<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1996
SUBJECT TO AMENDMENT
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
MATRIA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C> <C>
DELAWARE 8082 58-2205984
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1850 PARKWAY PLACE, 12TH FLOOR
MARIETTA, GEORGIA 30067
(770) 423-4500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
J. BRENT BURKEY, ESQ.
MATRIA HEALTHCARE, INC.
1850 PARKWAY PLACE, 12TH FLOOR
MARIETTA, GEORGIA 30067
(770) 423-4500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
JAMES L. SMITH, III, ESQ. ROBERT M. MATTSON, ESQ.
TROUTMAN SANDERS LLP MORRISON & FOERSTER LLP
600 PEACHTREE STREET, N.E. 19900 MACARTHUR BOULEVARD
SUITE 5200 SUITE 1200
NATIONSBANK PLAZA IRVINE, CALIFORNIA 92715-2445
ATLANTA, GEORGIA 30308-2216 (714) 251-7138
(404) 885-3111
</TABLE>
---------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement and the satisfaction or waiver (where permissible) of the other
conditions to the Merger described herein.
---------------------
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED PROPOSED
TITLE OF EACH AMOUNT MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(2) FEE(3)
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Common Stock, $.01 par value.......... 37,682,286 $-- $333,388,811(4) $114,962(4)
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Common Stock Purchase Rights.......... 37,682,286 (4) (4) $100(4)
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</TABLE>
(1) Based on the sum of (i) 18,115,309 which is the maximum number of shares of
Healthdyne Common Stock that would be outstanding immediately prior to the
Merger described herein, assuming the exercise of all Healthdyne stock
options and (ii) 19,566,977 which is the maximum number of shares of Tokos
that would be outstanding immediately prior to the Merger described herein,
assuming the exercise of all Tokos stock options.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rule 457(f) by determining the sum of (i) the product
of (a) $8.75, the average of the high and low sale prices of Healthdyne
Common Stock as reported by the Nasdaq National Market on February 2, 1996
and (b) 18,115,309, the maximum number of shares of Healthdyne Common Stock
computed as described in Note (1) and (ii) the product of (a) $8.9375, the
average of the high and low sale prices of Tokos Common Stock as reported by
the Nasdaq National Market on February 2, 1996 and (b) 19,566,977, the
maximum number of shares of Tokos Common Stock computed as described in Note
(1).
(3) An aggregate filing fee of $59,880 was paid by Healthdyne and Tokos on
December 5, 1995 in connection with the filing by Healthdyne and Tokos of
preliminary proxy materials on Schedule 14A on such date.
(4) Rights are attached to and trade with the Common Stock of the Registrant.
The value attributable to such Rights, if any, is reflected in the market
price of the Common Stock. The registration fee paid represents the minimum
statutory fee pursuant to Section 6(b) of the Securities Act of 1933, as
amended.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
MATRIA HEALTHCARE, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
LOCATION OR CAPTION IN
ITEM OF FORM S-4 JOINT PROXY STATEMENT/PROSPECTUS
--------------------------------------------- -----------------------------------------
<C> <S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. -- Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page; Cross Reference Sheet;
Outside Front Cover Page of Prospectus
2. -- Inside Front and Outside Back Cover Pages of
Prospectus................................. Available Information; Table of Contents
3. -- Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information............. Summary; Risk Factors; Selected Financial
Data; Comparative Per Share Data;
Comparative Market Data; The Healthdyne
Meeting; The Tokos Meeting; Description
of Tokos; Description of Healthdyne;
Operation, Management and Business of
Newco after the Merger; The Merger; The
Merger Agreement; Comparative Rights of
Stockholders
4. -- Terms of the Transaction..................... Summary; The Merger; The Merger
Agreement; Comparative Rights of
Stockholders
5. -- Pro Forma Financial Information.............. Selected Financial Information;
Healthdyne Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Pro Forma
Consolidated Condensed Financial Data
6. -- Material Contacts With the Company Being
Acquired................................... Summary; The Merger; Operation,
Management and Business of Newco After
the Merger; Comparative Rights of
Stockholders
7. -- Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ *
8. -- Interests of Named Experts and Counsel....... Legal Matters; Experts
9. -- Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Comparative Rights of Stockholders
B. INFORMATION ABOUT THE REGISTRANT
10. -- Information With Respect to S-3
Registrants................................ *
11. -- Incorporation of Certain Information by
Reference.................................. *
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
LOCATION OR CAPTION IN
ITEM OF FORM S-4 JOINT PROXY STATEMENT/PROSPECTUS
--------------------------------------------- -----------------------------------------
<C> <S> <C> <C>
12. -- Information With Respect to S-2 or S-3
Registrants................................ *
13. -- Incorporation of Certain Information by
Reference.................................. *
14. -- Information With Respect to Registrants Other
than S-3 or S-2 Registrants................ Available Information; Summary; Pro Forma
Consolidated Condensed Financial
Information; Operation, Management and
Business of Newco after the Merger
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. -- Information With Respect to S-3 Companies.... *
16. -- Information With Respect to S-2 or S-3
Companies.................................. Available Information; Summary;
Appendices II and III; Description of
Tokos; Description of Healthdyne;
Selected Financial Information; Tokos
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Healthdyne Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Consolidated Financial Statements of
Tokos Medical Corporation (Delaware)
and Subsidiaries; Consolidated
Financial Statements of Healthdyne,
Inc. and Subsidiaries
17. -- Information With Respect to Companies Other
Than S-2 or S-3 Companies.................. *
D. VOTING AND MANAGEMENT INFORMATION
18. -- Information if Proxies, Consents or
Authorizations Are to be Solicited......... The Healthdyne Meeting; The Tokos
Meeting; The Merger; Operation,
Management and Business of Newco After
the Merger; Description of Tokos;
Description of Healthdyne; Comparative
Rights of Stockholders
19. -- Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer....................... *
</TABLE>
- ---------------
* Omitted since the answer is negative or Item is not applicable.
<PAGE> 4
HEALTHDYNE, INC.
1850 PARKWAY PLACE
MARIETTA, GEORGIA 30067
February 7, 1996
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Meeting") of Healthdyne, Inc., a Georgia corporation ("Healthdyne"), to be held
on Wednesday, March 6, 1996, at 10:00 a.m., local time, at the offices of
Troutman Sanders LLP, 600 Peachtree Street, Suite 5200, Atlanta, Georgia.
At the Meeting, you will be asked to consider and vote upon (a) a proposal
to approve and adopt the Agreement and Plan of Merger dated as of October 2,
1995, as amended (the "Merger Agreement"), among Healthdyne, Tokos Medical
Corporation (Delaware), a Delaware corporation ("Tokos"), and Matria Healthcare,
Inc., a Delaware corporation ("Newco"), providing for the merger (the "Merger")
of Healthdyne and Tokos with and into Newco, with Newco continuing as the
surviving corporation, and (b) a proposal to approve and adopt the Newco 1996
Stock Incentive Plan, the Newco 1996 Directors' Non-Qualified Stock Option Plan
and the Newco 1996 Employee Stock Purchase Plan (collectively, the "Newco
Plans"). Under the Merger Agreement, (i) each share of Common Stock, par value
$.01 per share, of Healthdyne (the "Healthdyne Common Stock") outstanding
immediately prior to the consummation of the Merger, together with its
associated preferred stock purchase right, will be converted into one share of
Common Stock, par value $.01 per share, of Newco ("Newco Common Stock"), and one
associated common stock purchase right (a "Newco Stock Right") and (ii) each
share of Common Stock, par value $.001 per share, of Tokos outstanding
immediately prior to the consummation of the Merger, together with its
associated common stock purchase right, will be converted into one share of
Newco Common Stock and one associated Newco Stock Right. The Merger and related
transactions are more fully described in the accompanying Joint Proxy
Statement/Prospectus.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE MERGER AND FOR THE NEWCO
PLANS AT THE MEETING. WE URGE YOU TO REVIEW CAREFULLY THE JOINT PROXY
STATEMENT/PROSPECTUS AND ACCOMPANYING APPENDICES, INCLUDING THE DISCUSSIONS
THEREIN CONCERNING HEALTHDYNE'S REASONS FOR THE MERGER AND FACTORS WHICH SHOULD
BE CAREFULLY CONSIDERED IN CONNECTION WITH YOUR VOTE ON THE MERGER.
We hope you will attend the Meeting. However, whether or not you plan to
attend the Meeting, it is important that your shares are represented at the
Meeting. Accordingly, please complete, sign and date the enclosed proxy and
promptly return it in the enclosed prepaid envelope. If you are present at the
Meeting you may, if you wish, withdraw your proxy and vote in person.
Very truly yours,
PARKER H. PETIT
Chairman of the Board and
Chief Executive Officer
<PAGE> 5
HEALTHDYNE, INC.
1850 PARKWAY PLACE
MARIETTA, GEORGIA 30067
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 6, 1996
---------------------
To the Shareholders of
Healthdyne, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Healthdyne, Inc., a Georgia corporation ("Healthdyne"), will be
held at the offices of Troutman Sanders LLP, 600 Peachtree Street, Suite 5200,
Atlanta, Georgia at 10:00 a.m., local time, on Wednesday, March 6, 1996, to
consider and act upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger
dated as of October 2, 1995, as amended (the "Merger Agreement"), among
Healthdyne, Tokos Medical Corporation (Delaware), a Delaware corporation
("Tokos"), and Matria Healthcare, Inc., a Delaware corporation ("Newco"),
providing for the merger (the "Merger") of Healthdyne and Tokos with and
into Newco, with Newco continuing as the surviving corporation. Under the
Merger Agreement, (i) each share of Common Stock, par value $.01 per share,
of Healthdyne (the "Healthdyne Common Stock") outstanding immediately prior
to the consummation of the Merger, together with its associated preferred
stock purchase right, will be converted into one share of Common Stock, par
value $.01 per share, of Newco ("Newco Common Stock") and one associated
common stock purchase right (a "Newco Stock Right") and (ii) each share of
Common Stock, par value $.001 per share, of Tokos outstanding immediately
prior to the consummation of the Merger, together with its associated
common stock purchase right, will be converted into one share of Newco
Common Stock and one associated Newco Stock Right;
2. A proposal to approve and adopt the Newco 1996 Stock Incentive
Plan, the Newco 1996 Directors' Non-Qualified Stock Option Plan and the
Newco 1996 Employee Stock Purchase Plan (collectively, the "Newco Plans");
and
3. Such other business as properly may come before the Meeting or any
adjournment or postponement thereof.
The Merger, the Newco Plans and other related matters are more fully
described in the accompanying Joint Proxy Statement/Prospectus and Appendices
thereto, which form a part of this Notice.
The Board of Directors of Healthdyne has fixed the close of business on
January 31, 1996 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of and to vote at the Meeting or any adjournment
or postponement thereof. Only shareholders of record at the close of business on
the Record Date are entitled to notice of and to vote at the Meeting and any
adjournments or postponements thereof. A list of such shareholders will be
available for inspection at the offices of Healthdyne located at 1850 Parkway
Place, Marietta, Georgia 30067, at least ten days prior to the Meeting.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE MERGER AND FOR THE NEWCO
PLANS AT THE MEETING. WE URGE YOU TO REVIEW CAREFULLY THE ACCOMPANYING JOINT
PROXY STATEMENT/PROSPECTUS WHICH INCLUDES DISCUSSIONS OF HEALTHDYNE'S REASONS
FOR THE MERGER AND FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED IN CONNECTION
WITH YOUR VOTE ON THE MERGER.
<PAGE> 6
Whether or not you plan to attend the Meeting, please execute and return
promptly the enclosed form of proxy. A return envelope is enclosed for your
convenience and requires no postage for mailing in the United States.
By Order of the Board of Directors,
J. BRENT BURKEY
Secretary
February 7, 1996
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE
<PAGE> 7
TOKOS MEDICAL CORPORATION (DELAWARE)
1821 EAST DYER ROAD
SANTA ANA, CALIFORNIA 92705
February 7, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Meeting") of Tokos Medical Corporation (Delaware), a Delaware corporation
("Tokos"), to be held on Wednesday, March 6, 1996, at 10:00 a.m., local time, at
Windsor/Embassy Suites Hotel, 1325 East Dyer Road, Santa Ana, CA.
At the Meeting, you will be asked to consider and vote upon (a) a proposal
to approve and adopt the Agreement and Plan of Merger dated as of October 2,
1995, as amended (the "Merger Agreement"), among Tokos, Healthdyne, Inc., a
Georgia corporation ("Healthdyne"), and Matria Healthcare, Inc., a Delaware
corporation ("Newco"), providing for the merger (the "Merger") of Tokos and
Healthdyne with and into Newco, with Newco continuing as the surviving
corporation, and (b) a proposal to approve and adopt the Newco 1996 Stock
Incentive Plan, the Newco 1996 Directors' Non-Qualified Stock Option Plan and
the Newco 1996 Employee Stock Purchase Plan (collectively, the "Newco Plans").
Under the Merger Agreement, (i) each share of Common Stock, par value $.001 per
share, of Tokos outstanding immediately prior to the consummation of the Merger,
together with its associated common stock purchase right, will be converted into
one share of Common Stock, par value $.01 per share, of Newco ("Newco Common
Stock") and one associated common stock purchase right (a "Newco Stock Right")
and (ii) each share of Common Stock, par value $.01 per share, of Healthdyne
outstanding immediately prior to the consummation of the Merger, together with
its associated preferred stock purchase right, will be converted into one share
of Newco Common Stock and one associated Newco Stock Right. The Merger and
related transactions are more fully described in the accompanying Joint Proxy
Statement/Prospectus.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE MERGER AND FOR THE NEWCO PLANS AT THE MEETING.
WE URGE YOU TO REVIEW CAREFULLY THE JOINT PROXY STATEMENT/PROSPECTUS AND
ACCOMPANYING APPENDICES, INCLUDING THE DISCUSSIONS THEREIN CONCERNING TOKOS'
REASONS FOR THE MERGER AND FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED IN
CONNECTION WITH YOUR VOTE ON THE MERGER.
We hope you will attend the Meeting. However, whether or not you plan to
attend the Meeting, it is important that your shares are represented at the
Meeting. Accordingly, please complete, sign and date the enclosed proxy and
promptly return it in the enclosed prepaid envelope. If you are present at the
Meeting you may, if you wish, withdraw your proxy and vote in person.
Very truly yours,
ROBERT F. BYRNES
Chairman of the Board and
Chief Executive Officer
<PAGE> 8
TOKOS MEDICAL CORPORATION (DELAWARE)
1821 EAST DYER ROAD
SANTA ANA, CALIFORNIA 92705
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 6, 1996
---------------------
To the Stockholders of
Tokos Medical Corporation (Delaware):
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of Tokos Medical Corporation (Delaware), a Delaware corporation
("Tokos"), will be held at Windsor/Embassy Suites Hotel, 1325 East Dyer Road,
Santa Ana, CA, at 10:00 a.m., local time, on Wednesday, March 6, 1996, to
consider and act upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger
dated as of October 2, 1995, as amended (the "Merger Agreement"), among
Tokos, Healthdyne, Inc., a Georgia corporation ("Healthdyne"), and Matria
Healthcare, Inc., a Delaware corporation ("Newco"), providing for the
merger (the "Merger") of Tokos and Healthdyne with and into Newco, with
Newco continuing as the surviving corporation. Under the Merger Agreement,
(i) each share of Common Stock, par value $.001 per share, of Tokos
outstanding immediately prior to the consummation of the Merger, together
with its associated common stock purchase right, will be converted into one
share of Common Stock, par value $.01 per share, of Newco (the "Newco
Common Stock") and one associated common stock purchase right (a "Newco
Stock Right") and (ii) each share of Common Stock, par value $.01 per
share, of Healthdyne outstanding immediately prior to the consummation of
the Merger, together with its associated preferred stock purchase right,
will be converted into one share of Newco Common Stock and one associated
Newco Stock Right;
2. A proposal to approve and adopt the Newco 1996 Stock Incentive
Plan, the Newco 1996 Directors' Non-Qualified Stock Option Plan and the
Newco 1996 Employee Stock Purchase Plan (collectively, the "Newco Plans");
and
3. Such other business as properly may come before the Meeting or any
adjournment or postponement thereof.
The Merger, the Newco Plans and other related matters are more fully
described in the accompanying Joint Proxy Statement/Prospectus and Appendices
thereto, which form a part of this Notice.
The Board of Directors of Tokos has fixed the close of business on January
31, 1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of and to vote at the Meeting or any adjournment
or postponement thereof. Only stockholders of record at the close of business on
the Record Date are entitled to notice of and to vote at the Meeting and any
adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the offices of Tokos located at 1821 East Dyer Road,
Santa Ana, California 92705, at least ten days prior to the Meeting.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE MERGER AND FOR THE NEWCO PLANS AT THE MEETING.
WE URGE YOU TO REVIEW CAREFULLY THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS WHICH INCLUDES DISCUSSIONS OF TOKOS' REASONS FOR THE MERGER
AND FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED IN CONNECTION WITH YOUR VOTE ON
THE MERGER.
<PAGE> 9
Whether or not you plan to attend the Meeting, please execute and return
promptly the enclosed form of proxy. A return envelope is enclosed for your
convenience and requires no postage for mailing in the United States.
By Order of the Board of Directors,
ANDREW D. SIMONS
Secretary
February 7, 1996
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE> 10
HEALTHDYNE, INC.
TOKOS MEDICAL CORPORATION (DELAWARE)
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON MARCH 6, 1996
---------------------
MATRIA HEALTHCARE, INC.
PROSPECTUS
---------------------
This Joint Proxy Statement/Prospectus is being furnished to the shareholders
of Healthdyne, Inc., a Georgia corporation ("Healthdyne"), and to the
stockholders of Tokos Medical Corporation (Delaware), a Delaware corporation
("Tokos"), in connection with the solicitation of proxies by their respective
Boards of Directors to be used at a Special Meeting of Shareholders of
Healthdyne (the "Healthdyne Meeting") and a Special Meeting of Stockholders of
Tokos (the "Tokos Meeting"), each of which is to be held on Wednesday, March 6,
1996, or any adjournment(s) or postponement(s) thereof. At such meetings, the
stockholders of each of Healthdyne and Tokos will be asked to consider and vote
upon (a) a proposal to approve and adopt the Agreement and Plan of Merger dated
as of October 2, 1995, as amended (the "Merger Agreement"), among Tokos,
Healthdyne and Matria Healthcare, Inc., a Delaware corporation ("Newco"),
providing for the merger (the "Merger") of Healthdyne and Tokos with and into
Newco, with Newco continuing as the surviving corporation (the "Surviving
Corporation") and (b) a proposal to approve and adopt the Newco 1996 Stock
Incentive Plan, the Newco Directors' Non-Qualified Stock Option Plan and the
Newco 1996 Employee Stock Purchase Plan (collectively, the "Newco Plans"). Upon
consummation of the Merger, (i) each share of Common Stock, par value $.001 per
share, of Tokos (the "Tokos Common Stock") outstanding immediately prior to the
consummation of the Merger, together with its associated common stock purchase
right, will be converted into one share of Common Stock, par value $.01 per
share, of Newco (the "Newco Common Stock"), and one associated common stock
purchase right (a "Newco Stock Right") and (ii) each share of Common Stock, par
value $.01 per share, of Healthdyne (the "Healthdyne Common Stock") outstanding
immediately prior to the consummation of the Merger, together with its
associated preferred stock purchase right, will be converted into one share of
Newco Common Stock and one associated Newco Stock Right. In addition, approval
and adoption of the Merger Agreement will constitute approval of the assumption
by Newco of the rights and obligations of Tokos under the Tokos Stock Option
Plans (as defined below) and of the rights and obligations of Healthdyne under
the Healthdyne Stock Option Plans (as defined below). See "The Merger
Agreement -- Treatment of Stock Options and Convertible Securities". A copy of
the Merger Agreement is attached as Appendix A to this Joint Proxy
Statement/Prospectus and a copy of the form of the Certificate of Incorporation
of Newco is attached as Appendix D to this Joint Proxy Statement/Prospectus.
This Joint Proxy Statement/Prospectus also constitutes a Prospectus of Newco
relating to approximately 37,682,286 shares of Newco Common Stock (including the
associated Newco Stock Rights) to be issued to the holders of Healthdyne Common
Stock and Tokos Common Stock pursuant to the Merger Agreement. All information
contained herein with respect to Healthdyne has been furnished by Healthdyne and
all information contained herein with respect to Tokos has been furnished by
Tokos.
The Healthdyne Common Stock and the Tokos Common Stock are quoted on the
Nasdaq National Market ("Nasdaq") under the symbols "HDYN" and "TKOS",
respectively. On October 2, 1995, the day the Merger Agreement was signed and
the last trading day before the public announcement of the proposed Merger, the
last reported sale price for a share of Healthdyne Common Stock was $9.500 per
share and the last reported sale price for a share of Tokos Common Stock was
$10.625 per share. On February 1, 1996, the last reported sale price for a share
of Healthdyne Common Stock was $8.8750 per share and the last reported sale
price for a share of Tokos Common Stock was $8.9375 per share. Stockholders are
encouraged to obtain current market prices of Healthdyne Common Stock and Tokos
Common Stock prior to voting on the Merger.
---------------------
SEE "RISK FACTORS" AT PAGE 10 HEREIN FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS WHICH SHOULD BE CONSIDERED IN EVALUATING THE TRANSACTIONS
CONTEMPLATED BY THIS JOINT PROXY STATEMENT/PROSPECTUS.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed or delivered to the shareholders of Healthdyne and to the
stockholders of Tokos on or about February 9, 1996.
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS FEBRUARY 7, 1996
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...............................................................
SUMMARY............................................................................. 1
RISK FACTORS........................................................................ 10
Uncertainties Associated with Integration of Businesses........................... 10
Large Percentage of Assets Comprised of Goodwill.................................. 10
Healthcare Reform and Federal Budget Legislation.................................. 10
Possible Limitations on Reimbursements by Third Party Payors...................... 11
Extensive Regulation.............................................................. 11
Recent Medical Controversies...................................................... 13
Competition....................................................................... 13
Dependence on Relationships with Third Parties.................................... 13
Potential Liability............................................................... 14
HIE Spinoff....................................................................... 14
Pending Litigation................................................................ 15
Dependence on Adeza for Fetal Fibronectin......................................... 15
History of Losses; Net Loss Carryovers............................................ 16
Potential Severance Liabilities................................................... 16
Certain Anti-takeover Provisions.................................................. 16
Dependence on Key Personnel....................................................... 16
No Prior Market for Newco Common Stock............................................ 16
Possible Volatility of Stock Prices............................................... 17
Dividend Policy................................................................... 17
SELECTED FINANCIAL INFORMATION...................................................... 18
TOKOS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................ 20
General........................................................................... 20
Results of Operations............................................................. 20
Liquidity and Capital Resources................................................... 23
HEALTHDYNE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................................................................... 26
General........................................................................... 26
Operating Results................................................................. 27
Liquidity and Capital Resources................................................... 29
Recent Accounting Pronouncements.................................................. 30
NEWCO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION........................ 31
COMPARATIVE PER SHARE DATA.......................................................... 39
COMPARATIVE MARKET DATA............................................................. 39
THE HEALTHDYNE MEETING.............................................................. 41
General........................................................................... 41
Matters to be Considered at the Healthdyne Meeting................................ 41
Record Date....................................................................... 41
Proxies........................................................................... 41
Quorum............................................................................ 42
Vote Required..................................................................... 42
THE TOKOS MEETING................................................................... 42
General........................................................................... 42
Matters to be Considered at the Tokos Meeting..................................... 43
Record Date....................................................................... 43
Proxies........................................................................... 43
</TABLE>
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Quorum............................................................................ 44
Vote Required..................................................................... 44
THE MERGER.......................................................................... 44
Background of the Merger.......................................................... 44
Healthdyne's Reasons for the Merger and Board of Directors' Recommendation........ 46
Opinion of Healthdyne's Financial Advisor......................................... 48
Tokos' Reasons for the Merger and Board of Directors' Recommendation.............. 52
Opinion of Tokos' Financial Advisor............................................... 54
Interests of Certain Persons in the Merger........................................ 60
Certain Federal Income Tax Consequences........................................... 63
Regulatory Approvals.............................................................. 64
Accounting Treatment.............................................................. 65
Resale Restrictions and Registration Rights....................................... 65
THE MERGER AGREEMENT................................................................ 66
The Merger........................................................................ 66
Closing and Effective Time of the Merger.......................................... 66
Conversion of Securities.......................................................... 66
Treatment of Stock Options and Convertible Securities............................. 66
Exchange of Certificates.......................................................... 67
Representations and Warranties.................................................... 68
Certain Covenants; Conduct of Business Prior to Effective Time.................... 69
Negotiations with Others.......................................................... 69
Management After the Merger....................................................... 70
Indemnification and Insurance..................................................... 70
Conditions to the Merger.......................................................... 71
HIE Spinoff....................................................................... 72
Termination....................................................................... 72
Cancellation Fee and Effect of Termination........................................ 73
Amendment and Waiver.............................................................. 74
DESCRIPTION OF TOKOS................................................................ 74
Business of Tokos................................................................. 74
Legal Proceedings................................................................. 82
Executive Compensation............................................................ 83
Certain Transactions.............................................................. 84
Employment Agreements............................................................. 85
Board Compensation................................................................ 86
DESCRIPTION OF HEALTHDYNE........................................................... 86
Business of Healthdyne............................................................ 86
Recent Developments............................................................... 86
Healthdyne Maternity Management................................................... 87
Pending Litigation................................................................ 91
Executive Compensation............................................................ 92
Certain Transactions.............................................................. 96
OPERATION, MANAGEMENT AND BUSINESS OF NEWCO AFTER THE MERGER........................ 97
Business of Newco................................................................. 97
Management of Newco............................................................... 97
Newco Principal Stockholders...................................................... 100
Description of Capital Stock of Newco............................................. 103
Listing of Newco Common Stock..................................................... 106
Transfer Agent.................................................................... 106
Corporate Headquarters............................................................ 106
</TABLE>
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COMPARATIVE RIGHTS OF STOCKHOLDERS.................................................. 106
General........................................................................... 106
Classified Board of Directors..................................................... 106
Number and Election of Directors.................................................. 107
No Stockholder Action by Written Consent.......................................... 108
Appraisal Rights.................................................................. 108
Special Meetings of Stockholders.................................................. 109
Common Stock...................................................................... 109
Preferred Stock................................................................... 109
Stockholder Rights Plan........................................................... 110
Amendment of the Certificate of Incorporation and Bylaws.......................... 110
Business Combinations............................................................. 111
Special Voting Requirements....................................................... 112
Indemnification and Liability of Directors and Officers........................... 113
PROPOSAL TO APPROVE AND ADOPT THE NEWCO PLANS....................................... 114
1996 Stock Incentive Plan......................................................... 114
Federal Income Tax Consequences................................................... 116
1996 Directors' Non-Qualified Stock Option Plan................................... 118
1996 Employee Stock Purchase Plan................................................. 118
LEGAL MATTERS....................................................................... 120
EXPERTS............................................................................. 120
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................................... F-1
Tokos Medical Corporation (Delaware).............................................. F-2
Healthdyne, Inc. ................................................................. F-26
APPENDIX A -- Agreement and Plan of Merger, as Amended.............................. A-1
APPENDIX B -- Fairness Opinion of Needham & Company, Inc. .......................... B-1
APPENDIX C -- Fairness Opinion of Robertson, Stephens & Company, L.P. .............. C-1
APPENDIX D -- Certificate of Incorporation of Newco................................. D-1
APPENDIX E -- Bylaws of Newco....................................................... E-1
APPENDIX F -- Newco Plans...........................................................
APPENDIX F-I Newco 1996 Stock Incentive Plan................................... F-I-1
APPENDIX F-II Newco Directors' Non-Qualified Stock Option Plan.................. F-II-1
APPENDIX F-III Newco 1996 Employee Stock Purchase Plan........................... F-III-1
</TABLE>
<PAGE> 14
AVAILABLE INFORMATION
Healthdyne and Tokos each are subject to informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The Registration
Statement on Form S-4 and exhibits thereto (the "Registration Statement") filed
by Newco with the Commission, as well as reports, proxy statements and other
information filed by each of Healthdyne and Tokos can be inspected and copied at
the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the public reference facilities
maintained by the Commission, at its regional offices located at Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661,
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained from the Commission at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Additionally, material filed by Healthdyne and Tokos can
be inspected at the offices of Nasdaq Reports Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
Newco has filed the Registration Statement with the Commission covering the
Newco Common Stock (including the associated Newco Stock Rights) to be issued
pursuant to the Merger Agreement. As permitted by the rules and regulations of
the Commission, this Joint Proxy Statement/Prospectus does not contain all
information set forth in the Registration Statement and exhibits thereto. For
further information, please refer to the Registration Statement, including the
exhibits thereto, all of which are available for inspection as set forth above.
Statements contained in this Joint Proxy Statement/Prospectus relating to the
contents of any contract or other document referred to herein are not
necessarily complete, and reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
All information concerning Healthdyne contained in this Joint Proxy
Statement/Prospectus has been furnished by Healthdyne and all information
concerning Tokos contained in this Joint Proxy Statement/Prospectus has been
furnished by Tokos. No person is authorized to give any information or to make
any representation with respect to the matters described in this Joint Proxy
Statement/Prospectus other than information and representations contained herein
and, if given or made, such information or representation must not be relied
upon as having been authorized by Healthdyne, Tokos, Newco or any other person.
This Joint Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of any offer to purchase, any securities, or a solicitation of a
proxy, in any jurisdiction in which, or to or from any person to or from whom,
it is unlawful to make such an offer or solicitation. Neither the delivery of
this Joint Proxy Statement/Prospectus nor any distribution of securities
hereunder shall under any circumstances be deemed to imply that there has been
no change in the assets, properties or affairs of Healthdyne or Tokos since the
date hereof or that the information set forth herein is correct as of any time
subsequent to the date hereof.
<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
in this Joint Proxy Statement/Prospectus and Appendices hereto. Stockholders are
urged to read this Joint Proxy Statement/Prospectus and its Appendices before
voting on the matters discussed herein.
As used herein, the term "Healthdyne" refers to Healthdyne, Inc., and the
term "Tokos" refers to Tokos Medical Corporation (Delaware), in both cases
including, unless the context otherwise requires, their respective subsidiaries,
and the term "Newco" refers to Matria Healthcare, Inc.
HEALTHDYNE
Prior to the spinoff of its subsidiaries Healthdyne Technologies, Inc. in
May 1995 and Healthdyne Information Enterprises, Inc. in November 1995,
Healthdyne was a national provider of home healthcare services, medical devices
and specialty products. Healthdyne's remaining business unit, Healthdyne
Maternity Management, is a national provider of specialized obstetrical home
healthcare and risk assessment services which assist physicians and payors in
the management of high risk pregnancies and numerous other obstetrical and
gynecological conditions. Healthdyne provides its services throughout the United
States through approximately 35 service centers and a number of other additional
service sites.
Healthdyne was incorporated in 1970 as a Georgia corporation. Healthdyne's
principal executive offices are located at 1850 Parkway Place, 12th Floor,
Marietta, Georgia 30067, and its telephone number is (770) 423-4500.
TOKOS
Tokos is a national provider of specialized obstetrical home healthcare and
risk assessment services which assist physicians and payors in the management of
high risk pregnancies and numerous other obstetrical and gynecological
conditions. In addition, Tokos, through its Matryx Health Partners Division,
offers consulting, management and administrative services to provider networks
and managed care organizations. Tokos provides its services throughout the
United States through approximately 48 service centers and a number of other
additional service sites.
Tokos' wholly-owned subsidiary, Tokos Medical Corporation, was incorporated
in California in July 1983. Tokos was incorporated in California in January 1985
as the parent corporation of Tokos Medical Corporation and was reincorporated
under the laws of the State of Delaware in February 1990. Tokos conducts its
device manufacturing business through CareLink and its clinical services
operations through Tokos Clinical Services, each of which is operated as a
division of Tokos Medical Corporation. Tokos' principal executive offices are
located at 1821 East Dyer Road, Santa Ana, California 92705, and its telephone
number is (714) 474-1616.
NEWCO
Newco is a recently incorporated Delaware corporation formed for the
purposes of the Merger. Prior to the Merger, Newco will have no material assets
or liabilities. At the consummation of the Merger, Healthdyne and Tokos will
merge with and into Newco, and Newco will issue shares of its common stock, $.01
par value per share ("Newco Common Stock"), and associated common stock purchase
rights ("Newco Stock Rights") to stockholders of Healthdyne and Tokos.
THE HEALTHDYNE MEETING
The Healthdyne Meeting will be held on Wednesday, March 6, 1996 at 10:00
a.m., local time, at the offices of Troutman Sanders LLP, 600 Peachtree Street,
Suite 5200, Atlanta, Georgia.
At the Healthdyne Meeting, including any adjournment thereof, the
shareholders of Healthdyne will be asked to consider and vote upon a proposal to
approve and adopt the Merger Agreement, a proposal to approve
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<PAGE> 16
and adopt the Newco Plans and such other business as properly may come before
the Healthdyne Meeting. The Merger Agreement provides that as of the effective
time of the Merger, Healthdyne and Tokos will be merged with and into Newco. See
"Merger Agreement."
The close of business on January 31, 1996, has been fixed as the record
date (the "Record Date") for the determination of the shareholders of Healthdyne
entitled to notice of and to vote at the Healthdyne Meeting. Holders of
Healthdyne Common Stock are entitled to one vote for each share of Healthdyne
Common Stock held by them. The holders of a majority of the outstanding shares
of Healthdyne Common Stock, present either in person or by properly executed
proxies, will constitute a quorum at the Healthdyne Meeting.
The affirmative vote of holders of a majority of the outstanding shares of
Healthdyne Common Stock is required to approve and adopt the Merger Agreement
and a vote in favor of the Merger shall constitute a shareholder's approval of
the assumption by Newco of the Healthdyne Stock Option Plans. The affirmative
vote of the holders of a majority of the outstanding shares of Healthdyne Common
Stock present or represented at the Healthdyne Meeting and a majority of the
outstanding shares of Tokos Common Stock present or represented at the Tokos
Meeting is required to approve and adopt the Newco Plans. As of the Record Date,
16,666,114 shares of Healthdyne Common Stock were issued and outstanding, of
which approximately 11.5% were beneficially owned by directors, executive
officers and affiliates of Healthdyne (excluding 164,540 shares which may be
acquired by such persons upon exercise of options and other rights which are
exercisable within 60 days of the Record Date). See "The Healthdyne
Meeting -- Vote Required."
THE TOKOS MEETING
The Tokos Meeting will be held on Wednesday, March 6, 1996 at 10:00 a.m.,
local time, at Windsor/Embassy Suites Hotel, 1325 East Dyer Road, Santa Ana, CA.
At the Tokos Meeting, including any adjournment thereof, the stockholders
of Tokos will be asked to consider and vote upon a proposal to approve and adopt
the Merger Agreement, a proposal to approve and adopt the Newco Plans and such
other business as properly may come before the Tokos Meeting. The Merger
Agreement provides that as of the effective time of the Merger, Tokos and
Healthdyne will be merged with and into Newco. See "The Merger Agreement."
The close of business on January 31, 1996, has been fixed as the Record
Date for the determination of the stockholders of Tokos entitled to notice of
and to vote at the Tokos Meeting. Holders of Tokos Common Stock are entitled to
one vote for each share of Tokos Common Stock held by them. The holders of a
majority of the outstanding shares of Tokos Common Stock, present either in
person or by properly executed proxies, will constitute a quorum at the Tokos
Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of Tokos Common Stock is required to approve and adopt the Merger Agreement and
a vote in favor of the Merger shall constitute a stockholder's approval of the
assumption by Newco of the Tokos Stock Option Plans. The affirmative vote of the
holders of a majority of the outstanding shares of Healthdyne Common Stock
present or represented at the Healthdyne Meeting and a majority of the
outstanding shares of Tokos Common Stock present or represented at the Tokos
Meeting is required to approve and adopt the Newco Plans. As of the Record Date,
17,579,202 shares of Tokos Common Stock were issued and outstanding, of which
approximately 6.7 % were beneficially owned by directors, executive officers and
affiliates of Tokos (excluding 630,454 shares which may be acquired by such
persons upon exercise of options which are exercisable within 60 days of the
Record Date). See "The Tokos Meeting -- Vote Required."
THE MERGER
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, Tokos and Healthdyne will be merged with
and into Newco and each share of Tokos Common Stock outstanding immediately
prior to the consummation of the Merger, together with its associated common
stock purchase right, will be converted into one share of Newco Common Stock
(the "Tokos Exchange Ratio") and one associated Newco Stock Right, and each
share of Healthdyne Common Stock outstanding
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<PAGE> 17
immediately prior to the consummation of the Merger, together with its
associated preferred stock purchase right, will be converted into one share of
Newco Common Stock (the "Healthdyne Exchange Ratio" and together with the "Tokos
Exchange Ratio," the "Exchange Ratio") and one associated Newco Stock Right
(collectively, the "Merger Consideration"). See "The Merger
Agreement -- Conversion of Securities." The shares of Healthdyne Common Stock
and Tokos Common Stock and their respective accompanying stock purchase rights
to be converted in the Merger are sometimes referred to herein collectively as
the "Shares" and the shares of Newco Common Stock and the associated Newco Stock
Rights to be issued in the Merger are sometimes referred to herein collectively
as "Newco Shares." Based upon the number of outstanding shares of Healthdyne
Common Stock and Tokos Common Stock as of January 31, 1996, assuming that all
outstanding options and warrants to purchase Healthdyne Common Stock and Tokos
Common Stock are exercised, approximately 37,682,286 shares of Newco Common
Stock would be outstanding upon consummation of the Merger, (a) of which
approximately 18,115,309 shares, representing approximately 48% of the total,
will be held by former Healthdyne shareholders and (b) of which approximately
19,566,977 shares, representing approximately 52% of the total, will be held by
former Tokos stockholders.
Treatment of Stock Options. At the "Effective Time" (as hereinafter
defined), Newco shall assume (i) all options to purchase shares of Tokos Common
Stock (the "Tokos Stock Options") outstanding under all stock option plans of
Tokos ("Tokos Stock Option Plans") and (ii) all options to purchase shares of
Healthdyne Common Stock (the "Healthdyne Stock Options" and collectively, with
the Tokos Stock Options, the "Assumed Options") outstanding under all stock
option plans of Healthdyne ("Healthdyne Stock Option Plans"). Each Assumed
Option shall be exercisable for the number of Newco Shares equal to the number
of Tokos or Healthdyne shares subject to such option prior to the Effective
Time, at the exercise price per Newco share equal to the exercise price per
share applicable to such Assumed Option immediately prior to the Effective Time
(without taking into account any anti-dilution formula); provided, however, that
in the case of any Assumed Option to which Section 421 of the Internal Revenue
Code of 1986, as amended (the "Code"), applies by reason of its qualification
under Section 422 of the Code, the conversion formula shall be adjusted, if
necessary, to comply with Section 424(a) of the Code. Except as provided above,
each Assumed Option shall continue to have and be subject to the same terms and
conditions as were applicable to such option immediately prior to the Effective
Time except that, in the case of Healthdyne, each such Assumed Option held by an
optionee who continues his service with Healthdyne up to the Effective Time
shall become immediately exercisable for all of the shares subject to such
option and, in the case of Tokos, the repurchase rights in favor of Tokos with
respect to each Assumed Option held by an optionee who continues his service
with Tokos up to the Effective Time will not be transferred to Newco in the
Merger. Assumed Options held by officers and directors of Healthdyne whose
employment by Newco is terminated at or after the Effective Time shall continue
to be exercisable for 12 months after the Effective Time (to the extent
otherwise exercisable), rather than three months, after such termination of
employment, unless the final expiration date of the Assumed Options would have
occurred prior thereto without regard to early termination for any reason, in
which case such Assumed Options shall continue to be exercisable only until the
final expiration date. Assumed Options held by Tokos executive officers shall
continue to be exercisable after the Effective Time (to the extent otherwise
exercisable) until the final expiration date of such options.
Approval and adoption of the Merger Agreement by Healthdyne and Tokos
stockholders will constitute approval of the assumption by Newco of the Assumed
Options outstanding under the Healthdyne Stock Option Plans and the Tokos Stock
Option Plans.
Recommendation of the Boards of Directors. The Healthdyne Board of
Directors has unanimously approved the Merger Agreement and unanimously
recommends a vote FOR approval and adoption of the Merger Agreement by the
shareholders of Healthdyne. The Board of Directors of Tokos has approved the
Merger Agreement and unanimously recommends a vote FOR approval and adoption of
the Merger Agreement by the stockholders of Tokos. See "The
Merger -- Healthdyne's Reasons for the Merger" and "-- Tokos' Reasons for the
Merger."
The factors considered by the Healthdyne Board of Directors in making this
determination included, among other things, (i) the outlook for continued
pressure on reimbursement levels in the healthcare industry and the
corresponding need to reduce operating costs; (ii) the opportunities for
substantial operating
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<PAGE> 18
efficiencies that should result from the Merger; (iii) the complementary
geographic locations of Healthdyne and Tokos facilities throughout the United
States; (iv) the enhanced position of Newco after the Merger to deal with
uncertainties which may confront the industry due to healthcare reform; (v) the
market capitalization of Newco, which will be considerably larger than
Healthdyne's current market capitalization, and the possibility of improved
access to the capital markets; (vi) the historical, current and projected
financial condition and results of operations of Healthdyne and Tokos before and
after giving effect to the Merger; (vii) the management and operational
strengths of Healthdyne and Tokos; (viii) the strategic alternatives under
development at Tokos; (ix) the Healthdyne Exchange Ratio after giving effect to
the Tokos Exchange Ratio and recent trading prices of Healthdyne Common Stock
and Tokos Common Stock: (x) the improved liquidity that possibly would be
provided to Healthdyne's shareholders; (xi) the financial presentation and the
opinion of Needham & Company, Inc. ("Needham") that the Healthdyne Exchange
Ratio is fair to the Healthdyne shareholders from a financial point of view; and
(xii) the terms and conditions of the Merger Agreement and the fact that the
Merger will be a tax-free reorganization for federal income tax purposes.
The factors considered by the Tokos Board of Directors in approving the
Merger included, among other things, (i) the financial and business prospects
for Newco, including the opportunities for operating efficiencies that should
result from the Merger; (ii) the current industry, economic and market
conditions, including, without limitation, the Tokos Board's belief that, to
effectively compete among healthcare service providers, Tokos must broaden the
scope of services provided, improve its cost structure, and expand its
resources, so that Tokos can enhance its ability to contract with and provide
services to large managed care organizations; (iii) the complementary business
lines of and geographic areas served by Tokos and Healthdyne; (iv) the present
and anticipated environment in the obstetrical home healthcare industry and the
strategic options available to Tokos; (v) the management and operational
strengths of Tokos and Healthdyne and their respective knowledge of the
obstetrical home healthcare industry; (vi) that the Board of Directors of Newco
will consist of ten directors, five to be designated each by Tokos and
Healthdyne, and that a Transition Committee will be established to specifically
identify savings to be achieved by Newco within one year after the Effective
Time; (vii) the terms and conditions of the Merger Agreement and that the Merger
will qualify as a tax free reorganization for federal income tax purposes;
(viii) the presentations from and discussions with Tokos' management with
respect to, and the analysis of Robertson, Stephens & Company, L.P. ("Robertson
Stephens") of, the Merger; (ix) the opinion of Robertson Stephens that the Tokos
Exchange Ratio, after giving effect to the Healthdyne Exchange Ratio in the
Merger, is fair to the stockholders of Tokos from a financial point of view; and
(x) the opportunity for Tokos stockholders to participate in a larger company
with greater financial resources and an improved financial outlook.
For a more detailed discussion of the reasons considered by the Board of
Directors of each of Healthdyne and Tokos in approving the Merger Agreement, see
"The Merger -- Healthdyne's Reasons for the Merger" and "-- Tokos' Reasons for
the Merger." See also "Risk Factors" for a discussion of factors which should be
carefully considered by the stockholders of Healthdyne and Tokos in connection
with evaluating and voting on the Merger Agreement and the transactions
contemplated thereby.
Opinions of Financial Advisors. Needham has acted as a financial advisor
to Healthdyne in connection with the Merger. On October 2, 1995, Needham
rendered to the Board of Directors of Healthdyne its written opinion, to the
effect that, as of the date of such opinion and based upon and subject to
certain matters as stated therein, the Healthdyne Exchange Ratio is fair to the
shareholders of Healthdyne from a financial point of view. See "The
Merger -- Opinion of Healthdyne's Financial Advisor" and "The
Merger -- Interests of Certain Persons in the Merger -- Healthdyne's Financial
Advisors." The full text of the written opinion of Needham dated October 2,
1995, which sets forth the assumptions made, matters considered and limitations
on the review undertaken by Needham, is attached as Appendix B hereto.
Healthdyne shareholders are urged to read the opinion carefully in its entirety.
In arriving at its opinion, Needham, among other things: (i) reviewed the
Merger Agreement; (ii) reviewed certain other documents related to the Merger;
(iii) reviewed certain publicly available information concerning Healthdyne and
Tokos and certain other relevant financial and operating data of Healthdyne and
Tokos made available from the internal records of Healthdyne and Tokos; (iv)
visited
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<PAGE> 19
Healthdyne's and Tokos' facilities and held discussions with members of senior
management of Healthdyne and Tokos concerning their current and future business
prospects; (v) reviewed certain financial forecasts and projections prepared by
Healthdyne's and Tokos' respective managements; (vi) reviewed the historical
stock prices and trading volumes of the Healthdyne Common Stock and Tokos Common
Stock; (vii) reviewed the financial terms of certain other business combinations
that Needham deemed generally relevant; and (viii) performed and/or considered
such other studies, analyses, inquiries and investigations as Needham deemed
appropriate.
Robertson Stephens has acted as a financial advisor to Tokos in connection
with the Merger. On October 2, 1995, Robertson Stephens delivered to the Board
of Directors of Tokos its written opinion, to the effect that, as of the date of
such opinion and based upon and subject to certain matters as stated therein,
the Tokos Exchange Ratio is fair, from a financial point of view, to the holders
of Tokos Common Stock. See "The Merger -- Opinion of Tokos' Financial Advisor"
and "The Merger -- Interests of Certain Persons in the Merger -- Tokos'
Financial Advisor." The full text of the written opinion of Robertson Stephens
dated October 2, 1995, which sets forth the assumptions made, matters considered
and limitations on the review undertaken by Robertson Stephens, is attached as
Appendix C hereto. Tokos stockholders are urged to read the opinion carefully in
its entirety.
In connection with the preparation of its opinion dated October 2, 1995,
Robertson Stephens, among other things: (i) reviewed financial information on
Tokos and Healthdyne furnished to Robertson Stephens by both companies,
including certain internal financial analyses and forecasts prepared by the
management of Tokos and Healthdyne; (ii) reviewed publicly available
information; (iii) held discussions with the management of Tokos and Healthdyne
concerning the businesses, past and current business operations, financial
condition and future prospects of both companies, independently and combined,
including certain information prepared by the management of Tokos and Healthdyne
concerning potential cost savings and synergies that could result from the
Merger; (iv) reviewed the Merger Agreement; (v) reviewed the stock price and
trading histories of both companies; (vi) reviewed the exchange ratio implied by
historical stock prices of the two companies; (vii) reviewed the contribution by
each company to pro forma combined revenue, gross income, operating income, and
selected balance sheet categories; (vii) reviewed the valuations of publicly
traded companies which Robertson Stephens deemed comparable to Tokos and
Healthdyne; (ix) compared the financial terms of the Merger with other
transactions which Robertson Stephens deemed relevant; (x) analyzed the pro
forma earnings per share of the combined company based on information provided
by management of the two companies; and (xi) made such other studies and
inquires, and reviewed such other data as Robertson Stephens deemed relevant.
Closing and Effective Time of the Merger. The closing of the transactions
contemplated by the Merger Agreement (the "Closing") shall take place on the day
after the later to occur of (a) the date on which the later to occur of the
Healthdyne Meeting or the Tokos Meeting is held and (b) the day on which all
conditions set forth in the Merger Agreement are satisfied or waived, or such
other date, time and place as Tokos and Healthdyne shall agree. As soon as
practicable following the Closing, Newco will cause a Certificate of Merger to
be filed with the Delaware Secretary of State and a Certificate of Merger to be
filed with the Georgia Secretary of State. Such filings will be made
substantially simultaneously with one another, and the Merger will become
effective upon the later to occur of such filings. The date and time at which
the later of such certificates is filed is referred to herein as the "Effective
Time." The Effective Time is currently expected to occur on or shortly after
March 8, 1996, subject to approval by the stockholders of Healthdyne and Tokos
of the matters described herein and satisfaction or waiver of the conditions
precedent to the Merger set forth in the Merger Agreement. See "The Merger
Agreement -- Closing and Effective Time of the Merger" and "-- Conditions to the
Merger."
Conditions to the Merger. The obligations of Healthdyne and Tokos to
consummate the Merger are subject to the satisfaction of certain conditions,
including, among others, (i) obtaining requisite Healthdyne and Tokos
stockholder approvals and requisite regulatory approvals, (ii) the absence of
any injunction prohibiting consummation of the Merger, (iii) the absence of any
material adverse change in the business, assets, revenues, expenses or financial
condition of the other party, (iv) the receipt of certain legal opinions with
respect to the tax consequences of the Merger, (v) the receipt of accountants'
letters with respect to
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customary matters, (vi) Tokos' wholly-owned subsidiary, Tokos Medical
Corporation, a California corporation, shall have been merged into Tokos and
(vii) at least 20 days prior to the Effective Time, the HIE Spinoff shall have
been consummated. See "The Merger Agreement -- Conditions of the Merger."
Termination of Merger Agreement; Effect of Failure to Close. As discussed
above, the consummation of the Merger Agreement is subject to a number of
conditions, which, if not fulfilled or waived, permit termination of the Merger
Agreement. If the stockholders of either or both of Healthdyne or Tokos fail to
approve the Merger, the Merger will not be consummated. The Merger Agreement is
subject to termination by either Healthdyne or Tokos if the Merger is not
consummated on or before May 1, 1996. In addition, the Merger Agreement may be
terminated under certain other circumstances by either Healthdyne or Tokos,
including circumstances under which one of the parties may be entitled to
receive a termination fee and, in certain circumstances, reimbursement of
expenses. See "The Merger Agreement -- Termination" and "-- Effect of
Termination and Abandonment." In the event the Merger is not consummated for any
reason, the respective businesses of Healthdyne and Tokos are expected to
continue to operate independently in a manner substantially similar to their
present modes of operation.
Surrender of Healthdyne and Tokos Common Stock Certificates. After the
Effective Time, holders of Healthdyne Common Stock and Tokos Common Stock will
be furnished with a transmittal letter to be used to exchange their certificates
for the certificates evidencing shares of Newco Common Stock. Stockholders
should not return any stock certificates with the form of proxy accompanying
this Joint Proxy Statement/Prospectus. See "The Merger Agreement -- Exchange of
Certificates."
Transition Committee. Pursuant to the Merger Agreement, Healthdyne and
Tokos have established a transition committee (the "Transition Committee") of
Newco. Glass & Associates, Inc. has been selected to serve as the consultant
(the "Consultant") to Healthdyne, Tokos and the Transition Committee until the
conclusion of the "Transition Period" (as defined below). Prior to the Effective
Time, the Transition Committee is to deliver a business plan to the Boards of
Directors of Healthdyne and Tokos that specifically identifies business
strategies, goals and potential savings to be achieved by Newco in the one-year
period following the Effective Time (the "Transition Period"). The Transition
Committee will survive the Merger and will thereafter report directly to the
Board of Directors of Newco at each regular or special meeting thereof for a
period of nine months following October 2, 1995, unless extended or earlier
terminated by the Newco Board of Directors.
Management After the Merger. Following the consummation of the Merger,
Newco's Board of Directors will be comprised of the following ten individuals:
Parker H. Petit, Carl E. Sanders, Jackie M. Ward, Morris S. Weeden, Frederick P.
Zuspan, M.D., Robert F. Byrnes, Gene P. Guselli, Craig T. Davenport, Thomas W.
Erickson and David L. Goldsmith. If any of Parker H. Petit, Carl E. Sanders,
Jackie M. Ward, Morris S. Weeden and Frederick P. Zuspan, M.D. (collectively,
together with any individual or individuals selected as a replacement director
for any of them, the "Healthdyne Nominated Directors") is unable or unwilling to
serve as a director of Newco, such individual or individuals will be replaced by
an individual or individuals designated by the Healthdyne Board of Directors
and, if any of Robert F. Byrnes, Gene P. Guselli, Craig T. Davenport, Thomas W.
Erickson and David L. Goldsmith (collectively, together with any individual or
individuals selected as a replacement director for any of them, the "Tokos
Nominated Directors") is unable or unwilling to serve as a director of Newco
such individual or individuals will be replaced by an individual or individuals
designated by the Tokos Board of Directors. In addition, for a period of three
years following the Effective Time and continuing through Newco's 1998 Annual
Meeting of Stockholders, (i) any vacancy on Newco's Board of Directors arising
among the Tokos Nominated Directors and any nominee selected to fill a director
position occupied by a Tokos Nominated Director will be filled or selected by
the remaining Tokos Nominated Directors and (ii) any vacancy on Newco's Board of
Directors arising among the Healthdyne Nominated Directors and any nominee
selected to fill a director position occupied by a Healthdyne Nominated Director
will be filled or selected by the remaining Healthdyne Nominated Directors.
Under the terms of the Merger Agreement, the Bylaws of Newco will be in the form
of the Bylaws attached as Appendix E to this Joint Proxy Statement/Prospectus
(the "Newco Bylaws"). As provided in the Newco Bylaws, the affirmative vote of a
majority of all directors will be necessary to constitute the act of Newco's
Board of Directors.
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Following the consummation of the Merger, the principal executive officers
of Newco will be as follows: Parker H. Petit -- Chairman of the Board, Robert F.
Byrnes -- President and Chief Executive Officer, Frank Powers -- Executive Vice
President -- Provider Operations, Terry P. Bayer -- Executive Vice President --
Managed Care Operations, Donald R. Millard -- Senior Vice President and Chief
Financial Officer and J. Brent Burkey -- Senior Vice President and General
Counsel. See "The Merger Agreement -- Management After the Merger" and
"Operation, Management and Business of Newco After the Merger."
Corporate Headquarters. At the Effective Time, Newco will maintain its
corporate headquarters in the corporate offices presently occupied by Healthdyne
in Marietta, Georgia.
RISK FACTORS
In considering whether to approve and adopt the Merger Agreement,
Healthdyne shareholders and Tokos stockholders should carefully review and
consider the information beginning on page 10 under the caption "Risk Factors,"
including, among others, risk factors relating to: uncertainties associated with
integration of businesses; large percentage of assets comprised of goodwill;
healthcare reform and budget legislation; possible limitations on reimbursements
by third party payors; extensive regulation; dependence on relationships with
third parties; and history of losses.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Due to the benefits received by certain affiliates of Healthdyne and Tokos
in connection with the Merger, as described below, the interests of these
affiliates may be different from the interests of other stockholders.
Stockholders should consider such affiliates' interests in the Merger in
connection with their recommendation of the Merger. For further details relating
to the benefits summarized below, see "Risk Factors -- Potential Severance
Liabilities," "The Merger -- Interests of Certain Persons in the Merger," "The
Merger Agreement -- Covenants -- Conduct of Business Prior to the Effective
Time," "The Merger -- Treatment of Stock Options and Convertible Securities" and
"The Merger Agreement -- Indemnification and Insurance."
Certain members of the Board of Directors of both Healthdyne and Tokos and
the executive officers of both Healthdyne and Tokos may have interests in the
Merger that are in addition to the interests of stockholders of Healthdyne and
Tokos generally (including, without limitation, the eligibility for severance
benefits, the continuation of their employment with Newco, the continuation and
assumption by Newco of retirement benefit awards, the continuation of rights to
indemnification and insurance against certain claims and the acceleration of the
vesting of stock options). The Board of Directors of both Healthdyne and Tokos
were aware of these interests and considered them, among other factors, in
approving the Merger Agreement and the transactions contemplated thereby. Under
the severance benefit agreements, in the unlikely event the employment of each
of the individuals entitled to such arrangements were terminated following the
Merger, Newco's aggregate liability as of January 1, 1996 to former Healthdyne
and Tokos directors and executive officers would approximate $15.76 million.
Moreover, under the retirement benefit award agreements, in the event each of
the individuals entitled to such arrangements were so to request in accordance
with the terms of those agreements, the aggregate amount that Newco would have
been required to place in trust as of December 31, 1995 would approximate $3.152
million. See "The Merger -- Interests of Certain Persons in the Merger."
POTENTIAL ADVERSE CONSEQUENCES TO STOCKHOLDERS
As described above, certain directors and executive officers of Healthdyne
and Tokos may have interests in the Merger that are in addition to the interests
of stockholders of Healthdyne and Tokos generally (including, without
limitation, the eligibility for severance benefits, the continuation of their
employment with Newco, the continuation and assumption by Newco of retirement
benefit awards, the continuation of rights to indemnification and insurance
against certain claims and the acceleration of the vesting of stock options).
Severance payments and retirement benefit award payments, when and if paid,
would reduce the working capital of Newco, while directly benefiting those
directors and management receiving such severance
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payments and retirement benefit award payments. See "The Merger -- Interests of
Certain Persons in the Merger."
The Exchange Ratio was the result of negotiations between Tokos and
Healthdyne and, at the time of negotiation, resulted in an implicit premium to
Healthdyne shareholders and a discount for stockholders of Tokos. Because the
Exchange Ratio is fixed and not tied to the market prices of the constituent
companies' stock immediately prior to the consummation of the Merger,
stockholders of Tokos and Healthdyne may receive implicit premiums or discounts
based on the Exchange Ratio due to the relative trading prices for the
respective companies' common stock on the date the Merger is consummated. See
"Background of the Merger -- Determination of Exchange Ratio."
Stockholders of Healthdyne and Tokos may also be adversely affected due to
differences between the laws of the various states of incorporation (in the case
of Healthdyne) and between the provisions of the Certificate of Incorporation
(or Articles of Incorporation, as the case may be) and Bylaws of their
respective companies and the Certificate of Incorporation and Bylaws of Newco,
which govern their rights as stockholders. See "Comparative Rights of
Stockholders."
COMPARATIVE RIGHTS OF STOCKHOLDERS
As a result of the Merger, holders of Healthdyne Common Stock and holders
of Tokos Common Stock will become stockholders of Newco, and the rights of all
such former Healthdyne and Tokos stockholders will thereafter be governed by the
Newco Certificate of Incorporation (the "Newco Certificate"), the Newco Bylaws
and the DGCL. The rights of the holders of Healthdyne Common Stock are presently
governed by the Articles of Incorporation of Healthdyne (the "Healthdyne
Certificate"), the Bylaws of Healthdyne (the "Healthdyne Bylaws") and the GBCC.
The rights of holders of Tokos Common Stock are presently governed by the
Restated Certificate of Incorporation of Tokos (the "Tokos Certificate"), the
Bylaws of Tokos (the "Tokos Bylaws") and the DGCL. Both the Newco Certificate
and the Tokos Certificate provide for a classified board of directors;
Healthdyne's board is not classified. In addition, Newco directors may be
removed only for cause. Under both the Healthdyne and Tokos Certificates,
directors may be removed by majority stockholder vote with or without cause. The
Newco Bylaws provide that a special meeting of stockholders must be called upon
the written request of holders of a majority of Newco's issued and outstanding
capital stock. The Tokos certificate requires that such request be made by
holders of 10% of the total voting power of all outstanding shares, and the
Healthdyne Bylaws provide that such request be made by holders of 60% of
Healthdyne's outstanding stock. For a period of three years from the Effective
Date, certain provisions of the Newco Bylaws may be amended only by the
affirmative vote of holders of at least a majority of the Newco Common Stock.
Healthdyne's Bylaws may be amended by the directors or by holders of a majority
of the outstanding stock entitled to vote. The Healthdyne Certificate provides
that certain transactions (including mergers) must be approved by at least 75%
of the votes entitled to be cast unless the transaction has been previously
approved by three-fourths of the members of the board of directors. The Newco
Certificate does not contain a similar provision. See "Comparative Rights of
Stockholders" for a discussion of the material differences between the rights of
Newco stockholders and Healthdyne and Tokos stockholders.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), the Merger could not have been consummated until notifications
and certain information had been furnished to the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting period requirements had been satisfied.
Healthdyne and Tokos each filed a notification and report form under the HSR Act
with the FTC and the Antitrust Division on October 3, 1995, and received notice
of early termination of the required waiting period on November 2, 1995. No
other material federal or state regulatory approvals must be obtained in order
to consummate the Merger. See "The Merger -- Regulatory Approvals."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization within the meaning of
Section 368 of the Code. Healthdyne believes that no gain or loss will be
recognized by Healthdyne or Healthdyne shareholders on the exchange of
Healthdyne Common Stock for Newco Common Stock. Tokos believes that no gain or
loss will be recognized by Tokos or Tokos stockholders on the exchange of Tokos
Common Stock for Newco Common Stock. See "The Merger -- Certain Federal Income
Tax Consequences" and "The Merger Agreement -- Conditions to the Merger."
