<PAGE> 1
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
COMMUNITY CARE SERVICES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required:
[X] Fee computed on table below per Exchange Act Rules 14a-6(i) (4) and
0-11.
1) Title of each class of securities to which transaction
applies:
Common Stock, par value $.01
2) Aggregate number of securities to which transaction applies:
5,029,601
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
$1.20 per share
4) Proposed maximum aggregate value of transaction:
$6,035,521.20
5) Total fee paid:
<PAGE> 2
$1,207.10
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 3
COMMUNITY CARE SERVICES, INC.
18 Sargent Place
Mt. Vernon, New York 10550
----------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------------
Notice is hereby given that a special meeting of the shareholders (the
"Special Meeting") of Community Care Services, Inc. (the "Company") will be held
at the offices of the Company, 18 Sargent Place, Mt. Vernon, New York, on July
19, 1999, at 10:00 a.m. (local time), for the following purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to approve
and adopt the Agreement and Plan of Merger, dated as of June 14, 1999,
by and among the Company, Landauer Hospital Supplies Inc. ("LHS") and
LHS Merger Sub, Inc. ("Merger Sub") (the "Merger Agreement"), and the
transactions contemplated thereby, pursuant to which Merger Sub will be
merged with and into the Company, with the Company continuing as the
surviving entity, thereby becoming a wholly-owned subsidiary of LHS;
and
2. To consider and transact such other business as may properly come
before the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on June 15, 1999
as the record date for the determination of shareholders entitled to vote at the
Special Meeting and any adjournment or postponement thereof.
The Merger Agreement provides for the merger (the "Merger") of the
Company with Merger Sub, with the Company surviving and becoming a wholly-owned
subsidiary of LHS. Subject to the terms and conditions of the Merger Agreement,
upon consummation of the Merger, each share of the Company's common stock, par
value $.01 (the "Common Stock"), will be converted into the right to receive
$1.20 in cash.
A special committee of independent members of the Board of Directors of
the Company has determined that the Merger is fair and in the best interests of
the Company and its shareholders and has approved the Merger Agreement and the
transactions contemplated thereby on behalf of the Board of Directors, including
the Merger. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
VOTE "FOR" THE MERGER PROPOSAL.
You are urged to read carefully the accompanying Proxy Statement, which
includes a description of the terms of the proposed Merger. A copy of the Merger
Agreement is attached to the Proxy Statement as Annex A.
As more fully explained in the Proxy Statement, holders of the Common
Stock have the right to dissent from the Merger and to receive payment of the
fair value of their shares upon full compliance with Section 623 of the Business
Corporation Law of the State of New York, a copy of which is attached to the
Proxy Statement as Annex B.
To ensure your representation at the meeting, please sign date and
return the enclosed form of Proxy in the envelope provided. If you do attend and
wish to vote in person, you may revoke
<PAGE> 4
your proxy at that time. Please do not send in your stock certificates at this
time. In the event the Merger is consummated, you will be sent a letter of
transmittal for that purpose as soon as reasonably practicable thereafter.
By order of the Board of Directors,
Louis Rocco,
Secretary
June 28, 1999
<PAGE> 5
COMMUNITY CARE SERVICES, INC
18 Sargent Place
Mt. Vernon, New York 10550
------------
PROXY STATEMENT
-----------
This Proxy Statement is being furnished to the holders of common stock,
par value $.01 per share (the "Common Stock"), of Community Care Services, Inc.,
a New York corporation (the "Company"), in connection with the solicitation by
the Board of Directors of proxies of the shareholders to be voted at a special
meeting of shareholders to be held on July 19, 1999 or at any adjournments
thereof (the "Special Meeting"). The approximate date of mailing this Proxy
Statement is June 28, 1999.
This Proxy Statement relates to the Agreement and Plan of Merger, dated
as of June 14, 1999 (the "Merger Agreement"), by and among the Company, Landauer
Hospital Supplies Inc. ("LHS") and LHS Merger Sub, Inc. ("Merger Sub") and the
transactions contemplated thereby, including the Merger (as hereinafter
defined). A copy of the Merger Agreement is attached hereto as Annex A.
The Merger Agreement provides for the merger (the "Merger") of the
Company with Merger Sub, with the Company surviving and becoming a wholly-owned
subsidiary of LHS. Subject to the terms and conditions of the Merger Agreement,
upon consummation of the Merger, each share of Common Stock will be converted
into the right to receive $1.20 per share in cash (the "Merger Price").
Financing for the Merger is expected to include a senior financing of
approximately $7 million to $8 million and a junior financing of approximately
$3 million to $4 million from a financial institution to be determined. As of
the date hereof, LHS and Merger Sub are currently considering financing
proposals from three financial institutions.
A special committee of independent members of the Board of Directors of the
Company (the "Special Committee") has determined that the Merger is fair and in
the best interests of the Company and its shareholders and has approved the
Merger Agreement and the transactions contemplated thereby on behalf of the
Board of Directors, including the Merger. THE BOARD RECOMMENDS THAT THE
COMPANY'S SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
THE MERGER IS FOR CASH ONLY. AFTER THE CLOSING OF THE MERGER, CURRENT
COMPANY SHAREHOLDERS WILL HAVE NO FURTHER OWNERSHIP INTEREST IN THE COMPANY.
Only holders of shares of Common Stock of record at the close of
business on June 15, 1999 (the "Record Date") will be entitled to vote at the
Special Meeting. The Common Stock is the only class of the Company's voting
securities outstanding. On the Record Date, there were 7,217,851 outstanding
shares of Common Stock, each of which is entitled to one vote. As of the close
of business on the Record Date, LTTR Home Care, LLC ("LTTR") and Alan J.
Landauer, the President and sole shareholder of LHS, Managing Director and sole
member of LTTR, and a Director and Chairman of the Board of the Company, were
the record owners of an aggregate of 2,188,250 shares of Common Stock,
representing approximately 30.32% of the issued and outstanding Common Stock.
Also as of the Record Date, Dean L. Sloane, a director of the Company, Craig V.
Sloane, Mary Sloane, The Sloane Family Foundation and DMJ Management Group, Inc.
(the "Sloane Group") were the record and beneficial owners of an aggregate of
2,091,450 shares of Common Stock, representing approximately 28.98% of the
issued and
<PAGE> 6
outstanding Common Stock. Pursuant to the Sloane Shareholders' Agreement (as
hereinafter defined), the Sloane Group has agreed to vote its shares of Common
Stock in favor of the Merger and has granted an irrevocable proxy to LHS and any
designee of LHS to vote its shares in favor of the Merger. As a result, Mr.
Landauer controls the vote of 59.30% of the outstanding Common Stock. In
addition, other directors and officers of the Company beneficially own, in the
aggregate, 390,299 shares (including options to purchase 25,000 shares at an
exercise price of $.50 per share that are currently exercisable), constituting
5.41% of the outstanding Common Stock. See "The Special Meeting - Vote
Required," "The Sloane Shareholders' Agreement" and "Security Ownership of
Certain Beneficial Owners and Management."
The Common Stock is traded on the OTC Bulletin Board under the symbol
"CCSE". On April 6, 1999, the day before the public announcement of the Merger
was made, the last reported sale price of the Common Stock, as reported on the
OTC Bulletin Board, was $.50 per share. On June ___, 1999, the last trading day
prior to the date of this Proxy Statement, the last reported sale price of the
Common Stock, as reported on the OTC Bulletin Board, was $___ per share.
Where a choice has been specified in a Proxy, the Proxy will be voted
as specified. Each Proxy will be voted FOR each matter unless a contrary choice
is specified as to that matter. If the accompanying Proxy is executed and
returned, the shareholder may nevertheless revoke it at any time prior to the
voting thereof by delivering a later-dated Proxy, delivering written notice of
revocation to the Company's Secretary, or voting in person at the Annual
Meeting.
Proxies are being solicited by mail directly and through brokerage and
banking institutions. The Company will pay all expenses in connection with the
solicitation of proxies. In addition to the use of the mails, proxies may be
solicited by directors, officers, and employees of the Company, personally or by
telephone, telegraph, facsimile machine or e-mail. The Company may reimburse
brokers and other persons holding shares of the Company in their names, or in
the names of nominees, for their reasonable expenses in sending materials to
shareholders and obtaining their proxies.
SHAREHOLDERS OF THE COMPANY ARE URGED TO READ THIS PROXY STATEMENT AND
THE ANNEXES HERETO IN THEIR ENTIRETY.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OTHER PERSON. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT
IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
All information contained in this Proxy Statement concerning LHS,
Merger Sub and LTTR has been supplied by LHS and has not been independently
verified by the Company. Except as otherwise indicated, all other information
contained in this Proxy Statement has been supplied by the Company.
--------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
The date of this Proxy Statement is June 28, 1999.
ii
<PAGE> 7
TABLE OF CONTENTS
Page
----
THE SPECIAL MEETING...........................................................1
Purpose of the Meeting.....................................................1
Vote Required..............................................................1
Solicitation of Proxies ...................................................1
Voting and Revocation of Proxies...........................................2
PARTIES TO THE MERGER AGREEMENT...............................................2
The Company................................................................2
LHS .......................................................................2
Merger Sub.................................................................2
SPECIAL FACTORS...............................................................3
Background of the Merger ..................................................3
The Company's Reasons for the Merger.......................................7
Alan J. Landuaer's Reasons for the Merger..................................9
Opinion of Financial Advisor...............................................9
Effect of the Merger......................................................16
Certain Federal Income Tax Consequences...................................17
Accounting Treatment......................................................19
Interests of Certain Persons in the Merger................................19
DESCRIPTION OF THE MERGER AND THE MERGER AGREEMENT...........................19
The Merger................................................................19
Conversion of Securities..................................................20
Payment of Merger Price...................................................20
Representations and Warranties............................................21
Conduct of Business Pending the Merger....................................21
Exclusivity...............................................................21
Conditions Precedent to the Merger........................................22
Termination...............................................................23
Fees and Expenses.........................................................23
SLOANE SHAREHOLDERS' AGREEMENT...............................................23
RIGHTS OF DISSENTING SHAREHOLDERS............................................24
SOURCE AND AMOUNT OF FUNDS...................................................24
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....................25
DELISTING AND DEREGISTRATION OF COMMON STOCK AND WARRANTS....................25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............26
ADDITIONAL INFORMATION ABOUT THE COMPANY AND ITS BUSINESS ...................27
Business Development......................................................27
Business of the Company ..................................................28
Products and Services.....................................................28
Competition...............................................................30
Government Regulation and Reimbursement...................................31
Insurance.................................................................33
Employees.................................................................33
The Company's Directors and Executive Officers............................33
Certain Financial Information.............................................34
Public Filings............................................................35
Description of Property...................................................35
Legal Proceedings.........................................................35
iii
<PAGE> 8
INDEPENDENT CERTIFIED PUBIC ACCOUNTANTS......................................36
SHAREHOLDER PROPOSALS........................................................36
INCORPORATION BY REFERENCE...................................................36
OTHER MATTERS................................................................36
ANNEX A AGREEMENT AND PLAN OF MERGER
ANNEX B SECTION 623 OF THE BUSINESS CORPORATION LAW OF THE STATE OF NEW YORK
ANNEX C OPINION OF FINANCIAL ADVISOR
iv
<PAGE> 9
THE SPECIAL MEETING
PURPOSE OF THE MEETING
At the Special Meeting, the holders of Common Stock will consider and
vote upon the proposal to approve and adopt the Agreement and Plan of Merger
dated as of June 14, 1999 by and among the Company, LHS and Merger Sub, and the
transactions contemplated thereby, including the Merger (the "Merger Proposal").
The Special Committee has the authority to act on this matter for the
entire Board. The Special Committee has determined that the Merger is fair and
in the best interests of the Company and its shareholders and has approved the
Merger Proposal. THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE "FOR" THE MERGER PROPOSAL. See "Special Factors - The
Company's Reasons for the Merger."
VOTE REQUIRED
Approval of the Merger Proposal will require the affirmative vote of
the holders of two-thirds (66.67%) of the outstanding Common Stock. Only holders
of record of Common Stock at the close of business on June 15, 1999 (the "Record
Date") are entitled to receive notice of and to vote at the Special Meeting and
any adjournment or postponement thereof. The Common Stock is the Company's only
voting security outstanding. At the close of business on the Record Date, there
were 7,217,851 shares of Common Stock outstanding, each of which entitles the
registered holder thereof to one vote on all matters voted upon at the Special
Meeting. As of the Record Date, LTTR and Alan J. Landauer owned, in the
aggregate, 2,188,250 shares of Common Stock or 30.32% of the outstanding Common
Stock. The Sloane Group has entered into the Sloane Shareholders Agreement
pursuant to which the Sloane Group has agreed to vote in favor of the Merger
Proposal and has named LHS and any designee of LHS as its proxy to vote its
shares at the Special Meeting. As of the Record Date, the Sloane Group owned
2,091,450, or 28.98% of the outstanding Common Stock. As a result, Mr. Landauer
controls the vote of 59.30% of the outstanding Common Stock. In addition, other
directors and officers of the Company beneficially own, in the aggregate,
390,299 shares (including options to purchase 25,000 shares at an exercise price
of $.50 per share that are currently exercisable), constituting 5.41% of the
outstanding Common Stock. See "Security Ownership of Certain Beneficial Owners
and Management" and "The Sloane Shareholders' Agreement."
All directors and officers of the Company that own Common Stock have
indicated that they will vote in favor of the Merger, and all of such persons
(other than Mr. Landauer) intend to sell their shares to LHS upon the
consummation of the Merger. As a result, the Merger Proposal will have the
approval of at least 64.71% of the outstanding Common Stock without the vote of
any of the publicly held Common Stock.
SOLICITATION OF PROXIES
Proxies are being solicited hereby on behalf of the Board of Directors
of the Company. The entire cost of proxy solicitation for the Special Meeting
will be borne by the Company. In addition to the use of the mail, solicitation
may be made by telephone or otherwise by directors, officers and regular
employees of the Company. Such directors, officers and regular employees will
not be additionally compensated for such solicitation, but may be reimbursed for
out-of-pocket expenses incurred in connection therewith. If undertaken, the
expense of such solicitation would be nominal.
<PAGE> 10
VOTING AND REVOCATION OF PROXIES
SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING
FORM OF PROXY AND RETURN IT PROMPTLY TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. Shares represented by proxies properly signed and returned will be
voted at the Special Meeting in accordance with the instructions contained
thereon, unless revoked prior to the vote. If a proxy is properly signed and
returned without voting instructions, the shares represented thereby will be
voted FOR the approval and adoption of the Merger Agreement, and at the
discretion of the proxy holders as to any other matters which may properly come
before the Meeting. No other matters are scheduled to be presented to the
Meeting, but, if any other matters are properly brought before the Meeting and
submitted to a vote, all proxies will be voted in accordance with the judgment
of the persons authorized to vote the proxies. A proxy may be revoked at any
time before the vote by giving written notice of such revocation to Louis Rocco,
the Secretary of the Company, at Community Care Services, Inc., 18 Sargent
Place, Mount Vernon, New York 10550, prior to the Special Meeting, or by giving
written notice of such revocation at the Special Meeting to the Secretary of the
Special Meeting. A subsequently dated proxy will revoke a prior proxy. A
shareholder may attend the Special Meeting and vote in person whether or not
such shareholder has previously given a proxy.
PARTIES TO THE MERGER AGREEMENT
THE COMPANY
The Company was incorporated in the State of New York in 1992. The
Company, together with its wholly-owned subsidiary, Metropolitan Respirator
Service, Inc. ("Metropolitan"), provides home health care services and products
consisting primarily of respiratory equipment, rental and sale of durable
medical equipment and sale of home health care supplies primarily in the five
boroughs of New York City, and Westchester, Rockland and Nassau Counties in New
York State, as well as northern New Jersey. See "Additional Information About
the Company and its Business."
LHS
LHS was incorporated in the State of New York on May 26, 1955, and is
engaged in the sale and rental of durable medical equipment to home care
patients. The mailing address for LHS is 99 Calvert Street, Harrison, New York
10528, and its telephone number is (914) 835-4200. Alan J. Landauer has been the
President and sole shareholder of LHS since 1980, and is a Director and Chairman
of the Board of the Company.
MERGER SUB
Merger Sub was incorporated in the State of New York on May 20, 1999
solely for the purpose of consummating the Merger. Merger Sub has minimal assets
and no business and has carried on no activities other than those directly
related to its formation and the execution of the Merger Agreement. The address
of its principal executive office is c/o Landauer Hospital Supplies, Inc., 99
Calvert Street, Harrison, New York 10528 and its telephone number is (914)
835-4200. Merger Sub is a wholly-owned subsidiary of LHS. Alan J. Landauer is
the President of Merger Sub.
2
<PAGE> 11
SPECIAL FACTORS
BACKGROUND OF THE MERGER
The Merger culminates a series of events that began in June 1997, when
the Department of Justice commenced an investigation against the Company and its
then Chief Executive Officer, Alan T. Sheinwald ("Sheinwald"). A search warrant
was executed at the Company's executive offices on June 4, 1997. The Company was
informed that Sheinwald and the Company itself were targets of a Department of
Justice criminal investigation for allegedly improper payments relating to a
contract, involving Medicare, to provide healthcare services outside of New York
State. If the Company is charged with criminal wrongdoing and it is determined
that the Company engaged in criminal wrongdoing, the Company will be subject to
criminal penalties, which may include fines of up to $1,000,000 or more and an
order of restitution, would be terminated as a Medicaid and Medicare services
provider, and could also be at the risk of having its contracts with private
insurers and other non-governmental agencies terminated. Additionally, even if
the Company is not charged with criminal wrongdoing itself, but one of its past
or present officers or employees are convicted of crimes related to their
employment, the Company could be terminated as a Medicaid and Medicare provider.
In these circumstances, although the Company would not be subjected to automatic
exclusion from such programs, it could be at risk of having its contracts with
private insurers and other non-governmental agencies terminated. The Company has
cooperated with the government in the Department of Justice criminal
investigation (the "Federal Investigation"). See "Additional Information About
the Company and its Business - Legal Proceedings."
Following the commencement of the Federal Investigation, the closing
price of the Company's Common Stock dropped from $2.625 per share on June 4,
1997 to a low of $.1875 on November 20, 1998.
Sheinwald was dismissed as an executive and employee of the Company on
July 1, 1997. He retained ownership of 2,142,250 shares of the Company's Common
Stock. Following his dismissal, Sheinwald entertained several offers to purchase
his interest in the Company.
Alan J. Landauer contacted the Company's then Chairman of the Board,
Dean L. Sloane, in mid-December 1998 and they met later that week along with
Louis Rocco. At the meeting, Mr. Landauer expressed interest in purchasing
Sheinwald's Common Stock. Mr. Sloane and Mr. Rocco suggested to Mr. Landauer
that he contact Sheinwald directly to express his interest.
At the suggestion of Mr. Sloane and Mr. Rocco, Mr. Landauer, on behalf
of LTTR, contacted Mr. Sheinwald on or about December 16, 1998 regarding
purchasing Mr. Sheinwald's Common Stock. Mr. Landauer and Mr. Sheinwald held a
meeting the following day and reached an oral agreement that Mr. Landauer would
purchase Mr. Sheinwald's shares for an aggregate purchase price of approximately
$1,500,000 or $.71 per share.
On January 16, 1999, Mr. Landauer called Mr. Sloane to advise him that
LTTR had executed a letter of intent with Mr. Sheinwald to purchase his Common
Stock.
On January 19, 1999, the Company received a copy of a letter of intent
executed by LTTR and Sheinwald providing for the purchase by LTTR of 2,126,250
shares from Sheinwald (the "Sheinwald Shares") for up to $1,500,000, with a
portion of the purchase price contingent upon developments in the Federal
Investigation. The closing of the transaction was made contingent upon the
approval of the Board of Directors of the Company on or before February 8, 1999,
in accordance with Section 912 of the New York Business Corporation Law
("NYBCL").
3
<PAGE> 12
On January 21, 1999, Messrs. Sloane and Landauer met at Mr. Sloane's
office to discuss Mr. Landauer's intentions regarding the Company. At that time,
Mr. Landauer stated to Mr. Sloane his belief that the Company should be taken
private.
On February 3, 1999, LTTR and Sheinwald executed a Stock Purchase
Agreement providing for the sale by Sheinwald to LTTR of the Sheinwald Shares,
with the closing of the sale to be contingent upon, among other things, the
approval of the Company's Board of Directors on or before February 8, 1999. The
Board of Directors subsequently discussed the issue of LTTR's purchase of
Sheinwald's shares and obtained advice from counsel. Ultimately, the Board did
not grant such approval for LTTR's purchase of the Sheinwald Shares.
Following the execution of the Stock Purchase Agreement, Mr. Landauer
requested to meet with the Board to discuss the matter. On February 4, 1999, the
Board, via counsel, requested that Mr. Landauer provide a written proposal
regarding his intentions and advised that the Board was unable to meet with Mr.
Landauer at that time. Mr. Landauer's counsel responded on February 5, 1999 by
letter reserving Mr. Landauer's rights as a shareholder of the Company and
indicating that he would consider whether to complete the acquisition of the
Sheinwald Shares despite the Board of Directors' not having approved such
transaction.
On February 11, 1999, the Company's counsel advised Mr. Landauer's
counsel in a letter that any and all inquiries regarding the Company were to be
directed to Mr. Sloane.
On February 12, 1999, LTTR consummated its acquisition of Sheinwald's
Shares, having waived the contingency regarding the approval of the Company's
Board of Directors. On the same day, LTTR and Alan J. Landauer jointly filed a
Schedule 13D with the U.S. Securities and Exchange Commission indicating that
they had obtained beneficial ownership of 2,126,250 shares of Common Stock from
Mr. Sheinwald, in addition to 12,000 shares of Common Stock Mr. Landauer had
purchased in the open market (the "Schedule 13D"). Mr. Landauer is the sole
member and Managing Director of LTTR. In the Schedule 13D, LTTR and Mr. Landauer
reported that their purpose in acquiring Mr. Sheinwald's Common Stock was an
investment, but that LTTR intended to review the business affairs and financial
position of the Company and that based upon such review may consider from time
to time various alternative courses of action both with respect to the business
of the Company and with respect to LTTR's equity position therein.
Also on February 12, 1999, Mr. Landauer's counsel, in a letter to the
Company's counsel, requested a meeting between Messrs. Landauer and Sloane any
time after February 19, 1999.
Also on February 12, 1999, the Company engaged Pinnacle Advisory Group,
L.C., an affiliate of Pinnacle Partners, Inc. ("Pinnacle Partners") to serve as
the Company's financial advisor to, among other things, explore strategic
alternatives available to the Company to enhance shareholder value. Pinnacle
Partners is a private investment banking firm that provides financial advisory
services to healthcare companies throughout the United States. Pinnacle Partners
was selected as the Company's financial advisor based upon its reputation,
expertise in advising healthcare companies and the presentation made by it to
the Company's Board of Directors. Mr. Sloane was aware of Pinnacle Partners
reputation and contacted principals of Pinnacle Partners to discuss the
Company's situation and needs and the various ways in which Pinnacle Partners
could provide assistance in exploring strategic alternatives to enhance
shareholder value. Based upon Mr. Sloane's conversations with Pinnacle Partners,
Mr. Sloane recommended to the Board of Directors that Pinnacle Partners be
engaged as the Company's financial advisor. Pinnacle Partners made a
presentation to the whole Board of Directors and was approved by the Board of
Directors based upon its experience, reputation and the Company's needs.
4
<PAGE> 13
On February 26, 1999, Messrs. Sloane and Landauer met at Mr. Landauer's
office. Mr. Landauer presented to Mr. Sloane several analyses valuing the
Company prepared by his representatives. At that meeting, Mr. Landauer offered
to purchase Mr. Sloane's Common Stock. Mr. Sloane rejected the offer and advised
Mr. Landauer that he would act in the best interest of all of the Company's
shareholders and would not entertain an offer for only his holdings. Mr.
Landauer subsequently made a proposal to purchase all of the remaining
outstanding Common Stock at a price of $1.00 to $1.10 per share. Mr. Sloane
subsequently reported the offer to the other directors and consulted with
Pinnacle Partners regarding Mr. Landauer's offer.
During March 1999, Messrs. Sloane and Landauer spoke on several
occasions to refine Mr. Landauer's proposal and negotiate the terms of the
Merger. During the same time, several drafts of a letter of intent describing
the basic terms of the Merger were prepared, delivered and negotiated by the
parties.
On March 12, 1999, Mr. Landauer sent a letter to Mr. Sloane stating
that he intended to nominate three directors for election at the Company's
annual meeting of shareholders (the "Annual Meeting"), which was scheduled to be
held on March 23, 1999.
On March 18, 1999, Mr. Landauer filed an amended Schedule 13D (the
"Amended Schedule 13D") indicating that he had been granted irrevocable proxies
by several of the Company's shareholders, including Donald Fargnoli, Allan
Goldfeder, Louis Rocco, Saverio Burdi and Wade Wilson, pursuant to a
Shareholders Agreement (the "LTTR Shareholders Agreement"), to vote on the
election or removal of directors. Additionally, pursuant to the LTTR
Shareholders Agreement, the foregoing shareholders agreed that they would cause
the Company to have a Board of Directors consisting of five directors, three of
whom would be nominees of Mr. Landauer. Further, on the Amended Schedule 13D,
Mr. Landauer reported his purchase of an additional 50,000 shares of Common
Stock from Allan Goldfeder on March 12, 1999, bringing LTTR and Mr. Landauer's
holdings of Common Stock to 2,188,250.
