-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H3Wc8qkgNQa6RDIegYPbU4eSCgipjKx4envDcBEp7RQQmv3uh4PtB+/PjjTGGs23 RCCGurY+R4+osOuReFrrNg== 0000950152-99-007895.txt : 20000211 0000950152-99-007895.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950152-99-007895 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCS HEALTHCARE INC CENTRAL INDEX KEY: 0001004990 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 341816187 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27602 FILM NUMBER: 99719187 BUSINESS ADDRESS: STREET 1: 3201 ENTERPRISE PKWY STREET 2: STE 2200 CITY: BEACHWOOD STATE: OH ZIP: 44122 BUSINESS PHONE: 2165143350 MAIL ADDRESS: STREET 1: 1400 MCDONALD INVESTMENT CENTER STREET 2: 800 SUPERIOR AVE CITY: CLEVELAND STATE: OH ZIP: 44114 10-K 1 NCS HEALTHCARE, INC. 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION NO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] FOR THE FISCAL YEAR ENDED JUNE 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] FOR THE TRANSITION PERIOD FROM _________________________ TO ___________________ COMMISSION FILE NUMBER 0-27602 NCS HEALTHCARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 34-1816187 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 3201 Enterprise Parkway, Beachwood, Ohio 44122 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (216) 378-6800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share. 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] As of September 20, 1999, the registrant had 14,453,662 shares of Class A Common Stock, par value $.01 per share, and 5,899,673 shares of Class B Common Stock, par value $.01 per share, issued and outstanding. As of that date, the aggregate market value of these shares, which together constitute all of the voting stock of the registrant, held by non-affiliates was $37,416,868 (based upon the closing price of $2.50 per share of Class A Common Stock on the NASDAQ National Market on September 20, 1999). For purposes of this calculation, the registrant deems the 483,595 shares of Class A Common Stock and the 4,902,993 shares of Class B Common Stock held by all of its Directors and executive officers to be the shares of Class A Common Stock and Class B Common Stock held by affiliates. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held in 1999 are incorporated by reference into Part III of this Form 10-K. Except as otherwise stated, the information contained in this Form 10-K is as of June 30, 1999. 3 NCS HEALTHCARE, INC. 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 11 ITEM 3. LEGAL PROCEEDINGS 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY 11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 13 ITEM 6. SELECTED FINANCIAL DATA 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE 45 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 45 ITEM 11. EXECUTIVE COMPENSATION 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 46
4 PART I ITEM 1. BUSINESS GENERAL NCS HealthCare, Inc. (the "Company" or "NCS") is a leading independent provider of pharmacy services to long-term care institutions including skilled nursing facilities, assisted living facilities and other institutional health care settings. The Company purchases and dispenses prescription and non-prescription pharmaceuticals and provides client facilities with related management services, automated medical record keeping, drug therapy evaluation and regulatory assistance. The Company also provides a broad array of ancillary health care services to complement its core pharmacy services, including infusion therapy, physical, speech and occupational therapies, nutrition management, software services, mobile diagnostics and other services. The Company is considered to operate principally in one business segment. NCS entered the long-term care pharmacy services industry in 1986 with the acquisition of Modern Pharmacy Consultants, Inc. in Northeastern Ohio. Through June 30, 1999, the Company had completed a total of 49 acquisitions (other than fold-in acquisitions). There were no significant acquisitions during fiscal 1999. As a result of these acquisitions, the Company has expanded its geographic presence into 34 states serving approximately 262,000 residents. On February 14, 1996, the Company issued 4,476,000 shares of Class A Common Stock at $16.50 per share in connection with its initial public offering. A portion of the net proceeds from the stock issuance were used to repay approximately $27,000,000 of outstanding indebtedness under long and short-term borrowings. The remaining proceeds were used to fund business acquisitions. On October 4, 1996, the Company issued 4,235,000 shares of Class A Common Stock at $31.00 per share in connection with a public offering. A portion of the net proceeds were used to repay approximately $7,000,000 of outstanding indebtedness under short-term borrowings. The remaining proceeds were used to fund business acquisitions. On August 13, 1997, the Company issued $100,000,000 of convertible subordinated debentures due 2004. Net proceeds to the Company were approximately $97,250,000 net of underwriting discounts and expenses. The debentures carry an interest rate of 5 3/4% and are convertible into shares of Class A Common Stock at any time prior to maturity at $32.70 per share. A portion of the proceeds from the debenture offering was used to repay approximately $21,000,000 of outstanding indebtedness under short-term borrowings. The remaining proceeds were used to fund business acquisitions. MARKET OVERVIEW Institutional pharmacies purchase, repackage and distribute pharmaceuticals to residents of long-term care facilities such as skilled nursing facilities, assisted living facilities and other institutional health care settings. Unlike hospitals, most long-term care facilities do not have on-site pharmacies but depend instead on outside sources to provide the necessary products and services. In response to a changing regulatory environment and other factors, the sophistication and breadth of services required by long-term care facilities have increased dramatically in recent years. Today, in addition to providing pharmaceuticals, institutional pharmacies provide consultant pharmacy services, which include monitoring the control, distribution and administration of drugs within the long-term care facility and assisting in compliance with applicable regulations, as well as therapeutic monitoring and drug utilization review services. With the average long-term care facility patient taking seven to nine medications per day, high quality, cost-efficient systems for dispensing and monitoring patient drug regimens are critical. Providing these services places the institutional pharmacy in a central role of influencing the effectiveness and cost of care. Based on data from industry sources, the Company estimates that the U.S. market for pharmacy services (including consulting services and related supplies) in long-term care and assisted living facilities will approximate $6.5 billion for 1999. The Company believes that the market is growing due primarily to three factors. First, the number of long-term care facility residents is rising as a result of demographic trends. According to the Administration on Aging, it is estimated that by the year 2000, over 35 million Americans, or one in eight, will be 65 years or older. By 2030, it is estimated that the number of Americans who will be 85 or older, the segment of the population that comprises the largest percentage of residents at long-term care facilities, will triple. 1 5 The second factor creating growth in the institutional pharmacy market is the increasing number of medications taken per day by long-term care facility residents. This increase is due to (i) advances in medical technology which have resulted in the availability of new drug therapy regimens and (ii) the generally higher acuity levels of residents as a result of both payors' efforts to have care delivered in the lowest cost setting and the generally older, and consequently sicker, population of long-term care facility residents. The third factor is that hospitals are discharging patients earlier due to funding pressures and cost containment efforts. Therefore, an increasing number of patients are now receiving care outside of traditional hospitals in alternative settings such as long-term care facilities. More recently, the implementation of Medicare's Prospective Payment System (PPS) has hindered hospital discharges of Medicare A residents. However, the Company believes that this is a short-term situation and is not a lasting trend. In addition, the cost containment pressures in the hospital sector are also beginning to create opportunities for institutional pharmaceutical companies among rural hospitals as evidenced by an increasing trend towards outsourcing pharmaceutical services in this market. Based on data from industry sources, the Company estimates that the U.S. institutional pharmaceutical market for rural hospitals will approximate $4.0 billion for 1999. The institutional pharmacy market has undergone significant consolidation over the last few years. Prior to the 1970's, pharmacy needs of long-term care facilities were fulfilled by local retail pharmacies. Since then, the pharmacy and information needs of long-term care facilities have grown substantially and regulatory requirements and the reimbursement environment have become more complex. Institutional pharmacy companies, both independent and captive (those owned by an operator of long-term care facilities), have proven to be better positioned to meet these changing market demands. As a result, over the past 25 years the proportion of the market served by retail pharmacies has steadily declined, and institutional pharmacies have become the dominant providers of pharmacy services to the long-term care market. There are several factors that drove the consolidation among providers of long-term care pharmaceutical services. All of these factors relate to the advantages that large institutional providers have over retail and small institutional providers. Scale Advantages. Larger pharmacies are able to (i) realize advantages associated with size, including purchasing power, service breadth, more sophisticated sales and marketing programs and formulary management capabilities, (ii) achieve efficiencies in administrative functions and (iii) access the capital resources necessary to invest in critical computer systems and automation. Ability to Serve Multi-site Customers and Managed Care Payors. As a result of their ability to serve long-term care customers with several physical locations, larger pharmacies possess a significant competitive advantage over their smaller counterparts. Additionally, the Company believes that there are significant opportunities for full-service institutional pharmacies with a comprehensive range of services and regional coverage to provide a spectrum of health care products and services to managed care payors. Regulatory Expertise and Systems Capabilities. Long-term care facilities are demanding more sophisticated and specialized services from pharmacy providers due, in part, to the implementation in 1990 of the Omnibus Budget Reconciliation Act of 1987 ("OBRA"). The OBRA regulations, which were designed to upgrade and standardize care in nursing facilities, mandated strict new standards relating to planning, monitoring and reporting on the progress of patient care to include, among other things, prescription drug therapy. More recently, the implementation of Medicare's Prospective Payment System (PPS) has required that long-term care facilities estimate the total cost of stay of a resident prior to admission. The facilities, in turn, rely on their ancillary providers, such as institutional pharmacy vendors, to help them manage the costs of care of their Medicare A-covered residents. As a result, long-term care administrators increasingly seek experienced pharmacists and specialized providers with computerized information and documentation systems designed to monitor patient care and control the facilities' and payors' costs. Changing Reimbursement Environment. The long-term care market has undergone significant change over the last year as Medicare's new Prospective Payment System has been implemented. This reimbursement change which was mandated by the Balanced Budget Act of 1997 pays nursing homes a flat rate for all services, a significant departure from the prior cost-based system. In order to assist long-term care customers with this new regulation, institutional pharmacy providers must offer sophisticated PPS contracts that include cost-effective formularies. 2 6 BUSINESS STRATEGY NCS' strategy is to capitalize on industry trends and Company expertise to strengthen its position as a leading provider of high quality, integrated pharmacy and related services to institutional clients. The Company intends to implement this strategy by leveraging its current base of business through standardization of "best practices," cross marketing its services across its customer base to generate internal growth, utilizing its proprietary technology to deliver information and providing a broad array of ancillary health care services to complement its core pharmacy services. SERVICES The Company has traditionally provided institutional pharmacy and infusion products and services to long-term care facility residents. In recent years, NCS has developed an array of services which address the increasing needs of long-term care facilities to accommodate higher acuity admissions and manage costs. NCS believes that it is one of the few companies capable of offering customers the depth and breadth of these products and services. For the year ended June 30, 1999, approximately 78% of the Company's revenues were derived from providing pharmacy and consultant pharmacy services to long-term care facilities. An additional 5% of revenues were derived from providing infusion therapy services, 3% were derived from providing other therapy services and the remaining 14% were primarily derived from providing various other products and services, including nutrition management, oxygen and Medicare Part B services. Pharmacy Services. The Company's core business is providing pharmaceutical dispensing services to residents of long-term care facilities and other institutions. The Company purchases, repackages and dispenses prescription and non-prescription medication in accordance with physician orders and delivers such prescriptions at least daily to long-term care facilities for administration to residents by the nursing staffs of these facilities. The Company typically serves facilities within a two hour drive time of its distribution facility and provides 24 hour coverage 365 days per year. As of June 30, 1999, the Company provided its services from 84 sites in 34 states. NCS also provides its services through the management of third party institutional pharmacies. Upon receipt of a doctor's order, the information is entered into the Company's management information system, which automatically reviews the order for patient-specific allergies and potentially adverse interactions with other medications the patient is receiving. Following this analysis, a report on each order is produced for review by a Company pharmacist, who performs a prospective drug utilization analysis of the order and, if appropriate, substitutes generic drugs approved for equivalence by the U.S. Food and Drug Administration ("FDA"). In addition, subject to the prescribing physician's approval, the pharmacist may make therapeutic substitutions based on guidelines established by the Company's Therapeutic Formulary Committee. NCS provides pharmaceuticals to its clients through a unit dose distribution system. The Company divides the pharmaceuticals received in bulk form from its suppliers into unit dose packages for its customers. The unit dose format is designed to reduce errors, improve control over the distribution of pharmaceuticals and save nursing administration time relative to the bulk systems traditionally used by retail pharmacies. At those sites at which Concord DX, the Company's proprietary computer system, has been implemented, the Company utilizes its work flow control to improve efficiencies. In most cases, the Company uses its bar-coding system. Under this system, a bar code label is applied to each unit dose package. Through bar coding, information relating to the contents and destination of each unit dose package distributed can be automatically entered into the Concord DX system. This bar code technology enables the Company to monitor pharmaceuticals throughout the production and distribution process, thereby reducing errors, improving pharmacy control and enhancing production efficiency. At the request of the Company, certain manufacturers have begun to provide pharmaceuticals that are pre-packaged and bar coded. At June 30, 1999, approximately 80% of the Company's sites were converted to the Concord DX system. As an additional service, NCS furnishes its clients with information captured by its computerized medical records and documentation system. This system captures patient care information, which is used to create monthly management and quality assurance reports. The Company believes that this system of information management, combined with the unit dose delivery system, improves the efficiency and controls in nursing administration and reduces the likelihood of drug-related adverse consequences. 3 7 Consultant Pharmacy Services. Federal and state regulations mandate that long-term care facilities improve the quality of patient care by retaining consultant pharmacist services to monitor and report on prescription drug therapy. The OBRA legislation implemented in 1990 seeks to further upgrade and standardize health care by setting forth more stringent standards relating to planning, monitoring and reporting on the progress of prescription drug therapy as well as facility-wide drug usage. Noncompliance with these regulations may result in monetary sanctions as well as the potential loss of the facility's ability to participate in Medicare and Medicaid reimbursement programs. NCS provides consulting services that help clients comply with federal and state regulations applicable to long-term care facilities. The Company's services include: (i) reviewing each patient's drug regimen to assess the appropriateness and efficacy of drug therapies, including a review of the patient's medical records, monitoring drug reactions to other drugs or food, monitoring lab results and recommending alternate therapies or discontinuing unnecessary drugs; (ii) participating on the Pharmacy and Therapeutics, Quality Assurance and other committees of the Company's clients; (iii) inspecting medication carts and storage rooms; (iv) monitoring and reporting at least quarterly on facility-wide drug usage and drug administration systems and practices; (v) developing and maintaining the client's pharmaceutical policy and procedure manuals; and (vi) assisting the long-term care facility in complying with state and federal regulations as they pertain to patient care. Additionally, NCS offers a specialized line of consulting services which help long-term care facilities enhance care and reduce and contain costs as well as comply with state and federal regulations. Under this service line, the Company provides: (i) data required for OBRA and other regulatory purposes, including reports on psychotropic drug usage (chemical restraints), antibiotic usage (infection control) and other drug usage; (ii) plan of care programs which assess each patient's state of health upon admission and monitor progress and outcomes using data on drug usage as well as dietary, physical therapy and social service inputs; (iii) counseling related to appropriate drug usage and implementation of drug protocols; (iv) on-site continuing education seminars for the long-term care facilities' staff on topics such as drug information relating to clinical indications, adverse drug reactions, drug protocols and special geriatric considerations in drug therapy, information and training on intravenous drug therapy and updates on OBRA and other regulatory compliance issues; (v) mock regulatory reviews for nursing staffs; and (vi) nurse consultant services and consulting for dietary, social services and medical records. Infusion Therapy. Infusion therapy is the intravenous delivery of medication. The Company's infusion therapy services include pain management, antibiotic therapy and chemotherapy for long-term care residents and home care patients. NCS has received Joint Commission on the Accreditation of Healthcare Organizations accreditation at four sites and accreditation with commendation at another site. NCS prepares the product to be administered and delivers the product to the long-term care facility for administration by the nursing staff. Because the proper administration of infusion therapy requires a highly trained nursing staff, the Company provides education and certification programs to its clients in order to assure proper staff training and compliance with regulatory requirements. NCS believes that, by enhancing the ability of client facilities to administer infusion therapies, these programs have led to a greater use of infusion therapies throughout the Company's long-term care facility customer base. Other Therapies. In 1993, the Company began providing physical, speech and occupational therapy services. The Company currently provides these services to residents of 72 long-term care facilities. Nutrition Management. NCS assists long-term care facilities in menu planning, purchasing and managing their dietary operations. Because the food service area is typically one of the principal areas of regulatory violations, this is an area of critical concern to long-term care facility operators. Currently, NCS provides this service to 301 long-term care facility customers. Other. The Company provides long-term care facilities with assistance in complying with regulations concerning healthy and sanitary environments. The Company also assists its customers with various regulatory compliance matters and products and services relating to durable medical equipment ("DME"), oxygen, mobile diagnostics and Medicare Part B products and services. Finally, NCS offers specialized educational services that aid facilities in the training of their staffs. These services include surveys to prepare facilities for state reviews and training on appropriate nursing techniques in infusion therapy, wound care management and restorative nursing. 4 8 FORMULARY MANAGEMENT NCS employs formulary management techniques designed to assist physicians in making the best clinical choice of drug therapy for patients at the lowest cost. Under the Company's formulary programs, NCS pharmacists assist prescribing physicians in designating the use of particular drugs from among therapeutic alternatives (including generic substitutions) and in the use of more cost-effective delivery systems and dose forms. The formulary takes into account such factors as pharmacology, safety and toxicity, efficacy, drug administration, quality of life and other considerations specific to the elderly population of long-term care facilities. Successful implementation of formulary guidelines is dependent upon close interaction between the pharmacist and the prescribing physician. NCS seeks to attract and retain highly trained clinical pharmacists and encourages their active participation in the caring for residents of long-term care facilities, including consultation with the facilities' medical staff and other prescribing physicians, to increase the likelihood that the most efficacious, safe and cost-effective drug therapy is prescribed. The Company's formulary program is directed by the NCS Formulary Committee, which is comprised of eight pharmacists and two additional members. The Company believes that adherence to the NCS formulary guidelines provides the most cost effective therapy to the resident and strengthens the Company's purchasing power with pharmaceutical manufacturers. HUB AND SPOKE OPERATING NETWORK The Company is in the process of consolidating its 84 pharmacy sites into a hub and spoke operating network. Hub sites are responsible for the dispensing of all maintenance medications, billing and accounting, customer service and medical record keeping. Satellite sites are responsible only for the dispensing of new prescriptions and local consulting services. The benefits of the Company's hub and spoke model are increased quality, productivity, customer care and formulary compliance. In addition, by moving to a hub and spoke model, the Company believes that it can decrease its overall operating costs and working capital needs. MANAGEMENT INFORMATION SYSTEMS An integral part of NCS' operations is its proprietary management information system called "Concord DX", which has extensive capabilities designed to improve operating efficiencies and controls both internally and at the customer level. In conjunction with the unit dose distribution system and the use of a bar-coding label system on unit dose packages, Concord DX is able to monitor pharmaceuticals within NCS throughout the production and distribution process. At the customer level, Concord DX automatically screens prescription orders received from physicians for patient-specific allergies and potentially adverse reactions given other medications the patient may be receiving. Concord DX is also used to create individual patient medical records and monthly management and quality assurance reports for NCS' customers. To date, Concord DX has been implemented in 80% of NCS' customer base. In 1997, the Company acquired Rescot Systems Group, Inc. ("Rescot"). For the past 11 years, Rescot has developed one of the premier pharmacy systems used for managing patient and pharmacy data. Rescot has been instrumental in the design and implementation of Concord DX. In addition to these internal capabilities, NCS has added a suite of software applications named ASTRAL designed to address customers' needs. Each of the ASTRAL applications meets one of three goals: (1) improve the profitability of the nursing home, (2) enhance the quality of care delivered, or (3) improve the nursing home's ability to conform to regulatory requirements. NCS' current ASTRAL modules are as follows: NCS ON-LINE is the core product in ASTRAL. It improves profitability by dramatically reducing nursing time associated with ordering medicines and printing pharmacy reports. NCS On-Line provides a real time connection to NCS for ordering, reviewing med sheets and generating reports. Patient care is enhanced by reducing the amount of nursing time associated with clerical functions. PROVIEW improves a nursing home's profitability by enhancing the facility's ability to make economic admission decisions. ProView analyzes the costs and revenues associated with a resident prior to admission. In this era of Prospective Pay, it is a valuable tool for ensuring that a customer prospectively evaluates all financial aspects related to admitting a resident. OSCAR is an on-line survey tool which compares a facility's state surveys over time and across regions. By using OSCAR, a nursing facility can quickly gain perspective as to how they are performing relative to their history and their state, regional or national competitors. NCS updates this quarterly and it has improved their customers' ability to conform to regulations. 5 9 LIVEWELL is a clinical documentation and pharmacy ordering system designed for the assisted living market. It enhances care by electronically documenting the medical records and ordering functions. In addition to the innovations currently being used by NCS customers, the Company believes that the integration of other information systems within the nursing home is a critical future customer need. The Company believes that access to both clinical and financial information is a key factor in improving care and managing costs. The Company believes that the ASTRAL system will facilitate a unified NCS culture through improved site-to-site communication and will enhance the Company's ability to deliver high quality, standardized services throughout its geographic market. SALES AND MARKETING In marketing to prospective customers, NCS has organized the selling efforts of each formerly independent location into a single sales force consisting of 40 account executives, six regional sales managers and a vice president of sales. While the six regional sales managers train and oversee the account executives, they are also responsible for selling to regional and national chain accounts along with the vice president of sales; thus making up the national account team. Subsequently, all field sales representatives are trained in each of the Company's products and services and sell these services throughout their respective geographic territories. A typical territory consists of approximately 250 long-term care facilities, and the salesperson follows an eight-week call cycle. These individuals are paid base salaries with commissions comprising up to 75% of a successful salesperson's compensation. The Company believes that long-term care facilities change institutional pharmacies fairly infrequently, but when a change is made, it is generally the result of a competitor's ability to offer better service or a broader array of products and services. Additionally, in the PPS environment, price competition is becoming an increasing factor. The marketing team is comprised of a six-person team who reports to the director of marketing. They are responsible for the overall branding of the Company through trade advertising, direct telemarketing, educational seminars, industry press releases, industry trade shows and competitive information. PURCHASING NCS purchases pharmaceuticals primarily through a national wholesale distributor, with whom it has negotiated a prime vendor contract, and directly from certain pharmaceutical manufacturers. The Company also is a member of industry buying groups that contract with manufacturers for volume-based discounted prices which are passed through to the Company by its wholesale distributor. More recently, the Company has formed a group purchasing organization with two other large pharmaceutical buyers in the long-term care and acute care industries. The Company anticipates that it will purchase the majority of its pharmaceuticals through this new organization. The Company has numerous sources of supply available to it and has not experienced any difficulty in obtaining pharmaceuticals or other products and supplies used in the conduct of its business. CUSTOMERS At June 30, 1999, NCS had contracts to provide services to approximately 262,000 residents in 34 states. These contracts, as is typical in the industry, are generally for a period of one year but can be terminated by either party for any reason upon thirty days written notice. Over the past two years, NCS has expanded its customer base to also include rural hospitals and at June 30, 1999, NCS had contracts to manage hospital pharmacies in 23 states. As of June 30, 1999, no individual customer or market group represented more than 5% of the total sales of the Company's institutional pharmacy business. COMPETITION Competition among providers of pharmacy services to long-term care facilities is highly competetive. The Company believes that it is one of the top three national independent institutional pharmacies in the country. Institutional pharmacies compete principally on the basis of quality, cost effectiveness and service level. In the geographic areas it serves, the Company competes with local retail pharmacies, captive pharmacies and local, regional and national institutional pharmacies. The Company competes with several other companies with similar marketing strategies, some of which have greater resources than the Company. 6 10 REIMBURSEMENT AND BILLING As is generally the case for long-term care facility services, NCS receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third-party insurers and long-term care facilities. For the fiscal year ended June 30, 1999, the Company's payor mix was approximately 39% Medicaid, 3% Medicare, 19% private pay, 16% third-party insurance and other and 23% long-term care facilities, including amounts for which the long-term care facility receives reimbursement under Medicare Part A. Medicare and Medicaid are highly regulated. The failure of NCS and/or its client institutions to comply with applicable reimbursement regulations could adversely affect the Company's business. Private Pay. For those residents who are not covered by government-sponsored programs or private insurance, NCS generally bills the patient or other responsible party on a monthly basis. Depending upon local market practices, NCS may alternatively bill private residents through the long-term care facility. Pricing for private pay residents is based on prevailing regional market rates or "usual and customary" charges. Medicaid. The Medicaid program is a federal-state cooperative program designed to enable states to provide medical assistance to aged, blind or disabled individuals, or to members of families with dependent children whose income and resources are insufficient to meet the costs of necessary medical services. State participation in the Medicaid program is voluntary. To become eligible to receive federal funds, a state must submit a Medicaid "state plan" to the Secretary of HHS for approval. The federal Medicaid statute specifies a variety of requirements which the state plan must meet, including requirements relating to eligibility, coverage of services, payment and administration. For residents eligible for Medicaid, the Company bills the individual state Medicaid program or, in certain circumstances state designated managed care or other similar organizations. Medicaid programs are funded jointly by the federal government and individual states and are administered by the states. The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by the Health Care Financing Administration and applicable federal law. Federal regulations and the regulations of certain states establish "upper limits" for reimbursement for certain prescription drugs under Medicaid. In most states pharmacy services are priced at the lower of "usual and customary" charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. In addition, most states establish a fixed dispensing fee which is adjusted to reflect associated costs on an annual or less frequent basis. State Medicaid programs generally have long-established programs for reimbursement which have been revised and refined over time and have not had a material adverse effect on the pricing policies or receivables collection for long-term care facility pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect the Company's business. The annual increase in the federal share would vary from state to state based on a variety of factors. Such provisions, if ultimately signed into law, could adversely affect the Company's business. Additionally, any shift from Medicaid to state designated managed care could adversely affect the Company's business due to historically lower reimbursement rates for managed care. Medicare. The Medicare program is a federally funded and administered health insurance program for individuals age 65 and over or for certain individuals who are disabled. The Medicare program consists of two parts: Medicare Part A, which covers, among other things, inpatient hospital, skilled long-term care facility, home health care and certain other types of health care services; and Medicare Part B, which covers physicians' services, outpatient services and certain items and services provided by medical suppliers. Medicare Part B also covers a limited number of specifically designated prescription drugs. Under the Balanced Budget Act of 1997, a prospective payment system (PPS) was instituted for Medicare Part A reimbursement to skilled nursing facilities (SNFs). The prospective payment is in the form of a federal per diem rate for all covered SNF services. PPS began for SNFs whose costs reporting periods began after July 1, 1998 and the federal rate will be phased in over four years. Fees for pharmaceuticals provided to Medicare Part A patients are paid to the Company by the long-term care facility on a monthly basis. Pricing is in the form of a PPS contract that may include per diems, formulary requirements and risk sharing components. Medicare Part A has a cost-sharing arrangement under which beneficiaries must pay a portion of their costs. These non-covered co-payments are billed by the facility directly to residents or the state Medicaid plan, as the case may be. 7 11 Medicare Part B provides benefits covering, among other things, outpatient treatment, physicians' services, durable medical equipment ("DME"), orthotics, prosthetic devices and medical supplies. Products and services covered for Medicare Part B eligible residents in the long-term care facility include, but are not limited to, enteral feeding products, ostomy supplies, urological products, orthotics, prosthetics, surgical dressings, tracheostomy care supplies and a limited number of other medical supplies. All claims for DME, prosthetics, orthotics, prosthetic devices, including enteral therapy and medical supplies ("DMEPOS") are submitted to and paid by four regional carriers known as Durable Medical Equipment Regional Carriers ("DMERCs"). The DMERCs establish coverage guidelines, allowable utilization frequencies and billing procedures for DMEPOS. Payment is based on a fee schedule, which varies depending on the state in which the patient receiving the items resides. Payments for Medicare Part B products to eligible suppliers, which include long-term care facilities and suppliers such as NCS, are made on a per-item basis directly to the supplier. In order to receive Medicare Part B reimbursement payments, suppliers must meet certain conditions set by the federal government. NCS, as an eligible supplier, either bills Medicare directly for Part B covered products for each patient or, alternatively, assists the long-term care facility in meeting Medicare Part B eligibility requirements and prepares bills on behalf of the facility. For Part B services, such as physical, speech and occupational therapy, long-term care facilities bill Medicare for reimbursement of the amounts paid to NCS for these services. Medicare limits such reimbursement to the reasonable amount that would have been paid if provider employees had furnished the services. To date, Medicare has published "salary equivalency guidelines" for physical and respiratory therapy services. Medicare does not currently have salary equivalency guidelines for other therapy services, but may disallow payment for rates that substantially exceed rates paid for such services by other providers in the same area. Moreover, Medicare is likely to issue salary equivalency guidelines for occupational and speech therapy services in the near future. Medicare Part B also has an annual deductible as well as a co-payment obligation on behalf of the patient, and the portion not covered by Medicare is billed directly to the patient or appropriate secondary payor. Third-Party Insurance. Third-party insurance includes funding for residents covered by private plans, veterans' benefits, workers' compensation and other programs. The resident's individual insurance plan is billed monthly and rates are consistent with those for other private pay residents. Long-Term Care Facilities. In addition to occasional private patient billings and those related to drugs for Medicare eligible residents, long-term care facilities are billed directly for consulting services, certain over-the-counter medications and bulk house supplies. GOVERNMENT REGULATION Institutional pharmacies, as well as the long-term care facilities they service, are subject to extensive federal, state and local laws and regulations. These laws and regulations cover required qualifications, day-to-day operations, reimbursement and the documentation of activities. NCS continuously monitors the effects of regulatory activity on its operations. Licensure, Certification and Regulation. States generally require that companies operating a pharmacy within that state be licensed by the state board of pharmacy. The Company currently has pharmacy licenses in each of the states in which it operates a pharmacy. In addition, the Company's pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of controlled substances. Long-term care facilities are also separately required to be licensed in the states in which they operate and, if serving Medicare or Medicaid patients, must be certified to ensure compliance with applicable program participation requirements. Long-term care facilities are also subject to the long-term care facility reforms of OBRA, which impose strict compliance standards relating to the quality of care for long-term care operations, including vastly increased documentation and reporting requirements. In addition, pharmacists, nurses and other health professionals who provide services on the Company's behalf are in most cases required to obtain and maintain professional licenses and are subject to state regulation regarding professional standards of conduct. Federal and State Laws Affecting the Repackaging, Labeling and Interstate Shipping of Drugs. Federal and state laws impose certain repackaging, labeling and package insert requirements on pharmacies that repackage drugs for distribution beyond the regular practice of dispensing or selling drugs directly to patients at retail. A drug repackager must register with the FDA. The Company believes that it holds all required registrations and licenses and that its repackaging operations are in compliance with applicable state and federal requirements. 8 12 Medicare and Medicaid. For an extensive period of time, the long-term care facility pharmacy business has operated under regulatory and cost containment pressures from state and federal legislation primarily affecting Medicaid and Medicare. The Medicare program establishes certain requirements for participation of providers and suppliers in the Medicare program. Pharmacies are not subject to such certification requirements. Skilled long-term care facilities and suppliers of DMEPOS, however, are subject to specified standards. Failure to comply with these requirements and standards may adversely affect an entity's ability to participate in the Medicare program and receive reimbursement for services provided to Medicare beneficiaries. See "--Reimbursement and Billing." Federal law and regulations contain a variety of requirements relating to the furnishing of prescription drugs under Medicaid. First, states are given broad authority, subject to certain standards, to limit or to specify conditions as to the coverage of particular drugs. Second, federal Medicaid law establishes standards affecting pharmacy practice. These standards include general requirements relating to patient counseling and drug utilization review and more specific requirements for long-term care facilities relating to drug regimen reviews for Medicaid patients in such facilities. Recent regulations clarify that, under federal law, a pharmacy is not required to meet the general standards for drugs dispensed to long-term care facility residents if the long-term care facility complies with the drug regimen review requirements. However, the regulations indicate that states may nevertheless require pharmacies to comply with the general standards, regardless of whether the long-term care facility satisfies the drug regimen review requirement, and the states in which the Company operates currently require its pharmacies to comply therewith. Third, federal regulations impose certain requirements relating to reimbursement for prescription drugs furnished to Medicaid residents. See "--Reimbursement and Billing--Medicaid." In addition to requirements imposed by federal law, states have substantial discretion to determine administrative, coverage, eligibility and payment policies under their state Medicaid programs which may affect the Company's operations. For example, some states have enacted "freedom of choice" requirements which prohibit a long-term care facility from requiring its residents to purchase pharmacy or other ancillary medical services or supplies from particular providers that deal with the long-term care facility. Such limitations may increase the competition that the Company faces in providing services to long-term care facility patients. Prospective Payment System. The Balanced Budget Act of 1997 (BBA), enacted on August 5, 1997, mandated the implementation of a prospective payment system (PPS) for skilled nursing facilities (SNFs) providing care for Medicare Part A patients, effective for all SNFs whose cost reporting period begins on or after July 1, 1998. Under the new PPS, SNFs receive a single per diem payment for all Medicare Part A covered SNF services. The new single, per diem federal rate is being phased in over a four-year period beginning July 1, 1998. Each Medicare A covered patient is designated into one of 44 resource utilization group (RUG), or case-mix categories, as defined by the Health Care Financing Administration (HCFA). The per diem payment associated with each RUG category encompass all costs of furnishing covered skilled nursing services including routine, ancillary and capital-related costs. PPS incorporates payment for pharmacy within the nursing component (as a non-therapy ancillary) of the federal per diem and adjust costs by the nursing index. Referral Restrictions. The Company is subject to federal and state laws which govern financial and other arrangements between health care providers. These laws include the federal anti-kickback statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by Medicare or Medicaid. Violations of these laws may result in fines, imprisonment and exclusion from the Medicare and Medicaid programs or other state-funded programs. Federal and state court decisions interpreting these statutes are limited, but have generally construed the statutes broadly. Recent Federal legislation has increased the enforcement and penalties for violation of these statutes. Federal regulations establish "Safe Harbors," which give immunity from criminal or civil penalties to parties in good faith compliance. While the failure to satisfy all the criteria for a specific Safe Harbor does not necessarily mean that an arrangement violates the federal statute, the arrangement is subject to review by the HHS Office of Inspector General ("OIG"), which is charged with administering the federal anti-kickback statute. Beginning January 1, 1997, the Secretary of Health and Human Services began issuing written advisory opinions regarding the applicability of certain aspects of the anti-kickback statute to specific arrangements or proposed arrangements. Advisory opinions will be binding as to the Secretary and the party requesting the opinion. 9 13 The OIG has issued "Fraud Alerts" identifying certain questionable arrangements and practices which it believes may implicate the federal anti-kickback statute. The OIG has issued a Fraud Alert providing its views on certain joint venture and contractual arrangements between health care providers. The OIG has recently issued a Fraud Alert concerning prescription drug marketing practices that could potentially violate the federal anti-kickback statute. Pharmaceutical marketing activities may implicate the federal anti-kickback statute because drugs are often reimbursed under the Medicaid program. According to the Fraud Alert, examples of practices that may implicate the statute include certain arrangements under which remuneration is made to pharmacists to recommend the use of a particular pharmaceutical product. In addition, a number of states have recently undertaken enforcement actions against pharmaceutical manufacturers involving pharmaceutical marketing programs, including programs containing incentives to pharmacists to dispense one particular product rather than another. These enforcement actions arise under state consumer protection laws which generally prohibit false advertising, deceptive trade practices and the like. Further, a number of the states involved in these enforcement actions have requested that the FDA exercise greater regulatory oversight in the area of pharmaceutical promotional activities by pharmacists. It is not possible to determine whether the FDA will act in this regard or what effect, if any, FDA involvement would have on the Company's operations. The Company believes its contract arrangements with other health care providers, its pharmaceutical suppliers and its pharmacy practices are in compliance with these laws. There can be no assurance that such laws will not, however, be interpreted in the future in a manner inconsistent with the Company's interpretation and application. Environmental Matters. In operating its facilities, NCS makes every effort to comply with environmental laws. No major difficulties have been encountered in effecting compliance. In addition, no material capital expenditures for environmental control facilities are expected. While the Company cannot predict the effect which any future legislation, regulations or interpretations may have upon its operations, it does not anticipate any changes that would have a material adverse impact on its operations. General. In the ordinary course of its business, the Company is subject to inspections, audits, inquiries and similar actions by governmental authorities responsible for enforcing the laws and regulations to which the Company is subject. In January 1997, government authorities requested information from the Company in connection with an audit and investigation of the circumstances surrounding the apparent drug-related homicide of a non-management employee of one of the Company's pharmacies. The information provided relates to the Company's inventory and the possible theft of controlled substances from this pharmacy. The review identified inadequacies in record keeping and inventory control at this pharmacy. In a meeting with governmental authorities in August 1997, the Company discussed its findings and those of the government and documented corrective measures taken by the Company. In September 1998, the Company was notified by the United States Department of Justice, United States Attorney for the Southern District of Indiana ("USA-Indiana") that the United States Drug Enforcement Administration had referred this matter to the Office of the USA-Indiana for possible legal action involving certain numerous alleged violations of federal law. The USA-Indiana invited the Company to contact the Office of the USA-Indiana in an effort to resolve the matter. The Company subsequently contacted the Office of the USA-Indiana, and discussions regarding a possible settlement of this matter ensued and are currently proceeding. No specific settlement terms or amounts have yet been agreed upon by the parties. In January 1998, federal and state government authorities sought and obtained various documents and records from a Harrin, Illinois pharmacy operated by a wholly-owned subsidiary of the Company. The Company has cooperated fully and continues to cooperate fully with the government's inquiry. In June 1999, representatives of the Company met with attorneys with the Civil and Criminal Divisions of the Office of the United States Department of Justice, United States Attorney for the Southern District of Illinois ("USA-Illinois") regarding the government's investigation. The USA-Illinois informed the Company that it had information that allegedly substantiated numerous violations of federal law, but the Company has not received any written notification of these allegations. Discussions regarding the government's investigation have ensued and are currently proceeding between representatives of the USA-Illinois and the Company. EMPLOYEES As of June 30, 1999, the Company had approximately 4,200 full-time employees. None of its employees are represented by a union. The Company considers relations with its employees to be good. 10 14 ITEM 2. PROPERTIES The Company presently maintains its executive offices in approximately 10,500 square feet of space in Beachwood, Ohio pursuant to a lease expiring in 2000 with an unaffiliated third party. NCS currently considers this space to be sufficient for its corporate headquarters operations. As of June 30, 1999, the Company leased or owned 101 properties in 34 states with a total square footage of 792,000 square feet ranging in size from approximately 500 square feet to approximately 35,000 square feet. The terms of the leases relating to these properties vary in length remaining, from one month to ten years and, in some cases, include options to extend. For information concerning the Company's rental obligations, see Note 5 (Operating Leases) of the Notes to Consolidated Financial Statements, which is set forth at Item 8 of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS On June 7, 1999, a lawsuit was filed against the Company in the Superior Court of Norfolk County, Massachusetts. Plaintiffs are certain selling stockholders of the PharmaSource Group, Inc. ("PharmaSource"), which NCS acquired on September 17, 1997. The complaint alleges breach of contract and unfair business practices arising out of NCS' non-payment of certain amounts allegedly payable under the terms of an earn-out provision included in the acquisition agreement. Plaintiffs seek to compel payment of NCS stock worth $17,385,223 based on the preliminary earn-out calculation. Under the terms of the earn-out arrangement, amounts payable under the earn-out are to be paid through the issuance of additional shares of Class A Common Stock. If on the first anniversary of the date of issuance of the earn-out shares, the per share price of the Company's Class A Common Stock is less than $17.225 per share, then the Company will be required to issue additional shares to compensate for the difference in value. The case has been scheduled for pretrial on October 4, 1999, at which time the court will set a discovery schedule and an order concerning the progression of proceedings. NCS strongly believes that it has meritorious defenses against the claim of the plaintiffs and believe, the earn-out, if any, is substantially less than the amount claimed by the plaintiffs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY* The name, age and positions of each of the Company's executive officers are as follows:
NAME AGE POSITION - ---- --- -------- Jon H. Outcalt 63 Chairman of the Board of Directors Kevin B. Shaw 42 President, Chief Executive Officer and Director Phyllis K. Wilson 58 Executive Vice President and Director Gerald D. Stethem 35 Chief Financial Officer William B. Byrum 55 Executive Vice President and Chief Operating Officer Marvin R. Richardson 42 Executive Vice President Patrick Morris 39 Senior Vice President John P. DiMaggio 36 Senior Vice President Michael J. Mascali 39 Senior Vice President Thomas Bryant Mangum 48 Senior Vice President A. Malachi Mixon III 59 Director Richard L. Osborne 61 Director Boake A. Sells 62 Director
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Jon H. Outcalt, Chairman of the Board, is a founding principal of NCS and has served as Chairman of the Board since 1986. He was a Senior Vice President of Alliance Capital Management L.P., a global investment management company, from 1975 to December 1995. Mr. Outcalt serves on the Board of Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts for the automotive and other industries, and Ohio Savings Financial Corporation, a savings and loan holding company. He is a graduate of Trinity College (B.A.) and the Wharton Graduate School of Business (M.B.A.). Kevin B. Shaw, President, Chief Executive Officer and a Director of the Company, is a founding principal of NCS and has served as President, Secretary and a Director of the Company since 1986 and as Chief Executive Officer since December 1995. Prior to joining the Company, he was employed by McKinsey & Company and Owens Corning Fiberglas. Mr. Shaw is a graduate of Harvard College (B.A.) and Stanford Graduate School of Business (M.B.A.). Phyllis K. Wilson, R.PH., Executive Vice President and a Director of the Company since November, 1993, is the founder of NCS' Columbus, Ohio operation. From 1989 to June 1995, she was responsible for corporate development and oversaw the Company's Ohio and Michigan operations. She is past President of the Ohio State Board of Pharmacy and served on the Board from 1977 to 1985. Ms. Wilson is a founding member of the American Society of Consultant Pharmacists and is a graduate of Ohio State University with a B.S. in Pharmacy. 11 15 Gerald D. Stethem, Chief Financial Officer, joined NCS in November, 1994 and served as Controller until February 1998, at which time he was named Chief Financial Officer. He was previously with Ernst & Young LLP, an auditing and accounting firm, where he served as a Manager in the firm's Entrepreneurial Services Group. He is a graduate of Ohio State University with a B.A. in Accounting. William B. Byrum, Executive Vice President and Chief Operating Officer, joined the Company in September 1995. From April 1993 to September 1995, Mr. Byrum was President and Chief Executive Officer of Corinthian Healthcare Systems, Inc., an institutional pharmacy, prior to its acquisition by the Company. From 1991 to April 1993, he was Vice President of Development (Acquisitions) for Hook-SupeRx, Inc. Prior to 1991, Mr. Byrum was Vice President, Store Operations at the Hook Drug Division of Hook-SupeRx, Inc., serving in various management positions. Mr. Byrum is a graduate of Purdue University with a B.S. in Pharmacy. Marvin R. Richardson, Executive Vice President, joined NCS in June 1995 as a Regional Vice President. From 1991 to 1995, Mr. Richardson was the founder and President of Quality Health Care of Indiana, an institutional pharmacy, prior to its acquisition by the Company. He is a graduate of Purdue University with a B.S. in Pharmacy. Patrick Morris, Senior Vice President, joined the Company in February 1997. Mr. Morris was with the law firm of Calfee, Halter & Griswold LLP, Cleveland, Ohio from 1985 to February 1997, and was a partner in such firm from 1993 to February 1997. Mr. Morris is a graduate of Trinity College (B.A.) and Case Western Reserve University School of Law (J.D.). John P. DiMaggio, Senior Vice President, joined the Company in December 1992 and served as Management Information Systems Director of the Company until December 1994. Mr. DiMaggio served as Vice President of Information Systems of the Company from December 1994 to November 1998, at which time he assumed his current position as Senior Vice President of Information Systems. Mr. DiMaggio has an M.B.A. in Finance from the Katz Graduate School of Business and a B.S. Degree in Computer Science from the University of Pittsburgh. Michael J. Mascali, Senior Vice President, joined the Company in October 1995. Mr. Mascali was a Regional Vice President of Operations from October 1995 to February 1998. From February 1998 to January 1999, he was Senior Vice President of Compliance and from January 1999 to May 1999 he was Senior Vice President of Operations, at which time he assumed his current position as Senior Vice President of Compliance. From May 1989 to October 1995, Mr. Mascali was a director of pharmacy for Synetic and Pharmacy Corporation of America in Connecticut, a long term care pharmacy. Mr. Mascali graduated from St. John's University with a B.S. in Pharmacy. Thomas Bryant Mangum, Senior Vice President, joined the Company in June 1998. From November 1996 to June 1998, Mr. Mangum was Senior Director of Pharmacy for Tenet HealthCare System, an owner and manager of acute care hospitals. From November 1995 to November 1996, he was Vice President of Pharmacy services for Premier, Inc., a group purchasing organization for acute care hospitals, where he had responsibility for pharmaceutical contract negotiations. From 1990 to November 1995, Mr. Mangum was Associate Vice President of Pharmacy and Nutrition Services for SunHealth, a group purchasing organization for acute care hospitals. He is a graduate of University of North Carolina Pharmacy School and currently serves on the Pharmacy School Board. A. Malachi Mixon III, a Director of the Company since December 1994, has been the Chief Executive Officer and a Director of Invacare Corporation since 1979 and, since 1983, its Chairman of the Board. Mr. Mixon also served as President of Invacare Corporation from 1979 to 1996. Invacare Corporation is a leading worldwide manufacturer and distributor of home health care products. He serves as a Director of Lamson & Sessions Co., a supplier of engineered thermoplastic products, and Sherwin-Williams Company, a producer and distributor of coatings and related products, and is Chairman of the Board of Trustees of The Cleveland Clinic Foundation, one of the world's leading health care institutions. Mr. Mixon is a graduate of Harvard College (B.A.) and the Harvard Graduate School of Business (M.B.A.). Richard L. Osborne, a Director of the Company since 1986, has served as the Executive Dean of the Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio, since 1971. Mr. Osborne serves on the Board of Directors of Myers Industries, Inc., a manufacturer of plastic and rubber parts for the automotive and other industries, New Horizons Worldwide, Inc., a provider of computer training services, and Ohio Savings Financial Corporation, a savings and loan holding company. He is a graduate of Bowling Green State University (B.S.) and Case Western Reserve University (M.S.). Boake A. Sells, a Director of the Company since November 1993, has been a self-employed private investor since June 1992. He was Chairman of the Board, President and Chief Executive Officer of Revco D.S., Inc. from September 1987 to June 1992, and was formerly President and Chief Operating Officer of Dayton Hudson Corporation and President and Chief Operating Officer of Cole National Corporation. Mr. Sells is a Director of Harrah's Entertainment, Inc., a leading casino gaming company. He is a graduate of University of Iowa (B.A.) and Harvard Graduate School of Business (M.B.A.). 12 16 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Class A Common Stock is traded on the Nasdaq National Market under the symbol NCSS. The following table sets forth, for the two fiscal years ended June 30, 1999, the high and low sale prices per share for the Class A Common Stock, as reported on the Nasdaq National Market. These prices do not include retail markups, markdowns or commissions. HIGH LOW ---- --- 1998 First Quarter $ 29.13 $ 22.38 Second Quarter 27.50 22.25 Third Quarter 33.50 24.13 Fourth Quarter 32.88 27.00 1999 First Quarter $ 29.31 $ 16.50 Second Quarter 23.75 12.00 Third Quarter 23.44 9.44 Fourth Quarter 15.00 5.06 On September 23, 1999, the last sale price of the Class A Common Stock as reported by Nasdaq was $ 2.1875 per share. As of September 23, 1999, there were approximately 246 holders of record of the Class A Common Stock, and approximately 41 holders of record of Class B Common Stock. The Company has never declared or paid cash dividends on its Class A Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any dividends in the foreseeable future. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs and plans for expansion. On August 3, 1999 the Company amended its line of credit agreement entering into several restrictive covenants including a restriction on declaration and payment of cash dividends to shareholders. There were no equity securities of the Company issued during the fourth fiscal quarter that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). 13 17 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30, ------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues $ 65,602 $ 113,281 $275,040 $ 509,064 $ 717,825 Cost of revenues 46,570 82,415 205,536 380,217 540,547 ---------- ---------- -------- ---------- ----------- Gross profit 19,032 30,866 69,504 128,847 177,278 Selling, general and administrative expenses (1) 14,539 22,236 51,153 93,895 139,522 Special charge to increase allowance for doubtful accounts (2) - - - - 32,384 Nonrecurring charges (2) - 2,811 - 8,862 8,115 ---------- ---------- -------- ---------- ----------- Operating income (loss) 4,493 5,819 18,351 26,090 (2,743) Interest (expense) income, net (1,089) (1,611) 1,576 (5,745) (18,301) ---------- ---------- -------- ---------- ----------- Income (loss) before income taxes 3,404 4,208 19,927 20,345 (21,044) Income tax (expense) benefit (1,536) (1,852) (8,655) (9,014) 7,640 ---------- ---------- -------- ---------- ----------- Income (loss) before accounting change 1,868 2,356 11,272 11,331 (13,404) Cumulative effect of accounting change (1) - - - - (2,921) ---------- ---------- -------- ---------- ----------- Net income (loss) $ 1,868 $ 2,356 $ 11,272 $ 11,331 $ (16,325) ========== ========== ======== ========== =========== Net income (loss) per share - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ ( 0.81) ========== ========== ======== ========== =========== Net income (loss) per share - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ ( 0.81) ========== ========== ======== ========== =========== Income (loss) before accounting change - basic $ 0.32 $ 0.28 $ 0.70 $ 0.59 $ (0.66) ========== ========== ======== ========== =========== Income (loss) before accounting change - diluted $ 0.28 $ 0.26 $ 0.69 $ 0.58 $ (0.66) ========== ========== ======== ========== =========== Weighted average common shares outstanding - basic 5,818 8,462 15,991 19,100 20,200 ========== ========== ======== ========== =========== Weighted average common shares outstanding - diluted 6,764 8,995 16,843 19,372 20,200 ========== ========== ======== ========== ===========
YEAR ENDED JUNE 30, ------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents $ 286 $ 21,460 $ 8,160 $ 21,186 $ 29,424 Working capital 10,616 48,336 53,164 149,362 197,395 Total assets 38,595 110,668 321,030 623,790 699,499 Line of credit - - 10,285 147,800 214,700 Long-term debt, excluding current portion 18,505 1,961 8,043 3,879 1,936 Convertible subordinated debentures 1,900 6,549 4,813 102,753 100,000 Stockholders' equity 8,117 91,100 253,226 287,334 276,434
(1) Selling, general and administrative expenses for 1999 include $11,503 of pre-tax costs that would have been capitalized prior to the adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities." The cumulative effect of accounting change represents start-up costs, net of tax, that were previously capitalized as of June 30, 1998. (2) For 1996, represents a nonrecurring charge in connection with the termination of certain compensation arrangements with the prior owners of certain acquired businesses. For 1998, represents a nonrecurring charge related to restructuring and other nonrecurring expenses in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. For 1999, represents a special charge to increase the allowance for doubtful accounts, and other nonrecurring charges in association with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 14 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's Statements of Operations, expressed as a percentage of total revenues.
