SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1996 Commission File Number: 0-19795
PCI SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0336586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1403 Foulk Road, Suite 102
Wilmington, Delaware 19803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 479-0281
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of August 9, 1996, there were 6,211,250 shares of Common Stock, par value
$.001 per share, outstanding.
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1996
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations -
Three and Nine Months ended June 30, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and September 30, 1995 5
Condensed Consolidated Statements of Cash Flows -
Nine Months ended June 30, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
2
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PCI SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1996
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
3
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenue $ 42,451,000 $ 34,703,000 $ 121,819,000 $ 95,225,000
Cost of goods sold 31,734,000 26,361,000 91,061,000 74,795,000
------------- ------------- ------------- -------------
Gross profit 10,717,000 8,342,000 30,758,000 20,430,000
Selling, general and administrative expenses 6,355,000 4,656,000 16,875,000 12,613,000
Interest expense 1,142,000 427,000 2,490,000 1,325,000
Other (income) expense (65,000) 113,000 (145,000) 41,000
------------- ------------- ------------- -------------
Income before income tax expense 3,285,000 3,146,000 11,538,000 6,451,000
Income tax expense 1,010,000 1,448,000 3,901,000 2,591,000
------------- ------------- ------------- -------------
Net income $ 2,275,000 $ 1,698,000 $ 7,637,000 $ 3,860,000
============= ============= ============= =============
Earnings per share $ .35 $ .28 $ 1.22 $ .63
============= ============= ============= =============
Weighted average shares outstanding 6,425,000 6,126,000 6,240,000 6,142,000
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1996 1995
------------ -------------
(Unaudited) (See Note)
ASSETS
Current assets:
Cash and cash equivalents $ 5,151,000 $ 3,619,000
Accounts receivable, net 23,321,000 17,940,000
Inventories 11,012,000 11,588,000
Deferred income taxes 3,929,000 1,241,000
Other 1,337,000 1,826,000
------------ ------------
Total current assets 44,750,000 36,214,000
Property, plant and equipment, net 84,733,000 61,901,000
Goodwill, net 18,843,000 10,182,000
Other assets 3,253,000 670,000
------------ ------------
$151,579,000 $108,967,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to financial institutions $ 1,562,000 $ 2,005,000
Accounts payable 8,109,000 9,746,000
Accrued expenses - other 10,641,000 6,991,000
Federal, state and foreign income taxes payable 909,000 1,650,000
Current maturities of long-term debt 6,607,000 3,642,000
------------ ------------
Total current liabilities 27,828,000 24,034,000
Long-term debt, less current maturities 55,339,000 27,208,000
Deferred income taxes 3,750,000 2,758,000
Other liabilities 3,283,000 1,431,000
Stockholders' equity 61,379,000 53,536,000
------------ ------------
$151,579,000 $108,967,000
============ ============
Note: The balance sheet at September 30, 1995 has been condensed from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
5
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
---------------------------
1996 1995
------------ ------------
Cash flows from operating activities:
Net income $ 7,637,000 $ 3,860,000
Adjustments to reconcile net income to net
cash provided by operating activities 1,384,000 4,640,000
------------ ------------
Net cash provided by operating activities 9,021,000 8,500,000
Cash flows from investing activities:
Acquisition of Unipack, net of cash acquired (17,478,000) --
Capital expenditures (19,484,000) (16,620,000)
Contingent consideration - Tri-Line -- (533,000)
Proceeds from sale of equipment 795,000 1,132,000
Other 202,000 32,000
------------ ------------
Net cash used in investing activities (35,965,000) (15,989,000)
Cash flows from financing activities:
Borrowings 36,317,000 11,427,000
Debt repayments (6,897,000) (2,936,000)
Acquisition of treasury stock -- (382,000)
Acquisition of minority interest (900,000) --
Other (44,000) (166,000)
------------ ------------
Net cash provided by financing activities 28,476,000 7,943,000
------------ ------------
Net increase in cash and cash equivalents 1,532,000 454,000
Cash and cash equivalents:
Beginning of period 3,619,000 3,089,000
------------ ------------
End of period $ 5,151,000 $ 3,543,000
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 2,203,000 $ 1,350,000
============ ============
Income taxes paid $ 5,080,000 $ 1,985,000
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of stock - acquisition of Unipack $ 765,000 --
============ ============
See notes to condensed consolidated financial statements.
6
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of June 30, 1996, the condensed
consolidated statements of operations for the three and nine months ended June
30, 1996 and 1995, and the condensed consolidated statements of cash flows for
the nine months then ended have been prepared by the Company without audit. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1996 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements for the
fiscal year ended September 30, 1995 and notes thereto included in the Company's
September 30, 1995 Annual Report on Form 10-K. The results of operations for the
periods ended June 30, 1996 are not necessarily indicative of the operating
results for the full year.
Note B - Subsequent Event - Merger
On July 24, 1996, the Company announced that it had entered into a
definitive agreement (the "Merger Agreement") with Cardinal Health, Inc.
("Cardinal") (NYSE: CAH) of Dublin, Ohio, pursuant to which the Company will
become a wholly-owned subsidiary of Cardinal in a stock-for-stock merger
expected to be accounted for as a pooling-of-interests for financial reporting
purposes (the "Merger"). Under the terms of the Merger Agreement, shareholders
of the Company will receive .336 shares of Cardinal common stock for each share
of the Company's common stock they own at the time the transaction is
consummated (the "Exchange Ratio"), subject to adjustment under specified
circumstances. In addition, stock options of the Company will be converted into
equivalent options for shares of Cardinal common stock, based upon the Exchange
Ratio. The Merger is expected to be completed in the Fall, subject to approval
by the shareholders of the Company and the receipt of requisite regulatory
approvals. The Merger Agreement may be terminated by either the Company or
Cardinal under specified circumstances. In connection with the transaction,
MEDIQ Incorporated ("MEDIQ"), the Company's largest shareholder, granted
Cardinal an option to purchase all of the Company's common stock owned by MEDIQ,
which is equal to approximately 46% of the outstanding shares, exercisable upon
the occurrence of certain events, and entered into a Support/Voting Agreement
with Cardinal. Additionally, the Company's directors each entered into a
Support/Voting Agreement with Cardinal.
7
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note C - Earnings Per Share
Effective during the third quarter of 1996, outstanding stock options have
been included in the calculation of weighted average shares outstanding because
the dilutive effect is greater than 3%.
Note D - Acquisition of Unipack
On February 29, 1996, the Company acquired all of the outstanding capital
stock of Unipack Limited ("Unipack"), a pharmaceutical packaging company located
in the United Kingdom, for approximately $18,000,000 in cash and 60,000 shares
of the Company's common stock (valued at $765,000 as of the date of the
acquisition). The Company financed the acquisition with long-term debt (see Note
G). The acquisition was accounted for by the purchase method of accounting. The
excess of the cost of the acquisition over the fair values of the net assets
acquired, of $8,978,000, has been recorded as goodwill and will be amortized
over 20 years.
The operations of Unipack are included in the Company's Condensed
Consolidated Statement of Operations from the date of the acquisition. The
following unaudited pro forma summary presents the consolidated results of
operations of the Company for the nine months ended June 30, 1996 and 1995 as if
the acquisition had occurred at the beginning of fiscal year 1995, after giving
effect to certain adjustments, including amortization of goodwill and loan
acquisition costs. The pro forma information is presented for comparative
purposes only and does not necessarily reflect the results of operations of the
Company had the acquisition been made at the beginning of fiscal year 1995.
Pro Forma
Financial Information
Nine Months Ended June 30,
--------------------------------
1996 1995
------------- -------------
Revenues $ 129,704,000 $ 108,610,000
Net income $ 7,899,000 $ 4,260,000
Earnings per share $ 1.26 $ .69
Weighted average shares outstanding 6,274,000 6,202,000
Note E - Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
June 30, September 30,
1996 1995
------------ ------------
Raw materials $ 6,982,000 $ 6,894,000
Work in process 1,097,000 1,000,000
Finished goods 2,933,000 3,694,000
------------ ------------
$ 11,012,000 $ 11,588,000
============ ============
8
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note F - Accrued Expenses
June 30, September 30,
1996 1995
------------ ------------
Payroll and related taxes $ 2,097,000 $ 1,747,000
Insurance 1,995,000 1,649,000
Other 6,549,000 3,595,000
------------ -----------
$ 10,641,000 $ 6,991,000
============ ===========
Note G - Long Term Debt
In February 1996, the Company refinanced certain of its debt obligations,
which included a $3,000,000 revolving credit facility and term loans aggregating
approximately $10,200,000, by an agreement with a commercial bank which provides
for a $9,000,000 revolving credit facility, a $14,200,000 term loan and a
$5,000,000 equipment facility. The revolving credit facility expires in March
1999 and bears interest, at the Company's option, at the prime rate plus .25% or
LIBOR plus 2.25%. At June 30, 1996, $4,326,000 was outstanding and $2,657,000 of
letters of credit were issued under the revolving credit facility. The term loan
is payable quarterly through March 2003, plus interest, at the Company's option,
at the prime rate plus .375% or LIBOR plus 2.50%. The equipment facility expires
in March 1997, and bears interest, at the Company's option, at the prime rate
plus .375% or LIBOR plus 2.50%. Advances under the equipment facility are
converted to term notes, payable over a maximum of 60 months. At June 30, 1996,
$1,272,000 was outstanding under the equipment facility.
In connection with the acquisition of Unipack, the Company entered into an
agreement with a commercial lender in the United Kingdom for a revolving credit
facility and a term loan denominated and payable in pounds sterling. The
revolving credit facility in the amount of approximately $5,000,000 expires
February 1999, with interest payable at a rate based upon LIBOR plus 2.5%. At
June 30, 1996, approximately $5,000,000 was outstanding under this revolving
credit facility. The term loan of approximately $12,900,000 is payable in 27
quarterly principal installments of approximately $322,000, with interest at
LIBOR plus 2.675%, with the remaining balance of approximately $4,200,000
payable on March 31, 2003.