On March 22, the Company's Board of Directors met to review a
presentation by Pinnacle Partners regarding the potential strategic alternatives
available to the Company to enhance shareholder value. At such meeting,
representatives of Pinnacle Partners, participating via teleconference, reviewed
and discussed with members of the Board of Directors a variety of strategic
alternatives that they had evaluated on behalf of the Company, including a sale
or merger of the Company, a leveraged buyout of the Company, an acquisition and
consolidation strategy and a continuation of the Company's business plan on a
status quo basis. Pinnacle Partners reviewed the feasibility of each of the
alternatives discussed in the preceding sentence, and, following the conclusion
of its presentation, recommended to the Board of Directors that it pursue a sale
or merger of the Company to attempt to enhance shareholder value.
Representatives of Pinnacle Partners were authorized to commence activities
designed to solicit interest from parties interested in acquiring or entering
into a merger transaction with the Company. Pinnacle Partners was also advised
that Mr. Sloane would continue negotiations with Mr. Landauer regarding Mr.
Landauer's proposal to acquire the Company. At such meeting, Pinnacle Partners
indicated that, in their view, the proposal by Mr. Landauer to acquire the
Company also represented an attractive alternative to the Company.
Also on March 22, 1999, the Company rescheduled the Annual Meeting for
April 8, 1999 to allow more time for brokers holding shares in street name to
obtain voting instructions from their clients.
Effective March 23, 1999, Mr. Bruce L. Ansnes and Dr. Bernard M. Kruger
resigned from the Board of Directors of the Company for personal reasons.
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<PAGE> 14
On March 24, 1999, Messrs. Sloane and Landauer met at Mr. Landauer's
office. After continued negotiations between Mr. Sloane and Mr. Landauer, Mr.
Landauer increased his prior offer for the outstanding Common Stock to $1.20 per
share. Mr. Sloane indicated that he needed to consult with representatives of
Pinnacle Partners regarding the new proposal and to review the proposal with the
Board of Directors.
Between March 24, 1999 and April 6, 1999, Mr. Sloane consulted with
representatives of Pinnacle Partners regarding the proposal by Mr. Landauer to
acquire the outstanding Common Stock for $1.20 per share. Mr. Sloane requested
that Pinnacle Partners prepare an analysis in order to evaluate the fairness of
the proposed Merger.
The Company and LTTR executed a letter of intent effective April 6,
1999 providing for the purchase by LTTR or one of its affiliates of all of the
Company's issued and outstanding Common Stock for the price of $1.20 per share
(the "Merger Price"), conditioned upon the successful negotiation of a
definitive written agreement and the approval of the Company's shareholders. The
exclusivity period under the letter of intent between the Company and LTTR was
extended by supplemental letters dated May 17, 1999 and May 28, 1999. Also
effective April 6, 1999, Dean L. Sloane, Mary Sloane, Joshua Sloane, Craig V.
Sloane, and The Sloane Family Foundation executed a letter of intent pursuant to
which they each agreed, for a period of forty-five business days, or such
earlier time as negotiations on a definitive Merger Agreement between LTTR and
the Company terminate, not to transfer, encumber, or engage in any discussions
or negotiations with respect to their shares of Common Stock.
At the Annual Meeting held on April 8, 1999, Messrs. Bruce L. Ansnes
and Craig V. Sloane and Dr. Bernard M. Kruger did not seek re-election to the
Board, although their names appeared as nominees on the Proxies solicited by the
Company. The three nominees proposed by Mr. Landauer, including Mr. Landauer,
Thomas C. Blum and Gary J. Spirgel, were elected to the Board of Directors,
together with incumbent directors Dean L. Sloane and Louis Rocco. At the Board
of Directors meeting following the Annual Meeting, a Special Committee of
independent members of the Board of Directors comprised of Messrs. Sloane,
Spirgel and Rocco was appointed to evaluate the Merger and was delegated the
authority to approve the transaction on behalf of the Board of Directors if it
found that the transaction was fair and in the best interests of the Company.
Between April 8, 1999 and May 18, 1999, several meetings (in person and
telephonically) were held among representatives of the parties to the Merger
during which the parties conducted negotiations regarding the Merger and the
Merger Agreement. Following such meetings, drafts of the Merger Agreement,
revised to reflect such meetings, were circulated to the parties to the Merger
and their representatives upon which further discussions and negotiations were
conducted.
On May 19, 1999, the Special Committee held a telephonic meeting at
which Mr. Sloane reported that an agreement with Mr. Landauer regarding the
Merger had been reached, subject to approval of the Special Committee. The
Company's legal advisors reported on the status of the negotiations and the
remaining issues in the Merger Agreement. The Special Committee discussed the
draft of the fairness opinion provided by Pinnacle Partners. The Special
Committee also discussed the potential benefits and risks of the transaction, as
well as the status of the Company and the potential risks of not entering into a
transaction. At the conclusion of the meeting, the Special Committee of the
Board of Directors unanimously agreed to enter into the Merger Agreement,
subject to satisfactory resolution of the remaining legal issues in the Merger
Agreement.
On June 7, 1999, a meeting of the Board of Directors was held to
discuss the Merger. Pinnacle Partners (participating via telephone) reviewed
with the Board of Directors the financial and other analyses performed by
Pinnacle Partners in connection with its evaluation of the Merger Price. After
review of its material, Pinnacle Partners rendered to the Special Committee an
oral opinion (which opinion was subsequently confirmed by delivery of a written
opinion, dated June 15, 1999) to the
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<PAGE> 15
effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein (including confirmation from the Company's
certified public accountants as to the status of the Company's audit and
proposed adjustments and reclassifications to the Company's operating results
for the period ended March 31, 1999), the Merger Price was fair, from a
financial point of view, to the holders of Common Stock (other than Alan J.
Landauer, LTTR and their affiliates, including the Sloane Group, as to which
Pinnacle Partners was not requested to express an opinion). The Board of
Directors subsequently ratified the action of the Special Committee in approving
the Merger.
On June 14, 1999, the Merger Agreement was executed and the parties
issued a joint press release announcing the Merger.
On June 15, 1999, a telephonic meeting of the Special Committee was
held at which Pinnacle Partners reviewed certain adjustments in the calculations
upon which the fairness opinion was based, but indicated that the adjustments
were immaterial and did not impact its opinion of the fairness of the Merger.
The Special Committee then ratified its prior decision to approve the Merger.
THE COMPANY'S REASONS FOR THE MERGER
The Special Committee has determined that the Merger is fair and in the
best interests of the Company and its shareholders and has unanimously approved
the Merger Agreement and the transactions contemplated thereby, including the
Merger. THE SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE "FOR" THE MERGER.
In determining to recommend that the Company's shareholders vote FOR
the Merger, the Special Committee considered a number of factors, including the
following:
(i) The current and historical financial condition, results of
operations and resources of the Company, including the need to replace its
$2,500,000 line of credit with The Bank of New York (the "Bank"). The Company
has drawn down approximately $2,500,000 under the line. In July 1997, the Bank
notified the Company that it put a $2,500,000 cap on borrowings until the
uncertainty involving the Federal Investigation was resolved. The credit
facility is callable by the Bank at any time. The Bank has transferred the
administration of the credit facility within the Bank to its Asset Recovery
Department. The Merger, if consummated, would provide the Company with
sufficient capital to satisfy its obligations to the Bank and to take advantage
of market opportunities.
(ii) The projected financial condition, results of operations,
prospects and strategic objectives of the Company in the health care industry,
as well as the risks involved in achieving those objectives given the current
economic and market conditions effecting the Company. Consummation of the Merger
would remove from the Company's shareholders the substantial risks inherent in
the health care industry, although it would also eliminate the ability of the
shareholders to participate in any future growth in the value of the Company.
(iii) The efforts conducted by the Company with the assistance of
Pinnacle Partners in exploring strategic alternatives to enhance shareholder
value. It was clear to the Special Committee that there was no alternative
transaction immediately available which was as favorable to the Company's
shareholders as the proposed Merger.
(iv) The risks to the Company associated with the pending Federal
Investigation. If the Company is charged with criminal wrongdoing and it is
determined that the Company engaged in criminal wrongdoing, the Company will be
subject to criminal penalties, which may include fines of up to $1,000,000 or
more and an order of restitution, would be terminated as a Medicaid and Medicare
services provider, and could also be at the risk of having its contracts with
private insurers and other non-governmental agencies terminated. Additionally,
even if the Company is not charged with criminal
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<PAGE> 16
wrongdoing itself, but one of its past or present officers or employees are
convicted of crimes related to their employment, the Company could be terminated
as a Medicaid and Medicare provider. In these circumstances, although the
Company would not be subjected to automatic exclusion from such programs, it
could be at risk of having its contracts with private insurers and other
non-governmental agencies terminated.
(v) The Special Committee's belief that the Merger Price permitted the
Company's shareholders to recognize with certainty $1.20 per share in cash for
all their shares, whereas, without the Merger, the ability of the shareholders
of the Company to realize the Merger Price would be uncertain and subject to
contingencies beyond the Company's control.
(vi) The delisting of the Common Stock from trading in the Nasdaq Small
Cap Market, effective March 31, 1999. Because of the lack of trading volume of
the Common Stock and the absence of market makers to enact transactions in the
over-the-counter market, the Company's shareholders are limited in their ability
to liquidate their holdings.
(vii) The availability of the rights granted to dissenting shareholders
under Section 623 of the NYBCL. Such rights would allow any shareholder who
believed that the $1.20 per share price offered by LHS was insufficient to seek
an opportunity to so assert under New York law.
(viii) The likelihood that the Merger would be consummated, including
the likelihood of satisfying the conditions to the consummation of the Merger
contained in the Merger Agreement.
(ix) The experience, reputations and financial condition of persons
controlling LHS.
(x) The recommendation of the Company's management in favor of the
Merger.
(xi) The expectation that the Merger will result in the Company and its
affiliates having an increased market share through the merging of customer
bases with LHS and its affiliates, resulting in enhanced bargaining positions
with vendors, greater visibility to potential customers, economies of scale, and
maximization of efficiency through the merger of management and work forces.
(xii) The terms of the Merger Agreement and the proposed Merger are the
result of arms-length negotiations by representatives of the Company and the
Special Committee and representatives of LHS. Although termination of the Merger
Agreement, under certain circumstances, would obligate the Company to pay a
$350,000 termination fee and reimburse expenses, the Special Committee believes
that these provisions would not materially impede another serious possible
acquirer and would allow the Board of Directors to fulfill its fiduciary
obligations to consider a superior proposal if one were received.
(xiii) The Special Committee's belief that the trading price of the
Common Stock does not reflect the true value of the Company as evidenced by the
price of Common Stock having been reported on the OTC Bulletin Board on May 18,
1999 at a closing price of $.75 per share.
(xiv) Pinnacle Partners' presentation to the Board of Directors on June
7, 1999 and Pinnacle Partners' written opinion dated June 15, 1999 to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the Merger Price to be received in the Merger by the holders of
Common Stock (other than Alan J. Landauer, LTTR and their affiliates, including
the Sloane Group, as to which Pinnacle Partners was not requested to express an
opinion) was fair from a financial point of view to such holders.
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<PAGE> 17
The foregoing discussion of the information and factors considered by
the Special Committee is not meant to be exhaustive, but includes all material
factors considered by it. In view of the variety of factors considered, the
Special Committee did not find it practical to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Special
Committee may have given different weights to different factors.
The Special Committee was aware of the interests and involvement of Mr.
Landauer and his affiliates in connection with the Merger negotiations and the
potential for conflict. However, although LTTR and Mr. Landauer have voting
control of over fifty percent of the outstanding Common Stock, they do not alone
control a sufficient percentage of the outstanding Common Stock to approve the
Merger. Also, with the exception of Gary J. Spirgel, the members of the Special
Committee that studied the fairness of the Merger are not associates of LHS,
LTTR or Mr. Landauer. The members of the Special Committee, which negotiated the
final terms of the Merger Agreement, included Dean L. Sloane and Louis Rocco,
the remaining two members of the Board of Directors that existed prior to the
Annual Meeting, and Mr. Spirgel. All of the members of the Special Committee
believe that the approval of the Merger is fair and in the best interest of the
Company. The Special Committee does not believe that LTTR and Mr. Landauer used
their stock position to better their economic position in connection with the
Merger. See "Special Factors - Interests of Certain Persons in the Merger."
The Special Committee did not perform a formal independent analysis of
the financial fairness of the Merger, but did rely on the Pinnacle Partners
Opinion, described below. In consideration of the role of the Special Committee
and the engagement of Pinnacle Partners and the Company's outside legal counsel,
the Special Committee did not appoint an unaffiliated representative to act
solely on behalf of the unaffiliated holders of the Common Stock.
ALAN J. LANDAUER'S REASONS FOR THE MERGER
Alan J. Landauer believes that the business of the Company and its
affiliates is complementary with the business of LHS and that the Merger will
benefit the companies by resulting in enhanced bargaining power with vendors,
greater visibility in the marketplace, and improved economics through economies
of scale. The Merger is expected to result in greater profitability, which will
enable the combined companies to take advantage of market opportunities as they
arise.
OPINION OF FINANCIAL ADVISOR
Pinnacle Partners was retained by the Special Committee of the Board of
Directors of the Company (the "Special Committee") to act as its financial
advisor in connection with the proposed Merger. Pinnacle Partners was selected
by the Special Committee upon recommendation of the Company because of its
expertise and the reputation of its senior professionals in the areas of mergers
and acquisitions and "going private" transactions. Pinnacle Partners is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
estate, corporate and other purposes. In connection with such engagement, the
Special Committee requested that Pinnacle Partners evaluate the fairness, from a
financial point of view, to the holders of Common Stock (other than Alan J.
Landauer, LTTR, and their affiliates, including the Sloane Group (the "Landauer
Affiliates"), as to which Pinnacle Partners was not requested to express an
opinion) of the consideration to be received by such holders in the Merger. On
June 7, 1999, at a meeting of the Special Committee held to evaluate the
proposed Merger, Pinnacle Partners delivered its oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion dated June 15, 1999) to
the Board of Directors to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein (including confirmation
from the Company's certified public accountants as to the status of the
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<PAGE> 18
Company's audit and proposed adjustments and reclassifications to the Company's
operating results for the period ended March 31, 1999), the Merger Price
was fair, from a financial point of view, to the holders of Common Stock (other
than the Landauer Affiliates, as to which Pinnacle Partners was not requested to
express an opinion) (the "Pinnacle Partners Opinion").
A COPY OF THE PINNACLE PARTNERS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW
UNDERTAKEN BY PINNACLE PARTNERS IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT
AND INCORPORATED HEREIN BY REFERENCE. THE PINNACLE PARTNERS OPINION IS DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION OF
$1.20 PER SHARE IN CASH TO BE RECEIVED BY THE HOLDERS OF COMMON STOCK IN THE
MERGER. THE PINNACLE PARTNERS OPINION WAS PROVIDED AT THE REQUEST AND FOR THE
INFORMATION OF THE SPECIAL COMMITTEE IN EVALUATING THE CONSIDERATION AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER CONCERNING WHETHER TO ELECT
TO RECEIVE THE CONSIDERATION OR VOTE IN FAVOR OF TRANSACTIONS CONTEMPLATED BY
THE MERGER AGREEMENT. THE SUMMARY OF THE PINNACLE PARTNERS OPINION SET FORTH IN
THIS PROXY STATEMENT SETS FORTH THE MATERIAL ELEMENTS OF SUCH OPINION, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE PINNACLE PARTNERS
OPINION ATTACHED AS ANNEX C HERETO. STOCKHOLDERS OF THE COMPANY SHOULD READ THE
PINNACLE PARTNERS OPINION CAREFULLY IN ITS ENTIRETY FOR INFORMATION WITH RESPECT
TO THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN BY PINNACLE PARTNERS IN RENDERING ITS OPINION. PINNACLE
PARTNERS HAS CONSENTED TO THE REFERENCES TO PINNACLE PARTNERS AND THE PINNACLE
PARTNERS OPINION IN THIS PROXY STATEMENT, AND TO THE ATTACHMENT OF THE PINNACLE
PARTNERS OPINION TO THIS PROXY STATEMENT AS AN APPENDIX HERETO.
In arriving at the Pinnacle Partners Opinion, Pinnacle Partners:
(i) reviewed the Merger Agreement (dated June 14, 1999), a draft of
this Proxy Statement (dated June 14, 1999), which Pinnacle Partners assumed is
identical in all material respects to the Definitive Proxy Statement, the Sloane
Shareholders' Agreement (dated June 14, 1999), and Stock Purchase Agreement
between Landauer and Sheinwald (dated February 12, 1999);
(ii) reviewed the Company's prospectus, dated as of October 18, 1996,
filed with the Securities and Exchange Commission;
(iii) reviewed the Company's Annual Reports on Form 10-K filed with the
Securities and Exchange Commission for the fiscal years ended March 31, 1997 and
1998;
(iv) reviewed the Company's Quarterly Reports on Form 10-Q filed with
the Securities and Exchange Commission for the fiscal quarters ended June 30,
1998, September 30, 1998 and December 31, 1998;
(v) reviewed certain interim and estimated unaudited financial
statements and analysis for the Company prepared by management of the Company;
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(vi) reviewed projected financial statements and related forecasts of
the Company prepared, or based upon information supplied by, management of the
Company;
(vii) held discussions with certain senior officers, directors and
other representatives and advisors of the Company (including the Company's
certified public accountants and legal counsel) concerning the history,
business, operations, financial condition and prospects of the Company
(including discussions held with representatives of Pinnacle Partners who
visited the Company's corporate headquarters);
(viii) reviewed the financial terms of the Merger as set forth in the
Merger Agreement in relation to, among other things: current and historical
market prices and trading volumes of the Common Stock; the historical and
projected earnings and other operating data of the Company; and the
capitalization and financial condition of the Company, including near-term
liquidity needs of, and capital resources available to, the Company;
(ix) reviewed, to the extent publicly available, certain business,
financial, stock market and other information relating to the businesses of
other companies whose operations Pinnacle Partners considered relevant in
evaluating those of the Company;
(x) reviewed, to the extent publicly available, the financial terms of
selected transactions which Pinnacle Partners considered relevant in evaluating
the Merger;
(xi) reviewed the historical trading prices and volumes of the shares
of Common Stock as traded on Nasdaq and the over-the-counter bulletin board;
(xii) performed various financial analyses, as Pinnacle Partners deemed
appropriate, of the Company using generally accepted analytical methodologies,
including:
(a) analysis of premiums paid in public merger and acquisition
transactions;
(b) the application of the public trading multiples of
companies which Pinnacle Partners deemed comparable to the Company to the
financial results of the Company;
(c) the application of the multiples reflected in selected
mergers and acquisitions involving businesses which Pinnacle Partners deemed
comparable to the Company to the financial results of the Company; and
(d) a discounted projected cash flow analysis
In addition to the foregoing, Pinnacle Partners reviewed such other
materials, performed such other financial examinations, studies, analyses,
inquiries and investigations and considered such other financial, economic and
market criteria as Pinnacle Partners deemed appropriate in arriving at its
Opinion.
In rendering the Pinnacle Partners Opinion, Pinnacle Partners assumed
and relied, without independent verification, upon the accuracy and completeness
of all the financial and other information, as well as information that was
publicly available, supplied or otherwise reviewed by or discussed with Pinnacle
Partners by the Company or from other sources, and upon the assurance of the
Company's management that they were not aware of any information or facts that
would make the information provided to Pinnacle Partners incomplete, inaccurate
or misleading. With respect to the projected financial statements referenced in
the second preceding paragraph, Pinnacle Partners was advised by the management
of the Company, and assumed without independent investigation, that they were
reasonably
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<PAGE> 20
prepared and reflected the best currently available estimates and judgements of
the management of the Company as to the future results of operations and
financial condition at and for the periods specified therein, and Pinnacle
Partners has expressed no opinion with respect to such financial statements. In
rendering the Pinnacle Partners' Opinion, Pinnacle Partners assumed that the
Company will continue to operate as a going concern, and no consideration was
given to the effect of any solvency, bankruptcy or similar laws on the Merger in
the event such laws become applicable to the Company in the future. Pinnacle
Partners did not undertake and was not provided with an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of the
Company, nor did Pinnacle Partners undertake any physical inspection of the
properties or assets of the Company.
Pinnacle Partners expressed no view as to, and the Pinnacle Partners
Opinion does not address, the relative merits of the Merger as compared to any
alternative business strategies that might exist for the Company or the effect
of any other transaction in which the Company might engage. The Pinnacle
Partners Opinion did not constitute a recommendation as to any action taken by
the Board of Directors or the Company and did not constitute a recommendation to
any stockholder of the Company with respect to whether to vote in favor of the
transactions contemplated by the Merger Agreement, and should not be relied upon
by any stockholder as such. The Pinnacle Partners Opinion was necessarily based
upon information available, and financial, stock market and other conditions and
circumstances existing and disclosed, to Pinnacle Partners as of the date of the
Pinnacle Partners Opinion. Although Pinnacle Partners evaluated the Merger
Price from a financial point of view, Pinnacle Partners was not asked to
and did not recommend the specific consideration to be paid in the Merger, which
was determined through negotiations between the Company and LHS. No other
limitations were imposed by the Company on Pinnacle Partners with respect to the
investigations made or procedures followed by Pinnacle Partners in rendering the
Pinnacle Partners Opinion. Pinnacle Partners disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
the Pinnacle Partners Opinion which might come or be brought to Pinnacle
Partners' attention after the date of the Pinnacle Partners Opinion. Pinnacle
Partners and the Company entered into a letter-form engagement agreement dated
February 12, 1999 (the "Engagement Agreement"), pursuant to which Pinnacle
Partners was retained to, among other things, render the Pinnacle Partners
Opinion. The Pinnacle Partners Opinion stated Pinnacle Partners' understanding
that such opinion would be used by the Special Committee solely in connection
with its consideration of the fairness of the consideration to be received by
holders of Common Stock (other the Landauer Affiliates, as to which Pinnacle
Partners was not requested to express an opinion) in the Merger and for no other
purpose, and that in rendering the Pinnacle Partners Opinion, Pinnacle Partners
specifically disclaims being engaged as an agent or fiduciary of the Company's
stockholders or any third party.
In preparing the Pinnacle Partners Opinion, Pinnacle Partners performed
a variety of financial and comparative analyses, including those described
below. The summary of such analyses does not purport to be a complete
description of the analyses underlying the Pinnacle Partners Opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Pinnacle Partners considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis, factor or
ratio considered by it. Accordingly, Pinnacle Partners believes that its
analyses must be considered as a whole and that selecting any portion or
portions of such analyses and of the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and the Pinnacle Partners Opinion. In its
analyses, Pinnacle Partners made numerous assumptions with respect to the
Company, industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of the
Company. The estimates contained in such analyses and the valuation ranges
resulting from any particular analysis
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<PAGE> 21
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty. The
Pinnacle Partners Opinion, and the underlying analysis prepared by Pinnacle
Partners in arriving at the Pinnacle Partners Opinion, were only one of many
factors considered by the Special Committee in its evaluation of the Merger and
should not be viewed as determinative of the views of the Special Committee or
management with respect to the Merger Price or the proposed Merger.
STOCK TRADING HISTORY. Pinnacle Partners reviewed the history of the
trading prices and trading volume of the Common Stock since October 18, 1996 and
the relative trading price of the Common Stock over the prior twelve month, six
month, three month and one month periods, respectively, in relation to the (i)
Standard & Poor's Small Cap 600 Index (the "S&P Small Cap"), (ii) Russell 2000
Index (the "Russell 2000") and (iii) Standard & Poor's Health Care Index ("S&P
Health Care"). Such analysis showed that over the twelve month period ended June
14, 1999, the Common Stock returned -62.1%, as compared to the S&P Small Cap,
Russell 2000 and S&P Health Care, which returned -4.4%, -2.3% and 6.6%,
respectively. Over the six month period ended June 14, 1999, the Common Stock
returned 175.0% as compared to the S&P Small Cap, Russell 2000 and S&P Health
Care, which returned 9.2%, 11.2% and -3.2%, respectively. Over the three month
period ended June 14, 1999, the Common Stock returned 0.0% as compared to the
S&P Small Cap, Russell 2000 and S&P Health Care, which returned 8.3%, 8.3% and
- - - -14.5%, respectively. Over the one month period ended June 14, 1999, the Common
Stock returned 0.0% as compared to the S&P Small Cap, Russell 2000 and S&P
Health Care, which returned -0.1%, -2.6% and -7.2%, respectively. As noted above
and below, in arriving at its Opinion, Pinnacle Partners considered the results
of all of its analyses as a whole and did not attribute any particular weight to
any analysis, factor or ratio considered by it.