YEAR ENDED JUNE 30, ------------------- 1997 1998 1999 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost of revenues 74.7 74.7 75.3 ----- ----- ----- Gross margin 25.3 25.3 24.7 Selling, general and administrative expenses 18.6 18.5 19.4 Special charge to increase allowance for doubtful accounts - - 4.5 Nonrecurring charges - 1.7 1.2 ----- ----- ----- Operating income (loss) 6.7 5.1 (0.4) Interest (expense) income, net .6 (1.1) (2.6) ----- ----- ----- Income (loss) before income taxes 7.3 4.0 (3.0) Cumulative effect of accounting change - - (0.4) Income tax (expense) benefit (3.2) (1.8) 1.1 ----- ----- ----- Net income (loss) 4.1% 2.2% (2.3)% ===== ===== =====
YEARS ENDED JUNE 30, 1999 AND 1998 The net loss for the year ended June 30, 1999 was $16.3 million or $0.81 per diluted share compared to net income of $11.3 million or $0.59 per diluted share for the year ended June 30, 1998. The net loss for the year ended June 30, 1999 before the cumulative effect adjustment to adopt the Accounting Standards Executive Committee Statement of Position 98-5 (SOP 98-5) "Reporting on the Costs of Start-up Activities," was $13.4 million or $0.66 per diluted share compared to net income of $11.3 million or $0.59 per diluted share in the prior year. Net income for the year ended June 30, 1999, excluding the special and nonrecurring charges described below, and the effect of adopting SOP 98-5, increased to $17.9 million or $0.88 per diluted share, from $16.6 million or $0.86 per diluted share, excluding nonrecurring charges, in the prior year. Revenues for the year ended June 30, 1999 increased 41.0% to $717.8 million from $509.1 million for the year ended June 30, 1998. The increase in revenues over the prior fiscal year is primarily attributed to two factors: the Company's acquisition program and internal growth. Of the $208.7 increase for the year ended June 30, 1999, $113.4 million of the increase is attributable to revenues for the fiscal year ended June 30, 1999 including a full period of operations for fiscal 1998 acquisitions. These fiscal 1998 acquisitions include Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation in February 1998, Apple Institutional Services in March 1998 and the institutional pharmacy assets of Walgreens Co. in June 1998. Internal growth accounted for $95.3 million of the increase as the Company's existing operations continued to grow through marketing efforts to new and existing clients, increased drug utilization of long-term care facility residents, and the growth and integration of new and existing products and services. The total number of beds serviced by the Company as of June 30, 1999 increased 5.6% to 262,000 beds, from 248,000 beds at June 30, 1998. Cost of revenues for the year ended June 30, 1999 increased $160.3 million or 42.2% to $540.5 million from $380.2 million for the year ended June 30, 1998. Cost of revenues as a percentage of revenues increased to 75.3% for the year ended June 30, 1999 from 74.7% for the year ended June 30, 1998. The Company's leverage associated with purchasing pharmaceuticals, formulary management program and the leveraging of production costs positively impacted gross margins during the year ended June 30, 1999. However, these improvements were offset by gross margin reductions as a result of pricing pressures and a reduction in higher margin services as more facilities served by the Company were subject to the phased in implementation of the PPS reimbursement system during the last three months of the fiscal year ended June 30, 1999. Selling, general and administrative expenses for the year ended June 30, 1999 increased $45.6 million or 48.6% to $139.5 million from $93.9 million for the year ended June 30, 1998. Selling, general and administrative expenses as a percentage of revenues increased from 18.5% for the year ended June 30, 1998 to 19.4% for the year ended June 30, 1999. 15 19 Excluding the $11.5 million pre-tax increase for costs which would otherwise have been capitalized prior to early adoption of SOP 98-5 during the year ended June 30, 1999, selling, general and administrative expenses increased $34.1 million or 36.3% to $128.0 million from $93.9 million for the year ended June 30, 1998. Excluding the effects of early adoption of SOP 98-5, selling, general and administrative expenses as a percentage of revenues decreased from 18.5% for the year ended June 30, 1998 to 17.8% for the year ended June 30, 1999. The percentage decrease for the year ended June 30, 1999 is a result of creating operational efficiencies with acquisitions and the ability to leverage overhead expenses over a larger revenue base. At the time of acquisition, the selling, general and administrative expenses of the acquired companies are typically higher than the Company as a whole. The increase in selling, general, and administrative expenses in absolute dollars is mainly attributable to expenses associated with the operations of businesses acquired during the prior fiscal year. Excluding the effects of the early adoption of SOP 98-5 and the special and nonrecurring charges as described below, operating income for the year ended June 30, 1999 increased $14.3 million or 40.6% to $49.3 million from $35.0 million for the year ended June 30, 1998. This improvement is primarily attributable to increased sales volume generated during the year from acquisitions and internal growth. Excluding the effects of the early adoption of SOP 98-5 during the year ended June 30, 1999 and the special and nonrecurring charges, operating income as percentage of sales for the years ended June 30, 1999 and 1998 was 6.9%. The adverse impact of the implementation of the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of 1997, for Medicare residents of skilled nursing facilities was significantly greater than anticipated. PPS has created numerous changes to reimbursement policies applicable to skilled nursing under Medicare Part A. Prior to PPS, Medicare reimbursed each skilled nursing facility based on that facility's actual Medicare Part A costs plus a premium. Under PPS, Medicare pays skilled nursing facilities a fixed fee per Medicare Part A patient day based on the acuity level of the patient. The per diem rate covers all items and services furnished during a covered stay for which reimbursement was formerly made separately under Medicare. Consequently, the Company has experienced revenue pressure as a result of nursing facilities attempting to manage pharmaceutical costs along with all other costs associated with patient care under a simple per diem reimbursement amount. In addition, there has been a reduction in utilization of other therapies such as speech, occupational and physical rehabilitation. Additionally, as a result of these changes, skilled nursing facilities have become increasingly more reluctant to admit Medicare residents, especially those requiring complex care, causing Medicare census in these facilities to weaken and a reduction in the average length of stay for Medicare residents. These factors have had the effect of significantly reducing overall occupancy in the facilities served by the Company. The resident acuity level has also decreased as these facilities have attempted to avoid high acuity patients negatively impacting overall utilization of drugs, particularly those with higher cost such as infusion therapy. For Medicare certified skilled nursing facilities with a high cost structure, or those which are unable to cut costs, PPS has caused significant earnings and cash pressure. Some facilities have sought consolidation as a method of reducing costs and increasing efficiencies causing the Company to experience some bed loss. These outcomes have negatively impacted nursing facilities and the institutional pharmacy services industry as a whole. Although there may be some legislative relief for the Company's customers, management is positioning the Company to succeed in the current PPS environment by adjusting its cost structure appropriately. The Company is rapidly reducing operating and overhead costs and accelerating the implementation of the hub and spoke fulfillment and delivery model. Savings are expected to exceed $20 million on an annualized basis, once implemented. During the fourth quarter of 1999 the Company recorded special and nonrecurring charges of $40.5 million before tax ($24.3 million net of tax). A special charge of $32.4 million before tax was recorded to increase the allowance for doubtful accounts, and nonrecurring charges of $8.1 million before tax were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from significant changes observed in industry and customer trends during the last three months of the fiscal year ended June 30, 1999, and items encountered from recent acquisitions. The circumstances of the customer and industry trends primarily relate to increased bankruptcies and significant financial difficulties recently experienced by the Company's customers primarily as a result of the implementation of the Medicare Prospective Payment System ($12.9 million pre-tax charge, as described below). The acquisition related items pertain to specific receivable collectibility issues related to acquired operating systems, and other nonrecurring issues which have resulted in potentially uncollectible receivables ($11.0 million and $8.5 million pre-tax charges, respectively, as described below). 16 20 Accounts receivable collection and allowance adequacy is a continuous focus of management. Bad debt provisions and allowances are continually monitored and evaluated based on historical experience and projected future trends. Until several months ago bad debt experience rates had remained relatively consistent and the recorded provisions reflected this experience. However, during the last three months of the fiscal year ended June 30, 1999, these same processes and procedures identified trends indicating a significant change in the financial viability in many of the Company's customers and accordingly an increase in the amount of potentially uncollectible accounts. The negative trends in the financial viability of the Company's customers attributed primarily to a greater than expected adverse impact of the implementation of PPS. PPS became effective for skilled nursing facilities on July 1, 1998. PPS implementation coincides with each facility's cost reporting period (fiscal year) beginning after June 30, 1998. Since a majority of these facilities report on a December 31 year-end, most facilities were reimbursed under the PPS provisions beginning January 1, 1999. The negative impact of PPS reimbursement on the financial health of long-term care facilities became evident during the last three months of the fiscal year ended June 30, 1999 with a significant increase in the number of customers declaring bankruptcy or liquidating assets as compared to historical trends. As a result of these recent negative trends, a before tax increase of $12.9 million in the allowance for doubtful accounts was required as of June 30, 1999. Management has reviewed the Company's credit and collection processes, enhancing the policies and procedures where necessary, in order to identify and mitigate future collection issues under the PPS reimbursement system. One of the Company's primary initiatives has been to integrate its pharmacy operations under one common operating system, NCS' Concord DX system. At June 30, 1999, approximately 80% of the pharmacy sites have been successfully converted to NCS' Concord DX system. Prior to conversion to Concord DX, acquired pharmacies continued to use their historical operating and billing systems. During the fiscal year ended June 30, 1999, the Company accelerated its focus on conversion of all historical billing and operating systems to Concord DX. As part of the conversion process, receivables billed under historical systems were intensely scrutinized and any collectibility risk was further assessed at the time of conversion. Accordingly, an $11.0 million pretax increase to the allowance for doubtful accounts was recorded to allow for potentially uncollectible accounts under historical systems. The Company recorded additional special charges to increase the allowance for doubtful accounts for numerous smaller items aggregating $8.5 million before taxes. These special charge items primarily include uncollectible accounts receivable acquired in business combinations in excess of allowances established at time of acquisition, and uncollectible accounts receivable resulting from system conversion and transitions to new service provider numbers subsequent to acquisition. During the fourth quarter of fiscal 1999, the Company adopted a new plan of restructuring to consolidate certain pharmacy sites in similar geographies. The plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies in close proximity in order to improve operating efficiencies. As a result of the new exit plan, 4 additional pharmacy sites will be consolidated into either a new or existing location. During the year ended June 30, 1999, the Company recorded nonrecurring charges of $4.7 million related to the new site consolidations and additional costs incurred on the site consolidations announced in the prior year. These costs consist of $2.1 million related to employee severance and other compensation related expenses, $0.6 million related to lease termination costs and $2.0 million related to asset impairments and other miscellaneous costs. As of June 30, 1999, three site consolidations had been completed with the remainder expected to be completed by the end of fiscal 2000. 17 21 The remaining $3.4 million of the nonrecurring charge primarily relates to severance incurred during the fourth quarter associated with the Company's expense reduction initiatives, additional acquisition related and other miscellaneous expenses. Employee severance costs included in the nonrecurring charge relate to the termination of 120 employees. Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as follows:
Nonrecurring Reserve Description Cash/Non-cash Charge Activity At 6/30/99 ----------- ------------- ------------ -------- ---------- (In millions) Site Consolidations Severance/compensation related Cash $ 2.1 $ (1.5) $ .6 Lease terminations Cash .6 (.1) .5 Asset impairments Non-cash 1.5 (1.5) -- Other Cash .5 (.5) -- Special increase to allowance Non-cash 32.4 (32.4) -- for doubtful accounts Other Cash 3.4 (2.7) .7 ------- ------- ------- Total $ 40.5 $(38.7) $ 1.8 ======= ======= =======
The Company had net interest expense of $18.3 million for the year ended June 30, 1999, compared to net interest expense of $5.7 million during the year ended June 30, 1998. The increase in expense is due to increased borrowings on the line of credit and the issuance of $100 million of convertible subordinated debentures in August 1997. These funds were used primarily for acquisitions. 18 22 YEARS ENDED JUNE 30, 1998 AND 1997 Revenues for the year ended June 30, 1998 increased 85.1% to $509.1 million from $275.0 million for the year ended June 30, 1997. The increase in revenues over the prior fiscal year is primarily attributed to two factors: the Company's acquisition program and internal growth. Of the $234.1 increase for the year ended June 30, 1998, $69.2 million was due to the acquisitions of Cheshire LTC Pharmacy, Inc. in August 1997, PharmaSource Healthcare, Inc. in September 1997, Marco & Company, LLC in December 1997, MedStar Pharmacy, Inc. in January 1998, Medical Pharmacy, Robcin Enterprises, Inc. and Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation in February 1998, Apple Institutional Services in March 1998 and the institutional pharmacy assets of Walgreens Co. in June 1998. In addition, $87.8 million of the increase is attributable to revenues for the fiscal year ended June 30, 1998 including a full period of operations for fiscal 1997 acquisitions. These fiscal 1997 acquisitions include Advanced Rx Services, Inc. in July 1996, IPAC Pharmacy, Inc., Medical Arts Pharmacy, Northside Pharmacy Inc., Med-Equip, Thrifty Medical Supply, Inc. and Thrifty Medical of Tulsa L.L.C. in August 1996, Hudson Pharmacy of Wichita, Inc. in September 1996, Spectrum Health Services, Inc. in October 1996, Clinical Health Systems in November 1996, Rescot Systems Group, Inc., W.P. Malone, Inc., Long Term Care Pharmacy Services and Eakles Drug Store, Inc. in January 1997, Pharmacare, Advanced Pharmaceutical Services, Inc. and Dahlin Pharmacy, Inc. in February 1997, Stoll Services, Inc., Cooper Hall Pharmacy, Inc., Hammer Incorporated, Daven Drug, and Medi-Centre Pharmacy in March 1997, Vangard Labs, Inc. in April 1997, Long Term Care, Inc. in May 1997 and Look Drug Store, Inc. and HLF Adult Home Pharmacy in June 1997. Internal growth accounted for $77.1 million of the increase as the Company's existing operations continued to grow through marketing efforts to new and existing clients, increased drug utilization of long-term care facility residents, and the growth and integration of new and existing products and services. The total number of beds serviced by the Company as of June 30, 1998 increased 63% to 248,000 beds, from 152,000 beds at June 30, 1997. Cost of revenues for the year ended June 30, 1998 increased $174.7 million or 85.0% to $380.2 million from $205.5 million for the year ended June 30, 1997. Cost of revenues as a percentage of revenues were 74.7% for the years ended June 30, 1998 and June 30, 1997. The Company's leverage associated with purchasing pharmaceuticals, formulary management program and the leveraging of production costs positively impacted gross margins during the year ended June 30, 1998. However, these improvements were offset by the lower margins of companies acquired during the year ended June 30, 1998. At the time of acquisition, the gross margins of the acquired companies are typically lower than the Company as a whole; however, the Company is typically able to increase the gross margins of the acquired companies through more advantageous purchasing terms and the use of formulary management. Selling, general and administrative expenses for the year ended June 30, 1998 increased $42.7 million or 83.6% to $93.9 million from $51.2 million for the year ended June 30, 1997. Selling, general and administrative expenses as a percentage of revenues decreased from 18.6% for the year ended June 30, 1997 to 18.4% for the year ended June 30, 1998. The percentage decrease for the year ended June 30, 1998 is a result of creating operational efficiencies with acquisitions and the ability to leverage overhead expenses over a larger revenue base. At the time of acquisition, the selling, general and administrative expenses of the acquired companies are typically higher than the Company as a whole. The Company has been successful at creating operational efficiencies with acquisitions as selling, general and administrative expenses as a percentage of revenues has decreased six quarters in a row. The increase in selling, general, and administrative expenses in absolute dollars is mainly attributable to expenses associated with the operations of businesses acquired during the current and prior fiscal year. Excluding the nonrecurring charge described below, operating income for the year ended June 30, 1998 increased $16.6 million or 90.5% to $35.0 million from $18.4 million for the year ended June 30, 1997. This improvement is primarily attributable to increased sales volume generated during the year from acquisitions and internal growth. Excluding the nonrecurring charge described below, operating income as percentage of sales for the year ended June 30, 1998 increased slightly to 6.9% from 6.7% for the year ended June 30, 1997. During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8.9 million ($5.3 million net of tax) related to restructuring and other nonrecurring expenses in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. As a result of the plans described below, the Company expects to remove $1.5 million from its cost structure in fiscal 1999. These savings are predominantly due to reduced wage-related costs, reduced carrying costs of fixed assets, reduced rent charges and other miscellaneous savings. The components of the nonrecurring charge are described below. 19 23 During the fourth quarter of fiscal 1998, the Company adopted a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies. The plan will combine pharmacies in close proximity in order to improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites will be consolidated into either a new or existing location. The Company recorded nonrecurring charges of $5.3 million related to the site consolidations during the year ended June 30, 1998, which consists of $0.5 million related to employee severance costs in relation to the termination of 149 employees, $0.7 million related to lease termination costs and $4.1 million related to asset impairments and other miscellaneous costs. As of June 30, 1999, fourteen site consolidations had been completed with the remainder expected to be completed by the end of fiscal 2000. All of the employee terminations under the plan have occurred as of June 30, 1999. Approximately $0.9 million of the nonrecurring charge relates to the buyout of existing employment agreements with the prior owners of certain acquired businesses. In June 1998 the Company entered into a new $150 million revolving credit facility and a $50 million bridge facility (June 1998 facilities) that replaced the existing $135 million revolving credit facility. The June 1998 facilities were replaced in July 1998 by a $245 million revolving credit facility. Approximately $1.3 million of the nonrecurring charge relates to the write-off of deferred financing fees on the $135 million revolving credit facility and certain financing fees associated with the June 1998 facilities. The remaining $1.4 million of the nonrecurring charge primarily relates to additional acquisition related expenses. The Company anticipates that the activities related to the costs included in the reserve as of June 30, 1999 will be completed in fiscal 2000. Details of the fourth quarter fiscal 1998 nonrecurring charge are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99 ----------- ------------- ------------- -------- ---------- -------- ---------- (In millions) Site Consolidations Severance packages Cash $ .5 $ -- $ .5 $ (.5) $ -- Lease terminations Cash .7 -- .7 (.4) .3 Asset impairments Non-cash 3.5 (3.5) -- -- -- Other Cash .6 (.4) .2 (.2) -- Buyout of employment agreements Cash .9 (.2) .7 (.6) .1 Write-off financing fees Non-cash 1.3 (1.3) -- -- -- Other Cash 1.0 (.8) .2 (.1) .1 Non-cash .4 (.4) -- -- -- ------ ------ ------ ---- ------ Total $ 8.9 $ (6.6) $ 2.3 $(1.8) $ .5 ====== ====== ====== ===== ======
The Company had net interest expense of $5.7 million for the year ended June 30, 1998, compared to net interest income of $1.6 million during the year ended June 30, 1997. The increase in expense is due to increased borrowings on the line of credit and the issuance of $100 million of convertible subordinated debentures in August 1997. These funds were used primarily for acquisitions. The net interest income position in fiscal 1997 is primarily attributable to the reduction of long-term debt with funds from the Company's initial public offering completed on February 14, 1996 and interest income earned on funds from a secondary public offering completed by the Company on October 4, 1996. 20 24 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) operating activities was $8.3 million, $(14.8) million and $(24.0) in fiscal 1997, 1998 and 1999, respectively. Cash used in operating activities increased in fiscal 1999 due to increases in trade accounts receivable, other current assets and inventories. The growth in accounts receivable and inventory are primarily associated with internal sales growth. Additionally, some accounts receivable growth is attributable to slower payment trends by customers as a result of PPS implementation and other accounts receivable issues previously described above. The increase in other current assets primarily results from income tax refunds receivable at June 30, 1999. These cash flow decreases were partially offset by increases in trade accounts payable and accrued expenses. A majority of the trade accounts payable increase is attributable to longer negotiated payment terms under a new primary pharmaceutical supplier agreement implemented in June 1999. Cash provided by operating activities decreased during fiscal 1998 due to increases in accounts receivable and inventories primarily associated with internal sales growth. These cash flow decreases were partially offset by increases in trade accounts payable and accrued expenses. Net cash used in investing activities decreased from $150.0 million in fiscal 1997 and $202.8 million in fiscal 1998 to $35.0 million in fiscal 1999. The decrease is primarily the result of fewer business acquisitions during 1999 as compared to the two previous years. The decrease is partially offset by an increase in capital expenditures. The Company made capital expenditures of $9.9 million in fiscal 1997, $24.0 million in fiscal 1998 and $29.4 million in fiscal 1999. Significant capital expenditures during the year ended June 30, 1999 primarily included computer and information systems equipment and computer software as the Company continued to invest in converting all sites to the Concord DX System. At June 30, 1999 a majority of the Company's sites had been converted. Additionally, other capital expenditures during 1999 were made for furniture and fixtures, leasehold improvements, medication carts and delivery vehicles. Significant capital expenditures during the year ended June 30, 1998 included computer and information systems equipment, computer software, furniture and fixtures at new facilities in Pinellas Park, Florida and Van Nuys, California, leasehold improvements, medication carts and delivery vehicles. Net cash provided by financing activities increased from $128.4 million in fiscal 1997 to $230.7 million in fiscal 1998 and then decreased to $67.2 million in fiscal 1999. The increase in fiscal 1998 is primarily the result of funds received from an offering of convertible subordinated debentures completed by the Company on August 13, 1997 and an increase in funds borrowed under the revolving credit facility. These funds were primarily utilized for acquisitions in fiscal 1998. The decrease in cash provided by financing activities during fiscal 1999 primarily results from reduced financing needs resulting from a significant reduction in acquisition activity during 1999. The net proceeds during 1999 were primarily obtained from the revolving credit agreement to fund working capital needs resulting from internal growth and infrastructure investments in a common operating system. Use of the revolving credit agreement slowed to a net increase of $2.0 million during the fourth quarter of 1999 as a result of reduced operating and overhead costs from strategic initiatives, more favorable payment terms with the Company's new primary pharmaceutical supplier and lower infrastructure investments in the conversion to a common operating system. In August 1997, the Company issued $100 million of convertible subordinated debentures due 2004. The debentures carry an interest rate of 5 3/4%. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. The Company's ability to make payments of principal and interest on the debentures will depend on its ability to receive distributions of cash from its subsidiaries. Each of the Company's wholly-owned subsidiaries has guaranteed the Company's payment obligations under the debentures, so long as such subsidiary is a member of an affiliated group (within the meaning of Section 279(g) of the Internal Revenue Code of 1986, as amended) which includes the Company. The satisfaction by the Company's subsidiaries of their contractual guarantees, as well as the payment of dividends and certain loans and advances to the Company by such subsidiaries, may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. The Company expects to meet future financing needs principally through the use of its revolving credit facility. In June 1998, the Company entered into a four-year, $150 million revolving credit facility (the "Credit Facility") with a bank, which replaced the existing $135 million revolving agreement. Under the Credit Facility, the Company also has available a $10 million swing line revolving facility (the "Swing Line"). Also in June 1998, the Company entered into a $50 million bridge facility agreement (the "Bridge Facility") due December 31, 1998. Effective July 13, 1998, the Credit Facility was amended increasing the total commitment from $150 million to $245 million and was syndicated to a consortium of 11 banks. Also effective July 13, 1998 the Bridge Facility was paid with funds under the amended Credit Facility and was terminated. Effective August 3, 1999, the Credit Facility was amended to reduce the available commitment from $245 million to $235 million, provide all of the Company assets as security, limit the availability of the facility to use for working capital only, require Lender approval on future acquisitions, and modify covenants and the variable interest rate basis. The amended Credit Facility bears interest at a variable rate based upon the Eurodollar rate plus a spread of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded Debt to EBITDA. The Company believes that its cash and available sources of capital, including funds available under its revolving credit facility, are sufficient to meet its normal operating requirements. 21 25 The Company's effective income tax expense (benefit) rates were 43.4%, 44.3% and (36.3)% for the years ended June 30, 1997, 1998 and 1999, respectively. The tax rates differ from the federal statutory rate primarily as a result of state and local income taxes and the non-deductibility of certain acquisition costs. As discussed under the caption, "Business-Governmental Regulation," the Company's facility in Indianapolis, Indiana has been the subject of an investigation by federal authorities, and the Company has engaged in discussions with representatives of the U.S. Attorney's office in Indianapolis concerning the settlement of alleged violations of federal law at that facility. Company's Herrin, Illinois facility is also under investigation by federal and state authorities. It is possible that the imposition of significant fines or other remedies in connection with the resolution of either of these matters could have a material effect on the Company's financial condition and results of operations. YEAR 2000 READINESS DISCLOSURE Computer systems in use after the beginning of the year 2000 will need to accept four-digit entries in the date code field in order to distinguish 21st century dates from 20th century dates. Consequently, many companies face significant uncertainties because of the need to upgrade or replace their currently installed computer systems to comply with such "Year 2000" requirements. Various systems could be affected ranging from complex information technology ("IT") computer systems to non-IT devices, such as an individual machine's programmable logic controller. The Company has reviewed all significant current and planned internal IT systems and believes these systems are Year 2000 compliant. However, there can be no assurance that coding errors or other defects will not be discovered in the future. The Company is currently in the process of reviewing and assessing all significant non-IT devices for Year 2000 compliance. The Company expects to complete the process for review and assessment, device testing and resolution of noncompliance issues, if any, by November 30, 1999. The Company is currently determining the extent to which it may be impacted by any third parties' failure to remediate their own Year 2000 issues. The Company is assessing and reviewing relationships with all significant customers, suppliers, payors and other third parties to determine the extent, if any, to which the Company could be impacted by those third-parties' failure to remediate their own Year 2000 issues. The Company expects to complete this review and assessment by November 30, 1999. At this stage of the review no assurance can be given that the failure by one or more third parties to become Year 2000 compliant will not have a material adverse impact on its operations. The Company intends to develop contingency plans for significant third parties' determined to be at high risk of noncompliance or business disruption before October 31, 1999. The contingency plans will be developed on a case-by-case basis. Judgments regarding contingency plans are themselves subject to many variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of noncompliance by third parties, or that its contingency plan will be sufficient to mitigate the impact. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not possible to anticipate all future outcomes, especially when third parties are involved, there could be circumstances in which the Company's operations could be interrupted. If the federal and state healthcare reimbursement agencies or their intermediaries fail to implement Year 2000 compliant technologies before December 31, 1999, a significant cash flow problem may result. These agencies and intermediaries have Year 2000 plans in place and we continue to monitor the status of these projects. All of these government agencies have stated that interim procedures would be implemented if their Year 2000 solutions are not in place by January 1, 2000. In addition, disruptions in the economy in general resulting from Year 2000 issues could also adversely impact the Company. The majority of future costs related to Year 2000 readiness issues will be expensed as incurred and are expected to be funded through operating cash flows. Through the year ended June 30, 1999 costs related to the Year 2000 issue have been immaterial to the financial results of the Company. Future costs related to Year 2000 issues are also expected to be immaterial to the financial results of the Company. Estimates of costs are based on currently available information and developments may occur that could increase the costs related to Year 2000 issues. 22 26 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in or incorporated by reference into this Annual Report on Form 10-K, including, but not limited to, those regarding the Company's financial position, business strategy, acquisition strategy and other plans and objectives for future operations and any other statements that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have expected effects on its business or operations. These forward-looking statements are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company may differ materially from those expressed or implied by any such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include the impact of the Prospective Payment System, the availability and cost of attractive acquisition candidates, continuation of various trends in the long-term care market (including the trend toward consolidation), competition among providers of long-term care pharmacy services, the availability of capital for acquisitions and other capital requirements, changes in regulatory requirements, reform of the health care delivery system, disruptions in the Company's operations resulting from Year 2000 issues and other risks and uncertainties described in the Company's SEC reports. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company has not entered into derivative financial instruments for trading purposes. The Company's primary market risk exposure relates to interest rate risk. The Company has managed its interest rate risk by balancing its exposure between fixed and variable rates while attempting to minimize its interest costs. The Company has a balance of $214,700,000 on its revolving credit facility at June 30, 1999, which is subject to a variable rate of interest based on the Eurodollar rate. Assuming borrowings at June 30, 1999, a one-hundred basis point change in interest rates would impact net interest expense by approximately $2,147,000 per year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Report of Independent Auditors 24 Consolidated Balance Sheets at June 30, 1998 and 1999 25 Consolidated Statements of Operations for each of the three years in the period ended June 30, 1999 27 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 1999 28 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1999 30 Notes to Consolidated Financial Statements 31 23 27 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders NCS HealthCare, Inc. We have audited the accompanying consolidated balance sheets of NCS HealthCare, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCS HealthCare, Inc. and subsidiaries at June 30, 1998 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective July 1, 1998, the Company changed its method of accounting for start-up costs. August 11, 1999 Cleveland, Ohio Ernst & Young LLP 24 28 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS JUNE 30, -------- 1998 1999 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 21,186 $ 29,424 Trade accounts receivable, less allowance for doubtful accounts of $18,427 and $38,880 as of June 30, 1998 and 1999 142,325 160,168 Inventories 43,784 49,244 Deferred income taxes 10,458 19,901 Prepaid expenses and other current assets 3,766 26,496 -------- -------- Total current assets 221,519 285,233 PROPERTY, PLANT AND EQUIPMENT Land 129 204 Buildings 2,090 2,206 Machinery, equipment and vehicles 27,498 31,129 Computer equipment and software 22,340 37,458 Furniture, fixtures and leasehold improvements 17,502 23,394 -------- -------- 69,559 94,391 Less accumulated depreciation and amortization 25,966 35,275 -------- -------- 43,593 59,116 Goodwill, less accumulated amortization of $12,317 and $22,803 as of June 30, 1998 and 1999 340,209 343,247 Other assets, less accumulated amortization of $2,117 and $3,286 as of June 30, 1998 and 1999 18,469 11,903 -------- -------- TOTAL ASSETS $623,790 $699,499 ======== ======== See accompanying notes 25 29 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, -------- 1998 1999 ---- ---- CURRENT LIABILITIES Trade accounts payable $ 34,131 50,061 Accrued compensation and related expenses 17,360 15,798 Other accrued expenses 19,118 18,499 Current portion of long-term debt 1,548 3,480 -------- -------- Total current liabilities 72,157 87,838 Line of credit 147,800 214,700 Long-term debt, excluding current portion 3,879 1,936 Convertible subordinated debentures 102,753 100,000 Deferred income taxes 9,127 18,209 Other long-term liabilities 740 382 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value per share; 1,000,000 shares authorized; none issued - - Common stock, $.01 par value per share: Class A -- 50,000,000 shares authorized; 13,334,639 and 14,277,492 shares issued and outstanding at June 30, 1998 and 1999, respectively 133 143 Class B -- 20,000,000 shares authorized; 6,463,244 and 6,005,280 shares issued and outstanding at June 30, 1998 and 1999, respectively 65 60 Paid-in capital 258,462 263,882 Retained earnings 28,674 12,349 -------- -------- 287,334 276,434 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $623,790 $699,499 ======== ========
See accompanying notes 26 30 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, ------------------- 1997 1998 1999 ---- ---- ---- Revenues $275,040 $509,064 $717,825 Cost of revenues 205,536 380,217 540,547 -------- -------- -------- Gross profit 69,504 128,847 177,278 Selling, general and administrative expenses 51,153 93,895 139,522 Special charge to increase allowance for doubtful accounts -- -- 32,384 Nonrecurring charges -- 8,862 8,115 -------- -------- -------- Operating income (loss) 18,351 26,090 (2,743) Interest expense (1,143) (8,199) (19,864) Interest income 2,719 2,454 1,563 -------- -------- -------- Income (loss) before income taxes 19,927 20,345 (21,044) Income tax (expense) benefit (8,655) (9,014) 7,640 Cumulative effect of accounting change, net of taxes -- -- (2,921) -------- -------- -------- Net income (loss) $ 11,272 $ 11,331 $ (16,325) ======== ======== ========== Earnings (loss) per share data: Earnings (loss) per common share - basic $ 0.70 $ 0.59 $ (0.81) ======== ======== ========== Earnings (loss) per common share - diluted $ 0.69 $ 0.58 $ ( 0.81) ======== ======== ========== Weighted average number of common shares outstanding - basic 15,991 19,100 20,200 ======== ======== ========== Weighted average number of common shares outstanding - diluted 16,843 19,372 20,200 ======== ======== ==========
See accompanying notes 27 31 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
CLASS A CLASS B COMMON COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY ----- ----- ------- -------- ------ Balance at June 30, 1996 $ 56 $ 66 $ 84,907 $ 6,071 $ 91,100 Issuance of 4,235,000 shares of Class A Common Stock 42 -- 123,584 -- 123,626 Issuance of 1,099,369 shares of Class A Common Stock and 385,722 shares of Class B Common Stock for business combinations 11 3 25,478 -- 25,492 Conversion of 246,208 shares of Class B Common Stock to 246,208 shares of Class A Common Stock 2 (2) -- -- -- Conversion of convertible subordinated debentures (172,569 shares of Class A Common Stock) 2 -- 1,734 -- 1,736 Net income -- -- -- 11,272 11,272 -------- -------- -------- -------- -------- Balance at June 30, 1997 113 67 235,703 17,343 253,226 Exercise of stock options (2,637 shares of Class A Common Stock) -- -- 20 -- 20 Issuance of 796,608 shares of Class A Common Stock and 563,879 shares of Class B Common Stock for business combinations 8 6 16,798 -- 16,812 Conversion of 843,377 shares of Class B Common Stock to 843,377 shares of Class A Common Stock 8 (8) -- -- -- Conversion of convertible subordinated debentures and notes payable (378,379 shares of Class A Common Stock) 4 -- 5,941 -- 5,945 Net income -- -- -- 11,331 11,331 -------- -------- -------- -------- -------- Balance at June 30, 1998 133 65 258,462 28,674 287,334
