premier, inc
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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For The Fiscal Year ended June 30, 2016
Commission File Number 001-36092
Premier, Inc.(Exact name of registrant as specified in its charter)
Delaware 35-2477140(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
13034 Ballantyne Corporate Place
Charlotte, North Carolina 28277(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 357-0022_____________________________________________________________________
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 Par Value NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xNo ¨Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act . Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No oIndicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No oI ndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . oIndicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ (Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the Class A common stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed secondfiscal quarter was approximately $1,537.3 million . For purposes of the foregoing calculation only, executive officers and directors of the registrant have been deemed to beaffiliates.As of August 19, 2016 , there were 47,394,515 shares of the Registrant’s Class A common stock, par value $ 0.01 per share, outstanding and 94,809,069 shares of theRegistrant’s Class B common stock, par value $0.000001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCEThe Registrant’s definitive proxy statement for its 2016 Annual Meeting of Stockholders to be held on or about December 2, 2016 are incorporated by reference into Part IIIhereof to the extent described herein.
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PREMIER, INCFORM 10-K
TABLE OF CONTENTS
PagePART I
ITEM 1. BUSINESS 7 ITEM 1A. RISK FACTORS 20 ITEM 1B. UNRESOLVED STAFF COMMENTS 39 ITEM 2. PROPERTIES 39 ITEM 3. LEGAL PROCEEDINGS 39 ITEM 4. MINE SAFETY DISCLOSURES 40
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES 41
ITEM 6. SELECTED FINANCIAL DATA 43 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 46 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 78 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 127 ITEM 9A. CONTROLS AND PROCEDURES 127 ITEM 9B. OTHER INFORMATION 128 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 129 ITEM 11. EXECUTIVE COMPENSATION 129
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS 129
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 129 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 129 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 130 SIGNATURES 131
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EXPLANATORY NOTE
This report represents the annual report for the fiscal year ended June 30, 2016 for Premier, Inc. (this "Annual Report"). On October 1, 2013, Premier, Inc.completed the initial public offering ("IPO") of its Class A common stock (the "Class A common stock"). Premier, Inc. is a holding company that was incorporatedas a Delaware corporation on May 14, 2013 which, prior to the IPO, had no substantial assets and conducted no substantial activity except in connection with theIPO. Premier, Inc.'s sole asset is a controlling equity interest in Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is thegeneral partner of Premier Healthcare Alliance, L.P. ("Premier LP"), a California limited partnership, which historically conducted the group purchasing portion ofour supply chain services business. Unless the context suggests otherwise, references in this Annual Report to "Premier," the "Company," "we," "us" and "our"refer (1) prior to the IPO and related transactions, to PHSI (as defined herein) and its consolidated subsidiaries and (2) after our IPO and related transactions, toPremier, Inc. and its consolidated subsidiaries.
Immediately following the consummation of the IPO, a series of transactions, which we refer to as the "Reorganization" (and, collectively with the IPO, the"Reorganization and IPO"), occurred by which Premier GP became the general partner of Premier LP. Premier Healthcare Solutions, Inc. ("PHSI"), a Delawarecorporation, through which we historically conducted the majority of the performance services portion of our business under the name "Premier, Inc.", became ourindirect subsidiary through Premier LP. PHSI, Premier LP and Premier Supply Chain Improvement, Inc., ("PSCI"), a Delaware corporation and our indirectsubsidiary (through Premier LP) through which we historically conducted certain portions of our supply chain services business, historically conducted all of ourbusiness. Upon the consummation of the Reorganization and the IPO, our assets and business operations were substantially similar to those of PHSI, Premier LPand PSCI prior to the Reorganization and the IPO, and we conduct all of our business through Premier LP and its subsidiaries.
Because the Reorganization and the IPO had not yet been consummated and Premier, Inc. had no substantial assets and conducted no substantial activitiesuntil October 1, 2013, the financial statements and other information of PHSI and its consolidated subsidiaries are included in this Annual Report for periods priorto October 1, 2013. For more information about the Reorganization and the IPO, refer to Note 2 - Initial Public Offering and Reorganization to the auditedconsolidated financial statements of this Annual Report.
Throughout this Annual Report, references to (1) "members" refer collectively to our past, present and future customers and (2) "member owners" refercollectively to our past, present and future members, who have owned, or who currently own, limited partnership interests in Premier LP and/or common stock ofPHSI, and, as the context relates to the completion of the Reorganization and the IPO, as described in Note 2 - Initial Public Offering and Reorganization to theaudited consolidated financial statements of this Annual Report, beneficially own shares of Premier, Inc. Class B common stock, (the "Class B common stock"),and Class B common units of Premier LP (the "Class B common units") after giving effect to the Reorganization, provided, that, in the context of discussions ofthe group purchasing organization ("GPO") participation agreements throughout this Annual Report, the term "member owner" also includes any related entity oraffiliate of a member owner that is approved by Premier LP to be the signatory of such GPO participation agreement in lieu of the member owner.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Annual Report that are not statements of historical or current facts, such as those under the heading "Management's Discussion andAnalysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance orachievements to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. Inaddition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that includeterms such as "believes," "belief," "expects," "estimates," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Forward-looking statements mayinclude comments as to our beliefs and expectations regarding future events and trends affecting our business and are necessarily subject to uncertainties, many ofwhich are outside our control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are notlimited to:
• competition which could limit our ability to maintain or expand market share within our industry;
• consolidation in the healthcare industry;
• potential delays recognizing or increasing revenue if the sales cycle or implementation period takes longer than expected;
• the terminability of member participation in our group purchasing organization ("GPO") programs with limited or no notice;
• the rate at which the markets for our non-GPO services and products develop;
• the dependency of our members on payments from third-party payers;
• our reliance on administrative fees which we receive from GPO suppliers;
• our ability to maintain third-party provider and strategic alliances or enter into new alliances;
• our ability to timely offer new and innovative products and services;
• the portion of revenues we receive from our largest members;
• risks and expenses related to future acquisition opportunities and integration of acquisitions;
• financial and operational risks associated with investments in, or partnerships or joint ventures with, other businesses, particularly those that we do notcontrol;
• potential litigation;
• our reliance on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for providing services toour users;
• data loss or corruption due to failures or errors in our systems and service disruptions at our data centers, or breaches or failures of our security measures;
• the financial and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination ofproprietary or confidential information about us or our members or other third parties;
• our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
• our use of "open source" software;
• changes in industry pricing benchmarks;
• any increase in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market;
• our ability to maintain and expand our existing base of drugs in our specialty pharmacy;
• our dependency on contract manufacturing facilities located in various parts of the world;
• our ability to attract, hire, integrate and retain key personnel;
• adequate protection of our intellectual property and potential claims against our use of the intellectual property of third parties;
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• potential sales and use tax liability in certain jurisdictions;
• our indebtedness and our ability to obtain additional financing on favorable terms;
• fluctuation of our cash flows, quarterly revenues and results of operations;
• changes in the political, economic or regulatory healthcare environment;
• our compliance with complex federal and state laws governing financial relationships among healthcare providers and the submission of false orfraudulent healthcare claims;
• interpretation and enforcement of current or future antitrust laws and regulations;
• compliance with complex federal and state privacy, security and breach notification laws;
• compliance with, and potential changes to, extensive federal, state and local laws, regulations and procedures governing our specialty pharmacyoperations;
• risks inherent in the filling, packaging and distribution of pharmaceuticals, including the counseling required to be provided by our pharmacists fordispensing of products;
• our holding company structure and dependence on distributions from Premier Healthcare Alliance, L.P. ("Premier LP");
• different interests among our member owners or between us and our member owners;
• the ability of our member owners to exercise significant control over us, including through the election of all of our directors;
• exemption from certain corporate governance requirements due to our status as a "controlled company" within the meaning of the NASDAQ rules;
• the terms of agreements between us and our member owners;
• payments made under the tax receivable agreements to Premier LP's limited partners and our ability to realize the expected tax benefits related to theacquisition of Class B common units;
• changes to Premier LP's allocation methods that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxableincome;
• provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the"LP Agreement") and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;
• failure to maintain an effective system of internal controls;
• the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive effect of such issuances;
• our intention not to pay cash dividends on our Class A common stock;
• possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive effect of such issuances; and
• the risk factors discussed under the heading "Risk Factors" in Item 1A herein.
More information on potential factors that could affect our financial results is included from time to time in the "Cautionary Note Regarding Forward-LookingStatements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" or similarly captioned sections of thisAnnual Report and our other periodic and current filings made from time to time with the Securities and Exchange Commission ("SEC"), which are available onour website at http://investors.premierinc.com/. You should not place undue reliance on any of our forward-looking statements which speak only as of the date theyare made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events orotherwise. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
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Market Data and Industry Forecasts and Projections
We use market data and industry forecasts and projections throughout this Annual Report and in particular, under Item 1, Business-Industry Overview. Wehave obtained the market data from certain publicly available sources of information, including publicly available industry publications. We believe the data othershave compiled are reliable, but we have not independently verified the accuracy of this information. While we are not aware of any misstatements regarding theindustry data presented herein, forecasts and projections involve risks and uncertainties and are subject to change based on various factors, including thosediscussed under Item 1A, Risk Factors of this Annual Report. You should not place undue reliance on any such market data or industry forecasts and projections.We undertake no obligation to publicly update or revise any such market data or industry forecasts and projections, whether as a result of new information, futureevents or otherwise.
Trademarks, Trade Names and Service Marks
This Annual Report includes trademarks, trade names and service marks that we either own or license, such as “Premier,” “PremierConnect,” “PremierPro,”“Premier REACH,” “Commcare,” “ProviderSelect MD” and “QUEST,” which are protected under applicable intellectual property laws. Solely for convenience,trademarks, trade names and service marks referred to in this Annual Report may appear without the ®, TM or SM symbols, but such references are not intended toindicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, tradenames and service marks. This Annual Report also may contain trademarks, trade names and service marks of other parties, and we do not intend our use or displayof other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsementor sponsorship of us by, these other parties.
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PART I
Item 1. Business
The following discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes thereto includedelsewhere in this Annual Report on Form 10-K. The following discussion includes certain forward-looking statements. For a discussion of important factors,including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in thehistorical information and the forward-looking statements presented herein, see "Item 1A, Risk Factors" and "Cautionary Note Regarding Forward-LookingStatements" contained in this Annual Report.
Our Company
Premier, Inc., incorporated in Delaware on May 14, 2013, is primarily owned by hospitals, health systems and other healthcare organizations (such owners arereferred to herein as member owners) located in the United States, as well as public stockholders. Together with our subsidiaries and affiliates, we are a leadinghealthcare improvement company, uniting an alliance of approximately 3,750 U.S. hospitals and more than 130,000 other providers to transform healthcare. Withintegrated data and analytics, collaboratives, supply chain solutions, and advisory and other services, Premier enables better care and outcomes at a lower cost. Webelieve that we play a critical role in the rapidly evolving healthcare industry, collaborating with members to co-develop long-term innovations that reinvent andimprove the way care is delivered to patients nationwide. We deliver value through a comprehensive technology-enabled platform that offers critical supply chainservices, clinical, financial, operational and population health software-as-a-service ("SaaS") informatics products, advisory services and performanceimprovement collaborative programs.
As of June 30, 2016 , we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent approximately 1,400 owned,leased and managed acute care facilities and other non-acute care organizations. Our current membership base includes many of the country's most progressive andforward-thinking healthcare organizations, and we continually seek to add new members that are at the forefront of innovation in the healthcare industry. Our ClassA common stock is generally held by the public, and our Class B common stock is held by the limited partners of Premier LP, referred to as our member owners.
As a member-owned healthcare alliance, our mission, products and services, and long-term strategy have been developed in partnership with our memberhospitals, health systems and other healthcare organizations. We believe that this partnership-driven business model creates a relationship between our membersand us that is characterized by aligned incentives and mutually beneficial collaboration. This relationship affords us access to critical proprietary data andencourages member participation in the development and introduction of new Premier products and services. Our interaction with our members provides us with awindow into the latest challenges confronting the industry we serve and innovative best practices that we can share broadly within the healthcare industry,including throughout our membership. This model has enabled us to develop size and scale, data and analytics assets, expertise and customer engagement requiredto accelerate innovation, provide differentiated solutions and facilitate growth.
We seek to address challenges facing healthcare delivery organizations through our comprehensive suite of solutions that we believe:
• improve the efficiency and effectiveness of the healthcare supply chain;• deliver improvement in cost and quality;• innovate and enable success in emerging healthcare delivery and payment models to manage the health of populations; and• utilize data and analytics to drive increased connectivity, and clinical, financial and operational improvement.
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, derive intelligencefrom our data warehouse, mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation tohigher quality and more cost-effective healthcare.
We deliver our solutions and manage our business through two reportable business segments: supply chain services and performance services. The supplychain services segment includes our group purchasing organization or GPO, specialty pharmacy offerings and direct sourcing activities. The performance servicessegment includes our informatics, collaborative, advisory services and insurance services businesses.
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Industry Overview
According to data from the Centers for Medicare & Medicaid Services, or CMS, healthcare expenditures are a large component of the U.S. economy expectedto grow by an average of 5.8% per year for the period 2015-2025, reaching 20.1% of gross domestic product, or GDP, by 2025. According to data from the 2014American Hospital Association's Annual Survey, published in the 2016 edition of the AHA Hospital Statistics™, there were approximately 5,000 U.S. communityhospitals with approximately 786,900 staffed beds in the United States. Of these acute care facilities, approximately 3,200 were part of either multi-hospital ordiversified single hospital systems, meaning they were owned, leased, sponsored or contract managed by a central organization. According to the May 2016 editionof IMS Health’s Healthcare Market Index, in addition to U.S. hospitals, there were approximately 520,000 alternate site facilities and providers across thecontinuum of care in the United States. These alternate site facilities include primary/ambulatory care and post-acute care providers. Increasingly, these alternatesite facilities are being acquired by, integrated into or aligned with acute care facilities creating integrated delivery networks.
HealthcareSupplyChainServicesIndustry
According to CMS data, total spending on hospital services in the United States is projected to be approximately $1.1 trillion , or approximately 32% of totalhealthcare expenditures, in 2016. Expenses associated with the hospital supply chain, such as supplies and operational and capital expenditures, typically representbetween 20% and 30% of a hospital's budget according to Booz & Company. With continued reimbursement rate pressure across government and managed carepayers, a transitioning payment model from fee-for-service to value-based payment, and national health expenditures representing a significant portion of theeconomy, healthcare providers are examining all sources of cost savings, with supply chain spending a key area of focus. We believe opportunities to drive cost outof the healthcare supply chain include improved pricing for medical supplies and pharmaceuticals, appropriate resource utilization and increased operationalefficiency.
From origination at the supplier to final consumption by the provider or patient, healthcare products pass through an extensive supply chain incorporatingmanufacturers, distributors, GPOs, pharmacy benefit managers, and retail, long-term care and specialty pharmacies, among others. In response to the national focuson health spending and managing healthcare costs, supply chain participants are seeking more convenient and cost-efficient ways to deliver products to patientsand providers. We believe that improvements to the healthcare supply chain to bring it on par with other industries that have more sophisticated supply chainmanagement can drive out significant inefficiencies and cost.
HealthcarePerformanceServicesIndustry
Legislative reform, unsustainable cost trends, and the need for improved quality and outcomes have generated greater focus among healthcare providers oncost management, quality and safety, and population health management. In 2015, the Department of Health and Human Services (HHS) announced its goals foraligning future Medicare payments with quality and value, including tying 85 and 90 percent of Medicare fee-for-service payments to performance in 2016 and2018, respectively, and shifting up to 50 percent of Medicare fee-for-service payments to alternative payment models, such as accountable care organizations(ACOs) or bundled payment arrangements by the end of 2018. In order to meet these goals, health systems will need to continually monitor performance andmanage costs, while maintaining high levels of quality and testing new care delivery models. In response to this changing environment, we expect the markets forperformance services and solutions in the areas of cost management, quality and safety and population health management to grow significantly.
We expect information technology to continue to play a key enabling role in efficiency and cost reduction, performance improvement and care transformationacross the healthcare industry. In particular, the trends toward value-based purchasing and population-based healthcare are proving to require more sophisticatedbusiness intelligence and technology solutions. To achieve higher-quality outcomes and control costs, providers exhibit a strong and continuing need for data anddata analytics to help them understand their current performance and identify opportunities for improvement. We expect demand for data management and dataanalytics products to complement the focus on electronic health record adoption. According to Frost and Sullivan, 50% of hospitals in the United States areexpected to adopt data analytics capabilities by 2016, up from 10% in 2011. Similarly, the advisory services business is growing rapidly in the areas of businessmodel redesign, process improvement, labor productivity, non-labor cost management, clinical integration and change management.
Our Membership
Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations. The participation of theseorganizations in our membership provides us with a window into the latest challenges confronting the industry we serve and innovative best practices that we canshare broadly throughout our membership. At June 30, 2016 , our members included approximately 3,750 U.S. hospitals and more than 130,000 other providers.Approximately 390 individuals, representing approximately 165 of our U.S. hospital members, sit on 23 of our strategic and sourcing committees, and as part ofthese committees, use their industry expertise to advise on ways to improve the development, quality and value of our products
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and services. In addition, ten senior executives from our U.S. hospital member owner systems currently serve on our board of directors. Other than GNYHAPurchasing Alliance, LLC and its member organizations, which accounted for 9% , 9% and 8% of our net revenue in the fiscal years ended June 30, 2016, 2015and 2014 , respectively, no individual member or member owner systems accounted for more than 5% of our net revenue in such periods. Total GPO purchasingvolume by all members participating in our GPO was approximately $48 billion and $44 billion for the calendar years 2015 and 2014 , respectively.
The following table sets forth certain information with respect to retention rates for members participating in our GPO in the supply chain services segmentand renewal rates for our SaaS informatics products subscriptions in the performance services segment for the fiscal years shown:
Year Ended June 30, 2016 2015 2014 3 Year AverageGPO retention rate (a) 97% 99% 99% 98%SaaS institutional renewal rate (b) 92% 94% 94% 93%
(a) The retention rate is calculated based upon the aggregate purchasing volume among all members participating in our GPO for such fiscal year less the annualized GPO purchasing volumefor departed members for such fiscal year, divided by the aggregate purchasing volume among all members participating in our GPO for such fiscal year.
(b) The renewal rate is calculated based upon the total number of members that have SaaS revenue in a given period that also have revenue in the corresponding prior year period divided bythe total number of members that have SaaS revenue in the same period of the prior year.
Our Business Segments
We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population healthmanagement through two business segments: supply chain services and performance services, as addressed in Note 23 - Segments to the audited consolidatedfinancial statements of the Annual Report. We have no significant foreign operations or revenues.
SupplyChainServices
Our supply chain services segment assists our members in managing their non-labor expense and capital spend through a combination of products, servicesand technologies, including one of the largest national healthcare GPOs in the United States serving acute and alternate sites, specialty pharmacy offerings anddirect sourcing activities. Membership in our GPO also provides access to certain SaaS informatics products related to the supply chain and the opportunity toparticipate in our ASCEND ® collaborative. Our supply chain services segment consists of the following products and solutions:
Group Purchasing. Our national portfolio of approximately 2,200 contracts with approximately 1,200 suppliers provides our members with access to a widerange of products and services, including medical and surgical products, pharmaceuticals, laboratory supplies, capital equipment, information technology,facilities and construction, food and nutritional products and purchased services (such as clinical engineering and document shredding services). We use ourmembers' aggregate purchasing power to negotiate pricing discounts and improved contract terms with suppliers. Contracted suppliers pay us administrativefees based on the purchase volume of goods and services sold to our healthcare provider members under the contracts we have negotiated. We also partnerwith other organizations, including regional GPOs, to extend our network base to their members.
Our contract portfolio is designed to offer our healthcare provider members a flexible solution comprised of multi-sourced supplier contracts, as well as pre-commitment and/or single-sourced contracts that offer higher discounts. Our multi-sourced contracts offer pricing tiers based on purchasing volume and/orcommitment and multiple suppliers for many products and services. Our pre-commitment contracts require that a certain amount of our members commit inadvance to a specified amount or percentage of purchasing volume before we enter into a contract with a particular supplier. Our single-source contracts areentered into with a specified supplier, and through this exclusive relationship, allow us to contract for products that meet our members' specifications. In thecase of pre-commitment contracts, we provide the particular supplier with a list of members that have pre-committed to a specified amount or percentage ofpurchasing volume and the supplier directly handles the tracking and monitoring of fulfillment of such purchasing volume. In the case of single and multi-sourced contracts we negotiate and execute the contracts on behalf of our members and make such contracts available to our members to access. Theutilization of such single and multi-sourced contracts is determined by the particular member with assistance from our field force. Since there are no specificfulfillment requirements needed in our single and multi-source contracts in order to obtain certain pricing levels, each particular member and supplier agree onthe appropriate pricing tier based on expected purchasing volume with tracking and ongoing validation of such purchasing volume provided by the supplier.The flexibility
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provided by our expansive contract portfolio allows us to effectively address the varying needs of our members and the significant number of factors thatinfluence and dictate these needs, including overall size, service mix, and the degree of integration between hospitals in a health system.
We continually innovate our GPO programs and supply chain platforms. For example, our EXPRESSbuy ® program enables coordinated, limited-time,volume-driven purchasing opportunities that offer savings beyond regular contract pricing. Through a proprietary web-based application, we offer ourmembers the opportunity to aggregate committed volumes and achieve additional price discounts while allowing our suppliers to sell targeted products,including time-sensitive or excess inventory, more efficiently and at reduced costs.
Our GPO programs target multiple markets, including acute care and alternate site settings. Our alternate site program, one of the largest in the United Stateswith approximately 130,000 members as of June 30, 2016 , includes the following:
Continuum of Care. Alternate sites served by our Continuum of Care GPO program include long-term care and senior living, ambulatory care, firstresponders and emergency medical services, home health, imaging centers and surgery centers. Our Continuum of Care GPO members have access tonearly all of our GPO supplier contracts, including medical and surgical products, pharmaceuticals, laboratory supplies, facilities and construction, capitalequipment, information technology, food and nutritional products and purchased services, as well as additional GPO supplier contracts accessed throughour 50% ownership interest in Innovatix, LLC, one of the nation's largest alternate site GPOs.
ProviderSelect MD ® . ProviderSelect MD ® is one of the nation's largest group purchasing programs for physicians. Focused specifically onindependent physician practices, the program offers members access to nearly all of our GPO supplier contracts.
Premier REACH ® . Premier REACH ® is a group purchasing program for non-healthcare entities, including education ( e.g., K-12 schools, colleges anduniversities, and early childhood education), hospitality, recreation ( e.g., stadiums, parks and fairgrounds) and employee food programs. Our PremierREACH ® members have access to nearly all of our GPO supplier contracts including food service, facilities products and services, informationtechnology and administrative services.
Specialty Pharmacy. Through our specialty pharmacy business, we developed a complete service offering for our members to improve access to medicationand to better manage patient therapy for chronically-ill patients with specialty drug needs and genetic disorders. Our specialty pharmacy business providestraditional pharmacy dispensing services ( i.e ., retail and mail order), as well as “specialty pharmacy” services, which fully integrate the administrativecoordination, patient care management, and data management reporting functions that ultimately service the needs of patients, providers, payers, andpharmaceutical manufacturers. The business was specifically designed to serve as a scaled solution for our members and to provide a specialty pharmacy “carehub” to meet the unique specialty pharmacy needs of health systems across the continuum of care. We provide robust clinical management programs that aretargeted toward those disease states where best-in-class care pathways and interventions by clinically-trained pharmacists are essential for patient adherenceand compliance. Our “care hub” capabilities enable members to more effectively care for complex patient populations, improve clinical quality and safety, andharness otherwise unavailable clinical data.
Direct Sourcing. Our direct sourcing business, SVS, LLC d/b/a S2S Global ("S2S Global"), was established to help our members access a diverse productportfolio and to provide transparency to manufacturing costs and competitive pricing to our members. Through our consolidated subsidiary, S2S Global, wefacilitate the development of product specifications with our members, source or contract manufacture the products to member specifications and sell productsdirectly to our members or suppliers. By engaging with our members at the beginning of the sourcing process to define product specifications and thensourcing, or contract manufacturing, products to meet the exact needs of our members, we eliminate the need for unnecessary product features andspecifications that may typically be included by suppliers and result in higher prices for our members without providing incremental value. Therefore, ourdirect sourcing activities benefit our members by providing them with an expanding portfolio of medical products through more efficient means, and withgreater cost transparency, than if such products were purchased from other third-party suppliers. We market our direct sourcing activities under two distinctbrands: PremierPro™, which is designated for our members, and Prime Plus™, which is designated for our other customers, primarily regional distributorswith private-label product programs.
Managed Services. Our managed services line of business is a fee for service model created to perform supply chain related services for members. Through apartnership with a national pharmacy benefit manager, we provide contract negotiation and administration, claims data and rebate processing and evaluation ofcurrent pharmacy formulary and utilization.
SaaS Informatics Products. Members of our GPO have access to certain components of our PremierConnect Supply Chain offering and its associatedapplications and the ability to purchase additional elements that are discussed in more detail below.
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ASCEND ® Collaborative. Our ASCEND ® Collaborative has developed a process to aggregate purchasing data for our members, enabling such members todetermine whether to negotiate committed group purchases within the collaborative. Through our ASCEND ® Collaborative, members receive grouppurchasing programs, tiers and prices specifically negotiated for them, as well as benchmarking metrics to assist them in identifying additional supply chainand operations cost savings opportunities and knowledge sharing with other member participants and industry experts. As of June 30, 2016 , approximately780 U.S. hospital members, which represent approximately 111,000 hospital beds, participated in our ASCEND ® Collaborative. These hospital memberparticipants have identified approximately $300 million in additional savings as compared to their U.S. hospital peers not participating in ASCEND ® since itsinception in 2009. For calendar year 2015 , these member participants had approximately $14.6 billion in annual supply chain purchasing spend.
PerformanceServices
Our offerings in the performance services sector of the healthcare industry are primarily information technology analytics and workflow automation andadvisory services. We believe we are one of the largest informatics and advisory services businesses in the United States focused exclusively on healthcareproviders. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark,analyze and identify areas of improvement across three main categories: cost management, quality and safety, and population health management. This segmentalso includes our technology-enabled performance improvement collaboratives, through which we convene members, design programs and facilitate, foster andadvance the exchange of clinical, financial and operational data among our members to measure patient outcomes and determine best practices that drive clinical,financial and operational improvements. Our performance services segment includes our PremierConnect ® technology offerings, advisory services andcollaboratives and insurance services, as follows:
PremierConnect ® :
We have created a world-class integrated technology platform for continuous performance improvement called PremierConnect ® . This platform allowsmembers to analyze performance using established data standards, benchmarking, interactive dashboards and custom report services. This portfolio ofperformance improvement solutions is comprised of the following domains:
PremierConnect Quality & Regulatory. The PremierConnect Quality & Regulatory domain enables health systems and providers to identify and target high-value quality improvement areas that drive greater clinical effectiveness and efficiency across the continuum of care. This solution provides clinicalbenchmarking, population analyses and predictive analytics to help hospitals and physician practices be successful in the transition to value-based care.
PremierConnect Safety. The PremierConnect Safety domain enables health systems and providers to improve patient safety, including ongoing infectionprevention, antimicrobial stewardship, reduction of hospital-acquired conditions and real-time clinical surveillance used to drive faster, more informeddecisions.
PremierConnect Supply Chain & ERP. The PremierConnect Supply Chain domain enables health systems and providers to lower supply chain costs throughleading supply chain management analytics, evidence-based purchasing, and innovative enterprise resource planning ("ERP") workflow that drives efficiencyand effectiveness throughout the entire procurement life cycle. This healthcare-only ERP solution also extends into accounts payable, general ledger andfinancial reporting.
PremierConnect Operations. The PremierConnect Operations domain enables health systems and providers to optimize labor management with integratedfinancial reporting and budgeting across the continuum of care. These applications integrate benchmarking and productivity data from acute, outpatient andambulatory settings.
PremierConnect Population Health. The PremierConnect Population Health domain enables health systems and providers to transition to optimal resource andrisk management through actionable business intelligence utilizing analytics that provide population and provider insights from measuring and benchmarkingacute and ambulatory clinical performance.
PremierConnect ® Enterprise. The PremierConnect Enterprise domain enables health systems and providers to leverage integrated analytics across all ofPremier's subject matter expertise. This solution includes integrating a member's custom data into a hosted and integrated data warehouse and analyticsplatform. This solution provides data acquisition, management and governance capabilities for health systems and extends this capability to research and lifesciences.
Advisory Services:
Our advisory services, provided through Premier Performance Partners, seek to drive change and improvement in cost reduction, quality of care and patientsafety, and prepare our members to succeed in a population health environment. We use an income statement method to address every area affecting themember's bottom line, finding opportunities in both revenue
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enhancement and expense management. Premier Performance Partners offers expertise and capabilities in the following areas: care coordination and physicianengagement, clinical, financial and operational performance, facilities and capital asset management, organizational transformation, physician preferenceitems (PPI), reform readiness assessment, clinical integrated and population health operations and analytics, purchased services assessment, revenue cyclemanagement and recovery audit contractor (RAC) readiness, service line improvement, strategic and business planning and supply chain transformation.
We provide a data-driven approach and expertise to deliver targeted results in reducing costs, increasing margin and improving quality. Using variousspecialists and advisors, we provide wrap-around services for our major SaaS informatics products and our GPO to enhance the member value from theseprograms. For example, our clinical performance partners provide U.S. hospitals with access to performance improvement and operational specialists. Usingour informatics tools and applications, these clinical performance partners mine data for improvement opportunities and then lead or assist with improvementprojects in such areas as resource and operational assessments, process improvement, performance improvement monitoring, strategic planning andknowledge transfer for organizational change. U.S. hospitals contract for clinical, financial and/or operational performance partner support for a given numberof days per month, with contracts lasting from less than a year to five years in duration.
Performance Improvement Collaboratives:
QUEST ® Collaborative. Through our QUEST ® Collaborative (QUEST ® ), we work with our members to identify improvement opportunities and bestpractices and engage them to participate in performance improvement exercises using identified best practices, to collaborate to define performance goals andto use healthy competition to drive performance improvement. QUEST ® builds on the past success of our partnership with CMS in the Premier HospitalQuality Incentive Demonstration, a value-based purchase program through which CMS awarded bonus payments to hospitals for high quality in severalclinical areas and reported quality data on its website. The collaborative currently targets improvements in seven domains, including evidence-based care, costand efficiency of care, patient and family engagement, safety, mortality and appropriate hospital use and community health. As of June 30, 2016 , QUEST ®
had approximately 350 participating U.S. hospitals working together and utilizing our SaaS informatics products to develop highly standardized quality, safetyand cost metrics. QUEST ® seeks to develop next-generation quality, safety and cost metrics with a consistency and standardization we do not believe existstoday. We believe that our members who participate in QUEST ® are better prepared to deal with healthcare reform requirements and, by improving in theseven domains referenced above, can earn Medicare incentives, avoid Medicare penalties and better manage reimbursement cuts.
Bundled Payment Collaborative. Our Bundled Payment Collaborative assists our members in their participation in the CMS Bundled Payments for CareImprovement Initiative, an initiative by which organizations enter into payment arrangements that include financial and performance accountability forepisodes of care. Our Bundled Payment Collaborative offers ongoing analysis of our members' Medicare Part A and Medicare Part B data, dashboards formanaging bundled payment programs and gainsharing, in addition to providing knowledge, expertise, and best practices from experts and members.
The Population Health Management Collaboratives. Our Population Health Management Collaborative, or PHM Collaborative (the successor to our PACT TM
-Partnership for Care Transformation collaborative), is focused on helping members develop and implement effective models of care and payment forconnected groups of providers who take responsibility for improving the health status, efficiency and experience of care (quality and satisfaction) for a definedpopulation ( i.e., accountable care organizations) and how to align this care redesign with new value based payment arrangements. Our PHM Collaborativeprovides members with the opportunity to share value based case and payment developmental strategies, programs, and other best practices. The PHMCollaborative provides valuable assistance and access to over 30 PHM subject matter experts to members in developing the tools necessary to manage thehealth of a population and to exchange knowledge with each other and with industry and government experts. As of June 30, 2016 , we had 67 health systemsand Clinically Integrated Networks, comprised of over 445 hospitals in 33 states participating in our PHM Collaborative.
Partnership for Patients Collaborative. We participated in the CMS-established Partnership for Patients initiative, a public-private collaborative working toimprove the quality, safety and affordability of healthcare. Physicians, nurses, hospitals, employers, patients and their advocates, and the federal and stategovernments have joined together to form Partnership for Patients to decrease preventable hospital-acquired conditions and readmissions. Our HospitalEngagement Network (HEN) serves as a mobile classroom with Clinical Improvement Advisors (CIAs). In September 2015, CMS renewed the Partnership forPatients initiative.
Data Alliance Collaborative. A group of the nation’s leading health systems have launched the Data Alliance Collaborative to ensure that healthcare providershave the technology and analytics in place to improve quality and lower costs. These forward-thinking providers are working together with Premier to disruptthe way healthcare information technology is
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developed. Data Alliance Collaborative members are using integrated data ( e.g. , clinical, claims, labor, supply chain, administrative, financial, patientexperience, genomics, etc.) to develop new insights and answer the complex questions driven by the transformation to population-based care. They areinnovating collaboratively to meet their current needs and are creating the conceptual and technical foundation that enables them to respond nimbly to anuncertain future.
Insurance Services. We provide insurance programs and services to assist U.S. hospital and healthcare system members with liability and benefits insuranceservices, along with risk management services. We design insurance programs and services for our members to improve their quality, patient safety andfinancial performance while lowering costs. We provide management services for American Excess Insurance Exchange, Risk Retention Group, a reciprocalrisk retention group that provides excess hospital, professional, umbrella and general liability insurance to certain U.S. hospital and healthcare systemmembers. We also negotiate the purchase of other insurance products from commercial insurance carriers on behalf of our members.
Pricing and Contracts
We generate revenue from our supply chain services segment through fees received from suppliers based on the total dollar volume of supplies purchased byour members in connection with our GPO programs and through product sales in connection with our specialty pharmacy and direct sourcing activities. Ourperformance services segment has three main sources of revenue: (i) three to five-year subscription agreements to our SaaS informatics products, (ii) annualsubscriptions to our performance improvement collaboratives and (iii) professional fees for our advisory services.
SupplyChainServices
In connection with the Reorganization and IPO, our member owners entered into GPO participation agreements with Premier LP which became effective uponthe completion of the Reorganization and the IPO. Pursuant to the terms of its GPO participation agreement, each of these member owners generally receivesrevenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's owned,leased, managed and affiliated facilities through our GPO supplier contracts. In addition, our two largest regional GPO member owners, which representedapproximately 16% of our gross administrative fees revenue for the year ended June 30, 2016 , each remit gross administrative fees collected by such memberowner based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through the member owner's own GPO supplier contracts,in accordance with their Premier GPO Agreement, and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to us.Subject to certain termination rights, these GPO participation agreements are for an initial five-year term, although our two largest regional GPO member ownershave entered into agreements with seven-year terms. The terms of the GPO participation agreements vary as a result of provisions in our existing arrangementswith member owners that conflict with the terms of the GPO participation agreement and which by the express terms of the GPO participation agreement areincorporated by reference and deemed controlling and will continue to remain in effect. In limited circumstances, Premier LP and certain member owners enteredinto GPO participation agreements with certain terms that vary from the standard form, which were approved by the member agreement review committee of ourboard of directors, based upon regulatory constraints, pending merger and acquisition activity or other exigent circumstances affecting those member owners.Certain non-owner members operate under contractual relationships that provide for a specific revenue share that differs from the 30% revenue share that weprovide to our member owners under the current GPO participation agreements.
In our specialty pharmacy, we earn revenue from product sales and other services. Revenues are earned through traditional pharmacy dispensing services ( i.e., retail and mail order), as well as “specialty pharmacy” services, including 340B drug pricing program dispensing services, administrative coordination, patientcare management and data management reporting functions. Our specialty pharmacy contracts generally range from one to three years in length and, except forexclusive networks, there are generally no guaranteed sales associated with a payer network contract.
In our direct sourcing activities, we earn revenue from product sales. Products are sold to our members through direct shipment and distributor and wholesalechannels. Products are also sold to regional medical-surgical distributors and other non-healthcare industries ( i.e., foodservice). We have contracts with ourmembers that buy products through our direct shipment option. These contracts do not usually provide a guaranteed purchase or volume commitment requirement.
PerformanceServices
Performance services revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses, performance improvementcollaborative and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions from group-sponsored insurance programs.
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SaaS informatics products subscriptions include the right to use our proprietary hosted technology on a SaaS basis, training and member support to deliverimprovements in cost management, quality and safety, population health management and provider analytics. Pricing varies by subscription and size of thesubscriber. Informatics subscriptions are generally three to five-year agreements with automatic renewal clauses and annual price escalators that typically do notallow for early termination. These agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis andrevenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation. Implementation involves thecompletion of data preparation services that are unique to each member's data set and, in certain cases, the installation of member site-specific software, in order toaccess and transfer member data into our hosted SaaS informatics products. Implementation is generally 90 to 170 days following contract execution before theSaaS informatics products can be fully utilized by the member.
Performance improvement collaborative and other service subscription revenue to support our offerings in cost management, quality and safety and populationhealth management is recognized over the service period, which is generally one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement. Fees are billed as stipulated inthe contract, and revenue is recognized on a proportional performance method as services are performed and deliverables are provided. In situations where thecontracts have significant contract performance guarantees or member acceptance provisions, revenue recognition occurs when the fees are fixed and determinableand all contingencies, including any refund rights, have been satisfied. Fees are based either on time and materials or the savings that are delivered.
Sales
We conduct sales through our embedded field force, our dedicated national sales team and our Premier Performance Partners advisors, collectively comprisedof approximately 620 employees as of June 30, 2016 .
Our field force works closely with our U.S. hospital members and other members to target new opportunities by developing strategic and operational plans todrive cost management and quality and safety improvement initiatives. As of June 30, 2016 , our field force was deployed to seven geographic regions and severalstrategic/affinity members across the United States. This field force works at our member sites to identify and recommend best practices for both supply chain andclinical integration cost savings opportunities. The regionally deployed field force is augmented by a national team of subject matter specialists who focus on keyareas such as lab, surgery, cardiology, orthopedics, imaging, pharmacy, information technology and construction. Our field force assists our members in growingand supporting their alternate site membership.
Our sales team provides national sales coverage for establishing initial member relationships and works with our field force to increase sales to existingmembers. Our regional sales teams are aligned with the seven regions in our field force model.
Our Premier Performance Partners team identifies and targets advisory engagements and wrap-around services for our major SaaS informatics products andour GPO to enhance the member value from these programs.
Intellectual Property
We offer our members a range of products to which we own intellectual property rights, including online services, best practices content, databases, electronictools, web-based applications, performance metrics, business methodologies, proprietary algorithms, software products and advisory services deliverables. We ownand control a variety of trade secrets, confidential information, trademarks, trade names, copyrights, domain names and other intellectual property rights that, in theaggregate, are of material importance to our business.
We protect our intellectual property by relying on federal, state and common law rights, as well as contractual arrangements. We are licensed to use certaintechnology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and otherintellectual property rights owned and controlled by us.
Research and Development
Our research and development, or R&D, expenditures primarily consist of our strategic investment in internally developed software to further our initiatives,and new product development in the areas of cost management, quality and safety and population health management. We have also made significant investmentsin our SaaS informatics product offerings. We expensed $2.9 million , $2.9 million and $3.4 million for R&D activities for fiscal years 2016 , 2015 and 2014 ,respectively, and capitalized software development costs of $61.0 million , $57.9 million and $41.1 million for fiscal years 2016 , 2015 and 2014 , respectively. Weexperience fluctuations in our research and development expenditures, including capitalized software development costs, across reportable periods due to thetiming of our software development life cycles, with new product features and functionality, new technologies and upgrades to our service offerings.
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Competition
The markets for our products and services in both our supply chain services segment and performance services segment are fragmented, intensely competitiveand characterized by rapidly evolving technology and product standards, user needs and the frequent introduction of new products and services. We haveexperienced and expect to continue to experience intense competition from a number of companies.
The primary competitors to our supply chain services segment are other large GPOs such as HealthTrust Purchasing Group (a subsidiary of HCA Holdings,Inc.), Intalere Inc., Managed Health Care Associates, Inc. and Vizient, Inc. In addition, we compete against certain healthcare provider-owned GPOs in thissegment. Our specialty pharmacy competes with Caremark Inc. (owned by CVS Caremark Corporation), Curascript, Inc./Accredo (owned by Express ScriptsHolding Co.), Diplomat Specialty Pharmacy and many smaller local specialty pharmacies. Finally, our direct sourcing activities compete primarily with privatelabel offerings/programs, product manufacturers and distributors, such as Cardinal Health, Inc., McKesson Corporation, Medline Industries, Inc. and Owens &Minor, Inc.
The competitors in our performance services segment range from smaller niche companies to large, well-financed and technologically-sophisticated entities.Our primary competitors in this segment include (i) information technology providers such as Allscripts Healthcare Solutions, Inc., Caradigm USA LLC, CernerCorporation, Epic Systems Corporation, IBM Corporation, Infor, Inc., McKesson Corporation and Oracle Corporation, and (ii) consulting and outsourcing firmssuch as The Advisory Board Company, Deloitte & Touche LLP, Evolent Health, Inc., Healthagen, LLC (a subsidiary of Aetna, Inc.), Huron Consulting, Inc.,Navigant Consulting, Inc. and Optum, Inc. (a subsidiary of UnitedHealth Group, Inc.).
With respect to our products and services across both segments, we compete on the basis of several factors, including breadth, depth and quality of productand service offerings, ability to deliver clinical, financial and operational performance improvements through the use of products and services, quality andreliability of services, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. With respect to our productsand services across both of our business segments, we also compete on the basis of price.
Government Regulation
General
The healthcare industry is highly regulated by federal and state authorities and is subject to changing political, economic and regulatory influences. Factorssuch as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditionsaffect the purchasing practices, operations and the financial health of healthcare organizations. In particular, changes in laws and regulations affecting thehealthcare industry, such as increased regulation of the purchase and sale of medical products, or restrictions on permissible discounts and other financialarrangements, could require us to make unplanned modifications of our products and services, result in delays or cancellations of orders or reduce funds anddemand for our products and services.
We are subject to numerous risks arising from governmental oversight and regulation. You should carefully review the following discussion and the risksdiscussed under “Item 1A, Risk Factors” for a more detailed discussion.
AffordableCareAct
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of 2010, collectively referred to as theAffordable Care Act, is a sweeping measure designed to expand access to affordable health insurance, control healthcare spending and improve healthcare quality.The law includes provisions to tie Medicare provider reimbursement to healthcare quality and incentives, mandatory compliance programs, enhanced transparencydisclosure requirements, increased funding and initiatives to address fraud and abuse and incentives to state Medicaid programs to promote community-based careas an alternative to institutional long-term care services. In addition, the law provides for the establishment of a national voluntary pilot program to bundleMedicare payments for hospital and post-acute services, which could lead to changes in the delivery of healthcare services. Likewise, many states have adopted orare considering changes in healthcare policies in part due to state budgetary shortfalls. Because implementation of many provisions of the Affordable Care Actremains unsettled, we do not know what effect the federal Affordable Care Act or state law proposals may have on our business.
CivilandCriminalFraudandAbuseLaws
We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs and private health plans fromfraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws arecomplex and broadly-worded, and their application to our specific products, services and relationships may not be clear and may be applied to our business in waysthat we do not anticipate. Federal and state
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regulatory and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations andother reimbursement laws and rules. These laws and regulations include:
Anti-Kickback Laws. The federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of remuneration, directly orindirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order ofitems or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of "remuneration" has beenbroadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Manystates have adopted similar prohibitions against kickbacks and other practices that are intended to influence the purchase, lease or ordering of healthcare items andservices regardless of whether the item or service is covered under a governmental health program or private health plan. Certain statutory and regulatory safeharbors exist that protect specified business arrangements from prosecution under the Anti-Kickback Statute if all elements of an applicable safe harbor are met,however these safe harbors are narrow and often difficult to comply with. Congress has appropriated an increasing amount of funds in recent years to supportenforcement activities aimed at reducing healthcare fraud and abuse.
The U.S. Department of Health and Human Services, or HHS, created certain safe harbor regulations which, if fully complied with, assure parties to aparticular arrangement covered by a safe harbor that they will not be prosecuted under the Anti-Kickback Statute. We attempt to structure our group purchasingservices, pricing discount arrangements with suppliers, and revenue share arrangements with applicable members to meet the terms of the safe harbor for GPOs setforth at 42 C.F.R. § 1001.952(j) and the discount safe harbor set forth at 42 C.F.R. § 1001.952(h). Although full compliance with the provisions of a safe harborensures against prosecution under the Anti-Kickback Statute, failure of a transaction or arrangement to fit within a safe harbor does not necessarily mean that thetransaction or arrangement is illegal or that prosecution under the Anti-Kickback Statute will be pursued. From time to time, HHS, through its Office of InspectorGeneral, makes formal and informal inquiries, conducts investigations and audits the business practices of GPOs, including our GPO, the result of which could benew rules, regulations or in some cases, a formal enforcement action.
To help ensure regulatory compliance with HHS rules and regulations, our members that report their costs to Medicare are required under the terms of thePremier Group Purchasing Policy to appropriately reflect all elements of value received in connection with our Reorganization and IPO on their cost reports. Weare required to furnish applicable reports to such members setting forth the amount of such value, to assist their compliance with such cost reporting requirements.There can be no assurance that the HHS Office of Inspector General or the U.S. Department of Justice, or DOJ, will concur that these actions satisfy theirapplicable rules and regulations.
False Claims Act. Our business in general, and our specialty pharmacy in particular, is also subject to numerous federal and state laws that forbid thesubmission or "causing the submission" of false or fraudulent information or the failure to disclose information in connection with the submission and payment ofclaims for reimbursement to Medicare, Medicaid, other federal healthcare programs or private health plans. In particular, the False Claims Act, or FCA, prohibits aperson from knowingly presenting or causing to be presented a false or fraudulent claim for payment or approval by an officer, employee or agent of the UnitedStates. In addition, the FCA prohibits a person from knowingly making, using, or causing to be made or used a false record or statement material to such a claim.Violations of the FCA may result in treble damages, significant monetary penalties, and other collateral consequences including, potentially, exclusion fromparticipation in federally funded healthcare programs. The scope and implications of the amendments to the FCA pursuant to the Fraud Enforcement and RecoveryAct, or FERA, have yet to be fully determined or adjudicated and as a result it is difficult to predict how future enforcement initiatives may impact our business. Aclaim that includes items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
Privacy and Security Laws. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, contains substantial restrictions and requirementswith respect to the use and disclosure of certain individually identifiable health information, referred to as "protected health information." The HIPAA PrivacyRule prohibits a covered entity or a business associate (essentially, a third party engaged to assist a covered entity with enumerated operational and/or compliancefunctions) from using or disclosing protected health information unless the use or disclosure is validly authorized by the individual or is specifically required orpermitted under the Privacy Rule and only if certain complex requirements are met. In addition to establishing these complex requirements, covered entities andbusiness associates must also meet additional compliance obligations set forth in the Privacy Rule. In addition, the HIPAA Security Rule establishesadministrative, organization, physical and technical safeguards to protect the privacy, integrity and availability of electronic protected health informationmaintained or transmitted by covered entities and business associates. The HIPAA Security Rule requirements are intended to mandate that covered entities andbusiness associates regularly re-assess the adequacy of their safeguards in light of changing and evolving security risks. Finally, the HIPAA Breach NotificationRule requires that covered entities and business associates, under certain circumstances, notify patients/beneficiaries and HHS when there has been an improperuse or disclosure of protected health information.
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Our specialty pharmacy, our self-funded health benefit plan and our healthcare provider members (provided that these members engage in HIPAA-definedstandard electronic transactions with health plans, which will be all or the vast majority) are directly regulated by HIPAA as "covered entities." From time to time,as part of our specialty pharmacy business, certain of our affiliates act as business associates of retail and other pharmacies in connection with co-brandinginitiatives. As such, we are subject to HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S.hospital members disclose protected health information to us so that we may use that information to provide certain data analytics, benchmarking, advisory or otheroperational and compliance services to these members, we are a "business associate" of those members. In these cases, in order to provide members with servicesthat involve the use or disclosure of protected health information, HIPAA require us to enter into "business associate agreements" with our covered entitymembers. Such agreements must, among other things, provide adequate written assurances:
(i) as to how we will use and disclose the protected health information within certain allowable parameters established by HIPAA,(ii) that we will implement reasonable administrative, organizational, physical and technical safeguards to protect such information from misuse,(iii) that we will enter into similar agreements with our agents and subcontractors that have access to the information,(iv) that we will report breaches of unsecured protected health information, security incidents and other inappropriate uses or disclosures of the
information, and(v) that we will assist the covered entity with certain of its duties under HIPAA.
With the enactment of the Health Information Technology for Economic and Clinical Health, or HITECH Act, the privacy and security requirements ofHIPAA were modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of coveredentities. Prior to this change, business associates had contractual obligations to covered entities but were not subject to direct enforcement by the federalgovernment. In 2013, HHS released final rules implementing the HITECH Act changes to HIPAA. These amendments expanded the protection of protected healthinformation by, among other things, imposing additional requirements on business associates, further restricting the disclosure of protected health information incertain cases when the disclosure is part of a remunerated transaction, and modifying the HIPAA Breach Notification Rule, which has been in effect sinceSeptember 2009, to create a rebuttable presumption that any improper use or disclosure of protected health information requires notice to affectedpatients/beneficiaries and HHS.
Transaction Requirements. HIPAA also mandates format, data content and provider identifier standards that must be used in certain electronic transactions,such as claims, payment advice and eligibility inquiries. Although our systems are fully capable of transmitting transactions that comply with these requirements,some payers and healthcare clearinghouses with which we conduct business may interpret HIPAA transaction requirements differently than we do or may requireus to use legacy formats or include legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses requireconformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful transactions, we attempt to complywith their requirements, but may be subject to enforcement actions as a result. In 2009, CMS published a final rule adopting updated standard code sets fordiagnoses and procedures known as ICD-10 code sets and changing the formats to be used for electronic transactions subject to the ICD-10 code sets, known asVersion 5010. All healthcare providers are required to comply with Version 5010 and use the ICD-10 code sets. We are actively working to make the propermodifications in preparation for the upcoming release of new ICD-10 code sets on October 1, 2016.
Other Federal and State Laws. In addition to our obligations under HIPAA there are other federal laws that impose specific privacy and security obligations,above and beyond HIPAA, for certain types of health information and impose additional sanctions and penalties. These rules are not preempted by HIPAA. Moststates have enacted patient and/or beneficiary confidentiality laws that protect against the disclosure of confidential medical information, and many states haveadopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, data security breach notification requirements,and special rules for so-called "sensitive" health information, such as mental health, genetic testing results, or Human Immunodeficiency Virus, or HIV, status.These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affectour business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, iscoordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption ofelectronic health records in the healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments atONCHIT will have on the necessary specifications or demand for our products, services, or on associated compliance costs.
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AntitrustLaws
The Sherman Antitrust Act and related federal and state antitrust laws are complex laws that prohibit contracts in restraint of trade or other activities that aredesigned to or that have the effect of reducing competition in the market. The federal antitrust laws promote fair competition in business and are intended to createa level playing field so that both small and large companies are able to compete in the market. In their 1996 Statements of Antitrust Enforcement Policy in HealthCare, first issued in 1993, or the Healthcare Statements, the DOJ and the Federal Trade Commission, or FTC, set forth guidelines specifically designed to helpGPOs gauge whether a particular purchasing arrangement may raise antitrust concerns and established an antitrust safety zone for joint purchasing arrangementsamong healthcare providers. Under this antitrust safety zone, the DOJ and FTC will not challenge, except in extraordinary circumstances, joint purchasingarrangements among healthcare providers that meet two basic conditions: (i) the purchases made by the healthcare providers account for less than 35% of the totalsales of the purchased product or service in the relevant market; and (ii) the cost of the products and services purchased jointly account for less than 20% of thetotal revenues from all products and services sold by each competing participant in the joint purchasing arrangement.
We have attempted to structure our contracts and pricing arrangements in accordance with the Healthcare Statements and believe that our GPO suppliercontracts and pricing discount arrangements should not be found to violate the antitrust laws. However, no assurance can be given that enforcement authorities willagree with this assessment. From time to time, the group purchasing industry comes under review by congress and other governmental bodies with respect toantitrust laws. In connection with the 2002 hearing by the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, we andother operators of GPOs formed the Healthcare Supply Chain Association, or HSCA, which developed a code of conduct to assure compliance with ethical andlegal standards, including the antitrust laws. In addition, in 2002 we adopted our own Code of Conduct in consultation with a leading ethicist.
On August 11, 2009, we and several other operators of GPOs received a letter from Senators Charles Grassley, Herb Kohl and Bill Nelson requestinginformation concerning the different relationships between and among us and our members, distributors, manufacturers and other suppliers, and requesting certaininformation about the services we perform and the payments we receive in connection with our GPO programs. On September 25, 2009, we and several otheroperators of GPOs received a request for information from the U.S. Government Accountability Office, or GAO, also concerning our services and relationshipswith our members in connection with our GPO programs. Subsequently, we and other operators of GPOs received follow-up requests for additional information.We fully complied with all of these requests. On September 27, 2010, the GAO released a report titled "Group Purchasing Organizations-Services Provided toCustomers and Initiatives Regarding Their Business Practices." On that same day, the Minority Staff of the U.S. Senate Finance Committee released a report titled"Empirical Data Lacking to Support Claims of Savings with Group Purchasing Organizations." On March 30, 2012, the GAO released a report titled "GroupPurchasing Organizations-Federal Oversight and Self-Regulation." On November 24, 2014, the GAO released a report titled "Funding Structure Has PotentialImplications for Medicare Costs."
Congress, the DOJ, the FTC, the U.S. Senate or another state or federal entity could at any time open a new investigation of the group purchasing industry, ordevelop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricing arrangements with suppliers, increasereporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that adversely impacts our business. We may also faceprivate or government lawsuits alleging violations arising from the concerns articulated by these governmental factors or alleging violations based solely onconcerns of individual private parties.
GovernmentalAudits
Because we act as a GPO for healthcare providers that participate in governmental programs, our group purchasing services have in the past and may again inthe future be subject to periodic surveys and audits by governmental entities or contractors for compliance with Medicare and Medicaid standards andrequirements. We will continue to respond to these government reviews and audits but cannot predict what the outcome of any future audits may be or whether theresults of any audits could significantly or negatively impact our business, our financial condition or results of operations.
ComplianceDepartment
We have developed a compliance program that is designed to monitor that our operations are conducted in compliance with applicable laws and regulationsand, if violations occur, to promote early detection and prompt resolution. These objectives are achieved through education, monitoring, disciplinary action andother remedial measures we believe to be appropriate. We provide all of our employees with a compliance education that has been developed to communicate ourcode of conduct, standards of conduct, and compliance policies and procedures, as well as policies for monitoring, reporting and responding to compliance issues.We also provide all of our employees with a third party toll-free number and Internet website address in order to report any compliance or privacy concerns. Inaddition, our Chief Ethics and Compliance Officer individually, and along with the Audit and Compliance Committee of the Board of Directors, helps overseecompliance and ethics matters across our business operations.
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Employees
As of June 30, 2016 , we employed approximately 2,100 persons, approximately 47% of whom are based in our headquarters in Charlotte, North Carolina.None of our employees are working under a collective bargaining arrangement.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the documents that we file withthe SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain further information about the operation of the SEC'sPublic Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a website maintainedby the SEC. The address of this site is https://www.sec.gov. In addition, our website address is www.premierinc.com. We make available through our website thedocuments identified above, free of charge, promptly after we electronically file such material with, or furnish it to, the SEC.
We also provide information about our company through: Twitter (https://twitter.com/premierha), Facebook(https://www.facebook.com/premierhealthcarealliance), LinkedIn (https://www.linkedin.com/company/6766), YouTube(https://www.youtube.com/user/premieralliance), Instagram (https://instagram.com/premierha), Foursquare (https://foursquare.com/premierha) and Premier’s blog(https://www.actionforbetterhealthcare.com).
Except as specifically indicated otherwise, the information available on our website, the SEC's website and the social media outlets identified above, is not andshall not be deemed a part of this Annual Report.
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Item 1A. Risk Factors
Our business, operations, and financial position are subject to various risks. Before making an investment in our Class A common stock or other securities wemay have outstanding from time to time, you should carefully consider the following risks, as well as the other information contained in this annual report. Any ofthe risks described below could materially harm our business, financial condition, results of operations and prospects, and as a result, an investment in our Class Acommon stock or other securities we may have outstanding from time to time could decline, and you may lose part or all of the value of your investment. Thissection does not describe all risks that are or may become applicable to us, our industry, or our business, and it is intended only as a summary of certain materialrisk factors. Some statements in this annual report, including such statements in the following risk factors, constitute forward-looking statements. See the sectionentitled “Cautionary Note Regarding Forward-Looking Statements.” More detailed information concerning other risks or uncertainties we face, as well as the riskfactors described below, is contained in other sections of this annual report.
Risks Related to Our Business
Weface intense competition, which could limit our ability to maintain or expand market share within our industry and harmour business and operatingresults.
The market for products and services in each of our operating segments is fragmented, intensely competitive and characterized by rapidly evolving technologyand product standards, dynamic user needs and the frequent introduction of new products and services. We face intense competition from a number of companies,including the companies listed under “Item 1 - Business - Competition.” The primary competitors for our supply chain services segment are other large GPOs,including in certain cases GPOs owned by healthcare providers. Our specialty pharmacy competes both with large national pharmacies and smaller local specialtypharmacies. Our direct sourcing activities compete primarily with private label offerings and programs, product manufacturers and distributors. The competitors inour performance services segment range from smaller niche companies to large, well-financed and technologically-sophisticated entities, and includes informationtechnology providers and consulting and outsourcing firms.
With respect to our products and services in both segments, we compete on the basis of several factors, including breadth, depth and quality of our product andservice offerings, ability to deliver clinical, financial and operational performance improvement through the use of products and services, quality and reliability ofservices, ease of use and convenience, brand recognition and the ability to integrate services with existing technology. Some of our competitors are moreestablished, benefit from greater name recognition, have larger member bases and have substantially greater financial, technical and marketing resources. Other ofour competitors have proprietary technology that differentiates their product and service offerings from our offerings. As a result of these competitive advantages,our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands,products and services and make more attractive offers to our members.
We also compete on the basis of price in both of our segments. We may be subject to pricing pressures as a result of, among other things, competition withinthe industry, consolidation of healthcare industry participants, practices of managed care organizations, changes in laws and regulations applicable to our businessoperations, government action affecting reimbursement and financial stress experienced by our members. If our pricing experiences significant downward pressure,our business will be less profitable and our results of operations will be adversely affected. In this competitive environment, we cannot be certain that we will beable to retain our current members or expand our member base. If we do not retain current members or expand our member base, our business, financial conditionand results of operations will be harmed. Moreover, we expect that competition will continue to increase as a result of consolidation in both the healthcareinformation technology and healthcare services industries. If one or more of our competitors or potential competitors were to merge or partner with another of ourcompetitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business, financial conditionand results of operations.
Consolidationinthehealthcareindustrycouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems with greater market power. We expectregulatory and economic conditions to force additional consolidation in the healthcare industry in the future. As consolidation accelerates, the economies of scaleof our members’ organizations may grow. If a member experiences sizable growth following consolidation, it may determine that it no longer needs to rely on usand may reduce its demand for our products and services. Some of these large and growing healthcare systems may choose to contract directly with suppliers forcertain supply categories, and some suppliers may seek to contract directly with the healthcare providers rather than with GPOs such as ours. In connection withany consolidation, certain of our members may also move their business to another GPO. In addition, as healthcare providers consolidate to create larger and moreintegrated healthcare delivery systems with greater market
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power, these providers may try to use their market power to negotiate fee reductions for our products and services across both of our business segments. Finally,consolidation may also result in the acquisition or future development by our members of products and services that compete with our products and services. Anyof these potential results of consolidation could have a material adverse effect on our business, financial condition and results of operations.
Wemayexperiencesignificantdelaysinrecognizingrevenueorincreasingrevenueifthesalescycleorimplementationperiodwithpotentialnewmemberstakeslongerthananticipated.
A key element of our strategy is to market the various products and services in our supply chain services and performance services segments directly tohealthcare providers, such as health systems and acute care hospitals, and to increase the number of our products and services utilized by existing members. Theevaluation process is often lengthy and involves significant technical evaluation and commitment of personnel by these organizations. Further, the evaluationprocess depends on a number of factors, many of which we may not be able to control, including potential new members’ internal approval processes, budgetaryconstraints for technology spending, member concerns about implementing new procurement methods and strategies and other timing effects. In addition, thecontract or software implementation process for new products or services can take six months or more and, accordingly, delay our anticipated financial benefitsfrom sales of such products or services. If we experience an extended or delayed implementation cycle in connection with the sale of additional products andservices to existing or new members, it could have a material adverse effect on our business, financial condition and results of operations.
MemberparticipationinourGPOprogramsmaybeterminatedwithlimitedornonoticeandwithoutsignificantterminationpayments.Ifourmembersreduceactivitylevelsorterminateorelectnottorenewtheircontracts,ourrevenueandresultsofoperationsmaydecreasematerially.
In connection with the Reorganization, we entered into new GPO participation agreements with all of our member owners existing immediately prior to thecompletion of the Reorganization. These GPO participation agreements are generally terminable at any time by either party, upon one year’s prior written notice, inaddition to being terminable for cause. Our success in retaining member participation in our GPO programs depends upon our reputation, strong relationships withsuch members and our ability to deliver consistent, reliable and high quality products and services. In addition, members may seek to reduce, cancel or elect not torenew their contracts due to factors that are beyond our control and are unrelated to our performance, including their business or financial condition, changes intheir strategies or business plans or economic conditions in general. When contracts are reduced, canceled or not renewed for any reason, we lose the anticipatedfuture revenue associated with such contracts and, consequently, our revenue and results of operations may decrease materially.
Themarkets forournon-GPOservices andproducts maydevelopmoreslowlythanweexpect, whichcouldadversely affect ourrevenueandourability tomaintainorincreaseourprofitability.
The market for products and services in our non-GPO lines of business is narrowly based, and our success will depend to a substantial extent on thewillingness of existing and potential new members to increase their use of our SaaS informatics products. Many companies have invested substantial resources tointegrate established enterprise software into their businesses and therefore may be reluctant or unwilling to switch to our products and services. Furthermore, somecompanies may have concerns regarding the risks associated with the security and reliability of the technology delivery model associated with these services. Ifcompanies do not perceive the benefits of our products and services, then the market for these products and services may not expand as much or develop as quicklyas we expect, which would significantly adversely affect our business, financial condition and results of operations.
Our members are highly dependent on payments from third-party healthcare payers, including Medicare, Medicaid and other government-sponsoredprograms,andreductionsorchangesinthird-partyreimbursementcouldadverselyaffectthesemembersandconsequentlyourbusiness.
Our members derive a substantial portion of their revenue from third-party private and governmental payers, including Medicare, Medicaid and othergovernment sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for our products and servicesour members purchase or otherwise obtain through us is available to our members from governmental health programs, private health insurers, managed care plansand other third-party payers. These third-party payers are increasingly using their enhanced bargaining power to secure discounted reimbursement rates and mayimpose other requirements that adversely impact our members’ ability to obtain adequate reimbursement for our products and services. If third-party payers do notapprove our products and services for reimbursement or fail to reimburse for them adequately, our members may suffer adverse financial consequences which, inturn, may reduce the demand for and ability to purchase our products or services.
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In addition, government actions could limit government spending generally for the Medicare and Medicaid programs, limit payments to healthcare providersand increase emphasis on competitive bidding programs that could have an adverse impact on our members and, in turn, on our business, financial condition andresults of operations.
WerelyontheadministrativefeeswereceivefromourGPOsuppliers,andthefailuretomaintaincontractswiththeseGPOsupplierscouldhaveagenerallynegativeeffectonourrelationshipswithourmembersandcouldadverselyaffectourbusiness,financialconditionandresultsofoperations.
Historically, we have derived a substantial amount of our revenue from the administrative fees that we receive from our GPO suppliers. We maintaincontractual relationships with these suppliers which provide products and services to our members at reduced costs and which pay us administrative fees based onthe dollars spent by our members for such products and services. Our contracts with these GPO suppliers generally may be terminated upon 90 days’ notice. Atermination of any relationship or agreement with a GPO supplier would result in the loss of administrative fees pursuant to our arrangement with that supplier,which could adversely affect our business, financial condition and results of operations. In addition, if we lose a relationship with a GPO supplier we may not beable to negotiate similar arrangements for our members with other suppliers on the same terms and conditions or at all, which could damage our reputation withour members and adversely impact our ability to maintain our member agreements or expand our membership base and could have a material adverse effect on ourbusiness, financial condition and results of operations.
In addition, CMS, which administers the Medicare and federal aspects of state Medicaid programs, has issued complex rules requiring pharmaceuticalmanufacturers to calculate and report drug pricing for multiple purposes, including the limiting of reimbursement for certain drugs. These rules generally excludefrom the pricing calculation administrative fees paid by drug manufacturers to GPOs to the extent that such fees meet CMS’s “bona fide service fee” definition.There can be no assurance that CMS will continue to allow exclusion of GPO administrative fees from the pricing calculation, which could negatively affect thewillingness of pharmaceutical manufacturers to pay administrative fees to us.
If we are unable to maintain our relationships with third-party providers or maintain or enter into newstrategic alliances, we may be unable to growourcurrentbasebusiness.
Our business strategy includes entering into and maintaining strategic alliances and affiliations with leading service providers and other GPOs. Thesecompanies may pursue relationships with our competitors, develop or acquire products and services that compete with our products and services, experiencefinancial difficulties, be acquired by one of our competitors or other third party or exit the healthcare industry, any of which may adversely affect our relationshipwith them. In addition, in many cases, these companies may terminate their relationships with us for any reason with limited or no notice. If existing relationshipswith third-party providers or strategic alliances are adversely impacted or are terminated or we are unable to enter into relationships with leading healthcare serviceproviders and other GPOs, we may be unable to maintain or increase our industry presence or effectively execute our business strategy.
Ifwearenotabletotimelyoffernewandinnovativeproductsandservices, wemaynotremaincompetitiveandourrevenueandresultsofoperationsmaysuffer.
Our success depends on providing products and services within our supply chain services and performance services segments that healthcare providers use toimprove clinical, financial and operational performance. Information technology providers and other competitors are incorporating enhanced analytical tools andfunctionality and otherwise developing products and services that may become viewed as more efficient or appealing to our members. If we cannot adapt to rapidlyevolving industry standards, technology and member needs, including changing regulations and provider reimbursement policies, we may be unable to anticipatechanges in our current and potential new members’ requirements that could make our existing technology, products or service offerings obsolete. We mustcontinue to invest significant resources in research and development in order to enhance our existing products and services, maintain or improve our productcategory rankings and introduce new high quality products and services that members and potential new members will want. If our enhanced existing or newproducts and services are not responsive to the needs of our members or potential new members, are not appropriately timed with market opportunity or are noteffectively brought to market we may lose existing members and be unable to obtain new members and our results of operations may suffer.
Wederiveasignificantportionofourrevenuesfromourlargestmembers,someofwhicharealsoGPOsthatserveourmembers.
Our top five members, all of which are participants in our group purchasing programs, comprised approximately 18% of our consolidated net revenues for theyear ended June 30, 2016 . Our largest member, GNYHA Purchasing Alliance, LLC and its member organizations, comprised approximately 9% of ourconsolidated net revenues for the same period. The sudden loss of any significant member or a number of smaller members that are participants in our grouppurchasing programs could materially and adversely affect our operating results. In addition, certain of our significant members are themselves GPOs with theirown respective direct contracting relationships, including relationships with some of our other members. The sudden loss of any of these members
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may also result in increased competition for our supply chain services segment and materially and adversely affect our operating results.
Acquisitionscouldresultinoperatingdifficulties,dilutionandotheradverseconsequences.
Our business strategy includes growth through acquisitions of additional businesses and assets. Future acquisitions may not be completed on preferred terms,and acquired assets or businesses may not be successfully integrated into our operations. Any of these acquisitions will involve the risks commonly encountered inacquisitions of businesses. Such risks include, among other things:
• failing to integrate the operations and personnel of the acquired businesses in an efficient, timely manner;• assuming potential liabilities of an acquired company, some of which may not become known until after the acquisition;• an acquired company's lack of compliance with laws and governmental rules and regulations, and the related costs and expenses necessary to bring
such entity into compliance;• an acquired company's general information technology controls may not be sufficient to prevent unauthorized access or transactions, cyber-attacks or
other data security breaches;• managing the potential disruption to our ongoing business;• distracting management focus from our core businesses;• encountering difficulties in identifying and acquiring products, technologies, or businesses that will help us execute our business strategy;• entering new markets in which we have little to no experience;• impairing relationships with employees, members, and strategic partners;• failing to implement or remediate controls, procedures and policies appropriate for a public company at acquired companies that prior to the
acquisition lacked such controls, procedures and policies;• the amortization of purchased intangible assets;• incurring expenses associated with an impairment of all or a portion of goodwill and other intangible assets due to the failure of certain acquisitions
to realize expected benefits; and• diluting the share value and voting power of existing stockholders.
Anticipated benefits of our previous and future acquisitions may not materialize. Future acquisitions or dispositions of under-performing businesses couldresult in the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill and other intangible assets, any of which could harm ourresults of operations and financial condition. In addition, expenses associated with potential acquisitions, including, among others, due diligence costs, legal,accounting, technology and financial advisory fees, travel and internal resources utilization, can be significant. These expenses may be incurred regardless ofwhether any potential acquisition is completed. In instances where acquisitions are not ultimately completed, these expenses typically cannot be recovered or offsetby the anticipated financial benefits of a successful acquisition. As we pursue our business strategy and evaluate opportunities, these expenses may adverselyimpact our results of operations and earnings per share.
Our business and growth strategy also includes non-controlling investments in other businesses. In the event these investments do not performas well asexpected,wecouldexperiencethelossofsomeorallofthevalueofourinvestmentwhichlosscouldadverselyimpactourfinancialconditionandresultsofoperations.
Although we conduct accounting, financial, legal and business due diligence prior to making investments, we cannot guarantee that we will discover allmaterial issues that may affect a particular target business, or that factors outside the control of the target business and outside of our control will not later arise. Tothe extent we invest in a financially underperforming or unstable company or an entity in its development stage that does not successfully mature, we may lose thevalue of our investment. Occasionally, current and future investments are, and will be, made on a non-controlling basis, in which case we have limited ability toinfluence the financial or business operations of the companies in which we invest. If our investment loses value, we may be required to write down or write offour investment, or recognize impairment or other charges that could adversely impact our financial condition or results of operations and our stock price. Eventhough these charges may be non-cash items and not have a material impact on our liquidity, the fact that we report charges of this nature could contribute tonegative market perceptions about us and our business strategy and our Class A common stock.
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Wearesubjecttolitigationfromtimetotime,whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
We participate in businesses that are subject to substantial litigation. We are from time to time involved in litigation, which may include claims relating tocommercial, product liability, personal injury, employment, antitrust, intellectual property or other regulatory matters. Additionally, if current or future governmentregulations are interpreted or enforced in a manner adverse to us or our business, specifically those with respect to antitrust or healthcare laws, we may be subjectto enforcement actions, penalties, damages and other material limitations on our business.
From time to time, we have been named as a defendant in lawsuits brought by suppliers of medical products. Typically, these lawsuits have alleged theexistence of a conspiracy among manufacturers of competing products and operators of GPOs, including us, to deny the plaintiff access to a market for itsproducts. No assurance can be given that we will not be subjected to similar actions in the future or that such matters will be resolved in a manner satisfactory to usor which will not harm our business, financial condition or results of operations.
We may become subject to additional litigation in the future. Some of these claims may result in significant defense costs or may compel us to pay significantfines, judgments or settlements, which, if uninsured, could have a material adverse effect on our business, financial condition, results of operations and cash flows.In addition, certain litigation matters could adversely impact our commercial reputation, which is critical for attracting and retaining suppliers and memberparticipation in our GPO programs.
WerelyonInternetinfrastructure,bandwidthproviders,datacenterprovidersandotherthirdpartiesandourownsystemsforprovidingservicestoourusers,and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact ourrelationshipswithusers,adverselyaffectingourbrand,ourbusinessandourfinancialperformance.
Our ability to deliver our performance services segment products is dependent on the development and maintenance of the infrastructure of the Internet andother telecommunications services by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and securityfor providing reliable Internet access and services and reliable telephone, facsimile and pager systems. We have experienced and expect that we will experience inthe future interruptions and delays in these services and availability from time to time. We rely on internal systems as well as third-party suppliers, includingbandwidth and telecommunications equipment providers, to provide our services. We are also currently in the process of migrating some of our data centeroperations to third-party data-hosting facilities. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic eventwith respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact ourrelationship with users. To operate without interruption, both we and our service providers must guard against:
• damage from fire, power loss, and other natural disasters;• communications failures;• software and hardware errors, failures, and crashes;• security breaches and computer viruses and similar disruptive problems; and• other potential interruptions.
Any disruption in the network access, telecommunications or co-location services provided by our third-party providers or any failure of or by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise limited control over these third-party suppliers, which increases our vulnerability to problems with services they provide. Any errors, failures, interruptions or delays experienced in connectionwith these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect ourbusiness and financial performance and could expose us to third-party liabilities, some of which may not be adequately insured.