THE PREMIUMS PAID ANALYSIS. Pinnacle Partners the median premiums paid
in merger and acquisition transactions between January 1, 1997 and June 2, 1999
for (i) all U.S. announced mergers and acquisitions transactions, (ii)
transactions valued less than $25.0 million, and (iii) transactions where the
target's stock price was less than $10.00 per share. The premiums paid were
applied to the price of the Company's Common Stock one day and four weeks prior
to both the public announcement of the signing of a letter of intent relating to
the Merger (April 7, 1999), and the meeting of the Board of Directors during
which the Merger Agreement was approved (June 7, 1999). Based upon this
analysis, the imputed equity values per share of the Common Stock one day prior
to the public announcement of the signing of a letter of intent were $0.62,
$0.65 and $0.62, respectively, based upon the median premiums associated with
(i) all U.S. announced mergers and acquisitions transactions, (ii) transactions
valued less than $25.0 million, and (iii) transactions in which the target's
stock price was less than $10.00 per share, respectively. The imputed equity
values per share of the Common Stock four weeks prior to the public announcement
of the signing of a letter of intent (that being March 9, the last date on which
the Common Stock was traded up through and including the day prior to the public
announcement) were $1.34, $1.43 and $1.29, respectively, based upon the median
premiums associated with (i) all U.S. announced mergers and acquisitions
transactions, (ii) transactions valued less than $25.0 million, and (iii)
transactions in which the target's stock price was less than $10.00 per share,
respectively. The imputed equity values of the Common Stock one day prior to the
meeting of the Board of Directors during which the Merger Agreement was approved
(that being June 2, the last date on which the Common Stock was traded up
through and including June 7, 1999) were $0.85, $0.90 and $0.85, respectively,
based on the median premiums associated with (i) all U.S. announced mergers and
acquisitions transactions, (ii) transactions valued less than $25.0 million, and
(iii) transactions in which the target's stock price was less than $10.00 per
share, respectively. The imputed equity values of the Common Stock four weeks
prior to the meeting of the Board of Directors during which the Merger Agreement
was approved were $1.00, $1.07 and
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$0.97, respectively, based on the median premiums associated with (i) all U.S.
announced mergers and acquisitions transactions, (ii) transactions less than
$25.0 million, and (iii) transactions where the target's stock price was under
$10.00 per share, respectively. As noted above and below, in arriving at its
opinion, Pinnacle Partners considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis, factor or
ratio considered by it.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANY. Using publicly available
information, Pinnacle Partners analyzed and compared selected financial and
operating data of the Company to the corresponding data of a group of publicly
traded companies that Pinnacle Partners deemed to be similar to the Company (the
"Comparable Companies"). In determining the appropriate Comparable Company
universe for the Company, Pinnacle Partners considered a variety of factors
including business focus, market capitalization, revenue, earnings before
interest and taxes ("EBIT"), and net income. The Comparable Companies included:
Lincare Holdings, Inc., Apria Healthcare Group, Inc., Matria Healthcare, Inc.,
Coram Healthcare Corp., Transworld Healthcare, Inc., National Home Health Care
Corp., Option Care, Inc., American HomePatient, Inc., Pediatric Services of
America, Inc., Staff Builders, Inc., Caretenders Health Corp., Star MultiCare
Services, Inc., In Home Health, Inc., Amedisys, Inc., New York Health Care,
Inc., Accuhealth, Inc., Help At Home, Inc., Healthcor Holdings, Inc. and Numed
Home Health Care, Inc. With respect to the Comparable Companies, Pinnacle
Partners analyzed their respective stock prices as of June 14, 1999 compared to
their latest 12 month ("LTM") and projected earnings per share ("EPS") for the
current and the subsequent fiscal years to determine a price/earnings multiple
based upon the current price of the stocks. Pinnacle Partners applied the median
price/earnings multiple to the Company's LTM net income (adjusted to reflect a
"normalized" effective tax rate of 44%), as well as projected current and
subsequent net income (for the years ended March 31, 2000 and March 31, 2001,
respectively), which resulted in an imputed equity value per share of $0.20
based upon LTM net income, $0.59 per share based upon projected March 31, 2000
net income and $1.28 based upon projected March 31, 2001 net income. Pinnacle
Partners also applied the mean price/earnings multiple to the Company's LTM net
income, as well as projected current and subsequent fiscal year net income,
which resulted in an imputed equity value per share of $0.29 based upon LTM net
income, $0.54 per share based upon projected March 31, 2000 net income and $1.16
based upon projected March 31, 2001 net income.
Additionally, Pinnacle Partners analyzed the adjusted market values
(fully diluted market value, plus outstanding debt, less cash) as multiples of
LTM revenues and EBIT based upon closing stock prices as of June 14, 1999.
Pinnacle Partners applied median multiples based upon LTM revenues and EBIT to
corresponding financial data for the Company which resulted in an imputed equity
value per share of $0.56 based upon LTM Revenues and $0.93 based upon LTM EBIT.
Pinnacle Partners also applied mean multiples based upon LTM revenues and EBIT
to corresponding financial data for the Company which resulted in an imputed
equity value per share of $1.27 based upon LTM Revenues and $1.12 based on LTM
EBIT. As noted above and below, in arriving at its opinion, Pinnacle Partners
considered the results of all of its analyses as a whole and did not attribute
any particular weight to any analysis, factor or ratio considered by it.
SELECTED MERGER AND ACQUISITION TRANSACTIONS ANALYSIS. Using publicly
available information, Pinnacle Partners reviewed, among other things, the
implied transaction multiples paid or proposed to be paid in 22 selected
transactions in, primarily, the home healthcare industry, consisting of
(acquiror/target): (Advanced Paradigm, Inc. / Foundation Health's IPS), (Dental
Care Alliance, Inc. /Philadelphia Dental Offices), (Gentle Dental Services, Inc.
/ Capital Dental Care, Inc.), (The Kroll-O'Gara Co. / Laboratory Specialists of
America, Inc.), (Amedisys, Inc. / Columbia/HCA - 6 states), (Omnicare, Inc. /
United Professional Cos.), (Olsten Corporation / Columbia/HCA - Florida
operations), (RehabCare Group, Inc. / StarMed Staffing, Inc.), (Spectrum
Healthcare, Inc. / United Correctional Management, Inc.), (Sunbelt Home Health,
Inc. / Housecall Medical Resources, Inc.), (American HomePatient, Inc. /National
Medical Systems, Inc.), (Preferred Employers Holdings Group, Inc. / HSSI -
Travel Nurse operations), (Integrated
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Health, Inc. / Community Care America, Inc.), (Accuhealth, Inc. / Healix
Healthcare, Inc.), (Integrated Health, Inc. / Rotech Medical Corp.), (Healthcor
Holdings, Inc. / Southern Medical Mart, Inc.), (Vencor, Inc. / Transitional
Hospitals Corp.), (Home Health Corp. of America, Inc. / PDN, Inc. & Medical IV),
(NHP, Inc. / Preferred Home Health, Inc.), (Olsten Corporation / Quantum Health
Resources, Inc.) and (Horizon/CMS Healthcare, Inc. / Medical Innovations, Inc.).
Pinnacle Partners analyzed the median multiple of purchase price to LTM Net
Income (adjusted to reflect a "normalized" effective tax rate of 44%), and
applied this data to corresponding financial data for the Company which resulted
in an imputed equity value per share of $0.27. Pinnacle Partners also analyzed
the median multiple of Transaction Value to LTM Revenue, EBITDA (Earnings before
interest, taxes, depreciation and amortization) and EBIT, which resulted in an
imputed equity value per share of $1.68, $2.39 and $0.78, respectively.
Pinnacle Partners also analyzed the mean multiple of purchase price to
LTM Net Income, and applied this data to corresponding financial data for the
Company which resulted in an imputed equity value per share of $0.27. Pinnacle
Partners analyzed the mean multiple of Transaction Value to LTM Revenue, EBITDA
and EBIT, which resulted in an imputed equity value per share of $2.44, $2.54
and $0.66, respectively.
No company, transaction or business used as a comparison in the
"Selected Company Analysis" or "Selected Merger and Acquisition Transactions
Analysis" is identical to the Company or the Merger. Accordingly, an analysis of
the results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies, the Selected
Transactions or the business segment, company or transaction to which they are
being compared. As noted above and below, in arriving at its opinion, Pinnacle
Partners considered the results of all of its analyses as a whole and did not
attribute any particular weight to any analysis, factor or ratio considered by
it.
DISCOUNTED CASH FLOW ANALYSIS. Pinnacle Partners performed a discounted
cash flow analysis of the projected free cash flow of the Company for fiscal
years 2000 and 2003, based upon internal estimates of the management of the
Company. The stand-alone discounted cash flow analysis of the Company was
determined by (i) adding (x) the present value of projected free cash flows over
the four-year period from 2000 to 2003 and (y) the present value of the
estimated terminal value in year 2003, (ii) subtracting the total current
outstanding debt of the Company and (iii) adding the total amount of cash and
cash equivalents on the Company's balance sheet. Pinnacle Partners also
estimated the range of terminal values for the Company at the end of the
four-year period by applying terminal value multiples of 0.35x to 0.65x to the
Company's projected 2003 revenues. The projected cash flows and estimated
terminal values of the Company were discounted using discount rates ranging from
8% to 12%. The discount rates that were used were determined by analyzing the
estimated weighted average cost of capital ("WACC") of the Company, based upon
the Capital Asset Pricing Model ("CAPM"). The CAPM determines an estimated WACC
based upon (i) a risk-free rate, which was estimated by using the yield of the
30-year U.S. Treasury Bond as of June 14, 1999 as a proxy yield, and (ii) a risk
premium that incorporates the estimated beta for the company, which was
estimated by analyzing the unlevered betas of the universe of Comparable
Companies. Based upon a WACC of 9.04%, the imputed equity for the Common Stock
was $1.22 per share. Utilizing the range of terminal multiples and discount
rates discussed above, this analysis resulted in a range of equity values for
the Common Stock of approximately $.60 to $1.57 per share. As noted above and
below, in arriving at its opinion, Pinnacle Partners considered the results of
all of its analyses as a whole and did not attribute any particular weight to
any analysis, factor or ratio considered by it.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering the Pinnacle
Partners Opinion, Pinnacle Partners considered certain other factors and
conducted certain other comparative analyses,
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including, among other things, a review of (i) indications of interest received
from, and discussions with, third parties other than LHS; (ii) historical and
projected financial results of the Company; (iii) the history of trading prices
and volume for the Common Stock; (iv) the stockholder profile of the Company;
and (v) selected published analysts' reports on the companies that Pinnacle
Partners deemed to be generally comparable to the Company. As noted above, in
arriving at its opinion, Pinnacle Partners considered the results of all of its
analyses as a whole and did not attribute any particular weight to any analysis,
factor or ratio considered by it.
Subject to the matters set forth in the Pinnacle Partners Opinion, the
judgments made by Pinnacle Partners as to its analyses and the factors
considered by Pinnacle Partners caused Pinnacle Partners to be of the opinion,
as of the date of the Pinnacle Partners Opinion, that the Merger Price
was fair, from a financial point of view, to the holders of Common Stock (other
than the Landauer Affiliates, as to which Pinnacle Partners was not requested to
express an opinion).
Pursuant to the Engagement Letter, the Company paid Pinnacle Partners a
fee of $50,000 (the "Fairness Opinion Fee") upon delivery of the Pinnacle
Partners Opinion. Also pursuant to the Engagement Letter, the Company paid
Pinnacle Partners a fee of $10,000 upon the execution of the Engagement Letter
and has agreed to reimburse Pinnacle Partners for its out-of-pocket expenses
incurred by it in connection with its engagement, including all fees and
expenses of its legal counsel. In addition, the Company has agreed to indemnify
Pinnacle Partners and related persons against certain liabilities, including
liabilities under the federal securities laws, arising out of Pinnacle Partners'
engagement as the Company's financial advisor. Pinnacle Partners may provide
investment banking or financial advisory services to the Company or LHS or their
affiliates in the future. Pinnacle Partners is a private investment banking firm
whose senior professionals have extensive experience in the valuation of
businesses and their securities in connection with mergers, acquisitions,
private placements and valuations for corporate and other purposes.
EFFECT OF THE MERGER
At the date and time of the closing under the Merger Agreement (the
"Closing"), a Certificate of Merger (the "Certificate of Merger") will be
delivered to the Secretary of State of the State of New York for filing. The
Merger will become effective at the time of such filing (the "Effective Time").
At the Effective Time, Merger Sub will be merged with and into the
Company, with the Company continuing as the surviving corporation (in such
capacity, the "Surviving Corporation") and becoming a wholly-owned subsidiary of
LHS, which is controlled by Alan J. Landauer, and LHS will have a 100% interest
in the net book value and net earnings of the Company $1.42 and $_____,
respectively, based upon the unaudited financial statements of the Company as of
March 31, 1999. As a result of the Merger, the separate corporate existence of
Merger Sub will cease, and the Surviving Corporation will retain and succeed to
all the rights and be responsible for all the obligations of the Company and
Merger Sub in accordance with the NYBCL.
At the Effective Time, the Certificate of Incorporation and the By-laws
of Merger Sub as in effect immediately prior thereto, will become the
Certificate of Incorporation and By-laws, respectively, of the Surviving
Corporation, until thereafter amended in accordance with applicable law. The
name of the Surviving Corporation shall be Landauer Metropolitan Respiratory
Services, Inc.
The directors and officers of Merger Sub immediately prior to the
Effective Time will become the directors and officers of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation.
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At the Effective Time, by virtue of the Merger and without any further
action on the part of any shareholder of the Company or Merger Sub:
(i) each issued and outstanding share of Common Stock and any
associated shareholder rights (other than shares held by dissenting
shareholders, LTTR, LTTR's members and Merger Sub), shall be canceled and
converted into the right to receive $1.20 per share;
(ii) each dissenting shareholder shall be entitled to receive
the "fair value" of his Common Stock as determined in accordance with Section
623 of the NYBCL (See "Rights of Dissenting Shareholders");
(iii) each issued and outstanding share of common stock, par
value $.01 per share, of Merger Sub shall be converted into one share of common
stock of the Surviving Corporation;
(iv) each option to purchase shares of Common Stock
outstanding prior to the Effective Time shall be canceled at the Effective Time
and each option holder shall receive, in exchange, a cash payment, which prior
to deduction for applicable withholding taxes, is in an amount equal to the
product of (A) the excess, if any, of the Merger Price over the per share
exercise price of the option and (B) the number of shares subject to the option
(whether or not vested). If the exercise price of any option is equal to or
exceeds the Merger Price, such option shall be canceled without any payment; and
(v) each warrant to purchase shares of Common Stock
outstanding prior to the Effective Time shall entitle the holder to receive a
cash payment equal to the Merger Price upon exercise of the warrant by the
warrant holder at or before the Effective Time, including payment by the warrant
holder of the exercise price of the warrant. Each such warrant not so exercised
shall continue in effect after the Effective Time until it expires by its own
terms, but the warrant holder shall be entitled only to a cash payment by the
Surviving Corporation equal to the Merger Price upon exercise of the warrant by
the warrant holder, including payment by the warrant holder of the exercise
price of the warrant, until the expiration of the warrant.
At the Effective Time, if the Merger is consummated, present holders of
Common Stock will no longer have an equity interest in the Company and will
cease to have rights with respect thereto, except the right to receive the
applicable payment in respect of each such share and the right to receive
payment for their Common Stock to the extent that they exercised their right to
dissent with respect thereto prior to the Special Meeting. Present holders of
the Common Stock will neither share in the Company's future earnings and growth
nor the risks associated with such earnings and growth. No transfer of shares of
Common Stock will be made on the stock transfer books of the Surviving
Corporation after the Effective Time.
As a result of the Merger, the Common Stock will cease to be publicly
traded and therefore will be deregistered under the Securities Exchange Act of
1934 (the "Exchange Act"). As a result, the Company will no longer be obligated
to file reports pursuant to Section 13 of the Exchange Act.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material federal income tax
consequences of the Merger to beneficial owners of Common Stock and to holders
of options and warrants to purchase Common Stock, and is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing, proposed, temporary and final regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change
(possibly on a retroactive basis). No attempt has been made to comment on all
federal income tax consequences of the Merger that may be
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relevant to particular holders, including those that are subject to special tax
rules such as holders who received their Common Stock upon the exercise of
employee stock options or otherwise as compensation, dealers in securities,
mutual funds, insurance companies, tax-exempt entities, holders who do not hold
their Common Stock as capital assets and holders that, for federal income tax
purposes, are non-resident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts.
THE TAX DISCUSSION SET FORTH IS INCLUDED FOR GENERAL INFORMATION ONLY.
IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE
TO ANY PARTICULAR HOLDER. HOLDERS ARE ADVISED AND EXPECTED TO CONSULT WITH THEIR
OWN LEGAL AND TAX ADVISORS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AND ANY OTHER CONSEQUENCES TO
THEM OF THE MERGER UNDER STATE, LOCAL AND FOREIGN TAX LAWS.
The receipt of cash by a holder in exchange for such holder's Common
Stock will constitute a taxable transaction to such holder for federal income
tax purposes. In general, each holder of Common Stock will recognize gain or
loss for federal income tax purposes equal to the difference, if any, between
the cash received pursuant to the Merger or pursuant to the exercise of
dissenters' rights under the NYBCL and such holder's adjusted tax basis for its
Common Stock. In general, such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if the holder has held its Common Stock
for more than one year as of the Effective Time. There are limitations on the
deductibility of capital losses.
Unless a holder of Common Stock entitled to receive cash payments
pursuant to the Merger complies with certain reporting and certification
procedures, or otherwise demonstrates to the satisfaction of the Paying Agent,
as hereinafter defined, that it is an exempt recipient under applicable
withholding provisions of the Code and the Treasury regulations promulgated
thereunder, such holder may be subject to federal backup withholding at a rate
of 31% with respect to all such cash payments which such holder is entitled to
receive. Backup withholding is not an additional tax. Rather, persons subject to
31% backup withholding generally will be allowed a credit for the amount of tax
withheld against such person's federal income tax liability for such year.
Each holder of an option to purchase Common Stock that is outstanding
prior to the Effective Time will, in settlement thereof and without any action
by such holder, be entitled to receive for each share of Common Stock subject to
such option an amount in cash (subject to any applicable tax withholding
requirements) equal to the excess, if any, of the Merger Price over the per
share exercise price of such option. The holder of such option will recognize
ordinary compensation income equal to the cash received pursuant to the Merger
(including any applicable tax withholding) in respect of such option. Holders of
such options should consult their own tax advisors as to whether all or a
portion of the cash payable in respect of an option may be subject to the 20%
nondeductible excise tax under Sections 280G and 4999 of the Code imposed on
"excess parachute payments."
It is anticipated that each holder of a warrant to purchase Common
Stock that is outstanding prior to the Effective Time and that subsequently
expires without exercise pursuant to the terms of the Merger, may be entitled to
recognize a loss for federal income tax purposes in an amount equal to the
holder's adjusted tax basis in such warrant. Such loss is expected to result
generally in a long-term capital loss for such holder (and be subject to the
limitations on the deductibility of capital losses generally) if the Common
Stock that initially was to be issued upon exercise of the warrant would have
been a capital asset if acquired by such holder and the warrant has been held by
the holder for more than one year at the time such loss is recognized. Loss
recognition may also apply generally to a warrant holder who exercises such
warrant pursuant to the terms of the Merger. Holders of warrants should consult
with their own legal and tax advisors as to the particular tax consequences,
including the amount, character and timing of any loss, that may result for
federal income tax purposes with respect to such warrants.
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Consummation of the Merger will result in an ownership change under
Internal Revenue Code Section 382 which may limit the future use of the
Company's existing net operating loss carry forwards.
EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS, ANY
RECENT CHANGES IN APPLICABLE TAX LAWS AND ANY PROPOSED LEGISLATION.
ACCOUNTING TREATMENT
The Company understands that the Merger will be accounted for by LTTR
as a "purchase" under generally accepted accounting principles.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Alan J. Landauer, a Director and the Chairman of the Board of the
Company, is the President and sole shareholder of LHS, the Managing Director and
sole member of LTTR, and the President of Merger Sub. If the Merger is
consummated, the Company will become a wholly-owned subsidiary of LHS, and Mr.
Landauer will become President of the Company. Accordingly, Mr. Landauer has a
substantial interest in the matters to be acted upon at the Special Meeting.
Upon the Closing, Dean L. Sloane, a Director of the Company and its former
Chairman of the Board, and Craig V. Sloane, a former Director of the Company,
will enter into three-year consulting agreements with the Company providing for
annual consulting fees of $110,000 and $26,000, respectively.
DESCRIPTION OF THE MERGER AND THE MERGER AGREEMENT
The description of the Merger Agreement contained in this Proxy
Statement discusses the material aspects thereof, but does not purport to be
complete in every respect. It is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference.
THE MERGER
At the Effective Time, Merger Sub will be merged with and into the
Company, with the Company continuing as the surviving corporation (in such
capacity, the "Surviving Corporation"). As a result of the Merger, the separate
corporate existence of Merger Sub will cease and the Surviving Corporation will
retain and succeed to all the rights and be responsible for all the obligations
of the Company and Merger Sub in accordance with the NYBCL.
At the Effective Time, the Certificate of Incorporation and the By-laws
of Merger Sub as in effect immediately prior thereto, will become the
Certificate of Incorporation and By-laws, respectively, of the Surviving
Corporation, until thereafter amended in accordance with applicable law. The
name of the Surviving Corporation shall be Landauer Metropolitan Respiratory
Services, Inc.
The directors and officers of Merger Sub immediately prior to the
Effective Time will become the directors and officers of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation.
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CONVERSION OF SECURITIES
At the Effective Time, by virtue of the Merger and without any further
action on the part of any shareholder of the Company or Merger Sub:
(i) each issued and outstanding share of Common Stock and any
associated shareholder rights (other than shares held by dissenting
shareholders, LTTR, LTTR's members and Merger Sub), shall be canceled and
converted into the right to receive $1.20 per share;
(ii) each dissenting shareholder shall be entitled to receive
the "fair value" of his Common Stock as determined in accordance with Section
623 of the NYBCL (See "Rights of Dissenting Shareholders'"); and
(iii) each issued and outstanding share of common stock, par
value $.01 per share, of Merger Sub shall be converted into one share of common
stock of the Surviving Corporation.
At the Effective Time, holders of Common Stock will cease to have
rights with respect thereto, except the right to receive the applicable payment
in respect of each such share and the right to receive payment for their Common
Stock to the extent that they exercised their right to dissent with respect
thereto prior to the Special Meeting. No transfer of shares of Common Stock will
be made on the stock transfer books of the Surviving Corporation after the
Effective Time.
PAYMENT OF MERGER PRICE
Immediately after the Effective Time, Merger Sub will cause the
Surviving Company to deposit with Continental Stock Transfer & Trust Company
(the "Paying Agent"), an aggregate amount in cash sufficient in the aggregate
for the Paying Agent to make full payment of the Merger Price to the holders of
all of the outstanding Common Stock (other than dissenting shareholders, LTTR,
LTTR's members and Merger Sub). No interest will accrue or be paid to the holder
of any outstanding Common Stock.
As soon as reasonably practical after the Effective Time, the Paying
Agent will mail to each holder of record of certificates which immediately prior
to the Effective Time represented outstanding shares of Common Stock
("Certificates"): (i) a letter of transmittal which will specify that delivery
shall be effected, and risk of loss and title to each such Certificate shall
pass only upon delivery of such Certificate to the Paying Agent, contain a
representation in a form reasonably satisfactory to the Surviving Corporation as
to the good and marketable title to the Common Stock represented by such
Certificates free and clear of any lien, and contain such other provisions as
the Company and LHS may reasonably specify; and (ii) instructions to effect the
surrender of such Certificates in exchange for an amount equal to the product of
the Merger Price and the number of shares of Common Stock represented by such
Certificate.
Upon the surrender to the Paying Agent of a Certificate for
cancellation, together with a duly executed letter of transmittal and such other
documents as the Paying Agent may reasonably require, the Paying Agent will
deliver the applicable Merger Price in respect of the shares of Common Stock
represented by such Certificate, without interest. The Paying Agent will
promptly surrender such Certificate to the Surviving Corporation for
cancellation.
