NEIGHBORCARE, INC.
601 EAST PRATT STREET
BALTIMORE, MD 21202
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about July 13, 2005 with
Amendment No. 20 to the Solicitation/ Recommendation Statement on Schedule 14D-9
(as amended, the "SCHEDULE 14D-9") of NeighborCare, Inc. (the "COMPANY" or
"NEIGHBORCARE"). You are receiving this Information Statement in connection with
the possible election of persons designated by Omnicare, Inc. ("OMNICARE") to a
majority of the seats on the Board of Directors of the Company (the "BOARD").
You are urged to read this Information Statement carefully. You are not,
however, required to take any action. Capitalized terms used herein and not
otherwise defined shall have the meaning set forth in the Schedule 14D-9.
Nectarine Acquisition Corp., a wholly-owned subsidiary of Omnicare
("MERGER SUB" or "PURCHASER"), is offering to purchase any and all of the
outstanding shares of Common Stock, par value $0.02 per share, of the Company,
together with the associated preferred stock purchase rights (the "COMPANY
COMMON STOCK"), at a purchase price of $34.75 per share (the "$34.75 OFFER").
The $34.75 Offer is scheduled to expire at 12:00 midnight, New York City time,
on July 27, 2005. On July 13, 2005, Omnicare and Merger Sub filed an amendment
to their Tender Offer Statement on Schedule TO reflecting the terms of the
$34.75 Offer and an amended offer to purchase reflecting the $34.75 Offer as
Exhibit (a)(1)(XX) to Amendment No. 35 to their Tender Offer Statement on
Schedule TO (the "$34.75 OFFER TO PURCHASE"). The $34.75 Offer is made upon the
terms and subject to the conditions set forth in the $34.75 Offer to Purchase.
The $34.75 Offer to Purchase is being sent to the Company shareholders
separately. Pursuant to the Agreement and Plan of Merger, dated as of July 6,
2005, among Omnicare, Merger Sub and the Company (the "MERGER AGREEMENT"), at
the expiration of the $34.75 Offer upon the terms and subject to the
satisfaction or waiver of certain conditions set forth in the Merger Agreement,
it is contemplated that Merger Sub will purchase all of the Company Common Stock
validly tendered pursuant to the $34.75 Offer and not withdrawn (the "PROPOSED
MERGER"). The consummation of the $34.75 Offer pursuant to the terms of the
Merger Agreement would result in a change of control of the Company. Following
the consummation of the $34.75 Offer and subject to the other conditions
contained in the Merger Agreement, including, if required by Pennsylvania law,
obtaining the necessary vote of the Company's shareholders in favor of the
Merger Agreement, Merger Sub will be merged with and into the Company (the
"MERGER") and each outstanding share of Company Common Stock not tendered into
the $34.75 Offer (other than shares held by the Company, Omnicare or its
subsidiaries or shareholders who properly perfect appraisal rights under
Pennsylvania law) will be converted into the right to receive $34.75 in cash, or
any higher price paid in the $34.75 Offer, without interest. Following the
consummation of the Merger, the Company will continue as the surviving
corporation.
The information contained in this Information Statement concerning
Omnicare, Merger Sub and the Omnicare Designees (as defined below) has been
furnished to the Company by Omnicare and Merger Sub, and the Company assumes no
responsibility for the accuracy or completeness of such information.
BOARD OF DIRECTORS
GENERAL
The Company Common Stock is the only class of voting stock of the Company
outstanding, and the holders of the Common Stock are entitled to one vote per
share. As of July 6, 2005, there were 44,124,707 shares of Company Common Stock
issued and outstanding. The Board currently consists of eight members, and there
are currently no vacancies; the size and composition of the Board are subject to
certain contractual commitments set forth in the Merger Agreement and described
below. The Company's Board of Directors is divided into three classes of
directors each serving three-year terms.
The term of the three Class I directors expires at the Company's annual
meeting of shareholders in 2007; the term of the three Class II directors
expires at the Company's annual meeting of shareholders in 2005; and the term of
the two Class III directors expires at the Company's annual meeting of
shareholders in 2006.
RIGHT TO DESIGNATE DIRECTORS
The Merger Agreement provides that, subject to applicable laws, promptly
upon the acceptance for payment of shares of Company Common Stock pursuant to
the Offer, Omnicare will be entitled to designate, subject to Section 14(f) of
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), such
number of directors, rounded up to the next whole number, to the board of
directors of the Company, each subsidiary of the Company and each committee
thereof (the "OMNICARE DESIGNEES"), as is equal to the product of the total
number of directors on the board (determined after giving effect to the
directors elected pursuant to this sentence) multiplied by the greater of (i)
75% and (ii) the percentage that the aggregate number of Shares beneficially
owned by Omnicare or its affiliates bears to the total number of fully diluted
Shares then outstanding. The Company is required under the Merger Agreement to
take all actions necessary to cause the Omnicare Designees to be so elected,
including, if necessary, seeking the resignations of one or more existing
directors. The Merger Agreement provides that until such time as the Proposed
Merger becomes effective (the "EFFECTIVE TIME"), the Company's board of
directors must have at least three directors who were directors on the date of
the Merger Agreement or who were selected by a majority vote of the continuing
directors then in office ("CONTINUING DIRECTORS").
Following the election or appointment of the Omnicare Designees to the
board of directors of the Company and until the Effective Time, the approval of
a majority of the Continuing Directors will be required to authorize (and such
authorization shall constitute the authorization of the board of directors and
no other action on the part of the Company, including any action by any other
director of the Company, will be required to authorize):
i. any amendment or termination of the Merger Agreement by the Company;
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ii. any exercise or waiver of any of the Company's rights or remedies
under the Merger Agreement;
iii. any extension of the time for performance of Omnicare's and
Purchaser's respective obligations under the Merger Agreement;
iv. any agreement between the Company and any of its subsidiaries, on the
one hand, and Omnicare, Purchaser and any of their affiliates (other
than the Company and any of its subsidiaries), on the other hand; or
v. to take any action that would prevent or would materially delay the
consummation of the Proposed Merger.
THE OMNICARE DESIGNEES
Omnicare has informed the Company that the Omnicare Designees will be
selected by Omnicare from among any of the directors and executive officers of
Omnicare set forth below. The following table sets forth certain information
with respect to individuals Omnicare may designate as the Omnicare Designees
(including age as of the date hereof, current principal occupation or employment
and five-year employment history). Unless otherwise indicated below, each
occupation set forth opposite each person relates to employment with Omnicare.
Unless otherwise indicated below, the business address of each of the Omnicare
Designees is c/o Omnicare, Inc., 100 East RiverCenter Boulevard, Covington,
Kentucky 41011. Each of the Omnicare Designees is a citizen of the United
States.
PRESENT PRINCIPAL
OCCUPATION AND
FIVE YEAR EMPLOYMENT
NAME TITLE HISTORY
---------------- --------------- -----------------------------------
Edward L. Hutton Chairman of the Mr. Hutton has been Chairman of the
Board Board of Omnicare since May 2003.
In May 2003, Omnicare amended its
By-Laws to create the non-executive
position of Chairman of the Board.
Prior to May 2003, Mr. Hutton served
in an executive position, as
Chairman of Omnicare, from 1981. He
is also Chairman of the Board and a
Director of Chemed Corporation
(which was named Roto-Rooter, Inc.),
Cincinnati, Ohio (a diversified
public corporation with interests in
plumbing, drain cleaning and hospice
services) ("CHEMED") and has held
these positions since May 2004 and
April 1970, respectively. Prior to
May 2004, Mr. Hutton had served as
executive Chairman of Chemed since
November 1993. Previously, he was
President and Chief Executive
Officer of Chemed, positions he had
held from April 1970 to November
1993, and was Chairman and Chief
Executive Officer of Chemed from
November 1993 until May 2001.
Joel F. Gemunder Director, President Mr. Gemunder is President and Chief
and Chief Executive Executive Officer of Omnicare and
Officer has held these positions since May
1981 and May
3
2001, respectively. Mr. Gemunder is
President of Purchaser and has held
this position since June 2004. Mr.
Gemunder was an Executive Vice
President of Chemed and Group
Executive of its Health Care Group
from May 1981 through July 1981 and
a Vice President of Chemed from
1977 until May 1981. Mr. Gemunder
is a Director of Chemed and
Ultratech, Inc. (a manufacturer of
photolithography equipment for the
computer industry).
Timothy E. Bien Senior Vice Mr. Bien is Senior Vice President --
President -- Professional Services Purchasing of
Professional Omnicare, a position he has held
Services and since May 1996.
Purchasing
Charles H. Erhart, Jr. Director Mr. Erhart retired as President of
W.R. Grace & Co., Columbia, Maryland
(an international specialty
chemicals, construction and
packaging company) ("GRACE") in
August 1990. He had served as
President since July 1989. From
November 1986 to July 1989, he was
Chairman of the Executive Committee
of Grace. From May 1981 to November
1986, he served as Vice Chairman
and Chief Administrative Officer
of Grace. Mr. Erhart is a Director
of Chemed.
David W. Froesel, Jr. Director, Senior Mr. Froesel is Senior Vice President
Vice President and and Chief Financial Officer of
Chief Financial Omnicare and has held these
Officer positions since March 1996. Mr.
Froesel is Treasurer and Director of
Purchaser and has held these
positions since June 2004. From May
1993 to February 1996, Mr. Froesel
was Vice President of Finance and
Administration at Mallinckrodt
Veterinary, Inc., a subsidiary of
Mallinckrodt, Inc. From July 1989 to
April 1993, he was worldwide
Corporate Controller of Mallinckrodt
Medical, Inc., a subsidiary of
Mallinckrodt, Inc.
Cheryl D. Hodges Senior Vice Ms. Hodges is Senior Vice President
President and and Secretary of Omnicare and has
Secretary held these positions since February
1994. Ms. Hodges is Secretary and
Director of Purchaser and has held
these positions since June 2004.
Patrick E. Keefe Executive Vice Mr. Keefe is Executive Vice
President -- President -- Operations of Omnicare
Operations and has held this position since
February 1997.
Sandra E. Laney Director Ms. Laney is Chairman and Chief
Executive Officer of Cadre Computer
Resources Co., Cincinnati, Ohio (a
network security services company),
positions she has held since
September 2001. Previously she
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served as Executive Vice President
and Chief Administrative Officer of
Chemed from May 2001 and May 1991,
respectively, until March 2003.
From November 1993 until May 2001,
she held the position of Senior
Vice President of Chemed. From May
1984 to November 1993, she was a
Vice President of Chemed. Ms. Laney
is a Director of Chemed.
Andrea R. Lindell Director Dr. Lindell is Dean and a Professor
DNSc, RN of the College of Nursing at the
University of Cincinnati, a position
she has held since December 1990.
Dr. Lindell is also Associate Senior
Vice President of the Medical Center
at the University of Cincinnati, a
position she has held since July
1998. From September 1994 to June
2002, she also held an additional
position as Interim Dean of the
College of Allied Health Sciences at
the University of Cincinnati. From
August 1981 to August 1990, Dr.
Lindell served as Dean and a
Professor of the School of Nursing
at Oakland University, Rochester,
Michigan. In addition, from
September 1977 until August 1981,
Dr. Lindell also held the position
of Chair, Department of Nursing, of
the University of New Hampshire,
Durham, New Hampshire.
John T. Crotty Director Mr. Crotty is Managing Partner of
CroBern Management Partnership LLP,
Lake Bluff, Illinois (a healthcare
investment and advisory firm) and
retired President and Chief
Executive Officer of CroBern Inc.
(a healthcare consulting and
advisory firm), both firms he
co-founded in 1986. Previously, he
held several senior management
positions during 19 years with
American Hospital Supply
Corporation. Mr. Crotty is a
Director of Owens and Minor, Inc.,
(a distributor of medical and
surgical supplies).