Data loss or corruption due to failures or errors in our systems and service disruptions at our data centers may adversely affect our reputation andrelationshipswithexistingmembers,whichcouldhaveanegativeimpactonourbusiness,financialconditionandresultsofoperations.
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss orcorruption or cause the information that we collect to be incomplete or contain inaccuracies that our members regard as significant. Complex software such as oursmay contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce newsoftware and updates and enhancements to our software. Despite testing by us, from time to time we have discovered defects or errors in our software, and suchdefects or errors may be discovered in the future. Any defects or errors could expose us to risk of liability to members and the government and could cause delaysin the introduction of new products and services, result in increased costs and diversion
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of development resources, require design modifications, decrease market acceptance or member satisfaction with our products and services or cause harm to ourreputation.
Furthermore, our members might use our software together with products from other companies. As a result, when problems occur, it might be difficult toidentify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs,divert the attention of our technical personnel from our product development efforts, impact our reputation and lead to significant member relations problems.
Moreover, our internal data centers and service provider locations store and transmit critical member data that is essential to our business. While theselocations are chosen for their stability, failover capabilities and system controls, we do not directly control the continued or uninterrupted availability of everylocation. In addition to the services we provide from our offices, we are currently in the process of migrating some of our data center operations to third-party data-hosting facilities. Data center facilities are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures andsimilar events. They are also subject to break-ins, sabotage, intentional acts of vandalism, cyber-attacks and similar misconduct. Despite precautions taken at thesefacilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems couldresult in lengthy interruptions in our service. These service interruption events could impair our ability to deliver services or deliverables or cause us to fail toachieve service levels required in agreements with our members, which could negatively affect our ability to retain existing members and attract new members.
Ifoursecuritymeasuresarebreachedorfailandunauthorizedaccesstoamember’sdataisobtained,orourmembersfailtoobtainproperpermissionfortheuse and disclosure of information, our services may be perceived as not being secure, members may curtail or stop using our services and we may incursignificantliabilities.
Our services involve the web-based storage and transmission of members’ proprietary information and protected health information of patients. From time totime we may detect vulnerabilities in our systems, which, even if not resulting in a security breach, may reduce member confidence and require substantialresources to address. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance, insufficiency, defective design orotherwise, someone may be able to obtain unauthorized access to member or patient data. As a result, our reputation could be damaged, our business may sufferand we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for remediation and efforts to preventfuture occurrences.
We rely upon our members as users of our system for key activities to promote security of the system and the data within it. On occasion, our members havefailed to perform these activities. Failure of members to perform these activities may result in claims against us that could expose us to significant expense andharm our reputation. In addition, our members may authorize or enable third parties to access their data or the data of their patients on our systems. Because we donot control such access, we cannot ensure the complete propriety of that access or integrity or security of such data in our systems. Any breach of our securitycould have a material adverse effect on our business, financial condition and results of operations.
Additionally, we require our members to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the informationthat we receive. If our members do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on theirbehalf may be limited or prohibited by state or federal privacy laws or other laws. Any such failure to obtain proper permissions and waivers could impair ourfunctions, processes and databases that reflect, contain or are based upon such data and may prevent use of such data. Moreover, we may be subject to claims orliability for use or disclosure of information by reason of our lack of a valid notice, permission or waiver. These claims or liabilities could subject us to unexpectedcosts and adversely affect our business, financial condition and results of operations.
Wecould suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and other serious negative consequences if wesustaincyberattacksorotherdatasecuritybreachesthatdisruptouroperationsorresultinthedisseminationofproprietaryorconfidentialinformationaboutusorourmembersorotherthirdparties.
We manage and store proprietary information and sensitive or confidential data relating to our operations. We may be subject to breaches of the informationtechnology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriateor compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also maybe able to develop and deploy viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities ofour products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defectsin design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of our systems.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Ourremediation efforts may not be successful and could result in interruptions, delays or cessation
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of service and loss of existing or potential members. In addition, breaches of our security measures and the unapproved use or disclosure of proprietary informationor sensitive or confidential data about us or our members or other third parties could expose us, our members or other affected third parties to a risk of loss ormisuse of this information, result in litigation, governmental inquiry and potential liability for us, damage our brand and reputation or otherwise harm our business.Furthermore, we are exposed to additional risks because we rely in certain capacities on third-party data management providers whose possible security problemsand security vulnerabilities are beyond our control.
Anyrestrictionsonouruseof,orabilitytolicense,dataorourfailuretolicensedataandintegratethird-partytechnologies, couldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
We depend upon licenses from third parties, most of which are non-exclusive, for some of the technology and data used in our applications, and for some ofthe technology platforms upon which these applications are built and operate. We also obtain a portion of the data that we use from government entities and publicrecords and from our members for specific member engagements. We cannot assure you that our licenses for information will allow us to use that information forall potential or contemplated applications and products. In addition, if our members revoke their consent for us to maintain, use, de-identify and share their data,our data assets could be degraded.
In the future, data providers could withdraw their data from us or restrict our usage due to competitive reasons or because of new legislation or judicialinterpretations restricting use of the data currently used in our products and services. In addition, data providers could fail to adhere to our quality control standardsin the future, causing us to incur additional expense to appropriately utilize the data. If a substantial number of data providers were to withdraw or restrict theirdata, or if they fail to adhere to our quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integratethese data sources into our service offerings, our ability to provide products and services to our members would be materially and adversely impacted, resulting ina material adverse effect on our business, financial condition and results of operations.
We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery,and to support our technology infrastructure. Some of this software is proprietary and some is open source. Our use of third-party technologies exposes us toincreased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources fromdevelopment of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition andmaintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and could be difficult to replace onceintegrated into our own proprietary applications. Our inability to obtain, maintain or comply with any of these licenses could delay development until equivalenttechnology can be identified, licensed and integrated, which would harm our business, financial condition and results of operations.
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to competedirectly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of newtechnology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue fromlicensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensedtechnology in the future, we might not be able to modify or adapt our own solutions.
Ouruseof“opensource”softwarecouldadverselyaffectourabilitytosellourproductsandsubjectustopossiblelitigation.
The products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open sourcesoftware into other products in the future. There is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, andtherefore the potential impact of these terms on our business is unknown and may result in unanticipated obligations or litigation regarding our products andtechnologies. For example, we may be subjected to certain conditions, including requirements that we offer our products that use particular open source software atno cost to the user, that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open sourcesoftware, and/or that we license such modifications or derivative works under the terms of the particular open source license. In addition, if we combine ourproprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of ourproprietary software, which could substantially help our competitors develop products that are similar to or better than ours. If an author or other party thatdistributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incursignificant legal costs defending ourselves against such allegations and could be subject to significant damages.
Changesinindustrypricingbenchmarkscouldmateriallyimpactourfinancialperformance.
Contracts in the prescription drug industry, including our contracts with our specialty pharmacy members, generally use “average wholesale price,” or AWP,which is published by a third party, as a benchmark to establish pricing for prescription drugs.
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Various federal and state government agencies and prosecutors, as well as legislators and private litigants, have challenged the use of AWP for prescription drugreimbursement, as well as the manner by which AWP is calculated. Thus, some publishers have ceased providing AWP information, and the uncertainty related tocontinued AWP industry pricing benchmarks and the lack of reliable alternate pricing sources could have a material adverse effect on our business, financialcondition and results of operations in future periods.
Prescriptionvolumesmaydecline,andournetrevenuesandprofitabilitymaybenegativelyimpacted,ifthesafetyriskprofilesofdrugsincreaseorifdrugsarewithdrawnfromthemarket,includingasaresultofmanufacturingissues,orifprescriptiondrugstransitiontoover-the-counterproducts.
We dispense significant volumes of brand-name and generic drugs from our specialty pharmacies. When increased safety risk profiles or manufacturing issuesof specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or otherwise reduce the numbers of prescriptions for these drugs.Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced global consumer demand for such drugs. On occasion, productsare withdrawn by their manufacturers or transition to over-the-counter products. In cases where there are no acceptable prescription drug equivalents or alternativesfor these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.
Our ability to grow our specialty pharmacy could be limited if we do not maintain and expand our existing base of drugs, if we lose patients or ifmanufacturerslimitorceasedoingbusinesswithus.
Our specialty pharmacy focuses on complex and high-cost medications that serve a relatively small patient population. Accordingly, our future growth reliesin part on maintaining and expanding our base of drugs or penetration in certain treatment categories. Sales volumes at our specialty pharmacy could also benegatively impacted due to increases in the safety risk profiles or manufacturing issues of specific drugs, product withdrawals by manufacturers or transitions toover-the-counter products. Any loss of patient base or reduction in demand for any reason for the medications we currently dispense could have a material adverseeffect on our business, financial condition and results of operations.
In addition, industry trends may result in health plans contracting with a single provider for specialty pharmacy services and manufacturers limiting theirbusiness with regional providers of these services. If we are unable to obtain managed care contracts in the areas in which we provide specialty pharmacy servicesor are unable to obtain specialty pharmacy products at reasonable costs or at all, our business, financial condition and results of operations could be adverselyaffected.
Our direct sourcing activities depend on contract manufacturing facilities located in various parts of the world, and any physical, financial, regulatory,environmental, labor or operational disruption or product quality issues could result in a reduction in sales volumes and the incurrence of substantialexpenditures.
As part of our direct sourcing activities, we contract with manufacturing facilities in various parts of the world, including facilities in China. Operations atthese manufacturing facilities could be curtailed or partially or completely shut down as the result of a number of circumstances, most of which are outside of ourcontrol, such as unscheduled maintenance, an earthquake, hurricane, flood, tsunami or other natural disaster or significant labor strikes, work stoppages or politicalunrest. Any significant curtailment of production at these facilities, or production issue resulting in a substandard product, could result in litigation or governmentalinquiry or materially reduced revenues and cash flows in our direct sourcing activities. In addition our business practices in international markets are subject to therequirements of the U.S. Foreign Corrupt Practices Act of 1977, as amended, any violation of which could subject us to significant fines, criminal sanctions andother penalties. We expect all of our contracted manufacturing facilities, including facilities located in China, to comply with all applicable laws, including labor,safety and environmental laws, and to otherwise meet our standards of conduct. Our ability to find manufacturing facilities that uphold these standards is achallenge, especially with respect to facilities located outside the United States. We also are subject to the risk that one or more of these manufacturing facilitieswill engage in business practices in violation of our standards or applicable laws, which could damage our reputation and adversely impact our business and resultsof operations.
A substantial portion of the manufacturing for our direct sourcing activities is conducted in China. As a result, our business, financial condition, results ofoperations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies ofmost developed countries in many respects, including the degree of government involvement, the level of development, the growth rate, the control of foreignexchange, access to financing and the allocation of resources. Additionally, the facilities in China with which we contract are particularly susceptible to rising laborcosts and interruptions as a result of minimum wage laws, scheduling and overtime requirements, labor disputes and strikes.
Ifwelosekeypersonnelorifweareunabletoattract,hire,integrateandretainkeypersonnel,ourbusinesswouldbeharmed.
Our future success depends in part on our ability to attract, hire, integrate and retain key personnel, including our executive officers and other highly skilledtechnical, managerial, editorial, sales, marketing and customer service professionals. Competition for such personnel is intense. We have from time to time in thepast experienced, and we expect to continue to experience in the
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future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experiencedpersonnel have greater resources than we have. We cannot be certain of our ability to identify, hire and retain adequately qualified personnel. Failure to identify,hire and retain necessary key personnel could have a material adverse effect on our business, financial condition and results of operations.
Failuretoprotectourintellectualpropertyandclaimsagainstouruseoftheintellectualpropertyofthirdpartiescouldcauseustoincurunanticipatedexpenseandpreventusfromprovidingourproductsandservices,whichcouldadverselyaffectourbusiness,financialconditionandresultsofoperations.
Our success depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination ofintellectual property rights, including trade secrets, copyrights and trademarks, as well as customary contractual and confidentiality protections and internalpolicies applicable to employees, contractors, members and business partners. These protections may not be adequate, however, and we cannot assure you that theywill prevent misappropriation of our intellectual property. In addition, parties that gain access to our intellectual property might fail to comply with the terms of ouragreements and policies and we may not be able to enforce our rights adequately against these parties. The disclosure to, or independent development by, acompetitor of any trade secret, know-how or other technology not protected by a patent could materially and adversely affect any competitive advantage we mayhave over such competitor. The process of enforcing our intellectual property rights through legal proceedings would likely be burdensome and expensive and ourultimate success cannot be assured. Our failure to adequately protect our intellectual property and proprietary rights could adversely affect our business, financialcondition and results of operations.
In addition, we could be subject to claims of intellectual property infringement, misappropriation or other intellectual property violations as our applications’functionalities overlap with competitive products, and third parties may claim that we do not own or have rights to use all intellectual property used in the conductof our business. We could incur substantial costs and diversion of management resources defending any such claims. Furthermore, a party making a claim againstus could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to provide productsor services. Such claims also might require indemnification of our members at significant expense.
A number of our contracts with our members contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-partyclaims that are brought in connection with the use of our products.
Our exposure to risks associated with the protection and use of intellectual property may be increased as a result of acquisitions, as we have limited visibilityinto the development process of acquired entities or businesses with respect to their technology or the care taken by acquired entities or businesses to safeguardagainst infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not beenasserted prior to our acquisition thereof.
Ifwearerequiredtocollectsalesandusetaxesontheproductsandserviceswesellincertainjurisdictionsoronline,wemaybesubjecttotaxliabilityforpastsales,futuresalesmaydecreaseandourfinancialconditionmaybemateriallyandadverselyaffected.
Sales tax is currently not imposed on the administrative fees we collect in connection with our GPO programs. If sales tax were imposed in the future on suchfees, the profitability of our GPO programs may be materially and adversely affected.
Rules and regulations applicable to sales and use tax vary significantly by tax jurisdiction. In addition, the applicability of these rules given the nature of ourproducts and services is subject to change.
We may lose sales or incur significant costs should various tax jurisdictions be successful in imposing sales and use taxes on a broader range of products andservices than those currently so taxed, including products and services sold online. A successful assertion by one or more taxing authorities that we should collectsales or other taxes on the sale of our solutions could result in substantial tax liabilities for past and future sales, decrease our ability to compete and otherwiseharm our business.
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products and services, including products andservices sold online, we may be liable for past taxes in addition to taxes going forward. Liability for past taxes may also include very substantial interest andpenalty charges. If we are required to collect and pay back taxes (and the associated interest and penalties) and if our members fail or refuse to reimburse us for allor a portion of these amounts, we will have incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our services going forwardwill effectively increase the cost of such services to our members and may adversely affect our ability to retain existing members or to gain new members in theareas in which such taxes are imposed.
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Wemayneedtoobtainadditionalfinancingwhichmaynotbeavailableormaybeonunfavorabletermsandresultindilutionto,oradiminutionoftherightsof,ourthen-existingstockholdersandcauseadecreaseinthepriceofourClassAcommonstock.
We may need to raise additional funds in order to:
• finance unanticipated working capital requirements;• develop or enhance our technological infrastructure and our existing products and services;• fund strategic relationships;• respond to competitive pressures; and• acquire complementary businesses, assets, technologies, products or services.
Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, ourability to fund our expansion strategy, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond tocompetitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, our then-existing stockholdersmay be diluted and holders of these newly issued securities may have rights, preferences or privileges senior to those of our then-existing stockholders. Theissuance of these securities may cause downward pressures on the trading price of our Class A common stock.
Ourindebtednesscouldadverselyaffectourbusinessandourliquidityposition.
We have a five-year $750 million unsecured revolving credit facility, which includes an accordion feature granting us the ability to increase the size of thefacility by an additional $250 million on terms and conditions mutually acceptable to the parties. As of June 30, 2016 , we had no amounts outstanding under thiscredit facility.
Our indebtedness may increase from time to time in the future for various reasons, including fluctuations in operating results, capital expenditures andpotential acquisitions. Any indebtedness we incur and restrictive covenants contained in the agreements related thereto could:
• make it difficult for us to satisfy our obligations, including making interest payments on our debt obligations;• limit our ability to obtain additional financing to operate our business;• require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital
expenditures and working capital and other general operational requirements;• limit our flexibility to execute our business strategy and plan for and react to changes in our business and the healthcare industry;• place us at a competitive disadvantage relative to some of our competitors that have less debt than us;• limit our ability to pursue acquisitions; and• increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or
the economy.
The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results of operations or cause asignificant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness.
Our unsecured revolving credit facility contains, among other things, restrictive covenants that will limit our and our subsidiaries’ ability to finance futureoperations or capital needs or to engage in other business activities. The credit facility restricts, among other things, our ability and the ability of our subsidiaries toincur additional indebtedness or issue guarantees, create liens on our assets, make distributions on or redeem equity interests, make investments, transfer or sellproperties or other assets, and engage in mergers, consolidations or acquisitions. Furthermore, the credit facility includes cross-default provisions and requires us tomeet specified financial ratios and tests. In addition, any debt securities we may issue in the future may have similar or more restrictive financial or operationalcovenants that may limit our ability to execute our business strategies or operate our Company.
Ourquarterlyrevenuesandresultsofoperationshavefluctuatedinthepastandmaycontinuetofluctuateinthefuture.
Fluctuations in our quarterly results of operations may be due to a number of factors, some of which are not within our control, including:
• our ability to offer new and innovative products and services;• regulatory changes, including changes in healthcare laws;• unforeseen legal expenses, including litigation and settlement costs;
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• the purchasing and budgeting cycles of our members;• the lengthy sales cycles for our products and services, which may cause significant delays in generating revenues or an inability to generate revenues;• pricing pressures with respect to our future sales;• the timing and success of new product and service offerings by us or by our competitors;• member decisions regarding renewal or termination of their contracts, especially those involving our larger member relationships;• the amount and timing of costs related to the maintenance and expansion of our business, operations and infrastructure;• the amount and timing of costs related to the development, adaptation, acquisition, or integration of acquired technologies or businesses;• the financial condition of our current and potential new members; and• general economic and market conditions and conditions specific to the healthcare industry.
We believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our results of operations maynot be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly results of operations fall below theexpectations of securities analysts or investors, the price of the Class A common stock could decline substantially. In addition, any adverse impacts on the Class Acommon stock may harm the overall reputation of our organization, cause us to lose members and impact our ability to raise additional capital in the future.
Risks Related to Healthcare Regulation
Thehealthcareindustryishighlyregulated.Anymaterialchangesinthepolitical, economicorregulatoryenvironmentthataffecttheGPObusinessorthepurchasingpracticesandoperationsofhealthcareorganizations,orthatleadtoconsolidationinthehealthcareindustry,couldreducethefundsavailabletoproviderstopurchaseourproductsandservicesorotherwiserequireustomodifyourservices.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systemsparticularly, as well as our ability to increase the number of programs and services that we sell to our members. The healthcare industry is highly regulated byfederal and state authorities and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies forhealthcare expenses, consolidation in the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations andthe financial health of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as increased regulation of the purchaseand sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications of ourproducts and services, result in delays or cancellations of orders or reduce funds and demand for our products and services.
In March 2010, President Obama signed into law the Affordable Care Act. The Affordable Care Act is a sweeping measure designed to expand access toaffordable health insurance, control healthcare spending and improve healthcare quality. In addition, many states have adopted or are considering changes inhealthcare laws or policies in part due to state budgetary shortfalls. Regulations for implementing various provisions of the Affordable Care Act are being releasedon an ongoing basis, and we do not know what effect the federal Affordable Care Act or any state law proposals may have on our business. Further, disparatepolitical views regarding the Affordable Care Act create uncertainty regarding the law’s continued existence in its current form or an amended form or a totalreplacement. This uncertainty as to the law’s future, or the amendment or replacement of the law in the future, could adversely affect our business.
Ifwefailtocomplywithcomplexfederalandstatelawsgoverningfinancialrelationshipsamonghealthcareprovidersandsubmissionoffalseorfraudulentclaims to government healthcare programs, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcareprograms.
Anti-Kickback Regulations
We are subject to federal and state laws and regulations designed to protect patients, government healthcare programs and private health plans from fraudulentand abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex, andtheir application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federaland state regulatory and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid fraud and abuseregulations and other reimbursement laws and rules. From time to time, we and others in the healthcare industry have received inquiries or requests to producedocuments in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of ourmanagement team could be diverted to these efforts.
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Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties and we could beexcluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantlyharm our business, financial performance and financial condition.
Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment,solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for therecommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicareor Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments orproviding anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended toinfluence the purchase, lease or ordering of healthcare items and services regardless of whether the item or service is covered under a governmental health programor private health plan. Although certain statutory and regulatory safe harbors exist, these safe harbors are narrow and often difficult to comply with. Congress hasappropriated an increasing amount of funds in recent years to support enforcement activities aimed at reducing healthcare fraud and abuse. We cannot assure youthat our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect onour business, financial condition or results of operations. Any determination by a state or federal agency that any of our activities, or those of our suppliers ormembers, violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations orbusiness or could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have a material adverseeffect on our business, financial condition and results of operations.
In 2005, the Department of Health and Human Services, or HHS, Office of Inspector General conducted an extensive audit of the business practices of threeGPOs, including us, and published a report thereon. Subsequently, CMS provided specific guidance on the proper treatment on Medicare cost reports of revenuedistributions received from GPOs, including us. Our members that report their costs to Medicare are required under the terms of the Premier Group PurchasingPolicy to appropriately reflect all elements of value received in connection with the Reorganization and our IPO (including, without limitation, increases in the fairmarket value of equity held by such member owners, proceeds from the purchase of Class B common units from such member owners immediately following ourIPO and as a result of subsequent exchanges, Premier LP cash distributions, administrative fee revenue share paid by Premier LP to our members based upon theirowned, leased, managed and affiliated facilities’ purchases through GPO supplier contracts and payments under the tax receivable agreements) on their costreports. We are required to furnish applicable reports to such members setting forth the amount of such value, to assist their compliance with such cost reportingrequirements. We cannot assure you, however, that the HHS Office of Inspector General or the U.S. Department of Justice, or DOJ, would concur with suchapproach. Any determination by a state or federal agency that the provision of such forms of value violate any of these laws could subject us to civil or criminalpenalties, could require us to change or terminate some portions of our operations or business, or could disqualify us from providing services to healthcareproviders doing business with government programs, and, thus could have a material adverse effect on our business, financial condition and results of operations.
In the lead-up to our 2013 IPO, we received correspondence from a former GPO competitor expressing concern that the manner in which our IPO wasexplained to our current and prospective member owners could violate the Anti-Kickback Statute. We believe that our discussions with then-current andprospective member owners regarding our IPO were conducted in compliance with the Anti-Kickback Statute and other applicable laws. However, enforcementauthorities could question or disagree with our assessment. Although a process exists for requesting advisory opinions from the HHS Office of Inspector Generalregarding compliance of particular arrangements with the Anti-Kickback Statute, we have not sought such an opinion and do not believe that the issues raised inthe competitor’s correspondence are capable of being addressed in an advisory opinion because the content and specifics of each discussion would be at issue. Anydetermination by a state or federal agency that the manner in which the opportunity to participate in our IPO was presented to our member owners and prospectivemember owners, either in and of itself or when viewed in conjunction with the requirements for ownership in Premier LP and participation in our group purchasingprogram or the various forms of value received by our member owners in connection with or related to our IPO, violated any of these laws could subject us to civilor criminal penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providing services tohealthcare providers doing business with government programs and, thus, could have a material adverse effect on our business, financial condition and results ofoperations.
We periodically receive and respond to questions from government agencies on various matters, and we responded to an informal request in July 2014 fromthe HHS Office of Inspector General to analyze our Reorganization and to discuss how the GPO Participation Agreements comply with the discount safe harbor tothe Anti-Kickback Statute. We have had no further correspondence or interaction, oral or written, with the HHS Office of Inspector General regarding Anti-Kickback Statute compliance since that time. There is no safe harbor to the Anti-Kickback Statute that is applicable to the Reorganization in its entirety across allof the agreements, and no assurance can be given that the HHS Office of Inspector General or other regulators or enforcement authorities will agree with ourassessment. Any determination by a state or federal agency that the terms of our Reorganization or our relationship with our members violate the Anti-KickbackStatute or any other federal or state laws could
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subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providingservices to healthcare providers doing business with government programs and, thus, could have a material adverse effect on our business, financial condition andresults of operations.
False Claims Regulations
Our business is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or thefailure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, other federal healthcareprograms or private health plans. In particular, the False Claims Act, or FCA, prohibits a person from knowingly presenting or causing to be presented a false orfraudulent claim for payment or approval by an officer, employee or agent of the United States. In addition, the FCA prohibits a person from knowingly making,using, or causing to be made or used a false record or statement material to such a claim. Violations of the FCA may result in treble damages, significant monetarypenalties and other collateral consequences, potentially including exclusion from participation in federally funded healthcare programs. The scope and implicationsof the amendments to the FCA pursuant to the Fraud Enforcement and Recovery Act of 2009, or FERA, have yet to be fully determined or adjudicated, and as aresult it is difficult to predict how future enforcement initiatives may impact our business. The minimum and maximum per claim monetary damages have roughlydoubled effective August 1, 2016 for violations occurring on or after November 2, 2015, from $5,500.00 to $11,000.00 per claim to $10,781.40 to $21,562.80 perclaim, and will be periodically readjusted for inflation hereafter. If enforcement authorities find that we have violated the FCA, it could have a material adverseeffect on our business, financial condition and results of operations. Pursuant to the 2010 healthcare reform legislation, a claim that includes items or servicesresulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
These laws and regulations may change rapidly and it is frequently unclear how they apply to our business. Errors in claims submitted by our specialtypharmacies and pharmacy benefits management businesses, as well as errors created by our products or advisory services that relate to entry, formatting,preparation or transmission of claim or cost report information by our members may be determined or alleged to be in violation of these laws and regulations. Anyfailure of our businesses or our products or services to comply with these laws and regulations, or the assertion that any of our relationships with suppliers ormembers violated the Anti-Kickback Statute and therefore caused the submission of false or fraudulent claims, could (i) result in substantial civil or criminalliability, (ii) adversely affect demand for our services, (iii) invalidate all or portions of some of our member contracts, (iv) require us to change or terminate someportions of our business, (v) require us to refund portions of our services fees, (vi) cause us to be disqualified from serving members doing business withgovernment payers, and (vii) have a material adverse effect on our business, financial condition and results of operations.
Ifcurrentorfutureantitrustlawsandregulationsareinterpretedorenforcedinamanneradversetousorourbusiness,wemaybesubjecttoenforcementactions,penaltiesandothermateriallimitationsonourbusiness.
We are subject to federal and state laws and regulations designed to protect competition which, if enforced in a manner adverse to us or our business, couldhave a material adverse effect on our business, financial condition and results of operations. Over the last decade or so, the group purchasing industry has been thesubject of multiple reviews and inquiries by the U.S. Senate and its members with respect to antitrust laws. Additionally, the U.S. General Accounting Office, orGAO, has published several reports examining GPO pricing, contracting practices, activities and fees. We and several other operators of GPOs have responded toGAO inquiries in connection with the development of such reports. No assurance can be given regarding any further inquiries or actions arising or resulting fromthese examinations and reports, or any related impact on our business, financial condition or results of operations.
Congress, the DOJ, the Federal Trade Commission, or FTC, the U.S. Senate or another state or federal entity could at any time open a new investigation of thegroup purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricingarrangements with suppliers, increase reporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that adverselyimpacts our business, financial condition and results of operations. We may also face private or government lawsuits alleging violations arising from the concernsarticulated by these governmental factors or alleging violations based solely on concerns of individual private parties.
If we are found to be in violation of the antitrust laws we could be subject to civil and criminal penalties or damages. The occurrence of any of these eventscould significantly harm our business, financial condition and results of operations.
Complexfederalandstateprivacy,securityandbreachnotificationlawsmayincreasethecostsofoperationandexposeustocivilandcriminalgovernmentsanctionsandthird-partycivillitigation.
We must comply with extensive federal and state requirements regarding the use, retention, security and re-disclosure of patient/beneficiary healthcareinformation. The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, which we refer tocollectively as HIPAA, contain substantial restrictions and complex
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requirements with respect to the use and disclosure of certain individually identifiable health information, referred to as “protected health information.” TheHIPAA Privacy Rule prohibits a covered entity or a business associate (essentially, a third party engaged to assist a covered entity with enumerated operationaland/or compliance functions) from using or disclosing protected health information unless the use or disclosure is validly authorized by the individual or isspecifically required or permitted under the Privacy Rule and only if certain complex requirements are met. The HIPAA Security Rule establishes administrative,organization, physical and technical safeguards to protect the privacy, integrity and availability of electronic protected health information maintained or transmittedby covered entities and business associates. The HIPAA Breach Notification Rule requires that covered entities and business associates, under certaincircumstances, notify patients/beneficiaries and HHS when there has been an improper use or disclosure of protected health information.
Our specialty pharmacy, our self-funded health benefit plan, and our healthcare provider members (provided that these members engage in HIPAA-definedstandard electronic transactions with health plans, which will be all or the vast majority) are directly regulated by HIPAA as “covered entities.” From time to time,as part of our specialty pharmacy business, certain of our affiliates act as business associates of retail and other pharmacies in connection with co-brandinginitiatives. As such, we are subject to HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S.hospital members disclose protected health information to us so that we may use that information to provide certain data analytics, benchmarking, advisory or otheroperational and compliance services to these members, we are a “business associate” of those members and are required to protect such health information underHIPAA. With the enactment of the HITECH Act, the privacy and security requirements of HIPAA were modified and expanded, including further restrictions onthe disclosure of protected health information by business associates of covered entities in certain cases when the disclosure is part of a remunerated transaction,and modifying the HIPAA Breach Notification Rule, which has been in effect since September 2009, to create a rebuttable presumption that any improper use ordisclosure of protected health information requires notice to affected patients/beneficiaries and HHS.
Any failure or perceived failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certainnotification, penalty and/or enforcement risks, damage our reputation and adversely affect demand for our products and services and force us to expend significantcapital, research and development and other resources to modify our products or services to address the privacy and security requirements of our members andHIPAA.
In addition to our obligations under HIPAA there are other federal laws that include specific privacy and security obligations, above and beyond HIPAA, forcertain types of health information and impose additional sanctions and penalties. These rules are not preempted by HIPAA. Finally, most states have enactedpatient and/or beneficiary confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or areconsidering adopting further legislation in this area, including privacy safeguards, security standards, data security breach notification requirements and specialrules for so-called “sensitive” health information, such as mental health, genetic testing results or HIV status. These state laws, if more stringent than HIPAArequirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affectour business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, iscoordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption ofelectronic health records in the healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments atONCHIT will have on the necessary specifications, demand for our products and services or associated compliance costs.
Failure to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection and data security may subject usto penalties, including civil monetary penalties and, in some circumstances, criminal penalties. In addition, such failure may materially injure our reputation andadversely affect our ability to retain members and attract new members and, accordingly, adversely affect our financial performance.
Our specialty pharmacy operations are subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatorychangecouldadverselyaffectourbusiness,theresultsofouroperationsorourfinancialcondition.
In addition to the other laws and regulations we face, our specialty pharmacy business is subject to numerous federal, state and local laws and regulations.Changes in these regulations may require extensive system and operating changes that may be difficult to implement. The regulations to which our specialtypharmacy operations are subject include, but are not limited to, federal, state and local registration and regulation of pharmacies; supply chain security; dispensingand sale of controlled substances; applicable Medicare and Medicaid regulations, including the Medicare Part D program; HIPAA; regulations governing aspectsof healthcare plan arrangements; regulations relating to the protection of the environment and health and safety matters, including those governing exposure to andthe management and disposal of hazardous substances; regulations enforced by the U. S. Federal Trade Commission, the U. S. Department of Health and HumanServices and the Drug Enforcement Administration, as well as state boards of pharmacy and other state regulatory authorities, governing the sale, advertisementand promotion of products we
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sell; anti-kickback laws; false claims laws and federal and state laws governing the practice of the profession of pharmacy. Untimely compliance or noncompliancewith applicable regulations could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of our business,including: (i) suspension or disgorgement of payments from government programs; (ii) loss of required government certifications; (iii) loss of authorizations toparticipate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; (iv) loss of licenses; or (v) significant fines ormonetary penalties.
Certainrisksareinherentinprovidingpharmacyservices;ourinsurancemaynotbeadequatetocoveranyclaimsagainstus.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improperfilling or labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit, defective, expired or contaminated drugs, product tampering orrecalls, and changes to shipping regulations or costs. Errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. In addition,federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems,common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customersregarding any potential negative effects of a prescription drug if the warning could reduce, negate or help manage these effects. Product liability or personal injuryclaims may be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide. Should a product or other liability issuearise, the coverage limits under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims. We alsomay not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability or personal injury issue,material financial judgment against us, or a product recall could have a material adverse effect on our business operations, financial condition and results ofoperations.
Risks Related to Our Structure
Premier, Inc. is a holding company with no material business operations of its own, and it depends on distributions from Premier LP to pay taxes, makepaymentsunderthetaxreceivableagreementsandpayanycashdividends,ifdeclared,onourClassAcommonstock.
Premier, Inc. is a holding company with no material operations of its own, and it currently has no independent ability to generate revenue. Consequently,Premier, Inc.’s ability to obtain operating funds currently depends upon distributions from Premier LP to Premier GP and then from Premier GP to Premier, Inc. Inaccordance with the LP Agreement, subject to applicable laws and regulations and the terms of Premier LP’s financing agreements, Premier GP causes Premier LPto make quarterly distributions to Premier GP and to the holders of Class B common units to facilitate the payment of taxes, as may be required. Premier GPdistributes any amounts it receives from Premier LP to Premier, Inc., and Premier, Inc. uses such amounts to (i) pay applicable taxes, (ii) meet its obligations underthe tax receivable agreements and (iii) meet its obligations to the member owners under the Exchange Agreement if such member owners elect to exchange theirClass B common units for shares of our Class A common stock and we elect to pay some or all of the consideration to such member owners in cash.
In addition, pursuant to the GPO participation agreements, Premier LP generally is contractually required to pay each member owner a 30% revenue share,and pay other designated revenue shares to some members, of all gross administrative fees collected by Premier LP based upon purchasing by such memberowner’s owned, leased, managed and affiliated facilities through our GPO agreements and contracts. Additionally, our two largest regional GPO member owners,which represented approximately 16% of our gross administrative fee revenue for the year ended June 30, 2016 , each remit gross administrative fees collected bysuch member owner based upon purchasing by such member owner’s owned, leased, managed and affiliated facilities through the member owner’s own GPOsupplier contracts, in accordance with their Premier GPO Agreement, and receive revenue share from Premier LP equal to 30% of such gross administrative feesremitted to us.
To the extent that Premier, Inc. needs funds and Premier LP is restricted from making distributions under applicable law or regulation or under the terms ofour unsecured revolving credit facility or is otherwise unable to provide such funds, Premier, Inc.’s liquidity and financial condition could be materially andadversely affected. The declaration and payment of future dividends by us, if any, will be at the discretion of our board of directors and will depend on, amongother things, financial results and cash flows from Premier LP’s operations, our strategic plans and such other factors as our board of directors considers relevant.In addition, Premier LP is generally prohibited under Delaware law from making a distribution to a partner to the extent that, at the time of the distribution, aftergiving effect to the distribution, liabilities of the limited partnership (with certain exceptions) exceed the fair value of its assets.
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Differentinterestsamongourmemberownersorbetweenourmemberownersandus,includingwithrespecttorelatedpartytransactions,couldpreventusfromachievingourbusinessgoals.
For the foreseeable future, we expect that a majority of our board of directors will include directors and executive officers of our member owners and otherdirectors who may have commercial relationships with our member owners. Certain of our member owners could have business interests that may conflict withthose of the other member owners, which may make it difficult for us to pursue strategic initiatives that require consensus among our member owners.
In addition, our relationship with our member owners, who are both our members and own a significant percentage of our common stock and the units ofPremier LP, could create conflicts of interest among the member owners, or between the member owners and us, in a number of areas relating to our past andongoing relationships. For example, certain of our products and services compete (or may compete in the future) with various products and services of our memberowners. In addition, conflicts of interest may arise among the member owners based on certain allocations of net profits that the member owners may receive inproportion to their relative participation in our products and services. Except as set forth in the tax receivable agreements, the GPO participation agreements andthe LP Agreement, there are not any formal dispute resolution procedures in place to resolve conflicts between us and a member owner or between memberowners. We may not be able to resolve any potential conflicts between us and a member owner and, even if we do, the resolution may be less favorable to us thanif we were negotiating with an unaffiliated party.
Ourmemberownersareabletoexercisesignificantcontroloverus,includingthroughtheelectionofallofourdirectors.
In addition to board members that are employees of member owners, our member owners beneficially own, in the aggregate, 100% of our outstanding sharesof Class B common stock, giving them control of approximately 68% of the combined voting power of our Class A common stock and Class B common stock asof June 30, 2016 . Our member owners may also own, from time to time, shares of our Class A common stock, thereby further increasing their aggregate votingpower. Pursuant to the terms of a voting trust agreement (the "Voting Trust Agreement"), the trustee will vote all of the member owners’ Class B common stock asa block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on our board ofdirectors, and by a majority of the votes received by the trustee from the member owners for all other matters. As a result, our member owners have the ability toelect all of the members of our board of directors and thereby control our management and affairs. In addition, our member owners will be able to determine theoutcome of substantially all matters requiring action by our stockholders, including amendments to our certificate of incorporation and bylaws, any proposedmerger, consolidation or sale of all or substantially all of our assets and other corporate transactions even if such actions are not favored by our other stockholders.This concentration of ownership may also prevent a change in the composition of our board of directors or a change in control of our company that could depriveother stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company and might ultimately affect the marketprice of our Class A common stock.
In addition, at June 30, 2016 our member owners owned 100% of our outstanding Class B common units, representing approximately 68% of the outstandingunits of Premier LP. Because they hold their economic ownership interest in our business through Premier LP, rather than through Premier, Inc., due to the fact thatshares of Class B common stock are not entitled to any economic rights, these member owners may have conflicting interests with holders of shares of our Class Acommon stock. For example, many of our member owners are not-for-profit organizations which, as a result of their tax-exempt status, could influence theirdecisions regarding whether and when to dispose of assets, whether and when to incur new, or refinance existing, indebtedness, and whether and when Premiershould terminate the tax receivable agreements and accelerate its obligations thereunder. In addition, the structuring of future transactions may be influenced bythese member owners’ tax or other considerations even where no similar benefit would accrue to us.
Our member owners are able to exercise a greater degree of influence in the operation of our business and that of Premier LP and the management of ouraffairs and those of Premier LP than is typically available to stockholders of a publicly-traded company. Even if our member owners own a minority economicinterest in Premier LP, they may be able to continue to exert significant influence over us and Premier LP through their ownership of our Class B common stockand the Voting Trust Agreement among the member owners and the trustee of Premier Trust.
Weareexemptfromcertaincorporategovernancerequirementsbecausewearea“controlledcompany”withinthemeaningofNASDAQrules.Asaresult,ourstockholdersdonothavetheprotectionsaffordedbythesecorporategovernancerequirements,whichmaymakeourClassAcommonstocklessattractivetoinvestors.
Our member owners, acting as a group pursuant to the terms of the Voting Trust Agreement, own more than 50% of the total voting power of our outstandingcommon stock and we are a “controlled company” under NASDAQ corporate governance standards. As a controlled company, we are not required by NASDAQfor continued listing of Class A common stock to (i) have a majority of independent directors, (ii) maintain an independent compensation committee or(iii) maintain an independent nominating function. We are taking advantage of all of these exemptions from NASDAQ listing requirements. Accordingly, our
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stockholders do not have the same protection afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements andthe ability of our independent directors to influence our business policies and affairs may be reduced. As a result, our status as a “controlled company” could makeour Class A common stock less attractive to some investors or could otherwise harm our Class A common stock price.
Theagreementsbetweenusandourmemberownersweremadeinthecontextofanaffiliatedrelationshipandmaycontaindifferenttermsthancomparableagreementswithunaffiliatedthirdparties.
The contractual agreements that we have with each of our member owners were negotiated in the context of an affiliated relationship in which representativesof our member owners and their affiliates comprised a significant portion of our board of directors. As a result, the financial and other terms of these agreements,including covenants and other contractual obligations on our part and on the part of our member owners and termination and default provisions, may be lessfavorable to us than terms that we might have obtained in negotiations with unaffiliated third parties in similar circumstances. These potentially different termscould have a material adverse effect on our business, financial condition and results of operations.
Any payments made under the tax receivable agreements with our member owners will reduce the amount of overall cash flow that would otherwise beavailabletous.Inaddition,wemaynotbeabletorealizealloraportionofthetaxbenefitsthatareexpectedtoresultfromtheacquisitionofClassBcommonunitsfromthelimitedpartners.
As a result of Premier, Inc.’s acquisition of Class B common units of Premier LP from the member owners in connection with our IPO, and any subsequentexchanges of Class B common units with us for shares of Class A common stock, we expect to become entitled to special tax benefits attributable to tax basisadjustments involving amounts generally equal to the difference between our purchase price for the acquired Class B common units (or, in the case of an exchange,the value of the shares of Class A common stock issued by us) and our share of the historic tax basis in Premier LP’s tangible and intangible assets that isattributable to the acquired Class B common units. Pursuant to an agreement with each of our member owners in connection with our IPO, we must pay to themember owners 85% of the amount, if any, by which our tax payments to various tax authorities are reduced as a result of these special tax benefits. We are alsoobligated to make certain other payments on the occurrence of certain events that would terminate the agreement with respect to certain member owners. The taxbasis adjustments, as well as the amount and timing of any payments under the tax receivable agreements, will vary depending upon a number of factors, includingthe timing of any exchanges between us and the member owners, the amount and timing of our income and the amount and timing of the amortization anddepreciation deductions and other tax benefits attributable to the tax basis adjustments.
As a result of the tax basis adjustments from our IPO and subsequent exchanges, presuming that Premier is able to timely realize the anticipated tax benefits,the future aggregate amount of payments to be made by the Company to the member owners is approximately $279.7 million as of June 30, 2016 . Pursuant to thetax receivable agreements, payments are due to member owners to the extent that the Company recognizes the tax benefits attributable to the initial purchase ofClass B common units from the member owners in the Reorganization and subsequent quarterly exchanges between the Company and its member owners. Weexpect Premier, Inc. to fund the required payments from distributions received from Premier LP.
The tax receivable agreements provide that, in the event we exercise our right to early termination or in the event of a change in control or a material breach byus of our obligations, the agreements will terminate and the Company will be required to make a lump-sum payment equal to the present value of all forecastedfuture payments that would have otherwise been made under the tax receivable agreements. These payments could be substantial and could exceed the actual taxbenefits that we eventually receive as a result of acquiring Class B common units from the member owners. In the event that we do not have available capital onhand or access to adequate funds to make these payments, our financial condition would be materially adversely impacted.
Additionally, our ability to realize our 15% share of the total tax savings that we are entitled to retain under the tax receivable agreements depends on anumber of assumptions. If our actual taxable income were insufficient or there were adverse changes in applicable law or regulations, we may be unable to realizeall or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected.
Changes to Premier LP’s allocation methods may increase a tax-exempt limited partner’s risk that some allocated income is unrelated business taxableincome.
The LP Agreement provides for the allocation of retained income to the limited partners of Premier LP, in part, according to the number of units owned ratherthan relative participation of the limited partners. A member owner that is a tax-exempt limited partner of Premier LP whose relative Class B common unitownership is high compared to its relative participation may conclude, based on an analysis of its own facts and circumstances, that it has more unrelated businesstaxable income, or UBTI, subject to tax than it had reported in the past, or may be at increased risk that the Internal Revenue Service, or IRS, will seek to increasethe amount of income reported by the tax-exempt limited partner as UBTI. Further, the LP Agreement provides for the allocation of distributed income to beadjusted based on facts and circumstances as are determined appropriate by Premier GP. Such adjustments
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may also increase the amount of income reported by certain tax-exempt limited partners as UBTI. Any increase in UBTI may cause a limited partner to leavePremier LP, which could have an adverse effect on our business, financial condition and results of operations.
OurcertificateofincorporationandbylawsandtheLPAgreementandprovisionsofDelawarelawmaydiscourageorpreventstrategictransactions,includingatakeoverofourcompany,evenifsuchatransactionwouldbebeneficialtoourstockholders.
Provisions contained in our certificate of incorporation and bylaws and the LP Agreement and provisions of the Delaware General Corporation Law, orDGCL, could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. Forexample, our certificate of incorporation and bylaws:
• divide our board of directors into three classes with staggered three-year terms, which may delay or prevent a change of our management or a changein control;
• authorize our board of directors to issue “blank check” preferred stock in order to increase the aggregate number of outstanding shares of capitalstock and thereby make a takeover more difficult and expensive;
• do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect directorcandidates;
• do not permit stockholders to take action by written consent other than during the period following our IPO in which we qualify as a “controlledcompany” within the meaning of NASDAQ rules;
• provide that special meetings of the stockholders may be called only by or at the direction of the board of directors, the chair of our board or the chiefexecutive officer;
• require advance notice to be given by stockholders of any stockholder proposals or director nominees;• require a super-majority vote of the stockholders to amend our certificate of incorporation; and• allow our board of directors to make, alter or repeal our bylaws but only allow stockholders to amend our bylaws upon the approval of 66 2 / 3 % or
more of the voting power of all of the outstanding shares of our capital stock entitled to vote.
In addition, we are subject to the provisions of Section 203 of the DGCL which limits, subject to certain exceptions, the right of a corporation to engage in abusiness combination with a holder of 15% or more of the corporation’s outstanding voting securities, or certain affiliated persons.
The Exchange Agreement contains rights of first refusal in favor of the other member owners and Premier LP in the event that a member owner desires toexchange its Class B common units for shares of our Class A common stock, cash or a combination of both. In addition, the Tax Receivable Agreements contain achange of control provision which, if triggered, would require us to make a one-time cash payment to the member owners equal to the present value of thepayments that are forecasted to be made under the Tax Receivable Agreements based on certain assumptions.
These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede ourability to expand our business and strengthen our competitive position. These restrictions could also limit stockholder value by impeding a sale of Premier, Inc. orPremier LP and discouraging potential takeover attempts that might otherwise be financially beneficial to stockholders.
Risks Related to Our Class A Common Stock
If wefail to maintainaneffective systemofintegratedinternal controls, wemaynot beabletoreport ourfinancial results accurately, whichcouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on atimely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies toconduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. Maintainingeffective internal controls has been and will continue to be costly and may divert management’s attention.
Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be unable to report our financialinformation on a timely basis and thereby result in adverse regulatory consequences, including sanctions by the SEC or violations of NASDAQ listing rules. Therealso could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in thereliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internalcontrols over financial reporting. This could materially adversely affect our business, financial condition and results of operations and could also lead to a declinein the price of our Class A common stock.
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ThesubstantialnumberofsharesofClassAcommonstockthatwillbeeligibleforsaleorexchangebyourmemberownersinthenearfuturecouldcausethemarketpriceforourClassAcommonstocktodeclineormakeitdifficultforustoraisefinancingthroughthesaleofequitysecuritiesinthefuture.
We cannot predict the effect, if any, that market sales of shares of Class A common stock or the availability of shares of Class A common stock for sale by ourmember owners will have on the market price of our Class A common stock from time to time. At June 30, 2016 , we had 45,995,528 shares of our Class Acommon stock outstanding. Sales of substantial amounts of shares of our Class A common stock in the public market, or the perception that those sales will occur,could cause the market price of our Class A common stock to decline or make future offerings of our equity securities more difficult. If we are unable to sell equitysecurities at times and prices that we deem appropriate, we may be unable to fund our future growth.
At June 30, 2016 , there were 96,132,723 Class B common units of Premier LP outstanding. In connection with the Reorganization and IPO, Premier, Inc.,Premier LP and the member owners entered into an Exchange Agreement which became effective upon the completion of the Reorganization and IPO. Under thisagreement, subject to certain restrictions, commencing on October 31, 2014, and during each year thereafter, each member owner has the cumulative right toexchange up to one-seventh of the Premier LP Class B common units initially allocated to such member owner (or subsequently purchased by such member ownerpursuant to the related right of first refusal set forth in the Exchange Agreement), for shares of our Class A common stock, cash or a combination of both, the formof consideration to be at the discretion of the audit and compliance committee of our board of directors, subject to certain restrictions. Currently, we expect to settlethese exchanges with our Class A common stock for the foreseeable future. This exchange right can generally be exercised on a quarterly basis (subject to rights offirst refusal in favor of the other holders of Class B common units and Premier LP). In November 2014, we filed a registration statement with the SEC thatregistered under the Securities Act the resale of shares of Class A common stock received under the Exchange Agreement. On October 31, 2016, the third trancheof Class B common units, representing 15,441,618 units, will become eligible for exchange. Including Class B common units eligible for exchange as of the date ofthis Annual Report, a cumulative amount of 33,042,602 Class B common units are expected to be eligible for exchange on October 31, 2016.
WedonotintendtopayanycashdividendsonourClassAcommonstockintheforeseeablefuture.
We do not expect to pay any dividends on our Class A common stock in the foreseeable future. Payments of future dividends, if any, will be at the discretionof our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cashneeds, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation in the price of our Class Acommon stock, if any, may be your only source of gain on an investment in our Class A common stock.
Ourfutureissuanceofcommonstock,preferredstock,limitedpartnershipunitsordebtsecuritiescouldhaveadilutiveeffectonourcommonstockholdersandadverselyaffectthemarketvalueofourClassAcommonstock.
In the future, we could issue a significant number of shares of Class A common stock or Class B common stock, which could dilute our existing stockholderssignificantly and have a material adverse effect on the market price for the shares of our Class A common stock. Furthermore, the future issuance of shares ofpreferred stock with voting rights may adversely affect the voting power of our common stockholders, either by diluting the voting power of our common stock ifthe preferred stock votes together with the common stock as a single class or by giving the holders of any such preferred stock the right to block an action on whichthey have a separate class vote even if the action were approved by the holders of our common stock. The future issuance of shares of preferred stock withdividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market pricefor our Class A common stock by making an investment in the Class A common stock less attractive.
Moreover, Premier LP may issue additional limited partnership units to third parties without the consent of Class A common stockholders, which wouldreduce Premier, Inc.’s ownership percentage in Premier LP and would have a dilutive effect on the amount of distributions made to Premier, Inc. by Premier LP.Any newly admitted Premier LP limited partners will receive Class B common units in Premier LP and an equal amount of shares of our Class B common stock.Any such issuances could materially and adversely affect the market price of our Class A common stock.
In addition to potential equity issuances described above, we also may issue debt securities that would rank senior to shares of our Class A common stock.
Upon our liquidation, holders of our preferred shares and debt securities and instruments will receive a distribution of our available assets before holders ofshares of our Class A common stock. We are not required to offer any such additional debt or equity securities to existing stockholders on a preemptive basis.Therefore, additional issuances of our Class A common stock, directly or through convertible or exchangeable securities (including Class B common units),warrants or options, will dilute the holders of shares of our existing Class A common stock and such issuances, or the anticipation of such issuances, may reducethe
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market price of shares of our Class A common stock. Any preferred shares, if issued, would likely have a preference on distribution payments, periodically or uponliquidation, which could limit our ability to make distributions to holders of shares of our Class A common stock. Because our decision to issue debt or equitysecurities or otherwise incur debt in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount,timing or nature of our future capital raising efforts.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We occupy our Charlotte, North Carolina headquarters under a long-term lease which expires in 2026 and includes options for us, at our discretion, to renewthe lease for up to fifteen years in total beyond that date. We also lease our specialty pharmacy location in Fort Lauderdale, Florida, our advocacy public affairsoffice in Washington, DC, and several other smaller facilities. Our headquarters and other properties are suitable for their respective uses and are, in all materialrespects, adequate for our present needs. As of June 30, 2016 , we occupy and lease the following facilities:
Tenant Location Lease Expiration DateAperek, Inc. Raleigh, NC June 30, 2019Commcare Pharmacy FTL, LLC Ft. Lauderdale, FL August 31, 2016Commcare Pharmacy Plantation Plantation, FL November 30, 2022Commcare Pharmacy MIA, LLC Miami, FL January 31, 2018Commcare Pharmacy WPB, LLC West Palm Beach, FL November 15, 2016CECity.com, Inc. Homestead, PA August 31, 2020Meddius, LLC Charlottesville, VA November 1, 2017MEMdata, LLC College Station, TX April 3, 2017Premier, Inc. Charlotte, NC February 28, 2026Premier, Inc. Washington, DC April 30, 2019Premier Insurance Management Services, Inc. San Diego, CA November 30, 2019SVS, LLC Charlotte, NC October 30, 2016SVS, LLC Rockville, MD November 30, 2017SYMMEDRx, LLC Overland Park, KS November 30, 2019TheraDoc, Inc. Salt Lake City, UT March 31, 2017
Leases approaching their stated expiration dates are generally extended pursuant to their terms or renegotiated as required. With respect to leases with statedexpiration dates during the next year, we believe we will be able to extend or renegotiate such leases as necessary to meet our business needs.
Item 3. Legal Proceedings
We participate in businesses that are subject to substantial litigation. We are periodically involved in litigation, arising in the ordinary course of business orotherwise, which from time to time may include claims relating to commercial, product liability, employment, antitrust, intellectual property or other regulatorymatters, among others. If current or future government regulations are interpreted or enforced in a manner adverse to us or our business, specifically those withrespect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties, damages and other material limitations on our business.
From time to time we have been named as a defendant in several lawsuits brought by suppliers of medical products. Typically, these lawsuits have alleged theexistence of a conspiracy among manufacturers of competing products and operators of GPOs, including us, to deny the plaintiff access to a market for itsproducts. We believe that we have at all times conducted our business affairs in an ethical and legally compliant manner and have successfully resolved all suchactions. No assurance can be given that we will not be subjected to similar actions in the future or that such matters will be resolved in a manner satisfactory to usor which will not harm our business, financial condition or results of operations.
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Additional information relating to certain legal proceedings in which we are involved is included in Note 22 - Commitments and Contingencies , to theaccompanying consolidated financial statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not Applicable
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock is publicly traded on the NASDAQ Global Select Market under the ticker symbol "PINC." Our Class B common stock is notpublicly traded. The following table sets forth, for the periods indicated, the high and low prices of our Class A common stock on the NASDAQ Global SelectMarket.
Price Range of Common
Stock High LowFiscal Year Ended June 30, 2016 Fourth Quarter $ 35.11 $ 30.36Third Quarter $ 37.00 $ 29.68Second Quarter $ 37.24 $ 33.27First Quarter $ 39.11 $ 32.62
Fiscal Year Ended June 30, 2015 Fourth Quarter $ 39.81 $ 36.04Third Quarter $ 39.20 $ 31.36Second Quarter $ 35.27 $ 29.29First Quarter $ 32.98 $ 27.95
Holders
Based on the records of our Class A common stock transfer agent, as of August 19, 2016 , there were 47,394,515 shares of our Class A common stock issuedand outstanding, held by 29 holders of record. Because substantially all of our Class A common stock is held by brokers and other institutions on behalf ofshareholders, we are unable to estimate the total number of beneficial owners currently holding our Class A common stock. As of August 19, 2016 , 94,809,069shares of our Class B common stock are issued and outstanding, held by one holder of record, the trustee of the Class B common stock voting trust. However, as ofAugust 19, 2016 , our Class B common stock is beneficially owned by our 171 member owners.
Dividend Policy
We did not pay any dividends during the fiscal years ended June 30, 2016 and 2015 . We do not anticipate paying any cash dividends for the foreseeablefuture. Furthermore, shares of our Class B common stock are not entitled to any dividend payments. The payment of dividends, if any, is subject to the discretionof our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, generalbusiness conditions, restrictions imposed by our current and any future financing arrangements, legal restrictions on the payment of dividends and other factors ourboard of directors deems relevant. Our current credit facility includes restrictions on our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters incorporated herein by reference.
Purchases of Equity Securities
There were no repurchases of equity securities during the year ended June 30, 2016 . We do not have any publicly announced or other repurchase plansregarding our Class A common stock.
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Company Stock Performance
The performance graph below shows a 33-month comparison of the total cumulative return, assuming reinvestment of all dividends, had $100 been invested atthe close of business on September 26, 2013 (our first trading day), in each of:
• our Class A common stock;• the NASDAQ Composite stock index (“NASDAQ Composite index”); and• a customized peer group of fourteen companies selected by us (the “Peer Group”).
We have used the Peer Group, a group selected in good faith and used by our compensation committee for benchmarking purposes, for peer comparisonpurposes because we believe this group provides an accurate representation of our peers. The Peer Group consists of the following fourteen companies: AdvisoryBoard Co, Allscripts Healthcare Solutions Inc., Athenahealth Inc., Cerner Corp, HMS Holdings Corp, Huron Consulting Group Inc., IHS Inc., IMS HealthHoldings Inc., Magellan Health Inc., MedAssets Inc., Navigant Consulting Inc., Owens & Minor Inc., Patterson Companies Inc. and Quality Systems Inc.
Our compensation committee last reviewed and selected the fourteen companies in our Peer Group in August 2015. For the performance graph below,MedAssets Inc. has been included in the Peer Group through November 1, 2015, the day before it announced it would be acquired. As we grow and develop as apublic company, and as the companies in our Peer Group change, our Compensation Committee will continue to review and reconfigure our Peer Group asapplicable.
The information contained in the performance graph below shall not be deemed “soliciting material” or to be “filed” with the SEC nor shall such informationbe deemed incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent we specifically incorporate it byreference into such filing.
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Value of Investment as of Stated Date: Company/Index Name 9/26/2013 6/30/2014 6/30/2015 6/30/2016Premier, Inc. Class A Common Stock (a) $ 100.00 $ 94.62 $ 125.48 $ 106.69NASDAQ Composite $ 100.00 $ 117.85 $ 133.69 $ 130.50Peer Group (b) $ 100.00 $ 106.38 $ 119.55 $ 107.42
(a) As noted above, we have not paid any cash dividends during the period covered by the graph.(b) Includes the performance of MedAssets Inc. through November 1, 2015, the date before it announced it would be acquired.
We will neither make nor endorse any predictions as to future stock performance or whether the trends depicted in the graph above will continue or change inthe future. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6. Selected Financial Data
As of June 30, 2016 , the Company, through its wholly-owned subsidiary, Premier GP, held a controlling general partner interest of approximately 32% in,and, as a result, consolidated the financial statements of, Premier LP. The limited partners' ownership of Premier LP of approximately 68% at June 30, 2016 isreflected as redeemable limited partners' capital in the Company's consolidated balance sheets, and their proportionate share of income in Premier LP is reflectedwithin net income attributable to non-controlling interest in Premier LP in the Company's consolidated statements of income and within comprehensive incomeattributable to non-controlling interest in the consolidated statements of comprehensive income.
After the completion of the Reorganization following the consummation of our IPO, PHSI became our consolidated subsidiary and is considered ourpredecessor for accounting purposes. Accordingly, PHSI's consolidated financial statements are our historical financial statements, for periods prior to October 1,2013. The historical consolidated financial statements of PHSI are reflected herein based on PHSI's historical ownership interests of Premier LP and itsconsolidated subsidiaries.
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We derived the selected historical consolidated financial data presented below for the years ended June 30, 2016 , 2015 , 2014 , 2013 and 2012 from theaudited consolidated financial statements and related notes of Premier, Inc. and PHSI, as applicable, included elsewhere in this Annual Report or as presented inprevious SEC filings. You should refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the notes to theaccompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause thisdata not to be indicative of our future financial position or results of operations.
We have reclassified certain prior period amounts for deferred income tax assets to be consistent with the current period presentation (see Note 3 - SignificantAccounting Policies ).
The following tables set forth selected historical consolidated financial and operating data for the five-year period ended June 30, 2016 and should be read inconjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and our audited consolidated financial statementscontained elsewhere herein.
(In Thousands, Except Per Share Amounts) Year ended June 30,Consolidated Statements of Income Data: 2016 (1) 2015 (2) 2014 (3) 2013 2012 (4)
Net revenue: Net administrative fees (5) $ 498,394 $ 457,020 $ 464,837 $ 519,219 $ 473,249Other services and support 337,554 270,748 233,186 205,685 178,552
Services 835,948 727,768 698,023 724,904 651,801Products 326,646 279,261 212,526 144,386 116,484Net revenue 1,162,594 1,007,029 910,549 869,290 768,285Cost of revenue 457,056 396,910 307,625 237,413 189,719Gross profit 705,538 610,119 602,924 631,877 578,566Operating expenses:
Selling, general and administrative 403,611 332,004 294,421 248,301 240,748Research and development 2,925 2,937 3,389 9,370 12,583Amortization of purchased intangible assets 33,054 9,136 3,062 1,539 3,146
Operating expenses 439,590 344,077 300,872 259,210 256,477Operating income 265,948 266,042 302,052 372,667 322,089Other income, net (6) 18,934 5,085 58,274 12,145 12,808Income before income taxes 284,882 271,127 360,326 384,812 334,897Income tax expense 49,721 36,342 27,709 9,726 8,229Net income 235,161 234,785 332,617 375,086 326,668
Net (income) loss attributable to non-controlling interest inS2S Global (7) — (1,836) (949) 1,479 608Net income attributable to non-controlling interest in PremierLP (8) (193,547) (194,206) (303,336) (369,189) (323,339)
Net income attributable to non-controlling interest (193,547) (196,042) (304,285) (367,710) (322,731)Adjustment of redeemable limited partners' capital toredemption amount 776,750 (904,035) (2,741,588) — —Net income (loss) attributable to stockholders $ 818,364 $ (865,292) $ (2,713,256) $ 7,376 $ 3,937
Weighted average shares outstanding: Basic 42,368 35,681 25,633 5,858 6,183Diluted 145,308 35,681 25,633 5,858 6,183
Earnings (loss) per share attributable to stockholders: Basic $ 19.32 $ (24.25) $ (105.85) $ 1.26 $ 0.64Diluted $ 1.33 $ (24.25) $ (105.85) $ 1.26 $ 0.64
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(In Thousands) June 30,Consolidated Balance Sheets Data: 2016 2015 2014 2013 2012Cash, cash equivalents and marketable securities, current $ 266,576 $ 387,189 $ 291,606 $ 255,619 $ 241,669Working capital (9) 136,827 275,533 188,527 212,490 189,680Property and equipment, net 174,080 147,625 134,551 115,587 101,630Total assets $ 1,855,383 $ 1,530,191 $ 1,246,656 $ 598,916 $ 554,939Deferred revenue (10) 54,498 39,824 15,694 18,880 19,820Total liabilities $ 669,614 $ 568,461 $ 472,293 $ 213,513 $ 196,990Redeemable limited partners' capital (11) 3,137,230 4,079,832 3,244,674 307,635 279,513Class A common stock 460 377 324 57 61Additional paid-in capital — — — 28,866 35,427(Accumulated deficit) retained earnings (1,951,878) (3,118,474) (2,469,873) 50,599 43,223Total stockholders' (deficit) equity $ (1,951,461) $ (3,118,102) $ (2,470,311) $ 77,768 $ 78,436
(1) Amounts include the results of operations of InFlowHealth, LLC ("InFlow"), CECity.com, Inc. ("CECity") and Healthcare Insights, LLC ("HCI"), all in ourperformance services segment, from October 1, 2015, August 20, 2015 and July 31, 2015, respectively, the dates of acquisition of all the membership interestsof InFlow for $6.1 million and HCI for $64.3 million , respectively, and all the outstanding shares of CECity for $398.3 million . See Note 4 - BusinessAcquisitions to the audited consolidated financial statements of this Annual Report for further information related to acquisitions completed during the yearended June 30, 2016 .
(2) Amounts include the results of operations of TheraDoc, Inc. ("TheraDoc") and Aperek, Inc. ("Aperek"), both in our performance services segment, fromSeptember 1, 2014 and August 29, 2014, respectively, the dates of acquisition of all the outstanding shares of common stock of TheraDoc for $108.6 millionand Aperek for $47.4 million . Further, on February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membershipinterests of S2S Global, our direct sourcing business, for approximately $14.5 million . See Note 4 - Business Acquisitions to the audited consolidatedfinancial statements of this Annual Report for further information related to acquisitions completed during the year ended June 30, 2015 .
(3) Amounts include the results of operations of MEMdata, LLC ("MEMdata"), Meddius, L.L.C. ("Meddius") and SYMMEDRx, LLC ("SYMMEDRx"), all inour performance services segment, from April 7, 2014, October 31, 2013 and July 19, 2013, respectively, the dates of acquisition of all the outstanding sharesof common stock of MEMdata for $6.1 million , Meddius for $7.7 million and SYMMEDRx for $28.7 million .
(4) Amounts include the results of operations of S2S Global in our supply chain services segment from December 6, 2011, the date of acquisition of 60% of theoutstanding limited liability company membership interests of S2S Global for $0.5 million .
(5) Following the completion of the Reorganization and IPO, we are contractually required under the GPO participation agreements to pay each member ownerrevenue share from Premier LP generally equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such memberowner's owned, leased, managed and affiliated facilities through our GPO supplier contracts. Prior to the Reorganization and IPO, we did not generally have acontractual requirement to pay revenue share to member owners participating in our GPO programs, but paid semi-annual distributions of partnership income.In addition, certain non-owner members have historically operated under, and, following the Reorganization and IPO, continue to operate under contractualrelationships that provide for a specific revenue share that differs from the 30% revenue share that we provide to our member owners under the GPOparticipation agreements following the Reorganization and IPO. As a result, our revenue share expense as a percentage of gross administrative fees increasedfor the years ended June 30, 2016, 2015 and 2014 which resulted in a decrease in net administrative fees for the years ended June 30, 2016, 2015 and 2014when compared to the actual net administrative fees for the prior fiscal years.
(6) Other income, net consists primarily of equity in net income of unconsolidated affiliates related to our 50% ownership interest in Innovatix, interest income,net and realized gains and losses on our marketable securities (which represent our interest and investment income, net) and gain or loss on disposal of assets.
(7) PSCI currently owns a 100% voting and economic interest in S2S Global as a result of its February 2, 2015 purchase of the remaining non-controlling interest( 40% ) in S2S Global. Prior to February 2, 2015, PSCI owned a 60% voting and economic
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interest in S2S Global. Net (income) loss attributable to non-controlling interest in S2S Global represents the portion of net (income) loss attributable to thenon-controlling equity holders of S2S Global ( 40% ) prior to the February 2, 2015 purchase.
(8) PHSI, through Premier Plans, owned a 1% controlling general partnership interest in Premier LP prior to the Reorganization. Net income attributable to non-controlling interest in Premier LP represents the portion of net income attributable to the limited partners of Premier LP, which was 78% following theReorganization and 99% prior to the Reorganization and may change each period as member ownership changes.
(9) Working capital represents the excess of total current assets over total current liabilities.
(10) Deferred revenue is primarily related to deferred subscription fees and deferred advisory fees in our performance services segment and consists ofunrecognized revenue related to advanced member invoicing or member payments received prior to fulfillment of our revenue recognition criteria.
(11) Redeemable limited partners' capital consists of the limited partners' approximately 68% ownership of Premier LP after the Reorganization and IPO andsubsequent quarterly exchanges pursuant to the Exchange Agreement and 99% ownership of Premier LP prior to the Reorganization and IPO. Pursuant to theterms of the existing limited partnership agreement of Premier LP, Premier LP is required to repurchase a limited partner's interest upon the withdrawal ofsuch limited partner and therefore the interest in Premier LP is classified as temporary equity in the mezzanine section of the consolidated balance sheets. TheCompany records redeemable limited partners' capital at the greater of the book value or redemption amount per the LP Agreement at the reporting date, withthe corresponding offset to additional paid-in-capital and retained earnings (accumulated deficit).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in thisAnnual Report. This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial statements, thechanges in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certainaccounting principles affect our consolidated financial statements. In addition, the following discussion includes certain forward-looking statements. For adiscussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially fromthe results referred to in the forward-looking statements, see "Item 1A, Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" contained inthis Annual Report.
Business Overview
OurBusiness
Premier, Inc. ("Premier", the "Company", "We", or "Our") is a leading healthcare improvement company, uniting an alliance of approximately 3,750 U.S.hospitals and more than 130,000 other providers to transform healthcare. We unite hospitals, health systems, physicians and other healthcare providers with thecommon goal of improving and innovating in the clinical, financial and operational areas of their business to meet the demands of a rapidly evolving healthcareindustry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational andpopulation health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative programs.
As of June 30, 2016 , we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent approximately 1,400 owned,leased and managed acute care facilities and other non-acute care organizations, through the ownership of Class B common stock, which they received upon thecompletion of a series of transactions (the "Reorganization") concurrent with the consummation of our Initial Public Offering ("IPO"), and collectively with theReorganization, the "Reorganization and IPO") on October 1, 2013. As of June 30, 2016 , the Class A common stock and Class B common stock representedapproximately 32% and 68% of our combined Class A and Class B common stock, collectively (the "Common Stock"). All of our Class B common stock was heldbeneficially by our member owners and all of our Class A common stock was held by public investors, which may include member owners that have receivedshares of our Class A common stock in connection with previous quarterly exchanges pursuant to the Exchange Agreement.
We generated net revenue of $1,162.6 million , $1,007.0 million and $910.5 million , net income of $235.2 million , $234.8 million and $332.6 million andAdjusted EBITDA of $441.0 million , $393.2 million and $392.3 million for the years ended June 30, 2016, 2015 and 2014 , respectively. On a Non-GAAP proforma basis, after giving effect to the Reorganization and the IPO, we generated net revenue of $869.3 million , net income of $294.6 million and AdjustedEBITDA of $351.0 million for the year
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ended June 30, 2014 . Non-GAAP pro forma adjustments reflect the impact of the Reorganization and IPO for periods prior to October 1, 2013 and accordingly, donot impact operating results for the years ended June 30, 2016 and 2015.
OurBusinessSegments
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, provide actionableintelligence derived from anonymized data in our data warehouse provided by our members, mitigate the risk of innovation and disseminate best practices that willhelp our member organizations succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutionsthat address the areas of total cost management, quality and safety improvement and population health management through two business segments: supply chainservices and performance services.
Our supply chain services segment includes one of the largest healthcare group purchasing organizations ("GPO") in the United States, serving acute andalternate sites, a specialty pharmacy and our direct sourcing activities. Supply chain services net revenue grew from $738.3 million for the year ended June 30,2015 to $829.4 million for the year ended June 30, 2016 , representing net revenue growth of 12% , and accounted for 71% of our overall net revenue. Supplychain services net revenue grew from $678.1 million for the year ended June 30, 2014 to $738.3 million for the year ended June 30, 2015 , representing net revenuegrowth of 9% , and accounted for 73% of our overall net revenue. We generate revenue in our supply chain services segment from fees received from suppliersbased on the total dollar volume of supplies purchased by our members and through product sales in connection with our specialty pharmacy and direct sourcingactivities.
Our performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcareproviders. Performance services net revenue grew from $268.8 million for the year ended June 30, 2015 to $333.2 million for the year ended June 30, 2016 ,representing revenue growth of 24% , and accounted for 29% of our overall net revenue. Performance services net revenue grew from $232.4 million for the yearended June 30, 2014 to $268.8 million for the year ended June 30, 2015 , representing net revenue growth of 16% , and accounted for 27% of our overall netrevenue. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyzeand identify areas of improvement across three main categories: cost management, quality and safety and population health management. This segment alsoincludes our advisory services and technology-enabled collaboratives.
ReorganizationandIPO
On October 1, 2013, we completed our IPO by issuing 32,374,751 shares of our Class A common stock at a price of $27.00 per share, raising net proceeds ofapproximately $821.7 million , after underwriting discounts and commissions, but before expenses. In addition, on October 1, 2013, upon the consummation of theIPO, we completed the Reorganization. See Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements contained hereinfor more information.
We incurred strategic and financial restructuring expenses in connection with the Reorganization and IPO of approximately $0.3 million , $1.4 million and$3.8 million during the years ended June 30, 2016, 2015 and 2014 , respectively. During the years ended June 30, 2016 and 2015 , strategic and financialrestructuring expenses were incurred in connection with the quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings relatedto the Registration Rights Agreement discussed in Note 2 - Initial Public Offering and Reorganization to the accompanying audited consolidated financialstatements, respectively.
We may incur additional strategic and financial and restructuring expenses in connection with future quarterly exchanges pursuant to the Exchange Agreementand company-directed offerings pursuant to the Registration Rights Agreement.
Acquisitions
Acquisition of InFlowHealth, LLC
On October 1, 2015, we acquired all of the limited liability company membership interests of InFlowHealth, LLC (“InFlow”), a SaaS-based softwaredeveloper specializing in improving the operational, financial and strategic performance of physician practices, for $6.1 million in cash. The acquisition providesselling members an earn-out opportunity of up to $26.9 million based on InFlow’s future annual contractual subscription revenues through December 31, 2019.The selling members also received restricted stock units of Premier with an aggregate equity grant value of $2.1 million which vest over a three-year period withrestrictions tied to continued employment. We utilized available funds on hand to complete the acquisition. Assets acquired and liabilities assumed were recordedat their estimated fair values as of October 1, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions ).
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Acquisition of CECity.com, Inc.