28 32 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION) (CONTINUED)
CLASS A CLASS B COMMON COMMON PAID-IN RETAINED STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY Balance at June 30, 1998 $ 133 $ 65 $ 258,462 $ 28,674 $ 287,334 Exercise of stock options (3,545 shares of Class A Common Stock and 69,692 shares of Class B Common Stock) -- -- 823 -- 823 Issuance of 114,134 shares of Class A Common Stock and payback of 7,572 shares of Class B Common Stock for business combinations 1 -- 1,397 -- 1,398 Issuance of 31,383 shares of Class A Common Stock for profit sharing plan 1 -- 449 -- 450 Conversion of 520,084 shares of Class B Common Stock to 520,084 shares of Class A Common Stock 5 (5) -- -- -- Conversion of convertible subordinated debentures (273,707 shares of Class A Common Stock) 3 -- 2,751 -- 2,754 Net (loss) -- -- -- (16,325) (16,325) --------- --------- --------- --------- --------- Balance at June 30, 1999 $ 143 $ 60 $ 263,882 $ 12,349 $ 276,434 ========= ========= ========= ========= =========
See accompanying notes 29 33 NCS HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JUNE 30, ------------------- 1997 1998 1999 ---- ---- ---- OPERATING ACTIVITIES Net income (loss) $ 11,272 $ 11,331 $ (16,325) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Non-cash portion of nonrecurring charges -- 5,229 1,486 Depreciation and amortization 8,885 16,454 23,512 Provision for doubtful accounts 1,325 2,279 35,568 Deferred income taxes 1,147 47 (3,665) Cumulative effect of accounting change, net of taxes -- -- 2,921 Non-cash profit sharing expense -- -- 450 Changes in assets and liabilities, net of effects of assets and liabilities acquired: Trade accounts receivable (22,932) (55,086) (58,702) Inventories (3,796) (12,098) (5,759) Trade accounts payable 2,447 18,040 15,930 Accrued expenses 9,762 1,543 (2,366) Prepaid expenses and other 162 (2,585) (17,042) --------- --------- --------- Net cash provided by (used in) operating activities 8,272 (14,846) (23,992) INVESTING ACTIVITIES Capital expenditures for property, plant and equipment (9,893) (24,019) (29,400) Proceeds from sales of assets 247 1,183 300 Purchases of businesses (137,080) (171,083) (653) Other (3,237) (8,872) (5,264) --------- --------- --------- Net cash used in investing activities (149,963) (202,791) (35,017) FINANCING ACTIVITIES Proceeds from issuance of long-term debt 159 13 1,664 Repayment of long-term debt (5,679) (4,135) (1,675) Borrowings on line-of-credit 34,236 169,299 108,325 Payments on line-of-credit (23,951) (31,784) (41,425) Proceeds from convertible subordinated debentures -- 97,250 -- Proceeds from issuance of common stock and exercise of stock options 123,626 20 358 --------- --------- --------- Net cash provided by financing activities 128,391 230,663 67,247 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (13,300) 13,026 8,238 Cash and cash equivalents at beginning of period 21,460 8,160 21,186 --------- --------- --------- Cash and cash equivalents at end of period $ 8,160 $ 21,186 $ 29,424 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,116 $ 5,076 $ 20,179 ========= ========= ========= Income taxes $ 6,925 $ 8,533 $ 1,792 ========= ========= =========
See accompanying notes 30 34 NCS HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999 (IN THOUSANDS, EXCEPT SHARE INFORMATION) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS NCS HealthCare, Inc. (the Company) operates in one primary business segment providing a broad range of health care services primarily to long-term care institutions including skilled nursing facilities, assisted living facilities and other institutional health care settings. The Company purchases and dispenses prescription and non-prescription pharmaceuticals and provides client facilities with related management services, automated medical record keeping, drug therapy evaluation and regulatory assistance. The Company also provides a broad array of ancillary health care services to complement its core pharmacy services, including infusion therapy, physical, speech and occupational therapies, nutrition management and mobile diagnostics. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized when products or services are provided to the customer. A significant portion of the Company's revenues from sales of pharmaceutical and related products are reimbursable from Medicaid and Medicare programs. The Company monitors its receivables from these and other third-party payor programs and reports such revenues at the net realizable amount expected to be received from third-party payors. Revenue from Medicaid and Medicare programs accounted for 39% and 3%, respectively, of the Company's net patient revenue for the year ended June 30, 1999. Movement of the allowance for doubtful accounts is as follows:
Balance at Provision for Write-offs Balance at Beginning of Doubtful Net of End of Period Accounts Acquisitions Recoveries Period ------------- ------------- ------------- ------------ ---------- Fiscal Year Ended June 30, 1999 $ 18,427 $35,568 $ -- $ (15,115) $ 38,880 1998 13,275 2,279 6,354 (3,481) 18,427 1997 3,629 1,325 9,846 (1,525) 13,275
CASH EQUIVALENTS The Company considers all investments in highly liquid instruments with original maturities of three months or less at the date purchased to be cash equivalents. Investments in cash equivalents are carried at cost which approximates market value. INVENTORIES Inventories for all business units consist primarily of purchased pharmaceuticals and medical supplies and are stated at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method for 5% of the June 30, 1999 net inventory balance and by using the first-in, first-out (FIFO) method for the remaining 95%. If the FIFO inventory valuation method had been used, inventories would have been $619 and $764 higher at June 30, 1998 and 1999, respectively. 31 35 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation on property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets which are as follows: Buildings 30 years Machinery, equipment and vehicles 5 - 10 years Computer equipment and software 3 - 5 years Furniture, fixtures and leasehold improvements 3 - 10 years Depreciation expense was $4,347, $7,813 and $11,420 for the years ended June 30, 1997, 1998 and 1999, respectively. GOODWILL, INTANGIBLES AND OTHER ASSETS Intangible assets consist primarily of goodwill. Costs in excess of the fair value of net assets acquired in purchase transactions are classified as goodwill and amortized using the straight-line method over periods up to 40 years. The carrying value of goodwill is evaluated if circumstances indicate a possible impairment in value. If undiscounted cash flows over the remaining amortization period indicate that goodwill may not be recoverable, the carrying value of goodwill will be reduced by the estimated shortfall of cash flows on a discounted basis. Debt issuance costs are included in other assets and are amortized using the effective interest method over the life of the related debt. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This accounting standard requires that the liability method be used in accounting for income taxes. Under this accounting method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that apply in the periods in which the deferred tax asset or liability is expected to be realized or settled. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed in Note 9, the alternative fair value accounting provided under FASB Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards No. 128, "Earnings per Share". Under this accounting standard, basic earnings per share are computed based on the weighted average number of shares of Class A and Class B shares outstanding during the period. Diluted earnings per share include the dilutive effect of stock options and subordinated convertible debentures. 32 36 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of all financial instruments of the Company approximates the amounts presented on the consolidated balance sheet with the exception of the $100 million convertible subordinated debt. As of June 30, 1999 and 1998, the fair value of the $100 million convertible subordinated debt was $45 million and $108 million, respectively, based on quoted market prices. START-UP COSTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires the Company to expense start-up costs as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, does not require restatement of prior periods and is applied as of the beginning of the fiscal year in which the SOP is first adopted. The Company early adopted SOP 98-5 effective as of July 1, 1998 and has reported the initial adoption as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations for the year ended June 30, 1999. In accordance with the adoption requirements of SOP 98-5, the Company has also restated its previously filed 1999 quarterly results to record the cumulative effect adjustment in the first quarter and expense in the respective quarterly results, those costs incurred and previously deferred in the first, second and third quarters of fiscal 1999 (see Note 14 Quarterly Data, unaudited). RECENTLY ISSUED ACCOUNTING STANDARDS In 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). This statement, which becomes effective for the Company in fiscal 2000, requires that certain costs of developing or obtaining software for internal use be capitalized. The Corporation presently capitalizes the costs required to be capitalized under SOP 98-1 as well as certain conversion related costs that will be required to be expensed on a prospective basis upon the adoption of SOP 98-1. The Company does not expect to incur significant amounts of these conversion related costs in future periods and consequently does not expect the statement to have a material effect on the Company's consolidated financial position, results of operations or cash flows. In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires that an enterprise report the change in its equity during the period from nonowner sources as other comprehensive income. The Company has evaluated the statement and determined that there are no reportable other comprehensive income items. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates. SOP 94-6 MATERIAL RISKS AND UNCERTAINTIES The Company has observed significant industry and customer trends during the last three months of the fiscal year ended June 30, 1999. These trends primarily relate to increased bankruptcies and significant financial difficulties recently experienced by the Company's skilled nursing facilities primarily as a result of greater than expected adverse impact with regard to the implementation of the Medicare Prospective Payment System (PPS) under the Balanced Budget Act of 1997. As a result of these negative trends, the Company has substantially increased its allowance for doubtful accounts as of June 30, 1999 (see Note 11 Special and Nonrecurring Charges). Should the negative trends continue in future periods at levels significantly exceeding those currently estimated by the Company, additional provisions for the accounts receivable recorded as of June 30, 1999 could be required. 2. LINE OF CREDIT In June 1998, the Company entered into a four-year, $150 million revolving credit facility (the credit facility) with a bank, which replaced the existing $135 million revolving credit facility. Under the credit facility, the Company also has available a $10 million swing line revolving facility (swing line). Also in June 1998, the Company entered into a $50 million bridge facility agreement (bridge facility) due December 31, 1998. Effective July 13, 1998, the credit facility was amended increasing the total commitment from $150 million to $245 million and was syndicated to a consortium of 11 banks. Also effective July 13, 1998, the bridge facility was paid with funds under the amended credit facility and was terminated. The credit facility bears interest at a variable rate (6.375% at June 30, 1999) based upon the Eurodollar rate plus a spread of 37.5 to 162.5 basis points, dependent upon the Company's Interest Coverage Ratio. The swing line bears interest at a money market rate (6.725% at June 30, 1999). At June 30, 1999 the credit facility contains certain debt covenants including an Interest Coverage Ratio and minimum consolidated net worth requirements. As of June 30, 1999 the Company had $214,700 outstanding under the credit facility, and no balance outstanding under the swing line. Effective August 3, 1999, the credit facility was amended to reduce the available commitment from $245 million to $235 million, provide all of the Company assets as security, limit the availability of the facility to use for working capital only, require Lender approval on future acquisitions, and modify covenants and the variable interest rate basis. The amended credit facility bears interest at a variable rate based upon the Eurodollar rate plus a spread of 150 to 275 basis points, dependent upon the Company's ratio of Total Funded Debt to EBITDA. 33 37 3. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, -------- 1998 1999 ---- ---- Notes payable to former owners of acquired companies maturing through July, 2001, at interest rates ranging from 5% to 8% $3,666 $2,788 2% note payable to Pennsylvania Industrial Development Authority due in monthly installments through June, 2010, and secured through an interest 543 505 in a building of the Company Collateralized lease obligations with interest ranging from 7% to 16% due monthly through April, 2004 685 1,709 Other 533 414 -------- ------- Total long-term debt 5,427 5,416 Less current portion 1,548 3,480 ------- ------ Long-term debt, excluding current portion $3,879 $1,936 ====== ======
The aggregate maturities of the long-term debt for each of the five years subsequent to June 30, 1999 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT - --------------------------- ------ 2000 $3,480 2001 635 2002 447 2003 249 2004 136 Thereafter 469 ------ $5,416 ====== 34 38 4. INCOME TAX EXPENSE Income tax expense (benefit), including the income tax benefit related to the cumulative effect of accounting change, for each of the three years ended June 30, 1999 consists of:
1997 1998 1999 ---- ---- ---- CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $5,614 $ 887 $6,501 $6,792 $ 55 $6,847 $(3,994) $(3,218) $(7,212) State and local 1,894 260 2,154 2,175 (8) 2,167 (1,929) (447) (2,376) ------ ------- ------ ------ ------ ------ ------- ------- ------- $7,508 $ 1,147 $8,655 $8,967 $ 47 $9,014 $(5,923) $(3,665) $(9,588) ====== ======= ====== ====== ====== ====== ======= ======= =======
Reconciliations of income taxes at the United States Federal statutory rate to the effective income tax rate for the three years ended June 30, 1999 are as follows:
1997 1998 1999 ---- ---- ---- Income taxes at the United States statutory rate $6,974 $7,121 $(9,070) State and local income taxes 1,231 1,414 (1,544) Goodwill amortization 521 604 640 Tax exempt interest (13) -- -- Other - net (58) (125) 386 ------ ------ ------- Total provision for income tax expense (benefit) 8,655 9,014 (9,588) Income tax benefit from cumulative effect of accounting change -- -- 1,948 ------ ------ ----- Net provision excluding benefit related to cumulative effect of accounting change $8,655 $9,014 $(7,640) ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets are as follows:
JUNE 30, -------- 1998 1999 ---- ---- Deferred tax assets (liabilities): Allowance for doubtful accounts $ 6,872 $ 15,440 Accrued expenses and other 5,141 6,090 Loss carryforwards 2,064 1,963 Depreciable assets and other (551) (3,122) Intangibles (12,195) (18,678) --------- --------- Net deferred tax assets $ 1,331 $ 1,693 ========= =========
At June 30, 1999 the Company has net operating loss carryforwards of $4.9 million for income tax purposes that expire in years 2010 through 2012. U.S. tax laws limit the annual utilization of tax loss carryforwards of acquired entities. 35 39 5. OPERATING LEASES The Company is obligated under operating leases primarily for office facilities and equipment. Future minimum lease payments under noncancelable operating leases as of June 30, 1999 are as follows: FISCAL YEAR ENDING JUNE 30, AMOUNT - --------------------------- ------ 2000 $5,514 2001 3,987 2002 3,122 2003 2,144 2004 1,339 Thereafter 2,133 ------- $18,239 ======= Total rent expense under all operating leases for the years ended June 30, 1997, 1998 and 1999 was $2,338, $6,577 and $9,214, respectively. 6. PROFIT-SHARING PLAN The Company maintains a profit sharing plan with an Internal Revenue Code Section 401(k) feature covering substantially all of its employees. Under the terms of the plan, the Company will match up to 20% of the first 10% of eligible employee contributions. Effective January 1, 1999 the Company amended the profit sharing plan to provide for the Company match to be contributed as the Company's common stock. The Company's aggregate contributions to the plan and related expense were $437, $740 and $1,035 for the years ended June 30, 1997, 1998 and 1999, respectively. 7. RELATED PARTY TRANSACTIONS The Company leases 16 of its facilities from entities affiliated with former owners of certain businesses acquired, who are employees of the Company. The buildings are used for operations of the Company. Rent expense of $1,004, $1,128 and $1,340 was incurred under these leasing arrangements in the years ended June 30, 1997, 1998 and 1999, respectively. 36 40 8. STOCKHOLDER'S EQUITY On October 4, 1996, the Company completed a public offering of 4,235,000 shares of Class A Common Stock at $31 per share. The offering raised approximately $123,600 (net of underwriting discounts and expenses). A portion of the net proceeds from the stock issuance was used to repay approximately $7,000 of outstanding indebtedness under short-term borrowings. Holders of Class A Common Stock and holders of Class B Common Stock are entitled to one and ten votes, respectively, in corporate matters requiring approval of the shareholders of the Company. No dividend may be declared or paid on the Class B Common Stock unless a dividend of equal or greater amount is declared or paid on the Class A Common Stock. On August 3, 1999 the Company amended its line of credit agreement entering into several restrictive covenants including a restriction on declaration and payment of cash dividends to shareholders. During fiscal 1995, the Company issued $1,900 of 8% convertible subordinated debentures (1995 debentures) due 1997. The 1995 debentures were converted into 188,952 shares of Class A Common Stock during fiscal 1996. During fiscal 1996, the Company issued $7,000 of 8% and $925 of 7% convertible subordinated debentures due 1998 and $5,000 of 10% convertible subordinated debentures due 1996 (collectively, 1996 debentures). During fiscal 1996, $6,375 of the 1996 debentures were converted into 493,357 shares of Class A Common Stock. During fiscal 1997, $1,736 of the 1996 debentures were converted into 172,569 shares of Class A Common Stock. During fiscal 1998, $2,061 of the 1996 debentures were converted into 204,880 shares of Class A Common Stock. The remaining $2,754 of the 1996 debentures were converted into 273,707 shares of Class A Common Stock during fiscal 1999. On August 13, 1997, the Company issued $100,000 of convertible subordinated debentures (1998 debentures) due 2004. Net proceeds to the Company were approximately $97,250, net of underwriting discounts and expenses. The 1998 debentures carry an interest rate of 5 3/4% and are convertible into shares of Class A Common Stock at any time prior to maturity at $32.70 per share. A portion of the proceeds from the debenture offering was used to repay approximately $21,000 of outstanding indebtedness under short-term borrowings. The debentures are obligations of the Company. The operations of the Company are currently conducted principally through subsidiaries, which are separate and distinct legal entities. Each of the Company's wholly-owned subsidiaries has unconditionally guaranteed, jointly and severally, the Company's payment obligations under the 1998 debentures. Accordingly, summarized financial information regarding the guarantor subsidiaries has not been presented because management of the Company believes that such information would not be meaningful to investors. During fiscal 1998, notes payable due to former owners of $3,884 were exchanged for 173,499 shares of Class A Common Stock. 37 41 9. STOCK OPTIONS During the period from 1987 through 1995, the Company granted stock options to certain directors and key employees which provide for the purchase of 1,054,890 common shares in the aggregate, at exercise prices ranging from $0.71 to $6.19 per share, which represented fair market values on the dates the grants were made. For options granted in 1987 with a tax-offset cash bonus feature, the Company recognized compensation expense of $175 for the year ended June 30, 1996. During the year ended June 30, 1996, options were exercised for the purchase of 890,333 shares of Class B Common Stock. During fiscal 1995, the Company adopted an Employee Stock Purchase and Option Plan which authorized 100,000 shares of Class A Common Stock for awards of stock options to certain key employees. During fiscal 1995 and 1996 the Company granted 11,520 and 7,458 options, respectively, at an exercise price of $6.19 and $7.33 per share, respectively, under the provisions of this plan. These exercise prices represented fair market values on the dates the grants were made. In January 1996, the Company adopted a Long Term Incentive Plan (the Plan) to provide up to 700,000 shares of Class A Common Stock for awards of incentive and nonqualified stock options to officers and key employees of the Company. During fiscal 1996 the Company granted 56,500 nonqualified stock options and 27,540 incentive stock options, all at $16.50 per share, the price at the initial public offering. The nonqualified stock options have a term of five years and become exercisable in thirds on February 1, 1998, 1999 and 2000. The incentive stock options have a term of six years and become exercisable in fifths of each year on February 1, 1997, 1998, 1999, 2000 and 2001. During fiscal 1997 and 1999 the Company granted 301,250 and 345,250 nonqualified stock options, respectively, at an exercise price of $20.00 and $15.00 per share, respectively, the market values of the stock on the dates of the grant. The fiscal 1997 nonqualified stock options have a term of five years and become exercisable in thirds on April 1, 1999, 2000 and 2001. The fiscal 1999 options have a term of five years and become exercisable in thirds on November 1, 2000, 2001, and 2002. In October 1998, the Company adopted the 1998 Performance Plan (the Performance Plan) to provide up to 1,200,000 shares of Class A Common Stock for awards of incentive and nonqualified stock options to directors, officers and key employees of the Company. During fiscal 1999, the Company granted 85,000 nonqualified stock options at an exercise price of $18.50 per share, the market value of the stock on the date of the grant. These nonqualified stock options have a term of five years and become exercisable in thirds on January 1, 2001, 2002 and 2003. The Company's stock option activity and related information for the years ended June 30 is summarized as follows:
1997 1998 1999 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- ------- ----- ------- ----- Outstanding at beginning of year 267,575 $ 8.84 566,825 $ 14.74 535,188 $14.64 Granted 301,250 20.00 - -- 430,250 15.69 Exercised -- -- (2,637) 7.49 (73,237) 4.87 Forfeited (2,000) 16.50 (29,000) 19.64 (45,507) 18.63 ------- -------- -------- ------- ------- ------ Outstanding at end of year 566,825 $ 14.74 535,188 $14.64 846,694 $15.82 ======= ======== ======== ======= ======= ====== Exercisable at end of year 141,658 185,604 237,872 ======= ======= =======
The weighted average fair value of options granted during fiscal 1997 and 1999 was $8.89 and $7.65 per share, respectively. Exercise prices for options outstanding as of June 30, 1999 ranged from $7.33 to $20.00 for the options granted in fiscal 1996, 1997, and 1998 and are $6.19 for the options granted during the period from 1987 through 1995. The weighted-average remaining contractual life of those options is 3.6 years for the options granted during the fiscal years 1996, 1997, and 1999 and 5.2 years for the options granted during the fiscal years 1987 through 1995 and 1999. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 6.00%; a dividend yield of 0.00%; a volatility factor of the expected market price of the Company's Class A Common Stock ranging from .482 to .520; and a weighted-average expected option life ranging from 4 to 4.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 38 42 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the three years ended June 30, 1999 is as follows (in thousands except for earnings per share information):
1997 1998 1999 ---- ---- ---- Net income (loss) - basic $11,120 $10,876 $(17,029) Net income (loss) - diluted $11,400 $10,876 $(17,029) Earnings per share - basic $ 0.70 $ 0.57 $ (0.84) Earnings per share - diluted $ 0.68 $ 0.56 $ (0.84)
10. ACQUISITIONS Significant acquisitions completed by the Company during fiscal 1997 include Advanced Rx Services, Inc. in Northfield, New Jersey, IPAC Pharmacy, Inc. in Portland, Oregon, Medical Arts Pharmacy in Grand Rapids, Michigan, Northside Pharmacy, Inc. and Thrifty Medical Supply, Inc. in Oklahoma City, Oklahoma, Thrifty Medical of Tulsa L.L.C. in Tulsa, Oklahoma, Hudson Pharmacy of Wichita, Inc. in Wichita, Kansas, Spectrum Health Services, Inc. in Tampa, Florida, Clinical Health Systems in Vancouver, Washington, Rescot Systems Group, Inc. in Philadelphia, Pennsylvania, W.P. Malone, Inc. in Arkadelphia, Arkansas, Long Term Care Pharmacy Services in East Greenwich, Rhode Island, Eakles Drug Store, Inc. in Hagerstown, Maryland, Pharmacare in Glendale, California, Advanced Pharmaceutical Services, Inc. in Tujunga, California, Dahlin Pharmacy, Inc. in Paramount, California, Stoll Services, Inc. in Modesto, California, Cooper Hall Pharmacy, Inc. in Mount Pleasant, South Carolina, Hammer Incorporated in Des Moines, Iowa, Daven Drug in Los Angeles, California, Medi-Centre Pharmacy in Lansing, Michigan, Vangard Labs, Inc. in Glasgow, Kentucky, Long Term Care, Inc. in Williston, Vermont, Look Drug Store, Inc. in Kaukauna, Wisconsin and HLF Adult Home Pharmacy in Rochester, New York. Significant acquisitions completed by the Company during fiscal 1998 include Cheshire LTC Pharmacy, Inc. in Cheshire, Connecticut, PharmaSource Healthcare, Inc. in Norcross, Georgia, Marco & Company, LLC in Billings, Montana, MedStar Pharmacy, Inc. in Benson, North Carolina, Greenwood Pharmacy and Managed Pharmacy Services, affiliates of Eckerd Corporation based in Sharon, Pennsylvania, Medical Pharmacy in Bakersfield, California, Robcin Enterprises, Inc. in Independence, Missouri, Apple Institutional Services in Salisbury, Maryland and the institutional pharmacy assets of Walgreen Co., an Illinois corporation. The Look Drug Store, Inc., HLF Adult Home Pharmacy, Cheshire LTC Pharmacy, Inc. and MedStar Pharmacy, Inc. acquisitions were accounted for as pooling of interests transactions, however the impact of these transactions on the Company's historical financial statements is not material; consequently, prior period financial statements have not been restated for these transactions. All other acquisitions have been accounted for as purchase transactions. Certain of the Company's acquistion agreements provide for contingent purchase price arrangements under which the purchase price paid may be subsequently increased upon the achievement of specific operating performance targets during post acquisition periods. The additional purchase price, payable in cash or Company stock is recorded, if earned, upon resolution of the contingent factors. Depending on the outcome of various contingent factors, the purchase price contingently payable could have a material effect on the Company's financial condition and results of operations. There were no significant acquisitions during the fiscal year ended June 30,1999. The following table summarizes the aggregate purchase price for all businesses acquired during the fiscal years ended: YEAR ENDED JUNE 30, ------------------- 1997 1998 ---- ---- Cash $137,080 $171,083 Debt 3,804 959 Class A Common Stock 25,492 16,812 -------- -------- Total $166,376 $188,854 ======== ======== The results of operations of all businesses acquired have been included in the consolidated financial statements of the Company from the dates of the respective acquisitions. All of the businesses acquired provide substantially similar services as the existing company. 39 43 Unaudited pro forma data as though the Company had completed its secondary public offering and had purchased all businesses at the beginning of the fiscal year ended June 30, 1998 is set forth below: 1998* ----- Revenues $608,186 Net income $ 10,433 Earnings per share - basic $ 0.53 Earnings per share - diluted $ 0.52 * Includes a one time nonrecurring charge of $8,862 ($5,317 net of tax). (see Note 11) The pro forma information does not intend to be indicative of operating results which would have occurred had the acquisitions been made at the beginning of the respective periods or of results which may occur in the future. The primary pro forma adjustments reflect amortization of goodwill acquired and interest costs. The pro forma information does not give effect to any potential synergies anticipated by the Company as a result of the acquisitions such as improvements in gross margin attributable to the Company's purchasing leverage and increased operating efficiencies. 11. SPECIAL AND NONRECURRING CHARGES During the fourth quarter of fiscal 1999, the Company recorded special and nonrecurring charges of $40.5 million ($24.3 million net of tax). A special charge of $32.4 million before tax was recorded to increase the allowance for doubtful accounts, and nonrecurring charges of $8.1 million before tax were recorded in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. The special charge to increase the allowance for doubtful accounts resulted from significant changes observed in industry and customer trends during the last three months of the fiscal year ended June 30, 1999, and items encountered from recent acquisitions. The circumstances of the customer and industry trends primarily relate to increased bankruptcies and significant financial difficulties recently experienced by the Company's customers primarily as a result of the Medicare Prospective Payment System implementation. The acquisition items encountered pertain to specific accounts receivable collectibility issues identified relating to previous utilization of "legacy" systems, and other nonrecurring issues which have resulted in potentially uncollectible accounts receivable. During the fourth quarter of fiscal 1999, the Company adopted a new plan of restructuring to consolidate certain pharmacy sites in similar geographies. The plan is a continuation of the plan adopted in fiscal 1998 to combine pharmacies in close proximity in order to improve operating efficiencies. As a result of the new exit plan, 4 additional pharmacy sites will be consolidated into either a new or existing location. During the year ended June 30, 1999, the Company recorded nonrecurring charges of $4.7 million related to the new site consolidations and additional costs incurred on the site consolidations announced in the prior year. These costs consist of $2.1 million related to employee severance and other compensation related expenses, $0.6 million related to lease termination costs and $2.0 million related to asset impairments and other miscellaneous costs. As of June 30, 1999, three site consolidations had been completed with the remainder expected to be completed by the end of fiscal 2000. 40 44 The remaining $3.4 million of the nonrecurring charge primarily relates to severance incurred during the fourth quarter associated with the Company's expense reduction initiatives, additional acquisition related and other miscellaneous expenses. Employee severance costs included in the nonrecurring charge relate to the termination of 120 employees. Details of the fourth quarter fiscal 1999 special and nonrecurring charge are as follows:
Nonrecurring Reserve Description Cash/Non-cash Charge Activity At 6/30/99 ----------- ------------- ------------ -------- ---------- Site Consolidations Severance/compensation related Cash $ 2,100 $ (1,500) $ 600 Lease terminations Cash 600 (100) 500 Asset impairments Non-cash 1,500 (1,500) -- Other Cash 500 (500) -- Special increase to allowance Non-cash 32,400 (32,400) -- Other Cash 3,400 (2,700) 700 --------- -------- --------- Total $ 40,500 $(38,700) $ 1,800 ========= ======== =========
During the fourth quarter of fiscal 1998, the Company recorded a nonrecurring charge of $8.9 million ($5.3 million net of tax) related to restructuring and other nonrecurring expenses in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. The components of the nonrecurring charge are described below. During the fourth quarter of fiscal 1998, the Company adopted a formal plan of restructuring to consolidate certain pharmacy sites in similar geographies. The plan combined pharmacies in close proximity in order to improve operating efficiencies. As a result of the exit plan, 17 pharmacy sites will be consolidated into either a new or existing location. The Company recorded nonrecurring charges of $5,300 related to the site consolidations which consisted of $500 related to employee severance costs in relation to the termination of 149 employees, $700 related to lease termination costs and $4,100 related to asset impairments and other miscellaneous costs. As of June 30, 1999, fourteen site consolidations had been completed with the remainder expected to be completed by the end of fiscal 2000. All employee terminations under the plan have occurred as of June 30, 1999. Approximately $900 of the nonrecurring charge relates to the buyout of existing employment agreements with the prior owners of certain acquired businesses. In June 1998, the Company's new credit facility and bridge facility replaced the existing $135 million revolving credit facility. The new credit facility and bridge facility were replaced in July 1998 by a $245 million revolving credit facility (see Note 2). Approximately $1.3 million of the nonrecurring charge relates to the write-off of deferred financing fees on the $135 million revolving credit facility and certain financing fees associated with the new credit facility and bridge facility. The remaining $1.4 million of the nonrecurring charge primarily relates to additional acquisition related expenses. 41 45 The Company anticipates that the activities related to the costs included in the reserve as of June 30, 1999 will be completed in fiscal 2000. Details of the fourth quarter fiscal 1998 nonrecurring charge and activity through June 30, 1999 are as follows:
Nonrecurring Reserve Reserve Description Cash/Non-cash Charge Activity At 6/30/98 Activity At 6/30/99 ----------- ------------- ------------- -------- ---------- -------- ---------- Site Consolidations Severance packages Cash $ 500 $ -- $ 500 $ (500) $ -- Lease terminations Cash 700 -- 700 (400) 300 Asset impairments Non-cash 3,500 (3,500) -- -- -- Other Cash 600 (400) 200 (200) -- Buyout of employment agreements Cash 900 (200) 700 (600) 100 Write-off financing fees Non-cash 1,300 (1,300) -- -- -- Other Cash 1,000 (800) 200 (100) 100 Non-cash 400 (400) -- -- -- ------ ------- -------- ------- ------- Total $8,900 $(6,600) $ 2,300 $(1,800) $ 500 ====== ======= ======== ======= =======
42 46 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1998 1999 ---- ---- ---- Numerator: Numerator for basic earnings per share - net income $11,272 $11,331 $ (16,325) Effect of dilutive securities: Convertible debentures 280 -- -- ------- ------- ---------- Numerator for diluted earnings per share $11,552 $11,331 $ (16,325) ======= ======= ========== Denominator: Denominator for basic earnings per share - weighted average common shares 15,991 19,100 20,200 Effect of dilutive securities: Stock options 207 272 -- Convertible debentures 645 -- -- ------- ------- ---------- Dilutive potential common shares 852 272 -- ------- ------- ---------- Denominator for diluted earnings per share 16,843 19,372 20,200 ======= ======= ========== Basic earnings per share: Income (loss) before accounting change $ 0.70 $ 0.59 $ (0.66) Cumulative effect of change in accounting principle -- -- (0.15) ------- ------- ---------- Net income (loss) per share $ 0.70 $ 0.59 $ (0.81) ======= ======= ========== Diluted earnings per share: Income (loss) before accounting change $ 0.69 $ 0.58 $ (0.66) Cumulative effect of change in accounting principle -- -- (0.15) ------- ------- ---------- Net income (loss) per share $ 0.69 $ 0.58 $ (0.81) ======= ======= ==========
At June 30, 1999 the Company has $100,000 of convertible subordinated debentures outstanding that are convertible into 3,058,104 shares of Class A Common Stock and 846,694 of employee stock options that are potentially dilutive that were not included in the computation of diluted earnings per share as their effect would be antidilutive. The Company had $102,753 of convertible subordinated debentures outstanding at June 30, 1998 that are convertible into 3,331,937 shares of Class A Common Stock that were not included in the computation of diluted earnings per share as their effect would be antidilutive. 13. CONTINGENCIES The Company's facility in Indianapolis, Indiana has been the subject of an investigation by federal authorities, and the Company has engaged in discussions with representatives of the U.S. Attorney's office concerning the alleged violations of federal law at that facility. It is possible that the imposition of significant times or other remedies in connection with the Indiana matter could have a material effect on the Company's financial condition and results of operations. The Company is involved from time to time in other litigation and regulatory investigations on various matters relating to the conduct of its business and acquisition related events. The Company is unable to predict the ultimate outcome of these other various current litigation and regulatory investigation matters. The Company intends to vigorously defend actions currently pending. However, if the Company is unsuccessful in defending such matters and insurance is unavailable or insufficient, the resolution of certain lawsuits and regulatory investigations could have a material effect on the Company's consolidated financial position, results of operations, and cash flows. 43 47 14. QUARTERLY DATA (UNAUDITED) Selected quarterly data for the years ended June 30, 1998 and 1999:
YEAR ENDED JUNE 30, 1998 ------------------------ FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 103,711 $ 114,508 $ 137,669 $ 153,177 $ 509,064 Gross profit 26,226 29,039 34,857 38,725 128,847 Nonrecurring charge (b) -- -- -- 8,862 8,862 Operating income 6,873 7,810 9,467 1,940 26,090 Net income (loss) $ 3,632 $ 4,022 $ 4,365 $ (689) $ 11,331 Earnings per share - basic (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.59 Earnings per share - diluted (a) $ 0.20 $ 0.21 $ 0.22 $ (0.03) $ 0.58
YEAR ENDED JUNE 30, 1999 (AS ORIGINALLY REPORTED) ------------------------------------------------- FIRST SECOND THIRD QUARTER QUARTER QUARTER ------- ------- ------- Revenues $172,846 $178,030 $184,611 Gross profit 43,856 45,400 47,444 Operating income (c) 12,812 13,594 14,629 Net income $ 4,750 $ 5,343 $ 5,874 Earnings per share - basic (a) $ 0.24 $ 0.27 $ 0.29 Earnings per share - diluted (a) $ 0.24 $ 0.26 $ 0.29
YEAR ENDED JUNE 30, 1999 (AS RESTATED) -------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 172,846 $ 178,030 $ 184,611 $ 182,338 $ 717,825 Gross profit 43,856 45,400 47,444 40,578 177,278 Special charge to increase allowance for doubtful accounts (d) -- -- -- 32,384 32,384 Nonrecurring charge (d) -- -- -- 8,115 8,115 Operating income (loss) (c) 11,055 11,111 11,354 (36,263) (2,743) Cumulative effect of accounting change (c) (2,921) -- -- -- (2,921) Net income (loss) $ 827 $ 3,915 $ 3,959 $ (25,026) $ (16,325) Earnings per share - basic (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81) Earnings per share - diluted (a) $ 0.04 $ 0.19 $ 0.20 $ (1.23) $ (0.81)
