
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<PAGE> 32
Executive Officers
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME OF OFFICER AGE OFFICER SINCE FOR THE LAST FIVE YEARS
--------------- --- ------------- -----------------------
<S> <C> <C> <C>
C. Arnold Renschler, M.D. 57 December 1997 President, Chief Executive Officer
and Director since December 1997.
Chairman since July 1998. Executive
Vice President of Beverly and
President of Pharmacy Corporation of
America ("PCA") from June 1996 until
December 1997. Senior Vice
President, Chief Clinical Officer,
President of three operating
divisions and a Director of
NovaCare, Inc. from 1990 to June
1996. Director of Ameripath, Inc.
since April 1997.
David L. Redmond 47 August 1998 Chief Financial Officer and
Executive Vice President of the
Company since August 1998. Chief
Financial Officer and Executive Vice
President of Cimetrix Incorporated
from February 1997 to December 1997.
Chief Financial Officer and Sr. Vice
President of Pharmacy Corporation of
America, a wholly owned subsidiary
of Beverly Enterprises, Inc., from
June 1995 to January 1997. Sr. Vice
President and Chief Financial
Officer of Pharmacy Management
Services, Inc. from November 1991 to
June 1995.
R. Scott Jones 40 December 1997 Senior Vice President, Marketing and
Sales of the Company since December
1997; Chief Operating Officer of the
Company's Mail Service Pharmacy
Division since August 1998; Vice
President Marketing and Sales of
Pharmacy Corporation of America,
Inc. from January 1997 to December
1997; Manager at General Electric
Medical Systems from 1991 to 1996.
Curtis B. Johnson 43 February 1998 Senior Vice President, General
Counsel of the Company since
February 1998; General Counsel of
DCAmerica, Inc., a U.S. subsidiary
of Counsel Corp. from April 1995 to
February 1998; Technology Counsel
for American Express Travel Related
Services Company, Inc. ("American
Express") from November 1994 to
April 1995; Litigation Counsel for
American Express from January 1993
to November 1994.
</TABLE>
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<PAGE> 33
EMPLOYMENT AND OTHER AGREEMENTS
C. ARNOLD RENSCHLER, M.D. On December 3, 1997, PharMerica entered into
an Employment Agreement with C. Arnold Renschler, M.D., PharMerica's President
and Chief Executive Officer. The Employment Agreement is effective through
December 31, 2000. It provides for PharMerica to pay Dr. Renschler an annual
base salary of at least $400,000 through November 30, 1998 with subsequent
annual increases. Dr. Renschler's annual base salary was increased to $450,000
effective December 1, 1998 in accordance with the terms of the Employment
Agreement. Additionally, the Employment Agreement provided for a one-time
signing bonus of $75,000, which was paid in early 1998, non-qualified stock
option grants at signing, an annual incentive compensation award with a target
range of 50% of Dr. Renschler's base salary and other employee benefits.
Under the terms of the Employment Agreement, if PharMerica terminates
Dr. Renschler's employment without cause or if Dr. Renschler terminates his
employment for good reason, Dr. Renschler will receive an amount equal to two
times his annual base salary and all benefits described in the Employment
Agreement will continue for one year. Further, all stock options granted to Dr.
Renschler will vest fully upon termination of employment without cause or for
good reason.
If Dr. Renschler's employment is terminated or he elects to resign with
good reason within two years after a change in control of PharMerica, or if Dr.
Renschler elects to resign from his position with PharMerica without good reason
within six months after a change in control, the Employment Agreement specifies
that PharMerica will pay Dr. Renschler 150% of the sum of his annual base salary
and his annual target incentive award. All benefits specified in the Employment
Agreement will continue for three years upon such event. Additionally, Dr.
Renschler will receive a retention bonus for services actually rendered on and
after the date of the change in control in an amount equal to 50% of the sum of
his annual base salary and annual target incentive award. Furthermore, Dr.
Renschler will receive, in exchange for agreeing not to solicit PharMerica's
customers or employees for one year, an amount equal to the sum of his annual
base salary and his annual target incentive award. All unvested stock options
Dr. Renscher holds will vest fully upon a change in control whether or not the
executive is terminated or resigns.
Notwithstanding this existing employment agreement, in connection with
the execution and delivery of the Bergen Merger Agreement, Bergen entered into a
new employment agreement with Dr. Renschler that will become effective upon
consummation of the Bergen Merger and that will supersede his existing
employment agreement with PharMerica. The new employment agreement with Bergen
provides that Dr. Renschler will be employed as an Executive Vice President of
Bergen for a period of at least three years with an initial annual base salary
of $350,000. The new employment agreement also provides that, notwithstanding
Dr. Renschler's continuing employment by Bergen, upon consummation of the Bergen
Merger: (i) PharMerica will nevertheless make the change in control payments
referred to above to Dr. Renschler as if Dr. Renschler had terminated his
employment within six months following the closing of the Bergen Merger, and
(ii) all outstanding stock options held by Dr. Renschler will become fully
vested and exercisable. The new employment agreement also provides that Dr.
Renschler will be nominated to the Board of Directors of Bergen for a term of
two years.
DAVID L. REDMOND. On August 4, 1998, PharMerica entered into an
Employment Agreement with David L. Redmond, PharMerica's Executive Vice
President and Chief Financial Officer. The Employment Agreement is effective
until August 4, 2001. It provides for PharMerica to pay Mr. Redmond an annual
base salary of $240,000. Additionally, Mr. Redmond is eligible under the
Employment Agreement for an annual incentive compensation award with a target
range of 45% of his base salary. For the period ending December 31, 1998, that
award was guaranteed to be $60,000.
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<PAGE> 34
Additionally, the Employment Agreement provides for a one time signing bonus in
the form of an interest-free loan through December 31, 1998 of $100,000, which
is forgiven if Mr. Redmond is employed by the Company on December 31, 1998,
non-qualified stock option grants at signing and other employee benefits.
If PharMerica terminates Mr. Redmond's employment without cause, or if
Mr. Redmond terminates his employment for good reason, PharMerica will pay Mr.
Redmond an amount equal to 150% of his annual base salary. In addition, the
benefits afforded to Mr. Redmond under the Employment Agreement will continue
for one year. If Mr. Redmond's employment terminates without cause, or with good
reason, all his stock options will vest fully.
Under the terms of the Employment Agreement, if Mr. Redmond's employment
is terminated or if he elects to resign with good reason within two years after
a change in control of PharMerica or if Mr. Redmond elects to resign from his
position with PharMerica without good reason within six months after the change
of control, the Employment Agreement specifies that PharMerica will pay Mr.
Redmond 150% of the sum of his annual base salary plus his annual target
incentive award. All of Mr. Redmond's benefits under the Employment Agreement
shall continue for three years upon such event. Additionally, Mr. Redmond will
receive a retention bonus for services actually rendered on or after the date of
the change of control in an amount equal to 50% of the sum of his base salary
and annual target incentive award. Furthermore, Mr. Redmond will receive, in
exchange for agreeing not to solicit PharMerica's customers or employees for one
year, an amount equal to the sum of his annual base salary and his annual target
incentive award. PharMerica may also be required to reimburse Mr. Redmond for
relocation expenses. Any unvested stock options granted to Mr. Redmond will vest
fully upon a change in control whether or not Mr. Redmond is terminated or
resigns.
It is anticipated that Mr. Redmond will remain employed by PharMerica
following consummation of the Bergen Merger through January 1, 2000 at an annual
salary of $240,000. However, pursuant to an amendment to his existing employment
agreement, Mr. Redmond will be entitled to receive substantially the same
benefits that he would have received had he resigned upon consummation of the
Bergen Merger.
R. SCOTT JONES. On December 10, 1997, PharMerica entered into an
Employment Agreement with R. Scott Jones, PharMerica's Senior Vice President of
Marketing and Sales. An addendum to the Employment Agreement was executed in
September 1998. The addendum extends the term of employment through December 3,
2000 and increases Mr. Jones' annual base salary to $181,500.
Under the Employment Agreement, Mr. Jones is eligible for an annual
incentive compensation award of up to 35% of his annual base salary. Upon
execution of the Employment Agreement in December 1997, he received a one-time
signing bonus of $50,000, non-qualified stock option grants, and other employee
benefits.
If PharMerica terminates Mr. Jones' employment without cause, PharMerica
will pay him a lump sum of 100% of his annual base salary and his benefits under
the Employment Agreement will continue for one year. If Mr. Jones' employment
with PharMerica terminates without cause, all his unvested stock options will
vest fully.
On September 22, 1998, PharMerica entered into a Change of Control
Severance Agreement with Mr. Jones. Under the terms of that agreement, if Mr.
Jones' employment is terminated by PharMerica without cause or by Mr. Jones' for
good reason within two years of a change of control of
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<PAGE> 35
PharMerica, he will be entitled to receive a severance payment in an amount
equal to two times his annual base salary and target bonus. In addition, if Mr.
Jones' employment is so terminated within two years of a change of control of
PharMerica, any unvested stock options granted to Mr. Jones shall vest fully,
Mr. Jones' benefits under PharMerica's medical and dental plans shall continue
for one year, PharMerica shall maintain Mr. Jones' vested life insurance for the
remainder of Mr. Jones' life, and under certain circumstances, PharMerica may be
required to reimburse Mr. Jones for reasonable relocation expenses.
CURTIS B. JOHNSON. On March 1, 1998, PharMerica entered into an
Employment Agreement with Curtis B. Johnson, PharMerica's Senior Vice President
and General Counsel. The Employment Agreement is effective until February 28,
2001. It provides for PharMerica to pay Mr. Johnson an annual base salary of
$185,000. It also renders Mr. Johnson eligible for an annual incentive award of
up to 40% of his annual base salary. Additionally, the Employment Agreement
provides for a one-time signing bonus of $25,000, option grants and other
employee benefits.
If PharMerica terminates Mr. Johnson's employment without cause,
PharMerica will pay him a lump sum of 100% of his annual base salary and his
benefits under the Employment Agreement will continue for one year. If Mr.
Johnson's employment with PharMerica terminates without cause, all his unvested
stock options will vest fully.
On September 22, 1998, PharMerica entered into a Change in Control
Severance Agreement with Mr. Johnson. Under the terms of that agreement, if Mr.
Johnson's employment is terminated by PharMerica without cause or by Mr. Johnson
for good reason within two years of a change in control of PharMerica, he will
be entitled to receive a severance payment in an amount equal to two times his
annual base salary and target bonus. In addition, if Mr. Johnson's employment is
terminated within two years of a change in control of PharMerica, any unvested
stock options granted to Mr. Johnson shall vest fully, Mr. Johnson's benefits
under PharMerica's medical and dental plans shall continue for one year,
PharMerica shall maintain Mr. Johnson's vested life insurance for the remainder
of Mr. Johnson's life, and, under certain circumstances, PharMerica may be
required to reimburse Mr. Johnson for reasonable relocation expenses.
JAMES D. SHELTON. On September 30, 1998, PharMerica and Mr. Shelton
entered into a Separation Agreement terminating Mr. Shelton's employment.
Pursuant to the Separation Agreement, options to purchase 340,000 shares of
PharMerica's stock were deemed fully vested and will remain exercisable until
October 31, 1999. PharMerica also agreed to pay Mr. Shelton an aggregate of
$225,000 and to continue providing Mr. Shelton (i) an automobile allowance of
$600 per month and (ii) benefits under all PharMerica compensation or employee
benefits plans or programs for which any salaried PharMerica employees are
eligible until October 31, 1999 or the date Mr. Shelton qualifies to participate
in another employer's benefit plans, whichever is earlier. Additionally, the
Separation Agreement provides that PharMerica will allow Mr. Shelton access to
his office at PharMerica until December 31, 1998.
ROBERT DELLA VALLE, PHARM.D. On September 30, 1998, PharMerica and Dr.
Della Valle entered into a Separation Agreement terminating Dr. Della Valle's
employment. Pursuant to the Separation Agreement, options to purchase 450,000
shares of PharMerica's stock were deemed fully vested and will remain
exercisable until December 31, 1999. PharMerica also agreed to pay Dr. Della
Valle a lump sum representing 150% of his annual base salary (including car
allowance of $600 per month) and to continue providing Dr. Della Valle benefits
under all PharMerica compensation or employee benefits plans or programs for
which any salaried PharMerica employees are eligible until December 31, 1999 or
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<PAGE> 36
the date Dr. Della Valle qualifies to participate in another employer's benefit
plans, whichever is earlier. Additionally, the Separation Agreement provides
that PharMerica will allow Dr. Della Valle access to his office at PharMerica
until December 31, 1998.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") (and, if such security is registered
on a national securities exchange, also with the exchange). Such executive
officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely upon representations submitted by the Company's directors
and executive officers and the Company's review of filings on Forms 3, 4 and 5,
including amendments thereto, the Company has concluded that with the exception
of delayed filings by Dr. Robert Della Valle, Mr. Curtis B. Johnson and Mr. R.
Scott Jones, all such forms were timely filed. Dr. Della Valle inadvertently
failed to report a transaction executed by his broker in June 1998 at the time
of the transaction but subsequently made a corrective filing. Mr. Johnson and
Mr. Jones failed to make the appropriate filings in connection with option
grants that the Company made to them in September 1998, but have subsequently
made corrective filings.
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<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the services in all
capacities to the Company for the fiscal year ended December 31, 1998 (the "1998
Fiscal Year"), the fiscal year ended December 31, 1997, and the fiscal year
ended December 31, 1996 of those persons who were the Company's chief executive
officer at any time during the 1998 Fiscal Year, one of the Company's four most
highly compensated officers other than the chief executive officer, or for whom
disclosure is otherwise required (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER UNDERLYING ALL
NAME AND ANNUAL COMPENSATION ANNUAL OPTIONS/SARS OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1) (#) COMPENSATION(1)
<S> <C> <C> <C> <C> <C> <C>
C. Arnold Renschler, M.D 1998 413,697 257,475(3) -0- 5,000 -0-
President and CEO(2) 1997 36,384 -0- -0- 520,000 -0-
1996 * * * * *
David L. Redmond 1998 91,385 60,000(5) -0- 300,000 100,000(5)
Chief Financial Officer 1997 * * * * *
and Executive Vice 1996 * * * * *
President (4)
R. Scott Jones 1998 177,546 32,183(7) -0- 35,000 -0-
Senior Vice President 1997 11,708 65,000(8) -0- 100,000 -0-
of Marketing and 1996 * * * * *
Sales(6)
Curtis B. Johnson 1998 148,125 25,000(10) 75,000(11) 160,000 -0-
Senior Vice President(9) 1997 * * * * *
1996 * * * * *
James D. Shelton 1998 271,634(13) -0- -0- -0- -0-
Former Chief Financial 1997 140,985 90,000 -0- 340,000 -0-
Officer(12) 1996 * * * * *
Robert Della Valle, 1998 449,227(15) -0- -0- -0- -0-
Pharm. D. 1997 168,846 100,000 -0- 300,000 -0-
Former Chief Operating 1996 79,719 40,000 -0- 150,000 -0-
Officer (14)
</TABLE>
---------------
* Indicates periods prior to employment with the Company.
(1) Perquisites for each executive officer are in amounts which do not
require disclosure, except as otherwise indicated below.
(2) Dr. Renschler joined the Company in December 1997.
(3) Includes $182,475 performance bonus and $75,000 signing bonus both
earned in 1997 and both paid in 1998.
(4) Mr. Redmond joined the Company in August 1998.
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<PAGE> 38
(5) As part of Mr. Redmond's compensation, the Company loaned him $100,000
upon joining the Company which was forgiven on December 31, 1998 in
accordance with his employment contact. In addition, Mr. Redmond was
paid a bonus of $60,000 on December 31, 1998 in accordance with his
employment agreement.
(6) Mr. Jones joined the Company in December 1997.
(7) Represents 1997 performance bonus earned in 1997 and paid in 1998.
(8) Includes $50,000 signing bonus earned and paid in December 1997.
(9) Mr. Johnson joined the Company in February 1998.
(10) Includes signing bonus paid in February 1998.
(11) Represents moving expenses.
(12) Mr. Shelton joined the Company in February 1997 and resigned from the
Company in September 1998.
(13) Amount includes severance payments made in connection with Mr.
Shelton's resignation.
(14) Dr. Della Valle joined the Company in July 1996 and resigned from the
Company in September 1998.
(15) Amount includes severance payments made in connection with Dr. Della
Valle's resignation.
OPTION GRANTS
The table below provides information on grants of stock options
pursuant to the Company's Option Plans (the "Option Plans") during the 1998
Fiscal Year to the Named Executive Officers. Additional grants have been
made to certain officers, directors and other employees since December 31,
1998. See "Stock Ownership of Directors, Executive Officers and Principal
Holders." The Company grants no stock appreciation rights.
OPTION/SAR GRANTS IN THE FISCAL YEAR ENDING DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
NUMBER OF PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS/ AT ASSUMED ANNUAL RATES
UNDERLYING SARS OF STOCK PRICE APPRECIATION
OPTIONS/ GRANTED TO EXERCISE OR FOR OPTION TERM(2)
SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
C. Arnold Renschler, M.D. 5,000 * $5.31 12/31/2008 16,697 42,314
David L. Redmond 300,000 36.41 $5.50 8/8/2008 1,037,676 2,629,675
R. Scott Jones 35,000 4.23 $4.06 9/21/2008 89,366 226,471
Curtis Johnson 140,000 16.99 $10.19 1/15/2008 897,181 2,273,633
20,000 2.43 4.06 9/21/2008 51,066 129,412
James Shelton -0- N/A N/A N/A N/A N/A
Robert Della Vella,
Pharm.D. -0- N/A N/A N/A N/A N/A
</TABLE>
---------------
* Indicates less than one percent.
(1) Pecentages are based on a total of 824,000 options granted to
employees, officers and directors in the 1998 Fiscal Year.
(2) The dollar amounts under these columns are the result of calculations at
5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, of the Company's Common Stock price.