John H. Timoney Director Mr. Timoney is a retired executive
of Applied Bioscience International
Inc. (a contract research
organization serving the
pharmaceutical and biotechnology
industries that was acquired by
Pharmaceutical Product Development
in 1996) ("APPLIED BIOSCIENCE"),
where he held a number of senior
positions from 1986 through 1996,
including Vice President, Chief
Financial Officer and Treasurer.
He was also a Director of Applied
Bioscience from September 1986
through June 1995. Mr. Timoney has
also held financial and executive
positions with IMS Health
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Incorporated (a market research
firm serving the pharmaceutical and
healthcare industries), Chemed and
Grace.
Amy Wallman Director Ms. Wallman is a retired audit
partner with Ernst & Young
International (a public accounting
and professional services firm), a
position she held from 1984 to July
2001. From 1995 to 2001, she also
served as Health Care Industry
Leader in Ernst & Young's
healthcare practice based in New
York, New York.
Omnicare has informed the Company that each of the individuals listed
above has consented to act as a director, if so designated. If necessary,
Omnicare may choose additional or other Omnicare Designees, subject to the
requirements of Rule 14f-1 of the Exchange Act.
None of the Omnicare Designees is currently a director of, or holds any
position with, the Company. Omnicare and Purchaser have advised the Company that
none of the Omnicare Designees or any of his or her affiliates (i) has a
familial relationship with any directors or executive officers of the Company or
(ii) has been involved in any transactions with the Company or any of its
directors, officers or affiliates which are required to be disclosed pursuant to
the rules and regulations of the Securities and Exchange Commission, except as
may be disclosed herein.
Omnicare and Purchaser have advised the Company that none of the Omnicare
Designees during the past five years has (i) been party to federal bankruptcy
law or state insolvency law proceedings, whereby a petition was filed by or
against such designee or a receiver, fiscal agent or similar officer was
appointed by a court for the business or property of such designee, (ii) been
convicted in a criminal proceeding (excluding traffic misdemeanors) or (iii)
been a party to any judicial or administrative proceeding that resulted in a
judgment, decree or final order with respect to engaging in any type of business
practice or enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws or federal commodities
laws, or a finding of any violation of federal or state securities laws.
CURRENT BOARD OF DIRECTORS
To the extent the Board will consist of persons who are not Omnicare
Designees, the Board is expected to continue to consist of those persons who are
currently directors of the Company who do not resign.
The names of the current members of the Board and certain information
about them are set forth below:
COMMITTEES OF THE BOARD OF
NAME AGE DIRECTORS
---------------------- --- ----------------------------------------------
John J. Arlotta 55 Chairman, Executive Committee
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James H. Bloem 54 Chairman, Audit and Compliance Committee;
Compensation Committee
James E. Dalton, Jr. 62 Nominating and Corporate
Governance Committee;
Compensation Committee
James D. Dondero 42 Chairman, Compensation Committee;
Executive Committee
Robert H. Fish 54 Executive Committee
Dr. Philip P. Gerbino 57 Lead Director; Audit and
Compliance Committee; Chairman,
Nominating and Corporate
Governance Committee
Arthur J. Reimers 50 Audit and Compliance Committee;
Executive Committee
Phyllis R. Yale 47 Nominating and Corporate
Governance Committee
John J. Arlotta has served as our chairman, president and chief
executive officer since December 2003. From July 2003 to December 2003, Mr.
Arlotta served as our vice chairman with primary responsibility for the
NeighborCare business. Prior to joining us, Mr. Arlotta served as a
consultant to Caremark Rx, Inc., a pharmaceutical services company, from
February 2002 to July 2003. Mr. Arlotta was president and chief operating
officer of Caremark Rx, Inc. from May 1998 to February 2002 and chief
operating officer of Caremark Rx, Inc. from September 1997 to May 1998.
James H. Bloem has served as our director since October 2, 2001. Mr. Bloem
has served as senior vice president and chief financial officer of Humana, Inc.,
a health benefits company, since February 2001. From September 1999 to February
2001, Mr. Bloem was an independent financial and business consultant. From
August 1995 to September 1999, Mr. Bloem served first as executive vice
president and then as president of the personal care division of Perrigo
Company, the nation's largest manufacturer of over-the-counter pharmaceuticals,
personal care, and nutritional products for the store brand market.
James E. Dalton has served as our director since October 2, 2001. Mr.
Dalton is the president of Edinburgh Associates, Inc., a consulting services
company, a position he has held since 2001. From 1990 to 2001, Mr. Dalton served
as president, chief executive officer and director of Quorum Health Group, Inc.,
a hospital ownership and management company. Mr. Dalton is a member of the board
of directors of Select Medical Corporation and Universal Health Realty Income
Trust.
James D. Dondero has served as our director since October 2, 2001. Since
1990, Mr. Dondero has served as president of Highland Capital Management, LP, an
investment advisory firm, where he has facilitated growth through the creation
of 19 separate portfolios holding in excess of $8 billion. Formerly, Mr. Dondero
served as chief investment officer of Protective Life Insurance Company's GIC
subsidiary, an insurance provider, from 1989 to 1993. Mr. Dondero is a member of
the board of directors of Motient Corporation.
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Robert H. Fish has served as our director since October 2001. Since
February 2005, Mr. Fish has been has been executive chairman and is also a
director of Coram Healthcare, Inc., a provider of home infusion services. Mr.
Fish served as our chairman and chief executive officer from January 2003 to
December 2003 until his resignation from these positions on December 1, 2003.
Prior to serving as our chairman and chief executive officer, Mr. Fish served as
our interim chairman from November 2002 to January 2003 and as our interim chief
executive officer from May 2002 to January 2003. Since November 1999, he has
served as managing partner of Sonoma-Seacrest, LLC, a California-based
healthcare practice specializing in strategic planning, performance improvement,
and merger and acquisition issues. From August 1995 to September 1999, Mr. Fish
served as president and chief executive officer of St. Joseph Health System, a
health care provider. Mr. Fish is a member of the board of directors of GHC.
Dr. Philip P. Gerbino has served as our director since March 16, 2000.
Since 1995, Dr. Gerbino has served as president of the University of the
Sciences in Philadelphia, which includes the Philadelphia College of Pharmacy,
and has been part of the faculty and administration of that institution for over
25 years. Dr. Gerbino is a member of the board of directors of DrugMax, Inc.
Arthur J. Reimers has served as our director since October 2003. Mr.
Reimers is currently an independent financial and business consultant. He joined
Goldman, Sachs & Co. as an investment banker in 1981 and in 1990 became a
partner of the firm. Upon Goldman, Sachs & Co.'s initial public offering in
1998, Mr. Reimers became a managing director and served in that capacity until
his retirement in 2001. From 1991 through 1996, Mr. Reimers served as co-head of
Goldman, Sachs & Co.'s Financial Advisory Group in its London office. Returning
to New York in 1996, Mr. Reimers founded and served as co-head of Goldman, Sachs
& Co.'s Healthcare Investment Banking Division until 1998. Mr. Reimers is a
member of the board of directors of Rotech Healthcare, Inc.
Phyllis R. Yale has served as our director since October 2003. Ms. Yale is
a managing director of Bain and Company, Inc., a global management consulting
firm. Ms. Yale joined Bain and Company in 1982, was elected to partnership in
1987 and currently manages its Boston office. Ms. Yale has worked extensively in
the healthcare and financial services industries.
The Company has a classified board, composed of three classes of directors
each serving three year terms. The three Class II Directors, whose terms expire
after the 2005 Annual Meeting of Shareholders are James D. Donero, James H.
Bloem and Phyllis R. Yale. The two Class III Directors, whose terms expire after
the 2006 Annual Meeting of Shareholders, are James E. Dalton, Jr. and Dr. Philip
P. Gerbino. The three Class I Directors, whose terms expire after the 2007
Annual Meeting of Shareholders, are John J. Arlotta, Robert H. Fish and Arthur
J. Reimers. There are no familial relationships among the current directors or
officers of the Company.
DIRECTOR INDEPENDENCE
In February 2004, we amended the charters of our Audit and Compliance
Committee and Compensation Committee and established a standing Nominating and
Corporate Governance Committee to implement the new rules and standards of the
SEC and Nasdaq Stock Market, Inc. The Board of Directors has determined that
each of its directors, other than Messrs. Arlotta and
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Fish, is independent as defined in Rule 4200(a)(15) of the Nasdaq Stock Market,
Inc. Marketplace Rules (the "NASDAQ RULES"). Mr. Arlotta is currently our
Chairman, President and Chief Executive Officer. Mr. Fish served as our Chairman
and Chief Executive Officer during fiscal 2003 until his resignation from these
positions on December 1, 2003 following the spin-off and remained an employee
for transitional purposes until February 28, 2004. Generally, the Nasdaq Rules
would prohibit a director from qualifying as "independent" if the director (or,
in certain instances, members of the director's family) has, or in the past
three years has had, certain relationships or affiliations with NeighborCare or
any of its consolidated subsidiaries, its outside auditors, or other companies
that conduct business with NeighborCare or any of its consolidated subsidiaries.
BOARD MEETINGS
The Board of NeighborCare held a total of 25 meetings during the last
completed fiscal year. No director attended fewer than 75% of the total number
of meetings of the Board and committees of the Board, if any, on which he served
during 2003. NeighborCare encourages, but does not require, members of our Board
of Directors to attend the annual meetings of shareholders. Seven of our
directors attended the 2004 Annual Meeting of Shareholders.
COMMUNICATIONS WITH THE BOARD
Any shareholder who desires to contact the Board of Directors or any one
or more individual members thereof may do so electronically c/o the General
Counsel by sending an e-mail to general.counsel@neighborcare.com or by writing
to the Board of Directors, c/o General Counsel, NeighborCare, Inc., 601 East
Pratt Street, 3rd Floor, Baltimore, Maryland 21202. Communications received
electronically or in writing are compiled by the General Counsel and distributed
to the Board of Directors or individual directors at the next regular meeting of
the Board of Directors or sooner if circumstances warrant.
BOARD COMPENSATION
Each of our directors who is not our employee receives an annual fee of
$25,000 for serving as a director and cash compensation of $1,500 for each
in-person meeting of the Board of Directors or Board Committee attended and
$1,000 for each telephonic meeting of the Board of Directors or Board Committee
attended. The chairperson of our Audit and Compliance Committee receives an
additional annual fee of $10,000.
Each director also receives an annual award of restricted stock under our
2004 Performance Incentive Plan having a fair market value at the time of grant
of $95,000. Such shares are 100% vested on the date of the award but during the
period commencing on the date of the award and terminating on the date the
grantee no longer serves as a director, referred to as the restricted period,
the shares may not be sold, assigned, exchanged, gifted, transferred, pledged,
or otherwise encumbered by the grantee except as described below. If, during the
restricted period, the fair market value of the shares is greater than $285,000,
the restrictions shall be lifted with respect to that number of the shares which
represents the amount of the fair market value of the shares in excess of
$285,000, but the restrictions shall continue to apply
9
during the restricted period to that portion of the shares with a fair market
value of $285,000. Upon a change of control, as defined in the plan, the shares
shall be free of restrictions.
Effective June 15, 2004, each director was granted 3,033 shares of
restricted stock valued at the closing market price of our common stock of
$31.32.
CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
Mr. Joseph A. LaNasa III was an elected member of our Board of Directors
until December 2003. In this capacity, he participated and had the opportunity
to vote on matters that were presented to our Board of Directors. Mr. LaNasa is
employed by Goldman Sachs & Co. as a managing director. As a director, Mr.
LaNasa acquired stock options that were granted under our 2001 Stock Option
Plan, but these expired without being exercised.
In fiscal 2003, we engaged Goldman Sachs to act as joint lead financial
advisor, together with UBS Warburg, in connection with the potential sale or
spin-off of a significant portion of our capital stock or assets. In April 2004,
we engaged Goldman Sachs to provide advisory services in connection with
Omnicare, Inc.'s unsolicited tender offer to acquire all of our outstanding
common stock. In fiscal 2004, we paid Goldman Sachs transaction fees in
connection with strategic transactions and placement fees for the sale of
securities and agreed to pay Goldman Sachs fees in connection with such advisory
services.
