EXHIBIT 10.29
September 3, 1997
Vitalink Pharmacy Services, Inc.
TeamCare, Inc.
0000 X. Xxxxx Xxxx
Xxxxxxxxxx, XX 00000
ATTN: Xxxxx X. XxXxxxx, President
RE: Liquidated Damages Calculation in Pharmaceutical Supply Agreements
Dear Xx. XxXxxxx:
Pursuant to the requirements of Section 10 of the Pharmaceutical
Supply Agreements (as that term is defined in the Omnibus Reconciliation
Services Agreement, dated as of March 1, 1997, by and between GranCare, Inc.
("GranCare") and Vitalink Pharmacy Services, Inc. ("Vitalink")) this letter
clarifies the calculation of damages that may become payable under said Section
10 in the event that ownership or control of a GranCare health care facility
subject to a Pharmaceutical Supply Agreement (other than a Replacement Facility
(as defined in paragraph 2 below)) is transferred (a "Transferred Facility"),
the transferee ceases to obtain pharmaceutical supplies and services from
Vitalink with respect to the Transferred Facility; and GranCare's obligation to
pay "damages" under Section 10 of the Pharmaceutical Supply Agreement is thereby
triggered (a "Supply Termination Event"). For purposes of this letter of
clarification, the term "Vitalink" shall mean and include TeamCare, Inc. and any
subsidiaries or affiliates (as defined in Rule 12b-2 under the Securities Act of
1934) of Vitalink and TeamCare. Upon the occurrence of a Supply Termination
Event, the amount of such "damages" shall be calculated as follows:
Vitalink Pharmacy Services
September 3, 1997
Page 2
1. The net revenues realized by Vitalink from the provision of
pharmacy services to the Transferred Facility pursuant to a
Pharmaceutical Supply Agreement over the 12 calendar months (or if
such Transferred Facility was served for less than 12 months, over the
number of whole months actually served (or in the case of partial
months, rounded to the nearest whole month based on the number of
actual days elapsed in accordance with established mathematical
convention)) immediately preceding the calendar month in which the
Supply Termination Event occurs ("LTM Net Pharmaceutical Revenues")
shall be multiplied by Vitalink's Percentage EBITDA Margin (as defined
below), the product so obtained being hereinafter referred to as
"EBITDA Earnings Amount". The "Percentage EBITDA Margin" shall be
Vitalink's consolidated EBITDA divided by Vitalink's consolidated net
revenue, in each case derived from Vitalink's most recent audited
financial statements. The EBITDA Earnings Amount shall then be
divided by 12 (or if such Transferred Facility was served for less
than 12 months, over the number of whole months actually served (or in
the case of partial months, rounded to the nearest whole month based
on the number of actual days elapsed in accordance with established
mathematical convention)), and the quotient so obtained (the "Monthly
Liquidated Damages Payment") shall be the monthly amount paid by
GranCare to Vitalink until the first to occur of (i) the expiration of
the remaining term of the Pharmaceutical Supply Agreement or (ii) the
month in which a Replacement Facility is substituted by GranCare. The
Vitalink Pharmacy Services
September 3, 1997
Page 3
Monthly Liquidated Damages Payment shall be payable commencing on the
tenth business day of the month immediately succeeding the month
during which Vitalink shall actually cease to provide pharmaceutical
supplies to the Transferred Facility.
2. GranCare shall have the option at any time after the
occurrence of a Supply Termination Event to substitute an alternative
health care facility (a "Replacement Facility") for a Transferred
Facility and suspend paying further Monthly Liquidated Damages
Payments (except as provided elsewhere herein), and the provision of
pharmaceutical supplies to any Replacement Facility shall be pursuant
to the terms and conditions of a Pharmaceutical Supply Agreement
except as otherwise provided herein.
Within 30 calendar days following each annual anniversary of
the actual commencement of service by Vitalink to any Replacement
Facility, the parties shall calculate the EBITDA Earnings Amount
derived by Vitalink from the provision of service to such Replacement
Facility for such preceding 12 month period by multiplying the net
revenues realized by Vitalink from the provision of pharmacy services
to such Replacement Facility pursuant to a Pharmaceutical Supply
Agreement for such 12-month period by the same Percentage EBITDA
Margin utilized to calculate the amount of the Monthly
Vitalink Pharmacy Services
September 3, 1997
Page 4
Liquidated Damages Payments with respect to the Transferred Facility
such Replacement Facility replaced (the "Replacement Earnings"). In
the event that Replacement Earnings for any 12 month period are less
than 90% of the EBITDA Earnings Amount calculated with respect to the
subject Transferred Facility, then GranCare shall, within thirty days
of receiving written notice from Vitalink setting forth in appropriate
detail the calculation of the amount of the Replacement Earnings with
respect to such Replacement Facility, pay to Vitalink an amount equal
to the excess of (i) an amount equal to 90% of the EBITDA Earnings
Amount attributable to the Transferred facility such Replacement
Facility replaced over (ii) the actual amount of such Replacement
Earnings ("Shortfall Payment"). On March 1/st/ of each year during the
term of the Pharmaceutical Supply Agreements, Vitalink shall determine
the aggregate amount of all Shortfall Payments made by GranCare during
the immediately preceding 12 calendar months (i.e., March 1 of the
prior year through February 28 of the then current year; the "LTM
Shortfall Payment"). In the event that the Replacement Earnings of one
or more Replacement Facilities, during such preceding 12 calendar
month period exceed 110% of the EBITDA Earnings Amount attributable to
the Transferred Facility any such Replacement Facility replaced (the
"Excess Replacement Earnings"), then Vitalink shall pay to GranCare by
March 10 of each year the sum of all Excess Replacement Earnings
realized by Vitalink not to exceed the LTM Shortfall Payment. Each of
the
Vitalink Pharmacy Services
September 3, 1997
Page 5
calculations required in this letter shall be provided to GranCare in
reasonable detail and shall be certified by Vitalink's President,
Chief Financial Officer or Treasurer.