Interest on these facilities is subject to adjustment based upon the
Company's fixed charge coverage ratio. In addition, these facilities require the
maintenance of certain balance sheet and operating ratios and impose other
financial and dividend limitations. The most restrictive of these provisions
limits cash dividends to no more than 50% of net income in any one year. At June
30, 1996, the Company complied with these ratios and limitations.
9
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note H - Acquisition of Minority Interest
Effective December 1, 1995, the Company exercised its option to repurchase
the outstanding shares of preferred stock of Tri-Line, a subsidiary of the
Company, issued in connection with the acquisition of Tri-Line in 1992. The
purchase price was $900,000, representing the book value of such shares, which
was included in other long-term liabilities in the Company's Balance Sheet at
September 30, 1995.
Note I - Employment Agreements
In February 1996, the Company entered into employment agreements with
certain executive officers which provide for base salaries, bonuses and
post-retirement benefits. The agreements also provide for certain payments in
the event of a change-of-control of the Company, as defined in the agreements.
As a result of satisfaction of the age requirement for retirement under the
agreement, the Company has accrued the estimated present value of
post-retirement benefits for one of such employees. Such amount is reflected as
a long-term liability of $2,200,000 and a non-current deferred asset of
$2,200,000 (included in "Other Assets" in the Condensed Consolidated Balance
Sheet), which is being amortized over three years. The occurrence of certain
events, as defined in the agreements, could result in the acceleration of the
amortization of the deferred asset. For the quarter and nine months ended June
30, 1996, the Company recorded selling, general and administrative expense
related to the accrual of post-retirement benefits pursuant to such employment
agreements of $275,000 and $458,000, respectively. In connection with entering
into the Merger Agreement with Cardinal, the Company entered into new employment
agreements with such executive officers, replacing the employment agreements
currently in effect for such executive officers. Such new agreements, with terms
ranging from two to three years, provide for base salaries, bonuses and
post-retirement benefits, as well as certain payments in recognition of service
to the Company in connection with the proposed Merger and covenants
not-to-compete from such employees and certain payments in the event of a
change-of-control of the Company (as defined in such agreements). Such new
agreements will become effective only upon the consummation of the Merger.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion addresses the financial condition of the Company
as of June 30, 1996 and the results of operations for the three and nine month
periods ended June 30, 1996, compared with the same periods last year. This
discussion should be read in conjunction with the Management's Discussion and
Analysis section (pages 9-11) for the fiscal year ended September 30, 1995
included in the Company's Annual Report on Form 10-K.
Some of the information presented in the following discussion constitutes
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors which could
cause actual results and events to differ from expectations include the
completion of the proposed merger with Cardinal Health, Inc. ("Cardinal"), which
is subject to approval by the stockholders of the Company and the receipt of
requisite regulatory approvals (see "Subsequent Event - Merger"), the timing and
amount of new product introductions by the Company's customers, the timing of
orders received from customers, the dependence on major customers, the gain or
loss of significant customers, changes in the mix of services provided, the cost
of raw materials, and fluctuations in interest rates and currency exchange
rates. In addition, the Company's pharmaceutical packaging services are
generally provided on an as-needed basis, with prices determined based upon
specifications of each order and the services provided. As a result, revenue per
customer and profit margins per order can vary significantly from year to year
and quarter to quarter. Results for any particular quarter are not necessarily
indicative of results for any subsequent quarter or related fiscal year. For
additional information concerning these and other important factors which may
cause the Company's actual results to differ materially from expectations and
underlying assumptions, please refer to the Company's Annual Report on Form 10-K
and other reports filed by the Company with the Securities and Exchange
Commission.
Results of Operations
On February 29, 1996, the Company acquired all of the outstanding capital
stock of Unipack Limited ("Unipack"), a pharmaceutical packaging company located
in the United Kingdom, for approximately $18,000,000 in cash and 60,000 shares
of the Company's common stock (valued at $765,000 as of the date of the
acquisition). The operations of Unipack are included in the Company's operating
results from the date of the acquisition.
11
<PAGE>
The following table sets forth for all periods indicated the percentage
relationship that items in the Company's Statements of Operations bear to
revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.7 76.0 74.8 78.5
----- ----- ----- -----
Gross profit 25.3 24.0 25.2 21.5
Selling, general and administrative expenses 15.0 13.4 13.8 13.2
Interest expense and other 2.5 1.5 1.9 1.5
----- ----- ----- -----
Income before income tax expense 7.8 9.1 9.5 6.8
Income tax expense 2.4 4.2 3.2 2.7
----- ----- ----- -----
Net income 5.4% 4.9% 6.3% 4.1%
===== ===== ===== =====
</TABLE>
Third Quarter 1996 Compared to Third Quarter 1995
Net revenue was $42,451,000, an increase of $7,748,000, or 22.3%, over
prior year quarter net revenue of $34,703,000. This increase was primarily
attributable to the inclusion of revenues from Unipack of $4,546,000 and
increased demand for the Company's services in the United States, including the
Company's facilities in Puerto Rico.
Gross profit was 25.3% of net revenue, as compared to 24.0% for the prior
year quarter. This increase was primarily attributable to the inclusion of the
operations of Unipack.
Selling, general and administrative expenses were $6,355,000, or 15.0% of
net revenue, as compared to $4,656,000, or 13.4% of net revenue in the prior
year quarter. This increase was primarily a result of the inclusion of the
operations of Unipack. The increase in selling, general and administrative
expenses also reflects $275,000 related to the accrual of post-retirement
benefits pursuant to employment agreements entered into with certain executive
officers in February 1996. The Company expects to record selling, general and
administrative expenses related to such agreements of $275,000 for the remainder
of fiscal 1996 and $1,100,000 for each year thereafter, through 1999. The
occurrence of certain events, as defined in the agreement could result in the
acceleration of such post-retirement benefits. (See Note I to the Condensed
Consolidated Financial Statements, "Employment Agreements.")
Interest expense was $1,142,000, as compared to $427,000 in the prior year
quarter. This increase was attributable to debt incurred in connection with the
new packaging facilities in Philadelphia, Pennsylvania and Schorndorf, Germany
and the acquisition of Unipack.
The Company's effective income tax rate was 30.7%, as compared to 46.0% in
the prior year quarter. The Company's effective tax rate is impacted by the
proportion of earnings from operations in Puerto Rico to consolidated earnings.
Earnings from operations in Puerto Rico are taxed at lower rates, in accordance
with Section 936 of the Internal Revenue Code. During fiscal 1995, the effective
tax rate increased reflecting lower earnings from operations in Puerto Rico.
Nine Months Ended June 30, 1996 Compared with Nine Months Ended June 30, 1995
Net revenue was $121,819,000, an increase of $26,594,000, or 27.9%, over
prior year period net revenue of $95,225,000. This increase reflects strong
demand for the Company's services in the United States (including Puerto Rico),
resulting primarily from an
12
<PAGE>
increase in new product introductions by the Company's customers. This increase
also reflects revenues from Unipack of $6,344,000.
Gross profit was 25.2% of net revenue, as compared to 21.5% for the prior
year period. This increase resulted primarily from changes in product mix and
increased production efficiencies, as well as, the inclusion of the operations
of Unipack from the date of acquisition. Increased efficiencies were primarily
related to the new facility in Philadelphia as well as improved materials
utilization at one of the Company's facilities in Puerto Rico.
Selling, general and administrative expenses were $16,875,000, or 13.8% of
net revenue, as compared to $12,613,000, or 13.2% of net revenue, in the prior
year period. The increase in selling, general and administrative expenses
reflects expenses incurred in connection with moving production into the new
packaging facility in Schorndorf, Germany and costs related to the closure of
the Company's facility in Virginia, as well as, the inclusion of the operations
of Unipack. The transfer of production related to the Virginia facility to the
Company's new facility in Philadelphia, Pennsylvania, is expected to be
completed in the fourth quarter of 1996. The increase in selling, general and
administrative expenses also reflects $458,000 related to the accrual of
post-retirement benefits, pursuant to employment agreements entered into with
certain executive officers in February 1996.
Interest expense was $2,490,000, as compared to $1,325,000 in the prior
year period. This increase was attributable to debt incurred in connection with
the new packaging facilities in Philadelphia, Pennsylvania and Schorndorf,
Germany and the acquisition of Unipack. Capitalized interest expense related to
the new facility in Germany was $188,000 in the current period.
The Company's effective income tax rate was 33.8%, as compared to 40.2% for
the prior year period. The Company's effective tax rate is impacted by the
proportion of earnings from operations in Puerto Rico to consolidated earnings.
Earnings from operations in Puerto Rico are taxed at lower rates, in accordance
with Section 936 of the Internal Revenue Code. During fiscal 1995, the effective
tax rate increased reflecting lower earnings from operations in Puerto Rico.
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital of $16,922,000, including
cash and cash equivalents of $5,151,000, as compared to working capital of
$12,180,000 as of September 30, 1995. For the nine months ended June 30, 1996,
net cash provided by operating activities was $9,021,000, as compared to
$8,500,000 in the prior year period. This increase was a result of improved
operating results, partially offset by the inclusion of the operations of
Unipack and increased levels of accounts receivable resulting from increased
revenues.
Investing activities for the nine months ended June 30, 1996, included
$17,478,000, representing the cash portion of the acquisition of Unipack (net of
cash acquired), and $19,484,000 of capital expenditures, of which approximately
$4,500,000 was attributable to the construction of the new pharmaceutical
packaging facility in Schorndorf, Germany, with the remainder for equipment and
building improvements to provide additional capacity. The Company anticipates
additional capital expenditures during the remainder of fiscal 1996 of
approximately $1,700,000 for equipment and building improvements and $1,200,000
for the completion of a new state-of-the-art packaging facility in Manchester,
England, which will replace one of Unipack's current facilities. The Company
expects to enter into a new credit facility to finance the completion of the
Manchester facility.
13
<PAGE>
Financing activities for the nine months ended June 30, 1996 included
borrowings of $36,317,000, of which $4,653,000 related to the refinancing of
existing debt, $17,924,000 related to the acquisition of Unipack, and $6,265,000
related to the new packaging facility in Schorndorf, Germany. Financing
activities also included debt repayments of $6,897,000 and the Company's
exercise of its option to repurchase the outstanding shares of preferred stock
of Tri-Line, a subsidiary of the Company, issued in connection with the Tri-Line
acquisition in 1992 for $900,000, representing the book value of such shares.