CORPORATE GOVERNANCE
ORGANIZATION OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board has four standing committees: (1) an Audit and Compliance
Committee; (2) a Compensation Committee; (3) an Executive Committee; and (4) a
Nominating and Corporate Governance Committee. The charters of the Audit and
Compliance Committee, Compensation Committee and Nominating and Corporate
Governance Committee are posted under CORPORATE GOVERNANCE DOCUMENTS -- INVESTOR
on NeighborCare's website at www.neighborcare.com.
AUDIT AND COMPLIANCE COMMITTEE
The AUDIT AND COMPLIANCE COMMITTEE held 12 meetings during the fiscal year
ended September 30, 2004. The Audit and Compliance Committee is responsible for
(i) the appointment, compensation and retention of NeighborCare's independent
public accountants; (ii) monitoring the relationship between and independence of
NeighborCare and such independent accountants; (iii) the oversight of the
accounting and financial reporting processes of NeighborCare and the audits of
the financial statements of NeighborCare; and (iv) establishing procedures for
the receipt, retention and treatment by NeighborCare of complaints regarding
accounting, internal accounting controls or auditing matters (including the
confidential, anonymous submission of such complaints by employees of
NeighborCare). The Audit and Compliance Committee also serves as NeighborCare's
"qualified legal compliance committee" within the meaning of Rule 205.2(k) of
Title 17, Chapter II of the Code of Federal Regulations. From October 1, 2003
through November 25, 2003, the Audit Committee was comprised of Messrs. Bloem,
Dondero and Gerbino. On November 25, 2003, the Board of Directors appointed
Messrs. Bloem, Gerbino and Reimers as members of the Audit and Compliance
10
Committee following the spin-off. Mr. Bloem serves as the chairperson of the
Audit and Compliance Committee. On February 11, 2004, the Board of Directors
adopted an amended and restated Audit and Compliance Committee charter. All
current Audit and Compliance Committee members and all Audit and Compliance
Committee members during the fiscal year ended September 30, 2004 are
independent within the meaning of Rule 10A-3 of the Exchange Act, and Rule
4200(a)(15) of the Nasdaq Rules. The Board of Directors has determined that Mr.
Bloem is an "audit committee financial expert" as defined under Item 401(h) of
Regulation S-K.
The COMPLIANCE COMMITTEE held no meetings during the fiscal year ended
September 30, 2004. The Compliance Committee was responsible for ensuring that
NeighborCare adopts and implements policies and procedures to ensure that
NeighborCare complies with all applicable statutes and regulations. The
Compliance Committee was comprised of Messrs. Bloem and Dalton during the fiscal
year ended September 30, 2004. The Board of Directors combined the Audit
Committee and the Compliance Committee in February 2004.
COMPENSATION COMMITTEE
The COMPENSATION COMMITTEE held seven meetings during the fiscal year
ended September 30, 2004. The Compensation Committee is responsible for (i) the
formulation, evaluation and approval of the compensation packages of
NeighborCare's executive officers and (ii) the oversight of all of the
compensation programs involving the issuance of NeighborCare's capital stock and
other equity securities. From October 1, 2003 through November 25, 2003, the
Compensation Committee was comprised of Messrs. Gerbino and LaNasa. On November
25, 2003, the Board of Directors appointed Messrs. Dondero, Bloem and Dalton as
the members of the Compensation Committee following the spin-off. Mr. Dondero
serves as the chairperson of the Compensation Committee. On February 11, 2004,
the Board of Directors adopted an amended Compensation Committee charter. All
current Compensation Committee members and all Compensation Committee members
during the fiscal year ended September 30, 2004 are independent within the
meaning of Rule 4200(a)(15) of the Nasdaq Rules.
EXECUTIVE COMMITTEE
The EXECUTIVE COMMITTEE held two meetings during the fiscal year ended
September 30, 2004. The Executive Committee has the authority of the Board of
Directors in the management of the business of NeighborCare during these periods
between the regular meetings of the Board of Directors. From October 1, 2003
through November 25, 2003, the Executive Committee was comprised of Messrs.
Dalton, Dondero, LaNasa and Fish. On November 25, 2003, the Board of Directors
appointed Messrs. Arlotta, Dondero, Fish and Reimers to the Executive Committee
following the spin-off. On December 1, 2003, Mr. LaNasa resigned from the Board
of Directors. Mr. Arlotta serves as the chairperson of the Executive Committee.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The NOMINATING AND CORPORATE GOVERNANCE COMMITTEE held three meetings
during the fiscal year ended September 30, 2004. The Nominating and Corporate
Governance Committee is responsible for (i) the identification, screening and
selection of qualified individuals to become directors and members of committees
of the Board of Directors; (ii) the
11
development and recommendation of corporate governance principles and policies
to the Board of Directors and the periodic monitoring and updating of such
principles and policies; and (iii) the oversight of the evaluation of the Board
of Directors and management of NeighborCare. The Board of Directors established
a Nominating and Corporate Governance Committee on November 25, 2003 and
appointed Messrs. Gerbino and Dalton and Ms. Yale as members of the Nominating
and Corporate Governance Committee following the spin-off. Dr. Philip Gerbino
serves as the chairperson of the Nominating and Corporate Governance Committee.
All Nominating and Corporate Governance Committee members are independent and
possess the ability to read and understand financial statements as required by
Nasdaq rules.
LEAD DIRECTOR AND EXECUTIVE SESSIONS
The independent directors of the Board of Directors held three meetings
without management present during the fiscal year ended September 30, 2004. The
executive sessions of independent directors are led by Dr. Philip Gerbino,
NeighborCare's "lead director" as appointed by the independent directors on
February 11, 2004. As lead director, Dr. Gerbino serves as a liaison between Mr.
Arlotta, NeighborCare's Chairman, and the Board of Directors.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics in compliance with
the Nasdaq Rules and the rules and regulations of the SEC. Our Code of Business
Conduct and Ethics applies to all directors, officers and employees, including
our Chief Executive Officer, Chief Financial Officer, Controller and any other
employees. A copy of our Code of Business Conduct and Ethics is available on our
website located at www.neighborcare.com/investor. We will post any amendments to
our Code of Business Conduct and Ethics on our website.
DIRECTOR NOMINATIONS
QUALIFICATIONS
In order to be nominated for director, a director candidate must meet the
following criteria: (i) the director must be a natural person over 21 years of
age; (ii) the director should have substantial management experience; (iii) the
director should have knowledge about the issues affecting NeighborCare's
business and the institutional pharmacy services industry in which NeighborCare
operates; (iv) the director should have exemplary personal integrity and
reputation, sound judgment, strong decision-making ability and share the values
of NeighborCare as outlined in the Code of Business Conduct and Ethics; and (v)
the director should have sufficient time to devote the director's energy and
attention to the diligent performance of the director's duties, including, but
not limited to, review of NeighborCare's documents, SEC filings and other
materials and the attendance of the Board of Directors and committee meetings,
as applicable. Additional special criteria apply to directors being considered
to serve on a particular committee of the Board of Directors, including, but not
limited to, the Audit and Compliance Committee. In addition, the Nominating and
Corporate Governance Committee will review whether the director nominee is
independent within the meaning of the Nasdaq Rules and the rules and regulations
of the SEC.
12
IDENTIFICATION AND EVALUATION OF NOMINEES
The Nominating and Corporate Governance Committee assesses the appropriate
size of the Board of Directors in accordance with NeighborCare's Articles of
Incorporation and Amended and Restated Bylaws, as amended, taking into account
any expected vacancies on the Board and which incumbent directors will stand for
re-election at the next meeting of shareholders. If vacancies are anticipated,
or otherwise arise, the Nominating and Corporate Governance Committee considers
candidates for director suggested by members of the Nominating and Corporate
Governance Committee and other Board members as well as management, shareholders
and other parties and makes recommendations to the full Board of Directors
regarding proposed candidates to fill the vacancy. The Nominating and Corporate
Governance Committee also has the authority to retain a search firm to identify
and evaluate director candidates. Except for incumbent directors standing for
re-election as described below, there are no differences in the manner in which
the Nominating and Corporate Governance Committee evaluates nominees for
director whether the nominee is recommended by a shareholder or any other party.
In the case of an incumbent director whose term of office expires, the
Nominating and Corporate Governance Committee reviews such director's service to
NeighborCare during the past term, including, but not limited to, the number of
Board of Directors and committee meetings attended, as applicable, quality of
participation and whether the candidate continues to meet the general
qualifications for a Board member outlined above, including the director's
independence, as well as any special qualifications required for membership on a
particular Board committee if such director serves on one or more committees of
the Board, and makes a recommendation regarding such director's nomination for
re-election to the full Board of Directors. If any member of the Nominating and
Corporate Governance Committee is an incumbent director eligible to stand for
re-election, such director shall not participate in the discussion of such
director's recommendation for nomination for election as a director by the
Nominating and Corporate Governance Committee.
In the case of a new director candidate, the Nominating and Corporate
Governance Committee will evaluate whether the nominee is independent, as
independence is defined under the Nasdaq Rules, and whether the nominee meets
the qualifications for a Board member outlined above as well as any special
qualifications applicable to a member of a particular Board committee, such as
the Audit and Compliance Committee, on which the nominee may be appointed to
serve if elected. In connection with such evaluation, the Nominating and
Corporate Governance Committee determines whether the Committee should interview
the nominee, and if warranted, one or more members of the Nominating and
Corporate Governance Committee interview the nominee in person or by telephone.
Upon completing the evaluation, and the interview if deemed necessary, the
Nominating and Corporate Governance Committee makes a recommendation to the full
Board of Directors as to whether to nominate the director nominee for election
at the next shareholders' meeting at which directors will be elected.
SHAREHOLDER NOMINATIONS
The Nominating and Corporate Governance Committee will consider properly
submitted shareholder recommendations of director candidates. A shareholder who
wishes to recommend a
13
prospective director nominee should send a letter to the Chairperson of the
Nominating and Corporate Governance Committee at: NeighborCare, Inc., 601 East
Pratt Street, 3rd Floor, Baltimore, Maryland 21202. Such letter must be signed
and dated and the following information must be included in or attached to the
letter:
o name and address of the shareholder making the recommendation;
o proof that the shareholder was the shareholder of record, and/or
beneficial owner, of Common Stock as of the date of the letter;
o the name, address and resume of the recommended nominee; and
o the written consent of the recommended nominee to serve as a director
of NeighborCare if so nominated and elected.
In addition, NeighborCare's Amended and Restated Bylaws, as amended,
permit a shareholder to nominate directors for election at an annual or special
shareholders meeting, provided the shareholder follows the procedures summarized
below:
o nominations by shareholders for directors which have not been
previously recommended by the Board of Directors must be
submitted to the Secretary of NeighborCare in writing not later
than (i) with respect to an election to be held at an annual
meeting of shareholders, the latest date upon which shareholder
proposals must be submitted to NeighborCare for inclusion in
NeighborCare's proxy statement relating to such meeting pursuant
to Rule 14a-8 under the Exchange Act, or other applicable rules
or regulations under the federal securities laws, or, if no such
rules apply, at least ninety (90) days prior to the date one year
from the date of the immediately preceding annual meeting of
shareholders, and (ii) with respect to an election to be held at
a special meeting of shareholders, the close of business on the
tenth day following the date on which notice of such meeting is
first given to shareholders.
o each shareholder nomination must set forth the following:
o the name and address of the shareholder making the nomination
and of the person or persons nominated;
o a representation that the shareholder is a holder of record of
Common Stock entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to vote for the
person or persons nominated;
o a description of all arrangements and understandings between the
shareholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination
or nominations were made by the shareholder;
14
o such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the SEC had the
nominee been nominated by the Board of Directors; and
o the consent of each nominee to serve as a director of
NeighborCare if so elected.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own more than 10% of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. Officers,
directors and greater than 10% shareholders are required by the SEC regulation
to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
submitted to us with respect to the fiscal year ended September 30, 2004, all
Section 16(a) filing requirements applicable to our executive officers,
directors and greater than 10% beneficial owners were complied with, except that
each of Messrs. Reimers, Dondero and Smith and Goldman Sachs Group, Inc. filed a
late report on Form 4, each reporting one transaction, and Mr. Fish filed a late
report on Form 4 reporting four transactions.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 2005 for: each person who we know
owns beneficially more than 5% of our common stock; each of our executive
officers named in the Summary Compensation Table contained in the section
entitled, "Executive Compensation," hereof; each of our directors; and all of
our executive officers and directors as a group. On June 30, 2005 there were
44,124,707 shares of our common stock outstanding, including 259,360 shares to
be issued in connection with our joint plan of reorganization confirmed by the
Bankruptcy Court on September 20, 2001.