DISSENTERS' RIGHTS
Under the General Corporation Law of the State of Delaware (the "DGCL"),
holders of Tokos Common Stock are not entitled to dissenters' rights in
connection with the Merger. Under the Business Corporation Code of the State of
Georgia (the "GBCC"), holders of Healthdyne Common Stock are not entitled to
dissenters' rights in connection with the Merger.
RESALES OF NEWCO COMMON STOCK AND REGISTRATION RIGHTS
The shares of Newco Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act, and therefore may be
resold without restriction by persons who are not deemed to be "affiliates" (as
such term is defined under the Securities Act) of Healthdyne, Tokos or Newco.
Certain of such affiliates, however, have been granted registration rights with
respect to the shares of Newco Common Stock to be received by them. See "The
Merger -- Resale Restrictions and Registration Rights."
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method for accounting
and financial reporting purposes.
CANCELLATION FEE
The Merger Agreement may be terminated under certain circumstances by
either Healthdyne or Tokos, including circumstances under which one of the
parties may be entitled to receive a termination fee equal to $5.5 million and,
in certain circumstances, reimbursement of expenses in the amount equal to $1.0
million. See "The Merger Agreement -- Termination" and "-- Effect of Termination
and Abandonment."
NASDAQ STOCK MARKET
Newco has applied to include the shares of Newco Common Stock to be issued
in the Merger on the Nasdaq National Market under the symbol "MATR."
PROPOSAL TO APPROVE AND ADOPT THE NEWCO PLANS
The Newco Board of Directors and Healthdyne and Tokos as stockholders of
Newco have approved the Newco Plans, consisting of the Newco 1996 Stock
Incentive Plan, the Newco 1996 Directors' Non-Qualified Stock Option Plan and
the Newco 1996 Employee Stock Purchase Plan. The Boards of Directors of
Healthdyne and Tokos have submitted the approval of the Newco Plans to the
Healthdyne and Tokos stockholders, respectively. Approval of the Newco Plans by
the requisite vote of Healthdyne and Tokos stockholders is not a condition to,
and is not required for, consummation of the Merger.
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RISK FACTORS
The following factors should be considered carefully by the stockholders of
Healthdyne and Tokos in connection with voting upon the Merger Agreement.
UNCERTAINTIES ASSOCIATED WITH INTEGRATION OF BUSINESSES
The Merger involves the integration of two companies that have previously
operated independently. After the Merger, the plans are for Newco to consolidate
the service centers and other facilities of Healthdyne and Tokos, based on a
case-by-case review of the existing operations. In connection with the Merger,
Newco expects to accrue as additional liabilities approximately $9.35 million at
the time of the Merger and expense approximately $7.2 million as restructuring
charges during the first quarter of operation relating to estimated severance
costs to terminate employees, lease termination costs and other
facilities-related exit costs arising from the closing of duplicate patient
service centers, consolidation of the two corporate headquarters, computer and
patient service equipment written off due to incompatibility, and other
integration and transaction costs. See Notes (2) and (10) to the Notes to Pro
Forma Consolidated Condensed Financial Information. In addition, transaction
costs of approximately $3.765 million, consisting primarily of investment
banking, legal, printing and other fees and expenses directly related to the
approval and consummation of the Merger transaction, are expected to be incurred
and have been included in the computation of the purchase price. The
consolidation of the two companies after the Effective Date of the Merger will
result in additional transition expenses in 1996, which are not presently
estimable but which may be substantial. THE ABOVE AMOUNTS ARE PRELIMINARY
ESTIMATES AND ARE SUBJECT TO CHANGE. In addition, there can be no assurance that
Newco will not incur additional charges in subsequent quarters related to the
Merger. Among the factors considered by the Boards of Directors of Healthdyne
and Tokos in connection with their approval of the Merger Agreement were the
opportunities for operating efficiencies that should result from the Merger.
While Healthdyne and Tokos expect to achieve savings in operating costs as a
result of the Merger, no assurance can be given that difficulties will not be
encountered in integrating the operations of Tokos and Healthdyne or that the
benefits and attendant cost savings expected from such integration will be
realized. Any delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on the results of operations or
financial condition of Newco after the Merger. See "The Merger." Furthermore,
there can be no assurance that the operations, management and personnel of the
two companies will be compatible or that Healthdyne or Tokos will not experience
the loss of key personnel. The Board of Directors of Newco will consist of ten
members. The Boards of Directors of Tokos and Healthdyne each will nominate five
of the Board members and the affirmative vote of a majority of the ten directors
will be required in order to take any Board action. See "The Merger
Agreement -- Management After the Merger" and "Operation, Management and
Business of Newco After the Merger -- Management of Newco."
LARGE PERCENTAGE OF ASSETS COMPRISED OF GOODWILL
Although, upon consummation of the Merger, Newco will have substantial
assets reflected on its balance sheet, a large percentage of those assets will
be intangible assets or goodwill (as opposed to tangible assets, such as cash,
accounts receivable, inventory and equipment). At September 30, 1995, assuming
consummation of the Merger on that date, Newco's total assets would have been
approximately $265.8 million, of which approximately $144.0 million, or 54% of
total assets, would have been goodwill. This large percentage of intangible
assets may have a tendency to depress the price of Newco Common Stock after the
Merger. In addition, the amortization or any future write down of such goodwill
by Newco could have a material adverse effect on the results of operation of
Newco after the Merger. See "Pro Forma Consolidated Condensed Financial Data."
HEALTHCARE REFORM AND FEDERAL BUDGET LEGISLATION
Healthcare is an area of extensive and dynamic change. In recent years, an
increasing number of legislative proposals have been introduced or proposed in
Congress and in some state legislatures that would effect major changes in the
healthcare system, either nationally or at the state level. Among the proposals
under consideration are cost controls on healthcare providers, insurance market
reforms to increase the
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availability of group health insurance to small businesses and requirements that
all businesses offer health insurance coverage to their employees. The costs of
certain proposals would be funded in part by reductions in payments by
governmental programs, including Medicare and Medicaid, to healthcare providers.
In addition, both public and private payors are increasing pressures to limit
increases in healthcare costs. These changes could have a material adverse
effect on the results of operations or financial condition of Newco after the
Merger.
In November 1995, the United States Senate and House of Representatives
passed a budget reconciliation bill which would establish a framework for
balancing the federal budget in seven years. While the President has vetoed the
bill, the Administration has agreed to negotiations to achieve a balanced budget
in this timeframe. Therefore, many of the budget reduction proposals in the
reconciliation bill may become part of any final legislation.
The bill passed by the Senate and House would result in a major
restructuring of the current Medicaid program. Rather than operating as an
entitlement program, the new "MediGrant" program would provide federal block
grants to the states for medical assistance provided to low income individuals
and families. While the states would be subject to certain federal requirements,
states would also have broad flexibility to establish their coverage,
eligibility and payment standards. Given the fixed federal funds that would be
available to support state MediGrant programs, there would be no assurance that,
if enacted, these provisions would not have a material adverse effect on the
results of operations of companies, like Newco, which provide services to
participants in these programs.
POSSIBLE LIMITATIONS ON REIMBURSEMENTS BY THIRD PARTY PAYORS
Most of Healthdyne's and Tokos' revenues are attributable to payments
received from third party payors such as private insurance companies, health
maintenance organizations and government payors. Any significant reduction in
third party reimbursement for the services to be offered by Newco could have a
material adverse effect on the results of operations or financial condition of
Newco after the Merger. In addition, managed care providers, which are a growing
segment of private payors, are placing downward pressure on the prices that
Healthdyne and Tokos can obtain for their services. The interrelated lowering of
reimbursement rates, increasing medical review of bills for services and
negotiating for reduced contract rates could have a material adverse effect on
the results of operations or financial condition of Newco after the Merger.
EXTENSIVE REGULATION
Participants in the healthcare industry, including providers of services
such as those offered by Healthdyne and Tokos, are subject to extensive federal,
state and local regulation relating to, among other things, licensure, conduct
of operations and the addition of facilities and services, and there can be no
assurance that future regulatory changes will not have a material adverse effect
on the results of operations or financial condition of Healthdyne, Tokos or
Newco after the Merger. As a provider of services to patients under various
government programs, including certain state Medicaid programs, each of Tokos
and Healthdyne is subject to the federal fraud and abuse laws. These laws
prohibit any bribe, kickback, rebate or payment of other remuneration of any
sort in return for the referral of Medicare or Medicaid patients, and the
submission of false claims. Violations of these provisions may result in civil
and criminal penalties and exclusion from participation in the Medicare and
Medicaid programs.
The broad language of the Anti-Kickback provisions of the fraud and abuse
laws has been interpreted by the courts and governmental enforcement agencies in
a manner which could impose liability on healthcare providers for engaging in a
wide variety of business transactions. Limited "safe harbor" regulations exempt
certain practices from enforcement action under the prohibitions. However, these
safe harbors are only available to transactions which fall entirely within the
narrowly defined guidelines.
Recently, the federal government made a policy decision to increase
significantly the resources allocated to enforcing the fraud and abuse laws. The
Office of the Inspector General, in cooperation with other federal agencies, has
announced its intention to scrutinize the activities of home health agencies,
durable medical
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equipment suppliers and skilled nursing facilities in California, Florida,
Illinois, New York and Texas, states in which both Healthdyne and Tokos have
significant operations. Private insurers and various state enforcement agencies
also have increased their scrutiny of healthcare claims in an effort to identify
and prosecute fraudulent and abusive practices. Healthdyne and Tokos each
maintain an internal regulatory compliance review program and from time to time
retain special counsel to provide advice on compliance with such laws and
regulations. However, no assurance can be given that the practices of Healthdyne
or Tokos, if reviewed, would be found to be in compliance with such laws, as
such laws ultimately may be interpreted.
In 1993, Congress enacted the so-called "Stark Law," which imposes civil
penalties and exclusions for referrals by physicians to certain entities with
which they have a financial relationship (subject to specified exceptions). In
addition, several states in which each of Tokos and Healthdyne operates have
laws that prohibit certain direct or indirect payments or fee-splitting
arrangements between healthcare providers, if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Other
states have enacted or are considering legislation that either prohibits
"physician self-referral" arrangements or requires physicians to disclose any
financial interests they may have with a healthcare provider that such
physicians recommend to their patients. Possible sanctions for a violation of
these restrictions include loss of licensure and civil and criminal penalties.
Such statutes and proposed legislation vary from state to state and seldom have
been interpreted by the courts or regulatory agencies. Strict enforcement of
these regulations is likely. Healthdyne and Tokos each has certain financial
relationships with physicians who may refer, or be in a position to refer,
patients to Healthdyne and Tokos, respectively, for services. Although each of
Healthdyne and Tokos believe that these financial relationships meet applicable
exceptions permitting referrals by such physicians, if the laws are subsequently
interpreted to prohibit these relationships, after the Merger, Newco may be
required to further modify these arrangements or to discontinue accepting
referrals from such physicians.
The federal budget reconciliation legislation, which was vetoed by the
President, would have established new fraud and abuse sanctions and penalties
and would have made the Stark prohibitions on physician self-referrals less
restrictive in certain respects. It is not clear whether similar legislation
will become law or, if enacted, what impact such legislation would have on the
services to be offered by Newco, but the elimination of certain self-referral
restrictions could create additional competitive pressures on the operations of
Newco.
Tokos' and Healthdyne's obstetrical management services, which utilize
their home uterine activity monitors, account for a substantial portion of their
respective revenues. These monitors are classified as medical devices under the
Federal Food, Drug and Cosmetic Act of 1976 and are subject to regulation by the
FDA. While the devices are labeled only for certain indications, as part of the
practice of medicine, physicians may and do prescribe the devices for
indications for which the devices are not labeled, such as for use in detecting
preterm labor in general. Management of Tokos and Healthdyne cannot quantify the
portion of their businesses resulting from such "off-label use". Tokos and
Healthdyne do not anticipate any change in the FDA's policies permitting
physicians to prescribe the use of these devices for indications for which the
devices are not labeled, but, if the FDA did change its policies to limit the
use of such devices or otherwise require Newco to change the business practices
currently carried on by Tokos and Healthdyne regarding the use of such devices,
such actions could have a material adverse effect on the results of operations
or financial condition of Newco after the Merger.
In addition, some of the services that Tokos and Healthdyne offer involve
the provision of drugs that are regulated by the FDA under the Food, Drug and
Cosmetic Act. While these drugs are labeled for specific indications and cannot
be promoted for any other indications, physicians may and do prescribe the drugs
for indications that have not been approved by the FDA. For example, terbutaline
is labeled for the treatment of asthma but is frequently prescribed by
obstetricians as a tocolytic for the treatment of preterm labor. Although Tokos
and Healthdyne do not promote the drug for this purpose, they do fill physician
orders to dispense and administer the medication for preterm labor patients. In
May 1993, the FDA Fertility and Maternal Health Drugs Advisory Committee met to
discuss the safety and efficacy of terbutaline for tocolysis. The Committee
recommended that the manufacturers of terbutaline apply for approval of the drug
in the treatment of preterm labor. Any action by the FDA that limits the ability
of Newco to offer a high risk pregnancy management service involving the
administration of drugs for indications for which the drugs have not been
labeled could
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have a material adverse effect on the results of operations or and financial
condition of Newco after the Merger.
Failure of Healthdyne or Tokos to comply with these regulations or laws
could adversely affect Newco's ability after the Merger to continue to provide,
or to receive reimbursement for, its products and services and could also
subject Healthdyne and Tokos and their respective officers to penalties. Changes
in these laws or interpretations of existing regulations or laws could have a
material adverse effect on permissible activities of Newco after the Merger, the
relative costs of doing business and the amount of reimbursement by government
and other third party payors. In addition, laws and regulations often are
adopted to regulate new products, services and industries. There can be no
assurance that either the states or the federal government will not impose
additional regulations upon Newco's activities which might adversely affect its
results of operations or financial condition.
RECENT MEDICAL CONTROVERSIES
In August 1992, an eight-member committee of the American College of
Obstetricians and Gynecologists ("ACOG") published an opinion stating, among
other things, that the use of home uterine activity monitoring devices has not
been shown to prevent prematurity. While the committee opinion represented a
more recent review of existing literature, there was essentially no change from
its 1989 opinion regarding the independent benefit of home uterine activity
monitoring. The ACOG committee opinion from time to time has received
substantial business and medical press coverage. While Tokos and Healthdyne do
not believe that either home uterine activity monitoring or any other diagnostic
devices can in and of themselves improve therapeutic outcomes (e.g., a mammogram
cannot prevent breast cancer), they do believe that monitoring can assist the
physician in the early detection of preterm labor. There have been a number of
studies regarding the use of home uterine activity monitoring devices. Each of
Tokos and Healthdyne believes that the results of these studies have been, and
will continue to be, reviewed by practicing physicians in determining whether to
prescribe home uterine activity monitoring for their patients. However, no
assurance can be given that physicians will continue to prescribe home uterine
activity monitoring services.
COMPETITION
The home healthcare services industry is highly competitive. While Tokos
and Healthdyne are aware of only a few national companies that currently offer a
broad line of home healthcare services specifically designed for the treatment
and management of high risk obstetrical patients, there are a number of local
and national companies that provide one or more of the services provided by
Tokos and Healthdyne. In addition, no assurance can be given that other
companies, particularly those in other segments of the home healthcare industry,
will not enter Newco's market. Certain of Tokos' and Healthdyne's competitors
and potential competitors have significantly greater financial, marketing and
technical resources than those of Newco. There can be no assurance that Newco
will not encounter increased competition in the future that could limit its
ability to maintain or increase its market share. Such increased competition
could have a material adverse effect on Newco's business, results of operations
or financial condition of Newco after the Merger.
DEPENDENCE ON RELATIONSHIPS WITH THIRD PARTIES
The profitability and growth of Newco's business depends on its ability to
establish and maintain close working relationships with managed care
organizations, private and governmental third-party payors, hospitals,
physicians, physician groups, home health agencies and other institutional
health providers, and large self-insured employers. Managed care plans have
continued to consolidate to enhance their ability to influence the delivery of
healthcare services and are increasingly contracting with providers of home care
services which can offer "one stop shopping" for home care services. There can
be no assurance that Healthdyne's or Tokos' existing relationships will be
successfully maintained by Newco or that additional relationships will be
successfully developed and maintained in existing or future markets. The loss of
such existing relationships or the failure to continue to develop such
relationships could have a material adverse effect on Newco's business, results
of operations or financial condition. Managed care organizations and third-party
payor entities are increasingly exercising greater control over, and insisting
on lower prices for, the utilization of healthcare
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services and other clinical decisions that have traditionally been made
exclusively by physicians. Both Tokos and Healthdyne have entered into a number
of contractual agreements with managed care organizations and third-party payor
entities under which they agree to perform services pursuant to specified
conditions at negotiated rates. In general, approximately 70% to 85% of Tokos'
and Healthdyne's net revenues in any period derived from entities with whom they
have a contractual arrangement. To a more limited extent, Tokos and Healthdyne
have also entered into risk sharing arrangements for the provision of their
services including capitation. The experience of Healthdyne and Tokos to date
with risk sharing arrangements has been limited, however, and Healthdyne and
Tokos are unable to predict whether arrangements of this type may prove to be
successful in the long term. There can be no assurance that the proportion of
Newco's business attributable to contractual arrangements will continue to
increase or that the risk sharing arrangements will be financially successful.
POTENTIAL LIABILITY
Participants in the home healthcare market are subject to lawsuits alleging
negligence, product liability or other similar legal theories, many of which
involve large claims and significant defense costs. From time to time,
Healthdyne and Tokos each are subject to such lawsuits as a result of the nature
of their businesses. Although Healthdyne and Tokos currently maintain liability
insurance intended to cover such claims, there can be no assurance that the
coverage limits of such insurance policies will be adequate or that all such
claims will be covered by the insurance. In addition, these insurance policies
must be renewed annually. While Healthdyne and Tokos have been able to obtain
liability insurance in the past, such insurance varies in cost, is difficult to
obtain and may not be available in the future on terms acceptable to Newco, if
at all. A successful claim in excess of the insurance coverage could have a
material adverse effect on the results of operations or financial condition of
Newco after the Merger. Claims, regardless of their merit or eventual outcome,
also may have a material adverse effect on Newco's business and reputation.
HIE SPINOFF
On October 20, 1995, the Board of Directors of Healthdyne approved a plan
to distribute Healthdyne's 100% owned interest in Healthdyne Information
Enterprises, Inc. ("HIE") to the shareholders of Healthdyne in a taxable
distribution. The HIE Spinoff was effected November 6, 1995. On October 20,
1995, Healthdyne and HIE entered into a Distribution Agreement, which sets forth
their rights and obligations in connection with the HIE Spinoff and also
executed related Tax Indemnity and Tax Disaffiliation Agreements, a Corporate
Services Agreement and a License Agreement. On November 7, 1995, the first day
of trading, the HIE stock traded in the over-the-counter market at $1.25 per
share, and Healthdyne intends to utilize that price as the fair market value of
HIE's Common Stock in reporting the HIE Spinoff for federal income tax purposes.
Based on that valuation, the HIE Spinoff would not result in any significant
taxable gain to Healthdyne (or claim against HIE under the Tax Indemnity
Agreement). However, HIE's Common Stock has subsequently closed at prices
ranging from $1.375 to $2.313. If those or any other prices in excess of $1.25
per share were deemed to represent the fair value of HIE Common Stock on the
date of the HIE Spinoff, Healthdyne could incur approximately $1.3 million of
federal income tax liability for each $0.25 increase in the fair value of HIE's
Common Stock. Healthdyne has net operating losses (NOLs) of approximately
$9,800,000, which may cover any tax liability resulting from the HIE Spinoff. In
the event Healthdyne does incur a federal income tax liability or is required to
utilize NOLs to decrease or eliminate any monetary payment of a federal income
tax liability as a result of the HIE Spinoff, HIE would be obligated under the
Tax Indemnity Agreement to reimburse Healthdyne for such liability or
utilization of NOLs, and HIE would have the option to pay such amounts in HIE
Common Stock. Because the full value of any HIE Common Stock received by
Healthdyne in satisfaction of HIE's indemnity obligation under the Tax Indemnity
Agreement may not be realized upon the sale of such stock by Healthdyne, there
is no absolute assurance that Healthdyne or Newco will not incur losses as a
result of the HIE Spinoff.
14
<PAGE> 29
PENDING LITIGATION
In July 1995, Tokos reached a $10 million settlement with the plaintiffs in
a class action securities suit entitled In re Tokos Medical Corporation
Securities Litigation filed in the United States District Court for the Central
District of California (the "Court"). The settlement resolved actions brought
against Tokos and certain of its officers and directors on behalf of
stockholders who purchased common stock of Tokos between March 26, 1990 and
March 19, 1993. The plaintiffs alleged that Tokos made false and misleading
statements about its business and results of operations in violation of federal
securities laws and common law fraud and negligent misrepresentation standards.
In the settlement, Tokos denied any wrongdoing or liability. The terms of the
settlement must be approved by the Court before the settlement is effective. In
addition, Tokos has the right to void the settlement if a certain percentage of
the members of the class timely file requests for exclusion from the settlement
class. No assurance can be given that the settlement will become effective. The
failure of settlement could have a material adverse effect on the results of
operations or financial condition of Newco after the Merger.
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
Eastern District of Missouri against Healthdyne and its former subsidiary HNS
alleging that The Lindner Fund would not have sold its investment in HNS on
February 8, 1994 had Healthdyne and HNS disclosed the potential sale of HNS.
Damages have been requested in the amount of $1,050,900, representing the
aggregate difference between the price received upon the sale of such stock by
The Lindner Fund and the $7.85 per share price paid by W.R. Grace & Co. on April
6, 1994 for HNS. Healthdyne has denied the allegations set forth in the
complaint and is currently defending the matter vigorously.
In addition to the foregoing, each of Healthdyne and Tokos is a party to
various legal claims and actions incidental to its business, including
professional and product liability claims. Each of Healthdyne and Tokos
maintains insurance, including insurance covering professional and product
liability claims, with customary deductible amounts. There can be no assurance,
however, that (i) additional suits will not be filed against Newco in the
future, (ii) Healthdyne's or Tokos' prior experience with respect to the
disposition of its litigation accurately indicates the results that will occur
in pending or future cases against Newco, or (iii) adequate insurance coverage
will be available at acceptable prices for incidents arising in the future.
DEPENDENCE ON ADEZA FOR FETAL FIBRONECTIN
In 1991, Tokos entered into a Marketing Agreement (the "Marketing
Agreement") with Adeza Biomedical pursuant to which Tokos obtained the exclusive
rights to market the fetal Fibronectin Immunoassay in the United States and
Canada. On September 21, 1995, the Food and Drug Administration approved the
pre-market approval application for this in vitro diagnostic device as an aid in
assessing the risk of pre-term delivery within 7 to 14 days from the time of
sample collection in women with symptoms of preterm labor. See "Description of
Tokos -- Business of Tokos -- Introduction."
Tokos and Adeza are currently engaged in discussions to effect
modifications in the Marketing Agreement to resolve certain disagreements over
the parties' respective obligations and to clarify ambiguities contained in the
original document. Tokos has become aware during these discussions that Adeza is
in need of additional capital to fund its operations. Adeza and Tokos have
discussed a number of proposals that would resolve their outstanding contractual
disagreements and address Adeza's working capital concerns, including the
possibility of Tokos extending financing to Adeza in the form of a commitment by
Tokos to make funds available above actual purchases of approximately $1 to $5
million over a two-year period. Adeza would repay Tokos with credits against
future purchases, cash or equity in Adeza and would also grant Tokos certain
additional rights. To date, the parties have not reached agreement on any of
these proposals. Further, there can be no assurance that the negotiations
currently underway will result in an agreement that satisfactorily resolves the
outstanding issues between Tokos and Adeza, including Adeza's working capital
concerns. Although Tokos has historically had a good working relationship with
Adeza and is optimistic that the parties will ultimately reach an agreement, a
failure to reach an agreement with Adeza could adversely affect the introduction
of fetal Fibronectin into the marketplace, and delay the ability of Tokos, or
Newco after the Merger, to derive revenues from sales of the product. If future
fetal Fibronectin sales are slowed or stymied by a failure to reach an agreement
with Adeza, and the shortfall in fetal Fibronectin revenues is not offset by
15
<PAGE> 30
increases in revenues from other products and services, then Tokos may not
achieve the full amount of the assumed revenue growth in 1996 contained in the
projections provided by Tokos management to the financial advisors for Tokos and
Healthdyne in connection with the fairness opinions rendered by such advisors.
See "The Merger -- Opinion of Healthdyne's Financial Advisor" and "-- Opinion of
Tokos' Financial Advisor."
HISTORY OF LOSSES; NET LOSS CARRYOVERS
Tokos had net losses for 1993 and 1994 and for the nine months ended
September 30, 1995. Healthdyne also had net losses from continuing operations
for 1993 and 1994, but had net income from continuing operations of $450,000 for
the nine months ended September 30, 1995. There can be no assurance that Newco
after the Merger will become or remain profitable in the future.
As of December 31, 1994, Healthdyne had accumulated net operating loss
carryovers for U.S. federal income tax purposes of approximately $9,800,000.
Under Section 382 of the Code, certain ownership changes with respect to the
stock of a corporation having unused net operating loss carryovers (a "loss
corporation"), or with respect to the stock of its parent corporation, may
result in annual limitations on utilization of such loss carryovers against
future income of the loss corporation. Although the Section 382 limitations will
apply to Healthdyne as a result of the Merger, Healthdyne believes that such
limitations will not result in the loss of the utilization of its loss
carryovers.
POTENTIAL SEVERANCE LIABILITIES
Certain executive officers of Healthdyne and Tokos will become eligible for
severance payments in the event that those officers are terminated or elect to
terminate their employment with Newco after the Merger, and all of their
currently unvested stock options will become vested upon consummation of the
Merger. Under the severance benefit agreements, in the unlikely event the
employment of each of the individuals entitled to such arrangements were
terminated following the Merger, Newco's aggregate liability as of January 1,
1996 to former Healthdyne and Tokos directors and executive officers would
approximate $15.76 million. Moreover, under the retirement benefit award
agreements, in the event each of the individuals entitled to such arrangements
were so to request in accordance with the terms of those agreements, the
aggregate amount that Newco would have been required to place in trust as of
December 31, 1995 would approximate $3.152 million. Severance payments and
retirement benefit award payments, when and if paid, would reduce the working
capital of Newco and adversely impact Newco's liquidity, while directly
benefiting those directors and management receiving such severance payments and
retirement benefit award payments, and could have a material adverse effect on
the operating results or financial condition of Newco after the Merger. See "The
Merger -- Interests of Certain Persons in the Merger."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Certificate of Incorporation and Bylaws of Newco
may make an unsolicited acquisition of control of Newco more difficult or
expensive. In addition, Newco has a stockholders rights plan, which also may
make an unsolicited acquisition of Newco more difficult or expensive. See
"Operation, Management and Business of Newco After the Merger -- Description of
Capital Stock of Newco" and "Comparative Rights of Stockholders."
DEPENDENCE ON KEY PERSONNEL
After the Merger, Newco will be dependent on the continued services and
management experience of its executive officers and other key employees. If such
executive officers or other key employees were to leave and Newco was unable to
obtain adequate replacements, Newco's operating results could be adversely
affected. In addition, Newco's growth depends on its ability to attract, retain
and motivate skilled employees, and on the ability of its officers and key
employees to manage growth successfully. See "The Merger -- Interests of Certain
Persons in the Merger" and "Operation, Management and Business of Newco After
the Merger -- Management of Newco."
16
<PAGE> 31
NO PRIOR MARKET FOR NEWCO COMMON STOCK
Prior to the Merger, there will be no public market for the shares of Newco
Common Stock. Although the shares of Newco Common Stock are expected to be
traded on the Nasdaq National Market, there can be no assurance that a liquid
trading market in such shares of Newco Common Stock will develop and no
assurance as to the price at which the Newco Common Stock will trade after the
Merger.
POSSIBLE VOLATILITY OF STOCK PRICES
The market price of Newco Common Stock may be subject to significant
fluctuations in response to variations in Newco's quarterly operating results,
announcements of developments concerning Newco's or its competitors' businesses,
failures to meet securities analysts' expectations, general trends in the market
for home healthcare products and services and other factors. In addition, broad
market fluctuations, as well as general economic or political conditions and
agendas such as healthcare reform, may adversely affect the market price of
Newco Common Stock, regardless of Newco's actual performance.
DIVIDEND POLICY
Although Healthdyne has engaged in two transactions involving the
distribution of the capital stock of certain of its subsidiaries to its
shareholders, no cash dividends have ever been paid on the Healthdyne Common
Stock or on the Tokos Common Stock. Healthdyne's and Tokos' present intention is
that Newco will retain all earnings for working capital, capital expenditures,
the repayment of outstanding indebtedness and general corporate purposes and
Healthdyne and Tokos currently do not anticipate any additional spinoffs.
Accordingly, Healthdyne and Tokos do not anticipate that Newco will pay any
dividends on Newco Common Stock in the foreseeable future.
17
<PAGE> 32
SELECTED FINANCIAL INFORMATION
The following selected financial information for Tokos and Healthdyne is
derived from, and should be read in conjunction with, the historical
consolidated financial statements of Tokos and Healthdyne and the related notes
thereto incorporated by reference in this Joint Proxy Statement/Prospectus. The
financial information for the nine months ended September 30, 1995 is not
necessarily indicative of the results that may be expected for the year ended
December 31, 1995.
TOKOS MEDICAL CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -----------------
1990 1991 1992 1993 1994 1994 1995
------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $84,909 $125,147 $159,887 $120,837 $100,696 $76,651 $66,993
Operating expenses.................... 78,848 107,040 131,377 117,647 99,014 73,858 66,292
Provision for doubtful accounts....... 10,979 13,288 17,056 13,656 7,042 6,106 4,020
Settlement of litigation.............. -- -- -- -- -- -- 4,300
Restructuring, severance and other
charges............................. -- -- -- 14,000 -- -- 2,268
------- -------- -------- -------- -------- ------- -------
Operating earnings (loss)........... (4,918) 4,819 11,454 (24,466) (5,360) (3,313) (9,887)
Interest income (expense), net........ (96) 134 39 39 51 8 370
------- -------- -------- -------- -------- ------- -------
Earnings (loss) before income taxes... (5,014) 4,953 11,493 (24,427) (5,309) (3,305) (9,517)
Income tax expense.................... -- 2,505 5,030 1,956 550 125 150
------- -------- -------- -------- -------- ------- -------
Net earnings (loss)................... $(5,014) $ 2,448 $ 6,463 $(26,383) $ (5,859) $(3,430) $(9,667)
======== ========= ========= ========= ========= ======== ========
Net earnings (loss) per common share
and common share equivalent......... $ (.33) $ .14 $ .37 $ (1.53) $ (.34) $ (.20) $ (.56)
======== ========= ========= ========= ========= ======== ========
Weighted average common shares and
common share equivalents............ 15,205 17,382 17,568 17,240 17,169 17,156 17,343
======== ========= ========= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $64,299 $86,964 $99,886 $69,959 $58,390 $58,981 $47,654
Long-term debt, less current portion...... 8,091 5,035 5,182 3,348 2,593 1,937 2,367
Stockholders' equity...................... 43,668 60,490 74,952 46,875 40,160 42,834 31,325
</TABLE>
18
<PAGE> 33
SELECTED FINANCIAL INFORMATION
HEALTHDYNE, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1990(A) 1991(A) 1992(A) 1993(A) 1994(A) 1994(A) 1995
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $25,864 $49,004 $69,269 $67,555 $66,407 $49,102 $51,935
Operating expenses..................................... 31,926 43,675 67,571 67,672 64,870 48,221 50,072
Provision for doubtful accounts........................ 2,350 5,029 7,271 7,044 5,368 4,480 3,123
------- ------- ------- ------- ------- ------- -------
Operating earnings (loss).............................. (8,412) 300 (5,573) (7,161) (3,831) (3,599) (1,260)
Interest income (expense), net......................... 1,055 (187) (609) (1,187) 577 391 1,423
Other income (expense)................................. 2,885 (2,954) (2,049) (2,094) (732) (568) (576)
------- ------- ------- ------- ------- ------- -------
Loss from continuing operations before income taxes.... (4,472) (2,841) (8,231) (10,442) (3,986) (3,776) (413)
Income tax benefit..................................... (3,893) (2,530) (2,581) (2,790) (2,178) (2,567) (863)
------- ------- ------- ------- ------- ------- -------
Earnings (loss) from continuing operations............. (579) (311) (5,650) (7,652) (1,808) (1,209) 450
Earnings (loss) from discontinued operations........... 8,619 10,808 2,153 16,274 17,977 18,046 (4,267)
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).................................... $ 8,040 $10,497 $(3,497) $ 8,622 $16,169 $16,837 $(3,817)
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per common share and common share
equivalent from continuing operations................ $ (.04) $ (.02) $ (.36) $ (.50) $ (.12) $ (.08) $ .03
Net earnings (loss) per common share and common share
equivalent........................................... $ .50 $ .67 $ (.22) $ .57 $ 1.05 $ 1.10 $ (.25)
======= ======= ======= ======= ======= ======= =======
Weighted average common shares and common share
equivalents.......................................... 15,966 15,636 15,576 15,212 15,335 15,298 15,348
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1990(A) 1991(A) 1992(A) 1993(A) 1994(A) 1994(A) 1995
------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................................... $80,147 $100,722 $108,718 $110,011 $116,935 $111,123 $89,682
Long-term debt, less current portion.............. 367 3,215 18,889 13,612 3,213 1,222 3,335
Shareholders' equity.............................. 65,080 80,015 67,694 76,691 93,264 93,940 65,385
</TABLE>
- ---------------
(a) Amounts have been reclassified to reflect discontinued operations.
19
<PAGE> 34
TOKOS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information" included elsewhere in this Joint Proxy
Statement/Prospectus.
GENERAL
Tokos derives substantially all of its revenues from the services it
provides assisting physicians with preterm labor management and specialized
obstetrical home care services for their patients, and from its comprehensive
maternal risk assessment and prenatal education services. The level of revenue
which Tokos receives per patient is primarily a function of the intensity of
services provided to each patient, the length of time the patient receives such
services, and other factors and adjustments which relate to third party payors.
During the past year, Tokos has made progress in its transition from a
specialty obstetrical homecare provider to a broader maternal-newborn managed
care organization with its introduction of the Matryx Health Partners division.
Tokos' management believes that over the next several years, Tokos' revenues
will be influenced to a greater degree by managed care entities, and less by
physicians. The emphasis of Tokos' service offering has expanded to the entire
maternal-newborn episode of care, with additional services offered including
pre-conception screening and education; obstetrical case management; prenatal
genetic testing and counseling; neonatal case management and postpartum clinical
follow-up as part of early discharge services. Tokos hopes to enhance this
evolution through partnership and strategic alliances.
RESULTS OF OPERATIONS
For the Year Ended December 31, 1994
Net revenues decreased 16.7% to $100.7 million in 1994 compared with $120.8
million in 1993. The decrease in net revenues primarily resulted from a decline
in preterm labor management patient census and a shift in patient service mix.
The decline in census (defined as the average number of patients receiving
services on each day during the period) primarily resulted from reduced
physician referrals and shorter average days on service per patient. Tokos
believes physicians have been more conservative in their use of Tokos' preterm
labor management services because of the lingering controversy surrounding the
appropriate utilization of these services, concerns about healthcare reform, and
the increasing role of managed care entities in clinical decision-making. The
decrease in net revenues also resulted from a shift in Tokos' service mix to
patients receiving less intensive preterm labor management services and other
homecare services which generate less revenue per patient day than Tokos' higher
intensive infusion therapies. The cause of the shift in service mix away from
higher intensive services may also relate to the factors discussed above.
Cost of patient services, as a percentage of net revenues, was 76.7% in
1994 compared with 76.5% in 1993. The cost of patient services decreased $15.2
million during 1994 in response to lower revenue levels; however, Tokos
continues efforts to reduce costs to achieve a lower percentage of net revenues.
General and administrative expenses increased as a percentage of net
revenue to 20.0% in 1994 compared with 18.9% in 1993. General and administrative
expenses decreased $2.7 million during 1994 in response to expense reductions
due to the decline in net revenues; however, net revenues declined at a faster
rate than expenses during 1994 and became a higher percentage of net revenues.
Certain costs such as corporate facilities and essential administrative
personnel, insurance and depreciation are relatively fixed by their nature and
could not be reduced as quickly as revenue decreased.
Tokos provides for estimated uncollectible accounts as revenues are
recognized. The provision for doubtful accounts as a percentage of net revenues
was reduced to 7.0% in 1994 compared with 11.3% in 1993. The percentage
provision decreased in 1994 compared to 1993 primarily as a result of improved
collections on revenues generated under contractual agreements and as a result
of improved insurance clearance and billing processes. The percentages of net
revenue generated under contractual arrangements were 67% in 1992, 80%
20
<PAGE> 35
in 1993 and 85% in 1994. The provision rate is adjusted periodically based upon
Tokos' quarterly evaluation of historical collection experience, recoveries of
amounts previously provided, industry reimbursement trends and other relevant
factors. Therefore, the provision rate could vary on a quarterly basis.
Research and development expenses were $1.6 million in 1994 compared with
$2.4 million in 1993. This decrease primarily resulted from Tokos' decision to
eliminate all equipment development activities, and reduce ongoing clinical
research and systems development activities.
As a result of Tokos' 1993 restructuring activities as discussed below,
there was $6.1 million remaining in the accrual at December 31, 1993 to be
substantially paid in 1994. During 1994, $5.5 million in restructuring charges
were expended with a remaining accrual at December 31, 1994 of $600,000. The
amounts expended include $3.3 million related to involuntary severance costs and
$2.2 million related to costs associated with the consolidation of certain
administrative functions and monitoring sites. Certain reclassifications of
those amounts have been made within the restructuring categories from those
previously reported, none of which are significant. The impact of restructuring
activities implemented during 1993 resulted in reductions of operating costs of
approximately $18.0 million in 1994 compared with 1993.
Tokos incurred $550,000 of income tax expense in 1994 compared with $2.0
million in 1993. Income tax expense recorded in 1994 resulted from provisions
for state franchise taxes and for potential settlement of the examination by the
Internal Revenue Service ("IRS") for the 1991, 1990, and 1989 tax years. During
1994, Tokos recorded no federal and state income tax benefits. While the
operating losses to date will be available to offset future taxable income, the
recognition of such income tax benefits has been delayed pending Tokos' return
to profitability.
For the Year Ended December 31, 1993
Net revenues decreased 24.4% to $120.8 million in 1993 compared with $159.9
million in 1992. The decrease in net revenues primarily resulted from a decrease
in preterm labor management patient census and, to a lesser extent, price
erosion. This decrease in census primarily resulted from reduced physician
referrals and shorter average days on service per patient. The price erosion
primarily resulted from an increasing proportion of net revenues being generated
under contractual agreements with third-party payors, which usually results in
less revenues per patient due to discounted prices. In 1993 80% of net revenues
were generated under contractual obligations compared to 67% in 1992.
Cost of patient services, as a percentage of net revenues, increased to
76.5% in 1993 compared with 61.8% in 1992. The increase in cost of patient
services was due primarily to the expansion of Tokos' infrastructure during the
last half of 1992 in anticipation of continued revenue growth, including the
addition of facilities and homecare nurses in remote sites and an increase in
field sales personnel. During 1993, Tokos reduced costs in response to lower
revenue levels; however, costs became a greater percentage of net revenues as
net revenues declined at a faster rate than costs during 1993.
General and administrative expenses increased as a percentage of net
revenues to 18.9% in 1993 compared with 16.4% in 1992. The decrease of $3.4
million in absolute dollars relates to the consolidation of redundant
administrative expenses arising from the acquisition of CareLink Corporation
during the second half of 1992, in addition to expense reductions during 1993 in
response to the decline in net revenues; however, net revenues declined at a
faster rate than expenses during 1993.
The provision for doubtful accounts as a percentage of net revenues was
11.3% in 1993 compared with 10.7% in 1992. Tokos increased its provision for
doubtful accounts due to uncertainties in the changing health care environment
affecting Tokos' business.
Research and development expenses were $2.4 million in 1993 compared with
$3.3 million in 1992. This decrease primarily resulted from the consolidation of
redundant research and development expenses arising from the acquisition of
CareLink Corporation during the second half of 1992, as well as Tokos' strategic
decision to eliminate equipment development activities, and to reduce its
clinical research and system development activities.
21
<PAGE> 36
During the second and fourth quarters of 1993, the Tokos Board of Directors
approved plans to restructure Tokos' operations in response to significant
declines in revenue and the uncertainties surrounding the changing health care
environments affecting Tokos' business. Tokos recorded restructuring charges
totalling $14.0 million in 1993 related to those decisions to restructure its
operations by, among other things, reducing the number of its monitoring
centers, centralizing patient intake and claims administration, reducing
in-house manufacturing and product development activities, and changing its
strategy regarding support of certain patient service equipment and patient
monitoring devices. The restructuring charges included $10.6 million in cash
expenses, of which $5.7 million related to involuntary severance costs of more
than 360 full and part-time employees, $3.5 million related to costs associated
with the consolidation of certain administrative functions and 22 monitoring
sites, as well as reduction of manufacturing activities, and $1.4 million
related to other restructuring costs. Actual cash expenditures during 1993
totalled $4.5 million, with the remaining $6.1 million to be paid in 1994. In
addition, Tokos recorded noncash allowances totalling $3.4 million relating to
its strategic decision to reduce support for certain of its patient service
equipment and monitoring devices. Tokos uses four different types of monitoring
devices incidental to delivering its clinical services (i.e., TermGuard I,
TermGuard II, Genesis and CareFone). The $3.4 million charge included a
writedown of $1.2 million relating to TermGuard I devices and $2.2 million
relating to certain Genesis devices, and was made as a result of the strategic
decision of Tokos to adopt TermGuard II and CareFone as its principal hardware
technology. Tokos believes that the remaining carrying amount of these devices
will be recovered from future patient revenues. The impact of restructuring
activities implemented during 1993 resulted in recurring cost savings in excess
of $4.0 million per quarter in the second half of 1993.
Tokos incurred $2.0 million of income tax expense in 1993 compared with
$5.0 million in 1992. Income tax expense recorded in 1993 resulted from Tokos'
decision to increase the valuation allowance related to deferred tax assets
previously recorded. Tokos' 1992 income tax expense is greater than statutory
rates due to losses incurred by CareLink Corporation prior to being acquired by
Tokos. No income tax benefit related to these premerger losses of CareLink
Corporation has been recorded. At December 31, 1993, Tokos had available for
federal income tax purposes net operating loss carryforwards from its
acquisition of CareLink Corporation of approximately $15.6 million. The use of
this net operating loss carryforward in future years will be limited to
approximately $2.3 million annually.
For the Nine Months Ended September 30, 1995
For the nine months ended September 30, 1995, Tokos had net revenues of
$67.0 million and a net loss of $9.7 million ($.56 per share) compared with net
revenues of $76.7 million and a net loss of $3.4 million ($.20 per share) for
the same period of the preceding year.
Of the $9.7 million loss for the nine months ended, September 30, 1995,
$4.3 million ($.25 per share) resulted from a settlement with the plaintiffs in
the class action securities suit entitled In re Tokos Medical Corporation
Securities Litigation. The charge to income of $4.3 million during the quarter
ended June 30, 1995 is in addition to an aggregate amount of $1.45 million which
had been previously accrued in general and administrative expense. Tokos agreed
to settle the securities class action lawsuit to avoid further dilution of
corporate resources, including management time and focus, as well as to avoid
further legal costs and uncertainties associated with taking the case to trial.
Net revenues decreased $9.7 million, or 12.6%, for the first nine months of
1995 compared with the corresponding period of 1994. This decrease in net
revenues primarily resulted from a decrease in preterm labor management patient
census. The decrease in preterm labor management census resulted from reduced
physician referrals and shorter average days on service per patient. Tokos
believes physicians have been more conservative in their use of Tokos' preterm
labor management services because of the lingering controversy surrounding the
appropriate utilization of these services, concerns about healthcare reform, and
the increasing role of managed care entities in clinical decision-making. Due to
these changes which are occurring in the external market, Tokos has redirected
its sales efforts in order to transition from a specialty homecare provider to a
broader maternal-newborn managed care organization. The redirected sales efforts
include more resources being focused on third party payor customers and
initiatives and less on the physician-driven business. For example, as positions
were vacated they were filled by individuals with more managed care experience.
Other
22
<PAGE> 37
individuals were recruited to focus chiefly on leads for risk products, shared
risk arrangements and multiproduct sales. Others were cross-trained and moved
from a physician focus to managed care. Tokos management believes that Tokos has
had some success as a result of these strategies; however, it is impractical to
quantify the impact of these activities on future operations.
Cost of patient services decreased $4.6 million to $53.1 million (79.3% of
net revenues) for the first nine months of 1995 compared with $57.7 million
(75.3% of net revenues) for the first nine months of 1994. This decrease in
absolute dollars was achieved through further consolidation of service sites and
other cost reduction activities in response to lower revenue levels.
General and administrative expenses decreased $2.2 million to $12.7 million
(19.0% of net revenues) for the first nine months of 1995 compared with $14.9
million (19.5% of net revenues) for the first nine months of 1994. The decrease
in absolute dollars primarily relates to expense reductions implemented by Tokos
due to the decline in its net revenues, in addition to a reduction in legal fees
related to the settlement of the shareholder lawsuit.
Tokos provides for estimated uncollectible accounts as revenues are
recognized. The provision for doubtful accounts as a percentage of net revenues
was 6.0% for the first nine months of 1995 compared with 8.0% for the
corresponding period of 1994. The provision is adjusted periodically based upon
Tokos' quarterly evaluation of historical collection experience, recoveries of
amounts previously provided, industry reimbursement trends and other relevant
factors. Therefore, the provision rate could vary on a quarterly basis.
Research and development expenses were $423,000 for the nine months ended
September 30, 1995 compared to $1,234,000 for the corresponding period of 1994.
This decrease primarily resulted from Tokos' decision to eliminate equipment
development activities, and to significantly reduce its clinical research and
systems development activities.
During 1995, as Tokos' revenues continued to decline, specific decisions
were made and communicated by management related to cost reduction efforts in
order to lower Tokos' break even point. The cost reduction plan consisted of
reductions in Tokos' workforce of approximately 105 employees, comprised of
personnel within information systems, reimbursement, administrative support and
to a lesser extent clinical service, and termination of several facility leases.
In connection with these cost reduction activities, Tokos incurred through
September 30, 1995, $2.3 million in expenses, $100,000 of which constituted an
accrual for future severance payments. The components of the $2.3 million in
expenses include $1.8 million related to involuntary severance costs of affected
employees, $228,000 related to the consolidation of facilities and $206,000 in
other related costs. Tokos continues to review its operating activities and will
take actions as deemed necessary in coming quarters in its efforts to regain
profitability.
Tokos recorded income tax expense of $150,000 (1.6% of pretax loss) related
to state franchise taxes in the nine months ended September 30, 1995. Tokos
recorded no federal and state income tax benefits in the first nine months of
1994 and 1995. While the operating loss in the third quarter will be available
to offset future taxable income, the recognition of such income tax benefits has
been deferred until Tokos returns to profitability.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.2 million for the first
nine months of 1995, compared with $2.9 million for the first nine months of
1994. Operating cash flow decreased in the first nine months of 1995 compared
with 1994 primarily due to the decline in Tokos' operating activities. The
change in net accounts receivable for the first nine months of 1995 remained
consistent with the first nine months of 1994 due to Tokos' improved historical
collection percentages. Improved collections are evidenced by the fact that
Tokos was able to reduce its provision for bad debts from 8.0% for the first
nine months of 1994 to 6.0% for the first nine months of 1995 and reduced the
accounts receivable days sales outstanding ("DSO") from 89 days at December 31,
1994 to 81 days at September 30, 1995. Tokos calculated DSO by dividing Tokos'
net receivables at the end of each calendar quarter by the average daily revenue
for the same calendar quarter. Tokos has purchased or is in the process of
purchasing physician-owned companies for which Tokos provides
23
<PAGE> 38
management services. During the first nine months of 1995, Tokos purchased
approximately 51% of these entities for an aggregate purchase price of $2.2
million consisting of cash of $166,000 and notes payable of $2.0 million. Over
the last twelve months, Tokos has purchased approximately 94% of those entities
for an aggregate purchase price of $4.5 million. Tokos expects to purchase the
remaining entities during the remainder of 1995. The notes, issued in connection
with these acquisitions, are an aggregate $3.7 million and have a balance
outstanding of $2.7 million at September 30, 1995. The remaining balances are to
be paid at various times over the next one to four years.
Tokos has loaned its Chief Executive Officer an aggregate of $2.1 million
which was due on December 31, 1995. The original due date of these notes was
March 20, 1994. The Board of Directors has the discretion to further extend
these notes beyond their due date; and in December 1995, extended the notes' due
date until December 31, 1996.
Accounts payable and accrued expenses decreased $2.6 million at September
30, 1995, compared with December 31, 1994, due primarily to the decline in
Tokos' operating activities. In July 1995, Tokos reached a settlement with the
plaintiffs in a class action securities suit. Tokos has accrued an aggregate
liability, net of insurance proceeds, of $5.75 million for its portion of the
settlement. Tokos has paid $750,000 cash, with the remaining $5.0 million
payable in cash or by the issuance of common stock. Accrued restructuring
charges totaled $628,000 at December 31, 1994, $447,000 of which was paid during
the first nine months of 1995.
Tokos made capital expenditures of approximately $1.6 million during the
first nine months of 1995 primarily for the purchases of computer and general
office equipment used in Tokos' corporate office and clinical sites of service.
Such capital expenditures consisted of agreements to purchase equipment under
capital lease obligations of $535,000 and cash purchases of $1.1 million.
Capital spending for the remainder of 1995 is expected to approximate 1994
levels.
Long-term debt decreased $2.9 million at September 30, 1995 compared with
December 31, 1994 primarily due to payments of long-term debt exceeding
additions which relate to the acquisition of the managed companies and capital
expenditures financed through capital leases. In October 1994, Tokos entered
into a $10.0 million revolving line of credit arrangement with a commercial
lender which expires on November 30, 1996. There are currently no outstanding
borrowings under this agreement. In 1991, Tokos acquired from Adeza Biomedical
Corporation ("Adeza") the exclusive rights to market Adeza's fetal fibronectin
immunoassay in the United States and Canada pursuant to a Marketing Agreement.
Included in long-term debt at December 31, 1994 was $4.0 million representing
the remaining Tokos payment obligations under the Marketing Agreement. In
January 1995, Adeza received notification from the FDA that its pre-market
approval ("PMA") application for fetal fibronectin immunoassay was accepted for
filing. In the nine months ended September 30, 1995, Tokos paid Adeza $2.5
million of the remaining $4.0 million outstanding obligation included in the
current portion of long-term debt. In October 1995, Adeza received final
approval of its PMA application. Therefore, Tokos paid the remaining $1.5
million in October 1995. Tokos and Adeza are currently engaged in discussions to
effect modification to their Marketing Agreement pursuant to which Tokos
obtained the exclusive rights to market Adeza's fetal fibronectin immunoassay in
the United States and Canada. Tokos has become aware during these discussions
that Adeza is in need of additional working capital to fund its operations.
Adeza and Tokos have discussed a number of proposals that would resolve their
outstanding contractual disagreements and address Adeza's working capital
concerns, including the possibility of Tokos extending financing to Adeza in the
form of some guaranteed levels of prepurchases of fetal fibronectin product and
related services by Tokos, supplemented with cash advances by Tokos. To date,
the parties have not reached agreement on any of these proposals. Further, there
can be no assurance that the negotiations currently underway will result in an
agreement that satisfactorily resolves the outstanding issues between Tokos and
Adeza, including Adeza's working capital concerns. If the parties ultimately
reach a satisfactory agreement that results in Tokos, or Newco, providing some
type of financial assistance to Adeza, the working capital that would otherwise
be available to Tokos, or Newco after the Merger, would be adversely affected.
Moreover, failure to reach an agreement with Adeza could have a material adverse
effect on the ability of Tokos, and Newco after the Merger, to market fetal
fibronectin and derive revenues from sales of the product.
24
<PAGE> 39
Tokos believes that its current cash balances and internally generated
funds, along with amounts available under the line of credit will be sufficient
to finance its current operations for at least the next twelve months. Due to
the restructuring of the business and changes in the health care industry, Tokos
does not have sufficient ability to forecast its liquidity beyond 12 months;
however, there are no known matters which would preclude Tokos from financing
its current operations beyond the next twelve months.
25
<PAGE> 40
HEALTHDYNE
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On April 6, 1994 Healthdyne sold its 68% ownership interest in Home
Nutritional Services, Inc. ("HNS"); on May 22, 1995 Healthdyne distributed to
its shareholders the 10 million shares of common stock (approximately 81% of the
outstanding shares) of Healthdyne Technologies, Inc. ("Healthdyne Technologies")
owned by Healthdyne in a tax-free distribution (the "Technologies Spinoff"); and
on November 6, 1995 Healthdyne distributed to its shareholders its common stock
of its wholly-owned subsidiary, Healthdyne Information Enterprises, Inc.
("HIE"), in a taxable distribution (the "HIE Spinoff"). The accounts of HNS,
Healthdyne Technologies and HIE prior to sale or distribution have been
reflected herein as discontinued operations.
Following the HIE Spinoff, the sole remaining business of Healthdyne is
Healthdyne Maternity Management ("HMM"), a wholly-owned division which provides
home obstetrical care and related risk management services. On October 2, 1995,
Healthdyne and Tokos entered into the Merger Agreement providing for the Merger,
following which Newco will be a nationwide provider of pregnancy management
services and high-risk home obstetrical care.
Healthdyne's present operations and future prospects may be influenced by
several factors, including developments in the healthcare industry, third-party
reimbursement policies and practices, and changes in regulatory requirements or
the manner in which such requirements are enforced with respect to approval and
use of medical devices. As a result of the increasing cost of health care in the
United States and overall efforts to reduce or control government and corporate
spending, government and third-party payors are becoming increasingly focused on
promoting cost-effective healthcare services, and payors, in particular, have
become more involved in decisions regarding diagnosis and treatment to ensure
that care is delivered in a cost-effective manner.
Substantially all of Healthdyne's current revenues are derived directly
from third-party payors for services rendered to patients by Healthdyne. The
levels of profitability of all healthcare companies, including Healthdyne, could
be adversely affected by the financial condition of certain governmental and
private payors and by their continuing efforts to reduce healthcare costs by
lowering reimbursement rates, increasing medical reviews of invoices for
services and negotiating for reduced contract rates. Healthdyne has responded to
these developments by attempting to emphasize cost-effective therapies and
procedures, pre-qualifying insurance coverage prior to the delivery of services
and educating third-party payors on the benefits of Healthdyne's home therapies.
Although reductions in the reimbursement rates that Healthdyne receives for
services rendered could have an adverse impact on Healthdyne, Healthdyne is
hopeful that the overall cost-effective nature of treatment in the home (as
compared to hospitalization), coupled with the potential benefits to be derived
from prenatal care, will be recognized and encouraged by any new healthcare
initiatives.
Healthdyne's business also may be affected by changes in government
regulation to which Healthdyne's products and services are subject or changes in
the manner in which such regulations are enforced or medical devices are
approved. In September 1995 the United States Food and Drug Administration
("FDA") approved the PreMarket Approval Application filed for Healthdyne's
System 37(R) Uterine Activity Monitor utilized by HMM. The lack of FDA approval
historically has adversely affected third-party reimbursement. The FDA approval
of System 37(R) is expected to result in a higher level of acceptance of home
uterine activity monitoring for reimbursement by some insurance carriers and
state medicaid programs.
The trend within the healthcare industry to deliver quality healthcare
services in a more cost-effective manner has had, and is expected to continue to
have, an impact on Healthdyne. Driven by employers and third-party payors, as
well as by legislation and regulation, prices for services provided to patients,
in general, are being reduced, cost-effective preventative health care is being
stressed and vertically integrated networks of care providers (some of whom are
accepting the insurance risk of providing care through capitation
26
<PAGE> 41
contracts with third-party payors) are being established. Healthdyne anticipates
that this trend will continue and is attempting to focus its efforts on
services, some of which are offered in conjunction with third-party payors,
which it believes can benefit from this new environment. There can be no
assurance, however, that either additional changes or presently unforeseen
consequences from this trend may not develop.
The following discussion of Healthdyne's financial condition and results of
operations should be read in conjunction with Healthdyne's consolidated
financial statements and related notes presented in Healthdyne's Annual Report
on Form 10-K for the year ended December 31, 1994 as filed with the Securities
and Exchange Commission (the "Commission").
OPERATING RESULTS
<TABLE>
<CAPTION>
1992(1) 1993(1) 1994(1)
------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net revenue...................................................... $69,269 $ 67,555 $66,407
Cost of revenue.................................................. 26,014 27,991 27,618
------- -------- -------
Gross profit................................................... 43,255 39,564 38,789
Selling and administrative expenses.............................. 37,111 38,795 36,698
Provision for doubtful accounts.................................. 7,271 7,044 5,368
Restructuring expenses and other charges......................... 3,800 -- --
Research and development expenses................................ 646 886 554
------- -------- -------
Operating loss................................................. (5,573) (7,161) (3,831)
Interest expense, net............................................ (609) (1,187) 577
Other expense, net............................................... (2,049) (2,094) (732)
------- -------- -------
Loss from continuing operations before income tax benefit........ (8,231) (10,442) (3,986)
Income tax benefit............................................... (2,581) (2,790) (2,178)
------- -------- -------
Loss from continuing operations.................................. (5,650) (7,652) (1,808)
Earnings from discontinued operations............................ 2,153 16,274 17,977
------- -------- -------
Net earnings (loss).............................................. $(3,497) $ 8,622 $16,169
======= ======== =======
</TABLE>
- ---------------
(1) Reflects HNS, Healthdyne Technologies and HIE as discontinued operations.
In 1993, net revenues decreased by 2% from 1992. Although there was an
approximate 20% increase in patient service days for patients receiving
subcutaneous terbutaline therapy (HMM's most intensive and highest priced
therapy), the increased revenues resulting from this increased volume were more
than offset by pricing discounts on all therapies given primarily to managed
care and other entities with whom HMM maintains a contractual relationship. The
level of patient service days for other therapies remained relatively constant
from 1992 to 1993.
In 1994, net revenues decreased by 2% from 1993. Although the patient
service days for subcutaneous terbutaline therapy patients continued to increase
at a rate of approximately 8% and additional revenues were generated from the
introduction of Healthdyne's new comprehensive pregnancy management program,
these increases were offset by pricing discounts.
Gross profit margins declined from 62% in 1992 to 58% in 1993 and 1994
primarily as a result of greater levels of price discounting. The increase in
price discounting in 1993 and 1994 was primarily a result of the effort of
governmental and private third-party payors to reduce healthcare costs by
lowering reimbursement amounts. In late 1991 and 1992, in an effort to control
rising healthcare costs, third-party payors and case management entities began
to exert pressure on healthcare providers to accept lower prices for quality
services. Healthdyne's discount levels stabilized in the second quarter of 1994
and have remained constant since that time. Healthdyne does not expect any
significant increases in discount levels in the near future.
Selling and administrative expenses, as a percentage of revenues, increased
from 54% in 1992 to 57% in 1993 due in part to the decline in revenue as well as
an increase in costs of corporate support staff which were
27
<PAGE> 42
necessary to support the three separate public entities Healthdyne had in 1993.
Selling and administrative expenses, as a percentage of net revenues, declined
to 55% in 1994 from 1993, due in part to a reduction of corporate support staff
expenses following the sale of HNS, as well as cost reductions in HMM's
branches.
Healthdyne provides for doubtful accounts to cover that portion of billed
revenues that is estimated to be uncollectible. This provision is adjusted
periodically based upon Healthdyne's evaluation of historical collection
experience, industry reimbursement trends and other relevant factors. As a
percentage of revenues, the provision was 10.5% in 1992 and 1993, and 8% in
1994. This decrease was largely the result of improved collection experience by
HMM primarily as a result of continuing efforts with third-party payors to
reimburse for the services provided by HMM, an increased percentage of revenue
generated from third-party payors with whom HMM maintains a contractual
relationship and increased efficiencies within the HMM billing and collection
department.
In 1992, HMM incurred a restructuring charge for a realignment of the field
organizational structure and a reserve for excess inventory. This inventory
reserve was necessary because a modular system of the division's product line
was introduced for use with all its patients, including patients with
hypertensive disorders, gestational diabetes and preterm labor; therefore, the
decision was made, as a part of the restructuring process, to discontinue
production of the then-current hypertension monitor. This decision resulted in
approximately $400,000 worth of inventory becoming excess.