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<PAGE> 39
OPTION EXERCISES AND VALUES
The table below provides information as to exercises of options by the
Named Executive Officers during the 1998 Fiscal Year under the Option Plans
and the year-end value of unexercised options. The Company grants no stock
appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEUY
UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS
FISCAL YEAR-END (#) AT FISCAL YEAR-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE (1)
<S> <C> <C> <C> <C>
C. Arnold Renschler, M.D. -0- -0- 783,332/166,667 3,450/0
David L. Redmond -0- -0- 75,000/225,000 37,500/112,500
R. Scott Jones -0- -0- 103,487/76,250 16,975/50,925
Curtis Johnson -0- -0- 100,000/85,000 51,872/29,055
James Shelton (2) -0- -0- 340,000/0 0/0
Robert Della Valle,
Pharm.D. (3) -0- -0- 450,000/0 0/0
</TABLE>
---------------
(1) Options are classified as "in-the-money" if the market value of the
underlying Common Stock exceeds the exercise price of the option. The
per share value of such in-the-money options is the difference between
the option exercise price and $6.00, the per share fair market value of
the underlying Common Stock as of December 31, 1998. Such amounts may
not necessarily be realized. Actual values which may be realized, if
any, upon the exercise of options will be based on the per share market
price of the Common Stock at the time of exercise and are thus
dependent upon future performance of the Common Stock.
(2) All of Mr. Shelton's stock options vested and became exercisable in
connection with his resignation from the Company in September 1998.
(3) All of Dr. Della Valle's stock options vested and became exercisable in
connection with his resignation from the Company in September 1998.
COMPENSATION COMMITTEE REPORT
The following Compensation Committee Report is not deemed to be part
of a document filed with the SEC pursuant to the Securities Act of 1933 (the
"Securities Act") or the Exchange Act and is not to be deemed incorporated
by reference in any documents filed under the Securities Act or the Exchange
Act without the express written consent of the persons named below.
Decisions on compensation of the Company's senior executives, except
for decisions related to awards under the Company's Options Plans, are made
by the Compensation Committee of the Company's Board of Directors. It is the
task of the Compensation Committee to establish executive compensation
guidelines for the Company which are reasonable and appropriate, meet their
stated purpose and effectively serve the needs of the Company and its
stockholders.
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<PAGE> 40
The current members of the Compensation Committee have met with the
entire Board of Directors in setting the compensation for the current
executive officers and have set forth policies to govern such compensation
currently and in the future. The Compensation Committee continues to review
all management compensation in light of these policies.
Compensation Philosophy and Policies for Executive Officers
The Company's primary business goal is to provide high quality
service while maximizing stockholder value. The Company believes it can best
achieve this goal by achieving leadership in the provision of relevant and
high quality health services, expanding its operations primarily through
acquisitions and internal growth without imperiling the achievement of other
strategic objectives, and establishing a reputation as a desirable employer
and responsible corporate citizen. The Company attempts to align management
compensation with the Company's business goals to increase the likelihood of
the Company's success on both a short-term and long-term basis.
The Company's current executive compensation program supports the
Company's strategy and objective of creating stockholder value by:
(i) Emphasizing pay for performance by linking a significant
portion of executive compensation to the performance of both
the Company and the individual executive officer.
(ii) Directly aligning the interest of executives with the
long-term interest of stockholders by awarding stock options
at current market prices to give value to the executives
through long-term stock appreciation.
(iii) Providing compensation opportunities appropriate for the
Company's size and industry in order to attract and retain
talented and committed executives on a long-term basis.
Currently, the Company's executive compensation program is comprised
of three principal components: base salary, annual cash incentive (bonus)
and long-term incentive opportunity through stock options. The annual
executive pay targets (base salary plus incentive) are intended to be
competitive with executive compensation of other U.S. public health care
companies, particularly institutional pharmacy companies, when the Company
meets or exceeds its annual operating goals.
The Company attempts to compare its executive pay targets with the
annual pay of other publicly held companies, particularly institutional
pharmacy companies, subject to available information. These other companies
include companies from the Peer Group reflected in the Stock Performance
Graph found elsewhere in this Form 10-K. However, since the Peer Group is
small and contains some companies substantially smaller than the Company,
the Compensation Committee retains the discretion to compare the Company's
executive pay targets with those of companies outside of this group.
The Compensation Committee believes that compensation should meet the
following goals in connection with the consolidation efforts of the Company:
to create incentives for current management and employees during the
transition period after the PCA/Capstone Merger; retain
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<PAGE> 41
management and employees to participate in managing and operating the
combined entity; and, ultimately, fit with the internal compensation system
of the combined entity.
Base Salary
All management salaries, including those of the executives, are
evaluated on a regular basis. In making its decision on salary levels, the
Company does not use a predetermined formula. In determining the salaries of
the Company's executive team, the Company considered past earnings of those
individuals as well as historical Company compensation and the executives'
potential to contribute to the Company's future. In evaluating appropriate
pay levels and salary increases for Company executives, the Compensation
Committee, without assigning particular weight to any, considered the
following factors: level of responsibility of the executive, individual job
performance, internal salary structure, pay practices of other companies,
size of the Company and achievement of the Company's strategic goals. In the
past, salary ranges have been based primarily on individual job performances
and past earnings.
Cash Incentives
Cash incentive awards are designed to focus management attention on
key operational goals for the current fiscal year. The key operational goals
are specific to each executive's area of responsibility. Specific weighting
is assigned for identified financial, strategic and management practices
goals. At least 50% of the available bonus percentage for each named
executive officer is now tied to Company revenues and/or Earnings Before
Interest Taxes Depreciation and Amortization (EBITDA). The remaining
percentages are based on specific goals set for each executive, such as
quality of care, revenue growth, accounts receivable management, control
expenses and integration of acquisitions. The nature of the operational
goals and the weighting assigned to each is subject to change each year. No
cash incentives awards were earned or paid for 1998 to Named Executive
Officers other than sign-on bonuses for Messrs. Redmond and Johnson. In 1997
and before, cash incentive awards were paid on an annual basis; beginning in
1999, the Company will pay incentive awards on a quarterly basis.
Bonus targets for Company executives are set between 20% and 50% of
their annual base salaries based upon achievement of their specific
operational goals and achievement by the Company or business unit of its
financial targets. At the end of the year, performance in light of these
goals is determined on an arithmetic scale with the pre-established
weighting. Discretionary adjustments by the Compensation Committee are
possible if the Committee believes the circumstances so warrant.
Long-Term Incentives
The Company's long-term incentive compensation program consists of
incentive and nonqualified stock options which are related to improvement in
long-term stockholder value. Stock option grants are designed to focus an
executive's attention on managing the Company from the perspective of a
long-term owner with an equity stake in the business. Stock options are
granted under the Option Plans by the Disinterested Stock Option Plan
Committee.
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<PAGE> 42
The option grants to executive officers offer the right to purchase
shares of Common Stock at their fair market value on the date of the grant.
These options will have value only if the Company's stock price increases.
The number of shares covered by each grant is selected based on the
executive's level of responsibility and past and anticipated contributions
to the Company.
Chief Executive Officer Compensation
Dr. Renschler is the Company's Chief Executive Officer. Generally,
the Chief Executive Officer is eligible to participate in the same executive
compensation plans available to the Company's other senior executive
officers. The Compensation Committee's general approach in setting the Chief
Executive Officer's annual compensation is derived from the same
considerations described above, that is to be competitive with other
publicly held health care corporations, but also to have a significant
portion of annual incentive compensation based upon specific corporate-wide
operating performance criteria.
The Compensation Committee approved a $400,000 base salary for Dr.
Renschler for the 1998 Fiscal Year and established his incentive bonus at a
target range of 50% of his base salary, or approximately $200,000. However,
no bonus was ultimately paid to Dr. Renschler. Dr. Renschler's compensation
package was developed primarily based upon his historical compensation
elsewhere and his experience in the industry. In 1998, new stock options to
acquire 5,000 shares of Common Stock were granted to Dr.
Renschler in connection with his position as a director.
Tax Regulations
Section 162(m) of the Internal Revenue Code of 1986, as amended,
generally disallows a tax deduction to public companies for executive
compensation in excess of $1 million. It is not anticipated that the Company
will pay any of its executive officers compensation in excess of $1 million
in the current fiscal year and, accordingly, to date, the Company has not
adopted a policy in this regard.
THE FOREGOING REPORT IS SUBMITTED BY ALL OF THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS, WHOSE MEMBERS ARE AS
FOLLOWS: DAVID R. BANKS, CECIL S. HARRELL, AND FREDRICK C. POWELL.
Compensation Committee Interlocks and Insider Participation
The following current directors served on the Compensation Committee
during the 1998 Fiscal Year: Banks, Harrell and Powell. No member of the
Compensation Committee is an employee of the Company.
Mr. Banks currently serves as Chief Executive Officer and Chairman of
the Board of Beverly, the Company's largest customer. On a pro forma basis,
Beverly and its residents accounted for approximately 18% of the Company's
1998 revenues. See "Certain Relationships and Related Transactions."
-42-
<PAGE> 43
STOCK PERFORMANCE CHART
The following chart compares the cumulative total returns of the
company with those of the Standard & Poor's 500 Stock Index and two peer group
indices. Cumulative return assumes $100 invested in the Company or respective
index on February 28, 1993, with dividend reinvestment through December 31,
1998. For the 1998 Fiscal Year, the Company has selected a peer group known as
Peer Group 1 as compiled by Research Data Group. This peer group is comprised
of two companies, excluding the Company. The companies are NCS Healthcare Inc.
and Omnicare Inc. Previously, the Company used a peer group index which was
comprised of six companies, including Care Group, Inc., Genesis Health Ventures,
Inc., Mednet Mpc Corp., Omnicare Inc., Synetic Inc., and Vitalink Pharmacy
Services, Inc. The returns of this peer group, Peer Group 2, are also included
in the following chart for comparison. The Company has changed from Peer Group
2 to Peer Group 1 because it believes the Company's recent increase in size and
overall consolidation within the Industry have reduced the value of a Peer Group
2 comparison.
<TABLE>
<CAPTION>
Cumulative Total Return
2/93 2/94 2/95 12/95 12/96 12/97 12/98
<S> <C> <C> <C> <C> <C> <C> <C>
PHARMERICA, INC. 100 93 100 214 325 296 171
PEER GROUP 1 100 121 184 269 390 352 335
PEER GROUP 2 100 147 408 588 566 623 623
S & P 500 100 108 116 150 185 246 317
</TABLE>
-43-
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL HOLDERS
The table below sets forth, as of February 25, 1999 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 five percent (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>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS(2)
<S> <C> <C>
Bergen Brunswig Corporation(3)(4) 7,819,315 8.7%
4000 Metropolitan Drive
Orange, California 92868
Counsel Corporation(3)(4) 7,819,315 8.7%
Exchange Tower, Suite 1300
130 King Street West
Toronto, Ontario M5X 1E3
Eagle Asset Management, Inc.(4) 5,739,109 6.4%
880 Carillon Parkway
St. Petersburg, Florida 33716
Mellon Bank Corporation(4) 5,826,716 6.5%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Wellington Management Company, LLP(4) 4,563,283 5.1%
75 State Street
Boston, Massachusetts 02109
C. Arnold Renschler, M.D.(5) 812,913 *
David L. Redmond(6) 100,000 *
R. Scott Jones(7) 120,154 *
Curtis B. Johnson(8) 100,000 *
David R. Banks(9) 141,584 *
Cecil S. Harrell(10) 2,057,731 2.3%
Boyd W. Hendrickson(11) 139,046 *
Fredrick C. Powell(12) 27,500 *
Albert Reichmann(13) 42,500 *
Gail Wilensky, Ph.D.(14) 35,000 *
E. Martin Gibson(15) 27,500 *
Robert Della Valle, Pharm.D.(16) 458,108 *
James D. Shelton(17) 340,000 *
All directors and Named Executive Officers as a group 4,402,036 4.8%
(13 persons)(18)
</TABLE>
-44-
<PAGE> 45
- --------------
* 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 89,667,106 shares of Common Stock
outstanding on February 25, 1999, 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) Counsel has direct beneficial ownership of 7,819,315 shares. These
shares are also shown as beneficially owned by Bergen because
Counsel has transferred to Bergen, for a limited period of time and
under limited circumstances, certain rights with respect to these
shares including the right to vote all of the shares on issues
relating to any "business combination" involving PharMerica. The
term "business combination" refers to, among other things, a merger,
consolidation, share exchange, sale, transfer, or other similar
transaction. The voting rights granted to Bergen in respect of the
shares will terminate on December 31, 2001. In addition, Counsel has
covenanted that it will not sell, distribute to its shareholders or
otherwise dispose of any of the shares prior to December 31, 1999
(or December 25, 1999 in the case of a distribution to Counsel's
shareholders) without the prior written consent of Bergen. Bergen
has also been granted a right of first refusal to purchase all the
shares in certain events. In addition to and to effectuate the
foregoing rights, Counsel granted to Bergen an irrevocable proxy, a
back-up option agreement and certain rights pursuant to a voting
trust agreement.
(4) Based solely upon information set forth in a Schedule 13G or
Schedule 13D filed by such person pursuant to the Exchange Act.
(5) Includes 52,193, 238,596, 74,561, 59,649, 353,333 and 5,000 shares
issuable upon exercise of options at $8.21, $8.47, $8.47, $8.55,
$9.56 and $5.31 per share, respectively.
(6) Includes 100,000 shares issuable upon exercise of options at $5.50
per share.
(7) Includes 44,737, 66,667 and 8,750 shares issuable upon exercise of
options at $8.38, $9.56 and $4.06 per share, respectively.
(8) Includes 25,000, 70,000 and 5,000 shares issuable upon exercise of
options at $4.31, $10.19 and $4.06 per share, respectively.
(9) Includes 72,500 and 5,000 shares issuable upon exercise of options
at $9.56 and $5.31 per share, respectively, and includes 3,991
shares held by his children.
(10) Includes 20,000 and 5,000 shares issuable upon exercise of options
at $9.56 and $5.31 per share, respectively, and includes 269 shares
held by his spouse.
(11) Includes 47,500 and 5,000 shares issuable upon exercise of options
at $9.56 and $5.31 per share, respectively, and includes 636 shares
held by his children.
(12) Includes 22,500 and 5,000 shares issuable upon exercise of options
at $9.56 and $5.31 per share, respectively.
(13) Includes 15,000, 2,500, 20,000 and 5,000 shares issuable upon
exercise of options at $4.44, $11.25, $9.56 and $5.31 per share,
respectively.
(14) Includes 5,000, 2,500, 20,000, 2,500 and 5,000 shares issuable upon
exercise of options at $4.44, $11.25, $9.56, $12.06 and $5.31 per
share, respectively.
(15) Includes 22,500 and 5,000 shares issuable upon exercise of options
at $12.04 and $5.31 per share, respectively.
-45-
<PAGE> 46
(16) Includes 50,000, 100,000 and 300,000 shares issuable upon the
exercise of options at $10.13, $10.50 and $9.56 per share,
respectively.
(17) Includes 40,000 and 300,000 shares issuable upon exercise of options
at $11.50 and $9.56 per share, respectively.
(18) Includes 2,180,986 shares issuable upon exercise of options.
CHANGE IN CONTROL
On January 11, 1999, Bergen and PharMerica entered into the Bergen
Merger Agreement. Under the terms of the Bergen Merger Agreement, upon
consummation of the Bergen Merger, shareholders of PharMerica will receive
0.275 of a share of Bergen Class A Common Stock in exchange for each share of
PharMerica common stock they hold. The Bergen Merger is intended to be tax-free
and will be treated as a purchase by Bergen for financial reporting purposes.
Consummation of the transaction is subject to the satisfaction of certain
conditions, including approvals by the shareholders of Bergen and PharMerica.
The Bergen Merger Agreement also provides that in the event the Bergen
Merger Agreement is terminated pursuant to certain of the circumstances
specified under Article VII thereof, PharMerica may be obligated to pay to
Bergen a termination fee of $38 million. In addition to such payment, in
certain circumstances set forth in such Article, PharMerica may become
obligated to reimburse Bergen up to $6 million for costs and expenses incurred
in connection with the transaction. In such event, certain amendments to the
existing supply agreement between Bergen and PharMerica also would be made.
In connection with the Bergen Merger, the Board of Directors of
PharMerica approved and PharMerica entered into a First Amendment to
Stockholder Protection Rights Agreement (the "Rights Agreement Amendment"). The
Rights Agreement Amendment excludes the Bergen Merger from certain restrictive
provisions of PharMerica's Stockholder Protection Rights Agreement.
The Bergen Merger Agreement and Rights Agreement Amendment are filed
as Exhibits 2.1 and 4.6 hereto, respectively, and are incorporated herein by
reference. The foregoing description of the Bergen Merger Agreement and Rights
Agreement Amendment is qualified in its entirety by reference to such Exhibits.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of various transactions involving
PharMerica and certain of its directors, officers, stockholders or other
affiliates.
Directors Banks and Hendrickson are directors and officers of Beverly,
the Company's largest customer. Beverly and its residents accounted for
approximately 18% of the Company's 1998 revenues, and were in excess of 10% of
the Company's revenues for each of 1996 and 1997. In connection with the
PCA/Capstone 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 PCA/Capstone 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
-46-
<PAGE> 47
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
PCA/Capstone Merger. In addition, each of Mr. Banks and Mr. Hendrickson have
received options to purchase an additional 27,500 shares at fair market value.
During 1998, the Company paid approximately $5.9 million to Counsel
Corporation, which owns approximately 9% of the Company's outstanding common
stock, for investment banking services in connection with the Company's
acquisition of NIPSI and the settlement of related litigation with Integrated
Health Services, Inc. These payments have been included in the total cost of
the NIPSI acquisition.
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 Credit Facility Indenture contains certain restrictions on
transactions with affiliates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)&(2) and (d) Financial Statements and Financial Statement Schedules. See
Index to Financial Statements included herein.
(a)(3) and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K dated within the
fourth quarter of the twelve month period ended December 31, 1998:
1. Form 8-K, filed and dated October 15, 1998, filed with
respect to financial statements for the acquisition of the
assets of National Institutional Pharmacy Services, Inc.
("NIPSI").
-47-
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHARMERICA, INC.
By: /s/ DAVID L. REDMOND
-------------------------------------------------
David L. Redmond
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------- -------------------------------------------- -----------------
<S> <C> <C>
/s/ C. Arnold Renschler, M.D. Chairman, President, Chief Executive Officer February 26, 1999
- ----------------------------- and Director (Principal Executive
C. Arnold Renschler, M.D. Officer)
/s/ David L. Redmond Chief Financial Officer and Executive February 26, 1999
- ----------------------------- Vice President (Principal Financial and
David L. Redmond Accounting Officer)
/s/ David R. Banks Director February 26, 1999
- -----------------------------
David R. Banks
/s/ E. Martin Gibson Director February 26, 1999
- -----------------------------
E. Martin Gibson
/s/ Cecil S. Harrell Director February 26, 1999
- -----------------------------
Cecil S. Harrell
/s/ Boyd W. Hendrickson Director February 26, 1999
- -----------------------------
Boyd W. Hendrickson
/s/ Fredrick C. Powell Director February 26, 1999
- -----------------------------
Fredrick C. Powell
Director February , 1999
- -----------------------------
Albert Reichmann
/s/ Gail Wilensky Director February 26, 1999
- -----------------------------
Gail Wilensky
</TABLE>
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PHARMERICA, INC.