Unless otherwise noted below, and subject to applicable community property
laws, to our knowledge, each person has sole voting and investment power over
the shares shown as beneficially owned, except to the extent authority is shared
by spouses under applicable law and except as set forth in the footnotes to the
table.
The number of shares beneficially owned by each shareholder is determined
under rules promulgated by the SEC. The information does not necessarily
indicate beneficial ownership for any other purpose. Beneficial ownership, as
set forth in the regulations of the SEC, includes securities owned by or for the
spouse, children or certain other relatives of such person as well as other
securities as to which the person has or shares voting or investment power or
has the right to acquire within 60 days of June 30, 2005. The same shares may be
beneficially owned by more than one person. Beneficial ownership may be
disclaimed as to certain of the securities. Shares
15
of common stock issuable upon the exercise of securities currently exercisable
or exercisable within 60 days of June 30, 2005 are deemed outstanding for
computing the share ownership and percentage ownership of the person holding
such securities, but are not deemed outstanding for computing the percentage of
any other person.
All addresses for the executive officers and directors are c/o
NeighborCare, Inc., 601 East Pratt Street, Baltimore, Maryland 21202.
SHARES OF
COMMON STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
OWNED (1) OWNED (1)
--------------- ----------------
Highland Capital Management, L.P. (2) 5,184,012 11.75%
Two Galleria Tower
13455 Noel Road, Suite 1300
Dallas, TX 75240
Chesapeake Management Partners (3) 2,395,293 5.43%
1829 Reisterstown Road, Suite 220
Baltimore, MD 21208
Credit Suisse First Boston (4) 2,240,858 5.08%
11 Madison Avenue
New York, NY 10010
Paul Tudor Jones, II (5) 2,329,100 5.28%
Tudor Investment Corporation
1275 King Street, 2nd Floor
Greenwich, CT 06831
John J. Arlotta (6) 811,842 1.84%
James D. Dondero (2) 5,184,012 11.75%
James H. Bloem (7) 53,663 *
Robert H. Fish (8) 405,866 *
Dr. Philip P. Gerbino (9) 10,616 *
James E. Dalton, Jr. (7) 53,663 *
Arthur J. Reimers 16,703 *
Phyllis R. Yale 6,703 *
John L. Kordash (10) 197,375 *
Robert A. Smith (11) 92,585 *
Richard W. Hunt (12) 44,821 *
Richard W. Sunderland Jr. -- *
John F. Gaither, Jr. (13) 128,125 *
All executive officers and 7,005,974 15.88%
directors as a group (13 persons) (14)
-------------------------
* Less than one percent.
16
(1) Excludes the beneficial ownership of units of our common stock held by
certain executive officers and directors pursuant to our Non-Qualified
Deferred Compensation Plan, which such executive officers cannot vote.
(2) Includes 41,537 shares of our common stock beneficially and directly owned
by Highland Capital Management, L.P. ("HIGHLAND CAPITAL") and 9,318 shares
of our common stock to which Highland Capital has investment discretion;
46,960 stock options to purchase our common stock, which are exercisable
within sixty days of June 30, 2005, granted under our 2001 Stock Option
Plan to Mr. Dondero and 6,703 shares of our common stock held by Mr.
Dondero (Mr. Dondero has an understanding with Highland Capital pursuant
to which he holds the options for the benefit of Highland Capital);
2,235,004 shares of common stock beneficially and directly owned by
Highland Crusader Offshore Partners, L.P. ("CRUSADER"); 264,656 shares of
common stock beneficially and directly owned by Prospect Street High
Income Portfolio, Inc. ("PROSPECT"); 41,100 shares of common stock owned
by PCMG Trading Partners XXIII L.P. ("PCMG"); 98,300 shares of our common
stock held by a trust for which Mr. Dondero is the sole grantor and
trustee; and 2,440,434 shares of our common stock beneficially and
directly owned by Highland Equity Focus Fund, L.P. Mr. Dondero disclaims
beneficial ownership of 5,184,012 shares of our common stock. Based
partially upon a Schedule 13D/A filed with the SEC on June 21, 2004 and a
Form 4 filed with the SEC on October 5, 2004, on behalf of a group
consisting of Highland Capital, Crusader, Prospect, PCMG and Mr. Dondero.
The general partner of Crusader is Highland Capital. Highland Capital, as
a registered investment advisor, is the investment advisor for Prospect.
The general partner of Highland Capital is Strand Advisors, Inc., a
Delaware corporation ("STRAND"). The general partner of PCMG is Strand
Advisors III, Inc., a Delaware corporation ("STRAND III"). Mr. Dondero is
the president of Highland, Prospect, Strand, and Strand III, and our
director.
(3) Includes 1,284,390 shares of common stock directly owned by Chesapeake
Partners Limited Partnership ("CPLP"), 1,027,803 shares of common stock
directly owned by Chesapeake Partners International, Ltd. ("CPINTL") and
83,100 shares of common stock directly owned by Barclays Global Investors
Event Drive Fund II ("BARCLAYS"). Chesapeake Partners Management Co., Inc.
is deemed to beneficially own the shares of CPLP, CPINTL and Barclays
under a sub-advisory agreement with Barclays Global Investors Limited in
which the aforementioned funds owning our shares are managed. These
amounts are based upon a Schedule 13D filed with the SEC on February 14,
2005.
(4) Includes 2,215,080 shares of common stock directly owned by Credit Suisse
First Boston Capital and 25,778 shares of common stock directly owned by
Credit Suisse First Boston LLC. These amounts are based upon a Schedule
13G/A filed with the SEC on April 7, 2005.
(5) Includes 250,685 shares of common stock directly owned by Tudor
Proprietary Trading LLC ("TPT"), 15,803 shares of common stock directly
owned by The Altar Rock Fund, L.P. ("ALTAR ROCK"), 1,593,797 shares of
common stock directly owned by The Raptor Global Portfolio, Ltd.
("RAPTOR") and 468,815 shares of common stock directly owned by The Tudor
BVI Global Portfolio, Ltd. ("BVI"). Tudor Investment Corporation ("TIC")
is
17
the sole general partner of Altar Rock and provides investment advisory
services to Raptor and BVI, TIC may be deemed beneficially to own the
shares of common stock owned by each of such reporting persons. Paul Tudor
Jones, II is the controlling shareholder of TIC and the indirect
controlling equity holder of TPT, therefore, he may be deemed beneficially
to own the shares of common stock deemed beneficially owned by TIC and
TPT. These amounts are based upon a Schedule 13G/A filed with the SEC on
February 14, 2005.
(6) Includes 671,875 shares of common stock issuable upon the exercise of
stock options that are exercisable within 60 days of June 30, 2005 granted
under our 2001 Stock Option Plan and 64,684 shares of restricted stock
granted under our 2004 Performance Incentive Plan.
(7) Includes 46,960 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days of June 30, 2005 granted under
our 2001 Stock Option Plan.
(8) Includes 399,163 shares of common stock issuable upon the exercise of
stock options that are exercisable within 60 days of June 30, 2005 granted
under our 2001 Stock Option.
(9) Includes 3,913 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days of June 30, 2005 granted under
our 2001 Stock Option Plan.
(10) Includes 171,875 shares of common stock issuable upon the exercise of
stock options that are exercisable within 60 days of June 30, 2005 granted
under our 2001 Stock Option Plan and 25,000 shares of restricted stock
granted under our 2004 Performance Incentive Plan.
(11) Includes 60,156 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days of June 30, 2005 granted under
our 2001 Stock Option Plan and 13,124 shares of restricted stock granted
under our 2004 Performance Incentive Plan.
(12) Includes 37,500 of restricted stock granted under our 2004 Performance
Incentive Plan.
(13) Includes 103,125 shares of common stock issuable upon the exercise of
stock options that are exercisable within 60 days of June 30, 2005 granted
under our 2001 Stock Option Plan and 25,000 shares of restricted stock
granted under our 2004 Performance Incentive Plan.
(14) Includes an aggregate of 1,550,987 shares of common stock issuable upon
the exercise of stock options that are exercisable within 60 days of June
30, 2005 granted under our 2001 Stock Option Plan and 165,308 shares of
restricted stock granted under our 2004 Performance Incentive Plan.
18
EXECUTIVE OFFICERS
The Board of Directors designated the following persons as executive
officers for the 2005 fiscal year:
NAME AGE POSITION
--------------------- --- -------------------------------------
John J. Arlotta 55 Chairman, President and Chief
Executive Officer
Robert A. Smith 56 Chief Operating Officer
John L. Kordash 62 Executive Vice President and
Assistant to the Chairman and
Chief Executive Officer
Richard W. Hunt 50 Senior Vice President and Chief
Financial Officer
John F. Gaither, Jr. 56 Senior Vice President, General
Counsel and Secretary
John J. Arlotta has served as our chairman, president and chief
executive officer since December 2003. From July 2003 to December 2003, Mr.
Arlotta served as our vice chairman with primary responsibility for the
NeighborCare business. Prior to joining us, Mr. Arlotta served as a
consultant to Caremark Rx, Inc., a pharmaceutical services provider, from
February 2002 to July 2003. Mr. Arlotta was president and chief operating
officer of Caremark Rx, Inc. from May 1998 to February 2002 and chief
operating officer of Caremark Rx, Inc. from September 1997 to May 1998.
Robert A. Smith has served as our chief operating officer since December
2003. From May 2001 to December 2003, Mr. Smith served as president and chief
operating officer of NeighborCare and in December 2003, following the spin-off
of GHC, Mr. Smith became our chief operating officer. Mr. Smith served as
executive vice president and chief operating officer of NeighborCare from
November 1999 to May 2001. He served as senior vice president of NeighborCare's
Allegheny region since August 1998, a position he held with Vitalink Pharmacy
Services prior to its acquisition by NeighborCare. Mr. Smith has held senior
management positions in several long-term care pharmacy organizations since
1988.
John L. Kordash has served as our executive vice president and assistant
to the chairman and chief executive officer since December 2003. From July 2003
to December 2003, Mr. Kordash served as our executive vice president and
assistant to the vice chairman. Prior to joining us, Mr. Kordash was chairman
and chief executive officer of Medical Scientists, Inc., a healthcare company
that provides predictive modeling medical software and healthcare consulting
services to organizations at risk for medical care costs, since 1997.
Richard W. Hunt has served as our senior vice president and chief
financial officer since July 2004. From February 2004 to July 2004, Mr. Hunt
served as chief executive officer of Gresham Holdings, LLC, a consulting
services firm. From August 2000 until February 2004, Mr. Hunt served as senior
vice president and chief financial officer of Global Healthcare Exchange, LLC, a
supplier of business-to-business procurement solutions for the healthcare
industry. From 1982 to 2000, Mr. Hunt served in various financial positions of
increasing
19
responsibility with Baxter International, Inc., a leading manufacturer and
marketer of healthcare products and services.