In February 1996, the Company refinanced certain of its debt obligations,
which included a $3,000,000 revolving credit facility and term loans aggregating
approximately $10,200,000, by an agreement with a commercial bank which provides
for a $9,000,000 revolving credit facility, a $14,200,000 term loan and a
$5,000,000 equipment facility. The revolving credit facility expires in March
1999 and bears interest, at the Company's option, at the prime rate plus .25% or
LIBOR plus 2.25%. At June 30, 1996, $4,326,000 was outstanding and $2,657,000 of
letters of credit were issued under the revolving credit facility. The term loan
is payable quarterly through March 2003, plus interest, at the Company's option,
at the prime rate plus .375% or LIBOR plus 2.50%. The equipment facility expires
in March 1997 and bears interest, at the Company's option, at prime plus .375%
or LIBOR plus 2.50%. Advances under the equipment facility are converted to term
notes, payable over a maximum of 60 months. At June 30, 1996, $1,272,000 was
outstanding under the equipment facility. Interest on the revolving credit
facility, the term loan and the equipment facility is subject to adjustment
based upon the Company's fixed charge coverage ratio.
In connection with the acquisition of Unipack, the Company entered into an
agreement with a commercial lender in the United Kingdom for a revolving credit
facility and a term loan denominated and payable in pounds sterling. The
revolving credit facility in the amount of approximately $5,000,000 expires in
February 1999 and bears interest at LIBOR plus 2.50%, subject to adjustment
based upon the Company's fixed charge coverage ratio. At June 30, 1996,
approximately $5,000,000 was outstanding under this revolving credit facility.
The term loan of approximately $12,900,000 is payable in quarterly principal
installments of approximately $322,000, plus interest at LIBOR plus 2.675%,
subject to adjustment based upon the Company's fixed charge coverage ratio, with
a final installment of approximately $4,200,000 payable March 2003. Under the
terms of the agreement, the Company is required to make prepayments of the
principal equal to 50% of excess cash flow (as defined). At June 30, 1996, no
prepayment was required.
Management believes that existing working capital, anticipated funds to be
generated from future operations, and available credit facilities will be
sufficient to meet the Company's anticipated operating and capital needs.
Depending upon the future growth of the business, additional financing may be
required.
Subsequent Event - Merger
On July 24, 1996, the Company announced that it had entered into a
definitive agreement (the "Merger Agreement") with Cardinal of Dublin, Ohio,
pursuant to which the Company will become a wholly-owned subsidiary of Cardinal
in a stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes (the "Merger"). Under the
terms of the Merger Agreement, shareholders of the Company will receive .336
shares of Cardinal common stock for each share of the Company's common stock
they own at the time the transaction is consummated (the "Exchange Ratio"),
subject to adjustment under specified circumstances. In addition, stock options
of the Company will be converted into equivalent options for shares of Cardinal
common stock, based
14
<PAGE>
upon the Exchange Ratio. The Merger is expected to be completed in the Fall,
subject to approval by the shareholders of the Company and the receipt of
requisite regulatory approvals. The Merger Agreement may be terminated by either
the Company or Cardinal under specified circumstances. In connection with the
transaction, MEDIQ Incorporated ("MEDIQ"), the Company's largest shareholder,
granted Cardinal an option to purchase all of the Company's common stock owned
by MEDIQ, which is equal to approximately 46% of the outstanding shares,
exercisable upon the occurrence of certain events, and entered into a
Support/Voting Agreement with Cardinal. Additionally, the Company's directors
each entered into a Support/Voting Agreement with Cardinal.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger, dated as of July 23, 1996, by and
between Cardinal Health, Inc., Panther Merger Corp., the
Registrant and MEDIQ Incorporated (1)
10.1 Reimbursement Agreement, dated July 23, 1996, by and between the
Registrant and MEDIQ Incorporated (2)
10.2 Employment Agreement, dated July 23, 1996, by and among the
Registrant, Cardinal Health, Inc. and Richard S. Sauter (2)
10.3 Employment Agreement, dated July 23, 1996, by and among the
Registrant, Cardinal Health, Inc. and Daniel F. Gerner (2)
11 Computation of Net Income Per Share (2)
27 Financial Data Schedule (2)
----------
(1) Incorporated herein by reference to Exhibit 2.1 to the Schedule
13D filed by Cardinal Health, Inc. with respect to the securities of
the Registrant on July 30, 1996.
(2) Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K/A, dated May 10, 1996, was filed to amend a
Current Report on Form 8-K, dated March 13, 1996, which reported the
acquisition of the stock of Unipack Limited. Such Current Report on
Form 8-K was amended by the inclusion of the financial statements of
the business acquired and pro forma financial information.
16
<PAGE>
PCI SERVICES, INC. AND SUBSIDIARIES
Quarter Ended June 30, 1996
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PCI Services, Inc.
----------------------------
(Registrant)
August 12, 1996 /s/ Michael F. Sandler
- ---------------------------- ----------------------------
(Date) Michael F. Sandler
Vice President and
Chief Financial Officer
17
EXHIBIT 10.1
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement (the "Agreement") is made and entered into
this 23rd day of July, 1996, by and between PCI Services, Inc, a Delaware
corporation ("PCI"), and MEDIQ INCORPORATED, a Delaware corporation ("MEDIQ").
R E C I T A L S:
WHEREAS, PCI and MEDIQ have negotiated and plan to enter into an
Agreement and Plan of Merger (the "Merger Agreement") by and among Cardinal
Health, Inc. ("Cardinal"), Panther Merger Corp. ("PMC"), PCI and MEDIQ, pursuant
to which, among other things, PMC shall be merged with and into PCI;
WHEREAS, Section 7.2 of the Merger Agreement provides for the payment of
certain amounts by PCI to Cardinal in the event of the termination of the Merger
Agreement under certain circumstances, including MEDIQ's failure to perform its
obligations under the Merger Agreement; and
WHEREAS, as a condition to proceeding with the transactions set forth in
the Merger Agreement, PCI has required, and MEDIQ has agreed to provide, the
reimbursement of PCI as set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises set forth herein, the parties, intending to be legally bound,
hereby agree as follows:
1. Reimbursement If PCI is required pursuant to Section 7.2 of the
Merger Agreement to pay to Cardinal a termination fee (up to $5 million) or
reimbursement (up to $1 million) of Cardinal's expenses following a termination
of the Agreement by Cardinal pursuant to Section 7.1 solely by reason of the
breach of MEDIQ's obligations pursuant to the Merger Agreement, the MEDIQ Option
or the MEDIQ Support Agreement, then MEDIQ shall, within two business days after
receipt of notice of such payment by PCI, reimburse PCI therefor, subject to the
maximum amounts set forth above. Any request by Cardinal for payment of any such
termination fee or expenses is referred to herein as a "Claim."
2. Indemnification Procedures. PCI shall promptly notify MEDIQ of any
Claim, and include in such notice the nature of any such Claim or potential
Claim of Cardinal, within one business day after any termination of the Merger
Agreement, and include in such notice the factual basis, and, if known, the
estimated amount of the Claim. MEDIQ shall have the right, at its expense, to
undertake the defense of or, with the consent of PCI (which consent shall not
unreasonably be withheld), to settle or compromise any such Claim, unless PCI
waives all rights to
<PAGE>
reimbursement or indemnity against MEDIQ with respect to such Claim. The
election by MEDIQ to undertake the defense of a Claim shall not preclude PCI
also from participating in such defense, so long as it bears its own legal fees
and expenses for so doing.
3. Notices. All notices pursuant to this Agreement shall be given as
follows:
TO PCI Services, Inc:
PCI Services, Inc
3001 Red Lion Road
Philadelphia, PA 19114
Attention: Daniel F. Gerner, President
TO MEDIQ INCORPORATED:
MEDIQ Incorporated
One MEDIQ Plaza
Pennsauken, NJ 08110
Attention: Thomas J. Carroll
Unless otherwise provided herein, all notices, demands, elections, requests or
other communications given or made under this Agreement must be in writing and
shall be deemed properly given or made only if delivered to the respective
addresses indicated above (or to such other address as may be specified by
notice) in one of the following manners: (i) by hand; (ii) by facsimile; (iii)
by overnight delivery service; or (iv) by certified mail, return receipt
requested. Any notice shall have been deemed to have been given on the date of
delivery.
4. Effect of this Agreement. Nothing contained in this Agreement shall
be construed as a waiver of rights under the Merger Agreement except as
expressly provided herein.
5. Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of Delaware.
6. No Waiver. No failure of any party at any time or times to require
performance of any provision hereof, and no delay in exercising any right,
power, privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof by any party preclude any further
exercise thereof or the exercise of any other right, power, privilege or remedy
of such party.
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<PAGE>
7. Counterparts. The Agreement may be executed in several counterparts,
each of which shall be deemed an original but all of which shall constitute one
instrument.
8. Expenses. Each party shall pay the reasonable attorneys fees and
expenses incurred by the other party hereto in connection with its enforcement
of its rights hereunder, to the extent it is the prevailing party in the
litigation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
PCI Services, Inc
BY:________________________
MEDIQ INCORPORATED
BY:_________________________
3
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective as of this 23rd day of July, 1996,
by and among PCI Services, Inc., a corporation organized and existing under the
laws of the state of Delaware (hereinafter "Employer"), Cardinal Health, Inc., a
corporation organized and existing under the laws of the state of Ohio
(hereinafter "Cardinal"), and Richard S. Sauter (hereinafter "Employee"), an
individual residing at 514 Lower State Road, North Wales, PA 19454.
WHEREAS, Employer has entered into an Agreement and Plan of Merger dated
as of July 23, 1996 (hereinafter the "Merger Agreement") pursuant to which a
subsidiary of Cardinal will merge with and into Employer, with Employer as the
surviving corporation, and Employer will become a wholly owned subsidiary of
Cardinal (hereinafter the "Transaction"; references herein to "Employer" refer
to Employer both before and after the Transaction); and
WHEREAS, Cardinal, Employer and Employee desire to set forth in a
written agreement the terms and conditions under which Employee will continue to
render services to Employer after the consummation of the Transaction;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, agree as follows:
1. Term and Duties.
(a) This Agreement shall become effective at the "Effective Time" as
defined in the Merger Agreement if, but only if, the Transaction is consummated.