On August 20, 2015, we acquired 100% of the outstanding shares of capital stock of CECity.com, Inc. ("CECity"), a cloud-based healthcare solutionsprovider specializing in performance management and improvement, pay-for-value reporting and professional education, for $398.3 million in cash. The Companyfunded the acquisition with $250.0 million of cash and $150.0 million of borrowings under the Company’s unsecured credit agreement (the "Credit Facility") (seeNote 13 - Debt ). Assets acquired and liabilities assumed were recorded at their estimated fair values as of August 20, 2015, with the remaining unallocatedpurchase price recorded as goodwill (see Note 4 - Business Acquisitions ).
Acquisition of Healthcare Insights, LLC
On July 31, 2015, we acquired all of the limited liability company membership interests of Healthcare Insights, LLC ("HCI"), a financial managementsoftware developer that provides hospitals and healthcare systems with budgeting, forecasting, labor productivity and cost analytic capabilities, for $64.3 million incash. The acquisition also provides selling members with an earn-out opportunity of up to $4.0 million based on HCI’s revenues during the twelve months endedDecember 31, 2017. We utilized available funds on hand to complete the acquisition. Assets acquired and liabilities assumed were recorded at their estimated fairvalues as of July 31, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions ).
Acquisition of Non-Controlling Interest in S2S Global
On February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of SVS LLC d/b/a S2S Global("S2S Global"), our direct sourcing business, for approximately $14.5 million . In connection with the purchase, we repaid the $14.2 million balance outstandingunder the S2S Global line of credit and terminated the line of credit (see Note 13 - Debt ). We utilized available funds on hand to complete the acquisition andpayoff the S2S Global line of credit (see Note 4 - Business Acquisitions ).
Acquisition of TheraDoc, Inc.
On September 1, 2014, we completed the acquisition of TheraDoc, Inc. ("TheraDoc"), a leading provider of clinical surveillance software to healthcareorganizations across the country that bring together disparate data from a hospital's source systems and helps alert clinicians to potential risks, for $108.6 million .We utilized available funds on hand to complete the acquisition (see Note 4 - Business Acquisitions ).
Acquisition of Aperek, Inc.
On August 29, 2014 we completed the acquisition of Aperek, Inc. ("Aperek"), (formerly Mediclick), a SaaS-based supply chain solutions company focused onpurchasing workflow and analytics, for $47.4 million . We utilized available funds on hand to complete the acquisition (see Note 4 - Business Acquisitions ).
See Note 24 - Subsequent Events to the accompanying audited consolidated financial statements for more information regarding our acquisition activitiessubsequent to June 30, 2016 .
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term and long-term. We have basedour expectations described below on assumptions made by us and on information currently available to us. To the extent our underlying assumptions about, orinterpretation of, available information prove to be incorrect our actual results may vary materially from our expected results. See "Cautionary Note RegardingForward-Looking Statements."
Trends in the U.S. healthcare market affect our revenues in the supply chain services and performance services segments. The trends we see affecting ourcurrent healthcare business include the implementation of healthcare reform legislation, enactment of new regulatory and reporting requirements, expansion ofinsurance coverage, intense cost pressure, payment reform, provider consolidation, shift in care to the alternate site market and increased data availability andtransparency. To meet the demands of this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measureand report on and bear financial risk for outcomes. We believe these trends will result in increased demand for our supply chain services and performance servicessolutions in the areas of cost management, quality and safety, and population health management.
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Key Components of Our Results of Operations
NetRevenue
Net revenue consists of (i) service revenue, which includes net administrative fees revenue and other services and support revenue and (ii) product revenue.Net administrative fees revenue consists of GPO administrative fees in our supply chain services segment. Other services and support revenue consists primarily offees generated by our performance services segment in connection with our SaaS informatics products subscriptions, license fees, advisory services andperformance improvement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in thesupply chain services segment.
SupplyChainServices
Supply chain services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers, reduced by the amount of anyrevenue share paid to members), specialty pharmacy revenue, direct sourcing revenue and managed service revenue.
The success of our supply chain services revenue streams are influenced by the number of members that utilize our GPO supplier contracts and the volume oftheir purchases, the number of members that utilize our specialty pharmacy, as well as the impact of changes in the defined allowable reimbursement amountsdetermined by Medicare, Medicaid and other managed care plans and the number of members that purchase products through our direct sourcing activities and theimpact of competitive pricing. Our managed services line of business is a fee for service model created to perform supply chain related services for members.
PerformanceServices
Performance services revenue consists of SaaS informatics products subscriptions, license fees, performance improvement collaborative and other servicesubscriptions, professional fees for advisory services, insurance services management fees and commissions from endorsed commercial insurance programs.
Our performance services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaboratives and advisoryservices to new and existing members, impact of applied research initiatives, renewal of existing subscriptions to our SaaS informatics products and expansion intonew markets with potential future acquisitions.
CostofRevenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide servicesrelated to revenue-generating activities, including advisory services to members and implementation services related to SaaS informatics products. Cost of servicerevenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost ofinternal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products. Our cost of productrevenue will be influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourcedmedical products.
OperatingExpenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative functions and support of revenue-generating activities including expenses to support and maintain our software-related products and services. In general, selling, general and administrative expensesare comprised of compensation and benefits related costs, travel-related expenses, business development expenses including costs for business acquisitionopportunities and indirect costs such as insurance, professional fees and other general overhead expenses. General and administrative expenses have increased as aresult of being a public company, including stock-based compensation expense related to the equity incentive plan established in connection with theReorganization and IPO.
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technologyprofessionals, net of capitalized labor, incurred to develop our software-related products and services.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.
OtherIncome,Net
Other income, net consists primarily of equity in net income of our unconsolidated affiliates, primarily generated from our 50% ownership interest inInnovatix, LLC ("Innovatix"). A change in the number of, and use by, members that participate in our
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GPO programs through Innovatix could have a significant effect on the amounts earned from this investment. Other income, net also includes interest income, net,and realized gains and losses on our marketable securities as well as gains or losses on the disposal of assets.
IncomeTaxExpense
Income tax expense includes the income tax expense attributable to Premier, Premier Healthcare Solutions, Inc. ("PHSI") and Premier Supply ChainImprovement ("PSCI"). For federal and state income tax purposes, income realized by Premier LP is taxable to its partners. As such, the low effective tax rate isattributable to the flow through of Premier LP income, which is not subject to federal and state income tax at Premier.
NetIncomeAttributabletoNon-ControllingInterest
As of June 30, 2016 , we owned an approximate 32% controlling general partner interest in Premier LP through Premier GP. Net income attributable to non-controlling interest represents the portion of net income attributable to the limited partners of Premier LP (approximately 68% ), and the portion of net income orloss attributable to the 40% non-controlling equity interest in S2S Global prior to our February 2, 2015 purchase when we increased our 60% ownership in S2SGlobal to 100% . Our non-controlling interest attributable to limited partners of Premier LP was reduced from 99% to approximately 78% upon theReorganization, and further reduced to approximately 68% as of June 30, 2016 , as a result of completed quarterly exchanges pursuant to the Exchange Agreement(see Note 15 - Redeemable Limited Partners' Capital ).
Other Key Business Metrics
The other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, AdjustedFully Distributed Earnings per Share and Free Cash Flow.
We define EBITDA as net income before interest and investment income, net, income tax expense, depreciation and amortization and amortization ofpurchased intangible assets. We define Adjusted EBITDA as EBITDA before merger and acquisition related expenses and non-recurring, non-cash or non-operating items and including equity in net income of unconsolidated affiliates. For all financial measures not determined in accordance with generally acceptedaccounting principles (“Non-GAAP”), we consider non-recurring items to be expenses and other items that have not been incurred within the prior two years andare not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses. Non-operating items include gainor loss on the disposal of assets.
We define Segment Adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment excluding depreciation andamortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items and including equity in netincome of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general andadministrative, and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific toa particular segment are not included in the calculation of Segment Adjusted EBITDA.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income tax expense, (ii) excluding the impact ofadjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of non-recurring and non-cash items, (iv) assuming the exchangeof all the Class B common units into shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and (v) reflectingan adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted FullyDistributed Net Income is a Non-GAAP financial measure because it represents net income attributable to Premier before merger and acquisition related expensesand non-recurring or non-cash items, the effects of non-controlling interests in Premier LP and the impact of the adjustment of redeemable limited partners' capitalto redemption amount.
We define Adjusted Fully Distributed Earnings per Share as earnings per share attributable to Premier (i) excluding income tax expense, (ii) excluding theimpact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of non-recurring and non-cash items, (iv) assumingthe exchange of all the Class B common units into shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and(v) reflecting an adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate.Adjusted Fully Distributed Earnings per Share is a Non-GAAP financial measure because it represents earnings per share attributable to Premier before merger andacquisition related expenses and non-recurring or non-cash items, the effects of non-controlling interests in Premier LP, and the impact of the adjustment ofredeemable limited partners' capital to redemption amount.
We define Free Cash Flow as net cash provided by operating activities less distributions and tax receivable agreement payments to limited partners andpurchases of property and equipment. Free Cash Flow is a Non-GAAP financial measure because it does not represent net cash provided by operating activitiesalone but takes into consideration the ongoing distributions to limited partners and purchase of property and equipment that are necessary for ongoing businessoperations and long-term value creation.
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We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions to limited partners and capitalinvestment to maintain existing products and services as well as development of new and upgraded products and services to support future growth. Free Cash Flowis important because it allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related business and/or debtreduction. Also, Free Cash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayment.
Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial statements. We considerAdjusted EBITDA and Free Cash Flow to be indicators of the operational strength and performance of our business. Adjusted EBITDA and Free Cash Flowmeasures allow us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do notconsider indicative of the operating performance of our business. Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performanceof our business segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share tofacilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared inaccordance with generally accepted accounting principles (“GAAP”), provides a more complete understanding of factors and trends affecting our business thanGAAP measures alone. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our board of directors, management and investors in comparing ouroperating performance on a consistent basis from period to period because they remove the impact of our asset base (primarily depreciation and amortization) anditems outside the control of our management team, e.g. taxes, as well as other non-cash (such as impairment of intangible assets, purchase accounting adjustmentsand stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), from our operations. We believe Adjusted FullyDistributed Net Income and Adjusted Fully Distributed Earnings per Share assist our board of directors, management and investors in comparing our net incomeand earnings per share on a consistent basis from period to period because it removes non-cash (such as impairment of intangible assets, purchase accountingadjustments and stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), and eliminates the variability of non-controlling interest as a result of member owner exchanges of Class B common units into shares of Class A common stock (which exchanges are a memberowner’s cumulative right, but not obligation, which began on October 31, 2014, and occur each year thereafter, and are limited to one-seventh of the memberowner’s initial allocation of Class B common units).
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in ourCredit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, AdjustedEBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are notmeasurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternativeto, net income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA include that they do not reflect: our capital expenditures or ourfuture requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense orthe cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirementsfor replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are notmeasures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from continuing operating activities.
Some of the limitations of Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are that they do not reflect income taxexpense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Shareare not measures of profitability under GAAP.
We also urge you to review the reconciliation of these Non-GAAP measures included elsewhere in this Annual Report. To properly and prudently evaluateour business, we encourage you to review the consolidated financial statements and related notes included elsewhere in this Annual Report, and to not rely on anysingle financial measure to evaluate our business. In addition, because EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed NetIncome, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are susceptible to varying calculations, the EBITDA, Adjusted EBITDA, SegmentAdjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow measures, as presented in thisAnnual Report, may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
As discussed in more detail below under "Results of Operations," we also use a non-GAAP pro forma presentation in this Annual Report for consolidatedoperating results prior to October 1, 2013, the effective date of the Reorganization and IPO. We believe this presentation is useful because our consolidatedoperating results prior to the Reorganization and IPO are not indicative of our results for periods after the Reorganization and IPO. This non-GAAP pro formapresentation is for informational purposes only and does not purport to reflect our historical results or operations or financial position. This non-GAAP pro formapresentation should not be relied upon as being indicative of our financial condition or results of operations had the Reorganization and IPO
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occurred on the dates assumed. Further, this presentation does not project our results of operations or financial position for any future period or date. You shouldcarefully review our historical actual results presented herein.
Results of Operations
Years Ended June 30, 2016 and 2015
The following table summarizes our results of operations for the years ended June 30, 2016 and 2015 (in thousands, except per share data):
Year Ended June 30, 2016 2015
Net revenue: Amount% of NetRevenue Amount
% of NetRevenue
Net administrative fees $ 498,394 43 % $ 457,020 45 %Other services and support 337,554 29 % 270,748 27 %
Services 835,948 72 % 727,768 72 %Products 326,646 28 % 279,261 28 %Net revenue 1,162,594 100 % 1,007,029 100 %Cost of revenue: Services 163,240 14 % 143,290 14 %Products 293,816 25 % 253,620 25 %Cost of revenue 457,056 39 % 396,910 39 %Gross profit 705,538 61 % 610,119 61 %Operating expenses: Selling, general and administrative 403,611 35 % 332,004 33 %Research and development 2,925 — % 2,937 — %Amortization of purchased intangible assets 33,054 3 % 9,136 1 %Operating expenses 439,590 38 % 344,077 34 %Operating income 265,948 23 % 266,042 26 %Other income, net 18,934 1 % 5,085 1 %Income before income taxes 284,882 24 % 271,127 27 %Income tax expense 49,721 4 % 36,342 4 %Net income 235,161 20 % 234,785 23 %Net income attributable to non-controlling interest in S2S Global — — % (1,836) — %Net income attributable to non-controlling interest in Premier LP (193,547) (17)% (194,206) (19)%Net income attributable to non-controlling interest (193,547) (17)% (196,042) (19)%Adjustment of redeemable limited partners' capital to redemption amount $ 776,750 nm $ (904,035) nmNet income (loss) attributable to stockholders $ 818,364 nm $ (865,292) nm
Weighted average shares outstanding: Basic 42,368 nm 35,681 nmDiluted 145,308 nm 35,681 nm
Earnings (loss) per share attributable to stockholders: Basic $ 19.32 nm $ (24.25) nmDiluted $ 1.33 nm $ (24.25) nm
Certain Non-GAAP Financial Data: Adjusted EBITDA (1) $ 440,975 38 % $ 393,175 39 %Adjusted Fully Distributed Net Income (2) $ 233,259 20 % $ 208,169 21 %Adjusted Fully Distributed Earnings Per Share (3) $ 1.61 nm $ 1.43 nm
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nm = Not meaningful
(1) The following table shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted EBITDA to income beforeincome taxes for the periods presented (in thousands):
Year Ended June 30, 2016 2015Net income $ 235,161 $ 234,785
Interest and investment loss (income), net (a) 1,021 (866)Income tax expense 49,721 36,342Depreciation and amortization 51,102 45,186Amortization of purchased intangible assets 33,054 9,136
EBITDA 370,059 324,583Stock-based compensation (b) 49,081 28,498Acquisition related expenses (c) 15,804 9,037Strategic and financial restructuring expenses (d) 268 1,373Adjustment to tax receivable agreement liability (e) (4,818) —Loss on investment (f) — 1,000ERP implementation expenses (g) 4,870 —Loss on disposal of long-lived assets — 15,243Acquisition related adjustment - deferred revenue (h) 5,624 13,371Other expense, net (i) 87 70
Adjusted EBITDA $ 440,975 $ 393,175
Segment Adjusted EBITDA: Supply Chain Services $ 439,013 $ 391,180Performance Services 110,787 90,235Corporate (j) (108,825) (88,240)
Adjusted EBITDA 440,975 393,175Depreciation and amortization (51,102) (45,186)Amortization of purchased intangible assets (33,054) (9,136)Stock-based compensation (b) (49,081) (28,498)Acquisition related expenses (c) (15,804) (9,037)Strategic and financial restructuring expenses (d) (268) (1,373)Adjustment to tax receivable agreement liability (e) 4,818 —ERP implementation expenses (g) (4,870) —Acquisition related adjustment - deferred revenue (h) (5,624) (13,371)Equity in net income of unconsolidated affiliates (21,647) (21,285)Deferred compensation plan income 1,605 753
Operating income 265,948 266,042Equity in net income of unconsolidated affiliates 21,647 21,285Interest and investment (loss) income, net (a) (1,021) 866Loss on investment (f) — (1,000)Loss on disposal of long-lived assets — (15,243)Other expense, net (i) (1,692) (823)
Income before income taxes $ 284,882 $ 271,127
(a) Represents interest expense (income), net and realized gains and losses on our marketable securities.(b) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016 .
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(c) Represents legal, accounting and other expenses related to acquisition activities.(d) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges
pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement.(e) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016 .(f) Represents the loss on investment for the year ended June 30, 2015.(g) Represents implementation and other costs of new enterprise resource planning ("ERP") system.(h) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAPrevenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would haveotherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, thefull amount of such revenues.
(i) Represents loss on sale of assets and unrealized loss on deferred compensation plan assets.(j) Corporate consists of general and administrative corporate expenses that are not specific to either of our reporting segments.
(2) The following table shows the reconciliation of net income (loss) attributable to stockholders to Non-GAAP Adjusted Fully Distributed Net Income for theperiods presented (in thousands):
Year Ended June 30, 2016 2015Net income (loss) attributable to stockholders $ 818,364 $ (865,292)
Adjustment of redeemable limited partners' capital to redemption amount (776,750) 904,035Income tax expense 49,721 36,342Amortization of purchased intangible assets 33,054 9,136Stock-based compensation (a) 49,081 28,498Acquisition related expenses (b) 15,804 9,037Strategic and financial restructuring expenses (c) 268 1,373Adjustment to tax receivable agreement liability (d) (4,818) —Loss on investment (e) — 1,000ERP implementation expenses (f) 4,870 —Loss on disposal of long-lived assets — 15,243Acquisition related adjustment - deferred revenue (g) 5,624 13,371Net income attributable to non-controlling interest in Premier LP (h) 193,547 194,206
Non-GAAP adjusted fully distributed income before income taxes 388,765 346,949Income tax expense on fully distributed income before income taxes (i) 155,506 138,780
Non-GAAP Adjusted Fully Distributed Net Income $ 233,259 $ 208,169
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016 .(b) Represents legal, accounting and other expenses related to acquisition activities.(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges
pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement.(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016 .(e) Represents the loss on investment for the year ended June 30, 2015.(f) Represents implementation and other costs of new ERP system.(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAPrevenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would haveotherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, thefull amount of such revenues.
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(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(3) The following table shows the reconciliation of the numerator and denominator for earnings (loss) per share attributable to stockholders to Non-GAAPAdjusted Fully Distributed Earnings per Share for the periods presented (in thousands):
Year Ended June 30, 2016 2015Reconciliation of numerator for earnings (loss) per share attributable to stockholders to Non-GAAPAdjusted Fully Distributed Earnings per Share: Net income (loss) attributable to stockholders $ 818,364 $ (865,292)
Adjustment of redeemable limited partners' capital to redemption amount (776,750) 904,035Income tax expense 49,721 36,342Amortization of purchased intangible assets 33,054 9,136Stock-based compensation (a) 49,081 28,498Acquisition related expenses (b) 15,804 9,037Strategic and financial restructuring expenses (c) 268 1,373Adjustment to tax receivable agreement liability (d) (4,818) —Loss on investment (e) — 1,000ERP implementation expenses (f) 4,870 —Loss on disposal of long-lived assets — 15,243Acquisition related adjustment - deferred revenue (g) 5,624 13,371Net income attributable to non-controlling interest in Premier LP (h) 193,547 194,206
Non-GAAP adjusted fully distributed income before income taxes 388,765 346,949Income tax expense on fully distributed income before income taxes (i) 155,506 138,780
Non-GAAP Adjusted Fully Distributed Net Income $ 233,259 $ 208,169
Reconciliation of denominator for earnings (loss) per share attributable to stockholders to Non-GAAPAdjusted Fully Distributed Earnings per Share: Weighted average:
Common shares used for basic and diluted earnings (loss) per share 42,368 35,681Potentially dilutive shares 2,366 1,048Conversion of Class B common units 100,574 108,518
Weighted average fully distributed shares outstanding - diluted 145,308 145,247
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016 .(b) Represents legal, accounting and other expenses related to acquisition activities.(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges
pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement.(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016 .(e) Represents the loss on investment for the year ended June 30, 2015.(f) Represents implementation and other costs of new ERP system.(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAPrevenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would haveotherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, thefull amount of such revenues.
(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
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(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
The following table shows the reconciliation of earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings perShare for the periods presented:
Year Ended June 30, 2016 2015Earnings (loss) per share attributable to stockholders: $ 19.32 $ (24.25)Adjustment of redeemable limited partners' capital to redemption amount (18.33) 25.34Impact of additions:
Income tax expense 1.17 1.02Stock-based compensation (a) 1.16 0.80Acquisition related expenses (b) 0.37 0.25Strategic and financial restructuring expenses (c) 0.01 0.04ERP implementation expense (d) 0.11 —Adjustment to tax receivable agreement liability (e) (0.11) —Loss on investment (f) — 0.03Acquisition related adjustment - deferred revenue (g) 0.13 0.37Loss on disposal of long-lived assets — 0.43Amortization of purchased intangible assets 0.78 0.26Net income attributable to non-controlling interest in Premier LP (h) 4.57 5.44
Impact of corporation taxes (i) (3.67) (3.90)Impact of increased share count (j) (3.90) (4.40)Non-GAAP Adjusted Fully Distributed Earnings per Share $ 1.61 $ 1.43
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016 .(b) Represents legal, accounting and other expenses related to acquisition activities.(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with quarterly exchanges pursuant
to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement.(d) Represents implementation and other costs of new ERP system.(e) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016 .(f) Represents the loss on investment for the year ended June 30, 2015.(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value
only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing theservices plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software licenseupdates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-yearperiod subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by theacquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues.
(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.(j) Reflects impact of increased share counts assuming the conversion of all Class B common units into shares of Class A common stock.
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NetRevenue
The following table summarizes our net revenue for the years ended June 30, 2016 and 2015 , indicated both in dollars (in thousands) and as a percentage ofnet revenue:
Year Ended June 30, 2016 2015
Net Revenue: Amount% of NetRevenue Amount
% of NetRevenue
Supply Chain Services Net administrative fees $ 498,394 43% $ 457,020 45%Other services and support 4,385 —% 1,977 —%
Services 502,779 43% 458,997 45%Products 326,646 28% 279,261 28%
Total Supply Chain Services 829,425 71% 738,258 73%Performance Services 333,169 29% 268,771 27%Total $ 1,162,594 100% $ 1,007,029 100%
Total net revenue for the year ended June 30, 2016 was $1,162.6 million , an increase of $155.6 million , or 15% from $1,007.0 million for the year endedJune 30, 2015 . Our supply chain services net revenue was 71% and 73% of total net revenue for the years ended June 30, 2016 and 2015 , respectively.
Supply Chain Services
Our supply chain services segment net revenue for the year ended June 30, 2016 was $829.4 million , an increase of $91.1 million , or 12% , from $738.3million for the year ended June 30, 2015 .
Net administrative fees revenue in our supply chain services segment for the year ended June 30, 2016 was $498.4 million , an increase of $41.4 million , or9% , from $457.0 million for the year ended June 30, 2015 . The increase in net administrative fees revenue was primarily attributable to the further contractpenetration of existing members. We may experience quarterly fluctuations in net administrative fees revenue due to periodic variability associated with the receiptof supplier member purchasing reports and administrative fee payments at quarter-end; however, we expect our net administrative fees revenue to continue to growto the extent our existing members increase the utilization of our contracts and additional members convert to our contract portfolio.
Product revenue in our supply chain services segment for the year ended June 30, 2016 was $326.6 million , an increase of $47.3 million , or 17% , from$279.3 million for the year ended June 30, 2015 . Product revenue in our supply chain services segment increased for the year ended June 30, 2016 primarily due to$28.0 million of increased direct sourcing revenue as a result of ongoing expansion of member participation in our direct sourcing business, resulting from higherdemand for exam and food services gloves and patient apparel, and $19.6 million of increased revenue from specialty pharmaceuticals for disease states such asoncology and rheumatoid arthritis, offset by a decrease in Hepatitis C pharmaceutical sales. We expect our direct sourcing and specialty pharmacy product revenueto continue to grow to the extent we are able to increase our product offerings, expand our product sales to existing members and additional members begin toutilize our programs.
Performance Services
Our performance services segment net revenue for the year ended June 30, 2016 was $333.2 million , an increase of $64.4 million , or 24% , from $268.8million for the year ended June 30, 2015 . The increase was primarily driven by revenues from the Company's CECity and HCI acquisitions of $31.0 million ,growth in our SaaS subscription and license revenue of $14.9 million , including increased revenue from TheraDoc, which was lower in the prior year due topurchase accounting, and growth of $12.7 million in our advisory services engagements primarily from cost management, population health and applied research.
We believe that additional growth from our CECity acquisition during the year was constrained by the impact of the Centers for Medicare & MedicaidServices (“CMS”) regulatory developments that allowed certain exemptions to CMS’ Meaningful Use reporting requirements. In addition, the market’s continuedevolution to more integrated technology solutions has resulted in lengthier implementations for some of our more complex solutions, and has also impacted growthof certain less-integrated, acute focused solutions. Similarly, growth in our advisory services was more limited due to delays and re-scoping of certain largeprojects during the year.
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We expect to experience variability in revenues generated from our performance services segment due to the timing of revenue recognition from certainadvisory services and performance-based engagements in which our revenue is based on a percentage of identified member savings and recognition occurs uponapproval and documentation of the savings. We expect our performance services net revenue to continue to grow to the extent we are able to expand our sales toexisting members and additional members begin to utilize our products and services.
CostofRevenue
The following table summarizes our cost of revenue for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and as a percentage ofnet revenue:
Year Ended June 30, 2016 2015
Cost of revenue: Amount% of NetRevenue Amount
% of NetRevenue
Services $ 163,240 14% $ 143,290 14%Products 293,816 25% 253,620 25%
Total cost of revenue $ 457,056 39% $ 396,910 39%
Cost of revenue by segment: Supply Chain Services $ 296,939 25% $ 255,794 25%Performance Services 160,117 14% 141,116 14%
Total cost of revenue $ 457,056 39% $ 396,910 39%
Cost of revenue for the year ended June 30, 2016 was $457.1 million , an increase of $60.2 million , or 15% , from $396.9 million for the year ended June 30,2015 . Cost of product revenue increased by $40.2 million , which was primarily attributable to the increases in direct sourcing and specialty pharmacy revenue.We expect our cost of product revenue to increase as we sell additional direct-sourced medical products to new and existing members and enroll additionalmembers into our specialty pharmacy program. Cost of service revenue increased by $20.0 million primarily due to an increase in personnel to support growth inSaaS-based implementations and population health advisory services. We expect cost of service revenue to increase to the extent we expand our performanceimprovement collaboratives and advisory services to members, increase sales of our population health management SaaS informatics products under reselleragreements, continue to develop new and existing internally-developed software applications, and expand into new product offerings as a result of our acquisitionsof CECity, HCI and InFlow.
Cost of revenue for the supply chain services segment for the year ended June 30, 2016 was $296.9 million , an increase of $41.1 million , or 16% , from$255.8 million for the year ended June 30, 2015 . The increase is primarily attributable to the growth in the direct sourcing and specialty pharmacy businesses,which have higher associated cost of revenue as compared to group purchasing. As a result, there is a higher increase in cost of revenue relative to net revenuebecause product revenue is growing at a higher rate than net administrative fees.
Cost of revenue for the performance services segment for the year ended June 30, 2016 was $160.1 million , an increase of $19.0 million , or 13% , from$141.1 million for the year ended June 30, 2015 primarily due to an increase in personnel to support growth in SaaS-based implementations and population healthadvisory services. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services tomembers, continue to develop new and existing internally-developed software applications, and expand into new product offerings as a result of our acquisitions ofCECity, HCI and InFlow.
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OperatingExpenses
The following table summarizes our operating expenses for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and as apercentage of net revenue:
Year Ended June 30, 2016 2015
Operating expenses: Amount% of NetRevenue Amount
% of NetRevenue
Selling, general and administrative $ 403,611 35% $ 332,004 33%Research and development 2,925 —% 2,937 —%Amortization of purchased intangible assets 33,054 3% 9,136 1%
Total operating expenses 439,590 38% 344,077 34%
Operating expenses by segment: Supply Chain Services $ 120,692 10% $ 116,240 12%Performance Services 155,728 14% 105,252 10%
Total segment operating expenses 276,420 24% 221,492 22%Corporate 163,170 14% 122,585 12%Total operating expenses $ 439,590 38% $ 344,077 34%
Selling, General and Administrative
Selling, general and administrative expenses for the year ended June 30, 2016 were $403.6 million , an increase of $71.6 million , or 22% , from $332.0million for the year ended June 30, 2015 primarily attributable to (i) increased salaries and benefits of $20.8 million primarily due to increased staffing to supportgrowth, additional expense due to the acquisitions of CECity and HCI and severance expense, (ii) an increase in stock-based compensation of $20.2 million due tothe layering of an additional plan year of stock compensation along with the achievement for performance based shares, (iii) an increase in professional servicesexpenses of $10.3 million , (iv) increased acquisition-related expenses of $6.8 million and (v) ERP system implementation expenses of $4.9 million .
We expect general and administrative expenses to decline in fiscal 2017 as a result of a reduction in anticipated stock compensation expense. On a longerterm basis, we would expect selling, general and administrative expenses to increase as we grow our business.
Research and Development
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technologyprofessionals, net of capitalized labor, incurred to develop our software-related products and services.
Research and development expenses were $2.9 million for each of the years ended June 30, 2016 and 2015 . Including capitalized labor, total research anddevelopment expenditures were $64.0 million for the year ended June 30, 2016 , an increase of $3.2 million from $60.8 million for the year ended June 30, 2015 .We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our software development lifecycles, withnew product features and functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets for the year ended June 30, 2016 was $33.1 million , an increase of $24.0 million , from $9.1 million for the yearended June 30, 2015 . The increase was primarily as a result of the additional amortization of purchased intangible assets related to our acquisitions. As we executeon our growth strategy and further deploy capital, we expect further increases in amortization of purchased intangible assets in connection with recent and futurepotential acquisitions.
Corporate
The increase in corporate expenses is primarily attributable to stock compensation expense as well as incremental corporate infrastructure, primarily intechnology services, finance and legal due to growth and the current year acquisitions.
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OtherNon-OperatingIncomeandExpense
Other Income, Net
Other income, net for the year ended June 30, 2016 was $18.9 million , an increase of $13.8 million from $5.1 million for the year ended June 30, 2015 due toa loss on disposal of assets of $15.2 million during the prior year.
Income Tax Expense
For the years ended June 30, 2016 and 2015 the Company recorded tax expense of $49.7 million and $36.3 million , respectively, which equates to aneffective tax rate of 17.5% and 13.4% , respectively. The effective tax rate has increased from the prior year primarily due to the recording of a valuation allowanceagainst deferred tax assets at PHSI and tax expense at Premier associated with the revaluation of deferred tax assets in connection with a reduction in the NorthCarolina state income tax rate for years 2016 and beyond. The Company’s effective tax rate differs from income taxes recorded at the statutory rate primarily dueto partnership income not subject to federal income taxes, state and local taxes and nondeductible expenses.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the year ended June 30, 2016 was $193.5 million , a decrease of $2.5 million , or 1% , from $196.0million for the year ended June 30, 2015 , primarily as a result of a decrease in non-controlling interest in Premier LP from approximately 74% at June 30, 2015 toapproximately 68% at June 30, 2016 and the Company's purchase of the remaining 40% ownership in S2S Global that resulted in the elimination of non-controlling interest in S2S Global for the year ended June 30, 2016 .
Non-GAAPAdjustedEBITDA
The following table summarizes our Non-GAAP Adjusted EBITDA for the years ended June 30, 2016 and 2015 indicated both in dollars (in thousands) and asa percentage of net revenue:
Year Ended June 30, 2016 2015
Non-GAAP Adjusted EBITDA by segment: Amount% of NetRevenue Amount
% of NetRevenue
Supply Chain Services 439,013 38 % 391,180 39 %Performance Services 110,787 9 % 90,235 9 %
Total Segment Adjusted EBITDA 549,800 47 % 481,415 48 %Corporate (108,825) (9)% (88,240) (9)%Total Adjusted EBITDA $ 440,975 38 % $ 393,175 39 %
Total Adjusted EBITDA for the year ended June 30, 2016 was $441.0 million , an increase of $47.8 million , or 12% , from $393.2 million for the year endedJune 30, 2015 . The increase in Adjusted EBITDA is primarily driven by revenue growth in the supply chain segment, as well as growth from the performanceservices segment, including contributions from the acquisitions of CECity and HCI, partially offset by higher selling, general and administrative expenses at thecorporate level.
Segment Adjusted EBITDA for the supply chain services segment of $439.0 million for the year ended June 30, 2016 reflects an increase of $47.8 million , or12% , compared to $391.2 million for the year ended June 30, 2015 , primarily as a result of increased net administrative fees and products revenue.
Segment Adjusted EBITDA for the performance services segment of $110.8 million for the year ended June 30, 2016 reflects an increase of approximately$20.6 million , or 23% , compared to $90.2 million for the year ended June 30, 2015 , primarily driven by contributions from the acquisitions of CECity and HCI.
Adjusted EBITDA at the corporate level of $(108.8) million reflects a decrease of $20.6 million , or 23% , compared to $(88.2) million for the year ended June30, 2015 , reflecting increased selling, general and administrative expenses primarily driven by higher incremental corporate infrastructure costs, primarily intechnology services, finance and legal due to growth and the current year acquisitions.
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Years Ended June 30, 2015 and 2014
The first three months of our fiscal year ended June 30, 2014 occurred prior to the Reorganization and IPO on October 1, 2013. As a result, our consolidatedoperating results prior to October 1, 2013 do not reflect (i) the Reorganization, (ii) the IPO and the use of the proceeds from the IPO or (iii) additional expenses weincur as a public company. As a result, our consolidated operating results prior to the Reorganization and IPO are not indicative of what our results of operationsare for periods after the Reorganization and IPO. In addition to presenting the historical actual results, we have presented Non-GAAP pro forma results reflectingthe following for the year ended June 30, 2014, to provide a more indicative comparison between current and prior periods. The Non-GAAP pro formaconsolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position thatwould have occurred had we operated as a public company during the year ended June 30, 2014. The Non-GAAP pro forma consolidated financial informationshould not be relied upon as being indicative of our financial condition or results of operations had the Reorganization and IPO occurred prior to the start of ourfiscal year ended June 30, 2014. The Non-GAAP pro forma consolidated financial information also does not project our results of operations or financial positionfor any future period or date. The Non-GAAP pro forma results reflect the following for the year ended June 30, 2014:
• The contractual requirement under the GPO participation agreements to pay each member owner revenue share from Premier LP equal to 30% of allgross administrative fees collected by Premier LP based upon purchasing by such member owner's owned, leased, managed and affiliated facilitiesthrough Premier LP's GPO supplier contracts. Historically, Premier LP did not generally have a contractual requirement to pay revenue share tomember owners participating in its GPO programs, but paid semi-annual distributions of partnership income.
• Additional U.S. federal, state and local income taxes with respect to its additional allocable share of any taxable income of Premier LP.• A decrease in non-controlling interest in Premier LP from 99% to approximately 78% .
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The following table summarizes our actual results of operations for the years ended June 30, 2015 and 2014 and Non-GAAP pro forma results of operationsfor the year ended June 30, 2014 (in thousands, except per share data):
Year Ended June 30,
2015 2014
Actual Actual Adjustments (1) Non-GAAP Pro Forma
Amount% of NetRevenue Amount
% of NetRevenue Amount Amount
% of NetRevenue
Net revenue:
Net administrative fees $ 457,020 45 % $ 464,837 51 % $ (41,263) (2) $ 423,574 49 %
Other services and support 270,748 27 % 233,186 26 % — 233,186 27 %
Services 727,768 72 % 698,023 77 % (41,263) 656,760 76 %
Products 279,261 28 % 212,526 23 % — 212,526 24 %
Net revenue 1,007,029 100 % 910,549 100 % (41,263) 869,286 100 %
Cost of revenue:
Services 143,290 14 % 115,740 13 % — 115,740 13 %
Products 253,620 25 % 191,885 21 % — 191,885 22 %
Cost of revenue 396,910 39 % 307,625 34 % — 307,625 35 %
Gross profit 610,119 61 % 602,924 66 % (41,263) 561,661 65 %
Operating expenses:
Selling, general and administrative 332,004 33 % 294,421 33 % — 294,421 35 %
Research and development 2,937 — % 3,389 — % — 3,389 — %
Amortization of purchased intangible assets 9,136 1 % 3,062 — % — 3,062 — %
Operating expenses 344,077 34 % 300,872 33 % — 300,872 35 %
Operating income 266,042 26 % 302,052 33 % (41,263) 260,789 30 %
Other income, net 5,085 1 % 58,274 6 % — 58,274 7 %
Income before income taxes 271,127 27 % 360,326 39 % (41,263) 319,063 37 %
Income tax expense 36,342 4 % 27,709 3 % (3,239) (3) 24,470 3 %
Net income 234,785 23 % 332,617 36 % (38,024) 294,593 34 %Net income attributable to non-controlling interest inS2S Global (1,836) — % (949) — % — (949) — %Net income attributable to non-controlling interest inPremier LP (194,206) (19)% (303,336) (33)% 57,690 (4) (245,646) (28)%
Net income attributable to non-controlling interest (196,042) (19)% (304,285) (33)% 57,690 (246,595) (28)%Adjustment of redeemable limited partners' capital toredemption amount $ (904,035) nm $ (2,741,588) nm — $ (2,741,588) nm
Net loss attributable to stockholders $ (865,292) nm $ (2,713,256) nm nm $ (2,693,590) nm
Weighted average shares outstanding
Basic 35,681 nm 25,633 nm na na na
Diluted 35,681 nm 25,633 nm na na na
Loss per share attributable to stockholders
Basic $ (24.25) nm $ (105.85) nm na na na
Diluted $ (24.25) nm $ (105.85) nm na na na
Certain Non-GAAP Financial Data:
Adjusted EBITDA (5) $ 393,175 39 % $ 392,288 43 % na $ 351,025 40 %
Adjusted Fully Distributed Net Income (6) $ 208,169 21 % nm nm na $ 188,561 22 %
Adjusted Fully Distributed Earnings per Share (7) $ 1.43 nm na na na $ 1.30 nm
nm = Not meaningfulna = Not applicable
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(1) Represents adjustments related to the Reorganization and IPO described below.(2) Represents the impact related to the change in revenue share described above.(3) Represents the income tax impact of the Reorganization and IPO effective October 1, 2013.(4) Represents the decrease in non-controlling interest in Premier LP from 99% to 78%.(5) The following table shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted EBITDA to income before
income taxes on both an actual and Non-GAAP pro forma basis for the periods presented (in thousands):
Year Ended June 30,
2015 2014
Actual Actual Adjustments (a)Non-GAAP Pro
Forma
Net income $ 234,785 $ 332,617 $ (38,024) $ 294,593
Interest and investment income, net (b) (866) (1,019) — (1,019)
Income tax expense 36,342 27,709 (3,239) 24,470
Depreciation and amortization 45,186 36,761 — 36,761
Amortization of purchased intangible assets 9,136 3,062 — 3,062
EBITDA 324,583 399,130 (41,263) 357,867
Stock-based compensation 28,498 19,476 — 19,476
Acquisition related expenses (c) 9,037 2,014 — 2,014
Strategic and financial restructuring expenses (d) 1,373 3,760 — 3,760
Adjustment to tax receivable agreement liability (e) — 6,215 6,215
Loss (gain) on investment (f) 1,000 (38,372) (38,372)
Loss on disposal of long-lived assets 15,243 — — —
Acquisition related adjustment - deferred revenue (g) 13,371 — — —
Other expense, net (h) 70 65 — 65
Adjusted EBITDA $ 393,175 $ 392,288 $ (41,263) $ 351,025
Segment Adjusted EBITDA: Supply Chain Services $ 391,180 $ 396,470 $ (41,263) $ 355,207
Performance Services 90,235 73,898 — 73,898
Corporate (i) (88,240) (78,080) — (78,080)
Adjusted EBITDA 393,175 392,288 (41,263) 351,025
Depreciation and amortization (45,186) (36,761) — (36,761)
Amortization of purchased intangible assets (9,136) (3,062) — (3,062)
Stock-based compensation (28,498) (19,476) — (19,476)
Acquisition related expenses (c) (9,037) (2,014) — (2,014)
Strategic and financial restructuring expenses (d) (1,373) (3,760) — (3,760)
Adjustment to tax receivable agreement liability (e) — (6,215) — (6,215)
Acquisition related adjustment - deferred revenue (f) (13,371) — — —
Equity in net income of unconsolidated affiliates (21,285) (16,976) — (16,976)
Deferred compensation plan income (expense) 753 (1,972) — (1,972)
Operating income 266,042 302,052 (41,263) 260,789
Equity in net income of unconsolidated affiliates 21,285 16,976 — 16,976
Interest and investment income, net (b) 866 1,019 — 1,019
Loss (gain) on investment (f) (1,000) 38,372 — 38,372
Loss on disposal of long-lived assets (15,243) — — —
Other (expense) income, net (h) (823) 1,907 — 1,907
Income before income taxes $ 271,127 $ 360,326 $ (41,263) $ 319,063
(a) Represents the adjustments related to the Reorganization and IPO described above.
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(b) Represents interest income, net and realized gains and losses on our marketable securities.(c) Represents legal, accounting and other expenses related to acquisition activities.(d) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015, strategic and financial
restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration Rights Agreement. During the year ended June 30, 2014,strategic and financial restructuring expenses were incurred in connection with the Reorganization and IPO.
(e) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service subsequent to the originalrecording of the tax receivable agreement liability.
(f) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenuesfor the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwisebeen recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amountof such revenues.
(h) Represents loss on sale of assets and unrealized gain (loss) on deferred compensation plan assets.(i) Corporate consists of general and administrative corporate expenses that are not specific to either of our reporting segments.
(6) The following table shows the reconciliation of net loss attributable to stockholders to Non-GAAP pro forma Adjusted Fully Distributed Net Income for theperiods presented (in thousands):
Year Ended June 30, 2015 2014Net loss attributable to stockholders $ (865,292) $ (2,713,256)
Adjustment of redeemable limited partners' capital to redemption amount 904,035 2,741,588Non-GAAP pro forma adjustment for revenue share post-IPO — (41,263)Income tax expense 36,342 27,709Stock-based compensation 28,498 19,476Acquisition related expenses (a) 9,037 2,014Strategic and financial restructuring expenses (b) 1,373 3,760Loss (gain) on investment (c) 1,000 (38,372)Adjustment to tax receivable agreement liability (d) — 6,215Loss on disposal of long-lived assets 15,243 —Acquisition related adjustment - deferred revenue (e) 13,371 —Amortization of purchased intangible assets 9,136 3,062Net income attributable to non-controlling interest in Premier LP (f) 194,206 303,336
Non-GAAP adjusted fully distributed income before income taxes 346,949 314,269Income tax expense on fully distributed income before income taxes (g) 138,780 125,708
Non-GAAP Adjusted Fully Distributed Net Income $ 208,169 $ 188,561
(a) Represents legal, accounting and other expenses related to acquisition activities.(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring expenses. During the year ended June 30, 2015, strategic and financial
restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration Rights Agreement. During the year ended June 30,2014, strategic and financial restructuring expenses were incurred in connection with the Reorganization and IPO.
(c) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.(d) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service subsequent to the original
recording of the tax receivable agreement liability.(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAPrevenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
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otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, thefull amount of such revenues.
(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(7) The following table shows the reconciliation of the numerator and denominator for loss per share attributable to stockholders to Non-GAAP pro formaAdjusted Fully Distributed Earnings per Share for the periods presented (in thousands):
Year Ended June 30, 2015 2014Reconciliation of numerator for loss per share attributable to stockholders to Non-GAAP Adjusted FullyDistributed Earnings per Share: Net loss attributable to stockholders $ (865,292) $ (2,713,256)
Adjustment of redeemable limited partners' capital to redemption amount 904,035 2,741,588Non-GAAP pro forma adjustment for revenue share post-IPO — (41,263)Income tax expense 36,342 27,709Stock-based compensation 28,498 19,476Acquisition related expenses (a) 9,037 2,014Strategic and financial restructuring expenses (b) 1,373 3,760Loss (gain) on investment (c) 1,000 (38,372)Adjustment to tax receivable agreement liability (d) — 6,215Loss on disposal of long-lived assets 15,243 —Acquisition related adjustment - deferred revenue (e) 13,371 —Amortization of purchased intangible assets 9,136 3,062Net income attributable to non-controlling interest in Premier LP (f) 194,206 303,336
Non-GAAP adjusted fully distributed income before income taxes 346,949 314,269Income tax expense on fully distributed income before income taxes (g) 138,780 125,708
Non-GAAP Adjusted Fully Distributed Net Income $ 208,169 $ 188,561
Reconciliation of denominator for loss per share attributable to stockholders for Non-GAAP Adjusted FullyDistributed Earnings per Share Weighted average:
Common shares used for basic and diluted earnings (loss) per share 35,681 25,633Potentially dilutive shares 1,048 124Class A common shares outstanding — 6,742Conversion of Class B common units 108,518 112,584
Weighted average fully distributed shares outstanding - diluted 145,247 145,083
(a) Represents legal, accounting and other expenses related to acquisition activities.(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015, strategic and financial
restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration Rights Agreement. During the year ended June 30,2014, strategic and financial restructuring expenses were incurred in connection with the Reorganization and IPO.
(c) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.(d) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service subsequent to the original
recording of the tax receivable agreement liability.(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair
value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs ofproviding the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated withsoftware license updates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAPrevenues for the one-year period subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would haveotherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, thefull amount of such revenues.
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(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
The following table shows the reconciliation of loss per share attributable to stockholders to Non-GAAP pro forma Adjusted Fully Distributed Earnings perShare for the periods presented:
Year Ended June 30, 2015 2014Loss per share attributable to stockholders: $ (24.25) $ (105.85)Adjustment of redeemable limited partners' capital to redemption amount 25.34 106.96Non-GAAP pro forma adjustment for revenue share post-IPO — (1.61)Impact of additions:
Income tax expense 1.02 1.08Stock-based compensation 0.80 0.76Acquisition related expenses (a) 0.25 0.08Strategic and financial restructuring expenses (b) 0.04 0.15Adjustment to tax receivable agreement liability (c) — 0.24Loss (gain) on investment (d) 0.03 (1.50)Acquisition related adjustment - deferred revenue (e) 0.37 —Loss on disposal of long-lived assets 0.43 —Amortization of purchased intangible assets 0.26 0.12Net income attributable to non-controlling interest in Premier LP (f) 5.44 11.83
Impact of corporation taxes (g) (3.90) (4.90)Impact of increased share count (h) (4.40) (6.06)Non-GAAP Adjusted Fully Distributed Earnings per Share $ 1.43 $ 1.30
(a) Represents legal, accounting and other expenses related to acquisition activities.(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015, strategic and financial restructuring
expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration Rights Agreement. During the year ended June 30, 2014, strategic andfinancial restructuring expenses were incurred in connection with the Reorganization and IPO.
(c) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service subsequent to the originalrecording of the tax receivable agreement liability.
(d) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value
only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing theservices plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software licenseupdates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-yearperiod subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by theacquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues.
(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class Acommon stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.(h) Reflects impact of increased share counts assuming the conversion of all Class B common units into shares of Class A common stock.
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NetRevenue
The following table summarizes our actual net revenue for the years ended June 30, 2015 and 2014 and our Non-GAAP pro forma net revenue for the yearended June 30, 2014, indicated both in dollars (in thousands) and as a percentage of net revenue:
Year Ended June 30,
2015 2014
Actual Actual Adjustments Non-GAAP Pro Forma
Net Revenue: Amount% of NetRevenue Amount
% of NetRevenue Amount Amount
% of NetRevenue
Supply Chain Services Net administrative fees $ 457,020 45% $ 464,837 51% $ (41,263) (a) $ 423,574 49%
Other services and support 1,977 —% 778 —% — 778 —%
Services 458,997 45% 465,615 51% (41,263) 424,352 49%
Products 279,261 28% 212,526 23% — 212,526 24%
Total Supply Chain Services 738,258 73% 678,141 74% (41,263) 636,878 73%
Performance Services 268,771 27% 232,408 26% — 232,408 27%
Total $ 1,007,029 100% $ 910,549 100% $ (41,263) $ 869,286 100%
(a) Represents the impact related to the change in revenue share.
Total net revenue for the year ended June 30, 2015 was $1,007.0 million , an increase of $96.5 million , or 11% , from total net revenue of $910.5 million forthe year ended June 30, 2014 and an increase of $137.7 million , or 16% , from Non-GAAP pro forma net revenue of $869.3 million for the year ended June 30,2014 .
Supply Chain Services
Our supply chain services segment net revenue for the year ended June 30, 2015 was $738.3 million , an increase of $60.2 million , or 9% , from supply chainservices segment net revenue of $678.1 million for the year ended June 30, 2014 and an increase of $101.4 million , or 16% , from Non-GAAP pro forma supplychain services segment net revenue of $636.9 million for the year ended June 30, 2014 .
Net administrative fees revenue in our supply chain services segment for the year ended June 30, 2015 was $457.0 million , a decrease of $7.8 million , or 2%, from $464.8 million for the year ended June 30, 2014 . The decrease in net administrative fees revenue is primarily due to the increase in revenue share of $43.4million reflecting the 30% revenue share payable to member owners after the Reorganization on October 1, 2013, offset by further contract penetration of existingmembers, continuing impact of newer member conversion to our contract portfolio, as well as the impact of increased utilization trends. We may experiencequarterly fluctuations in net administrative fees revenue due to periodic variability associated with the receipts of supplier member purchasing reports andadministrative fee payments at quarter-end.
Net administrative fees revenue for the year ended June 30, 2015 was $457.0 million , an increase of $33.4 million , or 8% , from Non-GAAP pro forma netadministrative fees revenue of $423.6 million for the year ended June 30, 2014 . The increase in net administrative fees revenue was primarily attributable to theimpact of further contract penetration of existing members, continuing impact of newer member conversion to our contract portfolio, as well as the impact ofincreased utilization trends.
Product revenue in our supply chain services segment for the year ended June 30, 2015 , was $279.3 million , an increase of $66.8 million , or 31% , from$212.5 million for the year ended June 30, 2014 . Product revenue in our supply chain services segment increased for the year ended June 30, 2015 , due to $37.4million of increased specialty pharmacy revenue and $30.9 million of increased direct sourcing revenue, as a result of growth in our specialty pharmacy, includingmember growth as well as access to additional drug therapies entering the market, and ongoing expansion of member support for our direct sourcing offering. Weexpect our specialty pharmacy and direct sourcing program revenue to continue to grow to the extent we are able to expand our product sales to existing membersand additional members begin to utilize our products.
Performance Services
Other services and support revenue in our performance services segment for the year ended June 30, 2015 was $268.8 million , an increase of $36.4 million ,or 16% , from $232.4 million for the year ended June 30, 2014 . The increase was primarily the result of growth in our SaaS subscription and license revenue of$31.7 million , primarily related to the acquisitions of TheraDoc and Aperek, growth in advisory services of $12.5 million , primarily from cost management andpopulation health management, offset
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by decline in performance improvement collaboratives of $8.0 million , primarily related to the termination of Partnership for Patients (PfP) contract in December2014. We expect to experience quarterly variability in revenues generated from our performance services segment due to the timing of revenue recognition fromcertain advisory services and performance-based engagements in which our revenue is based on a percentage of identified member savings and recognition occursupon approval and documentation of savings. Non-GAAP pro forma adjustments do not impact financial results for our performance services segment.
CostofRevenue
The following table summarizes our cost of revenue for the years ended June 30, 2015 and 2014 , indicated both in dollars (in thousands) and as a percentageof net revenue:
Year Ended June 30, 2015 2014
Cost of revenue: Amount% of NetRevenue Amount
% of NetRevenue
Services $ 143,290 14% $ 115,740 13%Products 253,620 25% 191,885 21%
Total cost of revenue $ 396,910 39% $ 307,625 34%
Cost of revenue by segment: Supply Chain Services $ 255,794 25% $ 194,689 21%Performance Services 141,116 14% 112,936 13%
Total cost of revenue $ 396,910 39% $ 307,625 34%
Cost of revenue for the year ended June 30, 2015 was $396.9 million , an increase of $89.3 million , or 29% , from $307.6 million for the year ended June 30,2014 . Cost of product revenue increased by $61.7 million , which was primarily attributable to the increases in specialty pharmacy and direct sourcing revenue.We expect our cost of product revenue to increase as we enroll additional members into our specialty pharmacy program and sell additional direct-sourced medicalproducts to new and existing members. The increase in specialty pharmacy is also driven by increased cost of revenue related to sales of new hepatitis-C therapies,whose drug acquisition costs are generally higher than traditionally seen across other specialty therapies. Cost of service revenue increased by $27.6 millionprimarily due to an increase in amortization of internally-developed software applications, expenses related to population health management SaaS informaticsproducts under reseller agreements and increased salary costs related to advisory services. We expect cost of service revenue to increase to the extent we expandour performance improvement collaboratives and advisory services to members, increase sales of our population health management SaaS informatics productsunder reseller agreements, and continue to develop new and existing internally-developed software applications.
Cost of revenue for the supply chain services segment for the year ended June 30, 2015 was $255.8 million , an increase of $61.1 million , or 31% , from$194.7 million for the year ended June 30, 2014 . The increase is primarily attributable to the growth in specialty pharmacy and direct sourcing, which have higherassociated cost of revenue as compared to group purchasing. As a result, there is a higher increase in cost of revenue relative to net revenue because productrevenue is growing at a higher rate than net administrative fees.
Cost of revenue for the performance services segment for the year ended June 30, 2015 was $141.1 million , an increase of $28.2 million , or 25% , from$112.9 million for the year ended June 30, 2014 . The increase is primarily attributable to the increase in amortization of internally-developed software applicationsand expenses related to population health management SaaS informatics products under reseller agreements, as well as increased salary costs related to advisoryservices.
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OperatingExpenses
The following table summarizes our operating expenses for the years ended June 30, 2015 and 2014 , indicated both in dollars (in thousands) and as apercentage of net revenue:
Year Ended June 30, 2015 2014
Operating expenses: Amount% of NetRevenue Amount
% of NetRevenue
Selling, general and administrative $ 332,004 33% $ 294,421 33%Research and development 2,937 —% 3,389 —%Amortization of purchased intangible assets 9,136 1% 3,062 —%
Total operating expenses 344,077 34% 300,872 33%
Operating expenses by segment: Supply Chain Services $ 116,240 12% $ 105,544 11%Performance Services 105,252 10% 80,808 9%
Total segment operating expenses 221,492 22% 186,352 20%Corporate 122,585 12% 114,520 13%Total operating expenses $ 344,077 34% $ 300,872 33%
Selling, General and Administrative
Selling, general and administrative expenses for the year ended June 30, 2015 were $332.0 million , an increase of $37.6 million , or 13% , from $294.4million for the year ended June 30, 2014 . The increase was attributable to increased salaries and benefits, rent and utilities, and insurance expense due to theacquisitions of TheraDoc and Aperek as well as increased business development expenses related to member meetings and increased hardware and softwaremaintenance costs related to the expansion and growth of SaaS informatics products. The increase is also the result of $9.0 million of increased stock-basedcompensation expense, as a result of twelve months of stock-based compensation expense for the year ended June 30, 2015 as compared to only nine months ofstock-based compensation expense for the year ended June 30, 2014 . In addition, increased acquisition-related expenses of $7.0 million were recognized duringthe year ended June 30, 2015 as compared to the year ended June 30, 2014 .
Research and Development
Research and development expenses for the year ended June 30, 2015 were $2.9 million , a decrease of $0.5 million , or 15% , from $3.4 million for the yearended June 30, 2014 . The decrease was primarily a result of a higher level of capitalized expenses in the current fiscal year from software in the developmentstages of production. We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our softwaredevelopment lifecycles that result in new product features and functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets for the year ended June 30, 2015 was $9.1 million , an increase of $6.0 million , or 194% , from $3.1 million forthe year ended June 30, 2014 . The increase was a result of the additional amortization of purchased intangible assets obtained in the acquisitions of TheraDoc andAperek. As we execute on our growth strategy and further deploy our available capital, we expect increases in amortization of purchased intangible assets inconnection with recent and future potential acquisitions.
OtherNon-OperatingIncomeandExpense
Other Income, Net
Other income, net for the year ended June 30, 2015 was $5.1 million , a decrease of $53.2 million from $58.3 million for the year ended June 30, 2014 . Thisdecrease is primarily attributable to the $15.2 million loss on disposal of long-lived assets recognized during the year ended June 30, 2015 in connection with ouroperations integration as a result of the TheraDoc acquisition and the $38.4 million gain recognized in connection with the sale of our 13% equity interest in GHXduring the year ended June 30, 2014 .
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Income Tax Expense
Income tax expense for the year ended June 30, 2015 was $36.3 million , an increase of $8.6 million from $27.7 million for the year ended June 30, 2014which is primarily attributable to the establishment of a valuation allowance on the majority of PHSI deferred tax assets due to uncertainties surrounding PHSI'sability to utilize these assets, offset by a reduction in book income in the current year and the recognition of a one-time tax expense of $11.9 million on the sale ofthe general partner interest during the year ended June 30, 2014. Our effective tax rate was 13.4% and 7.7% for the year ended June 30, 2015 and 2014,respectively. The low effective tax rate compared to the statutory rate for both periods is attributable to the flow through of partnership income which is not subjectto federal and state income tax at the Company.
Income tax expense for the year ended June 30, 2015 was $36.3 million , an increase of $11.8 million , from $24.5 million of income tax expense on a Non-GAAP basis, which reflects the impact of the Reorganization and IPO for the year ended June 30, 2014 . The increase in tax expense is primarily due to theestablishment of a valuation allowance on the majority of PHSI deferred tax assets offset by lower taxable income within our taxable corporations. Our effectivetax rate was 13.4% for the year ended June 30, 2015 and 7.7% on a Non-GAAP pro forma basis for the year ended June 30, 2014 . The low effective tax rate forboth periods is attributable to the flow through of partnership income which is not subject to federal and state income tax at the Company.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the year ended June 30, 2015 was $196.0 million , a decrease of $108.3 million , or 36% , from $304.3million for the year ended June 30, 2014 , primarily as a result of the gain on sale of investment in GHX of $38.4 million recognized during the year ended June30, 2014 , change in ownership of the limited partners of Premier LP from 99% to approximately 74% in connection with the Reorganization and IPO andsubsequent quarterly exchanges pursuant to the Exchange Agreement, and increased revenue share in connection with the Reorganization and IPO. Net incomeattributable to non-controlling interest was $196.0 million for the year ended June 30, 2015 , a decrease of $50.6 million , or 21% , from $246.6 million on a Non-GAAP pro forma basis for the year ended June 30, 2014 , primarily due to increased net administrative fee revenue, offset by increased revenue share as a result ofthe Reorganization and IPO and the gain on sale of investment in GHX of $38.4 million recognized during the year ended June 30, 2014 .
Non-GAAPAdjustedEBITDA
The following table summarizes our Non-GAAP Adjusted EBITDA for the years ended June 30, 2015 and 2014 and our Non-GAAP pro forma AdjustedEBITDA for the year ended June 30, 2014, indicated both in dollars (in thousands) and as a percentage of net revenue:
Year Ended June 30,
2015 2014
Actual Actual Adjustments Non-GAAP Pro Forma
Non-GAAP Adjusted EBITDA bysegment: Amount
% of NetRevenue Amount
% of NetRevenue Amount Amount
% of NetRevenue
Supply Chain Services $ 391,180 39 % $ 396,470 44 % $ (41,263) (a) $ 355,207 41 %
Performance Services 90,235 9 % 73,898 8 % — 73,898 8 %
Total Segment Adjusted EBITDA 481,415 48 % 470,368 52 % (41,263) 429,105 49 %
Corporate (88,240) (9)% (78,080) (9)% — (78,080) (9)%
Total Adjusted EBITDA $ 393,175 39 % $ 392,288 43 % $ (41,263) $ 351,025 40 %
(a) Represents the impact related to the change in revenue share.
Adjusted EBITDA for the year ended June 30, 2015 was $393.2 million , an increase of $0.9 million , from $392.3 million for the year ended June 30, 2014 .Adjusted EBITDA for the year ended June 30, 2015 was $393.2 million , an increase of $42.2 million , or 12% , from Non-GAAP pro forma Adjusted EBITDA of$351.0 million for the year ended June 30, 2014 .
Segment Adjusted EBITDA for the supply chain services segment of $391.2 million for the year ended June 30, 2015 reflects a decrease of $5.3 million , or1% , compared to $396.5 million for the year ended June 30, 2014 , primarily driven by the 30% revenue share payable to member owners after the Reorganizationon October 1, 2013. Segment Adjusted EBITDA for the supply chain services segment of $391.2 million for the year ended June 30, 2015 reflects an increase of$36.0 million , or 10% , compared to Non-GAAP pro forma Segment Adjusted EBITDA of $355.2 million for the year ended June 30, 2014 , primarily as a resultof the increased net administrative fees revenue and growth in direct sourcing.
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Segment Adjusted EBITDA for the performance services segment of $90.2 million for the year ended June 30, 2015 reflects an increase of $16.3 million , or22% , compared to $73.9 million for the year ended June 30, 2014 , as a result of the sale of new SaaS informatics products, effective management of operatingexpenses, and increased subscription and license revenue, partially offset by increased operating expenses, related to our acquisitions of Aperek and TheraDoc.
Off-Balance Sheet Arrangements
As of June 30, 2016 , we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Business Combinations
We account for acquisitions using the acquisition method. All of the assets acquired, liabilities assumed, contractual contingencies and contingentconsideration are recognized at their fair value on the acquisition date. Any excess of the purchase price over the estimated fair values of the net assets acquired isrecorded as goodwill. Acquisition-related costs are recorded as expenses in the consolidated financial statements.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use theincome method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value byapplying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptionsinherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risksinherent in the future cash flows and the assessment of the asset's life cycle and the competitive trends impacting the asset, including consideration of anytechnical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangibleassets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized. The Companyperforms its annual goodwill impairment testing on the first day of the last fiscal quarter of its fiscal year unless impairment indicators are present which couldrequire an interim impairment test.
Under accounting rules, the Company may elect to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.This qualitative assessment requires an evaluation of any excess of fair value over the carrying value for a reporting unit and significant judgment regardingpotential changes in valuation inputs, including a review of the Company's most recent long-range projections, analysis of operating results versus the prior year,changes in market values, changes in discount rates and changes in terminal growth rate assumptions. If it is determined that an impairment is more likely than notto exist, then we are required to perform a quantitative assessment to determine whether or not goodwill is impaired and to measure the amount of goodwillimpairment, if any.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of each of our reporting units toits carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting unit using a discounted cash flow analysis that iscorroborated by a market-based approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discountrates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the discounted cash flow analyses are based onthe most recent budget and long-term forecast. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the futurecash flows of the respective reporting units. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impairedand the second step of the impairment test is not necessary.
If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The secondstep of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its goodwill carrying amount to measure the amount ofimpairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In otherwords, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if thereporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of thereporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.
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The Company's most recent annual impairment testing, which consisted of a quantitative assessment, did not result in any goodwill impairment charges duringthe fourth quarter of the year ended June 30, 2016 .
Tax Receivable Agreements
The Company records a liability related to the tax receivable agreements based on 85% of the estimated amount of tax savings the Company expects toreceive, generally over a 15 -year period, in connection with the additional tax benefits created in connection with the Reorganization and IPO. Tax paymentsunder the tax receivable agreements will be made to the member owners as the Company realizes tax benefits attributable to the initial purchase of Class Bcommon units from the member owners in the Reorganization and IPO and any subsequent exchanges of Class B common units into Class A common stock orcash between the Company and the member owners. Determining the estimated amount of tax savings the Company expects to receive requires judgment asdeductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the actual realization of the tax benefit and the taxrates in effect at that time.
Changes in the estimated tax receivable agreement liability that are the result of a change in tax accounting method are recorded in selling, general andadministrative expense in the consolidated statements of income. Changes in the estimated tax receivable agreement liability that are related to new basis changesas a result of the exchange of Class B common units for a like number of shares of Class A common stock or as a result of departed member owners are recordedas an increase to additional paid-in capital in the consolidated statements of stockholders' (deficit) equity.
Revenue Recognition
NetRevenue
Net revenue consists of (i) service revenue which includes net administrative fees revenue and other services and support revenue and (ii) product revenue.Net administrative fees revenue consists of net GPO administrative fees in the supply chain segment. Other services and support revenue consists primarily of feesgenerated by the performance services segment in connection with the Company's SaaS informatics products subscriptions, advisory services and performanceimprovement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply chainsegment. The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or determinable, (iii) services have beenrendered and payment has been contractually earned, and (iv) collectability is reasonably assured.
Net Administrative Fees Revenue
Net administrative fees revenue is generated through administrative fees received from suppliers based on the total dollar volume of supplies purchased by theCompany's members in connection with its GPO programs.
The Company, through its group purchasing program, aggregates member purchasing power to negotiate pricing discounts and improve contract terms withsuppliers. Contracted suppliers pay the Company administrative fees which generally represent 1% to 3% of the purchase price of goods and services sold tomembers under the contracts the Company has negotiated. Administrative fees are recognized as revenue in the period in which the respective supplier reportsmember purchasing data, usually a month or a quarter in arrears of actual member purchase activity. The supplier report proves that the delivery of product orservice has occurred, the administrative fees are fixed and determinable based on reported purchasing volume, and collectability is reasonably assured. Memberand supplier contracts substantiate persuasive evidence of an arrangement. The Company does not take title to the underlying equipment or products purchased bymembers through its GPO supplier contracts.
The Company pays a revenue share equal to a percentage of gross administrative fees that the Company collects based upon purchasing by such members andtheir owned, leased, managed or affiliated facilities through its GPO supplier contracts. Revenue share is recognized according to the members' contractualagreements with the Company as the related administrative fees revenue is recognized. Considering GAAP relating to principal/agent considerations under revenuerecognition, revenue share is recorded as a reduction to gross administrative fees revenue to arrive at a net administrative fees revenue amount, which amount isincluded in service revenue in the accompanying consolidated statements of income.
Other Services and Support Revenue
Performance services revenue consists of SaaS informatics products subscriptions, performance improvement collaborative and other service subscriptions,professional fees for advisory services, and insurance services management fees and commissions from group-sponsored insurance programs.
SaaS informatics subscriptions include the right to use the Company's proprietary hosted technology on a SaaS basis, training and member support to deliverimprovements in cost management, quality and safety, population health management and provider
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analytics. Pricing varies by application and size of healthcare system. Informatics subscriptions are generally three to five year agreements with automatic renewalclauses and annual price escalators that typically do not allow for early termination. These agreements do not allow for physical possession of the software.Subscription fees are typically billed on a monthly basis and revenue is recognized as a single deliverable on a straight-line basis over the remaining contractualperiod following implementation. Implementation involves the completion of data preparation services that are unique to each member's data set and, in certaincases, the installation of member site-specific software, in order to access and transfer member data into the Company's hosted SaaS informatics products.Implementation is generally 90 to 170 days following contract execution before the SaaS informatics products can be fully utilized by the member.
The Company sells certain perpetual and term licenses that include mandatory post-contract customer support in the form of maintenance and supportservices. Pricing varies by application and size of healthcare system. Fees for the initial period can include license fees, implementation fees and the initial bundledmaintenance and support services fees. The fees for the initial period are recognized straight-line over the remaining initial period following implementation.Subsequent renewal maintenance and support services fees are recognized on a straight-line basis over the contractually stated renewal periods. Implementationservices are provided to the customer prior to the use of the software and do not involve significant customization or modification. Implementation is generally 300to 350 days following contract execution before the licensed software products can be fully utilized by the member.
Revenue from performance improvement collaboratives and other service subscriptions that support the Company's offerings in cost management, quality andsafety and population health management is recognized over the service period, which is generally one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement. Fees are billed as stipulated inthe contract, and revenue is recognized on a proportional performance method as services are performed and deliverables are provided. In situations where thecontracts have significant contract performance guarantees or member acceptance provisions, revenue recognition occurs when the fees are fixed and determinableand all contingencies, including any refund rights, have been satisfied.
Insurance services management fees are recognized in the period in which such services are provided. Commissions from group sponsored insurance programsare recognized over the term of the insurance policies, generally one year.
Certain administrative and/or patient management specialty pharmacy services are provided in situations where prescriptions are sent back to member healthsystems for dispensing. Additionally, the Company derives revenue from pharmaceutical manufacturers for providing patient education and utilization data.Revenue is recognized as these services are provided.
Product Revenue
Specialty pharmacy revenue is recognized when a product is accepted and is recorded net of the estimated contractual adjustments under agreements withMedicare, Medicaid and other managed care plans. Payments for the products provided under such agreements are based on defined allowable reimbursementsrather than on the basis of standard billing rates. The difference between the standard billing rate and allowable reimbursement rate results in contractualadjustments which are recorded as deductions from net revenue.
Direct sourcing revenue is recognized once the title and risk of loss of medical products have been transferred to members.
Multiple Deliverable Arrangements
The Company enters into agreements where the individual deliverables discussed above, such as SaaS subscriptions and advisory services, are bundled into asingle service arrangement. These agreements are generally provided over a time period ranging from approximately three months to five years after the applicablecontract execution date. Revenue is allocated to the individual elements within the arrangement based on their relative selling price using vendor specific objectiveevidence ("VSOE"), third-party evidence ("TPE") or the estimated selling price ("ESP"), provided that the total arrangement consideration is fixed anddeterminable at the inception of the arrangement. The Company establishes VSOE, TPE, or ESP for each element of a service arrangement based on the pricecharged for a particular element when it is sold separately in a stand-alone arrangement. All deliverables which are fixed and determinable are recognizedaccording to the revenue recognition methodology described above.
Certain arrangements include performance targets or other contingent fees that are not fixed and determinable at the inception of the arrangement. If the totalarrangement consideration is not fixed and determinable at the inception of the arrangement, the Company allocates only that portion of the arrangement that isfixed and determinable to each element. As additional consideration becomes fixed, it is similarly allocated based on VSOE, TPE or ESP to each element in thearrangement and recognized in accordance with each element's revenue recognition policy.
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Performance Guarantees
On limited occasions, the Company enters into agreements which provide for guaranteed performance levels to be achieved by the member over the term ofthe agreement. In situations with significant performance guarantees, the Company defers revenue recognition until the amount is fixed and determinable and allcontingencies, including any refund rights, have been satisfied. In the event that guaranteed savings levels are not achieved, the Company may have to performadditional services at no additional charge in order to achieve the guaranteed savings or pay the difference between the savings that were guaranteed and the actualachieved savings.
Deferred Revenue
Deferred revenue consists of unrecognized revenue related to advanced member invoicing or member payments received prior to fulfillment of the Company'srevenue recognition criteria. Substantially all deferred revenue consists of deferred subscription fees and deferred advisory fees. Subscription fees for company-hosted SaaS applications are deferred until the member's unique data records have been incorporated into the underlying software database, or until member site-specific software has been implemented and the member has access to the software. Deferred advisory fees arise when cash is received from members prior todelivery of service. When the fees are contingent upon meeting a performance target that has not yet been achieved, the advisory fees are deferred until theperformance target is met.
Software Development Costs
Costs to develop internal use computer software that are incurred in the preliminary project stage are expensed as incurred. During the development stage,direct consulting costs and payroll and payroll-related costs for employees that are directly associated with each project are capitalized and amortized over theestimated useful life of the software, once it is placed into operation. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of therelated software applications of up to five years and amortization is included in depreciation and amortization expense. Replacements and major improvements arecapitalized, while maintenance and repairs are expensed as incurred. Some of the more significant estimates and assumptions inherent in this process involvedetermining the stages of the software development project, the direct costs to capitalize and the estimated useful life of the capitalized software.
Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets or liabilities are determined based on the differencesbetween the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse.The Company provides a valuation allowance against net deferred tax assets when, based upon the available evidence, it is more likely than not that the deferredtax assets will not be realized.
The Company prepares and files tax returns based on interpretations of tax laws and regulations. The Company's tax returns are subject to examination byvarious taxing authorities in the normal course of business. Such examinations may result in future tax and interest assessments by these taxing authorities.
In determining the Company's tax expense for financial reporting purposes, the Company establishes a reserve for uncertain income tax positions unless it isdetermined to be "more likely than not" that such tax positions would be sustained upon examination, based on their technical merits. That is, for financialreporting purposes, the Company only recognizes tax benefits taken on the tax return if it believes it is "more likely than not" that such tax positions would besustained. There is considerable judgment involved in determining whether it is "more likely than not" that positions taken on the tax returns would be sustained.
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, varying taxing authorities, as well aschanges in tax laws, regulations and interpretations. The consolidated tax expense of any given year includes adjustments to prior year income tax accruals andrelated estimated interest charges that are considered appropriate. The Company's policy is to recognize, when applicable, interest and penalties on uncertainincome tax positions as part of income tax expense.
New Accounting Standards
New accounting standards that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Note 3 -Significant Accounting Policies , to the accompanying audited consolidated financial statements, which is incorporated herein by reference.
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Liquidity and Capital Resources
Our principal source of cash has historically been cash provided by operating activities. From time to time we have used, and expect to use in the future,borrowings under our Credit Facility as a source of liquidity. Our primary cash requirements involve operating expenses, working capital fluctuations, capitalexpenditures, acquisitions and related business investments. Our capital expenditures typically consist of internally-developed software costs, software purchasesand computer hardware purchases. Prior to the Reorganization and IPO, the vast majority of our excess cash had been distributed to our member owners.