John F. Gaither, Jr. has served as our senior vice president, general
counsel and secretary since September 2003. From April 2000 to September 2003,
Mr. Gaither served as vice president, general counsel and corporate secretary of
Global Healthcare Exchange, LLC, a supplier of business-to-business procurement
solutions for the healthcare industry. From 1982 to 2000, Mr. Gaither held
various positions with Baxter International, Inc., a leading manufacturer and
marketer of healthcare products and services.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned during each of the
last three fiscal years by our current and former Chief Executive Officer and
our five other most highly compensated executive officers, referred to as the
Named Executive Officers, whose aggregate salaries and bonuses exceeded $100,000
for services rendered in all capacities to us during fiscal 2004.
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER
ANNUAL
NAME AND POSITION FISCAL YEAR SALARY ($)(1) BONUS ($)(2) COMPENSATION (3)
----------------- ----------- ------------- ------------ ---------------
John J. Arlotta 2004 $850,000 $130,000 $102,184
Chairman, 2003 163,462 850,000 --
President and
Chief Executive
Officer
Robert H. Fish 2004 375,962 412,500 --
Former Chief 2003 850,000 1,221,410 83,406
Executive 2002 274,615 70,833 --
Officer
Robert A. Smith 2004 350,000 405,900 --
Senior Vice 2003 360,768 75,250 --
President and 2002 310,003 60,000 --
Chief Operating
Officer
John F. 2004 280,000 10,000 9,750
Gaither, Jr.
Senior Vice
President,
General Counsel
and Corporate
Secretary
John L. Kordash 2004 250,000 15,000 9,750
Vice Chairman 2003 15,385 -- --
and Executive Vice
President
Richard W. 2004 230,769 314,300 --
Sunderland, Jr. 2003 244,808 69,375 --
Former Chief 2002 218,828 65,600 --
Financial
Officer
Richard W. Hunt 2004 61,538 -- --
Senior Vice
President and
Chief Financial
Officer
LONG-TERM COMPENSATION
----------------------------------------------------
SECURITIES
RESTRICTED UNDERLYING
STOCK OPTIONS/ ALL OTHER
NAME AND POSITION AWARDS ($)(4) SAR'S COMPENSATION ($)(5)
------------------------ ------------ ----------- -------------------
John J. Arlotta $6,077,521 $1,000,000 $76,570
Chairman, President and -- -- 29,005
Chief Executive Officer
Robert H. Fish 94,994 3,913 480
Former Chief Executive -- 177,500 --
Officer -- 25,000 --
Robert A. Smith 822,150 87,500 1,708
Senior Vice President -- -- 2,000
and Chief Operating 304,950 50,000 1,700
Officer
John F. Gaither, Jr. 623,750 150,000 --
Senior Vice President,
General Counsel and
Corporate Secretary
John L. Kordash 623,750 250,000 2,398
Vice Chairman and Executive -- -- --
Vice President
Richard W. Sunderland, Jr. -- 75,000 79,607
Former Chief Financial -- -- --
Officer 223,630 -- --
Richard W. Hunt 1,247,500 -- 225
Senior Vice President and
Chief Financial Officer
-------------------------
(1) Includes compensation deferred under the 401(k) Retirement Plan,
Non-Qualified Deferred Compensation Plan and other arrangements with us.
Other payments made by us under the 401(k) Retirement Plan, Non-Qualified
Deferred Compensation Plan and other arrangements with us are not
included.
20
(2) Messrs. Arlotta, Fish, Gaither, Kordash and Sunderland received bonuses of
$130,000, $200,000, $10,000, $15,000, and $20,000, respectively, in
connection with the spin-off of GHC in fiscal 2004. Mr. Fish received a
pro rated performance bonus of $212,500 in fiscal 2004. Messrs. Smith and
Sunderland received employment contract payouts in fiscal 2004 of $405,900
and $294,300, respectively. Mr. Arlotta received a performance bonus of
$550,000 and a sign-on bonus of $300,000 in fiscal 2003. Mr. Fish received
a performance bonus of $500,000 and a bonus of $721,410 upon his
appointment as chief executive officer in fiscal 2003. All other amounts
reflect performance bonuses.
(3) Mr. Arlotta received compensation of approximately $40,041 for housing
expenses ($16,041 of which represents a tax "gross-up" payment) and
$13,000 for automobile expenses in fiscal 2004. Mr. Arlotta also
received $49,143 in tax "gross-up" payments in relation to a
company-sponsored life insurance plan in fiscal 2004. All remaining
amounts in fiscal 2004 reflect compensation for automobile expenses.
Mr. Fish received compensation of approximately $62,206 for housing
expenses and approximately $15,200 for automobile expenses in fiscal
2003.
(4) Restricted stock grants in fiscal 2004 were authorized under our 2004
Performance Incentive Plan (the "2004 PLAN") on June 15, 2004. The
restrictions vest at variable rates over a three-year term for each
recipient. The market value of our common stock at September 30, 2004 was
$25.35 per share. The grants of restricted stock to Mr. Arlotta were
committed in Mr. Arlotta's employment agreement but were not made until
after our shareholders' approval on June 15, 2004 of the 2004 Plan.
Restricted stock grants in fiscal 2002 and 2003 were authorized under our
2001 Stock Incentive Plan. See "Benefit Plans--2001 Stock Incentive Plan."
Of the shares granted to Mr. Arlotta, 64,678 vested immediately. As of
September 30, 2004, Mr. Arlotta had 113,197 shares unvested at a value of
$2,869,543, Mr. Smith had 19,687 shares unvested at a value of $499,065,
Messrs. Gaither and Kordash had 25,000 shares unvested at a value of
$633,750, and Mr. Hunt had 37,500 shares unvested at a value of $950,625.
(5) Includes severance pay, company-sponsored long-term disability and life
insurance coverage. Mr. Arlotta received $75,000 in relation to a
company-sponsored life insurance plan and $1,570 in imputed income from
long-term disability/life insurance premiums in fiscal 2004. Payments to
Messrs. Fish, Smith, Kordash and Hunt in fiscal 2004 reflect imputed
income from long-term disability/life insurance premiums. Mr. Sunderland
received severance payments in the aggregate amount of $78,919 in fiscal
2004.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock
options granted under the 2001 Stock Option Plan during fiscal 2004 to the Named
Executive Officers (Mr. Fish left the Company's employ on February 28, 2004):
21
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERMS
---------------------------------------------------------- ----------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SAR's
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SAR's EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---------------- ------------- ------------- ---------- ---------- ---------- ----------
John J. Arlotta 250,000 15.80% 21.50 12/9/2013 $3,380,309 $8,566,366
250,000 15.80% 19.55 12/16/2013 $3,073,722 $7,789,416
250,000 15.80% 18.79 12/24/2013 $2,954,233 $7,486,605
250,000 15.80% 20.12 1/15/2014 $3,163,240 $8,016,525
Robert H. Fish 3,913 0.25% 15.47 10/1/2013 $ 38,070 $ 96,476
Robert A. Smith 87,500 5.50% 21.50 12/9/2013 $1,183,108 $2,998,228
John F. Gaither, 150,000 9.50% 21.50 12/9/2013 $2,028,185 $8,566,366
Jr.
John L. Kordash 250,000 15.80% 21.50 12/9/2013 $3,380,309 $5,139,819
Richard W. 75,000 4.70% 21.50 12/9/2013 $1,014,093 $2,569,910
Sunderland, Jr.
Richard W. Hunt -- -- -- -- -- --
-------------------------
(1) Pursuant to Mr. Sunderland's separation agreement, 46,875 options granted
under the 2001 Stock Option Plan were forfeited in connection with his
resignation.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information concerning the number
and value of unexercised options to purchase shares of our common stock held at
the end of fiscal 2004 by the Named Executive Officers:
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES SECURITIES UNDERLYING IN-THE-MONEY
ACQUIRED OPTIONS/SARs FISCAL OPTIONS/SARs AT FISCAL
ON VALUE YEAR-END (#) YEAR-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE (1)
-------------------------- -------- --------- -------------------- ----------------------
John J. Arlotta -- -- 421,875/578,125 2,026,250/3,088,594
Robert H. Fish 147,797 1,779,403 399,163/-- 4,932,794/--
Robert A. Smith -- -- 38,281/49,219 147,382/189,493
John F. Gaither, Jr. -- -- 65,625/84,375 252,656/324,844
John L. Kordash -- -- 109,375/140,625 421,094/541,406
Richard W. Sunderland, Jr. -- -- 28,125/-- 108,281/--
Richard W. Hunt -- -- --/-- --/--
-------------------------
(1) Stock price at close of business on September 30, 2004 was $25.35.
22
COMPENSATION COMMITTEE REPORT
COMPENSATION GOVERNANCE
The Compensation Committee of the Board of Directors (the "COMMITTEE")
administers NeighborCare's compensation program for its executive officers,
including the compensation of its Chief Executive Officer. The membership of the
Committee is determined by the Board of Directors upon the recommendation of the
Nominating and Corporate Governance Committee and is comprised of entirely
independent directors. The Committee meets at regularly scheduled times during
the year and reports on Committee actions and recommendations at meetings of the
Board of Directors. The Company's General Counsel and Human Resources Department
assist the Committee in the performance of its responsibilities regarding
executive officer compensation and, in certain instances, act pursuant to
delegated authority to fulfill various functions in administering the Company's
executive compensation programs. In addition, the Committee regularly engages
independent compensation consultants to assist in determining the
competitiveness of the Company's total executive compensation structure.
COMPENSATION PHILOSOPHY
The Company's executive compensation program is structured and
administered to support the Company's business mission and align compensation
with business objectives. This mission focuses on the design and administration
of pharmaceutical services to the long term care marketplace, as well as the
retail and home care sectors, with a focus on knowledge and leveraging our
clinical and cost management expertise to promote quality, cost-effective care.
In furthering this mission, the Committee annually reviews, evaluates, and makes
recommendations concerning the Company's compensation strategy, executive
compensation and incentive compensation programs, including the determination of
base salary (and adjustments thereto), the amount of annual cash-based incentive
compensation, including awards under the annual Incentive Compensation Program,
and the amount and type of long-term incentive awards under the 2004 Performance
Incentive Plan, each subject to the approval of the Board of Directors.
The Committee's annual review, evaluation, and recommendations for
executive compensation are based on several guiding principles, including:
o enabling the Company to attract, retain and motivate executives who
are capable of leading the Company in achieving its business
objectives in an industry characterized by competitiveness, growth and
a challenging business environment;
o giving executives competitive compensation and incentives to pursue
the maximization of long-term shareholder value;
o aligning the financial interests of the Company's executive officers
with those of its shareholders in both the short-term and long-term;
o being competitive when compared to healthcare and non-healthcare
companies of similar size and scope (the "PEER COMPANIES"); and
23
o recognizing the success of executives and employees in achieving both
qualitative and quantitative goals for the benefit of the Company and
its shareholders.
It is the Committee's goal to combine the three primary components of the
Company's executive compensation structure (i.e., base salary, cash-based
incentive compensation and long-term incentive awards) to create a total
compensation package for executive officers that is at or above the median
compensation level for executive officers of similarly sized companies in
comparable businesses, including the Peer Companies, provided that the Company
achieves its business and financial objectives. Additional components of
executive compensation that the Committee considers include the dollar value to
the executive and cost to the Company of all perquisites or similar personal
benefits, the earnings and accumulated payout obligations under the Company's
Non-Qualified Deferred Compensation Plan, as amended, and potential payout
obligations under possible severance and change-in-control scenarios. Each
component is addressed by the Committee in the context of competitive
conditions, including compensation offered by the Peer Companies, independent
executive compensation surveys and "best practices" materials and the
Committee's objectives, as well as the performance of the individual executive
officer and the Company.