Net interest income increased significantly in 1994 over 1993 and 1992 due
to the investment of Healthdyne's proceeds from the sale of HNS. Interest
expense increased in 1993 from 1992 primarily as a result of higher average
balances outstanding on Healthdyne's credit agreements.
Healthdyne adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," which was issued in February 1992, for its 1991
financial statements and applied the provisions retroactively to January 1,
1987. Among the various requirements of this Statement is the presentation of
the benefits of Healthdyne's operating loss carryforwards as a reduction of
income tax expense.
Healthdyne's overall income tax benefit for 1993 was lower than the
statutory rate primarily due to the Company's inability to carryback a portion
of the current year's net operating loss. In 1994 the income tax benefit
exceeded the statutory rate primarily as a result of utilization of prior years'
net operating losses and the receipt of non-taxable interest income.
For the Nine Months Ended September 30, 1995
Consolidated revenues from continuing operations increased 6% to $51.935
million in the nine months ended September 30, 1995, as compared to the same
period in 1994. The increase was due primarily to increased patient service
days.
Healthdyne's gross profit margin remained constant at 59% in the nine month
periods ended September 30, 1995 and 1994.
Healthdyne's selling and administrative expenses remained relatively
constant as a percentage of revenues, at 55% in the nine months, ended September
30, 1995 as compared to 56% in the same period in the prior year.
Healthdyne provides for doubtful accounts to cover that portion of billed
revenue that it estimates to be uncollectible. This provision is adjusted
periodically based upon Healthdyne's evaluation of historical collection
experience, industry reimbursement trends and other relevant factors. Due to
significantly improved collection experience at HMM beginning in late 1994 and
continuing to date, the provision was decreased from 9% of revenues in the nine
months ended September 30, 1994, to 6% of revenues in 1995.
For the nine months ended September 30, 1995, the effective income tax
benefit was greater than the statutory rate because of the utilization of
Healthdyne's operating tax losses and receipt of non-taxable interest income.
28
<PAGE> 43
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1995, Healthdyne had cash and short-term investments of
$29.95 million. Working capital as of that date was $52.032 million and the
current ratio was 4.2 to 1.
Net cash used in operating activities was $31.143 million for the nine
months ended September 30, 1994 compared to net cash used in operating
activities of $7.989 million for the nine months ended September 30, 1995. This
decrease was due to the purchase in 1994 of short-term investments with the
proceeds from the sale of HNS. Net cash provided by investing activities was
$53.835 million for the nine months ended September 30, 1994 compared to net
cash used in investing activities of $11.466 million for the nine months ended
September 30, 1995. This decrease was due primarily to the $61.230 million
proceeds from the sale of HNS included in the 1994 cash flow.
It is not expected that the Technologies Spinoff will have a material
effect on Healthdyne's liquidity or available cash flow. Since the initial
public offering of Healthdyne Technologies in 1993, Healthdyne has neither
provided significant funding to, nor obtained significant funding from,
Healthdyne Technologies. Since such date, including the nine months ended
September 30, 1995, Healthdyne Technologies has purchased certain services from
Healthdyne at a price which approximates the cost of such services and HMM has
purchased certain equipment from Healthdyne Technologies at 33% above
manufacturing cost. These arrangements will continue for a period of time after
the Technologies Spinoff although the services required to be provided to
Healthdyne Technologies and the payments thereunder are expected to be reduced.
Healthdyne remains contingently liable for claims that have arisen or may arise
from the operation of Technologies' business as a division of Healthdyne prior
to Technologies' initial public offering of common stock in 1993 (such as
product liability claims), although Technologies has indemnified Healthdyne
against and carries insurance for any such claims. Healthdyne Technologies and
Healthdyne were also parties to a Tax Sharing Agreement pursuant to which
Healthdyne Technologies paid Healthdyne $2.869 million in the year 1994 and
$1.423 million in 1995, for the utilization of Healthdyne's tax operating
losses. After the Technologies Spinoff, the earnings of Healthdyne Technologies
will not be included in Healthdyne's consolidated income tax return and, thus,
Healthdyne Technologies cannot utilize Healthdyne's tax operating losses and no
further payments will be received by Healthdyne under this agreement. Healthdyne
anticipates that its existing cash and short-term investments, coupled with its
ability to retain its tax operating loss carryforward to offset taxes otherwise
payable by Healthdyne in future periods, will be sufficient to meet its
scheduled obligations.
It is not expected that the HIE Spinoff will have a material effect on
Healthdyne's liquidity or available cash flow. Upon completion of the HIE
Spinoff, Healthdyne has no further obligation to provide funding for HIE. HIE
has, since its inception, purchased certain services from Healthdyne at a price
which approximates cost of such services. These arrangements will continue for a
period of time after the HIE Spinoff. Although not anticipated, Healthdyne could
incur income tax liability in connection with the HIE Spinoff in the event that
the fair value of shares of HIE distributed to Healthdyne shareholders is
determined to exceed Healthdyne's tax basis therein. HIE has agreed to indemnify
Healthdyne against any such tax liability. See "Risk Factors -- HIE Spinoff."
As of September 30, 1995, Healthdyne had no material commitments for
capital expenditures. However, Healthdyne and Tokos will incur substantial costs
in connection with the Merger. These costs include (i) restructuring costs to be
incurred by Tokos of approximately $7.2 million consisting of $3.5 million
relating to severance costs of terminated employees, $2.2 million of lease
termination costs for duplicate facilities, $1.0 million for write-off of
computer equipment due to software incompatibility and $0.5 million for other
Merger-related expenses; (ii) additional liabilities to be incurred by
Healthdyne as a result of the Merger of approximately $9.35 million consisting
of $9.15 million relating to severance costs of terminated employees, and $0.2
million for patient service centers specifically identified to be closed; and
(iii) transaction costs of approximately $3.765 million, consisting of $2.275
million for investment banking fees, $1.0 million for legal and accounting fees
and $0.49 million for other costs such as document printing and mailing and
filing fees. It
29
<PAGE> 44
is anticipated that existing funds and expected cash flows from operating and
investing activities will enable Healthdyne to make investments in its remaining
business and to meet its scheduled obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 119 ("SFAS 119"), "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments". Had
SFAS 119 been implemented by Healthdyne as of September 30, 1995, there would
have been no material effect on the consolidated condensed financial statements.
30
<PAGE> 45
NEWCO
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma financial information and explanatory notes are
presented to reflect the Merger. The Merger of Tokos and Healthdyne will be
accounted for in accordance with the purchase method of accounting. Under the
Merger Agreement, each share of Tokos Common Stock and Healthdyne Common Stock
outstanding immediately prior to consummation of the Merger will be exchanged
for one share of Newco Common Stock. Based upon the outstanding shares of the
respective companies as of December 31, 1995, Tokos shareholders will receive
approximately 53% of the combined Newco shares. Since Tokos' shareholders will
receive the larger percentage of Newco shares and since there is no other
evidence that clearly indicates that Healthdyne would be the acquiror, for
accounting purposes Tokos has been deemed to be the acquiror of Healthdyne. The
Pro Forma Condensed Balance Sheet as of September 30, 1995 assumes the Merger
occurred on September 30, 1995. The Pro Forma Statement Of Earnings (Loss) for
the year ended December 31, 1994 and the nine months ended September 30, 1995
assumes the Merger was consummated on January 1, 1994.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management of Tokos and Healthdyne believes
are reasonable. The Merger will be recorded based upon the estimated fair market
value of Healthdyne's net assets at date of acquisition. The adjustments
included in the pro forma financial information presented herein are
management's preliminary determination of these adjustments based upon available
information. The actual adjustments which will be based on an evaluation of
assets, liabilities and circumstances at the Merger date, are not expected to
differ significantly from the pro forma adjustments.
The pro forma consolidated condensed financial statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the Merger actually had been consummated as of the
indicated dates. The pro forma financial statements should be read in
conjunction with the historical financial statements of Tokos and Healthdyne
together with related notes thereto included in this Joint Proxy
Statement/Prospectus.
31
<PAGE> 46
NEWCO
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA NEWCO
TOKOS HEALTHDYNE ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues......................................... $ 100,696 $ 66,407 $ -- $ 167,103
Cost of revenues................................. 77,240 27,618 (34,620)(12) 70,238
---------- ---------- ----------- ---------
Gross profit................................... 23,456 38,789 34,620 96,865
Selling and administrative expenses.............. 19,807 36,556 34,620(12) 90,983
Provision for doubtful accounts.................. 7,042 5,368 -- 12,410
Research and development expenses................ 1,617 554 -- 2,171
Amortization of intangibles...................... 350 142 28,735(3) 31,894
-- -- 1,667(4) --
-- -- 1,000(5) --
---------- ---------- ----------- ---------
Operating loss................................... (5,360) (3,831) (31,402) (40,593)
Interest income, net............................. 51 577 -- 628
Other income expense, net........................ -- (732) -- (732)
---------- ---------- ----------- ---------
Loss from continuing operations before income
tax expense (benefit)....................... (5,309) (3,986) (31,402) (40,697)
Income tax expense (benefit)..................... 550 (2,178) -- (1,628)
---------- ---------- ----------- ---------
Loss from continuing operations................ $ (5,859) $ (1,808) $ (31,402) $ (39,069)
======== ======== ========= ========
Loss per common share and common share equivalent
from continuing operations..................... $ (.34) $ (.12) $ (1.16)
======== ======== ========
Weighted average number of common shares and
common share equivalents....................... 17,169 15,335 1,262(11) 33,766
======== ======== ========= ========
</TABLE>
32
<PAGE> 47
NEWCO
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
----------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA NEWCO
TOKOS HEALTHDYNE ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues......................................... $ 66,993 $ 51,935 $ -- $ 118,928
Cost of revenues................................. 53,130 21,280 (24,930)(12) 49,480
---------- ---------- ----------- ---------
Gross profit................................... 13,863 30,655 24,930 69,448
Selling and administrative expenses.............. 11,879 28,396 24,930(12) 65,205
Provision for doubtful accounts.................. 4,020 3,123 -- 7,143
Research and development expenses................ 423 243 -- 666
Amortization of intangibles...................... 860 153 21,501(3) 24,514
1,250(4) --
-- -- 750(5) --
Settlement of litigation......................... 4,300 -- -- 4,300
Severance and other expenses..................... 2,268 -- -- 2,268
---------- ---------- ----------- ---------
Operating loss................................... (9,887) (1,260) (23,501) (34,648)
Interest income, net............................. 370 1,423 -- 1,793
Other expense, net............................... -- (576) -- (576)
---------- ---------- ----------- ---------
Loss from continuing operations before income
tax expense (benefit)....................... (9,517) (413) (23,501) (33,431)
Income tax expense (benefit)..................... 150 (863) -- (713)
---------- ---------- ----------- ---------
Earnings (loss) from continuing operations..... $ (9,667) $ 450 $ (23,501) $ (32,718)
======== ======== ========= ========
Earnings (loss) per common share and common share
equivalent from continuing operations.......... $ (.56) $ .03 $ (.96)
======== ======== ========
Weighted average number of common shares and
common share equivalents....................... 17,343 15,348 1,249(11) 33,940
======== ======== ========= ========
</TABLE>
33
<PAGE> 48
NEWCO
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
TOKOS HEALTHDYNE HEALTHDYNE HEALTHDYNE MERGER NEWCO
---------- ---------- ----------- ---------- ----------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and short-term
investments.................. $ 9,234 $ 29,950 $ -- $ 29,950 $ -- $ 39,184
Trade accounts receivable,
net.......................... 18,590 12,767 -- 12,767 -- 31,357
Inventories.................... 1,386 1,015 -- 1,015 -- 2,401
Deferred income taxes.......... -- 1,100 -- 1,100 (1,100)(6) --
Prepaid expenses and other
current
assets....................... 430 5,740 -- 5,740 -- 6,170
Net assets of discontinued
operations................... -- 17,809 (17,809)(1) -- -- --
---------- ---------- ----------- ---------- ----------- ---------
Total current assets.... 29,640 68,381 (17,809) 50,572 (1,100) 79,112
Property and equipment, net...... 8,355 12,916 -- 12,916 -- 21,271
Goodwill and other intangibles,
net............................ 4,712 5,004 -- 5,004 152,383(2) 157,095
-- -- -- -- (5,004)(7) --
Other assets..................... 4,947 3,381 -- 3,381 -- 8,328
---------- ---------- ----------- ---------- ----------- ---------
$ 47,654 $ 89,682 $ (17,809) $ 71,873 $ 146,279 $265,806
========= ========== =========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of
long-term debt and
obligations under capital
leases....................... $ 3,811 $ 1,082 $ -- $ 1,082 $ -- $ 4,893
Accounts payable, principally
trade........................ 1,330 1,826 -- 1,826 -- 3,156
Other current liabilities...... 8,821 13,441 -- 13,441 9,350(2)
-- -- -- -- 7,200(10) 38,812
---------- ---------- ----------- ---------- ----------- ---------
Total current
liabilities........... 13,962 16,349 -- 16,349 16,550 46,861
Long-term debt and obligations
under capital leases,
excluding current
installments................. 2,367 3,335 -- 3,335 -- 5,702
Other long-term liabilities.... -- 4,043 -- 4,043 (1,100)(6) 2,943
---------- ---------- ----------- ---------- ----------- ---------
Total liabilities....... 16,329 23,727 -- 23,727 15,450 55,506
Minority interest.............. -- 570 -- 570 -- 570
Stockholders' equity:
Common stock................. 17 156 -- 156 (156)(2) 342
325(2)
Additional paid-in capital... 87,194 86,994 (17,809)(1) 69,185 (69,185)(2) 271,902
185,280(2)
(572)(8)
Notes and interest receivable
from officers and
directors.................. (3,506) -- -- -- -- (3,506)
Accumulated deficit.......... (51,808) (21,765) -- (21,765) 21,765(2) (59,008)
-- -- -- -- (7,200)(10) --
---------- ---------- ----------- ---------- ----------- ---------
31,897 65,385 (17,809) 47,576 130,257 209,730
Treasury stock............... (572) -- -- -- 572(8) --
---------- ---------- ----------- ---------- ----------- ---------
Total stockholders'
equity................ 31,325 65,385 (17,809) 47,576 130,829 209,730
---------- ---------- ----------- ---------- ----------- ---------
$ 47,654 $ 89,682 $ (17,809) $ 71,873 $ 146,279 $265,806
========= ========== =========== ========== =========== ==========
</TABLE>
34
<PAGE> 49
NEWCO
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) Reflects the spin-off of HIE by Healthdyne
(2) Reflects the purchase of Healthdyne by Tokos, the resulting excess
purchase price over the estimated fair value of net tangible assets acquired in
the Merger, and the elimination of common stock and additional paid in capital
less accumulated deficit of Healthdyne. The actual purchase price will be based
upon the number of Healthdyne shares (including options to purchase shares of
Healthdyne Common Stock) outstanding on the date the Merger is consummated. It
is not expected that the actual number of Healthdyne shares (including options)
outstanding on the date of the Merger will be materially different from the
number of shares reflected as outstanding in the pro forma financial statements.
For the pro forma adjustments, the purchase price has been based upon the number
of Healthdyne shares outstanding as of December 31, 1995. The pro forma purchase
price is and the actual purchase price will be based upon the average trading
value of Tokos common stock for two trading days immediately prior to and two
trading days immediately after the announcement date of the Merger, October 3,
1995. The fair value of the net tangible assets of Healthdyne includes $9,350 of
additional accrued liabilities for estimated severance payments and other
obligations resulting from the Merger. Included in this amount is $1,350 related
to severance for approximately one hundred twenty-five Healthdyne non-executive
employees that will be involuntarily terminated as a result of the Merger,
$7,800 of payments expected as a result of the Merger under executive severance
agreements and $200 facilities costs for patient service centers specifically
identified to be closed. The employees to be terminated are primarily personnel
in sales and field administration positions located in various geographic
regions throughout the country. The employees will be notified of termination on
or shortly after consummation of the Merger. The type and amount of benefits and
a plan of termination has been established. All known issues have been resolved,
but changes (such as increases in the number of terminated executives or
employees) or new issues could increase such costs. If the ultimate amount of
costs incurred is less than the amount recorded as a liability at consummation
date the purchase price will be reduced accordingly. If the ultimate amount of
costs exceeds the amount recorded as a liability and this adjustment is
determined within one year of the consummation date, the purchase price will be
increased, thereafter, any costs exceeding the amount recorded as a liability
will be recorded as an expense in the period in which the adjustment is
determined.
An analysis of the purchase price is as follows:
<TABLE>
<S> <C>
Healthdyne shares outstanding at December 31, 1995........................ 16,596
Tokos value per share..................................................... $ 10.31
--------
Value of outstanding stock................................................ $171,105
Value of Healthdyne stock options, net of proceeds from exercise.......... 10,735
Transaction costs......................................................... 3,765
--------
Purchase price of Healthdyne.............................................. 185,605
Less -- estimated fair value of net tangible assets acquired.............. 33,222
--------
Excess purchase price..................................................... $152,383
========
</TABLE>
The fair value of the net tangible assets was determined as follows:
- Cash and short-term investments are at current net realizable values.
- Accounts receivable and payable are at book value since receivables are
expected to be recovered and payables are expected to be settled both,
within sixty days.
- Inventories, which are primarily patient supplies, are at book value
since these inventories turnover in two to three months.
- Property and equipment is at net book value since net book value
approximates fair value.
35
<PAGE> 50
NEWCO
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
- Goodwill and deferred taxes have been eliminated in accordance with
generally accepted accounting principles.
Excess purchase price has been allocated to intangibles as follows:
<TABLE>
<S> <C>
Internally developed software............................................. $ 5,000
Executive non-compete agreements.......................................... 3,000
Goodwill.................................................................. 144,383
--------
$152,383
========
</TABLE>
At the date of each balance sheet, the Company assesses the recoverability
of its goodwill, by determining whether the remaining goodwill balance is
expected to be recoverable through the undiscounted future operating cash flows
of the acquired operations. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the company's average cost of funds.
Pursuant to SAB 74, the adoption of SFAS 121 is not expected to have a
material impact on the financial position or results of operations of Newco.
(3) Reflects increased amortization of goodwill using the straight-line
method over five years. Such amortization is not deductible for income tax
purposes.
(4) Reflects amortization of intangibles relating to internally developed
software over a period of three years.
(5) Reflects amortization of intangibles relating to non-compete agreements
over the three year term of the agreements.
(6) Reflects the elimination of Healthdyne deferred income taxes. With the
Technologies Spin-off, the recoverability of this asset was not assured due to
lack of a history of taxable income from continuing operations and therefore,
the asset was fully reserved. The pro forma adjustment offsets the asset against
the reserve.
(7) Reflects the elimination of Healthdyne's historical goodwill.
(8) Reflects the retirement of Tokos' treasury stock.
(9) The Pro Forma Consolidated Condensed Financial Statements do not
include anticipated cost savings of approximately thirty million ($30,000)
expected to be realized in connection with the Merger. Reductions of patient
service center expense in overlapping geographic locations, and synergies in
staff and functional areas provide expense reduction opportunities.
(10) The Pro Forma Consolidated Condensed Statements of Earnings (Loss) do
not reflect non-recurring restructuring costs (currently estimated at $7,200)
that are expected to be incurred by the acquiring company, Tokos, as a result of
the Merger. These charges are in addition to the $9,350 of accrued liabilities
of the acquired company, Healthdyne, discussed in Note 2 above. In connection
with the realization by 1997 of annual savings of approximately thirty million
($30,000), restructuring charges (currently estimated at $7,200) are expected to
be incurred in connection with the Merger and have been recorded as a liability
and
36
<PAGE> 51
NEWCO
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
an increase in accumulated deficit in the Pro Forma Consolidated Condensed
Balance Sheet. The estimated restructuring costs consist of the following:
<TABLE>
<S> <C>
Personnel................................................................... $3,500
Facilities.................................................................. 2,200
Equipment costs............................................................. 1,000
Other merger expenses....................................................... 500
------
$7,200
======
</TABLE>
Personnel related costs reflect $633 of executive and $2,867 of
non-executive severance costs for approximately two hundred seventy-five Tokos
employees to be involuntarily terminated. Facilities costs consist of lease
termination costs and other facilities-related exit costs arising from the
closing of duplicate patient service centers and consolidation of the two
corporate headquarters. Equipment costs consist primarily of computer and
patient service equipment to be written off due to incompatibility with the
nursing station software that has been selected to be used by Newco. The reserve
for these charges will be established on consummation date in compliance with
Emerging Issues Task Force No. 94-3 and 95-3 and will be charged to operations
in the quarter the Merger is consummated.
The estimate of staff reductions totaling approximately two hundred
seventy-five non-executive Tokos employees comes from the elimination of
duplicate sales force, patient service centers and duplicate staff and
administrative support functions. The contemplated time frame for completion of
these reductions is six to twelve months from closing.
Newco will incur certain additional costs in order to effect the
consolidation of the two companies and achieve the anticipated cost savings
referred to in Note 9 and 10 above during 1996. Until the Merger is completed,
Newco will not be able to accurately estimate the amount of these additional
costs, including the costs of duplicate local, regional and corporate
activities. It is expected that these costs (which may be substantial) will be
charged to operations in future periods when incurred and have not been accrued
as restructuring costs or additional accrued liabilities resulting from the
Merger.
(11) Reflects the conversion of each outstanding share of Healthdyne Common
Stock as of December 31, 1995 into one share of Newco Common Stock. The number
of shares of Newco Common Stock to be issued at consummation of the Merger will
be based upon the actual number of shares of Healthdyne Common Stock outstanding
at that time.
The weighted average number of shares outstanding used in the computation
of pro forma net loss per share consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ------------------
<S> <C> <C>
Historical weighted average number of shares of Tokos
outstanding........................................ 17,169 17,343
Assumed issuance of Newco shares to Healthdyne
shareholders....................................... 16,597 16,597
----------------- ----------
Pro forma weighted average shares.................... 33,766 33,940
============= ==============
</TABLE>
(12) Reflects reclassifications of certain operating costs of Tokos from
cost of revenues to selling and administrative expenses to be consistent with
the presentation used by Healthdyne and adopted by Newco. Historically,
Healthdyne has classified certain operating costs that are not directly related
to patient care as "selling and administrative expenses" in the consolidated
statements of earnings. These costs include field sales, field sales management
and sales administration costs, patient service center facility and
administration costs, and insurance benefit verification. Field sales and sales
administrative costs have not been classified as
37
<PAGE> 52
NEWCO
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION -- (CONTINUED)
"cost of revenues" since these costs are related to personnel whose function is
sales and who have limited, if any, patient care responsibilities. Patient
service center facility and administrative costs have not been classified as
"costs of revenues" since both patient care, selling and administrative
functions are conducted from these centers, and an allocation of such costs
between the functions is not considered material. Insurance benefit verification
is considered a part of the credit and collection function and, therefore, these
costs are classified as "selling and administrative expenses". Amounts
reclassified for Tokos include field sales, field sales management and sales
administration costs, patient service center facility and administration costs,
insurance benefit verification costs and other management and administration
costs not associated with patient service centers, representing approximately
15.5%, 11.0%, 1.5% and 6.5%, respectively, of 1994 and 1995 revenues.
Goodwill and other intangible assets in the Tokos historical financial
statements have been reclassified to present separately the intangible assets
and amortization of such assets, in order to be consistent with the pro forma
financial statement presentation.
38
<PAGE> 53
COMPARATIVE PER SHARE DATA
The following table presents historical financial data for Tokos,
reclassified financial data for Healthdyne (adjusted to reflect the Spinoffs)
and equivalent pro forma per share data after giving effect to the Merger using
the purchase method of accounting, assuming the Merger had been effective during
all periods presented. The pro forma equivalent data are based on the pro forma
combined amounts per share. The pro forma data does not purport to be indicative
of the results of future operations or the results that would have occurred had
the Merger been consummated at the beginning of the periods presented. The
information set forth below should be read in conjunction with the financial
statements and notes thereto of Healthdyne and Tokos incorporated herein by
reference and the unaudited pro forma combined condensed financial statements
included elsewhere in this Joint Proxy Statement/Prospectus. Neither Healthdyne
nor Tokos paid any cash dividends during the periods presented.
<TABLE>
<CAPTION>
EQUIVALENT
PRO FORMA HEALTHDYNE TOKOS
COMBINED RECLASSIFIED HISTORICAL
--------- ------------- ----------
<S> <C> <C> <C>
Book value per share of common stock outstanding at September
30, 1995..................................................... $5.26 $3.04 $ 1.79
Fully diluted income (loss) per share from continuing
operations:
1994........................................................... (1.16) (.12) (.34)
1993........................................................... (1.93) (.50) (1.53)
1992........................................................... (.90) (.36) 37
Nine months ended September 30, 1995........................... (.96) .03 (.56)
Nine months ended September 30, 1994........................... (.83) (.08) (.20)
</TABLE>
COMPARATIVE MARKET DATA
Healthdyne Common Stock and Tokos Common Stock are quoted on the Nasdaq
National Market ("Nasdaq") under the symbols "HDYN" and "TKOS", respectively.
Upon consummation of the Merger, Newco Common Stock is expected to be quoted on
Nasdaq under the symbol "MATR." Newco has applied to the Nasdaq to have the
shares of Newco Common Stock to be issued in the Merger included in the Nasdaq.
The table below sets forth, for the calendar quarters indicated, the high and
low sales prices per share quoted on Nasdaq for Healthdyne Common Stock
(adjusted to reflect the Spinoffs) and Tokos Common Stock. The information with
respect to the Nasdaq quotations reflects interdealer prices, without retail
markup, markdown or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HEALTHDYNE TOKOS
COMMON STOCK* COMMON STOCK
------------------ ------------------
HIGH LOW HIGH LOW
------- ------ ------- ------
<S> <C> <C> <C> <C>
Calendar 1994:
First Quarter....................................... $ 2.481 $1.737 $ 6.250 $3.250
Second Quarter...................................... 2.127 1.560 4.500 3.250
Third Quarter....................................... 2.268 1.667 8.000 3.375
Fourth Quarter...................................... 2.517 2.127 8.000 5.125
Calendar 1995:
First Quarter....................................... 2.917 2.148 7.875 4.359
Second Quarter...................................... 4.492 2.602 7.500 5.500
Third Quarter....................................... 8.765 3.506 12.875 6.750
Fourth Quarter...................................... 9.500 7.500 11.125 8.000
Calendar 1996:
First Quarter (through February 1, 1996)............ 10.125 8.375 10.375 8.625
</TABLE>
- ---------------
* The high and low prices of Healthdyne Common Stock have been adjusted
retroactively to January 1, 1994 to reflect the spinoff of Healthdyne
Technologies in May 1995, and HIE in November 1995. The adjusted prices of the
Healthdyne Common Stock prior to November 1995 do not reflect actual trading
prices, and are based on assumptions regarding the relative market value of a
share of Healthdyne Common Stock after deduction of the relative value
attributable to the entities spun-off by Healthdyne.
39
<PAGE> 54
The last reported sale prices per share of Healthdyne Common Stock and
Tokos Common Stock on October 2, 1995, the last trading day preceding public
announcement of the Merger, were $8.327 (after adjustment to reflect the HIE
Spinoff) and $10.625, respectively. The last reported sales prices per share of
Healthdyne Common Stock and Tokos Common Stock on February 1, 1996, were $8.8750
and $8.9375, respectively.
Because the Exchange Ratio is fixed and because the market prices of
Healthdyne and Tokos Common Stock are subject to fluctuation, the relative
market value of the Newco Shares that holders of Tokos Common Stock and
Healthdyne Common Stock will receive in the Merger may increase or decrease
prior to the Merger. Stockholders are urged to obtain current market quotations
for Healthdyne Common Stock and Tokos Common Stock.
40
<PAGE> 55
THE HEALTHDYNE MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by Healthdyne to
the holders of Healthdyne Common Stock in connection with the solicitation of
proxies by the Board of Directors of Healthdyne for use at a Special Meeting of
Shareholders of Healthdyne to be held on Wednesday, March 6, 1996, at the
offices of Troutman Sanders LLP, 600 Peachtree Street, Suite 5200, Atlanta,
Georgia, at 10:00 a.m., local time, and any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus, the attached Notice of Meeting and
the accompanying form of proxy are first being mailed to shareholders of
Healthdyne on or about February 9, 1996.
MATTERS TO BE CONSIDERED AT THE HEALTHDYNE MEETING
At the Healthdyne Meeting, including any adjournment thereof, holders of
shares of Healthdyne Common Stock will consider and vote upon a proposal to
approve and adopt the Merger Agreement, a proposal to approve and adopt the
Newco Plans and to consider such other matters as properly may come before the
Healthdyne Meeting.
The Healthdyne Board of Directors has approved the Merger Agreement and the
transactions contemplated thereby. The Healthdyne Board of Directors recommends
that the holders of Healthdyne Common Stock vote FOR approval and adoption of
the Merger Agreement and FOR the approval and adoption of the Newco Plans. See
"The Merger -- Healthdyne's Reasons for the Merger," "Risk Factors" and
"Approval of Newco Plans."
It is currently expected that representatives of Healthdyne's independent
accountants for the current year will be present at the Healthdyne Meeting where
they will have the opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
RECORD DATE
The Board of Directors of Healthdyne has fixed the close of business on
January 31, 1996, as the Record Date for the determination of shareholders
entitled to notice of, and to vote at, the Healthdyne Meeting. Accordingly, only
holders of record of shares of Healthdyne Common Stock at the close of business
on the Record Date are entitled to notice of, and to vote at, the Healthdyne
Meeting. As of the Record Date, 16,666,114 shares of Healthdyne Common Stock
were outstanding and held of record by approximately 2,513 shareholders.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the Healthdyne Meeting and does not
return the signed proxy card, such shareholder's shares will not be voted. If a
shareholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of the Merger
Agreement and FOR approval of the Newco Plans. As of the date of this Joint
Proxy Statement/Prospectus, the Healthdyne Board of Directors does not know of
any other matters which are to come before the Healthdyne Meeting. If any other
matters are properly presented at the Healthdyne Meeting for consideration,
including, among other things, consideration of a motion to adjourn the
Healthdyne Meeting to another time and/or place, the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
Any proxy given may be revoked by the person giving it at any time before
it is voted. Proxies may be revoked by (i) filing with the Secretary of
Healthdyne, at or before the taking of the vote at the Healthdyne Meeting, a
written notice of revocation bearing a later date than the proxy, (ii) duly
executing a later dated proxy relating to the same shares of Healthdyne Common
Stock and delivering it to the Secretary of Healthdyne at or before the taking
of the vote at the Healthdyne Meeting or (iii) attending the Healthdyne Meeting
and voting in person (although attendance at the Healthdyne Meeting will not in
and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to
Healthdyne, Inc., 1850 Parkway Place, Marietta, Georgia 30067, Attention:
Corporate
41
<PAGE> 56
Secretary, or hand delivered to the Secretary of Healthdyne at or before the
taking of the vote at the Healthdyne Meeting.
Healthdyne will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Healthdyne in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with such solicitation.
Arrangements also will be made with custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Healthdyne will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. In addition, D.F. King & Co., Inc. ("D.F.
King") will assist in the solicitation of proxies by Healthdyne for a fee of
$7,500, plus reimbursement of reasonable out-of-pocket expenses.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH BELOW.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Healthdyne Common Stock is
necessary to constitute a quorum at the Healthdyne Meeting.
VOTE REQUIRED
Healthdyne shareholders are entitled to one vote at the Healthdyne Meeting
for each share of Healthdyne Common Stock held of record by them on the Record
Date. The affirmative vote of the holders of a majority of the outstanding
shares of Healthdyne Common Stock is required to approve and adopt the Merger
Agreement and the affirmative vote of a majority of the outstanding shares of
Healthdyne Common Stock present or represented at the Healthdyne Meeting and a
majority of the outstanding shares of Tokos Common Stock present or represented
at the Tokos Meeting is required to approve and adopt the Newco Plans.
Abstentions will be counted for purposes of establishing a quorum and will have
the same legal effect as a vote against the adoption of the proposals to be
voted upon. Shares represented by proxies that reflect abstentions or broker
"non-votes" (i.e., shares held by a broker or nominee which are represented at
the meeting, but with respect to which such broker or nominee is not empowered
to vote on a particular proposal) will be counted as shares that are present and
entitled to vote for purposes of determining a quorum and will have the effect
as a vote against the adoption of the proposals to be voted upon.
As of the Record Date, Healthdyne's directors, executive officers and
affiliates may be deemed to be beneficial owners of an aggregate of 1,922,144
shares of Healthdyne Common Stock (excluding 164,540 shares which may be
acquired by such persons upon exercise of options or other rights which are
exercisable within 60 days of the Record Date), or approximately 11.5% of the
then-outstanding shares of Healthdyne Common Stock. Healthdyne has been advised
that its directors and executive officers intend to vote in favor of the
approval and adoption of the Merger Agreement and the Newco Plans.
THE TOKOS MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by Tokos to the
holders of Tokos Common Stock in connection with the solicitation of proxies by
the Board of Directors of Tokos for use at the Special Meeting of Stockholders
of Tokos to be held on Wednesday, March 6, 1996, at Windsor/Embassy Suites
Hotel, 1325 East Dyer Road, Santa Ana, CA, at 10:00 a.m., local time, and any
adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus, the attached Notice of Meeting and
the accompanying form of proxy are first being mailed to stockholders of Tokos
on or about February 9, 1996.
42
<PAGE> 57
MATTERS TO BE CONSIDERED AT THE TOKOS MEETING
At the Tokos Meeting, including any adjournment thereof, holders of shares
of Tokos Common Stock will consider and vote upon a proposal to approve and
adopt the Merger Agreement, a proposal to approve and adopt the Newco Plans and
to consider such other matters as properly may come before the Tokos Meeting.
The Tokos Board of Directors has approved the Merger Agreement and the
transactions contemplated thereby and recommends that the holders of Tokos
Common Stock vote FOR approval and adoption of the Merger Agreement and FOR the
approval and adoption of the Newco Plans. See "The Merger -- Tokos' Reasons for
the Merger," "Risk Factors" and "Approval of Newco Plans."
It is currently expected that representatives of Tokos' independent
accountants for the current year will be present at the Tokos Meeting where they
will have the opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
RECORD DATE
The Board of Directors of Tokos has fixed the close of business on January
31, 1996, as the Record Date for the determination of stockholders entitled to
notice of, and to vote at, the Tokos Meeting. Accordingly, only holders of
record of shares of Tokos Common Stock at the close of business on the Record
Date are entitled to notice of, and to vote at, the Tokos Meeting. As of the
Record Date, 17,579,202 shares of Tokos Common Stock were outstanding and held
of record by approximately 1,321 stockholders.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not attend the Tokos Meeting and does not
return the signed proxy card, such stockholder's shares will not be voted. If a
stockholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted FOR approval of the Merger
Agreement and FOR approval of the Newco Plans. As of the date of this Joint
Proxy Statement/Prospectus, the Tokos Board of Directors does not know of any
other matters which are to come before the Tokos Meeting. If any other matters
are properly presented at the Tokos Meeting for consideration, including, among
other things, consideration of a motion to adjourn the Tokos Meeting to another
time and/or place, the persons named in the enclosed form of proxy and acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment.
Any proxy given may be revoked by the person giving it at any time before
it is voted. Proxies may be revoked by (i) filing with the Secretary of Tokos,
at or before the taking of the vote at the Tokos Meeting, a written notice of
revocation bearing a later date than the proxy, (ii) duly executing a later
dated proxy relating to the same shares of Tokos Common Stock and delivering it
to the Secretary of Tokos at or before the taking of the vote at the Tokos
Meeting or (iii) attending the Tokos meeting and voting in person (although
attendance at the Tokos Meeting will not in and of itself constitute a
revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Tokos Medical Corporation, 1821 Dyer
Road, Santa Ana, California 92705, Attention: Corporate Secretary, or hand
delivered to the Secretary of Tokos at or before the taking of the vote at the
Tokos Meeting.
Tokos will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Tokos in person or by
telephone or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with such solicitation.
Arrangements also will be made with custodians, nominees and fiduciaries for the
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Tokos will reimburse
such custodians, nominees and fiduciaries for reasonable expenses
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incurred in connection therewith. In addition, D.F. King will assist in the
solicitation of proxies by Tokos for a fee of approximately $7,500, plus
reimbursement of reasonable out-of-pocket expenses.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
THE PROCEDURE FOR THE EXCHANGE OF SHARES AFTER THE MERGER IS CONSUMMATED IS SET
FORTH BELOW.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Tokos Common Stock is
necessary to constitute a quorum at the Tokos Meeting.
VOTE REQUIRED
Tokos stockholders are entitled to one vote at the Tokos Meeting for each
share of Tokos Common Stock held of record by them on the Record Date. The
affirmative vote of the holders of a majority of the outstanding shares of Tokos
Common Stock is required to approve and adopt the Merger Agreement and the
affirmative vote of a majority of the outstanding shares of Healthdyne Common
Stock present or represented at the Healthdyne Meeting and a majority of the
outstanding shares of Tokos Common Stock present or represented at the Tokos
Meeting is required to approve and adopt the Newco Plans. Under Tokos' Bylaws
and the DGCL, shares represented by proxies that reflect abstentions or "broker
non-votes" (i.e., shares held by a broker or nominee which are represented at
the meeting, but with respect to which such broker or nominee is not empowered
to vote on a particular proposal) will be counted as shares that are present and
entitled to vote for purposes of determining the presence of a quorum and will
have the effect as a vote against the adoption of the proposals to be voted
upon.
As of the Record Date, Tokos' directors, executive officers and affiliates
may be deemed to be beneficial owners of an aggregate of 1,179,983 shares of
Tokos Common Stock (excluding 630,454 shares which may be acquired by such
persons upon exercise of options or other rights which are exercisable within 60
days of the Record Date), or approximately 6.7% of the then-outstanding shares
of Tokos Common Stock. Tokos has been advised that its directors and executive
officers intend to vote in favor of the approval and adoption of the Merger
Agreement and the Newco Plans.
THE MERGER
BACKGROUND OF THE MERGER
Tokos and Healthdyne both provide obstetrical home care products and
services from multiple locations throughout the United States. The home
healthcare industry is undergoing significant consolidation. The consolidation
process has been marked by a number of recent mergers and acquisitions by
companies in the industry and by continued acquisition of smaller regional
companies by the major companies in the industry.
Recognizing these market forces, the senior management of both Tokos and
Healthdyne have been analyzing their financial and strategic alternatives and
reviewing their options for strategic combinations of the type contemplated by
the proposed Merger. The management and Boards of Directors of each company has
concluded that the proposed Merger was the best strategic combination available
to each company and its stockholders. See "The Merger -- Tokos' Reasons for the
Merger" and "-- Healthdyne's Reasons for the Merger."
Tokos and Healthdyne began exploring the possibility of engaging in a
business combination in February of 1994 when Parker H. Petit, Chairman and
Chief Executive Officer of Healthdyne, met with Robert F. Byrnes, Chairman and
Chief Executive Officer of Tokos, to discuss such a possibility. At that time,
due to pricing pressures and consolidation taking place in the home infusion
therapy industry, Healthdyne also was exploring the possibility of a sale of its
68% owned home infusion subsidiary, Home Nutritional Services, Inc., which was
sold to W.R. Grace & Co. for approximately $61 million in cash in April 1994. In
February Healthdyne engaged the investment banking firm of Colman Furlong & Co.
("Colman Furlong") to represent
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it in negotiating a possible transaction with Tokos and Robertson Stephens was
engaged to provide advice to Tokos regarding a possible transaction with
Healthdyne, which engagement was formalized on May 2, 1994. On February 11,
1994, Mr. Petit, Donald R. Millard, Vice President -- Finance of Healthdyne, and
J. Brent Burkey, Senior Vice President and General Counsel of Healthdyne, with
Joseph F. Furlong, III of Colman Furlong participating by telephone, met in
Dallas, Texas with Mr. Byrnes, Jeffrey Larkin, then Senior Vice President and
General Counsel of Tokos, Nicholas A. Mione, Vice President -- Finance of Tokos,
and E. David Hetz of Robertson Stephens to further explore the possibility of
Healthdyne and Tokos engaging in a business combination. At that meeting,
Healthdyne and Tokos each executed a confidentiality agreement in favor of the
other. On February 18, 1994, Mr. Larkin, on behalf of the Tokos Board of
Directors, notified Mr. Petit that Tokos was not interested in pursuing further
discussions. On March 16, 1994, Mr. Petit wrote a letter to the directors of
Tokos proposing, subject to due diligence and the negotiation of a definitive
agreement, that Healthdyne would acquire Tokos for consideration consisting of
cash and stock having a nominal value of approximately $5.85 per Tokos share. On
March 18, 1994, Tokos rejected the offer and stated that Tokos had no interest
in continuing discussions. On March 31, 1994, Healthdyne proposed offering
either all cash or all stock for Tokos. On April 4, 1994, Tokos rejected such
proposal. During May and June 1994, executives and investment bankers from
Healthdyne and Tokos met several times to discuss the structure for a possible
business combination. On June 16, 1994, Tokos notified Healthdyne that the Tokos
Board of Directors had decided Tokos was not interested in pursuing further a
proposed business combination with Healthdyne, and discussions between the
companies ceased.
From June 1994 until June 1995, representatives of Healthdyne and Tokos had
no meaningful discussions concerning a potential business acquisition. On May
22, 1995, Healthdyne distributed the stock of its 81% subsidiary, Healthdyne
Technologies, to its shareholders as a tax-free dividend, and commenced work on
the proposed taxable distribution of the stock of its wholly-owned subsidiary
HIE to its shareholders. Following these transactions, Healthdyne's sole
remaining business is the business of Healthdyne Maternity Management. On June
5, 1995, as suggested by Mr. Byrnes, Messrs. Petit and Byrnes met in Dallas,
Texas and decided to resume discussions regarding a possible business
combination. On June 8, 1995, Mr. Byrnes reported to the Tokos Board of
Directors on these initial discussions. On June 30, 1995, Healthdyne and Tokos
jointly engaged Nightingale & Associates, Inc. ("Nightingale") to study and
advise both companies concerning management structure and transition issues
related to a business combination. On July 10, 1995, the Healthdyne Board of
Directors discussed the status of discussions with Tokos and authorized
continued negotiations toward a business combination. Healthdyne and Tokos and
their respective representatives and legal and financial advisors then began due
diligence investigations as negotiations of the terms of a proposed business
combination continued. On July 11, 1995, the executive officers and investment
bankers for Healthdyne and Tokos met with representatives of Nightingale to
exchange information concerning their respective businesses and a possible
business combination. On July 21, 1995, Nightingale provided to Healthdyne and
Tokos a preliminary draft of its report concerning the proposed business
combination and certain management and transition issues. On July 26, 1995, the
Tokos Board of Directors discussed the status of the discussions with Healthdyne
and authorized management to continue to explore a possible transaction with
Healthdyne. On August 10, 1995, the Healthdyne Board of Directors met to receive
reports on the due diligence investigations from management and its legal and
financial advisors and also to consider the Nightingale report. On August 15,
1995, Messrs. Petit and Byrnes met to discuss the proposed business combination
and the exchange ratios for the transaction. On August 31, 1995, a preliminary
draft of the Merger Agreement was circulated to Tokos, Healthdyne and their
respective legal and financial advisors. On August 28, 1995, Healthdyne engaged
Needham to furnish financial advisory and investment banking services with
respect to the proposed transaction with Tokos. On September 5, 1995,
negotiations between Healthdyne and Tokos reached an impasse, primarily over
issues of corporate governance and transition matters. On September 14, 1995,
Messrs. Byrnes and Petit met with Carl E. Sanders, a director of Healthdyne, and
David L. Goldsmith, a director of Tokos, and agreed on a framework to resolve
these issues. Thereafter, continuing through the evening of October 2, 1995,
revised drafts of the proposed Merger Agreement and related documents were
circulated and the parties and their representatives negotiated the terms
thereof.
Tokos' Board of Directors held a special meeting on October 1, 1995 and
October 2, 1995 and Healthdyne's Board of Directors held a special meeting on
October 2, 1995 to consider the provisions of the
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proposed Merger Agreement, including the proposed Exchange Ratio, and the
transactions contemplated thereby. At such meetings, members of each company's
senior management, together with its legal and financial advisors, reviewed with
their respective company's Board of Directors, among other things, the
background of the Merger, each company's alternatives, the strategic rationale
for and potential risks and benefits of the Merger, a summary of due diligence
findings, financial and valuation analyses of the transaction and the terms of
the Merger Agreement. In addition, Robertson Stephens rendered its opinion to
Tokos' Board of Directors that, based upon and subject to the various
considerations set forth in the opinion, as of such date, the proposed Tokos
Exchange Ratio was fair to the stockholders of Tokos, from a financial point of
view. Needham rendered its opinion to Healthdyne's Board of Directors that, as
of such date, the Healthdyne Exchange Ratio was fair to the holders of
Healthdyne Common Stock from a financial point of view. After extensive
consideration, the companies' Boards of Directors approved the Merger Agreement
and the transactions contemplated thereby. The Merger Agreement was executed by
Healthdyne and Tokos on the evening of October 2, 1995, and a public
announcement of the signing was made on October 3, 1995 prior to the opening of
the financial markets. On October 3, 1995, Newco was incorporated under the DGCL
and, following its organization, signed the Merger Agreement.
Determination of Exchange Ratio. The Exchange Ratio was determined by the
representatives of Tokos and Healthdyne through arms-length negotiations that
included discussions regarding, among other things, governance, board
composition, board membership, and other terms of the Merger. Representatives of
both companies considered the business, operations and management of both
companies to be substantially comparable, and agreed to value each company on a
comparable basis. The representatives of both companies utilized, as an initial
point of discussion, a valuation methodology based on contribution of revenues,
adjusted to reflect the relative net cash contributions of each company and the
business prospects of additional lines of business that had yet to generate
significant revenues to date. The representatives of both companies recognized
that other financial operating parameters failed to provide a meaningful basis
for determining relative valuations because both companies had failed to
generate positive operating income from continuing operations on a recent
historical basis.
On August 15, 1995, both parties met to discuss the proposed business
combination and the Exchange Ratio for the transaction. Using the methodology
mentioned above, both parties discussed ownership interests in the combined
company of between 51% to 57%, and 43% to 49% for Tokos and Healthdyne
stockholders, respectively. After further negotiations between the parties over
the course of the next one and a half months, the final Exchange Ratio (1 for 1)
was agreed upon, resulting in Tokos and Healthdyne stockholders having, at the
time, an expected 53% and 47% ownership interest the combined company,
respectively.
HEALTHDYNE'S REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION
The Healthdyne Board of Directors believes that the Merger will further its
strategic objective of achieving efficiencies and economic bargaining power with
managed care institutions and other third-party payors. Specifically,
Healthdyne's Board of Directors believes that, to effectively compete among
healthcare service providers, Healthdyne must broaden the scope of services
provided, improve its cost structure and expand its resources, so that
Healthdyne can enhance its ability to contract with and provide services to
large managed care organizations. The Board of Directors of Healthdyne further
believes that the Merger is fair to and in the best interest of Healthdyne and
its shareholders and that the terms of the Merger Agreement are fair to
Healthdyne and its shareholders. Accordingly, and for the reasons discussed
below, the Healthdyne Board of Directors has unanimously approved the Merger
Agreement and the Merger and the transactions contemplated thereby. In approving
the Merger Agreement and the transactions contemplated thereby, and in
recommending that Healthdyne's shareholders approve and adopt the same,
Healthdyne's Board of Directors consulted with Healthdyne management, as well as
its financial and legal advisors, and considered a number of factors, including,
but not limited to, the following:
1. The outlook for changes in reimbursement levels in the healthcare
industry. The Healthdyne Board of Directors believed that the prospect of
continuing pressure to reduce reimbursement rates for the services provided
by Healthdyne, as a result of changes in the business and regulatory
environment of
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the healthcare industry, made it imperative that Healthdyne reduce its
operating costs (see number 2, below) in order to achieve and maintain an
acceptable level of profitability.
2. The opportunities for operating efficiencies that should result
from the Merger. The Healthdyne Board concluded that the Merger could allow
as much as $30 million in annual savings in the operating costs of the
combined entity. The Board also recognized that the cost savings from
operating synergies initially will be offset to a large extent by the costs
(estimated at approximately $20.32 million) associated with the Merger,
including the amounts to be paid to certain individuals as a result of the
termination of their employment following the Merger. See Pro Forma
Consolidated Condensed Financial Information, "Risk
Factors -- Uncertainties Associated with Integration of Businesses" and
"The Merger -- Interest of Certain Persons in the Merger."
3. The complementary geographic locations of Healthdyne and Tokos
facilities throughout the United States. The Healthdyne Board believed that
the respective locations of Healthdyne and Tokos would not only enhance the
combined entity's ability to market its services and to serve its
customers, but also would permit the combined entity to achieve significant
cost savings.
4. The enhanced position of Newco after the Merger to deal with
uncertainties which may confront the industry due to healthcare reform. The
Healthdyne Board concluded that Healthcare needed greater size in order to
effectively compete and that the Merger would enable Healthdyne to attain
such size more rapidly than by remaining independent. Newco's pro forma
revenue is more than twice the amount of Healthdyne's revenue.
5. The market capitalization of Newco, which will be considerably
larger than Healthdyne's current market capitalization, and the possibility
of improved access to the capital markets. The Healthdyne Board of
Directors believed that Newco's market capitalization would be more than
twice as large as Healthdyne's and that the larger market capitalization
would make Newco Common Stock a more attractive financing vehicle.
6. The historical, current and projected financial condition and
results of operations of Healthdyne and Tokos before and after giving
effect to the Merger. The Healthdyne Board concluded that Healthdyne's
balance sheet combined with the operating efficiencies expected from the
Merger (see number 2, above) would cause Newco after the Merger to be
stronger than either Healthdyne or Tokos before the Merger. For example, on
a pro forma basis effective September 30, 1995, Newco would be
substantially larger than Healthdyne in the following balance sheet
categories:
<TABLE>
<CAPTION>
NEWCO HEALTHDYNE
-------- ----------
<S> <C> <C>
Total Assets................................................... $265,806 $ 71,873
Stockholders' Equity........................................... $209,730 $ 47,576
</TABLE>
See Pro Forma Consolidated Condensed Financial Information.
7. The management and operational strengths of Healthdyne and Tokos.
The Healthdyne Board of Directors believed that Healthdyne's strong
operational and financial management team would complement the strong
marketing and strategic skills of Tokos' management.
8. The Healthdyne Exchange Ratio after giving effect to the Tokos
Exchange Ratio and recent trading prices of Healthdyne Common Stock and
Tokos Common Stock. The Exchange Ratio represented a premium to the trading
price of Healthdyne's Common Stock adjusted to give effect to the
anticipated effect of the HIE Spinoff.
9. The improved liquidity that possibly would be provided to
Healthdyne's shareholders. Although collectively creating value for
Healthdyne's shareholders, the Technologies and HIE Spinoffs reduced
Healthdyne's market capitalization, and the Healthdyne Board believed its
shareholders would have greater liquidity as a result of the Merger, which
would more than double the number of the outstanding shares and would
increase the market value as a result of combining the two companies.
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10. The financial presentation and the opinion of Needham that the
Healthdyne Exchange Ratio is fair to the Healthdyne shareholders from a
financial point of view. The Healthdyne Board of Directors considered the
various financial, comparative, pro forma and contribution analyses of
Healthdyne and Tokos included in Needham's presentation and felt that such
analyses, taken as a whole, supported a conclusion that the Exchange Ratio
was fair, from a financial point of view, to the Healthdyne shareholders.
See "-- Opinion of Healthdyne's Financial Advisor." Although the Healthdyne
Board of Directors did not specifically adopt the opinion, it relied upon
the opinion, and the presentation of Needham was a key factor in the
Healthdyne Board's decision to recommend approval of the Merger.
11. The terms and conditions to the Merger Agreement and the fact that
the Merger will be a tax free reorganization for federal income tax
purposes. The Healthdyne Board of Directors concluded that the nature of
the closing conditions and termination provisions of the Merger Agreement
provided Healthdyne with reasonable assurance that the Merger, once
announced, would ultimately be consummated. Moreover, the consequences of
the "no shop" and "break-up" fee provisions to Tokos offered Healthdyne
assurance that Tokos was sufficiently committed to consummating the Merger.
In addition, the Healthdyne Board of Directors believed that structuring
the Merger to permit Healthdyne shareholders to exchange Healthdyne shares
for Newco shares on a tax-free basis was a clear benefit to the
shareholders of Healthdyne.
Due to the wide variety of factors considered in connection with the
evaluation of the Merger, the Healthdyne Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. The
affirmative vote of the holders of a majority of the outstanding shares of
Healthdyne Common Stock is required to approve and adopt the Merger Agreement
and the affirmative vote of a majority of the outstanding shares of Healthdyne
Common Stock present or represented at the Healthdyne Meeting and a majority of
the outstanding shares of Tokos Common Stock present or represented at the Tokos
Meeting is required to approve and adopt the Newco Plans. The approval of at
least a majority of unaffiliated security holders is not required to approve and
adopt the Merger Agreement or the Newco Plans.
THE BOARD OF DIRECTORS OF HEALTHDYNE HAS UNANIMOUSLY VOTED IN FAVOR OF THE
MERGER AND UNANIMOUSLY RECOMMENDS THAT HEALTHDYNE SHAREHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. HEALTHDYNE'S SHAREHOLDERS ARE
URGED TO CAREFULLY REVIEW THE FACTORS DISCUSSED IN "RISK FACTORS" IN CONNECTION
WITH EVALUATING AND VOTING ON THE MERGER AGREEMENT.
OPINION OF HEALTHDYNE'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated August 28, 1995, Healthdyne retained
Needham to furnish financial advisory and investment banking services with
respect to the proposed transaction with Tokos. In connection with this
engagement, Healthdyne requested Needham to render an opinion as to whether or
not the Healthdyne Exchange Ratio is fair to the shareholders of Healthdyne from
a financial point of view. Needham was not requested to, and did not, make any
recommendation to the Healthdyne Board of Directors as to utilizing a specific
exchange ratio. The Healthdyne Exchange Ratio was determined through
negotiations between Healthdyne management and Tokos management.
At a meeting of the Board of Directors of Healthdyne on October 2, 1995,
Needham delivered its written opinion that, as of such date and based upon
matters described therein, the Healthdyne Exchange Ratio is fair to the
shareholders of Healthdyne from a financial point of view. NEEDHAM'S OPINION IS
DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AGREEMENT AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF HEALTHDYNE AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE HEALTHDYNE MEETING.
Needham is not expressing any opinion as to what the value of Newco Common
Stock will be when issued to the shareholders of Healthdyne pursuant to the
Merger or the price at which Newco Common Stock will trade subsequent to the
Merger. The full text of the written opinion of Needham dated October 2, 1995,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken by
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Needham, is attached as Appendix B, and the summary of the Needham opinion set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the Needham opinion. HEALTHDYNE SHAREHOLDERS ARE URGED TO READ THE
NEEDHAM OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE
PROCEDURES FOLLOWED, THE FACTORS CONSIDERED AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things: (i) reviewed the
Merger Agreement; (ii) reviewed certain other documents related to the Merger,
(iii) reviewed certain publicly available information concerning Healthdyne and
Tokos and certain other relevant financial and operating data of Healthdyne and
Tokos made available from the internal records of Healthdyne and Tokos; (iv)
visited Healthdyne's and Tokos' facilities and held discussions with members of
senior management of Healthdyne and Tokos concerning their current and future
business prospects; (v) reviewed certain financial forecasts and projections
prepared by Healthdyne's and Tokos' respective managements; (vi) reviewed the
historical stock prices and trading volume of the Healthdyne Common Stock and
Tokos Common Stock; (vii) reviewed the financial terms of certain other business
combinations that Needham deemed generally relevant; and (viii) performed and/or
considered such other studies, analyses, inquiries and investigations as Needham
deemed appropriate. Needham assumed and relied upon, without independent
verification, the accuracy and completeness of the information it reviewed for
purposes of its opinion. With respect to Healthdyne's and Tokos' financial
forecasts provided to Needham by their respective managements, Needham assumed
that such forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of such managements, at the time of
preparation, of the future operating and financial performance of Healthdyne and
Tokos. Management's forecasts for Healthdyne assumed revenue growth and
operating margin improvements, in part as a result of improved nursing
productivity in the field and reduced overhead expenses, which either were
generally consistent with recent quarterly historical trends or anticipated
following the Technologies Spin-off and HIE Spin-off. Management's forecasts for
Tokos showed an improvement from recent quarterly trends attributable to assumed
operating margin improvements as a result of the ongoing and previously
announced field expense reduction programs and increased revenues over prior
periods in large part as a result of the planned introduction in 1996 of fetal
fibronectin and the implementation of certain of its strategic alternatives with
third party payors. Needham did not make or obtain any independent evaluation,
appraisal or physical inspection of the assets or liabilities of Healthdyne or
Tokos. Needham's opinion states that it is necessarily based on economic,
monetary and market conditions existing as of the date of such opinion.
Based on this information, Needham performed a variety of financial
analyses of the Merger and the Healthdyne Exchange Ratio. The following
paragraphs summarize the significant quantitative and qualitative analyses
performed by Needham in arriving at its opinion presented to the Healthdyne
Board of Directors.
Pro Forma Merger Analysis. Needham analyzed certain pro forma financial
effects resulting from the Merger. In conducting this analysis, Needham relied
upon certain assumptions described above and financial projections provided by
the respective managements of Healthdyne and Tokos. Needham analyzed the pro
forma financial effect of combining Healthdyne and Tokos and the potential
synergies the respective managements believe are achievable upon completion of
the Merger. The purpose of this analysis is to compare the projected earnings
per share that Healthdyne shareholders are expected to achieve on a stand alone
basis to the projected earnings per share that Healthdyne shareholders are
expected to achieve in Newco. Such analysis indicated that, among other things,
excluding the potential benefit of Newco's accumulated net operating loss carry
forwards and other tax credits, earnings per share for 1996 could be increased
between 117% and 345%. These amounts are based upon analyses prepared by
Healthdyne's and Tokos' managements that the Merger could result in cost of
revenue and selling, general and administrative and other expense savings from,
among other things, reductions of branch expense in overlapping geographic
locations and synergies in staff and functional areas. The actual operating
results or financial position of Newco for 1996 may vary materially from those
projected depending upon, among other things, the timing and magnitude of the
actual savings and synergies realized. The results of the pro forma combination
analysis are not necessarily indicative of future operating results or financial
positions.
Stock Trading History. Needham examined the history of trading prices and
volumes for Healthdyne Common Stock and Tokos Common Stock, both separately and
in relation to each other for the period
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January 1, 1995 to September 27, 1995. Analysis of Healthdyne's Common Stock
trading history revealed that it traded in a range of $2.84 to $10.00 with an
average stock price of $4.85 during this period. The prices analyzed by Needham
represented the price of Healthdyne Common Stock as adjusted for the
Technologies Spinoff that occurred on May 22, 1995, but not adjusted for the HIE
Spinoff that occurred on November 6, 1995. Tokos' Common Stock traded in a range
of $4.75 to $12.00 with an average stock price of $7.18 during this period.
Needham noted that both the Healthdyne Common Stock and the Tokos Common Stock
were relatively liquid with comparable average daily trading volumes of 139,855
and 160,976 shares, respectively. Needham further noted that the historical
exchange ratio implied by comparing the historical trading prices of Healthdyne
Common Stock, as adjusted for the HIE Spinoff, with the historical trading
prices of Tokos Common Stock consistently fell below the Healthdyne Exchange
Ratio.
Relative Contribution Analysis. Needham reviewed and analyzed the relative
contribution to Newco's revenues and earnings before interest, taxes,
depreciation and amortization ("EBITDA") by Healthdyne and Tokos over various
recent historical periods as well as for projected 1995 and 1996. Needham also
reviewed and analyzed the relative contribution to Newco's net cash, working
capital and shareholders' equity by Healthdyne and Tokos as of June 30, 1995.
Based on this analysis, Healthdyne contributes 43.8% and 41.4% to Newco's pro
forma projected 1995 revenues and EBITDA, respectively. Similarly, Healthdyne
contributes 92.2%, 35.8% and 59.6% to Newco's net cash, working capital, and
shareholders' equity, respectively, as of June 30, 1995. Based on the number of
shares of common stock of Healthdyne and Tokos outstanding October 2, 1995,
Healthdyne shareholders will own approximately 47% of Newco on a fully diluted
basis after the Merger. Needham noted that, based upon the foregoing,
Healthdyne's shareholders' ownership of Newco was greater than Healthdyne's
projected contributions to pro forma projected 1995 revenues and EBITDA of Newco
and to working capital of Newco, but less than Healthdyne's projected
contributions to net cash and shareholders' equity of Newco.
Comparable Company Analysis. Needham compared selected historical and
projected operating and stock market data and operating and financial ratios for
Healthdyne to the corresponding data and ratios of certain other publicly traded
home healthcare services companies which it deemed generally comparable to
Healthdyne. Such data and ratios included total market capitalization to
historical and projected revenue, price per share to historical and projected
earnings per share and market value to historical book value.