HOLDERS OF COMMON STOCK SHOULD NOT FORWARD THEIR STOCK CERTIFICATES
WITH THE ENCLOSED PROXY CARD, NOR SHOULD THEY RETURN THEIR STOCK CERTIFICATES TO
THE PAYING AGENT, UNTIL THEY HAVE RECEIVED A LETTER OF TRANSMITTAL.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
the Company relating to, among other things, the following matters regarding the
Company and its subsidiaries (which representations and warranties are subject,
in certain cases, to specified exceptions): (i) due organization, qualification
and corporate power; (ii) capital structure; (iii) the authorization, validity
and enforceability of the Merger Agreement; (iv) the absence of any conflict
with applicable laws and contracts to which they are a party; (v) reports and
other documents filed with the Securities and Exchange Commission; (vi) title to
assets; (vii) subsidiaries; (viii) the accuracy and completeness of the
Company's financial statements; (ix) the absence of material adverse changes
since December 31, 1998; (x) the absence of undisclosed liabilities; (xi) the
absence of any requirement to pay broker's fees in connection with the Merger;
(xii) compliance with laws; (xiii) tax matters, including the payment of taxes
and filing of tax returns; (xiv) intellectual property rights; (xv) rights to
tangible assets; (xvi) the quality of its inventory; (xvii) contracts and other
agreements to which they are party; (xviii) the validity and collectibility of
notes, accounts receivable and reimbursements; (xix) the absence of powers of
attorney granted by any of them; (xx) the validity of insurance policies; (xxi)
litigation; (xxii) product warranties; (xxiii) employee relations; (xxiv)
employee benefit plans; (xxv) the absence of guaranties of obligations of other
parties; (xxvi) compliance with laws governing environmental, health and safety
issues; (xxvii) the absence of business arrangements or relationships with the
holders of Common Stock; (xxviii) possession of all licenses, permits and other
authorizations necessary to own and operate its assets and participate in
reimbursement programs as currently participated in; and (xxix) the absence of
termination proceedings as to participation in Medicare or Medicaid.
The Merger Agreement contains various representations and warranties of
LHS and Merger Sub relating to, among other things: (i) due organization; (ii)
the authorization, validity and enforceability of the Merger Agreement; (iii)
the absence of any conflict with applicable laws and contracts to which they are
a party; (iv) the absence of any requirement to pay broker's fees in connection
with the Merger; and (v) the absence of litigation with respect to the execution
of the Merger Agreement and the consummation of the transactions contemplated
thereby.
Except for the agreements relating to the payment of the Merger Price
and provisions concerning indemnification, none of the representations,
warranties and covenants of the parties to the Merger Agreement will survive the
Effective Time.
CONDUCT OF BUSINESS PENDING THE MERGER
The Company has agreed that from the date of the Merger Agreement it
will not (and will not cause or permit any of its subsidiaries to) engage in any
practice, take any action, or enter into any transaction outside the ordinary
course of business.
EXCLUSIVITY
The Company has agreed that it will not (and will not cause or permit
any of its subsidiaries to) solicit, initiate or encourage the submission of any
proposal or offer from any person relating to the acquisition of all or
substantially all of its capital stock or assets, except that the Company and
its subsidiaries and their respective directors and officers may participate in
any discussion or negotiations regarding, furnish any information with respect
to, assist or participate in, or facilitate in any other manner any effort to or
attempt by any person to do or seek any of the foregoing to the extent their
fiduciary duties may require. The Company is required to notify LHS immediately
if any person makes any proposal, offer, inquiry or contact with respect to any
of the foregoing.
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CONDITIONS PRECEDENT TO THE MERGER
The obligations of the Company, LHS and Merger Sub to consummate the
Merger are conditioned, among other things, on the following:
(i) The Merger Agreement receiving the approval of at least 66
2/3% of the issued and outstanding Common Stock;
(ii) The Company and its subsidiaries obtaining all required
third party consents to the Merger;
(iii) The absence of any pending or threatened action, suit or
proceeding which could prevent the consummation of any of the transactions
contemplated by the Merger Agreement, cause the rescission of any of the
transactions contemplated by the Merger Agreement following consummation,
adversely effect the right of LHS to own the capital stock of the Surviving
Corporation and to control the Surviving Corporation and its subsidiaries, or
adversely affect the right of the Surviving Corporation or its Subsidiaries to
own its assets and operate its business;
(iv) The parties receipt of all authorizations, consents and
approvals of governments and governmental agencies required in connection with
the Merger; and
(v) LHS and Merger Sub obtaining all of the financing they
require in order to consummate the Merger.
In addition, the obligation of LHS and Merger Sub to consummate the
Merger is conditional, among other things, on the number of dissenting shares
not exceeding 5% of the total number of issued and outstanding shares (not
including those shares owned by LTTR, LTTR's members and Merger Sub).
Conditions to the closing of the Merger Agreement may be waived upon
the agreement of the parties, or upon the assent of the party having the right
to terminate the Merger Agreement if a given condition is not met, as the case
may be.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Closing, whether before or after approval of the Merger by the Company's
shareholders:
(i) by mutual written consent of the Company, LHS and Merger
Sub;
(ii) by either LHS or Merger Sub if (a) the Company has
breached any material representation, warranty or covenant contained in the
Merger Agreement in any material respect and failed to cure such breach for a
period of ten days after receipt of notice of the breach from LHS or Merger Sub
or (b) if the closing does not occur on or before August 30, 1999 due to the
failure of any condition precedent to the obligation of LHS and Merger Sub to
close (unless the failure results primarily from LHS or Merger Sub breaching any
representation, warranty or convenant contained in the Merger Agreement);
(iii) by the Company if (a) LHS or Merger Sub has breached any
material representation, warranty or covenant contained in the Merger Agreement
in any material respect and failed to cure such breach for a period of ten days
after receipt of notice of the breach from the Company or (b) if the Closing
does not occur on or before August 30, 1999 due to the failure of any condition
22
<PAGE> 31
precedent to the obligation of the Company to close (unless the failure results
primarily from the Company breaching any representation, warranty or convenant
contained in the Merger Agreement); and
(iv) by any party giving notice to the other parties at any
time after the Special Meeting if the Merger Agreement and the Merger fail to
receive the requisite shareholder approval.
If the Merger Agreement is terminated prior to Closing, the Company and
its management will continue to explore strategic alternatives to enhance
shareholder value. There can be no assurance that such alternatives will be
available to the Company or that they can be obtained on terms as favorable to
the Company and the shareholders as those provided for in the Merger Agreement.
FEES AND EXPENSES
Regardless of whether the Merger is consummated, all expenses incurred
in connection with the transactions contemplated by the Merger Agreement will be
paid by the party incurring such expenses (including legal fees and expenses).
Notwithstanding the foregoing, if the Merger Agreement terminates prior to the
Closing because either (i) there is a breach by the Company of any material
representation, warranty or covenant contained in the Merger Agreement in any
material respect which is not cured within ten days after receipt of notice of
the breach from LHS or Merger Sub (other than failures which result primarily
from LHS or Merger Sub breaching any representation, warranty or convenant
contained in the Merger Agreement) or (ii) if the Company terminates the Merger
Agreement prior to obtaining shareholder approval of the Merger and the Merger
Agreement as a result of having received an acquisition proposal that the Board
of Directors of the Company determines, in good faith, and after consultation
and advice from its financial advisors, is likely to be subject to completion
and would, if consummated, result in a transaction more favorable, from a
financial point of view, to the Company's shareholders than the Merger, then the
Company shall pay to LHS a termination fee of $350,000, and will reimburse LHS
for any and all expenses incurred by LHS and Merger Sub, including attorneys'
fees, relating to or arising out of the Merger Agreement and the transactions
contemplated by the Merger Agreement.
Fees and expenses of the Company in connection with the Merger,
including filing fees, printing costs, attorneys' fees and costs, fees of the
Company's independent certified public accountants, and fees of $50,000 and
out-of-pocket expenses to Pinnacle Partners, are expected to total approximately
$150,000, exclusive of fees and costs of LHS and Merger Sub.
SLOANE SHAREHOLDERS' AGREEMENT
The Sloane Group and LHS entered into a Shareholders' Agreement
concurrent with the execution of the Merger Agreement under which the Sloane
Group agreed to vote all of the shares of Common Stock owned by it (not less
than 2,091,450 shares) in favor of the Merger (the "Sloane Shareholders'
Agreement"). A complete copy of the Sloane Shareholders' Agreement was included
with an amendment to the Schedule 13D with respect to the Company filed by LHS,
LTTR and Alan J. Landauer with the Securities and Exchange Commission on June
__, 1999.
In order to induce LHS and Merger Sub to enter into the Merger
Agreement, and pursuant to the Sloane Shareholders' Agreement, the Sloane Group
also granted an irrevocable proxy to LHS and any designee of LHS to vote its
shares of Common Stock at any meeting of shareholders or in response to any
solicitation of proxies with respect to the Merger or certain other transactions
for a period of six months from the date of the Sloane Shareholders' Agreement.
23
<PAGE> 32
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of Common Stock who oppose the Merger and comply with the
provisions of Section 623 of the NYBCL are entitled to demand and receive in
cash the fair value of their shares as determined pursuant to the NYBCL. Company
shareholders who wish to exercise this right must file a written objection to
the Merger prior to the Special Meeting or at the Special Meeting but before the
vote on the Merger, must not vote in favor of the Merger, and must meet certain
other conditions. This objection may be withdrawn at any time prior to a
dissenting shareholder's acceptance of an offer from the Company upon the
satisfaction of certain conditions. Such shareholders will forfeit their right
to a cash value payment if they do not comply with all statutory procedures and
requirements.
The written objection must include a notice of election to dissent, the
name and residence address of the shareholder, the number of shares of Common
Stock as to which he or she dissents and a demand for payment of the fair value
of his or her shares of Common Stock if the Merger is approved and carried out.
A shareholder may not dissent as to less than all of his or her shares as to
which he or she has a right to dissent.
The above is a brief summary of dissenting shareholders' rights, which
is not meant to be a complete description of the procedures for exercising
rights pursuant to Section 623 of the NYBCL. Please see the text of Section 623
of the NYBCL attached hereto as Annex B for a complete description of the
procedure for exercising dissenting shareholders' rights.
SOURCE AND AMOUNT OF FUNDS
LHS and Merger Sub intend to finance the payment of the Merger Price
and certain costs and expenses relating to the Merger through a senior financing
of approximately $7 million to $8 million (the "Senior Financing") and a junior
financing of approximately $3 million to $4 million (the "Junior Financing")
from a financial institution yet to be determined. As of the date hereof, LHS
and Merger Sub are currently considering financing proposals from three
financial institutions.
The proceeds of the Senior Financing are expected to finance the
payment of the Merger Price and certain costs relating to the Merger. It is
expected that the Senior Financing will bear interest at a rate of between 9%
and 10% and have a repayment term of 6 to 10 years. The proceeds of the Junior
Financing are expected to be used to finance the working capital needs of the
Company. The Junior Financing is expected to bear interest at a rate of between
10.5% and 11.0% and have a repayment term of 6 to 10 years. Both the Senior
Financing and the Junior Financing will be secured by a blanket security
interest on all of the assets of LHS and the Company. LHS expects to repay
amounts owing under the Senior Financing and Junior Financing from available
cash from operations of LHS and the Company.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and Class A Warrants of the Company are traded on the
OTC Bulletin Board and the Boston Stock Exchange under the symbols "CCSE" and
"CCSEW", respectively. Prior to March 31, 1999, the Common Stock had been traded
on the Nasdaq SmallCap Market, but was delisted from the SmallCap Market
following the determination by the Nasdaq Listing Qualifications Panel that the
Common Stock failed to maintain a minimum bid price of $1.00 per share pursuant
to Nasdaq Marketplace Rules.
Set forth below are the high and low bids for the Common Stock and
Class A Warrants during the periods indicated as provided by the Nasdaq
SmallCap, and as appeared on the OTC Bulletin Board following the delisting of
the Common Stock from the Nasdaq SmallCap Market at the close of business
24
<PAGE> 33
on March 30, 1999. Such quotations reflect interdealer price without retail
mark-up, markdown or commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
FISCAL QUARTER ENDED HIGH LOW
- - - -------------------- ---- ---
<S> <C> <C>
March 31, 1997 ....................... 4.875 3.938
June 30, 1997 ........................ 4.625 0.625
September 30, 1997 ................... 1.813 0.844
December 31, 1997 .................... 3.031 1.250
March 31, 1998 ....................... 4.625 1.906
June 30, 1998 ........................ 5.6875 1.375
September 30, 1998 ................... 2.9375 0.625
December 31, 1998 .................... 0.9375 0.1875
March 31, 1999 ....................... 1.000 0.250
</TABLE>
<TABLE>
<CAPTION>
CLASS A WARRANTS
FISCAL QUARTER ENDED HIGH LOW
- - - -------------------- ---- ---
<S> <C> <C>
March 31, 1997 ....................... 3.375 2.063
June 30, 1997 ........................ 3.125 0.125
September 30, 1997 ................... 0.500 0.063
December 31, 1997 .................... 1.000 0.344
March 31, 1998 ....................... 1.500 0.625
June 30, 1998 ........................ 1.375 0.3125
September 30, 1998 ................... 1.000 0.125
December 31, 1998 .................... 0.1875 0.010
March 31, 1999 ....................... 0.050 0.050
</TABLE>
On June 8, 1999, there were approximately 474 holders of record of the
common stock, which includes all shares held in nominee names by brokerage firms
and financial institutions as one stockholder.
The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Item 6 "Management's Discussion and Analysis of Financial Condition or
Plan of Operation" in the Company's Annual Report on Form 10-KSB for the fiscal
year ending March 31, 1999 is incorporated herein by reference.
DELISTING AND DEREGISTRATION OF COMMON STOCK AND WARRANTS
If the Merger is consummated the Common Stock and the Warrants will
cease to be publicly traded and therefore will be deregistered under the
Securities Exchange Act of 1934, as amended. As a result, the Company will no
longer be obligated to file reports pursuant to Section 13 of the Exchange Act.
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<PAGE> 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock on June 15, 1999 with respect to (a)
each person or group known to the Company to be the beneficial owner of more
than 5% of the outstanding shares of Common Stock, (b) each director of the
Company, (c) each named executive officer of the Company (as that term is
defined in Item 402(a)(2) of Regulation S-B promulgated by the Securities and
Exchange Commission) and (d) all officers and directors of the Company as a
group. Except as set forth below, all of such shares are held of record and
beneficially.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- -------------------- ----------------
<S> <C> <C>
Alan J. Landauer .............. 4,279,700(1) 59.30%
99 Calvert Street
Harrison, NY 10528
LTTR Home Care, LLC ........... 2,126,250 29.46%
99 Calvert Street
Harrison, New York 10528
Dean L. Sloane ................ 1,388,000(2) 19.23%
4 Gannett Drive
White Plains, NY 10604
Thomas C. Blum ................ 10,000(3) *
Columbia Financial Partners, LP
375 Park Avenue
New York, NY 10152
Louis Rocco ................... 293,056 4.06%
18 Sargent Place
Mt. Vernon, NY 10550
</TABLE>
- - - ----------
(1) Includes 2,126,250 shares owned by LTTR. Also includes an aggregate of
2,091,450 shares owned by the Sloane Group, for which proxies have been granted
to LHS and any designee of LHS for the purpose of voting such shares at any
meeting of shareholders or in response to any solicitations of proxies for a
period of six months expiring December 14, 1999. See "Sloane Shareholders'
Agreement."
(2) Does not include 100,000 Shares owned by Mr. Sloane's wife, Mary Sloane, 800
shares owned by Mr. Sloane's son, Joshua Sloane and 175,000 Shares owned by The
Sloane Family Foundation for which Mr. Sloane disclaims beneficial ownership.
Mr. Sloane has granted an irrevocable proxy to LHS and any designee of LHS for
the purpose of voting such shares at any meeting of shareholders or in response
to any solicitation of proxies for a period of six months expiring December 14,
1999. See "Sloane Shareholders' Agreement."
(3) Mr. Blum disclaims beneficial ownership of 10,000 shares of Common Stock
owned by his brother James J. Blum.
26
<PAGE> 35
<TABLE>
<S> <C> <C>
Gary J. Spirgel ........................ 0 *
18 Sargent Place
Mount Vernon, NY 10550
Saverio D. Burdi ....................... 87,243(4) 1.21%
18 Sargent Place
Mt. Vernon, NY 10550
Harris G. Leroy II ..................... 0 *
6 Betsy Ross Court
Skillman, New Jersey 08558
All Officers and Directors as a Group (7 4,669,999 64.71%
persons)
</TABLE>
*Less than one percent.
ADDITIONAL INFORMATION ABOUT THE COMPANY AND ITS BUSINESS
BUSINESS DEVELOPMENT
The Company was incorporated in the State of New York in 1992. The
Company, together with Metropolitan, provides home health care services and
products consisting primarily of respiratory equipment, rental and sale of
durable medical equipment and sale of home health care supplies primarily in the
five boroughs of New York City, and Westchester, Rockland and Nassau Counties in
New York State, as well as northern New Jersey.
In April 1993, the Company acquired certain assets of Adam, including
inventory, office equipment and an assignment of the office lease. Since
acquiring the assets of Adam, the Company's management has expanded operations
by implementing a sales strategy focusing on an informed diagnostic-centered
approach, signing new major payor contracts with additional HMOs and PPOs
including Oxford Health Plans, Metro Plus Health Maintenance Organization,
NYLCare, The Bronx Health Plan, US Healthcare, HealthFirst, and Local 1199
National Benefit Fund, and offering new equipment, products and services such as
low air loss beds, alternating pressure beds and standing wheelchairs. In
addition, the Company has significantly increased its sales of medical supplies
as a result of becoming a provider of disposable medical supplies for the
largest certified home health care agency in New York.
On October 18, 1996, the Company consummated an initial public offering
of its securities. Pursuant to the offering, with an overallotment of 195,000
units, the Company sold 1,495,000 shares of Common Stock at a price of $5.10 per
share and 1,495,000 Class A Warrants at a price of $.10 per Warrant, each such
Warrant entitling the holders thereof to purchase one share of Common Stock at
an exercise price of $6.00 per share. The gross aggregate proceeds from the
public offering were $7,774,000 and the net proceeds to the Company were
$5,638,326.
- - - ----------
(4) Includes options to purchase 25,000 shares of Common Stock at an exercise
price of $.50 per share granted to Mr. Burdi as of December 14, 1998.
27
<PAGE> 36
On May 10, 1997, the Company acquired 68% of the outstanding shares of
Metropolitan for a purchase price of approximately $5,993,000, consisting of
approximately $2,800,000 in cash, Promissory Notes with an aggregate principal
amount of $2,967,000 accruing interest at a rate of 6% per annum, a portion of
which was issued to certain Metropolitan employees (including a Promissory Note
for $444,000 issued to Wade Wilson, the brother-in-law of Alan T. Sheinwald, who
at the time was the President and Chief Executive Officer of the Company), and
62,243 shares of the Company's common stock with a value of $226,000. Also on
May 10, 1997, the Company purchased the remaining 32% of the outstanding shares
of Metropolitan in a separate transaction. The purchase price was approximately
$2,487,000 consisting of $1,300,000 in cash, 300,000 shares of common stock of
the Company with a value of $1,087,000 and a one year Promissory Note with a
face value of $100,000 accruing interest at a rate of 6% payable quarterly.
Metropolitan was incorporated on April 15, 1974 and is engaged in the
sale and rental of medical supplies and durable medical equipment within the New
York metropolitan area. The Company has continued to operate Metropolitan as a
separate business and has treated Metropolitan as a wholly-owned subsidiary.
BUSINESS OF THE COMPANY
The Company is a provider of an extensive variety of home health care
products and services. The Company services the home health care market by
coordinating with various health care workers and payor case managers to
determine the home health needs of patients.
The importance of home health care is increasing as a result of
significant economic pressure within the health care industry. The ongoing
pressure to contain health care costs, while maintaining high quality care, is
accelerating the growth of alternate site care that reduces hospital admissions
and lengths of hospital stays, such as home health care.
The growth in home health care is also due to increased acceptance by
payors, patients and the medical community, including physicians, hospitals and
other providers. Home health care often results in lower costs, which is
increasingly important under managed care. In addition, home health care has
grown rapidly as a result of advances in medical technology, which have
facilitated the delivery of services in alternate sites; demographic trends,
such as an aging population; and a strong preference among patients to receive
health care in their homes.
The home health care industry is highly fragmented and characterized by
local providers that typically do not offer a comprehensive range of
cost-effective services. These local providers often do not have the capital
necessary to expand their operations or the range of services offered, which
limits their ability to compete for managed care contracts and other referrals
and to realize efficiencies in their operations. As managed care has become more
prevalent, payors increasingly are seeking home health care providers that offer
a cost-effective, comprehensive range of services in each market served, which
further inhibits the ability of local providers to compete effectively. As a
result of these economic and competitive pressures, the home health care
industry is undergoing rapid consolidation, a trend the Company expects will
continue.
PRODUCTS AND SERVICES
The Company services patients referred to the Company by nurses,
physicians, social workers and payor case managers, as well as discharge
planners at hospitals, HMOs, PPOs and rehabilitation centers. Working with these
individuals, the Company's personnel coordinate the delivery and set-up of the
products and supplies to be used by patients in their home recovery and care.
Upon receipt of an
28
<PAGE> 37
order, the Company will arrange for the appropriate products and supplies to be
delivered to the patient at home. At the time of delivery, the Company's
personnel will set up equipment as necessary and spend time with the patient
and/or care givers to explain the proper use of the medical equipment delivered.
The Company handles customer service inquiries via an 800 telephone number, and
will generally send its personnel to visit the patient, if necessary, to rectify
any problems that may arise.
The primary categories of products provided by the Company (and
examples of the products available in each category) are set forth below:
Durable Medical Equipment
-- Hospital beds
-- Wheelchairs
-- Walking Aids
-- Bathroom safety equipment
-- Patient lifts
Disposable Medical Supplies ("Supplies")
-- Incontinent products (diapers, liners, chux)
-- Wound care products (dressings and bandages for treating
decubitus (bed sores and lesions, pressure sores,
ulcerations, etc.)
-- Nutritional products (Ensure, Sustacal, etc.)
-- Diabetic products/supplies
-- Ostomy supplies
-- Urological supplies (catheters, etc.)
-- Blood pressure products
-- Skin care products
Rehabilitation Products ("Rehabilitation")
-- Powered operated vehicles (Includes specialized versions
such as wheelchairs and scooters)
-- Advanced support surfaces (low air loss beds, alternating
pressure mattresses)
-- Specialized seating
Respiratory Equipment and Products ("Respiratory")
-- 0(2) concentrators
-- Nebulizers with compressors
-- Suction pumps
-- Oximetry equipment
-- C-PAP (Continuous positive air pressure) equipment
-- Bi-PAP (Bi-level positive air pressure) equipment
The Company provides a diversified range of services and products. The
following table sets forth the percentage of net revenues represented by each
line of business for the years ended March 31:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
DME and Supplies ........... 54.7% 58.9%
</TABLE>
29
<PAGE> 38
<TABLE>
<S> <C> <C>
Rehabilitation ............. 15.0% 15.6%
Respiratory ................ 30.3% 25.5%
----- -----
100.0% 100.0%
===== =====
</TABLE>
The Company's inventory is housed in its 20,000 square foot
office/warehouse facility in Mount Vernon, New York. All of its products are
readily available from more than one supplier and the Company can generally fill
an order within 24 hours of placement. The Company operates on a regular basis
24 hours a day, Monday through Saturday and provides services on an emergency
basis on Sundays. The Company utilizes its 800-telephone number for customer
service calls. The Company's office receives calls from 8:00 A.M., to 6:00 P.M.,
Monday through Friday and 9:00 A.M., to 1:00 P.M., on Saturdays, while an
answering service handles calls at all other hours. The Company's service
technicians are available to handle calls on a 24-hour basis.
Generally, the fees charged by the Company for its products and
supplies are covered by third party payor arrangements such as Medicaid,
Medicare or private insurance. Equipment such as hospital beds, wheelchairs and
patient lifters covered by Medicare is generally paid for on a rental basis over
a 15-month term. In many instances, such equipment is returned to the Company
prior to the 15-month term, in which case the equipment is re-conditioned and
available for a new rental term. Generally, the equipment can be reconditioned
for use to be available for several rental terms for a period in excess of five
years. The Company receives a semi-annual maintenance payment for any equipment
that is used in excess of 15 months on a per patient basis. Purchased equipment
covered by Medicare is reimbursed at approved published prices. Equipment
covered by Medicaid is generally sold pursuant to an approved price range or a
cost plus fee basis. Insurance payors use customary and usual standards for
their reimbursement terms, which are generally comparable to Medicare terms. For
the fiscal year ended March 31, 1999, the average days of sales outstanding from
the day of billing was 146 days from Medicare, 131 days from Medicaid and 128
days from private insurers and other non-governmental agencies, respectively. An
inconsequential percentage of the Company's business is direct cash sales to
customers. For the fiscal years ending March 31, 1999 and 1998, the allocation
of net revenues among the Company's third party payors was approximately 34.6%
and 30.0% to Medicare, 26.3% and 30.7% to Medicaid and 39.1% and 39.3% to
private insurers and other non-governmental agencies, respectively.
COMPETITION
The home health care provider industry is highly competitive. While
there are a few select national providers, the Company currently encounters its
most significant competition in providing home health care products from small
commercial providers operating in the New York metropolitan area. Relatively few
barriers to entry exist in the home health care industry. Accordingly, other
companies, including managed care organizations and health care providers that
currently are not serving the home health care market, may become competitors.
Recently there has been consolidation of home health care companies within the
New York Metropolitan area. Such consolidation may limit the Company's ability
to maintain or increase its market share, which may materially affect its
business, results of operations and financial condition. The Company believes
that health care facilities in the geographic area serviced by the Company
consider quality of care, reliability and reputation to be the most important
factors in referring a home health care provider to its patients, although other
factors such as financial stability, personnel policies and practices and costs
are also considered.