BASE SALARY
Each executive officer's annual salary, including the base salary of the
Chief Executive Officer, is based primarily upon the competitive market for the
executive officer's services. It is the Committee's goal that the Company pays
market level compensation for market level performance. The Committee therefore
considers the levels of compensation paid by other companies, including the Peer
Companies, in determining appropriate levels of compensation for the Company's
executive officers. Base salary decisions, however, are not targeted to specific
compensation amounts paid by other companies and depend largely upon an
individual executive officer's performance.
The Committee evaluates certain qualitative factors relating to the
performance of each executive, including the Chief Executive Officer, during the
preceding year. These include:
o experience;
o responsibilities assumed;
o demonstrated leadership ability;
o overall effectiveness;
o contribution to the Company's priorities; and
o the level of an executive officer's compensation in relation to other
executive officers in the Company with the same, more or less
responsibilities.
Compensation arrangements for executive officers are often set forth in
employment agreements with specified terms, which are reviewed and approved by
the Committee. The
24
Company has employment agreements with each of its named executive officers
setting forth the base salary of each named executive officer, which agreements
are described in further detail under "EXECUTIVE COMPENSATION -- EMPLOYMENT
AGREEMENTS AND SEVERANCE AGREEMENTS."
CASH-BASED INCENTIVE COMPENSATION
In addition to base salary, the Committee recommends annual cash incentive
bonuses for the Chief Executive Officer, based upon the performance of the
Company and the Chief Executive Officer during the applicable period. In
general, individual cash incentive bonuses for the Chief Executive Officer are
established pursuant to the employment agreement between the Company and the
Chief Executive Officer, which establishes a target annual cash incentive bonus
of at least 100% of base salary, although the Committee is authorized to approve
cash incentive bonuses of greater than 100% of base salary if performance goals
are achieved. No cash incentive bonus was paid to the Chief Executive Officer
with respect to fiscal 2004.
All other executive officers participate in the Company's annual Incentive
Compensation Program, which provides a cash incentive bonus for the achievement
of pre-established financial and operational goals, both at the individual level
and organizational level. For fiscal 2004, the applicable target performance
goals related to the Company's earnings before interest, taxes, depreciation and
amortization. Based on performance against the previously established goals, no
cash incentive bonuses were paid to executive officers with respect to fiscal
2004.
LONG-TERM INCENTIVE AWARDS
Long-term incentive compensation is provided in the form of grants of
stock options and/or restricted stock. The objective of these awards is to align
the long-term interests of executive officers and shareholders by creating a
direct link between executive compensation and shareholder return, and to enable
executives to develop and maintain a significant long-term equity interest in
the Company. To achieve this purpose, the Company adopted the 2004 Performance
Incentive Plan (the "PERFORMANCE INCENTIVE PLAN") in June 2004, which permits
grants of incentive stock options, options not intended to qualify as incentive
stock options, stock appreciation rights, restricted and unrestricted stock
awards, and combinations of the foregoing. The long-term incentive component
(through extended vesting) is also designed to create retention incentives for
the executive officers. Only awards of restricted stock were granted during
fiscal 2004.
The Performance Incentive Plan is administered by the Committee, which has
full and exclusive power to administer and interpret the Performance Incentive
Plan, to grant awards and to adopt such administrative rules, regulations,
procedures, and guidelines governing the Performance Incentive Plan and the
awards as it may deem necessary in its discretion, from time to time; provided,
however, that grants to executive officers must also be approved by the Board of
Directors. The Committee's authority includes, but is not limited to, the
authority to:
o determine the type of awards to be granted under the Performance
Incentive Plan;
o select award recipients and determine the extent of their
participation;
25
o determine the method or formula for establishing the fair market value
of the Company's common stock for various purposes under the
Performance Incentive Plan; and
o establish all other terms, conditions, restrictions and limitations
applicable to awards and the shares of the Company's common stock
issues pursuant to awards, including, but not limited to, those
relating to a participant's retirement, death, disability, leave of
absence or termination of employment.
Similar to base salary and cash-based incentive compensation, long-term
incentive award levels are set with regard to competitive conditions, including
similar awards offered by the Peer Companies, and each executive officer's
actual award, including the Chief Executive Officer's, is based upon the
executive officer's performance, potential for increased responsibility and
contributions, leadership abilities and commitment to the Company's business
mission.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as amended,
establishes a limit of $1,000,000 on the amount of compensation that
NeighborCare may deduct in any one year with respect to its Chief Executive
Officer and each of the four other most highly paid executive officers. Certain
performance-based compensation approved by shareholders is not subject to the
deduction limit if certain conditions are met. The Performance Incentive Plan is
qualified in order that certain awards under such plan constitute
performance-based compensation not subject to Section 162(m) of the Internal
Revenue Code. In an effort to maintain flexibility in NeighborCare's
compensation policies designed to promote varying corporate goals, the Committee
has not adopted a policy that all compensation must be deductible.
CHIEF EXECUTIVE OFFICER COMPENSATION
In determining Mr. Arlotta's total compensation, the Committee evaluated
the same factors which it considers in establishing the compensation levels of
the Company's other executive officers. In addition, the Committee considered
Mr. Arlotta's position as NeighborCare's most senior executive officer, a review
of compensation for chief executive officers of similarly sized companies in
comparable businesses, including the Peer Companies, and the significant role
Mr. Arlotta has in achieving the Company's business mission.
Mr. Arlotta's annual base salary for fiscal 2005 is $900,000.
Mr. Arlotta had an opportunity to earn a cash incentive bonus equal to at
least 100% of his base salary for fiscal 2004 under the terms of his employment
agreement; however, he recommended no payout and the committee concurred with
his recommendation. Mr. Arlotta was paid a special bonus in the amount of
$130,000 in fiscal 2004 relating to the spin-off of Genesis HealthCare
Corporation in December 2003.
Pursuant to the terms of his employment agreement, Mr. Arlotta received a
one-time award of restricted stock in connection with the spin-off of Genesis
HealthCare Corporation having an aggregate market value on the date of grant of
$4,000,000, which such shares were issued upon the shareholders' approval of the
Performance Incentive Plan in June 2004. The
26
restricted shares contain the terms and conditions discussed under "EXECUTIVE
COMPENSATION AND CERTAIN TRANSACTIONS -- SUMMARY COMPENSATION TABLE." No other
long-term incentive awards were granted to Mr. Arlotta in fiscal 2004.
During the course of fiscal 2004, the Committee reviewed all forms of
compensation paid to Mr. Arlotta, including base salary, the one-time spin-off
cash bonus, long-term incentive awards, the value of perquisites or similar
personal benefits received for fiscal 2004, the aggregate values of restricted
stock and stock options held as of the end of fiscal 2004 and potential payout
obligations under possible severance and change-in-control scenarios.
CONCLUSION
Based on these factors and considerations, the Committee has determined
the executive officers' total compensation (and, in the case of severance and
change-in-control scenarios, the potential payouts), including the Chief
Executive Officer's total compensation, in the aggregate to be reasonable and
fair and further that such compensation structure meets the Company's objective
of attracting and retaining talented and motivated executive officers in order
to maximize long-term shareholder value.
Members of the Compensation Committee:
James D. Dondero (Chairperson)
James H. Bloem
James E. Dalton
EMPLOYMENT AGREEMENTS AND SEVERANCE ARRANGEMENTS
EMPLOYMENT AGREEMENTS
Effective July 7, 2003, we entered into an employment agreement with John
J. Arlotta, our chairman, president and chief executive officer, as amended on
December 9, 2003, June 18, 2004 and July 12, 2005. The agreement automatically
renews for an additional one-year period on each anniversary of its effective
date. The automatic extension of the agreement may be terminated with notice by
either the affirmative vote of two-thirds of the non-management members of the
Board of Directors or by Mr. Arlotta. Mr. Arlotta receives an annual base salary
of $850,000, subject to annual reviews by the Compensation Committee of the
Board of Directors pursuant to the employment agreement. The agreement provided
for an incentive bonus of not less than $550,000, with a target bonus of 80% of
his base salary, for fiscal 2003. Annually thereafter, the agreement provides
that Mr. Arlotta will receive an incentive bonus equal to at least 100% of his
base salary but only upon the Compensation Committee's certification that the
applicable performance goals have been achieved. Mr. Arlotta received a signing
bonus of $300,000 and an incentive (i.e., performance) bonus of $550,000 in
fiscal 2003 pursuant to the agreement. Mr. Arlotta received no incentive (i.e.,
performance) bonus under his employment contract with respect to fiscal 2004.
Upon the recommendation of the Compensation Committee, the Board of Directors
increased Mr. Arlotta's annual base salary from $850,000 to $900,000 effective
as of March 1, 2005.
27
Pursuant to the terms of the agreement, we granted to Mr. Arlotta options
to purchase 1,000,000 shares of our Common Stock in increments of 250,000 shares
on each of December 9, 2003, December 16, 2003, December 24, 2003 and January 5,
2004, of which 25% vests immediately upon the date of grant and the remainder
vests in quarterly installments of 6.25% thereafter. Under the agreement, Mr.
Arlotta also received a restricted stock award on January 15, 2004 with an
aggregate value of $4,000,000, rounded to the nearest whole share and based on
the average closing price of our common stock for the thirty trading days
immediately following the spin-off. On the date of the restricted stock award,
25% of the shares vested immediately, with vesting in equal quarterly
installments thereafter such that the shares vest in full by July 7, 2006. In
addition, Mr. Arlotta is entitled to participate in each employee benefit plan
or perquisite applicable generally to our executive officers. Under the terms of
the agreement, all equity-based compensation will fully vest automatically upon
a change in control, any termination by us without cause or due to Mr. Arlotta's
death or disability, each as defined in the agreement, any termination by Mr.
Arlotta for good reason or our failure to automatically extend the term of the
agreement.
The Board of Directors may terminate the employment agreement with Mr.
Arlotta with or without cause, as defined in the agreement, by the affirmative
vote of two-thirds of the non-management members of the Board of Directors. Mr.
Arlotta may terminate his employment with us upon notice of the occurrence of
certain events, including a change in control of NeighborCare. Upon termination
of the employment agreement for any reason, Mr. Arlotta will be entitled to his
accrued and unpaid base salary through the date of termination, any earned but
unpaid bonus for any fiscal year ending prior to the date of termination, any
benefits accrued and vested under the terms of our employee benefit plans and
programs through the date of termination, all deferred compensation of any kind
and the option to have assigned to him any assignable insurance policy relating
to him. In addition upon death, we will pay Mr. Arlotta's estate a lump sum in
cash equal to his base salary for the period from the date of death through the
end of the term of the agreement, benefits as if his employment had terminated
on the last day of the month and a pro rata bonus for the portion of the year of
termination preceding the date of his death based upon an annual amount equal to
100% of his base salary. Also, all restricted stock, stock options and
performance share awards will automatically vest as of the date of death.
If Mr. Arlotta's employment agreement is terminated by us without cause or
due to his disability, each as defined in the agreement, or by Mr. Arlotta for
good reason or following a change of control, each as defined in the agreement,
or as a result of non-extension of the agreement, in addition to the foregoing,
NeighborCare will:
o pay him a pro rata bonus for the portion of the year in which the date
of termination occurs preceding the date of termination based upon an
annual amount equal to 100% of his base salary and a lump-sum cash
payment equal to two times his highest base salary in the three years
preceding termination plus two times his target bonus for the year of
termination less any disability insurance benefits if applicable for
the two-year period beginning with the date of termination;
28
o continue to provide the health and life insurance benefits provided to
him and his spouse and eligible dependents immediately prior to his
date of termination for a period of two years following the date of
termination; and
o all restricted stock, stock option and performance share awards will
fully vest and remain exercisable for two years following termination.
In addition, Mr. Arlotta is entitled to the above consideration in the
event that he terminates the agreement because NeighborCare has engaged or has
required that he engage in any activity which would cause him to violate
covenants of his contained in a consulting agreement between him and his former
employer, Caremark Rx, Inc. On July 8, 2003, Caremark filed a complaint seeking
to prohibit Mr. Arlotta's employment with NeighborCare pursuant to the terms of
such consulting agreement. In December 2003, NeighborCare, Caremark and Mr.