(a) Earnings per share is calculated independently for each quarter and the sum of the quarters may not necessarily be equal to the full year earnings per share amount. (b) A nonrecurring charge of $8,862 before taxes and $5,317 after taxes, or $0.28 per basic share and $0.27 per diluted share, was recorded during the fourth quarter of 1998 related to restructuring and other nonrecurring expenses in connection with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. For the year ended June 30, 1998, net income, excluding this nonrecurring charge, was $16,648 or $0.87 per basic share and $0.86 per diluted share. (c) Selling, general and administrative expenses as originally reported for the first, second and third quarters of 1999 include pre-tax costs of $1,757, $2,483 and $3,275, respectively, that would have been capitalized prior to the adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities." The $2,921 cumulative effect of accounting change represents start-up costs, net of tax, that were previously capitalized as of June 30, 1998. (d) Special and nonrecurring charges of $40,499 before taxes and $24,299 after taxes, or $1.20 for both basic and diluted share, were recorded during the fourth quarter of 1999. The special charges consists of an increase to the allowance for doubtful accounts, and other nonrecurring charges in association with the implementation and execution of strategic restructuring and consolidation initiatives of certain operations and other nonrecurring items. For the year ended June 30, 1999, net income, excluding these nonrecurring charges and the effects of adopting SOP 98-5, was $17,909 or $0.88 per basic and diluted share. 44 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information regarding Directors appearing under the caption "Election of Directors" in the Company's Definitive Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held in 1999 (the "1999 Proxy Statement") is incorporated herein by reference, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. Information required by this item as to the executive officers of the Company is included as Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is set forth in the 1999 Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to "Executive Compensation" in the 1999 Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to "Stock Ownership of Principal Holders and Management" in the 1999 Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS To the extent applicable the information required by this item is incorporated herein by reference to "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the 1999 Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. 45 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K: 1. Financial Statements The 1999 Consolidated Financial Statements of NCS HealthCare, Inc. are included in Part II, Item 8. 2. Financial Statement Schedules. All financial statement schedules for the Company and its subsidiaries have been included in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required. 3. Exhibits See the Index to Exhibits at page E-1 of this Form 10-K. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999. 46 50 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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. NCS HEALTHCARE, INC. By: /s/ JON H. OUTCALT Jon H. Outcalt Chairman of the Board of Directors Date: September 28, 1999 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Signature Title /s/ JON H. OUTCALT Chairman of the Board of Directors Jon H. Outcalt KEVIN B. SHAW President, Chief Executive Officer and Director Kevin B. Shaw (Principal Executive Officer) GERALD D. STETHEM Chief Financial Officer (Principal Financial Gerald D. Stethem and Accounting Officer) PHYLLIS K. WILSON Director Phyllis K. Wilson Director A. Malachi Mixon III Director Boake A. Sells Director Richard L. Osborne Date: September 28, 1999 47 51 INDEX OF EXHIBITS
Sequential Exhibit No. Description Page - ----------- ----------- ---- 2.1 Asset Purchase Agreement, dated as of July 31, 1996, by and among the Company, NCS HealthCare of Oregon, Inc., IPAC Pharmacy, Inc. and Prestige Care, Inc. (A) 2.2 Agreement of Merger, dated August 13, 1996, by and among the Company, Northside Pharmacy, Inc., Willis V. Smith, The Willis Vernon Smith Unitrust, dated as of August 8, 1996, Charles Oliver and NCS HealthCare of Oklahoma, Inc. (B) 2.3 Asset Purchase Agreement, dated August 13, 1996, by an among NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation, Med-Equip Homecare Equipment Service, Inc., an Oklahoma corporation, Gail Benjamin, Willis V. Smith and John Tarr (B) 2.4 Asset Purchase Agreement, dated August 13, 1996, by and among Thrifty Medical of Tulsa, L.L.C., an Oklahoma limited liability company, Willis V. Smith, Charles Oliver and NCS HealthCare of Oklahoma, Inc., an Oklahoma corporation (B) 2.5 Stock Purchase Agreement, dated August 13, 1996, by and among the Willis Vernon Smith Unitrust Dated August 8, 1996, Charles Oliver, Willis V. Smith and the Registrant (B) 2.6 Asset Purchase Agreement, dated December 29, 1997, by and among the Company, NCS HealthCare of New York, Inc., Thrift Drug, Inc., Fay's Incorporated and Eckerd Corporation (C) 2.7 Asset Purchase Agreement, dated April 10, 1998, among the Company, NCS Acquisition Sub, Inc., Walgreens Advance Care, Inc. and Walgreen Co. Incorporated and Eckerd Corporation (D) 3.1 Amended and Restated Certificate of Incorporation of the Company (E) 3.2 Amended By-Laws of the Company (E) 4.1 Specimen certificate of the Company's Class A Common Stock (E) 4.2 Specimen certificate of the Company's Class B Common Stock (E) 4.3 Form of 53/4% Convertible Subordinated Debentures due 2004 (F) 4.4 Indenture, dated August 13, 1997, between the Company and National City Bank, as Trustee (F) * 10.1 Deferred Compensation Agreement, dated as of January 1, 1994, by and between Modern Pharmacy Consultants, Inc. and Phyllis K. Wilson (E) * 10.2 1996 Long Term Incentive Plan (C) * 10.3 Aberdeen Group, Inc. 1995 Amended and Restated Employee Stock Purchase and Option Plan (C)
E-1 52
Sequential Exhibit No. Description Page - ----------- ----------- ---- * 10.4 Amended and Restated Stock Option Agreement, dated as of December 3, 1993, by and between Aberdeen Group, Inc. and Richard L. Osborne (E) * 10.5 Amended and Restated Stock Option Agreement, dated as of December 29, 1994, by and between Aberdeen Group, Inc. and Jeffrey R. Steinhilber (E) 10.6 Lease Agreement, dated as of July 16, 1990, by and among Crow-O'Brien-Woodhouse I Limited Partnership, Aberdeen Group, Inc. and Van Cleef Properties, Inc. (E) 10.7 Lease Agreement, dated as of January 1, 1996, by and between PR Realty and Nursing Center Services, Inc. (E) 10.8 Industrial Lease Agreement dated as of May 28, 1993 by and between Industrial Developments International, Inc. and Corinthian Pharmaceutical Systems, Inc. (E) 10.9 Lease Agreement, dated as of January 17, 1995, by and among Calvin Hunsicker, Brenda Hunsicker and Aberdeen Group, Inc. (E) 10.10 Form of Indemnity Agreement by and between the Company and each of its Directors and Executive Officers (E) *10.11 Employment and Noncompetition Agreement, dated as of September 1, 1996, by and between Aberdeen Group, Inc. and William B. Bryum (E) 10.12 Credit Agreement, dated as of June 1, 1998, among the Company, (G) the lending institutions named therein and KeyBank National Association, as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.13 Letter Agreement, dated June 1, 1998, between the Company (G) and KeyBank national Association regarding Capital Markets Bridge Facility 10.14 Amendment No. 1, dated as of July 13, 1998, to the Credit (G) Agreement, dated as of June 1, 1998, among the Company, the lending institutions named therein and KeyBank National Association, as the Swing Line Lender, Letter of Credit Issuer and Administrative Agent 10.15 Amendment No. 2, dated March 3, 1999, to the Credit Agreement (H) dated as of June 1, 1998, among the Company and the Lenders named therein, NBD Bank and National City Bank, as co-agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Letter of Credit Issuer and as Administrative Agent 10.16 Amendment No. 3, dated August 3, 1999, to the Credit Agreement dated as of June 1, 1998, among the Company and the Lenders named therein, NBD Bank and National City Bank, as co-agents, and KeyBank National Association, as a Lender, the Swing Line Lender, the Letter of Credit Issuer and as Administrative Agent 10.17 Security Agreement, dated as of August 3, 1999, among the Company, its subsidiaries and KeyBank National Association * 10.18 Separation Agreement, effective as of June 11, 1999, between Jeffery R. Steinhilber and the Company
E-2 53 21.1 Subsidiaries of the Company 27.1 Financial Data Schedule * Management contract or compensatory plan or arrangement. (A) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report in Form 8-K, dated August 1, 1996 (File No. 0-027602). (B) Incorporated herein by reference to the appropriate exhibit to the Company's Current Report on Form 8-K, dated August 15, 1996 (File No. 0- 027602). (C) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated January 30, 1998. (D) Incorporated herein by reference to the appropriate exhibit to the Company's Current report on Form 8-K, dated June 1, 1998. (E) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-1 declared effective on February 13, 1996 (Reg. No. 33-80455). (F) Incorporated herein by reference to the appropriate exhibit to the Company's Registration Statement on Form S-3, as amended (Reg. No. 333-35551). (G) Incorporated herein by reference to the appropriate exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (H) Incorporated herein by reference to the appropriate exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. E-3 EX-10.16 2 EXHIBIT 10.16 1 Exhibit 10.16 ================================================================================ ================================================================================ NCS HEALTHCARE, INC. AS BORROWER THE LENDERS NAMED HEREIN AS LENDERS BANK ONE, MICHIGAN BANK ONE, NA NATIONAL CITY BANK AS CO-AGENTS AND [LOGO KEYBANK] KEYBANK NATIONAL ASSOCIATION AS A LENDER, THE SWING LINE LENDER, THE LETTER OF CREDIT ISSUER AND AS THE ADMINISTRATIVE AGENT AND THE COLLATERAL AGENT --------------------- AMENDMENT NO. 3 DATED AS OF AUGUST 3, 1999 TO CREDIT AGREEMENT DATED AS OF JUNE 1, 1998 --------------------- ================================================================================ ================================================================================ 2 AMENDMENT NO. 3 TO CREDIT AGREEMENT THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT, dated as of August 3, 1999 ("THIS AMENDMENT"), among the following: (i) NCS HEALTHCARE, INC., a Delaware corporation (herein, together with its successors and assigns, the "BORROWER"); (ii) the Lenders party hereto; (iii) BANK ONE, MICHIGAN; BANK ONE, NA; and NATIONAL CITY BANK, as Lenders and as Co-Agents; and (iv) KEYBANK NATIONAL ASSOCIATION, a national banking association, as a Lender, the Swing Line Lender, the Letter of Credit Issuer, and as the Administrative Agent and the Collateral Agent under the Credit Agreement: PRELIMINARY STATEMENTS: (1) The Borrower, the Lenders named therein, the Swing Line Lender and the Administrative Agent entered into the Credit Agreement, dated as of June 1, 1998, as amended by Amendment No. 1 thereto, dated as of July 13, 1998, and Amendment No. 2 thereto, dated as of March 3, 1999 (as so amended and in effect immediately prior to the effective date of this Amendment, the "CREDIT AGREEMENT"; with the terms defined therein, or the definitions of which are incorporated therein, being used herein as so defined). (2) The parties hereto desire to change certain of the terms and provisions of the Credit Agreement, all as more fully set forth below. NOW, THEREFORE, the parties hereby agree as follows: 1. SECTION AMENDMENTS, ETC. 1.1. PERMANENT REDUCTION IN TOTAL GENERAL REVOLVING COMMITMENT. Effective on the Effective Date of this Amendment provided for in section 4 hereof, (i) the Total General Revolving Commitment is permanently reduced from $245,000,000 to $235,000,000, and (ii) the Lenders party hereto waive any requirement for prior notice of such reduction under section 4.2 or any other applicable provision of the Credit Agreement. 1.2. CHANGE IN CERTAIN DEFINITIONS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 1.1 of the Credit Agreement is amended by deleting therefrom the definitions of the terms "CONSOLIDATED NET INCOME", "CONSOLIDATED EBIT", "INTEREST COVERAGE RATIO", "MATERIAL ADVERSE EFFECT", "TOTAL INCOME TAX EXPENSE" and "TOTAL INTEREST EXPENSE", and by inserting therein the following defined terms in appropriate alphabetic order: "CONSOLIDATED AMORTIZATION EXPENSE" shall mean, for any period, all amortization expenses of the Borrower and its Subsidiaries, all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP. 3 "CONSOLIDATED DEPRECIATION EXPENSE" shall mean, for any period, all depreciation expenses of the Borrower and its Subsidiaries, all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP. "CONSOLIDATED INCOME TAX EXPENSE" shall mean, for any period, all provisions for taxes based on the net income of the Borrower or any of its Subsidiaries (including, without limitation, any additions to such taxes, and any penalties and interest with respect thereto), and all franchise taxes of the Borrower and its Subsidiaries, all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP. "CONSOLIDATED INTEREST EXPENSE" shall mean, for any period, total interest expense (including that which is capitalized and that which is attributable to Capital Leases, in accordance with GAAP) of the Borrower and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and net costs under Hedge Agreements, all as determined in accordance with GAAP. "CONSOLIDATED NET INCOME" shall mean for any period, the net income (or loss), without deduction for minority interests, of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "CONSOLIDATED EBITDA" shall mean, for any period, Consolidated Net Income for such period; PLUS (A) the sum (without duplication) of the amounts for such period of (i) Consolidated Interest Expense, (ii) Consolidated Income Tax Expense, (iii) Consolidated Depreciation Expense, (iv) Consolidated Amortization Expense, (v) amortization or write-off of deferred financing costs and charges for prepayment penalties on prepayment of Indebtedness, and (v) extraordinary and other non-recurring non-cash losses and charges; LESS (B) gains on sales of assets and other extraordinary and non-recurring gains; all as determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP, EXCEPT that in computing Consolidated Net Income for purposes of this definition, there shall be excluded therefrom (x) the income, (or loss) of any entity (other than Subsidiaries of the Borrower) in which the Borrower or any of its Subsidiaries has a joint or minority interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Subsidiaries during such period, and (y) the income of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary. Notwithstanding anything to the contrary contained herein, (1) in computing the Borrower's Consolidated EBITDA for any Testing Period, in no event shall any extraordinary or non-recurring charges or write-offs with respect to trade receivables or bad debts, even if commonly considered "non-cash" items, be added to Consolidated Net Income, and (2) in computing the Borrower's Consolidated EBITDA for any Testing Period which includes the fiscal quarter ended on or nearest to June 30, 1999, the extraordinary and non-recurring losses and charges of up to $40,000,000 during such fiscal quarter shall be an addition under clause (v) above, even though a portion of such losses and charges may be considered cash items. Notwithstanding anything to the contrary contained herein, in computing the Borrower's Consolidated EBITDA for any Testing Period, such Consolidated EBITDA shall (x) include the appropriate financial items for any person or business unit which has been acquired by the 2 4 Borrower for any portion of such Testing Period prior to the date of acquisition, and (y) exclude the appropriate financial items for any person or business unit which has been disposed of by the Borrower, for the portion of such Testing Period prior to the date of disposition. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of, when used with reference to the Borrower or any of its Subsidiaries, the Borrower and its Subsidiaries, taken as a whole, or when used with reference to any other person, such person and its Subsidiaries, taken as a whole, as the case may be; PROVIDED that a Material Adverse Effect with respect to the Borrower and its Subsidiaries, taken as a whole, shall not be considered to have occurred solely as a result of the occurrence (under the circumstances therein described) of any of the events identified in the letter dated as of August 3, 1999, from the Borrower to the Lenders which specifically refers to this definition. 1.3. ADDITION OF APPLICABLE PRIME RATE MARGIN TO PRIME RATE LOANS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, sections 2.8(a) and 2.8(b) of the Credit Agreement are amended to read in their entirety as follows: 2.8. INTEREST. The unpaid principal amount of each General Revolving Loan which is a Prime Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a fluctuating rate per annum which shall at all times be equal to the Prime Rate in effect from time to time PLUS the Applicable Prime Rate Margin (as defined below); and a Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Eurodollar Margin (as defined below) for such General Revolving Loan PLUS the relevant Eurodollar Rate. (b) The unpaid principal amount of each Swing Line Revolving Loan which is a Prime Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a fluctuating rate per annum which shall at all times be equal to the Prime Rate in effect from time to time PLUS the Applicable Prime Rate Margin; and a Money Market Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall be equal to the Quoted Rate therefor. 1.4. CHANGE IN INTEREST RATE MARGINS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 2.8(g) of the Credit Agreement is amended to read in its entirety as follows: (g) As used herein the terms "APPLICABLE PRIME RATE MARGIN" and "APPLICABLE EURODOLLAR MARGIN" shall mean the particular rate per annum determined by the Administrative Agent in accordance with the Pricing Grid Table which appears below, based on the Borrower's ratio of Total Indebtedness to Consolidated EBITDA, as computed in accordance with section 9.6(a) hereof, and such Pricing Grid Table, and the following provisions: (i) Initially, until changed hereunder in accordance with the following provisions, the Applicable Prime Rate Margin will be 25.00 basis points per annum and the Applicable Eurodollar Margin will be 225.00 basis points per annum. 3 5 (ii) Commencing with the fiscal quarter of the Borrower ended on or nearest to December 31, 1999, and continuing with each fiscal quarter thereafter, the Administrative Agent will determine the Applicable Prime Rate Margin and the Applicable Eurodollar Margin in accordance with the Pricing Grid Table, based on the Borrower's ratio of (x) Total Indebtedness as of the end of the fiscal quarter, to (y) Consolidated EBITDA for the Testing Period ended on the last day of the fiscal quarter, as computed in accordance with section 9.6(a) hereof, and identified in such Pricing Grid Table. Changes in the Applicable Prime Rate Margin and/or the Applicable Eurodollar Margin based upon changes in such ratio shall become effective on the first day of the month following the receipt by the Administrative Agent pursuant to section 8.1(a) or (b) of the financial statements of the Borrower, accompanied by the certificate and calculations referred to in section 8.1(c), demonstrating the computation of such ratio, based upon the ratio in effect at the end of the applicable period covered (in whole or in part) by such financial statements. (iii) Notwithstanding the above provisions, during any period when (1) the Borrower has failed to timely deliver its consolidated financial statements referred to in section 8.1(a) or (b), accompanied by the certificate and calculations referred to in section 8.1(c), (2) a Default under section 10.1(a) has occurred and is continuing, or (3) an Event of Default has occurred and is continuing, the Applicable Prime Rate Margin and the Applicable Eurodollar Margin shall each be the highest rate per annum indicated therefor in the Pricing Grid Table, regardless of the Borrower's ratio of Total Indebtedness to Consolidated EBITDA at such time. (iv) Any changes in the Applicable Prime Rate Margin and/or the Applicable Eurodollar Margin shall be determined by the Administrative Agent in accordance with the above provisions and the Administrative Agent will promptly provide notice of such determinations to the Borrower and the Lenders. Any such determination by the Administrative Agent pursuant to this section 2.8(g) shall be conclusive and binding absent manifest error. PRICING GRID TABLE (EXPRESSED IN BASIS POINTS)
==================================================================================================================== RATIO OF APPLICABLE APPLICABLE APPLICABLE TOTAL INDEBTEDNESS EURODOLLAR PRIME RATE FACILITY FEE TO MARGIN MARGIN RATE CONSOLIDATED EBITDA ==================================================================================================================== greater than 5.00 to 1.00 225.00 25.00 50.00 - -------------------------------------------------------------------------------------------------------------------- greater than 4.50 to 1.00 and # 5.00 to 1.00 200.00 12.50 50.00 - -------------------------------------------------------------------------------------------------------------------- greater than 4.00 to 1.00 and # 4.50 to 1.00 175.00 -0- 50.00 - --------------------------------------------------------------------------------------------------------------------
4 6
==================================================================================================================== RATIO OF APPLICABLE APPLICABLE APPLICABLE TOTAL INDEBTEDNESS EURODOLLAR PRIME RATE FACILITY FEE TO MARGIN MARGIN RATE CONSOLIDATED EBITDA ==================================================================================================================== greater than 3.50 to 1.00 and # 4.00 to 1.00 162.50 -0- 37.50 - -------------------------------------------------------------------------------------------------------------------- greater than 3.00 to 1.00 and # 3.50 to 1.00 137.50 -0- 37.50 - -------------------------------------------------------------------------------------------------------------------- less than or equal to 3.00 to 1.00 112.50 -0- 37.50 ====================================================================================================================
For the avoidance of doubt, it is agreed that the above changes in section 2.8(g) of the Credit Agreement shall (i) be effective from and after the Effective Date of this Amendment provided for in section 4 hereof, as to all Loans then or thereafter outstanding; and (ii) in no event result in a lower Applicable Eurodollar Margin than would have been applicable if this Amendment had not been executed and delivered. 1.5. CHANGE IN APPLICABLE FACILITY FEE RATE. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 4.1(a) of the Credit Agreement is amended to read in its entirety as follows: 4.1. FEES. (a) The Borrower agrees to pay to the Administrative Agent a Facility Fee ("FACILITY FEE") for the account of each Non-Defaulting Lender which has a General Revolving Commitment for the period from and including the Effective Date to but not including the date the Total General Revolving Commitment has been terminated and no Loans, Letters or Credit or Unpaid Drawings remain outstanding , on the average daily amount of the Total General Revolving Commitment, whether used or unused, at the Applicable Facility Fee Rate, payable quarterly in arrears on the last Business Day of each March, June, September and December and the date the Total General Revolving Commitment is terminated. As used herein, the term "APPLICABLE FACILITY FEE RATE" means the particular rate per annum determined by the Administrative Agent in accordance with the Pricing Grid Table which appears in section 2.8(g) hereof, based on the Borrower's ratio of Total Indebtedness to Consolidated EBITDA, as computed in accordance with section 9.6(a) hereof, and such Pricing Grid Table, and the following provisions: (i) Initially, until changed hereunder in accordance with the following provisions, the Applicable Facility Fee Rate will be 50 basis points per annum. (ii) Commencing with the fiscal quarter of the Borrower ended on or nearest to December 31, 1999, and continuing for each fiscal quarter thereafter, the Administrative Agent will determine the Applicable Facility Fee Rate in accordance with the Pricing Grid Table, based on the Borrower's ratio of Total Indebtedness to Consolidated EBITDA, as computed in accordance with section 9.6(a) hereof, and such Pricing Grid Table. Changes in the Applicable Facility Fee Rate shall be made and effective as of the same date as is provided in section 2.8(g) in the case of the 5 7 determination or re-determination of the Applicable Eurodollar Margin. If any such change in the Applicable Facility Fee Rate is retroactive to a date in a period for which the Facility Fee has already been paid, the Borrower will immediately pay to the Administrative Agent for the account of the Lenders all additional Facility Fee due by reason of such increased Applicable Facility Fee Rate. (iii) Notwithstanding the above provisions, during any period when (1) the Borrower has failed to timely deliver its consolidated financial statements referred to in section 8.1(a) or (b), accompanied by the certificate and calculations referred to in section 8.1(c), (2) a Default under section 10.1(a) has occurred and is continuing, or (3) an Event of Default has occurred and is continuing, the Applicable Facility Fee Rate shall be the highest rate per annum indicated therefor in the Pricing Grid Table, regardless of the Borrower's ratio of Total Indebtedness to Consolidated EBITDA at such time. (iv) Any changes in the Applicable Facility Fee Rate shall be determined by the Administrative Agent in accordance with the above provisions and the Administrative Agent will promptly provide notice of such determinations to the Borrower and the Lenders. Any such determination by the Administrative Agent pursuant to this section 4.1(a) shall be conclusive and binding absent manifest error. For the avoidance of doubt, it is agreed that the above changes in section 4.1(a) of the Credit Agreement shall in no event result in a lower Applicable Facility Fee Rate than would have been applicable if this Amendment had not been executed and delivered. 1.6. ADDITIONAL MANDATORY REDUCTION OF TOTAL GENERAL REVOLVING COMMITMENT---CERTAIN PROCEEDS OF EQUITY SALES. Effective on the Effective Date of this Amendment provided for in section 4 hereof, a new section 4.3(d) is added to the Credit Agreement, reading in its entirety as follows: (d) The Total General Revolving Commitment shall be permanently reduced, without premium or penalty, at the time that any mandatory prepayment of General Revolving Loans would be made pursuant to section 5.2(f) if General Revolving Loans were then outstanding in the full amount of the Total General Revolving Commitment, in an amount at least equal to the required prepayment of principal of General Revolving Loans which would be required to be made in such circumstance; PROVIDED that in no event shall the Total General Revolving Commitment be required to be reduced pursuant to this section 4.3(d) to an amount which, when taken together with the aggregate principal amount of Indebtedness, other than the Obligations, included in Total Senior Indebtedness then outstanding, would be less than 3.50 times the Borrower's Consolidated EBITDA for its most recent fiscal quarter or quarters ended June 30, 1999 or subsequent thereto (annualized to a period of 4 fiscal quarters in the case of any such period which consists of less than 4 consecutive fiscal quarters all of which end June 30, 1999 or later). Any such reduction shall apply to proportionately and permanently reduce the General Revolving Commitment of each of the affected Lenders, and any partial reduction of the Total General Revolving Commitment pursuant to this section 4.3(d) shall be in the amount of at least $1,000,000 (or, if greater, in integral multiples of $1,000,000). The Borrower will provide at least three (or such lesser number as the Administrative Agent may permit in the exercise of reasonable discretion) Business Days' prior written notice (or telephonic notice confirmed in writing) to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Lenders), of any reduction of the Total General Revolving Commitment pursuant to this section 4.3(d), specifying the date and amount of the reduction. 6 8 1.7. MANDATORY PREPAYMENTS. (a) Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 5.2(d) of the Credit Agreement is amended to read in its entirety as follows: (d) CERTAIN PROCEEDS OF ASSET SALES. If during the fiscal year of the Borrower beginning on July 1, 1999, or any subsequent fiscal year, the Borrower and its Subsidiaries have received any Cash Proceeds during such fiscal year from one or more Asset Sales (other than the Excluded Asset Sales), not later than the third Business Day following the date of receipt of any such Cash Proceeds an amount, conforming to the requirements as to the amount of partial prepayments contained in section 5.1, at least equal to 100% of the Net Cash Proceeds then received from any such Asset Sale shall be applied as a mandatory prepayment of principal of, FIRST, the then outstanding General Revolving Loans, if any, and SECOND, after all outstanding General Revolving Loans have been paid in full, the then outstanding Swing Line Revolving Loans, if any. As used herein, the term "EXCLUDED ASSET SALES" shall mean any Asset Sale of the business and assets which, for purposes of identification, were operated as of June 30, 1999 as (i) the Vanguard Packaging operations, (ii) the Medical Supply Division, and/or (iii) the Durable Medical Equipment Division. (b) Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 5.2(f) of the Credit Agreement is redesignated as section 5.2(g) and a new section 5.2 (f) is added to the Credit Agreement, reading in its entirety as follows: (f) MANDATORY PREPAYMENT---CERTAIN PROCEEDS OF EQUITY SALES. Not later than the Business Day following the date of the receipt by the Borrower and/or any Subsidiary of the cash proceeds (net of underwriting discounts and commissions, placement agent fees and other customary fees and costs associated therewith) from any sale or issuance of equity securities by the Borrower or any Subsidiary after June 30, 1999 (other than (i) any inter-company sale to the Borrower or any Subsidiary and (ii) any sale or issuance to management, employees (or key employees) or directors pursuant to stock option, stock purchase or similar plans for the benefit of management, employees (key employees) or directors generally), the Borrower will prepay the principal of FIRST, the outstanding General Revolving Loans, if any, and SECOND, after no General Revolving Loans are outstanding, the outstanding Swing Line Revolving Loans, if any, in an aggregate amount, conforming to the requirements as to the amounts of partial prepayments contained in section 5.1, which is not less than (x) 100% of such net proceeds, or (y) if less, an amount equal to the then aggregate outstanding principal amount of the outstanding Loans, if any. 1.8. NO MATERIAL ADVERSE CHANGE. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 7.9 of the Credit Agreement is amended to read in its entirety as follows: 7.9. NO MATERIAL ADVERSE CHANGE. Since June 30, 1999, there has been no change in the condition, business or affairs of the Borrower and its Subsidiaries taken as a whole, or their properties and assets considered as an entirety, except for changes, none of which, individually or in the aggregate, has had or could reasonably be expected to have, a Material Adverse Effect. 1.9. ADDITIONAL MONTHLY AND OTHER REPORTING REQUIREMENTS.. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 8.1 of the Credit Agreement is amended by adding a new paragraph (k) at the end thereof, reading in its entirety as follows: 7 9 (k) CERTAIN MONTHLY AND OTHER REPORTS. (i) As soon as practicable and in any event within 20 working days after the end of each calendar month, commencing with July 1999 and continuing for the next 12 calendar months, a written report certified by a responsible financial or accounting officer of the Borrower, reasonably satisfactory in form, scope and detail to the Administrative Agent, as to (i) the consolidated condensed balance sheet, and related consolidated condensed income statement and statement of cash flows of the Borrower and its consolidated Subsidiaries for such month, (ii) the amounts and specific financial or investment institution accounts in which the same are held of all cash and Cash Equivalent balances of the Borrower and its consolidated Subsidiaries as at the end of such month, and (iii) the aging of the accounts receivable of the Borrower and its Subsidiaries on a consolidated basis, displayed for the principal categories or classifications of account debtors (such as Medicare, Medicaid, Private Pay, etc.). (ii) As soon as practicable and in any event within one month following each fiscal quarter, a written report certified by a responsible financial or accounting officer of the Borrower, reasonably satisfactory in form, scope and detail to the Administrative Agent, as to (x) the aging of the accounts receivable of the Borrower and its Subsidiaries on a consolidated basis, (y) charge-offs or write-offs of accounts receivable and any increases or decreases in reserves for delinquent or unrecoverable accounts receivable, and (z) the amounts of the accounts receivable of the Borrower and its Subsidiaries on a consolidated basis, which is owed by (x) the principal categories or classifications of account debtors (such as Medicare, Medicaid, Private Pay, etc.), and (y) the 10 account debtors with the largest outstanding balances. 1.10. SENIOR DEBT. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 8.13 of the Credit Agreement is amended to read in its entirety as follows: 8.13. SENIOR DEBT. The Borrower will at all times ensure that the claims of the Lenders in respect of the Obligations of the Borrower will in all respects rank prior to the claims of every unsecured creditor of the Borrower, and any Indebtedness of the Borrower which is subordinated in any manner to the claims of any other creditor of the Borrower will be subordinated in like manner to such claims of the Lenders. 1.11. ADDITIONAL SECURITY DOCUMENTS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 8.11 of the Credit Agreement is amended to read in its entirety as follows: 8.11. ADDITIONAL SECURITY; FURTHER ASSURANCES. In the event that at any time after June 30, 1999 the Borrower or any of its Subsidiaries owns or holds an interest in any Real Property, assets, stock, securities or any other property or interest, located within or outside of the United States or arising out of business conducted from any location within or outside the United States, which is not at the time included in the Collateral and is not subject to a Permitted Lien securing Indebtedness (all of the foregoing, "UNCOLLATERALIZED PROPERTY"), the Borrower will notify the Administrative Agent in writing of such event, identifying the Uncollateralized Property in question and referring specifically to the rights of the Administrative Agent and the Lenders under this section 8.11; PROVIDED that notwithstanding the foregoing, (x) the Borrower need not notify the Administrative Agent under this section 8.11(a) of any leasehold interest which is acquired or held by the Borrower or any Subsidiary unless the same involves a nominal or bargain purchase price option, and (y) the Borrower need not notify the Administrative Agent under this section 8.11(a) of the ownership by the Borrower or any of its Subsidiaries of any Real Property if such Real Property was owned by the Borrower or any of its Subsidiaries as of June 30, 1999. 8 10 (b) The Borrower will, or will cause an applicable Subsidiary to, within 30 days following request by the Collateral Agent (who may make such request only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of this Agreement for any period subsequent to June 30, 1999), grant the Collateral Agent for the benefit of the Secured Creditors (as defined in the Security Documents) security interests and mortgages or deeds of trust, pursuant to new documentation (each an "ADDITIONAL SECURITY DOCUMENT") or joinder in any existing Security Document to which it is not already a party, in all of the Uncollateralized Property as to which the Administrative Agent has notified the Borrower that the same is required to be included in the Collateral, SUBJECT to obtaining any required consents from third parties (including third party lessors and co-venturers) necessary to be obtained for the granting of a Lien on any particular Uncollateralized Property (with the Borrower hereby agreeing to use, and to cause its Subsidiaries to use, reasonable best efforts to obtain such consents), and ALSO SUBJECT to the provisions of section 8.10(b). (c) Each Additional Security Document (i) shall be granted pursuant to documentation reasonably satisfactory in form and substance to the Administrative Agent, which documentation shall in the case of Real Property owned in fee be accompanied by such Phase I environmental reports or assessments, a mortgage policy of title insurance (subject to a standard survey exception), and other supporting documentation requested by and reasonably satisfactory in form and substance to the Administrative Agent; and (ii) shall constitute a valid and enforceable perfected Lien upon the interests or properties so included in the Collateral, subject to no other Liens except those permitted by section 9.3 or otherwise agreed to by the Administrative Agent at the time of perfection thereof and (in the case of Real Property or interests therein) such other encumbrances as may be set forth in the mortgage policy, if any, relating to such Additional Security Document which shall be delivered to the Collateral Agent together with such Additional Security Document and which shall be satisfactory in form and substance to the Collateral Agent and the Administrative Agent. The Borrower, at its sole cost and expense, will cause each Additional Security Document or instruments related thereto to be duly recorded or filed in such manner and in such places as are required by law to establish, perfect, preserve and protect the Liens created thereby required to be granted pursuant to the Additional Security Document, and will pay or cause to be paid in full all taxes, fees and other charges payable in connection therewith. Furthermore, if so requested in writing by the Collateral Agent (who may make such request only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of this Agreement for any period subsequent to June 30, 1999), the Borrower shall cause to be delivered to the Collateral Agent such opinions of local counsel, appraisals (if required under section 8.11(e) below), title insurance, environmental assessments and other related documents as may be reasonably requested by the Collateral Agent in connection with the execution, delivery and recording of any Additional Security Document, all of which documents shall be in form and substance reasonably satisfactory to the Collateral Agent and the Administrative Agent, except that no leasehold mortgage or title insurance shall be required for any leasehold properties (unless the lessee has a nominal or bargain purchase option). (d) The Borrower will, and will cause each of its Subsidiaries to, at the expense of the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such conveyances, financing statements, transfer endorsements, powers of attorney, certificates, and other assurances or instruments and take such further steps relating to the 9 11 Collateral covered by any of the Security Documents as the Collateral Agent may reasonably require. If at any time the Collateral Agent determines, based on applicable law, that all applicable taxes (including, without limitation, mortgage recording taxes or similar charges) were not paid in connection with the recordation of any mortgage or deed of trust, the Borrower shall promptly pay the same upon demand. (e) The Borrower will if requested by any Lender at any time, in order to meet any legal requirement applicable to such Lender, provide to the Collateral Agent and the Lenders, at the sole cost and expense of the Borrower, appraisals and other supporting documentation relating to any mortgage or deed of trust delivered as an Additional Security Document hereunder, as specified by any Lender, meeting the appraisal and other documentation requirements of the Real Estate Reform Amendments of the Financial Institution Reform, Recovery and Enforcement Act of 1989, as amended, or any other legal requirements applicable to any Lender, which in the case of any such appraisal shall be prepared by one or more valuation firms of national standing, acceptable to the Required Lenders, utilizing appraisal standards satisfying such Amendments, Act or other legal requirements. (f) For the avoidance of doubt, the Borrower shall have no obligation to cause to be delivered any survey of a Real Property subjected to a mortgage or deed of trust so as to permit a title company to eliminate by endorsement the "survey exception" to the title policy for such Real Property. (g) Notwithstanding the foregoing provisions of this section 8.11, in the event the Administrative Agent notifies the Borrower that the Required Lenders have determined on the basis of an environmental report or assessment delivered by the Borrower pursuant to the provisions of section 8.11(c) that an Additional Security Document encumbering any particular Real Property should not be delivered under this section 8.11, the Borrower shall be relieved of its obligation in this section 8.11 to deliver or cause to be delivered an Additional Security Document in the form of a mortgage, deed of trust or similar instrument covering such Real Property, SUBJECT to any later determination by the Required Lenders notified to the Borrower by the Administrative Agent that an Additional Security Document in the form of a mortgage, deed of trust or similar instrument covering such Real Property should be executed and delivered hereunder. (h) As promptly as practicable after the date (i) any Credit Party has any Collateral located in a jurisdiction as to which the Administrative Agent shall not previously have received a lien search report listing all effective UCC financing statements and other Liens filed against such Credit Party in such jurisdiction and containing copies of all such effective UCC financing statements and other Lien documents, (ii) any person first becomes a Credit Party, or (iii) any UCC financing statement or Security Document is filed against any Credit Party to perfect security interests granted pursuant to the Security Agreement or any other Security Document, the Borrower will, at its expense, cause to be delivered to the Administrative Agent and the Lenders search reports listing all effective UCC financing statements and other Lien documents filed against such person or Credit Party in each applicable jurisdiction and containing copies of all such effective UCC financing statements and other Lien documents. In addition, whenever requested by the Administrative Agent, but not more frequently than once in any 12-month period, the Borrower will promptly provide the Administrative Agent and the Lenders with such new or updated title, lien, judgment, patent, trademark and UCC financing statement searches or reports as to the Borrower or any of its Subsidiaries, or any Collateral of any Credit Party, as the Administrative Agent may specify to the Borrower in its request. 