Employer shall employ Employee under this Employment Agreement as Vice Chairman
and Chief Executive Officer of Employer, and to render such services as are
appurtenant thereto, for a term (hereinafter the "Term") beginning at the
Effective Time and ending on the second anniversary of the Effective Time.
During the Term, Employee shall perform such executive duties of a responsible
nature as shall be in all material respects in conformance with the directions
and policies established and promulgated by Employer and consistent with his
position.
(b) During the Term, Employee shall report to such senior executive
officer of Cardinal as shall be designated from time to time by the Board of
Directors of Employer (hereinafter the "Board"), and shall devote his best
efforts and
<PAGE>
full business time to the performance of his duties and to advance
Employer's interests.
(c) During the Term, Employee shall not, without the prior written
consent of Employer, be engaged in any other 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 Employee from investing
his assets in such form or manner as will not require the performance of
services by Employee in the operation of the affairs of the enterprises or
companies in which said investments are made. Employee may participate in
appropriate community activities not inconsistent with his duties and position
as an Executive of Employer. In all cases, Employee's activities in this regard
shall comply with policies of general application as to participation on Boards
of Directors of non-profit and for-profit corporations, as such policies are
established by Employer from time to time.
2. Compensation.
(a) As compensation for Employee's services hereunder during the Term,
Employer shall pay to Employee an annual salary (hereinafter, the "Base Salary")
during the Term, payable in installments at such times as Company customarily
pays its other executive employees. The Base Salary shall be paid at the rate of
three hundred thirty thousand ($330,000) dollars per year for the calendar year
1996. During the Term, the Base Salary shall be reviewed annually for possible
increase in accordance with the Company's normal payroll practices for
management personnel, and shall not be decreased after any such increase. Any
increase in the Base Salary shall not limit, expand or reduce any other
obligation of the Company under this Agreement.
(b) The Board, after consultation with the management of Employer
(including Employee), shall annually establish, for each fiscal year of Employer
during the Term after the fiscal year ending September 30, 1996, the amount of
pre-tax net income of Employer which the Board expects Employer to earn for such
fiscal year (hereinafter "Targeted Pre-Tax Net Income"). The Targeted Pre-Tax
Net Income for Employer's fiscal year ending September 30, 1996 shall be the
amount established as such under the Employer's current Annual Bonus Program.
During the Term, for each of Employer's most recently completed fiscal years
(each hereinafter a "Most Recent Fiscal Year") beginning with Employer's fiscal
year ending September 30, 1996, Employee shall be entitled to receive as
incentive compensation a bonus (hereinafter the "Annual Bonus") equal to
Employee's Base Salary as of the end of such Most Recent Fiscal Year multiplied
by a percentage
2
<PAGE>
determined by comparing Employer's actual Pre-Tax Net Income (hereinafter the
"Actual Pre-Tax Net Income") for the Most Recent Fiscal Year to the Targeted
Pre-Tax Net Income for such fiscal year:
If Actual Pre-Tax Net Income
for the Most Recent Fiscal Year Then the Annual Bonus
compared to Targeted Pre-Tax as a percentage of Base
Net Income for such fiscal year is: Salary shall be:
- ----------------------------------- ----------------
less than 90% 0% of Base Salary
90% to less than 100% 20% of Base Salary
100% to less than 110% 40% of Base Salary
110% to less than 120% 53% of Base Salary
120% or greater 60% of Base Salary
Any Annual Bonus due to Employee pursuant to this subparagraph 2(b) shall be
paid to Employee in accordance with the standard terms of Employer's bonus plan
for executives, as in effect from time to time. As used herein, "Pre-Tax Net
Income" means income before income tax expense computed in accordance with
generally accepted accounting principles consistently applied. Alternatively, if
Employee and Employer mutually agree, the Annual Bonus for any fiscal year
during the Term shall be determined pursuant to Cardinal's standard Management
Incentive Plan as in effect from time to time.
(c) During the Term, Employee shall be entitled to receive such fringe
benefits as are applicable to all similarly situated senior executives of
Employer; provided, however, that Employer may at any time and from time to time
add to, reduce, eliminate or otherwise modify these fringe benefits as long as
Employee is provided with those fringe benefits which are applicable to all
similarly situated senior executives of Employer. Without limiting the
generality of the foregoing: (i) Employee shall be entitled to four (4) weeks of
vacation during each year during the Term; and (ii) during the Term, Employer
shall lease a luxury automobile of such type as is selected by Employee
(hereinafter the "Automobile"), comparable to the automobile provided by
Employer as of the date of this Agreement, for Employee's exclusive business and
personal use, shall replace the Automobile every two (2) years, shall pay or
reimburse Employee for all lease payments, operating, maintenance and repair
costs, and shall maintain and pay for liability, collision and comprehensive
insurance covering the Automobile, in such amounts and on such terms as provided
by Employer as of the date of this Agreement.
(d) In recognition of Employee's services to Employer before the date
of this Agreement, Employee shall be
3
<PAGE>
entitled to receive, following the termination of Employee's employment with
Employer under this Agreement, an aggregate severance payment of five hundred
thousand ($500,000) dollars, payable in two equal annual installments, without
interest, on each of the third and fourth anniversaries of the Effective Time.
(e) In consideration of his services in connection with the completion
of the Transaction and the noncompetition covenant set forth in subparagraph
4(b) hereinafter, Employee shall be entitled to receive a fee (hereinafter the
"Incentive/Noncompetition Fee") of Two Million ($2,000,000) Dollars, payable on
the January 15 next following the Effective Time; provided, however, that
Employee shall forfeit all rights to receive any unpaid installments of the
Incentive Fee if he violates any of the covenants set forth in subparagraph 4(b)
hereinafter.
(f) In further recognition of Employee's services to Employer before the
date of this Agreement, beginning upon the second anniversary of the Effective
Time, Employer shall pay Employee two hundred thousand ($200,000) dollars per
year for the remainder of his life. Following Employee's death (whether before
or after such payments begin), payments of two hundred thousand ($200,000)
dollars per year shall be made to Employee's surviving spouse, if any, from the
date of Employee's death until the death of such spouse. All payments under this
subparagraph 2(f) shall be made in installments, not less frequently than
monthly.
3. Expenses.
During the Term, Employee is authorized to incur reasonable expenses for
conducting and promoting the business of Employer, including expenses for travel
and similar items, subject to limitations and restrictions set by Employer from
time to time. Employer will reimburse Employee for such expenses, on a monthly
or other regular basis, upon the presentation by Employee of an itemized account
of such expenditures, consistent with procedures established by Employer,
together with such receipts or other evidence as shall be required for tax or
accounting purposes.
4. Disclosure of Information/Restrictive Covenant.
(a) Employee recognizes and acknowledges that (i) all plans, systems,
methods, designs, procedures, books and records known to Employee, relating to
the operations, personnel and practices of Employer or of any subsidiary or
other affiliate of Employer (including, without limitation, Cardinal)
(hereinafter an "Affiliate") (whether instituted or
4
<PAGE>
commenced prior or subsequent to the date hereof and whether or not initially
instituted or commenced by Employer or by an Affiliate), or (ii) all other
records, documents and information concerning the business activities, practices
and procedures of Employer or any Affiliate and any name or style under which
Employer or any Affiliate shall be operated during the Term and the Consulting
Period, or shall have been operated prior hereto, and (iii) any logo or other
descriptive or illustrative form thereof, utilized by Employer or any Affiliate,
as they may exist from time to time, constitute and will constitute valuable,
special and unique assets of the businesses of Employer and the Affiliates, and
Employee may have access to confidential information and/or trade secrets
related to the businesses of Employer and the Affiliates. Except as required in
the course of the services hereunder, Employee therefore covenants and agrees
that he will not ever, at any time without Employer's prior consent, directly or
indirectly disclose to any third party or use for his own benefit any part of
such confidential information, to the extent such information has theretofore
remained confidential (except for unauthorized disclosures by Employee) and
except as otherwise ordered by a court of competent jurisdiction, or use or
permit to be used any such name, style, logo or form, to or by any person, firm,
corporation, association, or other entity for any reason or purpose whatsoever.
(b) Presently the businesses of Employer and its subsidiaries are
international in scope, and the parties hereto understand and agree that it is
their intention to maintain Employer's business activities, operations, markets
and marketing activities and of corporations and entities controlled by Employer
throughout the world, and further that the businesses of Employer and its
subsidiaries will continue in the future to be international in scope.
Therefore, the parties expressly agree that during the "Noncompetition Period"
(as hereinafter defined), Employee will not, anywhere in the world, (i) own
directly or indirectly, manage, operate, control, be employed by, participate
in, or be connected in any manner with the ownership, management, operation or
control of, any business which shall deal with or provide services, or engage in
activities, at any time now or hereafter engaged in by Employer or any of its
subsidiaries, nor (ii) solicit or attempt to solicit customers of Employer or
any of its subsidiaries, or other persons or entities with or through whom
Employer or any of its subsidiaries has done business, for the purpose of
providing such services or engaging in such activities or in any other way
interfere with or detract from the business and opportunities of Employer or any
of its subsidiaries, including by way of example and without limiting the
generality of the foregoing, by inducing an employee to leave the employ of
Employer or one of its
5
<PAGE>
subsidiaries, or by inducing a consultant or other independent contractor to
sever that person's relations with Employer or one of its subsidiaries;
provided, however, that the foregoing provisions of this subparagraph 4(b) shall
not prohibit Employee during the period of such restriction from accepting
employment, or acting as a consultant, in the pharmaceutical industry, provided
that Employee's activities therein, to the extent that they relate to packaging,
shall not relate in any manner to contract packaging or other similar services
by independent packagers. The "Noncompetition Period" means the longer of (A)
the period during which the Employee is employed by Employer or any of the
Affiliates plus the period ending on the third anniversary of the date such
employment terminates and (B) the period ending on the fifth anniversary of the
Effective Time.