As of June 30, 2016 and 2015 , we had cash and cash equivalents totaling $248.8 million and $146.5 million , respectively, and marketable securities withmaturities ranging from three months to five years totaling $47.9 million and $415.4 million , respectively. The decrease in marketable securities of $367.5 millionis primarily attributable to funding the acquisitions of CECity and HCI.
As of June 30, 2016 , there were no outstanding borrowings under the Credit Facility. See Note 13 - Debt to the accompanying audited consolidated financialstatements contained herein for more information.
We expect cash generated from operations and borrowings under our Credit Facility to provide us with liquidity to fund our anticipated working capitalrequirements, revenue share obligations, tax payments, capital expenditures and growth for the foreseeable future. Our capital requirements depend on numerousfactors, including funding requirements for our product and service development and commercialization efforts and our information technology requirements andthe amount of cash generated by our operations. We currently believe that we have adequate capital resources at our disposal to fund currently anticipated capitalexpenditures, business growth and expansion and current and projected debt service requirements; strategic growth initiatives, however, will likely require the useof available cash on hand, cash generated from operations, borrowings under our Credit Facility and other long-term debt and, potentially, proceeds from theissuance of additional equity or debt securities.
DiscussionofcashflowsfortheyearsendedJune30,2016and2015
A summary of net cash flows follows (in thousands):
Year Ended June 30,Net cash provided by (used in): 2016 2015
Operating activities $ 371,470 $ 364,058Investing activities (159,636) (231,873)Financing activities (109,539) (117,449)
Net increase in cash $ 102,295 $ 14,736
Net cash provided by operating activities was $371.5 million for the year ended June 30, 2016 compared to $364.1 million for the year ended June 30, 2015 ,with the increase of $7.4 million primarily attributable to increased cash from net administrative fees offset by $14.6 million in additional tax payments during theyear ended June 30, 2016 in comparison to the year ended June 30, 2015 and a $10.0 million net prepayment to a distributor in order to receive additional discountson product purchases.
Net cash used in investing activities was $159.6 million for the year ended June 30, 2016 compared to net cash used in investing activities of $231.9 millionfor the year ended June 30, 2015 . Our investing activities for the year ended June 30, 2016 primarily consisted of (i) the acquisitions of InFlow, CECity and HCI,net of cash acquired, for a total of $468.6 million , (ii) capital expenditures for property and equipment of $77.0 million and (iii) investments in unconsolidatedaffiliates of $3.3 million , partially offset by (i) net proceeds from the sale of marketable securities of $367.2 million and (ii) distributions from equity investmentsof $22.1 million .
Our investing activities for the year ended June 30, 2015 primarily consisted of (i) the acquisitions of Aperek and TheraDoc, net of cash acquired, for a total of$156.0 million , (ii) capital expenditures for property and equipment of $70.7 million , (iii) purchase of non-controlling interest in S2S Global of $14.5 million ,(iv) net purchases of marketable securities of $9.5 million , and (v) investment in PharmaPoint, LLC of $5.0 million , partially offset by (i) distributions fromInnovatix of $18.9 million and (ii) decrease in restricted cash of $5.0 million .
Net cash used in financing activities was $109.5 million for the year ended June 30, 2016 , compared to $117.4 million for the year ended June 30, 2015 . Ourfinancing activities for the year ended June 30, 2016 primarily included (i) distributions to Premier LP limited partners of $92.7 million , (ii) payments to limitedpartners of Premier LP of $10.8 million related to tax receivable agreements, (iii) repurchase of vested restricted units for employee tax-withholding for $7.9million , (iv) payments made on notes payable of $2.1 million and (v) final remittance of net income attributable to the former S2S Global minority shareholder of$1.9
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million , partially offset by (i) proceeds from the exercise of stock options of $3.6 million and (ii) proceeds from the issuance of Class A common stock under thestock purchase plan of $2.3 million . We also borrowed, and fully repaid, $150.0 million from our Credit Facility during the year ended June 30, 2016 .
Our financing activities for the year ended June 30, 2015 primarily included (i) net cash payments to Premier LP limited partners of $92.2 million , (ii) payoffof S2S Global's revolving line of credit of $14.7 million , (iii) payments to Premier LP limited partners of $11.5 million under tax receivable agreements and (iv)payments made on notes payable of $1.4 million , partially offset by proceeds from the exercise of stock options of $1.5 million .
DiscussionofNon-GAAPFreeCashFlow
We define Non-GAAP Free Cash Flow as net cash provided by operating activities less distributions to limited partners and purchases of property andequipment. A summary of Non-GAAP Free Cash Flow and reconciliation to net cash provided by operating activities for the periods presented follows (inthousands):
Year Ended June 30, 2016 2015Net cash provided by operating activities $ 371,470 $ 364,058
Purchases of property and equipment (76,990) (70,734)Distributions to limited partners of Premier LP (92,707) (92,212)Payments to limited partners of Premier LP related to tax receivable agreements (10,805) (11,499)
Non-GAAP Free Cash Flow $ 190,968 $ 189,613
Non-GAAP Free Cash Flow for the year ended June 30, 2016 was $191.0 million , compared with $189.6 million for the year ended June 30, 2015 . Theincrease in Non-GAAP Free Cash Flow is primarily the result of increased cash generated from net administrative fees, offset by $14.6 million additional taxpayments during the year ended June 30, 2016 in comparison to the year ended June 30, 2015 , a $10.0 million net prepayment to a distributor in order to receiveadditional discounts on product purchases and $6.3 million in increased purchases of property and equipment.
Contractual Obligations
At June 30, 2016 , we had material commitments for obligations under notes payable, our non-cancellable office space lease agreements and estimatedpayments due to limited partners under tax receivable agreements. Future payments for notes payable, operating lease obligations due under long-term contractualobligations and estimated payments to limited partners under tax receivable agreements as of June 30, 2016 are as follows:
Payments Due by Period
Description of Contractual Obligations (In Thousands) Total Less than 1 year 1-3 years 3-5 yearsGreater than 5
yearsTax receivable agreement liability (a) $ 279,662 $ 13,912 $ 31,197 $ 33,029 $ 201,524Operating lease obligations (b) 76,049 9,620 17,637 15,557 33,235Notes payable (c) 19,342 5,484 8,255 5,603 —Other 474 230 244 — —Total $ 375,527 $ 29,246 $ 57,333 $ 54,189 $ 234,759
(a) Estimated payments due to limited partners under tax receivable agreements are based on 85% of the estimated amount of tax savings we expect to receive, generally over a 15 year period,in connection with the additional tax benefits created in connection with the Reorganization and IPO.
(b) Future contractual obligations for leases represent future minimum payments under non-cancellable operating leases primarily for office space.(c) Notes payable represent an aggregate principal amount of $19.3 million owed to departed member owners, payable over five years.
2014CreditFacility
On June 24, 2014, we entered into our current Credit Facility. The Credit Facility was amended on June 4, 2015. The Credit Facility has a maturity date ofJune 24, 2019. The Credit Facility provides for borrowings of up to $750.0 million with (i) a $25.0 million sub-facility for standby letters of credit and (ii) a $75.0million sub-facility for swingline loans. At our request, the Credit Facility may be increased from time to time by up to an additional aggregate amount of $250.0million , subject to the approval of
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the lenders providing such increase. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the credit facility by PremierGP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
The Credit Facility permits us to prepay amounts outstanding without premium or penalty, though we are required to compensate the lenders for losses andexpenses incurred as a result of the prepayment of any Eurodollar Rate Loan (as defined in the Credit Facility). Committed loans may be in the form of EurodollarRate Loans or Base Rate Loans (as defined in the Credit Facility) at our option. Eurodollar Rate Loans bear interest at the Eurodollar Rate (defined as the LondonInterbank Offer Rate, or LIBOR) plus the Applicable Rate (defined as a margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility)).Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus0.50% or the one-month LIBOR plus 1.0% ) plus the Applicable Rate. The Applicable Rate ranges from 1.125% to 1.75% for Eurodollar Rate Loans and 0.125%to 0.75% for Base Rate Loans. At June 30, 2016 , the interest rate for three-month Eurodollar Rate Loans was 1.779% and the interest rate for Base Rate Loans was3.625% . We are required to pay a commitment fee ranging from 0.125% to 0.250% per annum on the actual daily unused amount of commitments under the creditfacility. At June 30, 2016 , the commitment fee was 0.125% .
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others,limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments of which certain covenant calculations use EBITDA, anon-GAAP measure. Under the terms of the Credit Facility, Premier GP is not permitted to allow its Consolidated Total Leverage Ratio (as defined in the CreditFacility) to exceed 3.00 to 1.00 for any period of four consecutive fiscal quarters. In addition, Premier GP must maintain a minimum Consolidated InterestCoverage Ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscal quarter. We were in compliance with all such covenants at June 30, 2016. The Credit Facility also contains customary events of default including, among others, payment defaults, breaches of representations and warranties, covenantdefaults, cross-defaults of any indebtedness or guarantees in excess of $30.0 million , bankruptcy and other insolvency events, judgment defaults in excess of $30.0million , and the occurrence of a change of control (as defined in the Credit Facility). If any event of default occurs and is continuing, the administrative agentunder the Credit Facility may, with the consent, or shall, at the request, of the required lenders, terminate the commitments and declare all of the amounts owedunder the Credit Facility to be immediately due and payable.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitionsand other general corporate purposes. As of June 30, 2016 , we had no outstanding borrowings under the Credit Facility. The above summary does not purport tobe complete, and is subject to, and qualified in its entirety by reference to, the complete text of the Credit Facility, as amended, which is filed as an exhibit to thisAnnual Report. See also Note 13 - Debt to our audited consolidated financial statements contained in this Annual Report.
S2SGlobalRevolvingLineofCredit
On February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of S2S Global. In connection withthe purchase, we repaid the $14.2 million balance outstanding under the S2S Global line of credit and terminated the S2S Global line of credit prior to its February16, 2015 maturity date.
Member-OwnerTaxReceivableAgreement
In connection with the Reorganization and IPO, we entered into a tax receivable agreement with each of our member owners, pursuant to which we agreed topay to the member owners, generally over a 15 year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and localincome and franchise tax that we actually realize (or are deemed to realize, in the case of payments required to be made upon certain occurrences under such TaxReceivable Agreements) as a result of the increases in tax basis resulting from the initial sale of Class B common units by the member owners in connection withthe Reorganization, as well as subsequent exchanges by such member owners pursuant to the Exchange Agreement, and of certain other tax benefits related to ourentering into the Tax Receivable Agreements ("TRA"), including tax benefits attributable to payments under the TRA.
The Company had TRA liabilities of $279.7 million and $235.9 million as of June 30, 2016 and 2015 , respectively, which represented 85% of the tax savingsthe Company expects to receive in connection with the Section 754 election. The increase of $43.8 million in TRA liabilities from June 30, 2015 to June 30, 2016was comprised of a $72.3 million increase for quarterly member owner exchanges, offset by (i) a decrease of $4.8 million in connection with revaluing the deferredtax and TRA liabilities in connection with the North Carolina state income tax rate reduction for 2016 and beyond, (ii) a decrease of $12.9 million in connectionwith departed member owners and (iii) a decrease of $10.8 million related to payments made to member owners during the year ended June 30, 2016 .
77
CertainContractualArrangementswithOurMemberOwners
In connection with the Reorganization, we entered into several agreements to define and regulate the governance and control relationships among us, PremierLP and the member owners. Note 2 - Initial Public Offering and Reorganization to our audited consolidated financial statements contained herein provides asummary of the material provisions of these agreements. These summaries do not purport to be complete, and they are subject to, and qualified in their entirety byreference to, the complete text of the agreements which are filed as exhibits to this Annual Report. These agreements should be carefully read before making anyinvestment decisions regarding our securities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on theincrease or decrease in the amount of any interest expense we must pay with respect to outstanding debt instruments. At June 30, 2016 , we had no variable ratedebt outstanding. We invest our excess cash in a portfolio of individual cash equivalents and marketable securities. We do not currently hold, and we have neverheld, any derivative financial instruments. As a result, we do not expect changes in interest rates to have a material impact on our results of operations or financialposition. We plan to ensure the safety and preservation of our invested principal funds by limiting default, market and investment risks. We plan to mitigate defaultrisk by investing in low-risk securities. Substantially all of our financial transactions are conducted in U.S. dollars. We do not have significant foreign operationsand, accordingly, do not have market risk associated with foreign currencies.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related notes are filed together with this Annual Report. See the index to financial statements under Item 15(a) onpage 130 for a list of financial statements filed with this report, and under this item.
78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting FirmReport of Independent Registered Public Accounting Firm on Internal Controls Over Financial ReportingConsolidated Balance Sheets as of June 30, 2016 and June 30, 2015Consolidated Statements of Income for the years ended June 30, 2016, 2015 and 2014Consolidated Statements of Comprehensive Income for the years ended June 30, 2016, 2015 and 2014Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended June 30, 2016, 2015 and 2014Consolidated Statements of Cash Flows for the years ended June 30, 2016, 2015 and 2014Notes to Consolidated Financial Statements
79
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Premier, Inc.
We have audited the accompanying consolidated balance sheets of Premier, Inc. (the "Company") as of June 30, 2016 and 2015, and the related consolidatedstatements of income, comprehensive income, stockholders’ (deficit) equity and cash flows for each of the three years in the period ended June 30, 2016. Ouraudits also included the financial statement schedule presented in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premier, Inc. at June 30, 2016and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2016, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the Company changed its classification of deferred tax liabilities and assets and changed its methodof accounting for measurement-period adjustments in business combinations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Premier, Inc.’s internal control overfinancial reporting as of June 30, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (2013 framework) and our report dated August 25, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charlotte, North CarolinaAugust 25, 2016
80
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Premier, Inc.
We have audited Premier, Inc.’s internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Premier, Inc.’smanagement is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control overfinancial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinionon the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.
In our opinion, Premier, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets ofPremier, Inc. as of June 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ (deficit) equity and cashflows for each of the three years in the period ended June 30, 2016 and our report dated August 25, 2016 expressed an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did not include the internal controls of CECity.com, Inc., Healthcare Insights, LLC and InFlowHealth,LLC, which are included in the 2016 consolidated financial statements of Premier, Inc. and constituted 22% , 4% and 1% , of total assets, respectively, as of June30, 2016. CECity.com, Inc. represented approximately 2% , and Healthcare Insights, LLC and InFlowHealth, LLC each represented less than 1% , of net revenuefor the year then ended. Our audit of internal control over financial reporting of Premier, Inc. also did not include an evaluation of the internal control overfinancial reporting of CECity.com, Inc., Healthcare Insights, LLC and InFlowHealth, LLC.
/s/ Ernst & Young LLP
Charlotte, North CarolinaAugust 25, 2016
81
PREMIER, INC.Consolidated Balance Sheets
(In thousands, except share data)
June 30, 2016 June 30, 2015
Assets Cash and cash equivalents $ 248,817 $ 146,522Marketable securities 17,759 240,667Accounts receivable (net of $1,981 and $1,153 allowance for doubtful accounts, respectively) 144,424 99,120Inventory 29,121 33,058Prepaid expenses and other current assets 19,646 22,353Due from related parties 3,123 3,444
Total current assets 462,890 545,164Marketable securities 30,130 174,745Property and equipment (net of $265,751 and $220,685 accumulated depreciation, respectively) 174,080 147,625Intangible assets (net of $50,870 and $17,815 accumulated amortization, respectively) 158,217 38,669Goodwill 537,962 215,645Deferred income tax assets 422,849 353,723Deferred compensation plan assets 39,965 37,483Other assets 29,290 17,137
Total assets $ 1,855,383 $ 1,530,191
Liabilities, redeemable limited partners' capital and stockholders' deficit Accounts payable $ 46,003 $ 37,634Accrued expenses 56,774 41,261Revenue share obligations 63,603 59,259Limited partners' distribution payable 22,493 22,432Accrued compensation and benefits 60,425 51,066Deferred revenue 54,498 39,824Current portion of tax receivable agreement 13,912 11,123Current portion of long-term debt 5,484 2,256Other liabilities 2,871 4,776
Total current liabilities 326,063 269,631Long-term debt, less current portion 13,858 15,679Tax receivable agreements, less current portion 265,750 224,754Deferred compensation plan obligations 39,965 37,483Other liabilities 23,978 20,914
Total liabilities 669,614 568,461
Redeemable limited partners' capital 3,137,230 4,079,832
Stockholders' deficit: Class A common stock, $0.01 par value, 500,000,000 shares authorized; 45,995,528 and 37,668,870 shares issued andoutstanding at June 30, 2016 and June 30, 2015, respectively 460 377Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 96,132,723 and 106,382,552 shares issued andoutstanding at June 30, 2016 and June 30, 2015, respectively — —Additional paid-in-capital — —Accumulated deficit (1,951,878) (3,118,474)Accumulated other comprehensive loss (43) (5)
Total stockholders' deficit (1,951,461) (3,118,102)
Total liabilities, redeemable limited partners' capital and stockholders' deficit $ 1,855,383 $ 1,530,191
See accompanying notes to the consolidated financial statements.
82
PREMIER, INC.Consolidated Statements of Income
(In thousands, except per share data)
Year Ended June 30,
2016 2015 2014
Net revenue: Net administrative fees $ 498,394 $ 457,020 $ 464,837Other services and support 337,554 270,748 233,186
Services 835,948 727,768 698,023Products 326,646 279,261 212,526
Net revenue 1,162,594 1,007,029 910,549
Cost of revenue: Services 163,240 143,290 115,740Products 293,816 253,620 191,885
Cost of revenue 457,056 396,910 307,625
Gross profit 705,538 610,119 602,924
Operating expenses: Selling, general and administrative 403,611 332,004 294,421Research and development 2,925 2,937 3,389Amortization of purchased intangible assets 33,054 9,136 3,062
Operating expenses 439,590 344,077 300,872
Operating income 265,948 266,042 302,052
Equity in net income of unconsolidated affiliates 21,647 21,285 16,976Interest and investment income (loss), net (1,021) 866 1,019Gain (loss) on investment — (1,000) 38,372Loss on disposal of long-lived assets — (15,243) —Other income (expense), net (1,692) (823) 1,907
Other income, net 18,934 5,085 58,274
Income before income taxes 284,882 271,127 360,326Income tax expense 49,721 36,342 27,709
Net income 235,161 234,785 332,617Net income attributable to non-controlling interest in S2S Global — (1,836) (949)Net income attributable to non-controlling interest in Premier LP (193,547) (194,206) (303,336)
Net income attributable to non-controlling interest (193,547) (196,042) (304,285)Adjustment of redeemable limited partners' capital to redemption amount 776,750 (904,035) (2,741,588)
Net income (loss) attributable to stockholders $ 818,364 $ (865,292) $ (2,713,256)
Weighted average shares outstanding: Basic 42,368 35,681 25,633Diluted 145,308 35,681 25,633
Earnings (loss) per share attributable to stockholders: Basic $ 19.32 $ (24.25) $ (105.85)Diluted $ 1.33 $ (24.25) $ (105.85)
See accompanying notes to the consolidated financial statements.
83
PREMIER, INC.Consolidated Statements of Comprehensive Income
(In thousands)
Year Ended June 30,
2016 2015 2014
Net income $ 235,161 $ 234,785 $ 332,617Net unrealized (loss) gain on marketable securities (110) (213) 203
Total comprehensive income 235,051 234,572 332,820Less: comprehensive income attributable to non-controlling interest (193,470) (195,885) (304,448)
Comprehensive income attributable to Premier, Inc. $ 41,581 $ 38,687 $ 28,372
See accompanying notes to the consolidated financial statements.
84
PREMIER, INC.Consolidated Statements of Stockholders' (Deficit) Equity
(In thousands)
PHSI CommonStock
Class A CommonStock
Class B CommonStock Additional
Paid-InCapital
Common StockSubscribed
SubscriptionsReceivable
RetainedEarnings
(AccumulatedDeficit)
Non-Controlling
Interest
AccumulatedOther
ComprehensiveIncome (Loss)
TotalStockholders'
(Deficit)EquityShares Amount Shares Amount Shares Amount Shares Amount
Balance at June 30, 2013 5,653 $ 57 — $ — — $ — $ 28,866 23 $ 300 $ (300) $ 50,599 $ (1,754) $ — $ 77,768Repurchase of PHSI commonstock (49) (1) — — — — (645) — — — — — — (646)Payment on stock subscriptions 23 — — — — — 300 (23) (300) 300 — — — 300Issuance of Class A commonstock at IPO — — 32,375 324 — — 821,347 — — — — — — 821,671Purchase of Class A commonunits from Premier LP — — — — — — (247,742) — — — — — — (247,742)Purchase of Class B commonunits from PHSI — — — — — — (30,072) — — — — — — (30,072)Contribution of PHSI commonstock in connection with the IPO (5,627) (56) — — — — (76,860) — — — — — — (76,916)Capitalized IPO-related costs — — — — — — (5,911) — — — — — — (5,911)Increase in deferred tax assetrelated to the Reorganization — — — — — — 282,972 — — — — — — 282,972Increase in payables pursuant tothe tax receivable agreements — — — — — — (186,077) — — — — — — (186,077)Acquisition of non-controllinginterest from member owners,net of sale of Class B commonstock — — — — 112,608 — (412,860) — — — — — 3 (412,857)Redemption of limited partner — — — — (97) — — — — — — — — —Adjustment of redeemablelimited partners' capital toredemption amount — — — — — — (192,784) — — — (2,548,804) — — (2,741,588)Stock-based compensationexpense — — — — — — 19,476 — — — — — — 19,476Repurchase of vested restrictedunits for employee tax-withholding — — — — — — (10) — — — — — — (10)Net income — — — — — — — — — — 332,617 — — 332,617Net income attributable to non-controlling interest — — — — — — — — — — (304,285) — — (304,285)Net income attributable to non-controlling interest in S2SGlobal — — — — — — — — — — — 949 — 949Net unrealized gain onmarketable securities — — — — — — — — — — — — 40 40
Balance at June 30, 2014 — $ — 32,375 $ 324 112,511 $ — $ — — $ — $ — $ (2,469,873) $ (805) $ 43 $ (2,470,311)Redemption of limited partners — — — — (910) — — — — — — — — —Reduction in tax receivableagreement liability related todeparted member owners — — — — — — 1,905 — — — — — — 1,905Exchange of Class B commonunits for Class A common stockby member owners — — 5,218 53 (5,218) — 175,062 — — — — — — 175,115Increase in additional paid-incapital related to quarterlyexchange by member owners anddeparture of member owners — — — — — — 18,097 — — — — — — 18,097Issuance of Class A commonstock under equity incentive plan — — 76 — — — 1,508 — — — — — — 1,508
85
PHSI CommonStock
Class A CommonStock
Class B CommonStock Additional
Paid-InCapital
Common StockSubscribed
SubscriptionsReceivable
RetainedEarnings
(AccumulatedDeficit)
Non-Controlling
Interest
AccumulatedOther
ComprehensiveIncome (Loss)
TotalStockholders'
(Deficit)EquityShares Amount Shares Amount Shares Amount Shares Amount
Stock-based compensationexpense — — — — — — 28,498 — — — — — — 28,498Repurchase of vestedrestricted units for employeetax-withholding — — — — — — (135) — — — — — — (135)Net income — — — — — — — — — — 234,785 — — 234,785Net income attributable tonon-controlling interest — — — — — — — — — — (196,042) — — (196,042)Net income attributable tonon-controlling interest inS2S Global — — — — — — — — — — — 1,836 — 1,836Purchase of non-controllinginterest in S2S Global — — — — — — (13,487) — — — — (1,031) — (14,518)Increase in deferred tax assetrelated to purchase of non-controlling interest in S2SGlobal — — — — — — 5,243 — — — — — — 5,243Net unrealized loss onmarketable securities — — — — — — — — — — — — (48) (48)Adjustment to redeemablelimited partners' capital toredemption amount — — — — — — (216,691) — — — (687,344) — — (904,035)
Balance at June 30, 2015 — $ — 37,669 $ 377 106,383 $ — $ — — $ — $ — $ (3,118,474) $ — $ (5) $ (3,118,102)Redemption of limitedpartners — — — — (2,527) — — — — — — — — —Exchange of Class Bcommon units for Class Acommon stock by memberowners — — 7,723 77 (7,723) — 267,604 — — — — — — 267,681Increase in additional paid-incapital related to quarterlyexchange by member ownersand departure of memberowners — — — — — — 35,431 — — — — — — 35,431Issuance of Class A commonstock under equity incentiveplan — — 523 5 — — 3,552 — — — — — — 3,557Employee stock purchaseplan — — 81 1 — — 2,728 — — — — — — 2,729Stock-based compensationexpense — — — — — — 48,670 — — — — — — 48,670Repurchase of vestedrestricted units for employeetax-withholding — — — — — — (7,863) — — — — — — (7,863)Net income — — — — — — — — — — 235,161 — — 235,161Net income attributable tonon-controlling interest — — — — — — — — — — (193,547) — — (193,547)Net unrealized loss onmarketable securities — — — — — — — — — — — — (38) (38)Final remittance of netincome attributable to S2SGlobal before February 1,2015 — — — — — — — — — — (1,890) — — (1,890)Adjustment to redeemablelimited partners' capital toredemption amount — — — — — — (350,122) — — — 1,126,872 — — 776,750
Balance at June 30, 2016 — $ — 45,996 $ 460 96,133 $ — $ — — $ — $ — $ (1,951,878) $ — $ (43) $ (1,951,461)
See accompanying notes to the consolidated financial statements.
86
PREMIER, INC.Consolidated Statements of Cash Flows
(In thousands)
Year Ended June 30,
2016 2015 2014
Operating activities Net income $ 235,161 $ 234,785 $ 332,617
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 84,156 54,322 39,823Equity in net income of unconsolidated affiliates (21,647) (21,285) (16,976)Deferred income taxes 25,714 18,294 9,820Loss (gain) on investment — 1,000 (38,372)Loss on disposal of long-lived assets — 15,243 —Stock-based compensation 48,670 28,498 19,476Adjustment to tax receivable agreement liability (4,818) — 6,215
Changes in operating assets and liabilities: Accounts receivable, prepaid expenses and other current assets (37,250) (18,964) (18,924)Other assets (9,638) (1,736) (1,680)Inventories 3,937 (12,235) (8,082)Accounts payable, accrued expenses and other current liabilities 50,313 60,834 45,997Long-term liabilities (4,195) 2,791 (3,585)
Other operating activities 1,067 2,511 1,793
Net cash provided by operating activities 371,470 364,058 368,122
Investing activities Purchase of marketable securities (19,211) (395,302) (500,835)Proceeds from sale of marketable securities 386,372 385,788 148,019Proceeds from sale of investment in GHX — — 38,372Acquisition of CECity.com, Inc., net of cash acquired (398,261) — —Acquisition of Healthcare Insights, LLC, net of cash acquired (64,274) — —Acquisition of InFlowHealth, LLC (6,088) — —Acquisition of Aperek, Inc., net of cash acquired — (47,446) —Acquisition of TheraDoc, Inc., net of cash acquired — (108,561) —Acquisition of SYMMEDRx, net of cash acquired — — (28,690)Acquisition of Meddius, L.L.C, net of owner note receivable — — (7,737)Acquisition of MEMdata, LLC, net of cash acquired — — (6,142)Purchase of non-controlling interest in S2S Global — (14,518) —Investment in unconsolidated affiliates (3,250) (5,000) —Distributions received on equity investment 22,093 18,900 15,650Decrease in restricted cash — 5,000 —Purchases of property and equipment (76,990) (70,734) (55,740)Other investing activities (27) — —
Net cash used in investing activities (159,636) (231,873) (397,103)
Financing activities Payments made on notes payable (2,143) (1,403) (9,297)Proceeds from S2S Global revolving line of credit — 1,007 6,000Payments on S2S Global revolving line of credit — (14,715) —Proceeds from credit facility 150,000 — 60,000Payments on credit facility (150,000) — (60,000)Payments made in connection with the origination of the credit facility — — (2,511)Proceeds from issuance of Class A common stock in connection with the IPO, net of underwriting fees andcommissions — — 821,671Payments made in connection with the IPO — — (2,822)
87
Year Ended June 30,
2016 2015 2014
Purchases of Class B common units from member owners — — (543,857)Proceeds from issuance of PSHI common stock — — 300Proceeds from notes receivable from partners — — 12,685Proceeds from exercise of stock options under equity incentive plans 3,552 1,508 —Proceeds from issuance of Class A common stock under stock purchase plan 2,317 — —Repurchase of vested restricted units for employee tax-withholding (7,863) (135) (11)Final remittance of net income attributable to former S2S Global minority shareholder (1,890) — —Distributions to limited partners of Premier LP (92,707) (92,212) (319,687)Payments to limited partners of Premier LP related to tax receivable agreements (10,805) (11,499) —
Net cash used in financing activities (109,539) (117,449) (37,529)
Net increase (decrease) in cash and cash equivalents 102,295 14,736 (66,510)Cash and cash equivalents at beginning of year 146,522 131,786 198,296
Cash and cash equivalents at end of year $ 248,817 $ 146,522 $ 131,786
Supplemental schedule of non cash investing and financing activities: Issuance of limited partnership interest for notes receivable $ — $ — $ 7,860Payable to member owners incurred upon repurchase of ownership interest $ 3,556 $ 2,046 $ 1,781Reduction in tax receivable agreement liability related to departed member owners $ 12,927 $ 2,007 $ —Reduction in redeemable limited partners' capital to reduce outstanding receivable $ — $ — $ 28,009Distributions and notes payable utilized to reduce subscriptions, notes, interest and accounts receivable from memberowners $ 5,407 $ 6,506 $ 6,227Reduction in redeemable limited partners' capital for limited partners' distribution payable $ 22,493 $ 22,432 $ 22,351Increase in redeemable limited partners' capital for adjustment to redemption amount, with offsetting decrease inadditional paid-in capital and accumulated deficit $ (776,750) $ 904,035 $ 2,741,588Reduction in redeemable limited partners' capital, with offsetting increase in common stock and additional paid-incapital related to quarterly exchanges by member owners $ 267,681 $ 175,062 $ —Increase in additional paid-in capital related to quarterly exchanges by member owners and departure of memberowners $ 35,431 $ 18,097 $ —Increase in tax receivable agreement liability related to quarterly exchanges by member owners $ 72,335 $ 57,177 $ —Increase in deferred tax assets related to quarterly exchanges by member owners $ 99,841 $ 75,073 $ —Reduction in deferred tax assets related to departed member owners $ 5,002 $ 201 $ —Increase in deferred tax assets related to purchase of non-controlling interest in S2S Global $ — $ 5,243 $ —Increase in deferred tax assets and additional paid-in capital related to the Reorganization $ — $ — $ 282,972Increase in payables and decrease in additional paid-in capital pursuant to the tax receivable agreements $ — $ — $ 186,077Reduction in prepaid expenses and other current assets for IPO costs capitalized to additional paid-in capital $ — $ — $ 2,822
See accompanying notes to the consolidated financial statements.
88
PREMIER, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
Premier, Inc. ("Premier" or the "Company") is a publicly-held, for-profit Delaware corporation primarily owned by hospitals, health systems and otherhealthcare organizations (such owners of Premier are referred to herein as "member owners") located in the United States and by public stockholders. TheCompany, together with its subsidiaries and affiliates, is a leading healthcare improvement company that unites hospitals, health systems, physicians and otherhealthcare providers to improve and innovate in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolvinghealthcare industry.
The Company's business model and solutions are designed to provide its members access to scale efficiencies, spread the cost of their development, provideactionable intelligence derived from anonymized data in the Company's data warehouse, mitigate the risk of innovation and disseminate best practices that willhelp the Company's member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
The Company, together with its subsidiaries and affiliates, delivers its integrated platform of solutions through two business segments: supply chain servicesand performance services. See Note 23 - Segments for further information related to the Company's reportable business segments. The supply chain servicessegment includes one of the largest healthcare group purchasing organizations ("GPOs") in the United States, a specialty pharmacy and direct sourcing activities.The performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers.The Company's software as a service ("SaaS") informatics products utilize its comprehensive data set to provide actionable intelligence to its members, enablingthem to benchmark, analyze and identify areas of improvement across the three main categories of cost management, quality and safety, and population healthmanagement. The performance services segment also includes the Company's technology-enabled performance improvement collaboratives, advisory services andinsurance management services.
Basis of Presentation and Consolidation
Basis of Presentation
The Company, through its wholly-owned subsidiary, Premier Services, LLC ("Premier GP"), holds an approximate 32% controlling general partner interest in,and, as a result, consolidates the financial statements of, Premier Healthcare Alliance, L.P. ("Premier LP"). The limited partners' approximate 68% ownership ofPremier LP is reflected as redeemable limited partners' capital in the Company's accompanying consolidated balance sheets, and the limited partners' proportionateshare of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's consolidated statements ofincome and within comprehensive income attributable to non-controlling interest in the consolidated statements of comprehensive income.
The member owners owned approximately 68% and 74% of the Company's combined Class A and Class B common stock (the "common stock") through theirownership of Class B common stock at June 30, 2016 and 2015 , respectively. During the year ended June 30, 2016 , the member owners exchanged approximately7.7 million of their Class B common units and associated Class B common stock for an equal amount of Class A common stock as part of their quarterly exchangerights under an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of a series of transactions(the "Reorganization") following the consummation of the Company's initial public offering (the "IPO," and collectively with the Reorganization, the"Reorganization and IPO") on October 1, 2013 (See Note 17 - Earnings (Loss) Per Share ). See Note 2 - Initial Public Offering and Reorganization for furtherinformation on the Exchange Agreement. As a result, at June 30, 2016 , the member owners owned approximately 68% of the Company's combined common stockthrough their ownership of Class B common stock, and the public investors, which may include member owners that have received shares of Class A commonstock in connection with previous exchanges, owned approximately 32% of the Company's outstanding common stock.
Principles of Consolidation
After the completion of the Reorganization and IPO, Premier Healthcare Solutions, Inc. ("PHSI") became a consolidated subsidiary of the Company. PHSI isconsidered the predecessor of the Company for accounting purposes and accordingly, PHSI's consolidated financial statements are the Company's historicalfinancial statements for periods prior to October 1, 2013. The historical consolidated financial statements of PHSI are reflected herein based on PHSI's historicalownership interests of Premier
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LP and its consolidated subsidiaries. See Note 2 - Initial Public Offering and Reorganization for further information related to the IPO and the Reorganization.
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission(the "SEC") and in accordance with U.S. generally accepted accounting principles ("GAAP") and include the assets, liabilities, revenues and expenses of allmajority-owned subsidiaries over which the Company exercised control and when applicable, entities for which the Company had a controlling financial interest orwas the primary beneficiary. All intercompany transactions have been eliminated upon consolidation. Accordingly, the consolidated financial statements reflect alladjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the periods shown,including normal recurring adjustments.
We have reclassified certain prior period amounts for deferred income tax assets to be consistent with the current period presentation (see Note 3 - SignificantAccounting Policies ).
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements in accordance with GAAP requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates includingestimates for allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements,values of investments not publicly traded, the valuation allowance on deferred tax assets, uncertain income taxes, deferred revenue, future cash flows associatedwith asset impairments and the allocation of purchase price are evaluated on an ongoing basis. These estimates are based on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
(2) INITIAL PUBLIC OFFERING AND REORGANIZATION
Initial Public Offering
On October 1, 2013, Premier consummated its IPO of 32,374,751 shares of its Class A common stock, at a price of $27.00 per share, raising net proceeds ofapproximately $821.7 million after underwriting discounts and commissions, but before expenses.
Premier used approximately (i) $543.9 million of the net proceeds from the IPO to acquire 21,428,571 Class B common units from the member owners, (ii)$30.1 million of the net proceeds to acquire 1,184,882 Class B common units from PHSI and (iii) $247.7 million of the net proceeds to acquire 9,761,298 newlyissued Class A common units of Premier LP, or the Class A common units, from Premier LP, in each case for a price per unit equal to the price paid per share ofClass A common stock by the underwriters to Premier in connection with the IPO. All Class B common units purchased by Premier with the net proceeds from theIPO automatically converted to Class A common units, pursuant to the terms of the LP Agreement, and were contributed by Premier to Premier GP.
Reorganization
On October 1, 2013 (the "Effective Date"), Premier consummated the Reorganization. In connection with the Reorganization and IPO, immediately followingthe Effective Date, all of Premier LP's limited partners that approved the Reorganization received an amount of Class B common units and capital account balancesin Premier LP equal to their percentage interests and capital account balances in Premier LP immediately preceding the Reorganization. Additionally, immediatelyfollowing the Effective Date, all of the stockholders (consisting of member owners) of PHSI that approved the Reorganization contributed their PHSI commonstock to Premier LP in exchange for additional Class B common units based on such stockholder's percentage interest in the fair market valuation of PHSI andPremier LP prior to the Reorganization. As a result of the foregoing contributions, PHSI became a wholly-owned subsidiary of Premier LP.
In connection with the Reorganization, the member owners purchased from Premier 112,607,832 shares of Class B common stock, for par value, $0.000001per share, which number of shares of Class B common stock equaled the number of Class B units held by the member owners immediately following the IPO,pursuant to a stock purchase agreement.
Below is a summary of the principal documents that effected the Reorganization and define and regulate the governance and control relationships amongPremier, Premier LP and the member owners after the completion of the Reorganization and IPO.
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LPAgreement
In connection with the Reorganization and IPO, pursuant to the LP Agreement, Premier GP became the general partner of Premier LP. As the general partnerof Premier LP, Premier GP generally controls the day-to-day business affairs and decision-making of Premier LP without the approval of any other partner, subjectto certain limited partner approval rights. As the sole member of Premier GP, Premier is responsible for all operational and administrative decisions of Premier LP.In accordance with the LP Agreement, subject to applicable law or regulation and the terms of Premier LP's financing agreements, Premier GP will cause PremierLP to make quarterly distributions out of its estimated taxable net income to Premier GP and to the holders of Class B common units as a class in an aggregateamount equal to Premier LP's total taxable income other than net profit attributable to dispositions not in the ordinary course of business for each such quartermultiplied by the effective combined federal, state and local income tax rate then payable by Premier to facilitate payment by each Premier LP partner of taxes, ifrequired, on its share of taxable income of Premier LP. In addition, in accordance with the LP Agreement, Premier GP may cause Premier LP to make additionaldistributions to Premier GP and to all limited partners holding of Class B common units as a class in proportion to their respective number of units, subject to anyapplicable restrictions under Premier LP's financing agreements or applicable law. Premier GP will distribute any amounts it receives from Premier LP to Premier,which Premier will use to (i) pay applicable taxes, (ii) meet its obligations under the tax receivable agreements and (iii) meet its obligations to the member ownersunder the Exchange Agreement if they elect to convert their Class B common units for shares of its Class A common stock and Premier elects to pay some or all ofthe consideration to such member owners in cash.
In the event that a limited partner of Premier LP holding Class B common units not yet eligible to be exchanged for shares of Premier's Class A common stockpursuant to the terms of the Exchange Agreement (i) ceases to participate in Premier's GPO programs, (ii) ceases to be a limited partner of Premier LP (except as aresult of a permitted transfer of its Class B common units), (iii) ceases to be a party to a GPO participation agreement (subject to certain limited exceptions) or (iv)becomes a related entity of, or affiliated with, a competing business of Premier LP, in each case, Premier LP will have the option to redeem all of such limitedpartner's Class B common units not yet eligible to be exchanged at a purchase price set forth in the LP Agreement. In addition, the limited partner will be requiredto exchange all Class B common units eligible to be exchanged on the next exchange date following the date of the applicable termination event described above.
VotingTrustAgreement
Additionally, in connection with the Reorganization and IPO, Premier's member owners entered into a voting trust agreement (the "Voting Trust Agreement")which became effective upon the completion of the Reorganization and IPO and pursuant to which the member owners contributed their Class B common stockinto Premier Trust, under which Wells Fargo Delaware Trust Company, N.A., as trustee, acts on behalf of the member owners for purposes of voting their shares ofClass B common stock. As a result of the Voting Trust Agreement, the member owners retain beneficial ownership of the Class B common stock, while the trusteeis the legal owner of such equity. Pursuant to the Voting Trust Agreement, the trustee must vote all of the member owners' Class B common stock as a block in themanner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on our board of directors andby a majority of the votes received by the trustee from the member owners for all other matters.
ExchangeAgreement
In connection with the Reorganization and IPO, Premier, Premier LP and the member owners entered into the Exchange Agreement which became effectiveupon the completion of the Reorganization and IPO. Pursuant to the terms of the Exchange Agreement, subject to certain restrictions, commencing on October 31,2014 and during each year thereafter, each member owner has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units,as well as any additional Class B common units purchased by such member owner pursuant to certain rights of first refusal (discussed below), for shares of Class Acommon stock (on a one -for-one basis subject to customary adjustments for subdivisions or combinations by split, reverse split, distribution, reclassification,recapitalization or otherwise), cash or a combination of both, the form of consideration to be at the discretion of Premier's audit and compliance committee (oranother committee of independent directors). This exchange right can be exercised on a quarterly basis (subject to certain restrictions contained in the registrationrights agreement described below) and is subject to rights of first refusal in favor of the other holders of Class B common units and Premier LP. For each Class Bcommon unit that is exchanged pursuant to the Exchange Agreement, the member owner will also surrender one corresponding share of our Class B commonstock, which will automatically be retired.
RegistrationRightsAgreement
In connection with the Reorganization and IPO, Premier and the member owners entered into a registration rights agreement (the "Registration RightsAgreement") which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the Registration Rights Agreement, Premierfiled with the SEC a resale shelf registration statement for resales from time to time of its Class A common stock issued to the member owners in exchange fortheir Class B common units pursuant to
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the Exchange Agreement, subject to various restrictions. The registration statement was declared effective by the SEC in November 2014. Subject to certainexceptions, Premier will use reasonable efforts to keep the resale shelf registration statement effective for seven years. In addition, Premier will undertake toconduct an annual company-directed underwritten public offering to allow the member owners to resell Class A common stock and, at Premier's election, to permitit to sell primary shares, following the first quarterly exchange date of each of the first three years during which the member owners have the right to exchangetheir Class B common units for shares of Class A common stock. Premier will not be required to conduct a company-directed underwritten public offering unlessthe number of shares of Class A common stock requested by the member owners (and any third parties) to be registered in the applicable company-directedunderwritten public offering constitutes the equivalent of at least 3.5% of the aggregate number of Class A common units and Class B common units, or,collectively, the common units, outstanding. If the offering minimum has not been met, Premier will either proceed with the company-directed underwritten publicoffering (such decision being in Premier's sole discretion) or notify the member owners that Premier will abandon the offering. After the third year during whichmember owners have the right to exchange their Class B common units for shares of Premier's Class A common stock, Premier may elect to conduct a company-directed underwritten public offering in any subsequent year. Premier, as well as the member owners, and third parties, will be subject to customary prohibitions onsale prior to and for 60 days following any company-directed underwritten public offering. The Registration Rights Agreement also grants the member ownerscertain "piggyback" registration rights with respect to other registrations of Class A common stock.
TaxReceivableAgreements
In connection with the Reorganization and IPO, Premier entered into a tax receivable agreement with the member owners which became effective upon thecompletion of the Reorganization and IPO. Pursuant to the terms of the tax receivable agreement, for as long as the member owner remains a limited partner,Premier has agreed to pay to the member owners, generally over a 15 -year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal,foreign, state and local income and franchise tax that Premier actually realizes (or is deemed to realize, in the case of payments required to be made upon certainoccurrences under such tax receivable agreement) as a result of the increases in tax basis resulting from the initial sale of Class B common units by the memberowners in connection with the Reorganization, as well as subsequent exchanges by such member owners pursuant to the Exchange Agreement, and of certain othertax benefits related to Premier entering into the tax receivable agreements, including tax benefits attributable to payments under the tax receivable agreements.
GPOParticipationAgreement
In connection with the Reorganization and IPO, Premier's member owners entered into GPO participation agreements with Premier LP which becameeffective upon the completion of the Reorganization and IPO. Pursuant to the terms of its GPO participation agreement, each member owner will receive cashsharebacks, or revenue share, from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such memberowner's acute and alternate site providers and other eligible non-healthcare organizations that are owned, leased or managed by, or affiliated with, each suchmember owner, or owned, leased, managed and affiliated facilities, through Premier's GPO supplier contracts. In addition, Premier's two largest regional GPOmember owners, which represented, in the aggregate, approximately 16% of Premier LP's gross administrative fees revenue for fiscal year 2014, will each remit allgross administrative fees collected by such member owner based upon purchasing by such member owner's owned, leased, managed and affiliated facilitiesthrough the member owner's own GPO supplier contracts and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted toPremier LP. Subject to certain termination rights, these GPO participation agreements will be for an initial five -year term, although Premier LP's two largestregional GPO member owners have entered into agreements with seven -year terms.
The terms of the GPO participation agreements vary as a result of provisions in Premier's existing arrangements with member owners that conflict with theterms of the GPO participation agreement and which by the express terms of the GPO participation agreement are incorporated by reference and deemedcontrolling and will continue to remain in effect. In certain other instances, Premier LP and member owners have entered into GPO participation agreements withcertain terms that vary from the standard form, which were approved by the member agreement review committee of Premier's board of directors, based uponregulatory constraints, pending merger and acquisition activity or other circumstances affecting those member owners.
Effects of the Reorganization
Immediately following the consummation of the Reorganization and IPO:
• Premier became the sole member of Premier GP and Premier GP became the general partner of Premier LP. Through Premier GP, Premier exercisesindirect control over the business operated by Premier LP, subject to certain limited partner approval rights. Premier GP has no employees and acts solelythrough its board of managers and appointed officers in directing the affairs of Premier LP;
• the member owners held 112,607,832 shares of Class B common stock and 112,607,832 Class B common units;
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• Premier GP held 32,374,751 Class A common units;
• through their holdings of Class B common stock, the member owners had approximately 78% of the voting power in Premier;
• the investors in the IPO collectively owned all of Premier's outstanding shares of Class A common stock and collectively had approximately 22% of thevoting power in Premier; and
• Premier LP was the operating partnership and parent company to all of Premier's other operating subsidiaries, including Premier Supply ChainImprovement, Inc. ("PSCI") and PHSI.
Any newly admitted Premier LP limited partners will also become parties to the Exchange Agreement, the Registration Rights Agreement, the Voting TrustAgreement and the tax receivable agreements, in each case on the same terms and conditions as the then existing member owners (except that any Class B commonunits acquired by such newly admitted Premier LP limited partners will not be subject to the seven -year limitation on exchange of Class B common units set forthin the LP Agreement and the Exchange Agreement). Any newly admitted Premier LP limited partner will also enter into a GPO participation agreement withPremier LP.
Impact of the Reorganization
The impact of the Reorganization gave effect to:
• (i) the issuance of 32,374,751 shares of Class A common stock in the IPO, or approximately 22% of the Class A common stock and Class B commonstock, collectively, outstanding after the Reorganization and IPO, at an IPO price of $27.00 per share and the use of the net proceeds therefrom topurchase (A) Class A common units from Premier LP, (B) Class B common units from PHSI and (C) Class B common units from Premier's memberowners, (ii) the entry by Premier LP, Premier GP and the member owners into the LP Agreement and (iii) the issuance of 112,607,832 shares of Class Bcommon stock to the member owners;
• the change from the 99% non-controlling interest held by the limited partners of Premier LP prior to the Reorganization to the approximately 78% non-controlling interest held by the limited partners of Premier LP subsequent to the Reorganization and IPO;
• the change in the allocation of Premier LP's income from 1% of operating income and 5% of investment income to PHSI prior to the Reorganization andIPO to approximately 22% of Premier LP's income to Premier (indirectly through Premier GP) subsequent to the Reorganization and IPO as the result ofthe modified income allocation provisions of the LP Agreement and Premier's purchase of approximately 22% of the common units;
• adjustments to reflect redeemable limited partners' capital at the redemption amount, which is the greater of the book value or redemption amount per theLP Agreement;
• adjustments that give effect to the tax receivable agreement, including the effects of the increase in the tax basis of Premier LP's assets resulting fromPremier's purchase of Class B common units from the member owners; and
• estimated payments due to member owners pursuant to the tax receivable agreement equal to 85% of the amount of cash savings, if any, in U.S. federal,foreign, state and local income and franchise tax that Premier actually realizes (or is deemed to realize) in the case of certain payments required to bemade upon certain occurrences under such tax receivable agreements as a result of the increases in the tax basis of Premier LP's assets resulting fromPremier's purchase of Class B common units from the member owners and of certain other tax benefits related to Premier entering into the tax receivableagreement.
Premier accounted for the Reorganization as a non-substantive transaction in a manner similar to a transaction between entities under common controlpursuant to Accounting Standards Codification Topic 805, Business Combinations . Accordingly, after the Reorganization, the assets and liabilities of Premier arereflected at their carryover basis.
(3) SIGNIFICANT ACCOUNTING POLICIES
Business Combinations
We account for acquisitions using the acquisition method. All of the assets acquired, liabilities assumed, contractual contingencies and contingentconsideration are recognized at their fair value on the acquisition date. Any excess of the purchase
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price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related costs are recorded as expenses in the consolidatedfinancial statements.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use theincome method. This method starts with a forecast of all of the expected future net cash flows for each asset. These cash flows are then adjusted to present value byapplying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptionsinherent in the income method or other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risksinherent in the future cash flows and the assessment of the asset's life cycle and the competitive trends impacting the asset, including consideration of anytechnical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangibleassets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with remaining maturities of three months or less at the time of acquisition.
Marketable Securities
The Company invests its excess cash in commercial paper, U.S. government securities, corporate debt securities and other securities with maturities generallyranging from three months to five years from the date of purchase. Marketable securities, classified as available-for-sale, are carried at fair market value, with theunrealized gains and losses on such investments reported in comprehensive income as a separate component of stockholders' (deficit) equity or redeemable limitedpartners' capital as appropriate. Realized gains and losses, and other-than-temporary declines in investments, are included in other income, net in the accompanyingconsolidated statements of income. The Company uses the specific-identification method to determine the cost of securities sold. The Company does not holdpublicly traded equity investments.
Fair Value of Financial Instruments
The fair value of an asset or liability is based on the assumptions that market participants would use in pricing the asset or liability. Valuation techniquesconsistent with the market approach, income approach and/or cost approach are used to measure fair value. The Company follows a three-tiered fair valuehierarchy when determining the inputs to valuation techniques. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels inorder to maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are as follows:
Level 1: consists of financial instruments whose values are based on quoted market prices for identical financial instruments in an active market;
Level 2: consists of financial instruments whose values are determined using models or other valuation methodologies that utilize inputs that areobservable either directly or indirectly, including (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical orsimilar assets or liabilities in markets that are not active, (iii) pricing models whose inputs are observable for substantially the full term of the financialinstrument and (iv) pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or othermeans for substantially the full term of the financial instrument;
Level 3: consists of financial instruments whose values are determined using pricing models that utilize significant inputs that are primarily unobservable,discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significantmanagement judgment or estimation.
Accounts Receivable
Financial instruments, other than marketable securities, that subject the Company to potential concentrations of credit risk consist primarily of the Company'sreceivables. Receivables consist primarily of amounts due from hospital and healthcare system members for services and products. The Company maintains anallowance for doubtful accounts. This allowance is an estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors suchas past experience, credit quality of the member base, age of the receivable balances, both individually and in the aggregate, and current economic conditions thatmay affect a member's ability to pay. Provisions for the allowance for doubtful accounts attributable to bad debt are recorded in selling, general and administrativeexpenses in the accompanying consolidated statements of income. Accounts deemed uncollectible are written off, net of actual recoveries. If circumstances relatedto specific customers change, the Company’s estimate of the recoverability of receivables could be further adjusted.
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Inventory
Inventory consisting of finished goods, primarily medical products and other non-pharmaceutical products, are stated at the lower of cost or market on anaverage cost basis. Inventories consisting of pharmaceuticals and pharmaceutical-related products are stated at the lower of cost or market on a first-in, first-outbasis. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and unusable inventory and records necessary provisionsto reduce such inventory to net realizable value.
Property and Equipment, Net
Property and equipment are recorded at cost, net of accumulated depreciation. Expenditures for major additions and improvements are capitalized and minorreplacements, maintenance and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost andaccumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.Depreciation is provided over the estimated useful lives (“EUL”) of the related assets using the straight-line method. Capitalized modifications to leased propertiesare amortized using the straight-line method over the shorter of the lease term or the assets' EUL. See Note 8 - Property and Equipment, Net .
Costs to develop internal use computer software during the application development stage are capitalized. Internal use capitalized software costs are includedin property and equipment, net in the accompanying consolidated balance sheets. Capitalized costs are amortized on a straight-line basis over the estimated usefullives of the related software applications of up to five years and amortization is included in cost of revenue in the accompanying consolidated statements ofincome. The Company capitalized costs related to software developed for internal use of $61.0 million and $57.9 million during the years ended June 30, 2016 and2015 , respectively.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of anasset or asset group may not be recoverable from the estimated cash flows expected to result from its use and eventual disposition. In cases where the undiscountedcash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset orasset group. The factors considered by the Company in performing this assessment include current and projected operating results, trends and prospects, themanner in which the asset or asset group is used, and the effects of obsolescence, demand, competition and other economic factors.
Intangible Assets
Definite-lived intangible assets consist primarily of acquired technology, customer relationships and trade names, and are amortized on a straight-line basisover their EUL. See Note 9 - Intangible Assets, Net .
The Company reviews the carrying value of definite-lived intangible assets subject to amortization for impairment whenever events and circumstancesindicate that the carrying value of the intangible asset subject to amortization may not be recoverable from the estimated cash flows expected to result from its useand eventual disposition. In cases where the undiscounted cash flows are less than the carrying value, an impairment loss is recognized equal to an amount bywhich the carrying value exceeds the fair value of the intangible asset subject to amortization. The factors considered by the Company in performing thisassessment include current and projected operating results, trends and prospects, the manner in which the definite-lived intangible asset is used, and the effects ofobsolescence, demand and competition, as well as other economic factors.
An impairment loss is recognized if the carrying amount of a definite-lived intangible asset exceeds the estimated fair value on the measurement date.
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized. The Companyperforms its annual goodwill impairment testing on the first day of the last fiscal quarter of its fiscal year unless impairment indicators are present which couldrequire an interim impairment test.
Under accounting rules, the Company may elect to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred.This qualitative assessment requires an evaluation of any excess of fair value over the carrying value for a reporting unit and significant judgment regardingpotential changes in valuation inputs, including a review of the Company's most recent long-range projections, analysis of operating results versus the prior year,changes in market values, changes in discount rates and changes in terminal growth rate assumptions. If it is determined that an impairment is more likely than notto exist, then we are required to perform a quantitative assessment to determine whether or not goodwill is impaired and to measure the amount of goodwillimpairment, if any.
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Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of each of our reporting units toits carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting unit using a discounted cash flow analysis that iscorroborated by a market-based approach. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discountrates, perpetual growth rates and the amount and timing of expected future cash flows. The cash flows employed in the discounted cash flow analyses are based onthe most recent budget and long-term forecast. The discount rates used in the discounted cash flow analyses are intended to reflect the risks inherent in the futurecash flows of the respective reporting units. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impairedand the second step of the impairment test is not necessary.
If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The secondstep of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its goodwill carrying amount to measure the amount ofimpairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In otherwords, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if thereporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of thereporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.
The Company's most recent annual impairment testing, which consisted of a quantitative assessment, did not result in any goodwill impairment charges duringthe fourth quarter of the year ended June 30, 2016 .
Deferred Compensation Plan Assets and Related Liabilities
The Company maintains a non-qualified deferred compensation plan for the benefit of eligible employees. This plan is designed to permit employee deferralsin excess of certain tax limits and provides for discretionary employer contributions in excess of the tax limits applicable to the Company's 401(k) plan. Theamounts deferred are invested in assets at the direction of the employee.
Company assets designated to pay benefits under the plan are held by a rabbi trust and are subject to the general creditors of the Company.
The assets, classified as trading securities, and liabilities of the rabbi trust are recorded at fair value and are accounted for as assets and liabilities of theCompany. The assets of the rabbi trust are used to fund the deferred compensation liabilities owed to current and former employees. The deferred compensationplan contains both current and non-current assets. The current portion of the deferred compensation plan assets is comprised of estimated amounts to be paid withinone year to departed participants following separation from the Company. The estimated current portion, totaling $2.0 million and $2.6 million at June 30, 2016and 2015 , respectively, is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The corresponding currentportion of deferred compensation plan liabilities is included in other current liabilities in the accompanying consolidated balance sheets at June 30, 2016 and 2015 .The non-current portion of the deferred compensation plan assets, totaling $40.0 million and $37.5 million at June 30, 2016 and 2015 , respectively, is included inlong-term assets in the accompanying consolidated balance sheets. The corresponding non-current portion of deferred compensation plan liabilities is included inlong-term liabilities in the accompanying consolidated balance sheets at June 30, 2016 and 2015 . Unrealized gain (loss) of $(1.6) million , $(0.8) million and $2.0million respectively, on plan assets as of June 30, 2016, 2015 and 2014 , respectively, are included in other income (expense), net in the accompanyingconsolidated statements of income. Deferred compensation income (expense) from the change in the corresponding liability of $1.6 million , $0.8 million and$(2.0) million , respectively, are included in selling, general and administrative expense in the accompanying consolidated statements of income for the yearsended June 30, 2016, 2015 and 2014 , respectively.
Investments
The Company uses the cost method to account for investments in businesses that are not publicly traded and for which the Company does not control or havethe ability to exercise significant influence over operating and financial policies. In accordance with the cost method, these investments are recorded at lower ofcost or fair value, as appropriate, and are classified as long-term and included in other assets.
Investments held by the Company in businesses that are not publicly traded and for which the Company has the ability to exercise significant influence overoperating and financial management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded atcost and are adjusted for the Company's proportionate share of earnings, losses and distributions. These investments are classified as long-term and included inother assets. See Note 12 - Investments .
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The Company assesses and records impairment losses when events and circumstances indicate the investments might be impaired. Gains and losses arerecognized when realized and recorded in other income (expense), net in the accompanying consolidated statements of income.
Tax Receivable Agreements
The Company records a liability related to the tax receivable agreements based on 85% of the estimated amount of tax savings the Company expects toreceive, generally over a 15 -year period, in connection with the additional tax benefits created in connection with the Reorganization and IPO. Tax paymentsunder the tax receivable agreements will be made to the member owners as the Company realizes tax benefits attributable to the initial purchase of Class Bcommon units from the member owners in the Reorganization and IPO and any subsequent exchanges of Class B common units into Class A common stock orcash between the Company and the member owners. Determining the estimated amount of tax savings the Company expects to receive requires judgment asdeductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the actual realization of the tax benefit and the taxrates in effect at that time.
Changes in the estimated tax receivable agreement liability that are the result of a change in tax accounting method are recorded in selling, general andadministrative expense in the consolidated statements of income. Changes in the estimated tax receivable agreement liability that are related to new basis changesas a result of the exchange of Class B common units for a like number of shares of Class A common stock or as a result of departed member owners are recordedas an increase to additional paid-in capital in the consolidated statements of stockholders' (deficit) equity.
Redeemable Limited Partner's Capital
The LP agreement includes a provision that provides for redemption of a limited partner’s interest upon termination as follows: For Class B common units notyet eligible for exchange, those will be redeemed at a purchase price which is the lower of the limited partner’s capital account balance in Premier LP immediatelyprior to the IPO after considering any IPO proceeds received and the fair market value of the Class A common stock of the Company on the date of the terminationwith either (a) a five -year, unsecured, non-interest bearing term promissory note, (b) a cashier’s check or wire transfer of immediately available funds in anamount equal to the present value of the Class B unit redemption amount, or (c) payment on such other terms mutually agreed upon with Premier GP. For Class Bcommon units that are eligible for exchange, the limited partner is also required to exchange all eligible Class B common units on the next exchange date followingthe date of the termination.
A limited partner cannot redeem all or any part of its interest in Premier LP without the approval of Premier GP, which is controlled by the board of directors.Given the limited partners hold the majority of the votes of the board of directors, limited partners' capital has a redemption feature that is not solely within thecontrol of the Company. As a result, the Company reflects limited partners’ capital on the consolidated balance sheets as redeemable limited partners’ capital intemporary equity. In addition, the limited partners have the ability to exchange their Class B common units for cash or Class A common shares on a one -for- onebasis. Accordingly, the Company records redeemable limited partners' capital at the redemption amount, which represents the greater of the book value orredemption amount per the LP Agreement at the reporting date, with the corresponding offset to additional paid-in-capital and retained earnings (accumulateddeficit).
Distributions to Limited Partners under the LP Agreement
Premier LP makes quarterly distributions to Premier, Inc. as the general partner and to the limited partners in the form of a legal partnership incomedistribution governed by the terms of the LP Agreement. The general partner distribution is based on the general partner's ownership in Premier LP. The limitedpartner distributions are based on the limited partners' ownership in Premier LP and relative participation across Premier service offerings. While the limitedpartner distributions are partially based on relative participation across Premier service offerings, the actual distribution is not solely based on revenue generatedfrom an individual partner’s participation as distributions are based on the net income or loss of the partnership which encompass the operating expenses of thepartnership as well as income or loss generated by non-owner members' participation in Premier’s service offerings. To the extent Premier LP incurred a net loss,the partners would not receive a quarterly distribution.
Revenue Recognition
NetRevenue
Net revenue consists of (i) service revenue which includes net administrative fees revenue and other services and support revenue and (ii) product revenue.Net administrative fees revenue consists of net GPO administrative fees in the supply chain segment. Other services and support revenue consists primarily of feesgenerated by the performance services segment in connection with the Company's SaaS informatics products subscriptions, advisory services and performanceimprovement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply chainsegment. The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or
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determinable, (iii) services have been rendered and payment has been contractually earned, and (iv) collectability is reasonably assured.
NetAdministrativeFeesRevenue
Net administrative fees revenue is generated through administrative fees received from suppliers based on the total dollar volume of supplies purchased by theCompany's members in connection with its GPO programs.
The Company, through its group purchasing program, aggregates member purchasing power to negotiate pricing discounts and improve contract terms withsuppliers. Contracted suppliers pay the Company administrative fees which generally represent 1% to 3% of the purchase price of goods and services sold tomembers under the contracts the Company has negotiated. Administrative fees are recognized as revenue in the period in which the respective supplier reportsmember purchasing data, usually a month or a quarter in arrears of actual member purchase activity. The supplier report proves that the delivery of product orservice has occurred, the administrative fees are fixed and determinable based on reported purchasing volume, and collectability is reasonably assured. Memberand supplier contracts substantiate persuasive evidence of an arrangement. The Company does not take title to the underlying equipment or products purchased bymembers through its GPO supplier contracts.
The Company pays a revenue share equal to a percentage of gross administrative fees that the Company collects based upon purchasing by such members andtheir owned, leased, managed or affiliated facilities through its GPO supplier contracts. Revenue share is recognized according to the members' contractualagreements with the Company as the related administrative fees revenue is recognized. Considering GAAP relating to principal/agent considerations under revenuerecognition principles, revenue share is recorded as a reduction to gross administrative fees revenue to arrive at a net administrative fees revenue amount, whichamount is included in service revenue in the accompanying consolidated statements of income.
OtherServicesandSupportRevenue
Performance services revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses, performance improvementcollaborative and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions from group-sponsored insurance programs.
SaaS informatics subscriptions include the right to use the Company's proprietary hosted technology on a SaaS basis, training and member support to deliverimprovements in cost management, quality and safety, population health management and provider analytics. Pricing varies by application and size of healthcaresystem. Informatics subscriptions are generally three to five year agreements with automatic renewal clauses and annual price escalators that typically do not allowfor early termination. These agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and revenueis recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation. Implementation involves thecompletion of data preparation services that are unique to each member's data set and, in certain cases, the installation of member site-specific software, in order toaccess and transfer member data into the Company's hosted SaaS informatics products. Implementation is generally 90 to 170 days following contract executionbefore the SaaS informatics products can be fully utilized by the member.
The Company sells certain perpetual and term licenses that include mandatory post-contract customer support in the form of maintenance and supportservices. Pricing varies by application and size of healthcare system. Fees for the initial period include the license fees, implementation fees and the initial bundledmaintenance and support services fees. The fees for the initial period are recognized straight-line over the remaining initial period following implementation.Subsequent renewal maintenance and support services fees are recognized on a straight-line basis over the contractually stated renewal periods. Implementationservices are provided to the customer prior to the use of the software and do not involve significant customization or modification. Implementation is generally 300to 350 days following contract execution before the licensed software products can be fully utilized by the member.
Revenue from performance improvement collaboratives and other service subscriptions that support the Company's offerings in cost management, quality andsafety and population health management is recognized over the service period, which is generally one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement. Fees are billed as stipulated inthe contract, and revenue is recognized on a proportional performance method as services are performed and deliverables are provided. In situations where thecontracts have significant contract performance guarantees or member acceptance provisions, revenue recognition occurs when the fees are fixed and determinableand all contingencies, including any refund rights, have been satisfied.
Insurance services management fees are recognized in the period in which such services are provided. Commissions from group sponsored insurance programsare recognized over the term of the insurance policies, generally one year.
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Certain administrative and/or patient management specialty pharmacy services are provided in situations where prescriptions are sent back to member healthsystems for dispensing. Additionally, the Company derives revenue from pharmaceutical manufacturers for providing patient education and utilization data.Revenue is recognized as these services are provided.
ProductRevenue
Specialty pharmacy revenue is recognized when a product is accepted and is recorded net of the estimated contractual adjustments under agreements withMedicare, Medicaid and other managed care plans. Payments for the products provided under such agreements are based on defined allowable reimbursementsrather than on the basis of standard billing rates. The difference between the standard billing rate and allowable reimbursement rate results in contractualadjustments which are recorded as deductions from net revenue.
Direct sourcing revenue is recognized once the title and risk of loss of medical products have been transferred to members.
MultipleDeliverableArrangements
The Company enters into agreements where the individual deliverables discussed above, such as SaaS subscriptions and advisory services, are bundled into asingle service arrangement. These agreements are generally provided over a time period ranging from approximately three months to five years after the applicablecontract execution date. Revenue is allocated to the individual elements within the arrangement based on their relative selling price using vendor specific objectiveevidence ("VSOE"), third-party evidence ("TPE") or the estimated selling price ("ESP"), provided that the total arrangement consideration is fixed anddeterminable at the inception of the arrangement. The Company establishes VSOE, TPE, or ESP for each element of a service arrangement based on the pricecharged for a particular element when it is sold separately in a stand-alone arrangement. All deliverables which are fixed and determinable are recognizedaccording to the revenue recognition methodology described above.
Certain arrangements include performance targets or other contingent fees that are not fixed and determinable at the inception of the arrangement. If the totalarrangement consideration is not fixed and determinable at the inception of the arrangement, the Company allocates only that portion of the arrangement that isfixed and determinable to each element. As additional consideration becomes fixed, it is similarly allocated based on VSOE, TPE or ESP to each element in thearrangement and recognized in accordance with each element's revenue recognition policy.
PerformanceGuarantees
On limited occasions, the Company enters into agreements which provide for guaranteed performance levels to be achieved by the member over the term ofthe agreement. In situations with significant performance guarantees, the Company defers revenue recognition until the amount is fixed and determinable and allcontingencies, including any refund rights, have been satisfied. In the event that guaranteed savings levels are not achieved, the Company may have to performadditional services at no additional charge in order to achieve the guaranteed savings or pay the difference between the savings that were guaranteed and the actualachieved savings.
DeferredRevenue
Deferred revenue consists of unrecognized revenue related to advanced member invoicing or member payments received prior to fulfillment of the Company'srevenue recognition criteria. Substantially all deferred revenue consists of deferred subscription fees and deferred advisory fees. Subscription fees for company-hosted SaaS applications are deferred until the member's unique data records have been incorporated into the underlying software database, or until member site-specific software has been implemented and the member has access to the software. Deferred advisory fees arise when cash is received from members prior todelivery of service. When the fees are contingent upon meeting a performance target that has not yet been achieved, the advisory fees are deferred until theperformance target is met.
Cost of Revenue and Operating Expenses
CostofRevenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide servicesrelated to revenue-generating activities, including advisory services to members and implementation services related to SaaS informatics products. Cost of servicerevenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost ofinternal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products.
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OperatingExpenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative employees and indirect expensesassociated with employees that primarily support revenue generating activities (including compensation and benefits) and travel-related expenses, as well asoccupancy and other indirect expenses, insurance expenses, professional fees, and other general overhead expenses.
Research and development expenses consist of employee-related compensation and benefits expenses, and third-party consulting fees of technologyprofessionals, incurred to develop, support and maintain the Company's software-related products and services.
Amortization of purchased intangible assets includes the amortization of all identified definite-lived intangible assets resulting from acquisitions.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are reflected in selling, general and administrative expenses in the accompanying consolidatedstatements of income and were $3.3 million , $2.2 million and $1.7 million for the years ended June 30, 2016, 2015 and 2014 , respectively.
Software Development Costs
Costs to develop internal use computer software that are incurred in the preliminary project stage are expensed as incurred. During the development stage,direct consulting costs and payroll and payroll-related costs for employees that are directly associated with each project are capitalized and amortized over theestimated useful life of the software, once it is placed into operation. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of therelated software applications of up to five years and amortization is included in depreciation and amortization expense. Replacements and major improvements arecapitalized, while maintenance and repairs are expensed as incurred. Some of the more significant estimates and assumptions inherent in this process involvedetermining the stages of the software development project, the direct costs to capitalize and the estimated useful life of the capitalized software.
Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets or liabilities are determined based on the differencesbetween the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse.The Company provides a valuation allowance against net deferred tax assets when, based upon the available evidence, it is more likely than not that the deferredtax assets will not be realized.
The Company prepares and files tax returns based on interpretations of tax laws and regulations. The Company's tax returns are subject to examination byvarious taxing authorities in the normal course of business. Such examinations may result in future tax and interest assessments by these taxing authorities.
In determining the Company's tax expense for financial reporting purposes, the Company establishes a reserve for uncertain income tax positions unless it isdetermined to be "more likely than not" that such tax positions would be sustained upon examination, based on their technical merits. That is, for financialreporting purposes, the Company only recognizes tax benefits taken on the tax return if it believes it is "more likely than not" that such tax positions would besustained. There is considerable judgment involved in determining whether it is "more likely than not" that positions taken on the tax returns would be sustained.
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, varying taxing authorities, as well aschanges in tax laws, regulations and interpretations. The consolidated tax expense of any given year includes adjustments to prior year income tax accruals andrelated estimated interest charges that are considered appropriate. The Company's policy is to recognize, when applicable, interest and penalties on uncertainincome tax positions as part of income tax expense.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period from non-owner sources. Net income and other comprehensive income,including unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income.
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Basic and Diluted Earnings (Loss) per Share
Basic earnings (loss) per share ("EPS") is calculated by dividing net income by the number of weighted average common shares outstanding during the period.Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would result in the reduction ofa loss or the increase in income per share. Diluted EPS is computed by dividing net income by the number of weighted average common shares increased by thedilutive effects of potential common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance withthe treasury stock method.
Recently Adopted Accounting Standards
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance SheetClassification of Deferred Taxes , as part of their simplification initiatives. The update requires that deferred tax liabilities and assets be classified as noncurrent ina classified statement of financial position. The Company early adopted this standard as allowed as of December 31, 2015. The Company retroactively adjusteddeferred tax assets and liabilities as they would have been reported at June 30, 2015 in accordance with ASU 2015-17 (see Note 20 - Income Taxes ).
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting Measurement-Period Adjustments . Under this standard, an acquirer mustrecognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts aredetermined. The effect on earnings of changes in depreciation or amortization, or other income effects (if any) as a result of the change to the provisional amounts,calculated as if the accounting had been completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts aredetermined rather than retrospectively. This standard also requires that the acquirer present separately on the face of the income statement, or disclose in the notes,the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to theprovisional amounts had been recognized as of the acquisition date. The Company early adopted the new standard as allowed effective January 1, 2016. Theadoption of ASU 2015-16 did not result in any significant changes in the Company's results of operations or statement of position. For further information, seeNote 10 - Goodwill .
Recently Issued Accounting Standards Not Yet Adopted
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based PaymentAccounting , which is intended to simplify the accounting for employee share-based payments. The amendments in this updated guidance include changes tosimplify the accounting for share-based payment transactions, including the income tax consequences, classification of such share-based awards as either equity orliabilities and classification in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periodswithin those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2017. Early adoption is permitted. The Companyis currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which is intended to increase transparency and comparability among organizationsof accounting for leasing arrangements. This guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability onthe balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting thepattern of expense recognition in the income statement. Entities will be required to recognize and measure leases as of the earliest period presented using amodified retrospective approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.The new standard will be effective for the Company for the fiscal year beginning July 1, 2019. Early adoption is permitted. The Company is currently evaluatingthe impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which is intended toprovide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Thestandard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective forthe Company for the fiscal year beginning July 1, 2018. Early adoption is permitted for financial statements that have not been issued. The Company is currentlyevaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-CreditArrangements , which clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangementsgiven the lack of guidance on this topic in ASU 2015-03 Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 statesthat the SEC staff would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuancecosts ratably over
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the term of the line-of-credit arrangement.” This standard will be effective retrospectively for financial statements issued for fiscal years beginning after December15, 2015, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2016. Theguidance has no impact on the Company’s accounting for debt issuance costs associated with its line-of-credit.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory , which requires entities to measure most inventory “at the lower ofcost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. This guidancewill not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The new standard will be effectiveprospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for theCompany for the fiscal year beginning July 1, 2017. Early adoption is permitted. Upon transition, entities must disclose the nature of and reason for the accountingchange. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis , which effectively eliminates thepresumption that a general partner should consolidate a limited partnership, modifies the evaluation of whether limited partnerships and similar legal entities arevariable interest entities ("VIE"s) or voting interest entities, and affects the consolidation analysis of reporting entities that are involved with VIEs (particularlythose that have fee arrangements and related party relationships). In some cases, consolidation conclusions will change under the new guidance and, in other cases,a reporting entity will provide additional disclosures if an entity that currently is not considered a VIE is considered a VIE under the new guidance. The newstandard will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The new standard allows foreither full retrospective or modified retrospective adoption. The new standard will be effective for the Company for the fiscal year beginning July 1, 2016. TheCompany has completed its evaluation and has concluded there is no material impact from the adoption of the new standard on its consolidated financial statementsother than providing additional disclosures regarding its consolidation of Premier LP.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which will supersede nearly all existing revenue recognitionguidance. The new standard requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures about thenature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments andassets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for either full retrospective or modified retrospective adoption.