The Company's objective is to enhance its position as a leading
regional provider of cost-effective, comprehensive home health care. Management
believes that offering comprehensive services and maintaining a strong regional
presence are essential to generate referrals, particularly from managed
30
<PAGE> 39
care organizations and other payors. The Company expects that managed care
contracts will generate an increasing number of referrals as the penetration of
managed care accelerates.
The Company has developed and implemented service and procedure
standards that comply with the standards required by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), a nationally recognized
organization that develops standards for various health care industry segments
and monitors compliance with those standards through voluntary surveys of
participating providers. As the home health care industry has grown, the need
for objective quality measurements has increased. Not all providers have chosen
to undergo the accreditation process because of its expense and time burden.
Consequently, the Company has positioned itself to procure managed care
contracts in part because of its choice to undergo rigorous review of its
operations. The Company and Metropolitan are JCAHO accredited.
GOVERNMENT REGULATION AND REIMBURSEMENT
The Company and Metropolitan must comply with and are subject to
extensive federal and state regulations in connection with their participation
in Medicaid and Medicare. Medicare is a federal health insurance program for the
elderly and for chronically disabled individuals, which pays for equipment and
services when medically necessary. Medicare uses a charge-based reimbursement
system for purchased medical equipment based on approved published prices.
Equipment such as hospital beds, wheelchairs and patient lifters is generally
paid for on a rental basis over a 15 month term, with maintenance payments
semi-annually thereafter on a per patient basis.
Medicaid is a combined federal-state program for medical assistance to
impoverished individuals who are aged, blind or disabled or members of families
with dependent children. The Medicaid program in New York is subject to federal
requirements. The New York State Department of Health ("DOH") has the authority
to set levels of reimbursement within federal guidelines. These reimbursement
levels are generally consistent with the Company's customary charges.
The Company has submitted a reenrollment application to DOH for
Metropolitan, which is currently pending. Pursuant to State regulations,
reenrollment is required due to change in ownership of Metropolitan. An adverse
determination on reenrollment, which is not subject to judicial review, would
have material adverse consequences on the Company's business, results of
operations and financial condition. The Company has surrendered it Medicaid
provider number as part of a settlement reached with DOH and transferred its
Medicaid business to Metropolitan. See "Additional Information About the Company
and Its Business - Legal Proceedings."
Government funding for health care programs, including Medicare and
Medicaid, is subject to changes in laws and regulations, administrative rulings,
interpretations of policy, determinations by intermediaries and governmental
funding restrictions, all of which could materially increase or decrease program
reimbursements for the Company's products and services. Efforts have been made
at various governmental levels to reduce the costs of such programs, and no
assurance can be given that future funding levels for Medicare and Medicaid
programs will be comparable to present levels. Changes in reimbursement policies
as a result of budget cuts or other government action could adversely affect the
Company's operations. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and cost-control measures, and public debate of these issues will likely
continue in the future. The level of revenues and profitability of the Company,
like those of other health care providers, will also be affected by the
continuing efforts of private payors to contain or reduce the costs of health
care by lowering reimbursement rates, increasing case management review of
service, negotiating reduced contract pricing and capitation arrangements.
31
<PAGE> 40
The Company, like other Medicaid-Medicare providers, is subject to
governmental audits and other reviews and investigations related to Medicaid and
Medicare reimbursement claims. The Company is also subject to various fraud and
abuse laws that are designed to maintain the integrity of the Medicare and
Medicaid programs. These laws prohibit, among other things, any bribe, kickback,
rebate or remuneration of any kind in return for, or as an inducement for, the
referral of Medicare or Medicaid patients (the "Anti-kickback Statute"). The
United States Department of Health and Human Services ("HHS") has interpreted
the Anti-kickback Statute broadly to include the intentional payment of anything
of value to influence the referral of a Medicare and Medicaid recipient. HHS has
also adopted regulations creating "safe harbors" that exempt certain types of
business relationships and payments that do not appear to pose a threat of
Medicare and Medicaid program abuse. Transactions covered by the Anti-kickback
Statute that do not conform to applicable safe harbors are not necessarily in
violation of the Anti-kickback Statute, but the practice may be subject to
increased scrutiny and possible prosecution. A violation of the Anti-kickback
Statute may result in civil and criminal penalties, including imprisonment,
fines of up to $1,000,000 and orders of restitution, as well as exclusion from
participation in the Medicare and Medicaid programs.
Federal and state enforcement authorities have significantly increased
the amount of resources devoted to the investigation and prosecution of health
care fraud and abuse. For example, under the Health Insurance Portability and
Accountability Act (the "Act"), which was enacted in 1996, new appropriations
have been earmarked to fund government enforcement activities, a new federal
program has been established to coordinate and centralize such activities, and a
national data bank has been created to collect information regarding adverse
actions (including civil, criminal, license, and certification sanctions)
against health care providers, suppliers and or licensed practitioners.
The Act also strengthens existing anti-fraud programs. The Act conforms
Medicare's civil monetary penalty provision to cover certain conduct that is
prohibited elsewhere under the Medicare statute and other federal laws. The Act
also added a rule under the civil monetary penalty provision prohibiting a
person from remunerating a Medicare or Medicaid beneficiary that the person
knows or should know is likely to influence the beneficiary to order or receive
items or services. The Act further provides for mandatory exclusion from the
Medicare/Medicaid Programs of an individual (or entity) convicted of a felony
relating to health care fraud, and authorizes permissive exclusions of up to
three years for the conviction of other health care offenses. The Act also
allows for the permissive exclusion of certain individuals who (i) maintain a
controlling interest in a sanctioned entity and who knew or should have known of
the action constituting the basis of the sanction or (ii) who serve as managing
employees or officers of such a sanctioned entity.
There has also been an increase in enforcement activities under the
fraud and abuse laws pursuant to Operation Restore Trust, a federal government
initiative that focuses on the reimbursement practices of nursing homes, home
health care agencies and durable medical equipment companies located in the five
states with the largest Medicare populations. The targeted states include
California, Florida, Illinois, New York and Texas. Operation Restore Trust has
been responsible for millions of dollars in civil and criminal restitution,
fines, recovery of overpayments and the exclusion of a number of individuals and
corporations from the Medicare program.
Pursuant to the federal/state statutory regulations and administration
of the Medicaid program, each state has a Medicaid Fraud Control Unit. In New
York State that Unit is placed within the Office of the Attorney General. This
office has broad civil and criminal jurisdiction over Medicaid providers. In the
course of its operations, it reviews Medicaid providers. The Company is
currently the subject of such a review. Several other providers of medical
equipment and supplies in the same general geographic area have recently been
subject to similar reviews.
32
<PAGE> 41
The Company has implemented a Medicare and Medicaid Compliance Plan.
The Compliance Plan encompasses a code of conduct, corporate policies on vendor
contracting, sales and marketing, billing, records management, and other
matters. The plan is being implemented by means of formal training program of
the Company's staff.
Upon the consummation of the Merger, the Company will make a filing
with the DOH notifying that agency of the change of ownership of the Company and
Metropolitan and requesting that Metropolitan be re-enrolled as a Medicaid
provider.
INSURANCE
The Company carries a broad range of general liability, comprehensive
property damage, worker's compensation, professional liability, automobile and
other insurance coverage that management considers adequate for the protection
of its assets and operations. While management believes the manufacturers of the
equipment it sells or rents currently maintain their own insurance, and in some
cases the Company has received evidence of such coverage, there can be no
assurance that such manufacturers will continue to do so. There can be no
assurance that the coverage limits of such policies will be sufficient to cover
any judgements, settlements or cost relating to any pending or future legal
proceedings. If the insurance carried by the Company is not sufficient to cover
any judgements, settlements or cost relating to pending or future legal
proceedings, the Company's business and financial condition could be materially,
adversely effected.
EMPLOYEES
As of March 31, 1999, the Company had approximately 130 employees, 117
of whom are full-time employees and 13 of whom are part-time. Its management
team is comprised of four executives and four managers with extensive experience
in the home health care industry. The Company has two sales representatives and
two rehabilitation specialists who work on a salary. There are three dispatchers
and eight drivers who deliver products and are specially trained by the Company
to properly set up equipment and explain its use to patients. The Company has
fifteen warehouse workers, four repair specialists, and twenty five customer
service intake personnel, thirty three individuals who handle reimbursement and
a six person administrative staff. The Company also has twenty staff respiratory
therapists to provide service and advice to customers utilizing respiratory
equipment. Also, the Company has one person dedicated to its management
information system, two finance and accounting personnel and two purchasing
personnel. The Company also has 16 contract drivers who make deliveries. The
Company is not a party to any collective bargaining agreements and considers its
relations with employees to be good.
THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
Alan J. Landauer, Chairman of the Board of Directors of the Company
since April 8, 1999, is also the President and Chief Executive Officer of
Landauer Hospital Supplies, Inc., a home medical equipment provider, a position
he has held since 1980. He has also been the President and Chief Executive
Officer of Landauer Home Infusion Service from 1991 to the present. Mr. Landauer
is active in the management and growth of these home medical equipment providers
and has completed four acquisitions in the prior four years.
Thomas C. Blum, a Director of the Company since April 8, 1999, is
currently affiliated with Columbia Financial Partners, which makes private
investments in small financial institutions, as a consultant. From September
1996 to October 1998, Mr. Blum was Managing Director of Bear Stearns & Co. where
he was responsible for investment banking relationships in the financial
institutions group. In the prior 14 years, Mr. Blum was employed by Salomon
Brothers, Inc. rising to Vice President in
33
<PAGE> 42
investment banking, where he was responsible for mergers and acquisitions,
capital raising and advisory work. From 1989 to 1992 Mr. Blum ran Salomon's Asia
financial institutions business from Tokyo, Japan. Mr. Blum and Mr. Landauer are
first cousins.
Gary J. Spirgel, a Director of the Company since April 8, 1999, was
employed for 16 years by Health Force, Inc., a national provider of home care
services with 85 offices in 23 states and a wholly owned subsidiary of
Accustaff, Inc. From 1994 to 1998 he was President of Health Force, where he had
full operational responsibility for the company, including profitability. His
active employment with Health Force terminated in April 1998 when the division
was sold.
Dean L. Sloane has been a Director of the Company since its inception
and was appointed Chairman of the Board of Directors of the Company in July 1997
and served in that capacity until April 8, 1999. Since December 1988, he has
been Chairman of the Board, President and a Director of Community Medical
Transport, Inc., a publicly traded company.
Louis Rocco joined the Company in May 1997 as Vice President. He also
serves as a Director and as Secretary of the Company and President of
Metropolitan. Mr. Rocco was a founder of Metropolitan and held various executive
positions in Metropolitan from its inception through May 1997. Mr. Rocco is a
registered Respiratory Therapist and has a B.S. in Respiratory Therapy from Long
Island University.
Saverio D. Burdi joined the Company in May 1997 as Senior Vice
President and was appointed Chief Operating Officer in July 1997. Prior to
joining the Company, Mr. Burdi was an owner of Metropolitan and was employed by
Metropolitan from June 1989 through May 1997, and served as Vice President-Sales
of Metropolitan from June 1992 though May 1997.
Elia C. Guarneri joined the Company in January 1998 as Corporate
Controller, was appointed Acting Chief Financial Officer in October 1998 and was
made Chief Financial Officer on February 11, 1999. Prior to joining the Company,
Mr. Guarneri was Senior Accountant at Puglisi, Midler & Co. from December 1995
to January 1998 and was a Staff Accountant at Tobin & Company from October 1994
to December 1995. Prior to October 1994, Mr. Guarneri attended Pace University.
Mr. Guarneri received a B.B.A. from Pace University and is a Certified Public
Accountant.
None of the above listed officers and directors of the Company have
during the past five years (i) been involved in a petition under the bankruptcy
code of the United States (ii) been convicted in a criminal preceding (iii) been
the subject of any order, judgment or decree enjoining him from, among other
things, acting as a broker, dealer, investment advisor, engaging in any type of
business practice or engaging in any activity in connection with the purchase or
sale of any security or in connection with any violation of federal or state
securities laws, (iv) been subject to any order or decree barring or suspending
his right to engage in any activities described in (iii) above, or (v) been
found by a court of competent jurisdiction in a civil action or by a
governmental authority to have violated any federal or state securities law.
CERTAIN FINANCIAL INFORMATION
The following table sets forth the Company's book value per share of
Common Stock outstanding as of the dates shown:
<TABLE>
<CAPTION>
DATE BOOK VALUE PER SHARE OF COMMON STOCK
---- ------------------------------------
<S> <C>
March 31, 1998 $1.40
December 31, 1998 $1.39
</TABLE>
34
<PAGE> 43
<TABLE>
<S> <C>
March 31, 1999 $1.42
</TABLE>
The Company's ratio of earnings to fixed charges as of March 31, 1998,
December 31, 1998 and March 31, 1999 were 12%, 87.2% and 60.4%, respectively.
PUBLIC FILINGS
While the Company is not required to deliver an annual report to its
security holders, the Company has elected to deliver its annual report to its
security holders and such annual report will include audited financial
statements.
The Company files all of the reports required by Section 12 of the
Securities Exchange Act of 1934, as amended, with the Securities and Exchange
Commission (the "Commission"). Anyone may read and copy such materials filed
with the Commission at the Commission's Public Reference Room at 450 Fifth
Street N.W., Washington, D.C. 20549. Information about the Public Reference Room
can be obtained by calling the Commission at 1-800-SEC-0330. In addition, the
Commission maintains an internet site at http://www.sec.gov that contains
reports, proxy, and information statements, and other information regarding
issuers that file electronically.
DESCRIPTION OF PROPERTY
The Company's offices and warehouse are located in a 20,000 square foot
facility in Mount Vernon, New York, pursuant to a five year lease which
commenced January 1, 1996 and provides for annual rental payments of $114,000
for the first three years of the lease term and $132,000 for the last two years
of the lease term.
LEGAL PROCEEDINGS
On June 4, 1997, a search warrant was executed at the Company's
executive offices. The Company was informed that its then Chief Executive
Officer and then Chief Operating Officer and the Company itself are targets of a
Department of Justice criminal investigation for allegedly improper payments
relating to a contract, involving Medicare, to provide healthcare services
outside of New York State. If the Company is charged with criminal wrongdoing
and it is determined that the Company engaged in criminal wrongdoing, the
Company will be subject to criminal penalties, which may include fines of up to
$1,000,000 or more and an order of restitution, would be terminated as a
Medicaid and Medicare services provider, and could also be at the risk of having
its contracts with private insurers and other non-governmental agencies
terminated. Additionally, even if the Company is not charged with criminal
wrongdoing itself, but one of its past or present officers or employees are
convicted of crimes related to their employment, the Company could be terminated
as a Medicaid and Medicare provider. In these circumstances, although the
Company would not be subjected to automatic exclusion from such programs, it
could be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. The Company has cooperated with the
government in the Department of Justice criminal investigation.
On May 16, 1997, the New York State Department of Social Services
("DSS"), which has subsequently been abolished and its functions assumed by the
New York State Department of Health ("DOH"), issued a Draft Notice of Proposed
Agency Action and Draft Audit Report regarding the Company ("The Draft Notice").
Pursuant to the Draft Notice, DSS sought recovery of $227,000 from the Company
as well as exclusion of the Company as a provider under the New York State
Medicaid program. Pursuant to DOH's process, the Company, through its healthcare
regulatory counsel, submitted a detailed response to the Draft Notice. DOH
thereafter reviewed its draft findings and recommendations
35
<PAGE> 44
and issued a final Notice. Pursuant to which DOH reduced the amount of the
proposed audit recovery to $83,978. DOH has also withdrawn its intention to
exclude the Company as a provider under the New York State Medicaid program. DOH
has issued an advisory to the Company that continued performance issues of the
type or nature addressed in the audit could result in a severe sanction in the
future. As a further development, the Company has agreed to surrender its
Medicaid provider number, in favor of conducting its Medicaid business through
Metropolitan. During the fourth quarter of fiscal year 1999 the Company
transferred the majority of its Medicaid business to Metropolitan. The effective
date of the surrender of the Company's Medicaid provider number was March 1,
1999.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Company's independent certified public accountant is Richard A.
Eisner & Company, LLP. A representative of Richard A. Eisner & Company, LLP will
attend the Special Meeting and will have an opportunity to make a statement if
he desires to do so. That representative will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, the Company will hold its 2000 annual
meeting of its shareholders in accordance with its Bylaws and the NYBCL. Any
proposals of shareholders to be presented at the 2000 annual meeting of
shareholders are required to be delivered to the Secretary of the Company by no
later than November 8, 1999 in order to be included in the Company's Proxy
Statement and form of Proxy. If a shareholder does not notify the Company by
January 22, 2000 of a proposal, then the persons named as Proxies in the
accompanying Proxy may use their discretionary voting authority if the proposal
is raised at the meeting.
INCORPORATION BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference: (i) the Company's
audited Financial Statements for the years ended March 31, 1999 and March 31,
1998 included in the Company's Annual Report on Form 10-KSB for the Year Ended
March 31, 1999; (ii) the unaudited balance sheets and comparative year-to-date
income statements and statements of cash flows and related earnings per share
amounts included in the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1998; and (iii) all documents filed subsequent to the
date of this Proxy Statement.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE, TO EACH PERSON
TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST AND BY
FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF
RECEIPT OF SUCH REQUEST, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT. ALL SUCH REQUESTS SHOULD BE
DIRECTED TO LOUIS ROCCO, SECRETARY OF THE COMPANY, AT 18 SARGENT PLACE, MOUNT
VERNON, NEW YORK 10550 (TELEPHONE NUMBER 914-605-9050).
OTHER MATTERS
The Board is not aware of any business which will be presented at the
Special Meeting other than those matters set forth in the accompanying Notice of
Special Meeting. If any other matters are properly presented at the Special
Meeting for action, it is intended that the person named in the accompanying
Proxy and acting thereunder will vote in accordance with his best judgment on
such matters.
36
<PAGE> 45
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
Landauer Hospital Supplies Inc.
LHS Merger Sub, Inc.
AND
Community Care Services, Inc.
June 14, 1999
================================================================================
<PAGE> 46
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Definitions -1-
2. Basic Transaction -6-
(a) The Merger -6-
(b) The Closing -6-
(c) Actions at the Closing -6-
(d) Effect of Merger -6-
(i) General -6-
(e) Procedure for Payment -8-
(f) Closing of Transfer Records -8-
3. Representations and Warranties of the Target -8-
(a) Organization, Qualification, and Corporate Power -9-
(b) Capitalization -9-
(c) Authorization of Transaction -9-
(d) Noncontravention -10-
(e) Filings with the SEC -10-
(f) Title to Assets -10-
(g) Subsidiaries -10-
(h) Financial Statements -11-
(i) Events Subsequent to Most Recent Fiscal Quarter End -11-
(j) Undisclosed Liabilities -11-
(k) Brokers' Fees -11-
(l) Legal Compliance -11-
(m) Tax Matters -12-
(n) Real Property -13-
(o) Intellectual Property -15-
(p) Tangible Assets -15-
(q) Inventory -16-
(r) Contracts -16-
(s) Notes, Accounts Receivable and Reimbursements -17-
(t) Powers of Attorney -18-
(u) Insurance -18-
(v) Litigation -19-
(w) Product Warranty -19-
(x) Product Liability -19-
(y) Employees -19-
(z) Employee Benefits -20-
(aa) Guaranties -22-
(bb) Environmental, Health, and Safety Matters -22-
</TABLE>
<PAGE> 47
<TABLE>
<S> <C>
(cc) Certain Business Relationships With the Target and Its
Subsidiaries -23-
(dd) Compliance with Applicable Laws -24-
(ee) Medicare and Medicaid -25-
(dd) No Litigation -25-
4. Representations and Warranties of the Buyer and the Transitory
Subsidiary -25-
(a) Organization -26-
(b) Authorization of Transaction -26-
(c) Noncontravention -26-
(d) Brokers' Fees -26-
(e) No Litigation -27-
5. Covenants -27-
(a) General -27-
(b) Notices and Consents -27-
(c) Regulatory Matters and Approvals -27-
(d) Fairness Opinion -28-
(e) Operation of Business -28-
(f) Full Access -29-
(g) Notice of Developments -29-
(h) Exclusivity -29-
(i) Disclosure -29-
6. Conditions to Obligation to Close -30-
(a) Conditions to Obligation of the Buyer and the Transitory
Subsidiary -30-
(b) Conditions to Obligation of the Target -32-
7. Termination -33-
(a) Termination of Agreement -33-
(b) Effect of Termination -34-
(c) Termination Fee -34-
8. Miscellaneous -34-
(a) Survival -34-
(b) Press Releases and Public Announcements -34-
(c) No Third-Party Beneficiaries -34-
(d) Entire Agreement -35-
(e) Succession and Assignment -35-
(f) Counterparts -35-
(g) Headings -35-
(h) Notices -35-
(i) Governing Law -36-
(j) Amendments and Waivers -36-
(k) Jurisdiction; Service of Process -37-
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
(l) Severability -37-
(m) Expenses -37-
(n) Construction -37-
(o) Incorporation of Exhibits and Schedules -37-
Schedule 1 Disclosure Schedule Exceptions to Representations and
Warranties S-1-1
Schedule 2 Environmental Safety and Permits Schedule S-2-1
Exhibit A Form of Certificate of Merger A-1-1
Exhibit B Permitted Investments B-1-1
Exhibit C Form of Opinion of Counsel to the Target C-1-1
Exhibit D Form of Opinion of Counsel to the Buyer and the Transitory
Subsidiary D-1-1
</TABLE>
<PAGE> 49
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER entered into as of June 14, 1999, (the
"Agreement") by and among LANDAUER HOSPITAL SUPPLIES INC., a New York
corporation (the "Buyer"), LHS MERGER SUB, INC., a New York corporation and a
wholly-owned Subsidiary of the Buyer (the "Transitory Subsidiary"), and
COMMUNITY CARE SERVICES, INC., a New York corporation (the "Target"; the Buyer,
the Transitory Subsidiary, and the Target are referred to collectively herein as
the "Parties").
This Agreement contemplates a transaction in which the Buyer will
acquire the Target for cash through a reverse subsidiary merger of the
Transitory Subsidiary with and into the Target.
Concurrent with the execution and delivery of this Agreement, and as a
condition and inducement to the Buyer's willingness to enter into this
Agreement, Dean L. Sloane, Craig V. Sloane, Mary Sloane, The Sloane Family
Foundation and DMJ Management Group, Inc. (the "Sloane Group") will enter into
an agreement with Buyer (the "Shareholders' Agreement") pursuant to which the
Sloane Group will agree to vote all shares of Target common stock owned by each
of the members of the Sloane Group (not less than 2,091,450 shares) in favor of
the Merger. In addition, the Shareholders' Agreement will provide that each
member of the Sloane Group will give an irrevocable proxy to Buyer to vote such
shares in such member's name and on such member's behalf at any meeting of
shareholders or in response to any solicitation of proxies with respect to the
Merger or certain other transactions for a period of six (6) months from the
date of such agreement.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1. Definitions.
"Acquisition Proposal" means any acquisition of 10% or more of the
consolidated assets of the Target and its Subsidiaries or of over 10% of any
class of equity securities of the Company or any of its Subsidiaries; any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Target or any of its
Subsidiaries whose assets, individually or in the aggregate, constitute more
than 10% of the consolidated assets of the Target, other than the transactions
contemplated by this Agreement; or any other transaction, the consummation of
which would, or could reasonably be expected to, materially dilute the benefits
to the Buyer of the transactions contemplated hereby.
"Acquisition Transaction" means any Acquisition Proposal that is
consummated.
<PAGE> 50
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act except that the Buyer, the
Transitory Subsidiary, LTTR Home Care LLC and Alan J. Landauer shall not be
deemed members of an Affiliated Group of the Target or its Affiliates.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision of
state, local or foreign law.
"Buyer" has the meaning set forth in the preface above.
"Buyer-owned Share" means any Target Share that the Buyer or the
Transitory Subsidiary owns beneficially.
"Certificate of Merger" has the meaning set forth in Section 2(c)
below.
"Closing" has the meaning set forth in Section 2(b) below.
"Closing Date" has the meaning set forth in Section 2(b) below.
"COBRA" means the requirements of Part 6 of Subtitle B of Title I of
ERISA and Code Section 4980B.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
businesses and affairs of the Target and its Subsidiaries that is not already
generally available to the public.
"Controlled Group" has the meaning set forth in Code Section 1563.
"Definitive Proxy Materials" means the definitive proxy materials
relating to the Special Meeting.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Dissenting Share" means any Target Share held of record by any
shareholder who or which has exercised his or its rights pursuant to Section 623
of the New York Business Corporation Law.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement, (b) qualified defined
contribution retirement plan or arrangement which is an Employee Pension Benefit
Plan, (c) qualified defined benefit retirement plan or
<PAGE> 51
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit or other retirement, bonus, or incentive plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health, and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as
now or hereafter in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Loss Account" has the meaning set forth in Treas. Reg. Section
1.1502-19.