3. In the event that a Replacement Facility is served for a
period of less than 12 months, the calculation of the required
Shortfall Payment, if any, shall be an amount equal to the excess, if
any, of (i) the sum of the Monthly Liquidated Damages Payments for
each month less than 12 that the Replacement Facility was served by
Vitalink multiplied by 90% over (ii) the Replacement Earnings realized
by Vitalink from the provision of pharmacy services to such
Replacement Facility during such period.
4. The termination of the Pharmaceutical Supply Agreement with
respect to any Replacement Facility or the transfer of any Replacement
Facility shall not constitute a Supply Termination Event. However,
upon the actual termination of the provision of services pursuant to a
Pharmaceutical Supply Agreement with respect to any Replacement
Facility, GranCare shall recommence the Monthly Liquidated Damages
Payments in the immediately succeeding month based upon the EBITDA
Earnings Amount of the Transferred Facility that such Replacement
Facility replaced, subject to any subsequent suspension thereof
Vitalink Pharmacy Services
September 3, 1997
Page 6
which may thereafter result from GranCare substituting alternative
Replacement Facilities.
5. In the event it is determined that a Facility (as defined in
the Pharmaceutical Supply Agreements) has improperly terminated a
Pharmaceutical Supply Agreement based on an incorrect assertion that
Provider (as defined in the Pharmaceutical Supply Agreements) breached
its obligations pursuant to Section 12 of the Pharmaceutical Supply
Agreements, the amount of damages that GranCare shall be obligated to
pay to Vitalink shall be calculated based on the same methodology set
forth in paragraph 1 hereof with respect to the actual period of time
during which such Facility shall have "covered" by obtaining pharmacy
services from an alternative source and, in the case of partial
months, rounded to the nearest whole month based on the number of
actual days elapsed in accordance with established mathematical
convention. The parties hereto expressly acknowledge that the
foregoing provision is being included to provide internal consistency
within the Pharmaceutical Supply Agreement, and as result (i) the
final sentence of paragraph 12 will be ignored for all purposes and
(ii) the phrase "net revenue lost by Provider" in the penultimate
sentence of said paragraph 12 shall be deemed to have been replaced
with a reference to "liquidated damages."
Vitalink Pharmacy Services
September 3, 1997
Page 7
6. GranCare shall be entitled to review during normal business
hours Vitalink's financial records pertaining to its provision of
services to any Transferred Facility or Replacement Facility pursuant
to a Pharmaceutical Supply Agreement in connection with making any of
the calculations contained in this letter. Notwithstand-ing the
provisions of paragraph 13 of the Pharmaceutical Supply Agreements, in
the event of a dispute between the parties hereto over any of the
calculations set forth in this letter of clarification, the parties
shall appoint a mutually acceptable "Big Six" accounting firm, or some
other mutually acceptable arbitrator with appropriate finance and
accounting expertise, to arbitrate the differences between the parties
hereto. The decision of any such accounting firm or other arbitrator
shall be final and binding, and the cost of such proceeding shall be
equally split between the parties hereto. In the event the parties
are unable to agree upon an accounting firm or other arbitrator, the
provisions of paragraph 13 of the Pharmaceutical Supply Agreements
shall be followed.
7. When references to "GranCare" and "Vitalink" are made herein,
such references shall include each respective party's successors and
assigns.
Vitalink Pharmacy Services
September 3, 1997
Page 8
8. Except as expressly set forth herein, no other terms or
provisions of any Pharmaceutical Supply Agreement are being modified
or amended by this letter of clarification and such Agreements are
hereby ratified and confirmed.
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Vitalink Pharmacy Services
September 3, 1997
Page 9
GRANCARE, INC.
By:/s/ Xxxxx Xxxxxx
-------------------------
M. Xxxxx Xxxxxx,
President
ACKNOWLEDGED AND AGREED:
VITALINK PHARMACY SERVICES, INC.
By:/s/ Xxxxx X. XxXxxxx
-------------------------------
Xxxxx X. XxXxxxx,
President
TEAMCARE, INC.
By:/s/ Xxxxx X. XxXxxxx
-------------------------------
Xxxxx X. XxXxxxx,
President