The FASB subsequently issued an amendment in ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , inAugust 2015 to defer the effective date of the new standard for all entities by one year. The new standard, as amended, will be effective for fiscal years beginningafter December 15, 2017, including interim periods within those fiscal years. Early adoption as of the original effective date for public entities will be permitted.
The FASB issued another amendment in ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations , inMarch 2016 related to a third party providing goods or services to a customer. When another party is involved in providing goods or services to a customer, anentity is required to determine whether the nature of its promise is to provide the specified good or service itself, the entity acts as a principal. If an entity arrangesfor the good or service to be provided by a third party, the entity acts as an agent. The standard requires principals to recognize revenue for the gross amount andagents to recognize revenue for the amount of any fee or commission it expects to be entitled. The new standard, as amended, will be effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing , which clarifies specific aspects of ASU 2014-09,Revenue from Contracts with Customers, clarifying how to identify performance obligations and guidance related to licensing implementation. This new standardprovides guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property or aright to access the entity's intellectual property. The new standard, as amended, will be effective with ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients , which clarifies specific aspects of ASU 2014-09,Revenue from Contracts with Customers , clarifying how to identify performance obligations and guidance related to its promise in granting a license of intellectualproperty. This new standard provides guidance to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised goodor service is separately identifiable and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has beentransferred to the customer as a fulfillment cost. The new standard also clarifies how an entity should evaluate the nature of its promise in granting a license ofintellectual property to help determine whether it recognizes revenue over time or at a point in time and addresses how entities should consider license renewalsand restrictions. The new standard, as amended, will be effective with ASU 2014-09.
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The new revenue recognition standards, as amended, will be effective for the Company for the fiscal year beginning July 1, 2018. The Company is currentlyevaluating the transition method that will be elected as well as the impact of the adoption of the new standards on its consolidated financial statements and relateddisclosures. The Company is also evaluating the impact of the deferral of the effective date on its plans for adopting the new standard.
(4) BUSINESS ACQUISITIONS
Acquisition of InFlowHealth, LLC
On October 1, 2015, PHSI acquired all of the limited liability company membership interests of InFlowHealth, LLC ("InFlow") for $6.1 million in cash. TheCompany utilized available funds on hand to complete the acquisition. The acquisition provides selling members an earn-out opportunity of up to $26.9 millionbased on InFlow’s future annual contractual subscription revenues above certain thresholds through December 31, 2019. As of June 30, 2016 , the Companyvalued the earn-out at $4.1 million related to the contingent purchase price, of which $0.5 million is classified as current and included in other current liabilitiesand $3.6 million is classified as long-term and included in other non-current liabilities in the consolidated balance sheet. In accordance with GAAP, the contingentconsideration is recorded at fair value based on a probability-weighted approach including multiple earnings scenarios, although this value is not indicative of aknown amount to be paid. The selling members also received restricted stock units of the Company with an aggregate equity grant value of $2.1 million , whichvest over a three -year period with restrictions tied to continued employment.
InFlow is a SaaS-based software developer that specializes in improving the operational, financial and strategic performance of physician practices. InFlow’ssoftware allows physicians to identify opportunities for improvement and guide physician practice budgeting and strategic investments by aggregating financialand operational data from physicians in medical groups across the United States. The software is designed to provide actionable insights into among other things,practice capacity, patient volumes, productivity and staffing ratios, revenue cycle performance, patient demographics, referral patterns and overall compensation.
The Company has accounted for the InFlow acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets(see Note 9 - Intangible Assets, Net ) acquired and liabilities assumed based on their fair values. The InFlow acquisition resulted in the recognition ofapproximately $5.9 million of goodwill (see Note 10 - Goodwill ) attributable to the anticipated profitability of InFlow. The InFlow acquisition is considered anasset acquisition for tax purposes. Accordingly, the Company expects the goodwill to be deductible for tax purposes.
The calculation of the earn-out is based on future revenues as defined in the purchase agreement. In accordance with GAAP, the Company is required to fair-value the earn-out liability at each reporting period with any adjustments to the earn-out recorded in earnings under other expenses, net. The Company reportsInFlow as part of its performance services segment.
Acquisition of CECity.com, Inc.
On August 20, 2015, PHSI acquired 100% of the outstanding shares of capital stock of CECity.com, Inc. (“CECity”), a Delaware corporation, for $398.3million . The Company funded the acquisition with $250.0 million of cash and $150.0 million of borrowings under the Company’s credit facility (see Note 13 -Debt ). CECity is a cloud-based healthcare solutions provider, specializing in performance management and improvement, pay-for-value reporting and professionaleducation. CECity offers turnkey solutions for clinical data registries, continuing medical education, maintenance of certification, performance improvement, pay-for-value reporting and life-long professional development.
The Company has accounted for the CECity acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets(see Note 9 - Intangible Assets, Net ) acquired and liabilities assumed based on their fair values. The CECity acquisition resulted in the recognition ofapproximately $274.0 million of goodwill (see Note 10 - Goodwill ) which reflects a premium relative to the fair value of the identified assets due to the strategicimportance of the transaction to the Company and the CECity business model which does not rely extensively on tangible assets as well as the anticipatedprofitability of CECity. The CECity acquisition is considered an asset acquisition for tax purposes. Accordingly, the Company expects the goodwill to bedeductible for tax purposes.
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The following table summarizes the fair values assigned to the net assets acquired and the liabilities assumed as of the CECity acquisition date of August 20,2015 (in thousands):
Acquisition Date Fair ValuePurchase price $ 400,000Working capital adjustment (28)
Total purchase price 399,972Less: cash acquired (1,708)
Total purchase price, net of cash acquired 398,264Accounts receivable 3,877Other current assets 295Property and equipment 605Intangible assets 125,400
Total assets acquired 130,177Other current liabilities 5,871
Total liabilities assumed 5,871Goodwill $ 273,958
Approximately $4.0 million of pretax transaction-related costs related to the CECity acquisition are recorded in selling, general and administrative expenses inthe accompanying consolidated statement of income for the year ended June 30, 2016 , respectively. The Company reports CECity as part of its performanceservices segment.
Pro forma results of operations for this acquisition have not been presented because the effects on revenue and net income were not material to our historicconsolidated financial statements.
Acquisition of Healthcare Insights, LLC
On July 31, 2015, PHSI acquired all of the limited liability company membership interests of Healthcare Insights, LLC (“HCI”) for $64.3 million in cash. TheCompany utilized available funds on hand to complete the acquisition. The acquisition also provides selling members with an earn-out opportunity of up to $4.0million based on HCI’s revenues during the 12 months ending December 31, 2017 as defined in the purchase agreement. As of June 30, 2016 , the fair value of theearn-out liability related to the HCI acquisition is zero . HCI has two primary businesses exclusively serving the healthcare provider market: (i) financial analyticswhich includes budgeting, forecasting, and labor productivity applications, and (ii) clinical analytics which includes service line analytics and direct costinganalytics to support value-based care.
The Company has accounted for the HCI acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets (seeNote 9 - Intangible Assets, Net ) acquired and liabilities assumed based on their fair values. The HCI acquisition resulted in the recognition of approximately $42.4million of goodwill (see Note 10 - Goodwill ) attributable to the anticipated profitability of HCI. The HCI acquisition is considered an asset acquisition for taxpurposes. Accordingly, the Company expects the goodwill to be deductible for tax purposes.
The calculation of the earn-out is based on future revenues as defined in the purchase agreement. In accordance with GAAP, the Company is required to fair-value the earn-out liability at each reporting period with any adjustments to the earn-out recorded in earnings in other expense, net. The Company reports HCI aspart of its performance services segment.
Acquisition of Non-Controlling Interest in S2S Global
On February 2, 2015, the Company purchased the remaining 40% of the outstanding limited liability company membership interests of SVS LLC d/b/a S2SGlobal ("S2S Global") for approximately $14.5 million . In connection with the purchase, the Company repaid the $14.2 million balance outstanding under the S2SGlobal line of credit and terminated the S2S Global line of credit prior to its maturity date. The Company utilized available funds on hand to complete theacquisition and pay-off the S2S Global line of credit (see Note 13 - Debt ).
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Acquisition of TheraDoc, Inc.
On September 1, 2014, the Company completed the acquisition of 100% of the outstanding shares of TheraDoc, Inc. ("TheraDoc") for approximately $108.6million . TheraDoc is a leading provider of clinical surveillance software to healthcare organizations across the country that brings together disparate data from ahospital's source systems and helps alert clinicians to potential risks. The Company utilized available funds on hand to complete the acquisition.
Acquisition of Aperek, Inc.
On August 29, 2014, the Company completed the acquisition of 100% of the outstanding shares of Aperek, Inc. ("Aperek"), (formerly Mediclick), forapproximately $47.4 million . Aperek is a SaaS-based supply chain solutions company focused on purchasing workflow and analytics. The Company utilizedavailable funds on hand to complete the acquisition.
(5) MARKETABLE SECURITIES
The Company invests its excess cash in commercial paper, U.S. government securities, corporate debt securities and other securities with maturities generallyranging from three months to five years from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold.Marketable securities, classified as available-for-sale, consist of the following (in thousands):
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market ValueJune 30, 2016 Corporate debt securities $ 33,267 $ — $ (135) $ 33,132Asset-backed securities 14,755 3 (1) 14,757 $ 48,022 $ 3 $ (136) $ 47,889
June 30, 2015 Commercial paper $ 43,067 $ 12 $ — $ 43,079U.S. government debt securities 101,597 66 (8) 101,655Corporate debt securities 211,079 34 (129) 210,984Asset-backed securities 59,692 12 (10) 59,694 $ 415,435 $ 124 $ (147) $ 415,412
Commercial paper, corporate debt securities, U.S. government debt securities and asset-backed securities are classified as current and long-term marketablesecurities in the accompanying consolidated balance sheets.
The decline in the fair market value of corporate debt securities is attributable to changes in interest rates and not credit quality. The Company does notintend to sell the corporate debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell the corporatedebt securities before recovery of their amortized cost bases, which may be maturity. The Company does not consider the corporate debt securities to be other-thantemporarily impaired at June 30, 2016 .
At June 30, 2016 , the Company had marketable securities with the following maturities (in thousands):
Cost Fair Market ValueDue in one year or less $ 17,768 $ 17,759Due after one year through five years 30,254 30,130 $ 48,022 $ 47,889
See Note 6 - Fair Value Measurements for further discussion related to the Company’s measurement of fair market value for its marketable securities.
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(6) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company measures the following assets at fair value on a recurring basis (in thousands):
Description Total
Quoted Prices in ActiveMarkets for Identical
Assets (Level 1)
Significant OtherObservable Inputs (Level
2)Significant Unobservable
Inputs (Level 3)June 30, 2016
Cash equivalents $ 83,846 $ 83,846 $ — $ —Corporate debt securities 33,132 — 33,132 —Asset-backed securities 14,757 — 14,757 —Deferred compensation plan assets (a) 41,917 41,917 — —
Total assets $ 173,652 $ 125,763 $ 47,889 $ —
Earn-out liabilities (b) 4,128 — — 4,128Total liabilities $ 4,128 $ — $ — $ 4,128
June 30, 2015 Cash equivalents $ 33,434 $ 33,434 $ — $ —Commercial paper 43,079 — 43,079 —U.S. government debt securities 101,655 34,145 67,510 —Corporate debt securities 210,984 — 210,984 —Asset-backed securities 59,694 — 59,694 —Deferred compensation plan assets (a) 40,057 40,057 — —
Total assets $ 488,903 $ 107,636 $ 381,267 $ —
(a) Deferred compensation plan assets consist of highly liquid mutual fund investments.(b) Earn-out liabilities incurred in connection with acquisitions of InFlow and HCI, valued at $4.1 million and zero , respectively, at June 30, 2016 .
Cash equivalents are included in cash and cash equivalents; commercial paper, corporate debt securities, U.S. government debt securities and asset-backedsecurities are included in current and long-term marketable securities (see Note 5 - Marketable Securities ); the current portion of deferred compensation planassets is included in prepaid expenses and other current assets ( $2.0 million and $2.6 million at June 30, 2016 and June 30, 2015 , respectively) in theaccompanying consolidated balance sheets. The fair value of the Company's commercial paper, corporate debt securities, U.S. government debt securities andasset-backed securities, classified as Level 2, are valued using quoted prices for similar securities in active markets or quoted prices for identical or similarsecurities in markets that are not active. The Company had no assets or liabilities for which fair value is measured on a recurring basis at June 30, 2015 that wouldbe classified as Level 3. At June 30, 2016 , the Company's earn-out liabilities are classified as Level 3. The fair value of the earn-out liabilities was determinedusing the Monte Carlo simulation method.
Non-Recurring Fair Value Measurements
During the year ended June 30, 2016 , no non-recurring fair value measurements were required relating to the testing of goodwill and intangible assets forimpairment, however the purchase price allocations required significant non-recurring Level 3 inputs (see Note 4 - Business Acquisitions ). The preliminary fairvalues of the acquired intangible assets resulting from the acquisitions of CECity, HCI and InFlow were determined using the income approach.
Other Financial Instruments
The fair value of cash, accounts receivable, accounts payable and accrued liabilities approximates carrying value because of the short-term nature of thesefinancial instruments. The fair value of non-interest bearing notes payable, classified as Level 2, is less than their carrying value by approximately $0.7 million and$0.6 million at June 30, 2016 and June 30, 2015 , respectively, based on an assumed market interest rate of 2.1% at June 30, 2016 and 1.6% at June 30, 2015 ,respectively.
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(7) ACCOUNTS RECEIVABLE, NET
Trade accounts receivable consist primarily of amounts due from hospital and healthcare system members for services and products. Managed servicesreceivable consist of amounts receivable from fees for supply chain services for members utilizing the Company's integrated pharmacy services related to contractnegotiation and administration, claims data, rebate processing and evaluation of current pharmacy formulary and utilization. Other receivables consist primarily ofinterest receivable on marketable securities.
Accounts receivable, net consists of the following (in thousands):
June 30, 2016 2015Accounts receivable $ 112,443 $ 88,078Managed services receivable 33,728 10,941Other 234 1,254 146,405 100,273Allowance for doubtful accounts (1,981) (1,153)Accounts receivable, net $ 144,424 $ 99,120
(8) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in thousands):
June 30, Useful life 2016 2015Capitalized software 3-5 years $ 361,864 $ 298,106Computer hardware 3-5 years 53,547 46,806Furniture and other equipment 5 years 8,102 7,630
Leasehold improvementsLesser of estimated useful life or
term of lease 16,318 15,768 439,831 368,310Accumulated depreciation and amortization (265,751) (220,685)Property and equipment, net $ 174,080 $ 147,625
Depreciation and amortization expense related to property and equipment for the years ended June 30, 2016, 2015 and 2014 was $51.1 million , $45.2 millionand $36.8 million , respectively. Unamortized capitalized software costs at June 30, 2016 and 2015 were $146.0 million and $120.4 million , respectively.
During the year ended June 30, 2015, the Company recognized a loss on disposal of long-lived assets of approximately $15.2 million primarily comprised of$13.3 million in capitalized software costs, which were included in the performance services segment. The Company specifically identified these capitalizedsoftware assets as having no future economic benefit in conjunction with the on-going integration of the TheraDoc acquisition during its annual inventory processin May 2015. See Note 4 - Business Acquisitions . The Company did not incur a material loss on disposal of long-lived assets during the years ended June 30, 2016and 2014.
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(9) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following (in thousands):
June 30, Useful Life 2016 2015Technology 5.0 years $ 143,727 $ 34,524Customer relationships 8.3 years 48,120 16,120Trade names 7.0 years 13,160 5,760Non-compete agreements 5.0 years 4,080 80Total intangible assets 209,087 56,484Accumulated amortization (50,870) (17,815)Total intangible assets, net $ 158,217 $ 38,669
The increase in intangible assets, net was due to the CECity, HCI and InFlow acquisitions completed during the year ended June 30, 2016 (see Note 4 -Business Acquisitions ). Amortization expense of intangible assets was $33.1 million , $9.1 million and $3.1 million for the years ended June 30, 2016, 2015 and2014 , respectively. Amortization expense related to technology was $25.2 million , $6.1 million and $1.5 million for the years ended June 30, 2016, 2015 and2014 , respectively. During the year ended June 30, 2015, the Company wrote-off approximately $11.6 million in fully amortized intangible assets.
The estimated aggregate amortization expense for each of the next five fiscal years and thereafter is as follows (in thousands):
2017 $ 35,8552018 35,3322019 33,7762020 28,9752021 7,864Thereafter 13,015Total amortization expense (a) $ 154,817
(a) Estimated aggregate amortization expense for the next five fiscal years and thereafter excludes amortization on technology under development, which is classified astechnology in the total intangible assets table, of $3.4 million , as these assets have not yet been completed.
The net carrying value of intangible assets by segment is as follows (in thousands):
June 30, 2016 2015Supply Chain Services $ — $ 347Performance Services 158,217 38,322 $ 158,217 $ 38,669
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(10) GOODWILL
Goodwill consists of the following (in thousands):
Supply Chain
Services Performance Services
Acquisition adjustmentsduring the measurement
period TotalBalance at June 30, 2015 $ 31,765 $ 183,880 $ — $ 215,645
CECity acquisition (a) — 273,713 245 273,958HCI acquisition (a) — 41,905 534 42,439InFlow acquisition (a) — 5,827 93 5,920
Balance at June 30, 2016 $ 31,765 $ 505,325 $ 872 $ 537,962
(a) See Note 4 - Business Acquisitions .
(11) OTHER LONG-TERM ASSETS
Other long-term assets consist of the following (in thousands):
June 30, 2016 2015Investments $ 16,800 $ 14,283Deferred loan costs, net 1,595 2,095Other 10,895 759Total other long-term assets $ 29,290 $ 17,137
The Company recorded $0.5 million , $0.3 million and $0.2 million in amortization expense on deferred loan costs during the years ended June 30, 2016, 2015and 2014 , respectively. Amortization expense on deferred loan costs is recognized based on the straight-line method, which approximates the effective interestmethod, and is included in interest and investment income, net in the consolidated statements of income.
Included in Other at June 30, 2016 is a $10.0 million net prepayment to a distributor, which was funded in order to receive additional discounts on productpurchases.
(12) INVESTMENTS
Innovatix, LLC ("Innovatix") is a privately held limited liability company that provides group purchasing services to alternate site providers in specific classesof trade. The Company, through PSCI, held 50% of the membership units in Innovatix at June 30, 2016 and 2015 . The Company accounts for its investment inInnovatix using the equity method of accounting. The carrying value of the Company's investment in Innovatix was $9.0 million and $9.3 million at June 30, 2016and 2015 , respectively, and is classified as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's 50%ownership share of Innovatix's net income included in equity in net income of unconsolidated affiliates in the accompanying consolidated statements of incomewas $21.8 million , $21.3 million and $17.0 million for the years ended June 30, 2016, 2015 and 2014 , respectively, all of which is included in the supply chainservices segment.
On May 1, 2015, the Company, through its consolidated subsidiary, PSCI, purchased 5,000,000 units of Class B Membership Interests in PharmaPoint, LLC("PharmaPoint") for $5.0 million , which represented a 28% ownership interest in PharmaPoint. The remaining 72% ownership interest is held by NationsPharmaceuticals, LLC through its 13,000,000 units of Class A Membership Interests. The Company accounts for its investment in PharmaPoint using the equitymethod of accounting. The carrying value of the Company's investment in PharmaPoint was $4.6 million and $5.0 million at June 30, 2016 and 2015 , respectively,and is classified as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's share of PharmaPoint's net loss was$0.4 million and $0.1 million for the years ended June 30, 2016 and 2015 , respectively. The PharmaPoint
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net loss is included in equity in net income from unconsolidated affiliates in the accompanying consolidated statements of income and is included in the supplychain services segment.
The Company obtained a 49% ownership interest in Pharmacy Quality Solutions, Inc. (“PQS”) through its acquisition of CECity in August 2015 (see Note 4- Business Acquisitions ). PQS provides medication use quality assessment services through its EquiPP platform which is utilized by U.S. pharmacies, includingmajor retail chains with monthly medication data for approximately 40 million individuals. The Company recorded zero net income from unconsolidated affiliatesfor the year ended June 30, 2016 . The Company accounts for its investment in PQS under the equity method. The carrying value of the Company's investment inPQS was zero at June 30, 2016 .
On January 28, 2016, the Company, through its consolidated subsidiary, PSCI, purchased 5,250,000 Class B Membership Units in BloodSolutions, LLC("Bloodbuy") for $2.3 million , which represented a 15% ownership interest in Bloodbuy. The Company accounts for its investment in Bloodbuy using the equitymethod of accounting as the Company has rights to appoint a board member. The carrying value of the Company's investment in Bloodbuy was $2.2 million atJune 30, 2016 , and is classified as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's share of Bloodbuy'snet loss was $0.1 million for the year ended June 30, 2016 . The Bloodbuy net loss is included in equity in net income from unconsolidated affiliates in theaccompanying consolidated statements of income and is included in the supply chain services segment.
(13) DEBT
Long-term debt consists of the following (in thousands):
Commitment Amount
June 30, 2016 June 30, 2015 Due Date Balance Outstanding Balance OutstandingCredit Facility $ 750,000 June 24, 2019 $ — $ —Notes Payable — Various 19,342 17,935 19,342 17,935Less: current portion (5,484) (2,256)Total long-term debt $ 13,858 $ 15,679
Credit Facility
On June 24, 2014, Premier LP, along with its consolidated subsidiaries, PSCI and PHSI, as Co-Borrowers, Premier GP and certain domestic subsidiaries ofPremier GP, as guarantors, entered into an unsecured Credit Facility, dated as of June 24, 2014, and amended on June 4, 2015 (the "Credit Facility"). The CreditFacility provides for borrowings of up to $750.0 million with (i) a $25.0 million sub-facility for standby letters of credit and (ii) a $75.0 million sub-facility forswingline loans. The Credit Facility may be increased from time to time at the Company's request up to an aggregate additional amount of $250.0 million , subjectto lender approval. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the Credit Facility by Premier GP, certaindomestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
At the Company's option, committed loans may be in the form of eurodollar rate loans (“Eurodollar Loans”) or base rate loans (“Base Rate Loans”).Eurodollar Loans bear interest at the eurodollar rate (defined as the London Interbank Offered Rate, or LIBOR, plus the Applicable Rate (defined as a marginbased on the Consolidated Total Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest of theprime rate announced by the administrative agent, the federal funds effective rate plus 0.50% or the one-month LIBOR plus 1.0% ) plus the Applicable Rate. TheApplicable Rate ranges from 1.125% to 1.75% for Eurodollar Rate Loans and 0.125% to 0.75% for Base Rate Loans. To fund the CECity acquisition the Companyutilized $150.0 million of the Credit Facility (see Note 4 - Business Acquisitions ), of which $50.0 million was repaid in each of November 2015, February 2016and May 2016. At June 30, 2016 , the interest rate for three-month Eurodollar Rate Loans was 1.779% and the interest rate for Base Rate Loans was 3.625% . TheCo-Borrowers are required to pay a commitment fee ranging from 0.125% to 0.250% per annum on the actual daily unused amount of commitments under thecredit facility. At June 30, 2016 , the commitment fee was 0.125% .
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others,limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments of which certain covenant calculations use EBITDA, anon-GAAP measure. Under the terms of the Credit Facility, Premier GP is
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not permitted to allow its consolidated total leverage ratio (as defined in the Credit Facility) to exceed 3.00 to 1.00 for any period of four consecutive quarters. Inaddition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscalquarter. The Company was in compliance with all such covenants at June 30, 2016 .
The Credit Facility also contains customary events of default including, among others, payment defaults, breaches of representations and warranties, covenantdefaults, cross-defaults of any indebtedness or guarantees in excess of $30.0 million , bankruptcy and other insolvency events, judgment defaults in excess of $30.0million , and the occurrence of a change of control (as defined in the Credit Facility). If any event of default occurs and is continuing, the administrative agentunder the Credit Facility may, with the consent, or shall, at the request, of the required lenders, terminate the commitments and declare all of the amounts owedunder the Credit Facility to be immediately due and payable. The Company may prepay amounts outstanding under the Credit Facility without premium or penaltyprovided that Co-Borrowers compensate the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Loan, as defined in the CreditFacility.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitionsand other general corporate purposes. As of June 30, 2016 and 2015 , there were no outstanding borrowings under the Credit Facility. As of June 30, 2016 , theCompany had approximately $25.0 million available under the letter of credit commitments.
Interest expense incurred during the year ended June 30, 2016 was $2.7 million and cash paid for interest during the year ended June 30, 2016 was $2.1million .
S2SGlobalLineofCredit
On February 2, 2015, the Company purchased the remaining 40% of the outstanding limited liability company membership interests of S2S Global. Inconnection with the purchase, the Company repaid the $14.2 million balance outstanding under the S2S Global line of credit and terminated the S2S Global line ofcredit prior to its maturity date.
Notes Payable
At June 30, 2016 and 2015 , the Company had $19.3 million and $17.9 million , respectively, in notes payable consisting primarily of non-interest bearingnotes payable outstanding to departed member owners, of which $5.5 million and $2.2 million , respectively, are included in current portion of long-term debt and$13.9 million and $15.7 million , respectively, are included in long-term debt, less current portion, in the accompanying consolidated balance sheets. Notes payablegenerally have stated maturities of five years from their date of issuance.
Future minimum principal payments as of June 30, 2016 are as follows (in thousands):
2017 $ 5,4842018 7,9952019 2602020 2,4202021 3,183Thereafter —Total principal payments $ 19,342
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(14) OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following (in thousands):
June 30, 2016 2015Deferred rent $ 16,049 $ 15,996Reserve for uncertain tax positions 3,815 3,436Earn-out liability, less current portion 3,659 —Accrued compensation 455 1,482Total other long-term liabilities $ 23,978 $ 20,914
(15) REDEEMABLE LIMITED PARTNERS' CAPITAL
At June 30, 2013, redeemable limited partners' capital represents the limited partners' 99% ownership of Premier LP. Pursuant to the terms of the historicallimited partnership agreement, Premier LP was required to repurchase a limited partner's interest in Premier LP upon the sale of such limited partner's shares ofPHSI common stock, such limited partner's withdrawal from Premier LP or such limited partner's failure to comply with the applicable purchase commitmentsunder the existing limited partnership agreement of Premier LP. As a result, the redeemable limited partners' capital is classified as temporary equity in themezzanine section of the consolidated balance sheets since (i) the withdrawal is at the option of each limited partner and (ii) the conditions of the repurchase arenot solely within the Company's control.
Upon the consummation of the Reorganization and IPO, each limited partner's shares of PHSI were contributed for Class B common units of Premier LP.Commencing on October 31, 2014, and during each year thereafter, each limited partner has the cumulative right to exchange up to one-seventh of its initialallocation of Class B common units for shares of Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of theCompany's independent audit committee of the board of directors.
Redeemable limited partners' capital represents the member owners' 68% ownership of Premier LP at June 30, 2016 . The limited partners hold the majority ofthe votes of the board of directors and any redemption or transfer or choice of consideration cannot be assumed to be within the control of the Company. As such,classification outside of permanent equity is still required and the redeemable limited partners' capital is recorded at the redemption amount, which represents thegreater of the book value or redemption amount per the LP Agreement, and is classified as temporary equity in the mezzanine section of the consolidated balancesheet at June 30, 2016 . As previously discussed, the Company records redeemable limited partners' capital at the greater of the book value or redemption amountper the LP Agreement that the Company calculates as the fair value of all Class B common units, as if immediately exchangeable into Class A common shares. Forthe years ended June 30, 2016, 2015 and 2014 the Company recorded an adjustment to fair value for the redemption amount to redeemable limited partners' capitalof $(776.8) million , $904.0 million and $2,741.6 million respectively.
During the year ended June 30, 2016 , the Company recorded a reduction of $267.7 million to redeemable limited partners' capital to reflect the exchange ofClass B common units and associated shares of Class B common stock by the member owners for a like number of shares of the Company's Class A common stockpursuant to the terms of the Exchange Agreement. The following table summarizes the number of Class B common units and associated shares of Class B commonstock exchanged by member owners for a like number of shares of the Company's Class A common stock during the year ended June 30, 2016 (in thousands,except share amounts):
Date of Quarterly ExchangeNumber of Class B Common
Units ExchangedReduction in RedeemableLimited Partners' Capital
July 31, 2015 91,374 $ 3,268November 2, 2015 5,830,458 206,281February 1, 2016 1,591,807 51,049May 2, 2016 209,359 7,083 7,722,998 $ 267,681
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The table below shows the changes in redeemable limited partners' capital classified as temporary equity from June 30, 2013 to June 30, 2016 (in thousands):
Receivables FromLimited Partners
RedeemableLimited Partners'
Capital
Accumulated OtherComprehensive Income
(Loss)
Total RedeemableLimited Partners'
CapitalJune 30, 2013 $ (56,571) $ 364,219 $ (13) $ 307,635Issuance of redeemable limited partnership interest for notes receivable (7,860) 7,860 — —Receipts on receivables from limited partners 12,706 — — 12,706Distributions and reductions applied to receivables from limited partners 33,586 (28,009) — 5,577Redemption of limited partners — (1,781) — (1,781)Net income attributable to Premier LP — 303,336 — 303,336Distributions to limited partners — (348,277) — (348,277)Contribution of PHSI common stock in connection with the IPO — 76,916 — 76,916Purchase of Class A common units from Premier LP — 247,742 — 247,742Purchase of Class B common units from PHSI — 30,072 — 30,072Acquisition of non-controlling interest from members — (131,000) (3) (131,003)Net unrealized gain on marketable securities — — 163 163Adjustment to redemption amount — 2,741,588 — 2,741,588June 30, 2014 $ (18,139) $ 3,262,666 $ 147 $ 3,244,674Distributions applied to receivables from limited partners 6,506 — — 6,506Redemption of limited partners — (2,046) — (2,046)Net income attributable to Premier LP — 194,206 — 194,206Distributions to limited partners — (92,273) — (92,273)Net unrealized loss on marketable securities — — (155) (155)Exchange of Class B common units for Class A common stock bymember owners — (175,115) — (175,115)Adjustment to redemption amount — 904,035 — 904,035June 30, 2015 $ (11,633) $ 4,091,473 $ (8) $ 4,079,832Distributions and notes payable applied to receivables from limitedpartners 5,407 — — 5,407Redemption of limited partners — (4,281) — (4,281)Net income attributable to Premier LP — 193,547 — 193,547Distributions to limited partners — (92,767) — (92,767)Net unrealized loss on marketable securities — — (77) (77)Exchange of Class B common units for Class A common stock bymember owners — (267,681) — (267,681)Adjustment to redemption amount — (776,750) — (776,750)June 30, 2016 $ (6,226) $ 3,143,541 $ (85) $ 3,137,230
Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are either interestbearing notes issued to new limited partners or non-interest bearing loans (contribution loans) provided to existing limited partners and are reflected as a reductionin redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid.No interest bearing notes receivable were executed by limited partners of Premier LP during the years ended June 30, 2016 and 2015 .
During the year ended June 30, 2016 , six limited partners withdrew from Premier LP. The limited partnership agreement provides for the redemption of theformer limited partner's Class B common units that are not eligible for exchange in the form
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of a five -year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption amount, or other mutuallyagreed upon terms. Partnership interest obligations to the former limited partners are reflected in notes payable in the accompanying consolidated balance sheets.
Prior to the consummation of the Reorganization and IPO, Premier LP maintained a discretionary distribution policy in which semi-annual cash distributionswere made each February attributable to the recently completed six months ended December 31 and each September attributable to the recently completed sixmonths ended June 30. As provided in the then existing limited partnership agreement, the amount of actual cash distributed may have been reduced by the amountof such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.
Upon the consummation of the Reorganization and IPO, Premier LP amended its distribution policy in which cash distributions will be required, as long astaxable income is generated and cash is available to distribute, on a quarterly basis prior to the 60 th day after the end of each calendar quarter instead of a semi-annual basis. The Company makes quarterly distributions to its limited partners in the form of a legal partnership income distribution governed by the terms of theLP Agreement. These partner distributions are based on the limited partner’s ownership in Premier LP and relative participation across Premier service offerings.While these distributions are based on relative participation across Premier service offerings, it is not based directly on revenue generated from an individualpartner’s participation as the distributions are based on the net income or loss of the Partnership which encompass the operating expenses of the Partnership as wellas participation by non-owner members in Premier’s service offerings. To the extent Premier LP incurred a net loss, the partners would not receive a quarterlydistribution. As provided in the limited partnership agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used bylimited partners to offset contribution loans or other amounts payable to the Company.
Premier LP made a quarterly distribution on August 27, 2015 to its limited partners of $22.4 million , which is equal to Premier LP's total taxable income forthe three months ended June 30, 2015 multiplied by the Company's standalone effective combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on November 25, 2015 to its limited partners of $23.1 million , which is equal to Premier LP's total taxable incomefor the three months ended September 30, 2015 multiplied by the Company's standalone effective combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on February 25, 2016 to its limited partners of $22.5 million , which is equal to Premier LP's total taxable incomefor the three months ended December 31, 2015 multiplied by the Company's standalone effective combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on May 26, 2016 to its limited partners of $24.7 million , which is equal to Premier LP's total taxable income for thethree months ended March 31, 2016 multiplied by the Company's standalone effective combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on August 25, 2016 to its limited partners of $22.5 million , which is equal to Premier LP's total taxable income forthe three months ended June 30, 2016 multiplied by the Company's stand-alone effective combined federal, state and local income tax rate. The distribution isreflected in limited partners' distribution payable in the accompanying consolidated balance sheet at June 30, 2016 .
(16) STOCKHOLDERS' DEFICIT
As of June 30, 2016 , there were 45,995,528 shares of the Company's Class A common stock, par value $0.01 per share, and 96,132,723 shares of theCompany's Class B common stock, par value $0.000001 per share, outstanding.
Holders of Class A common stock are entitled to (i) one vote for each share held of record on all matters submitted to a vote of stockholders, (ii) receivedividends, when and if declared by the board of directors out of funds legally available therefore, subject to any statutory or contractual restrictions on the paymentof dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class of series of stock having apreference over or the right to participate with the Class A common stock with respect to the payment of dividends or other distributions and (iii) receive pro rata,based on the number of shares of Class A common stock held, the remaining assets available for distribution upon the dissolution or liquidation of Premier, afterpayment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are (i) entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and (ii) notentitled to receive dividends or to receive a distribution upon the dissolution or a liquidation of Premier, other than dividends payable in shares of Premier'scommon stock. Pursuant to the Voting Trust Agreement, the trustee will vote all of the Class B common stock as a block in the manner determined by the pluralityof the votes received by the trustee from the
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member owners for the election of directors to serve on the board of directors, and by a majority of the votes received by the trustee from the member owners forall other matters. Class B common stock will not be listed on any stock exchange and, except in connection with any permitted sale or transfer of Class B commonunits, cannot be sold or transferred.
(17) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of Premier is computed by dividing net income (loss) attributable to stockholders by the weighted average number of shares ofcommon stock outstanding for the period. Net income (loss) attributable to stockholders reflects the adjustment recorded in the period to reflect redeemable limitedpartners' capital at the redemption amount, as a result of the benefit obtained by limited partners through the ownership of Class B common units. Except when theeffect would be anti-dilutive, the diluted earnings per share calculation, which is calculated using the treasury stock method, includes the impact of non-vestedrestricted stock units, shares of non-vested performance share awards, shares that could be issued under the outstanding stock options and the effect of the assumedredemption of Class B common shares through the issuance of Class A common shares.
The following table provides a reconciliation of common shares used for basic earnings (loss) per share and diluted earnings (loss) per share (in thousands,except per share amounts):
Year Ended June 30, 2016 (d) 2015 (d) 2014 (e)
Numerator for basic earnings (loss) per share: Net income (loss) attributable to stockholders $ 818,364 $ (865,292) $ (2,713,256)
Numerator for diluted earnings (loss) per share: Net income attributable to stockholders $ 818,364 $ — $ —Adjustment of redeemable limited partners' capital to redemption amount (776,750) — —Net income attributable to non-controlling interest in Premier LP 193,547 — —Net income 235,161 — —Tax effect on Premier Inc. net income (a) (41,497) — —Adjusted net income $ 193,664 $ — $ —
Denominator for basic earnings (loss) weighted average shares (b) 42,368 35,681 25,633
Denominator for diluted earnings (loss) per share: Effect of dilutive securities: (c) Stock options 348 — —Restricted stock 589 — —Performance share awards 1,429 — —Class B shares outstanding 100,574 — —Denominator for diluted earnings (loss) per share-adjusted:Weighted average shares and assumed conversions 145,308 35,681 25,633
Basic earnings (loss) per share $ 19.32 $ (24.25) $ (105.85)Diluted earnings (loss) per share $ 1.33 $ (24.25) $ (105.85)
(a) Represents income tax expense related to Premier, Inc. retaining the portion of net income attributable to income from non-controlling interest in Premier, LP for the purpose of dilutedearnings per share.
(b) Weighted average number of common shares used for basic earnings (loss) per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vestedperformance share awards and Class B shares outstanding for the years ended June 30, 2016, 2015 and 2014 , respectively.
(c) For the year ended June 30, 2016 , the effect of 1,292 stock options were excluded from the diluted weighted average shares outstanding as they have an anti-dilutive effect on the weightedaverage shares outstanding. For the year ended June 30, 2015 , the effect of 60 , 354 and 634 stock options, restricted stock units and performance share awards, respectively, wereexcluded from the diluted weighted average shares outstanding due to the net loss sustained for the respective period. Further, 106,383 Class B common units exchangeable for Class Acommon shares was excluded from the dilutive weighted average shares outstanding because to do so would have been anti-dilutive for the period presented. For the year ended June 30,2014 , the effect of 124 restricted stock units
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were excluded from the diluted weighted average shares outstanding due to the net loss sustained for the respective period. Further, 112,511 Class B common units exchangeable for ClassA common shares was excluded from the dilutive weighted average shares outstanding because to do so would have been anti-dilutive for the period presented.
(d) The weighted average shares calculation is based on Premier, Inc. common shares outstanding for the years ended June 30, 2016 and 2015 .(e) The weighted average shares calculation is based on a combination of the PHSI historical common shares outstanding for the three months ended September 30, 2013 and the Premier, Inc.
common shares outstanding for the period from September 25, 2013 to June 30, 2014.
Pursuant to the terms of the Exchange Agreement, Premier has issued, on a quarterly basis, shares of Class A common stock to member owners in exchangefor a like number of Class B common units of Premier LP. In connection with the exchange of Class B common units by member owners, shares of Premier's ClassB common stock are surrendered by member owners and retired. The following table presents certain information regarding the exchange of Class B common unitsand associated Class B common stock for Premier's Class A common stock in connection with the quarterly exchanges pursuant to the terms of the ExchangeAgreement:
Date of QuarterlyExchange
Number of Class BCommon Units
Exchanged
Number of Class BCommon Shares
Retired UponExchange
Number of Class BCommon Units
Outstanding AfterExchange
Number of Class BCommon Shares
Outstanding AfterExchange
Number of Class ACommon Shares
Outstanding AfterExchange
Percentage ofCombined Voting
Power Class B/ClassA Common Stock
July 31, 2015 91,374 91,374 106,078,063 106,078,063 37,762,544 74%/26%November 2, 2015 5,830,458 5,830,458 100,150,698 100,150,698 43,600,976 70%/30%
February 1, 2016 1,591,807 1,591,807 96,802,070 96,802,070 45,239,204 68%/32%May 2, 2016 209,359 209,359 96,132,723 96,132,723 45,554,075 68%/32%
August 1, 2016 (a) 1,323,654 1,323,654 94,809,069 94,809,069 47,365,528 67%/33%
(a) As the quarterly exchange occurred on August 1, 2016, the impact of the exchange is not reflected in the consolidated financial statements for the year ended June 30, 2016 .
(18) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. Pre-tax stock-basedcompensation expense was $48.7 million , $28.5 million and $19.5 million for the years ended June 30, 2016, 2015 and 2014 , respectively, with a resultingdeferred tax benefit of $18.5 million , $10.8 million and $7.4 million , respectively, calculated at a rate of 38% , which represents the expected effective income taxrate at the time of the compensation expense deduction and differs from the Company's current effective income tax rate due to enacted state income tax ratechanges.
At June 30, 2016 , there was $31.0 million of unrecognized stock-based compensation expense related to non-vested awards that will be amortized over 1.88years .
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan (the "2013 Equity Incentive Plan") provides for grants of up to 11,260,783 shares of Class A common stock, all ofwhich are eligible to be issued as non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units orperformance awards. As of June 30, 2016 , there were 5,493,425 shares available for grant under the 2013 Equity Incentive Plan.
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RestrictedStock
Restricted stock units ("RSU") and restricted stock awards ("RSA") issued and outstanding generally vest over a three -year period for employees and a one -year period for directors. The following table includes information related to restricted stock unit awards for the year ended June 30, 2016 :
Number of SharesWeighted Average Fair
Value at Grant DateOutstanding at June 30, 2015 819,091 $ 28.15
Granted 255,780 $ 35.10Vested (630,818) $ 27.17Forfeited (40,936) $ 30.33
Outstanding at June 30, 2016 403,117 $ 33.86
At June 30, 2016 , there was $8.1 million of unrecognized stock-based compensation expense related to non-vested awards that will be amortized over 1.93years .
PerformanceShareAwards
Performance share awards issued and outstanding generally vest over three years if performance targets are met. The following table includes informationrelated to performance share awards for the year ended June 30, 2016 :
Number of SharesWeighted Average Fair
Value at Grant DateOutstanding at June 30, 2015 1,091,868 $ 28.19
Granted 380,349 $ 35.50Vested (a) — $ —Forfeited (28,509) $ 32.93
Outstanding at June 30, 2016 1,443,708 $ 30.02
(a) As of June 30, 2016, 815,016 performance shares vested but were subject to approval by the Compensation Committee of the Company's Board of Directors. These shares were included inthe number of awards outstanding at June 30, 2016. The distribution of vested shares was approved on August 10, 2016 and distributed on August 23, 2016, on which date the classificationof the shares was changed from outstanding to vested.
At June 30, 2016 , there was $12.2 million of unrecognized stock-based compensation expense related to performance share awards that will be amortizedover 1.84 years .
StockOptions
Stock options have a term of 10 years from the date of grant. Vested stock options will expire either after 12 months of an employee's termination withPremier or immediately upon an employee's termination with Premier, depending on the termination circumstances. Stock options generally vest in equal annualinstallments over three years. The following table includes information related to stock options for the year ended June 30, 2016 :
Number of OptionsWeighted Average
Exercise PriceOutstanding at June 30, 2015 2,643,078 $ 28.24
Granted 863,717 $ 35.47Exercised (129,458) $ 27.44Forfeited (62,676) $ 34.16
Outstanding at June 30, 2016 3,314,661 $ 30.04 Outstanding and exercisable at June 30, 2016 2,074,973 $ 27.51
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The aggregate intrinsic value of stock options outstanding at June 30, 2016 and 2015 was $11.3 million and $27.0 million , respectively. The aggregateintrinsic value of stock options outstanding and exercisable at June 30, 2016 and 2015 was $10.8 million and $15.0 million , respectively. At June 30, 2016 and2015 , the aggregate intrinsic value of stock options expected to vest was $0.5 million and $12.0 million , respectively. The intrinsic value of stock optionsexercised during the year ended June 30, 2016 and 2015 was $0.8 million and $0.5 million , respectively. There were no stock options exercised during the yearended June 30, 2014 .
At June 30, 2016 , there was $10.7 million of unrecognized stock-based compensation expense related to stock options that will be amortized over 1.91 years .
The Company estimates the fair value of each stock option on the date of grant using a Black-Scholes option pricing model, applying the followingassumptions, and amortizes expense over the option's vesting period using the straight-line attribution approach:
June 30, 2016 2015 2014Expected life (a) 6 years 6 years 6 yearsExpected dividend (b) — — —Expected volatility (c) 32.7% - 33.5% 34.8% - 39.5% 42.0%Risk-free interest rate (d) 1.15% - 1.82% 1.66% - 1.89% 1.71%Weighted average option grant date fair value $11.11 - $12.40 $12.82 - $14.15 $11.46
(a) The six -year expected life (estimated period of time outstanding) of stock options granted was estimated using the "Simplified Method" which utilizes the midpoint between the vestingdate and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of Premier's employees.
(b) No dividends are expected to be paid over the contractual term of the stock options granted, resulting in the use of a zero expected dividend rate.(c) The expected volatility rate is based on the observed historical volatilities of comparable companies.(d) The risk-free interest rate was interpolated from the five -year and seven -year United States Treasury constant maturity market yield as of the date of the grant.
(19) PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The Company has a defined contribution 401(k) retirement savings plan ("the 401(k) plan") which covers employees who meet certain age and servicerequirements.
The Company had a defined contribution pension plan that was terminated in December 2014 and subsequently incorporated into the Company's definedcontribution 401(k) plan. The pension plan provided for monthly contributions of 5% of the participant's compensation, not to exceed certain limits. Pensionexpense, included in selling, general and administrative expenses in the accompanying consolidated statements of income, was $3.9 million and $8.2 million forthe years ended June 30, 2015 and 2014 , respectively.
The 401(k) plan provides for monthly employee contributions of up to 20% and matching monthly employer contributions up to 4% of the participant'scompensation, not to exceed certain limits. The 401(k) expense, included in selling, general and administrative expenses in the accompanying consolidatedstatements of income, was $8.5 million , $6.6 million and $6.8 million for the years ended June 30, 2016, 2015 and 2014 , respectively.
The Company maintains a non-qualified deferred compensation plan for the benefit of eligible employees. This plan is designed to permit employee deferralsin excess of certain tax limits and provides for discretionary employer contributions, in excess of the tax limits applicable to the pension, which terminated onDecember 31, 2014, and 401(k) plans. S ee Note 3 - Significant Accounting Policies .
(20) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations. Under theprovisions of federal and state statutes, Premier LP is not subject to federal and state income taxes. For federal and state income tax purposes, income realized byPremier LP is taxable to its partners. The Company, PHSI and PSCI are subject to U.S. federal and state income taxes.
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Significant components of the consolidated expense for income taxes are as follows, (in thousands):
June 30, 2016 2015 2014Current:
Federal $ 19,765 $ 15,240 $ 14,331State 4,242 2,808 3,558
Total current expense 24,007 18,048 17,889Deferred:
Federal 15,703 15,770 8,832State 10,011 2,524 988
Total deferred expense 25,714 18,294 9,820Provision for income taxes $ 49,721 $ 36,342 $ 27,709
The Company's effective income tax rate differs from income taxes recorded at the statutory rate primarily due to partnership income not subject to federalincome taxes. A reconciliation of the amount at the statutory federal income tax rate to the actual tax expense is as follows, (in thousands):
June 30, 2016 2015 2014Computed tax expense $ 99,709 $ 94,895 $ 126,115Partnership income (federal) not subject to tax to the Company (85,063) (82,751) (109,445)State taxes (net of federal benefit) 664 1,961 2,136Meals and entertainment and other permanent items 1,051 1,840 972Research and development credits (1,562) (2,160) (639)Benefit on subsidiaries treated separately for income tax purposes (7,497) (6,323) —Gain on intercompany sale of Premier Plans, LLC — — 11,908Change in valuation allowance 36,279 28,210 (3,150)Deferred tax revaluation 8,080 — —Other (1,940) 670 (188)Provision for income taxes $ 49,721 $ 36,342 $ 27,709Effective income tax rate 17.5% 13.4% 7.7%
The effective tax rate has increased from the prior years as a result of the increase in valuation allowance recorded against deferred tax assets and PHSI andtax expense associated with revaluing the deferred tax assets at Premier associated with a reduction in the North Carolina state income tax rate for years 2016 andbeyond that was not present in the prior year.
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Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of June 30, 2016 and 2015are presented below (in thousands):
June 30, 2016 2015Deferred tax asset
Partnership basis differences in Premier LP $ 413,408 $ 337,889Stock compensation 36,884 18,079Accrued expenses 33,438 34,281Net operating losses and credits 24,753 8,791Other 5,073 7,301
Total deferred tax assets 513,556 406,341Valuation allowance for deferred tax assets (64,958) (28,679)Net deferred tax assets 448,598 377,662Deferred tax liability
Purchased intangible assets and depreciation (25,749) (23,939)Net deferred tax asset $ 422,849 $ 353,723
At June 30, 2016 , the Company had federal and state net operating loss carryforwards of $49.6 million and $52.5 million , respectively, primarily attributableto PHSI. The resulting federal and state deferred tax assets are approximately $17.4 million and $2.3 million , respectively. The federal and state net operating losscarryforwards expire between the years ended June 30, 2018 through June 30, 2036, unless utilized. We believe it is more likely than not that a portion of these netoperating loss will be carried back to offset tax liabilities in the prior years. However, there are federal and state loss carryforwards for which a valuation allowancewas established as these losses are not expected to be utilized prior to their expiration.
At June 30, 2016 , the Company had federal research and development credit carryforwards of $5.1 million and nominal state credit carryforwards. Thefederal credit carryforwards expire at various times between the years ended June 30, 2020 through June 30, 2036, unless utilized. A valuation allowance wasestablished as the Company believes it is more likely than not that a significant portion of the federal and state credit carryforwards will not be realized in the nearfuture.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for income tax purposes. Annually, the Company assesses the future realization of the tax benefit of its existing deferred tax assets anddetermines whether a valuation allowance is needed. Based on the Company's assessment, we have concluded that it is more likely than not that some of thedeferred tax assets will not be realized in the future. As a result, the Company recorded a valuation allowance of $65.0 million against its deferred tax assets atJune 30, 2016 , an increase of $36.3 million from the $28.7 million valuation allowance recorded as of June 30, 2015 .
As of June 30, 2016 and 2015 , the Company had recognized net deferred tax assets of $422.8 million and $353.7 million , respectively. The increase of $69.1million in deferred tax assets was primarily attributable to (i) the increase of $99.8 million in connection with the exchange of member owner Class B commonunits pursuant to the Exchange Agreement that occurred during fiscal year 2016 and (ii) $18.6 million recorded in the ordinary course of business, partially offsetby (i) reductions in deferred tax assets of $8.0 million recorded in connection with adjusting the basis in assets related to the North Carolina state income tax ratereduction, (ii) a $5.0 million decrease in deferred tax asset attributable to tax receivable payments that are no longer due to departed member owners and (iii) avaluation allowance recorded against deferred tax assets of $36.3 million at PHSI. The deferred tax benefits of $94.8 million associated with the exchanges ofmember owner Class B shares and departed member owners are directly reported to contributed capital, resulting in a deferred income tax expense of $25.7 millionin the year ended June 30, 2016 .
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , which requires companies to classify all deferred taxassets and liabilities as non-current on the balance sheet instead of separating into current and non-current. As noted in Note 3 - Significant Accounting Policies ,the Company elected to early adopt the provisions of this guidance on a retrospective basis, the result of which was to reclassify approximately $8.0 million ofdeferred tax assets classified as current to non-current at June 30, 2015.
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In accordance with the prescribed guidance, the Company’s consolidated balance sheet at June 30, 2015 has been retrospectively adjusted to apply the newguidance as summarized in the table below (in thousands):
June 30, 2015 June 30, 2015 As Reported Adjustment As AdjustedDeferred income tax asset - current $ 8,005 $ (8,005) $ —Deferred income tax asset 345,718 8,005 353,723Total $ 353,723 $ — $ 353,723
Unrecognized Tax Benefits
The Company recognizes income tax benefits for those income tax positions determined more likely than not to be sustained upon examination, based on thetechnical merits of the positions. The reserve for uncertain income tax positions is included in other liabilities in the consolidated balance sheet. A reconciliation ofthe beginning and ending gross amounts of the Company's uncertain tax position reserves for the years ended June 30, 2016, 2015 and 2014 are as follows:
June 30, 2016 2015 2014Beginning of year balance $ 3,436 $ 1,438 $ 759Increases in prior period tax positions 318 1,185 353Decreases in prior period tax positions (201) — —Decreases due to lapse in statute of limitations (721) (225) (253)Increases in current period tax positions 1,549 1,038 579End of year balance $ 4,381 $ 3,436 $ 1,438
If the Company were to recognize the benefits of these uncertain tax positions, the income tax provision and effective tax rate would be impacted by $3.4million , $3.2 million and $1.4 million , including interest and penalties and net of the federal and state benefit for income taxes, for the years ended June 30, 2016,2015 and 2014 , respectively. The Company recognizes interest and penalties accrued on uncertain income tax positions as part of the income tax provision. Theamount of accrued interest and penalties was $0.4 million and $0.2 million at June 30, 2016 and 2015 .
The Company has determined that it is reasonably possible that its existing reserve for uncertain income tax positions at June 30, 2016 will change in the nexttwelve months; however, the Company does not expected the changes to have a material impact on its consolidated financial statements.
In the second quarter of fiscal year 2016, the IRS examination of PHSI’s income tax return for tax year ended June 30, 2013 was settled with no adjustment.Federal tax returns for tax years ended June 30, 2014 and 2015 remain open as of June 30, 2016. Furthermore, the Company is subject to ongoing state and localexaminations for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s financial position orresults of operations, nor does the company anticipate a material impact in the future.
The Company made cash tax payments of $24.9 million during the year ended June 30, 2016 .
(21) RELATED PARTY TRANSACTIONS
GNYHA Services, Inc. ("GNYHA") and its member organizations owned approximately 11% of the outstanding partnership interests in Premier LP as ofJune 30, 2016 . Net administrative fees revenue based on purchases by GNYHA and its member organizations was $66.8 million , $60.9 million and $62.0 millionfor the years ended June 30, 2016, 2015 and 2014 , respectively. The Company has a contractual requirement under the GPO participation agreement to pay eachmember owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such memberowner's facilities through Premier LP's GPO supplier contracts. As GNYHA also remits all gross administrative fees collected by GNYHA based on purchases byits member organizations through GNYHA's own GPO supplier contracts, it also receives revenue share from Premier LP equal to 30% of such grossadministrative fees remitted to the Company. Approximately $7.6 million and $7.1 million of revenue share obligations in the accompanying consolidated balancesheets relate to revenue share obligations to GNYHA and its member organizations at June 30, 2016 and 2015 , respectively. The Company also maintains a grouppurchasing
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agreement with GNYHA Alternate Care Purchasing Corporation, d/b/a Essensa, under which Essensa utilizes the Company's GPO supplier contracts. Netadministrative fees revenue recorded with Essensa was $2.8 million , $2.4 million and $2.0 million for the years ended June 30, 2016, 2015 and 2014 ,respectively. At June 30, 2016 and 2015 , the Company had revenue share obligations to Essensa of $0.2 million .
In addition, of the $22.5 million and $22.4 million limited partners' distribution payable in the accompanying consolidated balance sheets at June 30, 2016 and2015 , respectively, $2.9 million and $3.0 million , respectively, are payable to GNYHA and its member organizations at June 30, 2016 and 2015 , respectively. Inaddition, $32.1 million , $32.6 million and $14.1 million were recorded during the years ended June 30, 2016, 2015 and 2014 , respectively, for services andsupport revenue earned from GNYHA and its member organizations. Services and support revenue increased from the year ended June 30, 2014 to the year endedJune 30, 2015 primarily due to the increased participation by GNYHA and its member organizations in the Company's specialty pharmacy program. Receivablesfrom GNYHA and its member organizations, included in due from related parties in the accompanying consolidated balance sheets, were $2.6 million and $3.0million at June 30, 2016 and 2015 , respectively.
The Company's 50% ownership share of Innovatix's net income included in equity in net income of unconsolidated affiliates in the accompanying consolidatedstatements of income is $21.8 million , $21.3 million and $17.0 million for the years ended June 30, 2016, 2015 and 2014 , respectively. The Company maintains agroup purchasing agreement with Innovatix under which Innovatix members are permitted to utilize Premier LP's GPO supplier contracts. Gross administrativefees revenue and a corresponding revenue share recorded under the arrangement were $44.3 million , $38.7 million and $35.0 million for the years ended June 30,2016, 2015 and 2014 , respectively. At June 30, 2016 and 2015 , the Company had revenue share obligations to Innovatix of $4.2 million and $3.7 million ,respectively, in the accompanying consolidated balance sheets.
The Company conducts all operational activities for American Excess Insurance Exchange Risk Retention Group ("AEIX"), a reciprocal risk retention groupthat provides excess and umbrella healthcare professional and general liability insurance to certain hospital and healthcare system members. The Company isreimbursed by AEIX for actual costs, plus an annual incentive management fee not to exceed $0.5 million per calendar year. The Company received costreimbursement of $4.3 million , $4.7 million and $4.9 million for the years ended June 30, 2016, 2015 and 2014 , respectively, and annual incentive managementfees of $0.2 million , $0.5 million and $0.4 million for the years ended June 30, 2016, 2015 and 2014 , respectively. As of June 30, 2016 and 2015 , $0.5 millionand $0.4 million , respectively, in amounts receivable from AEIX are included in due from related parties in the accompanying consolidated balance sheets.
(22) COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases. The office space leases provide for escalating rent payments during the lease terms. The Companyrecognizes rent expense on a straight-line basis over the lease term. Rent and associated operating expenses totaled $10.1 million , $11.4 million and $9.1 millionfor the years ended June 30, 2016, 2015 and 2014 , respectively.
Future minimum lease payments under noncancelable operating leases (with initial lease terms in excess of one year) are as follows (in thousands):
2017 $ 9,6202018 8,9152019 8,7222020 8,0112021 7,546Thereafter 33,235Total minimum lease payments $ 76,049
The Company is not currently involved in any litigation it believes to be significant. The Company is periodically involved in litigation, arising in the ordinarycourse of business or otherwise, which from time to time may include claims relating to commercial, product liability, employment, antitrust, intellectual property,or other regulatory matters. If current or future government regulations, specifically, those with respect to antitrust or healthcare laws, are interpreted or enforced ina manner adverse to the Company or its business, the Company may be subject to enforcement actions, penalties and other material limitations which could have amaterial adverse effect on the Company's business, financial condition and results of operations.
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(23) SEGMENTS
The Company delivers its solutions and manages its business through two reportable business segments, the supply chain services segment and theperformance services segment. The supply chain services segment includes the Company's GPO, integrated pharmacy offerings and direct sourcing activities. Theperformance services segment includes the Company's informatics, collaborative, advisory services and insurance services businesses.
The Company uses Segment Adjusted EBITDA (as defined herein) as its primary measure of profit or loss to assess segment performance and to determine theallocation of resources. The Company also uses Segment Adjusted EBITDA to facilitate the comparison of the segment operating performance on a consistentbasis from period to period. The Company defines Segment Adjusted EBITDA as the segment's net revenue and equity in net income of unconsolidated affiliatesless operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger andacquisition related expenses and non-recurring or non-cash items. Non-recurring items are expenses that have not been incurred within the prior two years and arenot expected to recur within the next two years. Operating expenses directly attributable to the segment include expenses associated with sales and marketing,general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are notspecific to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external customers.
The following tables present net revenue and Segment Adjusted EBITDA (in thousands):
Year Ended June 30,Net Revenue 2016 2015 2014Supply Chain Services
Net administrative fees $ 498,394 $ 457,020 $ 464,837Other services and support 4,385 1,977 778
Services 502,779 458,997 465,615Products 326,646 279,261 212,526
Total Supply Chain Services 829,425 738,258 678,141Performance Services 333,169 268,771 232,408Total $ 1,162,594 $ 1,007,029 $ 910,549
Year Ended June 30,Segment Adjusted EBITDA 2016 2015 2014Supply Chain Services $ 439,013 $ 391,180 $ 396,470Performance Services 110,787 90,235 73,898Corporate (108,825) (88,240) (78,080)Total $ 440,975 $ 393,175 $ 392,288
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A reconciliation of Segment Adjusted EBITDA to income before income taxes is as follows (in thousands):
Year Ended June 30,2016 2015 2014
Segment Adjusted EBITDA $ 440,975 $ 393,175 $ 392,288Depreciation and amortization (51,102) (45,186) (36,761)Amortization of purchased intangible assets (33,054) (9,136) (3,062)Stock-based compensation (a) (49,081) (28,498) (19,476)Acquisition related expenses (b) (15,804) (9,037) (2,014)Strategic and financial restructuring expenses (c) (268) (1,373) (3,760)Adjustment to tax receivable agreement liability (d) 4,818 — (6,215)ERP implementation expenses (e) (4,870) — —Acquisition related adjustment - deferred revenue (f) (5,624) (13,371) —Equity in net income of unconsolidated affiliates (g) (21,647) (21,285) (16,976)Deferred compensation plan income (expense) 1,605 753 (1,972)
Operating income 265,948 266,042 302,052
Equity in net income of unconsolidated affiliates (g) 21,647 21,285 16,976Interest and investment income (loss), net (h) (1,021) 866 1,019(Loss) gain on investment (i) — (1,000) 38,372Loss on disposal of long-lived assets — (15,243) —Other (expense) income, net (j) (1,692) (823) 1,907
Income before income taxes $ 284,882 $ 271,127 $ 360,326
(a) Represents non-cash employee stock-based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016 .(b) Represents legal, accounting and other expenses related to acquisition activities.(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the years ended June 30, 2016 and 2015 , strategic and financial
restructuring expenses were incurred in connection with the company-directed offerings conducted pursuant to the Registration Rights Agreement. During the year ended June 30, 2014,strategic and financial restructuring expenses were incurred in connection with the Reorganization and IPO.
(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30, 2016 and adjustment to taxreceivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service subsequent to the original recording of the tax receivableagreement liability during the year ended June 30, 2014.
(e) Represents implementation and other costs associated with the implementation of a new enterprise resource planning ("ERP") system.(f) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value
only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing theservices plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront fees associated with software licenseupdates and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one year in duration, our GAAP revenues for the one yearperiod subsequent to the acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by theacquired entity. The Non-GAAP adjustment to software license updates and product support revenues is intended to include, and thus reflect, the full amount of such revenues.
(g) Represents equity in net income of unconsolidated affiliates primarily generated by the Company's 50% ownership interest in Innovatix, all of which is included in the supply chainservices segment.
(h) Represents interest expense (income), net and realized gains and losses on our marketable securities.(i) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.(j) Represents loss on sale of assets and unrealized gain (loss) on deferred compensation plan assets.
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The following tables present capital expenditures, total assets and depreciation and amortization expense (in thousands):
Year Ended June 30,Capital Expenditures 2016 2015 2014Supply Chain Services $ 914 $ 1,815 $ 2,719Performance Services 62,337 63,435 50,655Corporate 13,739 5,484 2,366Total $ 76,990 $ 70,734 $ 55,740
June 30,Total Assets 2016 2015Supply Chain Services $ 345,219 $ 466,537Performance Services 934,588 457,963Corporate 575,576 605,691Total $ 1,855,383 $ 1,530,191
Year Ended June 30,Depreciation and Amortization Expense (a) 2016 2015 2014Supply Chain Services $ 1,401 $ 1,964 $ 1,482Performance Services 76,500 47,131 33,467Corporate 6,255 5,227 4,874Total $ 84,156 $ 54,322 $ 39,823
(a) Includes amortization of purchased intangible assets.
(24) SUBSEQUENT EVENTS
On July 26, 2016, the Company through its consolidated subsidiary, PSCI, acquired 49% of the issued and outstanding stock of FFF Enterprises, Inc. ("FFF")for $65.7 million in cash. FFF is a distributor of plasma products, vaccines, biosimilars and other specialty pharmaceuticals and biopharmaceuticals, of whichPremier, through its group purchasing agreement, and its members are a large existing customer. We will account for the investment in FFF under the equitymethod of accounting and report it as part of our supply chain services segment.
On August 4, 2016, the North Carolina Department of Revenue notified taxpayers that the state corporate tax rate has been reduced from 4% to 3% for the taxyear beginning on or after January 1, 2017. The Company is evaluating the impact and will record adjustments to reflect the effects of the change in the firstquarter of the fiscal year 2017.
On August 23, 2016, we closed our previously announced acquisition of Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services,LLC ("Community Pharmacy"). Through our consolidated subsidiary, PSCI, we acquired 100% of the membership interests of Acro and Community Pharmacy for$68.7 million in cash, subject to adjustment based on Acro's and Community Pharmacy's (i) cash on hand, (ii) outstanding indebtedness and (iii) net workingcapital at closing. The acquisition was funded with available cash on hand. Acro and Community Pharmacy are specialty pharmacy businesses which providecustomized healthcare management solutions to their clients. We will report both Acro and Community Pharmacy as part of our supply chain services segment.
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(25) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for the years ended June 30, 2016 and 2015 (in thousands, except per share data):
First Second Third Fourth Quarter Quarter Quarter QuarterFiscal 2016 Net revenue $ 270,835 $ 291,669 $ 298,669 301,421Gross profit 161,712 179,072 186,576 178,178Net income 52,253 60,995 71,557 50,356Net income attributable to non-controlling interest (47,900) (49,817) (56,018) (39,812)Adjustment of redeemable limited partners' capital to redemption amount 466,801 (65,561) 284,409 91,101Net income (loss) attributable to stockholders $ 471,154 $ (54,383) $ 299,948 $ 101,645
Weighted average shares outstanding: Basic 37,735 41,575 44,716 45,506Diluted 145,560 41,575 145,018 144,621
Net income (loss) per share attributable to stockholders: Basic $ 12.49 $ (1.31) $ 6.71 $ 2.23Diluted $ 0.24 $ (1.31) $ 0.43 $ 0.30
Fiscal 2015 Net revenue $ 229,308 $ 249,445 $ 261,723 $ 266,553Gross profit 139,287 154,913 158,908 157,011Net income 64,887 65,808 72,029 32,061Net income attributable to non-controlling interest (55,614) (56,537) (59,820) (24,071)Adjustment of redeemable limited partners' capital to redemption amount (382,657) (42,250) (387,062) (92,066)Net loss attributable to stockholders $ (373,384) $ (32,979) $ (374,853) $ (84,076)
Weighted average shares outstanding: Basic 32,376 35,589 37,316 37,576Diluted 32,376 35,589 37,316 37,576
Net loss per share attributable to stockholders: Basic $ (11.53) $ (0.93) $ (10.05) $ (2.24)Diluted $ (11.53) $ (0.93) $ (10.05) $ (2.24)
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to bedisclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and formsand that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, toallow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonableassurance of achieving the desired control objectives.
As of the end of the period covered by this Annual Report, we carried out an evaluation under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our chiefexecutive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2016 .
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f)under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States ofAmerica. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only inaccordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on its financial statements. Because of its inherentlimitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures maydeteriorate.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted anassessment of the effectiveness of our internal control over financial reporting as of June 30, 2016 . In making this assessment, management used the criteria setforth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, the COSO framework.Based on our evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2016 , our internal control over financial reportingwas effective.
Management’s annual evaluation of internal controls over financial reporting did not include an assessment of and conclusion on the effectiveness of internalcontrols over financial reporting of CECity.com, Inc., Healthcare Insights, LLC or InFlowHealth, LLC which were acquired during the year ended June 30, 2016and are included in our consolidated financial statements as of June 30, 2016 and for the period from their respective acquisition dates through June 30, 2016 . Theassets of CECity.com, Inc., Healthcare Insights, LLC and InFlowHealth, LLC represented approximately 22% , 4% and 1% , respectively, of our total assets as ofJune 30, 2016 . CECity.com, Inc. represented approximately 2% , and Healthcare Insights, LLC and InFlowHealth, LLC each represented less than 1% , of our netrevenue for the year ended June 30, 2016 .
The effectiveness of the Company’s internal control over financial reporting as of June 30, 2016 has been audited by Ernst & Young LLP, an independentregistered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
We are in the process of implementing a new comprehensive enterprise resource planning (“ERP”) system. As previously reported, we completed theimplementation of certain ERP modules including human resources, payroll and expense reimbursement effective January 1, 2016. In connection with theimplementation of these components of the overall ERP system, we updated the processes that constitute our internal control over financial reporting, as necessary,to accommodate related changes to our
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accounting procedures and business processes. We have continued to work on the implementation of additional ERP modules including core general ledger andrelated financial reporting components in a phased approach.
Although the processes that constitute our internal control over financial reporting have been materially affected by the implementation of certain ERPmodules, these changes were tested for effectiveness and future changes will require testing. Accordingly, we do not believe that the implementation of the ERPsystem has had or will have a material adverse effect on our internal control over financial reporting.
Except as otherwise described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under theExchange Act) during the quarter ended June 30, 2016 , that has materially affected, or is reasonably likely to materially affect our internal control over financialreporting.
Item 9B. Other Information
On August 23, 2016, we closed our previously announced acquisition of Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services,LLC ("Community Pharmacy"). Through our consolidated subsidiary, PSCI, we acquired 100% of the membership interests of Acro and Community Pharmacy for$68.7 million in cash, subject to adjustment based on Acro's and Community Pharmacy's (i) cash on hand, (ii) outstanding indebtedness and (iii) net workingcapital at closing. The acquisition was funded with available cash on hand. Acro and Community Pharmacy are specialty pharmacy businesses which providecustomized healthcare management solutions to their clients. We will report both Acro and Community Pharmacy as part of our supply chain services segment.
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PART III
We expect to file a definitive proxy statement relating to our 2016 Annual Meeting of Stockholders with the SEC pursuant to Regulation 14A, not later than120 days after the end of our most recent fiscal year. Accordingly, certain information required by Part III of this Annual Report has been omitted under GeneralInstruction G(3) to Form 10-K. Only the information from the definitive proxy statement that specifically addresses disclosure requirements of Items 10-14 belowis incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
We will provide information that is responsive to this Item 10 in our definitive proxy statement for our 2016 Annual Meeting of Stockholders or in anamendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions “Item 1 -Election of Directors,” “Corporate Governance and Board Structure,” “Section 16(a) Beneficial Ownership Reporting Compliance” and "Executive Officers," andpossibly elsewhere therein. That information is incorporated in this Item 10 by reference.
Item 11. Executive Compensation
We will provide information that is responsive to this Item 11 in our definitive proxy statement for our 2016 Annual Meeting of Stockholders or in anamendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions“Executive Compensation” and “Corporate Governance and Board Structure,” and possibly elsewhere therein. That information is incorporated in this Item 11 byreference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We will provide information that is responsive to this Item 12 in our definitive proxy statement for our 2016 Annual Meeting of Stockholders or in anamendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions “SecurityOwnership of Certain Beneficial Owners and Management,” and “Equity Compensation Plan Information,” and possibly elsewhere therein. That information isincorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our definitive proxy statement for our 2016 Annual Meeting of Stockholders or in anamendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions “RelatedPerson Transactions,” and “Corporate Governance and Board Structure,” and possibly elsewhere therein. That information is incorporated in this Item 13 byreference.
Item 14. Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our definitive proxy statement for our 2016 Annual Meeting of Stockholders or in anamendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Item 2 -Ratification of Appointment of Independent Registered Public Accounting Firm,” and possibly elsewhere therein. That information is incorporated in this Item 14by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
Documents as part of this Report:
(a) (1) The following consolidated financial statements are filed herewith in Item 8 of Part II above.(i) Report of Independent Registered Public Accounting Firm(ii) Consolidated Balance Sheets(iii) Consolidated Statements of Income(iv) Consolidated Statements of Comprehensive Income(v) Consolidated Statements of Stockholders’ (Deficit) Equity(vi) Consolidated Statements of Cash Flows(vii) Notes to Consolidated Financial Statements
(2) Financial Statement ScheduleSchedule II Valuation and Qualifying Accounts
Years Ended June 30, 2016, 2015 and 2014(in thousands)
Beginning Balance
Additions/(Reductions)to Expense or Other
Accounts Deductions Ending BalanceYear ended June 30, 2016
Allowance for doubtful accounts $ 1,153 1,655 827 $ 1,981Deferred tax assets valuation allowance $ 28,679 36,279 — $ 64,958
Year ended June 30, 2015 Allowance for doubtful accounts $ 1,054 144 45 $ 1,153Deferred tax assets valuation allowance $ 470 28,396 187 $ 28,679
Year ended June 30, 2014 Allowance for doubtful accounts $ 671 499 116 $ 1,054Deferred tax assets valuation allowance $ 3,719 (3,249) — $ 470
All other supplemental schedules are omitted because of the absence of conditions under which they are required.
(3) ExhibitsThe exhibits listed in the accompanying Exhibit Index are filed as a part of this report.
(b) ExhibitsSee Exhibit Index.
(c) Separate Financial Statements and ScheduleNone.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
PREMIER, INC.