"Fairness Opinion" has the meaning set forth in Section 5(d) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (d) all mask works and all
applications, registrations, and renewals in connection therewith, (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (f) all computer software (including data and
related documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
<PAGE> 52
"Knowledge" means that a Person knew or reasonably should have known a
given fact or circumstance without undertaking any investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Merger" has the meaning set forth in Section 2(a) below.
"Merger Consideration" has the meaning set forth in Section 2(d)(v)
below.
"Most Recent Fiscal Quarter End" has the meaning set forth in Section
3(h) below.
"Most Recent Balance Sheet" has the meaning set forth in Section 3(h)
below.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"New York Business Corporation Law" means the Business Corporation Law
of the State of New York, as amended.
"New York Certificate of Merger" has the meaning set forth in Section
2(c) below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Paying Agent" has the meaning set forth in Section 2(e) below.
"Payment Fund" has the meaning set forth in Section 2(e) below.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"PBGC" means the Pension Benefit Guaranty Corporation.
"Prohibited Transaction" has the meaning set forth in ERISA Section 406
and Code Section 4975.
"Public Report" has the meaning set forth in Section 3(e) below.
"Requisite Shareholder Approval" means the affirmative vote of the
holders of two thirds of the Target Shares in favor of this Agreement and the
Merger.
"SEC" means the Securities and Exchange Commission.
<PAGE> 53
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialman's,
and similar liens, (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Special Meeting" has the meaning set forth in Section 5(c)(ii) below.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a)
below.
"Target" has the meaning set forth in the preface above.
"Target Share" means any share of the Common Stock, $.01 par value per
share, of the Target other than Buyer-owned shares.
"Target Shareholder" means any Person who or which holds any Target
Shares.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Transitory Subsidiary" has the meaning set forth in the preface above.
"Warrants" means the Class A Redeemable Common Stock Purchase Warrants
of the Target.
"Warrant Agent" means Continental Stock Transfer & Trust Company.
<PAGE> 54
"Warrant Agreement" means the warrant agreement dated October 18, 1996
by and among the Target, the Warrant Agent and Maidstone Financial, Inc.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary will merge with and into the Target (the
"Merger") at the Effective Time. The Target shall be the corporation surviving
the Merger (the "Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Thacher Proffitt &
Wood, located at Two World Trade Center, New York, New York, commencing at 9:00
a.m. local time on the second business day following the satisfaction or waiver
of all conditions to the obligations of the Parties to consummate the
transactions contemplated hereby (other than conditions with respect to actions
the respective Parties will take at the Closing itself) or such other date as
the Parties may mutually determine (the "Closing Date").
(c) Actions at the Closing. At the Closing, (i) the Target will deliver
to the Buyer and the Transitory Subsidiary the various certificates,
instruments, and documents referred to in Section 6(a) below, (ii) the Buyer and
the Transitory Subsidiary will deliver to the Target the various certificates,
instruments, and documents referred to in Section 6(b) below, (iii) the Target
and the Transitory Subsidiary will deliver to the Department of State of the
State of New York for filing, a Certificate of Merger in the form attached
hereto as Exhibit A (the "Certificate of Merger"), and (iv) the Buyer will cause
the Surviving Corporation to deliver the Payment Fund to the Paying Agent in the
manner provided below in this Section 2.
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") the Target and the Transitory Subsidiary file the
Certificate of Merger with the Secretary of State of the State of
New York. The Merger shall have the effect set forth in the New
York Business Corporation Law. The Surviving Corporation may, at
any time after the Effective Time, take any action (including
executing and delivering any document) in the name and on behalf of
either the Target or the Transitory Subsidiary in order to carry
out and effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of Incorporation
of the Surviving Corporation shall be amended and restated at and
as of the Effective Time to read as did the Certificate of
Incorporation of the Transitory Subsidiary immediately prior to the
Effective Time and the name of the Surviving Corporation will be
changed to Landauer Metropolitan Respiratory Services, Inc.
<PAGE> 55
(iii) Bylaws. The Bylaws of the Surviving Corporation shall be
amended and restated at and as of the Effective Time to read as did
the Bylaws of the Transitory Subsidiary immediately prior to the
Effective Time and the name of the Surviving Corporation will be
changed to Landauer Metropolitan Respiratory Services, Inc.
(iv) Directors and Officers. The directors and officers of the
Transitory Subsidiary shall become the directors and officers of
the Surviving Corporation at and as of the Effective Time
(retaining their respective positions and terms of office).
(v) Conversion of Target Shares. At and as of the Effective Time,
(A) each Target Share (other than any Dissenting Share or
Buyer-owned Share) shall be converted into the right to receive an
amount (the "Merger Consideration") equal to $1.20 in cash (without
interest), (B) each Dissenting Share shall be converted into the
right to receive payment from the Surviving Corporation with
respect thereto in accordance with the provisions of the New York
Business Corporation Law, and (C) each Buyer-owned Share shall be
canceled; provided, however, that the Merger Consideration shall be
subject to equitable adjustment in the event of any stock split,
stock dividend, reverse stock split, or other change in the number
of Target Shares outstanding. No Target Share shall be deemed to be
outstanding or to have any rights other than those set forth above
in this Section 2(d)(v) after the Effective Time.
(vi) Conversion of Capital Stock of the Transitory Subsidiary. At
and as of the Effective Time, each share of common stock, $.01 par
value per share, of the Transitory Subsidiary shall be converted
into one share of common stock, $.01 par value per share, of the
Surviving Corporation.
(vii) Target Stock Options. Each option to purchase shares of
Target common stock that is outstanding prior to the Effective Time
(whether or not vested or exercisable) shall, at the Effective
Time, be canceled, and in exchange therefor, each option holder
shall receive a cash payment which, prior to deduction for
applicable withholding taxes, is in an amount equal to the product
of (A) the excess, if any, of the Merger Consideration over the per
share exercise price of the option and (B) the number of shares
subject to the option (whether or not vested). The Surviving
Corporation shall make such payment on or after the Closing Date
immediately upon receipt of a written agreement from the option
holder to accept such payment in full settlement of such option
holder's rights with respect to the option. If the per share
exercise price of any option equals or exceeds the Merger
Consideration, such option shall be canceled without any payment
required thereunder.
(viii) Warrants. Each Warrant to purchase shares of Target common
stock outstanding prior to the Effective Time shall entitle the
holder to receive a cash
<PAGE> 56
payment equal to the Merger Consideration upon exercise of the
Warrant by the Warrant holder at or before the Effective Time,
including payment by the Warrant holder of the exercise price of
the Warrant. Each such Warrant not so exercised shall continue in
effect after the Effective Time until it expires by its own terms,
but the Warrant holder shall be entitled only to a cash payment by
the Surviving Corporation equal to the Merger Consideration upon
exercise of the Warrant by the Warrant holder, including payment by
the Warrant holder of the exercise price of the Warrant, until the
expiration of the Warrant.
(e) Procedure for Payment.
(i) At or before the Effective Time, (A) the Buyer will cause the
Surviving Corporation to furnish to Continental Stock Transfer &
Trust Company (the "Paying Agent") a corpus (the "Payment Fund")
consisting of cash sufficient in the aggregate for the Paying Agent
to make full payment of the Merger Consideration to the holders of
all of the outstanding Target Shares (other than any Dissenting
Shares and Buyer-owned Shares). No interest will accrue or be paid
to the holder of any outstanding Target Shares.
(ii) The Buyer may cause the Paying Agent to invest the cash
included in the Payment Fund in one or more of the permitted
investments set forth on Exhibit B attached hereto; provided,
however, that the terms and conditions of the investments shall be
such as to permit the Paying Agent to make prompt payment of the
Merger Consideration as necessary. The Buyer may cause the Paying
Agent to pay over to the Surviving Corporation any net earnings
with respect to the investments, and the Buyer will cause the
Surviving Corporation to replace promptly any portion of the
Payment Fund which the Paying Agent loses through investments.
(iii) The Buyer may cause the Paying Agent to pay over to the
Surviving Corporation any portion of the Payment Fund (including
any earnings thereon) remaining 180 days after the Effective Time,
and thereafter all former shareholders shall be entitled to look to
the Surviving Corporation (subject to abandoned property, escheat,
and other similar laws) as general creditors thereof with respect
to the cash payable upon surrender of their certificates.
(iv) The Buyer shall cause the Surviving Corporation to pay all
charges and expenses of the Paying Agent.
(f) Closing of Transfer Records. After the close of business on the
Closing Date, transfers of Target Shares outstanding prior to the Effective Time
shall not be made on the stock transfer books of the Surviving Corporation.
3. Representations and Warranties of the Target. The Target represents
and warrants to the Buyer and the Transitory Subsidiary that the statements
contained in this Section 3 are correct and
<PAGE> 57
complete as of the date of this Agreement and, to the extent the correctness and
completeness of such statements are within the reasonable control of Target or
its Subsidiaries, will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3), except as set forth in the disclosure
schedule accompanying this Agreement and initialed by the Parties (the
"Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Section
3.
(a) Organization, Qualification, and Corporate Power. Each of the
Target and its Subsidiaries is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation.
Each of the Target and its Subsidiaries is duly authorized to conduct business
and is in good standing under the laws of each jurisdiction where such
qualification is required. Each of the Target and its Subsidiaries has full
corporate power and authority and all licenses, permits, and authorizations
necessary to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. Section 3(a) of the Disclosure Schedule
lists the directors and officers of each of the Target and its Subsidiaries. The
Target has delivered to the Buyer and Merger Sub correct and complete copies of
the certificate of incorporation and bylaws of each of the Target and its
Subsidiaries (as amended to date). The minute books (containing the records of
meetings of the shareholders, the board of directors, and any committees of the
board of directors), the stock certificate books, and the stock record books of
each of the Target and its Subsidiaries are correct and complete. None of the
Target and its Subsidiaries is in default under or in violation of any provision
of its certificate of incorporation or bylaws.
(b) Capitalization. The entire authorized capital stock of the Target
consists of 20,000,000 shares of common stock, par value $.01 per share, of
which 7,217,851 shares of common stock, including Target Shares and Buyer-owned
shares, are issued and outstanding; 1,000,000 preferred shares, of which no
shares are issued and outstanding; and no Target Shares are held in treasury.
All of the issued and outstanding Target Shares have been duly authorized and
are validly issued, fully paid, and nonassessable. In addition, the Target has
issued 5,685, 182 Warrants and 177,000 stock options to purchase shares of
Target common stock. There are no other outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Target to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Target. To the Knowledge of
any director or officer of the Target, there are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of the capital
stock of the Target except those to which the Buyer or any Affiliates of the
Buyer (other than the Target or its Subsidiaries) is a party. No holder of any
Warrant shall have the right, in connection with this Agreement or any event
following the Closing Date, to exercise a Warrant and receive an amount greater
than the exercise price thereof.
(c) Authorization of Transaction. The Target has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its
<PAGE> 58
obligations hereunder and the execution and delivery by the Target , and the
performance of its obligations hereunder, have been duly authorized by all
requisite corporate action on the part of the Company, and the Agreement has
been duly executed and delivered by the Target; provided, however, that the
Target cannot consummate the Merger unless and until it receives the Requisite
Shareholder Approval. This Agreement constitutes the valid and legally binding
obligation of the Target, enforceable in accordance with its terms and
conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the Target and its Subsidiaries is
subject or any provision of the charter or bylaws of any of the Target and its
Subsidiaries, the violation of which would have a material adverse effect on the
business of the Target and its Subsidiaries taken as a whole, or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which any of the Target and its Subsidiaries
is a party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets). Other
than in connection with the provisions of the New York Business Corporation Law,
the Securities Exchange Act, the Securities Act, and the state securities laws,
none of the Target and its Subsidiaries needs to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(e) Filings with the SEC. The Target has made all filings with the SEC
that it has been required to make under the Securities Act and the Securities
Exchange Act (collectively the "Public Reports"). Each of the Public Reports has
complied with the Securities Act and the Securities Exchange Act in all material
respects. None of the Public Reports, as of their respective dates, contained
any untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(f) Title to Assets. The Target and its Subsidiaries have good and
marketable title to, or a valid leasehold interest in, the properties and assets
used by them, located on their premises, or shown on the Most Recent Balance
Sheet or acquired after the date thereof, free and clear of all Security
Interests, except for properties and assets disposed of in the Ordinary Course
of Business since the date of the Most Recent Balance Sheet.
(g) Subsidiaries. Section 3(g) of the Disclosure Schedule sets forth
for each Subsidiary of the Target (i) its name and jurisdiction of
incorporation, (ii) the number of shares of authorized capital stock of each
class of its capital stock, (iii) the number of issued and outstanding shares of
each class of its capital stock, the names of the holders thereof, and the
number of shares held by each such holder, and (iv) the number of shares of its
capital stock held in treasury. All of the issued and outstanding shares of
capital stock of each Subsidiary of the
<PAGE> 59
Target have been duly authorized and are validly issued, fully paid, and
nonassessable. One of the Target and its Subsidiaries holds of record and owns
beneficially all of the outstanding shares of each Subsidiary of the Target,
free and clear of any restrictions on transfer (other than restrictions under
the Securities Act and state securities laws), Taxes, Security Interests,
options, warrants, purchase rights, contracts, commitments, equities, claims,
and demands. There are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require any of the Target and its
Subsidiaries to sell, transfer, or otherwise dispose of any capital stock of any
of its Subsidiaries or that could require any Subsidiary of the Target to issue,
sell, or otherwise cause to become outstanding any of its own capital stock.
There are no outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to any Subsidiary of the Target.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Subsidiary of the Target. None
of the Target and its Subsidiaries controls directly or indirectly or has any
direct or indirect equity participation in any corporation, partnership, trust,
or other business association which is not a Subsidiary of the Target.
(h) Financial Statements. The Target has filed Quarterly Reports on
Form 10-Q for the fiscal quarters ended December 31, 1998 (the "Most Recent
Fiscal Quarter End" or the "Most Recent Balance Sheet," as applicable),
September 30, 1998, and June 30, 1998 and an Annual Report on Form 10-K for the
fiscal year ended March 31, 1998. The financial statements included in or
incorporated by reference into these Public Reports (including the related notes
and schedules) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby, and present fairly the
financial condition of the Target and its Subsidiaries as of the indicated dates
and the results of operations of the Target and its Subsidiaries for the
indicated periods , are correct and complete in all respects, and are consistent
with the books and records of the Target and its Subsidiaries; provided,
however, that the interim statements are subject to normal year-end adjustments.
(i) Events Subsequent to Most Recent Fiscal Quarter End. Since the Most
Recent Fiscal Quarter End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Target and its Subsidiaries taken as a whole.
(j) Undisclosed Liabilities. None of the Target and its Subsidiaries
has any liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due), including any liability for
taxes, except for (i) liabilities set forth on the balance sheet dated as of the
Most Recent Fiscal Quarter End and (ii) liabilities which have arisen after the
Most Recent Fiscal Quarter End in the Ordinary Course of Business (none of which
results from, arises out of, relates to, is in the nature of, or was caused by
any breach of contract, breach of warranty, tort, infringement, or violation of
law).
(k) Brokers' Fees. None of the Target and its Subsidiaries has any
liability or
<PAGE> 60
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.
(l) Legal Compliance. Each of the Target, its Subsidiaries, and their
respective predecessors and Affiliates has complied with all applicable laws
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof), except where the failure to so comply
would not have a material adverse effect on the Target and its Subsidiaries
taken as a whole, and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
any of them alleging any failure so to comply.
(m) Tax Matters.
(i) Each of the Target and its Subsidiaries has filed all Tax
Returns that it was required to file. All such Tax Returns were
correct and complete in all respects. All Taxes owed by any of the
Target and its Subsidiaries (whether or not shown on any Tax
Return) have been paid. None of the Target and its Subsidiaries
currently is the beneficiary of any extension of time within which
to file any Tax Return. No claim has ever been made by an authority
in a jurisdiction where any of the Target and its Subsidiaries does
not file Tax Returns that it is or may be subject to taxation by
that jurisdiction. There are no Security Interests on any of the
assets of any of the Target and its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax.
(ii) Each of the Target and its Subsidiaries has withheld and paid
all Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, shareholder, or other third party.
(iii) No director or officer (or employee responsible for Tax
matters) of any of the Target and its Subsidiaries expects any
authority to assess any additional Taxes for any period for which
Tax Returns have been filed. There is no dispute or claim
concerning any Tax Liability of any of the Target and its
Subsidiaries either (A) claimed or raised by any authority in
writing or (B) as to which any of the directors and officers (and
employees responsible for Tax matters) of the Target and its
Subsidiaries has Knowledge based upon personal contact with any
agent of such authority. Section 3(m)(iii) of the Disclosure
Schedule lists all federal, state, local, and foreign income Tax
Returns filed with respect to any of the Target and its
Subsidiaries for taxable periods ended on or after March 31, 1996,
indicates those Tax Returns that have been audited, and indicates
those Tax Returns that currently are the subject of audit. The
Target has delivered to the Buyer correct and complete copies of
all federal income Tax Returns, examination reports, and statements
of deficiencies assessed against or agreed to by any of the Target
and its Subsidiaries since March 31, 1996.
<PAGE> 61
(iv) None of the Target and its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(v) None of the Target and its Subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations. None
of the Target and its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments
that will not be deductible under Code Section 280G. None of the
Target and its Subsidiaries has been a United States real property
holding corporation within the meaning of Code Section 897(c)(2)
during the applicable period specified in Code Section
897(c)(1)(A)(ii). Each of the Target and its Subsidiaries has
disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of
federal income Tax within the meaning of Code Section 6662. None of
the Target and its Subsidiaries is a party to any Tax allocation or
sharing agreement. None of the Target and its Subsidiaries (A) has
been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which
was the Target) or (B) has any Liability for the Taxes of any
Person (other than any of the Target and its Subsidiaries) under
Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or
otherwise.
(vi) Section 3(m)(vi) of the Disclosure Schedule sets forth the
following information with respect to each of the Target and its
Subsidiaries (or, in the case of clause (B) below, with respect to
each of the Subsidiaries) as of the most recent practicable date
(as well as on an estimated pro forma basis as of the Closing
giving effect to the consummation of the transactions contemplated
hereby): (A) the basis of the Target or Subsidiary in its assets;
(B) the basis of the shareholder(s) of the Subsidiary in its stock
(or the amount of any Excess Loss Account); (C) the amount of any
net operating loss, net capital loss, unused investment or other
credit, unused foreign tax, or excess charitable contribution
allocable to the Target or Subsidiary; and (D) the amount of any
deferred gain or loss allocable to the Target or Subsidiary arising
out of any Deferred Intercompany Transaction (as such term is
defined in the Code).
(vii) The unpaid Taxes of the Target and its Subsidiaries (A) did
not, as of the Most Recent Fiscal Year End, exceed the reserve for
Tax Liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax
income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) and (B) do not exceed that
reserve as adjusted for the passage of time through the Closing
Date in accordance with the past custom and practice of the Target
and its Subsidiaries in filing their Tax Returns.
<PAGE> 62
(n) Real Property.
(i) Neither the Target nor its Subsidiaries owns any real property.
(ii) Section 3(n)(ii) of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to any of
the Target and its Subsidiaries. The Target has delivered to the
Buyer correct and complete copies of the leases and subleases
listed in Section 3(n)(ii) of the Disclosure Schedule (as amended
to date). With respect to each lease and sublease listed in Section
3(n)(ii) of the Disclosure Schedule:
(A) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect except to the extent
enforceability may be limited by bankruptcy, moratorium or other
laws affecting the rights of creditors and by general principles of
equity;
(B) the lease or sublease will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated
hereby except to the extent enforceability may be limited by
bankruptcy, moratorium or other laws affecting the rights of
creditors and by general principles of equity;
(C) no party to the lease or sublease is in breach or default,
and no event has occurred which, with notice or lapse of time,
would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(D) no party to the lease or sublease has repudiated any
provision thereof;
(E) there are no disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(F) none of the Target and its Subsidiaries has assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered
any interest in the leasehold or subleasehold;
(G) all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including
licenses and permits) required in connection with the operation
thereof and have been operated and maintained in accordance with
applicable laws, rules, and regulations except where the failure to
do so would not have a material adverse effect on the Target and
its Subsidiaries taken as a whole;
(H) all facilities leased or subleased thereunder are supplied
with
<PAGE> 63
utilities and other services necessary for the operation of said
facilities; and
(I) to the Knowledge of the officers and directors of the
Target and its Subsidiaries, the owner of the facility leased or
subleased has good and marketable title to the parcel of real
property, free and clear of any Security Interest, easement,
covenant, or other restriction, except for installments of special
easements not yet delinquent and recorded easements, covenants, and
other restrictions which do not impair the current use, occupancy,
or value, or the marketability of title, of the property subject
thereto.
(o) Intellectual Property.
(i) The Target and its Subsidiaries own or have the right to use
pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary or desirable for the operation of the
businesses of the Target and its Subsidiaries as presently conducted.
Each item of Intellectual Property owned or used by any of the Target
and its Subsidiaries immediately prior to the Closing hereunder will be
owned or available for use by the Target or the Subsidiary on identical
terms and conditions immediately subsequent to the Closing hereunder.
Each of the Target and its Subsidiaries has taken all necessary and
desirable action to maintain and protect each item of Intellectual
Property that it owns or uses.
(ii) To the Knowledge of the officers and directors of the Target
and its Subsidiaries, none of the Target and its Subsidiaries has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of third parties,
and none of the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Target and its
Subsidiaries has received any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation,
or violation (including any claim that any of the Target and its
Subsidiaries must license or refrain from using any Intellectual
Property rights of any third party). To the Knowledge of any of the
directors and officers (and employees with responsibility for
Intellectual Property matters) of the Target and its Subsidiaries, no
third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of
any of the Target and its Subsidiaries.
(iii) Section 3(o)(iii) of the Disclosure Schedule identifies each
patent or registration which has been issued to any of the Target and
its Subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Target and its Subsidiaries has made with
respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which any of the Target and its
Subsidiaries has granted to any third party with respect to any of its
Intellectual Property (together with any exceptions).
(iv) Section 3(o)(iv) of the Disclosure Schedule identifies each
item of Intellectual
<PAGE> 64
Property that any third party owns and that any of the Target and its
Subsidiaries uses pursuant to license, sublicense, agreement, or
permission, other than off-the-shelf computer software licensed to the
Target or any of its Subsidiaries.
(p) Tangible Assets. The Target and its Subsidiaries own or lease all
buildings, machinery, equipment, and other tangible assets necessary for the
conduct of their businesses as presently conducted and as presently proposed to
be conducted. Each such tangible asset is free from defects (patent and latent),
in all material respects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear and
tear), and is suitable for the purposes for which it presently is used and
presently is proposed to be used.
(q) Inventory. The inventory of the Target and its Subsidiaries,
whether or not reflected in the Most Recent Balance Sheet, consists primarily of
medical supplies sold directly to customers for home use, medical equipment
rented to customers for home use all of which is merchantable and fit for the
purpose for which it was procured or manufactured, and none of which is
slow-moving, obsolete, damaged, or defective, subject only to the reserve for
inventory writedown set forth in the Most Recent Balance Sheet as adjusted for
the passage of time through the Closing Date in accordance with the past custom
and practice of the Target and its Subsidiaries.
(r) Contracts. Section 3(r) of the Disclosure Schedule lists the
following contracts and other agreements to which any of the Target and its
Subsidiaries is a party:
(i) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease
payments in excess of $50,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products,
or other personal property, or for the furnishing or receipt of
services, the performance of which will extend over a period of
more than one year, result in a material loss to any of the Target
and its Subsidiaries to the Knowledge of the officers and directors
of the Target and its Subsidiaries, or involve consideration in
excess of $50,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$50,000 or under which it has imposed a Security Interest on any of
its assets, tangible or intangible;
(v) any agreement concerning confidentiality or noncompetition
(other than those generally imposed by the Target and its
Subsidiaries on employees);
<PAGE> 65
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors,
officers, and employees;
(vii) any collective bargaining agreement;
(viii) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $25,000 or providing severance benefits;
(ix) any agreement under which it has advanced or loaned any amount
to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(x) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business,
financial condition, operations, results of operations, or future
prospects of any of the Target and its Subsidiaries taken as a
whole;
(xi) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $50,000;
or
(xii) each existing Medicare and Medicaid contract (collectively,
the "Program Agreements") or evidence thereof relating to the
participation by the Target and its Subsidiaries in the Medicare
and Medicaid Programs (the "Governmental Programs").