Report of Independent Public Accountants F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Audited Financial Statements and Schedule:
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-4
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts F-26
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of PharMerica, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of
PharMerica, Inc. and subsidiaries (a Delaware corporation and formerly Pharmacy
Corporation of America and subsidiaries) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements and the schedule
referred to below 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 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 1998, and the results of their
operations, and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements and schedule 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 financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic 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 financial statements taken as a whole.
Baltimore, Maryland /s/ ARTHUR ANDERSEN LLP
February 26, 1999
F-2
<PAGE> 51
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PharMerica, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of PharMerica, Inc. for the
year ended December 31, 1996. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of PharMerica, Inc. for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements and schedule 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 financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic 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 financial statements taken as a whole.
/s/ ERNST & YOUNG
Little Rock, Arkansas
April 18, 1997
F-3
<PAGE> 52
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1997 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 34,215 $ 32,312
Accounts receivable, net of allowance for doubtful
accounts of $22,096 and $38,201 202,645 250,711
Inventories 51,766 55,686
Prepaid expenses and other current assets 8,887 9,507
Deferred tax asset 35,360 37,017
----------- -----------
Total Current Assets 332,873 385,233
Property and equipment, net 49,207 64,187
Goodwill, net of accumulated amortization of
$26,653 and $43,753 723,954 699,313
Other assets, net 8,214 15,592
----------- -----------
Total Assets $ 1,114,248 $ 1,164,325
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 109,483 $ 91,909
Current portion of long-term debt 7,533 6,151
Current portion of accrued restructuring charges 14,269 4,031
----------- -----------
Total Current Liabilities 131,285 102,091
Deferred tax liability 21,216 26,567
Long-term debt, net of current portion 427,889 591,552
Accrued restructuring charges, net of current portion 4,980 11,280
----------- -----------
Total Liabilities 585,370 731,490
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $0.01 par value; 300,000,000 shares
authorized; 89,387,106 shares issued and outstanding
as of December 31, 1998; 87,930,184 shares
issued and 87,591,722 shares outstanding
as of December 31, 1997 876 894
Preferred stock, $0.01 par value; 500,000 shares
authorized and none outstanding -- --
Additional paid-in capital 413,567 417,114
Retained earnings 114,435 14,827
----------- -----------
Total Stockholders' Equity 528,878 432,835
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,114,248 $ 1,164,325
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 53
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Net revenues $ 516,400 $ 652,179 $ 1,145,928
Cost of revenues 280,468 355,577 656,589
--------- --------- -----------
Gross profit 235,932 296,602 489,339
Operating expenses:
Selling, general and administrative expenses 171,085 205,278 344,734
Bad debt expense 13,500 10,809 52,937
Depreciation and amortization 16,392 21,408 36,398
Loss on disposition of business -- -- 4,500
Asset impairment and restructuring charges -- 10,935 108,215
--------- --------- -----------
Operating income (loss) 34,955 48,172 (57,445)
Interest expense, net -- 2,483 39,133
--------- --------- -----------
Income (loss) before provision
for income taxes 34,955 45,689 (96,578)
Provision for income taxes 14,668 18,992 3,030
--------- --------- -----------
Net income (loss) $ 20,287 $ 26,697 $ (99,608)
========= ========= ===========
Earnings (loss) per common and common
equivalent share:
Basic $ 0.41 $ 0.50 $ (1.12)
========= ========= ===========
Diluted $ 0.41 $ 0.50 $ (1.12)
========= ========= ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 50,000 52,896 89,221
========= ========= ===========
Diluted 50,000 53,060 89,221
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 54
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1 $ 1 $ 3,866 $ 67,451 $ 71,318
Net income for the year ended December 31, 1996 -- -- -- 20,287 20,287
------- ----- --------- --------- ---------
Balance at December 31, 1996 1 1 3,866 87,738 91,605
Recapitalization in connection with the acquisition
of Capstone Pharmacy Services, Inc. 49,999 499 (499) -- --
Capital contribution from Beverly Enterprises, Inc. -- -- 15,076 -- 15,076
Issuance of common stock:
Stock issued in connection with the acquisition
of Capstone Pharmacy Services, Inc. 34,980 350 377,150 -- 377,500
Stock issued in connection with the acquisition
of Resident Care Pharmacy, Inc. 811 8 9,092 -- 9,100
Stock issued in connection with exercise of
warrants 1,800 18 8,882 -- 8,900
Net income for the year ended December 31, 1997 -- -- -- 26,697 26,697
------- ----- --------- --------- ---------
Balance at December 31, 1997 87,591 876 413,567 114,435 528,878
Shares released from escrow 332 3 (3) -- --
Common stock issued in connection with
exercise of stock options and warrants 2,002 20 10,062 -- 10,082
Common stock received in connection with
disposition and retired (538) (5) (6,512) -- (6,517)
Net loss for the year ended December 31, 1998 -- -- -- (99,608) (99,608)
------- ----- --------- --------- ---------
Balance at December 31, 1998 89,387 $ 894 $ 417,114 $ 14,827 $ 432,835
======= ===== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 55
PHARMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20,287 26,697 $ (99,608)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization 16,392 21,408 36,398
Asset impairment and restructuring charges -- 10,935 108,215
(Gain) loss on dispositions of assets (250) -- 4,500
Deferred income taxes 4,159 (4,879) 3,694
Changes in operating assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable (7,974) (30,471) (48,856)
Inventories 3,510 (10,581) (2,368)
Prepaid expenses and other current assets (44) 5,419 (196)
Accounts payable and accrued expenses (7,498) 14,202 (27,661)
Accrued restructuring charges -- (273) (13,234)
Other assets 329 (4,299) 113
-------- --------- ---------
Total adjustments 8,624 1,461 60,605
-------- --------- ---------
Net cash flows from operating activities 28,911 28,158 (39,003)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (8,683) (19,178) (88,124)
Purchase of property and equipment (9,616) (15,600) (23,982)
-------- --------- ---------
Net cash flows from investing activities (18,299) (34,778) (112,106)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of subordinated debt -- -- 316,875
Net proceeds from commercial bank borrowings
and other notes payable -- 424,524 204,627
Repayments of commercial bank borrowings
and other notes payable (1,288) (125,164) (382,378)
Proceeds from exercise of stock options and warrants -- 8,900 10,082
Advances to former parent, net (5,064) (275,000) --
-------- --------- ---------
Net cash flows from financing activities (6,352) 33,260 149,206
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,260 26,640 (1,903)
Cash and cash equivalents, beginning of year 3,315 7,575 34,215
-------- --------- ---------
Cash and cash equivalents, end of year $ 7,575 $ 34,215 $ 32,312
======== ========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 11 $ 2,716 $ 31,274
======== ========= =========
Taxes $ 0 $ 6,792 $ 12,107
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 56
PHARMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - PharMerica, Inc. ("PharMerica" or the
"Company"), a Delaware corporation, was formed as a result of the
merger between Capstone Pharmacy Services, Inc. ("Capstone") and
Pharmacy Corporation of America ("PCA"), a wholly-owned subsidiary of
Beverly Enterprises, Inc. ("Beverly"), on December 3, 1997 (the
"PCA/Capstone Merger").
PharMerica is a leading provider of pharmacy products and services
serving approximately 500,000 patients in long-term care and alternate
site settings. The Company provides services to patients in skilled
nursing facilities, assisted living facilities, residential and
independent living communities, specialty hospitals and the home
setting. The Company currently operates 159 pharmacies in 39 states
serving approximately 380,000 long-term care residents and more than
106,000 workers' compensation patients through mail service and its
on-line pharmacy programs.
BASIS OF PRESENTATION - In connection with the PCA/Capstone Merger,
the transaction was treated as an acquisition of Capstone by PCA for
accounting purposes since, at the date of the PCA/Capstone Merger,
Beverly's shareholders owned a majority of the surviving company.
Accordingly, the historical financial statements for the year ended
December 31, 1996 are comprised of PCA only.
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.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of
the financial statements. Also affected are the reported amounts of
revenues, expenses, 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.
F-8
<PAGE> 57
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Equipment and leasehold
improvements are recorded at cost. Depreciation and amortization are
computed using the straight-line method over their estimated useful
lives or, with respect to leasehold improvements, over the term of the
lease if shorter as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment ................. 3-15 years
Software and computer equipment ................... 3-5 years
Leasehold improvements ............................ 5-10 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 AND IMPAIRMENT OF LONG-LIVED ASSETS - 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 $7,279,000, $8,795,000 and $20,405,000 for
the years ended December 31, 1996, 1997 and 1998, 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 to its fair value based on discounted
projected cash flows.
In 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 PCA/Capstone Merger. These pharmacies were closed during
1998. The impairment loss included the write-off of various fixed
assets, such as leasehold improvements and furniture and fixtures,
which are specific to the pharmacies that were closed. Additionally,
the Company wrote down certain capitalized software costs to their
estimated fair value.
During the third quarter of 1998, the Company recorded an impairment
loss of approximately $99.0 million. The loss related primarily to
five pharmacies, each of which had negative operating cash flows
during 1998. The Company closed one of the pharmacies during the third
quarter of 1998 and identified three of the other pharmacies as
"assets to be disposed of" and recorded write-downs to reflect the
estimated net realizable value for these pharmacies. Two of these
pharmacies were sold during February 1999. Total proceeds from these
sales were approximately $3,800,000 which approximated their net book
value. The fifth pharmacy has had deteriorating operating results which
required the Company to record the charge. The four pharmacies held as
"assets to be disposed of" recorded total revenues and pre-tax income
before interest and amortization expense of approximately $36,673,000
and $69,000, respectively, for the year ended December 31, 1998.
F-9
<PAGE> 58
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
contributions were made for the years ended December 31, 1996, 1997
and 1998.
REVENUE RECOGNITION - Revenues are recorded as products are shipped
and services rendered. A portion of the Company's sales is covered by
various state and federal reimbursement programs which are subject to
review and audit. Reimbursement programs are also subject to change
from time to time. Revenues are reported at the estimated net amounts
to be received from individuals, third party payors, nursing
facilities and others. Approximately 37%, 37% and 43% of the Company's
revenues for the years ended December 31, 1996, 1997 and 1998,
respectively, were derived from funds under federal and state medical
assistance programs.
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 34% and 29%, respectively, of accounts receivable
reported on the consolidated balance sheets at December 31, 1997 and
1998.
INCOME TAXES - The Company files a consolidated federal income tax
return. Income tax expense is based on reported earnings before income
taxes. Deferred taxes on income are provided for items in which the
reporting period and methods used for income tax purposes differ from
those used for financial statement purposes, using the asset and
liability method. Deferred income taxes are recognized for the tax
consequence of "temporary differences" by applying enacted statutory
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
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 7 for the pro forma effects on the Company's reported
net income assuming the election had been to recognize compensation
expense on stock-based awards in accordance with SFAS No. 123.
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
F-10
<PAGE> 59
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.
A reconciliation of the weighted average basic common shares
outstanding to weighted average diluted common shares outstanding
follows (in thousands):
<TABLE>
<CAPTION>
As of December 31,
------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Basic 50,000 52,896 89,221
Effect of Dilutive Securities:
Options -- 139 --
Warrants -- 25 --
------ ------ ------
Diluted 50,000 53,060 89,221
====== ====== ======
</TABLE>
Options totaling 5,808,936 and warrants totaling 275,000 were
outstanding at December 31, 1998, but were not included in the 1998
diluted shares calculation because their effect would have been
antidilutive for that year.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During July 1998, the Company acquired treasury stock at market value
of approximately $6,517,000 in connection with the sale of a business.
The Company also acquired approximately $2,608,000 in assets under
capital leases during the year. During December 1997, the Company
issued common stock with a fair value of $9,100,000 in connection with
an acquisition.
NOTE 2 - ACQUISITIONS AND DIVESTITURES
1998 ACQUISITIONS AND DIVESTITURES - During January 1998, the Company
acquired the stock of Express Pharmacy Services, Inc., and Tmesys,
Inc., which are based in Tampa, Florida and provide workers'
compensation related mail order and on-line pharmacy services. The
purchase price was approximately $19,676,000, and goodwill at the date
of acquisition was approximately $18,622,000.
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
$25,000,000, and goodwill at the date of acquisition was approximately
$23,335,000. The agreement also provides for a contingent payment based
on the future adjusted earnings of the business.
During July 1998, the Company sold its Department of Corrections
business to Stadtlanders Drug Distribution Co., Inc., formerly an
affiliate of Counsel Corporation ("Counsel"), the Company's largest
shareholder. In exchange for substantially all net assets of the
business, the Company received 537,500 shares of PharMerica common
stock previously owned by Counsel. The Company recorded a pre-tax loss
on the sale of this business of approximately $4,500,000.
F-11
<PAGE> 60
During August 1998, the Company acquired certain assets of National
Institutional Pharmacy Services, Inc. ("NIPSI"), a New Mexico based
provider of institutional pharmacy services, from Integrated Health
Services, Inc. The purchase price was approximately $20,900,000, plus
related transaction costs of approximately $7,400,000. Goodwill
recorded at the date of acquisition was approximately $26,400,000.
During 1998, the Company also acquired the assets or stock of ten
additional companies. The aggregate purchase price totaled
approximately $24,000,000 and the related goodwill totaled
approximately $21,600,000. Certain acquisitions include provisions for
earnouts based on adjusted future earnings for the respective
business.
1997 ACQUISITIONS - During 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 approximately $20,138,000, and goodwill recorded at
the date of acquisition was approximately $12,000,000.
On December 3, 1997, Capstone issued 50,000,000 shares of its common
stock and paid approximately $291,000,000 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. leaving only its
institutional pharmacy business, PCA, to be acquired by Capstone.
Because Beverly's shareholders own a majority of the surviving
corporation, the transaction has been treated as an acquisition of
Capstone by PCA for accounting purposes.
In accordance with Emerging Issues Task Force Bulletin "EITF" 95-19,
the purchase price for the Beverly acquisition was determined using
the fair value of Capstone's common stock over a reasonable period of
time before and after the transaction was agreed to and announced. In
a reverse merger transaction, the shares of Capstone at the date of
close represent the consideration for the merger, plus the fair value
of Capstone's outstanding options and warrants, calculated using the
Black-Scholes option pricing model. After the merger was consummated,
the historical financial statements of the Company became those of
PCA.
F-12
<PAGE> 61
Also, during December 1997, the Company purchased Resident Care
Pharmacy, Inc. ("Resident Care"), a North Carolina-based institutional
pharmacy. The total consideration was approximately $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 approximately $13,610,000.
Additionally, during 1997, the Company acquired four institutional
pharmacies for an aggregate purchase price of approximately
$24,752,000. Aggregate goodwill associated with these acquisitions
totalled approximately $21,901,000.
1996 ACQUISITIONS - During 1996, the Company acquired three
institutional pharmacies for cash totaling approximately $10,835,000
and disposed of one institutional pharmacy for cash proceeds of
approximately $2,152,000.
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, representing the excess of
acquisition cost over the fair value of net assets acquired, for these
business acquisitions is being amortized over forty years.
UNAUDITED PRO FORMA FINANCIAL INFORMATION - Unaudited pro forma
consolidated results of operations of the Company for the years ended
December 31, 1997 and 1998 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions and
divestitures discussed above had been made as of January 1, 1997 (in
thousands except per share amounts):
<TABLE>
<CAPTION>
(UNAUDITED)
PRO FORMA
YEARS ENDED
DECEMBER 31,
1997 1998
----------- -----------
<S> <C> <C>
Revenues $ 1,071,276 $ 1,168,874
Income (loss) before provision for income taxes 54,066 (85,858)
Provision for income taxes (23,032) (5,530)
----------- -----------
Net income (loss) $ 31,034 $ (91,388)
=========== ===========
Diluted income (loss) per share $ 0.36 $ (1.02)
=========== ===========
</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) 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
F-13
<PAGE> 62
which might have occurred had the operations and management of the
Company and the acquired companies been combined in prior years.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 41,409 $ 51,105
Software and computer equipment 28,065 41,723
Leasehold improvements 13,022 15,914
Construction in progress 1,376 4,426
--------- ---------
83,872 113,168
Accumulated depreciation and amortization (34,665) (48,981)
--------- ---------
Property and equipment, net $ 49,207 $ 64,187
========= =========
</TABLE>
Depreciation of property and equipment amounted to approximately
$6,737,000, $9,452,000, and $12,462,000 for the years ended December
31, 1996, 1997 and 1998, respectively. Total equipment under capital
leases was approximately $6,441,000 and $7,864,000, with accumulated
depreciation of $3,069,000 and $4,432,000 at December 31, 1997, and
1998, respectively.
NOTE 4 - LONG-TERM DEBT
The Company maintains a $325 million Bank Credit Facility with several
commercial banks (the "Credit Facility"). The Credit Facility
stipulates certain covenants relating to various financial ratios,
including a leverage ratio and a minimum net worth requirement, among
other restrictive covenants. The Company was in compliance with all
such covenants as of December 31, 1998. The Credit Facility allows
PharMerica to draw on the Credit Facility at any time, subject to
compliance with certain covenants, and matures on December 3, 2002.
Under the Credit Facility, the Company has the option to borrow under
an alternate base rate or a Eurodollar loan rate. Interest rates on
the alternate base rate loans are at the greatest of (a) the prime
rate, (b) the base certificate of deposit rate plus 1% or (c) the
federal funds effective rate on the date of the loan, plus 1/2 of 1%.
Interest on the alternate base rate loans is due quarterly in arrears.