10 12 (i) The Collateral Agent is authorized, without the consent of any of the Lenders, to enter into any modification of any Security Document which the Collateral Agent reasonably believes is required to conform to the mandatory requirements of local law, or to local customs followed by financial institutions with respect to similar collateral documents involving property located in any particular jurisdiction, in the case of any Security Document relating to property located in a particular jurisdiction which imposes a tax with respect to such Security Document based on the amount of the obligations secured thereby, expressly limit the amount of such secured obligations which are secured by such property to such amount as, in the Collateral Agent's good faith judgment, is appropriate so that the amount of such tax is reasonable in light of the estimated value of the property located in such jurisdiction, and/or designate the amount of title insurance coverage for any title insurance policy provided hereunder in an amount reasonably believed by the Collateral Agent to be representative of the fair value of the property covered thereby. (j) The Borrower will provide the Administrative Agent with sufficient copies of each Additional Security Document and any additional supporting documents delivered in connection therewith for distribution of copies thereof to the Lenders, and the Administrative Agent will promptly so distribute such copies. 1.12. ACQUISITIONS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 9.2(d) of the Credit Agreement is amended to read in its entirety as follows: (d) ACQUISITIONS: if no Default or Event of Default shall have occurred and be continuing or would result therefrom, the Borrower or any Subsidiary may make any Acquisition which has been approved in writing by the Required Lenders, PROVIDED that no Acquisition may be consummated which is actively opposed by the Board of Directors (or similar governing body) of the selling person or the person whose equity interests are to be acquired unless all of the Lenders consent in writing to such Acquisition; 1.13. INDEBTEDNESS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 9.4 of the Credit Agreement is amended to read in its entirety as follows: 9.4. INDEBTEDNESS. The Borrower will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness of the Borrower or any of its Subsidiaries, EXCEPT: (a) Indebtedness incurred under this Agreement and the other Credit Documents; (b) Indebtedness of the Borrower or any Subsidiary in respect of Capital Leases; PROVIDED that the aggregate Capitalized Lease Obligations of the Borrower and its Subsidiaries, plus the aggregate outstanding principal amount of Indebtedness permitted under clause (c) below, shall not exceed $5,000,000 in the aggregate at any time outstanding, and at the time of any incurrence thereof after the date hereof, and after giving effect thereto, no Event of Default shall have occurred and be continuing or would result therefrom; (c) Indebtedness of the Borrower or any Subsidiary subject to Liens permitted by section 9.3(j), including any guaranty by the Borrower of any such Indebtedness; PROVIDED that the aggregate principal amount of such Indebtedness shall not exceed 11 13 $2,000,000 in the aggregate at any time outstanding, and at the time of any incurrence thereof after the date hereof, and after giving effect thereto, no Event of Default shall have occurred and be continuing or would result therefrom; (d) the Subordinated Indebtedness evidenced by the Convertible Subordinated Debentures due 2004 in the aggregate principal amount of $100,000,000; (e) any refinancing, extension, renewal or refunding of any Subordinated Indebtedness permitted by the foregoing clause (d) not involving an increase in the principal amount thereof, a reduction of more than 10% in the remaining weighted average life to maturity thereof (computed in accordance with standard financial practice), or any changes in the terms of subordination applicable thereto which is adverse to the interests of the Lenders; (f) the subordinated guaranties of Subsidiaries of the Borrower with respect to the Subordinated Indebtedness referred to in clauses (d) and (e) above, PROVIDED the terms of such subordination are substantially the same as contained in the subordinated guaranties originally issued in support of the Convertible Subordinated Debentures due 2004; (g) Existing Indebtedness, and any refinancing, extension, renewal or refunding of any such Existing Indebtedness not involving an increase in the principal amount thereof or a reduction of more than 10% in the remaining weighted average life to maturity thereof (computed in accordance with standard financial practice); (h) Indebtedness of the Borrower or any Subsidiary under Hedge Agreements entered into in the ordinary course of business; (i) Indebtedness of the Borrower to any of its Subsidiaries, and Indebtedness of any of the Borrower's Subsidiaries to the Borrower or to another Subsidiary of the Borrower, in each case to the extent permitted under section 9.5; (j) Guaranty Obligations permitted under section 9.5; and (k) additional unsecured Indebtedness of the Borrower not in excess of $2,000,000 aggregate principal amount outstanding at any time, to the extent not otherwise permitted pursuant to the foregoing clauses, PROVIDED that at the time of incurrence thereof, and after giving effect thereto, the Borrower will be in compliance with sections 9.6, 9.7 and 9.8, and no Event of Default shall have occurred and be continuing or would result therefrom. 1.14. ADDITIONAL SCHEDULED EXISTING INDEBTEDNESS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, Annex III of the Credit Agreement is amended to add thereto an appropriate reference to miscellaneous Capital Leases outstanding at June 30, 1999, in the aggregate amount of not more than $4,000,000. 1.15. GUARANTEES. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 9.5(p) of the Credit Agreement is amended to read in its entirety as follows: 12 14 (p) if no Event of Default shall have occurred and be continuing, or would result therefrom, unsecured Guaranty Obligations not otherwise permitted by the foregoing clauses, made after June 30, 1999, covering up to $2,000,000 aggregate principal amount of Indebtedness outstanding at any time, shall be permitted to be incurred. 1.16. ADDITIONAL SCHEDULED GUARANTEES. Effective on the Effective Date of this Amendment provided for in section 4 hereof, Annex V of the Credit Agreement is amended to add the following item: 2. Miscellaneous guaranties outstanding at June 30, 1999, in the aggregate amount of not more than $3,000,000. 1.17. FINANCIAL COVENANTS. Effective on the Effective Date of this Amendment provided for in section 4 hereof, sections 9.6, 9.7, 9.8 and 9.9 of the Credit Agreement are amended to read in their entirety as follows: 9.6. LEVERAGE RATIOS. (a) TOTAL LEVERAGE RATIO. The Borrower will not at any time permit the ratio of (i) the amount of its Total Indebtedness at such time to (ii) its Consolidated EBITDA for its Testing Period most recently ended, to exceed the ratio specified below for any Testing Period:
================================================================================== TESTING PERIOD RATIO ================================================================================== Testing Period ended on or nearest to September 30, 4.85 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to December 31, 5.10 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 5.45 to 1.00 March 31, 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 5.25 to 1.00 June 30, 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to September 30, 5.00 to 1.00 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to December 31, 4.75 to 1.00 2000 and any Testing Period thereafter ==================================================================================
(b) SENIOR LEVERAGE RATIO. The Borrower will not at any time permit the ratio of (i) the amount of its Total Senior Indebtedness at such time to (ii) its Consolidated EBITDA for its Testing Period most recently ended, to exceed the ratio specified below for any Testing Period: 13 15
================================================================================== TESTING PERIOD RATIO ================================================================================== Testing Period ended on or nearest to September 30, 3.400 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to December 31, 3.575 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 3.825 to 1.00 March 31, 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 3.675 to 1.00 June 30, 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to September 30, 3.500 to 1.00 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to December 31, 3.250 to 1.00 2000 and any Testing Period thereafter ==================================================================================
9.7. COVERAGE RATIO. The Borrower will not at any time permit the ratio of (i) its Consolidated EBITDA for any Testing Period, minus the amount of its Consolidated Capital Expenditures for such Testing Period, to (ii) its Consolidated Interest Expense for such Testing Period, to exceed the ratio specified below for any applicable Testing Period; PROVIDED, that in computing Consolidated Capital Expenditures for any Testing Period ended on or prior to March 31, 2000, the Consolidated Capital Expenditures for such Testing Period shall be determined on an annualized basis using the Consolidated Capital Expenditures for the period from July 1, 1999 through the end of such Testing Period as the basis for such annualization:
================================================================================== TESTING PERIOD RATIO ================================================================================== Testing Period ended on or nearest to September 30, 2.200 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to December 31, 1.950 to 1.00 1999 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 1.675 to 1.00 March 31, 2000 ---------------------------------------------------------------------------------- Testing Period ended on or nearest to 1.725 to 1.00 June 30, 2000 ----------------------------------------------------------------------------------
14 16
================================================================================== TESTING PERIOD RATIO ================================================================================== Testing Period ended on or nearest to September 30, 1.800 to 1.00 2000 and any Testing Period thereafter ==================================================================================
9.8. MINIMUM CONSOLIDATED EBITDA. The Borrower will not permit its Consolidated EBITDA for any Testing Period consisting of its fiscal quarter then most recently ended to be less than the amount indicated below for such Testing Period:
================================================================================== MINIMUM CONSOLIDATED EBITDA TESTING PERIOD ================================================================================== Testing Period consisting of single fiscal quarter $14,250,000 ended on or nearest to September 30, 1999 ---------------------------------------------------------------------------------- Testing Period consisting of single fiscal quarter $14,500,000 ended on or nearest to December 31, 1999 ---------------------------------------------------------------------------------- Testing Period consisting of single fiscal quarter $14,750,000 ended on or nearest to March 31, 2000 ---------------------------------------------------------------------------------- Testing Period consisting of single fiscal quarter $15,000,000 ended on or nearest to June 30, 2000 ---------------------------------------------------------------------------------- Testing Period consisting of single fiscal quarter $15,250,000 ended on or nearest to September 30, 2000 and any Testing Period consisting of any single fiscal quarter thereafter ==================================================================================
The amounts specified in the above table shall be subject to adjustment in accordance with the following provisions: (i) In the event the Borrower and/or its Subsidiaries completes any Acquisition after June 30, 1999 and before the beginning of any Testing Period identified in the above table, the amounts for such Testing Period and for all subsequent Testing Periods in such table shall each be increased by 94% of the consolidated earnings before interest, income taxes, depreciation and amortization attributable to the business and assets acquired in each such Acquisition for its most recent fiscal quarter preceding the date such 15 17 Acquisition is completed. Promptly after it completes an Acquisition referred to in the preceding sentence, the Borrower will provide to the Administrative Agent such financial statements and other information as may be required by the Administrative Agent to determine the amount of any such increase. The amount of any such increase shall be determined by the Administrative Agent in good faith and the Administrative Agent will promptly provide notice of such determination to the Borrower and the Lenders. Any such determination by the Administrative Agent pursuant to this paragraph (i) shall be conclusive and binding absent manifest error. (ii) In the event the Borrower and/or its Subsidiaries completes any sale or disposition of a Subsidiary or other Asset Sale after June 30, 1999, the amounts for the then current and any subsequent Testing Periods in such table shall each be decreased by an amount equal to 94% of the consolidated earnings before interest, income taxes, depreciation and amortization attributable to the business and assets so sold or disposed of, for the remaining portion of the Testing Period in which such sale or disposition occurs and for any subsequent Testing Period, based on the appropriate financial information for the most recent fiscal quarter preceding the date such sale or disposition is completed. Promptly after it completes a sale or disposition referred to in the preceding sentence, the Borrower will provide to the Administrative Agent such financial statements and other information as may be required by the Administrative Agent to determine the amount of any such decrease. The amount of any such decrease shall be determined by the Administrative Agent in good faith and the Administrative Agent will promptly provide notice of such determination to the Borrower and the Lenders. Any such determination by the Administrative Agent pursuant to this paragraph (ii) shall be conclusive and binding absent manifest error. 9.9. MINIMUM CONSOLIDATED NET WORTH; NO DIVIDENDS, ETC. The Borrower will not permit its Consolidated Net Worth at any time to be less than $268,000,000, EXCEPT that (i) effective as of the end of the Borrower's fiscal quarter ended December 31, 1999, and as of the end of each fiscal quarter thereafter, the foregoing amount (as it may from time to time be increased as herein provided), shall be increased by 50% of the Consolidated Net Income of the Borrower and its Subsidiaries for the fiscal quarter ended on such date, if any, without deduction for minority interests, as determined in conformity with GAAP (there being no reduction in the case of any such Consolidated Net Income which reflects a deficit), and (ii) the foregoing amount (as it may from time to time be increased as herein provided), shall be increased by (A) an amount equal to 100% of the cash proceeds (net of underwriting discounts and commissions and other customary fees and costs associated therewith) from any sale or issuance of equity by the Borrower after June 30, 1999 (other than any sale or issuance to management or employees pursuant to employee benefit plans of general application), plus (B) the principal amount of any Indebtedness which after June 30, 1999 is converted or exchanged into equity securities of the Borrower. (b) The Borrower will not directly or indirectly declare, order, pay or make any dividend (other than dividends payable solely in common stock of the Borrower) or other distribution on or in respect of any capital stock of any class of the Borrower, whether by reduction of capital or otherwise, or directly or indirectly make, or permit any of its Subsidiaries to directly or indirectly make, any purchase, redemption, retirement or other acquisition of any capital stock of any class of the Borrower (other than for a consideration consisting solely of capital stock of the same class of the Borrower) or of any warrants, rights or options to acquire or any securities convertible into or exchangeable for any capital stock of the Borrower, except that the Borrower may make any cash payments in lieu of fractional shares in connection with the 16 18 conversion into common stock of the Borrower of any of the Borrower's Convertible Subordinated Debentures due 2004. 1.18. RELEASE OF COLLATERAL. Effective on the Effective Date of this Amendment provided for in section 4 hereof, the reference to "section 8.11(b)" in clause (iv) of section 12.12 of the Credit Agreement is changed to "this Agreement". 1.19. CONCERNING THE FORMER INTEREST COVERAGE RATIO FINANCIAL COVENANT. For the avoidance of doubt, and in light of the elimination of the financial covenant which had been contained in section 9.8 of the Credit Agreement, and which had required that the Borrower's Interest Coverage Ratio not be less than the required minimum Interest Coverage Ratios specified therein, which elimination is being effected by this Amendment, the Lenders party hereto hereby confirm and agree that (i) compliance with section 9.8 of the Credit Agreement for the period ending June 30, 1999, is waived, and (ii) during the period from June 30, 1999 to the Effective Date of this Amendment provided for in section 4 hereof, no Default or Event of Default solely attributable to section 9.8 of the Credit Agreement shall be deemed to have occurred. 1.20. PLEDGE AGREEMENT. Effective on the Effective Date of this Amendment provided for in section 4 hereof, section 18(b) of the Pledge Agreement, which had provided for termination of the Pledge Agreement at the option of the Borrower under certain circumstances, shall be of no further force or effect. Except as expressly modified and superseded by the preceding sentence, the terms and provisions of the Pledge Agreement are ratified and confirmed and shall continue in full force and effect. If required by the Administrative Agent, the Borrower will, and will cause any other Credit Party which is a party to the Pledge Agreement to, enter into a separate amendment of the Pledge Agreement which gives effect to the foregoing. 2. SECTION REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants as follows: 2.1. AUTHORIZATION AND VALIDITY OF AMENDMENT, ETC. This Amendment has been duly authorized by all necessary corporate action on the part of the Borrower, has been duly executed and delivered by a duly authorized officer of the Borrower, and constitutes the valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). 2.2. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Credit Parties contained in the Credit Agreement or in the other Credit Documents are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier specified date, in which case such representations and warranties are hereby reaffirmed as true and correct in all material respects as of the date when made. 2.3. NO EVENT OF DEFAULT. No condition or event has occurred or exists which constitutes or which, after notice or lapse of time or both, would constitute an Event of Default. 17 19 2.4. COMPLIANCE. The Borrower is in full compliance with all covenants and agreements contained in the Credit Agreement, as amended hereby, and the other Credit Documents to which it is a party; and without limitation of the foregoing, each Subsidiary of the Borrower which, as of the date hereof, is required to be a Subsidiary Guarantor, has as on or prior to the date hereof become a Subsidiary Guarantor under the Subsidiary Guaranty. 2.5. FINANCIAL STATEMENTS, ETC. The Borrower has furnished to the Lenders and the Administrative Agent complete and correct copies of: (a) the audited consolidated balance sheets of the Borrower and its consolidated subsidiaries as of June 30, 1997, and June 30, 1998, and the related audited consolidated statements of income, stockholders' equity, and cash flows for the fiscal years then ended, accompanied by the unqualified report thereon of the Borrower's independent accountants; and (b) the unaudited condensed consolidated balance sheets of the Borrower and its consolidated subsidiaries as of March 31, 1999, and the related unaudited condensed consolidated statements of income and of cash flows of the Borrower and its consolidated subsidiaries for the fiscal quarter or quarters then ended, as contained in the Form 10-Q Quarterly Report of the Borrower filed with the SEC. All such financial statements have been prepared in accordance with GAAP, consistently applied (except as stated therein), and fairly present the financial position of the Borrower and its consolidated subsidiaries as of the respective dates indicated and the consolidated results of their operations and cash flows for the respective periods indicated, subject in the case of any such financial statements which are unaudited, to the absence of footnotes and to normal audit adjustments which the Borrower reasonably believes will not involve a Material Adverse Effect. 2.6. RECENT FINANCIAL PROJECTIONS, ETC. The Borrower has delivered or caused to be delivered to the Lenders, prior to the execution and delivery of this Amendment, financial projections prepared by management of the Borrower for the Borrower and its Subsidiaries consisting of, among other things, a projected balance sheet, income statement and cash flow statement for its fiscal year ended June 30, 2000, and projected income statements for its fiscal years ended June 30, 2001 and 2002 (the "RECENT FINANCIAL PROJECTIONS"). The Recent Financial Projections were prepared on behalf of the Borrower in good faith after taking into account the existing and historical levels of business activity of the Borrower and its Subsidiaries, trends known to the Borrower, including general economic trends, and all other information, assumptions and estimates considered by management of the Borrower and its Subsidiaries to be pertinent thereto. The Recent Financial Projections were considered by management of the Borrower, as of such date of preparation, to be realistically achievable; PROVIDED, that no representation or warranty is made as to the impact of future general economic conditions or as to whether the Borrower's projected consolidated results as set forth in the Recent Financial Projections will actually be realized. No material facts have become known to the Borrower subsequent to the date of preparation of the Recent Financial Projections and prior to the date hereof which, if they had been appropriately reflected in the Recent Financial Projections, would have resulted in a material adverse change in the assets, liabilities, results of operations or cash flows reflected therein. 2.7. FEE OWNERSHIP OF REAL PROPERTY. At the date of this Amendment, neither the Borrower nor any of its Subsidiaries is the fee owner of any Real Property, other than the 5 facilities located at (i) 90 Glade Drive, Kittaning, Pennsylvania (the Borrower), (ii) 12 East Second Street, Kaukauna, Wisconsin (NCS HealthCare of Wisconsin, Inc.), (iii) 90 Glade Drive, Kittaning, Pennsylvania (NCS HealthCare of Pennsylvania, Inc.), (iv) 110 Davis Farm Road, Portland, Maine (Uni-Care Health Services of Maine, Inc.) 18 20 and (v) 835 North L. Rogers Wells Blvd., Glasgow, Kentucky (NCS HealthCare of Kentucky, Inc.), which in the aggregate have a net book value on the consolidated financial statements of the Borrower of less than $2,500,000. (For the avoidance of doubt, it is noted that the Lenders have determined at the present time not to require that any such Real Property be subjected to a mortgage or deed of trust as security for the Obligations, SUBJECT to any later determination by the Required Lenders or the Administrative Agent in accordance with section 8.11 of the Credit Agreement, as amended hereby, to require that any such Real Property be so subjected to a mortgage or deed of trust as security for the Obligations.) SECTION 3. RATIFICATIONS. Except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement are ratified and confirmed and shall continue in full force and effect. SECTION 4. BINDING EFFECT. This Amendment shall become effective on a date (the "EFFECTIVE DATE"), on or before August 3, 1999, if the following conditions shall have been satisfied on and as of such date: (a) EXECUTION OF AMENDMENT. This Amendment shall have been executed by the Borrower and the Administrative Agent, and counterparts hereof as so executed shall have been delivered to the Administrative Agent; the Acknowledgment and Consent appended hereto shall have been executed by the Credit Parties named therein, and counterparts thereof as so executed shall have been delivered to the Administrative Agent; and the Administrative Agent shall have been notified by the Required Lenders that such Lenders have executed this Amendment (which notification may be by facsimile or other written confirmation of such execution). (b) FEES. The Borrower shall have paid to the Administrative Agent, in immediately available funds, such nonrefundable fees as have previously been agreed between the Borrower and the Administrative Agent. In addition, the Administrative Agent shall have paid to the Lenders who have entered into this Amendment such fees as have been previously communicated to such Lenders by the Administrative Agent. (c) SECURITY AGREEMENT. The Credit Parties named therein shall have duly executed and delivered and there shall be in full force and effect, and original counterparts shall have been delivered to the Administrative Agent, in sufficient quantities for the Lenders, of the Security Agreement (as modified, amended or supplemented from time to time in accordance with the terms thereof and hereof, the "SECURITY AGREEMENT"), substantially in the form of Exhibit A attached hereto. (d) CORPORATE RESOLUTIONS AND APPROVALS. The Administrative Agent shall have received, in sufficient quantity for the Administrative Agent and the Lenders, certified copies of the resolutions of the Board of Directors of the Borrower and each other Credit Party, approving the Credit Documents to which the Borrower or any such other Credit Party, as the case may be, is or may become a party, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the execution, delivery and performance by the Borrower or any such other Credit Party of the Credit Documents to which it is or may become a party. 19 21 (e) INCUMBENCY CERTIFICATES. The Administrative Agent shall have received, in sufficient quantity for the Administrative Agent and the Lenders, a certificate of the Secretary or an Assistant Secretary of the Borrower and of each other Credit Party, certifying the names and true signatures of the officers of the Borrower or such other Credit Party, as the case may be, authorized to sign the Credit Documents to which the Borrower or such other Credit Party is a party and any other documents to which the Borrower or any such other Credit Party is a party which may be executed and delivered in connection herewith. (f) OPINION OF COUNSEL. On or prior to the Effective Date of this Amendment, the Administrative Agent shall have received an opinion, addressed to the Administrative Agent and each of the Lenders and dated on or prior to the Effective Date of this Amendment, from Calfee, Halter & Griswold LLP, special counsel to the Borrower, satisfactory in form and substance satisfactory to the Administrative Agent, to the effect that (i) this Amendment, the Acknowledgment and Consent appended hereto and the Security Agreement have been duly authorized by all necessary corporate or other organizational action on the part of, and have been duly executed and delivered by, the Borrower and each other Credit Party which is a party thereto; (ii) the execution, delivery and performance by the Borrower and the other Credit Parties of this Amendment and the Security Documents will not (A) conflict with or result in any breach of, any of the terms, covenants, conditions or provisions of, (B) constitute a default under, or (C) result in the creation or imposition of (or the obligation to create or impose) any Lien (other than the Liens created pursuant to the Security Documents) upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of, the Indenture relating to the Convertible Subordinated Debentures due 2004; (iii) the Security Agreement is effective as between the parties thereto to create a security interest, in favor of the Collateral Agent, as security for the Secured Obligations (as defined therein) in all Collateral (as defined therein) of the Borrower and each other Credit Party which is a party thereto in which a security interest is purported to be created by the Security Agreement, to the extent that such Collateral consists of the type of property in which a security interest may be created under the Uniform Commercial Code as in effect in the State of Ohio; and (iv) no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any United States federal or Ohio governmental or public body, agency or authority, is required to authorize or is required under the federal laws of the United States or the laws of the State of Ohio as a condition to (A) the execution, delivery and performance by any Credit Party of any Credit Document to which it is a party, or (B) the legality, validity, binding effect or enforceability as against any Credit Party of any Credit Document to which any Credit Party is a party, EXCEPT for (1) the filing and recording of financing statements and other 20 22 documents necessary in order to perfect the Liens created by the Security Documents, and (2) such filings, orders, consents, approvals or other actions as may be required to be obtained or effected with governmental or public bodies, agencies or authorities, including courts, in connection with any actual or attempted grant or perfection or enforcement of a security interest in, or realization upon, any type of Collateral the possession or alienability of which is subject to specific federal or state requirements or limitations under published laws, regulations, rules or directives, now or hereafter in effect. (g) RECORDATION OF SECURITY DOCUMENTS, DELIVERY OF COLLATERAL, TAXES, ETC. The Security Documents (or proper notices or financing statements in respect thereof) shall have been duly recorded, published and filed in such manner and in such places as is required by law to establish, perfect, preserve and protect the rights and security interests of the parties thereto and their respective successors and assigns, all collateral items required to be physically delivered to the Collateral Agent thereunder shall have been so delivered, accompanied by any appropriate instruments of transfer, and all taxes, fees and other charges then due and payable in connection with the execution, delivery, recording, publishing and filing of such instruments and the issue and delivery of the Notes shall have been paid in full. (h) EVIDENCE OF INSURANCE. The Collateral Agent shall have received certificates of insurance and other evidence, satisfactory to it, of compliance with the insurance requirements of this Agreement and the Security Documents. (i) SEARCH REPORTS. The Administrative Agent shall have received completed requests for information on Form UCC-11, or search reports from one or more commercial search firms acceptable to the Administrative Agent, listing all of the effective financing statements filed against any Credit Party which is a party to any Security Document in any jurisdiction in which such Credit Party maintains an office or in which any Collateral of such Credit Party is located, together with copies of such financing statements. (j) PROCEEDINGS AND DOCUMENTS. All corporate and other organizational proceedings of the Credit Parties incident to this Amendment and the transactions contemplated hereby shall be satisfactory in form and substance to the Administrative Agent and the Administrative Agent shall have received from the Credit Parties such documents incident to the transactions completed hereby as it may require. Thereafter this Amendment shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, and each Lender and their respective permitted successors and assigns. After this Amendment becomes effective, the Administrative Agent will promptly furnish a copy of this Amendment to each Lender and the Borrower and advise them of the Effective Date. 5. SECTION MISCELLANEOUS. 5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment, and no investigation by the Administrative Agent or any Lender or any subsequent Loan or other Credit Event shall affect the representations and warranties or the right of the Administrative Agent or any Lender to rely upon them. 5.2. REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and any and all other agreements, instruments or documentation now or hereafter executed and delivered pursuant to the terms 21 23 of the Credit Agreement as amended hereby, are hereby amended so that any reference therein to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. 5.3. EXPENSES. As provided in the Credit Agreement, but without limiting any terms or provisions thereof, the Borrower shall pay on demand all reasonable costs and expenses incurred by the Administrative Agent in connection with the preparation, negotiation, and execution of this Amendment, including without limitation the reasonable costs and fees of the Administrative Agent's special legal counsel, regardless of whether this Amendment becomes effective in accordance with the terms hereof, and all reasonable costs and expenses incurred by the Administrative Agent or any Lender in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby. 5.4. SEVERABILITY. Any term or provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the term or provision so held to be invalid or unenforceable. 5.5. APPLICABLE LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Ohio. 5.6. HEADINGS. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 5.7. ENTIRE AGREEMENT. This Amendment is specifically limited to the matters expressly set forth herein. This Amendment and all other instruments, agreements and documentation executed and delivered in connection with this Amendment embody the final, entire agreement among the parties hereto with respect to the subject matter hereof and supersede any and all prior commitments, agreements, representations and understandings, whether written or oral, relating to the matters covered by this Amendment, and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. There are no oral agreements among the parties hereto relating to the subject matter hereof or any other subject matter relating to the Credit Agreement. 5.8. JURY TRIAL WAIVER. EACH OF THE PARTIES TO THIS AMENDMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AMENDMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY HERETO HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 5.9. COUNTERPARTS. This Amendment may be executed by the parties hereto separately in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. 22 24 IN WITNESS WHEREOF, this Amendment has been duly executed and delivered as of the date first above written.
NCS HEALTHCARE, INC. KEYBANK NATIONAL ASSOCIATION, INDIVIDUALLY AS A LENDER, THE SWING LINE LENDER, THE LETTER OF CREDIT ISSUER, AND BY: /S/ GERALD D. STETHEM AS THE ADMINISTRATIVE AGENT AND THE ------------------------------ COLLATERAL AGENT CHIEF FINANCIAL OFFICER BY: /S/ THOMAS J. PURCELL ---------------------------- VICE PRESIDENT BANK ONE, MICHIGAN NATIONAL CITY BANK, (FORMERLY NBD BANK), AS A LENDER AND AS CO-AGENT AS A LENDER AND AS CO-AGENT BY: /S/ GARY C. WILSON BY: /S/ CHRIS D. THORNTON ------------------------------ ---------------------------- FIRST VICE PRESIDENT VICE PRESIDENT BANK ONE, NA, FIRST UNION NATIONAL BANK AS A LENDER AND AS CO-AGENT BY: /S/ GARY C. WILSON BY: /S/ J. PAUL SOLITARIO ------------------------------ ---------------------------- FIRST VICE PRESIDENT VICE PRESIDENT COMERICA BANK MELLON BANK, N. A. BY: /S/ CRAIG F. DURNO BY: /S/ THOMAS E. CONSTANTINE ------------------------------ ---------------------------- ASSISTANT VICE PRESIDENT VICE PRESIDENT HARRIS TRUST AND SAVINGS BANK FIRSTAR BANK, NATIONAL ASSOCIATION (FORMERLY STAR BANK, N. A.) BY: /S STAN C. ROSENDAHL BY: /S/ DAVID J. DANNEMILLER ------------------------------ ---------------------------- VICE PRESIDENT VICE PRESIDENT AMSOUTH BANK BANK HAPOALIM B. M., CHICAGO BRANCH BY: /S/ DAVID C. STYLES BY: /S/ PHILIP E. GANSCH ------------------------------ ---------------------------- VICE PRESIDENT VICE PRESIDENT AND: /S/ AZARYA D. RESSLER ---------------------------- SVP & BRANCH MANAGER
23 25 ACKNOWLEDGMENT AND CONSENT For the avoidance of doubt, and without limitation of the intent and effect of sections 6 and 10 of the Subsidiary Guaranty (as such term is defined in the Credit Agreement referred to in the Amendment No. 3 to Credit Agreement (the "AMENDMENT"), to which this Acknowledgment and Consent is appended), each of the undersigned hereby unconditionally and irrevocably (i) acknowledges receipt of a copy of the Credit Agreement and the Amendment, and (ii) consents to all of the terms and provisions of the Credit Agreement as amended by the Amendment. To the extent any of the undersigned is not already a party to the Subsidiary Guaranty, it hereby joins in and agrees to be bound by the Subsidiary Guaranty as a Guarantor thereunder. Capitalized terms which are used herein without definition shall have the respective meanings ascribed thereto in the Credit Agreement referred to herein. This Acknowledgment and Consent is for the benefit of the Lenders, the Administrative Agent, the Collateral Agent and any Hedge Creditor (as defined in the Subsidiary Guaranty) which may be a third party beneficiary of the Subsidiary Guaranty or the Pledge Agreement, in its capacity as such third party beneficiary under any Credit Document, and their respective successors and assigns. No term or provision of this Acknowledgment and Consent may be modified or otherwise changed without the prior written consent of the Administrative Agent, given as provided in the Credit Agreement. This Acknowledgment and Consent shall be binding upon the successors and assigns of each of the undersigned. This Acknowledgment and Consent may be executed by any of the undersigned in separate counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the undersigned has duly executed and delivered this Acknowledgment and Consent as of the date of the Amendment referred to herein.
NCS HEALTHCARE OF OKLAHOMA, INC. NCS SERVICES, INC. NCS HEALTHCARE OF MASSACHUSETTS, INC. NCS HEALTHCARE OF RHODE ISLAND, INC. NCS HEALTHCARE OF IOWA, INC. NCS HEALTHCARE OF ARIZONA, INC. NCS HEALTHCARE OF KANSAS, INC. NCS HEALTHCARE OF KENTUCKY, INC. NCS HEALTHCARE OF MONTANA, INC. NCS HEALTHCARE OF SOUTH CAROLINA, INC. NCS HEALTHCARE OF VERMONT, INC. NCS HEALTHCARE OF MISSOURI, INC. NCS HEALTHCARE OF OREGON, INC. NCS HEALTHCARE OF BEACHWOOD, INC. NCS HEALTHCARE OF NEW YORK, INC. NCS HEALTHCARE OF MARYLAND, INC. NCS HEALTHCARE OF OHIO, INC. PHARMASOURCE HEALTHCARE, INC. NCS HEALTHCARE OF ARKANSAS, INC. NCS HEALTHCARE OF MICHIGAN, INC. NCS HEALTHCARE OF TEXAS, INC. NCS HEALTHCARE OF CALIFORNIA, INC. NCS HEALTHCARE OF INDIANA, INC. NCS HEALTHCARE OF TENNESSEE, INC. RESCOT SYSTEMS GROUP, INC. NCS HEALTHCARE OF ILLINOIS, INC. NCS HEALTHCARE OF MINNESOTA, INC. UNI-CARE HEALTH SERVICES, INC. NCS HEALTHCARE OF PENNSYLVANIA, INC. NCS HEALTHCARE OF WISCONSIN, INC. UNI-CARE HEALTH SERVICES OF MAINE, INC. NCS HEALTHCARE OF CONNECTICUT, INC. NCS HEALTHCARE OF NEBRASKA, INC. NCS HEALTHCARE OF NEW JERSEY, INC. NCS HEALTHCARE OF NEW MEXICO, INC. NCS HEALTHCARE OF FLORIDA, INC. BEACHWOOD HEALTHCARE MANAGEMENT, INC. NCS HEALTHCARE OF WASHINGTON, INC. MANAGEMENT & NETWORK SERVICES, INC.