Target has delivered to the Buyer a correct and complete copy of each written
agreement listed in Section 3(r) of the Disclosure Schedule (as amended to date)
and a written summary setting forth the terms and conditions of each oral
agreement referred to in Section 3(r) of the Disclosure Schedule. With respect
to each such agreement: (A) the agreement is a legal, valid, binding and
enforceable obligation of the Target or its Subsidiaries, as the case may be,
and is in full force and effect except to the extent enforceability may be
limited by bankruptcy, moratorium or other laws affecting the rights of
creditors and by general principles of equity; (B) subject to obtaining any
required consent from the other party or parties thereto, the agreement will
continue to be a legal, valid, binding and enforceable obligation of the Target
or its Subsidiaries, as the case may be, and in full force and effect on
identical terms following the consummation of the transactions contemplated
hereby except to the extent enforceability may be limited by bankruptcy,
moratorium or other laws affecting the rights of creditors and by general
principles of equity; (C) no party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
(s) Notes, Accounts Receivable and Reimbursements. All notes, accounts
receivable
<PAGE> 66
and reimbursements of the Target and its Subsidiaries are reflected properly on
their books and records, are valid receivables subject to no setoffs or
counterclaims (or with respect to Government Programs, no notice of any offsets
against future reimbursements), are current and collectible, and to the
Knowledge of the officers and directors of the Target and its Subsidiaries and
those employees responsible for billing and collections, will be collected in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth in the Most Recent Balance Sheet as adjusted for
the passage of time through the Closing Date in accordance with the past custom
and practice of the Target and its Subsidiaries.
(t) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of any of the Target and its Subsidiaries.
(u) Insurance. Section 3(u) of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which any of the Target and its Subsidiaries
has been a party, a named insured, or otherwise the beneficiary of coverage at
any time since March 31, 1996:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder, and the
name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) the scope (including an indication of whether the coverage was
on a claims made, occurrence, or other basis) and amount (including
a description of how deductibles and ceilings are calculated and
operate) of coverage; and
(v) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal, valid,
binding, enforceable, and in full force and effect except to the extent
enforceability may be limited by bankruptcy, moratorium or other laws affecting
the rights of creditors and by general principles of equity; (B) the policy will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby except to the extent enforceability may be limited by bankruptcy,
moratorium or other laws affecting the rights of creditors and by general
principles of equity; (C) neither any of the Target and its Subsidiaries nor any
other party to the policy is in breach or default (including with respect to the
payment of premiums or the giving of notices), and no event has occurred which,
with notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and
(D) no party to the policy has repudiated any provision thereof. Each of the
Target and its Subsidiaries has been covered since March 31, 1996 by
<PAGE> 67
insurance in scope and amount customary and reasonable for the businesses in
which it has engaged during the aforementioned period. Section 3(u) of the
Disclosure Schedule describes any self-insurance arrangements affecting any of
the Target and its Subsidiaries.
(v) Litigation. Section 3(v) of the Disclosure Schedule sets forth each
instance in which any of the Target and its Subsidiaries (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party or, to the Knowledge of any of the directors and officers (and employees
with responsibility for litigation matters) of the Target and its Subsidiaries,
has been threatened to be made a party to any action, suit, proceeding, hearing,
or investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator. None of the actions, suits, proceedings, hearings, and
investigations set forth in Section 3(v) of the Disclosure Schedule could result
in any adverse change in the business, financial condition, operations, results
of operations, or future prospects of any of the Target and its Subsidiaries.
None of the directors and officers (and employees with responsibility for
litigation matters) of the Target and its Subsidiaries has any reason to believe
that any such action, suit, proceeding, hearing, or investigation may be brought
or threatened against any of the Target and its Subsidiaries. There are no
pending appeals, adjustments, challenges, audits, litigation, notices of intent
to reopen or open completed payments with respect to the Governmental Programs
and none of the Target and its Subsidiaries has received notice of pending,
threatened or possible decertification or other loss of participation in any of
the Governmental Programs which remains in effect as of the date hereof.
(w) Product Warranty. None of the Target and its Subsidiaries
manufacture or assemble any products. Each product sold, leased, or delivered by
any of the Target and its Subsidiaries has been in conformity with all
applicable contractual commitments and all express and implied warranties, and
none of the Target and its Subsidiaries has any Liability (and there is no basis
for any present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against any of them giving rise to any
Liability) for replacement or repair thereof or other damages in connection
therewith, subject only to the reserve for product warranty claims set forth on
the face of the Most Recent Balance Sheet (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of the Target and its Subsidiaries. No product sold,
leased, or delivered by any of the Target and its Subsidiaries is subject to any
guaranty, warranty, or other indemnity offered by the Target or one of its
Subsidiaries beyond the applicable standard terms and conditions of sale or
lease. Section 3(w) of the Disclosure Schedule includes copies of the standard
terms and conditions of sale or lease for each of the Target and its
Subsidiaries (containing applicable guaranty, warranty, and indemnity
provisions).
(x) Product Liability. None of the Target and its Subsidiaries has any
Liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability) arising out of any injury to
individuals or property as a result of the ownership, possession, or use of any
product sold, leased, or delivered by any of the Target and its Subsidiaries.
<PAGE> 68
(y) Employees. To the Knowledge of any of the directors and officers
(and employees with responsibility for employment matters) of the Target and its
Subsidiaries, no executive, key employee, or group of employees has any plans to
terminate employment with any of the Target and its Subsidiaries. None of its
Subsidiaries is a party to or bound by any collective bargaining agreement, nor
has any of them experienced any strikes, grievances which have resulted in
legal, administrative or other similar proceedings, claims of unfair labor
practices, or other collective bargaining disputes. None of the Target and its
Subsidiaries has committed any unfair labor practice. None of the directors and
officers (and employees with responsibility for employment matters) of the
Target and its Subsidiaries has any Knowledge of any organizational effort
presently being made or threatened by or on behalf of any labor union with
respect to employees of any of the Target and its Subsidiaries.
(z) Employee Benefits.
(i) Section 3(z) of the Disclosure Schedule lists each Employee
Benefit Plan that any of the Target and its Subsidiaries maintains
or to which any of the Target and its Subsidiaries contributes or
has any obligation to contribute.
(A) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in
all respects with the applicable requirements of ERISA, the Code,
and other applicable laws.
(B) All required reports and descriptions (including Form 5500
Annual Reports, summary annual reports, PBGC-1's, and summary plan
descriptions) have been timely filed and distributed appropriately
with respect to each such Employee Benefit Plan. The requirements
of COBRA have been met with respect to each such Employee Benefit
Plan which is an Employee Welfare Benefit Plan.
(C) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been
paid to each such Employee Benefit Plan which is an Employee
Pension Benefit Plan and all contributions for any period ending on
or before the Closing Date which are not yet due have been paid to
each such Employee Pension Benefit Plan or accrued in accordance
with the past custom and practice of the Target and its
Subsidiaries. All premiums or other payments for all periods ending
on or before the Closing Date have been paid with respect to each
such Employee Benefit Plan which is an Employee Welfare Benefit
Plan.
(D) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the requirements of a "qualified plan"
under Code Section 401(a), has received, within the last two years,
a favorable determination letter from the Internal Revenue Service
that it is a "qualified plan," and Seller is not aware of any facts
or circumstances that could result in the revocation of such
determination letter.
<PAGE> 69
(E) The market value of assets under each such Employee Benefit
Plan which is an Employee Pension Benefit Plan (other than any
Multiemployer Plan) equals or exceeds the present value of all
vested and nonvested Liabilities thereunder determined in
accordance with PBGC methods, factors, and assumptions applicable
to an Employee Pension Benefit Plan terminating on the date for
determination.
(F) The Target has delivered to the Buyer correct and complete
copies of the plan documents and summary plan descriptions, the
most recent determination letter received from the Internal Revenue
Service, the most recent Form 5500 Annual Report, and all related
trust agreements, insurance contracts, and other funding agreements
which implement each such Employee Benefit Plan.
(ii) With respect to each Employee Benefit Plan that any of the
Target, its Subsidiaries, and any ERISA Affiliate (as such term is
defined under ERISA) maintains or ever has maintained or to which
any of them contributes, ever has contributed, or ever has been
required to contribute:
(A) No such Employee Benefit Plan which is an Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a
Reportable Event as to which notices would be required to be filed
with the PBGC. No proceeding by the PBGC to terminate any such
Employee Pension Benefit Plan (other than any Multiemployer Plan)
has been instituted or, to the Knowledge of any of the directors
and officers (and employees with responsibility for employee
benefits matters) of the Target and its Subsidiaries, threatened.
(B) There have been no Prohibited Transactions with respect to
any such Employee Benefit Plan. No ERISA fiduciary has any
Liability for breach of fiduciary duty or any other failure to act
or comply in connection with the administration or investment of
the assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such Employee
Benefit Plan (other than routine claims for benefits) is pending
or, to the Knowledge of any of the directors and officers (and
employees with responsibility for employee benefits matters) of the
Target and its Subsidiaries, has been threatened. None of the
directors and officers (and employees with responsibility for
employee benefits matters) of the Target and its Subsidiaries has
any Knowledge of any Basis for any such action, suit, proceeding,
hearing, or investigation.
(C) None of the Target and its Subsidiaries has incurred, and
none of the directors and officers (and employees with
responsibility for employee benefits matters) of the Target and its
Subsidiaries has any reason to expect that
<PAGE> 70
any of the Target and its Subsidiaries will incur, any Liability
to the PBGC (other than PBGC premium payments) or otherwise under
Title IV of ERISA (including any withdrawal liability as defined in
ERISA Section 4201) or under the Code with respect to any such
Employee Benefit Plan which is an Employee Pension Benefit Plan.
(iii) None of the Target, its Subsidiaries, and the other members
of the Controlled Group that includes the Target and its
Subsidiaries contributes to, ever has contributed to, or ever has
been required to contribute to any Multiemployer Plan or has any
Liability (including withdrawal liability as defined in ERISA
Section 4201) under any Multiemployer Plan.
(iv) None of the Target and its Subsidiaries maintains or ever has
maintained or contributes, ever has contributed, or ever has been
required to contribute to any Employee Welfare Benefit Plan
providing medical, health, or life insurance or other welfare-type
benefits for current or future retired or terminated employees,
their spouses, or their dependents (other than in accordance with
COBRA).
(aa) Guaranties. None of the Target and its Subsidiaries is a guarantor
or otherwise is liable for any Liability or obligation (including indebtedness)
of any other Person
(bb) Environmental, Health, and Safety Matters.
(i) Each of the Target, its Subsidiaries, and their respective
predecessors and Affiliates has complied and is in compliance with
all Environmental, Health, and Safety Requirements, except where
the failure to so comply would not have a material adverse effect
on the Target and its Subsidiaries taken as a whole.
(ii) Without limiting the generality of the foregoing, each of the
Target, its Subsidiaries and their respective Affiliates has
obtained and complied with, and is in compliance with, all
material permits, licenses and other authorizations that are
required pursuant to Environmental, Health, and Safety
Requirements for the occupation of its facilities and the
operation of its business; a list of all such material permits,
licenses and other authorizations is set forth in the attached
Schedule 2 (the "Environmental and Safety Permits Schedule")
(iii) Neither the Target, its Subsidiaries, nor their respective
predecessors or Affiliates has received any written or oral
notice, report or other information regarding any actual or
alleged violation of Environmental, Health, and Safety
Requirements, or any liabilities or potential liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise),
including any investigatory, remedial or corrective obligations,
relating to any of them or its facilities arising under
Environmental, Health, and Safety Requirements.
<PAGE> 71
(iv) To the Knowledge of the officers and directors of the Target
and its Subsidiaries, none of the following exists at any property
or facility owned or operated by the Target or its Subsidiaries:
(1) underground storage tanks, (2) asbestos-containing material in
any form or condition, (3) materials or equipment containing
polychlorinated biphenyls, or (4) landfills, surface impoundments,
or disposal areas.
(v) None of the Target, its Subsidiaries, or their respective
predecessors or Affiliates has treated, stored, disposed of,
arranged for or permitted the disposal of, transported, handled,
or released any substance, including without limitation any
hazardous substance, or owned or operated any property or facility
(and no such property or facility is contaminated by any such
substance) in a manner that has given or would give rise to
liabilities, including any liability for response costs,
corrective action costs, personal injury, property damage, natural
resources damages or attorney fees, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), the Solid Waste Disposal Act, as amended
("SWDA") or any other Environmental, Health, and Safety
Requirements.
(vi) Neither this Agreement nor the consummation of the
transaction that is the subject of this Agreement will result in
any obligations for site investigation or cleanup, or notification
to or consent of government agencies or third parties, pursuant to
any of the so-called "transaction-triggered" or "responsible
property transfer" Environmental, Health, and Safety Requirements.
(vii) Neither the Target, its Subsidiaries, nor any of their
respective predecessors or Affiliates has, either expressly or by
operation of law, assumed or undertaken any liability, including
without limitation any obligation for corrective or remedial
action, of any other Person relating to Environmental, Health, and
Safety Requirements.
(viii) No facts, events or conditions relating to the past or
present facilities, properties or operations of the Target, its
Subsidiaries, or any of their respective predecessors or
Affiliates will prevent, hinder or limit continued compliance with
Environmental, Health, and Safety Requirements, give rise to any
investigatory, remedial or corrective obligations pursuant to
Environmental, Health, and Safety Requirements, or give rise to
any other liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) pursuant to Environmental, Health, and
Safety Requirements, including without limitation any relating to
onsite or offsite releases or threatened releases of hazardous
materials, substances or wastes, personal injury, property damage
or natural resources damage.
(cc) Certain Business Relationships With the Target and Its
Subsidiaries. None of the Target Shareholders or their Affiliates has been
involved in any business arrangement or
<PAGE> 72
relationship with any of the Target or its Subsidiaries within the past 12
months, and none of the Target Shareholders and their Affiliates owns any asset,
tangible or intangible, which is used in the business of any of the Target and
its Subsidiaries.
(dd) Compliance with Applicable Laws.
(i) Each of the Target and its Subsidiaries owns, holds or
possesses all licenses, franchises, permits, privileges,
immunities, approvals and other authorizations from governmental
entities which are necessary to entitle it to own or lease,
operate and use its assets, to participate in the Medicare,
Medicaid and all other reimbursement programs as currently
participated in and to carry on and conduct its business
(collectively called "Permits") except where the failure to do so
would not have a material adverse effect on the Target and its
Subsidiaries taken as a whole. Each of the Target and its
Subsidiaries has fulfilled and performed its obligations under
each of the respective Permits in all material respects, and no
event has occurred or condition or state of facts exists which
constitutes or, after notice or lapse of time or both, would
constitute a breach or default under any Permit either (i) which
permits or, after notice or lapse of time or both, would permit
revocation or termination of any Permit, or (ii) which may
reasonably be expected to adversely affect the rights of the
Target or its Subsidiaries under any Permit; no notice of
cancellation, suspension, revocation, or default or of any dispute
concerning any Permit, or of any event, condition or state of
facts described in the preceding clause, has been received by, or
is known to, the Target or its Subsidiaries, or, to the Knowledge
of any of the directors and officers of the Target and its
Subsidiaries, is proposed or threatened; and each of the Permits
is valid, subsisting and in full force and effect and may
reasonably be expected to continue in full force and effect after
the Effective Time in each case without (A) the occurrence of any
breach, default or forfeiture of rights thereunder, or (B) the
consent, approval, or act of, or the making of any filing with,
any governmental entity. None of the Target and its Subsidiaries
has made any fraudulent misrepresentations in connection with any
judicial or regulatory proceedings or actions before any
governmental entity.
(ii) None of the Target or its Subsidiaries has submitted any claims in
connection with any referrals to any of its programs which violated any
applicable self-referral law, including the Stark Bill (42 U.S.C.
Section 1395) or any applicable state self-referral law as those laws
are currently interpreted.
(iii) Each program operated by the Target and its Subsidiaries has (i)
obtained and maintains in good standing its JCAHO accreditation, if
applicable, as well as all required healthcare licenses, (ii) where
required by applicable law, obtained and maintains accreditation for
such programs, (iii) obtained and maintains all certifications required
from any governmental entity including, without limitation, where
required by applicable law, Medicaid certification and Medicare
certification and (iv) obtained and maintains eligibility and good
standing for reimbursement from Medicare and Medicaid and any other
third party payor.
<PAGE> 73
(iv) There are no situations which involved or involve the Target or
its Subsidiaries in (A) the use of any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related
to political activity, (B) the making of any direct or indirect
unlawful payments to government officials from corporate funds or the
establishment or maintenance of any unlawful or unrecorded funds, (C)
the violation of any of the provisions of The Foreign Corrupt Practices
Act of 1977, or any rules or regulations promulgated thereunder, (D)
the payment of or offering to pay any illegal remuneration for any
referral to any of its programs in violation of any applicable anti-
kickback law, including the "Medicare Anti-kickback Statute" (42 U.S.C.
Section 1320a-7b(b)) or any applicable state anti-kickback law, (E) the
violation of any Medicare or Medicaid requirements, including the fraud
and abuse provisions, (F) the receipt of any illegal discounts or
rebates or any other violation of the anti-trust laws, (G) any
investigation by the SEC of which the officers or directors of the
Target have Knowledge or (H) any investigation of the Target or its
Subsidiaries by a Medicare intermediary or carrier, the Health Care
Finance Administration, the Office of the Inspector General of the
Department of Heath and Human Services or any other federal, foreign,
state or local government agency or authority of which the officers or
directors of the Target have Knowledge.
(v) None of the Target or its Subsidiaries has submitted any claim for
payment to any payor source, either governmental or nongovernmental, in
violation of any false claim or fraud law, including the "False Claim
Act" (31 U.S.C. Section 3729) or any applicable state false claim or
fraud law.
(ee) Medicare and Medicaid. None of the Target and its Subsidiaries is
engaged in termination proceedings as to its participation in Medicare or
Medicaid or has received notice that its current participation, if any, in
Medicare or Medicaid is subject to any contest, termination or suspension as a
result of alleged violations or any non-compliance with participation
requirements. There is no pending or, to the Knowledge of the Target or its
Subsidiaries, threatened proceeding or investigation involving participation by
the Target or its Subsidiaries in the Medicare or Medicaid programs. To the
Knowledge of any of the directors and officers of the Target, none of the Target
and its Subsidiaries has received reimbursement in excess of the amount provided
by law. All liabilities and contractual adjustments of the business under any
third party payor or reimbursement programs have been properly reflected and
adequately reserved for in the financial statements as of the dates thereof
(with the reserves being established consistently with past practices). The
Target and its Subsidiaries have always been and are currently in compliance in
all respects with applicable rules and regulations governing reimbursement under
the Medicare and Medicaid programs.
(dd) No Litigation. None of the officers or directors of the Target or
its Subsidiaries have Knowledge of any pending or threatened litigation related
to the execution of this Agreement in the consummation of the transactions
contemplated hereby.
<PAGE> 74
4. Representations and Warranties of the Buyer and the Transitory
Subsidiary. Each of the Buyer and the Transitory Subsidiary represents and
warrants to the Target that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and, to the extent the
correctness and completeness of such statements are within the control of Target
or its Subsidiaries, will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Section 4), except as set forth in the Disclosure
Schedule. The Disclosure Schedule will be arranged in paragraphs corresponding
to the numbered and lettered paragraphs contained in this Section 4.
(a) Organization. Each of the Buyer and the Transitory Subsidiary is a
limited liability company and a corporation, respectively, duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
organization.
(b) Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder and the execution and delivery by the Target, and the performance of
its obligations hereunder, have been duly authorized by all requisite corporate
action on the part of the Company, and the Agreement has been duly executed and
delivered by the Target. This Agreement constitutes the valid and legally
binding obligation of each of the Buyer and the Transitory Subsidiary,
enforceable in accordance with its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which either the Buyer or the Transitory
Subsidiary is subject or any provision of the charter or bylaws of either the
Buyer or the Transitory Subsidiary the violation of which would have a material
adverse effect on the business of the Buyer and the Transitory Subsidiary taken
as a whole or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
either the Buyer or the Transitory Subsidiary is a party or by which it is bound
or to which any of its assets is subject, except where the violation, conflict,
breach, default, acceleration, termination, modification, cancellation, or
failure to give notice would not have a material adverse effect on the ability
of the Parties to consummate the transactions contemplated by this Agreement. To
the Knowledge of any director or officer of the Buyer, and other than in
connection with the provisions of the New York Corporation Law, the Securities
Exchange Act, the Securities Act and the state securities laws, neither the
Buyer nor the Transitory Subsidiary needs to give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement except where the failure to give notice, to file,
or to obtain any authorization, consent, or approval would not have a material
adverse effect on the ability of the Parties to consummate the transactions
contemplated by this Agreement.
<PAGE> 75
(d) Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has
any liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this Agreement
for which any of the Target and its Subsidiaries could become liable or
obligated.
(e) No Litigation. None of the officers or directors of the Buyer or
the Transitory Subsidiary have Knowledge of any pending or threatened litigation
related to the execution of this Agreement in the consummation of the
transactions contemplated hereby.
5. Covenants. The Parties agree as follows with respect to the period
from and after the execution of this Agreement.
(a) General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6 below).
(b) Notices and Consents. The Target will give any notices (and will
cause each of its Subsidiaries to give any notices) to third parties, and will
use its best efforts to obtain (and will cause each of its Subsidiaries to use
its best efforts to obtain) any third party consents, that the Buyer may request
in connection with the matters referred to in Section 3(d) above.
(c) Regulatory Matters and Approvals. Each of the Parties will (and the
Target will cause each of its Subsidiaries to) give any notices to, make any
filings with, and use its reasonable best efforts to obtain any authorizations,
consents, and approvals of governments and governmental agencies in connection
with the matters referred to in Section 3(d) and Section 4(c) above. Without
limiting the generality of the foregoing:
(i) Securities Act, Securities Exchange Act and State
Securities Laws. The Target will prepare and file with the SEC
preliminary proxy materials under the Securities Exchange Act
relating to the Special Meeting. The Target will use its best
efforts to respond to the comments of the SEC thereon and will
make any further filings (including amendments and
supplements) in connection therewith that may be necessary,
proper, or advisable. The Buyer will provide the Target, and
the Target will provide the Buyer, with whatever information
and assistance in connection with the foregoing filings that
the filing Party reasonably may request.
(ii) New York Business Corporation Law. The Target will call a
special meeting of its shareholders (the "Special Meeting"),
as soon as practicable in order that the shareholders may
consider and vote upon the adoption of this Agreement and the
approval of the Merger in accordance with the New York
Business Corporation Law. The Target will mail the Definitive
Proxy Materials
<PAGE> 76
to its shareholders as soon as practicable. The Definitive
Proxy Materials will contain the affirmative recommendation of
the board of directors of the Target in favor of the adoption
of this Agreement and the approval of the Merger; provided,
however, that no director or officer of the Target shall be
required to violate any fiduciary duty or other requirement
imposed by law in connection therewith.
(iii) Medicare and Medicaid. The Target will take all actions
necessary to authorize Buyer and the Transitory Subsidiary to
use the Target's or its Subsidiaries' Medicare and/or Medicaid
numbers as permitted by law.
(d) Fairness Opinion. The Target will deliver to the Buyer and the
Transitory Subsidiary on or before the date the Definitive Proxy Materials are
mailed to the shareholders of the Target an opinion of Pinnacle Partners as to
the fairness of the Merger to the Target Shareholders from a financial point of
view (the "Fairness Opinion").
(e) Operation of Business. The Target will not (and will not cause or
permit any of its Subsidiaries to) engage in any practice, take any action, or
enter into any transaction outside the Ordinary Course of Business. Without
limiting the generality of the foregoing:
(i) none of the Target and its Subsidiaries will authorize or
effect any change in its charter or bylaws;
(ii) none of the Target and its Subsidiaries will grant any
options, warrants, or other rights to purchase or obtain any
of its capital stock or issue, sell, or otherwise dispose of
any of its capital stock (except upon the conversion or
exercise of options, warrants, and other rights currently
outstanding);
(iii) none of the Target and its Subsidiaries will declare,
set aside, or pay any dividend or distribution with respect to
its capital stock (whether in cash or in kind), or redeem,
repurchase, or otherwise acquire any of its capital stock;
(iv) none of the Target and its Subsidiaries will issue any
note, bond, or other debt security or create, incur, assume,
or guarantee any indebtedness for borrowed money or
capitalized lease obligation outside the Ordinary Course of
Business;
(v) none of the Target and its Subsidiaries will impose any
Security Interest upon any of its assets outside the Ordinary
Course of Business;
(vi) none of the Target and its Subsidiaries will make any
capital investment in, make any loan to, or acquire the
securities or assets of any other Person outside the Ordinary
Course of Business;
(vii) none of the Target and its Subsidiaries will make any
change in employment terms for any of its directors, officers,
and employees outside the
<PAGE> 77
Ordinary Course of Business; and
(viii) none of the Target and its Subsidiaries will commit to
any of the foregoing.
(f) Full Access. The Target will (and will cause each of its
Subsidiaries to) permit representatives of the Buyer to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of the Target and its Subsidiaries, to all premises,
properties, personnel, books, records (including tax records), contracts, and
documents of or pertaining to each of the Target and its Subsidiaries. Each of
the Buyer and the Transitory Subsidiary will treat and hold as such any
Confidential Information it receives from any of the Target and its Subsidiaries
in the course of the reviews contemplated by this Section 5(f), will not use any
of the Confidential Information except in connection with this Agreement, and,
if this Agreement is terminated for any reason whatsoever, agrees to return to
the Target all tangible embodiments including written, electronic, or other
formats (and all copies) thereof which are in its possession or control, and
will destroy all work papers, memoranda and notes related thereto except,
however, that Confidential Information shall not be deemed to include (i) such
information that is already known to the Buyer or the Transitory Subsidiary or
to others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of the Buyer or the Transitory Subsidiary,
(ii) the use of such information that is necessary or appropriate in making any
filing or obtaining any consent or approval required for the consummation of the
Merger or (iii) the furnishing or use of such information is required by or
necessary or appropriate in connection with legal proceedings; provided, that,
the Buyer and the Transitory Subsidiary will provide written notice to the
Target in advance of making such disclosure and will not object to the Target's
efforts to intercede in such matter for such purpose of protecting the
confidentiality of the Confidential Information.