Interest rates on the Eurodollar loans are calculated using the
adjusted LIBOR rate for the interest period in effect, plus the
applicable rate. The adjusted LIBOR rate is the LIBOR rate for such
interest period multiplied by the statutory reserve rate. The
applicable rate and the statutory reserve rate are defined in the
Credit Facility. Interest on the Eurodollar loans is due on the last
day of the interest period applicable to the borrowing. As of December
31, 1998, the Company had $259.7 million outstanding under a
Eurodollar loan at an effective interest rate, including the
amortization of deferred financing costs, of approximately 6.25%. Upon
the occurrence of a change in control, all borrowings become due and
payable. (See Note 15)
In March 1998, the Company sold $325 million of Senior Subordinated
Notes (the "Notes") in a private placement offering. The Notes bear
interest at 8 3/8% and mature in 2008. Net proceeds of the Notes were
used to repay a portion of the outstanding borrowings under the Credit
Facility. In accordance with the terms of the Notes, in July 1998 the
Company exchanged the private placement
F-14
<PAGE> 63
notes for publicly registered notes with substantially the same terms.
The Notes contain certain limitations or prohibitions on the Company,
including the incurrence of certain indebtedness, the creation of
security interests, certain acquisitions and dispositions and certain
investments and a restriction on payment of dividends. As of December
31, 1998, the Company was in compliance with such covenants. Upon the
occurrence of a change in control, the Company is required to offer to
purchase the Notes at a cash price equal to 101% of the outstanding
principal, plus accrued interest. (See Note 15)
Long-term debt at December 31, 1997 and 1998 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Borrowings under a $325 million credit agreement ($550 million
at December 31, 1997) with a group of several commercial
banks, interest at varying rates based on the type of
borrowing, secured by the stock of the Company's
subsidiaries, due December 2002 $ 424,524 $ 259,650
$325 million Senior Subordinated Notes, interest at 8 3/8%,
due April 2008 -- 325,000
Unsecured notes payable to former stockholders of a Capstone
acquiree, interest at 6%, currently payable 1,000 --
Unsecured note payable to former owners of a Capstone acquiree,
non-interest bearing, payable in monthly installment of $20
beginning in March 1998, remaining balance due January 1999 1,100 900
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 --
Unsecured notes payable to former stockholders of
Kentucky Health Services, Inc., non-interest bearing with
$3,000 installment and due February 1999 -- 3,000
Assumed note payable from Resident Care acquisition,
due currently 1,592 490
Unsecured note payable to former owner of NIPSI,
interest at 10%, due August 2003 -- 4,500
Non-compete payable to former shareholders of acquired
companies, non-interest bearing 1,644 --
Capital lease obligations (Note 12) 3,224 3,829
Other 338 334
--------- ---------
435,422 597,703
Less: Current portion 7,533 6,151
--------- ---------
Long-term portion $ 427,889 $ 591,552
========= =========
</TABLE>
F-15
<PAGE> 64
Future maturities of long-term debt, exclusive of capital lease
obligations at December 31, 1998, follow (in thousands):
<TABLE>
<S> <C>
1999 $ 4,456
2000 135
2001 132
2002 259,650
2003 4,500
Thereafter 325,000
---------
$ 593,873
=========
</TABLE>
Interest expense for the years ended December 31, 1996, 1997 and 1998,
was approximately $0, $2,483,000, and $39,133,000, respectively.
These amounts include amortization of deferred financing costs of
approximately $0, $113,000 and $831,000 for the years ended December
31, 1996, 1997 and 1998, respectively.
NOTE 5 - RESTRUCTURING CHARGES
During December 1997, in connection with the Merger, the Company
adopted a plan to restructure its long-term care pharmacy operations.
In connection with this plan, management intended to close six former
PCA pharmacies, 14 former Capstone pharmacies, and relocate Capstone's
corporate headquarters from Irving, Texas to Tampa, Florida. The
restructuring activities in connection with the PCA/Capstone Merger
were completed during 1998.
The Company recorded restructuring costs of approximately $5.8 million
in 1997 related to the closure of certain former PCA pharmacies,
consisting of $3.6 million of severance covering approximately 180
pharmacy employees, $0.7 million of lease termination costs and $1.4
million of other exit costs.
The Company also assumed liabilities, included in the Capstone
purchase price allocation, of approximately $9.6 million related to
the closure of the former Capstone pharmacies and the relocation of
Capstone's former corporate headquarters, consisting of $5.0 million
of severance covering approximately 260 employees, $3.1 million of
lease termination costs and $1.5 million of relocation costs. The
terminated positions were comprised primarily of pharmacy employees
and several regional and corporate positions.
In connection with the Capstone acquisition, the Company assumed
approximately $3.9 million of liabilities from previous Capstone
restructurings consisting primarily of remaining lease termination
costs.
As of December 31, 1998, approximately $6.0 million has been charged
against these restructuring accruals consisting of approximately $2.9
million paid as severance to 125 terminated employees and
approximately $3.1 million paid for relocation, terminated leases and
other exit costs. In September 1998, management determined that $6.8
million of the remaining accrued restructuring charges, which were
created in December 1997, exceeded the estimated amount required to
complete the originally planned restructuring. Accordingly, the
restructuring accrual was reduced by $3.8 million by a reduction of
asset impairment and restructuring charges on the consolidated
statements of operations, and a reduction of $3.0 million in goodwill
on the consolidated balance sheet.
F-16
<PAGE> 65
In September 1998, the Company recorded approximately $13.0 million in
additional restructuring charges, consisting of approximately $2.1
million of severance covering approximately 46 corporate positions and
approximately $10.9 million relating to future rents to be paid
through the year 2003 and related exit costs in connection with the
relocation of the Company's corporate office and its mail service
pharmacy facility in Tampa. The Company consolidated and relocated its
corporate office and the mail service pharmacy operating unit to a new
location in Tampa.
During the three months ended December 31, 1998, approximately $1.3
million was charged against these restructuring accruals consisting of
approximately $1.0 million paid as severance to 46 terminated
employees and approximately $0.3 million paid for terminated leases
and related exit costs.
NOTE 6 - INCOME TAXES
Prior to the merger with Capstone and the spin-off of the Beverly
long-term care 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, 1996, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Federal:
Current $ 8,649 $ 12,963 $ --
Deferred 3,423 2,668 1,530
State:
Current 1,860 2,788 1,251
Deferred 736 573 249
-------- -------- -------
$ 14,668 $ 18,992 $ 3,030
======== ======== =======
</TABLE>
The actual income tax expense for the years ended December 31, 1996,
1997 and 1998, 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,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Tax benefit at statutory rate 35.0% 35.0% (35.0%)
State income taxes, net of federal
income tax effect 4.8 4.6 (4.6)
Tax effect of permanent differences 1.6 2.0 42.7
Other items, net 0.6 -- --
---- ---- ----
Provision for income taxes 42.0% 41.6% 3.1%
==== ==== ====
</TABLE>
F-17
<PAGE> 66
The tax effect of cumulative temporary differences at December 31,
1997 and 1998 follow (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1997 1998
-------- --------
<S> <C> <C>
Current Deferred Taxes:
Accounts receivable allowance $ 11,568 $ 11,419
Inventory 686 696
Accrued restructuring charges 1,537 566
Other accrued liabilities 14,740 14,322
Net operating loss carryforward 6,829 10,014
-------- --------
Net current deferred tax asset $ 35,360 $ 37,017
======== ========
Non-Current Deferred Taxes:
Goodwill $ 14,784 $ 19,652
Accumulated depreciation and other 6,432 6,915
-------- --------
Net non-current deferred tax liability $ 21,216 $ 26,567
======== ========
</TABLE>
NOTE 7 - 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 the 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 earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ 20,287 $ 26,697 $ (99,608)
Pro forma $ 20,019 $ 25,083 $ (105,503)
Earnings (loss) per share:
As reported $ 0.41 $ 0.50 $ (1.12)
Pro forma $ 0.40 $ 0.47 $ (1.18)
</TABLE>
F-18
<PAGE> 67
A summary of option transactions during the years ended December 31,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
--------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year 92,000 $ 6.26 753,000 $ 7.99 5,960,000 $ 8.60
Options granted 661,000 8.23 5,207,000 8.68 824,000 6.04
Options exercised -- -- -- -- (557,000) 5.74
Options canceled -- -- -- -- (418,000) 6.94
------- -------- --------- -------- ---------- --------
Options outstanding, end of year 753,000 $ 7.99 5,960,000 $ 8.60 5,809,000 $ 8.63
======= ======== ========= ======== ========== ========
Shares available for future grant -- -- 3,952,500 -- 3,128,500 --
======= ======== ========= ======== ========= ========
Options exercisable at end of year 753,000 $ 7.99 3,818,000 $ 8.06 4,249,000 $ 8.77
======= ======== ========= ======== ========= ========
Weighted average fair value
of options granted $ 4.56 $ 5.34 $ 4.54
======== ======== ========
</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>
For the Year Ended December 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.5% 6.5% 4.7% - 5.7%
Expected life 10 years 10 years 10 years
Volatility 34% 34% 63%
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1998 Life Price 1998 Price
--------------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.41 - $5.00 671,000 5.3 years $ 4.20 446,000 $ 4.26
$5.01 - $7.50 549,000 9.1 years $ 5.97 318,000 $ 6.30
$7.51 - $10.00 3,586,000 6.7 years $ 9.33 2,610,000 $ 9.25
$10.01 - $12.04 1,003,000 2.9 years $ 10.52 875,000 $ 10.52
--------- --------- ------- --------- -------
5,809,000 6.1 years $ 8.63 4,249,000 $ 8.77
========= ========= ======= ========= =======
</TABLE>
F-19
<PAGE> 68
As part of the PCA/Capstone Merger, warrants for 1,665,293 shares were
assumed and were outstanding at December 31, 1997. During the year
ended December 31, 1998, warrants for 1,382,571 shares were exercised
at an average price of $4.97 per share and warrants for 7,722 shares
expired. At December 31, 1998, warrants for 275,000 shares were
outstanding at an average price of $10.77 per share. Warrants for
75,000 shares at an exercise price of $7.50 per share expired on
January 1, 1999.
NOTE 8 - 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 or based on quoted market
prices for publicly traded debt.
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash & cash equivalents $ 34,215 $ 34,215 $ 32,312 $ 32,312
Other current assets (1) 263,298 263,298 315,904 315,904
Current portion of long-term debt 7,533 7,533 6,151 6,151
Other current liabilities 109,483 109,483 91,909 91,909
Long-term debt (net of current
portion) 427,889 427,889 591,552 557,427
</TABLE>
(1) Excluding deferred tax asset
NOTE 9 - MAJOR CUSTOMER AND VENDOR RELATIONSHIPS
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 attributable to Beverly nursing
facilities, inclusive of
F-20
<PAGE> 69
revenues from federal and state medical assistance programs and other
third party payors, were approximately 31%, 29% and 18% of net sales
for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company utilizes a primary supplier arrangement for its
pharmaceutical purchases. Purchases of inventory under primary
supplier relationships during the years ended December 31, 1996, 1997
and 1998, were approximately 92%, 94% and 82% of total inventory
purchases, respectively.
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Trade accounts payable $ 46,386 $ 37,048
Accrued salaries, payroll taxes and benefits 12,109 16,314
Other accrued expenses 50,988 38,547
--------- --------
Total $ 109,483 $ 91,909
========= ========
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
Prior to December 3, 1997, PCA was a wholly-owned subsidiary of
Beverly. Subsequent to the PCA/Capstone Merger, all transactions
between Beverly and the Company were made on an arms-length basis.
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 $82,083,000, $91,228,000 for the years
ended December 31, 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 $1,820,000, $3,186,000 for the years ended
December 31, 1996, 1997, respectively. In addition, the Company was
insured for general liability and workers' compensation risks through
the self insurance programs of Beverly. Total insurance allocations to
the Company were approximately $1,829,000 and $2,558,000 for the years
ended December 31, 1996 and 1997, respectively. The Company believes
that the charges for services provided by Beverly to the Company are
a reasonable allocation of the
F-21
<PAGE> 70
costs incurred by Beverly on behalf of the Company in providing these
services; however, such costs are not necessarily indicative of the
costs that would have been incurred if the Company operated as a
stand-alone entity.
The average intercompany balance was approximately $315,500,000 and
$327,172,000 for the years ended December 31, 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.
During the year ended December 31, 1998, the Company paid
approximately $5,900,000 to Counsel Corporation, a significant
shareholder, for investment banking services in connection with the
Company's acquisition of NIPSI and the settlement of related
litigation with Integrated Health Services, Inc.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office and warehouse space, automobiles
and equipment. Rental expense under these leases aggregated
approximately $12,142,000, $13,642,000 and $21,486,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Capital Leases Operating Leases
------------------------ -------------- ----------------
<S> <C> <C>
1999 $ 1,857 $ 9,354
2000 1,173 3,315
2001 719 2,223
2002 388 1,344
2003 59 430
------- --------
Total minimum lease payments 4,196 $ 16,666
========
Less: amount representing interest 367
-------
Present value of net minimum lease payments 3,829
Less: current portion 1,695
-------
Long-term portion $ 2,134
=======
</TABLE>
In November 1998, a putative securities class action was filed against
PharMerica, C. Arnold Renschler, M.D. (the Company's Chief Executive
Officer), Robert Della Valle (the Company's former Chief Operating
Officer) and James D. Shelton (the Company's former Chief Financial
Officer) in the United States District Court for the Middle District
of Florida. The proposed class consists of all persons who purchased
or acquired stock of PharMerica between January 7, 1998 and July 24,
1998. The complaint seeks monetary damages but does not specify an
amount. In general, the complaint alleges that the defendants made
material omissions by withholding from the market information related
to the costs associated with certain acquisitions. The complaint
alleges claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. PharMerica believes the
F-22
<PAGE> 71
complaint is without merit and intends to defend the case
vigorously. The potential outcome of the litigation cannot be
predicted with certainty, however, management believes the litigation
will not have a material impact on the financial position or results of
operations of the Company given a preliminary investigation and its
existing insurance coverages.
The Company is subject to various other claims and litigation in the
ordinary course of its business. In the opinion of management and
outside counsel, the ultimate settlement of these claims and
litigation will not have a material adverse effect on the consolidated
financial position or future operating results of the Company.
F-23
<PAGE> 72
NOTE 13 - QUARTERLY DATA (UNAUDITED)
Selected quarterly data for the years ended December 31, 1997 and 1998
follow (in thousands):
<TABLE>
<CAPTION>
Quarter Ended in 1998
------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 274,677 $ 287,672 $ 289,767 $ 293,812
Costs of revenues 152,802 160,862 172,219 170,706
--------- --------- ---------- ---------
Gross profit 121,875 126,810 117,548 123,106
--------- --------- ---------- ---------
Operating expenses:
Selling, general and
administrative expenses 85,528 89,452 130,293 92,399
Depreciation and amortization 8,524 8,892 9,327 9,654
Loss on disposition -- -- 4,500 --
Asset impairment and
restructuring charges -- -- 108,215 --
--------- --------- ---------- ---------
Total operating expenses 94,052 98,344 252,335 102,053
--------- --------- ---------- ---------
Operating income (loss) 27,823 28,466 (134,787) 21,053
Interest expense, net 7,795 9,588 10,656 11,094
--------- --------- ---------- ---------
Income (loss) before provision
for income taxes 20,028 18,878 (145,443) 9,959
Provision (benefit) for income taxes 8,698 8,196 (18,000) 4,136
--------- --------- ---------- ---------
Net income (loss) $ 11,330 $ 10,682 $ (127,443) $ 5,823
========= ========= ========== =========
Quarter Ended in 1998
------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
Revenues $ 147,592 $ 153,738 $ 155,555 $ 195,294
Costs of revenues 80,087 82,310 84,894 108,287
--------- --------- ---------- ---------
Gross profit 67,505 71,428 70,661 87,007
--------- --------- ---------- ---------
Operating expenses:
Selling, general and
administrative expenses 49,229 52,210 51,900 62,748
Depreciation and amortization 4,827 5,082 5,022 6,478
Asset impairment and
restructuring charges -- -- -- 10,935
--------- --------- ---------- ---------
Total operating expenses 54,056 57,292 56,922 80,161
--------- --------- ---------- ---------
Operating income 13,449 14,136 13,739 6,846
Interest expense, net 46 3 70 2,364
--------- --------- ---------- ---------
Income before provision
for income taxes 13,403 14,133 13,669 4,482
Provision for income taxes 5,576 5,845 5,675 1,897
--------- --------- ---------- ---------
Net income $ 7,827 $ 8,288 $ 7,994 $ 2,585
========= ========= ========== =========
</TABLE>
F-24
<PAGE> 73
NOTE 14 - OPERATING SEGMENTS
In 1998, the Company adopted SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. The Company's five business
units have separate management teams and infrastructures that offer
different products and services. The business units have been
aggregated into two reportable segments, long-term care and mail
pharmacy services. These segments are managed separately because each
of these business units requires different marketing strategies and
delivery systems.
The long-term care segment consists of two business units serving the
eastern and western United States. This segment provides institutional
pharmacy products and services to patients in the long-term care and
alternate site settings, including skilled nursing facilities,
assisted living facilities, and residential and independent living
communities.
The mail pharmacy services segment provides mail order and on-line
pharmacy services, including prescription and non-prescription
pharmaceuticals, medical supplies, and medical equipment. The primary
customer base for this segment includes injured workers who are
receiving workers' compensation benefits, and homebound
catastrophically injured patients.
The accounting policies of the reportable segments are the same as
those described in Note 1. Income taxes, restructuring expenses, and
certain bad debt and goodwill amortization expense charges have not
been allocated to the operating segments. The Company evaluates the
performance of its segments based on operating earnings of the
respective business units. Intersegment sales and transfers are not
significant.
Summarized financial information for 1998 concerning the Company's
reportable operating segments is outlined below (in thousands):
<TABLE>
<CAPTION>
Mail
Long-Term Pharmacy All Non-recurring
Care Services Other Charges Total
--------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 962,731 $ 137,734 $ 45,463 $ -- $ 1,145,928
EBITDA 107,823 26,817 (42,972) (112,715) (21,047)
Total assets 646,371 57,029 460,925 0 1,164,325
Capital expenditures 12,550 1,548 9,883 0 23,981
Depreciation and amortization 18,283 1,834 16,281 0 36,398
</TABLE>
The "All Other" column includes corporate related items, results of
immaterial operations and, as it relates to EBITDA, income and expense
not allocated to reportable segments. The "Non-recurring Charges"
column includes asset impairment and restructuring charges of
$108,215,000 and loss on disposition of $4,500,000.