Companies deemed to be generally comparable to Healthdyne included American
HomePatient, Inc., Apria Healthcare Group, Inc., Coram Healthcare Corporation,
Pediatric Services of America, Inc., Quantum Health Resources, Inc., Rotech
Medical Corporation and Tokos. For these companies the multiples of stock price
to projected 1996 revenues ranged from 0.6 to 2.1 with a mean of 1.3 and a
median of 1.3, compared to a multiple of projected 1996 revenues for Healthdyne
of 1.6; the multiple for Tokos was 2.1. For these companies, the multiples of
market value to historical book value ranged from 0.6 to 6.2 with a mean of 2.9
and a median of 3.0, compared to a multiple of historical book value of
Healthdyne of 2.9; the multiple for Tokos was 6.2. Needham noted that the
multiples for Healthdyne and Tokos exceeded (or, in the case of Healthdyne's
multiple of historical book value, equaled) the mean multiples for the
comparable companies. Needham also noted that this analysis was not inconsistent
with Needham's conclusion as to the fairness, from a financial point of view, of
the Healthdyne Exchange Ratio.
Comparable Transaction Analysis. Needham also analyzed publicly available
financial information for thirty-six selected mergers and acquisitions of
companies in the home healthcare services industry. In examining these
transactions, Needham analyzed certain income statement and balance sheet
parameters of the acquired companies relative to the enterprise value of these
companies. Multiples analyzed included enterprise value to historical revenue,
enterprise value to historical earnings before interest and taxes, enterprise
value to historical EBITDA, enterprise value to historical net income, and
market value to historical book value. In certain cases, complete financial data
was not publicly available for these transactions and only partial information
was used in such instances.
Proposed or completed home healthcare services deals analyzed by Needham
included: Lincare Holdings, Inc./Coram Healthcare Corp.; Abbey Healthcare Group,
Inc./Homedco Group, Inc.; HomeCall, Inc./Mid Atlantic Medical Service; Home
Nutritional Services, Inc./W.R. Grace & Co.; Total Pharmaceuti-
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cal Care, Inc./Abbey Healthcare Group, Inc.; American Home Therapies,
Inc./Medisys, Inc.; Medical Innovations, Inc./Ballard Medical Products; Critical
Care America, Inc./Medical Care International, Inc.; Preferred Homecare of
America, Inc./Home Intensive Care, Inc.; Occupational Urgent Care/HealthCare
Compare Corp.; and Care Plus, Inc./New England Critical Care, Inc. For these
transactions the multiples of last twelve months' revenues ranged from 0.7 to
10.0 with a mean of 2.9 and a median of 2.0, compared to Healthdyne's multiple
of enterprise value to last twelve months' revenues of 2.5, based upon the
September 27, 1995 Tokos closing price of $11.50 per share. The multiples of
market value to be received in the Merger to historical book value ranged from
0.9 to 9.4 with a mean of 3.7 and a median of 3.1, compared to Healthdyne's
multiple of historical book value of 4.3. Needham noted that the multiples
derived from the Healthdyne Exchange Ratio are within the ranges of multiples
derived from the comparable transactions.
No company or transaction used in any comparable analysis as a comparison
is identical in the case of Healthdyne. Accordingly, these analyses are not
mathematical; rather they involve complex considerations and judgments
concerning differences in the financial and operating characteristics of the
comparable companies and other factors that could affect the public trading and
acquisition values of the comparable companies and transactions to which they
are being compared, including, among other things, taking into consideration the
size, financial condition and healthcare services market segment of the
companies reviewed as well as the nature of the transactions reviewed.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of such analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of either Healthdyne or Tokos. These assumptions
included assumptions that the economic, monetary and market conditions existing
as of the date of Needham's opinion will be applicable throughout the periods
analyzed, and that Healthdyne's and Tokos' financial forecasts provided by their
respective managements were reasonably prepared on bases reflecting the best
currently available estimates and judgments of such managements at the time of
preparation of the future operating and financial performance of Healthdyne and
Tokos. Any estimates contained in these analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable as set forth therein. Additionally,
analyses relating to the values of business or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Pursuant to its engagement letter, Needham has been paid a fee of $125,000
for delivery of its opinion to the Healthdyne Board of Directors. None of
Needham's fee is contingent upon the consummation of the Merger. Healthdyne has
also agreed to reimburse Needham for its reasonable out-of-pocket expenses and
to indemnify it against certain liabilities relating to or arising out of
services performed by Needham as financial advisor to Healthdyne.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services Needham is frequently engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. During the first nine months of 1995, based upon
information published by AutEx, Needham was not a significant market maker for
Healthdyne Common Stock or Tokos Common Stock. However, in the normal course of
its business, Needham may actively trade the equity securities of Healthdyne or
Tokos for its own account or for the account of its customers and, therefore,
may, from time to time have a long or short position in, and buy or sell,
Healthdyne or Tokos securities, which positions, on occasion, may be material in
size relative to the volume of trading activity. Needham was retained by the
Healthdyne Board of Directors to act as Healthdyne's financial advisor in
connection with the Merger based on Needham's experience as a financial advisor
in mergers and acquisitions as well as Needham's familiarity with the home
healthcare services industry. In addition, Needham has in the past provided
Healthdyne with certain financial advisory and investment banking services
unrelated to the Merger, including financial advisory services in connection
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with the HIE Spinoff, for which services Needham has received compensation.
Healthdyne did not consider or interview any other financial advisor candidates.
TOKOS' REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION
The Tokos Board of Directors believes that the Merger will further Tokos'
strategic objectives of being a leading provider of both specialized obstetrical
and gynecological monitoring and assessment services as well as specialized
maternal/newborn managed care services in the United States, enhancing its
competitive position among healthcare companies servicing the managed care
industry, and improving profitability. The Board of Directors of Tokos further
believes that the Merger is fair to and in the best interest of Tokos and its
stockholders and that the terms of the Merger Agreement are fair to Tokos and
its stockholders. Accordingly, the Tokos Board of Directors has approved the
Merger Agreement and the Merger and the transactions contemplated thereby.
TOKOS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TOKOS STOCKHOLDERS VOTE IN
FAVOR OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT AND THE MERGER AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
At meetings held on October 1 and 2, 1995, the Board of Directors of Tokos,
with the assistance of Robertson Stephens and Tokos' outside legal and other
advisors considered the terms and structure of the Merger, and reviewed the
legal, financial and other ramifications thereof.
In reaching its decision to enter into and to recommend the adoption of the
Merger Agreement and the Merger, the Board of Directors of Tokos considered a
number of factors, including, without limitation, the following:
1. The ability of the combined entity to realize cost savings from
operating synergies. The Board was of the view that, with both competition
increasing and pricing pressures becoming more acute, the most effective
way to achieve profitability and more favorable operating margins is
through reduction of operating expenses. Based upon the expected
consolidation of regional centers and corporate offices, and the expected
realization of savings in cost of services, sales, management and
administrative expenses, the Board determined that Newco is more likely to
achieve more favorable operating margins than Tokos could on a stand-alone
basis. The Tokos Board concluded that the Merger could allow as much as $30
million in annual savings in the operating costs of the combined entity.
The Board also recognized that the initial cost savings from operating
synergies will be partially offset by the costs associated with the
negotiation and consummation of the Merger, as well as the amounts to be
paid to certain individuals in connection with the Merger or upon the
subsequent termination of their employment. See "Risk
Factors -- Uncertainties Associated with Integration of Businesses" and
"The Merger -- Interests of Certain Persons in the Merger."
2. The historical and current business condition of both Tokos and
Healthdyne, and the current economic and market conditions in the home
healthcare industry, including competitive pricing and governmental
regulation pressures that are driving a trend toward consolidation of home
healthcare companies. Due to these pressures arising from market
conditions, the Board was of the view that it may become more difficult for
smaller, independent "niche" companies, such as Tokos, to effectively
compete and realize profitable margins. The Board believed that the Merger
may be the most effective strategy to address these market pressures. The
Board in particular noted the steady decline in the revenue of Tokos and
the lack of growth in the revenues of Healthdyne as further underscoring
the need to create critical mass and realize cost savings through
consolidation.
3. The potential to maximize the value and success of the Fetal
Fibronectin marketing launch and related sales strategies. The Board
concluded that the larger sales force of Newco, all of whom have extensive
experience calling on obstetricians and perinatalogists, would be in a
better position to execute the strategic marketing efforts designed by
Tokos, including the Fetal Fibronectin marketing launch.
4. Consideration to be received by the Tokos stockholders as an equity
interest in a larger and more diversified company that is expected to
benefit strategically, competitively and operationally from the Merger,
which may allow the stockholders to realize growth in their investment and
possibly a greater
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long-term return than they would otherwise realize if Tokos remained
independent or was sold in a cash transaction.
5. The benefits to be derived by the combined entity in negotiating
contracts with third party payors and subcontracts for obstetrical services
with larger home care providers. The Board of Directors considered the
trend in the industry of third party payors consolidating their contracts
with national companies and companies that can provide a full spectrum of
home care services. The Board concluded that Tokos, as an independent
company, may experience increasing difficulties in securing contracts with
large third party payors and subcontracts for obstetrical services with
home care companies that have contracted with third party payors for all of
their home care services. The Board also concluded that Newco as a larger
company would be more likely than Tokos, on a stand alone basis, to be able
to effectively compete for both third party payor contracts and
subcontracts for obstetrical services with larger home care companies,
which may result in access to a larger patient population.
6. The ability of Newco to enhance its presence in certain
geographical markets and to enter additional markets. The Board considered
that the larger presence in common markets may provide a broader base of
referrals and bring greater resources to existing markets, allowing Newco
to enhance operating margins through increased volume and reduced expenses
as a percentage of revenue. In addition, the Board determined that Newco's
financial resources, ability to obtain financing and possibly greater
national name recognition is expected to permit Newco to enter new markets
on a more cost-effective basis than Tokos could on its own. These factors
led the Board to the conclusion that Newco would be in a better position
than Tokos, on a stand alone basis, to realize the growth and critical mass
that is necessary to compete effectively and profitably in the current
climate of the industry.
7. The historical and current financial condition, results of
operations, prospects and business of Tokos and Healthdyne. Specifically,
the Board concluded that the business and operations of Tokos and
Healthdyne were complementary and compatible, and that Healthdyne brought
to the combined enterprise a significant base of revenues, a history of
minimal loses or slight profitability and net cash of approximately
$30,000,000 as of September 30, 1995 (without giving effect to costs of the
Merger -- See "Pro Forma Consolidated Condensed Financial Information").
The Board believed that given Healthdyne's stronger balance sheet Newco
would be more financially sound than Tokos on a stand alone basis. The
Board noted the management and operational strengths of Tokos and
Healthdyne and their respective knowledge of the obstetrical home
healthcare industry.
8. The presentation with respect to the Merger and the written opinion
of Robertson Stephens dated October 2, 1995, to the effect that, as of such
date and based upon and subject to certain matters as stated in its written
opinion, the consideration to be received by the stockholders of Tokos
pursuant to the Merger Agreement is fair, from a financial point of view,
to the stockholders of Tokos. Although the Tokos Board of Directors did not
specifically adopt the opinion, it relied upon that opinion and the
presentation and fairness opinion of Robertson Stephens was of primary
importance to the Board of Directors in reaching its conclusion to approve
the Merger Agreement and the transactions contemplated thereby.
9. The terms of the Merger Agreement and the Merger generally,
including the conditions to closing, the structure of the Board of
Directors, consisting of four outside directors from each of Tokos and
Healthdyne and Mr. Petit and Mr. Byrnes, the strength of the proposed
management of Newco, the provisions relating to the ability of Tokos to
participate in negotiations or discussions with respect to other proposals
to acquire Tokos to the extent necessary to fulfill the fiduciary duties of
the Board of Directors to the stockholders of Tokos, and the nature and
amount of the termination fees that may be payable under certain
circumstances. The Board believed that the termination fees payable by
Healthdyne under certain circumstances provided an adequate level of
assurance that Healthdyne was sufficiently committed to the consummation of
the Merger.
10. The relative trading prices of Tokos Common Stock and Healthdyne
Common Stock. The Tokos Board placed particular emphasis on the substantial
ownership (approximately 53%) of Newco that Tokos' stockholders would have
as a result of the Exchange Ratio.
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11. The fact that the Merger should permit the holders of Tokos Common
Stock to exchange their shares for Newco Common Stock on a tax-free basis.
See "Merger -- Terms of the Merger Agreement" and "-- Federal Income Tax
Consequences." Business combination transactions in which there is a
material cash component as part of the consideration to be received by
stockholders, as opposed to an exchange of shares as in the Merger
transaction, may result in a taxable event to such stockholders upon
consummation of such transaction.
The Tokos Board of Directors considered the financial, comparative, pro
forma and contribution analyses of Tokos and Healthdyne, included in Robertson
Stephens' presentation and believed that such analyses, taken as such supported
a conclusion that the Tokos Exchange Ratio was fair, from a financial point of
view, to the Tokos stockholders. See "-- Opinion of Tokos' Financial Advisor."
Although the Tokos Board of Directors did not specifically adopt the opinion,
such conclusion was a key factor in the Tokos Board's decision to recommend
approval of the Merger.
In light of the variety of factors considered by Tokos' Board of Directors,
the Board did not find it practical to and did not assign any particular weight
to any of the foregoing factors, but considered all of these factors as a whole
in reaching its determination. However, in reaching its decision to approve the
Merger, the Board was most strongly influenced by the items noted in paragraphs
1, 2, 4, 6, 7, 8, 9 and 10.
The Tokos Board concluded, in light of all of the foregoing factors, that
the Merger is in the best interest of Tokos and its stockholders and is fair to
its stockholders.
The affirmative vote of the holders of a majority of the outstanding shares
of Tokos Common Stock is required to approve and adopt the Merger Agreement and
the affirmative vote of a majority of the outstanding shares of Healthdyne
Common Stock present or represented at the Healthdyne Meeting and a majority of
the outstanding shares of Tokos Common Stock present or represented at the Tokos
Meeting is required to approve and adopt the Newco Plans. The approval of at
least a majority of unaffiliated security holders is not required to approve and
adopt the Merger Agreement or the Newco Plans.
All of the members of the Board of Directors of Tokos except Mr. Goldsmith
voted to approve the Merger. Mr. Goldsmith, who is a Managing Director of
Robertson Stephens, abstained from that vote to avoid any appearance of conflict
of interest arising from Robertson Stephens' role as financial advisor to Tokos
in connection with the Merger. After the other Tokos directors unanimously
approved the Merger, Mr. Goldsmith joined the other members of the Board in
unanimously recommending the Tokos stockholders approve the Merger. THE BOARD OF
DIRECTORS OF TOKOS UNANIMOUSLY RECOMMENDS THAT TOKOS STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. TOKOS' STOCKHOLDERS ARE URGED TO
CAREFULLY REVIEW THE FACTORS DISCUSSED IN "RISK FACTORS" IN CONNECTION WITH
EVALUATING AND VOTING ON THE MERGER AGREEMENT.
OPINION OF TOKOS' FINANCIAL ADVISOR
Tokos retained Robertson Stephens to act as its financial advisor in
connection with the Merger. Robertson Stephens was retained based on Robertson
Stephens' experience as a financial advisor in connection with mergers and
acquisitions as well as Robertson Stephens' industry knowledge and familiarity
with Tokos.
At the October 2, 1995 special meeting of Tokos' Board of Directors,
Robertson Stephens delivered an oral opinion, which was subsequently confirmed
in writing, that as of such date and based on the matters described therein, the
Tokos Exchange Ratio was fair to stockholders of Tokos from a financial point of
view. Robertson Stephens did not recommend to Tokos that any specific ratio
constituted the appropriate Tokos Exchange Ratio for the Merger. Robertson
Stephens' opinion to the Tokos Board addresses only the fairness from a
financial point of view of the Tokos Exchange Ratio, and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Tokos Special Meeting. Robertson Stephens expresses no opinion as to the tax
consequences of the Merger, and Robertson Stephens' opinion as to the fairness
of the Tokos Exchange Ratio does not take into account the particular tax status
or position of any
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holder of Tokos Common Stock. In rendering its opinion, Robertson Stephens was
not engaged as an agent or fiduciary of Tokos stockholders or any other third
party. Robertson Stephens delivered its written opinion to Tokos dated October
2, 1995 subsequent to October 2, 1995.
The complete text of the opinion dated October 2, 1995 is attached hereto
as Appendix C and the summary of the opinion set forth below is qualified in its
entirety by reference to the full text of such opinion. Stockholders of Tokos
are urged to read such opinion carefully and in its entirety for a description
of the procedures followed, the factors considered, the assumptions made and
scope of the review undertaken by, as well as limitations on the review
undertaken by, Robertson Stephens in rendering its opinion.
In connection with the preparation of its opinion dated October 2, 1995,
Robertson Stephens, among other things: (i) reviewed financial information on
Tokos and Healthdyne furnished to Robertson Stephens by both companies,
including certain internal financial analyses and forecasts prepared by the
management of Tokos and Healthdyne; (ii) reviewed publicly available
information; (iii) held discussions with the management of Tokos and Healthdyne
concerning the businesses, past and current business operations, financial
condition and future prospects of both companies, independently and combined,
including certain information prepared by the management of Tokos and Healthdyne
concerning potential cost savings and synergies that could result from the
Merger; (iv) reviewed the Merger Agreement; (v) reviewed the stock price and
trading histories of both companies; (vi) reviewed the exchange ratio implied by
historical stock prices of the two companies; (vii) reviewed the contribution by
each company to pro forma combined revenue, gross income, operating income, and
selected balance sheet categories; (vii) reviewed the valuations of publicly
traded companies which Robertson Stephens deemed comparable to Tokos and
Healthdyne; (ix) compared the financial terms of the Merger with other
transactions which Robertson Stephens deemed relevant; (x) analyzed the pro
forma earnings per share of the combined company based on information provided
by management of the two companies; and (xi) made such other studies and
inquires, and reviewed such other data as Robertson Stephens deemed relevant.
Based on past activities, Robertson Stephens has a certain degree of
familiarity with Tokos. In addition, in the course of its engagement, Robertson
Stephens made further investigations of both Tokos and Healthdyne. In arriving
at its opinion, however, Robertson Stephens did not independently verify any of
the foregoing information and relied on all such information being complete and
accurate in all material respects. Furthermore, Robertson Stephens did not
obtain any independent appraisal of the properties or assets and liabilities of
Tokos or Healthdyne or of any of their subsidiaries, nor was Robertson Stephens
furnished with any such evaluations or appraisals. With respect to the financial
and operating forecasts (and the assumptions and bases therefor) of Tokos and
Healthdyne which Robertson Stephens reviewed, Robertson Stephens assumed that
such forecasts had been reasonably prepared in good faith on the basis of
reasonable assumptions, reflected the best available estimates and judgments of
the respective managements of Tokos and Healthdyne and that such projections and
forecasts will be realized in the amounts and in the time periods currently
estimated by such managements of Tokos and Healthdyne, including the possible
cost savings and synergies resulting from the Merger. In addition, Robertson
Stephens relied upon estimates and judgments of Tokos and Healthdyne management
as to the future financial performance of both companies. Management's forecasts
for Tokos showed an improvement from recent quarterly trends attributable to
assumed operating margin improvements as a result of the ongoing and previously
announced field expense reduction programs and increased revenues over prior
periods in large part as a result of the planned introduction in 1996 of fetal
fibronectin and the implementation of certain of its strategic alternatives with
third party payors. Management's forecasts for Healthdyne assumed revenue growth
and operating margin improvements, in part as a result of improved nursing
productivity in the field and reduced overhead expenses, which either were
generally consistent with recent quarterly historical trends or anticipated
following the Technologies Spin-off and HIE Spin-off. Robertson Stephens also
assumed that the Merger will be treated as a tax free reorganization for income
tax purposes. The opinion is necessarily based upon market, economic and other
conditions that existed and could be evaluated as of the date of the opinion,
and on information available to Robertson Stephens as of such date.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Robertson Stephens in arriving at its opinion
and reviewed with the Tokos Board of Directors and does not
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purport to be a complete description of the analyses performed by Robertson
Stephens. The information presented below is based on the financial condition of
Tokos and Healthdyne (adjusted to reflect the then-proposed HIE Spinoff) as of a
date or dates shortly before the Merger Agreement was executed on October 2,
1995 and stock price information through the close of the market on September
28, 1995.
Stock Price and Trading History. Robertson Stephens reviewed the trading
activity including share price and trading volume of Healthdyne Common Stock and
Tokos Common Stock for the one-year period since September 28, 1994. With
respect to Healthdyne, Robertson Stephens noted that since the Technologies
Spinoff on May 22, 1995, the daily closing prices of Healthdyne Common Stock
ranged from a high of $10.000 on September 1, 1995, to a low of $3.875 on June
27, 1995. With respect to Tokos, Robertson Stephens noted that since September
28, 1994, the daily closing prices of Tokos Common Stock ranged from a high of
$12.875 on September 26, 1995 to a low of $4.359 on March 16, 1995. In addition,
Robertson Stephens compared the indexed performance of Tokos Common Stock,
Healthdyne Common Stock, the Standard & Poor's 500 Index, and a composite index
based upon closing market prices of certain publicly traded home healthcare
service companies considered by Robertson Stephens to be comparable in certain
respects to Tokos and Healthdyne (the "Comparable Companies Index") since May
22, 1995. Robertson Stephens noted that both Tokos Common Stock price and
Healthdyne Common Stock price outperformed the Standard & Poor's 500 Index and
the Comparable Companies Index since May 22, 1995. The Comparable Companies
Index consisted of the closing market prices of the following companies:
American HomePatient, Inc., Apria Healthcare Group Inc., Coram Healthcare
Corporation, Lincare Holdings Inc., Olsten Corporation, Pediatric Services of
America, Inc., Quantum Health Resources, Inc., and RoTech Medical Corporation.
In addition, Robertson Stephens reviewed selected commentary of research
analysis at different points in the trading histories of Tokos Common Stock and
Healthdyne Common Stock.
Exchange Ratio Analysis. Robertson Stephens reviewed the exchange ratio of
shares of closing prices of Healthdyne Common Stock and Tokos Common Stock
implied by the daily closing prices of Healthdyne Common Stock and Tokos Common
Stock since May 22, 1995. The implied exchange ratios were calculated by
dividing the closing price of Tokos Common Stock by the corresponding closing
price of Healthdyne Common Stock for each day indicated. Robertson Stephens
noted that the implied exchange ratio on September 28, 1995 was 0.815, and that
the average implied exchange ratios for the latest 10 and 20 trading days ending
September 28, 1995 were 0.812 and 0.835, respectively.
Robertson Stephens reviewed the premium represented by the Exchange Ratio
compared to the implied exchange ratios based on closing prices as of one day
and four weeks prior to September 28, 1995. Such premiums were 22.7% and 19.2%,
respectively. In addition, Robertson Stephens reviewed the premiums represented
by the Exchange Ratio compared to the average implied exchange ratios based on
the historical closing prices for the latest 10 and 20 trading days ending
September 28, 1995. Such premiums were 23.1% and 19.8%, respectively. Robertson
Stephens noted that such premiums were consistent with those found in similar
mergers of equals transactions reviewed by Robertson Stephens (see Merger of
Equals Analysis).
Contribution Analysis. Robertson Stephens compared the contribution of
Tokos and Healthdyne to pro forma combined revenue and gross profit, based on
Tokos' and Healthdyne's management's forecast of their respective company's
financial performance for calendar years 1995 and 1996, the June quarter
annualized, and the last twelve months ending June 30, 1995. For such periods,
Robertson Stephens noted that Tokos contributes approximately 56.2% to 58.4% of
pro forma combined revenue, and approximately 52.2% to 54.3% of pro forma
combined gross profit. Giving consideration to Healthdyne's and Tokos' net cash
amounts, Robertson Stephens noted Tokos' implied pro forma equity ownership
based on Tokos' contribution to pro forma combined revenues and gross profit
ranged from 51.5% to 53.4% and 48.1% to 51.1%, respectively. Robertson Stephens
also compared the contribution of Tokos and Healthdyne to estimated calendar
1996 pro forma combined earnings before interest and taxes ("EBIT"). Robertson
Stephens noted that the combined pro forma EBITs for calendar year 1995, the
June quarter annualized, and the last twelve months ending June 30, 1995 were
negative and thus contributions based on such periods were not meaningful.
Robertson Stephens also noted that Tokos contributes approximately 61.7% to
estimated calendar 1996 EBIT.
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Robertson Stephens also compared the contribution of Tokos and Healthdyne
to select balance sheet items based on combining the balance sheets of each
company as of June 30, 1995. Robertson Stephens noted that Tokos contributes
25.5% of the combined cash, short-term investments and notes receivable, 53.4%
of the combined current assets excluding cash, short-term investments and notes
receivable, 41.5% of the combined total assets, and 40.4% of the combined
shareholders' equity.
Robertson Stephens compared these historical and projected contribution
figures with the approximately 53.1% ownership position that Tokos stockholders
would have in the pro forma company based on the number of shares outstanding.
The 53.1% ownership percentage was calculated by multiplying the number of
shares outstanding of Tokos Common Stock as of August 2, 1995 by the Tokos
Exchange Ratio, and dividing the product by the expected number of shares to be
outstanding of the pro forma combined company (based on the number or shares
outstanding of Healthdyne Common Stock as of August 1, 1995). Robertson Stephens
noted that the 53.1% ownership position was consistent with Tokos' contribution
to pro forma combined revenues and gross profit, based on the parameters
indicated above and after giving consideration to the respective amounts of net
cash (defined as cash less total debt) contributed by each company. Robertson
Stephens also noted the ownership position that Tokos stockholders are expected
to have in the pro forma company exceeded Tokos' percentage contribution to the
combined shareholder's equity (based on each company's balance sheet as of June
30, 1995) but was below Tokos' percentage contribution to the estimated combined
pro forma calendar 1996 EBIT.
Comparable Company Analysis. Robertson Stephens compared certain financial
data and multiples of income parameters accorded to other publicly traded
companies deemed by Robertson Stephens to be comparable to Healthdyne. Financial
data compared included market capitalization, total capitalization, revenues,
EBIT, net income, earnings per share, gross margin, operating margin, net
margin, historical and projected revenue growth rates, historical earnings per
share growth rates, and projected earnings per share growth rate as reported by
ZACKS. Multiples compared included total capitalization to revenue, total
capitalization to EBIT, price per share to earnings per share and price per
share to earnings per share divided by projected growth rate. Companies deemed
by Robertson Stephens to be comparable to Healthdyne included American
HomePatient, Inc., Apria Healthcare Group Inc., Coram Healthcare Corporation,
Lincare Holdings Inc., Olsten Corporation, Pediatric Services of America, Inc.,
Quantum Health Resources, Inc., and RoTech Medical Corporation (the "Comparable
Companies").
Robertson Stephens examined the range of exchange ratios derived from the
public market valuations of the Comparable Companies. In particular, Robertson
Stephens derived the total public market valuations of each of the Comparable
Companies as a multiple of each such Comparable Company's revenues. These
multiples ranged from 0.7x to 3.4x (with a mean and median of 1.5x) for the
twelve months ending June 1995, from 0.7x to 3.0x (with a mean of 1.4x and a
median of 1.3x) for both the June quarter annualized and projected calendar 1995
(based on publicly available projections) and from 0.5x to 2.5x (with a mean of
1.1x and a median of 0.9x) for projected calendar 1996 (based on publicly
available projections). Robertson Stephens then applied these revenue multiples
(after adjusting for Healthdyne's net cash) in order to derive the total public
market valuation of Healthdyne implied by the Comparable Companies' revenue
multiples. From Healthdyne's implied market valuation, Robertson Stephens
derived implied exchange ratios between Tokos and Healthdyne (based on the
number of outstanding shares of Tokos and Healthdyne). These implied exchange
ratios ranged from 0.403 to 1.515.
Robertson Stephens also valued Healthdyne based on Tokos' revenue
multiples. Based on total capitalization to revenues multiples of 2.2x for the
last twelve months ending June, 2.4x for the June quarter annualized, 2.4x for
projected calendar 1995, and 2.2x for projected calendar 1996 for Tokos, the
implied exchange ratio ranged from 1.030 to 1.110.
The average implied exchange ratio at the current Tokos price per share of
$11.500 as of September 28, 1995, ranged from 0.653 to 1.110. Robertson Stephens
noted that the Exchange Ratio was within this range.
Merger of Equals Analysis. Robertson Stephens reviewed financial, market,
and governance information of seven comparable stock-for-stock mergers in which
each company retained equal representation on Newco's board of directors. These
mergers were: Abbey Healthcare Group/Homedco Group, Lockheed
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Corporation/Martin Marietta Corporation, Anchor Bancorp/Dime Bancorp, SynOptics
Communications/ Wellfleet Communications, Price Company/Costco Wholesale, Omni
Capital Group/First Security Financial, and Midwest Energy Company/Iowa
Resources. For purposes of this analysis, the company offering a premium to the
other company was deemed the acquiror. Robertson Stephens analyzed and compared
such parameters as the pro forma ownership percentage, the makeup of the pro
forma combined board of directors, the acquiror's stock price as a percentage of
its 52-week high and low, the target's stock price as a percentage of its
52-week high and low, the one-day, four-week and latest 10 and 20 trading days
average premiums of the consideration offered to the target's stock price, the
offered exchange ratio premium to the trading exchange ratio four weeks before,
and the offered exchange ratio as a percentage of the 52-week high and low
trading exchange ratios.
Robertson Stephens noted that of the seven comparable merger of equals
transactions, pro forma ownership of the acquiror ranged from 46.3% to 59.4%,
with an average of 53.3%. All seven mergers had pro forma boards of directors
with an equal representation from both the target and the acquiror (disregarding
any new independent directors). The acquiror's stock price as a percentage of
its 52-week high ranged from 55.7% to 98.8%, with an average of 82.1%. The
acquiror's stock price as a percentage of its 52-week low ranged from 105.3% to
171.4%, with an average of 130.8%. The target's stock price as a percentage of
its 52-week high ranged from 38.7% to 101.4%, with an average of 83.6%. The
target's stock price as a percentage of its 52-week low ranged from 112.3% to
200.0%, with an average of 142.0%. The one-day stock price premium ranged from
11.0% to 21.6%, with an average of 16.8%. The four-week stock price premium
ranged from 14.9% to 29.1%, with an average of 23.1%. The premium of the offered
exchange ratio to the exchange ratio four weeks before ranged from 7.9% to
37.5%, with an average of 20.7%. The premium of the offered exchange ratio to
the average exchange ratios of the last 10 trading days ranged from 7.9% to
34.5%, with an average of 19.5%. The premium of the offered exchange ratio to
the average exchange ratios of the last 10 trading days ranged from 5.8% to
42.1%, with an average of 20.7%. The offered exchange ratio as a percentage of
the 52-week exchange ratio high ranged from 47.1% to 122.1%, with an average of
94.1%. The offered exchange ratio as a percentage of the 52-week low exchange
ratio ranged from 122.5% to 291.8%, with an average of 163.3%. Compared to these
analyses, Robertson Stephens noted that Tokos' pro forma ownership will be
approximately 53.1%. Tokos and Healthdyne will have equal representation on
Newco's Board of Directors, with five seats each. Tokos' stock price as a
percentage of its 52-week high was 89.3%, and of its 52-week low was 263.8%.
Healthdyne's stock price as a percentage of its 52-week high was 93.8%, and of
its 52-week low was 241.9%. The one-day stock price premium offered to
Healthdyne was 22.7%, and the four-week stock price premium was 26.0%. The
exchange ratio premium offered by Tokos to the ratio four weeks before was
19.2%, ratio based on the last ten trading days was 23.1%, and ratio based on
the last twenty trading days was 19.8%. The exchange ratio offered by Tokos as a
percentage of the 52-week exchange ratio high was 104.8% and of the 52-week
exchange ratio low was 190.9%.
Robertson Stephens noted that all stock price premiums and exchange ratio
premiums offered to Healthdyne were within the range of the seven comparable
merger of equals transactions reviewed, with the exception of the one-day stock
price premium, which exceeded the highest premium offered of the seven
comparable merger of equals transactions by the amount of 1.1%.
Pro Forma Merger Analysis. Robertson Stephens analyzed certain pro forma
effects resulting from the Merger, including the effect of the consummation of
the Merger, on the earnings per share of the combined company based on the
Exchange Ratio. Robertson Stephens noted that, in addition to other factors, the
value of the synergies was an important consideration in arriving at its opinion
that the Tokos Exchange Ratio pursuant to the Merger was fair from a financial
point of view to the holders of Tokos Common Stock. Such analysis indicated
that, based upon the realization of potential synergies estimated by Tokos' and
Healthdyne's management and excluding non-recurring merger-related expenses,
earnings per share for the fiscal year ending December 1996 could be increased
between 76.5% to 300.2%. The foregoing analysis assumes the realization of
certain synergies identified by Tokos' and Healthdyne's management primarily
attributable to the consolidation of service centers and other facilities,
reduction of operating expenses and the overall ability to achieve economies of
scale. The ability of the combined company to achieve such increases in earnings
per share for the fiscal year ending December 1996 depend upon the magnitude and
timing related to the
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realization of such synergies. The actual operating results or financial
position achieved by the combined company may vary from the projected results,
and the variations may be material.
The preparation of fairness opinions involves 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 opinions are not readily susceptible to
summary description. In arriving at its opinion, Robertson Stephens did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Robertson Stephens believes its analyses must
be considered as a whole and that considering any portion of such analyses and
the factors considered, without considering all analyses and current factors,
could create a misleading or incomplete view of the process underlying opinions.
In its analyses, Robertson Stephens made numerous assumptions with respect to
industry performance, general business and other conditions and matters, many of
which are beyond the control of Tokos and Healthdyne. These assumptions included
assumptions that the economic, monetary and market conditions existing as of the
date of Robertson Stephens' opinion will be applicable throughout the periods
analyzed, and that Healthdyne's and Tokos' financial forecasts provided by their
respective managements were reasonably prepared on bases reflecting the best
currently available estimates and judgments of such managements at the time of
preparation of the future operating and financial performance of Healthdyne and
Tokos. Qualitative judgments made by Robertson Stephens included, among other
things, judgments related to companies considered comparable to either Tokos or
Healthdyne, other merger and acquisition transactions deemed comparable to the
Merger, and the types of financial ratios, market information and terms relevant
to a determination of fairness regarding the Tokos Exchange Ratio. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold.
Robertson Stephens was retained based on Robertson Stephens' experience as
a financial advisor in connection with mergers and acquisitions as well as
Robertson Stephens' investment banking relationship and familiarity with Tokos.
Robertson Stephens is the investment manager of investment entities that
invested in the purchase of Tokos preferred stock, and a representative of
Robertson Stephens sits on the Board of Directors of Tokos. Robertson Stephens
has also provided certain investment banking services to Tokos from time to
time, including acting as the managing underwriter for the initial public
offering of shares of the common stock of Tokos on March 26, 1990 and acting as
financial advisor to Tokos in several of its acquisitions. Robertson Stephens
also makes a market in the Common Stock of Tokos. In the course of its market
making and other activities, Robertson Stephens may, from time to time, have a
long or short position in and buy and sell securities of Tokos.
Tokos formally engaged Robertson Stephens on May 2, 1994 by means of an
engagement letter to provide financial advisory services in connection with
potential merger or acquisition transactions. Such engagement letter was jointly
amended by Tokos and Robertson Stephens by means of an amendment letter dated
October 1, 1995. The engagement letter as amended provides that, for its
services, Robertson Stephens is to be paid, contingent upon the closing of the
Merger, a fee of $1,500,000. Of this amount, $400,000 is attributable to
Robertson Stephens' rendering of a fairness opinion. Tokos has also agreed to
indemnify Robertson Stephens for certain liabilities, including liabilities
under the federal securities laws or relating to or arising out of Robertson
Stephens' engagement as financial advisor to Tokos. Tokos did not consider or
interview any other financial advisor candidates.
Robertson Stephens is a nationally recognized investment banking firm. As
part of its investment banking business, Robertson Stephens is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of Tokos and
Healthdyne with respect to the Merger Agreement and the transactions
contemplated thereby, stockholders should be aware that certain members of the
management of Tokos and Healthdyne and the Boards of Directors of Tokos and
Healthdyne have interests in the Merger that are in addition to the interests of
stockholders of Tokos and Healthdyne generally.
Amendments to Healthdyne's Change in Control Agreements. In February 1988,
Healthdyne entered into agreements with Messrs. Petit, Dewberry, Burkey and
Millard and in October 1993 entered into a similar agreement with Mr. Yokubinas,
entitling such executive officers to certain benefits upon specified
terminations of employment within three years following a "change in control" of
Healthdyne. Each agreement provides that in the event of a "change in control"
of Healthdyne, the executive officer concerned will be entitled to certain
benefits upon his subsequent termination of employment during the term of the
agreement unless such termination is (i) because of his death, disability or
retirement, (ii) by Healthdyne for cause, or (iii) with respect to termination
by the executive officer, by the executive officer, other than for "good
reason." Under these agreements, a number of circumstances entitle the executive
officer to treat a good faith termination on his part as being a termination for
"good reason." These include an adverse change in the executive officer's
compensation, discontinuation of certain benefits, the assignment of duties
inconsistent with his status or duties in effect immediately prior to the
"change in control" of Healthdyne, the relocation of Healthdyne's principal
executive office to a location outside of Marietta, Georgia or Healthdyne's
requiring the executive officer to be based anywhere other than Healthdyne's
principal executive office.
If an executive officer's employment with Healthdyne or its subsidiaries
terminates following the consummation of a "change in control" of Healthdyne
other than under the circumstances set forth in clauses (i), (ii) or (iii) of
the preceding paragraph, the executive officer will be entitled to receive his
full base salary through the date of termination and a lump sum severance
payment equal to three times the executive officer's average annual salary and
other income derived from Healthdyne which is reportable for federal tax
purposes for the five years preceding the date of his termination. In addition,
such executive officer will be entitled to receive, for a period of three years
after the date of his termination, all life, disability and health insurance
coverage, automobile allowances and other fringe benefits equivalent to those in
effect at the date of termination and is entitled to receive additional amounts
relating to any excise taxes imposed on the executive as a result of Section
280G of the Code.
In connection with the execution of the Merger Agreement, and as
contemplated therein, Healthdyne entered into amended and restated agreements
with each of the executive officers mentioned above and a new agreement with
Frank D. Powers, President of Healthdyne Maternity Management (the "New
Agreements"). The New Agreements, which take effect only if and at the time that
the Merger becomes effective, will supersede the prior agreements described
above. The New Agreements acknowledge that the Merger constitutes a "change in
control", as defined in the agreements, and extend the term of the New
Agreements from a term ending in February 1997 to a term ending three years
after the Merger. In addition, under the New Agreements the executive officer
agrees to comply with certain protective covenants which, for a period of three
years following the later of the Effective Time or the effective time of any
other "change in control" of Newco that occurs within three years after the
effective date of the Merger and during the executive officer's continued
employment with Newco, prohibit the executive officer from competing with Newco,
soliciting customers or soliciting personnel of Newco. The New Agreements
otherwise are substantially similar to the change in control agreements
previously in effect.
Under these agreements, if a "change in control" had taken place on January
1, 1996, Messrs. Petit, Dewberry, Yokubinas, Burkey, Millard and Powers would
have been entitled to receive approximately $4,308,000, $2,319,000, $1,007,000,
$1,681,000, $651,000 and $647,000, respectively, upon termination of employment
as contemplated under these agreements. Section 280G of the Code imposes a 20%
excise tax on the recipient of "excess parachute payments," as identified in the
Code, and denies a tax deduction for such excess parachute payments to the
company making them. In addition, if any such payments constitute excess
parachute payments under Section 280G of the Code, Healthdyne (or, after the
Merger, Newco) would be
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obligated under these agreements to reimburse each executive officer for the
excise taxes resulting from such parachute payments and from any reimbursements
thereof paid by Healthdyne (or, after the Merger, Newco) and for the income
taxes imposed on the executive officer with respect to such reimbursements.
Healthdyne believes that, if Newco becomes obligated to make severance payments
under these agreements, no portion of these payments will constitute excess
parachute payments. However, there can be no assurance that the IRS would not
assert that some portion of such payments are excess parachute payments. If the
IRS were to prevail in such an assertion, the amount of deductions disallowed
and the amount of reimbursements required to be paid to terminated executives
could be substantial.
Amendments to Tokos Employment Agreements. During 1994 and 1995, Tokos
entered into Employment Agreements with Mr. Byrnes and Ms. Bayer and certain
other officers of Tokos, and a similar agreement with Mr. Mione. These
agreements provide for severance payments and certain benefits in the event of a
termination upon a "change in control," a "termination for failure to renew" and
a "termination other than for cause." The executive officers are not entitled to
any compensation or benefits if they are terminated for "cause" or if, prior to
change of control, they voluntarily terminate their employment with Tokos. A
termination upon a "change in control" is defined as a termination following (i)
the acquisition by a person or entity of twenty percent (20%) or more of Tokos'
common stock in a transaction not approved by the Board of Directors; or (ii) a
merger, consolidation or reorganization of Tokos with one or more corporations
as a result of which Tokos is merged out of existence or becomes a subsidiary of
another corporation or the sale of all or substantially all of the assets of
Tokos; or (iii) a tender or exchange offer, merger, consolidation or business
combination as a result of which the persons who were directors of Tokos before
such transaction cease to constitute a majority of the Board of Directors of
Tokos or any successor of Tokos. A "termination for failure to renew" means a
failure by Tokos to renew or extend the term of the agreement beyond the basic
term of the agreement or any extension thereof. A "termination other than for
cause" is defined as constructive termination of the executive officer or
material breach of the employment agreement by Tokos. A "termination for cause"
is defined as a termination for any willful dishonesty towards, fraud upon or
deliberate injury to, Tokos by the executive officer.
Amendments to the employment agreements described above were executed on
October 2, 1995, and become effective only upon the effectiveness of the Merger.
The amendments increase the amount of severance compensation payable in the
event of a termination upon a "change in control" or "termination for failure to
renew" from 18 months continuation of salary plus 150% of the highest bonus
earned by the employee, to an amount equal to three times the executive
officer's average annual base salary and other income derived from Tokos which
is reportable for federal tax purposes for the five years preceding the date of
his or her termination. In addition, the covenants against competition and
soliciting customers and employees previously included in the employment
agreements were revised to provide greater protection to Tokos.
If a "change in control" had taken place on January 1, 1996, Messrs. Byrnes
and Mione and Ms. Bayer would have been entitled under the amended Employment
Agreements to receive approximately $3,812,000, $633,000 and $702,000,
respectively, upon termination of employment as contemplated under these
agreements. The amount of severance compensation payable under the employment
agreements is limited to amounts which are deductible by Tokos for federal
income tax purposes under Section 280G of the Code.
Retirement Benefits. Healthdyne's executive officers participate in a
Retirement Benefit Award Program established by Healthdyne in 1994. In the event
of a "change in control" of Healthdyne, all benefits accrued to date under these
Retirement Benefit Awards immediately vest and each executive officer may
require Healthdyne to place in trust for the executive officer's benefit an
amount of money equal to the present value of the executive officer's accrued
retirement benefit. The executive officers who participate in this retirement
program and the amounts that Healthdyne would be required to place in trust for
each such executive officer as of December 31, 1995, if requested thereunder,
are as follows: Petit -- $1,098,000; Dewberry -- $423,000;
Yokubinas -- $510,000; Burkey -- $250,000; and Millard -- $145,000. Effective
November 16, 1995, Healthdyne adopted a retirement benefit award for Mr. Powers.
The amount Healthdyne would be required to place in trust for Mr. Powers as of
December 31, 1995, if requested thereunder, is $160,000.
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Effective October 2, 1995, as contemplated in the Merger Agreement, Tokos
adopted retirement benefit awards similar to Healthdyne's for Messrs. Byrnes and
Mione and Ms. Bayer. The amounts Tokos would be required to place in trust for
each such executive officer as of December 31, 1995, if requested thereunder,
following the Merger, are as follows: Byrnes -- $345,000; Mione -- $221,000;
Bayer -- $0.
Stock Option Plans. Pursuant to the Merger Agreement, as of the Effective
Time, Newco shall assume the stock options outstanding under the stock option
plans of each of Tokos and Healthdyne (the "Assumed Options"). Each Assumed
Option shall be exercisable for the number of Newco Shares equal to the number
of Tokos or Healthdyne shares subject to such option prior to the Effective
Time, at the exercise price per Newco Share equal to the exercise price per
Tokos or Healthdyne share applicable to such Assumed Option immediately prior to
the Effective Time (without taking into account any anti-dilution formula);
provided, however, that in the case of any Employee Stock Option to which
Section 421 of the Code applies by reason of its qualification under Section 422
of the Code, the conversion formula shall be adjusted, if necessary, to comply
with Section 424(a) of the Code. Except as provided above, each Assumed Option
shall continue to have and be subject to the same terms and conditions as were
applicable to such option immediately prior to the Effective Time except that,
in the case of Healthdyne, each such Assumed Option held by an optionee who
continues his service with Healthdyne up to the Effective Time shall become
immediately exercisable for all of the shares subject to such option and, in the
case of Tokos, the repurchase rights in favor of Tokos with respect to each
Assumed Option held by an optionee who continues his service with Tokos up to
the Effective Time will not be transferred to Newco in the Merger. Assumed
Options held by executive officers and directors of Healthdyne or Tokos, whose
employment by Newco is terminated at or after the Effective Time shall continue
to be exercisable for 12 months after the Effective Time (to the extent
otherwise exercisable), rather than three months, after such termination of
employment, unless the final expiration date of the Assumed Options would have
occurred prior thereto without regard to early termination for any reason, in
which case such Assumed Options shall continue to be exercisable only until the
final expiration date.
Approval and adoption of the Merger Agreement by Healthdyne and Tokos
stockholders will constitute approval of the assumption by Newco of the Assumed
Options outstanding under the Healthdyne Stock Option Plans and the Tokos Stock
Option Plans.
As of December 31, 1995, employees (or former employees) non-employee
directors and consultants of Tokos held Tokos Stock Options to purchase an
aggregate of 2,014,838 shares of Tokos Common Stock at a weighted average
exercise price of $5.98 per share (based on exercise prices ranging from $0.23
to $31.50 per share). Options to purchase 937,338 Tokos Shares at a weighted
average exercise price of $5.85 per share have not yet become vested as defined
in the Tokos Stock Option Plans, but will accelerate and become fully
exercisable without restriction at the Effective Time. As of December 31, 1995,
employees (or former employees) of Healthdyne, non-employee directors and
consultants held Healthdyne Options to purchase an aggregate of 1,506,317 shares
of Healthdyne Common Stock at a weighted average exercise price of $3.2041 per
share (based on exercise prices ranging from $1.6473 to $7.9415 per share).
Options to purchase 1,070,888 Healthdyne Shares at a weighted average exercise
price of $3.0279 per share have not yet become exercisable, but will accelerate
and become fully exercisable at the Effective Time.
Certain Benefits. From and after the Effective Time, Newco will honor in
accordance with their terms all benefits accrued at the Effective Time under the
Tokos Plans and Healthdyne Plans, including any rights to payments and benefits
under the agreements and arrangements described above under " -- Amendments to
Healthdyne's Change In Control Agreements" and " -- Amendments to Tokos
Employment Agreements" and shall grant all Tokos and Healthdyne employees from
and after the Effective Time credit for all service with Tokos and/or Healthdyne
and their respective affiliates and predecessors prior to the Effective Time for
all purposes for which such service was recognized under the benefit plan in
question; provided, however, that the granting of credit for such services shall
not result in a duplication of benefits provided to employees who become
employees of Newco. To the extent any such benefit plans provide medical or
dental welfare benefits after the Effective Time, such benefit plans shall waive
any preexisting condition exclusions and waiting periods for plan participation
unless the employee was subject to one or more preexisting condition exclusions
in the Tokos or Healthdyne plan, and shall provide that any expenses incurred on
or before the Effective Time
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shall be taken into account under the benefit plans of Newco for purposes of
satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions.
Indemnification and Insurance. Under the terms of the Merger Agreement,
Newco is required to indemnify and advance expenses to current and former
officers, directors, employees and agents of Tokos and Healthdyne (the
"Indemnified Parties"), to the fullest extent permitted under applicable law,
against all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising out
of or pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or after
the Effective Time arising under the Securities Act, the Exchange Act or state
corporation laws in connection with the Merger. In addition, Newco is obligated
not to amend the provisions of its certificate of incorporation and bylaws
providing for exculpation of director and officer liability and indemnification,
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties' right of indemnification. For a
period of six years after the Effective Time, Newco is obligated to maintain in
effect policies of directors' and officers' liability insurance that are
substantially no less advantageous to the Indemnified Parties than the policies
presently covering such individuals.
Board of Directors. Pursuant to the Merger Agreement, Healthdyne and Tokos
have agreed that four current members of Healthdyne's Board of Directors (Parker
H. Petit, Carl E. Sanders, Morris S. Weeden and Frederick P. Zuspan, M.D.) and
Jackie M. Ward will serve on Newco's Board of Directors, which will consist of
ten members. In addition, Healthdyne and Tokos have agreed that the following
five current members of the Board of Directors of Tokos will serve as directors
on the Board of Directors of Newco: Robert F. Byrnes, Gene P. Guselli, Craig T.
Davenport, Thomas W. Erickson and David L. Goldsmith. See "Operation, Management
and Business of Newco After the Merger -- Management of Newco."
Healthdyne's Financial Advisors. Healthdyne has paid a fee of $125,000 to
Needham and has agreed to reimburse Needham for its reasonable out-of-pocket
expenses. In addition, Healthdyne has agreed to pay Colman Furlong a fee of
$650,000 if the Merger is consummated, and has agreed to reimburse Colman
Furlong for its reasonable out-of-pocket expenses.
Tokos' Financial Advisor. Tokos has paid fees and incurred contingent
obligations to Robertson Stephens in connection with the Merger and has agreed
to pay Robertson Stephens a fee of $1.5 million (including out-of-pocket
expenses) if the Merger is consummated. In addition, Robertson Stephens is the
investment manager of investment entities that invested in the purchase of Tokos
preferred stock, and has also provided certain investment banking services to
Tokos from time to time, including acting as the managing underwriter for the
initial public offering of shares of the common stock of Tokos on March 26, 1990
and acting as financial advisor to Tokos in several of its acquisitions.
Robertson Stephens also makes a market in the Common Stock of Tokos. David L.
Goldsmith, a director of Tokos, is a partner of Robertson Stephens, and Mr.
Goldsmith will be director of Newco after the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Troutman Sanders LLP, counsel to Healthdyne, is of the opinion that, for
federal income tax purposes, the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and, accordingly, that (i) no
gain or loss will be recognized by Healthdyne as a result of the Merger, (ii) no
gain or loss will be recognized by Healthdyne shareholders upon the receipt of
Newco Common Stock in exchange for Healthdyne Common Stock in connection with
the Merger, (iii) the tax basis of Newco Common Stock to be received by
Healthdyne shareholders in connection with the Merger will be the same as the
tax basis in the Healthdyne Common Stock surrendered in exchange therefor, and
(iv) the holding period of Newco Common Stock to be received by Healthdyne
shareholders in connection with the Merger will include the holding period of
the Healthdyne Common Stock surrendered in exchange therefor, provided that the
Healthdyne Common Stock is held as a capital asset at the Effective Time. This
opinion is based in part on the truth and accuracy of the representations,
warranties and statements of fact made or to be made by Healthdyne, Tokos and
Newco in connection with the Merger.
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Healthdyne's obligation to consummate the Merger is conditioned upon
receipt of a written opinion from Troutman Sanders LLP to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that Healthdyne and Tokos
will each be a "party" to that reorganization within the meaning of Section
368(b) of the Code.
Morrison & Foerster LLP, counsel to Tokos, is of the opinion that, for
federal income tax purposes, the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and accordingly, that (i) no
gain or loss will be recognized by Tokos as a result of the Merger, (ii) no gain
or loss will be recognized by Tokos stockholders upon the receipt of Newco
Common Stock in exchange for Tokos Common Stock in connection with the Merger,
(iii) the tax basis of Newco Common Stock to be received by Tokos stockholders
in connection with the Merger will be the same as the tax basis in the Tokos
Common Stock surrendered in exchanged therefor, and (iv) the holding period of
Newco Common Stock to be received by Tokos stockholders in connection with the
Merger will include the holding period of the Tokos Common Stock surrendered in
exchange therefor, provided that the Tokos Common Stock is held as a capital
asset at the Effective Time. This opinion is based in part on the truth and
accuracy of the representations, warranties and statements of fact made or to be
made by Healthdyne, Tokos and Newco in connection with the Merger.
Tokos' obligation to consummate the Merger is conditioned upon receipt of a
written opinion from Morrison & Foerster LLP to the effect that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and that Healthdyne and Tokos will each be
a "party" to that reorganization within the meaning of Section 368(b) of the
Code.
The IRS has ruled privately that conversion of stock purchase rights
substantially similar to the rights associated with the Tokos Common Stock and
the Healthdyne Common Stock into rights substantially similar to Newco Stock
Rights in the Merger will be disregarded for federal income tax purposes.
Accordingly, neither Tokos stockholders nor Healthdyne shareholders should
realize a gain or loss on such conversion.
The discussion regarding federal income tax consequences set forth above is
included for general information only. It does not address the state, local or
foreign tax aspects of the Merger and may not apply to a stockholder who
acquired his or her shares of Healthdyne Common Stock or Tokos Common Stock
pursuant to the exercise of employee stock options or rights or otherwise as
compensation. This discussion relates only to Healthdyne Common Stock and Tokos
Common Stock held as capital assets within the meaning of Section 1221 of the
Code by persons who are citizens or residents of the United States. This
discussion does not address tax consequences to categories of holders entitled
to special treatment under the Code (including, without limitation, foreign
persons, tax-exempt organizations, insurance companies, financial institutions
and dealers in stocks and securities). It is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations thereunder
and current administrative rulings and court decisions. All of the foregoing are
subject to change, and any such change could affect the continuing validity of
this discussion. No ruling has been sought from the IRS with respect to the
federal income tax consequences of the Merger. Healthdyne and Tokos stockholders
should consult their own tax advisors with regard to the specific tax
consequences of the Merger to them, including the application and effect of any
state, local and foreign tax laws.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger could not have been consummated until notifications and certain
information had been furnished to the FTC and the Antitrust Division and
specified waiting period requirements had been satisfied. Each of Healthdyne and
Tokos filed a notification and report form under the HSR Act with the FTC and
the Antitrust Division on October 3, 1995 and received notice of early
termination of the waiting period on November 2, 1995.
The obligations of Healthdyne and Tokos to consummate the Merger are
subject to the condition that there be no temporary restraining order,
preliminary or permanent injunction or other order by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger. Each party has agreed to use its best efforts to have any such
injunction or order lifted. See "The Merger Agreement -- Conditions to the
Merger" and "-- Termination."
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Healthdyne and Tokos both operate their respective businesses pursuant to a
number of governmental licenses and permits. Since both Healthdyne and Tokos
will merge into Newco in the Merger, Newco will be required to obtain licenses
and permits that cannot be effectively transferred by Healthdyne or Tokos to
Newco, including 36 homecare licenses held in 18 different states. In addition,
Newco will be required to qualify as a foreign corporation in approximately 40
states.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method for accounting
and financial reporting purposes. Based upon the outstanding shares of Tokos
Common Stock and Healthdyne Common Stock as of December 31, 1995, Tokos
shareholders will receive approximately 53% of the combined shares of Newco
Common Stock. Since the former shareholders of Tokos will receive the larger
percentage of Newco shares and since there is no other evidence that clearly
indicates that Healthdyne would be the acquiror, for accounting purposes Tokos
has been deemed to be the acquiror.
RESALE RESTRICTIONS AND REGISTRATION RIGHTS
Shares of Healthdyne Common Stock and Tokos Common Stock that are
outstanding prior to the consummation of the Merger will, after conversion into
shares of Newco Common Stock, be freely tradeable without restrictions under the
Securities Act; provided, however, that shares of Newco Common Stock restricted
by contract or received by persons who are deemed to be "affiliates" (as that
term is defined in Rule 144 under the Securities Act) of Newco, Tokos or
Healthdyne ("restricted shares") may be resold by them only in transactions
permitted by the resale provisions of Rule 145 or as otherwise permitted under
the Securities Act. The existence of these restricted shares may have a
depressive effect on the market price of Newco Common Stock. Certain persons who
may be deemed "affiliates" of Healthdyne and Tokos (the "Restricted Holders")
have agreed not to dispose of the shares of Newco Common Stock which they will
receive in the Merger (the "Registrable Stock") as required under Rule 145 of
the Securities Act. Based upon the number of outstanding shares of Healthdyne
Common Stock and Tokos Common Stock as of December 31, 1995, and assuming the
exercise of all options, warrants and other rights to purchase Healthdyne or
Tokos Common Stock, approximately 37,682,286 shares of Newco Common Stock will
be outstanding upon consummation of the Merger, of which approximately 3,104,087
shares of Newco Common Stock will be held by the Restricted Holders. Assuming no
options are exercised prior to the consummation of the Merger: options, warrants
and other rights to purchase approximately 3,439,010 shares of Newco Common
Stock will be outstanding and exercisable upon consummation of the Merger; and
such Restricted Holders, in the aggregate, will hold fully exercisable options
and other rights to purchase approximately 1,337,216 shares of Newco Common
Stock.
In addition, Newco has agreed, upon demand within two years of the
Effective Time (the "Registration Period") made by Restricted Holders (other
than persons who will be affiliates of Newco after the Merger), to register the
sale or other distribution of shares of Newco Common Stock held by such holders
as soon as practicable after such demand. Such demand may be made with respect
to any or all of the Registrable Stock; provided, however, that the aggregate
number of shares requested to be registered in any demand or pursuant to related
demands must be at least 300,000. The Restricted Holders as a group are entitled
to three demand registrations during the Registration Period.
If Newco shall, at any time during the Registration Period, propose the
registration under the Securities Act (other than a registration on Form S-8 or
Form S-4) of any offering of Newco Common Stock, Newco shall give notice of such
registration to the Restricted Holders having registration rights who are not
affiliates and allow such holders to include their shares of Newco Common Stock
in such registration (subject to reduction upon the advice of Newco's investment
banking firm as necessary to ensure the orderly sale and distribution of shares
of Newco Common Stock being offered by Newco).
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THE MERGER AGREEMENT
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Joint Proxy
Statement/Prospectus. The following summary description of the terms of the
Merger Agreement is qualified in its entirety by, and made subject to, the more
complete information set forth in the Merger Agreement.
THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time, Tokos and Healthdyne will be merged with and into Newco and
thereupon the separate existence of Tokos and Healthdyne will cease, and Newco
will be the surviving corporation. The Merger will have the effects specified in
the DGCL.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The closing of the transactions contemplated by the Merger Agreement shall
take place on the day after the later of (a) the date on which the later to
occur of the Healthdyne Meeting and the Tokos Meeting is held or (b) the day on
which all of the conditions set forth in the Merger Agreement are satisfied or
waived, or at such other date, time and place as Tokos and Healthdyne agree.
Concurrently with the Closing, Healthdyne and Tokos will cause a
Certificate of Merger to be filed with the Secretary of State of the State of
Delaware and a Certificate of Merger to be filed with the Secretary of State of
the State of Georgia. Each such filing will be made substantially simultaneously
with the other and the Merger will become effective upon the later to occur of
such filings.
CONVERSION OF SECURITIES
Pursuant to the Merger Agreement, at the Effective Time, (i) each issued
and outstanding share of Tokos Common Stock, together with its associated common
stock purchase right will be converted into one share of Newco Common Stock and
one associated Newco Stock Right and (ii) each issued and outstanding share of
Healthdyne Common Stock, together with its associated preferred stock purchase
right will be converted into one share of Newco Common Stock and one associated
Newco Stock Right. The Merger will not cause the associated stock purchase
rights of Healthdyne or Tokos stockholders to become exercisable. The shares of
Healthdyne Common Stock and Tokos Common Stock and their respective accompanying
stock purchase rights to be converted in connection with the Merger are
sometimes referred to herein collectively as the "Shares" and the shares of
Newco Common Stock and the associated Newco Stock Rights are sometimes referred
to herein collectively as "Newco Shares."
All shares of Tokos Common Stock and Healthdyne Common Stock converted in
the Merger will no longer be outstanding and will automatically be cancelled and
retired and will cease to exist, and each holder of a certificate representing
any such shares will cease to have any rights with respect thereto, except the
right to receive, without interest, shares of Newco Common Stock upon the
surrender of such certificate. Any shares held in the treasury of Healthdyne or
Tokos shall be cancelled and retired, and no payment shall be made with respect
thereto.