(c) Employee acknowledges that the restrictions contained in this
paragraph are reasonable and necessary in view of the nature of the businesses
of Employer and the Affiliates in order to protect the legitimate interests of
Employer and the Affiliates, and that any violation thereof would result in
irreparable injury to Employer and the Affiliates. Therefore, Employee agrees
that, in the event of a breach or threatened breach by Employee of the
provisions of subparagraph 4(a) or 4(b), Employer and the Affiliates shall be
entitled to obtain from any court of competent jurisdiction, preliminary and
permanent injunctive relief restraining Employee from any violation of the
foregoing.
(d) Nothing herein shall be construed as prohibiting Employer and the
Affiliates from pursuing any other remedies available to Employer and the
Affiliates for such breach or threatened breach, including recovery of damages
from Employee, and an equitable accounting of all earnings, profits and other
benefits arising from such violation.
(e) Employer, Cardinal and Employee acknowledge their intention that
Employer and the Affiliates shall have the broadest possible protection of the
value of the businesses of Employer and the Affiliates in the trade area set
forth above consistent with public policy, and it will not violate the intent of
parties if any Court should determine that, consistent with established
precedent of the forum state, the public policy of such state requires a more
limited restriction in geographical area or duration of Employee's covenant not
to compete, contained in an appropriate decree.
6
<PAGE>
5. Termination.
(a) Employee's employment may be terminated by - Employer under any of
the following circumstances:
(i) Upon the death of Employee; or
(ii) Upon the "Disability" of Employee, defined as the inability of
Employee to perform services as an employee hereunder on a full-time basis by
reason of physical or mental incapacity, sickness or infirmity that continues
for more than twelve (12) months or for periods aggregating more than twelve
(12) months during any twenty-four (24) month period; provided, however, that
a determination of Executive's Disability shall be subject to the
certification of a qualified physician agreed to by the Company and the
Executive or, in the event of Executive's incapacity to designate a
physician, the Executive's legal representative;
(iii) For "Cause," defined as an act of fraud or intentional
misrepresentation or embezzlement, misappropriation or conversion of assets
of Employer or any Affiliate (as hereinafter defined), or the intentional and
repeated violation of the written policies or procedures of Employer; or
(iv) for any other reason (a termination without "Cause").
(b) Employee's employment may be terminated by Employee for "Good
Reason," defined as a termination within 30 days after and as a result of (i)
the assignment to Employee of duties inconsistent in any material respect with
subparagraph 1(a) of this Agreement, other than actions that are not taken in
bad faith and are remedied by Employer within ten business days after receipt of
notice thereof from Employee; (ii) any material failure by Employer to comply
with any provision of subparagraph 2 of this Agreement other than failures that
are not taken in bad faith and are remedied by Employer within ten business days
after receipt of notice thereof from Employee; or (iii) a change in Employee's
principal place of employment with Employer to a location beyond 25 miles from
Broad and Market Streets, Philadelphia, Pennsylvania, without Employee's
consent.
(c) If, during the Term, Employee's employment is terminated by Employer
without Cause or by Employee for Good Reason, Employee shall not be entitled to
any compensation provided for under this Agreement except as provided in
subparagraphs 2(d), 2(e) and 2(f) and Section 7 and in the
7
<PAGE>
following sentence. Employer (i) shall continue to pay Employee the Base Salary,
at the rate then in effect, for and with respect to the remainder of the Term
(hereinafter the "Employment Continuation Period") (in the same manner as
specified in subparagraph 2(a) hereof); (ii) pay the Annual Bonuses for each
fiscal year ending during the Continuation Period, in the same manner as
specified in subparagraph 2(b) hereof, except that the amount of each such
Annual Bonus (the "Bonus Amount") shall be 50% of the Annual Bonus most recently
paid to Employee before such termination; and (iii) shall continue to provide
Employee with group health benefits on the terms and conditions applicable to
active employees of Employer (hereinafter the "Group Health Benefits") during
the Employment Continuation Period; provided, that (x) if the Group Health
Benefits cannot be provided to nonemployees under the terms of the applicable
plans or applicable law, Employer shall provide Employee with substitute
benefits that are comparable and equal in value to such benefits, and (y) during
any period when Employee is eligible to receive any such benefits under another
employer-provided plan or a government plan, the Group Health Benefits or
substitute benefits provided by Employer under this clause (iii) may be made
secondary to those provided under such other plan.
(d) Other Terminations. If, during the Term, Employee's employment is
terminated for any reason other than by Employer without Cause or by Employee
for Good Reason, Employee shall not be entitled to any compensation provided for
under this Agreement, other than (i) Base Salary through the Termination Date,
(ii) benefits under any long-term disability insurance coverage in the case of
termination because of Disability, (iii) the amounts provided for in
subparagraphs 2(d), 2(e) and 2(f) and Section 7 in accordance therewith, and
(iv) vested benefits, if any, required to be paid or provided by law.
(e) Change of Control Provision. For purposes of this subparagraph 5(e),
a "Change of Control" shall have occurred in the event that during the Term,
Cardinal ceases to own, directly or indirectly, more than 50 percent of the
combined voting power of Employer's then-outstanding securities entitled to vote
generally in the election of directors. If (i) at any time after a Change of
Control, Employer terminates Employee's employment without Cause or (ii) within
one year after a Change of Control, Employee terminates his own employment for
any reason or no reason, then the provisions of this subparagraph 5(e) shall
apply instead of the provisions of subparagraphs 5(c) and (d), and:
8
<PAGE>
(A) Employer shall pay to Employee in a lump sum in cash within 30
days after the date of such termination the aggregate of the following
amounts:
(I) to the extent not theretofore paid, the Base Salary,
at the rate in effect on the date of such termination,
through the date of such termination; and
(II) the product of (x) three and (y) the Base Salary
plus the Bonus Amount; provided that the payment under
this subsection II shall be reduced to the extent
required so that such payment shall not be a parachute
payment within the meaning of Section 280G(b) of the
Internal Revenue Code of 1986, as amended (hereinafter
the "Code"), and the regulations promulgated thereunder,
or successor provisions of similar import, excluding for
this purpose any payment under subsection (I) above and
any payments under subparagraph 2(e) hereof, as
determined by Employer.
(B) Employer shall (i) pay the amounts provided for in subparagraphs
2(d), 2(e) and 2(f) and Section 7 in accordance therewith and (ii)
continue to provide Employee with Group Health Benefits for the
remainder of the Term; provided, that (x) if the Group Health Benefits
cannot be provided to nonemployees under the terms of the applicable
plans or applicable law, Employer shall provide Employee with
substitute benefits that are comparable and equal in value to such
benefits, and (y) during any period when Employee is eligible to
receive any such benefits under another employer-provided plan or a
government plan, the Group Health Benefits or substitute provided by
Employer under this clause (ii) may be made secondary to those provided
under such other plan.
9
<PAGE>
6. Insurance.
Employer shall have the right to purchase such policies of insurance on
the life of Employee as may be determined by Employer in its sole discretion,
and as may be available, at the sole cost and expense of Employer, and naming
Employer as owner and beneficiary, and Employee shall cooperate in the placement
thereof.
7. Consulting Services.
(a) If Employee so elects during the Term by giving Employer notice of
such election (hereinafter the "Consulting Election") specifying the effective
date of the Consulting Election, then upon the effective date of the Consulting
Election, he shall (i) cease to be an employee of Employer, (ii) resign from all
offices he then holds with Employer and its Affiliates, and (iii) thereafter
serve Employer as a nonemployee consultant under the terms and conditions set
forth in this Section 7 during the "Initial Consulting Period" as hereinafter
defined. Notwithstanding any provision of Section 5, the Employee shall not be
entitled to any separate compensation or benefits under Section 5 as a result of
becoming a consultant pursuant to the preceding sentence. In addition, Employee
shall serve Employer as a nonemployee consultant under the terms and conditions
set forth in this Section 7 during the Secondary Consulting Period (regardless
of whether there is an Initial Consulting Period). The "Initial Consulting
Period" means the period from the effective date of the Consulting Election
through the beginning of the "Secondary Consulting Period" as hereinafter
defined. The "Secondary Consulting Period" means the period from the earlier of
the second anniversary of the Effective Time and a termination of Employee's
employment following a Change of Control pursuant to Section 5(e) through the
fifth anniversary of the Effective Time. (The Initial Consulting Period and the
Secondary Consulting Period are hereinafter referred to collectively as the
"Consulting Period.") During the Consulting Period, Employee shall make himself
available at such times and places as Employee shall select (including by
telephone if Employee so determines) to render such services as may reasonably
be requested from time to time by the Board and/or the Chief Executive Officer
of the Company.
(b) From and after the beginning of the Consulting Period, Employee
shall cease to be entitled to receive any compensation and benefits under this
Agreement other than the amounts provided for in subparagraphs 2(d), 2(e) and
2(f) in accordance therewith and the compensation and benefits provided for in
this subparagraph 7(b). In consideration of Employee's services as consultant,
the
10
<PAGE>
Company shall pay the Executive a monthly consulting fee (hereinafter the
"Consulting Fee"), payable in arrears, as follows. During the Initial Consulting
Period, the Consulting Fee shall equal one-twenty-fourth (1/24th) of the Base
Salary as in effect immediately before the beginning of the Consulting Period
(hereinafter the "Initial Monthly Rate"). During the Secondary Consulting
Period, the Consulting Fee shall equal fourteen thousand one hundred sixty-seven
($14,167) dollars per month (hereinafter the "Secondary Monthly Rate"). In
addition, during the Initial Consulting Period only, the Company shall continue
to provide Employee with the Group Health Benefits during the Consulting Period;
provided, that (x) if any of the Group Health Benefits cannot be provided to
nonemployees under the terms of the applicable plans or applicable law, Employer
shall provide Employee with substitute benefits that are comparable and equal in
value to such benefits, and (y) during any period when Employee is eligible to
receive any such benefits under another employer-provided plan or a government
plan, the Group Health Benefits or substitute benefits provided by Employer
under this clause (ii) may be made secondary to those provided under such other
plan. If Employee dies during the Initial Consulting Period, Employer shall pay
Employee's estate the Consulting Fee at the Secondary Monthly Rate through the
third anniversary of Employee's death and the amounts provided for in
subparagraph 2(d), 2(e) and 2(f) in accordance therewith and Employer shall have
no other obligations under this Agreement. If Employee dies during the Secondary
Consulting Period, Employer shall pay Employee's estate the Consulting Fee at
the Secondary Monthly Rate through the end of the Consulting Period and the
amounts provided for in subparagraphs 2(d), 2(e) and 2(f) in accordance
therewith, and Employer shall have no other obligations under this Agreement. If
Employee's employment with Employer terminates before the beginning of the
Consulting Period because of Employee's Disability or death, Employer shall pay
Employee or Employee's estate the Consulting Fee at the Secondary Monthly Rate
from the date of Employee's Disability or death through the third anniversary
thereof.