A reconciliation of EBITDA to net income is as follows:
<TABLE>
<S> <C>
EBITDA (21,047)
Interest expense, net 39,133
Depreciation and amortization 36,398
Provision for income taxes 3,030
---------
(99,608)
=========
</TABLE>
NOTE 15 - SUBSEQUENT EVENTS
On January 11, 1999, Bergen Brunswig Corporation (traded on the
New York Stock Exchange under the trading symbol BBC)
and PharMerica entered into an Agreement and Plan of Merger
(the "Bergen Merger Agreement)", pursuant to which
PharMerica will be merged into, and will thereby become,
a wholly-owned subsidiary of Bergen (the "Bergen
Merger"). Under the terms of the Bergen Merger Agreement, upon
consummation of the Bergen Merger, shareholders of PharMerica will
receive 0.275 of a share of Bergen Class A Common Stock in exchange
for each share of PharMerica common stock they hold. The Bergen Merger
is intended to be tax-free and will be treated by Bergen as a purchase
for financial reporting purposes. Consummation of the transaction is
subject to the satisfaction of certain conditions, including approvals
by the shareholders of Bergen and PharMerica.
F-25
<PAGE> 74
PHARMERICA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands)
Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>
Amounts
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>
December 31, 1996 $ 18,908 $ 13,500 $ (18,510) $ (8) $ -- $ 13,890
======== ======== ========= ========= ======== ========
December 31, 1997 $ 13,890 $ 10,809 $ (13,897) $ 11,294 $ -- $ 22,096
======== ======== ========= ========= ======== ========
December 31, 1998 $ 22,096 $ 52,937 $ (48,164) $ 11,332 $ -- $ 38,201
======== ======== ========= ========= ======== ========
</TABLE>
Accrued Restructuring Charges:
<TABLE>
<CAPTION>
Amounts Adjustments
Balance at New Amounts Charged to Balance
Beginning Restructuring Due to Against Accrued at End of
Description of Year Charges Acquisitions Accrual Amounts Year
----------- --------- ------------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 $ -- $ 5,780 $ 13,469 $ -- $ -- $ 19,249
======== ======== ========= ========= ======== ========
December 31, 1998 $ 19,249 $ 13,000 $ -- $ (10,107) $ (6,831) $ 15,311
======== ======== ========= ========= ======== ========
</TABLE>
F-26
<PAGE> 75
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of January 11, 1999
by and among Bergen Brunswig Corporation, Peacock Merger
Corporation and PharMerica, Inc. (incorporated by
reference to Exhibit 2.1 to Form 8-K filed January 15,
1999).
3.1 Certificate of Incorporation of Choice Drug Systems, Inc.
(incorporated by reference to Exhibit 3.1 to Form 10-Q
for period ending August 30, 1995).
3.2 Certificate of Ownership and Merger Merging Choice Mergoco, Inc.
into Choice Drug Systems, Inc. (incorporated by reference to
Exhibit 3.2 to Form 10-Q for period ending August 30, 1995).
3.3 Certificate of Amendment (incorporated by reference to
Exhibit A to the Company's Proxy Statement for Special
Meeting of Stockholders on August 15, 1996).
3.4 Certificate of Amendment to Certificate of Incorporation of
Capstone Pharmacy Services, Inc. (incorporated by reference to
Exhibit 3.1 to Form 8-K filed December 12, 1997).
3.5 Bylaws of Choice Drug Systems, Inc. (incorporated by reference
to Exhibit 3.3 to Form 10-Q for period ending August 30, 1995).
4.1 Warrant to purchase shares of Common Stock dated January
1, 1996, for the purchase of 75,000 shares of Common
Stock (incorporated by reference to Exhibit 4.9 to the
Company's Annual Report on Form 10-K for fiscal year
ended December 31, 1996).
4.2 Warrant to purchase shares of Common Stock dated December 20, 1995
for the purchase of 15,000 shares of Common Stock
(incorporated by reference to Exhibit 4.10 to the Company's
Annual Report on Form 10-K for fiscal year ended December 31,
1996).
4.3 Form of ACA Investors Warrant for purchase of 200,000
shares of Common Stock (incorporated by reference to
Exhibit 4.11 to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1996).
4.4 Indenture dated March 31, 1998 related to 8 3/8% Senior
Subordinated Notes (incorporated by reference to Exhibit
4.9 to the Company's Registration Statement on Form S-4
filed May 15, 1998).
4.5 Stockholder Protection Rights Agreement dated August 13,
1998 (incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed August 24, 1998).
4.6 First Amendment to Stockholder Protection Rights
Agreement dated as of January 11, 1999, between
PharMerica, Inc. and Harris Trust and Savings Bank, as
Rights Agent (incorporated by reference to Exhibit 4.1 to
the Company's Form 8-K filed January 15, 1999).
10.1 1995 Nonqualified Stock Option Plan for Directors of the
Company (incorporated by reference to Exhibit A to
Schedule 14A filed August 2, 1995).
10.2 1995 Incentive and Nonqualified Stock Option Plan for Key
Personnel and Directors of the Company (incorporated by
reference to Exhibit B to Schedule 14A filed August 2,
1995).
10.3 Amendment to 1995 Incentive and Nonqualified Stock Option Plan
for Key Personnel and Directors of the Company (incorporated by
reference to Annex H to the Company's Registration Statement on
Form S-4 (Reg. No. 333-28517)).
10.4 Amended and Restated 1996 Employee Stock Purchase Plan
(incorporated by reference to Annex K to the Company's
Registration Statement on Form S-4 (Reg. No. 333-28517)).
10.5 Non-Qualified Deferred Compensation Plan for Executives
(incorporated by reference to Exhibit 4 to Form S-8 filed November
21, 1997).
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.6 Adirondack Consulting Agreement dated June 25, 1996 (incorporated
by reference to Exhibit 10.23 to Form 10-K for year ending December
31, 1996).
10.7 Agreement and Plan of Distribution by and among Beverly Enterprises,
Inc., New Beverly Holdings, Inc. and the Company, dated April 15,
1997 (incorporated by reference to Annex C to the Company's
Registration Statement on Form S-4 (Reg. No. 333-28417)).
10.8 Senior Subordinated Credit Agreement dated December 3,
1997 by and between the Company and Chase Manhattan Bank,
as Agent, and certain other banks (incorporated by
reference to Exhibit 10.9 to the Company's 10-K filed on
March 31, 1998).
10.9 Preferred Provider Agreement by and among Beverly
Enterprises, Inc. and the Company, dated December 3, 1997
(incorporated by reference to Exhibit 10.10 to the
Company's 10-K filed on March 31, 1998).
10.10 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.12 to the Company's 10-K filed on March 31, 1998).
10.11 Form of Employment Agreement with Officers (incorporated by
reference to Exhibit 10.13 to the Company's 10-K filed on March
31, 1998).
10.12 Purchase Agreement dated March 24, 1998 by and among
PharMerica, Inc., the Guarantors, Donaldson, Lufkin &
Jenrette Securities Corporation, Salomon Brothers Inc.,
BancAmerica Robertson Stephens, Chase Securities Inc. and
CIBC Oppenheimer Corp. (incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form
S-4/A filed June 22, 1998).
10.13 Form of Employment Agreement with Officers (incorporated
by reference to Exhibit 10.13 to the Company's Form 10-Q filed
for the period ending September 30, 1998).
10.14 Form of Separation and Change of Control Agreements with
Officer (incorporated by reference to Exhibit 10.14 to
the Company's Form 10-Q filed on November 17,1998).
10.15 Form of Amendment of Employment Agreement with Officers
(incorporated by reference to Exhibit 10.15 to the
Company's Form 10-Q filed on November 17,1998).
10.16 Form of Indemnification Agreement with Officers and
Directors (incorporated by reference to Exhibit 10.16 to
the Company's Form 10-Q filed on November 17, 1998).
10.17 Asset Purchase Agreement dated August 19, 1998 by and
between the Company, NIPSI and Integrated Health
Services, Inc. (incorporated by reference to Exhibit 2 to
the Company's Form 8-K filed September 3, 1998).
10.18 Amended and Restated Credit Agreement dated December
31,1998 among PharMerica, Inc., the Chase Manhattan Bank,
as Agent, and certain other banks.
10.19 Employment Agreement dated as of January ___, 1999 by and between
Bergen Brunswig Corporation and C. Arnold Renschler, M.D.
10.20 Agreement and Plan of Merger dated December 3, 1997 by and among
Capstone Pharmacy Services, Inc. and Beverly Enterprises, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (Reg. No. 333-28517)).
21 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
27 Financial Data Schedule (for SEC use only).
99 Safe Harbor Compliance Statement for Forward-Looking Statements
</TABLE>
*Denotes a management contract or compensatory plan, contract or arrangement.
<PAGE> 1
EXHIBIT 10.18
AMENDMENT AND RESTATEMENT dated as of December 31, 1998 (this
"Amendment"), to the Credit Agreement dated as of December 3, 1997, as amended
by Amendment No.1 dated as of December 31, 1997 (the "Credit Agreement"), among
PHARMERICA, INC., a Delaware corporation formerly known as Capstone Pharmacy
Services, Inc. (the "Borrower"), 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 (in such capacity, the "Administrative Agent").
The Borrower has requested that the Credit Agreement be amended and
restated to read in its entirety as set forth in the Credit Agreement, with the
exceptions specified below.
The Required Lenders are willing, on the terms and subject to the
conditions set forth herein, so to amend and restate the Credit Agreement.
In consideration of the premises and the agreements, provisions and
covenants herein contained, the parties hereto hereby agree, on the terms and
subject to the conditions set forth herein, as follows:
SECTION 1. Definitions: References. Unless otherwise defined herein,
capitalized terms shall have the meaning assigned to such terms in the Credit
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference, and each reference to "this Agreement" and each
other similar reference contained in the Credit Agreement, and any reference to
"the Credit Agreement" shall from and after the Restatement Effective Date (as
defined in Section 14 below) refer to the Credit Agreement as amended and
restated hereby.
SECTION 2. Amendments to Section 1.01 (Defined Terms).
(a) The definition of the term "Acquired EBITDA" set forth in
Section 1.01 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
"Acquired EBITDA" shall mean, with respect to any
Acquired Entity or Business or any Sold Entity or Business for
any period, the sum of the amounts for such period of net
income or loss of such Acquired Entity or Business or Sold
Entity or Business determined on a consolidated basis in
accordance with GAAP, plus, without duplication and to the
extent deducted from revenues in determining such consolidated
net income or loss, the sum of (a) the aggregate amount of
interest expense, both expensed and capitalized (including the
interest component in respect of Capital Lease Obligations),
accrued or paid during such period, in each case as determined
on a consolidated basis in accordance with GAAP) the aggregate
amount of income tax expense for such period and (c) all
amounts attributable to depreciation and amortization for such
period, and minus, without duplication, all interest income
for such period, all as determined on a consolidated basis
with respect to such Acquired Entity or Business
<PAGE> 2
or Sold Entity or Business in accordance with GAAP; provided
that Acquired EBITDA shall include an adjustment on a pro
forma basis to reflect identifiable net cost savings as agreed
to by the Administrative Agent and the Borrower.
(b) The definition of the term "Adjusted Consolidated EBITDA"
set forth in Section 1.01 of the Credit Agreement is hereby amended by adding at
the end thereof the following sentence:
Notwithstanding the foregoing, for purposes of determining
Adjusted Consolidated EBITDA for the periods ending December
31, 1998, March 31, 1999, and June 30, 1999, Adjusted
Consolidated EBITDA for the quarters ending March 31, 1998,
June 30, 1998, and September 30, 1998, shall be deemed to be
$41,225,000, $42,004,000 and $29,411,000, respectively.
(c) The definition of the term "Applicable Rate" set forth in
Section 1.01 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
"Applicable Rate" means, for any day, with respect to
any Loan or with respect to the facility fees payable
hereunder, as the case may be, the applicable rate per annum
set forth below under the caption "Eurodollar Spread", "ABR
Spread" or "Facility Fee Rate", as applicable, based upon the
Adjusted Leverage Ratio as of the most recent determination
date; provided that until the delivery to the Administrative
Agent, pursuant to Section 5.01(a), of the Borrower's
consolidated financial statements for the Borrower's fiscal
year ending December 31, 1998, the "Applicable Rate" shall be
deemed to be in Category 3:
<TABLE>
<CAPTION>
=============================================================================
EURODOLLAR ABR FACILITY
ADJUSTED LEVERAGE RATIO: SPREAD SPREAD FEE RATE
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Category 1
Greater than 5.00 to 1.00 2.500% 1.500% 0.500%
Category 2
Greater than 4.50 to 1.00 but
less than or equal to 5.00 to 1.00 2.000% 1.000% 0.500%
Category 3
Greater than 4.00 to 1.00 but
less than or equal to 4.50 to 1.00 1.500% 0.500% 0.500%
Category 4
Greater than 3.50 to 1.00 but
less than or equal to 4.00 to 1.00 1.000% 0.000% 0.500%
-----------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
============================================================================
EURODOLLAR ABR FACILITY
ADJUSTED LEVERAGE RATIO: SPREAD SPREAD FEE RATE
----------------------------------------------------------------------------
<S> <C> <C> <C>
Category 5
Greater than 3.00 to 1.00 but
less than or equal to 3.50 to 1.00 0.625% 0.000% 0.375%
Category 6
Less than or equal to 3.00 to 1.00 0.450% 0.000% 0.300%
============================================================================
</TABLE>
Each change in the Applicable Rate resulting from a change in the
Adjusted Leverage Ratio shall be effective with respect to all Loans and
Commitments outstanding on and after the date of delivery to the Administrative
Agent of the financial statements and certificates required by Section 5.01(a)
or (b)) indicating such change until the date immediately preceding the next
date of delivery of such financial statements and certificates indicating
another such change. Notwithstanding the foregoing, at any time after the
occurrence and during the continuance of an Event of Default, the Adjusted
Leverage Ratio shall be deemed to be in Category 1 for purposes of determining
the Applicable Rate.
(d) The definition of the term "Consolidated EBITDA" set forth
in Section 1.01 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
"Consolidated EBITDA" means, for any period, Consolidated Net
Income for such period, plus, without duplication and to the
extent deducted from revenues in determining Consolidated Net
Income, the sum of (a) the aggregate amount of Consolidated
Interest Expense for such period, (b)) the aggregate amount of
income tax expense for such period, (c) all amounts
attributable to depreciation and amortization for such period
and (d) non-cash restructuring charges taken in such period,
and minus, without duplication, (i) all interest income for
such period and (ii) all cash expenditures during such period
in respect of non-cash restructuring charges taken in one or
more prior periods, all as determined on a consolidated basis
with respect to the Borrower and the Subsidiaries in
accordance with GAAP. Notwithstanding the foregoing, for
purposes of determining Consolidated EBITDA for the periods
ending December 31, 1998, March 31, 1999, and June 30, 1999,
Consolidated EBITDA for the quarters ending March 31, 1998,
June 30, 1998, and September 30, 1998, shall be deemed to be
$36,347,000, $37,358,000 and $27,880,000, respectively.
(e) The definition of the term "Loan Documents" is hereby
amended by inserting immediately after the words "Guarantee Agreement" set
forth therein the words ", the Pledge Agreement".
3
<PAGE> 4
(f) Section 1.01 of the Credit Agreement is hereby further
amended by inserting in the appropriate alphabetical order therein the
following:
"Adjusted Senior Debt Leverage Ratio" means, on any
date, the ratio of (a) Senior Debt as of such date to (b)
Adjusted Consolidated EBITDA for the period of four
consecutive fiscal quarters of the Borrower most recently
ended as of such date, all as determined as a consolidated
basis in accordance with GAAP.
"Pledge Agreement" means the Pledge Agreement,
substantially in the form of Exhibit G, between the Borrower
and the subsidiary pledgors named therein and the
Administrative Agent for the benefit of the Secured Parties
(as defined therein).
"Senior Debt" means, as of any date of determination,
the aggregate principal amount of Total Debt on such date less
the aggregate principal amount of all Subordinated Notes
outstanding on such date.
SECTION 3. Amendment to Section 2.10 (Interest).
(a) Section 2.10(a) of the Credit Agreement is hereby amended
by inserting immediately after the words "Alternate Base Rate" set forth in the
second line thereof the words "plus the Applicable Rate".
(b) Section 2.10(c) of the Credit Agreement is hereby amended
by deleting the words "Alternate Base Rate" in the last line thereof and
substituting therefor the words "rate otherwise applicable to ABR Loans as
provided in Section 2.10(a)".
SECTION 4. Amendment to Article III (Representations and Warranties).
Article III of the Credit Agreement is hereby amended by adding thereto a new
Section 3.13 thereof as follows:
SECTION 3.13. Year 2000. Any reprogramming required
to permit the proper functioning, in and following the year
2000, of (a) the computer systems of the Borrower and its
Subsidiaries and (b) equipment containing embedded microchips
(including systems and equipment supplied by others or with
which the Borrower's systems interface) and the testing of all
such systems and equipment, as so reprogrammed, will be
completed by June 30, 1999. The cost to the Borrower and its
Subsidiaries of such reprogramming and testing and of the
reasonably foreseeable consequences of year 2000 to the
Borrower and its Subsidiaries (including reprogramming errors
and the failure of others' systems or equipment) will not
result in a Default or a Material Adverse Effect. Except for
such of the reprogramming referred to in the preceding
sentence as may be
4
<PAGE> 5
necessary, the computer and management information systems of
the Borrower and its Subsidiaries are and, with ordinary
course upgrading and maintenance, will continue for the term
of this Agreement to be, sufficient to permit the Borrower to
conduct its businesses without Default or Material Adverse
Effect.
SECTION 5. Amendment to Section 4.02 (Conditions to Each Credit Event).
Section 4.02(a) of the Credit Agreement is hereby amended by inserting
immediately after the words "this Agreement" set forth therein the words "and
the Pledge Agreement".
SECTION 6. Amendment to Section 5.01 (Financial Statements and Other
Information). Section 5.01(c) of the Credit Agreement is hereby amended by
deleting the words "and 6.11" set forth in clause (ii) thereof and substituting
therefor the words ", 6.11 and 6.13".
SECTION 7. Amendment to Section 5.09 (Additional Subsidiaries).