TREATMENT OF STOCK OPTIONS AND CONVERTIBLE SECURITIES
Pursuant to the Merger Agreement, as of the Effective Time, Newco shall
assume the Assumed Options. Each Assumed Option will be exercisable for the
number of Newco Shares equal to the number of Tokos or Healthdyne shares subject
to such option prior to the Effective Time, at the exercise price per Newco
Share equal to the exercise price per Tokos or Healthdyne share applicable to
such Assumed Option immediately prior to the Effective Time (without taking into
account any anti-dilution formula); provided, however, that in the case of any
Employee Stock Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the conversion formula shall be
adjusted, if necessary, to comply with Section 424(a) of the Code. Except as
provided above, each Assumed Option shall continue to have and be
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subject to the same terms and conditions as were applicable to such option
immediately prior to the Effective Time except that, in the case of Healthdyne,
each such Assumed Option held by an optionee who continues his service with
Healthdyne up to the Effective Time shall become immediately exercisable for all
of the shares subject to such option and, in the case of Tokos, the repurchase
rights in favor of Tokos with respect to each Assumed Option held by an optionee
who continues his service with Tokos up to the Effective Time will not be
transferred to Newco in the Merger. Assumed Options held by officers and
directors of Healthdyne whose employment by Newco is terminated at or after the
Effective Time shall continue to be exercisable for 12 months after the
Effective Time (to the extent otherwise exercisable), rather than three months,
after such termination of employment, unless the final expiration date of the
Assumed Options would have occurred prior thereto without regard to early
termination for any reason, in which case such Assumed Options shall continue to
be exercisable only until the final expiration date. Assumed Options held by
Tokos executive officers shall continue to be exercisable after the Effective
Time (to the extent otherwise exercisable) until the final expiration date of
such options. Any repurchase rights of Tokos and Healthdyne with respect to (y)
unvested Tokos and Healthdyne shares previously issued upon exercise of options
granted under the option plans or (z) unvested Newco Shares issuable upon
exercise of the Assumed Options, shall not be assigned to Newco. As soon as
reasonably practicable after the Effective Time, Newco will cause to be filed
one or more registration statements on Form S-8 under the Securities Act, or
amendments to any registration statements on Form S-8 covering its stock options
to register the Newco Shares issuable upon exercise of the Assumed Options, and
at or prior to the Effective Time, Newco shall take all corporate action
necessary to reserve for issuance a sufficient number of Newco Shares for
delivery upon exercise of the Assumed Options. The consummation of the Merger
shall not of itself be treated as a termination of an optionee's service with
Tokos or Healthdyne for purposes of the Assumed Options or the option plans.
Approval and adoption of the Merger Agreement by Healthdyne and Tokos
Stockholders will constitute approval of the assumption by Newco of the Assumed
Options outstanding under the Healthdyne Stock Option Plans and the Tokos Stock
Option Plans.
As of the Effective Time, each of the 8% Convertible Subordinated
Debentures Due December 31, 2001 (the "Convertible Debentures") of Healthdyne
which is outstanding both as of October 2, 1995 and at the Effective Time shall
be assumed by Newco by execution and delivery of a supplemental indenture,
pursuant to which Newco will agree to issue Newco Shares upon conversion of the
Convertible Debentures.
EXCHANGE OF CERTIFICATES
As of the Effective Time, Newco will deposit with SunTrust Bank, Atlanta,
Georgia, as exchange agent (the "Exchange Agent"), for the benefit of the
holders of shares of Healthdyne Common Stock and Tokos Common Stock, for
exchange in accordance with the Merger Agreement, certificates representing the
shares of Newco Common Stock to be issued in exchange for certificates which
represented shares of Tokos Common Stock or Healthdyne Common Stock, as the case
may be, immediately prior to the Effective Time.
Promptly after the Effective Time, Newco will cause the Exchange Agent to
mail to each holder of record of Tokos Common Stock and Healthdyne Common Stock
a letter of transmittal to be used by such holders in forwarding their
certificates representing such shares ("Certificates") and instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of Newco Common Stock. TOKOS AND HEALTHDYNE STOCKHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR RESPECTIVE CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE A NOTICE AND TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
Because of the one-for-one Exchange Ratio for both Healthdyne and Tokos
shares, there will be no fractional shares issued in the Merger unless
Healthdyne or Tokos effects changes in its outstanding capital stock (such as a
stock split or stock dividend), none of which is anticipated. In the event that
any such change results in an Exchange Ratio of other than one-for-one, no
fractional shares of Newco Common Stock will be issued and any holder of shares
of Healthdyne Common Stock or Tokos Common Stock entitled under the Merger
Agreement to receive a fractional share will be entitled to receive only a cash
payment in lieu thereof, which payment will be in an amount equal to the product
of (i) the fractional percentage of a share of Newco
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Common Stock to which such holder would otherwise be entitled, and (ii) the
Average Price (as defined below) of a Newco Share. The "Average Price" of a
Newco Share will be the average of the closing sales prices thereof for the five
trading days commencing on the third trading day following the Closing.
No dividends that are declared on Newco Shares will be paid to persons
entitled to receive certificates representing Newco Shares until such persons
surrender their certificates representing shares of Healthdyne Common Stock or
Tokos Common Stock. Upon such surrender, there shall be paid to the person in
whose name the certificates representing such Newco Shares shall be issued, any
dividends which shall have become payable with respect to such Newco Shares
between the Effective Time and the time of such surrender. In no event shall the
person entitled to receive such dividends be entitled to receive interest on
such dividends. If any certificates for any Newco Shares are to be issued in a
name other than that in which the certificate representing shares of Healthdyne
Common Stock or Tokos Common Stock surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the person requesting
such exchange shall pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of certificates for such Newco Shares in a
name other than that of the registered holder of the certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Notwithstanding the foregoing, none of Tokos,
Healthdyne, the Exchange Agent nor any other person shall be liable to a holder
of shares of Healthdyne Common Stock or Tokos Common Stock for any Newco Shares
or dividends thereon or the cash payment for fractional interests delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
At the Effective Time, the stock transfer books of Healthdyne and Tokos
shall be closed and no transfer of shares of Healthdyne Common Stock or Tokos
Common Stock shall thereafter be made. If, after the Effective Time,
certificates representing shares of Healthdyne Common Stock or Tokos Common
Stock are presented to Newco, they shall be cancelled and exchanged for
certificates representing Newco Shares in accordance with the terms hereof.
Any portion of the monies from which cash payments in lieu of fractional
interests in shares of Newco Common Stock will be made (including the proceeds
of any investment thereof), if any, and any shares of Newco Common Stock that
are unclaimed by the former stockholders of Tokos or Healthdyne one year after
the Effective Time will be delivered to Newco. Any former stockholders of Tokos
or Healthdyne who have not theretofore complied with the exchange procedures in
the Merger Agreement may thereafter look to Newco for delivery of their shares
of Newco Common Stock, deliverable in respect of each share of Newco Common
Stock such stockholder holds and any unpaid dividends and distributions on such
shares of Newco Common Stock. Notwithstanding the foregoing, none of Tokos,
Healthdyne, the Exchange Agent or any other person will be liable to any former
holder of shares of Tokos Common Stock or Healthdyne Common Stock for any amount
properly delivered to a public official pursuant to the applicable abandoned
property, escheat or similar laws.
No interest will be paid or accrued on cash in lieu of fractional shares,
if any, or unpaid dividends and distributions, if any, which will be paid upon
surrender of Certificates.
In the event any certificate evidencing shares is lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed certificate evidencing shares the
appropriate amount of Newco Common Stock. The Board of Directors of Newco may,
as a condition to the issuance thereof, require the owner of such lost, stolen
or destroyed Certificate to give Newco a bond in such sum as it may direct as
indemnity against any claim that may be made against Newco with respect to such
certificate alleged to have been lost, stolen or destroyed.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, each of Healthdyne's and Tokos': (i)
organization, existence, and capital structure and ownership of their respective
subsidiaries; (ii) authorization, execution, delivery, performance and
enforceability of the Merger Agreement; (iii) absence of conflicts under their
respective organizational documents, required
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consents and approvals, breaches of material contracts, and violations of
orders, statutes and regulations; (iv) documents filed by each of Healthdyne and
Tokos with the Commission and the accuracy of information contained therein
(including, with respect to Healthdyne, materials relating to the HIE Spinoff;
(v) absence of certain material changes; (vi) litigation, contracts and employee
benefit plans; (vii) compliance with material laws and regulations, including
payment of taxes; (viii) labor and employment matters; (ix) insurance; (x)
contracts with physicians, hospitals, HMOs and third party providers; (xi) no
ownership of the capital stock of the other company; (xii) stockholder rights
plans; (xiii) absence of dissenter's rights; (xiv) accuracy and completeness of
corporate records; and (xv) intellectual property rights.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
Each of Healthdyne and Tokos has agreed among other things, prior to the
Effective Time, unless the other agrees in writing or as otherwise required or
permitted by the Merger Agreement, (i) to conduct its operations only in the
ordinary course of business consistent with past practices, (ii) to confer with
representatives of the other on a regular and frequent basis to report
operational matters of a material nature and proposed material transactions and
deliver to the other unaudited financial statements, (iii) to promptly notify
the other of any material change in the conditions of its businesses and (iv) to
use its best efforts to preserve intact its present business organization, keep
available the services of its present officers and employees and preserve its
relationships with those persons having business relationships with them. In
addition, each of Healthdyne and Tokos has agreed, among other things, prior to
the Effective Time, unless the other agrees in writing or as otherwise required
or permitted by to the Merger Agreement, that it shall not: (i) amend its
certificate of incorporation or by-laws, (ii) except pursuant to the exercise of
certain options, stock purchase plans, debentures or warrants existing on
October 2, 1995, issue any shares of its capital stock or change its
capitalization as it existed on October 2, 1995, (iii) increase any compensation
or enter into or amend any employment agreement with any of its present or
future officers or directors, except for normal increases consistent with past
practice and the payment of cash bonuses to officers pursuant to and consistent
with existing bonus plans or programs, (iv) institute any new employee benefit
plan or amend any existing employee benefit plan in any material respect, (v)
declare, set aside or pay any dividend or make any other distribution or payment
with respect to any shares of its capital stock (except, in the case of
Healthdyne, the HIE Spinoff), (vi) directly or indirectly acquire any shares of
its capital stock or capital stock of any of its subsidiaries, (vii) change the
number of shares of Healthdyne Common Stock or Tokos Common Stock, as the case
may be, issued and outstanding by effecting a stock split, reverse stock split,
stock dividend, recapitalization or other similar transaction, or (viii) permit
any of its subsidiaries to sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, except in the ordinary
course of business.
Healthdyne and Tokos have agreed that, during the period from October 2,
1995 and continuing until the Effective Time, except as otherwise contemplated
by the Merger Agreement, neither Healthdyne nor Tokos will knowingly take any
action, or knowingly fail to take any action, that would jeopardize the
treatment of the Merger as a reorganization within the meaning of Section 368(a)
of the Code.
Both Healthdyne and Tokos have agreed (i) to cooperate in the prompt
preparation and filing of certain documents under federal and state securities
laws and filing of certain documents under federal and state securities laws and
with applicable government entities and (ii) to use their best efforts to obtain
and deliver to each other certain agreements from "affiliates", as such term is
defined under Rule 145 of the Securities Act.
NEGOTIATIONS WITH OTHERS
Each of Healthdyne and Tokos and their respective subsidiaries has agreed
that they will not, and will use their best efforts to cause their respective
directors, officers, employees, financial advisors, legal counsel, accountants
and other agents and representatives ("affiliates") not to, initiate, solicit or
encourage, directly or indirectly, or take any other action to facilitate any
inquiries or the making of any proposal with respect to, or, except to the
extent required in the exercise of the fiduciary duties of its Board of
Directors under applicable law as advised by independent counsel, engage or
participate in negotiations concerning, provide any nonpublic information or
data to or have any discussions with any person except the other or their
affiliates relating to,
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any acquisition, tender offer (including a self-tender offer), exchange offer,
merger, consolidation, acquisition of beneficial ownership of or the right to
vote securities representing ten percent (10%) or more of the total voting power
of such entity or any of its subsidiaries, dissolution, business combination,
purchase of all or any significant portion of the assets or any division of, or
any equity interest in, such entity or any subsidiary, or similar transaction
other than the Merger (such proposals, announcements, or transactions being
referred to as "Acquisition Proposals"). Each of Healthdyne and Tokos has agreed
to notify the other promptly orally and in writing if any such Acquisition
Proposals (including the terms thereof and identity of the persons making such
proposals) are received and furnish to the other a copy of any written proposal.
MANAGEMENT AFTER THE MERGER
The Bylaws of Newco (the "Newco Bylaws") immediately following the
Effective Time shall be in the form attached as Appendix E and the Board of
Directors of Newco is obligated to take all action necessary to cause: Carl E.
Sanders and Craig T. Davenport to be elected as directors of Newco for terms
expiring at the 1996 Annual Meeting of Stockholders; Jackie M. Ward, Frederick
P. Zuspan, M.D., Thomas W. Erickson and David L. Goldsmith to be elected as
directors of Newco for terms expiring at the 1997 Annual Meeting of
Stockholders; and Robert F. Byrnes, Parker H. Petit, Morris S. Weeden and Gene
P. Guselli to be elected as directors of Newco for terms expiring at the 1998
Annual Meeting of Stockholders. Under the terms of Newco Bylaws, if any of the
Tokos Nominated Directors (Robert F. Byrnes, Gene P. Guselli, Craig T.
Davenport, Thomas W. Erickson and David L. Goldsmith) are unable or unwilling to
serve as a director of Newco, such individual or individuals shall be replaced
by an individual or individuals designated by the Tokos Board of Directors and
if any of the Healthdyne Nominated Directors (Parker H. Petit, Carl E. Sanders,
Jackie M. Ward, Morris S. Weeden and Frederick P. Zuspan, M.D.) are unable or
unwilling to serve, such individual or individuals shall be replaced by an
individual or individuals designated by the Healthdyne Board of Directors. In
addition, for a period of three years following the Effective Time and
continuing through Newco's 1998 Annual Meeting of Stockholders, (i) any vacancy
on Newco's Board of Directors, or any committee thereof, arising among the Tokos
Nominated Directors and any nominee selected to fill a director position
occupied by a Tokos Nominated Director will be filled or selected by the
remaining Tokos Nominated Directors and (ii) any vacancy on Newco's Board of
Directors, or any committee thereof, arising among the Healthdyne Nominated
Directors and any nominee selected to fill a director position occupied by a
Healthdyne Nominated Director will be filled or selected by the remaining
Healthdyne Nominated Directors. Each of the directors of each of Healthdyne and
Tokos has agreed to take such individual action, as may be necessary on such
director's part, including resignation, to cause compliance with the provisions
described in this paragraph. See "Operation, Management and Business of Newco
After the Merger" and Newco Bylaws attached as Appendix E to this Joint Proxy
Statement/Prospectus.
Newco's Board of Directors is obligated to take all action necessary to
elect the following as the principal executive officers of Newco: Parker H.
Petit -- Chairman of the Board; Robert F. Byrnes -- President and Chief
Executive Officer; Frank Powers -- Executive Vice President-Provider Operations;
Terry P. Bayer -- Executive Vice President -- Managed Care Operations; Donald R.
Millard -- Senior Vice President and Chief Financial Officer; and J. Brent
Burkey -- Senior Vice President and General Counsel. In addition, Newco is
obligated to take all necessary actions to establish the following four
committees of the Board of Directors of Newco: an executive committee (the
"Executive Committee"), an audit committee (the "Audit Committee"), a
compensation and stock option committee (the "Compensation Committee") and a
nominating committee (the "Nominating Committee").
INDEMNIFICATION AND INSURANCE
Newco will indemnify and advance expenses to the Indemnified Parties, to
the fullest extent permitted under applicable law, against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation arising out of or pertaining to acts
or omissions, or alleged acts or omissions, by them in their capacities as such,
whether commenced, asserted or claimed before or after the Effective Time and
including, without limitation, liabilities arising under the Securities Act, the
Exchange Act or state
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corporation laws in connection with the Merger. In addition, Newco will keep in
effect the provisions in its Certificate and Bylaws providing for exculpation of
director and officer liability and indemnification, except as required by
applicable law or except to make changes permitted by law that would enlarge the
Indemnified Parties' right of indemnification.
For a period of six years after the Effective Time, Newco is obligated to
maintain in effect policies of officers' and directors' liability insurance
covering the Indemnified Parties, who are presently covered by Healthdyne or
Tokos insurance policies, on terms that are substantially no less advantageous
to such Indemnified Parties than such existing insurance; provided, that Newco
will not be required, in order to maintain or procure such coverage, to pay an
annual premium in excess of an agreed upon amount (the "Cap") and provided
further that if equivalent coverage cannot be obtained, or can be obtained only
by paying an annual premium in excess of the Cap, Newco will only be required to
obtain as much coverage as can be obtained by paying an annual premium equal to
the Cap.
Newco will pay all expenses, including attorneys' fees, that may be
incurred by any of the Indemnified Parties in enforcing the indemnity and other
obligations referred to above. The rights of each Indemnified Party will be in
addition to any other rights such person may have under the Newco Certificate or
Bylaws, the DGCL or otherwise.
CONDITIONS TO THE MERGER
The respective obligations of Healthdyne and Tokos to consummate the Merger
are subject to the fulfillment of each of the following conditions: (i) the
Merger Agreement shall have been approved by the requisite holders of the
Healthdyne Common Stock and the Tokos Common Stock; (ii) the waiting period
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated; (iii) neither Healthdyne nor Tokos shall be subject
to any order or injunction of a court of competent jurisdiction which prohibits
the consummation of the Merger; (iv) the Registration Statement shall have
become effective and no stop order with respect thereto shall be in effect; (v)
the shares of Newco Common Stock issued in the Merger shall have been approved
for listing on the Nasdaq National Market; (vi) all consents, authorizations,
orders and approvals of (or filings or registrations with) any governmental
commission, board or other regulatory body required in connection with the
execution, delivery and performance of the Merger Agreement shall have been
obtained or made, except where the failure to have obtained or made any such
consent, authorization, order, approval, filing or registration would not have a
material adverse effect on Tokos and Healthdyne (and their respective
subsidiaries), taken as a whole, following the Effective Time; (vii) no action
shall have been taken nor any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger by any governmental entity
which imposes any condition or restriction upon Newco, Healthdyne, Tokos or
their respective subsidiaries which would so materially adversely impact the
economic or business benefit of the Transactions contemplated by the Merger
Agreement as to render inadvisable the consummation of the Merger; (viii) Newco
shall have caused the Board of Directors, committees and officers of Newco to be
selected pursuant to, and as set forth in, the Merger Agreement; (ix) Tokos
Medical Corporation, a California corporation, shall have been merged into
Tokos; and (x) at least twenty (20) days prior to the Effective Time, Healthdyne
shall have consummated the HIE Spinoff in all material respects in conformity
with the description thereof contained in the preliminary prospectus contained
in the registration statement filed with the SEC on September 1, 1995.
The obligations of each of Healthdyne and Tokos to effect the Merger also
are subject to the fulfillment or waiver by the other party prior to the
Effective Time of the following conditions: (i) the other party shall have
performed in all material respects its agreements contained in the Merger
Agreement required to be performed by it under the Merger Agreement; (ii) the
representations and warranties of the other party contained in the Merger
Agreement shall be true and correct unless the failure of any of the
representations and warranties to be true and correct would not have or would
not be reasonably likely to have a material adverse effect on such party and its
subsidiaries, taken as a whole; (iii) Healthdyne and Tokos shall have each
received certain opinions of its tax counsel with respect to the federal tax
treatment of the Merger; (iv) Healthdyne and Tokos shall have received a
"comfort" letter from its and the other party's accountants; and (v) Healthdyne
and Tokos shall have obtained the consent or approval of each person whose
consent or
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approval is required in connection with the transactions contemplated by the
Merger Agreement, except where the failure to obtain such consents and approvals
would not have a material adverse effect.
HIE SPINOFF
As noted above under "The Merger Agreement -- Conditions to the Merger,"
consummation of the HIE Spinoff is a condition to the respective obligations of
Healthdyne and Tokos to consummate the Merger. On October 20, 1995, the Board of
Directors of Healthdyne approved a plan to distribute Healthdyne's 100% owned
interest in HIE to the shareholders of Healthdyne in a taxable distribution.
Holders of shares of Healthdyne Common Stock were not required to pay any cash
or other consideration for the shares of HIE Common Stock distributed or to
surrender or exchange shares of Healthdyne Common Stock in order to receive HIE
Common Stock. The Board of Directors of HIE had previously approved an
Adjustment Stock Option Plan and other arrangements related to the HIE Spinoff.
Healthdyne's Board of Directors established October 30, 1995 as the record date
and November 6, 1995 as the date for the HIE Spinoff.
The HIE Spinoff was effected on November 6, 1995, by mailing certificates
of HIE Common Stock to the holders of record of Healthdyne Common Stock on
October 30, 1995. One share of HIE Common Stock was distributed for each share
of Healthdyne Common Stock held, of which 16,114,851 were outstanding on the
record date. Following the HIE Spinoff, Healthdyne does not own any shares of
HIE Common Stock and all 16,114,851 outstanding shares of HIE Common Stock are
available for trading on the National Association of Securities Dealers over the
counter bulletin board.
On October 20, 1995, Healthdyne and HIE entered into a Distribution
Agreement, which sets forth their rights and obligations in connection with the
HIE Spinoff and also executed related Tax Indemnity and Tax Disaffiliation
Agreements, a Corporate Services Agreement and a License Agreement. On November
7, 1995, the first day of trading, the HIE stock traded in the over-the-counter
market at $1.25 per share, and Healthdyne intends to utilize that price as the
fair market value of HIE's Common Stock in reporting the HIE Spinoff for federal
income tax purposes. Based on that valuation, the HIE Spinoff would not result
in any significant taxable gain to Healthdyne (or claim against HIE under the
Tax Indemnity Agreement). However, HIE's Common Stock has subsequently closed at
prices ranging from $1.375 to $2.313. If those or any other prices in excess of
$1.25 per share were deemed to represent the fair value of HIE Common Stock on
the date of the HIE Spinoff, Healthdyne could incur approximately $1.3 million
of federal income tax liability for each $0.25 increase in the fair value of
HIE's Common Stock. Healthdyne has net operating losses (NOLs) of approximately
$9,800,000, which may cover any tax liability resulting from the HIE Spinoff. In
the event Healthdyne does incur a federal income tax liability or is required to
utilize NOLs to decrease or eliminate any monetary payment of a federal income
tax liability as a result of the HIE Spinoff, HIE would be obligated under the
Tax Indemnity Agreement to reimburse Healthdyne for such liability or
utilization of NOLs, and HIE would have the option to pay such amounts in HIE
Common Stock. Because the full value of any HIE Common Stock received by
Healthdyne in satisfaction of HIE's indemnity obligation under the Tax Indemnity
Agreement may not be realized upon the sale of such stock by Healthdyne, there
is no absolute assurance that Healthdyne or Newco will not incur any losses as a
result of the HIE Spinoff.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, before or after approval by the stockholders of
Healthdyne and Tokos:
(a) by the mutual written consent of Healthdyne and Tokos;
(b) by either Tokos or Healthdyne, if (i) the Merger has not been
consummated on or before May 1, 1996, (ii) the approval of the other's
stockholders has not been obtained at a duly held meeting of such
stockholders or at any adjournment thereof, or (iii) any court of competent
jurisdiction in the United States or other United States governmental
authority has issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action has become final and nonappealable;
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(c) by Healthdyne, (i) upon a breach by Tokos of (A) any
representation or warranty which would have or would be reasonably likely
to have a Material Adverse Effect on Tokos or (B) any material covenant or
agreement set forth in the Merger Agreement, which breach is not curable
or, if curable, is not cured within the earlier to occur of twenty (20)
days after written notice of such breach is given by Healthdyne to Tokos or
the Closing; (ii) if the Board of Directors of Tokos shall have withdrawn
or modified in a manner adverse to Healthdyne its approval or
recommendation of the Merger Agreement or the Merger, or shall have
resolved to do the same (provided, however, that Healthdyne may not
terminate the Merger Agreement pursuant to this clause (ii), if, as a
result of Tokos' receipt of an Acquisition Proposal from a third party,
Tokos withdraws, modifies or amends its approval or recommendation of the
transactions contemplated thereby and if Tokos publicly reconfirms its
recommendation of the transactions contemplated thereby and notifies
Healthdyne of such reconfirmation prior to termination of the Merger
Agreement by Healthdyne pursuant to this clause (ii)); or (iii) if it shall
receive any Acquisition Proposal after October 2, 1995 from a third party
or parties and the Board of Directors of Healthdyne shall have determined
in good faith that in the exercise of its fiduciary duties to the
shareholders of Healthdyne that it must recommend or approve such
Acquisition Proposal; provided that Healthdyne may only terminate the
Merger Agreement pursuant to this clause if it is not then otherwise in
breach of the Merger Agreement and provided further that Healthdyne may
only terminate the Merger Agreement pursuant to this clause if it
simultaneously with such termination delivers to Tokos the "Cancellation
Fee" (as hereinafter defined); or
(d) by Tokos, (i) upon a breach by Healthdyne of (A) any
representation or warranty which would have or would be reasonably likely
to have a Material Adverse Effect on Healthdyne or (B) any material
covenant or agreement set forth in the Merger Agreement, which breach is
not curable or, if curable, is not cured within the earlier to occur of
twenty (20) days after written notice of such breach is given by Tokos to
Healthdyne or the Closing; (ii) if the Board of Directors of Healthdyne
shall have withdrawn or modified in a manner adverse to Tokos its approval
or recommendation of the Merger Agreement or the Merger, or shall have
resolved to do the same (provided, however, that Tokos may not terminate
the Merger Agreement pursuant to this clause (ii), if, as a result of
Healthdyne's receipt of an Acquisition Proposal from a third party,
Healthdyne withdraws, modifies or amends its approval or recommendation of
the transactions contemplated thereby and if Healthdyne publicly reconfirms
its recommendation of the transactions contemplated thereby and notifies
Tokos of such reconfirmation prior to termination of the Merger Agreement
by Tokos pursuant to this clause (ii)); or (iii) if it shall receive any
Acquisition Proposal after October 2, 1995 from a third party or parties
and the Board of Directors of Tokos shall have determined in good faith
that in the exercise of its fiduciary duties to the stockholders of Tokos
that Tokos must recommend or approve such Acquisition Proposal; provided
that Tokos may only terminate the Merger Agreement pursuant to this clause
if it is not then otherwise in breach of the Merger Agreement and provided
further that Tokos may only terminate the Merger Agreement pursuant to this
clause if it simultaneously with such termination delivers to Healthdyne
the Cancellation Fee described below.
CANCELLATION FEE AND EFFECT OF TERMINATION
If with respect to either Tokos or Healthdyne (each a "Subject Company"):
(i) after October 2, 1995 any third party shall have become the beneficial owner
of ten percent (10%) or more of the shares of Common Stock of the Subject
Company outstanding at the time of such acquisition (other than acquisitions for
bona fide arbitrage purposes only); (ii) the Subject Company shall have entered
into an agreement, including without limitation an agreement in principle, with
respect to an Acquisition Proposal, other than the Merger; (iii) any third party
shall solicit and obtain proxies or consents from the Subject Company's
stockholders representing a majority of the outstanding shares of Common Stock
of the Subject Company with respect to an acquisition of control of the Subject
Company (other than solicitations relating to the Merger Agreement) or with
respect to a stockholder proposal aimed at preventing or recommending against
consummation of the Merger Agreement or any related transaction and such third
party shall successfully use such proxies or consents to acquire control of the
Subject Company or to defeat the Merger and the Subject Company shall enter into
an agreement, including without limitation, an agreement in principle with
respect to an Acquisition
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Proposal within six months thereafter; or (iv) the Subject Company shall breach
any of the provisions of the Merger Agreement prohibiting it from soliciting
Acquisition Proposals or shall recommend or approve an Acquisition Proposal and,
in either case, the Merger Agreement is terminated pursuant to the provisions
described in clause (i), (ii) or (iii) of paragraphs (c) and (d) above; then
such Subject Company ("Payor Company") shall pay to the other Subject Company
("Receiving Company") a fee in cash or immediately available funds of Five
Million Five Hundred Thousand Dollars ($5,500,000) (the "Cancellation Fee");
provided, however, that no such Cancellation Fee shall be payable with respect
to the provisions described in clauses (i) through (iii) above if the applicable
event otherwise triggering the Cancellation Fee occurs after the Merger
Agreement has been terminated pursuant to the provisions described in paragraph
(a), paragraph (b) or clause (i) of paragraphs (c) or (d) above.
In the event that either Healthdyne or Tokos terminates the Merger
Agreement pursuant to, respectively, the provisions described in clause (i) of
paragraph (c) or (d) above, then the nonterminating party shall pay to the
terminating party One Million Dollars ($1,000,000) representing full payment of
the terminating party's reasonable out-of-pocket expenses incurred in connection
with the negotiation, execution and performance of the Merger Agreement
("Expense Reimbursement Payment"); provided, however, that the terminating party
shall not be entitled to any Expense Reimbursement Payment if at the time of
termination the nonterminating party also would have been entitled to terminate
the Merger Agreement pursuant to the provisions described in clause (i) of
paragraph (c) or (d) above, as applicable. In addition, if the stockholders of
Healthdyne or Tokos fail to approve the Merger and the Merger Agreement is
terminated by Healthdyne or Tokos, then the party whose stockholders have so
failed to approve the Merger shall pay to the other party the Expense
Reimbursement Payment; provided, however, that no Expense Reimbursement Payment
shall be due if the stockholders of the party which would have otherwise been
entitled to such Expense Reimbursement Payment have previously failed to approve
the Merger at the stockholders meeting called for that purpose.
Payment of the Cancellation Fee and payment of the Expense Reimbursement
Payment when required, shall constitute full settlement of any and all
liabilities and obligations of the Payor Company under the Merger Agreement,
except for liabilities arising from the fraud or willful misconduct of the Payor
Company.
AMENDMENT AND WAIVER
Subject to applicable law, (a) the Merger Agreement may be amended at any
time by action taken by the respective Boards of Directors of the parties and
(b) the parties, by action taken by their respective Boards of Directors, may,
at any time prior to the Effective Time, extend the time for performance of any
obligation or action required of the other party under the Merger Agreement, may
waive inaccuracies in representations and warranties made to it in the Merger
Agreement and any document delivered pursuant to the Merger Agreement and may
waive compliance with any agreements or conditions for their respective benefit
contained in the Merger Agreement.
DESCRIPTION OF TOKOS
BUSINESS OF TOKOS
INTRODUCTION. Tokos is a leading national provider of specialized
obstetrical home health care services which assist physicians in the management
of high risk pregnancies. In addition, Tokos provides home health care services
for the management of other complicated obstetrical and gynecological
conditions. These management services are designed to achieve improved medical
outcomes at significant cost savings through the reduction of patient
hospitalization. Services offered by Tokos include screening to identify women
who may be at risk of complications during pregnancy; maternal risk assessment
and prenatal education for asymptomatic patients; daily management and education
of high risk patients; administration and supervision of a broad range of home
infusion therapies for obstetrical and gynecological conditions; specialty
obstetrical and gynecological nursing and pharmacy services; and pharmacy
compounding and dispensing services. In 1995 Tokos continued to expand its
service offerings to support patients through the entire maternal-newborn
episode of care -- from preconception through post partum. In addition, Tokos
offers consulting, management
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and administrative services to provider networks and managed care organizations
through its Matryx Health Partners division.
On July 29, 1992, Tokos acquired all of the outstanding stock of CareLink
Corporation for approximately 1,225,000 shares of Tokos Common Stock through a
merger which has been accounted for as a pooling-of-interests. Prior to the
merger, CareLink Corporation was primarily involved in providing a comprehensive
system of products and services to women with complicated pregnancies including
related home obstetrical care. The operations of CareLink Corporation have been
fully integrated into Tokos.
On December 31, 1991 Tokos acquired the exclusive marketing rights in the
U.S. and Canada to a proprietary immunoassay for fetal fibronectin developed and
patented by Adeza Biomedical Corporation, a California corporation ("Adeza").
The test has been demonstrated to be a reliable marker for predicting preterm
delivery by detecting the presence of the fetal fibronectin protein during the
24th and 34th week of pregnancy. On September 21, 1995 the Food and Drug
Administration (the "FDA") approved the pre-market approval application for this
in vitro diagnostic device as an aid in assessing the risk of pre-term delivery
within 7 to 14 days from the time of sample collection in women with symptoms of
preterm labor.
On August 31, 1991, Tokos acquired all of the outstanding stock of Medical
Resource Management, Inc. and Southside Obstetrical, Inc., each of which was a
South Carolina corporation; as well as all partnership interests in Triad
Obstetrical Homecare, L.P.; Piedmont Obstetrical Homecare, L.P.; Midlands
Obstetrical Homecare, L.P.; and Lowcountry Obstetrical Homecare, L.P., each of
which was a South Carolina Limited Partnership (collectively referred to as
"MRM"). Pursuant to certain merger agreements, Tokos acquired all of the
outstanding shares and partnership interests of the MRM group for approximately
439,000 shares of Tokos Common Stock. Each transaction has been accounted for as
a pooling-of-interests. MRM provides preterm labor management services for
pregnant women at risk of preterm labor along with other specialized services
associated with high risk pregnancies and complicated gynecological conditions
in the Carolinas. The operations of MRM have been fully integrated into Tokos.
On August 31, 1990, Tokos acquired all of the outstanding stock of
Physiologic Diagnostic Service, Inc. ("PDS") for approximately 2,700,000 shares
of Tokos Common Stock, including shares issued pursuant to PDS' pre-merger stock
option plans. The acquisition has been accounted for as a pooling-of-interests.
Prior to the merger, PDS was a provider of home uterine activity monitoring and
perinatal nursing services for pregnant women at high risk of preterm labor. The
operations of PDS have been fully integrated into Tokos.
Tokos' wholly-owned operating subsidiary, Tokos Medical Corporation, was
incorporated in California in July 1983. Tokos was incorporated in California in
January 1985 as the parent corporation of Tokos Medical Corporation and was
reincorporated under the laws of the State of Delaware on February 14, 1990.
Tokos conducts its device manufacturing business through CareLink ("CareLink")
and its clinical services operations through Tokos Clinical Services, each of
which is operated as a division of Tokos Medical Corporation. Unless the context
otherwise requires, "Tokos" refers to Tokos Medical Corporation (Delaware), a
Delaware corporation, its predecessor, and its wholly-owned operating
subsidiaries and divisions, including Tokos Medical Corporation. Tokos maintains
its executive offices at 1821 East Dyer Road, Santa Ana, California 92705.
SERVICES. Tokos offers a comprehensive range of specialized home health
care and risk assessment services designed to assist physicians in managing high
risk pregnancies and numerous other obstetrical and gynecological conditions
more cost effectively. Substantially all of Tokos' revenues are derived from
these services. In addition, Tokos has begun to provide consulting, management
and administrative services to address the needs of provider networks, managed
care organizations and other third party payors.
High Risk Pregnancy Management. Tokos offers multiple levels of high risk
pregnancy management services to assist physicians in the early detection of
preterm labor and the management of complicated pregnancies. These levels are
designed to meet various patient acuity levels and range from low intensity
surveillance to comprehensive obstetrical home care. Each level includes one or
more of the following: the screening of patients to identify women who may be at
risk for complications during pregnancy; the development of an individualized
program of care for each patient; the education of the patient as to
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symptoms associated with preterm labor; skilled perinatal nursing assessments of
the patient's condition; and the use of perinatal nurses and pharmacists
specializing in obstetrics to administer and manage tocolytic therapies designed
to meet the individualized needs of the patient.
- Preterm Labor Management. A physician who chooses to utilize Tokos'
preterm labor management services will prescribe the level of service offered by
Tokos that the physician believes is appropriate for the patient's acuity level.
The patient is assigned to a perinatal nurse located in one of Tokos' patient
service centers. This nurse is generally the patient's primary contact for the
duration of her treatment plan which typically lasts four to seven weeks
depending on the level of service prescribed. At the time of the assignment, the
nurse contacts the patient to discuss the physician's treatment plan and
instruct her in the use of any device, if one has been prescribed by her
physician. The nurse will educate the patient and, if appropriate, her family
with regard to symptoms associated with preterm labor, the methods to detect
such symptoms, and proper methods of care to minimize complications during
pregnancy. After the initial consultation, if the physician has prescribed a
comprehensive level of service, the nurse contacts the patient on a daily basis
to assess her condition including any symptoms of preterm labor, to provide
emotional support and counseling, and to encourage compliance with the
physician's treatment plan. Through the daily contact with the patient and the
frequent assessment of symptoms associated with preterm labor, Tokos' nurse
obtains information that assists the prescribing physician in the early
detection and treatment of preterm labor. If the physician prescribes Tokos' low
intensity surveillance or diagnostic services, the patient basically receives
the same initial consultation and education; however, Tokos' nurse does not
contact the patient on a daily basis. Instead, the patient transmits the results
of her uterine activity assessment and other symptoms to Tokos's center every
day and the nurse only initiates contact with the patient when the patient's
assessment data suggests the patient is symptomatic or other complications
exist. With any level of service, patients are encouraged to contact Tokos'
centers, which are staffed 24 hours a day, 7 days a week, as often as they
desire. If the nurse becomes aware of symptoms indicating the onset of preterm
labor or other impending medical complications, the nurse initiates contact with
the patient's physician.
Physicians may also prescribe labor inhibiting drugs known as tocolytics
for patients that are symptomatic and in need of some form of intervention.
Tokos provides supervision and administration of this therapy regime to patients
as an alternative to hospitalization. Frequently, this therapy involves delivery
of the drugs by a micro infusion pump. Tokos' nurses and pharmacists monitor the
patient's reactions to the therapy on an on-going basis. Nurses report any
change in patient status to the patient's physician as well as provide the
physician with periodic reports during the course of the therapy.
- Obstetrical Pharmacy Services and Support. Tokos employs specialized
clinical pharmacists who provide consulting services and support 24 hours a day,
7 days a week, to Tokos' nurses, and patients and their physicians as well as
other health care professionals. Tokos' pharmacists either have prior experience
or receive training from Tokos in the progressive physiological and metabolic
changes that affect drug pharmacokinetics as well as a woman's response during
pregnancy, and each is required to maintain and abide by a set of rigorous
professional standards adopted by Tokos. Tokos has developed proprietary
software systems specifically to assist in the assessment and clinical
monitoring of pregnant women, thereby enhancing the ability of both the
physician and pharmacist to develop effective individualized therapeutic
regimens to meet each patient's distinctive needs. Tokos' pharmacy services also
include patient and physician consultations, clinical laboratory monitoring and
complete documentation recording, as well as the preparation of a complete
medication history and profile. Tokos provides compounding and dispensing of
medication and supplies through a combination of national and local contracts as
well as its pharmacy located at its offices in Santa Ana, California.
- Full-Term Labor Management. Pregnant women suffering from paralysis or
other significant disorders may not be able to detect the onset of labor. Tokos'
full-term labor management services, which incorporate Tokos' nursing services
and home uterine activity monitoring devices, are prescribed by physicians to
aid such patients in the detection of labor.
Other Obstetrical and Gynecological Services. Tokos provides a
comprehensive range of skilled nursing, infusion therapy and patient management
services on a home care basis for a variety of obstetrical and
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gynecological conditions. Tokos' patient management services are designed to
address such complications as pregnancy induced hypertension and gestational
diabetes. Such conditions may be treated with on-going nursing assessment and
focused education at various levels of frequency and intensity, other patient
management and diagnostic services, and blood and urine testing. Tokos' infusion
therapies are designed to address such complications as hyperemesis gravidarum,
urinary tract and other infections, post-surgical wound care, and infertility.
Such conditions may be treated with varied intravenous or subcutaneous therapies
including antibiotic, pain management, hydration, anticoagulant and total
parenteral and enteral nutritional support. Tokos also provides genetic testing
and counseling, non-stress testing and complete maternal-newborn assessments for
post partum patients.
Maternal Risk Assessment and Prenatal Education Services. Tokos offers a
comprehensive risk assessment and patient education program designed to reduce
maternity related costs by providing expectant mothers with focused education
and psychosocial support and identifying pregnancies that may be high risk.
Tokos sells the program to employers, managed care organizations, health plans
and other third party payors or administrators who make it available to their
respective employees, insureds or members who are pregnant. The program consists
of some or all of the following: two or more telephonic health interviews
conducted by a perinatal nurse with the expectant mother at appropriate stages
of her pregnancy and after delivery; proprietary maternity reference books and
risk specific education relevant to the woman's particular needs; referrals to
other sources of help when appropriate; and access to a help line staffed by a
perinatal nurse twenty-four hours a day. Through the interviews with the
expectant mother, the nurse collects data about the woman, her family/medical
history and other circumstances that might affect her pregnancy. Based on this
information, the nurse provides the woman with education regarding her specific
risks, if any, and recommends appropriate behavior modifications that may
facilitate a healthy outcome. Relevant information collected by Tokos is
summarized in reports and provided to the participant's health care provider and
case manager. Results of program utilization and effect are summarized for the
client in periodic reports. Tokos also provides specialized maternal and newborn
case management services for clients that require assistance in managing and
ensuring appropriate care for the high risk mother and newborn.
Matryx Health Partners. Through its Matryx Health Partners division, Tokos
is developing service offerings designed to meet the needs of managed care
organizations, and provider networks who render care for such organizations.
Managed care organizations have grown substantially in terms of the percentage
of the population that is covered by such plans and in terms of their influence
over decisions regarding the utilization of health care services. Consolidation
in the industry has accelerated this process thereby creating demand for
services that help managed care organizations make decisions about the delivery
and financing of health care as well as assist physicians and other providers to
function in this emerging environment. Matryx Health Partners is developing
managed care services that support patients throughout the entire
maternal-newborn episode of care. It also offers data and outcome analysis and
other consulting services to assist managed care organizations better understand
how its resources are allocated and where savings can be obtained. Finally, the
Matryx division intends to provide management and administrative services to
provider networks and managed care organizations including claims
administration, client services, network management, quality/utilization
management, marketing and contracting.
PATIENT CARE INFORMATION SYSTEMS. Due to the acute nature of high risk
pregnancies, physicians, pharmacists and perinatal nurses must have immediate
access to a patient's medical history, current clinical status and treatment
plan. Tokos has made a substantial investment in the development of patient care
information systems. Such systems support health care professionals in detecting
obstetrical complications as well as in developing and implementing
individualized treatment plans for Tokos' patients. In addition, Tokos has
created a system to track patient outcomes and summarize data regarding patient
care. Tokos' information systems include devices to help monitor uterine
activity, a customized data communications network for transmission and
management of patient care information and a reporting system to collect and
collate relevant patient care information.
Uterine Activity Monitoring Devices. Tokos' Term Guard, Term Guard II,
Genesis, and CareFone uterine activity monitoring devices permit Tokos'
perinatal nurses to remotely review and assess uterine activity data. The
devices consist of a sensor attached to a belt and a portable recorder/modem.
Typically, the
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woman wears the belt around her abdomen for one hour twice a day and transmits
the recorded uterine activity data by telephone to a Tokos patient service
center. The data is graphed on a computer screen and assessed by Tokos'
perinatal nurse. Tokos continues to develop enhancements to these devices.
Data Communications Network. Tokos has established a communications
network including: telecommunications and computer equipment linking all of
Tokos' patient service centers; proprietary software; and a database consisting
of detailed patient care information. This database is updated regularly during
the course of the patient's care and, in conjunction with the rest of the
network, provides the physician, pharmacist and nurse with access to current and
complete information to manage and treat each patient. In general, physicians
obtain this information through telephone contact and other correspondence with
Tokos' nurses. In addition, insurance and related information is communicated by
the patient service centers to the corporate office enabling Tokos'
reimbursement specialists to provide prompt reimbursement assistance as
applicable to each patient.
Outcome Data and Reporting System. Tokos has also established a data
information system designed to assist managed care organizations and physician
groups track outcomes and summarize data regarding maternity-related care. This
system consists of proprietary software and processes that collect information
about maternity related access, care, utilization and satisfaction. Outcome
studies are conducted from a research perspective and are reviewed by a team
composed of analysts, biostatisticians and clinicians. Methodologies for
analyzing data and presenting information include the use of varied collection
data tools, implementation of a relational data base design and customization of
reports to meet client requirements. Maternal and newborn information is linked
for discussion of patient management interventions, resource utilization and
cost savings opportunities.
SERVICE LOCATIONS. As of November 30, 1995, Tokos had approximately 48
service centers throughout the United States and a number of other additional
sites of service. All of the patient service centers operate in accordance with
policies, procedures, and objectives established by Tokos. In addition to being
equipped and staffed to supply home care services, 10 of Tokos' patient service
centers are also equipped with computer and telecommunications equipment
necessary to provide home uterine activity monitoring services. Each of these
centers is capable of providing such services to a patient located anywhere in
the United States. Tokos' additional sites of service are locations from which
one or more of Tokos' nurses provide home diagnostic support and infusion
therapy services.
JCAHO Accreditation. As of November 30, 1995, 8 of Tokos' service centers
sought and obtained home care accreditation with the Joint Commission on
Accreditation of Health Care Organizations ("JCAHO"). The JCAHO is 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. JCAHO accreditation entails a
lengthy review process of a service center's operations and compliance with
JCAHO standards and is valid for three years. Accreditation is increasingly
being considered a prerequisite for entering into contracts with managed care
organizations and other third party payors. At November 30, 1995, five of Tokos'
48 centers, 33 were accredited by JCAHO with 21 of those accredited with
commendation.
REIMBURSEMENT FOR SERVICES. Tokos assists its patients, where applicable,
in obtaining reimbursement from their insurance carriers or other third-party
payors. Tokos typically obtains an assignment of benefits from each patient,
enabling Tokos to file claims for its services directly with the third-party
payor. In most cases, third-party payors pay Tokos directly for the reimbursable
amounts of its charges. As of November 30, 1995, approximately 95% of Tokos'
revenues were derived from private insurance, self-funded employers, managed
care organizations, prepaid health plans and patients, while approximately 5%
were derived from Medicaid programs. The levels of revenues and profitability of
Tokos could be adversely affected by the continuing efforts of managed care
organizations or other third-party payors to contain or reduce costs of health
care by lowering reimbursement rates, eliminating coverage for certain services,
increasing medical review of bills for services, and negotiating for reduced
contract rates.
MARKETING AND SALES. Tokos' marketing and sales efforts are primarily
based on direct personal contact by its national network of sales
representatives with physicians and other referral sources. In addition, Tokos'
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marketing activities promote increased awareness in the medical and payor
communities of the problems associated with preterm labor and birth as well as
the improved outcomes and cost savings attributable to Tokos' services.
While Tokos' marketing and sales activities focus primarily on physicians,
a critical component of Tokos' overall strategy is to increase sales through a
variety of contractual relationships with managed care organizations, providers
and other third party payors who are influential with regard to the referral of
patients and decisions concerning reimbursement for services. Managed care
organizations and third party payor entities are increasingly exercising greater
control over the utilization of health care services and other clinical
decisions that have traditionally been made exclusively by physicians. Tokos has
entered into a number of contractual arrangements with managed care
organizations and third-party payor entities under which Tokos agrees to perform
services pursuant to specified conditions at negotiated rates. Tokos has also
entered into mutually beneficial risk sharing arrangements for the provision of
its services including capitation. Tokos believes that the proportion of its
business attributable to contractual arrangements will continue to increase.
In addition, Tokos has devoted significant efforts to the development of a
marketing plan to support sales of the Fetal Fibronectin Immunoassay for which
it owns exclusive marketing rights. As of November 30, 1995, Tokos' efforts have
included development of sales materials/strategies and preliminary field
training.
COMPETITION. The home health care services industry is highly competitive.
While Tokos is aware of only a few national companies that currently offer home
health care services specifically for the treatment and management of high risk
obstetrical patients, there are a number of local and national companies that
provide one or more of those services provided by Tokos. In addition, no
assurance can be given that other companies, particularly those in other
segments of the home health care industry, will not enter Tokos' market. Certain
of Tokos' competitors and potential competitors have significantly greater
financial, marketing and technical resources than those of Tokos. Tokos believes
that currently the principal competitive factors in its industry are: geographic
presence; quality of care, including responsiveness of service and quality of
professional personnel; reputation with physicians, other referral sources and
patients; an ability to offer a full spectrum of home care services; and price.
REGULATION. Participants in the healthcare industry, including providers
of services such as those offered by Tokos, are subject to extensive federal,
state and local regulation relating to, among other things, licensure, conduct
of operations and the addition of facilities and services, and there can be no
assurance that future regulatory changes will not have a material adverse effect
on the results of operations or financial condition of Tokos. As a provider of
services to patients under various government programs, including certain state
Medicaid programs, Tokos is subject to the federal fraud and abuse laws. These
laws prohibit any bribe, kickback, rebate or payment of other remuneration of
any sort in return for the referral of Medicare or Medicaid patients, and the
submission of false claims. Violations of these provisions may result in civil
and criminal penalties and exclusion from participation in the Medicare and
Medicaid programs.
The broad language of the anti-kickback provisions of the fraud and abuse
laws has been interpreted by certain courts and governmental enforcement
agencies in a manner which could impose liability on healthcare providers for
engaging in a wide variety of business transactions. Limited "safe harbor"
regulations exempt certain practices from enforcement action under the
prohibitions. However, these safe harbors are only available to transactions
which fall entirely within the narrowly defined guidelines.
Recently, the federal government made a policy decision to increase
significantly the resources allocated to enforcing the fraud and abuse laws. The
Office of the Inspector General, in cooperation with other federal agencies, has
announced its intention to scrutinize the activities of home health agencies,
durable medical equipment suppliers and skilled nursing facilities in
California, Florida, Illinois, New York and Texas, states in which Tokos has
significant operations. Private insurers and various state enforcement agencies
also have increased their scrutiny of healthcare claims in an effort to identify
and prosecute fraudulent and abusive practices. Tokos maintains an internal
regulatory compliance review program and from time to time retains special
counsel to provide advice on compliance with such laws and regulations. However,
no assurance can be given that the practices of Tokos, if reviewed, would be
found to be in compliance with such laws, as such laws ultimately may be
interpreted.
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In 1993, Congress enacted the so-called "Stark Law," which imposes civil
penalties and exclusions for referrals by physicians to certain entities with
which they have a financial relationship (subject to specified exceptions). In
addition, several states in which Tokos operates have laws that prohibit certain
direct or indirect payments or fee-splitting arrangements between healthcare
providers if such arrangements are designed to induce or encourage the referral
of patients to a particular provider. Other states have enacted or are
considering legislation that either prohibits "physician self-referral"
arrangements or requires physicians to disclose any financial interests they may
have with a healthcare provider that such physicians recommend to their
patients. Possible sanctions for a violation of these restrictions include loss
of licensure and civil and criminal penalties. Such statutes and proposed
legislation vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Strict enforcement of these regulations is
likely. Tokos has certain financial relationships with physicians who may refer,
or be in a position to refer, patients to Tokos for services. Although Tokos
believes that these financial relationships meet applicable exceptions
permitting referrals by such physicians, if the laws are subsequently
interpreted to prohibit these relationships, Tokos may be required to further
modify these arrangements or to discontinue accepting referrals from such
physicians.
The federal budget reconciliation legislation, which was vetoed by the
President, would have established new fraud and abuse sanctions and penalties
but would have made the Stark prohibitions on physician self-referrals less
restrictive in certain respects. It is not clear whether similar legislation
will become law, or if enacted, what impact such legislation would have on the
services that are offered by Tokos, but the elimination of certain self-referral
restrictions could create additional competitive pressures on the operations of
Tokos.
Tokos' obstetrical management services utilizing its home uterine activity
monitors account for a substantial portion of its revenues. These monitors are
classified as medical devices under the Federal Food, Drug and Cosmetic Act and
are subject to regulation by the FDA. On September 29, 1995, Tokos received
pre-market approval from the FDA for the CareFone device for use, in conjunction
with standard high risk care, for the daily at-home measurement of uterine
activity in pregnancies greater than or equal to 24 weeks' gestation for women
with previous pre-term delivery. Tokos also has pre-market approval from the FDA
for the Genesis device for the same indications. The FDA has authorized the
promotion and labeling of the Term Guard I and Term Guard II devices for use in
aiding physicians in obtaining uterine activity data associated with the onset
of full-term labor, outside the hospital setting. However, Tokos is not
authorized to promote or label these devices for use in the early detection of
pre-term labor. While the devices are labeled only for certain indications, as
part of the practice of medicine, physicians may and do prescribe the devices
for indications for which the devices are not labeled, such as for use in
detecting preterm labor in general. As a result, any actions by the FDA which
limit the use of such devices or otherwise require Tokos to change the business
practices currently carried on by Tokos regarding the use of such devices could
have a material adverse effect on the results of operations or financial
condition of Tokos.
In addition, some of the services that Tokos offers involve the provision
of drugs that are regulated by the FDA under the Food, Drug and Cosmetic Act.
While these drugs are labeled for specific indications and cannot be promoted
for any other indications, physicians may and do prescribe the drugs for
indications that have not been approved by the FDA. For example, terbutaline is
labeled for the treatment of asthma but is frequently prescribed by
obstetricians as a tocolytic for the treatment of preterm labor. Although Tokos
does not promote the drug for this purpose, it does fill physician orders to
dispense and administer the medication for preterm labor patients. In May 1993,
the FDA Fertility and Maternal Health Drugs Advisory Committee met to discuss
the safety and efficacy of terbutaline for tocolysis. The Committee recommended
that the manufacturers of terbutaline apply for approval of the drug in the
treatment of preterm labor. Any action by the FDA that limits the ability of
Tokos to offer a high risk pregnancy management service involving the
administration of drugs for indications for which the drugs have not been
labeled could have a material adverse effect on the results of operations or
financial condition of Tokos.
A variety of regulatory actions are available to the FDA in order to ensure
that regulated firms comply with the provisions of the FDA Act. Although Tokos
does not anticipate any enforcement action against it, the commencement of any
such action against Tokos which limits the manner in which Tokos conducts its
business could have an adverse impact on Tokos.
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In certain states, the provision of infusion services and other nursing
services to patients in their homes is subject to state home healthcare
licensing and/or certificate of need ("CON") requirements. Tokos provides these
types of services. Tokos is engaged in an ongoing effort to obtain information
from state regulatory agencies on the application of new and existing licensing
and CON provisions to the business activities of Tokos. When applicable, Tokos
may be required either to obtain a license or other regulatory approval before
it can render these services directly in the home or to affiliate with other
licensed agencies in connection with the delivery of the nursing services.
Although generally a routine aspect of conducting a healthcare business,
compliance with these requirements in certain instances can be both burdensome
and costly. Violation of these state statutes can result in substantial fines
and other penalties. Tokos believes that Tokos has obtained or is in the process
of obtaining licenses for each facility for which licensing is required. This is
an area of increasing legislative activity, and there can be no assurance that
Tokos will not become subject to regulatory and licensing statutes in other
states in which it operates.
In addition, Tokos is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on Tokos' business or competitive position or
required material capital expenditures on the part of Tokos.
Failure to comply with these regulations or laws could adversely affect
Tokos' ability to continue to provide, or to receive reimbursement for, its
products and services and could also subject Tokos and its respective officers
to penalties. Changes in these laws or interpretations of existing regulations
or laws could have a material adverse effect on permissible activities of Tokos,
the relative costs of doing business and the amount of reimbursement by
government and other third-party payors. In addition, laws and regulations often
are adopted to regulate new products, services and industries. There can be no
assurance that either the states or the federal government will not impose
additional regulations upon Tokos' activities which might adversely affect its
results of operations or financial condition.
Tokos is unable to predict what legislation, if any, may be enacted in the
future relating to Tokos' business or the healthcare industry, including
third-party reimbursement, or what effect any such legislation may have on
Tokos.
RECENT CONTROVERSIES. During 1994, Tokos' operations continued to be
affected by several controversies surrounding its business. There has been, and
continues to be, debate within the medical community about how to decrease the
incidence of prematurity, which is a major cause of the high U.S. infant
mortality rate. Tokos believes that increased surveillance of women at risk of
developing preterm labor can assist the physician in early diagnosis of preterm
labor and help improve the medical outcomes of complicated pregnancies. Tokos
provides a comprehensive range of services to assist the physician in this
surveillance, including perinatal nursing, obstetrical pharmacy services and
tocolytic therapy. A significant portion of these services includes the use of
home uterine activity monitoring devices. Although the FDA has authorized the
promotion and labeling of most of these devices for use in assisting physicians
in obtaining uterine activity data associated with the onset of full-term labor
outside the hospital setting, many physicians prescribe these devices for use in
the early detection of preterm labor. In August 1992, an eight-member committee
of the American College of Obstetricians and Gynecologists ("ACOG") published an
opinion stating, among other things, that the use of home uterine activity
monitoring devices has not been shown to prevent prematurity; while the
committee opinion represented a more recent review of existing literature, there
was essentially no change from its 1989 opinion regarding the independent
benefit of home uterine activity monitoring. The ACOG committee opinion has
received substantial business and medical press coverage. While Tokos does not
believe that either home uterine activity monitoring or any other diagnostic
devices can in and of itself improve therapeutic outcomes (e.g., a mammogram
cannot prevent breast cancer), it does believe that monitoring can assist the
physician in the early detection of preterm labor.
There have been a number of studies regarding the use of home uterine
activity monitoring devices which have taken different and divergent
perspectives of the value of such devices. Tokos believes that the results of
these studies have been, and will continue to be, reviewed by practicing
physicians in determining whether to prescribe home uterine activity monitoring
for their patients.
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Management believes that these issues have had an adverse effect on Tokos'
results of operations.
RESEARCH AND DEVELOPMENT. As part of certain cost-reduction initiatives
that began in 1993 and continued through 1995, Tokos reduced its research and
development activities. However, Tokos continues to initiate and fund certain
independent clinical research studies concerning preterm labor. In addition,
Tokos continues to improve and develop its uterine activity monitoring devices,
data communications network and outcome data and reporting system.
MANUFACTURING. Tokos' manufacturing operations are segregated in its
CareLink division, and consist of subassembly, final assembly and testing of new
and rebuilt uterine activity monitoring devices. These devices are assembled
from standard components and from items produced to CareLink's specifications by
outside vendors such as semi-custom integrated circuits and fabricated metal and
plastic parts. Tokos's current inventory levels do not require Tokos to devote
substantial resources to the manufacturing of new devices. If Tokos' production
needs increase substantially, however, Tokos intends to outsource most of the
assembly processes currently being performed by CareLink. CareLink continues to
repair and refurbish Tokos' devices. All manufacturing activities of Tokos are
performed in compliance with the Good Manufacturing Practices of the FDA. Tokos
does not experience any backlog.
EMPLOYEES. As of November 30, 1995, Tokos had approximately 797 full-time
and part-time employees of which approximately 229 were registered nurses and
pharmacists.
INSURANCE. Tokos currently has in force general liability insurance,
including professional and products liability, with excess coverage limits of
$20,000,000 per incident and $20,000,000 in the aggregate annually (with a
self-insured retention of $200,000 per claim, and a total aggregate retention of
$1,000,000). Tokos' insurance policies provide coverage on a claims made basis
and are subject to annual renewal. Such insurance, however, is expensive,
difficult to obtain and may not be available in the future on acceptable terms
or at all. There can be no assurance that the coverage limits of such policies
will be adequate.
TRADEMARKS. Tokos has registered its GENESIS(R), TERM GUARD(R),
BABYLINK(R) and TOKOS(R) trademarks and considers the identification of such
marks with its business to be a significant factor in its ability to market and
promote Tokos' services.
PROPERTIES. Tokos leases approximately 115,000 square feet of space for
its corporate headquarters in Santa Ana, California. Additional business
activities conducted at the corporate headquarters include operation of Tokos'
licensed pharmacy, manufacturing facility, maternal risk assessment program and
Southern California patient service center. In March 1995, the term of the lease
for this building was extended through December 1999. Tokos' patient service
centers are typically located in suburban office parks and range between 600 and
6,500 square feet of space with an average of approximately 2,500 square feet.
Lease terms are typically three years or less.
LEGAL PROCEEDINGS
In July 1995, Tokos reached a $10 million settlement with the plaintiffs in
a class action securities suit entitled In re Tokos Medical Corporation
Securities Litigation filed in the United States District Court of the Central
District of California. The settlement resolved actions against Tokos and
certain of its officers and directors brought in November 1992 and March 1993.
The plaintiffs alleged that Tokos made false and misleading statements about its
business and results of operations in violation of federal securities laws and
common law fraud and negligent misrepresentation standards. Tokos' cost of the
settlement was $5.75 million in cash and stock which is net of insurance
proceeds. Tokos has paid $750,000 cash, with the remaining $5.0 million payable
in cash or by the issuance of common stock. In the settlement, Tokos denied any
wrongdoing or liability. The terms of the settlement must be approved by the
court before the settlement is effective.