Arlotta entered into a Partial Release and Settlement Agreement pursuant to
which Mr. Arlotta was permitted to accept continued employment with NeighborCare
under certain conditions and Caremark was released of certain compensation
obligations to Mr. Arlotta and the complaint was dismissed without prejudice.
Mr. Arlotta's employment agreement contains confidentiality provisions
that apply during and after the term of employment and non-competition and
non-solicitation provisions that generally limit him from engaging in certain
activities for the term of employment and for a period of two years after,
regardless of the reason for the termination of employment.
On each of July 28, 2003, September 10, 2003, November 24, 2003 and
November 26, 2003, we entered into employment agreements with John L. Kordash,
our executive vice president and assistant to the chief executive officer, John
F. Gaither, Jr., our senior vice president, general counsel and secretary,
Richard W. Sunderland, Jr., our former chief financial officer, and Robert A.
Smith, our chief operating officer, respectively. Effective December 9, 2003,
each of these agreements was amended and restated. Effective June 22, 2004 and
July 12, 2005, the agreements with Messrs. Kordash and Gaither were further
amended and effective February 11, 2005 and July 12, 2005, the agreement with
Mr. Smith was further amended. The agreements with Messrs. Kordash and Gaither
expire on October 1, 2005. The agreement with Mr. Smith expires on December 1,
2005. On May 7, 2004, the Company entered into a Separation Agreement with
Richard W. Sunderland, Jr., and on August 27, 2004, Mr. Sunderland resigned as
our chief financial officer. See " -- TRANSITION AGREEMENTS."
The agreements provide that annual base salaries to be paid to Messrs.
Kordash, Gaither, Sunderland and Smith are $250,000, $280,000, $250,000 and
$350,000, respectively. In addition, the agreements with Messrs. Kordash and
Gaither provided for an option grant on December 9, 2003 to purchase 250,000 and
150,000 shares, respectively, of our common stock at an exercise price of
$21.50, of which 25% vested immediately upon the date of grant and the remainder
vests in quarterly installments of 6.25% thereafter. The agreements with Messrs.
Sunderland and Smith provided for option grants by incorporation of prior letter
agreements with us, as described below, at the same exercise price and vesting
schedule described above. Under the terms of the agreements, all outstanding
equity-based compensation shall automatically become fully vested upon any
termination by us without cause or due to the executive's death or disability or
the executive's termination for good reason, each as defined in the agreements;
29
provided that the agreements with Messrs. Smith and Sunderland provide for less
than full vesting upon termination on or before January 1, 2005 in certain
instances. Upon the recommendation of the Compensation Committee, the Board of
Directors increased the annual base salaries of Messrs. Kordash, Gaither and
Smith from $250,000, $280,000 and $350,000, respectively, to $275,000, $295,000
and $360,000, respectively, effective as of March 1, 2005.
The agreements with Messrs. Kordash, Gaither, Sunderland and Smith contain
the following provisions that are substantially similar to those provisions
contained in Mr. Arlotta's employment agreement discussed above: an automatic
one-year extension, eligibility to participate in stock option, incentive
compensation and other incentive plans, receipt of perquisites generally
provided to our officers, termination of the agreement by us with or without
cause and by the executive upon the occurrence of certain events and
confidentiality and non-competition and non-solicitation provisions. Each
agreement also provides for severance compensation in the event of termination
without cause or for good reason consisting of a pro rata bonus for the portion
of the year in which the date of termination occurs, a lump-sum payment equal to
the sum of the executive's average base salary and the average annual bonus
earned under our incentive plans for the most recent two years, continuation of
health and life insurance benefits for up to two years and vesting of previously
granted stock options and restricted stock.
Effective June 22, 2004 and February 11, 2005, we amended our agreements
with Messrs. Kordash and Gaither and Mr. Smith, respectively, to provide (i)
that resignation during the ninety day period beginning six months following a
change in control will constitute termination by the executive for good reason,
and (ii) for the automatic vesting of all equity-based compensation upon a
change in control unless otherwise specifically provided by reference to the
amended agreement in any plan or award thereunder or unless 75% of the incumbent
directors (as defined in our 2004 Performance Incentive Plan) determine
otherwise prior to such change in control. The June 22, 2004 amendment to our
agreements with Messrs. Kordash and Gaither further provides for payment upon
termination without cause, death or disability or termination by executive for
good reason within two years of a change in control equal to two times his
average annual base salary and average annual bonus under our incentive plans
for the most recent two years.
In November 2003, in contemplation of the spin-off of GHC, we entered into
letter agreements with Messrs. Smith and Sunderland which were incorporated by
reference into each executive's amended and restated employment agreement
described above. Under the letter agreements, each executive agreed to waive his
right to a lump-sum payment and other benefits that the spin-off would likely
have triggered under their employment agreements in exchange for continued
employment until the spin-off. In addition, upon completion of the spin-off, we
agreed to:
o make a lump-sum payment to Messrs. Smith and Sunderland of $405,900
and $294,300, respectively, in settlement of amounts owing under prior
employment agreements;
o continue each executive's employment with the terms and conditions of
the employment agreements described above;
30
o grant a stock option to Messrs. Smith and Sunderland to purchase
87,500 and 75,000, respectively, shares of our Common Stock; and
o on the six-month anniversary of the option grant, either grant an
additional option to purchase the same amount of our Common Stock or
grant shares of restricted stock having a value equivalent to the
replaced options.
On June 29, 2004, we entered into an employment agreement with Richard W.
Hunt, our senior vice president and chief financial officer. The agreement
provides that Mr. Hunt's base salary for the initial one-year term of the
agreement is $250,000. The agreement also provides for the grant of 50,000
shares of our restricted stock, of which 12,500 vest 45 days after the grant
date and the remaining amount vests in equal installments on each of the first
three anniversaries of the effective date, provided that Mr. Hunt remains
employed by us on each such date. In the event that a change of control, as
defined in the agreement, occurs on or prior to December 31, 2004, 30,000 of
such shares of restricted stock will immediately vest (inclusive of, and not in
addition to, the 12,500 shares scheduled to vest 45 days after the grant date).
In the event that a change of control occurs after December 31, 2004, all of
such shares of restricted stock will vest in full. Upon the recommendation of
the Compensation Committee, the Board of Directors increased Mr. Hunt's annual
base salary from $250,000 to $260,000, effective as of March 1, 2005.
The agreement with Mr. Hunt contains the following provisions that are
substantially similar to those provisions contained in our agreements, as
amended, with Messrs. Kordash and Gaither discussed above: an automatic one-year
extension, eligibility to participate in equity and cash incentive compensation
and other incentive plans, receipt of perquisites generally provided to our
officers, termination of the agreement by us with or without cause and by Mr.
Hunt upon the occurrence of certain events and confidentiality and
non-competition and non-solicitation provisions. The agreement also provides for
severance compensation in the event of termination without cause or for good
reason consisting of a pro rata bonus for the portion of the year in which the
date of termination occurs, a lump-sum payment equal to the sum of Mr. Hunt's
average base salary and the average annual bonus earned under our incentive
plans for the most recent two years or, during the two-year period following a
change of control as described above with respect to our agreements with Messrs.
Kordash and Gaither, two times such sum, continuation of health and life
insurance benefits for up to two years and, if but only if such termination
occurs after the first anniversary of our agreement with Mr. Hunt, vesting of
previously granted stock options and restricted stock.
On July 6, 2005, the Company approved amendments to the employment
agreements between the Company and each of John J. Arlotta, John L. Kordash,
John F. Gaither, Jr., Richard W. Hunt, Robert A. Smith and Stephen Duvall. The
approved amendments relate principally to the non-compete and non-solicitation
provisions applicable to the executives under certain circumstances, and, when
executed by the executives, will have the effects described under "Item 3. Past
Contacts, Transactions, Negotiations and Agreements -- Employment Agreement
Amendments" in Amendment No. 20 to the Solicitation/Recommendation Statement on
Schedule 14D-9 to which this Information Statement is annexed. Such description
is incorporated herein by reference.
31
TRANSITION AGREEMENTS
On December 1, 2003, in connection with the spin-off, Robert Fish resigned
as our chairman and chief executive officer. Mr. Fish remained our employee for
transitional purposes until his termination on February 28, 2004. Pursuant to
the terms of Mr. Fish's employment agreement, upon his resignation Mr. Fish
received $766,500 in accrued and unpaid salary and bonuses through the date of
termination and a continuation of health and insurance benefits for himself, his
spouse and eligible dependents for a period of one year following the date of
termination. Upon his resignation, all restricted stock awards made to Mr. Fish
fully vested, and all vested stock options remained exercisable through the
original terms with all rights. The employment agreement also contains
provisions which restricted Mr. Fish from competing with NeighborCare for a
period of one year after termination.
On December 9, 2003, we entered into an option cancellation agreement with
Mr. Fish relating to options which vested upon the completion of the spin-off
and Mr. Fish's termination of employment in connection with the spin-off. After
the board of director's adjustment to the aggregate number and exercise price of
all outstanding options to purchase our common stock in connection with the
spin-off and as of the date of the agreement, Mr. Fish held options to purchase
430,470 shares of our common stock at an exercise price per share of $10.86 and
352,203 shares at an exercise price of $12.99, each of which expire on February
28, 2006. Under the option cancellation agreement, Mr. Fish surrendered to us
options to purchase 282,673 shares of common stock at the exercise price of
$10.86 for the aggregate cash payment of $2,580,108 less any applicable
withholding taxes.
On May 7, 2004, we entered into a Separation Agreement with Richard W.
Sunderland, Jr., then our chief financial officer. Under the agreement,
effective August 27, 2004, Mr. Sunderland received incentive compensation of
$59,688 and will receive $250,000 of severance in installments through August
27, 2005. Additionally, Mr. Sunderland will continue to receive benefits through
August 27, 2006.
BENEFIT PLANS
2004 PERFORMANCE INCENTIVE PLAN
On June 15, 2004, our shareholders approved our 2004 Performance Incentive
Plan. The purposes of our 2004 Performance Incentive Plan are to attract and
promote the long-term retention of our key employees, directors and certain
other persons who are in a position to make significant contributions to our
success, to reward our employees, directors and other persons for their
contributions, to provide additional incentive to our employees, directors and
other persons to continue making similar contributions and to further align the
interests of our employees, directors and other persons with those of our
shareholders. The 2004 Performance Incentive Plan was adopted to replace, on a
prospective basis, our 2001 Stock Incentive Plan and 2001 Stock Option Plan,
each as described below. See " -- 2001 STOCK INCENTIVE PLAN" and " -- 2001 STOCK
OPTION PLAN."
The 2004 Performance Incentive Plan permits grants of incentive stock
options, options not intended to qualify as incentive stock options, stock
appreciation rights, restricted and
32
unrestricted stock awards, restricted stock units, cash-based awards, including
supplemental cash awards, and performance awards, and any combination thereof.
Awards of restricted and unrestricted stock, restricted stock units and/or
deferred stock may also be issued under the 2004 Performance Incentive Plan to
participants in connection with management or employee purchase programs. Shares
issuable under awards that terminate unexercised or otherwise terminate without
an issuance of shares, shares issuable under awards that are payable in stock or
cash but are paid in cash and shares issued but later forfeited will be
available for future awards under the 2004 Performance Incentive Plan. If shares
of our common stock are not issued because such shares instead are used to
satisfy an applicable tax withholding requirement or other obligation to us in
connection with the exercise of an award, then such shares will again be
available for future issuance under the 2004 Performance Incentive Plan. In
addition, if the exercise price of any award is satisfied by the tender of
shares of our common stock (by actual delivery or attestation), only the number
of shares of our common stock issued under the 2004 Performance Incentive Plan,
net of any shares so tendered, will be deemed issued to the recipient.