BY: /S/ MICHAEL J. MASCALI ------------------------------------------- MICHAEL J. MASCALI, VICE PRESIDENT, ON BEHALF OF EACH OF THE ABOVE CORPORATIONS NCS HEALTHCARE OF NORTH CAROLINA, INC. BY: /S/ KEVIN B. SHAW ---------------------------------- KEVIN B. SHAW, PRESIDENT EX-10.17 3 EXHIBIT 10.17 1 Exhibit 10.17 ================================================================================ ================================================================================ NCS HEALTHCARE, INC. AS AN ASSIGNOR ITS SUBSIDIARIES WHICH ARE OR HEREAFTER BECOME A PARTY HERETO AS ASSIGNORS WITH [LOGO KEYBANK] KEYBANK NATIONAL ASSOCIATION, AS COLLATERAL AGENT -------------------------- SECURITY AGREEMENT DATED AS OF AUGUST 3, 1999 -------------------------- ================================================================================ ================================================================================ 2 SECURITY AGREEMENT SECURITY AGREEMENT, dated as of August 3, 1999 (as amended, modified, or supplemented from time to time, "THIS AGREEMENT"), among (i) NCS HEALTHCARE, INC., a Delaware corporation (herein, together with its successors and assigns, the "BORROWER" or an "ASSIGNOR"); (ii) each of the Subsidiaries of the Borrower which is now or hereafter becomes a party hereto (each, together with its successors and assigns, an "ASSIGNOR"; all of the Assignors are collectively referred to as the "ASSIGNORS"); and (ii) KEYBANK NATIONAL ASSOCIATION, a national banking association, as collateral agent (herein, together with its successors and assigns in such capacity, the "COLLATERAL AGENT"), for the benefit of the Secured Creditors (as defined below): PRELIMINARY STATEMENTS: (1) Except as otherwise defined herein, terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. Certain terms are defined in section 1 hereof. (2) This Agreement is made pursuant to the Credit Agreement, dated as of June 1, 1998, as amended by Amendment No. 1 thereto, dated as of July 13, 1998, Amendment No. 2 thereto, dated as of March 3, 1999, and Amendment No. 3 thereto, dated as of August 3, 1999 (herein, as so amended and as hereafter amended or otherwise modified, restated or replaced from time to time, the "CREDIT AGREEMENT"), among the Borrower, the financial institutions named as lenders therein (herein, together with their successors and assigns, the "LENDERS"), and KeyBank National Association, as the Administrative Agent (the "ADMINISTRATIVE AGENT") for the Lenders under the Credit Agreement. (3) The Credit Agreement provides, among other things, for loans or advances or other extensions of credit to or for the benefit of the Borrower of up to $235,000,000, with such loans or advances being evidenced by promissory notes (the "NOTES", such term to include all notes and other securities issued in exchange therefor or in replacement thereof). The Credit Agreement also provides that one or more Letter of Credit Issuers may issue Letters of Credit for the benefit of the Borrower and/or any of its Subsidiaries, and that the Lenders will risk participate in such Letters of Credit. (4) The Borrower or any of its Subsidiaries may from time to time be party to one or more Designated Hedge Agreements (as defined in the Credit Agreement) and other Designated Hedge Documents (as defined herein). Any institution or other person that participates, and in each case their successors and assigns, as a counterpart to the Borrower or any of its Subsidiaries or Affiliates pursuant to any Designated Hedge Document is referred to herein individually as a "DESIGNATED HEDGE CREDITOR" and collectively as the "DESIGNATED HEDGE CREDITORS". (5) This Agreement is made for the benefit of the Administrative Agent, the Collateral Agent, each Letter of Credit Issuer, the Lenders and the Designated Hedge Creditors (any or all of the foregoing, together with their respective successors and assigns, individually a "SECURED CREDITOR" and collectively, the "SECURED CREDITORS"). (6) Pursuant to the Subsidiary Guaranty, each Subsidiary Guarantor has jointly and severally guaranteed to the Secured Creditors the payment when due of the Guaranteed Obligations (as defined in the Subsidiary Guaranty). The Subsidiary Guaranty and this Agreement are each a Credit Document. (7) It is a condition precedent to the making of Loans and the issuance of, and participation in, Letters of Credit under the Credit Agreement that each Assignor shall have executed and delivered to the Collateral Agent this Agreement. (8) Each Assignor will obtain benefits from the incurrence of the Credit Document Obligations and the Designated Hedge Document Obligations (as such terms are hereafter defined) and, accordingly, desires to execute this Agreement in order to satisfy the condition described in the preceding paragraph and to induce the Secured Creditors to extend the Credit Document Obligations and the Designated Hedge Document Obligations. NOW, THEREFORE, in consideration of the benefit accruing to each Assignor, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby makes the following representations and warranties to the 3 Collateral Agent and the other Secured Creditors and hereby covenants and agrees with the Collateral Agent and the other Secured Creditors as follows: 1. DEFINITIONS AND TERMS. 1.1. DEFINED TERMS. Except as otherwise defined herein, terms used herein and defined in the Credit Agreement shall be used herein as therein defined. The following terms shall have the meanings herein specified unless the context otherwise requires: "ACCOUNT" shall mean any "account", as such term is now or hereafter defined in the UCC. "ACCOUNT DEBTOR" shall mean any "account debtor", as such term is now or hereafter defined in the UCC. "ACCOUNTS RECEIVABLE" shall mean (i) all Accounts, now existing or hereafter arising; and (ii) without limitation of the foregoing, in any event shall include, but shall not be limited to, (1) all right to a payment, whether or not earned by performance, for Goods or other property (other than money) that has been or is to be sold, consigned, leased, licensed, assigned or otherwise disposed of, for services rendered or to be rendered, for a policy of insurance issued or to be issued, for a suretyship obligation incurred or to be incurred, for energy provided or to be provided, or for the use or hire of a vessel under a charter or other contract whether due or to become due, whether or not it has been earned by performance, and whether now existing or hereafter acquired or arising in the future, including Accounts Receivable from employees and Affiliates of any Assignor, (2) all rights evidenced by an Account, invoice, purchase order, requisition, bill of exchange, note, contract, security agreement, lease, chattel paper, or any evidence of indebtedness or security related to the foregoing, (3) all security pledged, assigned, hypothecated or granted to or held by an Assignor to secure the foregoing, (4) all guarantees, letters of credit, banker's acceptances, drafts, endorsements, credit insurance and indemnifications on, for or of, any of the foregoing, including all rights to make drawings, claims or demands for payment thereunder, and (5) all powers of attorney for the execution of any evidence of indebtedness, guaranty, letter of credit or security or other writing in connection therewith. "AGREEMENT" shall mean this Security Agreement as the same may be modified, supplemented or amended from time to time in accordance with its terms. "AS-EXTRACTED COLLATERAL" shall mean any "as-extracted collateral", as such term is now or hereafter defined in the UCC. "ASSIGNOR" shall have the meaning specified in the first paragraph of this Agreement. "BLOCKED ACCOUNT AGREEMENT" shall mean an agreement, satisfactory in form and substance to the Collateral Agent, among an Assignor, the Collateral Agent and the financial institution in which an Assignor has a Deposit Account, pursuant to which, among other things, (i) the Collateral Agent shall have sole dominion and control over all funds held to the credit of, and all disbursements from, such Deposit Account, and (y) all of the funds on deposit in such Deposit Account (other than, in the discretion of the Collateral Agent, balances of $1,000 or less) shall be transferred to the Collateral Concentration Account on a daily or other basis specified by the Collateral Agent. "BLOCKED DEPOSIT ACCOUNT" shall mean a Deposit Account subject to a Blocked Account Agreement. "BUSINESS DAY" means any day excluding Saturday, Sunday and any day which shall be at the Payment Office of the Administrative Agent a legal holiday or a day on which banking institutions are authorized by law to close. "CHATTEL PAPER" shall mean any "chattel paper", as such term is now or hereafter defined in the UCC. "COLLATERAL" shall have the meaning provided in section 2.1. "COLLATERAL AGENT" shall have the meaning specified in the first paragraph of this Agreement. 2 4 "COLLATERAL CONCENTRATION ACCOUNT" shall mean a cash collateral Deposit Account established in the name of the Collateral Agent, and under the sole dominion and control of the Collateral Agent, for the benefit of the Secured Creditors, at an office of the Administrative Agent. "CONTRACT RIGHTS" shall mean all rights of an Assignor under or in respect of a Contract, including, without limitation, all rights to payment, damages, liquidated damages, and enforcement. "CONTRACTS" shall mean all contracts between an Assignor and one or more additional parties. "COPYRIGHTS" shall mean any U.S. copyright to which an Assignor now or hereafter has title, as well as any application for a U.S. copyright hereafter made by such Assignor. "CREDIT AGREEMENT" shall have the meaning provided in the Preliminary Statements of this Agreement. "CREDIT DOCUMENT OBLIGATIONS" shall mean and include: (i) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement, (ii) all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit issued under the Credit Agreement, and (iii) all other obligations and liabilities owing by the Borrower and the other Credit Parties to the Administrative Agent, the Collateral Agent, any Letter of Credit Issuer or any of the Lenders under the Credit Agreement and the other Credit Documents to which the Borrower or any other Credit Party is now or may hereafter become a party (including, without limitation, indemnities, Fees and other amounts payable thereunder), whether primary, secondary, direct, contingent, fixed or otherwise, in all cases whether now existing, or hereafter incurred or arising, including any such interest or other amounts incurred or arising during the pendency of any bankruptcy, insolvency, reorganization, receivership or similar proceeding, regardless of whether allowed or allowable in such proceeding or subject to an automatic stay under section 362(a) of the Bankruptcy Code. "DEPOSIT ACCOUNT" shall mean any "deposit account", as such term is now or hereafter defined in the UCC. "DESIGNATED HEDGE DOCUMENT" shall mean and include (i) each Designated Hedge Agreement to which the Borrower or any of its Subsidiaries or Affiliates is now or may hereafter become a party, and (ii) each confirmation, transaction statement or other document executed and delivered in connection therewith to which the Borrower or any of its Subsidiaries or Affiliates is now or may hereafter become a party. "DESIGNATED HEDGE DOCUMENT OBLIGATIONS" shall mean and include all obligations and liabilities owing by the Borrower or any of its Subsidiaries or Affiliates under all existing and future Designated Hedge Documents, in all cases whether now existing, or hereafter incurred or arising, including any such amounts incurred or arising during the pendency of any bankruptcy, insolvency, reorganization, receivership or similar proceeding, regardless of whether allowed or allowable in such proceeding or subject to an automatic stay under section 362(a) of the Bankruptcy Code. "DESIGNATED HEDGE CREDITORS" shall have the meaning provided in the Preliminary Statements of this Agreement. "DOCUMENT" shall mean any "document", as such term is now or hereafter defined in the UCC. "EQUIPMENT" shall mean any "equipment", as such term is now or hereafter defined in the UCC. "EVENT OF DEFAULT" shall mean any Event of Default under, and as defined in, the Credit Agreement, or any payment default, after any applicable grace period, under any Designated Hedge Document. 3 5 "FIXTURES" shall mean any "fixtures", as such term is now or hereafter defined in the UCC. "GENERAL INTANGIBLES" shall mean any "general intangibles", as such term is now or hereafter defined in the UCC. "GOODS" shall mean any "goods", as such term is now or hereafter defined in the UCC. "INSTRUMENT" shall mean any "instrument", as such term is now or hereafter defined in the UCC. "INVENTORY" shall mean (i) any "inventory", as such term is now or hereafter defined in the UCC; and (ii) without limitation of the foregoing, in any event shall include, but shall not be limited to, all merchandise and other Goods held for sale or lease, or furnished or to be furnished under contracts for service, including, without limitation, (1) raw materials, (2) work in process, (3) finished goods, (4) products made or processed, (5) intermediates, (6) packing materials, (7) shipping materials, (8) labels, (9) semi-finished inventory, (10) scrap inventory, (11) spare parts inventory, (12) manufacturing supplies, (13) consumable supplies, (14) other substances commingled therewith or added thereto, and (15) all such Goods that have been returned, reclaimed, repossessed or exchanged. "INVESTMENT PROPERTY" shall mean any "investment property", as such term is now or hereafter defined in the UCC. "LENDER" shall have the meaning provided in the Preliminary Statements of this Agreement. "MARKS" shall mean any trademarks and service marks now held or hereafter acquired by an Assignor, which are registered in the United States Patent and Trademark Office, as well as any unregistered marks used by an Assignor in the United States and trade dress including logos and/or designs in connection with which any of these registered or unregistered marks are used. "MINERALS" shall mean any "minerals", as such term is now or hereafter defined in the UCC. "MONEY" shall mean any "money", as such term is now or hereafter defined in the UCC. "PATENTS" shall mean any U.S. patent to which an Assignor now or hereafter has title, as well as any application for a U.S. patent now or hereafter made by an Assignor. "PERMITS" shall mean all licenses, permits, rights, orders, variances, franchises or authorizations of or from any governmental authority or agency. "PROCEEDS" shall mean (i) any "proceeds", as such term is now or hereafter defined in the UCC; and (ii) without limitation of the foregoing, in any event, shall include, but not be limited to, (1) whatever is acquired upon the sale, lease, license, exchange, or other disposition of any Collateral, (2) whatever is collected on, or distributed on account of, any Collateral, (3) rights arising out of any Collateral, (4) claims arising out of the loss or nonconformity of, defects in, or damage to any Collateral, (5) claims and rights to any proceeds of any insurance, indemnity, warranty or guaranty payable to an Assignor (or the Collateral Agent, as assignee, loss payee or an additional insured) with respect to any of the Collateral, (6) claims and rights to payments (in any form whatsoever) made or due and payable to an Assignor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting under color of governmental authority), (7) all cash, money, checks and negotiable instruments received or held on behalf of the Collateral Agent pursuant to any lockbox or similar arrangement relating to the payment of Accounts Receivable or other Collateral, and (8) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "PRODUCTS" shall mean any "products", as such term is now or hereafter defined in the UCC. "PROPRIETARY INFORMATION" means all information and know-how worldwide, including, without limitation, technical data; manufacturing data; research and development data; data relating to compositions, processes and formulations, manufacturing and production know-how and experience; management know-how; training programs; 4 6 manufacturing, engineering and other drawings; specifications; performance criteria; operating instructions; maintenance manuals; technology; technical information; software; computer programs; engineering and computer data and databases; design and engineering specifications; catalogs; promotional literature; financial, business and marketing plans; inventions and invention disclosures. "SECURED CREDITORS" shall have the meaning provided in the Preliminary Statements of this Agreement. "SECURED OBLIGATIONS" shall mean and include (i) in the case of the Borrower as one of the Assignors, (A) its primary obligations in respect of all Credit Document Obligations as to which it is a primary obligor; (B) its surety obligations as a guarantor in respect of all Credit Document Obligations as to which any of its Subsidiaries or Affiliates is a primary obligor; (C) its primary obligations in respect of all Designated Hedge Document Obligations as to which it is a primary obligor; and (D) its surety obligations as a guarantor in respect of all Designated Hedge Document Obligations as to which any of its Subsidiaries or Affiliates is a primary obligor; (ii) in the case of any Subsidiary Guarantor as one of the Assignors, (A) its primary obligations in respect of all Credit Document Obligations as to which it is a primary obligor; (B) its surety obligations as a Subsidiary Guarantor under the Subsidiary Guaranty; and (C) its primary obligations in respect of all Designated Hedge Document Obligations as to which it is a primary obligor; (iii) in the case of any Assignor, any and all sums advanced by the Collateral Agent in compliance with the provisions of this Agreement or any of the other Credit Documents in order to preserve the Collateral of such Assignor or to preserve or protect its Security Interest in such Collateral, including, without limitation, sums advanced to pay or discharge insurance premiums, taxes, Liens and claims; and (iv) in the case of any Assignor, in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities of such Assignor referred to in clauses (i), (ii) and (iii) above, after an Event of Default shall have occurred and be continuing, the reasonable expenses of re-taking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral of such Assignor, or of any exercise by the Collateral Agent of its rights hereunder in respect of such Assignor or its Collateral, together with reasonable attorneys' fees and court costs. "SECURITY INTEREST" shall mean the security interest granted by an Assignor and/or by all Assignors, as applicable, pursuant to section 2.1 hereof. "SIGNIFICANT MARK" shall have the meaning provided in section 6.3 of this Agreement. "SIGNIFICANT PATENT" shall have the meaning provided in section 7.3 of this Agreement. "TRADE SECRETS" means any secretly held existing engineering and other data, information, production procedures and other know-how relating to the design, manufacture, assembly, installation, use, operation, marketing, sale and servicing of any products or business of an Assignor worldwide whether written or not written. "UCC" shall mean the Uniform Commercial Code, as at any time adopted and in effect in any jurisdiction, specifically including and taking into account all amendments, supplements, revisions and other modifications of the Uniform Commercial Code which hereafter are adopted or otherwise take effect. 1.2 TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect 5 7 as the word "shall". Unless the context requires otherwise, any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), any reference herein to any person shall be construed to include such person's successors and assigns, the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, and unless otherwise specified, all references herein to sections, Annexes and Exhibits shall be construed to refer to sections of, and Annexes and Exhibits to, this Agreement. 2. SECURITY INTERESTS. 2.1. GRANT OF SECURITY INTERESTS. As security for the prompt and complete payment and performance when due of the Secured Obligations, each Assignor does hereby sell, assign and transfer unto the Collateral Agent, and does hereby grant to the Collateral Agent, for the benefit of the Secured Creditors, a continuing security interest in, all of the right, title and interest of such Assignor in, to and under all of the following, whether now existing or hereafter from time to time arising or acquired and wherever located (collectively, the "COLLATERAL"): (1) all Accounts, including, without limitation, each and every Account Receivable; (2) all Goods; (3) all Inventory; (4) all Equipment; (5) all Documents; (6) all Instruments; (7) all Chattel Paper; (8) all Money; (9) the Collateral Concentration Account, all Blocked Deposit Accounts, and all other Deposit Accounts, together with all monies, securities and instruments at any time deposited in any such Account or otherwise held for the credit thereof; (10) all Investment Property; (11) all Fixtures; (12) all As-Extracted Collateral, including, without limitation, all Minerals; (13) all General Intangibles; (14) all of each of the following: (A) all Contracts, together with all Contract Rights arising thereunder; (B) all rights to any letter of credit, including, without limitation, all rights to "proceeds of a letter of credit", as such term is now or hereafter defined in the UCC; (C) any "support obligation", as such term is now or hereafter defined in the UCC; (D) all rights, claims and interests in or under any policy of insurance; (E) any "commercial tort claim", as such term is now or hereafter defined in the UCC; (F) any claim arising out of any other tort; and (G) all rights represented by a judgment; (15) all of each of the following: (A) all Marks, together with the registrations and right to all renewals thereof, and the goodwill of the business of such Assignor symbolized by the Marks; (B) all Patents and Copyrights; (C) all computer programs and software of such Assignor and all intellectual property rights 6 8 therein and all other Proprietary Information of such Assignor, including, but not limited to, Trade Secrets; and (D) all Permits; (16) all other items, kinds and types of personal property, tangible or intangible, of whatever nature, whether similar or dissimilar to any or all of the foregoing, and regardless of whether the creation or perfection or effect of perfection or nonperfection of a security interest therein is governed by the UCC of any particular jurisdiction or by any other applicable treaty, convention, statute, law or regulation of any applicable jurisdiction; (17) all additions, modifications, alterations, improvements, upgrades, accessions, components, parts, appurtenances, substitutions and/or replacements of, to or for any of the foregoing; and (18) all Proceeds and Products of any and all of the foregoing; TO HAVE AND HOLD unto and be dealt with by the Collateral Agent, for the benefit of the Secured Creditors, upon the terms and conditions set forth in this Agreement; PROVIDED, HOWEVER, that there is specifically excluded from the Security Interest, and the term Collateral shall not include: (A) any Investment Property or other related Collateral of an Assignor that is subjected to the security interest of the Pledge Agreement; (B) any Equipment or Goods that is subject to a "purchase money security interest", as such term is now or hereafter defined in the UCC, which (x) constitutes a Permitted Lien under the Credit Agreement; and (y) prohibits the creation by an Assignor of a junior security interest therein, unless the holder thereof has consented to the creation of such a junior security interest; or (C) any Account, Account Receivable, Contract, Permit, Proprietary Information or General Intangible, or the Proceeds or Products of any of the foregoing, IF AND ONLY TO THE EXTENT THAT: (1) in the case of any such item of Collateral, (x) any Contract evidencing such item of Collateral contains a valid and effective contractual restriction or limitation which prohibits the grant or creation of a security interest therein, or (y) a valid and effective restriction or limitation imposed by applicable law, regulation, rule, order or other directive of any governmental body, agency or authority, or the order of any court of competent jurisdiction, prohibits the grant or creation of a security interest in such item of Collateral, or (2) in the case of any such item of Collateral, such item of Collateral would be subject to loss or forfeiture upon the grant or creation of a security interest therein by reason of (x) a valid and effective contractual restriction or limitation contained in any Contract evidencing such item of Collateral, or (y) a valid and effective restriction or limitation imposed by applicable law, regulation, rule, order or other directive of any governmental body, agency or authority, or the order of any court of competent jurisdiction. The inclusion of any item or type of property in any of the foregoing clauses or in any of the defined terms used therein does not imply the exclusion of such item or type of property from any of the other clauses of this section 2.1 or any of the definitions used in such clauses. The Security Interest of the Collateral Agent under this Agreement extends to all Collateral of any kind and/or nature which any Assignor may acquire at any time during the continuation of this Agreement. 2.2. NO ASSUMPTION OF LIABILITY. The Security Interest of any Assignor is granted as security only and shall not subject the Collateral Agent or any other Secured Creditor to, or in any way alter or modify, any obligation or liability of such Assignor with respect to or arising out of any of the Collateral. 7 9 2.3. POWER OF ATTORNEY. Each Assignor hereby irrevocably constitutes and appoints the Collateral Agent its true and lawful agent and attorney-in-fact, after the occurrence of and during the continuance of an Event of Default, and in such capacity the Collateral Agent shall have the right, with full power of substitution, in the name of such Assignor or otherwise, for the use and benefit of the Collateral Agent and the other Secured Creditors, but subject to any mandatory requirements or limitations of applicable law at the time in effect, to receive, endorse, present, assign, deliver and/or otherwise deal with any and all notes, acceptances, letters of credit, checks, drafts, money orders, or other evidences of payment relating to the Collateral of such Assignor or any part thereof; to demand, collect, receive payment of, and give receipt for and give credits, allowances, discounts, discharges, releases and acquittances of and for any or all of the Collateral of such Assignor; to sign the name of such Assignor on any invoice or bill of lading relating to any of the Collateral of such Assignor; to send verifications of any or all of the Accounts Receivable of such Assignor to its Account Debtors; to commence and prosecute any and all suits, actions or proceedings at law or in equity in or before any court or other tribunal (including any arbitration proceedings) to collect or otherwise realize on all or any of the Collateral of such Assignor, or to enforce any rights of such Assignor in respect of any of its Collateral; to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to any or all of the Collateral of such Assignor; to notify, or require such Assignor to notify or cause to be notified, its Account Debtors to make payment directly to the Collateral Agent or to a Blocked Deposit Account; and/or to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with any or all of the Collateral of such Assignor, and to do all other acts and things necessary or appropriate to carry out the intent and purposes of this Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Collateral of such Assignor for all purposes; PROVIDED, HOWEVER, that nothing herein contained shall be construed as requiring or obligating the Collateral Agent or any other Secured Creditor to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent or any other Secured Creditor, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby, and no action taken or omitted to be taken by the Collateral Agent or any other Secured Creditor with respect to the Collateral or any part thereof shall give rise to any defense, counterclaim or offset in favor of any Assignor or to any claim or action against the Collateral Agent or any other Secured Creditor. It is understood and agreed that the appointment of the Collateral Agent as the agent and attorney-in-fact of each of the Assignors for the purposes set forth above is a presently effective appointment, is coupled with an interest and is irrevocable. The provisions of this section shall in no event relieve any Assignor of any of its obligations under this Agreement or any of the other Credit Documents with respect to the Collateral or any part thereof or impose any obligation on the Collateral Agent or any other Secured Creditor to proceed in any particular manner with respect to the Collateral or any part thereof, or in any way limit the exercise by the Collateral Agent or any other Secured Creditor of any other or further right it may have on the date of this Agreement or hereafter, whether hereunder, under any other Credit Document, by law or otherwise. 3. REPRESENTATIONS AND WARRANTIES. Each Assignor represents and warrants to the Collateral Agent and the other Secured Creditors, which representations and warranties shall survive execution and delivery of this Agreement, as follows: 3.1. AUTHORITY. Such Assignor has full organizational power and authority to grant to the Collateral Agent the Security Interest in such Collateral pursuant hereto and to execute, deliver and perform its obligations in accordance with the terms of this Agreement. 3.2 ABSENCE OF OTHER LIENS, ETC. There is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind of such Assignor in the Collateral, EXCEPT as disclosed in Annex A hereto (the "PERMITTED FILINGS"), and for financing statements and continuation statements filed to perfect or continue the perfection of the Security Interest. (b) Such Assignor has, and as to any Collateral acquired by it from time to time after the date hereof such Assignor will have, (i) good title to all tangible items of Collateral owned by it (except for any items which in the aggregate are of immaterial value in regard to the Collateral of all Assignors considered as an entirety), and (ii) good and sufficient rights in all other items and types of its Collateral (except for any items which in the aggregate 8 10 are of immaterial value in regard to the Collateral of all Assignors considered as an entirety), in each case free and clear of any Lien, EXCEPT FOR Permitted Liens. 3.3. EFFECTIVE AND ENFORCEABLE SECURITY INTEREST. The Security Interest of such Assignor constitutes, as between such Assignor and the Collateral Agent, an effective and enforceable security interest in all of the Collateral of such Assignor, securing the payment and performance of the Secured Obligations. 3.4. PERFECTION OF SECURITY INTEREST UNDER UCC. All notifications and other actions, including, without limitation, (1) all deposits of certificates and instruments evidencing any Collateral (duly endorsed or accompanied by appropriate instruments of transfer), (2) all notices to and acknowledgments of any bailee or other person, (3) all acknowledgments and agreements respecting the right of the Collateral Agent to "control" any Collateral, as such term is now or hereafter defined in the UCC, and (4) all filings, registrations and recordings, which are (x) required by the terms of this Agreement to have been given, made, obtained, done and accomplished, and (y) necessary to create, preserve, protect and perfect the Security Interest granted by such Assignor to the Collateral Agent hereby in respect of its portion of the Collateral, have been given, made, obtained, done and accomplished. (b) After giving effect to all such actions, the Security Interest granted by such Assignor to the Collateral Agent pursuant to this Agreement in and to its portion of the Collateral will be perfected, to the extent a security interest in such Assignor's portion of the Collateral can be perfected under the UCC of any applicable jurisdiction. 3.5. PLACES OF BUSINESS, LOCATIONS OF COLLATERAL, ETC. At and as of the date hereof, the principal place of business of such Assignor, or its chief executive office (and the registered office of any Assignor which is a corporation) if it has more than one place of business, is located at the address indicated on Annex B hereto; the U.S. Federal Tax I.D. Number of such Assignor is set forth on Annex B hereto; and all Inventory and Equipment of such Assignor is located at one of the locations shown on Annex C attached hereto. 4. GENERAL COVENANTS. 4.1. NO OTHER LIENS; DEFENSE OF TITLE, ETC. No Assignor will make or grant, or suffer or permit to exist, any Lien on any of its Collateral, OTHER than the Permitted Liens. (b) Each Assignor, at its sole cost and expense, will take any and all actions reasonably necessary to defend title to its Collateral against any and all persons and to defend the validity, perfection, effectiveness and priority of the Security Interest of the Collateral Agent therein against any Lien other than Permitted Liens. 4.2. FURTHER ASSURANCES; FILINGS AND RECORDINGS, ETC. Each Assignor, at its sole cost and expense, will duly execute, acknowledge and deliver all such agreements, instruments and other documents and take all such actions (including, without limitation, (1) physically pledging Instruments, Documents, Chattel Paper and certificates evidencing Investment Property, with the Collateral Agent, (2) obtaining from other persons Blocked Account Agreements in accordance with section 5.2(a), (3) obtaining from other persons lien waivers and bailee letters in accordance with section 4.4(c), (4) obtaining from other persons agreements evidencing the exclusive control and dominion of the Collateral Agent over any Investment Property, in instances where confirmation of the "control" of the Collateral Agent over the particular Investment Property is required in order to perfect a security interest therein and such actions are required under the circumstances contemplated by section 4.2(e)(iv),and (5) making filings, recordings and registrations), as the Collateral Agent may from time to time request in order to better assure, preserve, protect and perfect the Security Interest of the Collateral Agent in the Collateral of such Assignor, and the 9 11 rights and remedies of the Collateral Agent hereunder, or otherwise to further effectuate the intent and purposes of this Agreement and to carry out the terms hereof. (b) Each Assignor, at its sole cost and expense, will at all times cause this Agreement (and/or proper notices, financing or other statements in respect hereof, and supplemental collateral assignments or collateral security agreements in respect of any portion of the Collateral) to be duly filed, recorded, registered and published, and re-filed, re-recorded, re-registered and re-published in such manner and in such places as may be required under the UCC or other applicable law in order to establish, perfect, preserve and protect the rights, remedies and Security Interest of the Collateral Agent in or with respect to the Collateral of such Assignor, and pay all taxes, fees and charges and comply with all statutes and regulations, applicable to such filing, recording, registration and publishing and such re-filing, re-recording, re-registration and re-publishing. Each Assignor irrevocably authorizes the Collateral Agent to file any financing statements with respect to the Collateral of such Assignor without the signature of such Assignor where the Collateral Agent is permitted by applicable law to do so. (c) When requested from time to time by the Collateral Agent to do so, each Assignor will promptly furnish to the Collateral Agent such information concerning itself and the location of its Collateral, in order that the Collateral Agent may determine whether all filings, recordings and registrations have been made in all jurisdictions in which such filing, recording or registration is necessary under the UCC or other applicable law in order to establish, perfect, preserve and protect the rights, remedies and Security Interest of the Collateral Agent in or with respect to the Collateral of such Assignor. (d) When requested from time to time by the Collateral Agent to do so, each Assignor will promptly furnish to the Collateral Agent such information and copies of documents as may be requested concerning any item or type of Collateral as to which a security interest may not be perfected by the filing of a financing statement under the UCC of any applicable jurisdiction, in order that the Collateral Agent may determine whether to require such Assignor to take any actions under section 4.2(a) with regard thereto. (e) Notwithstanding the foregoing or anything to the contrary contained in this Agreement: (i) no Assignor shall be required to file any UCC financing statement as a "fixture filing" which includes the legal description of any real property, in order to perfect the Security Interest in any Fixtures included in the Collateral, unless and until required to do so on not less than 15 days' prior written notice from the Collateral Agent to such effect (such notice to be given by the Collateral Agent only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999); (ii) no Assignor shall be required to file this Agreement or any separate collateral document with the United States Patent and Trademark Office or with the United States Copyright Office, in order to perfect the Security Interest in any Patents, Trademarks, Copyrights or similar Collateral, unless and until required to do so on not less than 10 days' prior written notice from the Collateral Agent to such effect (such notice to be given by the Collateral Agent only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999); (iii) an Assignor shall not be obligated to physically deliver to, or deposit with, the Collateral Agent, any of its Collateral in order to perfect the Security Interest therein unless and until the Collateral Agent shall have given such Assignor written notice requiring the same to be done (such notice to be given by the Collateral Agent only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), and if any such notice is given the applicable Assignor will immediately, and in any event within two Business Days following its receipt of such notice, effect such deposit with or delivery to the Collateral Agent; and 10 12 (iv) an Assignor shall not be obligated to obtain an agreement evidencing the exclusive control of the Collateral Agent over any of its Investment Property in order to perfect the Security Interest therein unless and until the Collateral Agent shall have given such Assignor written notice requiring the same to be done (such notice to be given by the Collateral Agent only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), and if any such notice is given the applicable Assignor will promptly, and in any event within 10 Business Days following its receipt of such notice, obtain and deliver any such agreement to the Collateral Agent. 4.3. CONTINUING OBLIGATIONS OF THE ASSIGNORS IN RESPECT OF THE COLLATERAL. Each Assignor shall remain liable to duly pay, observe, perform and satisfy all of the obligations, terms, covenants, provisions and conditions to be paid, observed, performed and satisfied by it under each contract, agreement and instrument relating to its Collateral, all in accordance with the terms, covenants, provisions and conditions thereof, and each Assignor will indemnify and hold harmless the Collateral Agent and the other Secured Creditors from and against any and all loss, liability, cost, expense or claim in any way relating to or arising therefrom. 4.4 USE AND DISPOSITION OF THE COLLATERAL. Unless and until an Event of Default shall have occurred and be continuing and the Collateral Agent shall have notified the Assignors thereof in writing and that the rights of any or all of the Assignors under this section 4.4(a) are suspended during the continuance of such Event of Default, an Assignor may use and dispose of its Collateral in any lawful manner not inconsistent with the provisions of this Agreement, the Credit Agreement or any other Credit Documents. (b) No Assignor will consign any of its Inventory to any person unless all filings of financing statements under the UCC and other actions and filings, registrations and recordings required under other applicable laws have been made in order to perfect the rights and interests of such Assignor in the consigned Inventory against creditors of and purchasers from the consignee; PROVIDED that unless and until the Collateral Agent shall have notified the Assignors in writing to the contrary (which notice may be given by the Collateral Agent only upon the written instructions of the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), no Assignor shall be required to comply with this section 4.4(b) until the aggregate book value of all Inventory consigned by the Assignors exceeds $500,000. (c) If so requested by the Collateral Agent in a written notice to an Assignor (which notice may be given by the Collateral Agent only upon written instructions from the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), (i) commencing 30 days after any such notice is received by such Assignor, such Assignor will not thereafter permit any of its Inventory or Equipment having a value in excess of $100,000 (or such larger amount as shall be acceptable to the Collateral Agent, in its discretion) to be in the possession or control of any single warehouseman, bailee, processor, supplier or agent at any time, UNLESS such warehouseman, bailee, processor, supplier or agent shall have been notified of the Security Interest and shall have agreed in writing to hold such Collateral subject to the Security Interest and the instructions of the Collateral Agent and to waive and release any Lien held by it with respect to such Collateral, whether arising by operation of law or otherwise; and (ii) commencing 30 days after any such notice is received by such Assignor, such Assignor will not thereafter permit any of its Inventory or Equipment having a value in excess of $100,000 (or such larger amount as shall be acceptable to the Collateral Agent, in its discretion) to be located on any leased property at any time, UNLESS the landlord shall have been notified of the Security Interest, shall have agreed in writing to waive and release any Lien held by it with respect to such Collateral, whether arising by operation of law or otherwise, and shall have granted the Collateral Agent such reasonable access and cure rights with respect to such leased property and lease as the Collateral Agent may reasonably require. 11 13 4.5. DELIVERY OR MARKING OF CHATTEL PAPER; ASSIGNMENT OF SECURITY FROM ACCOUNT DEBTORS AND CONSIGNMENTS; ETC. Without limitation of any of the provisions of section 4.2(a) hereof: (a) If any amount payable to an Assignor under or in connection with any of the Collateral shall be or become evidenced by any Chattel Paper, Document or Instrument, such Assignor will, if requested by the Collateral Agent (which request may be made by the Collateral Agent only upon the written instructions of the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), cause such Chattel Paper, Document or Instrument to be delivered to the Collateral Agent and pledged as part of the Collateral hereunder, accompanied by any appropriate instruments or endorsements or transfer. In the case of any Chattel Paper, the Collateral Agent may require, in lieu of the delivery thereof to the Collateral Agent, that the writings evidencing the Chattel Paper be legended to reflect the Security Interest of the Collateral Agent therein, all in a manner acceptable to the Collateral Agent. (b) If at any time any Assignor shall take and perfect a security interest in any property of an Account Debtor, as security for the Accounts Receivable owed by such Account Debtor and/or any of its Affiliates, or take and perfect a security interest arising out of the consignment to any person of any Inventory or other Collateral, such Assignor shall, if requested by the Collateral Agent (which request may be made by the Collateral Agent only upon the written instructions of the Required Lenders, issued by the Required Lenders, in their sole respective discretion, following review of any monthly, quarterly or annual financial information regarding the Borrower and its Subsidiaries which is furnished pursuant to section 8.1 of the Credit Agreement for any period subsequent to June 30, 1999), promptly execute and deliver to the Collateral Agent a separate assignment of all financing statements and other filings made to perfect the same. Such separate assignment need not be filed of public record unless necessary to continue the perfected status of the security interest of such Assignor against creditors of any transferees from the Account Debtor or consignee. 4.6. MODIFICATION OF TERMS OF ACCOUNTS AND CONTRACTS, ETC. No Assignor will enter into any material modification of the terms or provisions of any of its Accounts Receivable or Contracts, or grant any extension of time for the payment of any of its Accounts Receivable or Contracts, or compromise or settle the same for less than the full amount thereof, or release, wholly or partially, any person liable for the payment thereof or any guaranty, letter of credit, collateral or other obligation supporting or securing the payment thereof, or allow any credit or discount whatsoever thereon, OTHER than modifications, extensions, compromises, settlements, credits and discounts granted or made in the ordinary course of the business of the Assignors (considered as an entirety) or in accordance with reasonable business judgment of an Assignor (considered in light of the business of the Assignors as an entirety) when the Collateral Agent is not exercising its rights under section 8 hereof during the continuance of an Event of Default. 4.7. MAINTENANCE OF RECORDS, ETC. Each Assignor will at its own cost and expense keep proper books of record and account, in which full and correct entries shall be made with respect to all assets comprising its Collateral and of all financial transactions relating thereto, in accordance with GAAP, in the case of the Borrower as an Assignor, or which are reconcilable to GAAP, in the case of any other Assignor. All billings and invoices issued by an Assignor with respect to its Accounts Receivable will, in all material respects, be in compliance with and conform to the requirements of all applicable federal, state and local laws and any applicable laws of any relevant foreign jurisdiction. If an Event of Default shall have occurred and be continuing and the Collateral Agent so directs, each Assignor shall legend, in form and manner reasonably satisfactory to the Collateral Agent, its Accounts Receivable and Contracts, as well as books, records and documents of such Assignor evidencing or pertaining thereto with an appropriate reference to the fact that such Accounts Receivable and Contracts have been assigned to the Collateral Agent and that the Collateral Agent has a security interest therein. 4.8. COLLATERAL REPORTS. Whenever requested to do so by the Collateral Agent, each Assignor will promptly, at its own sole cost and expense, deliver to the Collateral Agent, in written hard copy form or on magnetic tape or other computer or machine readable form, as specified by the Collateral Agent, such listings, agings, descriptions, schedules and other reports with respect to its Accounts Receivable, Inventory, Equipment and other Collateral as the Collateral Agent may reasonably request, all of the same to be in such scope, categories and detail 12 14 as the Collateral Agent may have reasonably requested and to be accompanied by copies of invoices and other documentation as and to the extent reasonably requested by the Collateral Agent. 4.9. INSPECTIONS AND VERIFICATION. The Collateral Agent and such persons as the Collateral Agent may reasonably designate shall have the right, at any Assignor's own cost and expense, to inspect the Collateral of such Assignor, all books and records related thereto (and to make extracts and copies thereof) and the premises upon which any of such Collateral is located, to discuss such Assignor's affairs with the officers of such Assignor and its independent accountants, and to verify under reasonable procedures the validity, amount, quality, quantity, value, condition and status of, or any other matter relating to, such Collateral, including, in the case of Accounts or other Collateral in the possession of any third person, by contacting Account Debtors or the third person possessing such Collateral (after not less than two days' prior notice to the applicable Assignor) for the purpose of making such verification. Any procedures or actions taken, prior to the occurrence and continuance of an Event of Default, in order to verify Accounts by contacting Account Debtors, shall be effected by the Borrower's independent accountants, acting at the direction of the Collateral Agent, in such manner so as not to reveal the identity of the Collateral Agent or the existence of the Security Interest to the Account Debtors. The Borrower will instruct its independent accountants to undertake any such verification when and as requested by the Collateral Agent, but not more frequently than once in any 12 month period, unless an Event of Default shall have occurred and be continuing, in which case more frequent verifications may be required. The results of any such verification by independent accountants shall be reported by such independent accountants to both the Collateral Agent and the Borrower. In the event the Collateral Agent conducts at any premises of an Assignor, through the use of its own audit or collateral monitoring staff employees, any procedures to verify or analyze the validity, amount, quality, quantity, value, condition or status of, or any other matter relating to, any Collateral, the Collateral Agent shall be entitled to per diem compensation for each staff employee so utilized at a rate specified by the Collateral Agent not to exceed the rate then currently being charged for such employees for similar examinations of collateral of other borrowers (which rate is currently $600 per day per employee), and reimbursement of any out-of pocket travel expenses. The aggregate compensation payable pursuant to the preceding sentence shall not exceed $10,000 in any 12 month period, and there shall be not more than one collateral monitoring examination by the Collateral Agent for which compensation is payable pursuant to the preceding sentence in any 12 month period, in each case unless an Event of Default shall have occurred and be continuing. The Collateral Agent shall have the absolute right to share any information it gains from any such inspection or verification or from collateral reports furnished to it by an Assignor with the other Secured Creditors (it being understood that any such information shall be subject to the confidentiality provisions of the Credit Agreement). 