Tokos is subject to certain claims arising in the normal course of
business. Tokos does not believe any such claims will have a material adverse
effect upon Tokos' financial position or operating results.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to Tokos for the fiscal
years ended December 31, 1995, 1994 and 1993 of those persons who were at
December 31, 1995 either (i) the chief executive officer of Tokos, or (ii) one
of the other four most highly compensated executive officers of Tokos whose
annual salary and bonuses exceeded $100,000 or for whom disclosure would
otherwise be required but for the fact that the individual was not serving as an
executive officer at December 31, 1995 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM(2)
COMPENSATION
------------
ANNUAL AWARDS OF
COMPENSATION STOCK
----------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
- ------------------------------------ ----- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert F. Byrnes.................... 1995 $264,000 $ 0 100,000 $ 0
Chairman of the Board, Chief 1994 264,000 26,400 50,000 0
Executive Officer 1993 264,000 23,760 50,000(3) 0
John R. Bason(7).................... 1995 46,875 0 0 159,914(5)
Executive Vice President 1994 225,625 11,250 30,000 515(6)
1993 220,625 16,875 102,500(3) 0
Nicholas A. Mione................... 1995 165,375 0 40,000 0
Executive Vice President, Finance 1994 165,375 24,806 20,000 10,177(6)
and Administration, CFO 1993 157,500 14,175 77,500(3) 0
Terry P. Bayer...................... 1995 228,000 0 80,000 29,346(5)
President, Operating Subsidiary 1994 173,146 16,300 50,000 1,813(6)
1993 0 0 50,000(4) 0
</TABLE>
- ---------------
(1) Includes deferrals by the individuals under Tokos' 1987 401(k) Plan. Tokos
has not made contributions on behalf of any of its employees under this
Plan.
(2) Tokos has not issued stock appreciation rights and does not have a
"long-term incentive plan" as that term is defined in the applicable rules.
(3) Includes 25,000 options initially granted to Mr. Bason during 1993. All
other options represent the repricing in April 1993 of prior grants.
(4) Represents option grants to Ms. Bayer in December 1993 upon her acceptance
of a position with Tokos.
(5) Includes $48,606 paid to Mr. Bason pursuant to a Separation Agreement,
$25,961 in unused paid time off that Mr. Bason had accrued prior to his
departure from Tokos and $85,347 in other compensation paid to Mr. Bason in
connection with his agreement to cancel unexercized stock options; and,
includes $29,346 paid to Ms. Bayer for non-deductible relocation expenses
incurred during 1995.
(6) Includes $515 and $10,177 paid to Messrs. Bason and Mione, respectively, for
unused paid time off accrued in excess of established limits imposed by
Tokos in 1994; and includes $1,813 paid to Ms. Bayer for non-deductible
relocation expenses incurred during 1994.
(7) Mr. Bason resigned his position with Tokos in March 1995.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to grants
to the Named Executive Officers of stock options, pursuant to Tokos' 1995 Stock
Option Plan, during fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES OF
OF TOTAL STOCK PRICE
OPTIONS EXERCISE OR APPRECIATION FOR
GRANTED TO BASE PRICE OPTION TERM(3)
OPTIONS EMPLOYEES IN PER EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE 5% 10%
- --------------------------------------- ---------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Byrnes....................... 100,000 15.3% $6.25 01/03/05 $393,059 $996,089
Terry P. Bayer......................... 80,000 12.2 6.25 01/03/05 314,447 796,871
Nicholas A. Mione...................... 40,000 6.1 6.25 01/03/05 157,224 398,435
John R. Bason.......................... 0 0 N/A N/A 0 0
</TABLE>
- ---------------
(1) Options granted are fully exercisable upon the date of grant. Options
granted under the Option Plan generally vest at the rate of 25% at the end
of the first calendar year following the date of grant and 25% per year
thereafter. All shares purchased upon exercise of options which have not
vested are subject to certain repurchase rights of Tokos. The Plan
Administrator retains discretion, subject to plan limits, to modify the
terms of outstanding options and to reprice outstanding options. Options
are granted for a term of ten (10) years, subject to earlier termination in
certain events related to termination of service to Tokos.
(2) The exercise price and tax withholding obligations related to exercise may
be paid in cash, by delivery of already owned shares, through delivery of a
promissory note, in installment payments, or through a loan for which Tokos
acts as a guarantor or a combination of the foregoing, as determined by the
Plan Administrator.
(3) The potential realizable value illustrates value that could be realized upon
exercise of the options immediately prior to the expiration of their term,
assuming the specified compounded rates of appreciation on Tokos' Common
Stock over the term of the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
The following table sets forth certain information with respect to option
exercises during fiscal 1995 by the Name Executive Officers, and with respect to
unexercised options held by the Named Executive Officers as of December 31,
1995, in each case, under Tokos' 1995 Stock Option Plan.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL YEAR
FISCAL YEAR END END(1)(2)
---------------- -------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE
- -------------------------------------------------- --------------- -------- ---------------- -------------
<S> <C> <C> <C> <C>
Robert F. Byrnes.................................. 0 $ 0 200,000/0 $ 668,750/0
Terry P. Bayer.................................... 0 0 180,000/0 517,500/0
Nicholas A. Mione................................. 20,000 100,000 117,500/0 308,750/0
John R. Bason..................................... 0 0 0 0
</TABLE>
- ---------------
(1) Option grants are fully exercisable on the date of grant.
(2) Market value of securities underlying the options at December 31, 1995 less
the exercise or base price of "in-the-money" options.
CERTAIN TRANSACTIONS
Pursuant to the terms of both Tokos' 1985 Stock Option Plan and 1995 Stock
Option Plan, certain executive officers exercised options and purchased shares
of Tokos' Common Stock by the delivery of interest-
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bearing promissory notes that are payable in cash. The name, title, and
outstanding indebtedness, including accrued interest, of such officers, or
former officers, as of December 31, 1995 are: Robert F. Byrnes, Chairman of the
Board, Chief Executive Officer, President and Chief Operating Officer,
$1,097,000; Nicholas A. Mione, Executive Vice President, Finance and
Administration, and Chief Financial Officer, $119,000; and Mr. Davenport, a
former executive officer and current director of Tokos, $258,000. Tokos holds
300,000 shares of Common Stock of Tokos in escrow as collateral for these notes.
The value of this collateral at December 31, 1995 was $2,737,500. The notes bear
interest at 6% per annum, and were due on December 31, 1995; however, the Board
extended the notes until December 31, 1996 so that the officers would not sell
their shares of Tokos' stock.
During 1994 and 1993, Tokos loaned Mr. Byrnes $1,012,000 and $900,000,
respectively. Mr. Byrnes used such monies to extinguish an outstanding debt he
had initiated to pay approximately $2,000,000 in taxes that he owed in
connection with his exercise of options to purchase Tokos' stock in 1992. The
Board of Directors unanimously approved the loans to Mr. Byrnes so that he would
not be forced to sell his shares of Tokos' stock to repay his tax-related debt.
The loans by Tokos to Mr. Byrnes are evidenced by interest-bearing promissory
notes and are secured by approximately 701,000 shares of Tokos Common Stock
owned by Mr. Byrnes. The value of this collateral at December 31, 1995 was
$6,394,000. The outstanding indebtedness at December 31, 1995, including accrued
interest, was $2,156,000. The promissory notes, originally due March 20, 1994,
have been extended by the Board of Directors to December 31, 1996. The notes
bear interest at the rate of 6% per annum and are payable in cash.
In December 1993, Tokos entered into a one-year consulting and
non-competition agreement with Mr. Davenport in connection with his resignation
as President and Chief Operating Officer of Tokos. The compensation for Mr.
Davenport's services under the agreement was $264,000, which amount was paid in
full as of December 31, 1994. The Agreement also provided for the payment of an
additional bonus if Mr. Davenport completed a certain project by December 31,
1995; however, Mr. Davenport did not undertake such project and accordingly no
bonus was due or will be paid to Mr. Davenport.
EMPLOYMENT AGREEMENTS
During 1994 and 1995, Tokos entered into Employment Agreements with Mr.
Byrnes and Ms. Bayer and certain other officers of Tokos, and a similar
agreement with Mr. Mione. These agreements provide for severance payments and
certain benefits in the event of a termination upon a "change in control," a
"termination for failure to renew: and a "termination other than for cause." The
executive officers are not entitled to any compensation or benefits if they are
terminated for "cause" or if, prior to change of control, they voluntarily
terminate their employment with Tokos. A termination upon a "change in control"
is defined as a termination following (i) the acquisition by a person or entity
of twenty percent (20%) or more of Tokos' common stock in a transaction not
approved by the Board of Directors; or (ii) a merger, consolidation or
reorganization of Tokos with one or more corporations as a result of which Tokos
is merged out of existence or becomes a subsidiary of another corporation or the
sale of all or substantially all of the assets of Tokos; or (iii) a tender or
exchange offer, merger, consolidation or business combination as a result of
which the persons who were directors of Tokos before such transaction cease to
constitute a majority of the Board of Directors of Tokos or any successor of
Tokos. A "termination for failure to renew" means a failure by Tokos to renew or
extend the term of the agreement beyond the basic term of the agreement or any
extension thereof. A "termination other than for cause" is defined as
constructive termination of the executive officer or material breach of the
employment agreement by Tokos. A "termination for cause" is defined as a
termination for any willful dishonesty towards, fraud upon or deliberate injury
to, Tokos by the executive officer.
Amendments to the employment agreements described above were executed on
October 2, 1995, and become effective only upon the effectiveness of the Merger.
The amendments increase the amount of severance compensation payable in the
event of a termination upon a "change in control" or "termination for failure to
renew" from 18 months continuation of salary plus 150% of the highest bonus
earned by the employee, to an amount equal to three times the executive
officer's average annual base salary and other income derived from Tokos which
is reportable for federal tax purposes for the five years preceding the date of
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his or her termination. In addition, the covenants against competition and
soliciting customers and employees previously included in the employment
agreements were revised to provide greater protection to Tokos.
BOARD COMPENSATION
Tokos reimburses all of its directors for out-of-pocket expenses incurred
by them in connection with attending Tokos' Board meetings. In addition, each
non-employee director receives an annual retainer of $10,000 plus $2,000 for
each meeting attended and $1,000 for each telephonic meeting in which they
participate. Pursuant to this arrangement, Ms. George and Messrs. Erickson,
Guselli, Goldsmith and Davenport each earned $23,000 in 1995. In addition, Mr.
Goldsmith was compensated $2,000 for attending certain meetings on behalf of
Tokos in 1995.
Non-employee members of the Board were eligible to receive automatic grants
of non-qualified options pursuant to the provisions of Tokos' 1985 Stock Option
Plan (the "1985 Option Plan") which expired in February 1995. Under such 1985
Option Plan, non-employee members of the Board were entitled to automatic stock
option grants to purchase 15,000 shares of common stock at the time of their
reelection to the Board, such options to vest in increments of 5,000 over a
three-year period. At the 1995 Annual Meeting of the Stockholders of Tokos, the
stockholders approved Tokos' 1995 Stock Option Plan (the "1995 Stock Option
Plan") that contained terms with respect to stock options for non-employee
members of the Board that are substantially similar to the terms contained in
the 1985 Option Plan. Accordingly, in June 1995 Messrs. Guselli and Erickson
each received automatic grants to purchase 15,000 shares of Tokos Common Stock
in connection with their reelection as directors of Tokos.
DESCRIPTION OF HEALTHDYNE
BUSINESS OF HEALTHDYNE
Prior to the spinoff of its subsidiaries Healthdyne Technologies in May
1995 and HIE in November 1995, Healthdyne was a national provider of home
healthcare services, medical devices and specialty products. Healthdyne's
remaining business unit, HMM, is a national provider of specialized obstetrical
home healthcare and risk assessment services which assist physicians and payors
in the management of high risk pregnancies and numerous other obstetrical and
gynecological conditions. HMM provides its services throughout the United States
through approximately 35 service centers and a number of other additional
service sites.
Healthdyne was incorporated in Georgia in 1970, and its initial focus was
the development of a home medical care device to aid in the monitoring of
infants diagnosed as being susceptible to SIDS. Since the introduction of its
original SIDS monitoring system, Healthdyne has developed and acquired various
businesses and products for the home healthcare and hospital markets. In 1986,
Healthdyne decided to focus its business on the high technology home healthcare
market, including developing new products and services, and divested itself of
operations which did not fit this strategic focus. The divestitures of certain
operations over the next several years, the founding of HMM in 1987, the
development by Healthdyne Technologies of a line of diagnostic recording and
therapeutic products for the sleep disorders market, and the founding of HIE in
1994, are examples of the continuing implementation of this strategy.
At the beginning of 1995, Healthdyne's primary operating units were
composed of its manufacturing operation, Healthdyne Technologies, which produces
high technology medical devices designed for use in the home and specialized
clinical settings, its information systems business, HIE, which focuses on the
information technology needs of the healthcare industry and HMM, which provides
obstetrical care to patients in the home environment.
RECENT DEVELOPMENTS
On April 6, 1994, Healthdyne sold its 68% ownership interest in Home
Nutritional Services, Inc. ("HNS"), its home infusion services business; on May
22, 1995, Healthdyne distributed to its shareholders the 10,000,000 shares of
Common Stock (approximately 81% of the outstanding shares) of Healthdyne
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Technologies owned by Healthdyne in a tax-free distribution (the "Technologies
Spinoff"); and on November 6, 1995, Healthdyne distributed to its shareholders
the Common Stock of its wholly-owned subsidiary, HIE, in a taxable distribution
(the "HIE Spinoff"). Following the HIE Spinoff, the sole remaining business of
Healthdyne is the home obstetrical care and related risk management services
business of HMM, a wholly-owned division of Healthdyne.
HEALTHDYNE MATERNITY MANAGEMENT
HMM is the second largest national provider of obstetrical home care and
related risk management services. Since 1987, HMM has provided support for the
management of obstetrical patients who are at high risk of developing acute
complications of pregnancy. These services include a program for managing
patients who are at risk of preterm delivery, a program for managing patients
suffering from obstetrical hypertension and diabetes, infusion therapy services
primarily involving drugs to control preterm labor and nursing services. HMM's
goal is to address each of the significant complications of pregnancy which can
be monitored or treated in the home.
Approximately four million women give birth annually in the United States.
An estimated 20% of these women experience serious complications during
pregnancy, including preterm labor, obstetrical hypertension and gestational
diabetes. HMM has maintained its presence in each market it serves by continuing
to provide services for both preterm and obstetrical hypertension patients,
among others, through a national network of over 35 service centers and a number
of additional sites of service throughout the country. In addition, HMM
maintains two on-call centers to provide after hours, weekend and holiday
assistance to its regional centers. Patients are typically referred to HMM by an
obstetrician, perinatologist or family practice physician who has identified the
patient as being at high risk for experiencing obstetrical complications. Once
HMM's services have been prescribed by the physician, the patient is assigned a
primary care nurse who works at one of the HMM regional centers. HMM has a
professional staff of approximately 180 full and regularly scheduled part-time
registered obstetrical nurses, each of whom has a minimum of three years
experience in obstetrics. HMM also employs approximately 735 additional
obstetrically experienced registered nurses who are available to provide patient
training and back up support services on an "as needed" basis. The nurse
responds by visiting the patient's home and educating her on the prescribed
treatment program. The nurse remains in contact with the patient through
telephone conversations which usually follow the transmission by modem of
physiological data relating to the patient's condition which have been gathered
by the monitoring device. HMM stresses the clinical quality and range of its
home services and its ability to communicate timely and clinically useful
information to physicians. Nursing services are made available to physicians and
patients 24 hours per day, seven days a week.
HMM has developed a comprehensive clinical data management system known as
"PeriData"(R) containing over 140 demographic, clinical and outcome data
elements on all patients enrolled in its preterm labor program and other high
risk home care programs. In addition to using PeriData(R) to demonstrate the
benefits of its programs to the medical community, this data is used extensively
by HMM to show third-party payors and managed care companies the clinical
efficacy and cost-effective nature of its services. HMM has received
accreditation by the JCAHO as an accredited provider of in-home nursing and
equipment services, products and supplies for 27 centers, with the remaining
centers scheduled for survey in 1996.
HMM also offers a comprehensive maternity management service for both low
and high risk pregnancies through its BabySteps(TM) program, which provides risk
assessment, prenatal education and case coordination, including utilization and
patient outcome reporting services to private payors and employer groups, in an
effort to reduce maternal/newborn expenditures by payors and employers in the
obstetrical area by reducing neonatal hospital stays. Several large HMO's have
announced positive clinical and economic results from the use of BabySteps(TM)
or similar programs developed by HMM, coupled with the traditional home
obstetrical services of HMM.
RESEARCH AND DEVELOPMENT. HMM's research and development strategy is to
develop new and more cost-effective devices and procedures for providing
obstetrical care to patients in the home environment.
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During the fiscal years ended December 31, 1993 and 1994 and the nine months
ended September 30, 1995, HMM spent $886,000, $554,000 and $243,000,
respectively, on research and development activities.
MARKETING AND SALES. HMM markets its services through dedicated direct
sales forces to physicians, other healthcare providers, management service
organizations and third-party payors. HMM also maintains a group of clinical
support specialists and a dedicated team of managed care account managers to
support and assist the direct sales force in these efforts. In the patient
services business conducted by HMM, HMM stresses the clinical experience of its
personnel, the quality of its clinical services and the cost and clinically
effective nature of HMM's therapies when compared to hospitalization. In
addition, HMM annually sponsors a conference on the Prevention of Prematurity
and Neonatal Mortality and supports other educational efforts in an effort to
bring together leading medical authorities to discuss issues of common concern,
such as premature births and neonatal mortality and morbidity.
HMM has entered into a number of contractual and other arrangements with
medical professionals, institutions and third-party payors. These arrangements
include agreements with prepaid health plans under which HMM provides services
to members of the organization at discounted prices, and agreements with medical
professionals and institutions under which HMM provides certain services,
reimbursement management, and billing and collection services.
REIMBURSEMENT. A significant portion of HMM's revenues are affected
directly by the reimbursement policies of third-party payors, such as private
insurance programs and state Medicaid programs. HMM attempts to focus its
marketing efforts on developing private pay accounts. In general, these accounts
pay at a higher rate than government payment programs. Changes in the funding
available from either third party or government payors or in their reimbursement
policies could have an adverse impact on HMM's business.
Private insurance companies, including HMO's, are the primary source of
reimbursement for HMM with government payors accounting for approximately 6% of
HMM's revenues in 1994 and 5% through September 30, 1995. Reimbursement for
HMM's System 37(R) uterine activity monitoring device is presently available
from 21 of the 50 state Medicaid programs, and HMM has developed formal and
informal contractual relationships, including in some instances exclusive
provider arrangements, with approximately 650 third-party payors.
HMM assists its patients in obtaining reimbursement from their insurance
companies or other third-party payors. Generally, HMM contacts the patient's
insurance company or other third-party payors before the commencement of
services in order to determine the patient's coverage and the percentage of
charges that the payor will reimburse. HMM's reimbursement specialists then
evaluate the patient's insurance to determine the proper procedures for
submission of reimbursable claims. HMM typically obtains an assignment of
benefits from the patient that enables HMM to file claims for its services with
the third-party payor. In most cases, third-party payors pay HMM directly for
the reimbursable portions of its charges.
REGULATION. Participants in the healthcare industry, including providers
of services such as those offered by HMM, are subject to extensive federal,
state and local regulation relating to, among other things, licensure, conduct
of operations and the addition of facilities and services, and there can be no
assurance that future regulatory changes will not have a material adverse effect
on the results of operations or financial condition of HMM. As a provider of
services to patients under various government programs, including certain state
Medicaid programs, HMM is subject to the federal fraud and abuse laws. These
laws prohibit any bribe, kickback, rebate or payment of other remuneration of
any sort in return for the referral of Medicare or Medicaid patients, and the
submission of false claims. Violations of these provisions may result in civil
and criminal penalties and exclusion from participation in the Medicare and
Medicaid programs.
The broad language of the anti-kickback provisions of the fraud and abuse
laws has been interpreted by certain courts and governmental enforcement
agencies in a manner which could impose liability on healthcare providers for
engaging in a wide variety of business transactions. Limited "safe harbor"
regulations exempt certain practices from enforcement action under the
prohibitions. However, these safe harbors are only available to transactions
which fall entirely within the narrowly defined guidelines.
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Recently, the federal government made a policy decision to increase
significantly the resources allocated to enforcing the fraud and abuse laws. The
Office of the Inspector General, in cooperation with other federal agencies, has
announced its intention to scrutinize the activities of home health agencies,
durable medical equipment suppliers and skilled nursing facilities in
California, Florida, Illinois, New York and Texas, states in which HMM has
significant operations. Private insurers and various state enforcement agencies
also have increased their scrutiny of healthcare claims in an effort to identify
and prosecute fraudulent and abusive practices. Healthdyne maintains an internal
regulatory compliance review program and from time to time retains special
counsel to provide advice on compliance with such laws and regulations. However,
no assurance can be given that the practices of HMM, if reviewed, would be found
to be in compliance with such laws, as such laws ultimately may be interpreted.
In 1993, Congress enacted the so-called "Stark Law," which imposes civil
penalties and exclusions for referrals by physicians to certain entities with
which they have a financial relationship (subject to specified exceptions). In
addition, several states in which HMM operates have laws that prohibit certain
direct or indirect payments or fee-splitting arrangements between healthcare
providers if such arrangements are designed to induce or encourage the referral
of patients to a particular provider. Other states have enacted or are
considering legislation that either prohibits "physician self-referral"
arrangements or requires physicians to disclose any financial interests they may
have with a healthcare provider that such physicians recommend to their
patients. Possible sanctions for a violation of these restrictions include loss
of licensure and civil and criminal penalties. Such statutes and proposed
legislation vary from state to state and seldom have been interpreted by the
courts or regulatory agencies. Strict enforcement of these regulations is
likely. HMM has certain financial relationships with physicians who may refer,
or be in a position to refer, patients to HMM for services. Although HMM
believes that these financial relationships meet applicable exceptions
permitting referrals by such physicians, if the laws are subsequently
interpreted to prohibit these relationships, HMM may be required to further
modify these arrangements or to discontinue accepting referrals from such
physicians.
The federal budget reconciliation legislation, which was vetoed by the
President, would have established new fraud and abuse sanctions and penalties
but would have made the Stark prohibitions on physician self-referrals less
restrictive in certain respects. It is not clear whether similar legislation
will become law, or if enacted, what impact such legislation would have on the
services that are offered by HMM, but the elimination of certain self-referral
restrictions could create additional competitive pressures on the operations of
HMM.
HMM's obstetrical management services utilizing its home uterine activity
monitors account for a substantial portion of its revenues. These monitors are
classified as medical devices under the Federal Food, Drug and Cosmetic Act and
are subject to regulation by the FDA. In March 1989, the FDA cleared the System
37(R) device utilized by HMM to be marketed for use with either low or high risk
term pregnancies in the hospital or home. Additionally, in September 1995, the
FDA approved the utilization of the System 37(R) device prior to term with
pregnant patients having a history of previous preterm births. While the devices
are labeled only for certain indications, as part of the practice of medicine,
physicians may and do prescribe the devices for indications for which the
devices are not labeled, such as for use in detecting preterm labor in general.
As a result, any actions by the FDA which limit the use of such devices or
otherwise require HMM to change the business practices currently carried on by
HMM regarding the use of such devices could have a material adverse effect on
the results of operations or financial condition of Healthdyne.
In addition, some of the services that HMM offers involve the provision of
drugs that are regulated by the FDA under the Food, Drug and Cosmetic Act. While
these drugs are labeled for specific indications and cannot be promoted for any
other indications, physicians may and do prescribe the drugs for indications
that have not been approved by the FDA. For example, terbutaline is labeled for
the treatment of asthma but is frequently prescribed by obstetricians as a
tocolytic for the treatment of preterm labor. Although HMM does not promote the
drug for this purpose, it does fill physician orders to dispense and administer
the medication for preterm labor patients. In May 1993, the FDA Fertility and
Maternal Health Drugs Advisory Committee met to discuss the safety and efficacy
of terbutaline for tocolysis. The Committee recommended that the manufacturers
of terbutaline apply for approval of the drug in the treatment of preterm labor.
Any action by the FDA that limits the ability of HMM to offer a high risk
pregnancy management service involving the
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administration of drugs for indications for which the drugs have not been
labeled could have a material adverse effect on the results of operations or
financial condition of Healthdyne.
A variety of regulatory actions are available to the FDA in order to ensure
that regulated firms comply with the provisions of the FDA Act. Although HMM
does not anticipate any enforcement action against it, the commencement of any
such action against HMM which limits the manner in which HMM conducts its
business could have an adverse impact on Healthdyne.
In certain states, the provision of infusion services and other nursing
services to patients in their homes is subject to state home healthcare
licensing and/or certificate of need ("CON") requirements. HMM provides these
types of services. HMM is engaged in an ongoing effort to obtain information
from state regulatory agencies on the application of new and existing licensing
and CON provisions to the business activities of HMM. When applicable, HMM may
be required either to obtain a license or other regulatory approval before it
can render these services directly in the home or to affiliate with other
licensed agencies in connection with the delivery of the nursing services.
Although generally a routine aspect of conducting a healthcare business,
compliance with these requirements in certain instances can be both burdensome
and costly. Violation of these state statutes can result in substantial fines
and other penalties. Healthdyne believes that HMM has obtained or is in the
process of obtaining licenses for each facility for which licensing is required.
This is an area of increasing legislative activity, and there can be no
assurance that HMM will not become subject to regulatory and licensing statutes
in other states in which it operates.
In addition, Healthdyne is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on Healthdyne's business or competitive position
or required material capital expenditures on the part of HMM.
Failure to comply with these regulations or laws could adversely affect
HMM's ability to continue to provide, or to receive reimbursement for, its
products and services and could also subject HMM and Healthdyne and their
respective officers to penalties. Changes in these laws or interpretations of
existing regulations or laws could have a material adverse effect on permissible
activities of Healthdyne, the relative costs of doing business and the amount of
reimbursement by government and other third-party payors. In addition, laws and
regulations often are adopted to regulate new products, services and industries.
There can be no assurance that either the states or the federal government will
not impose additional regulations upon Healthdyne's activities which might
adversely affect its results of operations or financial condition.
Healthdyne is unable to predict what legislation, if any, may be enacted in
the future relating to Healthdyne's business or the healthcare industry,
including third-party reimbursement, or what effect any such legislation may
have on Healthdyne.
COMPETITION. The home obstetrical care services market, in which HMM
competes, is a relatively new market with a growing number of local, regional
and national companies. Tokos is the largest of these companies and competition
exists in substantially all of the metropolitan areas in which HMM maintains
centers.
The principal competitive factors for HMM are the therapies offered, the
expertise of its clinical employees, the ability to provide prompt and reliable
service, the price at which the services are offered and regulatory requirements
of the FDA. Healthdyne believes that HMM generally competes favorably with
respect to these factors.
Certain of HMM's competitors are larger and have greater resources than
HMM.
PATENTS, TRADEMARKS AND LICENSES. Healthdyne does not believe that there
are any patents, trademarks and licenses which are material to the business of
HMM, although HMM's business does depend and will likely continue to depend on
trade secret protection to strengthen its proprietary position. Healthdyne
typically requires its employees to execute appropriate confidentiality
agreements in connection with their employment with Healthdyne. There can be no
assurance that these agreements will not be breached or that Healthdyne will
have adequate remedies for such breach. Furthermore, no assurance can be given
that competitors will not
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independently develop substantially equivalent proprietary information or that
Healthdyne can meaningfully protect its rights in unpatented proprietary
technology. Litigation may be necessary to protect trade secrets or "know-how"
owned by Healthdyne. Such litigation could result in substantial costs to, and
might have a material adverse effect on, Healthdyne.
EMPLOYEES. Healthdyne currently employs a total of approximately 531
full-time employees and over 103 regular part-time employees. In addition,
Healthdyne employs approximately 820 additional part-time employees to provide
patient training and backup support on an "as needed" basis. None of
Healthdyne's employees are represented by a union. Healthdyne considers its
relationship with its employees to be satisfactory.
PROPERTIES. Healthdyne's principal executive and administrative offices
are located at 1850 Parkway Place, Marietta, Georgia, and consist of
approximately 94,700 square feet. The facility is leased through February 28,
1997. The lease provides for annual rental payments of $2,063,000.
Additional properties are also leased for the other operations of HMM.
These facilities, which total approximately 103,819 square feet of space, are
leased for various terms through 1998 at aggregate annual rentals of $1,440,000.
Healthdyne believes that its facilities are adequate for the foreseeable
future.
PENDING LITIGATION
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
Eastern District of Missouri against Healthdyne and its former subsidiary HNS
alleging that The Lindner Fund would not have sold its investment in HNS on
February 8, 1994 had Healthdyne and HNS disclosed the potential sale of HNS.
Damages have been requested in the amount of $1,050,900, representing the
aggregate difference between the price received upon the sale of such stock by
The Lindner Fund and the $7.85 per share price paid by W.R. Grace & Co. on April
6, 1994 for HNS. Healthdyne has denied the allegations set forth in the
complaint and is currently defending the matter vigorously.
In addition to the foregoing, Healthdyne is a party to various legal claims
and actions incidental to its current and, in some instances, former businesses,
including product liability claims and, to a lesser extent, professional
liability claims. Healthdyne maintains insurance, including insurance covering
professional and product liability claims, with customary deductible amounts,
and has been indemnified by Healthdyne Technologies with respect to any claim
relating to equipment manufactured and sold by Healthdyne Technologies, whether
before or after the Technologies Spinoff. There can be no assurance, however,
that (i) additional suits will not be filed against Healthdyne in the future,
(ii) Healthdyne's prior experience with respect to the disposition of its
litigation accurately indicates the results that will occur in pending or future
cases against Healthdyne, or (iii) adequate insurance coverage will be available
at acceptable prices for incidents arising in the future.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of Healthdyne's Chief Executive Officer and each of the other four
most highly compensated executive officers of Healthdyne serving as of December
31, 1995 (these five individuals, collectively, the "named executive officers")
for their services in all capacities to Healthdyne and its subsidiaries during
the past three years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
----------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($)(2)
----------------------------------- ---- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Parker H. Petit.................... 1995 $391,878 $ -- 70,000 $2,055
Chairman of the Board and 1994 371,877 150,000 185,000 2,055
Chief Executive Officer 1993 350,016 -- 170,000 2,467
J. Terry Dewberry.................. 1995 235,125 -- 40,000 2,055
Vice Chairman 1994 223,750 90,000 110,000 2,055
1993 210,000 -- 45,000 2,340
J. Paul Yokubinas.................. 1995 219,450 -- 40,000 2,055
President and Chief Operating 1994 208,333 84,000 35,000 2,055
Officer 1993 190,000 -- 55,000 2,202
J. Brent Burkey.................... 1995 209,000 -- 35,000 2,055
Senior Vice President, General 1994 198,750 60,000 40,000 2,055
Counsel and Secretary 1993 185,000 -- 40,000 2,047
Donald R. Millard.................. 1995 198,550 -- 35,000 2,055
Vice President -- Finance, Chief 1994 188,750 57,000 30,000 2,055
Financial Officer and Treasurer 1993 175,000 -- 30,000 --
</TABLE>
- ---------------
(1) Bonuses may be payable under Healthdyne's 1995 Management Incentive Plan
based upon a formula tied to Healthdyne's 1995 financial results, which
have not yet been compiled.
(2) Represents Healthdyne's matching contributions to the named executive
officers under Healthdyne's tax-qualified 401(k) Profit Sharing Plan
accrued during the twelve months indicated.
STOCK OPTIONS. The following table contains information concerning the
grant of stock options under Healthdyne's 1991 and 1993 Stock Option Plans to
the named executive officers of Healthdyne as of the end of the last fiscal
year.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
----------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES BASE OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ------------------
NAME (#)(1) YEAR ($/SH)(2) DATE 5%($) 10%($)
- ---------------------------------- --------- ----------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit................... 20,000 3.60% $4.27 06/08/00 $23,594 $ 52,138
50,000 9.01 3.94 06/20/00 54,427 120,270
J. Terry Dewberry................. 40,000 7.21 3.94 06/20/00 43,542 96,216
J. Paul Yokubinas................. 40,000 7.21 3.94 06/20/00 43,542 96,216
J. Brent Burkey................... 35,000 6.31 3.94 06/20/00 38,099 84,189
Donald R. Millard................. 35,000 6.31 3.94 06/20/00 38,099 84,189
</TABLE>
- ---------------
(1) These options to purchase Healthdyne's Common Stock were granted as follows:
On June 8, 1995, 20,000 option shares to Mr. Petit; on June 20, 1995,
50,000 option shares to Mr. Petit, 40,000 option shares each to Messrs.
Dewberry and Yokubinas, and 35,000 option shares each to Messrs. Burkey and
Millard. For the options granted in 1995, 33% of the shares subject to the
option grants become exercisable in cumulative increments on the first,
second and third anniversary date of the option grants. The options each
have a term of five years from the date of grant and are not transferable,
otherwise than by will or the laws of descent and distribution. Except as
provided in each of the option agreements, the options may not be exercised
unless employment with Healthdyne or an affiliate or subsidiary continues.
Options granted under the plans will expire (i) immediately upon the
employee's termination for good cause; (ii) three months after the date of
termination for reason other than good cause; (iii) three months after the
employee's voluntary termination; (iv) one year after the employee's death
or disability; or (v) five years from the date of the grant. In connection
with the Merger, options held by officers and directors of Healthdyne will
be amended so that such options will not terminate for twelve months after
the Effective Time unless the final expiration date of such option would
occur prior to such time. The purchase price of the shares subject to these
options may be paid (i) in cash; (ii) through the surrender of previously
owned stock of Healthdyne; or (iii) a combination of cash and previously
owned stock of Healthdyne. The optionees are obligated to reimburse
Healthdyne at the time of any exercises of the options for any taxes
required to be withheld by Healthdyne under federal, state or local law as
the result of the exercise of the options.
(2) The exercise price of the outstanding options to purchase Healthdyne's
Common Stock has been reduced substantially in connection with the spin off
to the shareholders of Healthdyne of Healthdyne's former 81%-owned
subsidiary, Healthdyne Technologies, effective May 22, 1995, and
Healthdyne's former wholly owned subsidiary, HIE, effective November 6,
1995 (collectively, the "Spinoffs"). At the time of each of the Spinoffs,
the aggregate exercise price of each outstanding option to purchase
Healthdyne Common Stock was reduced by an amount proportionate to the
reduction in the market price of the Healthdyne Common Stock resulting from
the Spinoff (the "Reduction Amount"), and each option holder who continued
as an employee or director of Healthdyne received "adjustment options" from
the company whose stock was distributed in the Spinoff to purchase an
equivalent number of shares of such company at an aggregate exercise price
equal to the Reduction Amount. These adjustments are consistent with the
adjustments to Healthdyne's stock prices shown under the Comparative Market
Data.
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STOCK OPTION EXERCISES. The following table sets forth information with
respect to the named executive officers concerning the exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT LAST FISCAL OPTIONS AT LAST FISCAL
SHARES VALUE YEAR END (#) YEAR END (#)(2)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit.................. 342,833 $2,324,964 -- 146,667 $ -- $ 875,594
J. Terry Dewberry................ 141,666 1,018,121 -- 78,334 -- 439,840
J. Paul Yokubinas................ 102,082 477,448 15,000 81,668 19,863 462,156
J. Brent Burkey.................. 55,000 377,351 16,667 68,333 108,638 384,763
Donald R. Millard................ -- -- 54,999 65,001 312,823 362,460
</TABLE>
- ---------------
(1) Represents the excess of the fair market value of the stock at the time of
exercise above the exercise price of the options.
(2) Based on $8.625, the last sale price of Healthdyne's Common Stock on
December 29, 1995.
COMPENSATION OF DIRECTORS. Directors of Healthdyne who are officers of
Healthdyne receive no additional compensation for serving on the Board of
Directors. Directors who are not officers receive a fee of $3,000 per quarter,
plus $1,000 for each Board meeting and $750 for each Committee meeting attended,
and are reimbursed for any travel expenses incurred.
PENSION PLAN. The named executive officers of Healthdyne participate in a
non-qualified pension plan. The following table shows the estimated pension
benefits payable to a covered participant at normal retirement age under this
pension plan which provides benefits based on remuneration that is covered under
the plan and years of service with Healthdyne and its affiliates.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
------------ ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 75,000.............................. $ 7,000 $18,250 $ 29,500 $ 29,500 $ 29,500 $ 29,500
100,000.............................. 14,500 29,500 44,500 44,500 44,500 44,500
125,000.............................. 22,000 40,750 59,500 59,500 59,500 59,500
150,000.............................. 29,500 52,000 74,500 74,500 74,500 74,500
175,000.............................. 37,000 63,250 89,500 89,500 89,500 89,500
200,000.............................. 44,500 74,500 104,500 104,500 104,500 104,500
</TABLE>
Remuneration covered by the benefit award is based on the average base
salary of the executive for the three years in which his base salary is the
highest. This amount for each of the named executive officers participating in
the plan as of December 31, 1995 was $371,257, $222,958, $205,928, $197,583 and
$187,433, respectively, for Messrs. Petit, Dewberry, Yokubinas, Burkey and
Millard. The estimated years of service for each named executive officer as of
the end of the last fiscal year was 25 years for Mr. Petit, 15 years for Mr.
Dewberry, 13 years for Mr. Yokubinas, 13 years for Mr. Burkey and 9 years for
Mr. Millard. Benefits shown are computed as a diminishing single life annuity
beginning at age 65 with annual reductions equal to the annual increases in
primary social security benefits. The base salary used to calculate covered
compensation is the same figure reported in the "Salary" column of the Summary
Compensation Table. See "Change of Control Arrangements" below for a discussion
of the effects of a "change of control" of Healthdyne on these retirement
benefit awards.
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In the event of a "change of control" of Healthdyne (defined to include,
among other things, the Merger and the sale or distribution of 30% or more of
Healthdyne's assets in one or a series of related transactions, including the
Spinoffs), all benefits accrued to date immediately vest and each executive
officer may require Healthdyne to place in trust for the executive officer's
benefit an amount of money equal to the present value of the participant's
accrued retirement benefit. See "The Merger--Interests of Certain Persons in the
Merger."
CHANGE OF CONTROL ARRANGEMENTS. In February 1988, Healthdyne entered into
agreements with Messrs. Petit, Dewberry, Burkey and Millard and in October 1993
entered into a similar agreement with Mr. Yokubinas, entitling such executive
officers to certain benefits upon specified terminations of employment within
three years following a "change in control" of Healthdyne. Each agreement
provides that in the event of a "change in control" of Healthdyne, the executive
officer concerned will be entitled to certain benefits upon his subsequent
termination of employment during the term of the agreement unless such
termination is (i) because of his death, disability or retirement, (ii) by
Healthdyne for cause, or (iii) with respect to termination by the executive
officer, by the executive officer, other than for "good reason." Under these
agreements, a number of circumstances entitle the executive officer to treat a
good faith termination on his part as being a termination for "good reason."
These include an adverse change in the executive officer's compensation,
discontinuation of certain benefits, the assignment of duties inconsistent with
his status or duties in effect immediately prior to the "change in control" of
Healthdyne, the relocation of Healthdyne's principal executive office to a
location outside of Marietta, Georgia or Healthdyne's requiring the executive
officer to be based anywhere other than Healthdyne's principal executive office.
If an executive officer's employment with Healthdyne or its subsidiaries
terminates following the consummation of a "change in control" of Healthdyne
other than under the circumstances set forth in clauses (i), (ii) or (iii) of
the preceding paragraph, the executive officer will be entitled to receive his
full base salary through the date of termination and a lump sum severance
payment equal to three times the executive officer's average annual salary and
other income derived from Healthdyne which is reportable for federal tax
purposes for the five years preceding the date of his termination. In addition,
such executive officer will be entitled to receive, for a period of three years
after the date of his termination, all life, disability and health insurance
coverage, automobile allowances and other fringe benefits equivalent to those in
effect at the date of termination and is entitled to receive additional amounts
relating to any excise taxes imposed on the executive as a result of Section
280G of the Code.
In connection with the execution of the Merger Agreement, and as
contemplated therein, Healthdyne entered into amended and restated agreements
with each of the executive officers mentioned above and a new agreement with
Frank D. Powers, President of Healthdyne Maternity Management (the "New
Agreements"). The New Agreements, which take effect only if and at the time that
the Merger becomes effective, will supersede the prior agreements described
above. The New Agreements acknowledge that the Merger constitutes a "change in
control", as defined in the agreements, and extend the term of the New
Agreements from a term ending in February 1997 to a term ending three years
after the Merger. In addition, under the New Agreements the executive officer
agrees to comply with certain protective covenants which, for a period of three
years following the later of the Effective Time or the effective time of any
other "change in control" of Newco that occurs within three years after the
effective date of the Merger and during the executive officer's continued
employment with Newco, prohibit the executive officer from competing with Newco,
soliciting customers or soliciting personnel of Newco. The New Agreements
otherwise are substantially similar to the change in control agreements
previously in effect.
Under these agreements, if a "change in control" had taken place on January
1, 1996, Messrs. Petit, Dewberry, Yokubinas, Burkey, Millard and Powers would
have been entitled to receive approximately $4,308,000, $2,319,000, $1,007,000,
$1,681,000, $651,000 and $647,000, respectively, upon termination of employment
as contemplated under these agreements. Section 280G of the Code imposes a 20%
excise tax on the recipient of "excess parachute payments," as identified in the
Code, and denies a tax deduction for such excess parachute payments to the
company making them. In addition, if any such payments constitute excess
parachute payments under Section 280G of the Code, Healthdyne (or, after the
Merger, Newco) would be obligated under these agreements to reimburse each
executive officer for the excise taxes resulting from such
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parachute payments and from any reimbursements thereof paid by Healthdyne (or,
after the Merger, Newco) and for the income taxes imposed on the executive
officer with respect to such reimbursements. Healthdyne believes that, if Newco
becomes obligated to make severance payments under these agreements, no portion
of these payments will constitute excess parachute payments. However, there can
be no assurance that the IRS would not assert that some portion of such payments
are excess parachute payments. If the IRS were to prevail in such an assertion,
the amount of deductions disallowed and the amount of reimbursements required to
be paid to terminated executives could be substantial.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee of the Board of Directors of Healthdyne is responsible
for executive compensation decisions as described above. During 1994, the
committee consisted of Parker H. Petit, William J. Gresham, Jr., Charles R.
Hatcher, Jr., Carl E. Sanders and Morris S. Weeden. Mr. Petit is Chairman of the
Board and Chief Executive Officer of Healthdyne. Mr. Sanders is the Chairman of
a law firm which provided legal services to Healthdyne during 1994 and which
will provide legal services to Healthdyne in the future.
CERTAIN TRANSACTIONS
In July 1981, 405,000 shares of Common Stock reserved under Healthdyne's
1981 Incentive Stock Option Plan were sold to certain of Healthdyne's officers
for $1.33 per share in exchange for $540,000 principal amount of Healthdyne's 8%
promissory notes (the "1981 Promissory Notes") payable in four years and secured
by the purchased shares. The Board of Directors of Healthdyne extended the
respective maturity dates of the 1981 Promissory Notes, forgave interest accrued
from July 1985 through December 1987, and stayed the accrual of any additional
interest until the stock is sold by said individuals. Mr. Parker H. Petit owns
248,000 of such shares. The maximum outstanding principal indebtedness to
Healthdyne of Mr. Petit (the only executive officer or director whose
indebtedness to Healthdyne exceeded $60,000) since January 1, 1995 was $917,900,
of which $325,800 related to the 1981 Promissory Notes, $350,000 to a loan
evidenced by a promissory note, dated September 24, 1992, payable on December
31, 1996, $17,100 to a loan evidenced by a promissory note dated October 1,
1990, payable on demand, $100,000 to a loan evidenced by a promissory note,
dated March 16, 1993, payable on demand, and $125,000 to a loan evidenced by a
promissory note, dated June 27, 1994, payable on demand. All notes, except the
1981 promissory notes, bear interest at a floating rate which is currently
8.25%. At the present time, Mr. Petit has approximately $873,182 of principal
indebtedness outstanding to Healthdyne.
Mr. Carl E. Sanders, a director of Healthdyne, is also the Chairman of
Troutman Sanders LLP, a law firm based in Atlanta, Georgia which provided
certain legal services to Healthdyne in fiscal year 1995 and may be retained by
Healthdyne in the future.
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OPERATION, MANAGEMENT AND BUSINESS OF NEWCO AFTER THE MERGER
BUSINESS OF NEWCO
Newco is a recently incorporated Delaware corporation formed for the
purposes of the Merger. Prior to the Merger, Newco will have no material assets
or liabilities. At the consummation of the Merger, Healthdyne and Tokos will
merge with and into Newco, and Newco will issue shares of Newco Common Stock to
former stockholders of Healthdyne and Tokos.
From and after the Effective Time, Newco will consolidate the operations of
each of the constituent companies in order to take advantage of efficiencies
presented by the combination. Newco expects that decisions as to the continuing
employment of Healthdyne and Tokos officers and employees, and the continuing
operation of business and each company's facilities, will be made on a
case-by-case basis after the consummation of the Merger, based upon Newco's
evaluation of the combined operations of Healthdyne and Tokos.
MANAGEMENT OF NEWCO
Directors After the Merger. As provided in the Merger Agreement, as of the
Effective Time, Newco is obligated to take all action necessary to cause: Carl
E. Sanders and Craig T. Davenport to be elected as directors of Newco for terms
expiring at the 1996 Annual Meeting of Stockholders; Jackie M. Ward, Frederick
P. Zuspan, M.D., Thomas W. Erickson and David L. Goldsmith to be elected as
directors of Newco for terms expiring at the 1997 Annual Meeting of
Stockholders; and Parker H. Petit, Robert F. Byrnes, Morris S. Weeden and Gene
P. Guselli to be elected as directors of Newco for terms expiring at the 1998
Annual Meeting of Stockholders. Under the terms of the Newco Bylaws, if any of
the Tokos Nominated Directors (Robert F. Byrnes, Gene P. Guselli, Craig T.
Davenport, Thomas W. Erickson and David L. Goldsmith) are unable or unwilling to
serves as a director of Newco, such individual or individuals shall be replaced
by an individual or individuals designated by the Tokos Board of Directors and
if any of the Healthdyne Nominated Directors (Parker H. Petit, Carl E. Sanders,
Jackie M. Ward, Morris S. Weeden and Frederick P. Zuspan, M.D.) are unable or
unwilling to serve, such individual or individuals shall be replaced by a
individual or individuals designated by the Healthdyne Board of Directors. In
addition, for a period of three years following the Effective Time and
continuing through Newco's 1998 Annual Meeting of Stockholders, (i) any vacancy
on Newco's Board of Directors, or any committee thereof, arising among the Tokos
Nominated Directors and any nominee selected to fill a director position
occupied by a Tokos Nominated Director will be filled or selected by the
remaining Tokos Nominated Directors and (ii) any vacancy on Newco's Board of
Directors, or any committee thereof, arising among the Healthdyne Nominated
Directors and any nominee selected to fill a director position occupied by a
Healthdyne Nominated Director will be filled or selected by the remaining
Healthdyne Nominated Directors. As provided in Newco Bylaws, the affirmative
vote of a majority of all directors will be necessary to constitute the act of
Newco's Board of Directors.
At each annual meeting, directors will be elected to succeed those
directors whose terms expire at such annual meeting, for a term of office which
will expire at the third succeeding annual meeting. Biographical information
with respect to the proposed directors of Newco is set forth below.
Parker H. Petit, age 56, is the founder of and has been employed by
Healthdyne as its Chairman of the Board of Directors and Chief Executive Officer
since 1970. Mr. Petit is also Chairman of the Board of Directors of Healthdyne
Technologies, Inc. and Healthdyne Information Enterprises, Inc. and a director
of Atlantic Southeast Airlines, Inc., a regional airline.
Robert F. Byrnes, age 51, has served as Chief Executive Officer of Tokos
since July 1984, as Chairman of the Board since November 1987 and as President
and Chief Operating Officer of Tokos since January 1994. From 1982 to July 1984,
Mr. Byrnes was the President and Chief Operating Officer of Caremark, Inc.
(formerly Home Health Care of America, Inc.). From 1978 to 1982, Mr. Byrnes was
Vice President of Marketing -- Business Development and Clinical Research for
Genentech, Inc. Prior to that, Mr. Byrnes held managerial positions with
divisions of American Hospital Supply Corporation, Abbott Laboratories, Inc. and
Eli Lilly & Company. Mr. Byrnes is also a director of several private healthcare
companies.
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Carl E. Sanders, age 70, has served as a director of Healthdyne since 1986.
Mr. Sanders, a former governor of the State of Georgia, is Chairman of Troutman
Sanders LLP, an Atlanta based law firm which provides legal services to
Healthdyne. Mr. Sanders is also a director of Carmike Cinemas, Inc., The Actava
Group, Inc., Norrell Corporation, Roadmaster Industries, Inc. and Healthdyne
Information Enterprises, Inc.
Jackie M. Ward, age 57, is President and Chief Executive Officer of
Computer Generation Incorporated, a privately-held, Atlanta based corporation
engaged in designing and producing "turnkey" computer hardware and software
systems for telecommunications and other specialized applications, which she
founded in 1968. Ms. Ward is also a former Chairperson of the Board of Regents
of the University System of Georgia and Chairman-elect of the Metro Atlanta
Chamber of Commerce, as well as a director of SCI Systems, Inc., Trigon Blue
Cross Blue Shield and NationsBank, N.A. and a member of several other government
and public service commissions.
Morris S. Weeden, age 76, has served as a director of Healthdyne since 1987
and is retired. Mr. Weeden was Vice Chairman--Board of Directors of Morton
Thiokol Inc., a salt, chemical, pharmaceutical, household and aerospace products
manufacturer, from March 1980 to December 1984. Prior thereto, Mr. Weeden was
Executive Vice President of Morton Norwich Products, Inc. in charge of
pharmaceutical operations, President of Morton International, a pharmaceutical
division of Morton Norwich Products, Inc. and President of Bristol Laboratories,
a pharmaceutical division of Bristol Myers Corp. Mr. Weeden is also a director
of Xytronyx, Inc.
Frederick P. Zuspan, M.D., age 74, has served as a director of Healthdyne
since 1993 and has been a physician since 1951. Dr. Zuspan has been Professor
and Chairman Emeritus, Department of Obstetrics and Gynecology at the Ohio State
University College of Medicine since July 1991 and Editor-in-Chief of the
American Journal of Obstetrics and Gynecology since 1991. Dr. Zuspan was
previously Professor of the Ohio State University College of Medicine from 1987
to 1991 and Professor and Chairman of the Department of Obstetrics and
Gynecology at the Ohio State University College of Medicine from 1983 to 1991,
at the University of Chicago, Pritzker School of Medicine from 1966 to 1975, and
at the Medical College of Georgia from 1960 to 1966.
Thomas W. Erickson, age 44, has served as a director of Tokos since 1985.
Mr. Erickson has also served as President of CareSelect Group, Inc., a
management service organization that provides management and administrative
services for various independent practice associations, since June 1994. Mr.
Erickson has also served as President and Chief Executive Officer of Erickson
Capital Group, Inc., a private investment firm, which invests in a wide range of
health care service companies and managed care alliances. Mr. Erickson is also a
director of numerous private healthcare companies.
Gene P. Guselli, age 42, has served as a director of Tokos since April
1994. Mr. Guselli has been President and Chief Executive Officer of InfoMedics,
Inc., a private company that produces automated patient information systems,
since December 1995. Prior to December 1995, Mr. Guselli served as President and
Chief Executive Officer of Private Healthcare Systems, Inc. since 1985. Prior to
1985, Mr. Guselli served in a variety of capacities as a hospital administrator
in both Boston and New York City. Mr. Guselli also served as a senior consultant
for the Health Data Institute in 1984. Mr. Guselli has over 19 years in the
healthcare industry. He is also a director of the American Association of
Preferred Provider Organizations.
Craig T. Davenport, age 43, has served as a director of Tokos since
November 1986 and as a consultant to Tokos through December 1994. Mr. Davenport
has been the Chief Executive Officer of the D.W. Group, a private advisory and
investment firm which provides services to newly emerging health care companies,
since August 1994. He has also been the President and Chief Executive Officer of
Intercare Systems, Inc., a private company that develops interactive, multimedia
systems for use in educating patients and professionals, since October 1994. Mr.
Davenport served as Chief Operating Officer of Tokos from November 1986 to
December 1993, and as President of Tokos from November 1987 to December 1993.
Prior to joining Tokos in 1985, Mr. Davenport held managerial positions with
divisions of American Hospital Supply Corporation. Mr. Davenport is also a
director of TheraTx, Inc. and numerous private healthcare companies.
David L. Goldsmith, age 47, has served as a director of Tokos since 1985.
Mr. Goldsmith has been a managing director of Robertson Stephens since 1992, and
a partner of Robertson Stephens from 1981 to 1992.
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In addition, Mr. Goldsmith directs the Robertson Stephens' venture capital and
management buyout activity. Mr. Goldsmith is also a director of Apria
Healthcare, Inc., Spectranetics, Inc., and several private health care
companies.
In addition, Newco is obligated to take all necessary actions to establish
the Executive Committee and such committee will initially consist of Parker H.
Petit, as Chairman, and Robert F. Byrnes, Carl E. Sanders, Jackie M. Ward, Gene
P. Guselli and Craig T. Davenport, as the other members.
In addition to such powers as may be delegated to it from time to time by
Newco's Board of Directors, the Executive Committee shall: resolve any
differences, disagreements or issues presented to the Executive Committee for
consideration by the Transition Committee; act in the absence of the full Board
of Directors of Newco as deemed necessary and appropriate and as permitted by
applicable law; keep the full Board of Directors of Newco apprised of Executive
Committee activities and decisions; and conduct detailed review and evaluation
of the annual budget prior to submission to the full Board of Directors of
Newco. In all matters brought before the Executive Committee by the Transition
Committee for resolution by the Executive Committee, Parker H. Petit and Robert
F. Byrnes shall act as ex officio nonvoting members.
The Audit Committee shall initially consist of four members. In addition to
such powers as may be delegated to it from time to time by Newco's Board of
Directors, the Audit Committee shall: recommend outside accountants for approval
by the full Board of Directors and the stockholders of Newco; meet with Newco's
outside auditors and Newco's Chief Financial Officer and their respective staffs
to review and evaluate accounting and control systems, issues and related
matters; meet independently with Newco's auditors and Chief Financial Officer to
discuss the accuracy and integrity of Newco's financial reporting management
information and control systems, and any other appropriate issues; and address
any other matters which are appropriate for the Audit Committee's review or
involvement. The initial members of the Audit Committee shall be two
non-employee Tokos Directors designated by the Board of Directors of Tokos and
two non-employee Healthdyne Directors designated by the Board of Directors of
Healthdyne.
The Compensation Committee shall initially consist of six members. In
addition to such powers as may be delegated to it from time to time by Newco's
Board of Directors, the Compensation Committee shall: review and approve
salaries for all corporate officers; review and approve all incentive and
special compensation plans and programs, including stock options and related
longer term incentive compensation programs; review and approve management
succession planning; conduct special competitive compensation studies and retain
compensation consultants as deemed necessary and appropriate; and recommend
appropriate programs and actions on any of the above matters to the full Board
of Directors of Newco for their review and approval. The initial members of the
Compensation Committee shall be two non-employee Healthdyne Directors designated
by the Board of Directors of Healthdyne and two non-employee Tokos Directors
designated by the Board of Directors of Tokos. Parker H. Petit and Robert F.
Byrnes shall serve as ex officio non-voting members of the Compensation
Committee.
The Nominating Committee shall initially consist of Robert F. Byrnes, as
Chairman, and Parker H. Petit, Frederick P. Zuspan, M.D. and David L. Goldsmith,
as the other members. In addition to such powers as may be delegated to it from
time to time by Newco's Board of Directors, the Nominating Committee shall to
the extent not inconsistent with the Merger Agreement: identify, screen and
recommend candidates for appointment to the Board of Directors of Newco for
consideration by the full Board of Directors of Newco and by the stockholders of
Newco; and establish compensation and retirement policies for members of the
Board of Directors of Newco.
For a period of three years following the Effective Time, any vacancies on
a committee of Newco's Board of Directors shall be filled in the same manner as
vacancies in Newco's Board of Directors. In accordance with the Newco Bylaws,
each of the committees named herein may act only by affirmative vote of a
majority of the authorized number of members of such committee.
In addition to the above committees, pursuant to the Merger Agreement,
Healthdyne and Tokos have established the Transition Committee. Glass &
Associates, Inc. has been selected to serve as the Consultant to Healthdyne,
Tokos and the Transition Committee until the conclusion of the Transition
Period. Prior to the
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Effective Time, the Transition Committee is to deliver a business plan to the
Boards of Directors of Healthdyne and Tokos that specifically identifies
business strategies, goals and potential savings to be achieved by Newco in the
Transition Period. The Transition Committee will survive the Merger and will
thereafter continue as a committee of the Board of Directors of Newco to report
directly to the Board of Directors of Newco at each regular or special meeting
thereof for a period of nine months following October 2, 1995, unless extended
or earlier terminated by the Newco Board of Directors.
Executive Officers After the Merger. Newco's Board of Directors is
obligated to take all action necessary to cause Parker H. Petit to be elected
the Chairman of the Board of Newco, Robert F. Byrnes to be elected the President
and Chief Executive Officer of Newco, Frank Powers to be elected the Executive
Vice President-Provider Operations of Newco, Terry P. Bayer to be elected the
Executive Vice President-Managed Care Operations of Newco, Donald R. Millard to
be elected the Senior Vice President and Chief Financial Officer of Newco and J.
Brent Burkey to be elected the Senior Vice President and General Counsel of
Newco. Other senior management positions of Newco after the Merger are expected
to be held by persons currently employed by Healthdyne or Tokos. Biographical
information with respect to Ms. Bayer and Messrs. Powers, Millard and Burkey is
set forth below.
Terry P. Bayer, age 45, has served as President of Tokos Medical
Corporation, Tokos' principal subsidiary, since October 1994 and as President of
Tokos' Matryx Health Partners division since March 1994. Prior to joining Tokos,
Ms. Bayer attended Stanford Law School from which she received a juris doctor
degree in June 1994. Ms. Bayer served as Vice President and General Manager of
Lincoln National Insurance from May 1989 through May 1992; Regional Vice
President of Partners National Health Plan from September 1988 through May 1989;
and Regional Vice President for Maxicare Health Plans from September 1984
through September 1988. Prior to 1984 Ms. Bayer held a number of management
level positions with various health plans and similar organizations.
Frank Powers, age 47, has served as President of Healthdyne Maternity
Management since October 1989 and as President of Healthdyne's Home Care Group
from November 1986 to October 1989. In addition, he was President of
Healthdyne's Home Care Products Division from September 1984 to November 1986
and Corporate Controller of Healthdyne from January 1983 to September 1984.
Donald R. Millard, age 48, has served as Vice President-Finance and Chief
Financial Officer of Healthdyne since July 1987 and, in addition, was elected
Treasurer in March 1990. Prior to joining Healthdyne, he served as President of
Dental One, Inc., a dental healthcare provider, from December 1982 to June 1987.
J. Brent Burkey, age 49, has served as Senior Vice President and General
Counsel of Healthdyne since September 1987 and as Vice President and General
Counsel of Healthdyne since November 1982. He has also served as Secretary of
Healthdyne since August 1984 and prior thereto as Assistant Secretary.
Neither Healthdyne nor Tokos is aware of any material relationships between
Healthdyne or its directors or executive officers and Tokos or its directors or
executive officers, except as contemplated by the Merger Agreement or as
described herein, including the documents incorporated herein by reference.
NEWCO PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Healthdyne and
Tokos with respect to certain stockholders of Healthdyne and Tokos as of
December 31, 1995, and with respect to Newco, as adjusted to reflect the
consummation of the Merger, by (1) each person who owns beneficially more than
five percent (5%) of the outstanding shares of Healthdyne or Tokos Common Stock
or is projected to own beneficially more than five percent (5%) of the
outstanding shares of Newco Common Stock, (2) each of Healthdyne's and Tokos'
directors and Newco's designated directors, (3) each of Newco's designated
executive officers and
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(4) all of Healthdyne's directors and officers as a group, all of Tokos'
directors and officers as a group and all of Newco's designated directors and
executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1) PERCENT OF CLASS(2)
------------------------------------ --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER HEALTHDYNE TOKOS NEWCO HEALTHDYNE TOKOS NEWCO
- -------------------------------------------- ---------- ---------- ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit(3)(4)....................... 1,722,661 1,722,661 10.3% 5.3 %
Robert F. Byrnes(5)......................... 1,232,263 1,232,263 7.0 % 3.6
Carl E. Sanders(6).......................... 72,500 72,500 * *
Jackie M. Ward(7)........................... 4 4 -- --
Morris S. Weeden(8)......................... 15,000 15,000 * *
Frederick P. Zuspan, M.D.(9)................ 5,000 5,000 * *
Gene P. Guselli(10)......................... 26,250 26,250 * *
Craig T. Davenport(11)...................... 92,392 92,392 * *
Thomas W. Erickson(12)...................... 24,000 24,000 * *
David L. Goldsmith(13)...................... 51,182 51,182 * *
Frank D. Powers(14)......................... 3,967 3,967 * *
Terry P. Bayer(15).......................... 180,000 180,000 1.0 *
Donald R. Millard(16)....................... 80,917 80,917 * *
J. Brent Burkey(17)......................... 33,965 33,965 * *
Wellington Management
Company(18)............................... 1,505,880 1,505,880 9.3 4.5
Gruber & McBaine Capital Management(19)..... 1,073,000 1,073,000 6.6 3.2
J. Terry Dewberry(20)....................... 35,192 35,192 * *
J. Paul Yokubinas(21)....................... 84,231 84,231 * *
Thornton A. Kuntz, Jr.(22).................. 834 834 * *
William J. Gresham, Jr.(23)................. 13,500 13,500 * *
Charles R. Hatcher, Jr. M.D.(24)............ 10,000 10,000 * *
Alexander H. Lorch(25)...................... 21,000 21,000 * *
State of Wisconsin Investment Board(26)..... 1,223,000 1,223,000 7.0 3.6
Mary J. George(27).......................... 29,250 29,250 * *
Nicholas A. Mione(28)....................... 175,100 175,100 1 *
All directors and executive officers of
Matria as a group (14 persons)............ 1,934,014 1,606,087 3,540,101 11.6 9.1 10.3
All directors and executive officers of
Healthdyne as a group (13 persons)........ 2,098,767 2,098,767 12.6
All directors and executive officers of
Tokos as a group
(8 persons)............................... 1,810,437 1,810,437 10.0
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Under the rules of the Commission, a person is deemed to be a beneficial
owner of a security if he or she has or shares the power to vote or to
direct the voting of such security, or the power to dispose or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days as well as any securities owned
by such person's spouse, children or relatives living in the same house.