Incentive stock options may be granted under the 2004 Performance
Incentive Plan only to our employees. All of our current and future employees
and other persons who, in the opinion of our Compensation Committee, are in a
position to make significant contributions to our success, such as consultants
and non-employee directors, are eligible to receive all other types of awards
under the 2004 Performance Incentive Plan. Our Compensation Committee will
determine the exercise price applicable to each stock option and stock
appreciation right, which will not be less than the fair market value of our
common stock at the time of the grant. In no case may our Compensation Committee
amend an outstanding award, or cancel an outstanding award and issue a new
award, for the sole purpose of reducing the exercise price thereunder.
The aggregate number of shares of our common stock for which awards may be
granted under the 2004 Performance Incentive Plan is 5,000,000 shares, with an
individual limit of 500,000 shares per fiscal year for each participant
(excluding grants under any individual employment agreement as an inducement
material to the individual's entering into an employment contract with us).
Notwithstanding the foregoing, in the event of any stock dividend, stock split,
combination or exchange of equity securities, merger, consolidation,
recapitalization, reorganization, divestiture or other distribution (other than
ordinary cash dividends) of assets to our shareholders, or any other event
affecting our common stock that the Compensation Committee deems, in its sole
discretion, to be similar circumstances, the aggregate number of shares of our
common stock which may be issued under our 2004 Performance Incentive Plan shall
be appropriately adjusted in a manner determined in the sole discretion of our
Compensation Committee.
The maximum aggregate amount that may be awarded in the form of a
cash-based award, including a supplemental cash award, in any one fiscal year to
a participant who is a "covered employee" as defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended, shall not exceed $2,000,000
determined as of the date of vesting or payout, as applicable. The maximum
aggregate amount that may be awarded in the form of a cash-based award,
including a supplemental cash award, in any one fiscal year to a participant who
is not a "covered employee" shall be determined by our Compensation Committee.
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As of September 30, 2004, 416,946 shares of restricted stock have been
issued to our employees, of which 145,304 were fully vested and 44,038 were
surrendered to fulfill employee income tax obligations resulting from the
grants, and 21,231 shares of restricted stock have been issued to members of our
Board of Directors under the 2004 Performance Incentive Plan. Restrictions on
grants to our employees typically vest ratably over three years from the date of
grant such that the employee cannot sell or trade the restricted stock until it
becomes vested. Restrictions on grants to our directors are described under " --
BOARD OF DIRECTORS COMPENSATION."
2001 STOCK INCENTIVE PLAN
On October 2, 2001, our Board of Directors authorized the issuance of
750,000 shares of restricted common stock to certain of our senior officers.
These shares vest and are issued quarterly over a five-year period, which
commenced on February 28, 2002 and will generally end on October 1, 2006. In May
2003, the Company made an offer to employees who held shares of restricted
common stock to accelerate the vesting of all such restricted shares in exchange
for the tendering of any options to purchase common stock. At September 30,
2004, 5,625 shares of restricted common stock remain unvested through October 1,
2006. See "-- 2001 Stock Option Plan." We will not make any future grants under
the 2001 Stock Incentive Plan.
2001 STOCK OPTION PLAN
The purpose of our 2001 Stock Option Plan is to provide additional
incentive to officers, other key employees, and directors of, and important
consultants to us and each present or future parent or subsidiary corporation,
by encouraging them to invest in shares of our common stock thereby acquire a
proprietary interest in us and an increased personal interest in our continued
success and progress.
The aggregate number of shares of our common stock that may be issued
under our 2001 Stock Option Plan is 3,480,000. Notwithstanding the foregoing, in
the event of any change in the outstanding shares of our common stock by reason
of a stock dividend, stock split, combination of shares, recapitalization,
merger, consolidation, transfer of assets, reorganization, conversion or what
our compensation committee of the Board of Directors deems in its sole
discretion to be similar circumstances, the aggregate number and kind of shares
which may be issued under our 2001 Stock Option Plan shall be appropriately
adjusted in a manner determined in the sole discretion of the compensation
committee. Reacquired shares of our common stock, as well as unissued shares,
may be used for the purpose of our 2001 Stock Option Plan. Our common stock
subject to options which have terminated unexercised, either in whole or in
part, shall be available for future options granted under our 2001 Stock Option
Plan. As of September 30, 2004, 2,281,904 options are granted and outstanding,
of which 1,632,287 are held by employees, 626,137 are held by current and former
directors and 39,134 are held by a third party consultant. We will not make any
future grants under the 2001 Stock Option Plan.
On April 1, 2003, we extended an offer to our employees, including
executive officers except for our then chief executive officer, to tender all
options to purchase shares of our common stock, par value $.02 per share,
outstanding under its 2001 Stock Option Plan, for the
34
following consideration: (a) for those holders of options who had received
awards of more than 2,000 restricted shares of common stock under our 2001 Stock
Incentive Plan, the acceleration of vesting of all such restricted shares plus a
cash payment of $2.50 per share underlying the option for options that had an
exercise price below $20.00 per share, and (b) with respect to those holders of
options who had not received awards of more than 2,000 restricted shares, (i)
for those options that had an exercise price of at least $20.00 per share, a
cash payment of $2.00 per share underlying the option, and (ii) for those
options that had an exercise price below $20.00 per share, a cash payment of
$2.50 per share subject to the option. The offer expired on May 12, 2003. We
accepted for exchange and cancellation options to purchase 1,724,000 shares of
our common stock, which represented all of the eligible outstanding options
properly tendered for exchange by eligible option holders, on May 13, 2003. All
eligible options held by our employees were tendered on the offer, with the
exception of options to purchase 35,000 shares.
See " -- Transition Agreements."
NON-QUALIFIED DEFERRED COMPENSATION PLAN
On April 1, 2001, we adopted a Non-Qualified Deferred Compensation Plan.
Beginning January 1, 2002, eligible employees (i.e., in calendar 2004, employees
whose base salary meets or exceeds $90,000) were permitted to defer up to 50% of
their base salary and up to 90% of their incentive compensation bonus each year
on a pre-tax basis under the NeighborCare Non-Qualified Deferred Compensation
Plan. Participants are able to select from several fund choices and their
Deferred Compensation Plan account increases or decreases in value in accordance
with the performance of the funds selected. The Non-Qualified Deferred
Compensation Plan is administered by a trustee.
RETIREMENT PLAN
On January 1, 1989, we adopted an employee Retirement Plan that consists
of a 401(k) component and a profit sharing component. Our retirement plan is a
401(k)/cash or deferred arrangement covering all of our employees (other than
certain employees covered by a collective bargaining agreement) who have
completed at least 500 hours of service during the six-month period beginning on
his or her commencement date or who has completed at least 1,000 hours of
service in the first year of employment or any subsequent calendar year. Under
the 401(k) component, each employee may elect to contribute a portion of his or
her current compensation up to the lesser of the maximum permitted by the
Internal Revenue Code or 50% (or, in the case of a highly compensated employee,
a maximum of 6% (4% for plan years ending prior to January 1, 2004)) of such
employee's annual compensation. We may make a matching contribution each year as
determined by the Board of Directors. The Board of Directors may establish this
contribution at any level each year, or may omit such contribution entirely.
Under the profit sharing component of the Retirement Plan, we may make an
additional employer contribution as determined by the Board of Directors each
year. The Board of Directors may establish this contribution at any level each
year, or may omit such contribution entirely.
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TAX DEDUCTION LIMIT
Current U.S. tax law has a $1 million annual tax deduction limit on
compensation a company pays to its chief executive officer and to each of its
four other most highly compensated executive officers. Compensation subject to
this deduction limit includes: cash compensation; the difference between the
exercise price of stock options granted and the value of the underlying stock on
the date of exercise; and the difference between the purchase price of a
restricted stock award and the value of the underlying stock on the vesting
date. NeighborCare may deduct compensation with respect to any of these
individuals only to the extent that during any fiscal year such compensation
does not exceed $1 million or meets certain other "performance based" criteria
which must be approved by the shareholders (as defined under the Internal
Revenue Code and related regulations).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was comprised of Messrs. Gerbino and LaNasa
until the consummation of the spin-off of GHC on December 1, 2003, at which time
Mr. LaNasa resigned from our Board of Directors and Messrs. Dondero, Bloem and
Dalton were appointed as the members of our Compensation Committee.
No person who served as a member of our Compensation Committee during the
fiscal year ended September 30, 2004 is currently nor was during or prior to
fiscal 2004 an officer or employee of the Company or, except as described above,
engaged in certain transactions with us required to be disclosed by regulations
of the Securities and Exchange Commission. Additionally, there were no
compensation committee "interlocks" during fiscal 2004, which generally means
that none of our executive officers served as a director or member of the
compensation committee of another entity, one of whose executive officers served
as a director or member of our Compensation Committee.
REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE
In the performance of its oversight function and in accordance with its
responsibilities under its charter, the Audit and Compliance Committee has
reviewed and discussed with management and our independent accountants, KPMG
LLP, our audited financial statements as of and for the fiscal year ended
September 30, 2004.
The Audit and Compliance Committee has also discussed with KPMG LLP the
matters required to be discussed by Statement on Auditing Standards No. 61,
COMMUNICATION WITH AUDIT COMMITTEES, as amended by the Auditing Standards Board
of the American Institute of Certified Public Accountants. In addition, the
Audit and Compliance Committee has, as required by Independence Standards Board
Standard No. 1, "INDEPENDENCE DISCUSSION WITH AUDIT COMMITTEES," discussed with,
and received the required written disclosures and a confirming letter from, KPMG
LLP regarding its independence and has discussed with KPMG LLP its independence.
The Audit and Compliance Committee has also considered whether the provision of
non-audit services by the independent accountants to us is compatible with
maintaining the auditor's independence.
36
Based upon the review and discussion referred to above, the Audit and
Compliance Committee recommended to the Board of Directors that the financial
statements referred to above be included in NeighborCare's Annual Report on Form
10-K for the fiscal year ended September 30, 2004, as amended.
The members of the Audit Committee during the fiscal year ended September
30, 2004 were James H. Bloem (Chairperson), Dr. Philip P. Gerbino and Arthur J.
Reimers.
NEIGHBORCARE STOCK PERFORMANCE
NeighborCare emerged from bankruptcy on October 2, 2001. Pursuant to its
joint plan of reorganization, all pre-bankruptcy NeighborCare common stock was
cancelled and NeighborCare issued new Common Stock. On December 1, 2003,
NeighborCare completed the spin-off of the common stock of Genesis HealthCare
Corporation.
The following graph and table show the comparison of cumulative total
returns for NeighborCare, the NASDAQ Stock Market (U.S.) Index and a
NeighborCare Peer Group. Stock price performances shown in the graph and table
are not necessarily indicative of future price performances. The graph and table
represent information regarding NeighborCare's Common Stock since NeighborCare's
emergence from bankruptcy on a total return basis. The spin-off of the common
stock of Genesis HealthCare Corporation is treated as a nontaxable cash dividend
that was immediately reinvested in NeighborCare Common Stock.
COMPARISON OF 3-YEAR CUMULATIVE TOTAL RETURN*
AMONG NEIGHBORCARE, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP
[GRAPH]
* $100 invested on 10/2/01 in stock or on 9/30/01 in index--including
reinvestment of dividends. Fiscal year ending September 30.
CUMULATIVE TOTAL RETURN
--------------------------------------------------
10/2/01 9/30/02 9/30/03 9/30/04
------- ------- ------- -------
NeighborCare, Inc. 100.00 80.87 119.09 167.77
Nasdaq Stock Market (U.S.) 100.00 79.09 103.18 111.56
Peer Group (1) 100.00 74.11 111.05 105.81
-------------------------
(1) The Peer Group index for fiscal 2004 is based on the total return for
investments in the common stock of Beverly Enterprises, Inc., Kindred
Healthcare, Inc., Manor Care, Inc. and Omnicare, Inc.
37