8. Notice.
(a) Each notice, demand, request, consent, report, approval or
communication (hereinafter "Notice") which is or may be required to be given by
any party to any other party in connection with this Agreement and the
transactions contemplated hereby, shall be in writing, and given by facsimile,
personal delivery, receipted delivery services, or by certified mail, return
receipt requested, prepaid and properly
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addressed to the party to be served as shown in subparagraph 8(b) hereinafter.
(b) Notices shall be effective on the date sent via facsimile, the date
delivered personally or by receipted delivery service, or three (3) days after
the date mailed:
If to Employer: PCI Services, Inc.
3001 Red Lion Road
Philadelphia, PA 19114-1123
Attn:
Facsimile:
If to Employee: At his residence address most
recently filed with Employer.
In each case, with Cardinal Health, Inc.
a copy to: 5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
If to Cardinal: Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
(c) Each party may designate by Notice to the others in writing, given
in the foregoing manner, a new address to which any Notice may thereafter be so
given, served or sent.
9. Waiver of Breach.
The waiver by either party of a breach of any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach.
10. Assignment.
The rights and obligations of Employer under this Agreement shall inure
to the benefit of and shall be binding upon the successors and assigns of
Employer, but the rights and obligations of Employee are personal and may not be
assigned or delegated without Employer's prior written consent.
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11. Entire Agreement; Effect if No Transaction.
As of the Effective Time, this Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and shall
supercede all prior agreements with respect thereto, including without
limitation the Executive Employment Agreement dated February 7, 1996. This
Agreement shall not be changed orally, but only by an agreement in writing
executed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. Notwithstanding any other
provision of this Agreement, this Agreement shall be null and void and of no
effect if the Transaction is not consummated.
12. Law Applicable.
This Agreement, and all covenants contained herein, shall be governed in
all respects, whether as to validity, construction, capacity, performance or
otherwise, by the laws of the Commonwealth of Pennsylvania in which it has a
situs. Each of the covenants contained in paragraph 4 of this Agreement shall be
construed as a separate covenant in each of the separate cities and counties of
the United States in which Employer is presently engaged in business. To the
extent that any such covenant shall be unenforceable in any one or more of such
cities or countries, such declaration shall not affect this covenant with
respect to any other city or county, as each of said covenants shall be
construed to be severable and independent. In the event any provision of this
Agreement shall be held invalid by a court with jurisdiction over the parties to
this Agreement, such provision shall be deleted from the Agreement, which shall
then be construed to give effect to the remaining provisions thereof.
13. Paragraph Headings.
The paragraph headings contained in this Agreement are for convenience
only and in no manner shall be construed as part of this Agreement.
14. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
Corporate Seal Employer:
PCI SERVICES, INC.
By: /s/ Daniel F. Gerner
-----------------------------
Daniel F. Gerner
President and Chief
Operating Officer
Attest: /s/
-----------------------------
Cardinal:
CARDINAL HEALTH, INC.
By: /s/ George H. Bennett
-----------------------------
George H. Bennett
Executive Vice President
and General Counsel
Employee:
/s/ Richard S. Sauter
-----------------------------
RICHARD S. SAUTER
/s/
- -----------------------------
Witness
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective as of this 23rd day of July, 1996,
by and among PCI Services, Inc., a corporation organized and existing under the
laws of the state of Delaware (hereinafter "Employer"), Cardinal Health, Inc., a
corporation organized and existing under the laws of the state of Ohio
(hereinafter "Cardinal"), and Daniel F. Gerner (hereinafter "Employee"), an
individual residing at 1025 Riverton Road, Moorestown, NJ 08057.
WHEREAS, Employer has entered into an Agreement and Plan of Merger dated
as of July 23, 1996 (hereinafter the "Merger Agreement") pursuant to which a
subsidiary of Cardinal will merge with and into Employer, with Employer as the
surviving corporation, and Employer will become a wholly owned subsidiary of
Cardinal (hereinafter the "Transaction"; references herein to "Employer" refer
to Employer both before and after the Transaction); and
WHEREAS, Cardinal, Employer and Employee desire to set forth in a
written agreement the terms and conditions under which Employee will continue to
render services to Employer after the consummation of the Transaction;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and intending to be
legally bound hereby, agree as follows:
1. Term and Duties.
(a) This Agreement shall become effective at the "Effective Time" as
defined in the Merger Agreement if, but only if, the Transaction is consummated.
Employer shall employ Employee under this Employment Agreement as President of
Employer, and to render such services as are appurtenant thereto, for a term
(hereinafter the "Term") beginning at the Effective Time and ending on the third
anniversary of the Effective Time. During the Term, Employee shall perform such
executive duties of a responsible nature as shall be in all material respects in
conformance with the directions and policies established and promulgated by
Employer and consistent with his position.
(b) During the Term, Employee shall report to Richard S. Sauter, or to
such other senior executive officer of Employer or Cardinal as shall be
designated from time to time by the Board of Directors of Employer (hereinafter
the "Board"), and shall
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devote his best efforts and full business time to the performance of his duties
and to advance Employer's interests.
(c) During the Term, Employee shall not, without the prior written
consent of Employer, be engaged in any other 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 Employee from investing
his assets in such form or manner as will not require the performance of
services by Employee in the operation of the affairs of the enterprises or
companies in which said investments are made. Employee may participate in
appropriate community activities not inconsistent with his duties and position
as an Executive of Employer. In all cases, Employee's activities in this regard
shall comply with policies of general application as to participation on Boards
of Directors of non-profit and for-profit corporations, as such policies are
established by Employer from time to time.
2. Compensation.
(a) As compensation for Employee's services hereunder during the Term,
Employer shall pay to Employee an annual salary (hereinafter the "Base Salary")
during the Term, payable in installments at such times as Company customarily
pays its other executive employees. The Base Salary shall be paid at the rate of
three hundred fifteen thousand ($315,000) dollars per year for the calendar year
1996. During the Term, the Base Salary shall be reviewed annually for possible
increase in accordance with the Company's normal payroll practices for
management personnel, and shall not be decreased after any such increase. Any
increase in the Base Salary shall not limit, expand or reduce any other
obligation of the Company under this Agreement.
(b) The Board, after consultation with the management of Employer
(including Employee), shall annually establish, for each fiscal year of Employer
during the Term after the fiscal year ending September 30, 1996, the amount of
pre-tax net income of Employer which the Board expects Employer to earn for such
fiscal year (hereinafter "Targeted Pre-Tax Net Income"). The Targeted Pre-Tax
Net Income for Employer's fiscal year ending September 30, 1996 shall be the
amount established as such under Employer's current Annual Bonus Program. During
the Term, for each of Employer's most recently completed fiscal years (each a
"Most Recent Fiscal Year") beginning with Employer's fiscal year ending
September 30, 1996, Employee shall be entitled to receive as incentive
compensation a bonus (hereinafter the "Annual Bonus") equal to Employee's Base
Salary as of the end of such Most Recent Fiscal Year multiplied by a percentage
determined by comparing Employer's actual Pre-Tax Net Income (hereinafter the
2
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"Actual Pre-Tax Net Income") for the Most Recent Fiscal Year to the Targeted
Pre-Tax Net Income for such fiscal year:
If Actual Pre-Tax Net Income
for the Most Recent Fiscal Year Then the Annual Bonus
compared to Targeted Pre-Tax as a percentage of Base
Net Income for such fiscal year is: Salary shall be:
- ----------------------------------- ----------------
less than 90% 0% of Base Salary
90% to less than 100% 20% of Base Salary
100% to less than 110% 40% of Base Salary
110% to less than 120% 53% of Base Salary
120% or greater 60% of Base Salary
Any Annual Bonus due to Employee pursuant to this subparagraph 2(b) shall be
paid to Employee in accordance with the standard terms of Employer's bonus plan
for executives, as in effect from time to time. As used herein, "Pre-Tax Net
Income" means income before income tax expense computed in accordance with
generally accepted accounting principles consistently applied. Alternatively, if
Employee and Employer mutually agree, the Annual Bonus for any fiscal year
during the Term shall be determined pursuant to Cardinal's standard Management
Incentive Plan as in effect from time to time.
(c) During the Term, Employee shall be entitled to receive such fringe
benefits as are applicable to all similarly situated senior executives of
Employer; provided, however, that Employer may at any time and from time to time
add to, reduce, eliminate or otherwise modify these fringe benefits as long as
Employee is provided with those fringe benefits which are applicable to all
similarly situated senior executives of Employer. Without limiting the
generality of the foregoing: (i) Employee shall be entitled to four (4) weeks of
vacation during each year during the Term; and (ii) during the Term, Employer
shall lease a luxury automobile of such type as is selected by Employee
(hereinafter the "Automobile"), comparable to the automobile provided by
Employer as of the date of this Agreement, for - Employee's exclusive business
and personal use, shall replace the Automobile every two (2) years, shall pay or
reimburse Employee for all lease payments, operating, maintenance and repair
costs, and shall maintain and pay for liability, collision and comprehensive
insurance covering the Automobile, in such amounts and on such terms as provided
by Employer as of the date of this Agreement.