By: /s/ SUSAN D. DEVORE
Name: Susan D. DeVore
Title: President, Chief Executive Officer and DirectorDate: August 25, 2016
POWER OF ATTORNEY
Each person whose signature appears below hereby severally constitutes and appoints each of Craig S. McKasson and David L. Klatsky his/her true andlawful attorney-in-fact and agent with full power of substitution and re-substitution, for him/her in his/her name, place and stead, in any and all capacities, to signany and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and ExchangeCommission, and hereby grants to each such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite andnecessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that each said attorney-in-factand agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantand in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ SUSAN D. DEVORESusan D. DeVore
President, Chief Executive Officer and Director (principal executiveofficer)
August 25, 2016
/s/ CRAIG S. MCKASSONCraig S. McKasson
Chief Financial Officer and Senior Vice President (principal financial andaccounting officer)
August 25, 2016
/s/ BARCLAY E. BERDANBarclay E. Berdan Director August 25, 2016
/s/ ERIC J. BIEBER, MDEric J. Bieber, MD Director August 25, 2016
/s/ STEPHEN R. D’ARCYStephen R. D’Arcy Director August 25, 2016
/s/ JODY R. DAVIDSJody R. Davids Director August 25, 2016
/s/ WILLIAM B. DOWNEYWilliam B. Downey Director August 25, 2016
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/s/ PETER S. FINEPeter S. Fine Director August 25, 2016
/s/ PHILIP A. INCARNATIPhilip A. Incarnati Director August 25, 2016
/s/ WILLIAM E. MAYERWilliam E. Mayer Director August 25, 2016
/s/ MARC D. MILLERMarc D. Miller Director August 25, 2016
/s/ MARVIN R. O'QUINNMarvin R. O'Quinn Director August 25, 2016
/s/ SCOTT REINERScott Reiner Director August 25, 2016
/s/ TERRY D. SHAWTerry D. Shaw Director August 25, 2016
/s/ RICHARD J. STATUTORichard J. Statuto Director August 25, 2016
/s/ ELLEN C. WOLFEllen C. Wolf Director August 25, 2016
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EXHIBIT INDEX
ExhibitNo.
Description
2.1
Stock Purchase Agreement dated August 4, 2014, by and between Hospira, Inc. and Premier Healthcare Solutions, Inc. (Incorporated byreference to Exhibit 2.1 to our Current Report on Form 8-K filed on August 5, 2014)
2.2
Stock Purchase Agreement, dated July 31, 2015, by and among Premier Healthcare Solutions, Inc., Premier, Inc., CECity.com, Inc., theshareholders thereof, certain related guarantors, and representative of the shareholders of CECity.com, Inc. (Incorporated by reference to Exhibit2.1 to our Current Report on Form 8-K filed on August 4, 2015)
3.1
Certificate of Incorporation of Premier, Inc. (Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1 filed on August26, 2013)
3.2
Amended and Restated Bylaws of Premier, Inc., effective as of December 4, 2015 (Incorporated by reference to Exhibit 3.2 to our CurrentReport on Form 8-K filed on December 4, 2015)
4.1
Form of Class A common stock certificate (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1, AmendmentNo. 1, filed on September 16, 2013)
9.1
Voting Trust Agreement Relating to Shares of Class B common stock of Premier, Inc. entered into as of October 1, 2013 by and among Premier,Inc., Premier Purchasing Partners, L.P., the holders of Class B common stock of Premier, Inc. and Wells Fargo Delaware Trust Company, N.A.(Incorporated by reference to Exhibit 9.1 to our Current Report on Form 8-K filed on October 7, 2013)
10.1
Amended and Restated Limited Partnership Agreement of Premier Healthcare Alliance, L.P. entered into as of September 25, 2013 and effectiveas of October 1, 2013 (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 7, 2013)
10.1.1
First Amendment to Amended and Restated Limited Partnership Agreement of Premier Healthcare Alliance, L.P. entered into as of January 27,2014 (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 12, 2014)
10.2
Exchange Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and among Premier, Inc., PremierPurchasing Partners, L.P. and its limited partners (Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October7, 2013)
10.3
Tax Receivable Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and among Premier, Inc. and thelimited partners of Premier Healthcare Alliance, L.P. (Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed onOctober 7, 2013)
10.4
Registration Rights Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and among Premier, Inc. and thelimited partners of Premier Healthcare Alliance, L.P. (Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed onOctober 7, 2013)
10.5
Form of GPO Participation Agreement by and among Premier Purchasing Partners, L.P. and its limited partners (Incorporated by reference toExhibit 10.2 to our Registration Statement on Form S-1 filed on August 26, 2013)
10.6 Premier, Inc. 2013 Equity Incentive Plan, as amended and restated (effective December 4, 2015)*+
10.6.1 First Amendment to the Premier, Inc. 2013 Equity Incentive Plan, as amended and restated (effective August 11, 2016)*+10.7
Form of Performance Share Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by reference to Exhibit 10.10to our Annual Report on Form 10-K filed on August 26, 2015)+
10.8
Form of Stock Option Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by reference to Exhibit 10.11 to our AnnualReport on Form 10-K filed on August 26, 2015)+
10.9 Form of Stock Option Agreement under the Premier, Inc. 2013 Equity Incentive Plan*+10.10
Form of Restricted Stock Unit Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by reference to Exhibit 10.12 to ourAnnual Report on Form 10-K filed on August 26, 2015)+
10.11
Form of Performance-Based Restricted Stock Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by referenceto Exhibit 10.13 to our Annual Report on Form 10-K filed on August 26, 2015)+
10.12
Form of Time-Based Restricted Stock Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by reference toExhibit 10.14 to our Annual Report on Form 10-K filed on August 26, 2015)+
10.13
Form of Restricted Stock Unit Agreement for Non-Employee Directors under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated byreference to Exhibit 10.10 to our Registration Statement on Form S-1 filed on August 26, 2013)+
10.14 Premier, Inc. Annual Incentive Compensation Plan, amended and restated effective August 11, 2016*+
10.15
Senior Executive Employment Agreement dated as of September 13, 2013, by and between Susan D. DeVore and Premier Healthcare Solutions,Inc. (Incorporated by reference to Exhibit 10.22 to our Registration Statement on Form S-1, Amendment No. 1, filed on September 16, 2013)+
133
ExhibitNo.
Description
10.16
Senior Executive Employment Agreement dated as of September 13, 2013, by and between Craig S. McKasson and Premier HealthcareSolutions, Inc. (Incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1, Amendment No. 1, filed on September16, 2013)+
10.17
Senior Executive Employment Agreement dated as of September 13, 2013 by and between Michael J. Alkire and Premier Healthcare Solutions,Inc. (Incorporated by reference to Exhibit 10.24 to our Registration Statement on Form S-1, Amendment No. 1, filed on September 16, 2013)+
10.18
Executive Employment Agreement dated as of September 18, 2013, by and between Wes Champion and Premier Healthcare Solutions, Inc.(Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form S-1, Amendment No. 2, filed on September 25, 2013)+
10.19
Executive Employment Agreement dated as of September 16, 2013, by and between Durral Gilbert and Premier Healthcare Solutions, Inc.(Incorporated by reference to Exhibit 10.37 to our Registration Statement on Form S-1, Amendment No. 2, filed on September 25, 2013)+
10.20
Executive Employment Agreement dated as of September 11, 2013, by and between Kelli Price and Premier Healthcare Solutions, Inc.(Incorporated by reference to Exhibit 10.39 to our Registration Statement on Form S-1, Amendment No. 2, filed on September 25, 2013)+
10.21 Executive Employment Agreement dated as of July 1, 2016, by and between Leigh Anderson and Premier Healthcare Solutions, Inc.*+
10.22 Executive Employment Agreement effective as of July 1, 2016, by and between David Klatsky and Premier Healthcare Solutions, Inc.*+
10.23
Premier, Inc. Directors' Compensation Policy, adopted 2016 (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filedon August 11, 2016)+
10.24
Premier, Inc. Form of Director Cash Award Agreement under the Premier, Inc. Directors' Compensation Policy (Incorporated by reference toExhibit 10.2 to our Current Report on Form 8-K filed on August 11, 2016)+
10.25
Form of Indemnification Agreement by and between each director and executive officer and Premier, Inc. (Incorporated by reference to Exhibit10.29 to our Registration Statement on Form S-1, Amendment No. 1, filed on September 16, 2013)+
10.26 Premier, Inc. 2015 Employee Stock Purchase Plan (as amended and restated effective September 25, 2015)*+10.27
Premier Healthcare Solutions, Inc. Deferred Compensation Plan, effective January 1, 2015 (Incorporated by reference to Exhibit 10.1 to ourQuarterly Report on Form 10-Q filed on November 12, 2014)+
10.28
Credit Agreement, dated as of June 24, 2014, by and among Premier Healthcare Alliance, L.P., Premier Supply Chain Improvement, Inc. andPremier Healthcare Solutions, Inc., as Co-Borrowers, Premier Services, LLC and certain domestic subsidiaries of Premier Services, LLC, asGuarantors, Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Issuer, other lenders from time totime party thereto, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint Lead Arrangers and JointBook Managers (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed June 25, 2014)
10.28.1
First Amendment to Credit Agreement, dated as of June 4, 2015, by and among Premier Healthcare Alliance, L.P., Premier Supply ChainImprovement, Inc. and Premier Healthcare Solutions, Inc., as Co-Borrowers, Premier Services, LLC and certain domestic subsidiaries ofPremier Services, LLC, as Guarantors, Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Issuer,other lenders from time to time party thereto, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as JointLead Arrangers and Joint Book Managers (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed June 4, 2015)
21 Subsidiaries of the Company*23 Consent of Ernst &Young LLP Independent Registered Public Accounting Firm*24 Power of Attorney (included on the signature page hereof)*31.1 Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2 Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1 Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡32.2 Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡101.INS XBRL Instance Document*101.SCH XBRL Taxonomy Extension Schema Document*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
134
ExhibitNo.
Description
101.LAB XBRL Taxonomy Extension Label Linkbase Document*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
* Filed herewith+ Indicates a management contract or compensatory plan or arrangement‡ Furnished herewith
(1) Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-36092. The SEC file number forour Registration Statement on Form S-1 is 333-190828.
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Exhibit 10.6
PREMIER, INC. 2013 EQUITY INCENTIVE PLAN
(as amended and restated effective December 4, 2015)
1. Establishment,PurposeandDuration. Premier, Inc. (referred to below as the “Company”) established thePremier, Inc. 2013 Equity Incentive Plan, which became effective upon approval by the Company’s stockholders on September 24,2013 (the “Effective Date”). The 2013 Equity Incentive Plan is hereby being amended and restated, subject to and effective upon theapproval of the Company’s stockholders at the annual meeting of stockholders on December 4, 2015 (hereinafter referred to belowas the “Plan”). The purpose of the Plan is to attract and retain Employees, Non-Employee Directors, and Consultants and to provideadditional incentives for these persons consistent with the long-term success of the Company’s business. Unless sooner terminated asprovided herein, the Plan shall terminate ten (10) years from the Effective Date. After the Plan is terminated, no further Awards maybe granted but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and thePlan’s terms and conditions.
2. Definitions. As used in the Plan, the following terms shall be defined as set forth below:
2.1 “ Act” means the Securities Exchange Act of 1934, as amended.
2.2 “ Affiliate” means any corporation or any other entity (including, but not limited to, a partnership) that isaffiliated with the Company through stock ownership or otherwise.
2.3 “ Award” or “ Awards” means, individually or collectively, except where referring to a particular category ofgrant under the Plan, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, Stock AppreciationRights, Restricted Shares, Restricted Stock Units, Performance Share Awards, Cash-Based Awards, or Other Stock-BasedAwards, in each case subject to the terms of the Plan.
2.4 “ AwardAgreement” means an agreement, certificate, resolution or other form of writing or other evidenceapproved by the Committee which sets forth the terms and conditions of an Award. An Award Agreement may be in anelectronic medium, may be limited to a notation on the Company’s books and records and, if approved by the Committee,need not be signed by a representative of the Company or a Participant.
2.5 “ BasePrice” means the price to be used as the basis for determining the Spread upon the exercise of a StockAppreciation Right.
2.6 “ BeneficialOwner” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules andRegulations under the Act.
2.7 “ Board” means the Board of Directors of the Company.
2.8 “ Cash-BasedAward” means an Award granted to a Participant as described in Section 11.
2.9 “ ChangeinControl” shall have the meaning given to it in Section 13.3.
2.10 “ Code” means the Internal Revenue Code of 1986, as amended from time to time.
2.11 “ Committee” means the committee of the Board described in Section 4.
2.12 “ Company” means Premier, Inc. or its successor.
2.13 “ Consultant” means any natural person, including an advisor, engaged by the Company or any Affiliate torender bona fide services to such entity (other than in connection with the offer or sale of securities in a capital-raisingtransaction or to promote or maintain a market for the Company’s securities).
2.14 “ CoveredEmployee” shall have the meaning given to it under Section 14.1.
2.15 “ DeferredStockUnit” means an Award that is vested on the Grant Date that entitles the recipient to receiveShares after a designated period of time. Deferred Stock Units shall be subject to such restrictions and conditions as set forthin the Award Agreement, which shall be consistent with the provisions for Restricted Stock Units set forth in Section 8 belowexcept for the requirement to have a Restricted Period or Performance Goals.
2.16 “ EffectiveDate” shall have the meaning set forth in Section 1 above.
2.17 “ Employee” means any person designated as an employee of the Company, any of its Affiliates, and/or anyof its or their Subsidiaries on the payroll records thereof.
2.18 “ ExecutiveOfficer” means an “executive officer” of the Company as defined by Rule 3b-7 under the Act.To the extent that the Board takes action to designate the persons who are the “executive officers” of the Company, thepersons so designated (and no others) shall be deemed to be the “executive officers” of the Company for all purposes of thePlan.
2.19 “ FairMarketValue” means a price that is based on the opening, closing, actual, high, low, or averageselling prices of a Share reported on the NASDAQ Global Select Market or other established stock exchange (or exchanges)on the applicable date, the preceding trading day, the next succeeding trading day, an average of trading days or on any otherbasis consistent with the requirements of the stock rights exemption under Section 409A of the Code using actualtransactions involving Shares, as determined by the Committee in its discretion. In the event Shares are not publiclydetermined at the time a determination of their value is required to be made hereunder, the determination of
their Fair Market Value shall be made by the Committee in such manner as it deems appropriate. Such definition(s) of FairMarket Value shall be specified in each Award Agreement and may differ depending on whether Fair Market Value is inreference to the grant, exercise, vesting, settlement, or payout of an Award; provided, however, that upon a broker-assistedexercise of an Option, the Fair Market Value shall be the price at which the Shares are sold by the broker.
2.20 “ FamilyMember” means a Participant’s spouse, parents, children and grandchildren.
2.21 “ GrantDate” means the date specified by the Committee on which a grant of an Award shall becomeeffective, which shall not be earlier than the date on which the Committee takes action with respect thereto.
2.22 “ IncentiveStockOption” means any Option that is intended to qualify as an “incentive stock option” underSection 422 of the Code or any successor provision.
2.23 “ Non-employeeDirector” means a member of the Board who is not an Employee.
2.24 “ NonqualifiedStockOption” means an Option that is not intended to qualify as an Incentive Stock Option.
2.25 “ Option” means any option to purchase Shares granted under Section 5.
2.26 “ OptionPrice” means the purchase price payable upon the exercise of an Option.
2.27 “ OtherStock-BasedAward” means an equity-based or equity-related Award not otherwise described by theterms of this Plan granted under Section 10.
2.28 “ Participant” means an Employee, Non-Employee Director or a Consultant who is selected by theCommittee to receive benefits under the Plan, provided that only Employees shall be eligible to receive grants of IncentiveStock Options.
2.29 “ Performance-BasedAwards” means Restricted Shares, Restricted Stock Units, Performance Share Awards,Other Stock-Based Awards or Cash-Based Awards granted to a Covered Employee that are designated by the Committee asbeing intended to qualify as “performance-based compensation” under Section 162(m) of the Code.
2.30 “ PerformanceCriteria” means the criteria that the Committee selects for purposes of establishing thePerformance Goal or Performance Goals for a Participant with respect to the Performance Cycle for a Performance-BasedAward. The Performance Criteria may be described in terms of Company wide objectives or objectives that are related to theperformance of the individual Covered Employee or an organizational level specified by the Committee, including, but notlimited to, a Subsidiary or Affiliate or a unit, division or group of the Company, a Subsidiary or Affiliate. PerformanceCriteria
may be measured on an absolute or relative basis, including but not limited to performance as measured against a group ofpeer companies or by a financial market index.
2.31 “ PerformanceCycle” means one or more periods of time, which may be of varying and overlappingdurations, as the Committee may select, over which the attainment of one or more Performance Criteria will be measured forthe purpose of determining a grantee’s right to and the payment of a Restricted Share Award, Restricted Stock Unit,Performance Share Award, Other Stock-Based Award or Cash-Based Award. A Performance Cycle shall not be less than 12months.
2.32 “ PerformanceGoals” means, with respect to a Restricted Share Award, a Restricted Stock Unit Award, aPerformance Share Award or a Cash-Based Award, the specific goal or goals established in writing by the Committee for thePerformance Cycle applicable to such Award. Performance Goals with respect to a Performance-Based Award granted to aCovered Employee shall only be based upon one or more Performance Criteria as permitted under Section 14.
2.33 “ PerformanceShareAward” means an Award denominated in either Shares or share units granted pursuantto Section 9.
2.34 “ Plan” shall have the meaning set forth in Section 1 above.
2.35 “ RestrictedPeriod” means a period of time established under Section 8 with respect to Restricted StockUnits.
2.36 “ RestrictedShares” means Shares granted under Section 7 subject to a substantial risk of forfeiture.
2.37 “ RestrictedStockUnits” means an Award pursuant to Section 8 of the right to receive Shares at the end of aspecified period.
2.38 “ ShareAuthorization” means the maximum number of Shares available for grant under the Plan, asdescribed in Section 3.
2.39 “ Shares” means the Class A common stock of the Company.
2.40 “ Spread” means, in the case of a Stock Appreciation Right, the amount by which the Fair Market Value onthe date when any such right is exercised exceeds the Base Price specified in such right.
2.41 “ StockAppreciationRight” means a right granted under Section 6.
2.42 “ Subsidiary” means any corporation or other entity, whether domestic or foreign, in which the Company hasor obtains, directly or indirectly, a proprietary interest of more than twenty percent (20%) by reason of stock ownership orotherwise.
2.43 “ SubstituteAward” means any Award granted or issued to a Participant in assumption or substitution ofeither outstanding awards or the right or obligation to make future awards by an entity acquired by the Company, an Affiliateor a Subsidiary or with which the Company, an Affiliate or a Subsidiary combines.
2.44 “ UnrestrictedShares” means a grant of Shares free of any Restricted Period, Performance Goals or anysubstantial risk of forfeiture. Unrestricted Shares may be granted in respect of past services or other valid consideration, or inlieu of cash compensation due to an Employee.
3. SharesAvailableUnderthePlan.
3.1 NumberofSharesReservedforAwards.
(a) Subject to adjustments as provided in Section 12, and the additional limits applicable to Non-EmployeeDirectors set forth in Section 3(b) below, the Share Authorization shall be 11,260,783 Shares of which:
i. no more than 11,260,783 Shares shall be eligible to be issued as Incentive Stock Options,
ii. grants of Options and Stock Appreciation Rights with respect to no more than 500,000 Sharesmay be made to any Participant during a single calendar year,
iii. no more than 500,000 Shares may be subject to Performance-Based Awards granted pursuant toSection 14 of the Plan (excluding Options and Stock Appreciation Rights) to any single Participant during asingle calendar year or in the event such Performance-Based Award is paid in cash, other securities, otherAwards or other property, no more than the Fair Market Value of 500,000 Shares on the last day of thePerformance Cycle to which such Award relates, and
iv. the maximum amount that can be paid to any single Participant pursuant to a Cash-Based Awarddescribed in Section 11 of the Plan with respect to (A) a Performance Cycle that is 12 months or less shall be$3,000,000 and (B) a Performance Cycle that is more than 12 months shall be $6,000,000.
(b) The aggregate value of Awards granted to, and cash compensation earned by, a Non-Employee Directorduring a single calendar year shall not exceed $250,000. For purposes of applying the limit under this Section 3.1(b),(A) the value of an Award other than an Option or Stock Appreciation Right shall be the Fair Market Value of aShare on the Award’s Grant Date and (B) the value of an Option or Stock Appreciation Right shall be equal to fairvalue of such Award using (i) the Black-Scholes option pricing model or other option pricing
model as may be used by the Company from time to time to report its financial results and (ii) the option expensingassumptions as set forth in the Company’s most recent prior 10-K filing with the Securities and ExchangeCommission or, if closer in time to the applicable Grant Date, the Company’s most recent prior 10-Q filing, asreasonably determined by the Committee.
(c) Any Awards other than Options and Stock Appreciation Rights that vest on the basis of the Participant’scontinued employment with or provision of service to the Company shall not provide for vesting which is any morerapid than annual pro rata vesting over a three (3) year period and any Awards other than Options and StockAppreciation Rights which vest upon the attainment of Performance Goals shall provide for a Performance Cycle ofat least twelve (12) months.
3.2 ShareUsage.
(a) Any Shares related to Awards that terminate by expiration, forfeiture, cancellation, or otherwise withoutthe issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission,prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under the Plan. Inaddition, Restricted Shares that are forfeited shall again be available for grant under the Plan.
(b) Awards that are to be settled by the issuance of Shares shall only be counted against the ShareAuthorization to the extent Shares are actually issued upon settling the Award. Any Shares withheld to satisfy taxwithholding obligations on an Award, Shares tendered to pay the exercise price of an Option under the Plan andShares repurchased on the open market with the proceeds of an Option exercise shall again be available for grantunder the Plan.
(c) Substitute Awards shall not be counted against the Shares available for granting Awards under the Plan.
4. PlanAdministration.
4.1 BoardCommitteeAdministration. The Plan shall be administered by the Compensation Committee appointedby the Board from among its members, provided that the full Board may at any time act as the Committee. The interpretationand construction by the Committee of any provision of the Plan or of any Award Agreement and any determination by theCommittee pursuant to any provision of the Plan or any such agreement, notification or document shall be final andconclusive. No member of the Committee shall be liable to any person for any such action taken or determination made ingood faith.
4.2 TermsandConditionsofAwards. The Committee shall have final discretion, responsibility, and authority to:
(a) grant Awards;
(b) determine the Participants to whom and the times at which Awards shall be granted;
(c) determine the type and number of Awards to be granted, the number of Shares to which an Award mayrelate, and the applicable terms, conditions, and restrictions, including the length of time for which any restrictionshall remain in effect;
(d) establish and administer Performance Goals and Performance Cycles relating to any Award;
(e) determine the rights of Participants with respect to an Award upon termination of employment orservice as a director;
(f) determine whether, to what extent, and under what circumstances an Award may be settled, cancelled,forfeited, exchanged, or surrendered;
(g) accelerate the vesting of an Award;
(h) interpret the terms and provisions of Award Agreements;
(i) provide for forfeiture of outstanding Awards and recapture of realized gains and other realized value insuch events as determined by the Committee; and
(j) make all other determinations deemed necessary or advisable for the administration of the Plan.
The Committee may solicit recommendations from the Company’s Chief Executive Officer with respect to the grant ofAwards under the Plan. The Committee (or, as permitted under Section 4.3, the Company’s Chief Executive Officer) shalldetermine the terms and conditions of each Award at the time of grant. No Participant or any other person shall have anyclaim to be granted an Award under the Plan at any time, and the Company is not obligated to extend uniform treatment toParticipants under the Plan. The terms and conditions of Awards need not be the same with respect to each Participant.
4.3 CommitteeDelegation. The Committee may delegate to the Company’s Chief Executive Officer the authorityto grant Awards to Participants who are not Non-Employee Directors or Executive Officers and to interpret and administerAwards for such Non-Employee Directors and Executive Officers. Any such delegation shall be subject to the limitations ofSection 157(c) of the Delaware General Corporation Law. The Committee may also delegate the authority to grant Awards toany subcommittee (s) consisting of members of the Board.
4.4 AwardstoNon-employeeDirectors. Notwithstanding any other provision of the Plan to the contrary, allAwards to Non-employee Directors must be authorized by the Board.
4.5 Employee’sServiceasNon-EmployeeDirectororConsultant. An Employee who receives an Award,terminates employment, and immediately thereafter begins performing service as a Non-Employee Director or Consultantshall have such service treated as service as an Employee for purposes of the Award. The previous sentence shall not applywhen (a) the Award is an Incentive Stock Option or (b) prohibited by law.
5. Options. The Committee may authorize grants to Participants of Options to purchase Shares upon such terms andconditions as the Committee may determine in accordance with the following provisions:
5.1 NumberofShares. Each grant shall specify the number of Shares to which it pertains.
5.2 OptionPrice. Each grant shall specify an Option Price per Share, which shall be equal to or greater than theFair Market Value per Share on the Grant Date, except in the case of Substitute Awards or as provided in Section 12.
5.3 Consideration. Each grant shall specify the form of consideration to be paid in satisfaction of the Option Priceand the manner of payment of such consideration, which may include in the Committee’s sole discretion: (a) cash in the formof currency or check or other cash equivalent acceptable to the Company, (b) nonforfeitable, unrestricted Shares owned bythe Participant which have a value at the time of exercise that is equal to the Option Price, (c) a reduction in Shares issuableupon exercise which have a value at the time of exercise that is equal to the Option Price (a “net exercise”), (d) to the extentpermitted by applicable law, the proceeds of sale from a broker-assisted cashless exercise, (e) any other legal considerationthat the Committee may deem appropriate on such basis as the Committee may determine in accordance with the Plan or (f)any combination of the foregoing. For the avoidance of doubt, Participants who receive Options to purchase Shares shallhave no legal right to own or receive Shares withheld from delivery upon exercise pursuant to Section 5.3(c), and otherwiseshall have no rights in respect of such Shares whether as a shareholder or otherwise.
5.4 Vesting. Any grant may specify (a) a waiting period or periods before Options shall become exercisable and(b) permissible dates or periods on or during which Options shall be exercisable, and any grant may provide for the earlierexercise of such rights in the event of a termination of employment. Vesting may be further conditioned upon the attainmentof Performance Goals established by the Committee.
5.5 ProvisionsGoverningISOs. Options granted under the Plan may be Incentive Stock Options, NonqualifiedStock Options or a combination of the foregoing, provided that only Nonqualified Stock Options may be granted to Non-Employee
Directors. Each grant shall specify whether (or the extent to which) the Option is an Incentive Stock Option or aNonqualified Stock Option. Notwithstanding any such designation, to the extent that the aggregate Fair Market Value of theShares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by anParticipant during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated asNonqualified Stock Options. Options failing to qualify as Incentive Stock Options for any reason will be treated asNonqualified Stock Options, rather than being forfeited.
5.6 ExercisePeriod.
(a) Subject to Section 18.9, no Option granted under the Plan may be exercised more than ten years fromthe Grant Date.
(b) If the Fair Market Value exceeds the Option Price on the last day that an Option may be exercised underan Award Agreement, the affected Participant shall be deemed to have exercised the vested portion of such Option ina net exercise under Section 5.3(c) above without the requirement of any further action.
5.7 AwardAgreement. Each grant shall be evidenced by an Award Agreement containing such terms andprovisions as the Committee may determine consistent with the Plan.
5.8 Options—StockRightsExemption. Options granted under the Plan are intended to qualify as “stock rights”within the meaning of Treas. Reg. Section 1.409A-1(b)(5).
6. StockAppreciationRights. The Committee may authorize grants to Participants of Stock Appreciation Rights. AStock Appreciation Right is the right of the Participant to receive from the Company an amount, which shall be determined by theCommittee and shall be expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of such right.Any grant of Stock Appreciation Rights under the Plan shall be upon such terms and conditions as the Committee may determine inaccordance with the following provisions:
6.1 PaymentinCashorShares. Any grant may specify that the amount payable upon the exercise of a StockAppreciation Right will be paid by the Company in cash, Shares or any combination thereof or may grant to the Participantor reserve to the Committee the right to elect among those alternatives.
6.2 Vesting. Any grant may specify (a) a waiting period or periods before Stock Appreciation Rights shall becomeexercisable and (b) permissible dates or periods on or during which Stock Appreciation Rights shall be exercisable, and anygrant may provide for the earlier exercise of such rights in the event of a termination of employment. Vesting may be furtherconditioned upon the attainment of Performance Goals established by the Committee.
6.3 ExercisePeriod. Subject to Section 18.9, no Stock Appreciation Right granted under the Plan may beexercised more than ten years from the Grant Date. If a Spread exists on the last day that a Stock Appreciation Right may beexercised under an Award Agreement, the affected Participant shall be deemed to have exercised the vested portion of suchStock Appreciation Right without the requirement of any further action.
6.4 AwardAgreement. Each grant shall be evidenced by an Award Agreement containing such terms andprovisions as the Committee may determine consistent with the Plan.
6.5 StockAppreciationRights—StockRightsExemption. Stock Appreciation Rights granted under the Plan areintended to qualify as “stock rights” within the meaning of Treas. Reg. Section 1.409A-1(b)(5).
7. RestrictedShares. The Committee may authorize grants to Participants of Restricted Shares upon such terms andconditions as the Committee may determine in accordance with the following provisions:
7.1 TransferofShares. Each grant shall constitute an immediate transfer of the ownership of Shares to theParticipant in consideration of the performance of services, subject to the substantial risk of forfeiture and restrictions ontransfer hereinafter referred to.
7.2 Consideration. To the extent permitted by Delaware law, each grant may be made without additionalconsideration from the Participant or in consideration of a payment by the Participant that is less than the Fair Market Valueon the Grant Date.
7.3 SubstantialRiskofForfeiture. Each grant shall provide that the Restricted Shares covered thereby shall besubject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code for a period to be determined by theCommittee on the Grant Date, and any grant or sale may provide for the earlier termination of such risk of forfeiture in theevent of a termination of employment.
7.4 Dividend,VotingandOtherOwnershipRights. Unless otherwise determined by the Committee, an award ofRestricted Shares shall entitle the Participant to dividend, voting and other ownership rights (except for any rights to aliquidating distribution) during the period for which such substantial risk of forfeiture is to continue. Any grant shall requirethat any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions beaccumulated or reinvested in additional Shares, which shall be subject to the same restrictions as the underlying Award orsuch other restrictions as the Committee may determine.
7.5 RestrictionsonTransfer. Each grant shall provide that, during the period for which such substantial risk offorfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to theextent prescribed by the Committee on the Grant Date.
7.6 Performance-BasedRestrictedShares. Any grant or the vesting thereof may be further conditioned upon theattainment of Performance Goals established by the Committee in accordance with the applicable provisions of Section 9regarding Performance Share Awards and, if any such Award is intended to be a Performance-Based Award, in accordancewith the provisions of Section 14.
7.7 AwardAgreement;Certificates. Each grant shall be evidenced by an Award Agreement containing such termsand provisions as the Committee may determine consistent with the Plan. Unless otherwise directed by the Committee, allcertificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant withrespect to such Shares, shall be held in custody by the Company until all restrictions thereon lapse.
8. RestrictedStockUnits. The Committee may authorize grants of Restricted Stock Units to Participants upon suchterms and conditions as the Committee may determine in accordance with the following provisions:
8.1 RestrictedPeriod. Each grant shall provide that the Restricted Stock Units covered thereby shall be subject toa Restricted Period, which shall be fixed by the Committee on the Grant Date, and any grant or sale may provide for theearlier termination of such period in the event of a termination of employment.
8.2 DividendEquivalentsandOtherOwnershipRights. During the Restricted Period, the Participant shall nothave any right to transfer any rights under the subject Award and shall not have any rights of ownership in the Sharesunderlying the Restricted Stock Units, including the right to vote such Shares, but the Committee may on or after the GrantDate authorize the payment of dividend equivalents on such shares in cash or additional Shares on a current, deferred orcontingent basis with respect to any or all dividends or other distributions paid by the Company. Notwithstanding theforegoing, any dividend equivalents with respect to dividends paid in stock shall be subject to the same restrictions as theunderlying Award.
8.3 Performance-BasedRestrictedShareUnits. Any grant or the vesting thereof may be further conditioned uponthe attainment of Performance Goals established by the Committee in accordance with the applicable provisions of Section 9regarding Performance Share Awards and, if any such Award is intended to be a Performance-Based Award, in accordancewith the provisions of Section 14.
8.4 AwardAgreement. Each grant shall be evidenced by an Award Agreement containing such terms andprovisions as the Committee may determine consistent with the Plan.
9. PerformanceShareAwards. The Committee shall determine whether and to whom Performance Share Awardsshall be granted and such terms, limitations and conditions as it deems appropriate in its sole discretion in accordance with thefollowing provisions:
9.1 NumberofPerformanceShareAwards. Each grant shall specify the number of Shares or share units to whichit pertains, which may be subject to adjustment to reflect changes in compensation or other factors.
9.2 PerformanceCycle. The Performance Cycle with respect to each Performance Share Award shall bedetermined by the Committee and set forth in the Award Agreement and may be subject to earlier termination in the event ofa termination of employment.
9.3 PerformanceGoals. Each grant shall specify the Performance Goals that are to be achieved by the Participantand a formula for determining the amount of any payment to be made if the Performance Goals are achieved.
9.4 PaymentofPerformanceShareAwards. Each grant shall specify the time and manner of payment ofPerformance Share Awards that shall have been earned.
9.5 DividendEquivalents. Under no circumstances may dividend equivalents be granted for any PerformanceShare Award.
9.6 Adjustments. If the Committee determines after the Performance Goals have been established that a change inthe business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts itsbusiness, or other events or circumstances render the Performance Goals unsuitable, the Committee shall have sole discretionto modify such Performance Goals, in whole or in part, as the Committee deems appropriate and equitable. The Committeeshall also have the right in its sole discretion to increase or decrease the amount payable at a given level of performance totake into account additional factors that the Committee may deem relevant to the assessment of individual or corporateperformance for the Performance Cycle. The provisions of this Section 9.6 shall not apply with respect to Performance-BasedAwards and any adjustments with respect to such Awards shall be made solely to the extent permitted under Section 14.4.
9.7 AwardAgreement. Each grant shall be evidenced by an Award Agreement containing such terms andprovisions as the Committee may determine consistent with the Plan.
9.8 Performance-BasedAwards. Notwithstanding anything to the contrary in this Section 9, Performance ShareAwards granted to Covered Employees that are intended to be Performance-Based Awards shall only be granted,administered and paid in compliance with all the requirements for Performance-Based Awards set forth in Section 14 below.
10. OtherEquityAwards. The Committee may grant other types of equity-based or equity-related Awards nototherwise described by the terms of the Plan (including the grant or offer for sale of unrestricted Shares and grant of Deferred StockUnits) in such amounts and subject to such terms and conditions, as the Committee shall determine. Such Awards may
involve the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of Shares andmay include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictionsother than the United States.
11. Cash-BasedAwards. The Committee may, in its sole discretion, grant Cash-Based Awards to Executive Officersand key employees in such amounts and upon such terms, and subject to such conditions, as the Committee shall determine at thetime of grant. The Committee shall determine the maximum duration of the Cash-Based Award, the amount of cash to which theCash-Based Award pertains, the conditions upon which the Cash-Based Award shall become vested or payable, and such otherprovisions as the Committee shall determine. Each Cash-Based Award shall specify a cash-denominated payment amount, formulaor payment ranges as determined by the Committee. Payment, if any, with respect to a Cash-Based Award shall be made inaccordance with the terms of the Award and shall be made in cash. Notwithstanding anything to the contrary in this Section 11, allCash-Based Awards that are Performance-Based Awards shall only be granted, administered and paid in compliance with all therequirements for Executive Officer Awards set forth in Section 14 below.
12. Adjustments. The Committee shall make or provide for such adjustments in the (a) limitations specified inSection 3, (b) number of Shares covered by outstanding Awards, (c) Option Price or Base Price applicable to outstanding Optionsand Stock Appreciation Rights and (d) kind of shares available for grant and covered by outstanding Awards (including shares ofanother issuer), as the Committee in its sole discretion may in good faith determine to be equitably required in order to preventdilution or enlargement of the rights of Participants that otherwise would result from (x) any stock dividend, stock split, reversestock split, combination or exchange of Shares, recapitalization, extraordinary cash dividend, or other change in the capital structureof the Company, (y) any merger, consolidation, spin—off, spin—out, split—off, split—up, reorganization, partial or completeliquidation or other distribution of assets (other than a normal cash dividend), issuance of rights or warrants to purchase securities or(z) any other corporate transaction or event having an effect similar to any of the foregoing. In addition, in the event of any suchtransaction or event, the Committee may provide in substitution for any or all outstanding Awards under the Plan such alternativeconsideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith thecancellation or surrender of all Awards so replaced. In the case of Substitute Awards, the Committee may make such adjustments,not inconsistent with the terms of the Plan, in the terms of Awards as it shall deem appropriate in order to achieve reasonablecomparability or other equitable relationship between the assumed awards and the Awards granted under the Plan as so adjusted.
13. ChangeinControl.
13.1 GeneralRule. Except as otherwise provided in an Award Agreement, in the event of a Change in Control, theCommittee may, but shall not be obligated to do any one or more of the following, in each case without Participant consent:(a) accelerate, vest or cause the restrictions to lapse with respect to, all or any portion of an Award, (b) cancel Awards for acash payment equal to their fair value (as determined in the sole
discretion of the Committee) which, in the case of Options and Stock Appreciation Rights, shall be deemed to be equal to theexcess, if any, of the consideration to be paid in connection with the Change in Control to holders of the same number ofShares subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the FairMarket Value of the Shares subject to such Options or Stock Appreciation Rights) over the aggregate Option Price (in thecase of Options) or Base Price (in the case of Stock Appreciation Rights), (c) provide for the issuance of replacement awardsthat will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder asdetermined by the Committee in its sole discretion, (d) terminate Options without providing accelerated vesting or (e) takeany other action with respect to the Awards the Committee deems appropriate. For avoidance of doubt, the treatment ofAwards upon a Change in Control may vary among Participants and Types of Awards in the Committee’s sole discretion.
13.2 SettlementofAwardsSubjecttoPerformanceGoalsUponaChangeinControl. Awards subject tosatisfying a Performance Goal or Goals shall be settled upon a Change in Control. The settlement amount shall be determinedby the Committee in its sole discretion based upon the extent to which the Performance Goals for any such Awards havebeen achieved after evaluating actual performance from the start of the Performance Cycle until the date of the Change inControl and the level of performance anticipated with respect to such Performance Goals as of the date of the Change inControl.
13.3 ChangeinControlshall mean the earliest to occur of the following events, provided that such event is notalso a Management Buyout (as defined below):
(a) Any Person (as defined below) is or becomes the Beneficial Owner, directly or indirectly, of securitiesof the Company representing 35% or more of the combined voting power of the Company’s then outstanding votingsecurities generally entitled to vote in the election of directors of the Company, provided, however, that for avoidanceof doubt, the shareholders owning the Company’s Class B common stock shall be treated as the Beneficial Ownerwith voting control for purposes of this definition, and not any Persons voting the shares subject to a voting trust orother similar arrangement, and further provided that no Change in Control will be deemed to have occurred as a resultof a change in ownership percentage resulting solely from an acquisition of securities by the Company or atransaction described in clause (i) of paragraph (b) below;
(b) There is consummated a Merger of the Company with any other business entity other than (i) a Mergerwhich would result in the securities of the Company generally entitled to vote in the election of directors of theCompany outstanding immediately prior to such Merger continuing to represent (either by remaining outstanding orby being converted into such securities of the surviving entity or any parent thereof), in combination with theownership of any trustee or other fiduciary holding such securities under an employee benefit plan of the
Company or any Subsidiary at least 50% of the combined voting power of the voting securities of the Company orsuch surviving entity or any parent thereof outstanding immediately after such Merger, generally entitled to vote inthe election of directors of the Company or such surviving entity or any parent thereof and, in the case of suchsurviving entity or any parent thereof, of a class registered under Section 12 of the Act, or (ii) a Merger effected toimplement a recapitalization of the Company (or similar transaction) in which no Person is or becomes a BeneficialOwner, directly or indirectly, of securities of the Company’s then outstanding voting securities of the Companygenerally entitled to vote in the election of directors of the Company;
(c) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Companyor there is consummated the sale or disposition by the Company of all or substantially all of the Company’s assets,other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity wherethe outstanding securities generally entitled to vote in the election of directors of the Company immediately prior tothe transaction continue to represent (either by remaining outstanding or by being converted into such securities of thesurviving entity or any parent thereof) 50% or more of the combined voting power of the outstanding votingsecurities of any such entity generally entitled to vote in such entity’s election of directors immediately after such saleand of a class registered under Section 12 of the Act.
(d) As used in this Section 13:
i. “Management Buyout” means any event or transaction which would otherwise constitute a Changein Control (a “Transaction”) if, in connection with the Transaction, the Participant, Family Members and/orthe Participant’s Affiliates participate, directly or beneficially, as an equity investor in, or have the option orright to acquire, whether vested or not vested, equity interests of, the acquiring entity or any of its Affiliates(as defined in Rule 12b-2 under the Act) (the “Acquiror”) having a percentage interest therein greater than1%. For purposes of the preceding sentence, a party shall not be deemed to have participated as an equityinvestor in the Acquiror by virtue of (i) obtaining Beneficial Ownership of any equity interest in the Acquiroras a result of the grant to the party of an incentive compensation award under one or more incentive plans ofthe Acquiror (including, but not limited to, the conversion in connection with the Transaction of incentivecompensation awards of the Company into incentive compensation awards of the Acquiror), on terms andconditions substantially equivalent to those applicable to other employees of the Company at a comparablelevel as such party immediately before the Transaction, after taking into account normal differencesattributable to job responsibilities, title and the like, (ii) obtaining beneficial interest of any equity interest inthe Acquiror on terms and conditions substantially
equivalent to those obtained in the Transaction by all other shareholders of the Company or (iii) the party’sinterests in any tax-qualified defined benefit or defined contribution pension or retirement plan in which suchparty or any Family Member is a participant or beneficiary.
ii. “Merger” means a merger, share exchange, consolidation or similar business consolidation underapplicable law.
iii. “Participant’s Affiliates” at any time consist of any entity in which the Participant and/ormembers of the Participant’s Family Members then own, directly or beneficially, or have the option or right toacquire, whether or not vested, greater than 10% of such entity’s equity interests, and all then current directorsand Executive Officers of the Company who are members of any group that also includes the Participant, aFamily Member and/or any such entity in which the members have agreed to act together for the purpose ofparticipating in the Transaction.
iv. “Person” shall have the meaning given in Section 3(a)(9) of the Act, as modified and used inSections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of itsSubsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of theCompany, and (iii) a corporation owned, directly or indirectly, by the stockholders of the Company insubstantially the same proportions and with substantially the same voting rights as their ownership and votingrights with respect to the Company.
14. RequirementsforPerformance-BasedAwards.
14.1 InGeneral. Any Executive Officer or other key employee providing services to the Company and/or itsSubsidiaries and Affiliates and who is selected by the Committee (hereinafter referred to as a “Covered Employee”) may begranted one or more Performance-Based Awards in the form of a Restricted Stock Award, Restricted Stock Units,Performance Share Awards, Other Equity Awards and/or Cash-Based Awards payable upon the attainment of PerformanceGoals that are established by the Committee and relate to one or more of the Performance Criteria, in each case on a specifieddate or dates or over any period or periods determined by the Committee, as permitted under this Section 14.Notwithstanding anything to the contrary in the Plan, the Committee shall have no obligation to grant any Award, whethersettled in Shares or cash, in the form of “performance-based compensation” under Section 162(m) of the Code. For theavoidance of doubt, a Covered Employee may receive as Performance-Based Awards a Cash-Based Award subject toPerformance Cycle that is twelve months and a Cash-Based Award subject to a Performance Cycle that is more than twelvemonths in the same calendar year. The Committee shall define in an objective fashion the manner of calculating thePerformance Criteria it selects to use for any Performance Cycle. Depending on the Performance Criteria used to establishsuch Performance Goals, the Performance Goals
may be expressed in terms of overall Company performance or the performance of a division, business unit, or an individual.Each Performance-Based Award shall also comply with the provisions set forth below.
14.2 GrantProcedure. With respect to each Performance-Based Award, the Committee shall select, within thefirst 90 days of a Performance Cycle, the Performance Criteria for such grant and the Performance Goals with respect to eachPerformance Criterion (including a threshold level of performance below which no amount will become payable with respectto such Award). Each Performance-Based Award will specify the amount payable, or the formula for determining the amountpayable, upon achievement of the various applicable performance targets. The Performance Criteria established by theCommittee may be (but need not be) different for each Performance Cycle and different Performance Goals may beapplicable to Performance-Based Awards to different Covered Employees. The Committee shall designate whether an Awardgranted to an Executive Officer or key employee is intended to be a Performance-Based Award at the time of grant.
14.3 PermissiblePerformanceCriteria. Only one or a combination of the following may be used as PerformanceCriteria for a Performance-Based Award: growth in net sales or revenue, return measures (including, but not limited to,return on invested capital, assets, capital, equity and sales), gross profit margin; operating expense ratios; operating expensetargets; productivity ratios; operating income, gross or operating margins; earnings before or after taxes, interest, depreciationand/or amortization, net earnings or net income (before or after taxes); earnings per share; cash flow (including, but notlimited to, operating cash flow, free cash flow, cash flow return on equity, and cash flow return on investment), workingcapital targets, funds from operations or similar measure, capital expenditures, share price (including, but not limited to,growth measures and total stockholder return), appreciation in the fair market value or book value of the common stock,economic value added (net operating profit after tax minus the sum of capital multiplied by the cost of the capital), debt toequity ratio / debt levels, quantitative measures of customer satisfaction, market share, acquisitions or strategic transactions,quantitative measures of employee satisfaction / engagement, employee retention / attrition, safety, budget achievement,expense reduction or cost savings, productivity improvements and inventory control / efficiency.
14.4 PermittedAdjustments. The Committee, in its discretion, may measure performance against PerformanceGoals under a Performance-Based Award by taking one or more of the following actions: (a) excluding each of the followingitems: (i) events of an “unusual nature” or of a type that indicates “infrequency of occurrence”, both as described inAccounting Standards Codification Topic 225-20 or any successor pronouncement thereto (as reported in the Corporation’sfinancial statements for the Performance Cycle), (ii) exchange rate effects, as applicable, for non-U.S. dollar denominatedoperating earnings, (iii) the effects to any statutory adjustments to corporate tax rates, (iv) the impact of discontinuedoperations, (v) losses from discontinued operations, (vi) restatements and other unplanned special charges such asacquisitions,
acquisition expenses (including, without limitation, expenses relating to goodwill and other intangible assets), (vi)divestitures, (vii) stock offerings, (viii) stock repurchases, (ix) strategic loan loss provisions and (b) not adjusting for changesin accounting principles. Any such action with respect to a Performance-Based Award must be taken by the Committeewithin the first ninety (90) days applicable to the Performance Cycle or such later time as may be permitted under Section162(m) of the Code or as would not cause any deduction arising from such Award to be disallowed under Section 162(m) ofthe Code.
14.5 CertificationofPerformanceGoalsandPayment. Following the completion of a Performance Cycle, theCommittee shall meet to review and certify in writing whether, and to what extent, the Performance Goals for thePerformance Cycle have been achieved and, if so, to also calculate and certify in writing the amount of the Performance-Based Awards earned for the Performance Cycle. The Committee shall then determine the actual size of each CoveredEmployee’s Performance-Based Award, and, in doing so with respect to a Cash-Based Award, may reduce or eliminate theamount of such Award if, in its sole judgment, such reduction or elimination is appropriate.
14.6 Interpretation. All Performance-Based Awards and the provisions hereunder applicable to such Awards shallbe interpreted consistent with the requirements of Section 162(m).
14.7 TransitionPeriod. Notwithstanding this Section 14, no restrictions imposed to qualify payments under thePlan as “qualified performance-based compensation” within the meaning of Treas. Reg. §1.162-27(e) shall apply until theexpiration of the “reliance period” described in Treas. Reg. §1.162¬27(f)(2).
15. Withholding.
15.1 TaxWithholding. The Company shall have the power and the right to deduct or withhold, or require aParticipant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic orforeign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan prior tomaking any payments hereunder.
15.2 ShareWithholding. With respect to withholding required upon the exercise of Options or Stock AppreciationRights, upon the lapse of restrictions on Restricted Shares and Restricted Stock Units, or upon the achievement ofperformance goals related to Performance Share Awards, or any other taxable event arising as a result of an Award grantedhereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in wholeor in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equalto the minimum statutory total tax that could be imposed on the transaction. All such elections shall be irrevocable, made inwriting or electronically, and signed or acknowledged electronically by the Participant, and shall be subject to anyrestrictions or limitations that the Committee, in its sole discretion, deems appropriate.
16. CertainTerminationsofEmployment,HardshipandApprovedLeavesofAbsence. Notwithstanding any otherprovision of the Plan to the contrary, in the event of a Participant’s termination of employment (including by reason of death,disability or retirement) or in the event of hardship or other special circumstances, the Committee may in its sole discretion take anyaction that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation,waiving or modifying any limitation or requirement with respect to any Award under the Plan. The Committee shall have thediscretion to determine whether and to what extent the vesting of Awards shall be tolled during any leave of absence, paid or unpaid;provided however, that in the event of military leave, vesting shall toll during any unpaid portion of such leave, provided that, upon aParticipant’s returning from military leave (under conditions that would entitle him or her to protection upon such return under theUniform Services Employment and Reemployment Rights Act), he or she shall be given vesting credit with respect to the Award tothe same extent as would have applied had the Participant continued to provide services to the Company throughout the leave on thesame terms as he or she was providing services immediately prior to such leave. Any actions taken by the Committee shall be takenconsistent with the requirements of Section 409A of the Code and, with respect to Performance-Based Awards, Section 162(m) ofthe Code.
17. AuthorizationofSub-Plans. The Committee may from time to time establish one or more sub-plans under thePlan for purposes of satisfying applicable blue sky, securities, and/or tax laws of various jurisdictions. The Committee shall establishsuch sub-plans by adopting supplements to the Plan containing (a) such limitations as the Committee deems necessary or desirable,and (b) such additional terms and conditions not otherwise inconsistent with the Plan as the Committee shall deem necessary ordesirable. All sub-plans adopted by the Committee shall be deemed to be part of the Plan, but each sub-plan shall apply only toParticipants within the affected jurisdiction and the Company shall not be required to provide copies of any sub-plans to Participantsin any jurisdiction which is not the subject of such sub-plan.
18. AmendmentsandOtherMatters.
18.1 PlanAmendments. The Board may amend, suspend or terminate the Plan or the Committee’s authority togrant Awards under the Plan at any time. Notwithstanding the foregoing, no amendments shall be effective without approvalof the Company’s stockholders if (a) stockholder approval of the amendment is then required pursuant to the Code, the rulesof the primary stock exchange or stock market on which the Shares are then traded, applicable U.S. state corporate laws orregulations, applicable U.S. federal laws or regulations, and the applicable laws of any foreign country or jurisdiction whereAwards are, or shall be, granted under the Plan, or (b) such amendment would (i) modify Section 18.4, (ii) materiallyincrease benefits accruing to Participants, (iii) increase the aggregate number of Shares issued or issuable under the Plan, (iv)increase any limitation set forth on the number of Shares which may be issued or the aggregate value of Awards or the per-person limits under Section 3 except as provided in Section 12, (v) modify the eligibility requirements for Participants in thePlan, or (vi) reduce the minimum Option Price and Base Price as set forth in Sections 5 and 6, respectively. Notwithstandingany other provision of the Plan to the contrary, except as provided in
Section 18.8, no termination, suspension or amendment of the Plan may adversely affect any outstanding Award without theconsent of the affected Participant.
18.2 AwardDeferrals. The Committee may permit Participants to elect to defer the issuance of Shares or thesettlement of Awards in cash under the Plan pursuant to such rules, procedures or programs as it may establish for purposesof the Plan. However, any Award deferrals which the Committee permits must comply with the provisions of Section 22 andthe requirements of Section 409A of the Code.
18.3 ConditionalAwards. The Committee may condition the grant of any award or combination of Awards underthe Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensationotherwise payable by the Company or any Affiliate to the Participant, provided that any such grant must comply with theprovisions of Section 22 and the requirements of Section 409A of the Code.
18.4 RepricingProhibited. The terms of outstanding Awards may not be amended to reduce the Option Price ofoutstanding Options or Base Price of outstanding Stock Appreciation Rights or cancel outstanding Options or StockAppreciation Rights in exchange for cash, other Awards or Options or Stock Appreciation Rights with an Option Price orBase Price that is less than the Option Price or Base Price of the original Options or Stock Appreciation Rights, and theCommittee may not take any other action that is considered a “repricing” for purposes of the stockholder approval rules ofthe applicable securities exchange or inter-dealer quotation system on which Shares are listed or quoted, without stockholderapproval, provided that nothing herein shall prevent the Committee from taking any action provided for in Section 12 above.
18.5 NoEmploymentRights. Nothing in the Plan or an Award Agreement shall interfere with or limit in any waythe right of the Company, its Affiliates, and/or its Subsidiaries to terminate any Participant’s employment or service on theBoard or to the Company at any time or for any reason not prohibited by law, nor confer upon any Participant any right tocontinue his employment or service as a director for any specified period of time. Neither an Award nor any benefits arisingunder the Plan shall constitute an employment contract with the Company, its Affiliates, and/or its Subsidiaries and,accordingly, subject to Section 18.1, the Plan and the benefits hereunder may be terminated at any time in the sole andexclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or itsSubsidiaries.
18.6 TaxQualification. To the extent that any provision of the Plan would prevent any Award that was intendedto qualify under particular provisions of the Code from so qualifying, such provision of the Plan shall be null and void withrespect to such Award, provided that such provision shall remain in effect with respect to other Awards, and there shall be nofurther effect on any provision of the Plan.
18.7 LeaveofAbsenceorTransfer. A transfer between the Company and any Affiliate or between Affiliates, or aleave of absence duly authorized by the Company, shall not be deemed to be a termination of employment. Periods of timewhile on a duly authorized leave of absence shall be disregarded for purposes of determining whether a Participant hassatisfied a Restricted Period or Performance Cycle under an Award.
18.8 AmendmentstoComplywithLaws,RegulationsorRules. Notwithstanding any other provision of the Planor any Award Agreement to the contrary, in its sole and absolute discretion and without the consent of any Participant, theBoard may amend the Plan, and the Committee may amend any Award Agreement, to take effect retroactively or otherwiseas it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or futurelaw, regulation or rule applicable to the Plan, including, but not limited to, Section 409A of the Code.
18.9 Tolling. In the event a Participant is prevented from exercising an Option or the Company is unable to settlean Award due to either any trading restrictions applicable to the Company’s Shares, the Participant’s physical infirmity oradministrative error by the Company relied upon and not caused by the Participant, then unless otherwise determined by theCommittee, the length of time applicable to any such restriction, condition or event shall toll any exercise period (i) untilsuch restriction lapses, (ii) until the Participant (or his representative) is able to exercise the Award or (iii) until such error iscorrected, as applicable.
18.10 NoDutytoInformRegardingExerciseRights. Neither the Company, any Affiliate, the Committee nor theBoard shall have any duty to inform a Participant of the pending expiration of the period in which a Stock Appreciation rightmay be exercised or in which an Option may be exercised.
19. IssuanceofShares;FractionalShares.
19.1 FormforIssuingShares;Legends. Shares may be issued on a certificated or uncertificated basis. Sharesmay include any legend which the Committee deems appropriate to reflect any restrictions on transfer of such Shares.
19.2 DeliveryofTitle. The Company shall have no obligation to issue or deliver evidence of title for Shares issuedunder the Plan prior to: (i) obtaining any approvals from governmental agencies that the Company determines are necessaryor advisable; and (ii) completing any registration or other qualification of the Shares under any applicable national or foreignlaw or ruling of any governmental body that the Company determines to be necessary or advisable.
19.3 InabilitytoObtainAuthority. The inability of the Company to obtain authority from any regulatory bodyhaving jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale ofany Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as towhich such requisite authority shall not have been obtained.
19.4 InvestmentRepresentations. The Committee may require any individual receiving Shares pursuant to anAward under the Plan to represent and warrant in writing that the individual is acquiring the Shares for investment andwithout any present intention to sell or distribute such Shares,
19.5 FractionalShares. The Company shall not be required to issue any fractional Shares pursuant to the Plan.The Committee may provide for the elimination of fractions or for the settlement thereof in cash.
20. LimitationsPeriod. Any person who believes he or she is being denied any benefit or right under the Plan mayfile a written claim with the Committee. Any claim must be delivered to the Committee within forty-five (45) days of the specificevent giving rise to the claim. Untimely claims will not be processed and shall be deemed denied. The Committee, or its designatedagent, will notify the Participant of its decision in writing as soon as administratively practicable. Claims not responded to by theCommittee in writing within ninety (90) days of the date the written claim is delivered to the Committee shall be deemed denied.The Committee’s decision shall be final, conclusive and binding on all persons. No lawsuit relating to the Plan may be filed before awritten claim is filed with the Committee and is denied or deemed denied, and any lawsuit must be filed within one year of suchdenial or deemed denial or be forever barred. The venue for any lawsuit shall be Charlotte, North Carolina.
21. GoverningLaw. The validity, construction and effect of the Plan and any Award hereunder will be determined inaccordance with the State of Delaware except to the extent governed by applicable federal law.
22. CompliancewithSection409A.
22.1 InGeneral. The Plan is intended to be administered in a manner consistent with the requirements, whereapplicable, of Section 409A. For avoidance of doubt, Stock Options and Stock Appreciation Rights are intended to qualifyfor the stock rights exemptions from Section 409A. Where reasonably possible and practicable, the Plan shall beadministered in a manner to avoid the imposition on Participants of immediate tax recognition and additional taxes pursuantto such Section 409A. Notwithstanding the foregoing, neither the Company nor the Committee shall have any liability to anyperson in the event Section 409A applies to any such Award in a manner that results in adverse tax consequences for theParticipant or any of his or her transferees.
22.2 ElectiveDeferrals. No elective deferrals or re-deferrals other than in regard to Restricted Stock Units arepermitted under the Plan.
22.3 ApplicableRequirements. To the extent any of the Awards granted under the Plan are deemed “deferredcompensation” and hence subject to Section 409A, the following rules shall apply to such Awards:
(a) MandatoryDeferrals. If the Company decides that the payment of compensation under the Plan shallbe deferred within the meaning of Section 409A, then, except as provided under Treas. Reg. Section 1.409A-1(b)(4)(ii), on granting of the Award to which such compensation payment relates, the Company shall specify the date(s) atwhich such compensation will be paid in the Award Agreement.
(b) InitialDeferralElections. For Awards of RSUs where the Committee provides the opportunity to electthe timing and form of the payment of the underlying Shares at some future time once any requirements have beensatisfied, the Participant must make his or her initial deferral election for such Award in accordance with therequirements of Section 409A, i.e., within thirty (30) days of first becoming eligible to receive such award or prior tothe start of the year in which the Award is granted to the Participant, in each case pursuant to the requirements ofSection 409A and Treas. Reg. Section 1.409A-2.
(c) SubsequentDeferralElections. To the extent the Company or Committee decides to permitcompensation subject to Section 409A to be re-deferred pursuant to Treas. Reg. Section 1.409A-2(b), then thefollowing conditions must be met: (i) such election will not take effect until at least 12 months after the date on whichit is made; (ii) in the case of an election not related to a payment on account of disability, death or an unforeseeableemergency, the payment with respect to which such election is made must be deferred for a period of not less thanfive years from the date such payment would otherwise have been paid; and (iii) any election related to a payment at aspecified time or pursuant to a fixed schedule (within the meaning of Treas. Reg. Section 1.409A-3(a)(4)) must bemade not less than 12 months before the date the payment is scheduled to be paid.
(d) TimingofPayments. Payment(s) of compensation that is subject to Section 409A shall only be madeupon an event or at a time set forth in Treas. Reg. Section 1.409A-3, i.e., the Participant’s separation from service, theParticipant’s becoming disabled, the Participant’s death, at a time or a fixed schedule specified in the Plan or anAward Agreement, a change in the ownership or effective control of the Company, or in the ownership of asubstantial portion of the assets of the Company, or the occurrence of an unforeseeable emergency.
(e) CertainDelayedPayments. Notwithstanding the foregoing, to the extent an amount was intended to bepaid such that it would have qualified as a short-term deferral under Section 409A and the applicable regulations, thensuch payment is or could be delayed if the requirements of Treas. Reg. 1.409A-1(b)(4)(ii) are met.
(f) AccelerationofPayment. Any payment made under the Plan to which Section 409A applies may not beaccelerated, except in accordance with Treas. Reg. 1.409A-3(j)(4).
(g) PaymentsuponaChangeinControl. Notwithstanding any provision of the Plan to the contrary, to theextent an Award subject to Section 409A shall be deemed to be vested or restrictions lapse, expire or terminate uponthe occurrence of a Change in Control and such Change in Control does not constitute a “change in the ownership oreffective control” or a “change in the ownership of a substantial portion of the assets” of the Company within themeaning of Section 409A (a)(2)(A)(v), then even though such Award may be deemed to be vested or restrictionslapse, expire or terminate upon the occurrence of the Change in Control or any other provision of the Plan, paymentwill be made, to the extent necessary to comply with the provisions of Section 409A, to the Participant on the earliestof (i) the Participant’s “separation from service” with the Company (determined in accordance with Section 409A),(ii) the date payment otherwise would have been made pursuant to the regular payment terms of the Award in theabsence of any provisions in the Plan to the contrary (provided such date is permissible under Section 409A) or (iii)the Participant’s death.
(h) PaymentstoSpecifiedEmployees. Payments due to a Participant who is a “specified employee” withinthe meaning of Section 409A on account of the Participant’s “separation from service” with the Company(determined in accordance with Section 409A) shall be made on the date that is six months after the date of theParticipant’s separation from service or, if earlier, the Participant’s date of death.
22.4 DeferralstoPreserveDeductibilityunderSection162(m). The Committee may postpone the exercising ofAwards, the issuance or delivery of Shares under any Award or any action permitted under the Plan to prevent the Company,a Subsidiary or any Affiliate from being denied a Federal income tax deduction with respect to any Award other than an ISOas a result of Section 162(m) in accordance with IRS regulations. In such case, payment of such deferred amounts must bemade as soon as reasonably practicable following the first date on which the Company, a Subsidiary and/or Affiliateanticipates or reasonably should anticipate that, if the payment were made on such date, the Company’s, Subsidiary’s and/orAffiliate’s deduction with respect to such payment would no longer be restricted due to the application of Section 162(m).
22.5 Determining“ControlledGroup”. In order to determine for purposes of Section 409A whether a Participantor eligible individual is employed by a member of the Company’s controlled group of corporations under Section 414(b) ofthe Code (or by a member of a group of trades or businesses under common control with the Company under Section 414(c)of the Code) and, therefore, whether the Shares that are or have been purchased by or awarded under the Plan to theParticipant are shares of “service recipient” stock within the meaning of Section 409A, a Participant or eligible employee ofPremier Healthcare Alliance, L.P. shall be considered employed by the Company’s controlled group (or by a member of agroup of trades or businesses under common control with the Company, as applicable).
23. Transferability.
23.1 TransferRestrictions. Except as provided in Sections 23.2 and 23.4, no Award granted under the Plan shallbe transferable by a Participant other than upon death by will or the laws of descent and distribution, and Options and StockAppreciation Rights shall be exercisable during a Participant’s lifetime only by the Participant or, in the event of theParticipant’s legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of theParticipant under state law. Any attempt to transfer an Award in violation of the Plan shall render such Award null and void.
23.2 LimitedTransferRights. The Committee may expressly provide in an Award Agreement that a Participantmay transfer such Award (other than an Incentive Stock Option), in whole or in part, to a Family Member, a trust for theexclusive benefit of the Participant and Family Members, a partnership or other entity in which all the beneficial owners arethe Participant and Family Members, or any other entity affiliated with the Participant that may be approved by theCommittee. Subsequent transfers of Awards shall be prohibited except in accordance with this Section 23.2. All terms andconditions of the Award, including provisions relating to the termination of the Participant’s covered employment or serviceshall continue to apply following a transfer made in accordance with this Section 23.2.
23.3 AdditionalRestrictionsonTransfer. Any Award made under the Plan may provide that all or any part of theShares that are to be issued or transferred by the Company upon exercise, vesting or settlement shall be subject to furtherrestrictions upon transfer.
23.4 DomesticRelationsOrders. Notwithstanding the foregoing provisions of this Section 23, any Award madeunder the Plan may be transferred as necessary to fulfill any domestic relations order as defined in Section 414(p)(1)(B) ofthe Code.
24. Forfeiture,RecoupmentandClawback. Without limiting in any way the generality of the Committee’s power tospecify any terms and conditions of an Award consistent with law, and for greater clarity, the Committee may specify in an AwardAgreement that the Participant’s rights, payments and benefits with respect to an Award, including any payment of Shares receivedupon exercise or in satisfaction of an Award under the Plan shall be subject to reduction, cancellation, forfeiture or recoupment uponthe occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions, without limit asto time. Such events shall include, but not be limited to, failure to accept the terms of the Award Agreement, termination of serviceunder certain or all circumstances, violation of material Company policies, misstatement of financial or other material informationabout the Company, fraud, misconduct, breach of noncompetition, confidentiality, nonsolicitation, noninterference, corporateproperty protection, or other agreements that may apply to the Participant, or other conduct by the Participant that the Committeedetermines is detrimental to the business or reputation of the Company and its Affiliates, including facts and circumstancesdiscovered after termination of service. Awards granted under the Plan shall be subject to any compensation recovery policy orminimum stock holding period requirement as may be adopted or amended by
the Company from time to time. All Awards (including any proceeds, gains or other economic benefit actually or constructivelyreceived by a Participant upon any receipt or exercise of any Award or upon the receipt or resale of any Shares underlying theAward) shall be subject to the provisions of any clawback policy implemented by the Company, including, without limitation, anyclawback policy adopted to comply with the requirements of applicable law, including without limitation the Dodd-Frank WallStreet Reform and Consumer Protection Act and any rules promulgated thereunder, to the extent set forth in such clawback policyand/or in the applicable Award Agreement.
25. NoConstraintonCorporateAction. Nothing in the Plan shall be construed to: (i) limit, impair, or otherwiseaffect the Company’s or an Affiliate’s or a Subsidiary’s right or power to make adjustments, reclassifications, reorganizations, orchanges of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of itsbusiness or assets; or, (ii) limit the right or power of the Company or an Affiliate or a Subsidiary to take any action which such entitydeems to be necessary or appropriate.
26. EffectofDispositionofFacilityorOperatingUnit. If the Company or any of its Affiliates closes or disposes ofthe facility at which a Participant is located or the Company or any of its Affiliates diminish or eliminate ownership interests in anyoperating unit of the Company or any of its Affiliates so that such operating unit ceases to be majority owned by the Company orany of its Affiliates then, with respect to Awards held by Participants who, subsequent to such event, will not be Employees, theCommittee may, to the extent consistent with Section 409A (if applicable), take any of the actions described in Section 13.1 withrespect to a Change in Control. If the Committee takes no special action with respect to any disposition of a facility or an operatingunit, then the Participant shall be deemed to have terminated his or her employment with the Company and its Subsidiaries andAffiliates and the terms and conditions of the Award Agreement and the other terms and conditions of the Plan shall control.
27. Indemnification. Subject to requirements of applicable state law, each individual who is or shall have been amember of the Board, or a Committee appointed by the Board, or an officer of the Company to whom authority was delegated inaccordance with Section 3, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, orexpense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, orproceeding to which he may be a party or in which he or she may be involved by reason of any action taken or failure to act underthe Plan and against and from any and all amounts paid by him in settlement thereof, with the Company’s approval, or paid by himin satisfaction of any judgment in any such action, suit, or proceeding against him, provided he shall give the Company anopportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf,unless such loss, cost, liability, or expense is a result of his own willful misconduct or except as expressly provided by statute. Theforegoing right of indemnification shall not be exclusive of any other rights of indemnification to which such individuals may beentitled under the Company’s Certificate of Incorporation or by-laws, as a matter of law, or otherwise, or any power that theCompany may have to indemnify them or hold them harmless.
28. NonexclusivityofthePlan. The adoption of the Plan shall not be construed as creating any limitations on thepower of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.
29. Miscellaneous.
29.1 GenderandNumber. Except where otherwise indicated by the context, any masculine term used herein alsoshall include the feminine, the plural shall include the singular, and the singular shall include the plural.
29.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegalityor invalidity shall not affect the remaining parts of the Plan, and this Plan shall be construed and enforced as if the illegal orinvalid provision had not been included.
29.3 RequirementsofLaw. The granting of Awards and the issuance of Shares under this Plan shall be subject toall applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securitiesexchanges as may be required.
29.4 Successors. All obligations of the Company under the Plan with respect to Awards granted hereunder shall bebinding on any successor to the Company, whether the existence of such successor is the result of a direct or indirectpurchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
29.5 PaymentFollowingaParticipant’sDeath. Any remaining vested rights or benefits under the Plan upon aParticipant’s death shall be paid or provided to the Participant’s legal spouse or, if no such spouse survives the Participant, tothe Participant’s estate.
29.6 RightsasaShareholder. Except as otherwise provided herein, a Participant shall have none of the rights of ashareholder with respect to Shares covered by any Award until the Participant becomes the record holder of such Shares.
Original Effective Date: September 24, 2013
Amended and Restated Effective Date: December 4, 2015
Exhibit 10.9
STOCK OPTION AGREEMENT
Participant: Vesting Dates: 1/3rd vested on the day prior to the first anniversaryof the Grant DateNumber of Shares:
Expiration Date:
Grant Date: 2/3 vested on the day prior to the second anniversaryof the Grant DateOption Price:
(Closing Price of Shares on Grant Date)
Fully vested on the day prior to the third anniversaryof the Grant Date
1. Grant of Option. This option is granted pursuant to the Premier, Inc. 2013 Equity Incentive Plan (the “Plan”), by Premier, Inc.(the “Company”) to the Participant. The Company hereby grants to the Participant as of the Grant Date (set forth above) a non-qualified stock option (the “Option”) to purchase the number of shares set forth above of the Company’s Class A common stock,$0.01 par value (“Shares”), at an option price per share (the “Option Price”) set forth above, pursuant to the Plan, as it may beamended from time to time, and subject to the terms, conditions, and restrictions set forth herein. Capitalized terms in this stockoption agreement (this “Award Agreement”) shall have the meaning specified in the Plan, unless a different meaning is specifiedherein.
2. Terms and Conditions. The terms, conditions, and restrictions applicable to the Option are specified in the Plan, this AwardAgreement, including Exhibit A – Option Rules and Exhibit B – Section 280G Rules, and the prospectus dated October, 2013 andany applicable prospectus supplement (together, the “Prospectus”). The terms, conditions and restrictions in the Plan and Prospectusinclude, but are not limited to, provisions relating to amendment, vesting, cancellation, and exercise, all of which are herebyincorporated by reference into this Award Agreement to the extent not otherwise set forth herein.
By accepting the Option, the Participant acknowledges receipt of the Prospectus and that he or she has read andunderstands the Prospectus.
The Participant understands that the Option and all other incentive awards are entirely discretionary and that no right toreceive an award exists absent a prior written agreement with the Company to the contrary. The Participant also understands that thevalue that may be realized, if any, from the Option is contingent, and depends on, the future market price of the Common Stock,among other factors. The Participant further confirms the Participant’s understanding that the Option is intended to promoteemployee retention and stock ownership and to align employees’ interests with those of shareholders, is subject to vesting conditionsand will be cancelled if the vesting conditions are not satisfied. Thus, the Participant understands that (a) any monetary valueassigned to the Option in any communication regarding the Option is contingent, hypothetical, or for illustrative purposes only, anddoes not express or imply any promise or intent by the Company to deliver, directly or indirectly, any certain or determinable cashvalue to the Participant; (b) receipt
of the Option or any incentive award in the past is neither an indication nor a guarantee that an incentive award of any type oramount will be made in the future, and that absent a written agreement to the contrary, the Company is free to change its practicesand policies regarding incentive awards at any time; (c) vesting may be subject to confirmation and final determination by theCommittee that the vesting conditions have been satisfied; and (d) Shares received upon exercise of the Option shall be subject tolock-up restrictions as described in Section 15 of this Award Agreement. The Participant shall have no rights as a stockholder of theCompany with respect to any shares covered by the Option unless and until the Option vests, is properly exercised and shares ofCommon Stock are issued.
3. Vesting. One-third (1/3rd) of the Shares covered by this Option shall vest and become exercisable on the day before eachVesting Date, provided the Participant is continuously employed by a member of the Premier Group. Notwithstanding the foregoing:
(a) In the event that a Participant terminates employment due to being a Good Leaver (as defined below) the portion ofthe Option that would have vested over the following twelve month period had the Participant continued employment shallimmediately vest on the date of such employment termination. A Participant is a “Good Leaver” on account of (i) terminatingemployment with the Premier Group due to death, Disability or an Approved Retirement (as defined in Section 14 below) or (ii) thetermination of the Participant’s employment with the Premier Group Without Cause (as defined in Section 14 below) prior to aChange in Control; and
(b) In the event a member of the Premier Group (or a successor) terminates the Participant’s employment with thePremier Group Without Cause or the Participant terminates his employment with the Premier Group for Good Reason (as defined inSection 14 below) within the twelve month period commencing upon a Change in Control (as defined in the Plan), the Option shallvest in full.