4.10. PAYMENT OF TAXES AND CLAIMS. Each Assignor will pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any Collateral or other properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien or charge upon any of its Collateral or any other properties belonging to it; provided that no Assignor shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP; and PROVIDED, FURTHER, that an Assignor will not be considered to be in default of any of the provisions of this sentence if such Assignor fails to pay any such amount which, individually or in the aggregate, is immaterial. Without limiting the generality of the foregoing, each Assignor will pay in full all of its wage obligations to its employees in accordance with the Fair Labor Standards Act (29 U.S.C. sections 206-207) and any comparable provisions of applicable law. 4.11. CONDITION OF COLLATERAL. Each Assignor will in all material respects maintain (i) its Equipment in good condition, ordinary wear and tear excepted, (ii) its finished goods Inventory in compliance with all applicable legal requirements (including labeling laws and regulations) and industry standards, and otherwise in good and saleable condition, and (iii) all other tangible items of its Collateral, taken as an entirety, in such condition as is consistent with good business practices, ordinary wear and tear excepted. 4.12. INSURANCE. Each Assignor, without any cost or expense to the Collateral Agent or any other Secured Creditor, will at all times keep its business and its Collateral insured against fire, theft, other casualties, liability for damage to other persons or property, and other insurable risks, as and to the extent contemplated by the Credit Agreement. Such insurance shall be written by financially responsible companies selected by the applicable Assignor and having an A.M. Best rating of "A-" or better and being in a financial size category of "VII" or larger, or by other companies acceptable to the Collateral Agent, and shall name the Collateral Agent as loss payee ( in the case of casualty insurance) or as an additional named insured as its interests may appear (in the case of liability insurance). 13 15 Each policy referred to in this section shall provide that it will not be canceled or reduced or expire except after not less than 30 days' written notice to the Collateral Agent and shall also provide that the interests of the Collateral Agent shall not be invalidated by an act or negligence of an Assignor or any person having an interest in any facility owned, leased or used by an Assignor nor by occupancy or use of any facility owned, leased or used by an Assignor for purposes more hazardous than permitted by such policy nor by any foreclosure or other proceedings relating to any facility owned, leased or used by an Assignor. Each Assignor will advise the Collateral Agent promptly of any policy cancellation, reduction or amendment. All of such insurance shall be primary and non-contributing with any insurance which may be carried by the Collateral Agent. At or prior to the time of the initial Borrowing under the Credit Agreement, each Assignor will provide to the Collateral Agent (x) certificates or endorsements naming the Collateral Agent as an additional insured or loss payee with respect to the casualty and liability insurance maintained as required hereby, and (y) if requested to do so, copies of all insurance policies maintained by it as required hereby. Each Assignor shall deliver to the Collateral Agent contemporaneously with the expiration or replacement of any policy of insurance required to be maintained hereunder a certificate as to the new or renewal policy. 4.13. PROCEEDS OF CASUALTY INSURANCE, CONDEMNATION OR TAKING. All amounts recoverable under any policy of casualty insurance or any award for the condemnation or taking by any governmental authority of any portion of the Collateral are hereby assigned to the Collateral Agent. (b) In the event any portion of the Collateral suffers a casualty loss or is involved in any proceeding for condemnation or taking by any governmental authority, THEN if an Event of Default has occurred and is continuing or if any required prepayment of any of the Secured Obligations is required to be made at such time or as a result thereof, the Collateral Agent is authorized and empowered, at its option, to participate in, control, direct, adjust, settle and/or compromise any such loss or proceeding, to collect and receive the proceeds therefrom and, after deducting from such proceeds any expenses incurred by it in connection with the collection or handling thereof, to apply the net proceeds to the Secured Obligations in accordance with the provisions of the Credit Agreement. (c) If any proceeds are received by the Collateral Agent as a result of a casualty, condemnation or taking involving the Collateral and the disposition of such proceeds is not subject to section 4.13(b), the Collateral Agent will promptly release the same to the applicable Assignor. 4.14. PROTECTIVE ADVANCES BY THE COLLATERAL AGENT. At its option, but without being obligated to do so, the Collateral Agent may, upon not less than two Business Days' prior written notice to any applicable Assignor, pay and discharge past due taxes, assessments and governmental charges, at any time levied on or with respect to any of the Collateral of such Assignor which such Assignor has failed to pay and discharge in accordance with the requirements of this Agreement or any of the other Credit Documents, pay and discharge any claims of other creditors of such Assignor which are secured by any Lien on any Collateral other than a Permitted Lien, pay for the maintenance, repair, restoration and preservation of the Collateral to the extent such Assignor fails to comply with its obligations in regard thereto under this Agreement and the other Credit Documents or the Collateral Agent reasonably believes payment of the same is necessary or appropriate to avoid a material loss or diminution in value of the Collateral, and/or obtain and pay the premiums on insurance for the Collateral which such Assignor fails to maintain in accordance with the requirements of this Agreement and the other Credit Documents, and each Assignor agrees to reimburse the Collateral Agent, on demand, for all reasonable payments and expenses incurred by the Collateral Agent with respect to such Assignor or any of its Collateral pursuant to the foregoing authorization, PROVIDED, HOWEVER, that nothing in this section shall be construed as excusing any Assignor from the performance of, or imposing any obligation on the Collateral Agent or any other Secured Creditor to cure or perform, any covenants or other agreements of any Assignor with respect to any of the foregoing matters as set forth herein or in any of the other Credit Documents. 4.15. ADDITIONAL INFORMATION CONCERNING TRADE NAMES, ETC. Each Assignor will from time to time promptly furnish the Collateral Agent upon its written request a list of all trade, fictitious and other names (together with applicable locations) under which it conducts business in any jurisdiction, or under which it or any of its predecessors in interest conducted business at any time within the preceding five years. 14 16 5. SPECIAL PROVISIONS CONCERNING COLLECTION OF ACCOUNTS, ETC. 5.1. COLLECTION. Each Assignor shall, in a manner consistent with the provisions of this section 5, endeavor to cause to be collected from the Account Debtor named in each of its Accounts, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures), any and all amounts owing under or on account of such Accounts, subject to any modifications, extensions, compromises, settlements, releases, credits and discounts granted or made in the ordinary course of the business as permitted under section 4.6. (b) Each Assignor shall, and the Collateral Agent hereby authorizes each Assignor to, enforce and collect all amounts owing to it on its Inventory and Accounts, for the benefit and on behalf of the Collateral Agent and the other Secured Creditors, PROVIDED, HOWEVER, that such privilege may at the option of the Collateral Agent, by notice to the Borrower (on behalf of all Assignors), be terminated upon the occurrence and during the continuance of any Event of Default. (c) An Assignor may use and apply as it sees fit any and all amounts collected by it in respect of its Inventory and Accounts, unless and until an Event of Default shall have occurred and be continuing and such Assignor shall have become obligated to take the actions contemplated by section 5.2. 5.2. COLLATERAL CONCENTRATION ACCOUNT, BLOCKED ACCOUNT AGREEMENTS, ETC. As promptly as practicable and in any event within 10 days following the occurrence and continuance of an Event of Default, the Collateral Agent will establish the Collateral Concentration Account; and the Assignors shall enter into Blocked Account Agreements with the Collateral Agent and each financial institution in which an Assignor has a Deposit Account. (b) Once established in accordance with the provisions of section 5.2(a), the Collateral Concentration Account shall be, and shall remain, under the sole dominion and control of the Collateral Agent, and the funds on deposit in the Collateral Concentration Account shall be applied to the outstanding Credit Document Obligations, in such order as the Collateral Agent may require, except that if an Event of Default shall have occurred and be continuing, such funds shall be applied as provided in section 8.4. Once a Deposit Account becomes a Blocked Deposit Account, it shall be, and shall remain, under the sole dominion and control of the Collateral Agent. Each Assignor acknowledges and agrees that (i) such Assignor will have no right of withdrawal from the Collateral Concentration Account or any of its Blocked Deposit Accounts, and (ii) the funds on deposit in the Collateral Concentration Account and in its Blocked Deposit Accounts shall continue to be collateral security for the Secured Obligations. (c) In connection with the establishment of the Blocked Account Agreements and at all times thereafter, each Assignor agrees (i) to cause all payments by its Account Debtors to be immediately deposited in its Blocked Deposit Accounts, and (ii) promptly to deposit all payments received by it from any other sale of any of its Collateral, whether in the form of cash, checks, notes, drafts, bills of exchange, money orders or otherwise, in its Blocked Deposit Accounts in precisely the form in which received (but with any endorsements of such Assignor necessary for deposit or collection). Until any such payments are so deposited, such payments shall be held in trust by such Assignor for and as the property of the Collateral Agent, for the benefit of the Collateral Agent and the other Secured Creditors hereunder. (d) Notwithstanding the foregoing, an Assignor shall not be required to cause any payments by its Account Debtors under federal or state reimbursement programs to be deposited in a Blocked Deposit Account if (i) such Assignor shall have furnished to the Collateral Agent evidence establishing to the reasonable satisfaction of the Collateral Agent that such deposit would be prohibited by the terms of an applicable federal or state reimbursement program, and (ii) contemporaneously with the receipt of any such payments the Obligations are prepaid in a corresponding amount. 15 17 6. SPECIAL PROVISIONS CONCERNING TRADEMARKS. 6.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents and warrants that it is the true and lawful owner or licensee of the Marks listed in Annex D attached hereto and that said listed Marks constitute all the marks registered in the United States Patent and Trademark Office that such Assignor now owns or uses in connection with its business. Each Assignor represents and warrants that it owns or is licensed to use all Marks that it uses, and that it owns all of the registrations listed on Annex D. Each Assignor further warrants that it is aware of no third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any trademark or service mark in a manner which could have a material adverse effect on the financial condition, business or property of such Assignor. 6.2. LICENSES AND ASSIGNMENTS. Each Assignor hereby agrees not to divest itself of any right under a Mark other than in the ordinary course of business absent prior written approval of the Collateral Agent. 6.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof, to notify the Collateral Agent in writing of the name and address of, and to furnish such pertinent information that may be available with respect to, any party who may be infringing or otherwise violating any of such Assignor's rights in and to any Mark that has a material adverse effect on the financial condition, business or property of such Assignor taken as a whole (each such Mark, a "SIGNIFICANT MARK"), or with respect to any party claiming that such Assignor's use of any Significant Mark violates any property right of that party, to the extent that such infringement or violation could have a material adverse effect on the financial condition, business or property of such Assignor. Each Assignor further agrees, unless otherwise directed by the Collateral Agent, diligently to prosecute any person infringing any Significant Mark in a manner consistent with its past practice and in the ordinary course of business. 6.4. PRESERVATION OF MARKS. Each Assignor agrees to use or license the use of its Significant Marks in interstate commerce during the time in which this Agreement is in effect, sufficiently to preserve such Marks as trademarks or service marks registered under the laws of the United States. 6.5. MAINTENANCE OF REGISTRATION. Each Assignor shall, at its own expense, diligently process all documents required by the Trademark Act of 1946, 15 U.S.C. ss.ss.1051 ET SEQ. to maintain trademark registration which would reasonably be expected to have a Material Adverse Effect, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office for all of its Marks pursuant to 15 U.S.C. ss.ss.1058(a), 1059 and 1065, and shall pay all fees and disbursements in connection therewith, and shall not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Collateral Agent, which consent shall not be unreasonably withheld. 6.6. FUTURE REGISTERED MARKS. If any mark registration issues hereafter to an Assignor as a result of any application now or hereafter pending before the United States Patent and Trademark Office, within 30 days of receipt of such certificate such Assignor shall deliver a copy of such certificate, and a grant of security in such mark to the Collateral Agent, confirming the grant thereof hereunder, the form of such confirmatory grant to be substantially the same as the form hereof. 6.7. REMEDIES. If an Event of Default shall occur and be continuing, the Collateral Agent may, by written notice to the relevant Assignor, take any or all of the following actions: declare the entire right, title and interest of such Assignor in and to each of the Marks, together with all trademark rights and rights of protection to the same, vested, in which event such rights, title and interest shall immediately vest, in the Collateral Agent for the benefit of the Secured Creditors, in which case such Assignor agrees to execute an assignment in form and substance reasonably satisfactory to the Collateral Agent, of all its rights, title and interest in and to the Marks to the Collateral Agent for the benefit of the Secured Creditors; take and use or sell the Marks and the goodwill of such Assignor's business symbolized by the Marks and the right to carry on the business and use the assets of the Assignor in connection with which the Marks have been used; and direct such Assignor to refrain, in which event such Assignor shall refrain, from using the Marks in any manner whatsoever, directly or indirectly, and, if requested by the Collateral Agent, change such Assignor's corporate name to eliminate therefrom any use of any Mark and execute such other and further documents that the Collateral Agent may request to further confirm this and to transfer 16 18 ownership of the Marks and registrations and any pending trademark application in the United States Patent and Trademark Office to the Collateral Agent. 7. SPECIAL PROVISIONS CONCERNING PATENTS AND COPYRIGHTS. 7.1. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor represents and warrants that it is the true and lawful owner or licensee of all rights in the Patents listed in Annex E attached hereto and in the Copyright registrations listed in Annex F attached hereto, that said Patents constitute all the United States patents and applications for United States patents that such Assignor now owns and that said Copyrights constitute all the registered United States copyrights that such Assignor now owns. Each Assignor represents and warrants that it owns or is licensed to practice under all Patents and Copyright registrations that it now owns, uses or practices under. Each Assignor further warrants that it is aware of no third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any patent or any copyright in a manner which could have a material adverse effect on the financial condition, business or property of such Assignor. 7.2. LICENSES AND ASSIGNMENTS. Each Assignor hereby agrees not to divest itself of any right under a Patent or Copyright other than in the ordinary course of business absent prior written approval of the Collateral Agent, which such approval shall not be unreasonably withheld. 7.3. INFRINGEMENTS. Each Assignor agrees, promptly upon learning thereof, to furnish the Collateral Agent in writing with all pertinent information available to such Assignor with respect to any infringement or other violation of such Assignor's rights in any Patent that has a material adverse effect on the financial condition, business or property of such Assignor taken as a whole (each such Patent, a "SIGNIFICANT PATENT") or Copyright, or with respect to any claim that practice of any Significant Patent or Copyright violates any property right of that party, to the extent that such infringement or violation could have a material adverse effect on the financial condition, business or property of such Assignor. Each Assignor further agrees, absent direction of the Collateral Agent to the contrary, diligently to prosecute any person infringing any Significant Patent or Copyright about which it has knowledge in a manner consistent with its past practice and in the ordinary course of business. 7.4. MAINTENANCE OF PATENTS. At its own expense, each Assignor shall make timely payment of all post-issuance fees required pursuant to 35 U.S.C. ss. 41 to maintain in force rights under each Patent. 7.5. PROSECUTION OF PATENT APPLICATIONS. At its own expense, each Assignor shall diligently prosecute all applications for United States patents listed on Annex E hereto, and shall not abandon any such application, except in favor of a continuation application based on such application, prior to exhaustion of all administrative and judicial remedies, absent written consent of the Collateral Agent, which such consent shall not be unreasonably withheld. 7.6. OTHER PATENTS AND COPYRIGHTS. Within 30 days of acquisition of a United States Patent or Copyright, or of filing of an application for a United States Patent or Copyright, the relevant Assignor shall deliver to the Collateral Agent a copy of said Patent or Copyright, as the case may be, with a grant of security as to such Patent or Copyright, as the case may be, confirming the grant thereof hereunder, the form of such confirmatory grant to be substantially the same as the form hereof. 7.7. REMEDIES. If an Event of Default shall occur and be continuing, the Collateral Agent may by written notice to the relevant Assignor take any or all of the following actions: declare the entire right, title and interest of such Assignor in each of the Patents and Copyrights vested, in which event such right, title and interest shall immediately vest in the Collateral Agent for the benefit of the Secured Creditors, in which case such Assignor agrees to execute an assignment in form and substance reasonably satisfactory to the Collateral Agent of all its right, title, and interest to such Patents and Copyrights to the Collateral Agent for the benefit of the Secured Creditors; take and practice or sell the Patents and Copyrights; (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from practicing the Patents and Copyrights directly or indirectly, and such Assignor shall execute such other and further documents as the Collateral Agent may request further to confirm this and to transfer ownership of the Patents and Copyrights to the Collateral Agent for the benefit of the Secured Creditors. 17 19 8. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT. 8.1. REMEDIES GENERALLY; OBTAINING OF THE COLLATERAL. Each Assignor agrees that, if any Event of Default shall have occurred and be continuing, THEN and in every such case, subject to any mandatory requirements or limitations of applicable law then in effect, the Collateral Agent, in addition to any rights now or hereafter existing under applicable law, shall have all rights as a secured creditor under the UCC in all relevant jurisdictions and may exercise any or all of the following rights (all of which each Assignor hereby agrees is commercially reasonable): (a) personally, or by agents or attorneys, immediately retake possession of the Collateral or any part thereof, from such Assignor or any other person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon such Assignor's or such other person's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Assignor; (b) instruct the obligor or obligors on any Account, agreement, instrument or other obligation (including, without limitation, Account Debtors) constituting the Collateral to make any payment required by the terms of such Account, agreement, instrument or other obligation directly to the Collateral Agent and/or directly to a Blocked Deposit Account; (c) sell, assign or otherwise liquidate, or direct such Assignor to sell, assign or otherwise liquidate, any or all of the Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation; (d) direct any financial institution which maintains a Blocked Deposit Account to transfer funds from such Blocked Deposit Account to the Collateral Concentration Account pursuant to the provisions of the applicable Blocked Account Agreement; (e) withdraw any or all monies, securities and/or instruments in the Collateral Concentration Account for application to the Secured Obligations in accordance with section 8.4 hereof; and (f) pay and discharge taxes, Liens or claims on or against any of the Collateral; (g) pay, perform or satisfy, or cause to be paid, performed or satisfied, for the benefit of any Assignor, any of the obligations, terms, covenants, provisions or conditions to be paid, observed, performed or satisfied by such Assignor under any contract, agreement or instrument relating to its Collateral, all in accordance with the terms, covenants, provisions and conditions thereof, as and to the extent that such Assignor fails or refuses to perform or satisfy the same; (h) enter into any extension if, or any other agreement in any way relating to, any of the Collateral; (i) make any compromise or settlement the Collateral Agent deems desirable or proper with respect to any of the Collateral; and/or (j) take possession of the Collateral or any part thereof, by directing such Assignor or any other person in possession thereof in writing to deliver the same to the Collateral Agent at any place or places designated by the Collateral Agent, in which event such Assignor shall at its own expense; (i) forthwith cause the same to be moved to the place or places so designated by the Collateral Agent and there delivered to the Collateral Agent, (ii) store and keep any Collateral so delivered to the Collateral Agent at such place or places pending further action by the Collateral Agent as provided in section 8.2, and 18 20 (iii) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition; it being understood that such Assignor's obligation so to deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by such Assignor of said obligation. 8.2. DISPOSITION OF THE COLLATERAL. Upon the occurrence and continuance of an Event of Default, any Collateral repossessed by the Collateral Agent under or pursuant to section 8.1 and any other Collateral whether or not so repossessed by the Collateral Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale of the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Collateral Agent may, in compliance with any mandatory requirements or limitations of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Collateral Agent or after any overhaul or repair which the Collateral Agent shall determine to be commercially reasonable. Any such disposition which shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than 10 days' written notice to such Assignor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the 10 days after the giving of such notice, to the right of the relevant Assignor or any nominee of the relevant Assignor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than 10 days' written notice to the relevant Assignor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the Collateral Agent's option, be subject to reserve), after publication of notice of such auction not less than 10 days prior thereto in two newspapers in general circulation in the city where such Collateral is located. To the extent permitted by any such requirement of law, the Collateral Agent on behalf of the Secured Creditors (or certain of them) may bid for and become the purchaser (by bidding in Secured Obligations or otherwise) of the Collateral or any item thereof, offered for sale in accordance with this section without accountability to the relevant Assignor (except to the extent of surplus money received as provided in section 8.4). If, under mandatory requirements of applicable law, the Collateral Agent shall be required to make disposition of the Collateral within a period of time which does not permit the giving of notice to the Assignor as hereinabove specified, the Collateral Agent need give the relevant Assignor only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of applicable law. 8.3. WAIVER OF CLAIMS. Except as otherwise provided in this Agreement, EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S TAKING POSSESSION OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE ASSIGNOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and each Assignor hereby further waives, to the extent permitted by law: (i) all damages occasioned by such taking of possession except any damages which are the direct result of the Collateral Agent's gross negligence or wilful misconduct; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent's rights hereunder; and (iii) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof, and each Assignor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws. 19 21 Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the relevant Assignor therein and thereto, and shall be a perpetual bar both at law and in equity against the relevant Assignor and against any and all persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under the relevant Assignor. 8.4. APPLICATION OF PROCEEDS. All Collateral and proceeds of Collateral obtained and realized by the Collateral Agent in connection with the enforcement of this Agreement pursuant to this section 8 shall be applied as follows: (1) FIRST, to the payment to the Collateral Agent, for application to the Secured Obligations as provided in section 10.3 of the Credit Agreement; and (2) SECOND, to the extent remaining after the application pursuant to the preceding clause (i) and following the termination of this Agreement pursuant to section 10.11 hereof, to the relevant Assignor or to whomever may be lawfully entitled to receive such payment. 8.5. REMEDIES CUMULATIVE, ETC. Each and every right, power and remedy hereby specifically given to the Collateral Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, any Designated Hedge Agreement or the other Credit Documents or now or hereafter existing at law or in equity, or by statute and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Collateral Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of exercise of one shall not be deemed a waiver of the right to exercise of any other or others. No delay or omission of the Collateral Agent in the exercise of any such right, power or remedy, or partial or single exercise thereof, and no renewal or extension of any of the Secured Obligations, shall impair or constitute a waiver of any such right, power or remedy or shall be construed to be a waiver of any Default or Event of Default or an acquiescence therein. No notice to or demand on any Assignor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Collateral Agent to any other or further action in any circumstances without notice or demand. In the event that the Collateral Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Collateral Agent may recover reasonable expenses, including attorneys' fees, and the amounts thereof shall be included in such judgment. 8.6. DISCONTINUANCE OF PROCEEDINGS. In case the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case the relevant Assignor, the Collateral Agent and each holder of any of the Secured Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Collateral Agent shall continue as if no such proceeding had been instituted. 8.7. PURCHASERS OF COLLATERAL. Upon any sale of any of the Collateral by the Collateral Agent hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Collateral Agent or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication or nonapplication thereof. 9. INDEMNITY. 9.1. INDEMNITY. The Assignors jointly and severally agree to indemnify, reimburse and hold the Collateral Agent, each Secured Creditor and their respective Affiliates, successors, assigns, employees, agents and servants (any or all of the foregoing, individually an "INDEMNITEE" and collectively. the "INDEMNITEES") harmless from and against any and all liabilities, obligations, losses, costs, expenses, damages, penalties, fines, claims, demands, actions, suits, proceedings, judgments, arbitration awards and appeals of whatsoever kind and nature (all of the 20 22 foregoing, collectively "INDEMNIFIABLE CLAIMS AND AMOUNTS"), at any time imposed on, asserted (whether or not successfully) against, or suffered or incurred by, any of the Indemnitees, in any way relating to or arising out of or otherwise connected to: (i) the execution, delivery or performance by any Assignor of this Agreement or any of the contracts, agreements or instruments included in its Collateral, including, without limitation, any actual or claimed failure of any Assignor to duly pay, observe, perform or satisfy any of the obligations, terms, covenants, provisions or conditions to be paid, observed, performed or satisfied by it under any contract, agreement or instrument included in, or otherwise related to, its Collateral; (ii) any actual or claimed violation by any Assignor of, or any liabilities or obligations of a Assignor arising under, any laws, regulations, rules, orders or judgments of any country, state or other governmental body, unit, agency or court, in any way related to any of its Collateral; (iii) the manufacture, ownership, ordering, purchase, delivery, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition, or use of any of the Collateral (including, without limitation, latent or other defects, whether or not discoverable); and/or (iv) any actual or claimed injury to any person or property, or the death of any person, whether based on any actual or alleged tort (including, without limitation, claims arising or imposed under the doctrine of strict liability), breach of an express or implied warranty, or other basis or theory of liability; PROVIDED that no Indemnitee shall be indemnified pursuant to this section 9.1(a) for Indemnifiable Claims and Amounts to the extent caused by the gross negligence or wilful misconduct of such Indemnitee. (b) If any action, suit or proceeding is commenced against any Indemnitee which such Indemnitee believes is subject to indemnification hereunder, such Indemnitee shall promptly notify the Borrower (who shall receive such notice on behalf of all Assignors), and such Indemnitee may, and if requested by the Borrower (on behalf of all Assignors) shall, in good faith, contest the validity, applicability and amount of such action, suit or proceeding with counsel selected by such Indemnitee, and shall permit the Borrower (on behalf of all Assignors) to participate in such contest, subject to the overall control and direction of such Indemnitee and its counsel. In addition, in connection with the defense of any action, suit or proceeding covered by this section 9.1 against more than one Indemnitee, all such Indemnitees shall be represented by the same legal counsel selected by such Indemnitees; PROVIDED, HOWEVER, that if such legal counsel determines in good faith that representing all such Indemnitees would or could result in a conflict of interest under the laws or ethical principles applicable to such legal counsel or that a defense or counterclaim is available to an Indemnitee that is not available to all such Indemnitees, then to the extent reasonably necessary to avoid such a conflict of interest or to permit unqualified assertion of such defense or counterclaim, each Indemnitee shall be entitled to separate representation by a legal counsel selected by that Indemnitee. (c) The Assignors, jointly and severally, agree that upon written notice by any Indemnitee of the incurrence or sufferance by such Indemnitee of any Indemnifiable Claims and Amounts, the Assignors will pay, on demand, all Indemnifiable Claims and Amounts, from time to time incurred or suffered by such Indemnitee. Each Indemnitee agrees to use its best efforts to promptly notify the Borrower (on behalf of all Assignors) of any written assertion of any Indemnifiable Claims and Amounts of which such Indemnitee has actual knowledge. (d) Without limitation of the foregoing, the Assignors jointly and severally agree to pay, or reimburse the Collateral Agent for (if the Collateral Agent shall have incurred fees, costs or expenses because an Assignor shall have failed to comply with its obligations under this Agreement or any Credit Document), any and all out-of-pocket fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Security Interest of the Collateral Agent in the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Collateral Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. 21 23 (e) In addition, and without limitation of the foregoing, the Assignors jointly and severally agree to pay, indemnify and hold each Indemnitee harmless from and against any loss, costs, damages and expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any material misrepresentation by an Assignor in this Agreement, or in any statement or writing contemplated by or made or delivered pursuant to or in connection with this Agreement. (f) If and to the extent that the obligations of any Assignor under this section 9.1 are unenforceable for any reason, each Assignor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 9.2. INDEMNITY OBLIGATIONS SECURED BY COLLATERAL; SURVIVAL. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Collateral. The indemnity obligations of the Assignors contained in this section 9 shall continue in full force and effect notwithstanding the full payment of all the Notes issued under the Credit Agreement and all of the other Secured Obligations and notwithstanding the discharge thereof. 10. MISCELLANEOUS. 10.1. NOTICES. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, transmitted, cabled or delivered, if to the Borrower, at its address specified in or pursuant to the Credit Agreement, if to any Assignor which is a Subsidiary of the Borrower, to it c/o the Borrower at its address specified in or pursuant to the Credit Agreement, if to the Collateral Agent, to it at the Notice Office of the Administrative Agent, if to any Lender, at its address specified in or pursuant to the Credit Agreement, and if to any Designated Hedge Creditor, at such address as such Designated Hedge Creditor shall have specified in writing to each Assignor and the Collateral Agent; or in any case at such other address as any of the persons listed above may hereafter notify the others in writing. All such notices and communications shall be mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 10.2. ENTIRE AGREEMENT. This Agreement, the other Credit Documents and any Designated Hedge Documents represent the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements among the parties. There are no unwritten oral agreements among the parties. 10.3. AMENDMENTS AND WAIVERS. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by (i) each Assignor affected thereby (it being understood that the addition or release of any Assignor hereunder shall not constitute a change, waiver, modification or variance affecting any Assignor other than the Assignor so added or released); and (ii) the Collateral Agent (acting with the consent of the Required Lenders or, to the extent required by section 12.12 of the Credit Agreement, all of the Lenders, or all of the Lenders (other than any Defaulting Lender), as applicable), PROVIDED, HOWEVER, that (a) no such change, waiver, modification or variance shall be made to section 8.4, section 9, section 10.11 or this section 10.3 which adversely affects any Secured Creditor without the written consent of such Secured Creditor; (b) any change, waiver, modification or variance which adversely affects the rights and benefits of a single Class of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors of such Class of Secured Creditors; and (c) any change, waiver, modification or variance which adversely affects the rights and benefits of less than all of the members of a single Class of Secured Creditors (and not all Secured Creditors, nor all Secured Creditors of the same Class, in a like or similar manner) shall require the written consent of each of such members which is adversely affected thereby. 22 24 For the purpose of this Agreement, the term "CLASS" shall mean each class of Secured Creditors, I.E., whether (x) the Administrative Agent, the Collateral Agent, the Letter of Credit Issuers and the Lenders as holders of the Credit Document Obligations or (y) the Designated Hedge Creditors as holders of the Designated Hedge Obligations. For the purpose of this Agreement, the term "REQUISITE CREDITORS" of any Class shall mean (x) with respect to the Credit Document Obligations, the Required Lenders and (y) with respect to the Designated Hedge Obligations, the holders of at least 51% of all Designated Hedge Obligations outstanding from time to time under the Designated Hedge Documents. 10.4. OBLIGATIONS ABSOLUTE. The obligations of each Assignor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, other than indefeasible payment in full of, and complete performance of, all of the Secured Obligations, including, without limitation: (a) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from other Credit Documents or any Designated Hedge Document, or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (b) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument or this Agreement except as expressly provided in such renewal, extension, amendment, modification, addition, supplement, assignment or transfer; (c) any furnishing of any additional security to the Collateral Agent or its assignee or any acceptance thereof or any release of any security by the Collateral Agent or its assignee; (d) any limitation on any person's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to an Assignor or any Subsidiary of an Assignor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not an Assignor shall have notice or knowledge of any of the foregoing; or (f) any other event or circumstance which, but for this provision, might release or discharge a guarantor or other surety from its obligations as such. 10.5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon each Assignor and its successors and assigns and shall inure to the benefit of the Collateral Agent and its successors and assigns, PROVIDED that no Assignor may transfer or assign any or all of its rights or obligations hereunder without the written consent of the Collateral Agent. All agreements, statements, representations and warranties made by each Assignor herein or in any certificate or other instrument delivered by such Assignor or on its behalf under this Agreement shall be considered to have been relied upon by the Secured Creditors and shall survive the execution and delivery of this Agreement, the other Credit Documents and any Designated Hedge Document regardless of any investigation made by the Secured Creditors on their behalf. 10.6. HEADINGS DESCRIPTIVE. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10.7. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.8. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF OHIO. 23 25 10.9. ENFORCEMENT EXPENSES, ETC. The Assignors hereby jointly and severally agree to pay, to the extent not paid pursuant to section 12.1 of the Credit Agreement, all reasonable out-of-pocket costs and expenses of the Collateral Agent and each other Secured Creditor in connection with the enforcement of this Agreement, the preservation of the Collateral, the perfection of the Security Interest, and any amendment, waiver or consent relating hereto (including, without limitation, the reasonable fees and disbursements of counsel employed by the Collateral Agent or any of the other Secured Creditors). 10.10. RELEASE OF PORTIONS OF COLLATERAL. So long as no payment default on any of the Secured Obligations or Event of Default is in existence or would exist after the application of proceeds as provided below, the Collateral Agent shall, at the request of an Assignor, release any or all of the Collateral of such Assignor, PROVIDED that (x) such release is permitted by the terms of the Credit Agreement (it being agreed for such purposes that a release will be deemed "PERMITTED BY THE TERMS OF THE CREDIT AGREEMENT" if the proposed transaction constitutes an exception contained in section 9.2 of the Credit Agreement) or otherwise has been approved in writing by the Required Lenders (or, to the extent required by section 12.12 of the Credit Agreement, all of the Lenders, or all of the Lenders (other than any Defaulting Lender), as applicable) and (y) the proceeds of such Collateral are to be applied as required pursuant to the Credit Agreement or any consent or waiver entered into with respect thereto. (b) At any time that an Assignor desires that the Collateral Agent take any action to give effect to any release of Collateral pursuant to the foregoing section 10.10(a), it shall deliver to the Collateral Agent a certificate signed by a principal executive officer stating that the release of the respective Collateral is permitted pursuant to section 10.10(a). In the event that any part of the Collateral is released as provided in section 10.10(a), the Collateral Agent, at the request and expense of an Assignor, will duly release such Collateral and assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold and as may be in the possession of the Collateral Agent and has not theretofore been released pursuant to this Agreement. The Collateral Agent shall have no liability whatsoever to any Secured Creditor as the result of any release of Collateral by it as permitted by this section 10.10. Upon any release of Collateral pursuant to section 10.10(a), none of the Secured Creditors shall have any continuing right or interest in such Collateral, or the proceeds thereof. 10.11. TERMINATION. After the termination of the Total Commitment and all Designated Hedge Documents, when no Note nor Letter of Credit is outstanding and when all Loans and other Secured Obligations (other than unasserted indemnity obligations) have been paid in full, this Agreement shall terminate, and the Collateral Agent, at the request and expense of the Assignors, will execute and deliver to the relevant Assignor a proper instrument or instruments (including UCC termination statements on form UCC-3) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to the relevant Assignor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Collateral Agent and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement. 10.12. COLLATERAL AGENT. The Collateral Agent will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. The acceptance by the Collateral Agent of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate the Collateral Agent to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. By accepting the benefits of this Agreement, each Secured Creditor acknowledges and agrees that the rights and obligations of the Collateral Agent shall be as set forth in section 11 of the Credit Agreement. Notwithstanding anything to the contrary contained in section 10.3 of this Agreement or section 12.12 of the Credit Agreement, this section 10.12, and the duties and obligations of the Collateral Agent set forth in this section 10.12, may not be amended or modified without the consent of the Collateral Agent. 10.13. ONLY COLLATERAL AGENT TO ENFORCE ON BEHALF OF SECURED CREDITORS. The Secured Creditors agree by their acceptance of the benefits hereof that this Agreement may be enforced on their behalf only by the action of the Collateral Agent, acting upon the instructions of the Required Lenders (or, after all Credit Document Obligations have been paid in full, instructions of the holders of at least 51% of the outstanding Designated Hedge Obligations) and that no other Secured Creditor shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Collateral Agent, for the benefit of the Secured Creditors, upon the terms of this Agreement. 24 26 10.14. OTHER CREDITORS, ETC. NOT THIRD PARTY BENEFICIARIES. No creditor of any Assignor or any of its Affiliates, or other person claiming by, through or under any Assignor or any of its Affiliates, other than the Collateral Agent and the other Secured Creditors, and their respective successors and assigns, shall be a beneficiary or third party beneficiary of this Agreement or otherwise shall derive any right or benefit herefrom. 10.15. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same agreement. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Collateral Agent. 10.16. EFFECTIVENESS. This Agreement shall be effective as to any Assignor upon its execution and delivery to the Collateral Agent of a counterpart of this Agreement manually executed on behalf of such Assignor, regardless of the date of this Agreement or the date this Agreement is executed and delivered by any other party hereto. 11. WAIVER OF JURY TRIAL. EACH ASSIGNOR AND THE COLLATERAL AGENT EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH ASSIGNOR HEREBY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY SECURED CREDITOR HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH SECURED CREDITOR WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. [The balance of this page is blank; the next page is the signature page.] 25 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. NCS HEALTHCARE, INC., KEYBANK NATIONAL ASSOCIATION, AS AN ASSIGNOR AS COLLATERAL AGENT BY: /S/ GERALD D. STETHEM BY: /S/ THOMAS J. PURCELL ----------------------------- -------------------------- CHIEF FINANCIAL OFFICER VICE PRESIDENT
THE FOLLOWING ADDITIONAL ASSIGNORS NCS HEALTHCARE OF OKLAHOMA, INC. NCS SERVICES, INC. NCS HEALTHCARE OF MASSACHUSETTS, INC. NCS HEALTHCARE OF RHODE ISLAND, INC. NCS HEALTHCARE OF IOWA, INC. NCS HEALTHCARE OF ARIZONA, INC. NCS HEALTHCARE OF KANSAS, INC. NCS HEALTHCARE OF KENTUCKY, INC. NCS HEALTHCARE OF MONTANA, INC. NCS HEALTHCARE OF SOUTH CAROLINA, INC. NCS HEALTHCARE OF VERMONT, INC. NCS HEALTHCARE OF MISSOURI, INC. NCS HEALTHCARE OF OREGON, INC. NCS HEALTHCARE OF BEACHWOOD, INC. NCS HEALTHCARE OF NEW YORK, INC. NCS HEALTHCARE OF MARYLAND, INC. NCS HEALTHCARE OF OHIO, INC. PHARMASOURCE HEALTHCARE, INC. NCS HEALTHCARE OF ARKANSAS, INC. NCS HEALTHCARE OF MICHIGAN, INC. NCS HEALTHCARE OF TEXAS, INC. NCS HEALTHCARE OF CALIFORNIA, INC. NCS HEALTHCARE OF INDIANA, INC. NCS HEALTHCARE OF TENNESSEE, INC. RESCOT SYSTEMS GROUP, INC. NCS HEALTHCARE OF ILLINOIS, INC. NCS HEALTHCARE OF MINNESOTA, INC. UNI-CARE HEALTH SERVICES, INC. NCS HEALTHCARE OF PENNSYLVANIA, INC. NCS HEALTHCARE OF WISCONSIN, INC. UNI-CARE HEALTH SERVICES OF MAINE, INC. NCS HEALTHCARE OF CONNECTICUT, INC. NCS HEALTHCARE OF NEBRASKA, INC. NCS HEALTHCARE OF NEW JERSEY, INC. NCS HEALTHCARE OF NEW MEXICO, INC. NCS HEALTHCARE OF FLORIDA, INC. BEACHWOOD HEALTHCARE MANAGEMENT, INC. NCS HEALTHCARE OF WASHINGTON, INC. MANAGEMENT & NETWORK SERVICES, INC.