(g) Notice of Developments. Each Party will give prompt written notice
to the others of any material adverse development causing a breach of any of its
own representations and warranties in Section 3 and Section 4 above. No
disclosure by any Party pursuant to this Section 5(g), however, shall be deemed
to amend or supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
(h) Exclusivity. The Target will not (and will not cause or permit any
of its Subsidiaries to) solicit, initiate, or encourage the submission of any
proposal or offer from any Person relating to the acquisition of all or
substantially all of the capital stock or assets of any of the Target and its
Subsidiaries (including any acquisition structured as a merger, consolidation,
or share exchange); provided, however, prior to the Target obtaining shareholder
approval of this Agreement, the Target, its Subsidiaries, and their directors
and officers will remain free to participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any Person to do or seek
any of the foregoing to the extent their fiduciary duties may require. The
Target shall notify the Buyer immediately if any Person makes any proposal,
offer, inquiry, or contact with respect to any of the foregoing.
<PAGE> 78
(i) Disclosure. The Definitive Proxy Materials will comply with the
Securities Exchange Act in all material respects. The Target hereby covenants
that the Definitive Proxy Materials will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they will
be made, not misleading; provided, however, the Target makes no covenant with
respect to any information that the Buyer and the Transitory Subsidiary will
supply specifically for use in the Definitive Proxy Materials. The Buyer and the
Transitory Subsidiary shall indemnify and hold harmless the Target, its
Subsidiaries and their respective officers, directors, employees and agents from
and against any and all losses, liabilities, costs, and expenses (including
without limitation, reasonable attorneys' fees and costs of litigation) directly
arising out of any untrue statement of material fact or omission of a statement
of material fact necessary in order to make the statements therein not
materially misleading made in the Definitive Proxy Materials directly
attributable to information provided by the Buyer or the Transitory Subsidiary.
The Target and its Subsidiaries shall indemnify and hold harmless the Buyer, the
Transitory Subsidiary and their respective officers, directors, employees and
agents from and against any and all losses, liabilities, costs, and expenses
(including without limitation, reasonable attorneys' fees and costs of
litigation) directly arising out of any untrue statement of material fact or
omission of a statement of material fact necessary in order to make the
statements therein not materially misleading made in the Definitive Proxy
Materials directly attributable to information provided by the Target or its
Subsidiaries.
(j) Warrants. Upon request of the Buyer, prior to the Special Meeting
the Target shall cause notice (in a form approved by the Buyer, which approval
shall not be unreasonably withheld) to be given to Warrant holders of the
proposed transaction and its effect upon the rights of such Warrant holders.
Following receipt of the Requisite Shareholder Approval, the Target will,
subject to content approval by the Buyer, which approval shall not be reasonably
withheld, prepare and file a certificate with the Warrant Agent (following the
form set forth in Section 9(e) of the Warrant Agreement) and cause a summary of
such certificate to be sent to the underwriter and each registered holder of
Warrants. The certificate will contain information regarding the rights of such
holders to acquire $1.20 in cash upon the exercise of such holders' Warrants.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have received the
Requisite Shareholder Approval and the number of Dissenting
Shares shall not exceed 5% of the number of outstanding Target
Shares;
<PAGE> 79
(ii) the Target and its Subsidiaries shall have procured all
of the third party consents specified in Section 5(b) above;
(iii) except for any representation and warranty that, as of
the date of this Agreement, to the Knowledge of Alan J.
Landauer, Chairman of the Board and a Director of the Target
since April 8, 1999, was untrue or incorrect, the
representations and warranties set forth in Section 3 above
shall be true and correct at and as of the Closing Date;
(iv) the Target shall have performed and complied with all of
its covenants hereunder in all material respects through the
Closing;
(v) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the
Buyer to own the capital stock of the Surviving Corporation
and to control the Surviving Corporation and its Subsidiaries,
(D) affect adversely the right of any of the Surviving
Corporation and its Subsidiaries to own its assets and to
operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect) or (E)
result in any liability, contingent or otherwise, from record
or beneficial holders of Warrants, except to the extent the
Purchase Price (as defined in the Warrant Agreement and
satisfactory to the Buyer) exceeds the value of what such
holder may be entitled to under the Warrant Agreement upon
consummation of the transactions contemplated by this
Agreement;
(vi) the Target shall have delivered to the Buyer and the
Transitory Subsidiary an officers' certificate to the effect
that each of the conditions specified above in
Section 6(a)(i)-(v) is satisfied in all respects;
(vii) the Parties shall have received all other
authorizations, consents, and approvals of governments and
governmental agencies referred to in Section 3(d) and
Section 4(c) above;
(viii) the Buyer and the Transitory Subsidiary shall have
received from counsel to the Target an opinion in form and
substance as set forth in Exhibit C attached hereto, addressed
to the Buyer and the Transitory Subsidiary, and dated as of
the Closing Date;
(ix) the Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Closing, of
each director and officer of the Target
<PAGE> 80
and its Subsidiaries other than those whom the Buyer shall
have specified in writing at least five business days prior to
the Closing;
(x) all actions to be taken by the Target in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will
be satisfactory in form and substance to the Buyer and the
Transitory Subsidiary; and
(xi) the Buyer and the Transitory Subsidiary shall have
obtained all of the financing they will require in order to
consummate the Merger.
The Buyer and the Transitory Subsidiary may waive any condition specified in
this Section 6(a) if they execute a writing so stating at or prior to the
Closing.
(b) Conditions to Obligation of the Target. The obligation of the
Target to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at
and as of the Closing Date;
(ii) each of the Buyer and the Transitory Subsidiary shall
have performed and complied with all of its covenants
hereunder in all material respects through the Closing;
(iii) no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would
(A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded
following consummation, (C) affect adversely the right of the
Buyer to own the capital stock of the Surviving Corporation
and to control the Surviving Corporation and its Subsidiaries,
(D) affect adversely the right of any of the Surviving
Corporation and its Subsidiaries to own its assets and to
operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect); and
there shall not be any judgement, order, decree, stipulation,
injunction or charge in effect preventing consummation of any
transactions contemplated by this Agreement.
(iv) each of the Buyer and the Transitory Subsidiary shall
have delivered to the Target an officers' certificate to the
effect that each of the conditions specified above in
Section 6(b)(i)-(v) is satisfied in all respects;
<PAGE> 81
(v) this Agreement and the Merger shall have received the
Requisite Shareholder Approval;
(vi) the Parties shall have received all other authorizations,
consents, and approvals of governments and governmental
agencies referred to in Section 3(d) and Section 4(c) above;
(vii) the Target shall have received from counsel to the Buyer
and the Transitory Subsidiary an opinion in form and substance
as set forth in Exhibit D attached hereto, addressed to the
Target, and dated as of the Closing Date; and
(viii) all actions to be taken by the Buyer and the Transitory
Subsidiary in connection with consummation of the transactions
contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Target.
The Target may waive any condition specified in this Section 6(b) if it executes
a writing so stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. Any of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after shareholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) the Buyer and the Transitory Subsidiary may terminate
this Agreement by giving written notice to the Target at any
time prior to the Effective Time (A) in the event the Target
has breached any material representation, warranty, or
covenant contained in this Agreement, the Buyer or the
Transitory Subsidiary has notified the Target of the breach,
and the breach has continued without cure for a period of 10
days after the notice of breach or (B) if the Closing shall
not have occurred on or before August 30, 1999, by reason of
the failure of any condition precedent under Section 6(a)
hereof (unless the failure results primarily from the Buyer or
the Transitory Subsidiary breaching any representation,
warranty, or covenant contained in this Agreement);
(iii) the Target may terminate this Agreement by giving
written notice to the Buyer and the Transitory Subsidiary at
any time prior to the Effective Time (A) in the event the
Buyer or the Transitory Subsidiary has breached any material
<PAGE> 82
representation, warranty, or covenant contained in this
Agreement in any material respect, the Target has notified the
Buyer and the Transitory Subsidiary of the breach, and the
breach has continued without cure for a period of 10 days
after the notice of breach or (B) if the Closing shall not
have occurred on or before August 30, 1999, by reason of the
failure of any condition precedent under Section 6(b) hereof
(unless the failure results primarily from the Target
breaching any representation, warranty, or covenant contained
in this Agreement);
(iv) Prior to the Target obtaining shareholder approval of
this Agreement, the Target may terminate this Agreement by
giving written notice to the Buyer at any time prior to the
Effective Time, in the event that a Person has made an
Acquisition Proposal that the board of directors of the Target
determines, in good faith, and after consultation with and
advice from its financial advisors, is likely to be subject to
completion and would, if consummated, result in a transaction
more favorable, from a financial point of view, to the
Target's shareholders than this Agreement and the Merger.
(v) any Party may terminate this Agreement by giving written
notice to the other Parties at any time after the Special
Meeting in the event this Agreement and the Merger fail to
receive the Requisite Shareholder Approval.
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 7(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); provided, however, that
the confidentiality provisions contained in Section 5(h) or Section 8(b) above
shall survive any such termination.
(c) Termination Fee. In the event of termination by the Target pursuant
to Section 7(a)(iv) above or by the Buyer or the Transitory Subsidiary pursuant
to or Section 7(a)(ii) above, Target shall (i) pay to Buyer a termination fee of
three hundred fifty thousand dollars ($350,000), not as a penalty but in
recognition of the substantial time and efforts expended, expenses incurred and
other opportunities foregone by the Buyer in connection with this Agreement plus
(ii) any and all expenses incurred by Buyer or the Transitory Subsidiary
(including without limitation, attorneys' fees) relating to or arising out of
this Agreement or the transactions or the agreements contemplated herein;
provided, however, this Section 7(c) shall not apply to a termination pursuant
to Section 7(a)(ii)(B) if the basis thereof is the failure to satisfy the
condition precedent described in Section 6(a)(i), unless an Acquisition
Transaction is contracted for on or prior to December 31, 1999.
8. Miscellaneous.
(a) Survival. None of the representations, warranties, and covenants of
the Parties (other than the provisions in Section 2 above concerning payment of
the Merger Consideration and the provisions in Section 5(k) above concerning
indemnification) will survive the Effective Time.
<PAGE> 83
(b) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement without the prior written approval of the other Parties;
provided, however, that any Party may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its reasonable best efforts to advise the other Party prior to making
the disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Section 2 above concerning payment of the Merger Consideration are intended for
the benefit of the Target Shareholders.
(d) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
(e) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Target:
Community Care Services, Inc.
18 Sargent Place
Mount Vernon, NY 10550
Attention: Elia C. Guaneri, Chief Financial Officer
Telephone: (914) 665-9050
Copy to:
Nordlicht & Hand
<PAGE> 84
Olympic Tower
645 Fifth Avenue
New York, NY 10022
Attention: Brian M. Hand, Esq.
Telephone: (212) 421-6500
Facsimile: (212) 421-0499
If to the Buyer:
Landauer Hospital Supplies Inc.
99 Calvert Street, P.O. Box 839
Harrison, NY 10528
Attention: Alan J. Landauer
Telephone: (914) 835-4200
Facsimile: (914) 835-4793
Copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, NY 10048
Attention: Thomas N. Talley, Esq.
Telephone: (212) 912-7645
Facsimile: (212) 912-7751
If to the Transitory Subsidiary:
LHS Merger Sub, Inc.
c/o Landauer Hospital Supplies, Inc.
99 Calvert Street, P.O. Box 830
Harrison, NY 10528
Attention: Alan J. Landauer
Telephone: (914) 835-4200
Facsimile: (914) 835-4793
Copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: Thomas N. Talley, Esq.
Telephone: (212) 912-7645
Facsimile: (212) 912-7751
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may
<PAGE> 85
change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT
TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW
YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(j) Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to shareholder approval will be subject
to the restrictions contained in the New York Business Corporation Law. No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by all of the Parties. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(k) Jurisdiction; Service of Process. Any action or proceeding seeking
to enforce any provision of, or based upon any right arising out of, this
Agreement may be brought against any of the Parties in the courts of the State
of New York, County of Westchester, or, if it has or can acquire jurisdiction,
in the United States District Court for the Southern District of New York, and
each of the Parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on any Party anywhere in the world.
(l) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(m) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(n) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the
<PAGE> 86
context otherwise requires. The word "including" shall mean including without
limitation.
(o) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
*****
<PAGE> 87
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
as of the date first above written.
LANDAUER HOSPITAL SUPPLIES INC.
/s/ Alan J. Landauer
By: __________________________
Name: Alan J. Landauer
Title: Chairman
LHS MERGER SUB, INC.
/s/ Alan J. Landauer
By: __________________________
Name: Alan J. Landauer
Title: President
COMMUNITY CARE SERVICES, INC.
/s/ Elia C. Guarneri
By: __________________________
Name: Elia C. Guaneri
Title: Chief Financial Officer
<PAGE> 88
SCHEDULE 1
DISCLOSURE SCHEDULE
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
<PAGE> 89
SCHEDULE 2
ENVIRONMENTAL SAFETY AND PERMITS SCHEDULE
<PAGE> 90
ANNEX B
BUSINESS CORPORATION LAW OF THE STATE OF NEW YORK
DISSENTERS' RIGHTS
Section 623. Procedure to Enforce Shareholders' Right to Receive Payment for
Shares.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as
to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice
<PAGE> 91
of election is withdrawn, or the corporate action is rescinded, or a court shall
determine that the shareholder is not entitled to receive payment for his
shares, or the shareholder shall otherwise lose his dissenters' rights, he shall
not have the right to receive payment for his shares and he shall be reinstated
to all his rights as a shareholder as of the consummation of the corporate
action, including any intervening preemptive rights and the right to payment of
any intervening dividend or other distribution or, if any such rights have
expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders'
<PAGE> 92
authorization for or consent to the proposed corporate action the shareholders
were furnished with a proxy or information statement, which included financial
statements, pursuant to Regulation 14A or Regulation 14C of the United States
Securities and Exchange Commission. If within thirty days after the making of
such offer, the corporation making the offer and any shareholder agree upon the
price to be paid for his shares, payment therefor shall be made within sixty
days after the making of such offer or the consummation of the proposed
corporate action, whichever is later, upon the surrender of the certificates for
any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation without
an office in this state, such proceeding shall be brought in the county where
the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his
<PAGE> 93
shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the proceeding,
the corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if
it is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
<PAGE> 94
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This Section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of Section 907 (Merger or consolidation of
domestic and foreign corporations).
<PAGE> 95
ANNEX C
OPINION OF FINANCIAL ADVISOR
[Letterhead of Pinnacle Partners]
CONFIDENTIAL
June 15, 1999
Special Committee of the
The Board of Directors
Community Care Services, Inc.
18 Sargent Place
Mount Vernon, New York 10550
Members of the Special Committee of the Board of Directors:
We understand that Community Care Services, Inc. (the "Company") has entered
into an Agreement and Plan of Merger, dated as of June 14, 1999, by and among
the Company, Landauer Hospital Supplies, Inc. ("LHS") and LHS Merger Sub, Inc.
("Merger Sub"), a wholly-owned subsidiary of LHS (the "Merger Agreement"). We
also understand that Merger Sub was established for the sole purpose of
effecting the transactions contemplated by the Merger Agreement. We understand
pursuant to the Merger Agreement, upon consummation of the transactions
contemplated by the Merger Agreement, the Company will merge with Merger Sub and
the Company will be the surviving entity, thereby becoming a wholly-owned
subsidiary of LHS (the "Merger"). We understand that, subject to the terms and
conditions of the Merger Agreement, upon consummation of the Merger, each
outstanding share of the Company's common stock, par value $0.01 per share
("Common Stock") will be converted into the right to receive $1.20 in cash (the
"Merger Consideration"), except for Common Stock beneficially owned by Alan
Landauer, Chairman of the Board of the Company; LTTR Home Care, LLC, an
affiliate of LHS ("LTTR"), of which Alan Landauer serves as the Managing
Director and sole member; and dissenting shareholders. We have been advised that
the Merger Consideration is the only consideration to be received by the holders
of Common Stock (as set forth above), and that such holders shall have no
further ownership interest in the Company as of the effective date of the
Merger.
We understand the following: (i) at the close of business on June 15, 1999, Alan
Landauer and LTTR were the record owners of an aggregate of 2,188,250 shares of
Common Stock, representing approximately 30.32% of the issued and outstanding
Common Stock; (ii) at the close of business on June 15, 1999, Dean L. Sloane, a
Director of the Company, Craig V. Sloane, Mary Sloane, Joshua
<PAGE> 96
Sloane and the Sloane Family Foundation and DMJ Management Group, Inc. (the
"Sloane Group") were the record and beneficial owners of an aggregate of
2,091,450 shares of Common Stock, representing approximately 28.98% of the
issued and outstanding Common Stock; (iii) pursuant to a shareholders agreement
entered into by the Sloane Group, the Sloane Group has agreed to vote its shares
of Common Stock in favor of the Merger by granting an irrevocable proxy to Alan
Landauer to vote its shares in favor of the Merger; and, (iv) as a result, Alan
Landauer controls the vote of 59.30% of the outstanding Common Stock. In
addition, we have been advised that the other Directors and Officers of the
Company beneficially own, in the aggregate, 390,299 shares of Common Stock
(including options to purchase 25,000 shares of Common Stock at an exercise
price of $0.50 per share that are currently exercisable) and which constitute
approximately 5.41% of the outstanding Common Stock.
You have requested our opinion, as investment bankers, as to the fairness, from
a financial point of view, of the Merger Consideration to be received in the
Merger by the holders of Common Stock (other than Alan Landauer, LTTR and their
affiliates, as defined in the Company's Draft Proxy Statement dated June 14,
1999, including the Sloane Group, as to which we were not requested to express
an opinion) (this "Opinion"). It is understood that this Opinion shall be used
by you solely in connection with your consideration of the fairness of the
Merger Consideration to be received by holders of Common Stock (other than Alan
Landauer, LTTR and their affiliates, including the Sloane Group, as to which we
were not requested to express an opinion), and for no other purpose, and that
the Company will not furnish this Opinion or any other material prepared by
Pinnacle Advisory Group, L.C., an affiliate of Pinnacle Partners, Inc.
(collectively, "Pinnacle Partners") to any other person or persons or use or
refer to this Opinion for any other purpose without the prior written approval
of Pinnacle Partners. Pinnacle Partners understands and agrees that this Opinion
may be referred to and reproduced in any proxy statement of the Company filed in
connection with the Merger with the Securities and Exchange Commission. Pinnacle
Partners, as part of its investment banking business, is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, private placements and valuations for corporate, estate and other
purposes.
In connection with our opinion set forth herein, we have, among other things:
(i) reviewed the Company's Draft Proxy Statement dated June 14, 1999 (the date
of the draft that was most recently available and which we assume herein will
not be materially different from the Proxy Statement that shall be mailed to
holders of the Common Stock); (ii) reviewed the Company's prospectus dated
October 18, 1996; (iii) reviewed the Company's Annual Reports on Form 10-K filed
with the Securities and Exchange Commission for the fiscal years ended March 31,
1997 and 1998; (iv) reviewed the Company's Quarterly Reports on Form 10-Q filed
with the Securities and Exchange Commission for the periods ended June 30, 1998,
September 30, 1998, and December 31, 1998; (v) reviewed certain other documents
filed by the Company with the Securities and Exchange Commission; (vi) reviewed
certain interim and estimated year-end financial analysis and forecasts for the
Company prepared by management of the Company; (vii) reviewed projected
financial statements for the Company prepared by or based upon information
provided by management of the Company; (viii) held discussions with management
of the Company and its advisors (including the Company's certified public
accountants and legal counsel) regarding the history, business, operations,
financial condition and prospects of the Company; (ix) performed various
financial analyses, as we deemed appropriate, of the Company using generally
accepted analytical methodologies, including: (a) an analysis of premiums paid
in public merger and acquisition transactions; (b) the application of the public
trading multiples of companies which we deemed comparable to the Company to the
financial results of the Company; (c) the application of the multiples reflected
in selected mergers and acquisitions involving businesses which we deemed
comparable to the Company to the financial results of the Company; (d) a
discounted projected cash flow analysis; and (e) a review of the
<PAGE> 97
historical trading prices and volumes of the Common Stock as traded on Nasdaq
and the over-the-counter bulletin board; and (x) reviewed such other materials
and performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In our review and analysis and in formulating our opinion, we have assumed and
relied upon the accuracy and completeness of all information supplied or
otherwise made available to us by the Company or obtained by us from other
sources (which we deemed reliable), and upon the assurance of the Company's
management that they are not aware of any information or facts that would make
the information provided to us incomplete, inaccurate or misleading. We have not
attempted to verify independently any of such information. With respect to any
interim, estimated or projected financial statements or forecasts referred to in
clauses (vi) through (viii) above, we have been advised by the Company, and we
have assumed, without independent investigation, that they have been prepared
reasonably and reflect the Company's best estimates and judgments of the
Company's actual or future results of operations and financial condition at and
for the periods specified therein, and we express no opinion with respect to
such interim or projected financial statements or forecasts. We have assumed
that the Company's audited financial results for the year ended March 31, 1999
will not be materially different from the estimated results for such period
provided to us by the Company. In rendering our opinion, we have assumed that
the Company will continue to operate as a going concern, and no consideration
has been given to the effect of any solvency, bankruptcy or similar laws on the
Merger in the event such laws become applicable to the Company in the future.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated by us on the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting our opinion which may come or be brought to our
attention after that date of the opinion unless specifically requested to do so.
Our opinion does not constitute a recommendation as to any action the Board of
Directors of the Company or any holder of Common Stock should take in connection
with the Merger Agreement, the Merger or any aspect thereof or alternatives
thereto. Without limitation to the foregoing, this letter does not constitute a
recommendation to any holder of Common Stock with respect to whether to elect to
receive the Merger Consideration or vote in favor of transactions contemplated
by the Merger Agreement, and should not be relied upon by any holder of Common
Stock as such. In rendering our opinion, we have not been engaged as an agent or
fiduciary of the Company's stockholders or of any other third party. Our opinion
relates solely to the fairness, from a financial point of view, of the Merger
Consideration to be received by the holders of Common Stock (other than Alan
Landauer, LTTR and their affiliates, including the Sloane Group, as to which we
were not requested to express an opinion) in the Merger. We express no opinion
herein as to the structure, terms or effect of any other aspect of the
transactions contemplated by, or provisions of, the Merger Agreement. Based upon
and subject to all the foregoing, we are of the opinion, as investment bankers,
that as of the date hereof, the Merger Consideration to be received by the
holders of Common Stock (other than Alan Landauer, LTTR and their affiliates,
including the Sloane Group, as to which we were not requested to express an
opinion), pursuant to the Merger is fair, from a financial point of view, to
such holders.
Very truly yours,
Pinnacle Advisory Group, L.C.
Steven C. Jacobs
- - - ---------------------
Managing Director
<PAGE> 98
PROXY COMMUNITY CARE SERVICES, INC.
Solicited on Behalf of the Board of Directors
The undersigned appoints Alan J. Landauer as the undersigned's proxy to
vote all shares of Common Stock of the undersigned in Community Care Services,
Inc. (the "Company"), a New York corporation, which the undersigned would be
entitled to vote at a special meeting of shareholders of the Company to be held
at the offices of the Company on July 19, 1999, at 10:00 a.m. (local time) or at
any adjournments thereof as follows:
1. Approval and adoption of the Agreement and Plan of Merger, dated June
14, 1999, by and among the Company, Landauer Hospital Supplies Inc.
("LHS") and LHS Merger Sub, Inc. ("Merger Sub") and the transactions
contemplated thereby, pursuant to which Merger Sub will merge with and
into the Company, with the Company continuing as the surviving entity,
thereby becoming a wholly-owned subsidiary of LHS.
|_| FOR |_| AGAINST |_| ABSTAIN
2. In their discretion, upon such other business as may properly come
before the meeting or any adjournments thereof.
The shares of Common Stock represented by this Proxy will be voted in
accordance with the foregoing instructions. In the absence of any instructions,
such shares will be voted FOR the proposal in Item 1.
The undersigned hereby revokes any Proxy or Proxies to vote shares of
Common Stock of the Company heretofore given by the undersigned.
________________________________, 1999
(Date)
_______________________________________
_______________________________________
Please date, sign exactly as your name
appears on this Proxy, and promptly
return in the enclosed envelope. When
signing as guardian, executor,
administrator, attorney, trustee,
custodian, or in any other similar
capacity, please give full title. If a
corporation, sign in full corporate
name by president or other authorized
officer, giving his title, and affix
corporate seal. If a partnership, sign
in the partnership name by authorized
person. In the case of joint
ownership, each joint owner must sign.