Notwithstanding the above, vesting of the Option shall be prohibited to the extent that it would violate applicable law.
4. Term. The Option shall in all events expire not later than the tenth (10th) anniversary of the Grant Date set forth above. If theParticipant has a termination of, or break in, employment prior to exercise or expiration of the Option, the Participant’s rights toexercise the Option shall be determined under the Option Rules set forth in Exhibit A , which shall be enforceable as if set forth inthis Award Agreement. Notwithstanding the foregoing, the unvested portion of the Option as determined under Section 3 above shallexpire and be permanently forfeited upon employment termination with the Premier Group.
5. Exercise of Option.
(a) In General. Subject to Section 6 below, the portion of the Option that is exercisable under this Award Agreementmay be exercised in whole or in part by the Participant upon notice to the Company in accordance with any form of exercise thatmay be permitted under the Plan by the Committee, in its sole discretion, which satisfies in full payment of the Option Price and
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applicable withholding taxes. For avoidance of doubt, the Committee may, in its discretion, require that the Option only be exercisedusing a net exercise (as described under the Plan). Such notice shall be given in the manner prescribed by the Company and shallspecify the date of exercise and the number of shares being exercised.
(b) Exercise Suspension. The Committee may suspend the right to exercise the Option during any period for which(i) there is no registration statement under the Securities Act of 1933, as amended, in effect with respect to the Shares issuable uponexercise of the Option, (ii) the Committee determines, in its sole discretion, that such suspension would be necessary or advisable inorder to comply with the requirements of (A) any applicable federal securities law or rule or regulation thereunder; (B) any rule of anational securities exchange, national securities association, or other self-regulatory organization; or (C) any other federal or statelaw or regulation (each an “Option Exercise Suspension”). Notwithstanding the foregoing, no Option Exercise Suspension shallextend the term of the Option in a manner that would result in the Option becoming nonqualified deferred compensation subject toSection 409A of the Code.
6. Compliance with Certain Obligations; Compensation Recovery . The Shares subject to the Option shall be subject toforfeiture as a result of the Participant’s violation of any obligations contained in any agreement between the Company and theParticipant relating to non-competition, non-interference, non-solicitation and confidentiality (the “ Employment Obligations ”), andshall be subject to being recovered under any compensation recovery policy that may be adopted from time to time by the Companyor any of its Affiliates. For avoidance of doubt, compensation recovery rights to Shares shall extend to the proceeds realized by theParticipant due to the sale or other transfer of Shares. The Participant’s prior execution of agreements containing the EmploymentObligations and confirmation of such obligations was a material inducement for the Company’s grant of the Option under thisAward Agreement.
7. Taxes; Limitation on Excess Parachute Payments . The exercise of the Option is conditioned on the Participant makingarrangements reasonably satisfactory to the Company for the withholding of all applicable federal, state, local or foreign taxes asmay be required under applicable law. The Participant shall bear all expense of, and be solely responsible for, all federal, state, localor foreign taxes due with respect to any payment received under this Award Agreement. The Committee, in its sole discretion, maysatisfy the Participant’s withholding tax obligations by reducing the number of Shares to which the Participant is entitled under theAward. Notwithstanding any other provision in this Award Agreement to the contrary, any payment or benefit received or to bereceived by the Participant in connection with a Change in Control or the termination of employment (whether payable under theterms of this Award Agreement or any other plan, arrangement or agreement with a member of the Premier Group (collectively, the“Payments”) that would constitute a “parachute payment” within the meaning of Section 280G of the Code, shall be reduced to theextent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code (the “ExciseTax”), but only if, by reason of such reduction, the net after-tax benefit received by the Participant shall exceed the net after-taxbenefit that would be received by the Participant if no such reduction was made. Whether and how the limitation under
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this Section 7 is applicable shall be determined under the Section 280G Rules set forth in Exhibit B , which shall be enforceable as ifset forth in this Award Agreement.
8. Consent to Electronic Delivery . In lieu of receiving documents in paper format, the Participant agrees, to the fullest extentpermitted by law, to accept electronic delivery of any documents that the Company may be required to deliver (including, but notlimited to, prospectuses, prospectus supplements, grant or award notifications and agreements, account statements, annual andquarterly reports, and all other agreements, forms and communications) in connection with this and any other prior or futureincentive award or program made or offered by the Company or its predecessors or successors. Electronic delivery of a document tothe Participant may be via a Company e-mail system or by reference to a location on a Company intranet site to which theParticipant has access.
9. Administration. In administering the Plan, or to comply with applicable legal, regulatory, tax, or accounting requirements, itmay be necessary for a member of the Premier Group to transfer certain Participant data to another member of the Premier Group, orto its outside service providers or governmental agencies. By accepting the Option, the Participant consents, to the fullest extentpermitted by law, to the use and transfer, electronically or otherwise, of the Participant’s personal data to such entities for suchpurposes.
10. Entire Agreement/Amendment/Survival/Assignment. The terms, conditions and restrictions set forth in the Plan, thisAward Agreement and the Prospectus, constitute the entire understanding between the parties hereto regarding the Option andsupersede all previous written, oral, or implied understandings between the parties hereto about the subject matter hereof. ThisAward Agreement may be amended by a subsequent writing (including e-mail or other electronic form) agreed to between theCompany and the Participant. Section headings herein are for convenience only and have no effect on the interpretation of thisAward Agreement. The provisions of this Award Agreement that are intended to survive a Participant’s termination of employmentshall survive such date. The Company may assign this Award Agreement and its rights and obligations hereunder to any current orfuture member of the Premier Group.
11. No Right to Employment. The Participant agrees that nothing in this Award Agreement constitutes a contract ofemployment with a member of the Premier Group for a definite period of time. The employment relationship is “at will,” whichaffords the Participant or a member of the Premier Group the right to terminate the relationship at any time for any reason or noreason not otherwise prohibited by applicable law. The Premier Group retains the right to decrease the Participant’s compensationand/or benefits, transfer or demote the Participant or otherwise change the terms or conditions of the Participant’s employment.
12. Transfer Restrictions. The Participant may not sell, assign, transfer, pledge, encumber or otherwise alienate, hypothecate ordispose of the Option or the Participant’s right under the Option to receive Shares, except as otherwise provided in the Committee’ssole discretion consistent with the Plan and applicable securities laws.
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13. Conflict. This Award Agreement is subject to the terms and provisions of the Plan, including but not limited to the adjustmentprovisions under Section 12 of the Plan. In the event of a conflict between the Plan, this Award Agreement and/or the Prospectus,the documents shall control in that order (that is, the Plan, this Award Agreement and then the Prospectus).
14. Definitions. For purposes of this Award Agreement, the following terms shall be as defined below:
(a) “Approved Retirement” shall mean a Participant’s voluntary resignation from the Premier Group on or after attainingage 59 ½ or age 55 with 5 or more years of service.
(b) “Just Cause” means termination of the Participant’s employment with the Premier Group by a member of the PremierGroup as a result of conduct by the Participant amounting to: (i) commission or omission of any act of dishonesty, moral turpitude,fraud, embezzlement, theft, misappropriation, breach of fiduciary duty, or breach of the duty of loyalty in connection with theParticipant’s employment with a Premier Group member or against any Premier Group partner hospital, affiliated health careorganization or customer; (ii) willful misconduct, insubordination, or repeated refusal or unwillingness to follow the reasonabledirectives of the Board of Directors / Managers of a Premier Group member and/or the Participant’s Premier Group employer, theChief Executive Officer of the Participant’s Premier Group employer, or the Participant’s immediate supervisor(s); (iii) willfulaction or inaction with respect to the Participant’s performance of his or her employment duties that constitutes a violation of law orgovernmental regulations or that causes a Premier Group member to violate such law or regulation; (iv) a material breach of anysecurities or other law or regulation or any Premier Group policy governing inappropriate disclosures or “tipping” related to (or thetrading or dealing of) securities, stock or investments; (v) excessive absenteeism not related to authorized sick leave, authorizedfamily/medical leave, authorized disability leave, authorized vacation, authorized military leave or other authorized statutory leavewithin the parameters set forth in accordance with Premier Group policies and procedures regarding the same; (vi) a conviction,guilty plea or plea of nolo contendere by the Participant for any crime involving moral turpitude or dishonesty or for any felony; or(vii) material breach or violation of the terms of employment or other agreements to which the Participant and one or more membersof the Premier Group are party; or (viii) breach or violation of material policies, rules, procedures or instructions of a Premier Groupmember.
For purposes of this definition only, no act or failure to act by a Participant shall be deemed “willful” if done or omitted to be doneby the Participant in good faith and with the reasonable belief that the Participant’s act or omission was in the best interest of thePremier Group and consistent with Premier Group policies and applicable law. Further, any act or failure to act based on andconsistent with (a) instructions pursuant to a resolution duly adopted by the Board of Directors / Managers of a Premier Groupmember, (b) instructions of the applicable Board Chair as authorized by such Boards, or (c) the advice of Premier Group counselshall be presumed to be done or omitted to be done by the Participant in good faith and in the best interests of the Premier Group .
(c) “Disability” means any of the following: (i) the Participant is unable to engage in any substantial gainful activity byreason of any medically determinable physical or mental
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impairment that can be expected to result in death or can be expected to last for a continuous period of at least twelve months, or theParticipant’s entitlement to and receipt of disability benefits under a disability insurance program that pays benefits on the basis ofthe foregoing definition; (ii) the Participant is, by reason of any medically determinable physical or mental impairment that can beexpected to result in death or can be expected to last for a continuous period of at least twelve months, receiving either (a) incomereplacement benefits for a period of at least three months under an accident and health plan covering employees of the Participant’sPremier Group employer, or (b) disability benefits under a disability insurance program that pays benefits on the basis of theforegoing definition; or (iii) the Participant is determined to be totally disabled by the Social Security Administration or RailroadRetirement Board .
(d) “Good Reason” means a Participant’s resignation of employment from all applicable members of the Premier Groupdue to: (i) a material reduction of the Participant’s base salary without the Participant’s consent; (ii) a material reduction in theParticipant’s authority, duties or responsibilities without the Participant’s consent, but excluding any such reductions made in goodfaith to conform with applicable law or accounting/public company standards; or (iii) a relocation of the Participant to a locationoutside a fifty (50) mile radius of the Participant’s primary office location. In all instances, a Participant must provide the Chair ofthe Board of Directors / Managers of the Participant’s Premier Group employer (in the case of the CEO) or the CEO of theParticipant’s Premier Group employer (in the case of other Participants) written notice of the asserted instances constituting “GoodReason” within ninety (90) calendar days of the initial existence of the condition(s). Further, “Good Reason” shall not mean orinclude resignation by a Participant for conditions (i) – (iii) if cured or remedied by the appropriate Premier Group member(s) withinthirty (30) calendar days of receiving the Participant’s notice.
(e) “Premier Group” shall mean the Company, its Subsidiaries and Affiliates.
(f) “Termination Date” shall have the meaning set forth in Exhibit A .
(g) “Without Cause” means a termination of the Participant’s employment with the Premier Group by a member of thePremier Group for a reason other than death, Disability or for Just Cause.
15. Lock-up Restriction. The Participant agrees that, if the Company proposes to offer for sale any Shares pursuant to a publicoffering under the Securities Act of 1933 and if requested by the Company and any underwriter engaged by the Company for areasonable period of time specified by the Company or such underwriter following the date of any prospectus, offeringmemorandum or similar disclosure document used with respect to such offering (such period of time not to exceed the lock-upperiod applicable to the Company for such proposed offering), the Participant will not, directly or indirectly, offer, sell, pledge,contract to sell (including any short sale), grant any option to purchase, or otherwise dispose of any securities of the Company heldby the Participant or enter into any Hedging Transaction (as defined below) relating to any securities of the Company held by theParticipant. For purposes of this Section, a “Hedging Transaction” means any short sale (whether or not against the box) or anypurchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any security (other than a
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broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Shares.
16. Governing Law. This Award Agreement shall be legally binding and shall be executed and construed and its provisionsenforced and administered in accordance with the laws of the State of Delaware without regard to the principles of conflicts of lawthereunder.
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EXHIBIT A - Option Rules
To Form of Stock Option Agreement
When you terminate covered employment References to “you” or “your” are to the Participant. “Termination Date” means the date on which you terminate
employment with the Premier Group. “Terminate employment” or “termination of employment” means the cessation of youremployment with the Premier Group.
If you terminate employment and immediately begin providing services as a consultant or director for a member of thePremier Group, you shall not be deemed to have terminated employment on the date on which your employment terminates.
If you terminate your employment or if there is a break in your employment, your Option may be cancelled before the end ofthe vesting period and the vesting and exercisability of your Option may be affected.
The provisions in the chart below apply to the Option granted to you in this Award Agreement under the Plan.
If any Option exercisability period set forth in the chart below would otherwise expire during an Option ExerciseSuspension, the Option shall remain exercisable for a period of 30 days after the Option Exercise Suspension (as defined in Section 5of this Award Agreement) is lifted by the Company (but no later than the original option expiration date, which is the tenth (10th)anniversary of the Grant Date).
If: Here’s what happens to Your Option:
You are a Good Leaver (asdefined in Section 3(a))
Any portion of the Option which would have vested over the twelve monthsfollowing Termination Date immediately vests upon your termination. You mayexercise the vested portion of your Option for up to twelve months after theTermination Date but no later than the original option expiration date.
We terminate your employmentfor Just Cause
Both the vested and unvested portions of your Option are immediately cancelled.
You leave the Premier Groupother than as a Good Leaverprior to a Change in Control
Upon the Termination Date the unvested portion of your Option will be forfeited,and you may exercise the vested portion of your Option for up to 90 days from theTermination Date, but no later than the original option expiration date.
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You take an approved personalleave of absence
For the first six (6) months of an approved personal leave, vesting continues. If theapproved leave exceeds six (6) months, vesting is suspended until you return towork and remain actively employed for 30 calendar days, after which time vestingwill be restored retroactively. The vested portion of your Option may be exercisedduring approved leave, but no later than the original option expiration date. If youterminate employment for any reason during the first year of an approved leave, thetermination of employment provisions will apply. If the leave exceeds one year,your Option will be cancelled immediately.
You are on an approved familyand medical leave, militaryleave, or other statutory leave ofabsence
Your Option will continue to vest on schedule, and you may exercise the vestedportion of your Option during the leave but no later than the original optionexpiration date.
You are terminatedinvoluntarily other than for JustCause or you terminate youremployment for Good Reason, ineither case, within one (1) yearfollowing a Change in Control
Upon the Termination Date the unvested portion of your Option will vestimmediately, and you may exercise the vested portion of your Option for up totwelve months from the Termination Date, but no later than the original optionexpiration date.
While employed and at any timeduring the Restricted Period,you breach the Agreement not toCompete
In addition to all rights and remedies available to the Company at law and in equity,you will immediately forfeit any of your outstanding rights under this AwardAgreement.
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Exhibit B – Section 280G Rules
To Form of Stock Option Agreement
When you receive benefits in connection with a Change in Control
The following rules shall apply for purposes of determining whether and how the limitations provided under Section 7 areapplicable to the Participant.
1. The “net after-tax benefit” shall mean (i) the Payments (as defined in Section 7) which the Participant receives or is thenentitled to receive from the Company or an Affiliate that would constitute “parachute payments” within the meaning of Section280G of the Code, less (ii) the amount of all federal, state and local income and employment taxes payable by the Participant withrespect to the foregoing calculated at the highest marginal income tax rate for each year in which the foregoing shall be paid to theParticipant (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of theforegoing), less (iii) the amount of Excise Tax imposed with respect to the payments and benefits described in (i) above.
2. All determinations under Section 7 of this Award Agreement and this Exhibit B will be made by an accounting firm orlaw firm that is selected for this purpose by the Company’s Chief Executive Officer prior to a Change in Control (the “280G Firm”).All fees and expenses of the 280G Firm shall be borne by the Company. The Company will direct the 280G Firm to submit anydetermination it makes under Section 7 of this Award Agreement and this Exhibit B and detailed supporting calculations to both theParticipant and the Company as soon as reasonably practicable.
3. If the 280G Firm determines that one or more reductions are required under Section 7 of this Award Agreement, the280G Firm shall also determine which Payments shall be reduced (first from cash payments and then from non-cash benefits) to theextent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, and the Companyshall pay such reduced amount to the Participant. The 280G Firm shall make reductions required under Section 7 of this AwardAgreement in a manner that maximizes the net after-tax amount payable to the Participant.
4. As a result of the uncertainty in the application of Section 280G at the time that the 280G Firm makes its determinationsunder this Section, it is possible that amounts will have been paid or distributed to the Participant that should not have been paid ordistributed (collectively, the “Overpayments”), or that additional amounts should be paid or distributed to the Participant(collectively, the “Underpayments”). If the 280G Firm determines, based on either the assertion of a deficiency by the InternalRevenue Service against the Company or the Participant, which assertion the 280G Firm believes has a high probability of successor controlling precedent or substantial authority, that an Overpayment has been made, the Participant must repay to the Company,without interest; provided, however, that no loan will be deemed to have been made and no amount will be payable by theParticipant to the Company unless, and then only to the extent that, the deemed loan and payment would either reduce the amount onwhich the Participant is subject to tax under Section 4999 of the Code or generate a refund of tax imposed under Section 4999 of theCode. If the 280G
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Firm determines, based upon controlling precedent or substantial authority, that an Underpayment has occurred, the 280G Firm willnotify the Participant and the Company of that determination and the amount of that Underpayment will be paid to the Participantpromptly by the Company.
5. The Participant will provide the 280G Firm access to, and copies of, any books, records, and documents in theParticipant’s possession as reasonably requested by the 280G Firm, and otherwise cooperate with the 280G Firm in connection withthe preparation and issuance of the determinations and calculations contemplated by Section 7 of this Award Agreement and thisExhibit B .
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Exhibit 10.14
PREMIER, INC. ANNUAL INCENTIVE COMPENSATION PLAN
AMENDED AND RESTATED EFFECTIVE AUGUST 11, 2016
ARTICLE 1. PLAN AMENDMENT AND RESTATEMENT; PURPOSE
1.1 Amendment and Restatement . Premier, Inc., a Delaware corporation (the “Company”), hereby amends and restates its annual incentive
compensation plan, which is known as the Premier, Inc. Annual Incentive Compensation Plan (the “Plan”), originally established effective July 1, 1996 for selectedemployees.
1.2 Purpose . The purpose of the Plan is to maximize the success of the Company and the Premier Group by providing significant financial
incentive opportunities to employees, to assist in attracting and retaining employees of superior abilities, and to further align the interests and objectives ofParticipants with those of the Company and the Premier Group.
ARTICLE 2. DEFINITIONS
2.1 Definitions . Whenever used herein the following terms shall have their respective meanings as set forth below:
(a) “Administrator” means the employee(s) of the Company designated from time to time by the Committee to perform those dutiesspecified in the Plan.
(b) “Award” shall have the meaning set forth in Section 7.2. (c) “Change in Control” shall have the meaning set forth in Section 13.3 (or subsequent applicable sections, if and as later amended) of the
Premier, Inc. 2013 Equity Incentive Plan, as it may be established, modified, changed or replaced from time to time. (d) “Code” shall have the meaning set forth in Section 8.2.
(e) “Code Section 409A” shall have the meaning set forth in Section 11.12.
(f) “Committee” means the Compensation Committee of the Board of Directors of the Company. (g) “Company” means Premier, Inc.
(h) “Disability” means a determination of disability with respect to a Participant under the long-term disability plan maintained by the
Participant’s Premier Group employer. If, at any time during the period that this Plan is in operation, the applicable entity of the Premier Group does notmaintain a long-term disability plan, “Disability” shall mean a physical or mental condition that, in the judgment of the Administrator, permanentlyprevents a Participant from performing the essential functions of the Participant’s job duties with the Premier Group or such other position or job that ismade available to the Participant within the Premier Group and for which the Participant is qualified by reason of education, training and experience, withor without reasonable accommodation. In making such determination, the Administrator may, but is not required to, rely on advice of a physiciancompetent in the area to which such Disability relates. In addition, the Participant upon request by the Administrator must submit such medical evidence,records and examination data to the Administrator regarding any Disability as is reasonably necessary for the Administrator to evaluate the same, to betreated as confidential as required by law. The Administrator shall make all determinations and resolve any disputes regarding Disability in its solediscretion, and any decision of the Administrator concerning the same will be binding on all parties.
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(i) “Earnings” means a Participant’s annual rate of base salary pay from the Participant’s Premier Group employer measured as of the lastday of each Plan Year (June 30) or, if sooner, the Participant’s last day of eligibility under the Plan during the Plan Year, in each case excluding all otherpay elements (such as bonus payments, commissions, incentive compensation, deferred compensation payments, stock options, profit sharing, dividends,benefits, severance pay, vacation payout, expense reimbursements, miscellaneous allowances or any other compensation). For a Participant who does notparticipate in the Plan for the full Plan Year (pursuant to Article 4), Earnings means the Participant’s annual rate of base salary pay described in thepreceding sentence calculated on a pro rata basis for the number of days during which the Participant actually participated in the Plan during the PlanYear.
(j) “Exchange Act” means the Securities Exchange Act of 1934 and all regulations issued thereunder and any successors thereto. (k) “Goals and Performance Standards” shall have the meaning set forth in Section 5.1. (l) “Participant” means any individual designated to participate in the Plan pursuant to Article 4. (m) “Performance Standard Achievement” shall have the meaning set forth in Section 7.1. (n) “Plan Year” means the twelve-month period beginning July 1 through June 30.
(o) “Premier Group” means the Company and/or those affiliates, subsidiaries or managed entities which the Company permits to
participate in the Plan. (p) “Retirement” means the Participant’s voluntary resignation from the Premier Group on or after attaining age 59 ½ or age 55 with 5 or
more years of service. (q) “Stretch” means the level of achievement in which the highest payout for Goals and Performance Standards will be made. (r) “Target” means 100% achievement of the Goals and Performance Standards. (s) “Target Award Opportunity” shall have the meaning set forth in Section 6.1. (t) “Termination of Employment” means the separation or end of the Participant’s employment with any and all members of the Premier
Group for any reason. (u) “Threshold” means the minimum level of achievement that must be attained for Goals and Performance Standards before a Plan
Award is potentially earned.
ARTICLE 3. ADMINISTRATION
3.1 Committee . The Committee shall have general responsibility for the administration of the Plan according to the terms and provisions of thePlan and shall have all the powers necessary to accomplish these purposes, including, but not by way of limitation, the right, power and authority:
(a) To make rules and regulations for the administration of the Plan; (b) To construe all terms, provisions, conditions and limitations of the Plan; (c) To correct any defects, supply any omissions or reconcile any inconsistencies that may appear in the Plan in the manner and to the
extent deemed expedient;
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(d) To determine all controversies relating to the administration of the Plan, including, but not limited to, differences of opinion that may
arise among the Premier Group or the Administrator and the Participants; (e) To resolve any questions necessary to promote the uniform administration of the Plan; and (f) To amend the Plan or terminate the Plan pursuant to Article 10.
3.2 Administrator . The Administrator shall have responsibility for the day to day operation of the Plan. The Administrator shall make initialdeterminations regarding administration of the Plan, including, but not limited to, differences of opinion that may arise among the Premier Group and mattersrelating to Participant eligibility and incentive payments under the Plan. The foregoing notwithstanding, the Administrator also shall have responsibility for thosedecisions or actions specifically set forth in the provisions of this Plan.
3.3 Discretion . The Committee or the Administrator, in exercising any power or authority granted under this Plan, or in making any determination
under this Plan, shall perform or refrain from performing those acts in its sole and absolute discretion and judgment. Any decision made by the Committee, or anyrefraining to act or any act taken by the Committee, shall be final and binding on all parties.
3.4 Liability and Indemnification . The Committee or the Administrator shall not be liable for any act done or any determination made in good
faith. The Company and the Premier Group shall, to the fullest extent permitted by law, indemnify and hold the Committee, its members and the Administratorharmless from any and all claims, causes of action, damages and expenses (including reasonable attorneys’ fees and expenses) incurred by the Committee, itsmembers and the Administrator in connection with or otherwise related to service in such capacity.
ARTICLE 4. PLAN PARTICIPATION
4.1 Participation . All employees of the Premier Group shall participate in the Plan, except that an individual who becomes an employee of the
Premier Group on or after April 1 shall not begin participating in the Plan until the next Plan Year. An individual who becomes an employee of the Premier Groupafter the start of the Plan Year and before April 1 shall enter the Plan immediately and a Target Award Opportunity shall be established and communicated to suchemployee as soon as administratively practicable. Notwithstanding the foregoing, anyone employed by a member of the Premier Group who receives an annualcash incentive award opportunity under the Premier, Inc. Equity Incentive Plan (or its successor) for a fiscal year shall not be eligible to earn an annual incentiveunder the Plan for such fiscal year.
4.2 Term of Participation . A Participant’s participation in the Plan shall continue until the earlier to occur of: (a) the Participant’s Termination of
Employment, or (b) termination of the Plan as provided in Article 10.
ARTICLE 5. GOALS AND PERFORMANCE STANDARDS
5.1 Goals and Performance Standards . The Chief Executive Officer of the Company or other appropriate senior executives of the Premier Groupshall recommend to the Committee: (a) Plan Year goals, and (b) performance standards that will be used to determine the degree to which the goals have beenachieved (“Goals and Performance Standards”). Threshold, Target and Stretch Performance Standards shall be established for each Goal. The Goals andPerformance Standards shall be measurable as of the conclusion of the Plan Year.
5.2 Committee Approval . The Committee will review, and will approve or modify as it deems appropriate, the recommendations for Goals and
Performance Standards as provided by Section 5.1.
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ARTICLE 6. AWARD OPPORTUNITY
6.1 Target Award Opportunity . Annually, for each Plan Year, the Chief Executive Officer of the Company or other appropriate seniorexecutives of the Premier Group shall establish a Target award opportunity for each Participant (the “Target Award Opportunity”). The Target Award Opportunityshall be expressed as a percent of a Participant’s Earnings for the Plan Year. Each Target Award Opportunity may consist of several components, includingwithout limitation:
• Company Goals• Departmental/Unit Goals• Individual Goals• Goals at the Discretion of the Chief Executive Officer or other appropriate senior executives The sum of all components will equal the total Target Award Opportunity. Each component of the total Target Award Opportunity shall be weighted
such that the total weighting will equal 100%. The Committee shall establish the Target Award Opportunity for any senior executives who are Participants in thePlan.
6.2 Participant Notification . The Administrator shall notify each Participant of the Participant’s Target Award Opportunity for the Plan Year as
soon as practicable following the establishment of such Target Award Opportunity.
ARTICLE 7. AWARD DETERMINATION
7.1 Performance Review . Within 90 days of the conclusion of a Plan Year, the Committee shall review and approve the performance of thePremier Group in achieving the Goals and Performance Standards for the Plan. The Administrator shall make a determination of the Award percentage for eachParticipant based on total, aggregate Goals and Performance Standard achievement approved by the Committee (“Performance Standard Achievement”) utilizingthe following:
Performance Standard Achievement Award Percentage Below Threshold 0 %Threshold 50 %Target 100 %Stretch 150 %
In determining Performance Standard Achievement, the Committee may, in its sole and absolute discretion, eliminate from earnings of the Premier Group
those extraordinary gains or losses of an abnormal or non-recurring nature, which in their judgment, should be excluded. This may, therefore, exclude items suchas sale of capital assets, approved acquisition-related adjustments, changes in accounting methods, tax adjustments, adjustments to earning for unrealized foreignexchange gains or losses, and approved restructuring expense or similar items. It is intended that any Goal established under the Plan that is based on income ofthe Premier Group will be determined using an income calculation that takes into consideration an expense accrual for the Plan Awards.
Actual Plan Awards will equal, exceed or fall below Target levels based on the extent of Performance Standard Achievement. If Performance Standard Achievement is determined to be between Threshold and Target or between Target and Stretch, the Administrator shall
determine the appropriate Award percentage by interpolation within the ranges shown in this Section 7.1 above.
7.2 Award Calculation . The Administrator shall calculate a Participant’s award under the Plan (the “Award”) applying the following formula: theAward percentage, as described in Section 7.1 above, multiplied by
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the Target Award Opportunity, multiplied by the Participant’s Earnings for Plan Year. For example, if the Award percentage is 110% and a Participant has aTarget Award Opportunity of 75% and Plan Year Earnings of $300,000, the Participant’s Award would be $247,500.
ARTICLE 8. AWARD PAYMENT
8.1 Payment and Timing . Awards shall be paid in cash by the Company on or about the September 15th immediately following the end of the
Company's fiscal year in which they were earned, but in no event later than the next following March 15th (or such later date as is permitted under InternalRevenue Service regulations or guidance with respect to qualifying the awards under the short-term deferral exception under Treasury Regulation Section 1.409A-1(b)(4)). No Awards shall be increased with interest due to a delayed payment. A Participant who is employed on the last day of the Plan Year or who qualifiesfor a pro rata payment under Section 9.1 of the Plan need not be employed by the Premier Group on the date that payment of the Award is actually made.
8.2 Deferral of Payment . Notwithstanding any other provision of the Plan, a Participant’s Award shall not be paid in cash to the extent that the
Participant has entered into a deferral agreement, an employment agreement or such other agreement with the Company or another member of the Premier Groupwhich agreement specifically provides for the deferral of an Award otherwise payable under the Plan and which agreement is drafted and operated to meet therequirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).
8.3 Recoupment Policy . A Participant’s eligibility to participate in, receive Awards under, and rights to payment pursuant to this Plan isconditioned upon the Participant’s being subject to any compensation recovery policy that may be adopted from time to time by the Company or any subsidiary ofthe Company (a “Recoupment Policy”) and all amounts payable pursuant to this Plan shall be subject to the Recoupment Policy.
ARTICLE 9. TERMINATION EVENTS
9.1 Termination Due to Death, Disability, Retirement or a Change of Control . In the event a Participant’s employment with the PremierGroup terminates or ends at any point in time before or after the end of the Plan Year as a result of a Participant’s: (a) death, Disability or Retirement, or(b) resignation occurring within two years following a Change of Control, the Participant (or the Participant’s estate in the event of the Participant’s death) shall beentitled to a payment under Article 7 on a pro rata basis as determined by the Administrator.
9.2 Other Termination Events . In the event a Participant’s employment terminates or ends at any point in time before the end of the Plan Year
for any reason other than the Participant’s: (a) death, Disability or Retirement, or (b) resignation occurring within two years following a Change of Control, theParticipant’s participation in the Plan shall immediately terminate, and the Participant shall forfeit all rights under the Plan, including the right to receive anyAward or any payment of all or a portion of any Award.
ARTICLE 10. AMENDMENT, MODIFICATION AND TERMINATION OF PLAN
10.1 Right to Amend, Suspend or Terminate Plan . The Committee reserves the right at any time to amend, modify, suspend or terminate the Plan
for any reason and without the consent of the Administrator, the Participants or any other person. 10.2 Notice . Notice of any amendment, modification, suspension or termination of the Plan shall be given by the Committee to the Administrator
and to all Participants.
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ARTICLE 11. GENERAL PROVISIONS REGARDING PLAN ADMINISTRATION
11.1 Limitation of Rights . The granting of any rights to a Participant under the provisions of the Plan represent only a discretionary, contingentright to receive compensation. Accordingly, nothing in this Plan shall be construed:
(a) To limit in any way the right of the Premier Group to terminate a Participant’s employment at any time for any reason; (b) To evidence any agreement or understanding, express or implied, that the Premier Group will employ a Participant in any particular
capacity for any particular term or for any particular remuneration; or (c) To grant any right to, or interest in, either express or implied, any equity position or ownership in the Premier Group.
Moreover, no Participants shall have any right or interest, whether vested or otherwise, in the Plan or in any Award unless and until all of the terms,conditions, and provisions of the Plan and the guidelines have been complied with and an Award has been paid.
11.2 Alienation . No benefit provided by this Plan shall be transferable by the Participant except on the Participant’s death, as provided in this Plan.
No right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge. Any attempt to anticipate, alienate,sell, assign, pledge, encumber or charge any right or benefit under this Plan shall be void. No right or benefit under this Plan shall, in any manner, be liable for orsubject to any debts, contracts, liabilities or torts of the person entitled to the right or benefit. If any Participant becomes bankrupt or attempts to anticipate,alienate, assign, pledge, sell, encumber or charge any right or benefit under this Plan, then the right or benefit shall, in the discretion of the Administrator, cease. Inthat event, the Company may hold or apply the right or benefit, or any part of the right or benefit, for the benefit of the Participant, his or her spouse, children, ordependents, the beneficiary or any of them, in the manner or in the proportion that the Administrator shall deem proper, in its sole discretion, but it shall not berequired to do so.
11.3 Tax Withholding . If the Premier Group shall be required to withhold any amount by reason of any federal, state or local tax laws, rules,
regulations or court decisions in respect of the payment of an earned Award, the Premier Group shall be entitled to deduct or withhold such amounts from anyAward payments to a Participant or beneficiary thereof.
11.4 Unfunded Plan . The Plan shall be unfunded. Premier Group shall not be required to segregate or earmark any cash, or other assets and
property in connection with the Plan. The Premier Group, the Committee and the Administrator shall not have any fiduciary responsibility to any employee orParticipant in connection with this Plan. In addition, the Premier Group shall not be deemed to be a trustee of any amounts to be paid to a Participant. Anyliability of the Premier Group to pay any Participant with respect to a potential Plan Award shall be based solely upon any obligations created pursuant to theprovisions of the Plan; and no such obligation shall be deemed to be secured by any pledge or encumbrance on any property of the Premier Group. However, thePremier Group shall have the discretion at any time to segregate such assets that may be represented by an Award. Such assets will at all times remain the propertyof the Premier Group. Moreover, any Participants and their beneficiaries shall at all times be merely unsecured creditors of the Company.
11.5 Plan Document Governs . In the event of a conflict between any other written or oral statements and this Plan document, the provisions of this
Plan document shall govern. 11.6 Governing Law . The construction and operation of this Plan are governed by the laws, rules, and judicial decisions of the State of Delaware,
except as superseded by federal law.
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11.7 Headings . All headings in the Plan are for reference only and not to be utilized in construing the Plan. 11.8 Gender . Unless clearly appropriate, all nouns of whatever gender refer indifferently to persons of any gender. 11.9 Singular and Plural . Unless clearly inappropriate, singular terms refer also the plural and vice versa. 11.10 Severability . Every provision of this Plan is severable from every other provision of this Plan. Thus, if any part of the provisions contained in
this Plan document is determined by a court of competent jurisdiction or by any arbitration panel to which a dispute is submitted to be invalid, illegal or incapableof being enforced, then such covenant or provision (with such modification as shall be required in order to render such covenant or provision not invalid, illegal orincapable of being enforced) shall remain in full force and effect, and all other covenants and provisions contained in this Plan document shall, nevertheless,remain in full force and effect to the fullest extent permitted by law, unless the continuance of the Plan in such circumstances is not consistent with its purposes.
11.11 Waiver of Breach . Waiver by the Committee, the Administrator or the Premier Group of any provision of this Plan shall not operate or be
construed as a waiver of any other provision of this Plan or any other future breach of the provisions so waived.
11.12 Code Section 409A . (a) The Plan is intended to be exempt from the requirements of Section 409A of the Code and the rules, regulations and other guidance promulgated
thereunder (“Code Section 409A”) and shall be construed and interpreted in such a manner consistent with said intent. (b) Notwithstanding the foregoing, in the event any portion of the Plan is determined to involve the deferral of compensation or the payment of
“nonqualified deferred compensation” (as such term is described in Code Section 409A), such portion of the Plan shall be interpreted to comply with CodeSection 409A, and each provision that conflicts with such requirements shall be neither valid nor enforceable. The Committee may amend any such portion of thePlan determined to be subject to the requirements of Code Section 409A to the extent required to comply with Code Section 409A, as the Committee maydetermine to be necessary or appropriate.
(c) Notwithstanding anything to the contrary in this Section 11.12, in no event whatsoever shall any member of the Premier Group be liable for any
additional tax, interest or penalties that may be imposed on a Participant as a result of Section 409A of the Code or any damages for failing to comply with Section409A of the Code.
(d) The following provisions shall apply upon a “separation from service” (as defined by Code Section 409A) on or after the date that any stock of theCompany (or its parent) becomes publicly traded on an established securities market or otherwise. If the Participant is deemed on the date of such a separationfrom service to be a “specified employee” (within the meaning of that term under Code Section 409A(a)(2)(B) and determined using any identificationmethodology and procedure selected by the Company (or its parent) from time to time, or if none, the default methodology and procedure specified under CodeSection 409A), then any amounts that are considered “nonqualified deferred compensation” (within the meaning of that term under Code Section 409A) payable asa result of the Participant’s separation from service shall not be paid prior to the date which is the earlier of (i) the expiration of the six (6) month period measuredfrom the date of such separation from service of the Participant, and (ii) the date of the Participant’s death (the “Delay Period”). Upon the expiration of the DelayPeriod, all payments delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of suchdelay) shall be paid to the Participant in a lump sum, and any remaining payments due under the Plan shall be paid or provided in accordance with the normalpayment dates
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specified for them herein. In determining whether a Participant is subject to the delay hereinabove described, the transitional rules of Treasury Regulation §1.409A-1(i)(6) shall be applied.”
ARTICLE 12. EFFECTIVE DATE
12.1 Effective Date . The Plan as amended and restated shall become effective as of August 11, 2016.
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Exhibit 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
I, Leigh Anderson, hereby agree to be employed by Premier Healthcare Solutions, Inc., a Delaware corporation with itsprincipal places of business in Charlotte, North Carolina, Washington, D.C., and Ft. Lauderdale, Florida (“Premier” or the“Company”), and Premier hereby agrees to employ me, subject to the following terms and conditions.
WHEREAS , I am currently employed as Chief Operating Officer, ITS of the Company in accordance with the terms of anEmployment Agreement entered into by and between me and Premier dated October 11, 2013 (the “Prior EmploymentAgreement”);
WHEREAS , in connection with my promotion to the position of Senior Vice President and Chief Information Officer,Premier desires to enter into a new employment agreement with me, and I wish to enter into such employment on the basis setforth in this Agreement.
NOW , THEREFORE , in exchange for the promises and mutual covenants contained in this Agreement, the parties,intending legally to be bound, agree as follows:
1. EMPLOYMENT
1.1 Job Duties . I agree to devote my full professional time, attention and best efforts to the performance of myemployment duties with Premier and/or its Related Companies (as defined in Section 6.2 ). I shall perform the duties andresponsibilities customary to my position(s) with Premier and/or its Related Companies and as assigned to me from time to time.Effective beginning July 1, 2016 (the “Effective Date”), my promoted position with Premier shall be as Senior Vice President andChief Information Officer.
1.2 Salary and General Benefits . During my continued employment at Premier effective beginning as of the EffectiveDate, Premier will: (a) compensate me for my services at a base rate determined by Premier from time to time, and (b) allow meto participate in the deferred compensation, other retirement plans, and employee benefit plans from time to time in effectgenerally for Premier or a “Related Company’s” (as defined in Section 6.2 ) similarly situated employees, subject to the termsand conditions of such plans and as they may be instituted, modified or terminated from time to time. My initial base salaryeffective beginning as of the Effective Date shall be $17,083.34 per semi-monthly pay period (equivalent to $410,000 annually),less applicable withholdings. If the base salary is increased, such increased amount shall thereafter become the “base salary”under this Agreement.
1.3 Annual Incentive Plan . During my continued employment with Premier effective beginning as of the EffectiveDate, I shall participate in any annual incentive plan sponsored by Premier or a “Related Company” (as defined in Section 6.2 )(the “Annual Plan”) applicable to me or other similarly situated senior executive level employees, in accordance with the termsand conditions of such Annual Plans as they may be established, modified, changed, replaced or terminated from time to time.My target incentive opportunity in the Annual Plan for FY 2017 (July 1, 2016 – June 30, 2017) will be 50% of my plan yearearnings as defined in the Annual Plan.
1.4 Equity . As additional consideration for entering into this Agreement, during my continued employment withPremier effective beginning as of the Effective Date, and provided I sign the applicable award agreements within the time periodrequired and am employed by Premier at the time of related equity awards, I shall be eligible to participate in the Premier, Inc.Equity Incentive Plan and any other
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equity-based or cash-based long-term incentive compensation plan applicable to me or other similarly situated senior executivelevel employees in accordance with terms and conditions of such plans as they may be established, modified, changed,replaced or terminated from time to time. In connection with such equity participation, and provided the conditions outlined abovein this Section 1.4 are met, Premier will provide me with a one-time grant of Premier, Inc. equity with an initial grant value equalto $100,000.00, to occur on or after June 30, 2016 following my signing of this Agreement. Further, Premier will also initiallyrecommend to the Compensation Committee of the Board of Directors of Premier, Inc. (the “Compensation Committee”) inAugust 2016 that I receive a grant of Premier, Inc. equity with an initial grant value equal to 125% of my initial annual base salaryset forth in Section 1.2 .
The types of equity to be granted will be consistent with those approved by the Compensation Committee, andmay include restricted stock unit award shares, target performance shares, non-qualified stock options or other forms of equityspecified in the Premier, Inc. Equity Incentive Plan, or any combination thereof. All such restricted stock units, targetperformance shares and stock options will vest and be awarded / issued in accordance with the terms of the applicable awardagreements and the Premier, Inc. Equity Incentive Plan, as such plans and award agreements may be established, modified,changed, replaced or terminated from time to time. Further, I understand and agree that any additional future grants of equityunder the Premier, Inc. Equity Incentive Plan are subject to the sole discretion and approval of Premier management and theCompensation Committee, such that any future program participation and/or grant amounts may vary from year to year.
1.5 Term . I agree that my continued employment with Premier shall be “at-will”, such that I may resign at any time forany reason and Premier may terminate my employment at any time for any reason, subject to my and Premier’s post-employment rights and obligations under this Agreement. The at-will nature of my employment may be altered only be a writtenagreement signed by a duly authorized Premier official. In addition, notwithstanding the provisions of this Section 1.5 or Section2 below, I agree that upon the termination or end of my employment with Premier foranyreason, I shall resign and do resignfrom allpositions as an officer, director and employee of Premier and Premier’s Related Companies (as defined in Section 6.2 ),with such resignations to be effective upon the termination or end of my employment with Premier.
2. SEVERANCE PROTECTIONS
2.1 Severance Pay . If my employment with Premier under this Agreement ends at any time due to a TerminationWithout Cause (as defined below), then Premier will provide me with 12 months of my then current base salary as severance(the “Severance Pay”), subject to the terms in this Section 2 . In order to be eligible for such Severance Pay, I must sign within45 days of receipt from Premier and not revoke a full and general release (the “Release”) of any and all claims that I have ormay have against Premier, its Related Companies (as defined in Section 6.2 ) and such entities’ past and then current officers,directors, shareholders, owners, members, agents and employees relating to all matters, to be prepared by Premier at that time.In addition, if I violate any of my post-employment obligations under this Agreement in Sections 4-6 , then my right to anySeverance Pay shall immediately cease and be forfeited.
2.2 Termination Without Cause . For purposes of this Agreement, “Termination Without Cause” means anytermination of my employment by Premier for any reason other than retirement, early retirement, death, “Disability” or“Termination for Just Cause”. In addition, my resignationshall be deemed a Termination Without Cause by Premier if I resign myemployment with Premier and all its Related Companies (as defined in Section 6.2 ) withintwenty-four (24) months following a“Change in Control” (as defined below) due to the following events without my written consent:
(a) a material reduction in my position, responsibilities or status, or a change in my title resulting in a materialreduction in my responsibilities or position with Premier, but excluding for this purpose : (i) any suspensions, removals, dutyreassignments, duty limitations or other actions set forth and allowed
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in Section 2.3 ; and (ii) any such reductions or changes made in good faith to conform with applicable law or generally acceptedindustry standards for my position;
(b) a reduction in my base salary (unless such percentage deduction is effectively made across the board for allother senior executives of Premier);
(c) the relocation of me to a location outside a fifty (50) mile radius of my primary office location on the date ofthis Agreement (Charlotte, NC); provided, however that relocation of me to Premier’s current or future headquarters location(with or without my consent) shall not constitute a resignation by me that can be deemed a Termination Without Cause; or
(d) a failure of the Company to obtain the assumption in writing of its obligations under this Agreement by anysuccessor to all or substantially all of the assets of the Company within 30 days after a merger, consolidation, sale or similartransaction.
For purposes of this Agreement, a “Change in Control” shall have the meaning set forth in Section 13.3 (orsubsequent applicable sections, if and as later amended) of the Premier, Inc. Equity Incentive Plan, as it may be established,modified, changed or replaced from time to time.
Premier and I further agree that for my resignation to constitute Termination Without Cause, in addition toproviding at least ninety (90) days advance written notice of resignation to Premier, I must provide written notice to the Presidentand Chief Executive Officer of Premier (the “Company CEO”) of my intent to resign within ninety (90) days of one of thetriggering events outlined in subsections (a) – (d) of this provision. Further, Termination Without Cause shall not mean or includeresignation by me for subsections (a) – (d) of this provision for any isolated, insubstantial or inadvertent reason not taken in badfaith if cured or remedied promptly by Premier, if such cure is possible, within no more than thirty (30) calendar days of receivingmy notice.
2.3 Termination For Just Cause . For purposes of this Agreement, “Termination for Just Cause” means terminationof my employment by Premier as the result of: (a) commission or omission of any act of dishonesty, embezzlement, theft,misappropriation or breach of fiduciary duty by me in connection with my employment with Premier; (b) any conviction, guiltyplea or plea of nolo contendere by me for any felony, a misdemeanor in which fraud and dishonesty is a material element, or acrime of moral turpitude, that is likely to result in incarceration if later sentenced (if the Company CEO or Chair of the Board ofDirectors of Premier, Inc. (the “Board Chair”)) deem in his or her absolute discretion that such conviction or plea may have asignificant adverse effect upon Premier or upon my ability to perform under this Agreement); (c) willful action or willful inactionwith respect to my performance of my employment duties that constitutes a violation of law or governmental regulations or thatcauses Premier or its Related Companies (as defined in Section 6.2 ) or affiliated entities to violate such law or regulation; (d) amaterial breach of any securities or other law or regulation or any Premier or Related Company policy governing inappropriatedisclosures or “tipping” related to (or the trading or dealing of) securities, stock or investments; (e) failure to reasonablycooperate or interference with a Premier-related investigation; (f) willful violation by me of Premier’s or its Related Companies’lawful material policies, rules and procedures, including but not limited to Premier and its Related Companies’ Code of Conductand Conflict of Interest policies; (g) the regulatory, governmental or administrative suspension, removal or prohibition of me asdefined in this Section below; (h) willful misconduct, willful insubordination or willful refusal or unwillingness to carry out or followspecific lawful, reasonable directives, duties or assignments established or given by the Company CEO or the Board of Directorsof Premier, Inc. (the “Board”) from time to time in accordance with this Agreement; (i) willful inattention to or dereliction of duty byme with respect to the business affairs of Premier or its Related Companies to which I am assigned material responsibilities orduties that is materially harmful to the business or reputation of Premier; (j) the breach of or failure to perform the obligations setforth in Sections 3 and/or 5-7 of this Agreement by me; (k) the prospective breach of the obligations set forth in Sections 3and/or 5-7
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of this Agreement by me; or (l) the breach or prospective breach or failure to perform the obligations set forth in Section 4 of thisAgreement that is either willful or materially harmful to the business or reputation of Premier.
(i) Premier and I, however, agree that “Termination For Just Cause” shall not mean or include termination of myemployment by Premier pursuant to subsection (i) or (k) as a result of an isolated, insubstantial and inadvertent action not takenby me in bad faith and which is remedied promptly by me, if such cure is possible, within no more than thirty (30) days afterreceipt of notice from the Company CEO or Board Chair or their authorized agents of such performance issue(s). Premier and Ifurther agree that “Termination for Just Cause” shall not mean or include termination of my employment by Premier pursuant tosubsections (j) or (l) as result of an isolated, insubstantial and inadvertent action not taken by me in bad faith and which isremedied promptly by me, if such cure is possible, within no more than ten (10) days after receipt of notice from the CompanyCEO or Board Chair or their authorized agents of such performance issue(s).
(ii) Premier and I agree that my general failure to meet the performance objectives, milestones and goalsestablished or given by the Company CEO or the Board from time to time shall not constitute grounds for “Termination for JustCause”. Further, for purposes of this definition only, no act or failure to act by me shall be deemed “willful” if: (A) done or omittedto be done by me in good faith and with the reasonable belief that my act or omission was in the best interest of Premier andconsistent with Premier and its Related Companies’ policies and applicable law; (B) based on and consistent with instructionspursuant to a resolution duly adopted by the Board; or (C) based on and consistent with the advice of Premier counsel.
(iii) Notwithstanding the above and Section 2.2 , Premier and I also acknowledge and agree that:
(A) If I am suspended and/or temporarily prohibited from participating in the conduct of the affairs ofPremier and/or its Related Companies or affiliated entities by a regulatory, governmental or administrative notice served underfederal or state law, the obligations of Premier under this Agreement shall be suspended as of the date of service of such notice,unless stayed by appropriate proceedings. If the charges in the notice are dismissed or withdrawn, Premier may in its discretion,upon approval by the Board, pay me all or part of the compensation withheld while its contract obligations were suspendedand/or reinstate in whole or in part any of its obligations that were suspended. My vested rights shall not otherwise be affectedby this provision.
(B) If I am permanently removed and/or prohibited from participating in the conduct of the affairs ofPremier and/or its Related Companies or affiliated entities by applicable federal, state or other regulatory, governmental oradministrative order or action, all obligations of Premier under this Agreement shall terminate as of the effective date of theorder, but vested rights of the parties hereto shall not be affected.
(iv) In addition, Premier and I agree that without expressly or constructively terminating this Agreement underthis Section 2.3 or Section 2.2 , Premier may place me on temporary leave with pay, temporarily exclude me from any premisesof Premier, its Related Companies and affiliated entities and/or temporarily reassign my duties with Premier and/or its RelatedCompanies during any pending Premier investigation or disciplinary action involving me and/or my potential “Termination for JustCause”. Premier and I further agree such authority shall be invoked only in exceptional circumstances when the Company CEOand General Counsel determine that such action is in the best interests of the Company.
2.4 Disability . “Disability” means my inability to perform the essential functions and duties of my position withPremier, with or without reasonable accommodation, by reason of any medically
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determinable physical or mental impairment that can be expected to result in death or that is to last or can be expected to last fora continuous period of not less than twelve months, as determined under the long-term disability plan sponsored by Premier or aRelated Company (as defined in Section 6.2 ) in which I participate.
Premier and I further agree that without expressly or constructively terminating this Agreement under this Sectionor Sections 2.1-2.3 , Premier may designate another employee to act in my place during any period of my Disability that extendsover ninety (90) consecutive calendar days or an aggregate of ninety (90) calendar days during any three hundred and sixty five(365) consecutive calendar day period. Notwithstanding whether any such designation is made, I shall continue to receive myfull base salary and other compensation, incentives and benefits under this Agreement (offset by any Company-paid short-termdisability and/or long-term disability plan payments) during any period of Disability during my employment with Premier.
2.5 Severance Details . Any Severance Pay shall: (a) be at the base salary rate in effect at the time of myTermination Without Cause, (b) be paid over time in the form of salary continuation for the 12 month period following the end ofmy employment with Premier in accordance with Premier’s regular payroll practices, and (c) be less applicable withholdings.Except as otherwise provided in Section 8.3(c) of this Agreement, and contingent on my execution and non-revocation of arelease as described in Section 2.1 , the first installment of the Severance Pay will be on the sixtieth (60th) day following theeffective date of my Termination Without Cause and will include Severance Pay for the period from the end of my employmentwith Premier through the first installment payment date. The remaining installments will continue thereafter for the remainder ofthe 12 month period following the end of my employment with Premier.
In the event of any termination of my employment entitling me to any Severance Pay under this Agreement, and providedI abided by Section 3 and continue to abide by the non-competition, non-interference, confidentiality and other requirements setforth in Sections 4-6 , I shall be under no obligation to seek other employment and there shall be no offset against amounts dueme under this Agreement on account of any compensation attributable to any subsequent employment that I may obtain.
3. CONFLICTS OF INTEREST
3.1 Conflicts of Interest . During my employment with Premier, I shall not: (a) engage in any outside business activitywithout written authorization from my supervisor at Premier; (b) in any way compete with Premier; or (c) engage in any conductintended to or reasonably expected to harm the interests of Premier. I also agree to comply with the terms of Premier’s Code ofConduct and Conflict of Interest policies, including but not limited to all terms relating to the divestiture or transfer to a blind trustof any equity interest that I may hold in participating vendors, as defined in such policies. Notwithstanding the foregoing, I mayengage in personal investment activities and charitable work that do not interfere with my duties for Premier and do not violatePremier’s Code of Conduct or Conflict of Interest policies.
4. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
4.1 Confidentiality . Except to the extent the use or disclosure of any Confidential Information (as defined below) isrequired to carry out my assigned duties with Premier, I agree that during my employment with Premier under this Agreementand for a period of 5 years thereafter, I will not: (a) disclose any Confidential Information to any person not employed by Premier;or (b) use for myself or for any other person or entity any Confidential Information. This provision, however, shall not precludeme from: (i) the use or disclosure of information known generally to the public (other than as a result of my
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violation of this Agreement); or (ii) any disclosure required by law or court order, by any governmental entity having regulatoryauthority over the business of the Company, or by any administrative or legislative body (including a committee thereof) withjurisdiction to order me to divulge, disclose or make accessible such information, provided I provide Premier prompt writtennotice of any potential disclosure under this subsection (ii) within forty-eight (48) hours of my receipt of the request for disclosureor my election to disclose such information under this subsection (ii), whichever is earliest, to the fullest extent permitted byapplicable law.
4.2 Confidential Information . “Confidential Information” means all confidential or proprietary information furnished to,obtained by or created by me while employed by Premier related to Premier or its business that could be used to competeagainst or otherwise harm Premier. Confidential Information includes, but is not limited to, such information in the followingcategories: (a) information regarding Premier’s affiliates and customers, including affiliate / customer lists, contact information,contracts, billing histories, affiliate/customer preferences, and information regarding products or services provided by Premier tosuch entities; (b) non-public financial information concerning Premier, including commissions and salaries paid to employees,sales data and projections, forecasts, cost analyses, and similar information; (c) plans and projections for business opportunitiesfor new or developing business of Premier, including marketing concepts and business plans; (d) Premier Intellectual Property(as defined below), software, source and object codes, computer data, research information and technical data; (e) informationrelating to Premier’s services, products, prices, costs, research and development activities, service performance, operatingresults, pricing strategies, employee lists or personnel matters; and (f) Premier information regarding sources and methods ofsupply, including supply agreements, supply terms, product discounts and similar information.
4.3 Return of Property . I agree that all materials, documents and data obtained or prepared by me in the course andscope of my employment with Premier are the property of Premier. I also agree that all Confidential Information is the property ofPremier. As such, I agree that I will return to Premier when requested, and in any event prior to my last day of employment withPremier, all materials, documents, information, data and other property belonging to Premier in my possession or control,regardless of how stored or maintained and including all originals and copies.
4.4 Intellectual Property . I hereby assign and agree in the future to assign to Premier my full right, title and interest inall Intellectual Property (as defined below). In addition, all copyrightable works that I create during my employment with Premiershall be considered “work made for hire” and shall be owned exclusively by Premier. “Intellectual Property” means any invention,formula, process, discovery, development, design, innovation or improvement made, conceived or first reduced to practice byme, solely or jointly with others, during my employment with Premier. However, “Intellectual Property” shall notapply to anyinvention that I develop on my own time, without using the equipment, supplies, facilities or trade secret information of Premier,unless such invention relates at the time of conception or reduction to practice to: (a) the business of Premier, (b) the actual ordemonstrably anticipated research or development of Premier, or (c) any work performed by me for Premier.
5. NON-COMPETE AND NON-INTERFERENCE / RAIDING
5.1 Non-Compete . For a period of 12 months following my last day of employment with Premier, I agree not to: (a)perform in the Prohibited Territory (as defined below) any services for a competitor of Premier that are the same as orsubstantially similar to the services I performed for Premier at any point during my last 12 months as a Premier employee; or (b)engage, within the Prohibited Territory, in any aspect of the Business (as defined below) that I was involved with on behalf ofPremier at any time during the last 12 months of my employment with Premier. “Prohibited Territory” means: (i) the continentalUnited States, which I acknowledge is the area that I am to assist Premier to engage in its business; and/or (ii) the States that Iassisted Premier to engage in its business during my last 12 months
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as a Premier employee. The “Business” means the business engaged in by Premier as of my last day of employment withPremier. Notwithstanding the preceding, owning the stock or options to acquire stock totaling less than 5% of the outstandingshares in a public company shall not by itself violate the terms of this Section 5.1 .
5.2 Non-Interference With Restricted Customers . For a period of 12 months following my last day of employmentwith Premier, I agree that I will not: (a) call upon, solicit, cause or attempt to cause any Restricted Customer (as defined below)to not do business with Premier or to reduce, modify or transfer any part of its business with Premier; (b) call upon, solicit, causeor attempt to cause any Restricted Customer to do business with a competitor of Premier; (c) sell or provide any services orproducts to any Restricted Customer that are competitive with or a replacement for Premier’s services or products; and/or (d) asan employee, agent, partner, director, consultant, or in any other capacity assist any person or entity to engage in any of theconduct described in subsections (a) - (c) of this Section. Notwithstanding the preceding, if I become an employee of aRestricted Customer after my employment with Premier ends, then this subsection shall not limit my communications or activitieswith that particular Restricted Customer while I am employed by that Restricted Customer, provided that: (i) as part of myservices with or for such Restricted Customer, I do not engage in activities or directly assist others to engage in activities thatcompete with Premier in the Business or otherwise violate Section 5.1 ; and (ii) I abide by the confidentiality and non-raiding ofemployees obligations set forth in this Agreement.
“Restricted Customer” means: (A) a Customer (as defined below) for which I earned or was paid incentive pay atany point during my last 12 months as a Premier employee; (B) a Customer with which I worked or for which I supervisedPremier’s work at any point during my last 12 months as a Premier employee; (C) a prospective Customer that I contacted or forwhich I supervised contact at any point during my last 12 months as a Premier employee; and/or (D) a current or prospectiveCustomer about which I obtained Confidential Information at any point during my last 12 months as a Premier employee.“Customer” means a Premier customer, partner hospital, member or affiliated health care organization.
5.3 Non-Interference With Restricted Suppliers . For a period of 12 months following my last day of employmentwith Premier, I agree that I will not solicit, cause or attempt to cause any Restricted Supplier (as defined below) to not dobusiness with Premier or to reduce, modify or transfer any part of its business with Premier. “Restricted Supplier” means anysupplier of goods or services to Premier: (a) with which I had dealings; (b) for which I supervised or assisted in Premier’sdealings; and/or (c) about which I obtained Confidential Information, all at any point during my last 36 months as a Premieremployee.
I further agree that in the event I am later employed by a non-group purchasing organization medical supplierfollowing my employment with Premier, I will recuse myself for a period of 12 months following my last day of employment withPremier from any consideration of decisions or other communications or discussions that would result in the termination of acontract, discontinuance of business, or reduction of business with or amounts paid to Premier involving the products or servicesthat my new employer supplies Premier. I further expressly acknowledge and agree that as part of my post-employmentconfidentiality commitments to Premier, I cannot and will not use any confidential Premier pricing, contract or other supplier-related information obtained during my employment with Premier in connection with any supply contract or other negotiationsbetween Premier and my new non-group purchasing organization medical supplier employer, if applicable, or to obtain acompetitive advantage against or otherwise harm Premier or its affiliated entities.
5.4 Non-Raiding of Employees . During my employment with Premier under this Agreement and for a period of 18months following my last day of employment with Premier, I agree not to on my own behalf or on behalf of any other entity: (a)hire or engage as an employee or as an independent contractor any then current employee of Premier with whom I worked orabout whose work I was familiar
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during my employment with Premier (each a “Restricted Employee”); and/or (b) solicit, encourage or cause or attempt to solicit,encourage or cause any Restricted Employee to leave his or her employment with Premier.
6. REASONABLENESS OF RESTRICTIONS
6.1 Reasonableness . I have carefully read and considered the provisions of this Agreement and, having done so,agree that the restrictions set forth in it are fair, reasonable, and necessary to protect Premier’s legitimate business interests,including its trade secrets, Confidential Information and goodwill with Premier’s customers, suppliers and employees. In addition,I acknowledge and agree that the restrictions in this Agreement do not unreasonably restrict or affect my ability to obtainemployment should my employment with Premier end. Thus, although Premier and I acknowledge and agree that I retain theright to contest the application or interpretation of Sections 3-5 of this Agreement to particular facts/circumstances, I agree not tocontest the general validity or enforceability of Sections 3-5 before any court, arbitration panel or other body.
Further, I agree that I shall notify any prospective employer, entity or individual with whom I seek to be employedor provide independent contractor services of the non-competition, non-interference, confidentiality and other requirements setforth in Sections 3-5 of this Agreement during the applicable term for each, and the Company may likewise provide such noticeduring the same period to any prospective employer, entity or individual with whom I seek to be employed or provideindependent contractor services.
6.2 Related Companies . For purposes of the restrictions and commitments in Section 3 (Conflicts of Interest), 4(Confidential Information and Intellectual Property), 5 (Non-Compete and Non-Interference) and 6.1 (Reasonableness),“Premier” or the “Company” shall mean: (a) the Company as defined in the Recitals to this Agreement; and; (b) any “RelatedCompany” (as defined below) or successor of Premier for or with whom I performed or supervised any services at any timeduring the last 12 months of my employment with Premier.
“Related Company” means (a) any Premier parent company, subsidiary company, sister company or joint venture,or related subsidiary company of such entities; and/or (b) any “parent corporation” with respect to Premier within the meaning ofSection 424(e) of the Internal Revenue Code of 1986, as amended (the “Code”), any “subsidiary corporation” with respect toPremier within the meaning of Code Section 424(f) but substituting the phrase “20 percent” for the phrase “50 percent” eachplace it appears in that section, and any corporation or other entity in a chain of corporations or other entities in which eachcorporation or other entity has a controlling interest in another corporation or other entity in the chain, beginning with thecorporation or other entity in which Premier has a controlling interest. For this purpose, “controlling interest” shall have the samemeaning as in Treasury Regulations Section 1.409A-1(b)(5)(E)(1) (or any successor provision) but substituting the phrase “atleast 20 percent” for the phrase “at least 50 percent” each place it appears in that section.
7. OBLIGATIONS CONCERNING PRIOR BUSINESS RELATIONSHIPS
7.1 Former Employment/Engagements . I represent and warrant to Premier that: (a) as of the Effective Date of thisAgreement, I am not working for or engaged by any other person or entity as an employee, independent contractor orconsultant; and (b) I have provided Premier with a copy of any and all agreements with third parties that may limit or attempt tolimit my right to be employed by Premier or its Related Companies (as defined in Section 6.2 ), to perform any activities forPremier or a Related Company, or to disclose to Premier or a Related Company any ideas, inventions, discoveries or otherinformation.
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7.2 No Disclosure or Use of Confidential Information of Others . I represent and warrant to Premier that I have notbrought and will not bring with me to Premier or use in the performance of my duties for Premier any materials, data, software,technology, trade secrets, intellectual property, confidential or proprietary information, or documents belonging to a third partythat are not generally available to the public, unless I have obtained written authorization to do so from the third party andprovided Premier with a copy of it. I understand and agree that, in my employment with Premier, I am not to breach anyobligation of confidentiality that I have to former employers or other third parties, and I agree that I shall fulfill all such obligationsduring my employment with Premier. I further agree that I shall not disclose to Premier or its Related Companies (as defined inSection 6.2 ) or seek to induce such entities to use any confidential information or trade secrets belonging to a third party.
8. GENERAL PROVISIONS
8.1 General Notification and Breach . Through and up to the conclusion of the 12-month restricted period set forth inSections 5.1-5.3 , I shall give notice to Premier of each new business activity I plan to undertake, at least seven (7) calendardays prior to beginning any such activity, including but not limited to work as an employee or independent contractor. Suchnotice shall state the name and address of the person or entity for whom such activity is undertaken and the nature of mybusiness relationship(s) and position(s) with such person or entity. I shall provide Premier with such other pertinent informationconcerning such business activity as Premier may reasonably request in order to determine my compliance with my obligationsunder Sections 4-6 of this Agreement.
I acknowledge that my breach of this Agreement, particularly Sections 3-6 , will cause immediate and irreparabledamage to Premier and its Related Companies and that such damages will be exceedingly difficult to measure in full. Therefore,I acknowledge that the payment of damages in an action at law for breach of this Agreement would not adequately compensatePremier or its Related Companies for the damages suffered. In addition, the short duration of the covenants contained in thisAgreement makes essential the enforcement of this Agreement by injunctive relief. Premier and I therefore agree that thisAgreement may be enforced through temporary, preliminary and permanent injunctive relief, and that all other availableremedies at law or in equity including, but not limited to, money damages, may be pursued for breach of this Agreement.
Moreover, I agree that, in addition to any other remedies available to Premier and/or its Related Companies byoperation of law or otherwise, if I breach of any of the obligations contained in Sections 3-6 , I shall: (a) forfeit at the time of thebreach the right to any additional Severance Pay under Section 2 of this Agreement; (b) forfeit the right to all further unpaid /unawarded, amounts that may otherwise be payable under the terms of any Annual Plan, the Equity Incentive Plan or any otherequity or incentive compensation plan in which I participates and to which I might otherwise then be entitled by virtue thereof atthe time of the breach, if any, notwithstanding any provisions of this Agreement or such plans or programs to the contrary; and(c) be required to refund to Premier and its Related Companies, and Premier and its Related Companies shall be entitled torecover of me, the amount of any and all such Severance Pay, Annual Plan, Equity Incentive plan, or other equity or incentiveplan pay or awards already paid or provided to or on behalf of me by Premier and/or its Related Companies (as defined inSection 6.2 ) following the initial breach, if any, notwithstanding any provisions of this Agreement or such plans or programs tothe contrary.
In addition, Premier and I agree that the prevailing party in any legal action to enforce the terms of thisAgreement, including but not limited to Sections 3-6 , shall be entitled to costs and attorneys’ fees related to any suchproceeding as allowed by law. Further, the time period for the covenants in Sections 4-6 shall be tolled during any period of timein which I am violating those Sections. The restrictions and obligations in Sections 4-6 shall survive my last day of employmentwith Premier and shall be in addition to any restrictions imposed on me by statute, at common law, or other agreements. Therestrictions and
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obligations in Sections 4-6 shall continue to be enforceable regardless of whether there is a subsequent dispute between meand Premier concerning any alleged breach of this Agreement.
8.2 Judicial Modification and Severability . If a court determines that any provision of this Agreement is invalid, thenPremier and I request that the court “blue-pencil” or otherwise modify such provision in order to render the provision not invalidand enforce the provision as modified. In such a case, all other provisions contained in this Agreement shall remain in full forceand effect. In addition, each provision of this Agreement is severable from each other provision.
8.3 Section 409A .
(a) Section 409A Compliance . Premier and I intend that any amounts payable hereunder that could constitute“deferred compensation” within the meaning of Section 409A of the Code (“Section 409A”) will be compliant with Section 409A. IfPremier shall determine that any provision of this Agreement does not comply with the requirements of Section 409A, Premiershall amend the Agreement to the extent necessary (including retroactively) in order to comply with Section 409A (whichamendment shall not reduce the amounts payable to me under this Agreement). Premier shall also have the discretionaryauthority to take such other actions to correct any failures to comply in operation with the requirements of Section 409A. Suchauthority shall include the power to adjust the timing or other details relating to the awards and/or payments described in thisAgreement (but not the amounts payable to me under this Agreement) if Premier determines that such adjustments arenecessary in order to comply with or become exempt from the requirements of Section 409A. Notwithstanding the foregoing, tothe extent that this Agreement or any payment or benefit (or portion thereof) under this Agreement or the plans referencedherein shall be deemed not to comply with Section 409A, then Premier and its Related Companies, the Board andCompensation Committee of the Board, and Premier, Inc. and its Related Companies’ shareholders, owners, board members,officers, employees, and their designees and agents shall not be liable to me in any way. However, if and to the extent I incurany Section 409A related excise taxes, penalties or interest charges as a result of the Company’s breach of this Agreement nototherwise consented to by me in writing (e.g., with respect to payment timing), then Premier shall reimburse me in full for theamount of such excise taxes, penalties and interest charges so that I am restored to the same position in which I would havebeen had Premier’s breach not occurred.
(b) Separation From Service . Notwithstanding anything in this Agreement to the contrary, no separationbenefits, if applicable, deemed deferred compensation subject to Section 409A shall be payable pursuant to this Agreementunless my separation from employment constitutes a “separation from service” with Premier within the meaning of Section 409Aand the Department of Treasury regulations and other guidance promulgated thereunder (a “Separation from Service”).
(c) Specified Employee . Notwithstanding any provision to the contrary in this Agreement, if I am deemed byPremier at the time of my Separation from Service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of theCode, to the extent delayed commencement of any portion of the benefits to which I am entitled under this Agreement isrequired in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of my benefits shallnot be provided to me prior to the earlier of (1) the expiration of the six-month period measured from the date of my Separationfrom Service or (2) the date of my death. Upon the first business day following the expiration of the applicable Code Section409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 8.3(c) shall be paid in a lump sum to me, and anyremaining payments due under this Agreement shall be paid as otherwise provided herein.
(d) Expense Reimbursements . To the extent that any reimbursements payable pursuant to this Agreement aresubject to the provisions of Section 409A, any such reimbursements payable to me pursuant to this Agreement shall be paid tome no later than December 31 of the year following the year in
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which the expense was incurred, the amount of expenses reimbursed in one year shall not affect the amount eligible forreimbursement in any subsequent year, and my right to reimbursement under this Agreement will not be subject to liquidation orexchange for another benefit.
(e) Installments . For purposes of Section 409A (including, without limitation, for purposes of TreasuryRegulation Section 1.409A-2(b)(2)(iii)), my right to receive the installment payments under this Agreement shall be treated as aright to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered aseparate and distinct payment.
8.4 Tax Penalty Protection . Notwithstanding any other provision in this Agreement to the contrary, any payment orbenefit received or to be received by me in connection with a “change in ownership or control” (as such term is defined underSection 280G of the Code – a “Change in Control”) or the termination of employment (whether payable under the terms of thisAgreement or any other plan, arrangement or agreement with Premier or its subsidiaries and affiliates (collectively, the“Payments”) that would constitute a “parachute payment” within the meaning of Section 280G of the Code, shall be reduced tothe extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code (the“Excise Tax”), but only if, by reason of such reduction, the net after-tax benefit received by me shall exceed the net after-taxbenefit that would be received by me if no such reduction was made. Whether and how the limitation under this Section isapplicable shall be determined under the Section 280G Rules set forth in Annex A hereto.
8.5 Incentive-Based Compensation Clawback . In accordance with the terms and conditions of Premier, Inc.’s andthe Company’s Compensation Recoupment Policy as such policy may be established, modified, changed, replaced orterminated from time to time by Premier, Inc. in its sole discretion to comply with listing exchange / service rules and regulationsand/or other applicable regulatory requirements, I agree to repay any incentive or other compensation paid or otherwise madeavailable to me by Premier or its Related Companies (as defined in Section 6.2 ), as required by the terms of such policy. If I failto return such compensation as required by the terms of the Compensation Recoupment Policy and/or applicable law, I herebyagree and authorize Premier and its Related Companies to, among other things as set forth in the policy: (a) deduct the amountof such identified compensation from any and all other compensation owed to me by Premier and/or is Related Companies;and/or (b) adjust and reduce future compensation to me. I acknowledge that Premier may take appropriate disciplinary action(up to, and including, Termination For Just Cause) if I fail to return / repay such identified compensation within the timeframerequired by the Compensation Recoupment Policy. Further, Premier and I agree that the provisions of this Section 8.5 shallremain in effect for the period required by applicable law.
8.6 Indemnification . Premier and I have entered into (or shall enter into concurrent with this Agreement) a separateindemnity agreement, consistent with Premier, Inc.’s certificate of incorporation, by-laws and other corporate governancedocuments; provided that the entry into such an agreement shall not be a condition precedent to my right to be indemnified byPremier as provided in such corporate governance documents. In addition, Premier will indemnify me or cause me to beindemnified in my capacity as an officer, director or senior manager of any Related Company (as defined in Section 6.2 ) forwhich I serve as such, to the fullest extent permitted by the laws of the state of incorporation of such Related Company in effectfrom time to time, or the certificate of incorporation, by-laws or other corporate governance documents of such RelatedCompany, whichever affords the greater protection to me. Premier may elect to satisfy its obligations pursuant to this Section 8.6under insurance policies maintained generally for the benefit of its officers, directors and employees against covered costs,charges and expenses incurred in connection with any action, suit, investigation or proceeding to which I may be made a partyby reason of being a director, officer or senior manager of Premier. In addition, Premier shall provide me with directors’ andofficers’ insurance coverage to the same extent as provided to other senior executives of Premier.
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8.7 Governing Law, Forum, Jurisdiction . I agree that this Agreement shall be governed by the laws of the State ofNorth Carolina, regardless of where I may work for Premier and irrespective of conflict of law principles. Moreover, any litigationunder this Agreement shall be brought by either me or Premier exclusively in Mecklenburg County, North Carolina,notwithstanding that I may not be a resident of North Carolina when the litigation is commenced and/or cannot be servedprocess within North Carolina. As such, Premier and I irrevocably consent to the jurisdiction of the courts in MecklenburgCounty, North Carolina (whether federal or state) for all disputes related to this Agreement and irrevocably consent to service ofprocess via nationally recognized overnight carrier, without limiting other service methods available under applicable law.