(d) Employee shall be granted, as of the Effective Time, 4,250 shares of
restricted Cardinal Stock (hereinafter the "Restricted Stock"), which shall vest
in three equal installments (but rounded to the nearest whole share) on each of
the first, second and the third anniversary of the Effective Time; provided,
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<PAGE>
that all Restricted Stock that has not previously vested shall vest upon the
occurrence of a Change of Control (as defined hereinafter); and provided,
further, that if Employee violates any of the covenants set forth in
subparagraph 4(b) or if his employment is terminated by Employer for Cause, he
shall forfeit all Restricted Stock that has not previously vested. The
Restricted Stock shall otherwise be subject to the standard terms and conditions
applicable to restricted stock under the Cardinal Equity Incentive Plan.
(e) In consideration of his services in connection with the completion
of the Transaction and the noncompetition covenant set forth in subparagraph
4(b) hereinafter, Employee shall be entitled to receive a fee (hereinafter the
"Incentive/Noncompetition Fee") consisting of an initial installment of five
hundred thousand ($500,000) dollars to be paid on the January 15 next following
the Effective Time and three additional installments of four hundred thousand
($400,000) dollars each to be paid on each of the first three anniversaries of
such date; provided, however, that Employee shall forfeit all rights to receive
any unpaid installments of the Incentive Fee if he violates any of the covenants
set forth in subparagraph 4(b) hereinafter.
(f) In recognition of Employee's services to Employer before the date of
this Agreement, beginning upon the first to occur of (i) the later of the
termination of Employee's employment with or consulting services to Employer for
any reason other than Disability or death and the Employee's attainment of age
60, and (ii) the termination of Employee's employment with Employer because of
Disability (as defined hereinafter), Employer shall pay Employee two hundred
forty thousand ($240,000) dollars per year for the remainder of his life.
Following Employee's death (whether before or after such payments begin),
payments of two hundred forty thousand ($240,000) dollars per year shall be made
to Employee's surviving spouse, if any, from the date of Employee's death until
the death of such spouse. All payments under this subparagraph 2(f) shall be
made in installments, not less frequently than monthly. Notwithstanding any
other provision of this Agreement, if Employee terminates his employment with
Employer during the Term without Good Reason, or voluntarily terminates his
services to Employer as a consultant before the end of the Consulting Period, no
payments shall be made to Employee or his spouse under this subparagraph 2(f).
3. Expenses.
During the Term, Employee is authorized to incur reasonable expenses for
conducting and promoting the business
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<PAGE>
of Employer, including expenses for travel and similar items, subject to
limitations and restrictions set by Employer from time to time. Employer will
reimburse Employee for such expenses, on a monthly or other regular basis, upon
the presentation by Employee of an itemized account of such expenditures,
consistent with procedures established by Employer, together with such receipts
or other evidence as shall be required for tax or accounting purposes.
4. Disclosure of Information/Restrictive Covenant.
(a) Employee recognizes and acknowledges that (i) all plans, systems,
methods, designs, procedures, books and records known to Employee, relating to
the operations, personnel and practices of Employer or of any subsidiary or
other affiliate of Employer (including, without limitation, Cardinal)
(hereinafter an "Affiliate") (whether instituted or commenced prior or
subsequent to the date hereof and whether or not initially instituted or
commenced by Employer or by an Affiliate), or (ii) all other records, documents
and information concerning the business activities, practices and procedures of
Employer or any Affiliate and any name or style under which Employer or any
Affiliate shall be operated during the Term and the Consulting Period, or shall
have been operated prior hereto, and (iii) any logo or other descriptive or
illustrative form thereof, utilized by Employer or any Affiliate, as they may
exist from time to time, constitute and will constitute valuable, special and
unique assets of the businesses of Employer and the Affiliates, and Employee may
have access to confidential information and/or trade secrets related to the
businesses of Employer and the Affiliates. Except as required in the course of
the services hereunder, Employee therefore covenants and agrees that he will not
ever, at any time without Employer's prior consent, directly or indirectly
disclose to any third party or use for his own benefit any part of such
confidential information, to the extent such information has theretofore
remained confidential (except for unauthorized disclosures by Employee) and
except as otherwise ordered by a court of competent jurisdiction, or use or
permit to be used any such name, style, logo or form, to or by any person, firm,
corporation, association, or other entity for any reason or purpose whatsoever.
(b) Presently the businesses of Employer and its subsidiaries are
international in scope, and the parties hereto understand and agree that it is
their intention to maintain Employer's business activities, operations, markets
and marketing activities and of corporations and entities controlled by Employer
throughout the world, and further that the businesses of Employer and its
subsidiaries will continue in the future to be international in scope.
Therefore, the
5
<PAGE>
parties expressly agree that during the "Noncompetition Period" (as hereinafter
defined), Employee will not, anywhere in the world, (i) own directly or
indirectly, manage, operate, control, be employed by, participate in, or be
connected in any manner with the ownership, management, operation or control of,
any business which shall deal with or provide services, or engage in activities,
at any time now or hereafter engaged in by Employer or any of its subsidiaries,
nor (ii) solicit or attempt to solicit customers of Employer or any of its
subsidiaries, or other persons or entities with or through whom Employer or any
of its subsidiaries has done business, for the purpose of providing such
services or engaging in such activities or in any other way interfere with or
detract from the business and opportunities of Employer or any of its
subsidiaries, including by way of example and without limiting the generality of
the foregoing, by inducing an employee to leave the employ of Employer or one of
its subsidiaries, or by inducing a consultant or other independent contractor to
sever that person's relations with Employer or one of its subsidiaries;
provided, however, that the foregoing provisions of this subparagraph 4(b) shall
not prohibit Employee during the period of such restriction from accepting
employment, or acting as a consultant, in the pharmaceutical industry, provided
that Employee's activities therein, to the extent that they relate to packaging,
shall not relate in any manner to contract packaging or other similar services
by independent packagers. The "Noncompetition Period" means the longer of (A)
the period during which the Employee is employed by Employer or any of the
Affiliates plus the period ending on the later of the third anniversary of the
date such employment terminates and (B) the sixth anniversary of the Effective
Time.
(c) Employee acknowledges that the restrictions contained in this
paragraph are reasonable and necessary in view of the nature of the businesses
of Employer and the Affiliates in order to protect the legitimate interests of
Employer and the Affiliates, and that any violation thereof would result in
irreparable injury to Employer and the Affiliates. Therefore, Employee agrees
that, in the event of a breach or threatened breach by Employee of the
provisions of subparagraph 4(a) or 4(b), Employer and the Affiliates shall be
entitled to obtain from any court of competent jurisdiction, preliminary and
permanent injunctive relief restraining Employee from any violation of the
foregoing.
(d) Nothing herein shall be construed as prohibiting Employer and the
Affiliates from pursuing any other remedies available to Employer and the
Affiliates for such breach or threatened breach, including recovery of damages
from Employee, and an equitable accounting of all
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<PAGE>
earnings, profits and other benefits arising from such violation.
(e) Employer, Cardinal and Employee acknowledge their intention that
Employer and the Affiliates shall have the broadest possible protection of the
value of the businesses of Employer and the Affiliates in the trade area set
forth above consistent with public policy, and it will not violate the intent of
parties if any Court should determine that, consistent with established
precedent of the forum state, the public policy of such state requires a more
limited restriction in geographical area or duration of Employee's covenant not
to compete, contained in an appropriate decree.
5. Termination.
(a) Employee's employment may be terminated by - Employer under any of
the following circumstances:
(i) Upon the death of Employee; or
(ii) Upon the "Disability" of Employee, defined as the inability of
Employee to perform services as an employee hereunder on a full-time basis by
reason of physical or mental incapacity, sickness or infirmity that continues
for more than twelve (12) months or for periods aggregating more than twelve
(12) months during any twenty-four (24) month period; provided, however, that
a determination of Executive's Disability shall be subject to the
certification of a qualified physician agreed to by the Company and the
Executive or, in the event of Executive's incapacity to designate a
physician, the Executive's legal representative; or
(iii) For "Cause," defined as any act of fraud or intentional
misrepresentation or embezzlement, misappropriation or conversion of assets
of Employer or any Affiliate (as hereinafter defined), or the intentional and
repeated violation of the written policies or procedures of Employer;
(iv) for any other reason (a termination without "Cause").
(b) Employee's employment may be terminated by Employee for "Good
Reason," defined as a termination within 30 days after and as a result of (i)
the assignment to Employee of duties inconsistent in any material respect with
subparagraph 1(a) of this Agreement, other than actions that are not taken in
bad faith and are remedied by Employer within ten business days after receipt of
notice thereof from Employee;
7
<PAGE>
(ii) any material failure by Employer to comply with any provision of
subparagraph 2 of this Agreement other than failures that are not taken in bad
faith and are remedied by Employer within ten business days after receipt of
notice thereof from Employee; or (iii) a change in Employee's principal place of
employment with Employer to a location beyond 25 miles from Broad and Market
Streets, Philadelphia, Pennsylvania, without Employee's consent.
(c) If, during the Term, Employee's employment is terminated by Employer
without Cause or by Employee for Good Reason, Employee shall not be entitled to
any compensation provided for under this Agreement except as provided in
subparagraphs 2(d), 2(e) and 2(f) and Section 7 and in the following sentence.
Employer (i) shall continue to pay Employee the Base Salary, at the rate then in
effect, for and with respect to the remainder of the Term (hereinafter the
"Continuation Period") (in the same manner as specified in subparagraph 2(a)
hereof); (ii) Pay the Annual Bonuses for each fiscal year ending during the
Continuation Period, in the same manner as specified in subparagraph 2(b)
hereof, except that the amount of each such Annual Bonus (the "Bonus Amount")
shall be 50% of the Annual Bonus most recently paid to Employee before such
termination; and (iii) shall continue to provide Employee with group health
benefits on the terms and conditions applicable to active employees of Employer
(hereinafter the "Group Health Benefits") during the Continuation Period;
provided, that (x) if the Group Health Benefits cannot be provided to
nonemployees under the terms of the applicable plans or applicable law, Employer
shall provide Employee with substitute benefits that are comparable and equal in
value to such benefits, and (y) during any period when Employee is eligible to
receive any such benefits under another employer- provided plan or a government
plan, the Group Health Benefits or substitute benefits provided by Employer
under this clause (iii) may be made secondary to those provided under such other
plan.