BY: /S/ MICHAEL J. MASCALI ---------------------------------------- MICHAEL J. MASCALI, VICE PRESIDENT, ON BEHALF OF EACH OF THE ABOVE CORPORATIONS NCS HEALTHCARE OF NORTH CAROLINA, INC. BY: /S/ KEVIN B. SHAW - -------------------------------------- KEVIN B. SHAW, PRESIDENT 26 28 ANNEX A to SECURITY AGREEMENT SCHEDULE OF EXISTING FINANCING STATEMENTS This information for this Schedule was separately delivered to the parties. 29 ANNEX B to SECURITY AGREEMENT SCHEDULE OF CHIEF EXECUTIVE OFFICES
==================================================================================================================== ASSIGNOR TAX I.D. NO. ADDRESS ==================================================================================================================== NCS HealthCare, Inc. 34-1816187 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Thrifty Medical Supply, Inc. 73-1291927 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of Oklahoma, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Rhode Island, Inc. 05-0429829 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Kansas, Inc. 34-1839712 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of South Carolina, 31-1508225 3201 Enterprise Parkway Inc. Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Oregon, Inc. 34-1836971 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Maryland, Inc. 31-1496240 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Arkansas, Inc. 31-1490517 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of California, Inc. 31-1499819 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- RESCOT SYSTEMS GROUP, INC. 23-2589308 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Uni-Care Health Services, Inc. 02-0468190 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Uni-Care Health Services of Maine, 02-0468192 3201 Enterprise Parkway Inc. Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of New Jersey, Inc. 22-3395391 3201 Enterprise Parkway (formerly Advanced Rx Services, Inc.) Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Florida, Inc. 34-1843258 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Washington, Inc. 34-1844193 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Management & Network Services, Inc. 34-1819691 3201 Enterprise Parkway Beachwood, Ohio 44122 - --------------------------------------------------------------------------------------------------------------------
30
==================================================================================================================== ASSIGNOR TAX I.D. NO. ADDRESS ==================================================================================================================== NCS Services, Inc. 34-1837567 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Iowa, Inc. 31-1509013 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Modesto, Inc. 31-1510328 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS Quality Care Pharmacy, Inc. 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Kentucky, Inc. 31-1521217 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- KINETIC SERVICES, INC. 95-4346189 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS Daven Drug, Inc. 31-1508219 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- JK Medical Services, Inc. 73-1461722 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of Oklahoma, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Vermont, Inc. 31-1526078 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Beachwood, Inc. 34-1881410 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- HLF Adult Home Pharmacy Corp. 16-1342819 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of New York, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Ohio, Inc. 31-1257307 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Michigan, Inc. 34-1777940 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Indiana, Inc. 35-1954599 3201 Enterprise Parkway Beachwood, Ohio 44122 - --------------------------------------------------------------------------------------------------------------------
31
==================================================================================================================== ASSIGNOR TAX I.D. NO. ADDRESS ==================================================================================================================== NCS HealthCare of Illinois, Inc. 37-1354510 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS Unlimited, Inc. 37-1360802 3201 Enterprise Parkway Beachwood, Ohio 44122 (this entity was dissolved) - -------------------------------------------------------------------------------------------------------------------- NCS HEALTHCARE OF PENNSYLVANIA, INC. 23-2679334 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- CHESHIRE LONG TERM CARE PHARMACY, 3201 Enterprise Parkway INC. Beachwood, Ohio 44122 (merged into NCS HealthCare of Connecticut, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Massachusetts, Inc. 31-1571275 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Arizona, Inc. 31-1573985 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Montana, Inc. 34-1851710 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Missouri, Inc. 34-1855274 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- CS HealthCare of North Carolina, 56-1889643 3201 Enterprise Parkway Inc. Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Optimal Acquisition Co., Inc. 3201 Enterprise Parkway Beachwood, Ohio 44122 (merged into NCS HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of New York, Inc. 34-1854267 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- PharmaSource Healthcare, Inc. 58-2066823 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Texas, Inc. 34-1866495 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Tennessee, Inc. 34-1866494 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Minnesota, Inc. 34-1866489 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of Wisconsin, Inc. 34-1866497 3201 Enterprise Parkway Beachwood, Ohio 44122 - --------------------------------------------------------------------------------------------------------------------
3 32
==================================================================================================================== ASSIGNOR TAX I.D. NO. ADDRESS ==================================================================================================================== NCS HealthCare of Nebraska, Inc. 34-1866491 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- NCS HealthCare of New Mexico, Inc. 34-1866493 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Beachwood HealthCare Management, Inc. 34-1868886 3201 Enterprise Parkway Beachwood, Ohio 44122 - -------------------------------------------------------------------------------------------------------------------- Kern Acquisition Corp. 34-1865336 3201 Enterprise Parkway (merged into NCS Beachwood, Ohio 44122 HealthCare of California, Inc.) - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
4 33 ANNEX C to SECURITY AGREEMENT SCHEDULE OF EQUIPMENT AND INVENTORY LOCATIONS
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare,Inc 34-1816187 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NCS HealthCare of New Jersey, Inc. 22-3395391 3201 Enterprise Parkway Beachwood, Ohio 44122 (formerly Advanced Rx Services, Inc.) 202 West Parkway Dr. Ste 2 Egg Harbor, NJ 08234 ====================================================================================================================== Beachwood HealthCare Management, Inc. 34-1868886 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NCS HealthCare of Connecticut, Inc. 06-1330453 3201 Enterprise Parkway Beachwood, Ohio 44122 288 Highland Ave. Cheshire, CT 06410 ====================================================================================================================== HLF Adult Home Pharmacy Corp. 16-1342819 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== JK Medical Services, Inc. 73-1461722 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== Kinetic Services, Inc. 95-4346189 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== Management & Network Services, 34-1819691 3201 Enterprise Parkway Inc. (MNSI) Beachwood, Ohio 44122 4936 Blazer Parkway Dublin, OH 43017 ====================================================================================================================== NCS Daven Drug, Inc. 31-1508219 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NCS HealthCare of Arizona, Inc. 31-1573985 3201 Enterprise Parkway Beachwood, Ohio 44122 2450 S. 4th Ave. Ste. 119 Yuma, AZ 85364 2323 East Magnolia St Ste. 103 Phoenix, AZ 85034 ======================================================================================================================
34
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare of Arkansas, Inc. 31-1490517 3201 Enterprise Parkway Beachwood, Ohio 44122 10620 Colonel Glenn Rd. Little Rock, AR 72204 10620 Colonel Glenn Rd. Little Rock, AR 72204 2890 B Walnut Rogers, AR 72756 4102 Jefferson Ave. Texarkana, AR 71854 ====================================================================================================================== NCS HealthCare of California, Inc. 31-1499819 3201 Enterprise Parkway Beachwood, Ohio 44122 7701 Haskell Ave. Van Nuys, CA 91406 8303 Alondra Blvd. Ste 111 Paramount, CA 90723 602 Scenic Dr. Modesto, CA 95350 1315 Boughton Dr. Bakerfield, CA 93380 16250 Gundry Ave. Paramount, CA 90723 3939 Guasti Road Unit B Ontario, CA 91761 ====================================================================================================================== NCS HealthCare of Florida, Inc. 34-1843258 3201 Enterprise Parkway Beachwood, Ohio 44122 2891 Gateway Centre Parkway Bld. C Pin. Park, FL 33782 3771 SW 42nd Ave. Ste. 5 Gainsville, FL 32608 ====================================================================================================================== NCS HealthCare of Illinois, Inc. 37-1354510 3201 Enterprise Parkway Beachwood, Ohio 44122 2363 Federal Dr. Decatur, IL 62526 113 North Park Ave. PO Box 278 Herrin, Il 62948 1510 Midway Ct. Ate. E107 Elk Grove Vil, IL 60007 911 Washington St. Highland, IL 62249 ====================================================================================================================== NCS HealthCare of Indiana, Inc. 35-1954599 3201 Enterprise Parkway Beachwood, Ohio 44122 Northwest Blvd. Indianapolis 822 Ste. 100 IN 46278 215 West State St. Princeton, IN 47670 211 West State St. Princeton, IN 47670 E52 Lake Ave.Fort Wayne, IN 46805 769 Madison Street, STE D Crown Point, IN 46307 ======================================================================================================================
2 35
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare of Iowa, Inc. 31-1509013 3201 Enterprise Parkway Beachwood, Ohio 44122 4131 109th St. Urbandale, IA 50322 2330 Transit Plaza, Ste. B Sioux City, IA 51106 1401 East Anson St. Box 474 Marshalltown, IA 50158 5217 Grand Ave. Davenport, IA 52807 ====================================================================================================================== NCS HealthCare of Kansas, Inc. 34-1839712 3201 Enterprise Parkway Beachwood, Ohio 44122 4999 S. LuLu Wichita, KS 67216 2003 SW Gage Blvd. Topeka, KS 66604 ====================================================================================================================== NCS HealthCare of Kentucky, Inc. 31-1521217 3201 Enterprise Parkway Beachwood, Ohio 44122 835 North L. Rogers Wells Blvd. Glascow, KY 42141 ====================================================================================================================== NCS HealthCare of Maryland, Inc. 31-1496240 3201 Enterprise Parkway Beachwood, Ohio 44122 201 North Burhans Blvd. Hagerstown, MD 21740 14300 Cherry Lane Ct, Ste 112 Laurel, MD 20707 1516 B South Salisbury Blvd. Salisbury, MD 21801 ====================================================================================================================== NCS HealthCare of Massachusetts, Inc. 31-1571275 3201 Enterprise Parkway Beachwood, Ohio 44122 50 D'Angelo Dr. Marlborough, MA 01752 ====================================================================================================================== NCS HealthCare of Michigan, Inc. 34-1777940 3201 Enterprise Parkway Beachwood, Ohio 44122 21811 Kelly Eastpoint, MI 48021 4025 Broadmoor S.E. Kentwood, MI 49512 4072 Market Place Rd. Flint, MI 48507 ====================================================================================================================== NCS HealthCare of Minnesota, Inc. 34-1866489 3201 Enterprise Parkway Beachwood, Ohio 44122 1285 Corporate Center Dr. Ste 120 Eagan, MN 55121 ====================================================================================================================== NCS HealthCare of Missouri, Inc. 34-1855274 3201 Enterprise Parkway Beachwood, Ohio 44122 11720 E. 23rd St. Independence, MO 64050 3413 Hollenberg Dr. Brigeton, MO 63044 ======================================================================================================================
3 36
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare of Modesto, Inc. 31-1510328 3201 Enterprise Parkway Beachwood, Ohio 44122 602 Scenic Dr. Modesto, CA 95350 ====================================================================================================================== NCS HealthCare of Montana, Inc. 34-1851710 3201 Enterprise Parkway Beachwood, Ohio 44122 1611 Alderson Ave. Billings, MT 59102 ====================================================================================================================== NCS HealthCare of Nebraska, Inc. 34-1866491 3201 Enterprise Parkway Beachwood, Ohio 44122 300 Oak Creek Dr. Lincoln, NE 68528 ====================================================================================================================== NCS HealthCare of New Mexico, Inc. 34-1866493 3201 Enterprise Parkway Beachwood, Ohio 44122 2835 FG Pan American Fwy. Albuquerque, NM 87107 ====================================================================================================================== NCS HealthCare of New York, Inc. 34-1854267 3201 Enterprise Parkway Beachwood, Ohio 44122 219 Seneca Turnpike New Hartford, NY 13413 4 British American Blvd. Latham, NY 12110 2470 Walden Ave. Buffalo, NY 14225 50 Carlson Rd. Rochester, NY 14610 1607 Route 300 Newburgh, NY 12550 621 E. Brighton Syracuse, NY 13210 St.Camillus 813 Fay Road Syracuse, NY 13219 ====================================================================================================================== NCS HealthCare of North Carolina, Inc. 56-1889643 3201 Enterprise Parkway Beachwood, Ohio 44122 164 Windchime Ct. Raleigh, NC 27615 609 E. Harnett Street Benson, NC 27504 4020 Capital Blvd. Ste 102 Raleigh, NC 27604 44 Buck Shoals Road Bld C Unit 5,6,7 Arden, NC 28704 ====================================================================================================================== NCS HealthCare of Ohio, Inc. 31-1257307 3201 Enterprise Parkway Beachwood, Ohio 44122 4700 Northwest Parkway Hilliard, Ohio 43026 3617 Center Park Dr. Westchester, OH 45069 34300 Lakeland Blvd. Eastlake, OH 44095 219 W. 12th St. Dover, OH 44622 ======================================================================================================================
4 37
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare of Oklahoma, Inc. 73-1499934 3201 Enterprise Parkway Beachwood, Ohio 44122 4400 North Lincoln Ste 220 Oaklahoma City, OK 73105 10838 Marshall Street, Ste 122 Tulsa, OK 74116 1300 W. Evengreen Durant, OK 74701 3200 East Reno Del City, OK 73117 6815 NW 10th St, Ste. 4 Ok. City, OK 73127 3168 North Portland Ok. City, OK 73112 ====================================================================================================================== NCS HealthCare of Oregon, Inc. 34-1836971 3201 Enterprise Parkway Beachwood, Ohio 44122 3104 Turner Road SE Salem, OR 97302 2725 NE Columbia Blvd. Portland, OR 97211 2620 Barnett Rd. Ste H Medford, OR 97504 ====================================================================================================================== NCS HealthCare of Pennsylvania, Inc. 23-2679334 3201 Enterprise Parkway Beachwood, Ohio 44122 4113 Birney Ave Moosic, PA 18507 90 Glade Dr. Kittanning, PA 16201 6330 Hedgewood Dr. Ste 280 Allentown, PA 18106 109 S. Sharpsville Ave. Sharon, PA 16146 110 East Broad St. Souderton, PA 18964 127 South Center St. Edensburg, PA 15931 100 Beta Dr. Pittsburgh, Pa 15238 3000 South Queen St. Dallastown, PA 17313 Telford - Distribution Ctr. 810 Tech Dr. Telford, PA 18969 =========================================-------------================================================================ NCS HealthCare of Rhode Island, Inc. 05-0429829 3201 Enterprise Parkway Beachwood, Ohio 44122 NCS Long Term Care Pharmacy, 500 South Rd. East Greenwich RI 02818 ====================================================================================================================== NCS HealthCare of South Carolina, Inc. 31-1508225 3201 Enterprise Parkway Beachwood, Ohio 44122 937 Bowman Rd. Mt Pleasant, SC 29464 ======================================================================================================================
5 38
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== NCS HealthCare of Tennessee, Inc. 34-1866494 3201 Enterprise Parkway Beachwood, Ohio 44122 5055 Covington Way, Ste 6 Memphis, TN 38134 ====================================================================================================================== NCS HealthCare of Texas, Inc. 34-1866495 3201 Enterprise Parkway Beachwood, Ohio 44122 1313 Valwood Parkway, Ste 150 Carrollton, TX 75006 5291 Langfield Rd. Houston, TX 77040 7619 South University Ave Lubbock, TX 79423 ====================================================================================================================== NCS HealthCare of Vermont, Inc. 31-1526078 3201 Enterprise Parkway Beachwood, Ohio 44122 16 Gregory Dr. Ste 3 S. Borlington, VT 05403 ====================================================================================================================== NCS HealthCare of Washington, Inc. 34-1844193 3201 Enterprise Parkway Beachwood, Ohio 44122 Kent Ofice 25502 74th Ave South Kent, WA 98032 3305 Main St. Ste 205 Vancouver, WA 98663 ====================================================================================================================== NCS HealthCare of Wisconsin, Inc. 34-1866497 3201 Enterprise Parkway Beachwood, Ohio 44122 3101 E. Enterprise Ave Appleton, WI 54913 2840 21st Place LaCrosse, WI 54601 1801 C-1 Airport Rd Waukesha, WI 53188 ====================================================================================================================== NCS of Missouri, Inc. 34-1859330 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NCS Services, Inc. 34-1837567 3201 Enterprise Parkway Beachwood, Ohio 44122 NCS Progressive Rehab. 696 1st Ave North, Ste 203, St. Petersburg, FL 33701 34300 Lakeland Blvd. Eastlake, OH 44095 4700 Northwest Parkway Hilliard, OH 43026 ====================================================================================================================== NCS Unlimited, Inc. 37-1360802 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NDS Consulting Applied For 3201 Enterprise Parkway Beachwood, Ohio 44122 ======================================================================================================================
6 39
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== Rescot System Group, Inc. 23-2589308 3201 Enterprise Parkway Beachwood, Ohio 44122 1 Neshaminy Interplex Ste 207 Trevose, PA 19053 ====================================================================================================================== Thrifty Medical Supply, Inc. 73-1291927 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== Uni-Care Health Services, Inc. 02-0468190 3201 Enterprise Parkway Beachwood, Ohio 44122 23 Perimeter Rd, South Londonderry, New Hampshire NH 03053 ====================================================================================================================== Uni-Care Health Services of Maine, Inc. 02-0468192 3201 Enterprise Parkway Beachwood, Ohio 44122 105 York Street Ste 1 Kennebunk, ME 04043 110 Davis Farm Road Portland, ME 04103 124 High Street, Ste 2 Caribou, ME 04736 20 Freedom Parkway Bangor, ME 04401 ======================================================================================================================
7 40
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== PharmaSource Healthcare, Inc. 58-2066823 3201 Enterprise Parkway, Beachwood, Ohio 44122 3500 Parkway Ln NW Ste 280 Norcross, GA 30092 100 Hopspital Ave Ozark, AL 36360 462 E. G. Mills Parkway Hinesville, GA 31313 393 Ridgecrest Circle Clayton, GA 30525 1600 Albany St Ste. 200 Beech Grove, IN 46107 600 Mary St. Ste 3213 Evansville, IN 47747 700 Broadway 8th Fl. East Ft. Wayne, IN 46802 5454 Hollman Ave. PO Box 189 Hammond, IN 46320 21 North Ave. Ste. 450 Kansas City, KS 66102 1700 SW 7th St. Ste 814 Topeka, KS 66606 5301 East Hudson River Rd. Ann Arbor, MI 48206 One Hurly Plaza 11th Fl. Flint, MI 46503 215 North Ave. Suite 200 Mount Clemens, MI 46043 1700 Clinton St. Muskegon, MI 49442 440 S. Market Springfield, MO 65305 101 Highwatch Rd. Effingham Falls, NH 1000 16th St. NW Mandan, ND 58554 155 5th St. Barberton, OH 44203 217 Clifton Ave. 15th Fl. Cincinnati, OH 45220 410 W. 100th Ave Columbus, OH 43210 3535 Olentangy River Rd. Columbus, OH 43214 300 Rockefeller Dr. Moskogee, OK 74401 3300 NW Expressway 5 East, Oklahoma City, OK 73112 1350 Locust St. Ste 104 Pittsburgh, PA 15219 800 East 21st St. Ste. 300 Sioux Falls, SD 57117 2000 N. Old Hickory Trail DeSoto, TX 75115 520 E. 6th St Loop 256 Odessa, TX 79761 ======================================================================================================================
8 41
====================================================================================================================== ASSIGNOR EI# SITES ====================================================================================================================== Kern Acquisition Co. Inc 34-1865336 3201 Enterprise Parkway Beachwood, Ohio 44122 ====================================================================================================================== NCS HealthCare of Beachwood, Inc. 34-1881410 3201 Enterprise Parkway Beachwood, Ohio 44122 4936 Blazer Parkway Ste B Dublin, OH 43017 4700 Northwest Parkway Hilliard, Ohio 43026 X ALLIANCE????? ====================================================================================================================== ====================================================================================================================== PARTNERSHIPS ====================================================================================================================== NCS Mobile Diagnostic Gateway Center Parkway Pinellas. Park, FL 33782 2363 Federal Dr. Decatur, IL 62526 1245 Forest Ave. Des Plaines, IL 60018 113 North Park Ave. Herrin, IL 62948 3413 Hollenberg Dr. Bridgeton, MO 60344 618 Broadway St. Pitcalm, PA 15140 6950 Germantown Ave. Ste. 200 Philadelphia, PA 19119 34300 Lakeland Blvd. Eastlake 44095 3320 Bardaville Dr. Lansing, MI 48906 6317 Centre Park Dr. Westchester, OH 45069 ====================================================================================================================== AAS Pharmacy 10203 Kotzebue Street, Ste 110 San Antonio, TX 78217 204 East Main St. Grayson, KY 10620 Colonel Glenn Rd. Ste B Little Rock, AR 72204 4936 Blazer Parkway Dublin, OH 43017 ======================================================================================================================
9 42 ANNEX D to SECURITY AGREEMENT SCHEDULE OF MARKS ----No material Marks---- 43 ANNEX E to SECURITY AGREEMENT SCHEDULE OF PATENTS AND APPLICATIONS -----No Material Patents----- 44 ANNEX F to SECURITY AGREEMENT SCHEDULE OF COPYRIGHTS AND APPLICATIONS -----No material Copyrights----- EX-10.18 4 EXHIBIT 10.18 1 EXHIBIT 10.18 EXECUTION COPY SEPARATION AGREEMENT -------------------- JEFFREY R. STEINHILBER ("Employee") and NCS HEALTHCARE, INC., a Delaware corporation ("Company"), in exchange for their mutual covenants and obligations set forth herein, hereby agree as follows: 1. As of June 11, 1999 ("Date of Resignation"), Employee, through his signature below, voluntarily resigns his employment with the Company. Employee understands that his employment records will reflect the voluntary nature of the cessation of his employment, and expressly acknowledges that he has not been "discharged" or "terminated" by the Company, constructively or otherwise. The Company hereby consents to and accepts Employee's resignation. 2. Employee and the Company hereby agree that execution and acceptance of this Agreement by the parties hereto constitutes a termination of that certain Employment Agreement, dated December 1, 1998, between Company and Employee, a copy of which has been attached hereto as EXHIBIT A (the "Employment Agreement") as of the Date of Resignation. Employee and the Company hereby acknowledge and agree that, pursuant to the terms of the Employment Agreement and notwithstanding anything to the contrary contained herein or otherwise, the obligations of the parties thereto set forth in Section 3 of the Employment Agreement shall survive the termination thereof and Employee, by his signature hereto, reaffirms his obligations as set forth in Section 3 of the Employment Agreement. The Employee Noncompetition Agreement, dated February 13, 1996, is hereby terminated in its entirety without the survival of any provisions. 3. In connection herewith, Employee will continue until November 30, 2001, to receive his $220, 000 annual salary, less such deductions and withholdings as are required by law, payable in accordance with Company's standard payroll practices (the "Salary Continuation"). In addition, Employee will continue to until November 30, 2001, to receive reimbursement for club dues and assessments for Mayfield Country Club and a $129.99 cellular telephone allowance in addition to the medical, 401(k) and other benefits provided by the Company to its executives and employees generally. Finally, Employee will be entitled to a $725 bonus and to retain the notebook computer, computer monitor, key board, and palm pilot previously provided to him by the Company and the magazine subscriptions paid for by the Company in Employee's name will be transferred to Employee's home address until renewal at the cost and choice of Employee. If Jon Outcalt and Kevin Shaw cease to own or otherwise control, in the aggregate, at least fifty percent (50%) of the voting control of the Company (as a result of a sale, exchange or other transfer or as a result of a merger, consolidation, reorganization or other transaction), then the "Salary Continuation" and an amount equal to the maximum 401(k) match that would otherwise have been paid by the Company will be immediately due in one lump sum calculated using an annual discount rate of 6%. 4. After November 30, 2001, to the extent permitted by law, Employee shall be entitled to continuation of coverage under the Company's health/medical insurance plan at his own expense pursuant to any rights he may have under the Federal -1- 2 Consolidated Omnibus Budget Reconciliation Act, as amended ("COBRA"), part VI of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended and Internal Revenue Code ss. 4980(B)(f). Such continuation shall be afforded up to the maximum period provided by law so long as Employee submits payments for elected coverage and otherwise complies with conditions of continuation on a timely basis. 5. (a) Except as otherwise provided in this Agreement, Employee does hereby for himself and for his heirs, executors, successors and assigns, release and forever discharge the Company, its current and past subsidiaries, divisions, and affiliated businesses, if any, together with its and their officers, directors, management, representatives, employees, shareholders, agents, successors, assigns, attorneys and other persons affiliated with the Company, both known and unknown (collectively, the "Releasees"), of and from any and all claims, demands, actions or causes of action, damages, or suits at law or equity, of whatsoever kind or nature arising in connection with Employee's employment or cessation of employment with the Company that has occurred prior to the Effective Date of this Agreement, including, but not limited to, all claims or demands for back pay, reinstatement, hire or re-hire, front pay, group insurance or employee benefits of whatsoever kind (except on rights expressly provided for herein), claims for moneys or expenses, any claims for failing to obtain employment at any other company or with any other person or employer, any claims relating to the Option Agreements (as defined in Section 7 below) or the termination thereof, or demands for attorney's fees and legal expenses that Employee has or may have by reason of any matter or thing arising out of, or in any way connected with, directly or indirectly, any act or omission in connection with Employee's employment or cessation of employment by the Company that has occurred prior to the Effective Date of this Agreement. (b) Except as otherwise provided in this Agreement, the Company hereby releases and forever discharges Employee of and from any and all claims, demands, actions or causes of action, damages, or suits at law or equity, of whatsoever kind or nature arising out of or relating to Employee's employment with Company, or demands for attorney's fees and legal expenses that the Company has or may have by reason of any matter or thing arising out of, or in any way connected with, directly or indirectly, any act or omission in connection with Employee's employment by the Company that has occurred prior to the Effective Date of this Agreement; provided, however, nothing herein shall be construed to release Employee from any fraudulent or illegal conduct. 6. Employee recognizes and understands that, by executing this Agreement, he shall be releasing the Releasees above from any claims that he now has, may have, or subsequently may have under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Sections 621, ET SEQ., as amended (the "ADEA"), by reason of any matter or thing arising out of, or in any way connected with, directly or indirectly, any acts or omissions which have occurred prior to and including the Effective Date of this Agreement. In other words, Employee will have none of the legal rights against the aforementioned parties that he would otherwise have under the ADEA by his signing this Agreement. 7. The Company and Employee are parties to (i) an Amended and Restated Stock Option Agreement dated as of December 7, 1995 (actually with the Company's predecessor, Aberdeen Group, Inc. for 2,570 Aberdeen shares at $285.33 per share, converted at 46.092647189 to 1 into 118,458 NCS shares at $6.19 per share of which 23,600 were previously -2- 3 exercised, leaving a balance of 94,858) (the "December Agreement"), (ii) an Incentive Stock Option Participation Agreement dated as of February 13, 1996 (the "February Agreement"), and (iii) a Nonqualified Stock Option Participation Agreement dated as of April 22, 1997 (the "April Agreement"). Collectively, the foregoing are referred to as the "Option Agreements." The parties agree that all unvested options have been forfeited but that notwithstanding anything to the contrary in the Option Agreements, Employee shall be entitled to exercise vested options under the Option Agreements as follows:
Option Price Last Date Agreement Vested Options Per Share For Exercise December Agreement 94,858 $ 6.19 December 28, 2004 February Agreement 13,524 $16.50 December 28, 2004 April Agreement 5,000 $25.00 December 28, 2004
The Company represents that the Human Resources Committee of the Board of Directors has approved the extension of the exercise date of the Options under the February and April Agreements to December 28, 2004. In addition the provisions of the December Agreement relating to the "Share Purchase Agreement" referred to therein are deemed deleted, the "Share Purchase Agreement" having been terminated. Also Section 9 of the April Agreement shall be deemed to apply to the December Agreement as well. The Company and Employee are also parties to a Nonqualified Stock Option Participation Agreement dated October 23, 1998, under which no options are vested and which is hereby terminated. 8. Employee and his heirs, executors, successors, assigns and representatives shall hold the fact and terms of this Agreement in strict confidence and shall not communicate, reveal, or disclose the terms of this Agreement to any other persons except to Employee's immediate family, to legal counsel, and to tax consultants, all of whom shall be instructed by Employee similarly to hold the fact and terms of this Agreement in the strictest confidence, and as required by law. 9. The Company hereby notifies Employee of his right to consult with his chosen legal counsel before signing this Agreement. The Company shall afford, and Employee acknowledges receiving, not less than twenty-one (21) calendar days in which to consider this Agreement to insure that Employee's execution of this Agreement is knowing and voluntary. In signing below, Employee expressly acknowledges that he has had at least twenty-one (21) days to consider this Agreement and that his execution of same is with full knowledge of the consequences thereof and is of his own free will. 10. Employee warrants and represents that, prior to and including the Effective Date of this Agreement, no claim, demand, cause of action, or obligation which is subject to this Agreement has been assigned or transferred to any other person or entity, and no other person or entity has or has had any interest in said claims, demands, causes of action, or obligations, and that Employee has the sole right to execute this Agreement. -3- 4 11. Both the Company and Employee agree and recognize that, for a period of seven (7) calendar days following Employee's execution of this Agreement, Employee may revoke this Agreement by providing written notice revoking the same, within this seven (7) day period, to the Company at the address set forth below. Such revocation of this Agreement by Employee will also automatically revoke the acceptance of the offer set forth herein and Employee will not be entitled to any amounts described herein. Should Employee revoke this Agreement within this seven (7) day period, Employee agrees immediately to return all moneys and other benefits that he has received from the Company pursuant to this Agreement prior to the date of such revocation. 12. All notices or other communications hereunder shall not be binding on either party hereto unless in writing, and delivered to the other party hereto at the following address: If to the Company: NCS HEALTHCARE, INC. 3201 Enterprise Parkway, Suite 220 Beachwood, Ohio 44122 Attn: President If to Employee: Jeffrey R. Steinhilber 300 Grey Fox Run Bentleyville, Ohio 44022 Notices shall be deemed duly delivered upon hand delivery thereof at the above addresses, one day after deposit with a nationally recognized overnight delivery company or three days after deposit thereof in the United States mails, postage prepaid, certified or registered mail. Either party may change its address for notice by delivery of written notice thereof in the manner provided. 13. This Agreement contains the entire agreement between the parties hereto as to the subject matters addressed herein, and there are no understandings between the parties other than those specifically and expressly set forth in this Agreement. This Agreement shall not be amended or modified in any manner except upon written agreement by the parties. 14. Employee acknowledges and agrees that his election to execute this Agreement is entirely voluntary, and hereby acknowledges that he has not been pressured, coerced, or otherwise unduly influenced by the Company to execute this Agreement. 15. This Agreement shall be governed and interpreted pursuant to the laws of the State of Ohio. CAUTION TO EMPLOYEE: READ BEFORE SIGNING. THIS DOCUMENT CONTAINS A RELEASE OF ALL CLAIMS AGAINST RELEASEES PRIOR TO THE EFFECTIVE DATE OF THIS AGREEMENT. -4- 5 IN WITNESS WHEREOF, Employee and the Company agree as set forth above: Date of Receipt of Agreement Signature of Employee by Employee: Acknowledging Date of Receipt September 7, 1999 /s/ Jeffrey R. Steinhilber - ----------------------------------- ------------------------------ Receipt Witnessed By: /s/ Diane Steinhilber ------------------------------ Date of Execution by Employee: (The "Effective Date of this Agreed To and Accepted By: Agreement" is the Eighth (8th) day After this Date.) September 8, 1999 /s/ Jeffrey R. Steinhilber - ----------------------------------- ------------------------------ Execution Witnessed By: /s/ Diane Steinhilber ------------------------------ Date of Execution by Company: September 10, 1999 - ----------------------------------- NCS HEALTHCARE, INC. By:/s/ Kevin B. Shaw --------------------------- Title: Chief Executive Officer ----------------------- Execution Witnessed By: /s/ Nancy Macklin ------------------------------ -5- 6 EXHIBIT A --------- [See attached] --- -6- 7 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is entered into this 1st day of December, 1998, by and between NCS HEALTHCARE, INC., a Delaware corporation (the "Company"), and JEFFREY R. STEINHILBER, an individual ("Executive"). In consideration of and in reliance upon the covenants, obligations and agreements herein contained, the Company and Executive hereby agree as follows: 1. EMPLOYMENT. Subject to the terms of this Agreement, for a period of three (3) years commencing on the date hereof (the "Employment Period"), the Company hereby agrees to employ Executive as Chief Operating Officer of the Company, and Executive hereby accepts such employment. As such, Executive shall report directly to the Chief Executive Officer (the "CEO") of the Company and perform such reasonable and appropriate duties for the Company as may be assigned to him by the CEO, including responsibility for organizing the distribution and consulting functions of the Company. Specifically, during the Employment Period, Executive's responsibility will include (i) completion of the hub-and-spoke distribution model for the Company, (ii) achievement of certain specific payroll and other expense targets as determined from time to time, and (iii) completion of the Company's conversion to the DX System. Throughout the Employment Period, Executive shall devote his efforts diligently and faithfully on a full-time basis to the business and welfare of the Company in accordance with and in furtherance of the policies and directives of the Company. 2. COMPENSATION AND BENEFITS. 2.1 SALARY. The Company shall pay Executive a base salary during his employment at the rate of Two Hundred Twenty Thousand Dollars ($220,000) per year, less such deductions and withholdings as are required by law, payable in accordance with the Company's standard payroll practices. Such annual base salary shall be reviewed by the CEO of the Company at least annually during the Employment Period or within such other period as is consistent with the Company's compensation review program in existence from time to time. Increases in Executive's annual base salary shall be made at the discretion of the Company's Board of Directors upon the recommendation of the CEO. Base salary shall not be reduced after any such increase. 2.2 BONUS. As further consideration for the services to be rendered by Executive to the Company during the Employment Period, Executive may receive bonus compensation or other executive incentives based on Executive's and the Company's performance. The amount of such bonus compensation or other executive incentives, if any, shall be determined in the sole discretion of the Company's Board of Directors upon recommendation of the CEO and may be comprised of a combination of cash payments and the granting of options under the Company's stock option program in existence from time to time. Any bonus shall be subject to such deductions and withholdings as are required by law. 8 2.3 BENEFITS. Executive shall be entitled to club dues and assessments for Mayfield Country Club and a cellular telephone allowance in addition to the medical, 401(k) and other benefits provided by the Company to its executives or employees generally. 2.4 EXPENSES. The Company shall reimburse Executive for reasonable expenses incurred by him on behalf of the Company in the performance of his services during his employment. Executive shall furnish the Company with the documentation in connection with such expenses required by the Internal Revenue Code and the regulations promulgated thereunder. 3. NONDISCLOSURE AND NONSOLICITATION. 3.1 DEFINITIONS. For purposes of this Agreement, the terms "NCS Group," "Competitor" and "Competitive Product or Service" are defined to include: (a) "NCS Group" means all business entities controlled by or under common control with the Company. (b) "Competitor" means any person or entity (or parent, subsidiary or affiliate thereof) engaged in or about to become engaged in research on, or the production, sale and/or performance of, any Competitive Product or Service in the United States. (c) "Competitive Product or Service" means a product or service which is competitive with a product or service manufactured, sold or performed by the NCS Group, or with respect to which the NCS Group has conducted research and created a business plan, during the three (3) years immediately preceding termination of Executive's employment with the Company. 3.2 NONCOMPETITION. During the Employment Period, and for a period of eighteen (18) months following the termination for any reason of Executive's employment with the Company (whether by expiration of the Employment Period or otherwise), without the prior written consent of the Company, Executive will not directly or indirectly render services to, act as an officer, director, partner, consultant, agent or employee of, or otherwise assist or operate as a Competitor. During the pendency of this noncompetition covenant, Executive will immediately notify the Company of any change of his address and the name and address of any subsequent employer. Nothing in this Section 3.2 shall prevent Executive from being a member or officer of or from participating in the activities of any trade or professional association, or from acquiring any equity interest in the Company or of less than one percent (1%) in a Competitor whose shares are traded on a national securities exchange or over-the-counter. 3.3 NONSOLICITATION. During the Employment Period and for a period of eighteen (18) months following the termination for any reason of Executive's employment with the Company (whether by expiration of the Employment Period or otherwise), Executive will not directly or indirectly, without the prior written approval of the Company, solicit, cause to be solicited or aid in soliciting, any of the NCS Group's (i) customers as of the date of termination for the purpose of selling to such customers Competitive Products or Services or (ii) 2 9 employees as of the date of termination for the purpose of hiring any such employees as an agent, consultant, employee or otherwise of another employer. 3.4 NONDISCLOSURE. Executive agrees that he shall not, at any time, directly or indirectly, disseminate verbally or in writing or use for his personal benefit, any Confidential Information, regardless of how it may have been acquired, except for the disclosure of such information as may be necessary for Executive to perform his duties hereunder, as required by law or otherwise as authorized in writing by an officer of the Company. Executive further agrees that, upon termination of his employment, he will return promptly to the Company all memoranda, notes, records, reports, manuals and other documents (and all copies thereof) relating to the NCS Group's business which he may then possess or have under his control. For purposes of this Agreement, "Confidential Information" means all information relating to the terms and conditions of this Agreement and all information belonging to, used by, or which is in the possession of, the NCS Group relating to the NCS Group's business, products, services, strategies, pricing, customers, representatives, suppliers, distributors, technology, programs, finances, costs, employee compensation, marketing plans, developmental plans, computer software (including all operating system and systems application software), inventions, developments or trade secrets, all to the extent such information is not intended by the NCS Group to be disseminated to the public or to other participants in its trade or business or is otherwise not generally known to Competitors. Executive acknowledges that all of the Confidential Information is and shall continue to be the exclusive proprietary property of the NCS Group, whether or not prepared in whole or in part by Executive and whether or not disclosed to or entrusted to the custody of Executive. 3.5 REMEDIES. If Executive commits or threatens to commit a breach of any of the provisions of this Section 3, the Company shall have the right to have the provisions of this Agreement specifically enforced by any court having jurisdiction, it being acknowledged by Executive and agreed by the parties that any such breach or threatened breach will cause injury to the Company for which money damages alone will not provide an adequate remedy. Therefore, if Executive threatens to violate or violates any provisions of this Section 3, Executive agrees that, in addition to its other remedies, the Company is entitled to injunctive relief, including, but not limited to, temporary restraining orders and/or preliminary or permanent injunctions to restrain or enjoin any violation or threatened violation of this Agreement without having to post any bond. The rights and remedies enumerated above shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. 3.6 REFORMATION OF AGREEMENT. If any of the covenants contained in this Section 3, or any portion thereof, are found by a court of competent jurisdiction to be invalid or unenforceable as against public policy or for any other reason, such court shall exercise its discretion to reform such covenant to the end that Executive shall be subject to nondisclosure, noncompetition and nonsolicitation covenants that are reasonable under the circumstances and are enforceable by the Company. In any event, if any provision of this Agreement is found unenforceable for any reason, such provision shall remain in force and effect to the maximum extent allowable and all nonaffected provisions shall remain fully valid and enforceable. 3 10 3.7 EXTENSION OF COVENANTS. If a court of competent jurisdiction finds that Executive has violated any of the restrictions or covenants contained in this Section 3, then the parties agree that the period of all restrictions and covenants set forth in Section 3 automatically shall be extended by the number of days that the court determines Executive to have been in violation of such restriction or covenant. 3.8 REASONABLENESS OF TERMS. Both the Company and Executive stipulate and agree that covenants and other terms contained in this Section 3 are reasonable in all respects, including time period, geographical area and scope of restricted activities (it being acknowledged that the Company's business is being carried on within a rapidly consolidating industry), and that the restrictions contained herein are designed to protect the NCS Group's business and ensure that Executive does not engage in unfair competition with the NCS Group. 4. TERMINATION. 4.1 MANNER OF TERMINATION. This Agreement may be terminated prior to the end of the Employment Period as follows: (a) BY THE COMPANY FOR DISABILITY. At the option of and by written notice from the Company, if Executive shall become disabled, which, for purposes of this Agreement, shall be deemed to have occurred if Executive suffers from any disability or impairment of health which continues for at least one hundred twenty (120) consecutive days or one hundred twenty (120) days in any twelve (12) month period and which, in the opinion of the Company, renders the Executive unable to perform his duties on an active, full-time basis. (b) BY THE COMPANY FOR GOOD CAUSE. At the option of and by written notice from the Company, if the Company shall find "good cause" for termination, which, for purposes of this Agreement, shall mean (i) a material breach by Executive of his obligations under Section 3 of this Agreement or his fiduciary obligations to the Company, (ii) commission by Executive of a felony or any offense involving misappropriation of money or property, (iii) repeated absenteeism, (iv) illegal drug use or excessive alcohol consumption on the part of Executive, or (v) if Executive repeatedly fails, after notice and a reasonable chance to cure, to observe the reasonable directives of the Board of Directors of the Company or their designee to whom Executive reports. (c) BY EXECUTIVE. By executive upon not less than ninety (90) days notice upon which the Executive would receive a severance benefit of twelve (12) months base pay and benefits. (d) DEATH. As of the end of the month in which Executive dies. 4.2 CONSEQUENCES OF TERMINATION. The provisions of Section 3 will survive termination of this Agreement. In addition, all rights of the parties to seek damages and other relief for breaches of this Agreement occurring prior to or on account of the termination hereof by the other of this Agreement will survive termination. In addition, if Executive's employment is terminated by the Company pursuant to Section 4.1(a) above, Executive shall be 4 11 entitled to continue to receive his annual base salary and, to the extent eligible for participation, to receive benefits under Section 2.3 above for a period equal to the longer of (i) eighteen (18) months, or (ii) the number of months remaining in the Employment Period. Except as set forth in this Section 4.2 and Section 4.3, all rights and obligations of the parties hereunder will expire upon termination of this Agreement. 4.3 SEVERANCE BENEFITS. In addition to any other compensation or benefit payable to Executive hereunder, if, at any time during the Employment Period, (a) Jon Outcalt and Kevin Shaw cease to own or otherwise control, in the aggregate, at least fifty percent (50%) of the voting control of the Company (as a result of a sale, exchange or other transfer or as a result of a merger, consolidation, reorganization or other transaction), (b) Kevin Shaw is no longer the Chief Executive Officer of the Company, and thereafter, but within the Employment Period or (c) the scope of Chief Operating Officer's responsibilities are materially changed from historical practices, (y) Executive's employment with the Company is terminated by the Company for any reason other than those set forth in Section 4.1(a), (b) or (d) above or (z) Executive terminates his employment pursuant to Section 4.1(c) above, Executive shall be entitled, as a severance benefit, to continue to receive his annual base salary and benefits under Section 2.3 above for a period equal to the longer of (i) eighteen (18) months, or (ii) the number of months remaining in the Employment Period. 5. MISCELLANEOUS. 5.1 WAIVER. Failure of the Company at any time to enforce any provision of this Agreement or to require performance by Executive of any provision hereof shall in no way affect the validity of this Agreement or any part hereof or the right of the Company thereafter to enforce its rights hereunder; nor shall it be taken to constitute a condemnation or waiver by the Company of that default or any other or subsequent default or breach. 5.2 NOTICES. All notices or other communications hereunder shall not be binding on either party hereto unless in writing and delivered to the other party hereto at the following address: If to the Company: NCS HEALTHCARE, INC. 3201 Enterprise Parkway, Suite 220 Beachwood, Ohio 44122 Attn: Chief Financial Officer If to Executive: Jeffrey R. Steinhilber 300 Grey Fox Run Bentleyville, OH 44022 Notices shall be deemed duly delivered upon hand delivery thereof at the above addresses or two (2) days after deposit thereof in the United States mails, postage prepaid, certified or registered mail. Any notice delivered in any other manner shall be effective upon receipt. Either party may change its address for notice by delivery of written notice thereof in the manner provided. 5 12 5.3 ASSIGNMENT. No rights of any kind under this Agreement shall, without prior written consent of the Company, be transferable to or assignable by Executive or any other person, or be subject to alienation, encumbrance, garnishment, attachment, execution or levy of any kind, voluntary or involuntary. This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns. 5.4 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio without regard for the conflicts of laws provisions thereof. 5.5 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. 5.6 HEADINGS. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 5.7 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS. This Agreement constitutes the entire understanding and agreement between the parties hereto concerning the subject matter hereof. All negotiations by the parties hereto concerning the subject matter hereof are merged into this Agreement and there are no representations, warranties, covenants, understandings or agreements, oral or otherwise, in relation thereto by the parties hereto other than those incorporated herein. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. INTENDING TO BE LEGALLY BOUND, the parties or their duly authorized representatives have signed this Agreement on the date first above written. NSC HEALTHCARE, INC. By: /s/Kevin B. Shaw -------------------------- Title: Chief Executive Officer ----------------------- EXECUTIVE /s/Jeffrey R. Steinhilber ------------------------------ Jeffrey R. Steinhilber 6 EX-21.1 5 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT STATE OF INCORPORATION CORPORATE NAME OR ORGANIZATION Beachwood HealthCare Management, Inc. Delaware Management & Network Services, Inc. Ohio NCS HealthCare of Arizona, Inc. Ohio NCS HealthCare of Arkansas, Inc. Ohio NCS HealthCare of Beachwood, Inc. Ohio NCS HealthCare of California, Inc. Ohio NCS HealthCare of Connecticut, Inc. Connecticut NCS HealthCare of Florida, Inc. Ohio NCS HealthCare of Illinois, Inc. Illinois NCS HealthCare of Indiana, Inc. Indiana NCS HealthCare of Iowa, Inc. Ohio NCS HealthCare of Kansas, Inc. Ohio NCS HealthCare of Kentucky, Inc. Ohio NCS HealthCare of Maryland, Inc. Ohio NCS HealthCare of Massachusetts, Inc. Ohio NCS HealthCare of Michigan, Inc. Ohio NCS HealthCare of Minnesota, Inc. Ohio NCS HealthCare of Missouri, Inc. Ohio NCS HealthCare of Montana, Inc. Ohio NCS HealthCare of Nebraska, Inc. Ohio NCS HealthCare of New Jersey, Inc. New Jersey NCS HealthCare of New Mexico, Inc. Ohio NCS HealthCare of New York, Inc. Ohio NCS HealthCare of North Carolina, Inc. Ohio NCS HealthCare of Ohio, Inc. Ohio NCS HealthCare of Oklahoma, Inc. Oklahoma NCS HealthCare of Oregon, Inc. Ohio NCS HealthCare of Pennsylvania, Inc. Pennsylvania NCS HealthCare of Rhode Island. Inc. Rhode Island NCS HealthCare of South Carolina, Inc. Ohio NCS HealthCare of Tennessee, Inc. Ohio NCS HealthCare of Texas, Inc. Ohio NCS HealthCare of Vermont, Inc. Ohio NCS HealthCare of Washington, Inc. Ohio NCS HealthCare of Wisconsin, Inc. Ohio NCS of Missouri, Inc. Delaware NCS Services, Inc. Ohio NCS Consulting Inc. Ohio PharmaSource Healthcare, Inc. Georgia Rescot Systems Group, Inc. Pennsylvania Uni-Care Health Services, Inc. New Hampshire Uni-Care Health Services of Maine, Inc. New Hampshire E-3 EX-23 6 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-72243; Form S-8 No. 333-70741; Form S-8 No. 333-49417; Form S-3 No. 333-63437; Form S-3 No. 333-47293; Form S-3/A, No. 333-29565 and Form S-3/A, No. 333-35551) of NCS HealthCare, Inc. and in the related prospectuses of our report dated August 11, 1999, with respect to the consolidated financial statements of NCS HealthCare, Inc. and subsidiaries included in its Annual Report (Form 10-K) for the year ended June 30, 1999. /s/ Ernst & Young LLP Cleveland, Ohio September 27, 1999 E-4 EX-27.1 7 EXHIBIT 27.1
5 1,000 YEAR YEAR JUN-30-1999 JUN-30-1998 JUL-01-1998 JUL-01-1997 JUN-30-1999 JUN-30-1998 29,424 21,186 0 0 199,048 160,752 38,880 18,427 49,244 43,784 285,233 221,519 94,391 69,559 35,275 25,966 699,499 623,790 87,838 72,157 320,116 108,180 0 0 0 0 203 198 276,231 287,136 699,499 623,790 717,825 509,064 717,825 509,064 540,547 380,217 540,547 380,217 0 0 35,568 2,279 19,864 8,199 (21,044) 20,345 (7,640) 9,014 (13,404) 11,331 0 0 0 0 2,921 0 (16,325) 11,331 (.81) .59 (.81) .58
EX-27.2 8 EXHIBIT 27.2
5 1,000 3-MOS 6-MOS 9-MOS JUN-30-1999 JUN-30-1999 JUN-30-1999 JUL-01-1998 JUL-10-1998 JUL-01-1998 SEP-30-1998 DEC-31-1998 MAR-31-1999 17,842 21,341 24,014 0 0 0 177,712 198,023 209,310 18,532 18,155 15,505 48,442 50,545 50,609 240,757 267,773 285,669 75,635 82,690 91,107 28,267 31,732 34,715 643,321 672,628 695,362 66,507 73,737 70,286 278,177 293,316 315,214 0 0 0 0 0 0 201 202 202 290,715 295,812 299,893 643,321 672,628 695,362 172,846 350,876 535,487 172,846 350,876 535,487 128,990 261,620 398,787 128,990 261,620 398,787 0 0 0 147 573 1,712 4,887 9,575 14,375 6,577 13,387 20,153 2,828 5,722 8,530 3,749 7,665 11,623 0 0 0 0 0 0 2,921 2,921 2,921 828 4,744 8,702 .04 .23 .43 .04 .23 .41
-----END PRIVACY-ENHANCED MESSAGE-----