8.8 Entire Agreement, Amendment, Waiver, Assignment . This Agreement constitutes the entire agreementbetween me and Premier related to the subject matters contained in it and supersedes all previous agreements related to thesesubject matters, includingbutnotlimitedtothePriorEmploymentAgreementandanyofferorpositionassignmentlettersbetweenmeandPremier,exceptthatPremierandIexpresslyagreethattheannualincentivetermscontainedinSection1.3ofmyPriorEmploymentAgreementshallcontinueinforceandeffectfortheapplicabletermofsuchprovisionasitappliestomyFY2016AnnualPlanawardandisherebyincorporatedinthisAgreementbyreference.Noamendment or attempted waiver of any of the provisions of this Agreement shall be binding unless reduced to writing and signedby me and Premier. Premier shall have the right to assign or transfer this Agreement to any affiliated entity or successor to all orpart of its business, and I irrevocably consent to any such assignment or transfer. Further, Premier and I agree that Premier maydisclose the compensation and other terms of this Agreement: (a) to Premier’s shareholders/owners; and (b) in its proxystatements or other public securities filings as required by law.
[Signature Page Follows]
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Agreed to and accepted:
Date: 7/1/16 /s/ Leigh Anderson Leigh Anderson
Agreed to and accepted: PREMIER HEALTHCARE SOLUTIONS, INC.
Date: 7/1/16 /s/ Jim Jensen Signature of Authorized Representative
Jim JensenVP, Compensation
PREMIER, INC.
Date: 7/1/16 /s/ Kelli L. Price Signature of Authorized Representative
Kelli L. PriceSVP, People
Joining this Agreement as a Party solely as a guarantor of PremierHealthcare Solutions, Inc.’s financial obligations hereunder
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Annex A: Section 280G Rules
The following rules shall apply for purposes of determining whether and how the limitations provided under Section 8.4 ofthis Agreement are applicable to me.
1. The “net after-tax benefit” shall mean (i) the Payments (as defined in Section 8.4 ) which I receive or am thenentitled to receive from the Company or a subsidiary or affiliate that would constitute “parachute payments” within the meaning ofCode Section 280G, less (ii) the amount of all federal, state and local income and employment taxes payable by me with respectto the foregoing calculated at the highest marginal income tax rate for each year in which the foregoing shall be paid to me(based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing),less (iii) the amount of Excise Tax imposed with respect to the payments and benefits described in (i) above.
2. All determinations under Section 8.4 of this Agreement and this Annex A will be made by an accounting firm orlaw firm that is selected for this purpose by Premier prior to a Change in Control (the “280G Firm”). All fees and expenses of the280G Firm shall be borne by the Company. Premier will direct the 280G Firm to submit any determination it makes underSection 8.4 of this Agreement and this Annex A and detailed supporting calculations to both me and Premier as soon asreasonably practicable.
3. If the 280G Firm determines that one or more reductions are required under Section 8.4 of this Agreement, the280G Firm shall also determine which Payments shall be reduced (first from cash payments and then from non-cash benefits) tothe extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code, andPremier shall pay such reduced amount to me. The 280G Firm shall make reductions required under Section 8.4 of thisAgreement in a manner that maximizes the net after-tax amount payable to me.
4. As a result of the uncertainty in the application of Section 280G at the time that the 280G Firm makes itsdeterminations under this provision, it is possible that amounts will have been paid or distributed to me that should not havebeen paid or distributed (collectively, the “Overpayments”), or that additional amounts should be paid or distributed to me(collectively, the “Underpayments”). If the 280G Firm determines, based on either the assertion of a deficiency by the InternalRevenue Service against Premier or me, which assertion the 280G Firm believes has a high probability of success or controllingprecedent or substantial authority, that an Overpayment has been made, I must repay the Overpayment amount promptly toPremier, without interest; provided, however, that no loan will be deemed to have been made and no amount will be payable byme to Premier unless, and then only to the extent that, the deemed loan and payment would either reduce the amount on which Iam subject to tax under Section 4999 of the Code or generate a refund of tax imposed under Section 4999 of the Code. If the280G Firm determines, based upon controlling precedent or substantial authority, that an Underpayment has occurred, the 280GFirm will notify me and Premier of that determination, and the Underpayment amount will be paid to me promptly by Premier.
5. I will provide the 280G Firm access to, and copies of, any books, records and documents in my possession asreasonably requested by the 280G Firm, and otherwise cooperate with the 280G Firm in connection with the preparation andissuance of the determinations and calculations contemplated by Section 8.4 of this Agreement.
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Exhibit 10.22
EXECUTIVE EMPLOYMENT AGREEMENT
I, David Klatsky , hereby agree to be employed by Premier Healthcare Solutions, Inc., a Delaware corporation with itsprincipal places of business in Charlotte, North Carolina, Washington, D.C., and Ft. Lauderdale, Florida (“Premier” or the“Company”), and Premier hereby agrees to employ me, subject to the following terms and conditions.
1. EMPLOYMENT
1.1 Job Duties . I agree to devote my full professional time, attention and best efforts to the performance of myemployment duties with Premier and/or its Related Companies (as defined in Section 6.2 ). I shall perform the duties andresponsibilities customary to my position(s) with Premier and/or its Related Companies and as assigned to me from time to time.My initial position with Premier shall be as Senior Vice President, General Counsel.
1.2 Salary and General Benefits . During my employment at Premier effective beginning as of the Effective Date,Premier will: (a) compensate me for my services at a base rate determined by Premier from time to time, and (b) allow me toparticipate in the deferred compensation, other retirement plans, and employee benefit plans from time to time in effect generallyfor Premier or a “Related Company’s” (as defined in Section 6.2 ) similarly situated employees, subject to the terms andconditions of such plans and as they may be instituted, modified or terminated from time to time. My initial base salary effectivebeginning as of the Effective Date shall be $18,750.00 per semi-monthly pay period (equivalent to $450,000.00 annually), lessapplicable withholdings. If the base salary is increased, such increased amount shall thereafter become the “base salary” underthis Agreement.
1.3 Annual Incentive Plan . During my employment with Premier effective beginning as of the Effective Date, I shallparticipate in any annual incentive plan sponsored by Premier or a “Related Company” (as defined in Section 6.2 ) (the “AnnualPlan”) applicable to me or other similarly situated senior executive level employees, in accordance with the terms and conditionsof such Annual Plans as they may be established, modified, changed, replaced or terminated from time to time. My targetincentive opportunity in the Annual Plan for FY 2017 (July 1, 2016 – June 30, 2017) will be 60% of my plan year earnings asdefined in the Annual Plan.
1.4 Intentionally left blank .
1.5 Equity Incentive Plan . As additional consideration for entering into this Agreement, during my employment withPremier, in August 2016 the Company will recommend to the Compensation Committee of the Board of Directors, that I willreceive a grant of Premier, Inc. equity with a grant value equal to 145% of my initial base salary. The types of Equity to begranted will be consistent with those approved by the Compensation Committee, and may include Restricted Stock Units,Performance Shares Stock Option, or other forms of equity specified in the Premier, Inc. Equity Incentive Plan, or anycombination thereof. Should my start date be delayed, my grant will potentially be delayed. Any equity will be awarded / issuedin accordance with the terms of the Premier, Inc. Equity Incentive Plan and applicable award agreement(s), to be providedelectronically after the grant.
1.6 Term . I agree that my employment with Premier shall be “at-will”, such that I may resign at any time for anyreason and Premier may terminate my employment at any time for any reason, subject to my and Premier’s post-employmentrights and obligations under this Agreement. The at-will nature of my employment may be altered only be a written agreementsigned by a duly authorized Premier official. In addition, notwithstanding the provisions of this Section 1.6 or Section 2 below, Iagree that upon the termination or end of my employment with Premier for anyreason , I shall resign and do resign from allpositions as an
officer, director and employee of Premier and Premier’s Related Companies (as defined in Section 6.2 ), with such resignationsto be effective upon the termination or end of my employment with Premier.
2. SEVERANCE PROTECTIONS
2.1 Severance Pay . If my employment with Premier under this Agreement ends at any time due to a TerminationWithout Cause (as defined below), then Premier will provide me with 12 months of my then current base salary as severance(the “Severance Pay”), subject to the terms in this Section 2 . In order to be eligible for such Severance Pay, I must sign within45 days of receipt from Premier and not revoke a full and general release (the “Release”) of any and all claims that I have ormay have against Premier, its Related Companies (as defined in Section 6.2 ) and such entities’ past and then current officers,directors, shareholders, owners, members, agents and employees relating to all matters, to be prepared by Premier at that time.In addition, if I violate any of my post-employment obligations under this Agreement in Sections 4-6 , then my right to anySeverance Pay shall immediately cease and be forfeited.
2.2 Termination Without Cause . For purposes of this Agreement, “Termination Without Cause” means anytermination of my employment by Premier for any reason other than retirement, early retirement, death, “Disability” or“Termination for Just Cause”. In addition, my resignationshall be deemed a Termination Without Cause by Premier if I resign myemployment with Premier and all its Related Companies (as defined in Section 6.2 ) withintwenty-four (24) months following a“Change in Control” (as defined below) due to the following events without my written consent:
(a) a material reduction in my position, responsibilities or status, or a change in my title resulting in a materialreduction in my responsibilities or position with Premier, butexcludingforthispurpose: (i)any suspensions, removals, duty reassignments, duty limitations or other actions set forthand allowed in Section 2.3 ; and (ii) any such reductions or changes made in good faith toconform with applicable law or generally accepted industry standards for my position;
(b) a reduction in my base salary (unless such percentage deduction is effectively made across the board forall other senior executives of Premier);
(c) the relocation of me to a location outside a fifty (50) mile radius of my primary office location on the dateof this Agreement (Charlotte, NC); provided, however that relocation of me to Premier’scurrent or future headquarters location (with or without my consent) shall not constitute aresignation by me that can be deemed a Termination Without Cause; or
(d) a failure of the Company to obtain the assumption in writing of its obligations under this Agreement by anysuccessor to all or substantially all of the assets of the Company within 30 days after amerger, consolidation, sale or similar transaction.
For purposes of this Agreement, a “Change in Control” shall have the meaning set forth in Section 13.3 (orsubsequent applicable sections, if and as later amended) of the Premier, Inc. 2013 Equity Incentive Plan, as it may beestablished, modified, changed or replaced from time to time.
Premier and I further agree that for my resignation to constitute Termination Without Cause, in addition toproviding at least ninety (90) days advance written notice of resignation to Premier, I must provide written notice to thePresident and Chief Executive Officer of Premier (the “Company CEO”) of my intent to resign within ninety (90) days of one ofthe triggering events outlined in subsections (a) – (d) of this provision. Further, Termination Without Cause shall not mean orinclude resignation by me for subsections (a) – (d) of this provision for any isolated, insubstantial or inadvertent reason nottaken in bad faith if cured or remedied promptly by Premier, if such cure is possible, within no more than thirty (30) calendardays of receiving my notice.
(d) Termination For Just Cause . For purposes of this Agreement, “Termination for Just Cause” meanstermination of my employment by Premier as the result of: (a) commission or omission of any act of dishonesty, embezzlement,theft, misappropriation or breach of fiduciary duty by me in connection with my employment with Premier; (b) any conviction,guilty plea or plea of nolo contendere by me for any felony, a misdemeanor in which fraud and dishonesty is a materialelement, or a crime of moral turpitude, that is likely to result in incarceration if later sentenced (if the Company CEO or Chair ofthe Board of Directors of Premier, Inc. (the “Board Chair”)) deem in his or her absolute discretion that such conviction or pleamay have a significant adverse effect upon Premier or upon my ability to perform under this Agreement); (c) willful action orwillful inaction with respect to my performance of my employment duties that constitutes a violation of law or governmentalregulations or that causes Premier or its Related Companies (as defined in Section 6.2 ) or affiliated entities to violate such lawor regulation; (d) a material breach of any securities or other law or regulation or any Premier or Related Company policygoverning inappropriate disclosures or “tipping” related to (or the trading or dealing of) securities, stock or investments; (e)failure to reasonably cooperate or interference with a Premier-related investigation; (f) willful violation by me of Premier’s or itsRelated Companies’ lawful material policies, rules and procedures, including but not limited to Premier and its RelatedCompanies’ Code of Conduct and Conflict of Interest policies; (g) the regulatory, governmental or administrative suspension,removal or prohibition of me as defined in this Section below; (h) willful misconduct, willful insubordination or willful refusal orunwillingness to carry out or follow specific lawful, reasonable directives, duties or assignments established or given by theCompany CEO or the Board of Directors of Premier, Inc. (the “Board”) from time to time in accordance with this Agreement; (i)willful inattention to or dereliction of duty by me with respect to the business affairs of Premier or its Related Companies towhich I am assigned material responsibilities or duties that is materially harmful to the business or reputation of Premier; (j) thebreach of or failure to perform the obligations set forth in Sections 3 and/or 5-7 of this Agreement by me; (k) the prospectivebreach of the obligations set forth in Sections 3 and/or 5-7 of this Agreement by me; or (l) the breach or prospective breach orfailure to perform the obligations set forth in Section 4 of this Agreement that is either willful or materially harmful to thebusiness or reputation of Premier.
(i) Premier and I, however, agree that “Termination For Just Cause” shall not mean or include terminationof my employment by Premier pursuant to subsection (i) or (k) as a result of an isolated, insubstantial and inadvertent action nottaken by me in bad faith and which is remedied promptly by me, if such cure is possible, within no more than thirty (30) daysafter receipt of notice from the Company CEO or Board Chair or their authorized agents of such performance issue(s). Premierand I further agree that “Termination for Just Cause” shall not mean or include termination of my employment by Premierpursuant to subsections (j) or (l) as result of an isolated, insubstantial and inadvertent action not taken by me in bad faith andwhich is remedied promptly by me, if such cure is possible, within no more than ten (10) days after receipt of notice from theCompany CEO or Board Chair or their authorized agents of such performance issue(s).
(ii) Premier and I agree that my general failure to meet the performance objectives, milestones and goalsestablished or given by the Company CEO or the Board from time to time shall not constitute grounds for “Termination for JustCause”. Further, for purposes of this definition only, no act or failure to act by me shall be deemed “willful” if: (A) done oromitted to be done by me in good faith and with the reasonable belief that my act or omission was in the best interest ofPremier and consistent with Premier and its Related Companies’ policies and applicable law; (B) based on and consistent withinstructions pursuant to a resolution duly adopted by the Board; or (C) based on and consistent with the advice of Premiercounsel.
(iii) Notwithstanding the above and Section 2.2 , Premier and I also acknowledge and agree that:
(A) If I am suspended and/or temporarily prohibited from participating in the conduct of the affairs of Premier and/or itsRelated Companies or affiliated entities by a regulatory, governmental or administrative notice served under federal orstate law, the obligations of Premier under this Agreement
shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges inthe notice are dismissed or withdrawn, Premier may in its discretion, upon approval by the Board, pay me all or part ofthe compensation withheld while its contract obligations were suspended and/or reinstate in whole or in part any of itsobligations that were suspended. My vested rights shall not otherwise be affected by this provision.
(B) If I am permanently removed and/or prohibited from participating in the conduct of the affairs of Premier and/or itsRelated Companies or affiliated entities by applicable federal, state or other regulatory, governmental or administrativeorder or action, all obligations of Premier under this Agreement shall terminate as of the effective date of the order, butvested rights of the parties hereto shall not be affected.
iv. In addition, Premier and I agree that without expressly or constructively terminating this Agreement under thisSection 2.3 or Section 2.2 , Premier may place me on temporary leave with pay, temporarily exclude me from anypremises of Premier, its Related Companies and affiliated entities and/or temporarily reassign my duties withPremier and/or its Related Companies during any pending Premier investigation or disciplinary action involvingme and/or my potential “Termination for Just Cause”. Premier and I further agree such authority shall be invokedonly in exceptional circumstances when the Company CEO and General Counsel determine that such action is inthe best interests of the Company.
2.3 Disability . “Disability” means my inability to perform the essential functions and duties of my position withPremier, with or without reasonable accommodation, by reason of any medically determinable physical or mental impairmentthat can be expected to result in death or that is to last or can be expected to last for a continuous period of not less than twelvemonths, as determined under the long-term disability plan sponsored by Premier or a Related Company (as defined in Section6.2 ) in which I participate.
Premier and I further agree that without expressly or constructively terminating this Agreement under this Sectionor Sections 2.1-2.3 , Premier may designate another employee to act in my place during any period of my Disability thatextends over ninety (90) consecutive calendar days or an aggregate of ninety (90) calendar days during any three hundred andsixty five (365) consecutive calendar day period. Notwithstanding whether any such designation is made, I shall continue toreceive my full base salary and other compensation, incentives and benefits under this Agreement (offset by any Company-paidshort-term disability and/or long-term disability plan payments) during any period of Disability during my employment withPremier.
2.4 Severance Details . Any Severance Pay shall: (a) be at the base salary rate in effect at the time of myTermination Without Cause, (b) be paid over time in the form of salary continuation for the 12 month period following the end ofmy employment with Premier in accordance with Premier’s regular payroll practices, and (c) be less applicable withholdings.Except as otherwise provided in Section 8.3(c) of this Agreement, and contingent on my execution and non-revocation of arelease as described in Section 2.1 , the first installment of the Severance Pay will be on the sixtieth (60th) day following theeffective date of my Termination Without Cause and will include Severance Pay for the period from the end of my employmentwith Premier through the first installment payment date. The remaining installments will continue thereafter for the remainder ofthe 12 month period following the end of my employment with Premier.
In the event of any termination of my employment entitling me to any Severance Pay under this Agreement, andprovided I abided by Section 3 and continue to abide by the non-competition, non-interference, confidentiality and otherrequirements set forth in Sections 4-6 , I shall be under no obligation to seek other employment and there shall be no offsetagainst amounts due me under this Agreement on account of any compensation attributable to any subsequent employmentthat I may obtain.
3. CONFLICTS OF INTEREST
3.1 Conflicts of Interest . During my employment with Premier, I shall not: (a) engage in any outside businessactivity without written authorization from my supervisor at Premier; (b) in any way compete with Premier; or (c) engage in anyconduct intended to or reasonably expected to harm the interests of Premier. I also agree to comply with the terms of Premier’sCode of Conduct and Conflict of Interest policies, including but not limited to all terms relating to the divestiture or transfer to ablind trust of any equity interest that I may hold in participating vendors, as defined in such policies. Notwithstanding theforegoing, I may engage in personal investment activities and charitable work that do not interfere with my duties for Premierand do not violate Premier’s Code of Conduct or Conflict of Interest policies.
4. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
4.1 Confidentiality . Except to the extent the use or disclosure of any Confidential Information (as defined below)is required to carry out my assigned duties with Premier, I agree that during my employment with Premier under this Agreementand for a period of 5 years thereafter, I will not: (a) disclose any Confidential Information to any person not employed byPremier; or (b) use for myself or for any other person or entity any Confidential Information. This provision, however, shall notpreclude me from: (i) the use or disclosure of information known generally to the public (other than as a result of my violation ofthis Agreement); or (ii) any disclosure required by law or court order, by any governmental entity having regulatory authorityover the business of the Company, or by any administrative or legislative body (including a committee thereof) with jurisdictionto order me to divulge, disclose or make accessible such information, provided I provide Premier prompt written notice of anypotential disclosure under this subsection (ii) within forty-eight (48) hours of my receipt of the request for disclosure or myelection to disclose such information under this subsection (ii), whichever is earliest, to the fullest extent permitted by applicablelaw.
4.2 Confidential Information . “Confidential Information” means all confidential or proprietary information furnishedto, obtained by or created by me while employed by Premier related to Premier or its business that could be used to competeagainst or otherwise harm Premier. Confidential Information includes, but is not limited to, such information in the followingcategories: (a) information regarding Premier’s affiliates and customers, including affiliate / customer lists, contact information,contracts, billing histories, affiliate/customer preferences, and information regarding products or services provided by Premier tosuch entities; (b) non-public financial information concerning Premier, including commissions and salaries paid to employees,sales data and projections, forecasts, cost analyses, and similar information; (c) plans and projections for businessopportunities for new or developing business of Premier, including marketing concepts and business plans; (d) PremierIntellectual Property (as defined below), software, source and object codes, computer data, research information and technicaldata; (e) information relating to Premier’s services, products, prices, costs, research and development activities, serviceperformance, operating results, pricing strategies, employee lists or personnel matters; and (f) Premier information regardingsources and methods of supply, including supply agreements, supply terms, product discounts and similar information.
4.3 Return of Property . I agree that all materials, documents and data obtained or prepared by me in the course andscope of my employment with Premier are the property of Premier. I also agree that all Confidential Information is the propertyof Premier. As such, I agree that I will return to Premier when requested, and in any event prior to my last day of employmentwith Premier, all materials, documents, information, data and other property belonging to Premier in my possession or control,regardless of how stored or maintained and including all originals and copies.
4.4 Intellectual Property . I hereby assign and agree in the future to assign to Premier my full right, title and interestin all Intellectual Property (as defined below). In addition, all copyrightable works that I create during my employment withPremier shall be considered “work made for hire” and shall be owned exclusively by Premier. “Intellectual Property” means anyinvention, formula, process, discovery, development, design, innovation or improvement made, conceived or first reduced topractice by me, solely or jointly with others, during my employment with Premier. However, “Intellectual Property” shall notapply to any invention that I develop on my own time, without using the equipment, supplies, facilities or trade
secret information of Premier, unless such invention relates at the time of conception or reduction to practice to: (a) thebusiness of Premier, (b) the actual or demonstrably anticipated research or development of Premier, or (c) any work performedby me for Premier.
5. NON-COMPETE AND NON-INTERFERENCE / RAIDING
5.1 Non-Compete . For a period of 12 months following my last day of employment with Premier, I agree not to: (a)perform in the Prohibited Territory (as defined below) any services for a competitor of Premier that are the same as orsubstantially similar to the services I performed for Premier at any point during my last 12 months as a Premier employee; or(b) engage, within the Prohibited Territory, in any aspect of the Business (as defined below) that I was involved with on behalfof Premier at any time during the last 12 months of my employment with Premier. “Prohibited Territory” means: (i) thecontinental United States, which I acknowledge is the area that I am to assist Premier to engage in its business; and/or (ii) theStates that I assisted Premier to engage in its business during my last 12 months as a Premier employee. The “Business”means the business engaged in by Premier as of my last day of employment with Premier. Notwithstanding the preceding,owning the stock or options to acquire stock totaling less than 5% of the outstanding shares in a public company shall not byitself violate the terms of this Section 5.1 .
5.2 Non-Interference With Restricted Customers . For a period of 12 months following my last day of employmentwith Premier, I agree that I will not: (a) call upon, solicit, cause or attempt to cause any Restricted Customer (as defined below)to not do business with Premier or to reduce, modify or transfer any part of its business with Premier; (b) call upon, solicit,cause or attempt to cause any Restricted Customer to do business with a competitor of Premier; (c) sell or provide any servicesor products to any Restricted Customer that are competitive with or a replacement for Premier’s services or products; and/or (d)as an employee, agent, partner, director, consultant, or in any other capacity assist any person or entity to engage in any of theconduct described in subsections (a) - (c) of this Section. Notwithstanding the preceding, if I become an employee of aRestricted Customer after my employment with Premier ends, then this subsection shall not limit my communications oractivities with that particular Restricted Customer while I am employed by that Restricted Customer, provided that: (i) as part ofmy services with or for such Restricted Customer, I do not engage in activities or directly assist others to engage in activitiesthat compete with Premier in the Business or otherwise violate Section 5.1 ; and (ii) I abide by the confidentiality and non-raiding of employees obligations set forth in this Agreement.
“Restricted Customer” means: (A) a Customer (as defined below) for which I earned or was paid incentive pay at anypoint during my last 12 months as a Premier employee; (B) a Customer with which I worked or for which I supervised Premier’swork at any point during my last 12 months as a Premier employee; (C) a prospective Customer that I contacted or for which Isupervised contact at any point during my last 12 months as a Premier employee; and/or (D) a current or prospective Customerabout which I obtained Confidential Information at any point during my last 12 months as a Premier employee. “Customer”means a Premier customer, partner hospital, member or affiliated health care organization.
5.3 Non-Interference With Restricted Suppliers . For a period of 12 months following my last day of employmentwith Premier, I agree that I will not solicit, cause or attempt to cause any Restricted Supplier (as defined below) to not dobusiness with Premier or to reduce, modify or transfer any part of its business with Premier. “Restricted Supplier” means anysupplier of goods or services to Premier: (a) with which I had dealings; (b) for which I supervised or assisted in Premier’sdealings; and/or (c) about which I obtained Confidential Information, all at any point during my last 36 months as a Premieremployee.
I further agree that in the event I am later employed by a non-group purchasing organization medical supplierfollowing my employment with Premier, I will recuse myself for a period of 12 months following my last day of employment withPremier from any consideration of decisions or other communications or discussions that would result in the termination of acontract, discontinuance of business, or reduction of business with or amounts paid to Premier involving the products orservices that my new employer supplies Premier. I further expressly acknowledge and agree that as part of my post-employment
confidentiality commitments to Premier, I cannot and will not use any confidential Premier pricing, contract or other supplier-related information obtained during my employment with Premier in connection with any supply contract or other negotiationsbetween Premier and my new non- group purchasing organization medical supplier employer, if applicable, or to obtain acompetitive advantage against or otherwise harm Premier or its affiliated entities.
5.4 Non-Raiding of Employees . During my employment with Premier under this Agreement and for a period of 18months following my last day of employment with Premier, I agree not to on my own behalf or on behalf of any other entity: (a)hire or engage as an employee or as an independent contractor any then current employee of Premier with whom I worked orabout whose work I was familiar during my employment with Premier (each a “Restricted Employee”); and/or (b) solicit,encourage or cause or attempt to solicit, encourage or cause any Restricted Employee to leave his or her employment withPremier.
6. REASONABLENESS OF RESTRICTIONS
6.1 Reasonableness . I have carefully read and considered the provisions of this Agreement and, having done so,agree that the restrictions set forth in it are fair, reasonable, and necessary to protect Premier’s legitimate business interests,including its trade secrets, Confidential Information and goodwill with Premier’s customers, suppliers and employees. Inaddition, I acknowledge and agree that the restrictions in this Agreement do not unreasonably restrict or affect my ability toobtain employment should my employment with Premier end. Thus, although Premier and I acknowledge and agree that I retainthe right to contest the application or interpretation of Sections 3-5 of this Agreement to particular facts/circumstances, I agreenot to contest the general validity or enforceability of Sections 3-5 before any court, arbitration panel or other body.
Further, I agree that I shall notify any prospective employer, entity or individual with whom I seek to be employedor provide independent contractor services of the non-competition, non- interference, confidentiality and other requirements setforth in Sections 3-5 of this Agreement during the applicable term for each, and the Company may likewise provide such noticeduring the same period to any prospective employer, entity or individual with whom I seek to be employed or provideindependent contractor services.
6.2 Related Companies . For purposes of the restrictions and commitments in Section 3 (Conflicts of Interest), 4(Confidential Information and Intellectual Property), 5 (Non-Compete and Non- Interference) and 6.1 (Reasonableness),“Premier” or the “Company” shall mean: (a) the Company as defined in the Recitals to this Agreement; and; (b) any “RelatedCompany” (as defined below) or successor of Premier for or with whom I performed or supervised any services at any timeduring the last 12 months of my employment with Premier.
“Related Company” means (a) any Premier parent company, subsidiary company, sister company or jointventure, or related subsidiary company of such entities; and/or (b) any “parent corporation” with respect to Premier within themeaning of Section 424(e) of the Internal Revenue Code of 1986, as amended (the “Code”), any “subsidiary corporation” withrespect to Premier within the meaning of Code Section 424(f) but substituting the phrase “20 percent” for the phrase “50percent” each place it appears in that section, and any corporation or other entity in a chain of corporations or other entities inwhich each corporation or other entity has a controlling interest in another corporation or other entity in the chain, beginningwith the corporation or other entity in which Premier has a controlling interest. For this purpose, “controlling interest” shall havethe same meaning as in Treasury Regulations Section 1.409A-1(b)(5)(E)(1) (or any successor provision) but substituting thephrase “at least 20 percent” for the phrase “at least 50 percent” each place it appears in that section.
7. OBLIGATIONS CONCERNING PRIOR BUSINESS RELATIONSHIPS
7.1 Former Employment/Engagements . I represent and warrant to Premier that: (a) as of the Effective Date of thisAgreement, I am not working for or engaged by any other person or entity as an
employee, independent contractor or consultant; and (b) I have provided Premier with a copy of any and all agreements withthird parties that may limit or attempt to limit my right to be employed by Premier or its Related Companies (as defined inSection 6.2 ), to perform any activities for Premier or a Related Company, or to disclose to Premier or a Related Company anyideas, inventions, discoveries or other information.
7.2 No Disclosure or Use of Confidential Information of Others . I represent and warrant to Premier that I havenot brought and will not bring with me to Premier or use in the performance of my duties for Premier any materials, data,software, technology, trade secrets, intellectual property, confidential or proprietary information, or documents belonging to athird party that are not generally available to the public, unless I have obtained written authorization to do so from the third partyand provided Premier with a copy of it. I understand and agree that, in my employment with Premier, I am not to breach anyobligation of confidentiality that I have to former employers or other third parties, and I agree that I shall fulfill all suchobligations during my employment with Premier. I further agree that I shall not disclose to Premier or its Related Companies (asdefined in Section 6.2 ) or seek to induce such entities to use any confidential information or trade secrets belonging to a thirdparty.
8. GENERAL PROVISIONS
8.1 General Notification and Breach . Through and up to the conclusion of the 12-month restricted period set forthin Sections 5.1-5.3 , I shall give notice to Premier of each new business activity I plan to undertake, at least seven (7) calendardays prior to beginning any such activity, including but not limited to work as an employee or independent contractor. Suchnotice shall state the name and address of the person or entity for whom such activity is undertaken and the nature of mybusiness relationship(s) and position(s) with such person or entity. I shall provide Premier with such other pertinent informationconcerning such business activity as Premier may reasonably request in order to determine my compliance with my obligationsunder Sections 4-6 of this Agreement.
I acknowledge that my breach of this Agreement, particularly Sections 3-6 , will cause immediate and irreparabledamage to Premier and its Related Companies and that such damages will be exceedingly difficult to measure in full.Therefore, I acknowledge that the payment of damages in an action at law for breach of this Agreement would not adequatelycompensate Premier or its Related Companies for the damages suffered. In addition, the short duration of the covenantscontained in this Agreement makes essential the enforcement of this Agreement by injunctive relief. Premier and I thereforeagree that this Agreement may be enforced through temporary, preliminary and permanent injunctive relief, and that all otheravailable remedies at law or in equity including, but not limited to, money damages, may be pursued for breach of thisAgreement.
Moreover, I agree that, in addition to any other remedies available to Premier and/or its Related Companies byoperation of law or otherwise, if I breach of any of the obligations contained in Sections 3-6 , I shall: (a) forfeit at the time of thebreach the right to any additional Severance Pay under Section 2 of this Agreement; (b) forfeit the right to all further unpaid /unawarded, amounts that may otherwise be payable under the terms of any Annual Plan, the 2013 LTIP, the 2013 EquityIncentive Plan or any other equity or incentive compensation plan in which I participates and to which I might otherwise then beentitled by virtue thereof at the time of the breach, if any, notwithstanding any provisions of this Agreement or such plans orprograms to the contrary; and (c) be required to refund to Premier and its Related Companies, and Premier and its RelatedCompanies shall be entitled to recover of me, the amount of any and all such Severance Pay, Annual Plan, 2013 LTIP, 2013Equity Incentive plan, or other equity or incentive plan pay or awards already paid or provided to or on behalf of me by Premierand/or its Related Companies (as defined in Section 6.2 ) following the initial breach, if any, notwithstanding any provisions ofthis Agreement or such plans or programs to the contrary.
In addition, Premier and I agree that the prevailing party in any legal action to enforce the terms of thisAgreement, including but not limited to Sections 3-6 , shall be entitled to costs and attorneys’ fees related to any suchproceeding as allowed by law. Further, the time period for the covenants in Sections
4-6 shall be tolled during any period of time in which I am violating those Sections. The restrictions and obligations in Sections4-6 shall survive my last day of employment with Premier and shall be in addition to any restrictions imposed on me by statute,at common law, or other agreements. The restrictions and obligations in Sections 4-6 shall continue to be enforceableregardless of whether there is a subsequent dispute between me and Premier concerning any alleged breach of thisAgreement.
8.2 Judicial Modification and Severability . If a court determines that any provision of this Agreement is invalid,then Premier and I request that the court “blue-pencil” or otherwise modify such provision in order to render the provision notinvalid and enforce the provision as modified. In such a case, all other provisions contained in this Agreement shall remain infull force and effect. In addition, each provision of this Agreement is severable from each other provision.
8.3 Section 409A .
(a) Section 409A Compliance . Premier and I intend that any amounts payable hereunder that couldconstitute “deferred compensation” within the meaning of Section 409A of the Code (“Section 409A”) will be compliant withSection 409A. If Premier shall determine that any provision of this Agreement does not comply with the requirements of Section409A, Premier shall amend the Agreement to the extent necessary (including retroactively) in order to comply with Section409A (which amendment shall not reduce the amounts payable to me under this Agreement). Premier shall also have thediscretionary authority to take such other actions to correct any failures to comply in operation with the requirements of Section409A. Such authority shall include the power to adjust the timing or other details relating to the awards and/or paymentsdescribed in this Agreement (but not the amounts payable to me under this Agreement) if Premier determines that suchadjustments are necessary in order to comply with or become exempt from the requirements of Section 409A. Notwithstandingthe foregoing, to the extent that this Agreement or any payment or benefit (or portion thereof) under this Agreement or the plansreferenced herein shall be deemed not to comply with Section 409A, then Premier and its Related Companies, the Board andCompensation Committee of the Board, and Premier, Inc. and its Related Companies’ shareholders, owners, board members,officers, employees, and their designees and agents shall not be liable to me in any way. However, if and to the extent I incurany Section 409A related excise taxes, penalties or interest charges as a result of the Company’s breach of this Agreement nototherwise consented to by me in writing (e.g., with respect to payment timing), then Premier shall reimburse me in full for theamount of such excise taxes, penalties and interest charges so that I am restored to the same position in which I would havebeen had Premier’s breach not occurred.
(b) Separation From Service . Notwithstanding anything in this Agreement to the contrary, no separationbenefits, if applicable, deemed deferred compensation subject to Section 409A shall be payable pursuant to this Agreementunless my separation from employment constitutes a “separation from service” with Premier within the meaning of Section 409Aand the Department of Treasury regulations and other guidance promulgated thereunder (a “Separation from Service”).
(c) Specified Employee . Notwithstanding any provision to the contrary in this Agreement, if I am deemed byPremier at the time of my Separation from Service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of theCode, to the extent delayed commencement of any portion of the benefits to which I am entitled under this Agreement isrequired in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of my benefits shallnot be provided to me prior to the earlier of (1) the expiration of the six-month period measured from the date of my Separationfrom Service or (2) the date of my death. Upon the first business day following the expiration of the applicable Code Section409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 8.3(c) shall be paid in a lump sum to me, and anyremaining payments due under this Agreement shall be paid as otherwise provided herein.
(d) Expense Reimbursements . To the extent that any reimbursements payable pursuant to this Agreementare subject to the provisions of Section 409A, any such reimbursements payable
to me pursuant to this Agreement shall be paid to me no later than December 31 of the year following the year in which theexpense was incurred, the amount of expenses reimbursed in one year shall not affect the amount eligible for reimbursement inany subsequent year, and my right to reimbursement under this Agreement will not be subject to liquidation or exchange foranother benefit.
(e) Installments . For purposes of Section 409A (including, without limitation, for purposes of TreasuryRegulation Section 1.409A-2(b)(2)(iii)), my right to receive the installment payments under this Agreement shall be treated as aright to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considereda separate and distinct payment.
8.4 Tax Penalty Protection . Notwithstanding any other provision in this Agreement to the contrary, any payment orbenefit received or to be received by me in connection with a “change in ownership or control” (as such term is defined underSection 280G of the Code – a “Change in Control”) or the termination of employment (whether payable under the terms of thisAgreement or any other plan, arrangement or agreement with Premier or its subsidiaries and affiliates (collectively, the“Payments”) that would constitute a “parachute payment” within the meaning of Section 280G of the Code, shall be reduced tothe extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code (the“Excise Tax”), but only if, by reason of such reduction, the net after-tax benefit received by me shall exceed the net after-taxbenefit that would be received by me if no such reduction was made. Whether and how the limitation under this Section isapplicable shall be determined under the Section 280G Rules set forth in Annex A hereto.
8.5 Incentive-Based Compensation Clawback . In accordance with the terms and conditions of Premier, Inc.’sand the Company’s Compensation Recoupment Policy as such policy may be established, modified, changed, replaced orterminated from time to time by Premier, Inc. in its sole discretion to comply with listing exchange / service rules and regulationsand/or other applicable regulatory requirements, I agree to repay any incentive or other compensation paid or otherwise madeavailable to me by Premier or its Related Companies (as defined in Section 6.2 ), as required by the terms of such policy. If I failto return such compensation as required by the terms of the Compensation Recoupment Policy and/or applicable law, I herebyagree and authorize Premier and its Related Companies to, among other things as set forth in the policy: (a) deduct the amountof such identified compensation from any and all other compensation owed to me by Premier and/or is Related Companies;and/or (b) adjust and reduce future compensation to me. I acknowledge that Premier may take appropriate disciplinary action(up to, and including, Termination For Just Cause) if I fail to return / repay such identified compensation within the timeframerequired by the Compensation Recoupment Policy. Further, Premier and I agree that the provisions of this Section 8.5 shallremain in effect for the period required by applicable law.
8.6 Indemnification . Premier and I have entered into (or shall enter into concurrent with this Agreement) a separateindemnity agreement, consistent with Premier, Inc.’s certificate of incorporation, by-laws and other corporate governancedocuments; provided that the entry into such an agreement shall not be a condition precedent to my right to be indemnified byPremier as provided in such corporate governance documents. In addition, Premier will indemnify me or cause me to beindemnified in my capacity as an officer, director or senior manager of any Related Company (as defined in Section 6.2 ) forwhich I serve as such, to the fullest extent permitted by the laws of the state of incorporation of such Related Company in effectfrom time to time, or the certificate of incorporation, by-laws or other corporate governance documents of such RelatedCompany, whichever affords the greater protection to me. Premier may elect to satisfy its obligations pursuant to this Section8.6 under insurance policies maintained generally for the benefit of its officers, directors and employees against covered costs,charges and expenses incurred in connection with any action, suit, investigation or proceeding to which I may be made a partyby reason of being a director, officer or senior manager of Premier. In addition, Premier shall provide me with directors’ andofficers’ insurance coverage to the same extent as provided to other senior executives of Premier.
8.7 Governing Law, Forum, Jurisdiction . I agree that this Agreement shall be governed by the laws of the State ofNorth Carolina, regardless of where I may work for Premier and irrespective of conflict
of law principles. Moreover, any litigation under this Agreement shall be brought by either me or Premier exclusively inMecklenburg County, North Carolina, notwithstanding that I may not be a resident of North Carolina when the litigation iscommenced and/or cannot be served process within North Carolina. As such, Premier and I irrevocably consent to thejurisdiction of the courts in Mecklenburg County, North Carolina (whether federal or state) for all disputes related to thisAgreement and irrevocably consent to service of process via nationally recognized overnight carrier, without limiting otherservice methods available under applicable law.
8.8 Entire Agreement, Amendment, Waiver, Assignment . This Agreement constitutes the entire agreementbetween me and Premier related to the subject matters contained in it and supersedes all previous agreements related to thesesubject matters, including but not limited to the Prior Employment Agreement and any offer or position assignmentletters between meand Premier.No amendment or attempted waiver of any of the provisions of this Agreement shall bebinding unless reduced to writing and signed by me and Premier. Premier shall have the right to assign or transfer thisAgreement to any affiliated entity or successor to all or part of its business, and I irrevocably consent to any such assignment ortransfer. Further, Premier and I agree that Premier may disclose the compensation and other terms of this Agreement: (a) toPremier’s shareholders/owners; and (b) in its proxy statements or other public securities filings as required by law.
[Signature Page Follows]
Agreed to and accepted:
Date: 4/1/16 /s/ David Klatsky David Klatsky
Agreed to and accepted: PREMIER HEALTHCARE SOLUTIONS, INC.
Date: 4/1/16 /s/ Debra S. White Signature of Authorized Representative
Debra S, WhiteVice President, Human Resources
PREMIER, INC.
Date: 4/1/16 /s/ Kelli L. Price Signature of Authorized Representative
Kelli L. PriceSenior Vice President, People Joining this Agreement as a Party solely as a guarantor of PremierHealthcare Solutions, Inc.’s financial obligations hereunder
Effective Date: July 1, 2016
Annex A: Section 280G Rules
The following rules shall apply for purposes of determining whether and how the limitations provided under Section 8.4of this Agreement are applicable to me.
1. The “net after-tax benefit” shall mean (i) the Payments (as defined in Section 8.4 ) which I receive or am thenentitled to receive from the Company or a subsidiary or affiliate that would constitute “parachute payments” within the meaningof Code Section 280G, less (ii) the amount of all federal, state and local income and employment taxes payable by me withrespect to the foregoing calculated at the highest marginal income tax rate for each year in which the foregoing shall be paid tome (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of theforegoing), less (iii) the amount of Excise Tax imposed with respect to the payments and benefits described in (i) above.
2. All determinations under Section 8.4 of this Agreement and this Annex A will be made by an accounting firm orlaw firm that is selected for this purpose by Premier prior to a Change in Control (the “280G Firm”). All fees and expenses of the280G Firm shall be borne by the Company. Premier will direct the 280G Firm to submit any determination it makes underSection 8.4 of this Agreement and this Annex A and detailed supporting calculations to both me and Premier as soon asreasonably practicable.
3. If the 280G Firm determines that one or more reductions are required under Section 8.4 of this Agreement,the 280G Firm shall also determine which Payments shall be reduced (first from cash payments and then from non-cashbenefits) to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of theCode, and Premier shall pay such reduced amount to me. The 280G Firm shall make reductions required under Section 8.4 ofthis Agreement in a manner that maximizes the net after-tax amount payable to me.
4. As a result of the uncertainty in the application of Section 280G at the time that the 280G Firm makes itsdeterminations under this provision, it is possible that amounts will have been paid or distributed to me that should not havebeen paid or distributed (collectively, the “Overpayments”), or that additional amounts should be paid or distributed to me(collectively, the “Underpayments”). If the 280G Firm determines, based on either the assertion of a deficiency by the InternalRevenue Service against Premier or me, which assertion the 280G Firm believes has a high probability of success orcontrolling precedent or substantial authority, that an Overpayment has been made, I must repay the Overpayment amountpromptly to Premier, without interest; provided, however, that no loan will be deemed to have been made and no amount will bepayable by me to Premier unless, and then only to the extent that, the deemed loan and payment would either reduce theamount on which I am subject to tax under Section 4999 of the Code or generate a refund of tax imposed under Section 4999of the Code. If the 280G Firm determines, based upon controlling precedent or substantial authority, that an Underpayment hasoccurred, the 280G Firm will notify me and Premier of that determination, and the Underpayment amount will be paid to mepromptly by Premier.
5. I will provide the 280G Firm access to, and copies of, any books, records and documents in mypossession as reasonably requested by the 280G Firm, and otherwise cooperate with the 280G Firm in connection with thepreparation and issuance of the determinations and calculations contemplated by Section 8.4 of this Agreement.
Exhibit 10.26
PREMIER, INC.2015 EMPLOYEE STOCK PURCHASE PLAN
(As Amended and Restated Effective September 25, 2015)
I. PURPOSE
The Premier, Inc. 2015 Employee Stock Purchase Plan (the “ Plan ”) is intended to provide eligible employees of the Company andits Designated Affiliates with the opportunity to acquire a proprietary interest in the Company on a discounted basis. The Plan wasapproved by the Board on October 3, 2014 and by our stockholders on December 5, 2014, and amended and restated by theCompensation Committee of the Board effective September 25, 2015. Capitalized terms shall have the defined meanings set forthunder Article II below, or elsewhere when the term first appears and is defined.
II. DEFINITIONS
For purposes of administration of the Plan, the following terms shall have the meanings indicated:
(a) “ Affiliate ” means any corporation, partnership, joint venture or other business entity in which the Company owns,directly or indirectly, stock or a capital or profit interest and with respect to which the Company possesses the power to direct orcause the direction of the management and policies.
(b) “ Board ” means the Board of Directors of the Company.
(c) “ Code ” shall mean the Internal Revenue Code of 1986, as amended.
(d) “ Company ” means Premier, Inc., a Delaware corporation, and any corporate successors to all or substantially all ofthe assets or voting stock of the Company which shall by appropriate action adopt the Plan.
(e) “ Designated Affiliate ” means an Affiliate that has been designated by the Board from time to time in its solediscretion as eligible to participate in the Plan. The Board may also remove an Affiliate from being a Designated Affiliate at anytime in its sole discretion. The Designated Affiliates as of the Effective Date are Premier Supply Chain Improvement, Inc., PremierHealthcare Solutions, Inc. and Premier Healthcare Alliance, L.P.
(f) “ Effective Date ” means the date on which stockholders of the Company approve the Plan.
(g) “ Eligible Earnings ” means compensation eligible to be deferred as an elective 401(k) contribution under the Premier,Inc. Retirement Savings Plan.
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(h) “ Employee ” means any person, including an officer, who is both (a) classified as a common law employee forpurposes of Section 3401 of the Code by the Company or a Designated Affiliate, and (b) regularly employed for at least 20 hours perweek and more than five months in a calendar year by the Company or a Designated Affiliate.
(i) “ Participant ” means any Employee who has elected to actively participate in the Plan.
(j) “ Plan Administrator ” shall be the Company’s Compensation Committee of the Board, provided that the Board may atany time (i) appoint a person or other committee to serve in such capacity, and (ii) act in lieu of the Compensation Committee on anymatter authorized for administrative action under the Plan.
(k) “ Stock ” means shares of the Class A common stock of the Company, with a par value of $0.01.
III. ADMINISTRATION
The Plan shall be administered by the Plan Administrator. Subject to the provisions of the Plan and applicable law, the PlanAdministrator shall have the authority in its sole discretion: (a) to determine the Stock’s fair market value; (b) to construe andinterpret the terms of the Plan; (c) to correct any defect, supply any omission, or reconcile any inconsistency in the Plan in themanner and to the extent it shall deem desirable to carry out the purposes of the Plan; (d) to prescribe, amend, and rescind rules andregulations relating to the Plan; and (e) to make all other determinations and take all other action described in the Plan or as the PlanAdministrator otherwise deems necessary or advisable for administering the Plan and effectuating its purposes. Decisions of the PlanAdministrator (or its designate) shall be final and binding on all parties who have an interest in the Plan.
IV. PURCHASE PERIODS
(a) Stock shall be offered for purchase under the Plan through a series of successive purchase periods during offeringperiods not to exceed 27 months until such time as (i) the maximum number of shares of Stock available for issuance under the Planshall have been purchased or (ii) the Plan shall have been sooner terminated in accordance with Article IX.
(b) Under no circumstances shall any purchase rights granted under the Plan be exercised, nor shall any shares of Stock beissued hereunder, until such time as the Company shall have complied with all applicable requirements of the Securities Act of 1933(as amended), all applicable listing requirements of any securities exchange on which the Stock is listed and all other applicablerequirements established by law or regulation, and shall be further subject to the approval of counsel for the Company with respectto such compliance.
(c) As a condition to the exercise of an option, the Company may require the person exercising such option to representand warrant at the time of any such exercise that the shares are being purchased only for investment and without any presentintention to sell or distribute
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such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicableprovisions of law.
(d) The Plan shall be implemented in a series of consecutive purchase periods, each to be of such duration as determinedby the Plan Administrator prior to the commencement date of the purchase period; provided that the first purchase period shall beginnot sooner than the Effective Date. The Plan Administrator shall have the authority to establish purchase periods over such intervalsand subject to such terms and conditions as it determines to be appropriate or desirable without stockholder approval.
(e) Each Participant shall be granted a separate purchase right with respect to each purchase period. The purchase rightshall be granted on the first day of the purchase period and shall be automatically exercised on the last U.S. business day of thatpurchase period or any earlier day the purchase right is to be exercised hereunder.
V. ELIGIBILITY AND PARTICIPATION
(a) An individual who has been continuously employed as an Employee for at least six (6) months as of thecommencement of a purchase period shall be eligible to participate in such purchase period under the Plan, subject to therequirements of Section V(b) and the limitations imposed by Article VI, Article VII and Article VIII below. No non-employeedirector or independent contractor may participate in the Plan.
(b) An Employee may become a Participant by completing and submitting enrollment forms (including but not limited to asubscription agreement and a payroll deduction authorization) in such form and manner as approved by the Plan Administrator (orits designee) during the twenty-one day period before the beginning of a purchase period, unless a different time for completing andsubmitting the enrollment forms is set by the Plan Administrator for all Employees with respect to a given purchase period.Notwithstanding the foregoing, no Employee shall be entitled to enroll in the Plan or acquire Stock under the Plan during any periodin which the Company has restricted the purchase or sale of its securities by its employees.
(c) The payroll deduction authorized by a Participant for purposes of acquiring Stock under the Plan may be any multipleof 1% of the Eligible Earnings of the Participant during the period the purchase right remains outstanding, up to a maximum equal to30% of the Participant’s Eligible Earnings (or such lower maximum percentage as may be designated by the Plan Administratorfrom time to time). The deduction rate so authorized shall continue in effect for the entire period the purchase right remainsoutstanding, unless the Participant shall, prior to the end of the purchase period for which the purchase right will remain in effect,withdraw by filing the appropriate form with the Plan Administrator (or its designate). Payroll deductions will automatically ceaseupon the termination of the Participant’s purchase right in accordance with Section VII(d) or Section VII(e) below. Participants mayadjust the percentage of their Eligible Earnings to be paid as contributions pursuant to the Plan from one purchase period to the nextby completing and submitting a new enrollment form during the enrollment period for the next purchase period. Participants may notadjust their rate of contribution during a purchase period. A Participant’s contribution rate in effect on the last day of a purchaseperiod shall automatically
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apply to the next purchase period unless (i) the Participant elects otherwise during the enrollment period preceding the next purchaseperiod or (ii) the Plan Administrator determines during a purchase period, by written notice to all affected Participants, thatParticipants’ contribution rates shall not automatically apply to the next purchase period.
(d) Payroll deductions shall commence on the first payroll that ends after the beginning of the purchase period and shallend on the last payroll paid on or prior to the last day of the purchase period to which the enrollment form is applicable, unlesssooner terminated as provided in Article VII.
VI. STOCK SUBJECT TO PLAN
(a) The Stock purchasable by Participants under the Plan shall be authorized but unissued Stock, Stock held in the treasuryof the Company, or from any other proper source. The total number of shares of Stock that may be issued under the Plan in theaggregate shall be 3,685,500 shares (subject to adjustment under Section VI(b) below).
(b) In the event any change is made to the Stock purchasable under the Plan by reason of (i) any merger, consolidation orreorganization or (ii) any stock dividend, stock split, recapitalization, combination of shares or other change affecting theoutstanding Stock as a class without the Company’s receipt of consideration, then unless such change occurs in connection with atransaction described under Section VII(k), appropriate adjustments shall be made by the Plan Administrator to (i) the class andmaximum number of shares issuable in the aggregate over the term of the Plan, (ii) the class and maximum number of sharespurchasable per Participant on any one purchase date, and (iii) the class and number of shares and the price per share of the Stocksubject to each purchase right at the time outstanding under the Plan. Any such adjustment shall be made by the Board, whosedetermination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company ofshares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reasonthereof shall be made with respect to, the number or price of shares of Stock subject to purchase rights under the Plan.
VII. PURCHASE RIGHTS
Subject to Article VI above, an Employee who participates in the Plan for a particular purchase period shall have the right topurchase Stock upon the terms and conditions set forth below and shall execute a subscription agreement embodying such terms andconditions and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. A subscriptionagreement may provide that it shall remain in effect indefinitely for future purchase periods, subject to (i) the individual’s right toterminate the subscription agreement by written notice to the Plan Administrator in advance of a future purchase period, and (ii) thePlan Administrator’s discretion to determine during a purchase period, by written notice to all affected Participants, that all suchsubscription agreements shall prospectively expire at the end of that purchase period or a designated one thereafter.
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(a) Purchase Price . The U.S. Dollar purchase price per share shall be 85% of the fair market value per share of Stockwhen the purchase right is exercised. For purposes of determining such fair market value (and for all other valuation purposes underthe Plan), the fair market value per share of Stock on any given date shall be the closing selling price per share of Stock on theimmediately preceding date for which there exists a quotation on the principal exchange on which the Stock is at the time traded.
(b) Number of Purchasable Shares . The number of shares purchasable by a Participant upon the exercise of anoutstanding purchase right shall be the number of whole shares of Stock obtained by dividing the amount collected from theParticipant through payroll deductions during each purchase period the purchase right remains outstanding by the purchase price ineffect for that purchase period. Any remaining amount in the Participant’s account shall be automatically refunded to the Participant.Under no circumstances shall purchase rights be granted under the Plan to any Employee if such Employee would, immediately afterthe grant, own (within the meaning of Section 424(d) of the Code) or hold outstanding options or other rights to purchase, stockpossessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any of its Affiliates.The accrual limitations of Article VIII shall apply to all purchase rights.
(c) Payment . Payment for Stock purchased under the Plan shall be effected by means of the Participant’s authorizedpayroll deductions. Such deductions shall begin on the first pay day coincident with or immediately following the commencementdate of the relevant purchase period and, unless terminated earlier pursuant to Sections VII(d) or (e) below, shall terminate with thepay day ending with or immediately prior to the last day of the purchase period. The amounts so collected shall be credited to thebook account maintained by the Company on the Participant’s behalf under the Plan, but no interest shall be paid on the balancefrom time to time outstanding in such book account. The amounts collected from a Participant may be commingled with the generalassets of the Company and may be used for general corporate purposes.
(d) Withdrawal from Purchase Period .
(i) A Participant may withdraw from a purchase period by filing the prescribed notification form with the PlanAdministrator (or its designate) on or prior to the date required by the Plan Administrator in its discretion. No further payrolldeductions shall be collected from the Participant with respect to that purchase period, and the Participant may elect with respect toany payroll deductions for the purchase period collected prior to the withdrawal date to: (A) have the Company refund, in thecurrency originally collected, the payroll deductions which the Participant made under the Plan during that purchase period or (B)have such payroll deductions held for the purchase of shares at the end of such purchase period. If no such election is made, thensuch payroll deductions shall automatically be refunded at the end of such purchase period, in the currency originally collected. Forpurposes of this Section VII(d), a Participant who fails to meet the requirements of an Employee as set forth in Section II(h) of thePlan during a purchase period will be deemed to have elected to withdraw from such purchase period.
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(ii) The Participant’s withdrawal from a particular purchase period shall be irrevocable and shall also require theParticipant to re-enroll in the Plan (by making a timely filing of a new subscription agreement and payroll deduction authorization) ifthe Participant wishes to resume participation in a subsequent purchase period.
(iii) The Plan Administrator may at any time change the rules pertaining to the timing of withdrawals, limit thefrequency of withdrawals, limit the frequency with which participants may withdraw and re-enroll in the Plan, and may impose awaiting period on participants who want to re-enroll following withdrawal.
(e) Termination of Employment/Leave of Absence . Except as provided in this Section VII(e) and in Section VII(l) below,if a Participant ceases to remain an Employee while his/her purchase right remains outstanding, then such purchase right shallimmediately terminate and all sums previously collected from the Participant during the purchase period in which such terminationoccurs shall be promptly refunded to the Participant (or his or her estate, if employment termination was due to death). However,should the Participant cease active service by reason of an approved leave of absence, then the Participant shall continue to qualifyas an Employee under the Plan for a period of up to the longer of (x) 90 days or (y) the period for which such Participant’s right toreemployment with the Company is guaranteed by statute or contract. Such Participant’s payroll deductions will continue at the ratein effect at the time the leave began, and if a new purchase period begins during the period of the leave, then the Participant willautomatically be enrolled in that purchase period at the rate of payroll deduction in effect for him/her at the time the leavecommenced. If any such Participant’s approved leave of absence continues for greater than the longest time period permitted in (x)and (y) above, then the Participant shall no longer qualify as an Employee and such purchase right shall immediately terminate. Anysuch Participant that continued to qualify as an Employee under the Plan during an approved leave of absence shall have theelection, exercisable up until the end of the then-current purchase period, to (i) withdraw all the funds then accumulated in theParticipant’s payroll account or (ii) have such funds held for the purchase of shares at the end of such purchase period. If no suchelection is made, then such funds shall automatically be held for the purchase of shares at the end of such purchase period. In noevent shall any further payroll deductions be added to the Participant’s account following his/her cessation of Employee status.However, an individual who returns to active employment following a leave of absence that exceeds the longest time periodpermitted in (x) and (y) above will be treated as a new common law employee for purposes of subsequent participation in the Planand must accordingly re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before the start dateof any subsequent purchase period in which he or she wishes to participate.
For purposes of the Plan, a Participant shall be considered to be an Employee for so long as such Participant remains in theactive employ of the Company or any other Designated Affiliate under the Plan.
(f) Stock Purchase . The Stock subject to the purchase right of each Participant (other than Participants whose purchaserights have previously terminated in accordance with Sections VII(d) or (e) above) shall be automatically purchased on theParticipant’s behalf on the last U.S.
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business day of the purchase period for which such purchase right remains outstanding. The purchase shall be effected by applyingthe amount credited to each Participant’s book account, as converted into U.S. Dollars if necessary, on the last U.S. business date ofthe purchase period to the purchase of whole shares of Stock (subject to the limitations on the maximum number of purchasableshares set forth in Section VII(b) and Article VIII) at the purchase price in effect for such purchase period. Any cash contributed to aParticipant’s account under the Plan after a purchase of shares of Stock at the end of a purchase period shall be either carried forwardto the next purchase period, applied to meet any minimum required tax withholding or returned to the Participant, as elected by thePlan Administrator.
(g) Proration of Purchase Rights . Should the total number of shares of Stock to be purchased pursuant to outstandingpurchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administratorshall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and any amounts credited to theaccounts of Participants shall, to the extent not applied to the purchase of Stock, be refunded to the Participants, in the currencyoriginally collected.
(h) Stockholder Rights . A Participant shall have no rights as a stockholder with respect to shares covered by the purchaserights granted to the Participant under the Plan until the shares are actually purchased on the Participant’s behalf in accordance withSection VII(f). No adjustments shall be made for dividends, distributions or other rights for which the record date is prior to thepurchase date.
(i) ESPP Broker Account . The shares purchased on behalf of each Participant shall be deposited directly into a brokerageaccount which the Company shall establish for the Participant at a Company-designated brokerage firm. The account will be knownas the ESPP Broker Account. The Plan Administrator may adopt such policies and procedures for the Plan as it determines isappropriate, including policies and procedures regarding the transfer of shares from a Participant’s ESPP Broker Account.
(j) Assignability . Neither the Plan contributions made by a Participant nor any purchase rights granted under the Plan maybe assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution) by aParticipant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect. Purchase rights shall beexercisable only by the Participant during the Participant’s lifetime.
(k) Merger or Liquidation of Company . In the event the Company or its stockholders enter into an agreement to dispose ofall or substantially all of the assets or outstanding capital stock of the Company by means of a sale, merger or reorganization inwhich the Company will not be the surviving corporation (other than a reorganization effected primarily to change the State in whichthe Company is incorporated, a merger or consolidation with a wholly-owned Subsidiary, or any other transaction in which there isno substantial change in the stockholders of the Company or their relative stock holdings, regardless of whether the Company is thesurviving corporation) or in the event the Company is liquidated, then all outstanding purchase rights under the Plan shallautomatically be exercised immediately prior to the consummation of such sale, merger, reorganization or liquidation by applying allsums previously collected from Participants
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during the purchase period of such transaction to the purchase of whole shares of Stock, subject, however, to the applicablelimitations described in Section VII(b).
(l) Acquisitions and Dispositions . The Plan Administrator may, in its sole and absolute discretion and in accordance withprinciples under Section 423 of Code, create special purchase periods for individuals who become Employees solely in connectionwith the acquisition of another company or business by merger, reorganization or purchase of assets and may provide for specialpurchase dates for Participants who will cease to be Employees solely in connection with the disposition of all or a portion of anyDesignated Affiliate or a portion of the Company, which purchase periods and purchase rights granted pursuant thereto shall,notwithstanding anything stated herein, be subject to such terms and conditions as the Plan Administrator considers appropriate inthe circumstances.
(m) Notice by Participants of Disqualifying Dispositions . As a condition for Plan participation, each Participant agreesthat the Company shall be notified, through the ESPP Broker Account (or by the Participant in writing if the Participant’s Stock isnot held therein), immediately after any sale or transfer of Stock that is both purchased through the Plan and is sold or disposed ofwithin the two year period beginning with the purchase period in which the Stock was purchased, but only to the extent that theStock is acquired under the Plan in a manner that is intended to meet the qualification requirements under Section 423 of the Code.
VIII. ACCRUAL LIMITATIONS
(a) No Participant shall be entitled to accrue rights to acquire Stock pursuant to any purchase right outstanding under thisPlan if and to the extent such accrual, when aggregated with (i) Stock rights accrued under other purchase rights outstanding underthe Plan and (ii) similar rights accrued under other employee stock purchase plan of the Company or any Affiliate, would otherwisepermit such Participant to purchase more than Twenty-Five Thousand dollars ($25,000) worth of Stock (determined on the basis ofthe fair market value of such stock on the date or dates such rights are granted to the Participant) for each calendar year such rightsare at any time outstanding.
(b) For purposes of applying the accrual limitations of Section VIII(a), the right to acquire Stock pursuant to each purchaseright outstanding under the Plan shall accrue as follows:
(i) The right to acquire Stock under each such purchase right shall accrue as and when the purchase right firstbecomes exercisable on the last U.S. business day of each purchase period the right remains outstanding.
(ii) No right to acquire Stock under any outstanding purchase right shall accrue to the extent the Participant hasalready accrued in the same calendar year the right to acquire Twenty-Five Thousand U.S. Dollars (US$25,000) worth of Stock(determined on the basis of the fair market value on the date or dates of grant) pursuant to one or more purchase rights held by theParticipant during such calendar year.
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(iii) If by reason of the Section VIII(a) limitations, one or more purchase rights of a Participant do not accrue for aparticular purchase period, and then the payroll deductions which the Participant made during that purchase period with respect tosuch purchase rights shall be promptly refunded in the currency originally collected.
(c) In the event there is any conflict between the provisions of this Article VIII and one or more provisions of the Plan orany instrument issued thereunder, the provisions of this Article VIII shall be controlling.
IX. AMENDMENT AND TERMINATION
(a) The Board or the Compensation Committee of the Board may from time to time alter, amend, suspend or discontinuethe Plan; provided, however, that no such action shall adversely affect purchase rights at the time outstanding under the Plan unlessnecessary or desirable to comply with any applicable law, regulation or rule; and provided, further, that no such action of the Boardor the Compensation Committee of the Board may, without the approval of the stockholders of the Company, increase the number ofshares issuable under the Plan (other than adjustments pursuant to Sections VI(b) and VII(b)), alter the purchase price formula so asto reduce the purchase price specified in the Plan, or materially modify the requirements for eligibility to participate in the Plan.
(b) Without stockholder approval and without regard to whether any Participant rights may be considered to have been“adversely affected,” the Plan Administrator shall be entitled to, in addition to, and without limitation with respect to, what ispermitted pursuant to Section IX(a), cancel or change the purchase periods, limit the frequency and/or number of changes in theamount withheld during a purchase period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S.dollars, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes inthe Company’s processing of properly completed enrollment forms, establish reasonable waiting and adjustment periods and/oraccounting and crediting procedures to ensure that amounts applied toward the purchase of Stock for each Participant properlycorrespond with amounts withheld from the Participant’s Eligible Earnings, and establish such other limitations or procedures as thePlan Administrator determines in its sole discretion advisable which are consistent with the Plan.
X. TAXES
(a) It is the Company’s intention that purchase rights under the Plan qualify to the maximum extent possible for favorabletax treatment under Section 423 of the Code when granted to Employees who are employed by a Designated Affiliate that is a“subsidiary corporation” of the Company as determined under Section 424(f) of the Code. To the extent that purchase rights aregranted to an Employee employed by a Designated Affiliate that is not a subsidiary corporation under Section 424(f) of the Code,then such purchase rights will not qualify for favorable tax treatment under Section 423 of the Code. The provisions of the Plan shallbe construed so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code exceptfor the Company being able to extend purchase
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right to Employees employed by a Designated Affiliate that is not a subsidiary corporation of the Company under Section 424(f) ofthe Code.
(b) It is intended that purchase rights that do not qualify for favorable tax treatment under Section 423 of the Code shallnot constitute nonqualified deferred compensation subject to the requirements of Section 409A of the Code, and the provisions of thePlan shall be construed consistent with this intention. Notwithstanding any provision of the Plan to the contrary, in the event that thePlan Administrator determines that any amounts payable hereunder will be taxable to a Participant under Section 409A of the Code,the Plan Administrator may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendmentsand policies with retroactive effect, that it determines necessary or appropriate to preserve the intended tax treatment of the benefitsprovided by the Plan and/or (ii) take such other actions as the Plan Administrator determines necessary or appropriate to complywith the requirements of Section 409A of the Code. No action shall be taken under the Plan that shall cause an Award to fail tocomply with Section 409A of the Code, to the extent applicable to purchase rights hereunder. However, in no event shall anymember of the Board, the Company or any of its Affiliates (including their respective employees, officers, directors or agents) haveany liability to any Participant (or any other person) with respect to taxes under Section 409A of the Code.
(c) A Participant shall be required to pay to the Company or any of its Affiliates, and the Company or any of its Affiliatesshall have the right and is hereby authorized to withhold, from any cash, shares of Stock, other securities or other propertydeliverable under the Plan or from any compensation or other amounts owing to a Participant, the amount (in cash, shares of Stock,other securities or other property) of any minimum required withholding taxes in respect of purchase rights or any payment ortransfer under the Plan and to take such other action as may be necessary in the opinion of the Plan Administrator or the Company tosatisfy all obligations for the payment of such withholding and taxes. Without limiting the generality of foregoing, the PlanAdministrator may, in its sole discretion, permit a Participant to satisfy, in whole or in part, any minimum required tax withholdingliability by (i) the delivery of shares owned by the Participant having a fair market value equal to such withholding liability or (ii)having the Company withhold from the number of shares of Stock otherwise issuable or deliverable under the Plan a number ofshares with a fair market value equal to such minimum required statutory withholding liability.
XI. GENERAL PROVISIONS
(a) The Plan shall terminate upon the earlier of (i) ten years after its Effective Date, or (ii) the date on which all shares ofStock available for issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan.
(b) Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Employee or otherperson the right to continue in the employment of the Company or any Affiliate or affect any right which the Company or anyAffiliate may have to terminate the employment of such Employee or other person.
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(c) All notices, elections or other communications by a Participant to the Company or the Plan Administrator under or inconnection with the Plan shall be deemed to have been duly given when received in the form specified by the Plan Administrator atthe location, or with the person, designated by the Plan Administrator for the receipt thereof.
(d) All costs and expenses incurred in the administration of the Plan shall be paid by the Company.
(e) Any documents that the Company may use in the administration of the Plan, may be delivered in paper or electronicmedium, including but not limited to email or the posting on a web site maintained by the Company or a third party under contractwith the Company.
(f) The laws of the State of Delaware shall have control over all matters and disputes arising under the Plan.
(g) The rights and privileges of all Participants under the Plan shall be the same (except as otherwise required byapplicable law).
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Exhibit 10.6.1
FIRST AMENDMENT TO THE
PREMIER, INC.
2013 EQUITY INCENTIVE PLAN
(as amended and restated effective December 4, 2015)
Effective as of August 11, 2016, the Board of Directors of Premier, Inc. hereby amends the Premier, Inc. 2013 Equity
Incentive Plan (as amended and restated effective December 4, 2015) (the “Plan”), pursuant to Section 18.1 of the Plan, as follows:
1. The Plan shall be, and hereby is, amended by replacing Section 3.1(c) in its entirety with the following:
“(c) Any Awards granted to an Employee, other than Options and Stock Appreciation Rights, that vest on the basis of the
Employee’s continued employment with or provision of service to the Company shall not provide for vesting which is any
more rapid than annual pro rata vesting over a three (3) year period, and any Awards granted to an Employee, other than
Options and Stock Appreciation Rights, which vest upon the attainment of Performance Goals shall provide for a
Performance Cycle of at least twelve (12) months; provided, however, that the Committee may provide for or permit
acceleration of vesting of such Awards in the event of a Change in Control or the Employee’s death, disability, or other
qualifying termination of service as determined by the Committee.”
2. In all other respects, the Plan, as amended, is hereby ratified and confirmed and shall remain in full force and effect.
Premier, Inc. has executed this First Amendment to the Premier, Inc. 2013 Equity Incentive Plan (as amended and restated
effective December 4, 2015).
Effective Date of Amendment: August 11, 2016
Exhibit 21
SUBSIDIARIES OF PREMIER, INC.
Name of Subsidiary State/Province of Incorporation
Premier Services, LLC (1) DelawarePremier Healthcare Alliance, L.P. (2) CaliforniaPremier Supply Chain Improvement, Inc. (3) DelawarePremier Healthcare Solutions, Inc. (3) DelawarePremier Marketplace, LLC (3) DelawareProvider Select LLC (3) DelawareNS3Health, LLC (4) FloridaSVS LLC (5) North CarolinaCommcare Pharmacy - FTL, LLC (6) FloridaCommcare Pharmacy - WPB, LLC (6) FloridaCommcare Pharmacy - MIA, LLC (6) FloridaCommcare Pharmacy - NYC, LLC (6) FloridaNS3 Software Solutions, LLC (6) FloridaMeddius, LLC (7) VirginiaPremier Insurance Management Services, Inc. (7) CaliforniaPremier Pharmacy Benefit Management, LLC (7) DelawareSymmedrx, LLC (7) KansasMEMdata, LLC (7) TexasAperek, Inc. (7) North CarolinaTheraDoc, Inc. (7) DelawareHealthcare Insights, LLC (7) Illinois
CECity.com, Inc. (7) Pennsylvania
InFlowHealth, LLC (7) California
(1) Wholly owned by Premier, Inc.(2) Premier Services, LLC holds an approximately 32% controlling general partnership interest at June 30, 2016.(3) Wholly owned by Premier Healthcare Alliance, L.P. (4) Wholly owned by Premier Supply Chain Improvement, Inc., and is d/b/a Commcare SpecialtyPharmacy.(5) Wholly owned by Premier Supply Chain Improvement, Inc., and is d/b/a S2S Global. (6) Wholly owned by NS3Health, LLC.(7) Wholly owned by Premier Healthcare Solutions, Inc.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-191484) pertaining to the 2013 Equity Incentive Plan of Premier, Inc., (2) Registration Statement (Form S-3 No. 333-199158) of Premier, Inc.,(3) Registration Statement (Form S-3/ASR No. 333-200136) of Premier, Inc.,(4) Registration Statement (Form S-8 No. 333-204628) pertaining to the 2015 Employee Stock Purchase Plan of Premier, Inc.;
of our reports dated August 25, 2016, with respect to the consolidated financial statements and schedule of Premier, Inc. and the effectiveness of internal controlover financial reporting of Premier, Inc. included in this Annual Report (Form 10-K) of Premier, Inc. for the year ended June 30, 2016.
/s/ Ernst & Young LLP
Charlotte, North CarolinaAugust 25, 2016
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANTTO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Susan D. DeVore, certify that:
1. I have reviewed this annual report on Form 10-K of Premier, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.
Date: August 25, 2016
/s/ Susan D. DeVore
Susan D. DeVore
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANTTO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Craig S. McKasson, certify that:
1. I have reviewed this annual report on Form 10-K of Premier, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.
Date: August 25, 2016
/s/ Craig S. McKasson
Craig S. McKasson
Senior Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Premier, Inc. ("Premier") on Form 10-K for the period ending June 30, 2016, as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Susan D. DeVore, President and Chief Executive Officer of Premier, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of Premier.
/s/ Susan D. DeVore Susan D. DeVore President and Chief Executive Officer
August 25, 2016
A signed original of this written statement required by Section 906 has been provided to Premier, Inc. and will be retained by Premier, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request. This written statement shall not be deemed filed by Premier, Inc. for purposes of Section 18of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to liability under that section, and will not be deemed to beincorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that Premier, Inc. specificallyincorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Premier, Inc. ("Premier") on Form 10-K for the period ending June 30, 2016, as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Craig S. McKasson, Senior Vice President and Chief Financial Officer of Premier, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of Premier.
/s/ Craig S. McKasson Craig S. McKasson Senior Vice President and Chief Financial Officer
August 25, 2016
A signed original of this written statement required by Section 906 has been provided to Premier, Inc. and will be retained by Premier, Inc. and furnishedto the Securities and Exchange Commission or its staff upon request. This written statement shall not be deemed filed by Premier, Inc. for purposes of Section 18of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to liability under that section, and will not be deemed to beincorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that Premier, Inc. specificallyincorporates it by reference.