Accordingly, more that one person may be deemed to be a beneficial owner of
the same securities. Unless otherwise indicated by footnote, the named
individuals have sole voting power and investment power with respect to the
shares held by them.
(2) With respect to each person in the table, assumes that such person has
exercised all options, warrants and other rights to purchase Newco Common
Stock, exercisable within 60 days, beneficially owned by him or that no
other person has exercised any such rights.
(3) Does not include 260,500 shares owned by Bank South, N.A., Atlanta,
Georgia, as Trustee of an irrevocable trust for benefit of two of Mr.
Petit's children. Mr. Dewberry, a director of Healthdyne, is a member of a
self-perpetuating, three-member advisory committee that has the power to
remove the Trustee and to direct the Trustee as to the voting and
disposition of the shares owned by the Trustee except that the advisory
committee has no such power during the lifetime of Mr. Petit if the shares
held by Mr. Petit and the trust, when aggregated, are "significant from the
viewpoint of voting control" of Healthdyne. Both the Trustee and the
advisory committee consider the shares owned by the Trustee to
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be significant in terms of voting control. In the absence of direction by
the advisory committee, the Trustee has sole power to direct the voting and
disposition of these securities.
(4) Includes 1,601,411 shares owned by Mr. Petit, 3,750 shares held by Mr.
Petit as custodian for one of his children, 97,500 shares held by Petit
Investments, L.P., a limited partnership in which Mr. Petit serves as
general partner ("Petit Investments"), 10,000 shares held by Petit Grantor
Trust, a living trust, and 10,000 shares which are subject to purchase upon
exercise of options exercisable within 60 days.
(5) Includes 1,032,263 shares held by Mr. and Mrs. Byrnes, as trustees of The
Byrnes Family Trust, as to which shares Mr. and Mrs. Byrnes share voting
and dispositive power, and 200,000 shares issuable upon exercise of options
held by Mr. Byrnes.
(6) Represents 62,500 shares owned by Mr. Sanders and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(7) Represents 4 shares issuable upon conversion of 8% Convertible Subordinated
Debentures owned by Ms. Ward.
(8) Represents 5,000 shares owned by Mr. Weeden and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(9) Represents 5,000 shares which are subject to purchase by Dr. Zuspan upon
exercise of options exercisable within 60 days.
(10) Represents 26,250 shares which are subject to purchase by Mr. Guselli upon
exercise of options exercisable within 60 days.
(11) Represents 68,188 shares held by Mr. and Mrs. Davenport, as trustees of The
Davenport Family Trust, as to which shares Mr. and Mrs. Davenport share
voting and dispositive power, 7,500 shares owned by Mr. Davenport and
16,704 shares which are subject to purchase upon exercise of options
exercisable within 60 days.
(12) Represents 24,000 shares which are subject to purchase by Mr. Erickson upon
exercise of options exercisable within 60 days.
(13) Represents 21,932 shares owned by Mr. Goldsmith and 29,250 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(14) Represents 634 shares owned by Mr. Powers and 3,333 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(15) Represents 180,0000 shares which are subject to purchase by Ms. Bayer upon
exercise of options exercisable within 60 days.
(16) Represents 14,421 shares owned by Mr. Millard, 58,333 shares which are
subject to purchase upon exercise of options exercisable within 60 days,
and 8,163 shares issuable upon conversion of 8% Convertible Subordinated
Debentures owned by Mr. Millard.
(17) Represents 13,965 shares owned by Mr. Burkey and 20,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(18) Based on information set forth in Amendment No. 1 to Schedule 13G dated
January 25, 1995, Wellington Management Company, in its capacity as
investment adviser, may be deemed to be the beneficial owner of shares
owned by numerous investment counselling clients. The address of Wellington
Management Company is 75 State Street, Boston, Massachusetts 02109.
(19) Based on information set forth in a joint filing on Schedule 13D dated
January 19, 1995, with respect to beneficial ownership of the following
persons and entities: Gruber & McBaine Capital Management, Jon D. Gruber,
J. Patterson McBaine, Lagunitas Partners, L.P., GMJ Investments, L.P.,
Charles C. McGettigan, Myron A. Wick, III, Proactive Investment Managers,
L.P., and Proactive Partners. The address of Gruber & McBaine Capital
Management is 50 Osgood Place, San Francisco, California 94113.
(20) Represents 30,192 shares owned by Mr. Dewberry and 5,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(21) Represents 64,231 shares owned by Mr. Yokubinas and 20,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(22) Represents 834 shares which are subject to purchase by Mr. Kuntz upon
exercise of options exercisable within 60 days.
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(23) Represents 3,500 shares owned by Mr. Gresham and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(24) Represents 10,000 shares which are subject to purchase by Dr. Hatcher upon
exercise of options exercisable within 60 days.
(25) Represents 11,000 shares owned by Mr. Lorch and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(26) Based on information in the Schedule 13G filed by SWIB with respect to
holdings as of September 30, 1995; SWIB manages these shares on behalf of
the investment trust funds held by the Wisconsin Retirement System; SWIB
has sole voting and dispositive power with respect to these shares. The
address of the State of Wisconsin Investment Board is 121 East Wilson
Street, Madison, Wisconsin 53703.
(27) Represents 29,250 shares which are subject to purchase by Ms. George upon
exercise of options exercisable within 60 days.
(28) Includes 51,600 shares held by Mr. Mione, as trustee of The Nicholas A.
Mione Jr. Living Trust, and 117,500 shares which are subject to purchase by
Mr. Mione upon exercise of options exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK OF NEWCO
The authorized capital stock of Newco consists of 1,000 shares of common
stock, $.01 par value, and 1,000 shares of preferred stock, $.01 par value.
Newco's authorized capital stock, as set forth in the Amended and Restated
Certificate of Incorporation which will be adopted by the approval of the Merger
Agreement, will consist of 100,000,000 shares of common stock, $.01 par value,
and 50,000,000 shares of preferred stock, $.01 par value.
COMMON STOCK. The holders of Newco Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. The holders of Newco Common Stock have no cumulative voting rights
in the election of directors. Subject to the prior rights of holders of
preferred stock of Newco which may be issued, the holders of Newco Common Stock
are entitled to dividends, when and if declared by the Board of Directors out of
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of Newco the holders of Newco Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of Newco
Common Stock have no preemptive rights and have no right to convert Newco Common
Stock into any other securities. All shares of Newco Common Stock issued
pursuant to the Merger will be when issued, fully paid and nonassessable.
PREFERRED STOCK. The Board of Directors has the authority, without further
stockholder approval, to issue authorized but unissued shares of preferred stock
in one or more series and to determine the preferences, rights, privileges and
restrictions of any series, including the dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. Such issuance of preferred stock may adversely affect, among other
things, the voting rights of existing stockholders.
COMMON STOCK PURCHASE RIGHTS. Pursuant to the Rights Agreement (the
"Rights Agreement") between Newco and SunTrust Bank, as Rights Agent, a common
stock purchase right (a "Right") will be issued with each share of Newco Common
Stock. Each Right entitles the registered holder to purchase from Newco a unit
consisting of one-hundredth of a share (a "Unit") of Newco Common Stock at a
Purchase Price of $61 per Unit, subject to adjustment. The Purchase Price shall
be paid in cash. The description and terms of the Rights are set forth in the
Rights Agreement.
Initially, the Rights will be attached to all Newco Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. The Rights will separate from the Newco Common
Stock and a "Distribution Date" will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
Newco
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Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 20% or more of such outstanding shares of
Newco Common Stock. Until the Distribution Date, (i) the Rights will be
evidenced by the Newco Common Stock certificates and will be transferred with
and only with such Newco Common Stock certificates, (ii) all Newco Common Stock
certificates issued will contain a notation incorporating the Rights Agreement
by reference and (iii) the surrender for transfer of any certificates for Newco
Common Stock outstanding will also constitute the transfer of the Rights
associated with the Newco Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on March 9, 2006, unless earlier redeemed by Newco as
described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Newco Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Newco Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that, at any time following the Distribution Date, (i) Newco
is the surviving corporation in a merger with an Acquiring Person or an
associate or affiliate of an Acquiring Person and its Newco Common Stock is not
changed or exchanged, or (ii) a person or group of affiliated or associated
persons becomes the beneficial owner of 20% or more of the then outstanding
shares of Newco Common Stock (except pursuant to a tender offer or exchange
offer for all outstanding shares of Newco Common Stock approved by a majority of
the Board of Directors who are not associated with an Acquiring Person, the
"Continuing Directors"), or (iii) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than 1% (e.g., a reverse stock split), or (iv)
in the event of certain transactions between an Acquiring Person or an affiliate
of an Acquiring Person and Newco, each holder of a Right will thereafter have
the right to receive, upon exercise and payment of an amount equal to 100 times
the exercise price (currently $61), Newco Common Stock (or, in certain
circumstances, cash, property or other securities of Newco) having a value equal
to 200 times the exercise price of the Right. Notwithstanding any of the
foregoing, following the occurrence of any of the events set forth in this
paragraph, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring Person will be null
and void. Moreover, the Rights shall not be exercisable, and shall be null and
void as long as held, by a holder (a "Nonqualified Holder") in any jurisdiction
where the requisite qualification for the issuance to such holder, or the
exercise by such holder, of the Rights in such jurisdiction shall not have been
obtained or be obtainable. However, Rights are not exercisable following the
occurrence of any of the events set forth above until such time as the Rights
are no longer redeemable by Newco as set forth below.
For example, at an exercise price of $.50 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) or a Nonqualified Holder
following an event set forth in the preceding paragraph would entitle its holder
to purchase $100 worth of Newco Common Stock (or other consideration, as noted
above) for $50. Assuming that the Newco Common Stock had a per share value of
$10 at such time, the holder of each valid Right would be entitled to purchase
10 shares of Newco Common Stock for $50. Fractional shares will not be issued.
In lieu of fractional shares of Newco Common Stock, Newco may pay to the
registered holder of Rights Certificates at the time such Rights are exercised
an amount in cash equal to the same fraction of the current market value of one
share of Newco Common Stock.
In the event that, at any time following the Stock Acquisition Date, (i)
Newco is acquired in a merger or other business combination transaction in which
Newco is not the surviving corporation (other than a merger described in the
second preceding paragraph), (ii) Newco is the surviving corporation in a merger
or consolidation with another person and all or part of its Newco Common Stock
is changed or exchanged, or (iii) more than 50% of Newco's assets or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the
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Right. The events set forth in this paragraph and in the second preceding
paragraph are referred to as the "Triggering Events."
The Purchase Price payable, and the number of Units of Newco Common Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Newco Common Stock, (ii) if holders of the Newco Common Stock are granted
certain rights or warrants to subscribe for Newco Common Stock or convertible
securities at less than the current market price of the Newco Common Stock, or
(iii) upon the distribution to holders of the Newco Common Stock of evidences of
indebtedness or assets (excluding regular semiannual cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment in
cash will be made based on the market price of the Newco Common Stock on the
last trading date prior to the date of exercise.
At any time until ten (10) days following the Stock Acquisition Date (as
such period may be extended by Newco pursuant to the Rights Agreement), Newco
may redeem the Rights in whole, but not in part, at a price of $.01 per Right
provided that in certain circumstances such redemption will require the
concurrence of a majority of the Continuing Directors. After this 10-day period
has expired, this right of redemption may be reinstated if an Acquiring Person
reduces his beneficial ownership to 10% or less of the outstanding shares of
Newco Common Stock in a transaction or series of transactions not involving
Newco and there are no other Acquiring Persons. After the above 10-day period
expires and prior to the occurrence of a Triggering Event, Newco may redeem the
Rights provided that such redemption is incidental to a merger, consolidation or
other business combination involving Newco or a reorganization or restructuring
of Newco which is approved by a majority of the Continuing Directors.
Immediately upon the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of Newco, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to shareholders or to Newco, shareholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Newco Common Stock (or other consideration) or for common stock
of the acquiring company as set forth above.
The Rights Agreement may be amended in certain instances as long as there
are Continuing Directors and a majority of such Continuing Directors votes in
favor of the proposed amendment. Other than those provisions relating to the
principal economic terms of the Rights, any of the provisions of the Rights
Agreement may be amended prior to the Distribution Date. After the Distribution
Date, the provisions of the Rights Agreement may be amended in order to cure any
ambiguity, to correct or supplement any provision contained in the Rights
Agreement which is defective or inconsistent with another provision therein, to
make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
time period under the Rights Agreement; provided however, that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable and no amendment shall be made to lengthen any other
time period unless such lengthening is for the purpose of protecting, enhancing
or clarifying the rights of, and/or the benefits to, the holders of the common
equity of Newco, including the holders of the Rights.
The description of the Rights set forth above does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is incorporated herein by reference.
Certain Provisions of the Certificate of Incorporation and Bylaws. Under
the Certificate, after giving effect to the issuance of shares contemplated in
the Merger and accounting for shares reserved for issuance pursuant to the
Assumed Options and the Rights Agreement there will be an aggregate of
approximately 38,682,286 authorized but unissued and unreserved shares of Newco
Common Stock and an aggregate of
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50,000,000 authorized but unissued and unreserved shares of preferred stock.
These additional authorized shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital and to
finance corporate acquisitions. The Board of Directors may issue preferred stock
with voting and conversion rights that could adversely affect the voting power
of the holders of Newco Common Stock. Except pursuant to the Merger and as
described this Joint Proxy Statement/Prospectus, Newco currently has no plans to
issue additional shares of Newco Common Stock or its preferred stock. However,
one of the effects of authorized but unissued and unreserved shares of capital
stock may be to render more difficult or discourage an attempt by a potential
acquiror to obtain control of Newco by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of Newco's management.
LISTING OF NEWCO COMMON STOCK
Application has been made to list Newco Common Stock on the Nasdaq National
Market under the symbol "MATR."
TRANSFER AGENT
SunTrust Bank, Atlanta, Georgia, will act as transfer agent for Newco
Common Stock following consummation of the Merger.
CORPORATE HEADQUARTERS
At the Effective Time, Newco will maintain its corporate headquarters in
the corporate offices presently occupied by Healthdyne in Marietta, Georgia.
COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
As a result of the Merger, holders of Healthdyne Common Stock and holders
of Tokos Common Stock will become stockholders of Newco, and the rights of all
such former Healthdyne and Tokos stockholders will thereafter be governed by the
Newco Certificate, the Newco Bylaws and the DGCL. The rights of the holders of
Healthdyne Common Stock are presently governed by the Articles of Incorporation
of Healthdyne (the "Healthdyne Articles"), the Bylaws of Healthdyne (the
"Healthdyne Bylaws") and the GBCC. The rights of holders of Tokos Common Stock
are presently governed by the Restated Certificate of Incorporation of Tokos
(the "Tokos Certificate"), the Bylaws of Tokos (the "Tokos Bylaws") and the
DGCL. The following summary sets forth certain material differences between the
rights of stockholders of Newco and the rights of stockholders of Healthdyne and
Tokos. The summary does not purport to be a complete description of the
differences between the rights of such holders, or to give full effect to the
provisions of statutory or common law, and is subject to, and qualified in its
entirety by reference to, the GBCC and the DGCL.
CLASSIFIED BOARD OF DIRECTORS
The DGCL provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Newco's Board of Directors
is divided into three classes of directors. In accordance with the Merger
Agreement and the Newco Certificate, the term of office of the first class of
directors will expire at Newco's 1996 Annual Meeting of Stockholders, the term
of office of the second class of directors will expire at Newco's 1997 Annual
Meeting of Stockholders and the term of office of the third class of directors
will expire at Newco's 1998 Annual Meeting of Stockholders. Beginning with
Newco's 1996 Annual Meeting of Stockholders, one class of directors will be
elected each for a three-year term.
The Tokos Certificate provides for a classified board of directors, divided
into three classes with staggered three-year terms.
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Under the GBCC a board of directors must consist of one or more individuals
with the number specified in or fixed in accordance with the articles of
incorporation or bylaws. The Healthdyne Bylaws specify that the board shall
consist of nine persons. The Healthdyne board of directors is not classified.
Classification of directors effectively reduces the stockholders' ability
to change the composition of Newco's Board of Directors. Thus, after the Merger,
former Healthdyne shareholders will have less ability to change the composition
of the Board of Directors of Newco than they presently possess with respect to
the Healthdyne Board of Directors.
Pursuant to the Merger Agreement and Newco's Bylaws, for a period of three
years commencing at the Effective Time of Merger and continuing through Newco's
1998 Annual Meeting of Stockholders, any vacancy on the Board arising among the
Tokos Nominated Directors will be filled or selected by a majority vote of the
remaining Tokos Nominated Directors, and any vacancy arising among the
Healthdyne Nominated Directors will be filled or selected by a majority vote of
the remaining Healthdyne Nominated Directors. After Newco's 1998 Annual Meeting
of Stockholders, at least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in the majority of Newco's Board
of Directors. Such a delay may help ensure that Newco's directors, if confronted
by a stockholder attempting to force a proxy contest, tender or exchange offer
or other extraordinary corporate transaction, would have sufficient time to
review the proposal as well as any available alternatives to the proposal and
act in what they believe to be the best interests of the stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Newco. The classification of Newco's Board of
Directors might also increase the likelihood that incumbent directors will
retain their positions.
NUMBER AND ELECTION OF DIRECTORS
The Newco Bylaws provide that Newco's Board of Directors will be classified
(See "-- Classified Board of Directors") and will initially consist of ten
members. Thereafter, the number of directors will be fixed or altered
exclusively by resolutions adopted by Newco's Board of Directors. The Newco
Bylaws further provide that, following Newco's 1998 Annual Meeting of
Shareholders, any vacancy on Newco's Board of Directors, including any newly
created directorship resulting from an increase in the number of directors, may
be filled by a majority of Newco's Board of Directors then in office, provided
that a quorum is present. Each director will hold office until his or her
successor is elected and qualified or until his or her earlier resignation.
Under DGCL, unless otherwise provided in the certificate of incorporation,
directors serving on a classified board may only be removed by the stockholders
for cause. The Newco Certificate and the Newco Bylaws are silent on the issue of
removal of directors. Therefore, directors may be removed only for cause and
only upon the affirmative vote of the holders of a majority of the voting power
of all the then outstanding shares of Newco Common Stock.
The Tokos Board of Directors currently consists of seven directors. The
Tokos Certificate provides that the number of directors will be fixed from time
to time by the Tokos Bylaws or an amendment thereof adopted by the Tokos board
of directors. In addition, the Tokos Certificate provides that any vacancy in
the Tokos Board of Directors must be filled by the affirmative vote of 66 2/3%
of the remaining directors then in office, except that in the event a director
is removed by the stockholders of Tokos for cause, the stockholders shall be
entitled to fill the vacancy created by such removal. If the office of any
director becomes vacant and there are no remaining directors, the stockholders
may fill the vacancy.
In addition, the Tokos Certificate provides that any director or directors
may be removed either for or without cause at any time by the affirmative vote
of the holders of a majority of the voting power entitled to vote for the
election of directors.
Under the GBCC, a board of directors must consist of one or more
individuals with the number specified in or fixed in accordance with the
articles of incorporation or bylaws. The Healthdyne Bylaws specify that the
board shall consist of nine persons and such directors may be removed at any
time with or without cause by
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the affirmative vote of the holders of a majority of the shares entitled to vote
at an election of directors. Any vacancy on the board of directors created by
the removal of a director by the shareholders must be filled by the
shareholders, or, if authorized by the shareholders, by the board of directors.
The Healthdyne Bylaws further provide that any other vacancy may be filled by
the affirmative vote of the remaining directors, even if less than a quorum, or
by the sole remaining director, or, if no director remains, by the shareholders.
The provisions of the DGCL providing that directors serving on a staggered
board may be removed only for cause upon the affirmative vote of holders of a
majority of the voting power outstanding, coupled with the provision of the
Newco Bylaws authorizing only the Newco Board of Directors to fill vacant
directorships, will preclude stockholders from removing incumbent directors
without cause and simultaneously gaining control of the Newco Board of Directors
by filling the vacancies created by such removal with their nominees. Thus,
these provisions may have certain anti-takeover effects.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Newco Certificate provides that stockholder action can be taken only at
an annual or special meeting of stockholders and prohibits stockholder action by
written consent in lieu of a meeting, except (i) as permitted by resolutions of
Newco's Board of Directors fixing the powers and preferences of any class or
series of shares as to which Newco's Board of Directors has been expressly
vested with authority to fix the powers and preferences or (ii) for the purpose
of approving, authorizing or adopting any action or proposal previously
approved, authorized or adopted by Newco's Board of Directors.
The Tokos Certificate provides that stockholder action can be taken only at
meetings held pursuant to the Tokos Certificate and the Tokos Bylaws and
prohibits stockholder action by written consent in lieu of a meeting except for
the purpose of approving any action approved by the Tokos board of directors.
The Healthdyne Bylaws provide that any action required or permitted to be
taken at any meeting of shareholders may be taken without a meeting if a consent
in writing setting forth the action so taken will be signed by all the holders
of outstanding stock entitled to vote thereon.
The provisions of the Newco Certificate prohibiting stockholder action by
written consent may have the effect of delaying considerations of a stockholder
proposal until the next annual meeting of stockholders. These provisions would
also prevent the holders of a majority of the voting power of Newco Common Stock
from unilaterally using the written consent procedure to take stockholder
action.
APPRAISAL RIGHTS
Under the DGCL, stockholders of corporations being acquired pursuant to a
merger have the right to serve upon the corporation a written demand for
appraisal of their shares when the stockholders receive any form of
consideration for their shares other than (a) shares of the surviving
corporation, (b) shares of any other corporation listed on a national securities
exchange or held of record by more than 2,000 shareholders, or (c) cash in lieu
of fractional shares or any combination thereof. Stockholders who perfect their
appraisal rights are entitled to receive cash from the corporation equal to the
value of their shares as established by judicial appraisal. Corporations may
enlarge these statutory rights by including in their certificate of
incorporation a provision allowing appraisal rights in any merger in which the
corporation is a constituent corporation. Neither the Newco Certificate nor the
Tokos Certificate contains any provision enlarging such appraisal rights.
The GBCC grants shareholders the right to dissent and receive payment of
the fair value of their shares in the event of certain amendments or changes to
the articles of incorporation adversely affecting their shares, or certain
business transactions, including certain mergers. This right is not available
when the affected shares are listed on a national securities exchange or held of
record by more than 2,000 shareholders unless (a) the articles of incorporation
or a resolution of the board of directors approving the transaction provides
otherwise, or (b) in a plan of merger or share exchange, the holders of such
shares are required to accept anything other than shares of the surviving
corporation or another publicly held corporation, except for payments in lieu of
fractional shares. The Healthdyne Certificate does not modify this limitation on
dissenters' appraisal rights.
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After the Merger, former Healthdyne shareholders, as stockholders of Newco,
will have appraisal rights as provided under the DGCL. These appraisal rights
differ in certain respects from those provided under the GBCC. For instance,
under the GBCC, shareholders have appraisal rights for more types of
transactions than under the DGCL, and, unlike the appraisal rights provisions of
the DGCL, under the GBCC the board of directors may voluntarily extend appraisal
rights to shareholders.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, special meetings of stockholders may be called by the board
of directors or those persons authorized by the corporation's certificate of
incorporation or the bylaws. The Newco Bylaws authorize Newco's Board of
Directors to call a special meeting of stockholders at any time. In addition,
the President or Secretary must call a special meeting upon the written request
of a majority of the members of the Board of Directors or of holders of a
majority of the capital stock of Newco issued and outstanding and entitled to
vote. Written notice of the time, place and specific purposes of such meeting
must be given to each stockholder entitled to vote at the meeting not less than
ten nor more than 60 days prior to the scheduled date of the special meeting.
The Tokos Bylaws provide that a special meeting of stockholders shall be
called by the president or secretary upon the written request of a majority of
the members of the Board of Directors of Tokos or holders of at least 10% of the
total voting power of all outstanding shares of stock entitled to vote. Such
request must state the specific purpose or purposes of the special meeting.
Written notice of the time, place and specific purposes of such meeting must be
given to each stockholder entitled to vote at the meeting not less than ten nor
more than 60 days prior to the scheduled date of the special meeting.
The GBCC permits the board of directors or any person specified in the
corporation's articles of incorporation or bylaws to call special meetings of
shareholders. A special meeting may also be called by the holders of at least
25%, or such greater or lesser percentages as the articles of incorporation or
bylaws provide, of all the votes entitled to be cast on any issue proposed to be
considered at a special meeting. The Healthdyne Bylaws provide that a special
meeting may be called at any time by the Board of Directors, the Chairman of the
Board or the President. The Healthdyne Bylaws further provide that Healthdyne
shall call a special meeting of shareholders upon the written request of the
holders of at least 60% of the outstanding Healthdyne Common Stock. The
Healthdyne Bylaws require that written notice of the time, place and specific
purpose or purposes for which the meeting is called be delivered not less than
ten nor more than 50 days before the date of the meeting to each shareholder of
record entitled to vote at such meeting.
The provisions of the Newco Bylaws require a greater percentage of holders
of shares outstanding (51%) to request a special meeting of stockholders than do
the provisions of the Tokos Bylaws (10%). Thus, it will be more difficult for
former stockholders of Tokos to request a special meeting after the Merger.
However, because the Healthdyne Bylaws require a greater percentage in this
respect (60%) than the Newco Bylaws, from the perspective of Healthdyne
shareholders, requesting a special meeting will not be as difficult.
COMMON STOCK
The terms of the Newco Common Stock are substantially identical to those of
the Tokos Common Stock and the Healthdyne Common Stock.
PREFERRED STOCK
Pursuant to the Newco Certificate, Newco's Board of Directors is
authorized, subject to the limitations prescribed by law, to provide for the
issuance of shares of preferred stock in one or more series, to establish the
number of shares of each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. See "Operation, Management and Business of
Newco After the Merger -- Description of Capital Stock of Newco." The Tokos
Certificate and the Healthdyne Certificate contain substantially similar
provisions relating to Tokos Preferred Stock and Healthdyne Preferred Stock,
respectively.
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The issuance of such shares of capital stock may have the effect of
delaying, deferring or preventing a change in control of Newco without any
further action by the stockholders of Newco.
STOCKHOLDER RIGHTS PLAN
Newco has adopted a stockholder rights plan that is designed to protect
Newco stockholders from coercive or unfair takeover tactics. The terms and
conditions of the plan are set forth in a rights agreement (the "Newco Rights
Agreement") between Newco and SunTrust Bank, as Rights Agent. See "Operation
Management and Business of Newco After the Merger -- Description of Capital
Stock of Newco."
Healthdyne currently has two shareholder rights plans (collectively the
"Healthdyne Rights Plan"), the description and terms of which are set forth in
rights agreements (collectively, the "Healthdyne Rights Agreement") between
Healthdyne and SunTrust Bank, as Rights Agent. The Healthdyne Rights Agreement
contains provisions which are substantially the same as those contained in the
Newco Rights Agreement except that (i) each right under the Healthdyne Rights
Agreement initially represents the right to purchase one one-hundredth of a
share of a series of Healthdyne preferred stock, (ii) the exchange right
contained in the Newco Rights Agreement is not included in the Healthdyne Rights
Agreement, (iii) the exercise price of the rights is initially $61, and (iv) the
rights expire on March 1, 2003.
Tokos also has a stockholder rights plan, the description and terms of
which are set forth in a rights agreement (the "Tokos Rights Agreement") between
Tokos and U.S. Stock Transfer Corporation, as Rights Agent. The Tokos Rights
Agreement generally contains provisions similar to those of the Newco Rights
Agreement described above, except that (i) each right under the Tokos Rights
Agreement initially represents the right to purchase one share of Tokos Common
Stock, (ii) the exercise price of the rights is initially $30, (iii) the rights
are not triggered by an event (e.g., a reverse stock split) that increases an
Acquiring Person's beneficial ownership by more than 1% or by certain
transactions between an Acquiring Person and Tokos, and (iv) the rights expire
on April 19, 2003.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Newco Certificate provides that, until three years from the Effective
Date, the provisions of the Newco Certificate regarding certain amendments to
the Bylaws with respect to (i) number, election and tenure of directors, (ii)
filling of certain vacancies on the board and nomination of directors of
additional terms, and (iii) initial committees of the board of directors may
only be amended by the affirmative vote of holders of at least a majority of the
Newco Common Stock. Otherwise, the Newco Certificate is silent as to the
amendment of the Newco Certificate. Section 242 of the DGCL provides that,
except for certain circumstances, amendments to a corporation's certificate of
incorporation are to be approved at the annual or a special meeting of
stockholders by a majority of the outstanding stock entitled to vote.
The Tokos Certificate provides that the Tokos Certificate may be amended in
the manner prescribed by statute except with respect to certain provisions
relating to (i) the amendment of the Tokos Bylaws, (ii) the filling of vacancies
on the board of directors and the classification of the board of directors,
(iii) stockholder action by written consent and the time and place of
stockholder meetings and (iv) amendment of the Tokos Certificate. Amendment of
these provisions requires (i) the approval of the board of directors and the
further approval of stockholders holding a majority of the outstanding shares
entitled to vote, or (ii) the approval of stockholders holding 66 2/3% of the
outstanding shares entitled to vote.
The Healthdyne Certificate is silent as to amendment of the Healthdyne
Certificate. The GBCC provides that, except for certain circumstances,
amendments to a corporation's articles of incorporation are to be approved by a
majority of the outstanding stock entitled to vote.
The Newco Certificate provides that, until three years from the Effective
Date, the provisions of the Newco Bylaws regarding (i) number, election and
tenure of directors, (ii) filling of certain vacancies on the board and
nomination of directors of additional terms, and (iii) initial committees of the
board of directors may only be amended by the affirmative vote of holders of at
least a majority of the Newco Common Stock.
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The Newco Bylaws provide that, except as provided in the Newco Certificate,
the Newco Bylaws may be amended or repealed, or new bylaws may be adopted, (i)
by the affirmative vote of the holders of at least a majority of the Newco
Common Stock, or (ii) by the affirmative vote of the majority of the whole
Newco's Board of Directors at any regular or special meeting. Any bylaws adopted
or amended by the stockholders may be amended or repealed by the Board of
Directors or the stockholders.
The Tokos Certificate provides that any bylaw amendment adopted by the
board of directors increasing or decreasing the authorized number of directors
shall require a resolution adopted by the affirmative vote of at least 66 2/3%
of the directors then in office. In addition, the Tokos Bylaws may only be
amended or repealed, or a new bylaw adopted, by a vote of not less than 66 2/3%
of the outstanding shares entitled to vote unless the amendment has previously
been approved by the board of directors, in which case a vote of a majority of
outstanding stock entitled to vote is required.
The Healthdyne Bylaws provide that the Healthdyne Bylaws may be amended or
repealed or new bylaws may be adopted by the affirmative vote of a majority of
directors then in office or by the affirmative vote of a majority of all shares
outstanding and entitled to vote. In addition, the shareholders may prescribe
that any bylaw adopted by them may not be amended or repealed by the board of
directors.
After the closing of the Merger but prior to three years after the
Effective Time, the rights of former stockholders of Tokos will remain the same
with respect to amendment of provisions of the Newco Bylaws regarding (i)
number, election and tenure of directors, (ii) nomination of directors and the
filling of certain vacancies and (iii) the initial committees of the board, but
it will be more difficult to amend such provisions than is currently the case
for former Healthdyne shareholders. The restrictions on amendment of these
provisions of the Newco Bylaws terminate three years after the Effective Time.
Thereafter, and from the Effective Time with respect to other provisions of the
Newco Bylaws, it will be less difficult for stockholders of Newco to amend the
Newco Bylaws than currently is the case for stockholders of Tokos. Also, from
the Effective Time, those sections of the Newco Certificate corresponding to the
sections of the Tokos Certificate requiring approval of the holders of
two-thirds of the outstanding Tokos Common Stock for amendment, will be less
difficult for stockholders of Newco to amend. The rights of former shareholders
of Healthdyne to amend the Newco Certificate and Bylaws will be basically the
same as is currently provided under the Healthdyne Certificate and Bylaws in
this regard.
BUSINESS COMBINATIONS
Section 203 of the DGCL, provides that, subject to certain exceptions
specified therein, a corporation will not engage in any business combination
with any interested stockholder for a three-year period following the date that
such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares held by
directors who are also officers and shares subject to employee stock purchase
plans in which employee participants do not have the right to determine
confidentially whether plan shares will be tendered in a tender or exchange
offer) or (iii) on or subsequent to such date, the business combination is
approved by the board of directors of the corporation and by the affirmative
vote at an annual or special meeting, and not by written consent, of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as specified in Section 203 of the DGCL, an interested
stockholder is defined to include (a) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation, at any time within three years immediately
prior to the relevant date and (b) the affiliates and associates of any such
person. The Newco Certificate does not exclude Newco from the restrictions
imposed under Section 203 of the DGCL. Similarly, the Tokos Certificate does not
exclude Tokos from the restrictions imposed under Section 203.
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The GBCC contains certain business combinations provisions which may have
the effect of preventing, discouraging or delaying a change of control of a
Georgia corporation that elects to be subject to the business combinations. The
business combinations provisions generally prohibit a corporation from engaging
in any business combination (a merger, consolidation or other specified
corporation transaction) with an interested shareholder (a 10% shareholder or an
affiliate of the corporation which was a 10% shareholder at any time within the
preceding two years) for a period of five years from the date such person
becomes an interested shareholder, unless the interested shareholder (i) prior
to becoming an interested shareholder, obtained the approval of the board of
directors for either the business combination or the transaction which resulted
in the shareholder becoming an interested shareholder, (ii) becomes the owner of
at least 90% of the outstanding voting stock of the corporation in the same
transaction in which the interested shareholder became an interested
shareholder, excluding for purposes of determining the number of shares
outstanding those shares owned by officers, directors, subsidiaries and certain
employee stock plans of the corporation or (iii) subsequent to the acquisition
of 10% or more of the outstanding voting stock of the corporation, acquires
additional shares resulting in ownership of at least 90% of the outstanding
voting stock of the corporation and obtains approval of the business combination
by the holders of a majority of the shares of voting stock of the corporation,
other than those shares held by interested shareholders, officers, directors,
subsidiaries and certain employee stock plans of the corporation. In addition,
after the five-year period, business combinations must either (i) be unanimously
approved by the continuing directors (directors who were board members prior to
the interested shareholder becoming interested) provided that at the time of the
approval there are at least three continuing directors on the board, (ii) be
recommended by at least two-thirds of the continuing directors and approved by a
majority of the votes entitled to be cast by holders of voting shares other than
the interested shareholder, or (iii) meet certain minimum price, form of
consideration and procedural requirements. Healthdyne has adopted a bylaw
electing coverage under the business combination provisions of the GBCC.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the corporation's certificate of incorporation or stockholders may
elect to exclude a corporation from the restrictions imposed thereunder. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring Newco to negotiate in advance with Newco's
Board of Directors, since the stockholder approval requirement would be avoided
if a majority of the directors then in office approves either a business
combination or the transaction which results in the stockholder becoming an
interested stockholder. After the Merger, former Healthdyne shareholders will be
subject to a different standard as stockholders of Newco with respect to how
transactions with interested stockholders are treated under state corporation
law. These standards will remain the same for former Tokos stockholders as
stockholders of Newco.
SPECIAL VOTING REQUIREMENTS
The Healthdyne Certificate provides that a merger, consolidation, sale by
Healthdyne of all or substantially all of its assets, or transaction in which
Healthdyne acquires an interest in another person (i.e., an individual, firm,
partnership, corporation or other entity) and shares of capital stock of
Healthdyne are issued that have (after giving effect to such issuance) the right
to cast a majority of all of the votes entitled to be cast by the outstanding
capital stock of Healthdyne must be approved by the affirmative vote of not less
than 75% of the votes entitled to be cast by the outstanding capital stock of
Healthdyne. However, this super-majority vote is not required if the transaction
(as in the case of the Merger) has been approved by a resolution adopted by not
less than three-fourths of the entire board of directors of Healthdyne at any
time prior to the consummation of the transaction. The super majority provision
may not be repealed or amended without a 75% affirmative shareholder vote or, if
adopted by three-fourths of the directors, by the affirmative vote of a majority
of all outstanding shares. Neither the Newco Certificate nor the Tokos
Certificate has comparable provisions. Although certain transactions covered by
the super-majority vote provision in the Healthdyne Certificate may also fall
within the coverage of Section 203 of the DGCL discussed above, former
shareholders of Healthdyne will not be able to assert this 75% super-majority
vote requirement as stockholders of Newco.
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INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal actions, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that indemnification may not be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The Newco Certificate limits Newco's directors' liability for monetary
damages to Newco and its stockholders for breaches of fiduciary duty to the
fullest extent permitted under the DGCL. In addition, the Newco Certificate
provides that Newco shall, to the fullest extent permitted by law, indemnify its
directors and officers against any liability, losses or related expenses which
they may incur by reason of serving or having served as directors and officers
of Newco.
The Newco Bylaws provide that each person who is involved in any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he or she is or was a director,
officer, employee or agent of Newco, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan, will be indemnified by the corporation
to the fullest extent permitted by the DGCL, as the same exists or may hereafter
be amended, against all costs, charges, expenses, liabilities and losses
reasonably incurred or suffered by such person in connection therewith, and such
indemnification will continue as to a person who has ceased to be a director,
officer, employee or agent and will inure to the benefit or his or her heirs,
executors and administrators; provided, however, that Newco will indemnify any
such person seeking indemnification in connection with a proceeding initiated by
such person only if such proceeding was authorized by Newco's Board of
Directors. The right to indemnification will be a contract right and will
include the right to be paid by Newco the expenses incurred in defending any
such proceeding in advance of its final disposition; provided, however, that if
the DGCL so requires, the payment of such expenses incurred by a director or
officer in advance of the final disposition of a proceeding will be made only
upon delivery to Newco of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it will ultimately be determined
that such director or officer is not entitled to be indemnified. Newco may
provide indemnification to employees and agents of Newco with the same scope and
effect as the foregoing indemnification of directors and officers.
The indemnification rights conferred by the Newco Certificate are not
exclusive of any other right to which a person seeking indemnification may be
entitled under any law, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. Newco may maintain insurance on behalf of its directors,
officers, employees and agents. Additionally, the Merger Agreement requires such
insurance to be maintained by Newco covering present and former officers,
directors, employees, trustees and agents of Tokos for a period of at least six
years from the Closing Date, subject to certain limitations. See "The Merger
Agreement -- Indemnification and Insurance."
The Tokos Certificate and the Tokos Bylaws contain similar provisions.
The GBCC permits, and the Healthdyne Bylaws provide, that Healthdyne may
indemnify any director or officer of Healthdyne for any liability and expense
that may be incurred in connection with any threatened, pending or completed
civil, criminal, administrative or investigative action, suit or proceeding
(whether brought by or in the right of Healthdyne or otherwise), in which he may
become involved by reason of his being or having been a director or officer of
Healthdyne, provided that such person acted in a manner he believed in good
faith to be in or not opposed to the best interests of Healthdyne, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Except where the
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individual is successful on the merits or otherwise in defense of any such
action, suit or proceeding, in which case indemnification is as of right,
indemnification is at the discretion of Healthdyne, as determined by the
Healthdyne board of directors, the shareholders, or legal counsel in accordance
with the GBCC. Under the GBCC, directors may not be indemnified in connection
with (i) any proceeding by or in the right of the corporation in which such
individual is adjudged liable to Healthdyne, or (ii) any other proceeding in
which such individual is adjudged liable on the basis that such individual
received an improper personal benefit.
The closing of the Merger will not materially affect the rights of the
Tokos or Healthdyne stockholders regarding indemnification and liability of
directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
PROPOSAL TO APPROVE AND ADOPT THE NEWCO PLANS
On February 6, 1996, the Board of Directors of Newco and Healthdyne and
Tokos as stockholders of Newco adopted three Newco Plans: the Newco 1996 Stock
Incentive Plan ("Stock Incentive Plan"), the Newco 1996 Directors' NonQualified
Stock Option Plan (the "Director Plan") and the Newco 1996 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). At the Healthdyne and Tokos Meetings,
stockholders of Healthdyne and Tokos will be asked to approve and adopt the
Newco Plans. Approval of the Stock Incentive Plan by the stockholders is
intended, among other things, to qualify options and stock appreciation rights
("SARs") granted under the Stock Incentive Plan to certain executive officers of
Newco as "performance-based compensation," which is not subject to the limits on
deductibility of Section 162(m) of the Internal Code of 1986, as amended (the
"Code"), described further below.
1996 STOCK INCENTIVE PLAN
The purpose of the Stock Incentive Plan is to provide incentives to
selected individuals and entities for increased efforts and successful
achievement on behalf of or in the interest of Newco. Individuals eligible to
have options, SARs or stock granted to them under the Plan shall be such
employees, officers, independent contractors and consultants of Newco or an
Affiliate as the Board of Directors or Stock Option Committee (in either event,
the "Committee"), in its discretion, shall designate from time to time.
The Stock Incentive Plan has three components: a stock option component, a
stock bonus/stock purchase component and a stock appreciation rights component.
The stock option component of the Stock Incentive Plan provides a means whereby
participants are given an opportunity to purchase shares of Newco Common Stock
pursuant to: (i) options that may qualify as incentive stock options ("ISOs")
under Section 422 of the Code, or (ii) nonqualified stock options ("NQSO"). ISOs
may be granted only to persons who are officers or employees of Newco or any of
its subsidiaries. ISOs may not be granted to any person who, at the time that
the ISO is granted owns stock possessing more than 10% of the combined voting
power of all classes of Newco's stock or any of Newco's subsidiaries' stock
("10% Shareholders"), unless the exercise price of the shares of the Newco
Common Stock covered by the option is at least 110% of the fair market value of
such shares at the date of grant and such ISO by its terms is not exercisable
after the expiration of five years from the date of grant.
Except for 10% Shareholders, ISOs may be granted under the stock option
component of the Stock Incentive Plan for terms up to ten years from the date of
grant. Except for 10% Shareholders, the exercise price of ISOs granted under the
Stock Incentive Plan must be at least equal to 100% of the fair market value of
Newco Common Stock as of the date of grant. The exercise price of NQSOs granted
under the Stock Incentive Plan must be at a price determined by the Committee.
However, NQSOs granted to the chief executive officer or the four other most
highly compensated officers of Newco (referred to herein as "Covered
Employees"), must have an exercise price which is not less than the fair market
value of the shares covered by the option on the date the option is granted.
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The stock bonus/stock purchase component of the Stock Incentive Plan
provides a means whereby participants in the Stock Incentive Plan may receive
bonuses of shares of Newco Common Stock or the right to purchase shares of Newco
Common Stock, subject to the restrictions, if any, imposed by the Committee. The
purchase price for rights to purchase shares of Newco Common Stock granted under
the Stock Incentive Plan will be at a price determined by the Committee. Stock
bonuses may be granted under the Stock Incentive Plan with such terms and
provisions and for such consideration, if any, as may be determined by the
Committee.
The stock appreciation rights component of the Stock Incentive Plan
provides a means whereby participants may receive compensation based on
appreciation in value of Newco Common Stock after the date of grant. Stock
appreciation rights may be granted either separately or in tandem with stock
options, as determined by the Committee.
The Stock Incentive Plan is administered by the Committee. The Committee
has broad discretion, subject to the terms of the Stock Incentive Plan to
determine the persons entitled to receive options, stock bonuses, stock
appreciation rights or the right to purchase shares of Newco Common Stock, the
terms and conditions thereof, and the number of shares for which such options,
bonuses of stock, rights to purchase stock and stock appreciation rights may be
granted. The Committee also has discretion to determine the nature of the
consideration to be paid upon the exercise of any option or right to purchase
stock granted under the Stock Incentive Plan; provided that such consideration
may, in the case of options, at the discretion of the Committee, consist of: (i)
shares of Newco Common Stock; (ii) an irrevocable direction to a broker to sell
shares of Newco Common Stock and deliver all or a portion of the proceeds to
Newco in payment of the exercise price; (iii) a promissory note with such terms
as the Committee shall approve; or (iv) any combination of the foregoing. Grants
made under the Stock Incentive Plan to Covered Employees may be made only by a
subcommittee (referred to herein as the "Section 162(m) Subcommittee") of the
Committee which is composed solely of two or more "outside directors," as such
term is defined in Section 162(m) of the Code and the Regulations thereunder.
Further, the effectiveness of any grant to a Covered Employee under the Stock
Incentive Plan is contingent upon shareholder approval of the Stock Incentive
Plan.
Newco also has the discretion to provide in any stock option, SAR, stock
bonus or stock purchase agreement under the Stock Incentive Plan that, in the
event of a change of control or a corporate transaction, any such option or SAR
will become immediately exercisable and any stock covered by a stock bonus or
stock purchase award will become released from any restrictions on transfer and
repurchase or forfeiture rights. Under the Stock Incentive Plan, a "change of
control" occurs upon (i) the acquisition of more than 50% of the voting power of
Newco by any person or (ii) a change in the composition of the members of the
Board over a three-year period or less to include a majority of persons not
serving on the Board at the beginning of the period or nominated by such
persons. Under the plan, a "corporate transaction" consists of approval by the
shareholders of (i) a merger or consolidation in which Newco is not the
surviving entity, (ii) the sale of all or substantially all of the assets of
Newco, or (iii) any reverse merger or other acquisition or business combination
in which Newco is the surviving entity in which holders of Newco's voting
securities prior to the merger do not own at least 50% of the voting power in
Newco after the merger.
Options, stock bonuses and rights to purchase Newco Common Stock may be
granted under the Stock Incentive Plan to exercise or purchase an aggregate of
not more than 1,000,000 shares of Newco Common Stock. The aggregate number of
shares of Newco Common Stock as to which incentive stock options may be granted
under the Stock Incentive Plan shall not exceed 1,000,000 (subject to adjustment
to reflect certain corporate transactions). The Stock Incentive Plan contains a
$100,000 limitation on the aggregate fair market value of ISOs, which become
exercisable in any calendar year. In addition, under the Stock Incentive Plan,
the maximum number of shares of Stock with respect to which SARs or options to
acquire Stock may be granted, or sale or bonus grants of Stock may be made, to
any individual per calendar year shall not exceed 500,000 shares (subject to
adjustment to reflect certain corporate transactions.
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FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. If an option under the Stock Incentive Plan is
treated as an ISO, the optionee generally recognizes no regular taxable income
as the result of the grant or exercise of the option. However, an amount equal
to the difference between the fair market value of the stock on the date of
exercise and the exercise price is classified as an item of alternative minimum
taxable income in the year of exercise for purposes of the alternative minimum
tax.
Newco will not be allowed a deduction for federal income tax purposes in
connection with the grant or exercise of an ISO, regardless of the applicability
of the alternative minimum tax to the optionee. Newco will be entitled to a
deduction, however, to the extent that ordinary income is recognized by the
optionee upon a disqualifying disposition (see below).
Upon a sale or exchange of the shares at least two years after the grant of
an ISO and one year or exercise of the option, gain or loss will be recognized
by the optionee equal to the difference between the sale price and the exercise
price. Such gain or loss will be characterized for federal income tax purposes
as long-term capital gain or loss. Newco is not entitled to any deduction under
these circumstances.
If an optionee disposes of shares acquired upon issuance of an ISO prior to
completion of either of the above holding periods, the optionee will have made a
"disqualifying disposition" of the shares. In such event, the optionee will
recognize ordinary income at the time of disposition equal to the difference
between the exercise price and the lower of the fair market value of the stock
at the date of the option exercise or the sale price of the stock. Newco
generally will be entitled to a deduction in the same amount as the ordinary
income recognized by the optionee on a disqualifying disposition if the
optionee's total compensation is deemed reasonable in amount.
The optionee also will recognize capital gain or loss on such disqualifying
disposition in an amount equal to the difference between (i) the amount realized
by the optionee upon such disqualifying disposition of the stock and (ii) the
exercise price, increased by the total amount of ordinary income, if any,
recognized by the optionee upon such disqualifying disposition (as described in
the second sentence of the preceding paragraph). Any such capital gain or loss
resulting from a disqualifying disposition of shares acquired upon exercise of
an ISO will be long-term capital gain or loss if the shares with respect to
which such gain or loss is realized have been held for more than twelve months.
NQSOs. An optionee generally recognizes no taxable income as the result of
the grant of an NQSO, assuming that the option does not have a readily
ascertainable fair market value at the time it is granted (which is usually the
case with plans of this type). Upon exercise of an NQSO, an optionee will
normally recognize ordinary compensation income for federal tax purposes equal
to the excess, if any, of the then fair market value of the shares over the
exercise price. Optionees who are employees will be subject to withholding with
respect to income recognized upon exercise of a NQSO.
Newco will be entitled to a tax deduction to the extent and in the year
that ordinary income is recognized by the exercising optionee, so long as the
optionee's total compensation is deemed reasonable in amount.
Upon a sale of shares acquired pursuant to the exercise of an NQSO, any
difference between the sale price and the fair market value of the shares on the
date of exercise will be treated as capital gain or loss, and will qualify for
long-term capital gain or loss treatment if the shares have been held for more
than twelve months.
Stock Bonus/Stock Purchase. The federal income tax treatment of
individuals who receive property in connection with the performance of services
is governed by Section 83 of the Code. That section requires that the recipient
of the property recognize income from the transfer in an amount equal to the
excess of the fair market value of the property received over the amount (if
any) paid for the property. Income is recognized by the recipient in the first
year in which the rights of the recipient to the property become "vested," i.e.,
are transferable or are no longer subject to a substantial risk of forfeiture,
whichever occurs first. The income is taxable at ordinary income rates and (in
the case of participating individuals who are employees) is subject to
withholding of income and applicable employment taxes at the time of vesting.
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Under the Stock Incentive Plan, participating individuals may or may not
pay any consideration for stock transferred to them under the stock bonus/stock
purchase component of the Plan, and the stock transferred may or may not be
subject to restrictions. If stock is granted to a recipient without
restrictions, the recipient will recognize ordinary income (calculated as
described in the preceding paragraph) in the recipient's taxable year in which
the stock is granted.
If stock granted under the Plan is nontransferable and subject to a
substantial risk of forfeiture, then (unless an election is made under Section
83(b) of the Code, as described in the next paragraph), recipients of stock will
recognize taxable income as of each date on which they become vested in stock
received under the Plan in the amount of the fair market value of the stock then
vesting (less the amount, if any, paid for such stock).
Participating individuals may elect under Section 83(b) of the Code to
report as taxable income in the year of award of an amount of ordinary income
equal to the stock's fair market value at that time (less the amount, if any,
paid for such stock). If such an election is made, the electing employee is not
required thereafter to report any further compensation income upon becoming
vested in the stock covered by the election. Such an election must be made
within 30 days of receipt of the stock. Such election may not be revoked except
with the consent of the government. Participating individuals making this
election who are employees will be subject to withholding with respect to the
taxable income they recognize at the time the stock is awarded to them.
Newco will be entitled to a tax deduction to the extent and in the year
that ordinary income is recognized by the participating individual, so long as
the individual's total compensation is deemed reasonable in amount. Dividends
paid on stock transferred under the Stock Incentive Plan are generally treated
as additional compensation prior to vesting, but are treated as true dividends
after vesting (or after a Section 83(b) election). Dividends are not deductible
by Newco.
Participating individuals will recognize gain upon the disposition of their
stock equal to the excess of (a) the amount realized on such disposition over
(b) the ordinary income recognized with respect to their stock under the
principles set forth above (plus the amount, if any, paid for such stock). That
gain will be taxable as long or short term capital gain depending on whether the
stock was held for at least one year.
If a participating individual disposes of his or her stock for an amount
less than the amount of ordinary income recognized with respect to the stock
(plus the amount, if any, paid with respect to the stock), he or she will
generally recognize a capital loss (long or short-term, depending on the holding
period) equal to the difference between any ordinary income recognized with
respect to the stock under the principles described previously (plus the amount,
if any, paid for the stock) and the amount realized upon disposition of the
stock. If a participating individual forfeits unvested stock with respect to
which no Section 83(b) election has been made upon termination of employment, he
or she will generally recognize ordinary income or loss equal to the difference
between the amount, if any, paid by the employee for the stock and the amount
received as a result of the forfeiture. If a participating individual forfeits
unvested stock with respect to which a Section 83(b) election has been made upon
termination of employment, he or she will generally recognize a capital gain or
loss equal to the difference between the amount, if any, paid by the employee
for the stock and the amount received as a result of the forfeiture, but no loss
or deduction is allowed with respect to the amount previously included in income
as a result of the Section 83(b) election.
SARs. Recipients of SARs generally should not recognize income until such
rights are exercised (assuming there is no ceiling on the value of the right).
Upon exercise, the participating individual will normally recognize ordinary
compensation income for federal income tax purposes equal to the amount of cash
and the fair market value of stock, if any, received upon such exercise.
Participating individuals who are employees will be subject to withholding with
respect to income recognized upon exercise of an SAR.
Newco will be entitled to a tax deduction to the extent and in the year
that ordinary income is recognized by the participating individual, so long as
the individual's total compensation is deemed reasonable in amount.
Participating individuals will recognize gain upon the disposition of any
stock received on exercise of an SAR equal to the excess of (a) the amount
realized on such disposition over (b) the ordinary income recognized with
respect to such stock under the principles set forth above. That gain will be
taxable as long or short term capital gain depending on whether the stock was
held for at least one year.
117
<PAGE> 132
Section 162(m) of the Code. Under Section 162(m) of the Code, compensation
paid to any Covered Employee is potentially nondeductible by Newco to the extent
that it exceeds $1,000,000. However, certain "performance-based compensation" is
exempt from the $1,000,000 cap on deductibility. The Stock Incentive Plan
contains provisions designed to qualify options and SARs granted thereunder to
Covered Employees as "performance-based compensation" under Section 162(m).
These provisions include: (1) grants to Covered Employees are made only by the
Section 162(m) Subcommittee; (2) the Stock Incentive Plan states a maximum
number of shares with respect to which options or SARs may be granted to any
individual per calendar year; (3) in the case of grants to Covered Employees,
the option exercise price must be at least equal to the fair market value of the
stock on the date the option is granted; and (4) the effectiveness of grants to
Covered Employees is contingent upon shareholder approval of the Stock Incentive
Plan.
1996 DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
A total of 250,000 shares of Newco Common Stock are reserved for issuance
under the Director Plan.
Under the Director Plan each non-employee director of Newco ("Non-Employee
Director") will receive a NQSO to purchase 5,000 shares of Newco Common Stock
(an "Initial Grant") upon (i) his or her first election or appointment to the
Board of Directors, or (ii) on the Effective Date of the Merger if he or she is
already a Non-Employee Director on that date; provided that the number of shares
covered by an Initial Grant will be reduced on a share for share basis by the
number of shares covered by any option granted to the Non-Employee Director by
Healthdyne or Tokos in the twelve months preceding the Effective Date. In
addition, the Director Plan provides that each Non-Employee Director who is a
director immediately prior to an annual meeting of Newco's shareholders and who
continues to be a director after such meeting will be granted an option to
purchase 5,000 shares of Newco Common Stock (a "Subsequent Grant") provided that
no Subsequent Grant will be made to any Non-Employee Director who has not served
as a director of Newco, as of the time of such annual meeting, for at least one
year. Each Subsequent Grant will be made on the date of the annual shareholders'
meeting in question.
The exercise price per share of each option granted under the Director Plan
will be the fair market value of Newco Common Stock on the date the option is
granted. Payment of the exercise price of any option to purchase Newco Common
Stock granted under the Director Plan may be made in any of the forms described
above for the Stock Incentive Plan.
Options granted under the Director Plan vest monthly over the twelve (12)
months from the date of grant, subject to earlier vesting upon a change in
control or corporate transaction. Under the Plan, a "change of control" occurs
upon (i) the acquisition of more than 50% of the voting power of Newco by any
person, or (ii) a change in the composition of the members of the Board over a
three year period to include a majority of persons not serving on the Board at
the beginning of the period or nominated by such persons. Under the Plan, a
"corporate transaction" consists of approval by the shareholders of (i) a merger
or consolidation in which Newco is not the surviving entity, (ii) the sale of
all or substantially all of the assets of Newco, or (iii) any reverse merger in
which Newco is the surviving entity in which holders of Newco's voting
securities prior to the merger do not own at least 50% of the voting power in
Newco after the merger.
Federal Income Tax Consequences. The federal income tax consequences for
options granted under the Director Plan are the same as those for NQSOs under
the Stock Incentive Plan.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code and to provide eligible employees
of Newco with an opportunity to purchase Newco Common Stock through payroll
deductions. An aggregate of 500,000 shares of Newco Common Stock is reserved for
issuance under the Stock Purchase Plan and available for purchase thereunder,
subject to adjustment in the event of a stock split, stock dividend or other
similar change in Newco Common Stock or the capital structure of Newco. All
employees of Newco and its subsidiaries (including officers) who have been
continuously employed for one year or more, whose customary employment is for
more than five months in any calendar year and more than 20 hours per week are
eligible to participate in the Stock Purchase Plan. Non-Employee Directors are
not eligible.
118
<PAGE> 133
The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally successive periods of three
months. A Purchase Period will initiate on April 1, 1996 and additional Purchase
Periods will commence each subsequent July 1, October 1, January 1 and April 1.
The initial Purchase Period will end on June 30, 1996. The Exercise Dates are
the last days of each Purchase Period.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Exercise Date for the Purchase Period during which deductions
are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of Newco Common Stock. The price per share at which shares of
Newco Common Stock are to be purchased under the Stock Purchase Plan during any
Purchase Period is the lesser of (a) 85% of the fair market value of the Newco
Common Stock on the date of the grant of the option (the commencement of the
Purchase Period) or (b) 85% of the fair market value of the Newco Common Stock
on the Exercise Date (the last day of the Purchase Period).
Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay, plus commissions paid,
exclusive of overtime, bonuses or shift-premiums. Participants may not make
direct cash payments to their accounts. The maximum number of shares of Newco
Common Stock which any employee may purchase under the Stock Purchase Plan
during a Purchase Period is 1,000 shares. Certain additional limitations on the
amount of Newco Common Stock which may be purchased during any calendar year are
imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to administer
the plan and to resolve all questions relating to the administration of the
plan.
Tax Consequences. The Stock Purchase Plan is intended to be an "employee
stock purchase plan" within the meaning of Section 423 of the Code. Under a plan
which so qualifies, no taxable income will be recognized by a participant, and
no deductions will be allowable to Newco upon either the grant or the exercise
of the purchase rights. Taxable income will not be recognized until there is a
sale or other disposition of the shares acquired under the Stock Purchase Plan
or in the event the participant should die while still owning the purchased
shares.
If the participant sells or otherwise disposes of the purchased shares
within two years after his or her enrollment into the Purchase Period or within
one year after the actual purchase date, the participant will recognize ordinary
income in the year of sale or disposition equal to the amount by which the fair
market value of the shares on the purchase date exceeded the purchase price of
those shares. If the participant sells or otherwise disposes of the purchased
shares more than two years after entry into the Purchase Period and more than
one year after the actual purchase date, then the participant will recognize
ordinary income in the year of sale or disposition equal to the lesser of (i)
the amount by which the fair market value of the shares on the sale or
disposition date exceeded the purchase price paid for those shares or (ii) 15%
of the fair market value of the shares on the date the participant entered the
Purchase Period. Any additional gain upon the disposition will be taxed as a
long-term capital gain.
If the participant still owns the purchased shares at the time of death,
the lesser of (i) the amount by which the fair market value of the shares on the
date of death exceeds the purchase price or (ii) 15% of the fair market value of
the shares on the date the participant entered the offering period will
constitute ordinary income in the year of death.