Section 5.09 of the Credit Agreement is hereby amended by adding at the end
thereof the following:
(c) If any additional Subsidiary is formed or
acquired after the date hereof, the Borrower will notify the
Administrative Agent and the Lenders thereof and the Borrower
shall pledge, or shall cause to be pledged, within 10 Business
Days of the formation or acquisition thereof, pursuant to the
Pledge Agreement, all the capital stock or other equity
interests of such Subsidiary owned directly or indirectly by
or on behalf of the Borrower; provided, however, that (i)
neither the Borrower nor any Subsidiary shall be required to
pledge more than 65% of the voting stock of any Subsidiary
organized outside the United States or the District of
Columbia (a "Foreign Subsidiary") and (ii) no Foreign
Subsidiary shall be required to become a party to the Pledge
Agreement, in each case to the extent to do so would cause
adverse tax consequences to the Borrower.
SECTION 8. Amendment to Section 6.09 (Adjusted Leverage Ratio).
Section 6.09 of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
SECTION 6.09. Adjusted Leverage Ratio. The Borrower
will not permit the ratio of (a) Total Debt as of the end of
any four-fiscal-quarter period ending on any date or during
any period set forth below to (b) Adjusted Consolidated EBITDA
for such four-fiscal-quarter period to be in excess of the
ratio set forth below opposite such date or period:
5
<PAGE> 6
<TABLE>
<CAPTION>
DATE OR PERIOD RATIO
-------------- -----
<S> <C>
December 31, 1998 4.50 to 1.00
March 31, 1999 5.00 to 1.00
June 30, 1999 through and 5.50 to 1.00
including September 30, 1999
December 31, 1999 5.00 to 1.00
March 31, 2000 4.75 to 1.00
June 30, 2000 4.50 to 1.00
Thereafter 4.00 to 1.00
</TABLE>
SECTION 9. Amendment to Article VI. Article VI of the Credit Agreement
is hereby further amended by adding thereto a new Section 6.13 thereof as
follows:
SECTION 6.13. Adjusted Senior Debt Leverage Ratio.
The Borrower will not permit the ratio of (a) Senior Debt as
of the end of any four-fiscal-quarter period ending on any
date or during any period set forth below to (b) Adjusted
Consolidated EBITDA for such four-fiscal-quarter period to be
in excess of the ratio set forth below opposite such date or
period:
<TABLE>
<CAPTION>
DATE OR PERIOD RATIO
-------------- -----
<S> <C>
December 31, 1998 through 2.50 to 1.00
and including September 30,
1999
December 31, 1999 2.25 to 1.00
Thereafter 2.00 to 1.00
</TABLE>
SECTION 10. Amendment to Article VII (Events of Default). Clause (e) of
Article VII of the Credit Agreement is hereby amended as follows: (a) by
inserting immediately after the words "the Borrower" in the first line thereof
the words "or any Subsidiary"; and (b) by deleting the words "this Agreement"
set forth in the second line thereof and substituting therefor the words "any
Loan Document".
SECTION 11. Restatement of Schedule 2.01. Schedule 2.01 to the Credit
Agreement is hereby amended and restated in the form attached as Schedule 2.01
hereto.
SECTION 12. Addition of Exhibit G. The Credit Agreement is hereby
amended by adding thereto a new Exhibit G, a form of which is attached as
Exhibit G hereto.
SECTION 13. Representations and Warranties. The Borrower represents and
warrants to the Administrative Agent and each of the Lenders that:
6
<PAGE> 7
(a) After giving effect to this Amendment, the representations
and warranties set forth in the Credit Agreement and the Pledge Agreement are
true and correct in all material respects with the same effect as if made on the
date hereof; except to the extent such representations and warranties expressly
relate to an earlier date.
(b) After giving effect to this Amendment no Event of Default
or Default has occurred and is continuing.
SECTION 14. Conditions to Effectiveness. This Amendment shall become
effective as of the date first written above (the "Restatement Effective Date")
on the date on which each of the following conditions precedent is satisfied:
(a) the Administrative Agent shall have received counterparts
of this Amendment that, when taken together, bear the signatures of the
Borrower, the Guarantors and the Required Lenders; and
(b) the Administrative Agent shall have received from the
Borrower for the account of each Lender that shall have executed and delivered a
counterpart of this Amendment to the Administrative Agent by 5.00 p.m., New York
City time, on Wednesday, December 30, 1998, a fee equal to 0.25% of such
Lender's Commitment (as set forth on Schedule 2.01 attached hereto).
SECTION 15. Pledge Agreement. The Borrower covenants and agrees with
the Administrative Agent and each of the Lenders that as soon as practicable,
but in no event later than 30 days after the Restatement Effective Date, the
Borrower shall provide to the Administrative Agent:
(a) a copy of the Pledge Agreement signed on behalf of the
Borrower and each Subsidiary to be a pledgor thereunder;
(b) stock certificates representing all the outstanding shares
of capital stock of each Subsidiary owned directly or indirectly by or on behalf
of the Borrower and stock powers endorsed in blank with respect thereto; and
(c) one or more opinions of counsel to the Borrower and/or the
Subsidiaries as to the Pledge Agreement and the transactions contemplated
thereby, in form and substance reasonably satisfactory to the Administrative
Agent and its counsel.
Failure by the Borrower to comply with this Section 15 within the time period
provided herein shall constitute an immediate Event of Default under the Credit
Agreement.
SECTION 16. Credit Agreement. Except as specifically provided herein,
the Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof as in existence on the date hereof. This Amendment shall
constitute a Loan Document for all purposes under the Credit Agreement.
7
<PAGE> 8
SECTION 17. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 18. Counterparts. This Amendment may be executed in
counterparts, each of which shall constitute an original but all of which when
taken together shall constitute but one contract. Delivery of an executed
signature page of this Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
SECTION 19. Expenses. The Borrower agrees to reimburse the
Administrative Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and disbursements of Cravath,
Swaine & Moore, counsel for the Administrative Agent.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first written above.
PHARMERICA, INC.,
By:
------------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
THE CHASE MANHATTAN BANK, individually,
as Book Manager and as Administrative Agent,
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
CIBC INC.,
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
CIBC OPPENHEIMER CORP, as Syndication
Agent,
By:
------------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, individually and as
Documentation Agent,
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
NATIONSBANK, N.A,.
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
9
<PAGE> 10
BANK OF MONTREAL,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
BARNETT BANK, N.A., TAMPA,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
PARIBAS,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
THE BANK OF NEW YORK,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
-------------------------------------
FIRST UNION NATIONAL BANK,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
10
<PAGE> 11
FLEET NATIONAL BANK,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
CREDIT LYONNAIS, NEW YORK BRANCH,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
COOPERATIEVE CENTRALERAIFFEISEN-
BOERENLEEENBANK B.A. RABOBANK
NEDERLAND, NEW YORK BRANCH,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
SUNTRUST BANK, CENTRAL FLORIDA, N.A.,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
-------------------------------------
AMSOUTH BANK OF ALABAMA,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
BANK LEUMI LE-ISREAL B.M.,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
MICHIGAN NATIONAL BANK,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
11
<PAGE> 12
VIA BANQUE,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
EACH OF THE GUARANTORS
HEREBY ACKNOWLEDGES THE
TERMS OF, AND ACCEPTS, THIS
AMENDMENT:
By:
----------------------------------
Name:
--------------------------------
Title:
------------------------------
12
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of January __, 1999,
is by and between Bergen Brunswig Corporation, a New Jersey corporation (the
"Employer"), C. Arnold Renschler, M.D., an individual residing at
_______________________________ (the "Employee"), and, with respect to Sections
1, 8 and 9 only, PharMerica, Inc., a Delaware corporation having an address at
____________________________ ("PharMerica").
RECITALS
1. The Employer has entered into an Agreement and Plan of Merger, dated
as of January __, 1999, by and among the Employer, PharMerica and a wholly-owned
subsidiary of the Employer ("Subcorp"), pursuant to which agreement (the "Merger
Agreement") Subcorp will merge with and into PharMerica (the "Merger") and
PharMerica will become a wholly-owned subsidiary of the Employer.
2. The Employee is currently employed by PharMerica as its Chief
Executive Officer and in such capacity he has acquired outstanding and special
skills and abilities and an extensive background in and knowledge of
PharMerica's business and the industry in which it is engaged.
3. The Employee and PharMerica previously entered into an employment
agreement dated as of December 3, 1997, as amended as of September 30, 1998 (the
"Prior Contract").
4. The Employer and PharMerica are willing to pay the Employee the
amounts which would have become payable to the Employee pursuant to Section XI
of the Prior Contract had he resigned from employment with PharMerica
immediately following the closing (the "Closing") of the transactions described
in the Merger Agreement in order to be assured of the continued association and
services of the Employee after the Closing and in order to retain for the
benefit of the Employer his experience, skills, abilities, background,
knowledge, and to facilitate long range planning and the execution of the
Employer's business in the most orderly and efficient manner.
5. The Employer and the Employee desire to set forth the terms pursuant
to which the Employee will be employed by the Employer at and after the Closing.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
SECTION 1. EFFECTIVENESS; PRIOR AGREEMENTS.
(a) This Agreement shall become effective as of the Closing. At the
Closing, this Agreement shall supersede all prior employment agreements and
arrangements between the parties ("Prior Agreements"), including without
limitation the Prior Contract, and both the Employee and PharMerica shall cease
to have any obligations thereunder. Notwithstanding any other provision of
<PAGE> 2
this Agreement, all provisions of this Employment Agreement other than this
Section 1 shall terminate and be null and void ab initio after any termination
of the Merger Agreement without consummation of the Merger; in such event, the
Prior Contract shall be reinstated in such form as the Prior Contract existed
immediately prior to the execution of the Merger Agreement.
(b) Notwithstanding the termination of the Prior Contract pursuant to
paragraph (a) above, PharMerica will pay to the Employee at the Closing a lump
sum equal to the amount that would have become payable to the Employee or owing
to the Employee (excluding any amount attributable to the value of
post-termination benefits, perquisites and moving expenses) pursuant to Section
XI of the Prior Contract had the Employee resigned from employment with
PharMerica immediately following the Closing. All Employer stock options held by
the Employee immediately prior to the Closing will become fully vested and
immediately exercisable as of the Closing. Any matching payments by PharMerica
in the Employee's account under PharMerica-sponsored retirement plans as of the
Closing will become fully vested as of the Closing.
SECTION 2. EMPLOYMENT.
(a) Unless sooner terminated as provided herein, the Employer shall
employ the Employee for a three (3) year term commencing on the Closing and
expiring on the third anniversary of the Closing, extended in the manner set
forth in the next sentence (the "Term"). The Term shall automatically be
extended for an additional one month period upon the completion of each
one-month period of service provided by the Employee under this Agreement unless
notice is given by either the Employee or the Employer to the other, at least 30
days prior to the expiration of such one-month period, that such party does not
wish to extend the Term of this Agreement, in which case the Term of this
Agreement shall expire at the end of the last month through which this Agreement
had previously been extended. The date upon which this Agreement terminates in
accordance with this Section 2(a) shall be referred to herein as the "Expiration
Date".
(b) Subject to termination of the Prior Agreements, the Employee hereby
represents and warrants that the Employee has the legal capacity to execute and
perform this Agreement, that this Agreement is a valid and binding agreement
enforceable against the Employee according to its terms, and that the execution
and performance of this Agreement by the Employee does not violate the terms of
any existing agreement or understanding to which the Employee is a party.
SECTION 3. POSITION AND DUTIES. During the Term, the Employee and the
Employer agree:
(a) The Employee shall during the Term of this Agreement serve as an
Executive Vice President of the Employer and, as such, the Employee hereby
promises to perform and discharge well and faithfully the duties that may be
assigned to him from time to time that are appropriate for an Executive Vice
President of an organization the size of the Employer that is engaged in the
type of business engaged in by the Employer, and the Employer agrees to assign
to him only such duties. The Employee shall report to the President of the
Employer. To the extent consistent with fiduciary
2
<PAGE> 3
principles, the Employee will be nominated to the Board of Directors of the
Employer (the "Board") at the next shareowners meeting after the Closing for a
term of two years.
(b) The Employee shall devote his time, attention and effort during
regular business hours to the business of the Employer and shall not during the
Term of this Agreement be engaged in any other substantial business activity
whether or not such business activity is pursued for gain, profit or other
pecuniary advantage; but this shall not be construed as preventing the Employee
from investing his personal assets in businesses which do not compete with the
Employer in such form or manner as will not require substantial services on the
part of the Employee in the operation of the affairs of the companies in which
such investments are made. Notwithstanding the foregoing, the Employee may make
personal investments in such form or manner as will neither require the
Employee's services in the operation or affairs of the business in which such
investments are made, nor violate the terms of the provisions set forth in
Section 8 hereof. Subject to the written consent of the Chief Executive Officer
of the Employer, the Employee may serve as a director on the board of directors
of other companies provided that no such other company is in competition with
the Employer or any of its subsidiaries.
SECTION 4. COMPENSATION AND BENEFITS. For all services rendered by the
Employee in any capacity required hereunder during the Term, including, without
limitation, services as an officer, director, or member of any committee of the
Employer or PharMerica or any subsidiary, affiliate or division thereof, the
Employee shall be compensated as follows:
(a) During the first twelve month period of the Term, the Employer
shall pay the Employee a fixed salary at an annualized rate of $350,000.00 per
annum ("Base Salary"). Effective as of the first day following such twelve month
period, the Employee's Base Salary shall be, per annum, $350,000.00 plus the
amount, if any, which results from multiplying $50,000.00 by a fraction, the
numerator of which is the aggregate amount of the last four fiscal quarter
bonuses paid to the Employee, if any, and the denominator of which is $350,000;
provided that in no event may such fraction exceed one or be less than one-half.
The Base Salary shall be payable in accordance with the customary payroll
practices of the Employer, but in no event less frequently than monthly.
(b) The Employee shall be entitled to participate in all employee
health and benefit programs of the Employer from time to time in effect for
senior executive officers of the Employer, including, but not limited to,
health, life disability and dental insurance and retirement plan benefit
programs (including the Employer's Supplemental Employee Retirement Plan),
subject to a determination of the Employee's eligibility under the terms of said
plans and otherwise in accordance with their respective terms. These benefits
will include a monthly car allowance, which at the beginning of the Term shall
be $800.00. Notwithstanding the foregoing, nothing in this Agreement shall
require any particular plan or program to be continued nor preclude the
amendment or termination of any such plan or program, provided that such
amendment or termination is applicable generally to the senior executive
officers of the Employer. The Employee shall be entitled to carry forward
accrued unused vacation, sick leave and other paid leave time from periods
before the
3
<PAGE> 4
Closing, in accordance with the policies of the Employer in effect before the
Closing with respect to such periods.
(c) The Employee shall be eligible to receive an annual bonus, payable
quarterly (based on the fiscal year of the Employer), during each year of the
Term of up to 100(degree), 4 percent of the Employee's Base Salary. The amount
of the bonus shall be determined by the Board (or by either the Chief Executive
Officer of the Employer or the Compensation Committee of the Board) consistent
with the manner in which such bonuses are determined and paid with respect to
senior executive officers of the Employer.
(d) Provided that the Employee remains in the employ of the Employer
through the first one-year anniversary date of the Closing, the Employer agrees
that Employee will participate in the grant of Employer stock options at a level
and on terms consistent with other senior executive officers of the Employer.
(e) If the Employee's office is relocated during the Term to Orange
County, California, the Employer shall reimburse the Employee for expenses
incurred by him in connection therewith in accordance with the terms and
conditions of the Employer's executive moving policy. In addition, the Employer
shall reimburse the Employee for expenses in moving to the location of the
Employee's choice in the United States in accordance with the terms and
conditions of the Employer's executive moving policy; provided that such moving
expenses are incurred after the Employee's termination of employment with the
Employer and within three years after the Closing.
SECTION 5. BUSINESS EXPENSES. The Employer shall pay or reimburse the
Employee for all necessary travel or other reasonable expenses incurred by the
Employee in connection with the performance of the Employee's duties and
obligations under this Agreement during the Term, subject to the Employee's
presentation of appropriate vouchers in accordance with such expense account
policies and approval procedures as the Employer may from time to time
reasonably establish for employees (including but not limited to prior approval
of extraordinary expenses) and to preserve any deductions for Federal income
taxation purposes to which the Employer may be entitled.
SECTION 6. TERMINATION AND COMPENSATION UPON TERMINATION. This
Agreement may be terminated prior to the Expiration Date only in accordance with
the following provisions:
(a) Death. In the event of the Employee's death, the Employee's
employment with the Employer shall be deemed to be terminated as of the
date of death. Upon the date of death, the Employee's estate or other
legal representative shall be entitled to receive:
(i) any Base Salary installments, vacation and auto allowance
due during the calendar month in which the date of death
occurs; and
(ii) a death benefit equal to 100% of the Base Salary and
bonus that would have otherwise been paid to the Employee had
he remained employed through the
4
<PAGE> 5
Expiration Date (measured as if the Employee gave notice of
its wish not to extend the Term of this Agreement 30 days
prior to the date of death), calculated using the same Base
Salary being paid at the date of death and a bonus equal to
the average of the last three bonuses received by the Employee
prior to the date of death.
(b) Disability. In the event that the Employee becomes totally and
permanently disabled so as to be eligible for benefit payments under the group
long-term disability plan of the Employer, the Employer shall continue to pay
the Base Salary and bonus provided in subsections 4(a) and 4(c), respectively,
for the Term of this Agreement, measured as if the Employer gave notice of its
wish not to extend the Term of this Agreement thirty days prior to the date it
is determined that the Employee is totally and permanently disabled so as to be
eligible for benefits under the group long-term disability plan of the Employer,
provided that the amount of such payments shall be reduced by his personal
representative under the group long-term disability plan(s) of the Employer. In
the event the Employee dies prior to the full payment of the amounts under this
subsection, the remaining payments shall be made to the Employee's estate or
other legal representative. Upon payment of the amounts set forth in this
subsection, the Employer shall have no further obligation to the Employee under
this Agreement, except as provided under Section 6(f).
(c) Termination by the Employee Without Good Reason or Upon the
Expiration Date. The Employee can terminate this Agreement without Good Reason
by giving 30 days notice of termination to the Employer. In addition, this
Agreement shall terminate upon the Expiration Date, as defined in Section 2(a).
Such terminations shall be without liability to the Employee and, upon such
termination and payment of any accrued and unpaid compensation through the date
of termination, the Employer shall have no further obligation to the Employee
under this Agreement, except as provided under Section 6(f).