(d) Other Terminations. If, during the Term, Employee's employment is
terminated for any reason other than by Employer without Cause or by Employee
for Good Reason, Employee shall not be entitled to any compensation provided for
under this Agreement, other than (i) Base Salary through the Termination Date,
(ii) benefits under any long-term disability insurance coverage in the case of
termination because of Disability, (iii) the amounts provided for in
subparagraphs 2(d), 2(e) and 2(f) and Section 7 in accordance therewith, and
(iv) vested benefits, if any, required to be paid or provided by law.
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<PAGE>
(e) Change of Control Provision. For purposes of this subparagraph 5(e),
a "Change of Control" shall have occurred in the event that during the Term,
Cardinal ceases to own, directly or indirectly, more than 50 percent of the
combined voting power of Employer's then-outstanding securities entitled to vote
generally in the election of directors. If (i) at any time after a Change of
Control, Employer terminates Employee's employment without Cause or (ii) within
one year after a Change of Control, Employee terminates his own employment for
any reason or no reason, then the provisions of this subparagraph 5(e) shall
apply instead of the provisions of subparagraphs 5(c) and (d), and:
(A) Employer shall pay to Employee in a lump sum in cash within
30 days after the date of such termination the aggregate of the
following amounts:
(I) to the extent not theretofore paid, the Base Salary,
at the rate in effect on the date of such termination,
through the date of such termination; and
(II) the product of (x) three and (y) the Base Salary
plus the Bonus Amount; provided that the payment under
this subsection II shall be reduced to the extent
required so that such payment shall not be a parachute
payment within the meaning of Section 280G(b) of the
Internal Revenue Code of 1986, as amended (hereinafter
the "Code"), and the regulations promulgated thereunder,
or successor provisions of similar import, excluding for
this purpose any payment under subsection (I) above and
any payments under subparagraph 2(e) hereof, as
determined by Employer.
(B) Employer shall (i) pay the amounts provided for in
subparagraphs 2(d), 2(e) and 2(f) and Section 7 in accordance therewith
and (ii) continue to provide Employee with Group Health Benefits for the
remainder of the Term; provided, that (x) if the Group Health Benefits
cannot be provided to nonemployees under the terms of the applicable
plans or applicable law, Employer shall provide Employee with substitute
benefits that are comparable and equal in value to such benefits, and
(y)
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during any period when Employee is eligible to receive any such benefits
under another employer-provided plan or a government plan, the Group
Health Benefits or substitute benefits provided by Employer under this
clause (ii) may be made secondary to those provided under such other
plan.
6. Insurance.
Employer shall have the right to purchase such policies of insurance on
the life of Employee as may be determined by Employer in its sole discretion,
and as may be available, at the sole cost and expense of Employer, and naming
Employer as owner and beneficiary, and Employee shall cooperate in the placement
thereof.
7. Consulting Services.
(a) For purposes of this Agreement, the "Consulting Period" shall mean
the period of seven years beginning on the earlier of the third anniversary of
the Effective Time and a termination of Employee's employment following a Change
of Control pursuant to Section 5(e). From the day after the third anniversary of
the Effective Time (hereinafter the "Consulting Period"), Employee shall serve
Employer as a nonemployee consultant under the terms and conditions set forth in
this Section 7. During the Consulting Period, Employee shall make himself
available at such times and places as Employee shall select (including by
telephone if Employee so determines) to render such services as may reasonably
be requested from time to time by the Board and/or the Chief Executive Officer
of the Company.
(b) From and after the beginning of the Consulting Period, Employee
shall cease to be entitled to receive any compensation and benefits under this
Agreement other than the amounts provided for in subparagraphs 2(d), 2(e) and
2(f) in accordance therewith and the compensation provided for in this
subparagraph 7(b). In consideration of Employee's services as consultant, during
the Consulting Period, the Company shall pay the Executive a monthly consulting
fee (hereinafter the "Consulting Fee") of eighteen thousand seven hundred fifty
($18,750) dollars, payable in arrears. If Employee dies during the Consulting
Period, Employer shall pay Employee's estate the Consulting Fee through the end
of the Consulting Period and the amounts provided for in subparagraphs 2(d),
2(e) and 2(f) in accordance therewith, and Employer shall have no other
obligations under this Agreement. If Employee's employment with Employer
terminates before the beginning of the Consulting Period because of Employee's
Disability or
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death, Employer shall pay Employee or Employee's estate the Consulting Fee from
the date of Employee's Disability or death through the seventh anniversary
thereof.
8. Notice.
(a) Each notice, demand, request, consent, report, approval or
communication (hereinafter "Notice") which is or may be required to be given by
any party to any other party in connection with this Agreement and the
transactions contemplated hereby, shall be in writing, and given by facsimile,
personal delivery, receipted delivery services, or by certified mail, return
receipt requested, prepaid and properly addressed to the party to be served as
shown in subparagraph 8(b) hereinafter.
(b) Notices shall be effective on the date sent via facsimile, the date
delivered personally or by receipted delivery service, or three (3) days after
the date mailed:
If to Employer: PCI Services, Inc.
3001 Red Lion Road
Philadelphia, PA 19114-1123
Attn:
Facsimile:
If to Employee: At his residence address most
recently filed with Employer.
In each case, with Cardinal Health, Inc.
a copy to: 5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
If to Cardinal: Cardinal Health, Inc.
5555 Glendon Court
Dublin, Ohio 43016
Attn: General Counsel
Facsimile: 614-717-8919
(c) Each party may designate by Notice to the others in writing, given
in the foregoing manner, a new address to which any Notice may thereafter be so
given, served or sent.
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9. Waiver of Breach.
The waiver by either party of a breach of any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
subsequent breach.
10. Assignment.
The rights and obligations of Employer under this Agreement shall inure
to the benefit of and shall be binding upon the successors and assigns of
Employer, but the rights and obligations of Employee are personal and may not be
assigned or delegated without Employer's prior written consent.
11. Entire Agreement; Effect if No Transaction.
As of the Effective Time, this Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and shall
supercede all prior agreements with respect thereto, including without
limitation the Employment Agreement between Employer and Employee dated August
27, 1991 and the Executive Employment Agreement dated February 7, 1996. This
Agreement shall not be changed orally, but only by an agreement in writing
executed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. Notwithstanding any other
provision of this Agreement, this Agreement shall be null and void and of no
effect if the Transaction is not consummated.
12. Law Applicable.
This Agreement, and all covenants contained herein, shall be governed in
all respects, whether as to validity, construction, capacity, performance or
otherwise, by the laws of the Commonwealth of Pennsylvania in which it has a
situs. Each of the covenants contained in paragraph 4 of this Agreement shall be
construed as a separate covenant in each of the separate cities and counties of
the United States in which Employer is presently engaged in business. To the
extent that any such covenant shall be unenforceable in any one or more of such
cities or countries, such declaration shall not affect this covenant with
respect to any other city or county, as each of said covenants shall be
construed to be severable and independent. In the event any provision of this
Agreement shall be held invalid by a court with jurisdiction over the parties to
this Agreement, such provision shall be deleted from the Agreement, which shall
then be construed to give effect to the remaining provisions thereof.
12
<PAGE>
13. Paragraph Headings.
The paragraph headings contained in this Agreement are for convenience
only and in no manner shall be construed as part of this Agreement.
14. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
Corporate Seal Employer:
PCI SERVICES, INC.
By: /s/ Richard S. Sauter
--------------------------------
Richard S. Sauter
Vice Chairman of the Board and
Chief Executive Officer
Attest:/s/
Cardinal:
CARDINAL HEALTH, INC.
By: /s/ George H. Bennett
--------------------------------
George H. Bennett
Executive Vice President
and General Counsel
Employee:
/s/ Daniel F. Gerner
--------------------------------
DANIEL F. GERNER
/s/
- --------------------------------
Witness
14
EXHIBIT 11
PCI SERVICES, INC., AND SUBSIDIARIES
Computation of Net Income Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computation of Primary Earnings Per Share:
Net income $ 2,275,000 $ 1,698,000 $ 7,637,000 $ 3,860,000
=========== =========== =========== ===========
Weighted Average of Primary Shares:
Common Stock 6,211,000 6,126,000 6,169,000 6,142,000
Assumed conversion of options 214,000 -- 71,000 --
----------- ----------- ----------- -----------
Total 6,425,000 6,126,000 6,240,000 6,142,000
=========== =========== =========== ===========
Primary Earnings Per Share $ .35 $ .28 $ 1.22 $ .63
=========== =========== =========== ===========
Computation of Fully Diluted Earnings Per Share (1):
Net income $ 2,275,000 $ 1,698,000 $ 7,637,000 $ 3,860,000
=========== =========== =========== ===========
Weighted Average of Fully Diluted Shares:
Common Stock 6,211,000 6,126,000 6,169,000 6,142,000
Assumed conversion of options 225,000 -- 75,000 --
----------- ----------- ----------- -----------
Total 6,436,000 6,126,000 6,244,000 6,142,000
=========== =========== =========== ===========
Fully Diluted Earnings Per Share $ .35 $ .28 $ 1.22 $ .63
=========== =========== =========== ===========
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required to be presented on the Condensed
Consolidated Statements of Operations by footnote 2 of paragraph 14 of APB
Opinion No. 15, because it is anti-dilutive or results in dilution of less
than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US Dollars
<EXCHANGE-RATE> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,151,000
<SECURITIES> 0
<RECEIVABLES> 23,682,000
<ALLOWANCES> 361,000
<INVENTORY> 11,012,000
<CURRENT-ASSETS> 44,750,000
<PP&E> 124,058,000
<DEPRECIATION> 39,325,000
<TOTAL-ASSETS> 151,579,000
<CURRENT-LIABILITIES> 27,828,000
<BONDS> 55,339,000
0
0
<COMMON> 7,000
<OTHER-SE> 61,372,000
<TOTAL-LIABILITY-AND-EQUITY> 151,579,000
<SALES> 121,819,000
<TOTAL-REVENUES> 121,819,000
<CGS> 91,061,000
<TOTAL-COSTS> 16,875,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,490,000
<INCOME-PRETAX> 11,538,000
<INCOME-TAX> 3,901,000
<INCOME-CONTINUING> 7,637,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,637,000
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