(d) Termination by the Employer for Cause. Except as provided in
Section 2 and this subsection 6(d), the Employer shall not have the right to
terminate the Employee's employment except in breach of this Agreement. The
Employer shall have the right to terminate this Agreement at any time and
without liability to the Employee if such termination is for Cause. For purposes
of this Agreement, "Cause" shall mean a determination by the Board that either
of the following has occurred.
(i) an act or acts of dishonesty by the Employee constituting
a felony under applicable law and resulting or intending to
result directly or indirectly in gain or to personal
enrichment of the Employee at the Employer's expense; or
(ii) a material breach of Section 3, 8 or 9.
Notice of termination pursuant to this subsection shall be accompanied
by a copy of a resolution duly adopted by the affirmative vote of not less than
a majority of a quorum of the Board which shall include the affirmative vote of
at least a majority of the Board's directors, finding that, in the good faith
opinion of the Board, the Employee was guilty of conduct amounting to cause and
5
<PAGE> 6
specifying the particulars thereof. Upon such termination, and payment of any
accrued and unpaid compensation, the Employer shall have no further obligation
to the Employee under this Agreement, except as provided under Section 6(f).
(e) Termination by the Employee with Good Reason. "Good Reason" shall
mean any of the following:
(i) without the express written consent of the Employee, any
material change by the Employer in the Employee's function,
duties, or responsibilities which change would cause the
Employee's position with the Employer to become of less
dignity, responsibility, importance or scope than that
applicable to a senior executive officer of the Employer;
(ii) any material failure by the Employer to comply with any
of the provisions of this Agreement;
(iii) the Employer's requiring the Employee to be based at any
office or location more than 25 miles from the office at which
the Employee is based on the Closing, other than (x) an office
of the Employer in Orange County, California or (y) infrequent
business trips of short duration reasonably required in the
performance of the Employee's responsibilities under this
Agreement; or
(iv) any failure by the Employer to obtain the assumption of
this Agreement by an successor or assign of the Employer.
If the Employer determines that Good Reason exists, the Employee shall
notify the Employer in the manner provided in Section 7.
(f) Post-employment Benefits. Notwithstanding anything contained herein
to the contrary, upon termination of the Employee's employment for any reason
other than death, he shall continue to be provided welfare benefit (e.g., health
and disability insurance) coverages, and the automobile allowance set forth in
Section 4(b), for the period (the "Benefits Continuation Period") commencing on
such date of termination and continuing for a period of thirty-six months;
provided, however, that the Employee shall be provided life insurance coverage
for the remainder of his life having a face value of no less than the coverage
in effect on December 31, 1998. Upon expiration of the Benefits Continuation
Period, the Employee shall have the right to elect continuation of health care
coverage under the Employer's group health plan in accordance with "COBRA" and
the Employer shall pay all premiums for such COBRA coverage for the Employee and
his covered dependents. The obligation of the Employer to pay for the cost of
such COBRA coverage shall terminate upon the Employee's obtaining other
employment to the extent that such health coverage is provided by the Employee's
new employer.
6
<PAGE> 7
SECTION 7. BREACH BY THE EMPLOYER; DAMAGES; ATTORNEY FEES.
(a) If the Employer breaches any term or condition of this Agreement,
the Employee shall give notice to the Employer setting forth the alleged breach,
requesting that the Employer remedy or cure its breach and offering to continue
to provide the Employee's services to the Employer in accordance with this
Agreement assuming such breached is remedied or cured. The Employer shall have
10 days to remedy or cure such breach. The Employee shall make a good faith
reasonable determination immediately after such ten (10) day period whether the
Employer has remedied such breach and shall communicate the Employee's
determination in writing to the Employer. If the Employee determines that
adequate remedy has occurred, the Employee shall continue in the employ of the
Employer as if no notice had been given. If the Employee determines that
adequate remedy has not occurred, the Employee, at his option, may treat this
Agreement as constructively involuntarily terminated by the Employer in breach
of this Agreement. Any determination by the Employee that breach has occurred
and that adequate remedy has not occurred shall be presumed correct and shall
govern unless the Employer shows by a clear preponderance of the evidence that
it was not a good faith reasonable determination.
(b) For purposes of calculating damages due to the Employee as a result
of any breach of this Agreement by the Employer, damages
(i) shall not exceed, and
(ii) Cause, termination,
(iii) in the case of a termination by the Employer other than
for including without limitation constructive involuntary
shall equal,
the present value (determined on the date such damages are received) of the
compensation the Employee would otherwise have received under this Agreement for
the remaining Term of this Agreement (calculated as if the notice provided for
in Section 2 was given on the date of the breach).
Present value shall be determined by using a discount rate equal to
120% of the "applicable Federal rate" determined under Section 1274(d) of the
Internal Revenue Code of 1986, as amended, or its successor, determined as of
the later of the date of the breach or the termination, compounded semiannually.
Damages, as calculated above, shall be reduced by any "earned income", as that
term is defined in section 911(d)(2)(A) of the Internal Revenue Code of 1986, as
amended, received by the Employee during the remainder of what would otherwise
have been the Term of this Agreement (calculated in the manner provided in the
first sentence of this subsection 13(b)) If earned income is received during
such period but after the payment of damages to the Employee by the Employer,
the Employee shall pay an amount equal to such earned income back to the
Employer as soon as practicable after receipt. No other mitigation of damages
shall be required of the Employee.
7
<PAGE> 8
(c) Notwithstanding any dispute concerning whether a breach exists or
whether adequate remedy has occurred, the Employer shall pay the Employee's
damages. The Employee may be required to repay such amounts to the Employer if
any such dispute is finally determined adversely to the Employee.
(d) The Company shall pay to the Employee all reasonable attorneys'
fees and necessary costs and disbursements incurred by or on behalf of the
Employee in connection with or as a result of a dispute under this Agreement,
whether or not the Employee ultimately prevails. Attorneys' fees shall be paid
by the Employer within 30 days of presentment by the Employee to the Employer of
an invoice received by the Employee from the Employee's attorneys. Any late
payments under this subsection shall bear interest at a rate of twenty percent
(20%) per month.
SECTION 8. CONFIDENTIALITY AND COVENANT AGAINST COMPETITION.
(a) The Employee hereby covenants and agrees with the Employer and
PharMerica for the benefit of the Employer, PharMerica and their respective
affiliates, that during the Term, and for a twelve month period commencing on
the later of the Expiration Date or the Employee's termination of employment for
any reason (the "Noncompete Period"), the Employee will not engage in nor carry
on, directly or indirectly, with or without compensation, any business which
provides services or products that are the same as, or in competition with, any
of the services or products provided to third parties by the Employer,
PharMerica or any of their affiliates, at any time between January 1, 1998 and
the date on which the Employee ceases to serve as an employee of the Employer,
PharMerica or any of their affiliates, regardless of whether such business is
performed by the Employee directly, or as a member of, or owner of an equity
interest in (other than as a holder of less than two percent (2%) of the issued
and outstanding stock of a publicly held corporation), or as an investor,
officer, director, employee, agent, member, associate or consultant of, any
person, partnership, corporation, joint venture, limited liability Employer or
other entity.
(b) The Employee further covenants that (x) the Employee will not
solicit or induce any employee of the Employer, PharMerica or any of their
affiliates to leave their employ and to work for anyone in competition with the
Employer, PharMerica or any of their affiliates, (y) the Employee will not
employ any person who during the Term was or is upon termination of the Term an
employee of the Employer, PharMerica or any of their affiliates unless such
person is no longer employed by the Employer, PharMerica or any of their
affiliates for at least six months and (z) the Employee will not solicit any
customer of the Employer, PharMerica or any of their affiliates who was such a
customer during the Term or any potential customer with whom the Employer,
PharMerica or any of their affiliates may reasonably be expected to contract or
service within one year after the later of the termination of the Term in a
manner which could adversely affect the Employer, PharMerica or any of their
affiliates or make statements to such customers or potential customers which
disparage the Employer, PharMerica or any of their affiliates in any way.
(c) The Employee further agrees that all documents, reports, plans,
proposals, marketing and sales plans, customer lists, intellectual property or
materials principally relating to the businesses
8
<PAGE> 9
of the Employer, PharMerica or any of their affiliates and made by the Employee
or that came or come into the Employee's possession by reason of the Employee's
employment by the Employer, PharMerica or any of their affiliates or by reason
of the Employee's services during the Term are the property of such entities and
shall not be used by the Employee in any way adverse to the interests of the
Employer, PharMerica or any of their affiliates. The Employee will not deliver,
reproduce or in any way allow such documents, intellectual property or things to
be delivered or used by any third party without specific direction or consent of
a duly authorized representative of the Employer. During or after termination of
the Employee's employment with the Employer, PharMerica or any of their
affiliates, the Employee will not publish, release or otherwise make available
to any third party any information describing any trade secret, other
intellectual property or other confidential information of such entities without
the prior specific written authorization of the Employer.
(d) The Employee will regard and preserve as confidential all trade
secrets and other confidential information pertaining to the business of the
Employer, PharMerica or any of their affiliates, that have been or may be
obtained by the Employee by reason of the Employee's employment by such
entities. The Employee will not, without written authority from the Employer to
do so, use for the Employee's own benefit or purposes, nor disclose to others,
either during the Employee's employment by the Employer, PharMerica or any of
their affiliates, or thereafter, except as required in the line of the
Employee's employment with such entities, any trade secret or other confidential
information connected with the business or developments of the Employer,
PharMerica or any of their affiliates; and the Employee will not take or retain
or copy any of the information, customer lists, intellectual property or other
documents or things of the Employer, PharMerica or any of their affiliates. This
provision shall not apply with respect to information which has been voluntarily
disclosed to the public, independently developed and disclosed by others, or
otherwise enters the public domain through lawful means. Upon termination of
employment with the Employer, the Employee will return to the Employer all such
information, customer lists, intellectual property and other documents and
things.
(e) For purposes of this Agreement, the term "trade secret" shall
include, but not be limited to, information encompassed in all plans, proposals,
marketing and sales plans, software, firmware, customer lists, mailing lists,
financial information, costs, pricing information, and all concepts or ideas in
or reasonably related to the businesses of the Employer, PharMerica or any of
their affiliates (whether or not divulged by the Employee or other employees or
agents of such entities) that have not previously been publicly released by duly
authorized representatives of the Employer.
(f) The covenants contained in paragraphs (b), (c) and (d) above will
continue until three years after the end of any employment relationship between
the Employee and the Employer, PharMerica or any of their affiliates.
(g) The covenants contained in paragraph (a) above shall be deemed to
be a series of separate covenants, one for each county of each state in the
United States of America. If, in any judicial proceeding, a court should refuse
to enforce all of the separate covenants deemed included
9
<PAGE> 10
in those paragraphs, then such unenforceable covenants shall be deemed
eliminated from the provisions of this Agreement for the purpose of such
proceeding to the extent necessary to permit the remaining separate covenants to
be enforced in such proceeding. If any court determines that any of the
covenants herein, or any part thereof, is unenforceable because of the duration
of such provision, such court shall reduce the duration of such provision to the
extent necessary to render it enforceable and, in its reduced form, such
provision shall then be enforced.
(h) The Employee acknowledges that the Employee has carefully read and
considered all of the terms and conditions of this Agreement, including the
restraints imposed upon the Employee pursuant to Sections 8(a), 8(b), 8(c) and
8(d) hereof. The Employee agrees that such restraints are necessary for the
reasonable and proper protection of the Employer, PharMerica and its affiliates
and the value of the business which the Employer has acquired pursuant to the
Merger Agreement, and that each and every one of said restraints is reasonable
in respect to subject matter, length of time, and geographical area.
(i) The Employee further acknowledges that damages at law would not be
a measurable or adequate remedy for a breach of the restrictive covenants
contained herein, and accordingly consents to the entry by any court of
competent jurisdiction of an order enjoining the Employee from violating any of
such covenants.
(j) The Employee further agrees that a copy of a summons and complaint
seeking the entry of such order may be served upon the Employee by certified
mail, return receipt requested, at the address set forth above or at any other
address which the Employee shall designate in a writing addressed to the
Employer in the manner that notices are to be addressed pursuant to this
Agreement.
SECTION 9. WORK FOR HIRE ACKNOWLEDGMENT; ASSIGNMENT. The Employee
acknowledges that all of the Employee's work on and contributions to the
products and services of the Employer, PharMerica and their affiliates (the
"Products"), including, without limitation, any and all patterns, designs,
artworks and other expressions in any tangible medium (collectively, the
"Works"), are within the scope of, and are a part of the services, duties and
responsibilities of, the Employee hereunder. All of the Employee's work on and
contributions to the Works will be rendered and made by the Employee for, at the
instigation of, and under the overall direction of the Employer, and all of the
Employee's said work and contributions, as well as the Works, are and at all
times shall be regarded as "work made for hire" as that term is used in the
United States Copyright Laws. Without curtailing or limiting this
acknowledgment, the Employee hereby assigns, grants, and delivers exclusively to
the Employer, as to work on and contribution to the Products pursuant hereto all
rights, titles, and interests in and to any such Works, and all copies and
versions, including all copyrights and renewals. The Employee will execute and
deliver to the Employer, or its successors and assigns, such other and further
assignments, instruments and documents as it from time to time reasonably may
request for the purpose of establishing, evidencing, and enforcing or defending
its complete, exclusive perpetual, and worldwide ownership of all rights,
titles, and interests of every kind and nature whatsoever, including all
copyrights, in and to the Works. The Employee hereby constitutes and appoints
the Employer as its agent and attorney-in-fact, with full power of
10
<PAGE> 11
substitution, to execute and deliver said assignments, irlstmments or documents
as the Employee may fail or refuse to execute and deliver, this power and agency
being coupled with an interest and being irrevocable.
SECTION 10. INDEMNITY. During the term hereof, the Employer agrees to
indemnify and hold the Employee harmless to the fullest extent permitted under
the law from any and all suits, actions, proceedings, claims or settlements
arising out of the performance of the Employee's duties hereunder, including all
activities as an officer and director of the Employer if applicable. The
Employer further agrees to pay all costs which are incurred by the Employee in
preparing and defending against such claims, including all attorneys' fees,
witness fees, court costs, settlement costs and other similar fees. The costs
and expenses incurred by the Employee in investigating, defending or appealing
any threatened, pending or completed suit, action, proceeding or claim covered
hereunder, shall be paid by the Employer in advance as may be appropriate
properly to defend any such action, suite, proceeding and/or paid in advance at
the request of the Employee, and any judgments, fines or amounts paid in
settlement shall be paid by the Employer in advance, with the understanding and
agreement hereby made and entered into by the Employee and the Employer that in
the event it shall ultimately be determined as provided hereunder that the
Employee was not entitled to be indemnified, or was not entitled to be fully
indemnified, that the Employee shall reply to the Employer such amount, or the
appropriate portion thereof, so paid or advanced.
SECTION 11. WITHHOLDING TAXES. The Employer may directly or indirectly
withhold from any payments made under this Agreement all Federal, state, city or
other taxes and all other deductions as shall be required pursuant to any law or
governmental regulation or ruling or pursuant to any contributory benefit plan
maintained by the Employer or PharMerica.
SECTION 12. NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be given in writing and
shall be deemed to have been duly given if delivered or mailed, postage prepaid,
by same day or overnight mail as follows:
(a) To the Employer:
to the Employer at the Employer's
address listed above
with a copy (which shall not be deemed notice) to:
Milan A. Sawdei, Esq.
Chief Legal Officer
Bergen Brunswig Corporation
4000 Metropolitan Drive
Orange, CA 92668
(b) To the Employee:
11
<PAGE> 12
to the Employer at the Employer's
address listed above
or to such other address as either party shall have previously specified in
writing to the other.
SECTION 13. NO ATTACHMENT. Except as required by law, no right to
receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to execution, attachment, levy or similar process or assignment
by operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect; provided, however, that
nothing in this Section 13 shall preclude the assumption of such rights by
executors, administrators or other legal representatives of the Employee or the
Employee's estate and their assigning any rights hereunder to the person or
persons entitled thereto.
SECTION 14. SOURCE OF PAYMENT. Except as otherwise provided under the
terms of any applicable employee benefit plan, all payments provided for under
this Agreement shall be paid in cash from the general funds of the Employer. The
Employer shall not be required to establish a special or separate fund or other
segregation of assets to assure such payments, and, if the Employer shall make
any investments to aid it in meeting its obligations hereunder, the Employee
shall have no right, title or interest whatever in or to any such investments
except as may otherwise be expressly provided in a separate written instrument
relating to such investments. Nothing contained in this Agreement, and no action
taken pursuant to its provisions, shall create or be construed to create a trust
of any kind, or a fiduciary relationship, between the Employer and the Employee
or any other person. To the extent that any person acquires a fight to receive
payments from the Employer hereunder, such fight, without prejudice to fights
which employees may have, shall be no greater than the right of an unsecured
creditor of the Employer.
SECTION 15. BINDING AGREEMENT; NO ASSIGNMENT. This Agreement shall be
binding upon, and shall inure to the benefit of, the Employee and the Employer
(and PharMerica, to the extent PharMerica is referenced herein) and their
respective permitted successors, assigns, heirs, beneficiaries and
representatives. This Agreement is personal to the Employee and may not be
assigned by the Employee without the prior written consent of the Board, as
evidenced by a resolution of the Board. Any attempted assignment in violation of
this Section 15 shall be null and void.
SECTION 16. GOVERNING LAW; CONSENT TO JURISDICTION. The validity,
interpretation, performance, and enforcement of this Agreement shall be governed
by the laws of the State of Florida. Service of process in connection with any
such suit, action or proceeding may be served on the Employee and the Employer
anywhere in the world by the same methods as are specified for the giving of
notices under this Agreement. THE EMPLOYEE AND THE EMPLOYER EACH WAIVE THE RIGHT
TO TRIAL BY JURY WITH RESPECT TO ANY MATTER ARISING UNDER THIS AGREEMENT.
12
<PAGE> 13
SECTION 17. ENTIRE AGREEMENT. This Agreement shall constitute the
entire agreement among the parties with respect to the matters covered hereby
and, upon effectiveness at the Closing, shall supersede all previous written,
oral or implied understandings among them with respect to such matters,
including, but not limited to, the Prior Agreements.
SECTION 18. AMENDMENTS. This Agreement may only be amended or otherwise
modified by a writing executed by both of the parties hereto.
SECTION 19. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed shall be deemed to be an original
and all of which together shall be deemed to be one and the same instrument.
[Remainder of page intentionally left blank]
13
<PAGE> 14
IN WITNESS WHEREOF, the Employer has caused this Agreement to be
executed and delivered by its duly authorized officer and the Employee has
signed this Agreement, all as of the first date written above.
BERGEN BRUNSWIG CORPORATION
By:
--------------------------------------
Employee:
--------------------------------
C. Arnold Renschler, M.D.
With respect to Sections 1, 8 and 9 only:
PHARMERICA, INC.
By:
--------------------------------------
14
<PAGE> 1
EXHIBIT 21
PharMerica, Inc. and Subsidiaries
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION D/B/A
---- ---------------------- -----
<S> <C> <C>
PharMerica, Inc. Delaware PharMerica, Inc.
Capstone Med, Inc. Delaware Capstone Med, Inc.
f/k/a DCMED, Inc. f/k/a DCMED, Inc.
PremierPharmacy, Inc. Delaware PremierPharmacy, Inc.
d/b/a Capstone Pharmacy
Services (Filed in New York)
Compuscript, Inc. New York Compuscript, Inc.
PharMerica Drug Systems, Inc. Maryland PharMerica Drug Systems, Inc.
Management Systems of Delaware Management Systems of
America, Inc. America, Inc.
Hollins Manor I, LLC Virginia Hollins Manor I, LLC
Goot's Goodies, Inc. Arizona Goot's Goodies, Inc.
Southwest Pharmacies Inc. Arizona Southwest Pharmacies Inc.
d/b/a Goot Pharmacy d/b/a Goot Pharmacy
Goot Nursing Home Pharmacy, Inc. Arizona Goot Nursing Home Pharmacy, Inc.
Goot's Pharmacy & Orthopedic Supply, Arizona Goot's Pharmacy & Orthopedic
Inc. Supply, Inc.
Goot Westbridge Pharmacy, Inc. Arizona Goot Westbridge Pharmacy, Inc.
Capstone Pharmacy of Delaware, Inc. Maryland Capstone Pharmacy of Delaware, Inc.
f/k/a B.T. Smith, Inc. f/k/a B.T. Smith, Inc.
Rombro's Drug Center, Inc. Maryland Rombro's Drug Center, Inc.
d/b/a MacGillivrays Pharmacy of
Paca St. (Retail - will probably be
closed 1/96)
Family Center Pharmacy, Inc. Pennsylvania Family Center Pharmacy, Inc.
d/b/a Medical Arts Pharmacy -
Institutional
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Pharmacy Corporation of America California Pharmacy Corporation of America
Tmesys, Inc. Florida Tmesys, Inc.
Express Pharmacy Services, Inc. Florida Express Pharmacy Services, Inc.
Alliance Health Services, Inc. Delaware Alliance Health Services, Inc.
Alliance Home Health Care, Inc. Connecticut Alliance Home Health Care, Inc.
Brownstone Pharmacy, Inc. Connecticut Brownstone Pharmacy, Inc.
Omni Med B, Inc. Connecticut Omni Med B, Inc.
Beverly Acquisition Corporation Delaware Beverly Acquisition Corporation
Computran Systems, Inc. Oregon Computran Systems, Inc.
Dunnington Drug, Inc. Delaware Dunnington Drug, Inc.
Dunnington Rx Services of Rhode Rhode Island Dunnington Rx Services of Rhode
Island, Inc. Island, Inc.
Dunnington Rx Services of Massachusetts Dunnington Rx Services of
Massachusetts, Inc. Massachusetts
DD Wholesale, Inc. Massachusetts DD Wholesale, Inc.
Pharmacy Corporation of America - Delaware Pharmacy Corporation of America -
Massachusetts, Inc. Massachusetts, Inc.
Healthcare Prescription Indiana Healthcare Prescription
Services, Inc. Services, Inc.
Insta-Care Holdings, Inc. Florida Insta-Care Holdings, Inc.
Insta-Care Pharmacy Services Texas Insta-Care Pharmacy Services
Corporation Corporation
Pharmacy Dynamics Group, Inc. Florida Pharmacy Dynamics Group, Inc.
Medical Health Industries, Inc. Delaware Medical Health Industries, Inc.
</TABLE>
2
<PAGE> 1
Exhibit 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements (File No. 333-39497, File No. 33-62881, File No.
33-62883, File No. 333-40775, File No. 033-21995, File No. 033-29317, File No.
033-62867, File No. 033-62865, File No. 033-62877, File No. 033-62879, File No.
033-62881, File No. 033-62883, File No. 333-18477, File No. 333-21927 and File
No. 333-3643).
Baltimore, Maryland,
March 10, 1999
/s/ Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements and amendments thereto:
Form S-8 No. 333-39497 401(k) Profit Sharing Plan
Form S-8 No. 033-62881 1995 Incentive and Nonqualified Stock Option
Plan for Key Personnel and Directors
Form S-8 No. 033-62883 1996 Employee Stock Purchase Plan
Form S-8 No. 333-40775 Nonqualified Deferred Compensation Plan for
Executives
Form S-8 No. 033-21995 1986 and 1987 Stock Option Plans
Form S-8 No. 033-29317 1986, 1987, 1988 Stock Option Plans-Outside
Directors Stock Option Plans
Form S-8 No. 033-62867 1989 Stock Option Plan
Form S-8 No. 033-62865 1991 Stock Option Plan
Form S-8 No. 033-62877 1992 Stock Option Plan
Form S-8 No. 033-62879 1995 Incentive and Nonqualified Stock Option
Plan for Key Personnel and Directors
Form S-8 No. 333-18477 1996 Compensation Plan for Kantor and Robbins
Form S-3 No. 333-21927 14,143,109 shares of common stock
Form S-3 No. 333-03643 6,478,367 shares of common stock and 650,000
Series B Warrants
of PharMerica, Inc. and in the related Prospectuses of our report dated April
18, 1997, with respect to the consolidated statements of operations,
stockholders' equity, and cash flows of PharMerica, Inc. for the year ended
December 31, 1996 included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Little Rock, Arkansas
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PHARMERICA INC. FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 32,312
<SECURITIES> 0
<RECEIVABLES> 250,711
<ALLOWANCES> 39,141
<INVENTORY> 55,686
<CURRENT-ASSETS> 385,233
<PP&E> 64,187
<DEPRECIATION> 48,981
<TOTAL-ASSETS> 1,164,325
<CURRENT-LIABILITIES> 102,091
<BONDS> 591,552
0
0
<COMMON> 894
<OTHER-SE> 417,114
<TOTAL-LIABILITY-AND-EQUITY> 432,835
<SALES> 1,145,928
<TOTAL-REVENUES> 1,145,928
<CGS> 656,589
<TOTAL-COSTS> 656,589
<OTHER-EXPENSES> 344,734
<LOSS-PROVISION> 52,937
<INTEREST-EXPENSE> 39,133
<INCOME-PRETAX> (96,578)
<INCOME-TAX> 3,030
<INCOME-CONTINUING> (99,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,608)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
<PAGE> 1
EXHIBIT 99
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995, Congress
encouraged public companies to make "forward-looking statements" by creating a
safe harbor to protect companies from securities law liability in connection
with forward-looking statements. PharMerica, Inc. intends to qualify both its
written and oral forward-looking statements for protection under the Reform Act
and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain because they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could cause
actual events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of PharMerica. We
undertake no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements to reflect future developments. In
addition, we undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
We are providing the following risk factor disclosure in connection
with our continuing effort to qualify our written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the disclosures contained in the Annual
Report on Form 10-K to which this statement is an exhibit and also include the
following:
RISK FACTORS
IF WE FAIL TO COMPLETE OUR PENDING MERGER TRANSACTION WITH BERGEN BRUNSWIG
CORPORATION, OUR STOCK PRICE COULD BE ADVERSELY AFFECTED.
We are preparing to close our pending merger transaction with Bergen
Brunswig Corporation, pursuant to which each outstanding share of our common
stock will be exchanged for 0.275 shares of Bergen common stock and we will
become a wholly owned subsidiary of Bergen. There are numerous conditions to
closing the Bergen
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transaction that have to be satisfied, including obtaining the approval of our
stockholders and the approval of Bergen's stockholders. In the event that we are
unable to close the Bergen transaction, there may be adverse consequences to us,
including a decrease in our stock price.
OUR SIGNIFICANT LEVERAGE MAY IMPAIR OUR ABILITY TO OBTAIN NEEDED CAPITAL
RESOURCES.
We have had and will continue to have a substantial amount of
indebtedness and significant debt service obligations. As of December 31, 1998,
we had approximately $591.5 million of long-term debt. Our long-term strategy
and working capital needs require substantial capital resources. However, our
present ratio of debt to total capitalization may make it difficult for us to
obtain additional capital resources on acceptable terms. In addition, we would
be unable to obtain additional borrowings under our existing credit facility if
we fail to maintain certain required financial ratios. As of December 31, 1998
we were in compliance with all of such ratios. However, adverse changes in our
operating results could cause us to fail to meet these ratios which, in turn,
could prevent us from obtaining needed capital resources under our credit
facility. Factors that could adversely affect our operating results and,
therefore, our ability to obtain funds under our credit facility or from other
financing sources include:
- the ability to integrate successfully our previously completed
acquisitions;
- pricing pressure on our goods and services;
- the loss of certain key customers;
- the regulatory and reimbursement environment in which we operate;
and
- prevailing economic conditions.
In addition, adverse changes in our operating results, cash flow and available
capital resources could result in our inability to satisfy our debt service
obligations.
THE LOSS OF BUSINESS FROM CERTAIN KEY CUSTOMERS COULD ADVERSELY AFFECT OUR
BUSINESS.
Revenues from Beverly Enterprises, Inc. ("Beverly") and Integrated
Health Services ("IHS") facilities and their residents accounted for
approximately 24% of our revenues for the year ended December 31, 1998. We
have agreements with Beverly and IHS pursuant to which we provide pharmacy
services and products and ancillary services and products to Beverly's and IHS's
long-term care facilities and their residents. These agreements contain certain
provisions allowing for pricing adjustments and termination under certain
circumstances. Accordingly, the pricing under such agreements may be adjusted or
all or part of such agreements may be terminated at some future date. We are
presently in discussions with IHS regarding possible pricing changes or service
reductions under our agreement with IHS. Any material loss of revenues or
business from Beverly or IHS could have a material adverse impact on our results
of operations
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and financial condition.
IF WE DO NOT SUCCESSFULLY INTEGRATE PREVIOUSLY ACQUIRED BUSINESSES, WE MAY BE
ADVERSELY AFFECTED.
We have experienced rapid growth since 1995 principally from
acquisitions and we may acquire additional businesses in the future. Our failure
to integrate successfully the operations of past or any future acquired
businesses could have an adverse impact on our results of operations and
financial condition. Obstacles to successful integration of acquired businesses
include:
- retaining and integrating key personnel of acquired companies;
- consolidating pharmacies without affecting quality of service and
without losing a material amount of customer relationships; and
- achieving operating efficiencies.
WE DEPEND ON REIMBURSEMENT FROM THIRD-PARTY PAYORS WHO ARE UNDER SIGNIFICANT
PRESSURE TO REDUCE COSTS, INCLUDING COSTS OF OBTAINING PRODUCTS AND SERVICES
FROM US.
We derive a majority of our revenues from government-sponsored
reimbursement programs that are under significant pressure to reduce costs. In
addition, non-governmental payors continuously seek to reduce costs by lowering
reimbursement rates, narrowing the scope of covered services, increasing case
management review of services, and negotiating reduced or fixed contract
pricing. These cost reduction efforts place pressure on the pricing of our
products and services which, in turn, could adversely affect our results of
operations and financial condition. In addition, changes in reimbursement
policies requiring payment on a pre-negotiated basis based on specific rates for
certain medical conditions, or on a capitated basis, could require us to operate
with fixed revenue streams but variable costs and uncertain utilization levels.
Under this type of payment system, our profitability could be adversely affected
if our costs turn out to be greater than we anticipated or if utilization of our
services is higher than we anticipated at the time we negotiated the fixed
revenue streams. Reimbursement rates for non-governmental payor sources are
generally higher than reimbursement rates from government-sponsored payor
programs. Therefore, changes in the mix of residents among Medicare, Medicaid
and private pay sources may adversely affect our revenues and profitability.
CHANGES IN MEDICARE REIMBURSEMENT METHODS MAY ENCOURAGE OUR SKILLED NURSING
FACILITY CUSTOMERS TO SEEK LOWER PRICES FROM US.
In July 1998, the three-year phase-in implementation of the prospective
payment system ("PPS") began for skilled nursing facilities that provide care to
patients eligible for coverage under Medicare Part A insurance. Under PPS, our
skilled nursing facility customers receive a fixed per diem rate to cover the
costs of all goods and services
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provided to Medicare Part A patients, including the costs of pharmaceuticals and
other goods and services provided by us that were previously reimbursed
separately under Medicare. While we will continue to bill facilities on a
negotiated fee schedule, the costs of pharmaceuticals and other goods and
services obtained from us are now a direct cost to the facility, rather than a
pass-through cost. Therefore, our nursing facility customers now have an
increased incentive to negotiate with us to minimize the costs of providing
goods and services to patients covered under Medicare Part A. This will place
additional pressure on our pricing which, in turn, may adversely affect on our
results of and financial condition.
OPERATING IN THE HEALTH CARE INDUSTRY IS RISKY DUE TO THE UNCERTAIN IMPACTS OF
VARIOUS GOVERNMENT-SPONSORED AND MARKET-DRIVEN INDUSTRY REFORMS.
The adoption of certain health care reform proposals could adversely
effect our results of operations and financial condition. The health care
industry is subject to changing political, economic and regulatory influences
that may affect the institutional pharmacy industry in which we operate. In
recent years, several comprehensive national health care reform proposals were
introduced in the United States Congress. While none of the proposals were
adopted, health care reform continues to be addressed at the state level.
Several states are considering health care reforms through Medicaid managed care
projects. Such projects could change the Medicaid reimbursement system in a
manner that would adversely affect our Medicaid reimbursement levels. We cannot
predict which, if any, federal or state reform proposals will be adopted, when
they may be adopted or what their impact on our operations would be if adopted.
THE SHIFT TOWARD MANAGED CARE REIMBURSEMENT METHODS MAY PLACE ADDITIONAL PRICING
PRESSURE ON OUR PRODUCTS AND SERVICES AND MAY ADVERSELY AFFECT OUR
PROFITABILITY.
As managed care assumes an increasing role in the health care industry,
our future success will depend, in part, on obtaining and retaining managed care
contracts. Competition for such contracts is intense and, in most cases, will
require us 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.
Reimbursement rates under managed care contracts typically are lower than those
paid by other private payors. In addition, reimbursement rates under managed
care contracts are often based on pre-negotiated fixed or capitated prices that
will require us accurately to predict costs, utilization and outcomes in order
to operate profitably. Our results of
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operations and financial condition could be adversely affected if we are unable
to obtain or retain managed care contracts or if we are unable to operate
profitably under the managed care contracts that we do obtain.
THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE.
The long-term care pharmacy markets in which we operate are fragmented
and highly competitive. Competition for each long-term care facility customer is
generally on a local basis and comes from both small to mid-size local operators
and regional and national operators. Competitors include retail pharmacies,
captive institutional pharmacies owned by long-term care providers and other
independent institutional pharmacy companies. We believe that the primary
competitive factors in our industry are:
- quality and range of services offered;
- prices;
- reputation with referral sources;
- ease of doing business with providers; and
- ability to develop and maintain relationships with referral
sources.
Some of our present and potential competitors, including retail pharmacies,
captive pharmacies and pharmaceutical distributors, are or may become larger
than us and have or may obtain greater financial and marketing resources than we
have. In addition, there are relatively few barriers to entry in the local
markets we serve and we may encounter substantial competition from new local
market entrants. Competition in our home delivery pharmacy business comes
primarily from local retail pharmacies and local medical equipment supply
companies. An important competitive factor in this business is the effectiveness
of our managed care and cost containment services.
OUR INDUSTRY IS HEAVILY REGULATED AND WE ARE SUBJECT TO PERIODIC INSPECTIONS AND
AUDITS BY GOVERNMENTAL AUTHORITIES AND THEIR AGENTS.
Our business is subject to extensive federal, state and local
regulation. Federal laws governing our activities include regulations regarding
the repackaging, storing and dispensing of drugs, Medicare reimbursement, and
certain financial relationships with physicians and other health care providers.
State laws governing our activities include regulations regarding Medicaid
reimbursement, workers' compensation, professional training, pharmacy licensure,
payments in exchange for patient referrals and the dispensing and storage of
pharmaceuticals. From time to time we become subject to inspections, audits,
investigations or requests for information by governmental authorities or their
agents regarding our compliance with applicable laws and regulations. For
example, we are currently involved in a federal investigation concerning one of
our
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nursing home customers and one of our pharmacies in Texas. We are not presently
able to predict the outcome of this investigation, but we believe that it will
not have a material adverse impact on our business as a whole. In addition, many
of our employees, such as our pharmacists, must maintain certain licenses in
order to provide services. Our long-term care facility customers are also
subject to federal and state regulations and licensing requirements. The failure
by these customers to comply with such regulations or to maintain required
licenses could result in the loss of our ability to provide pharmacy services to
their residents.
Existing laws and regulations are subject to change from time to time.
Compliance with any new or changed laws and regulations may require us to incur
unanticipated expenses which could adversely affect our results of operations or
financial condition. Failure to comply with existing or future laws or
regulations could subject us to fines or other penalties, including exclusion
from government-sponsored reimbursement programs such as Medicare and Medicaid.
In addition, any restrictions on pharmaceutical suppliers' marketing programs,
including the payment of incentives to dispense one particular product rather
than another or volume discounts, could adversely affect our supply costs and
our profitability. The practice of giving rebates in the pharmaceutical industry
is common; however, it is currently under scrutiny and could be determined to
violate law. Such a result could have a material adverse effect on our results
of operations and financial condition.
IF INFORMATION OR OTHER SYSTEMS ON WHICH WE RELY EXPERIENCE DIFFICULTIES DUE TO
YEAR 2000 COMPLIANCE PROBLEMS, OUR BUSINESS AND FINANCIAL RESULTS MAY BE
ADVERSELY AFFECTED.
We have an active Year 2000 program designed to assure that our company
has addressed its hardware and software needs and has remedied any Year 2000
compliance issues. Given the complexity of this issue, we cannot assure you that
our systems or the system of our vendors, customers, payors or other third
parties will not encounter difficulties as we approach or when we reach the Year
2000.
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