If the purchased shares are sold or otherwise disposed of within two years
after the participant's entry date into the Purchase Period or within one year
after the actual purchase date, then Newco will be entitled to a deduction in
the year of sale or disposition equal to the amount of ordinary income
recognized by the participant as a result of such sale or disposition. In all
other cases, no deduction will be allowed.
119
<PAGE> 134
LEGAL MATTERS
The legality of the shares of Newco Common Stock to be issued in connection
with the Merger will be passed upon for Newco by Troutman Sanders LLP, Atlanta,
Georgia. Troutman Sanders LLP, Atlanta, Georgia is acting as counsel for
Healthdyne in connection with certain legal matters relating to the Merger and
the transactions contemplated thereby. Morrison & Foerster LLP, Irvine,
California, is acting as counsel for Tokos in connection with certain legal
matters relating to the Merger and the transactions contemplated thereby.
EXPERTS
The consolidated financial statements of Healthdyne as of December 31,
1994, and for the year then ended, which appear below and are made a part of
this Joint Proxy Statement/Prospectus in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, and upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Tokos at December 31, 1993 and
1994, and for each of the three years in the period ended December 31, 1994,
included in this Joint Proxy Statement/Prospectus, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
120
<PAGE> 135
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 136
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF TOKOS MEDICAL CORPORATION (DELAWARE) AND
SUBSIDIARIES:
Report of Independent Auditors.................................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994...................... F-3
Consolidated Statements of Operations for the years ended December 31, 1992, 1993
and 1994....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993
and 1994....................................................................... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1992, 1993 and 1994............................................................ F-7
Notes to Consolidated Financial Statements........................................ F-9
Consolidated Balance Sheets as of December 31, 1994 and September 30, 1995
(unaudited).................................................................... F-21
Consolidated Statements of Income for the nine months ended September 30, 1994
and 1995 (unaudited)........................................................... F-22
Consolidated Statements of Cash Flows for the nine months ended September 30, 1994
and 1995 (unaudited)........................................................... F-23
Notes to Consolidated Financial Statements (unaudited)............................ F-25
CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHDYNE, INC. AND SUBSIDIARIES:
Report of Independent Auditors.................................................... F-27
Consolidated Balance Sheets as of December 31, 1993 and 1994...................... F-28
Consolidated Statements of Earnings (Loss) for the years ended December 31, 1992,
1993 and 1994.................................................................. F-30
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1992, 1993 and 1994............................................................ F-31
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993
and 1994....................................................................... F-33
Notes to Consolidated Financial Statements........................................ F-35
Consolidated Condensed Balance Sheets as of December 31, 1994 and September 30,
1995 (unaudited)............................................................... F-45
Consolidated Condensed Statements of Earnings (Loss) for the nine months ended
September 30, 1994 and 1995 (unaudited)........................................ F-47
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 1994 and 1995 (unaudited)........................................ F-48
Notes to Consolidated Condensed Financial Statements (unaudited).................. F-50
</TABLE>
F-1
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Tokos Medical Corporation (Delaware)
We have audited the consolidated balance sheets of Tokos Medical
Corporation (Delaware) and subsidiaries as of December 31, 1993 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements and schedule are the responsibility of Tokos'
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tokos Medical Corporation (Delaware) at December 31, 1993 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
February 21, 1995
Orange County, California
F-2
<PAGE> 138
CONSOLIDATED BALANCE SHEETS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................. $ 8,710,000 $ 9,149,000
Short-term investments............................................ 3,435,000 3,508,000
Accounts receivable (less allowances of $15,100,000 in 1993 and
$12,900,000 in 1994)........................................... 27,764,000 23,207,000
Patient service equipment and supplies............................ 1,926,000 1,288,000
Prepaid expenses and other current assets......................... 6,218,000 1,634,000
----------- -----------
Total current assets...................................... 48,053,000 38,786,000
Equipment and improvements:
Equipment......................................................... 30,230,000 15,476,000
Patient monitoring devices........................................ 7,227,000 6,824,000
Leasehold improvements............................................ 1,072,000 11,000
----------- -----------
38,529,000 22,311,000
Less accumulated depreciation and amortization.................... 24,665,000 11,903,000
----------- -----------
13,864,000 10,408,000
Other assets........................................................ 8,042,000 9,196,000
----------- -----------
$69,959,000 $58,390,000
========== ==========
</TABLE>
F-3
<PAGE> 139
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 3,277,000 $ 3,318,000
Accrued expenses.............................................. 3,147,000 5,203,000
Accrued restructuring charges................................. 6,141,000 628,000
Current portion of long-term debt............................. 7,171,000 6,488,000
------------ ------------
Total current liabilities............................. 19,736,000 15,637,000
Long-term debt, less current portion............................ 3,348,000 2,593,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued and outstanding at December 31,
1993 and 1994.............................................. -0- -0-
Common stock, $.001 par value, authorized 60,000,000 shares;
issued 17,376,268 shares at December 31, 1993 and
17,410,468 shares at December 31, 1994; outstanding
17,140,799 shares at December 31, 1993 and 17,254,465
shares at December 31, 1994................................ 17,000 17,000
Additional paid-in capital.................................... 86,413,000 86,519,000
Notes receivable and accrued interest from officers........... (2,306,000) (3,492,000)
Accumulated deficit........................................... (36,094,000) (42,126,000)
------------ ------------
48,030,000 40,918,000
Treasury stock, at cost....................................... (1,155,000) (758,000)
------------ ------------
46,875,000 40,160,000
------------ ------------
$ 69,959,000 $ 58,390,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 140
CONSOLIDATED STATEMENTS OF OPERATIONS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net patient service revenues......................... $159,887,000 $120,837,000 $100,696,000
Costs and expenses:
Cost of patient services........................... 98,845,000 92,400,000 77,240,000
General and administrative......................... 26,261,000 22,852,000 20,157,000
Provision for doubtful accounts.................... 17,056,000 13,656,000 7,042,000
Research and development........................... 3,289,000 2,395,000 1,617,000
Restructuring charges.............................. -0- 14,000,000 -0-
Transaction expenses............................... 2,982,000 -0- -0-
------------ ------------ ------------
148,433,000 145,303,000 106,056,000
------------ ------------ ------------
Income (loss) from operations........................ 11,454,000 (24,466,000) (5,360,000)
Interest expense (income):
Interest expense................................... 552,000 525,000 417,000
Interest income.................................... (591,000) (564,000) (468,000)
------------ ------------ ------------
(39,000) (39,000) (51,000)
------------ ------------ ------------
Income (loss) before taxes........................... 11,493,000 (24,427,000) (5,309,000)
Income taxes......................................... 5,030,000 1,956,000 550,000
------------ ------------ ------------
Net income (loss).................................... $ 6,463,000 $(26,383,000) $ (5,859,000)
=========== =========== ===========
Earnings (loss) per common and common equivalent
share.............................................. $ .37 $ (1.53) $ (0.34)
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding...................... 17,568,000 17,240,000 17,169,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 141
CONSOLIDATED STATEMENTS OF CASH FLOWS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994
----------- ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................................... $ 6,463,000 $(26,383,000) $(5,859,000)
Adjustments to reconcile net income (loss) to net
cash provided (used) in operating activities:
Depreciation and amortization..................... 6,120,000 7,132,000 6,842,000
Reserves for patient service equipment and patient
monitoring devices.............................. -0- 3,378,000 -0-
Tax benefits associated with stock option
exercises....................................... 3,117,000 124,000 -0-
Deferred income taxes............................. 67,000 6,668,000 8,000
Accrued interest on officer notes................. (33,000) (120,000) (174,000)
Other non-cash items.............................. (262,000) (288,000) -0-
Changes in operating assets and liabilities net of
effect of acquisitions:
Net accounts receivable......................... (6,013,000) 18,516,000 5,123,000
Patient service equipment and supplies.......... (632,000) 929,000 (214,000)
Prepaid expenses and other current assets....... (5,158,000) 1,591,000 4,584,000
Accounts payable................................ 300,000 (5,024,000) 41,000
Accrued expenses................................ (1,449,000) (318,000) 2,056,000
Accrued restructuring charges................... -0- 6,141,000 (5,513,000)
Purchased marketing rights...................... (1,000,000) -0- -0-
Income taxes payable and deferred income
taxes........................................ (1,632,000) -0- -0-
----------- ------------ -----------
Net cash provided (used) by operating
activities................................. (112,000) 12,346,000 6,894,000
Investing activities:
(Purchases) sales of short-term investments.......... 5,106,000 (357,000) (73,000)
Purchases and construction of equipment and
improvements...................................... (7,886,000) (2,357,000) (1,954,000)
Acquisition of managed companies, net of cash
acquired.......................................... -0- -0- (435,000)
Increase in other assets............................. (532,000) (768,000) (214,000)
----------- ------------ -----------
Net cash used by investing activities........ (3,312,000) (3,482,000) (2,676,000)
Financing activities:
Proceeds from stock option exercises and purchases
pursuant to employee stock purchase plan.......... 1,868,000 709,000 250,000
Proceeds from equity transactions of acquired
companies......................................... 1,190,000 -0- -0-
Proceeds from issuance of note payable to equipment
financing company................................. 1,000,000 1,198,000 -0-
Acceptance of note receivable from officer........... -0- (900,000) (1,012,000)
Purchases of treasury stock.......................... -0- (1,350,000) (50,000)
Treasury stock issued, gross......................... -0- -0- 447,000
Treasury stock contributions to employee stock
purchase plan..................................... -0- -0- (327,000)
Payments of long-term debt........................... (4,527,000) (5,536,000) (3,096,000)
Other long-term debt and equity transactions......... (172,000) (14,000) 9,000
----------- ------------ -----------
Net cash used by financing activities........ (641,000) (5,893,000) (3,779,000)
Increase (decrease) in cash and equivalents............ (4,065,000) 2,971,000 439,000
Cash and equivalents at beginning of year.............. 9,804,000 5,739,000 8,710,000
----------- ------------ -----------
Cash and equivalents at end of year.................... $ 5,739,000 $ 8,710,000 $ 9,149,000
========== =========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 142
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
SHARES AMOUNT
---------- -------
<S> <C> <C>
Balance at December 31, 1991............................................ 16,620,365 $17,000
Common stock options exercised........................................ 479,165
Common stock issued pursuant to employee stock purchase plan.......... 33,777
Tax benefits associated with stock option exercises...................
Equity transactions of acquired companies............................. 33,868
Acceptance of notes receivable from officers for stock option
exercises..........................................................
Purchase of remaining interest in partnership......................... 52,500
Other equity transactions............................................. 7,016
Net income............................................................
---------- -------
Balance at December 31, 1992............................................ 17,226,691 $17,000
Common stock options exercised........................................ 96,286
Common stock issued pursuant to employee stock purchase plan.......... 70,121
Contribution of treasury stock to employee stock purchase plan........
Tax benefits associated with stock option exercises...................
Treasury stock purchased..............................................
Acceptance of note receivable from officer............................
Accrued interest on officer notes.....................................
Other equity transactions............................................. (16,830)
Net loss..............................................................
---------- -------
Balance at December 31, 1993............................................ 17,376,268 $17,000
Common stock options exercised........................................ 30,692
Issuance of treasury stock to employee stock purchase plan and other
stock awards.......................................................
Treasury stock purchased..............................................
Acceptance of note receivable from officer............................
Accrued interest on officer notes.....................................
Other equity transactions............................................. 3,508
Net loss..............................................................
---------- -------
Balance at December 31, 1994............................................ 17,410,468 $17,000
========= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 143
<TABLE>
<CAPTION>
NOTES RECEIVABLE
ADDITIONAL AND ACCRUED TREASURY STOCK
PAID-IN INTEREST FROM ACCUMULATED ------------------------
CAPITAL OFFICERS DEFICIT SHARES AMOUNT TOTAL
----------- ---------------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
$77,429,000 $ (782,000) $(16,174,000) -0- $ -0- $ 60,490,000
1,534,000 1,534,000
654,000 654,000
3,117,000 3,117,000
1,190,000 1,190,000
(320,000) (320,000)
1,970,000 1,970,000
(146,000) (146,000)
6,463,000 6,463,000
----------- ---------------- ------------ -------- ----------- ------------
$85,748,000 $ (1,102,000) $ (9,711,000) -0- $ -0- $ 74,952,000
224,000 224,000
290,000 290,000
25,510 195,000 195,000
124,000 124,000
(260,979) (1,350,000) (1,350,000)
(900,000) (900,000)
(304,000) (304,000)
27,000 27,000
(26,383,000) (26,383,000)
----------- ---------------- ------------ -------- ----------- ------------
$86,413,000 $ (2,306,000) $(36,094,000) (235,469) $(1,155,000) $ 46,875,000
95,000 95,000
(173,000) 89,466 447,000 274,000
(10,000) (50,000) (50,000)
(1,012,000) (1,012,000)
(174,000) (174,000)
11,000 11,000
(5,859,000) (5,859,000)
----------- ---------------- ------------ -------- ----------- ------------
$86,519,000 $ (3,492,000) $(42,126,000) (156,003) $ (758,000) $ 40,160,000
========== ============ =========== ======== ========== ===========
</TABLE>
F-8
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TOKOS MEDICAL CORPORATION (DELAWARE)
DECEMBER 31, 1994
BUSINESS
Tokos and its subsidiaries provide comprehensive maternal-newborn clinical
management services to women, which include preterm labor management and
specialized obstetrical home health care services, prenatal risk screening, and
prenatal education.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Tokos and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Equivalents: Tokos considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Short-Term Investments: Investments having a maturity of more than three
months and less than twelve months are classified as short-term investments.
Short-term investments primarily consist of U.S. government obligations and
commercial paper. Effective January 1, 1994, Tokos adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt & Equity Securities (SFAS No. 115). Under this statement, Tokos classifies
its short-term investments as trading securities which are carried at fair
market value and any unrealized gains or losses are included in earnings.
Previously, Tokos accounted for its short-term investments at amortized cost.
The fair value of short-term investments are substantially equal to their
carrying value at December 31, 1993 and 1994. The adoption of SFAS No. 115 did
not have a material effect on Tokos' results of operations for 1994. For the
year ended December 31, 1994 the change in net unrealized holding gains (losses)
on trading securities included in income from trading assets was an unrealized
loss of $73,000.
Patient Service Equipment and Supplies: Patient service equipment and
supplies consists of equipment used in providing comprehensive maternity risk
management services to patients for periods which, on the average, last six to
seven weeks. At the completion of the patient service period, the equipment is
returned to Tokos for recalibration, refurbishment and re-use. Patient service
equipment is valued at the total production cost associated with each unit,
while the value of units in use is determined through deducting estimated
refurbishment costs from total production cost of each unit. Due to Tokos'
strategic decision to discontinue its support of these items, they were fully
reserved at December 31, 1994. Supplies on hand are valued at cost.
Equipment and Improvements: Equipment and improvements are stated at cost.
Patient monitoring devices are carried at manufactured cost, net of reserves
recorded due to Tokos' strategic decision to reduce its support of certain
patient monitoring devices. Depreciation of equipment is computed using the
straight-line method over the estimated service lives of the respective assets
which range from three to five years. Leasehold improvements and assets recorded
under capital lease obligations are amortized using the straight-line method
over the lives of the respective leases. Amortization of assets subject to
capital leases is included in depreciation expense.
At December 31, 1994 Tokos eliminated $17,462,000 in fully depreciated
equipment and improvements from the respective cost and accumulated depreciation
accounts.
F-9
<PAGE> 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
Intangible Assets: Intangible assets, consisting of goodwill and covenants
not to compete, represent the excess of the purchase price over the estimated
fair value of the net assets of acquired companies. They are included in other
assets (see Note 6) and are being amortized on a straight-line basis over the
periods of expected benefit ranging from 1 to 20 years.
Net Patient Service Revenues: Net revenues are based on amounts billed or
billable for services rendered, net of price adjustments made with third-party
payors by contract or otherwise. Revenues are also net of allowances which Tokos
makes and adjusts from time to time to reflect its estimates, based on
historical collection experience, including recoveries in excess of amounts
previously estimated, of the difference between amounts billed and amounts which
it has or expects to receive in full settlement from primary third-party payors,
secondary payors and patients. Net revenues include revenues generated from
Tokos' own patient service centers and fees from patient service operations
managed by Tokos.
Provision for Doubtful Accounts: Tokos provides for estimated
uncollectible accounts as revenues are recognized. The provision is adjusted
periodically based upon Tokos' quarterly evaluation of historical collection
experience, industry reimbursement trends and other relevant factors.
Concentration of Credit Risk: Financial instruments which potentially
expose Tokos to concentrations of credit risk consist primarily of cash and
equivalents, short-term investments, and accounts receivable with third-party
payors. Tokos invests its available cash in money market instruments and debt
instruments of the U.S. government, financial institutions, and corporations
with strong credit ratings. Tokos has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The collectibility of accounts receivable from
third-party payors is directly affected by conditions and changes in the
insurance industry and governmental programs, which are taken into account by
Tokos in computing and evaluating its allowance for doubtful accounts.
Earnings (Loss) Per Common and Common Equivalent Share: In 1993 and 1994,
the net loss per share was computed by dividing the net loss for the year by the
weighted average number of shares of Common Stock outstanding. In 1992, earnings
per share of Common Stock and Common Stock equivalents was computed by dividing
net income by the weighted average number of shares of Common Stock and Common
Stock equivalents outstanding. Common Stock equivalents consist of outstanding
stock options, accounted for under the treasury method. Common Stock equivalents
were included in the 1992 computation as the stock options were dilutive.
Outstanding stock options were excluded from the 1993 and 1994 computation as
these options were anti-dilutive. Fully diluted earnings per share are not
presented as the amounts are not materially different from those presented
herein.
Reclassifications: Certain reclassifications of 1993 amounts have been
made to correspond with 1994 classifications.
2. ACQUISITIONS
On July 29, 1992, Tokos acquired all of the outstanding stock of CareLink
Corporation, a California corporation, for approximately 1,225,000 shares of
Tokos' Common Stock through a merger which has been accounted for as a
pooling-of-interests. Tokos incurred transaction expenses of $2,982,000 in 1992
for the acquisition of CareLink Corporation.
F-10
<PAGE> 146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
3. PHYSICIAN-OWNED COMPANIES
Tokos had previously entered into agreements with certain physician-owned
companies to provide its basic core high-risk pregnancy and related healthcare
services to the patients of the companies for a fee. These services include home
uterine activity monitoring, home infusion therapy and other homecare services,
as well as, to a lesser extent, certain administrative services, such as billing
and collection. Pursuant to these agreements, Tokos receives a negotiated fee
for these services based on the volume of services performed for these
companies. Total revenues recorded by Tokos, which were generated from services
provided on behalf of these entities, totalled approximately $17,400,000 and
$9,200,000 for the years ended December 31, 1993 and 1994, respectively. The
amount included in accounts receivable represents Tokos' portion of the
uncollected revenues of these companies generated from the services performed;
none of the accounts receivable are owed back to the companies. Included in
gross accounts receivable is approximately $9,100,000 at December 31, 1993 and
$4,100,000 at December 31, 1994 relating to these companies. Upon collection of
these revenues, Tokos reclassifies the fees due for services performed from
accounts receivable to amounts due from physician-owned companies. Included in
prepaid expenses and other current assets are such amounts due from these
companies of $1,927,000 and $645,000 at December 31, 1993 and 1994,
respectively.
During the fourth quarter of 1994, Tokos purchased certain of these
physician-owned companies for $627,000 in cash and $1,659,000 in notes payable.
These acquisitions were accounted for using the purchase method of accounting
with the results of operations of the businesses acquired included from the
effective date of the acquisitions. These acquisitions have resulted in
intangible assets of $1,483,000. The 1994 acquisitions comprised approximately
40% of the total number of physician-owned companies for which Tokos provides
these services, and Tokos intends to acquire the balance in 1995.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
---------- ----------
<S> <C> <C>
Amounts due from managed companies (Note 3)................... $1,927,000 $ 645,000
Prepaid and refundable income taxes........................... 2,736,000 87,000
Other......................................................... 1,555,000 902,000
---------- ----------
$6,218,000 $1,634,000
========= =========
</TABLE>
5. NOTES RECEIVABLE AND ACCRUED INTEREST FROM OFFICERS
During 1993 and 1994, Tokos loaned its Chief Executive Officer ("CEO")
$900,000 and $1,012,000, respectively. Such loans, which were approved by the
Board of Directors, are evidenced by interest-bearing promissory notes and are
secured by approximately 731,000 shares of Tokos Common Stock owned by its CEO.
The value of this collateral at December 31, 1994 was $4,752,000. The promissory
notes, due December 31, 1995, bear interest at the rate of 6% per annum. The
original due date of these notes was March 20, 1994; however, the Board of
Directors extended these notes. The Board of Directors has the discretion to
further extend these notes beyond their due date.
Pursuant to the terms of Tokos' 1985 Incentive Stock Option Plan, certain
executive officers exercised options to purchase 884,325 shares of Tokos' Common
Stock by the delivery of $1,154,000 in interest-bearing promissory notes. At
December 31, 1994, $1,451,000 was the aggregate balance outstanding, including
accrued interest, and is classified as a reduction of stockholders' equity. The
notes bear interest at 6% per annum, and are due December 31, 1995. Tokos holds
380,000 shares in escrow as collateral for these notes. The value of this
collateral at December 31, 1994 was $2,470,000. The original due dates of these
notes were
F-11
<PAGE> 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
December 31, 1992; however, the Board of Directors extended these notes. The
Board of Directors has the discretion to further extend these notes beyond their
due date.
The Board of Directors, may, at its discretion, increase, hold or release
shares held as collateral for the notes.
6. OTHER ASSETS
The components of other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
---------- ----------
<S> <C> <C>
Investments in other healthcare entities...................... $3,420,000 $3,256,000
Intangibles, net of accumulated amortization of $320,000 in
1993 and $670,000 in 1994................................... 2,851,000 3,876,000
Other......................................................... 1,771,000 2,064,000
---------- ----------
$8,042,000 $9,196,000
========= =========
</TABLE>
To facilitate strategic expansion, Tokos has made equity investments in
other healthcare entities which are carried at cost. Each investment represents
less than 10% of each company's equity. Tokos periodically receives unaudited
financial statements from each company and reviews their operating performance
for impairment of its investments. Based on this review, Tokos believes the
carrying amount of each investment is not in excess of the approximate fair
value for the periods presented.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
---------- ----------
<S> <C> <C>
Purchased marketing rights.................................... $4,000,000 $4,000,000
Notes payable from managed company acquisitions............... -0- 1,658,000
Capital lease obligations..................................... 3,903,000 1,484,000
Note payable to equipment financing company................... 1,078,000 873,000
Other......................................................... 1,538,000 1,066,000
---------- ----------
10,519,000 9,081,000
Less current portion.......................................... 7,171,000 6,488,000
---------- ----------
$3,348,000 $2,593,000
========= =========
</TABLE>
In December 1991, Tokos agreed to pay $8,000,000 for the exclusive
marketing rights in the U.S. and Canada for a fetal fibronectin test, a
proprietary immunoassay developed and patented by Adeza Biomedical Corporation
("Adeza"). This test has the potential to be a reliable marker for preterm
delivery. At the time, there were many scientific and regulatory obstacles to be
overcome before Food and Drug Administration ("FDA") approval could be obtained
and Tokos could market the product. Tokos had no assurances that such approval
would be obtained and, therefore, the amount was charged to expense in
accordance with generally accepted accounting principles. Included in long-term
debt at December 31, 1994, is $4.0 million for the remaining obligation related
to the purchased marketing rights, which became due and payable when Adeza
received notification from the FDA that its pre-market approval application
("PMA") for the fetal fibronectin immunoassay was accepted for filing. On
January 16, 1995, Adeza informed Tokos that it had received such notification.
The agreed upon payment schedule requires Tokos to pay $3,250,000 during 1995
with the
F-12
<PAGE> 148
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
remaining $750,000 due and payable on January 1, 1996. At December 31, 1994,
these amounts have been included in current and non-current portions of
long-term debt accordingly.
During the fourth quarter of 1994, Tokos purchased certain managed
companies, and incurred $1,658,000 in notes payable. These notes payable are to
be paid over one to four years in accordance with the terms of the purchase
agreements.
Included in equipment and improvements in the accompanying consolidated
balance sheets at December 31, 1993 and 1994 are $17,928,000 and $5,392,000,
respectively, in assets held under capital lease. At December 31, 1994 Tokos
eliminated $12,968,000 in fully depreciated equipment and improvements held
under capital lease from the respective cost and accumulated depreciation
accounts. Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
---------- ----------
<S> <C> <C>
Present value of future rental payments under capitalized
agreements, at various interest rates....................... $3,903,000 $1,484,000
Less current portion.......................................... 2,382,000 1,228,000
---------- ----------
$1,521,000 $ 256,000
========= =========
</TABLE>
Tokos has the right to exercise various renewal or purchase options at the
end of the initial lease terms.
For the years ended December 31, 1992, 1993 and 1994, Tokos acquired
equipment under equipment financing and capital lease obligations of $3,822,000,
$2,507,000, and $0, respectively.
During 1993, Tokos obtained financing for equipment purchases totalling
$1,198,000 with an equipment financing company. Pursuant to the agreement, Tokos
is required to make monthly payments through May 1998. The note bears interest
at 10% per annum. Tokos did not finance equipment purchases with an equipment
financing company in 1994.
In October 1994, Tokos entered into a revolving line of credit agreement
with a commercial lender. Under the terms of this credit facility Tokos may
borrow up to $10,000,000 based upon the value of eligible collateral as defined
in the credit agreement. Borrowings under this agreement bear interest at a rate
of 2% over prime, and are secured by certain of Tokos' assets, principally
accounts receivable. The credit agreement expires November 30, 1995. At December
31, 1994, there were no outstanding borrowings.
Interest paid was $698,000 in 1992, $528,000 in 1993, and $416,000 in 1994.
F-13
<PAGE> 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
Maturities of long-term debt and future minimum lease payments under
capital lease obligations are as follows:
<TABLE>
<CAPTION>
CAPITAL
LONG-TERM LEASE
DEBT OBLIGATIONS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1995............................................... $5,337,000 $1,358,000 $6,695,000
1996............................................... 1,522,000 265,000 1,787,000
1997............................................... 772,000 6,000 778,000
1998............................................... 126,000 -0- 126,000
1999............................................... -0- -0- -0-
---------- ---------- ----------
7,757,000 1,629,000 9,386,000
Less amounts representing interest................. 160,000 145,000 305,000
---------- ---------- ----------
7,597,000 1,484,000 9,081,000
Less current portion............................... 5,260,000 1,228,000 6,488,000
---------- ---------- ----------
$2,337,000 $ 256,000 $2,593,000
========= ========= =========
</TABLE>
8. STOCKHOLDERS' EQUITY
Stock Options: In 1985, Tokos adopted an Incentive Stock Option Plan
("Option Plan"), as amended, whereby Tokos may grant options to officers,
employees and directors ("Optionee") at prices not less than fair value of the
Common Stock at the date of grant. Through December 31, 1991, the Option Plan
had been amended to increase the aggregate number of shares covered under the
plan to 3,500,000 shares. Of the total shares authorized, 500,000 shares may be
reduced on a one-for-one basis for each share of Common Stock issued under
Tokos' 1991 Employee Stock Purchase Plan ("Purchase Plan"). In 1992, the
stockholders approved an amendment to the Option Plan to increase the maximum
number of shares available from 3,500,000 shares by an amount not to exceed 2%
of the number of fully diluted shares of Common Stock outstanding for each of
the years ending December 31, 1991, 1992, 1993, and 1994. Options expire ten
years after the date of grant or earlier upon the Optionee's separation from
Tokos. Options are exercisable at the date of grant subject to certain
repurchase rights by Tokos.
In an effort to provide additional incentive to its employees, on April 6,
1993 the Compensation Committee approved an exchange program pursuant to which
all holders of options under the Option Plan had the right to exchange their
unexercised options for an equivalent number of new options having an exercise
price of $6.625, the fair market value of the Common Stock on April 6, 1993.
Each new option included a modified vesting period.
F-14
<PAGE> 150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
Summarized information for the option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
---------- -----------------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1991................... 1,544,664 $ .17 - $37.75
Granted.................................................. 466,611 22.50 - 35.25
Exercised................................................ (479,165) .17 - 35.25
Cancelled................................................ (56,179) 2.67 - 27.75
----------
Options outstanding at December 31, 1992................... 1,475,931 .17 - 37.75
Granted.................................................. 1,514,562 5.38 - 7.88
Exercised................................................ (96,286) .17 - 11.00
Cancelled................................................ (1,192,420) 1.83 - 37.75
----------
Options outstanding at December 31, 1993................... 1,701,787 .17 - 37.75
Granted.................................................. 667,250 3.50 - 7.15
Exercised................................................ (39,912) .23 - 6.63
Cancelled................................................ (176,281) 1.17 - 27.75
----------
Options outstanding at December 31, 1994................... 2,152,844 .17 - 37.75
=========
</TABLE>
Employee Stock Purchase Plan: In 1991, Tokos adopted the Employee Stock
Purchase Plan ("Purchase Plan") which authorizes the issuance of up to 500,000
shares of Common Stock to eligible employees of Tokos. Shares issued under the
Purchase Plan from the 500,000 shares authorized reduce on a one-for-one basis
the number of shares issuable under Tokos' Option Plan. Conversely, shares
issued under the Option Plan from the 500,000 shares authorized reduce on a
one-for-one basis the number of those shares issuable under the Purchase Plan.
Generally, all employees of Tokos, except for executive officers, are eligible
to participate in the Purchase Plan. The purchase price of the Common Stock is
the lesser of 85% of the fair market value of the Common Stock at the beginning
or end of the quarter in which purchased. Pursuant to the Purchase Plan, no
shares were newly issued and 89,466 were issued from treasury stock during 1994.
Stockholder Rights Plan: On March 19, 1993, the Board of Directors
declared a dividend of one common share purchase right ("Right") for each
outstanding share of Common Stock. An exercisable Right will, under certain
conditions, entitle its holder to purchase from Tokos one share of Common Stock
at the exercise price of $30 per share, subject to adjustment, until March 23,
2003. The Rights will become exercisable 10 days after a person or group (an
"Acquiring Person") acquires 20% or more of the Common Stock, or 10 days after a
person announces a tender offer which would result in such person acquiring 20%
or more of the Common Stock. The Right may be redeemed by the Board of Directors
for $.01 per Right at any time until 10 days following the public announcement
that a person has become an Acquiring Person. Under certain circumstances after
a person becomes an Acquiring Person, or after a merger or other business
combination involving Tokos, an exercisable Right will entitle its holder (other
than the Acquiring Person) to purchase shares of Common Stock (or shares of an
acquiring company) having a market value of two times the exercise price of one
Right.
F-15
<PAGE> 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1992 1993 1994
---------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal payable................................. $4,192,000 $(4,483,000) $(168,000)
State payable................................... 1,607,000 240,000 250,000
Tax benefit from the exercise of stock options
to paid-in capital........................... (3,117,000) (124,000) -0-
Net operating loss and credit carryforwards
utilized for income tax purposes............. (836,000) -0- -0-
---------- ----------- ---------
1,846,000 (4,367,000) 82,000
Deferred:
Federal......................................... 476,000 6,199,000 468,000
State........................................... (409,000) -0- -0-
---------- ----------- ---------
67,000 6,199,000 468,000
---------- ----------- ---------
Credit to paid-in capital......................... 3,117,000 124,000 -0-
---------- ----------- ---------
$5,030,000 $ 1,956,000 $ 550,000
========= ========== =========
</TABLE>
F-16
<PAGE> 152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Tokos' deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Management fee income from managed companies............ $ (1,684,000) $ (666,000)
Other deferred tax liabilities.......................... (618,000) -0-
------------ ------------
Deferred tax liabilities................................ (2,302,000) (666,000)
------------ ------------
Deferred tax assets:
Net operating losses acquired from CareLink
Corporation.......................................... 5,300,000 5,300,000
Intangible assets....................................... 4,791,000 4,354,000
Allowance for doubtful accounts......................... 4,560,000 3,829,000
Net operating loss carryforwards........................ -0- 2,075,000
Equipment and improvements.............................. 1,140,000 2,021,000
Accruals and other allowances........................... 639,000 1,140,000
Accrued restructuring charges........................... 3,093,000 750,000
Alternative minimum tax credit carryforwards............ 625,000 536,000
Research and development credit carryforwards........... 386,000 387,000
State taxes............................................. 277,000 276,000
General business credit carryforwards................... 250,000 468,000
Charitable contribution carryforwards................... -0- 183,000
Miscellaneous........................................... 18,000 127,000
------------ ------------
Total deferred assets........................... 21,079,000 21,446,000
------------ ------------
Net deferred tax assets......................... 18,777,000 20,780,000
Valuation allowance............................. (18,777,000) (20,780,000)
------------ ------------
Net deferred tax assets................................... $ -0- $ -0-
=========== ===========
</TABLE>
F-17
<PAGE> 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
The reconciliation of income tax expense to U.S. federal statutory rates is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1992 1993 1994
---------- ----------- -----------
<S> <C> <C> <C>
Income taxes at U.S. statutory rates (34% in
1992; 35% in 1993 and 1994).................... $3,907,000 $(8,550,000) $(1,858,000)
State income taxes, net of federal benefit....... 790,000 160,000 163,000
Losses of acquired companies..................... 990,000 -0- -0-
Net operating loss carryforwards recognized for
financial reporting purposes in 1991 and
1992........................................... (611,000) -0- -0-
Income tax rate differential (34%) from statutory
rate (35%)..................................... -0- 428,000 -0-
Expenses associated with acquisitions not
deductible for income tax purposes............. 217,000 -0- -0-
Utilization of research and development,
investment tax, and alternative minimum tax
credits........................................ (225,000) -0- -0-
Increase in valuation allowance associated with
deferred tax assets............................ -0- 9,697,000 2,003,000
Tax and interest related to IRS examination per
management estimate............................ -0- -0- 300,000
Other items...................................... (38,000) 221,000 (58,000)
---------- ----------- -----------
$5,030,000 $ 1,956,000 $ 550,000
========= ========== ==========
</TABLE>
At December 31, 1994, Tokos had net operating loss carryovers available for
federal income tax purposes of approximately $6,100,000. The net operating loss
carryforwards begin to expire in 2009. Tokos also had net operating loss
carryforwards from its acquisition of CareLink Corporation available for federal
income tax purposes of approximately $15,600,000. As a result of this change in
ownership, the use of the CareLink Corporation net operating loss carryforwards
in future years will be limited to approximately $2,300,000 annually. These
losses may be further limited to the annual income of the acquiring subsidiary.
These net operating loss carryforwards begin to expire in 2003. When realized,
the tax benefit for those items will be applied to reduce income tax expense.
At December 31, 1994, Tokos also had $468,000 and $536,000, respectively,
of general business credit and alternative minimum tax credit carryover for
federal income tax purposes. These credits expire at various times beginning in
1999. Tokos had research and development credit carryovers for federal income
tax purposes of approximately $387,000 from the acquired CareLink Corporation
which begin to expire at various times through 2002. When realized, these
credits will be applied to reduce income tax expense.
Income taxes paid, including prepayments of estimated income taxes,
totalled $5,228,000 in 1992, $915,000 in 1993, and $336,000 in 1994.
Tokos is currently under examination by the Internal Revenue Service for
the years ended December 31, 1989, 1990, and 1991. Tokos recorded $300,000 in
the fourth quarter of 1994 as management's estimate for tax and interest related
to this examination. Management continues to believe that the resolution of this
examination will not have a material adverse effect on Tokos' financial position
or results of operations of Tokos.
10. RESTRUCTURING CHARGES
During 1993, the Board of Directors approved plans to restructure Tokos'
operations by, among other things, reducing the number of its monitoring
centers, centralizing patient intake and claims administration, reducing
in-house manufacturing and product development activities, and changing its
strategy regarding
F-18
<PAGE> 154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
support of certain patient service equipment and patient monitoring devices.
Tokos has taken a number of actions consistent with those decisions. In
connection therewith, Tokos recorded aggregate restructuring charges totalling
$14,000,000 (or $.81 per share).
The components of the $14,000,000 restructuring charge included $5,691,000
related to involuntary severance costs of affected employees, $3,540,000 related
to costs associated with the consolidation of monitoring sites and certain
administrative functions, as well as reduction of manufacturing activities,
$3,378,000 related to reserves against patient service equipment and patient
monitoring devices, and $1,391,000 related to other restructuring costs. At
December 31, 1993, the $6,141,000 remaining in the accrual was to be
substantially paid in 1994. During 1994, $5,513,000 in restructuring charges
were expended with a remaining accrual at December 31, 1994 of $628,000. The
amounts expended include $3,318,000 related to involuntary severance costs and
$2,165,000 related to costs associated with the consolidation of administrative
functions and monitoring sites. Certain reclassifications of these amounts have
been made within the restructuring categories from those previously reported;
none of which are significant.
11. LEASE COMMITMENTS
Tokos leases its office facilities, patient service centers, and various
types of equipment under noncancelable operating leases. Lease terms generally
range from three to five years with renewal options for additional periods. Many
of the office facility leases provide that Tokos pay for taxes, maintenance,
insurance and other expenses, and contain rent escalation clauses. Future
minimum payments under the operating leases consist of the following at December
31, 1994:
<TABLE>
<S> <C>
1995......................................................... $3,445,000
1996......................................................... 878,000
1997......................................................... 269,000
1998......................................................... 20,000
1999......................................................... 7,000
-----------
$4,619,000
=========
</TABLE>
Total rent expense for operating leases was $3,293,000 in 1994, $3,924,000
in 1993, and $4,121,000 in 1992.
12. CONTINGENCIES
Tokos is a defendant in a class action securities lawsuit entitled In re
Tokos Medical Corporation Securities Litigation filed in the United States
District Court for the Central District of California. The suit consolidates
certain actions filed against Tokos and certain of its officers and directors in
November 1992 and March 1993. The suit asserts that Tokos made allegedly false
and misleading statements about its operations and results in violation of the
federal securities laws and common law fraud and negligent misrepresentation
standards. The plaintiffs seek unspecified damages on behalf of the stockholders
who purchased Company Common Stock between March 26, 1990 and March 18, 1993. On
June 9, 1993, Tokos responded to the suit with a Motion to Dismiss, which was
heard by the court on September 16, 1993. As a result of the Motion, certain
state law claims for fraud were dismissed and the only non-officer director was
dismissed as a defendant. During this time, the parties have engaged in
extensive discovery. Tokos intends to file a summary judgment motion during
1995. The trial is currently scheduled in July 1995, although based on the
scheduled filing date of summary judgment motions and the court's schedule, the
trial may be postponed. Tokos intends to vigorously defend this lawsuit. While
the outcome of any litigation is uncertain in today's litigious environment,
Tokos does not believe that the outcome of this lawsuit will have a material
adverse effect on the financial condition or results of operations of Tokos.
F-19
<PAGE> 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
Tokos is subject to certain claims arising in the normal course of
business. In management's opinion, any such contingencies would not materially
affect Tokos' financial position or operating results.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that Tokos disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for Tokos' financial instruments.
(a) Cash and equivalents and Short-Term Investments
The carrying amount approximates fair values because of the short maturity
of these instruments or because they are marked at market.
(b) Investments in Other Healthcare Entities
The carrying amount is not in excess of the approximate fair value based on
Tokos' review of the respective unaudited financial statements from each of
these companies.
(c) Long-Term Debt
The fair value of Tokos' long-term debt is estimated based on the current
rates offered to Tokos for debt of the same remaining maturities.
The estimated fair values of Tokos' financial instruments at December 31,
1993 and 1994 are as follows:
<TABLE>
<CAPTION>
1993 1994
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and equivalents................... $8,710,000 $8,710,000 $9,149,000 $9,149,000
Investments in other healthcare
entities............................. 3,420,000 3,420,000 3,256,000 3,256,000
Short-term investments................. 3,435,000 3,435,000 3,508,000 3,508,000
Long-term debt:
Purchased marketing rights........... 4,000,000 3,421,000 4,000,000 3,779,000
Notes payable to managed companies... -- -- 1,658,000 1,505,000
Note payable to equipment financing
company........................... 1,078,000 1,078,000 873,000 873,000
Other long-term borrowings........... 1,538,000 1,428,000 1,066,000 966,000
</TABLE>
F-20
<PAGE> 156
TOKOS MEDICAL CORPORATION (DELAWARE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1994 1995
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................. $ 9,149,000 $ 6,021,000
Short-term investments............................................ 3,508,000 3,213,000
Accounts receivable (less allowances of $12,900,000 at December
31, 1994 and $9,100,000 at September 30, 1995)................. 23,207,000 18,590,000
Patient service equipment and supplies............................ 1,288,000 1,386,000
Prepaid expenses and other current assets......................... 1,634,000 430,000
----------- -----------
Total current assets...................................... 38,786,000 29,640,000
Equipment and improvements:
Equipment and improvements, at cost............................... 22,311,000 23,413,000
Less accumulated depreciation and amortization.................... 11,903,000 15,058,000
----------- -----------
10,408,000 8,355,000
Other assets........................................................ 9,196,000 9,659,000
----------- -----------
$58,390,000 $47,654,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 3,318,000 $ 1,330,000
Accrued expenses.................................................. 4,381,000 3,811,000
Accrued litigation settlement..................................... 1,450,000 5,000,000
Current portion of long-term debt................................. 6,488,000 3,821,000
----------- -----------
Total current liabilities................................. 15,637,000 13,962,000
Long-term debt, less current portion................................ 2,593,000 2,367,000
Stockholders' equity:
Convertible preferred stock, $.001 par value, 2,000,000 shares
authorized; none issued and outstanding at December 31, 1994
and September 30, 1995......................................... -0- -0-
Common stock, $.001 par value, 60,000,000 shares authorized;
issued, 17,410,468 shares at December 31, 1994 and 17,597,707
shares at September 30, 1995; outstanding 17,254,465 shares at
December 31, 1994 and 17,478,851 shares at September 30,
1995........................................................... 17,000 17,000
Additional paid-in capital........................................ 86,519,000 87,194,000
Notes receivable and accrued interest from officers and
directors...................................................... (3,492,000) (3,506,000)
Accumulated deficit............................................... (42,126,000) (51,808,000)
----------- -----------
40,918,000 31,897,000
Treasury stock, at cost........................................... (758,000) (572,000)
----------- -----------
40,160,000 31,325,000
----------- -----------
$58,390,000 $47,654,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE> 157
TOKOS MEDICAL CORPORATION (DELAWARE)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Net patient service revenues...................................... $76,651,000 $66,993,000
Cost and expenses:
Cost of patient services........................................ 57,703,000 53,130,000
General and administrative...................................... 14,921,000 12,739,000
Provision for doubtful accounts................................. 6,106,000 4,020,000
Research and development........................................ 1,234,000 423,000
Settlement of litigation........................................ -0- 4,300,000
Severance and other expenses.................................... -0- 2,268,000
----------- -----------
79,964,000 76,880,000
----------- -----------
Loss from operations.............................................. (3,313,000) (9,887,000)
Interest expense (income)
Interest expense................................................ 289,000 306,000
Interest income................................................. (297,000) (676,000)
----------- -----------
(8,000) (370,000)
----------- -----------
Loss before taxes................................................. (3,305,000) (9,517,000)
Income taxes...................................................... 125,000 150,000
----------- -----------
Net loss.......................................................... $(3,430,000) $(9,667,000)
========== ==========
Loss per common and common equivalent share....................... $ (.20) $ (.56)
========== ==========
Weighted average number of common and common equivalent shares
outstanding..................................................... 17,156,000 17,343,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 158
TOKOS MEDICAL CORPORATION (DELAWARE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1994 1995
----------- -----------
<S> <C> <C>
Operating activities
Loss.......................................................... $(3,430,000) $(9,667,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 4,216,000 5,048,000
Accrued interest on officer and director notes............. (126,000) (135,000)
Other non-cash items....................................... (144,000) (64,000)
Changes in operating assets and liabilities:
Net accounts receivable.................................... 5,152,000 5,144,000
Patient service equipment and supplies..................... 291,000 (368,000)
Prepaid expenses and other current assets.................. 1,225,000 1,204,000
Accounts payable and accrued expenses...................... 529,000 (2,861,000)
Accrued litigation settlement.............................. -0- 4,300,000
Accrued restructuring charge............................... (4,777,000) (447,000)
----------- -----------
Net cash provided by operating activities....................... 2,936,000 2,154,000
----------- -----------
Investing activities
(Purchases) sales of short-term investments................... (55,000) 295,000
Purchases and construction of equipment and improvements...... (617,000) (1,100,000)
Acquisition of managed companies, net of cash acquired........ -0- 44,000
Payment of note receivable and interest from officer.......... -0- 121,000
Change in other assets........................................ (330,000) (102,000)
----------- -----------
Net cash used by investing activities........................... (1,002,000) (742,000)
----------- -----------
Financing activities
Proceeds from stock option exercises and purchases pursuant to
employee stock purchase plan............................... 148,000 914,000
Purchases of treasury stock................................... (50,000) -0-
Acceptance of note receivable from officer.................... (1,012,000) -0-
Payments of long-term debt.................................... (2,420,000) (5,454,000)
----------- -----------
Net cash used by financing activities........................... (3,334,000) (4,540,000)
----------- -----------
Decrease in cash and equivalents................................ (1,400,000) (3,128,000)
Cash and equivalents at beginning of period..................... 8,710,000 9,149,000
----------- -----------
Cash and equivalents at end of period........................... $ 7,310,000 $ 6,021,000
========== ==========
</TABLE>
F-23
<PAGE> 159
TOKOS MEDICAL CORPORATION (DELAWARE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Tokos paid interest of $288,000 and $277,000 for the nine months ended
September 30, 1994 and 1995, respectively.
Income taxes paid, including prepayments of estimated taxes, totaled
$300,000 and $219,000 for the nine months ended September 30, 1994 and 1995,
respectively.
Tokos entered into agreements to purchase equipment under capital lease
obligations of $0 and $535,000 for the nine months ended September 30, 1994 and
1995, respectively.
See notes to consolidated financial statements.
F-24
<PAGE> 160
TOKOS MEDICAL CORPORATION (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in Tokos' Form 10-K for the year ended
December 31, 1994.
Certain reclassifications of 1994 amounts were made to correspond with 1995
classifications.
2. MERGER
On October 2, 1995, Tokos announced a definitive agreement to merge with
Healthdyne, Inc. The merger will create a new company which has yet to be named,
consisting of the businesses of Tokos and Healthdyne Maternity Management. The
companies expect the merger to be a tax-free transaction with each Tokos share
and each Healthdyne share to be exchanged for one share of the new company.
3. INCOME TAXES
Tokos recorded income tax expense of $150,000 (1.6% of pretax loss) related
to state franchise taxes in the nine months ended September 30, 1995. Federal
and state income tax benefits were not recorded in the first nine months of 1994
and 1995 in order to increase Tokos' valuation allowance, thereby fully
reserving its deferred tax assets. While these operating losses will be
available to offset future taxable income, the recognition of such income tax
benefits has been deferred until Tokos returns to profitability.
4. SEVERANCE AND OTHER EXPENSES
During 1995, as Tokos' revenues continued to decline, specific decisions
were made and communicated by management related to cost reduction efforts in
order to lower Tokos' break even point. The cost reduction plan consisted of
reductions in Tokos' workforce of approximately 105 employees, comprised of
personnel within information systems, reimbursement, administrative support and
to a lesser extent clinical service, and termination of several facility leases.
In connection with these cost reduction activities, Tokos incurred through
September 30, 1995, $2.3 million in expenses, $100,000 of which constituted an
accrual for future severance payments. The components of the $2.3 million in
expenses include $1.8 million related to involuntary severance costs of affected
employees, $228,000 related to the consolidation of facilities and $206,000 in
other related costs. During the first nine months of 1995, $2.2 million in
severance and other costs were expended with an accrual at September 30, 1995 of
$100,000 related to future severance payments.
5. LITIGATION AND CONTINGENCIES
In July 1995, Tokos reached a $10 million settlement with the plaintiffs in
a class action securities suit entitled In re Tokos Medical Corporation
Securities Litigation filed in the United States District Court for the Central
District of California. Tokos' cost of settlement, after adjustment for
insurance proceeds directly deposited in an escrow account pursuant to the
settlement agreement, was $5.75 million in cash and stock. Tokos has paid
$750,000 cash, with the remaining $5.0 million payable in cash or by the
issuance of common stock. The charge to income of $4.3 million ($0.25 per share)
during the quarter ended June 30, 1995 is in addition to an aggregate amount of
$1.45 million which had been previously accrued in general and administrative
expense. In the settlement, Tokos denied any wrongdoing or liability. The terms
of the settlement must be approved by the court before the settlement is
effective. If Tokos elects to issue common
F-25
<PAGE> 161
TOKOS MEDICAL CORPORATION (DELAWARE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
stock in settlement of this obligation, the fair market value of the shares
issued may exceed $5.0 million. It is Tokos present intention to pay the $5.0
million in cash, either from borrowings under its line of credit or from funds
made available as a result of the proposed merger with Healthdyne.
Tokos is subject to certain claims arising in the normal course of
business. In management's opinion, any such contingencies would not materially
affect Tokos' financial position or operating results.
F-26
<PAGE> 162
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Healthdyne, Inc.:
We have audited the accompanying consolidated balance sheets of Healthdyne,
Inc. and subsidiaries as of December 31, 1993 and 1994, and the related
consolidated statements of earnings (loss), shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of Healthdyne's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Healthdyne,
Inc. and subsidiaries at December 31, 1993 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 17, 1995, except as to note 15
which is as of December 15, 1995
F-27
<PAGE> 163
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
(AMOUNTS IN
THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 3,615 $ 14,700
Short-term investments............................................... -- 29,816
Trade accounts receivable, less allowances of $4,510 and $6,146 at
December 31, 1993 and 1994, respectively.......................... 20,149 14,483
Inventories.......................................................... 398 532
Prepaid expenses and other current assets............................ 5,044 4,279
Deferred income taxes (note 7)....................................... 184 1,027
Refundable income taxes (note 7)..................................... 295 --
Assets held for disposition, net (notes 2 and 15).................... 59,388 33,785
-------- --------
Total current assets......................................... 89,073 98,622
Property and equipment, net (note 3)................................... 13,297 12,449
Excess of cost over net assets of businesses acquired, less accumulated
amortization of $102 and $187 at December 31, 1993 and 1994,
respectively (note 2)................................................ 3,069 3,260
Other assets........................................................... 4,572 2,604
-------- --------
$110,011 $116,935
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 164
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
(AMOUNTS IN
THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations under capital
leases (note 4)................................................... $ 712 $ 715
Accounts payable, principally trade.................................. 1,273 2,225
Accrued liabilities (notes 5 and 13)................................. 12,635 12,802
-------- --------
Total current liabilities.................................... 14,620 15,742
Long-term debt and obligations under capital leases, excluding current
installments (note 4)................................................ 13,612 3,213
Other long-term liabilities............................................ 4,232 4,158
-------- --------
Total liabilities............................................ 32,464 23,113
-------- --------
Minority interest...................................................... 856 558
Shareholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 2,250 shares; issued
none.............................................................. -- --
Common stock, $.01 par value. Authorized 25,000 shares; issued and
outstanding 15,192 shares and 15,277 shares at December 31, 1993
and 1994, respectively............................................ 152 153
Additional paid-in capital........................................... 110,656 111,059
Accumulated deficit.................................................. (34,117) (17,948)
-------- --------
Total shareholders' equity................................... 76,691 93,264
Commitments and contingencies (notes 2, 9, 11, and 12)
-------- --------
$110,011 $116,935
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 165
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1992 1993 1994
------- ------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.......................................................... $69,269 $67,555 $66,407
Cost of revenues.................................................. 26,014 27,991 27,618
------- ------- -------
Gross profit................................................. 43,255 39,564 38,789
Selling and administrative expenses............................... 37,111 38,795 36,698
Provision for doubtful accounts................................... 7,271 7,044 5,368
Restructuring expenses and other charges (note 13)................ 3,800 -- --
Research and development expenses................................. 646 886 554
------- ------- -------
Operating loss............................................... (5,573) (7,161) (3,831)
Interest income................................................... 210 119 1,173
Interest expense.................................................. (819) (1,306) (596)
Minority interest in net earnings of partnerships................. (1,615) (1,096) (655)
Other expense, net................................................ (434) (998) (77)
------- ------- -------
Loss from continuing operations before income tax benefit.... (8,231) (10,442) (3,986)
Income tax benefit (note 7)....................................... (2,581) (2,790) (2,178)
------- ------- -------
Loss from continuing operations.............................. (5,650) (7,652) (1,808)
Earnings from discontinued operations:
Operating earnings, net of income tax expense (benefit) of $977,
$(3,096), and $2,574 in 1992, 1993, and 1994, respectively... 2,153 10,794 647
Gain on sale of subsidiary stock, net of income taxes of $4,070
(note 6)..................................................... -- 5,480 --
Gain on sale of subsidiary, net of income taxes of $456 (note
2)........................................................... -- -- 17,330
------- ------- -------
Earnings from discontinued operations........................ 2,153 16,274 17,977
------- ------- -------
Net earnings (loss)..................................... $(3,497) $ 8,622 $16,169
======= ======= =======
Net earnings (loss) per common share and common share equivalent:
Loss from continuing operations................................. $ (.36) $ (.50) $ (.12)
Earnings from discontinued operations........................... .14 1.07 1.17
------- ------- -------
Net earnings (loss)..................................... $ (.22) $ .57 $ 1.05
======= ======= =======
Weighted average number of common shares and common share
equivalents..................................................... 15,576 15,212 15,335
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 166
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
--------------- PAID-IN ACCUMULATED ---------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
------ ------ ---------- ----------- ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991........... 15,228 $152 $119,105 $ (39,242) -- $ -- $80,015
Issuance of common stock:
Exercise of options and warrants... 233 3 1,185 -- -- -- 1,188
Employee Stock Purchase Plan....... 32 -- 337 -- -- -- 337
Purchase of treasury stock........... -- -- -- -- 407 (8,288) (8,288)
Retirement of treasury stock......... (407) (4) (8,284) -- (407) 8,288 --
Purchase of treasury stock by
subsidiary......................... -- -- (6,865) -- -- -- (6,865)
Decrease in minority interest in
subsidiary, net of investment
effect, resulting from purchase of
treasury stock by subsidiary....... -- -- 3,598 -- -- -- 3,598
Conversion of 8% subordinated
debentures into common stock....... 37 -- 668 -- -- -- 668
Increase in investment in subsidiary,
net of minority interest effect,
resulting from exercise of
subsidiary
stock options...................... -- -- 538 -- -- -- 538
Net loss............................. -- -- -- (3,497) -- -- (3,497)
------ ------ ---------- ----------- ------ ------- -------------
Balance, December 31, 1992........... 15,123 151 110,282 (42,739) -- -- 67,694
Issuance of common stock:
Exercise of options................ 14 -- 72 -- -- -- 72
Employee Stock Purchase Plan....... 55 1 302 -- -- -- 303
Net earnings......................... -- -- -- 8,622 -- -- 8,622
------ ------ ---------- ----------- ------ ------- -------------
Balance, December 31, 1993, carried
forward............................ 15,192 $152 $110,656 $ (34,117) -- $ -- $76,691
====== ======= ========= =========== ====== ======== ===========
</TABLE>
(Continued)
F-31
<PAGE> 167
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
--------------- PAID-IN ACCUMULATED --------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
------ ------ ---------- ----------- ------ ------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, brought
forward............................ 15,192 $152 $110,656 $ (34,117) -- $ -- $76,691
Issuance of common stock:
Exercise of options................ 49 1 253 -- -- -- 254
Employee Stock Purchase Plan....... 36 -- 190 -- -- -- 190
Purchase of treasury stock by
subsidiary......................... (105) (105)
Decrease in minority interest in
subsidiary, net of investment
effect, resulting from purchase of
treasury stock by
subsidiary......................... -- -- 38 -- -- -- 38
Increase in investment in subsidiary,
net of minority interest effect,
resulting from exercise of
subsidiary stock options........... 27 27
Net earnings................ -- -- -- 16,169 -- -- 16,169
------ ------ ---------- ----------- ------ ------ -------------
Balance, December 31, 1994........... 15,277 $153 $111,059 $ (17,948) -- $ -- $93,264
====== ======= ========= =========== ====== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 168
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1992 1993 1994
-------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations............................... $ (5,650) $(7,652) $ (1,808)
Adjustments to reconcile loss from continuing operations to
net cash provided by (used in) operating activities:
Depreciation and amortization.............................. 2,906 4,091 4,218
Provision for doubtful accounts............................ 7,271 7,044 5,368
Minority interest in net earnings of partnerships.......... 1,615 1,096 655
Unrealized loss on short-term investments.................. -- -- 588
Purchases of short-term investments........................ -- -- (105,717)
Sales of short-term investments............................ -- -- 75,313
Deferred income taxes...................................... 175 (2,650) (843)
(Increase) decrease in:
Trade accounts receivable.................................. (11,707) (5,211) 298
Inventories................................................ 95 585 (134)
Refundable income taxes.................................... -- (295) 295
Other assets............................................... 3,738 5,692 2,688
Increase (decrease) in:
Accounts payable........................................... 1,091 (1,298) 952
Accrued and other liabilities.............................. 2,874 4,021 93
Discontinued operations, net............................... 11,528 (1,143) (6,585)
------- ------- -------
Net cash provided by (used in) operating activities... 13,936 4,280 (24,619)
------- ------- -------
Cash flows from investing activities:
Purchase of minority interest in partnerships................. (1,128) (857) (276)
Purchases of property and equipment........................... (6,314) (5,012) (3,240)
Proceeds from sale of subsidiary.............................. -- -- 61,230
Discontinued operations, net.................................. (16,168) 2,873 (24,905)
------- ------- -------
Net cash provided by (used in) investing activities... $(23,610) $(2,996) $ 32,809
------- ------- -------
</TABLE>
(Continued)
F-33
<PAGE> 169
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1992 1993 1994
------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under revolving credit agreement.................... $22,000 $30,000 $ 2,000
Repayments under revolving credit agreement.................... (7,000) (37,000) (13,000)
Proceeds from issuance of long-term debt....................... 999 1,169 1,227
Principal repayments of long-term debt and obligations under
capital leases.............................................. (1,144) (1,354) (623)
Proceeds from issuance of common stock of Company and common
stock of subsidiary......................................... 2,345 375 509
Purchase of treasury stock..................................... (8,288) -- --
Purchase of treasury stock by subsidiary....................... (6,865) -- (105)
Capital contributions from minority interest in partnerships... 310 270 --
Distribution to minority interest in partnerships.............. (522) (1,732) (953)
Discontinued operations, net................................... 7,883 3,296 13,840
------- -------- --------
Net cash provided by (used in) financing activities.... 9,718 (4,976) 2,895
------- -------- --------
Net increase (decrease) in cash and cash equivalents... 44 (3,692) 11,085
Cash and cash equivalents at beginning of year................... 7,263 7,307 3,615
------- -------- --------
Cash and cash equivalents at end of year......................... $ 7,307 $ 3,615 $ 14,700
======= ======== ========
Supplemental disclosures of cash paid for:
Interest....................................................... $ 785 $ 1,293 $ 363
======= ======== ========
Income taxes................................................... $ 116 $ 183 $ 1,138
======= ======== ========
Supplemental disclosure of noncash financing
activity -- conversion of 8% convertible subordinated
debentures..................................................... $ 668 $ -- $ --
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 170
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 1992, 1993, AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
During 1994, Healthdyne, Inc. ("Healthdyne") provided a diversified line of
home health care services and products through three major subsidiaries. Its
81%-owned Healthdyne Technologies, Inc. ("Technologies") subsidiary manufactures
medical products for use in the home; its wholly owned Perinatal Services, Inc.
subsidiary, doing business as Healthdyne Maternity Management ("HMM"), provides
home pregnancy monitoring and related home obstetrical care; and its wholly
owned Healthdyne Information Enterprises, Inc. ("HIE") subsidiary provides
clinical information systems and management services to physicians and other
health care networks. Additionally, through March 1994, Healthdyne owned a 68%
interest in Home Nutritional Services, Inc. ("HNS"), a home infusion therapy
provider (see note 2). In 1995, Healthdyne distributed its ownership of
Technologies and HIE to its shareholders (see note 15).
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and income and expenses for the period.
The consolidated financial statements include the accounts of Healthdyne,
Inc. and all of its majority owned subsidiaries and partnerships. All
significant intercompany balances and transactions have been eliminated in
consolidation. The results of operations of HNS, Technologies, and HIE are shown
as discontinued operations for all years presented.
(c) Revenues and the Allowance for Uncollectible Accounts
Revenues are derived from the pregnancy monitoring process, the infusion
therapy process, and the rental of medical products. Revenues are recognized as
the related services are rendered and are net of estimated contractual
allowances and related discounts. A significant portion of Healthdyne's revenues
are billed to third-party reimbursement sources. Accordingly, the ultimate
collectibility of a substantial portion of Healthdyne's trade accounts
receivable is susceptible to changes in third-party reimbursement policies.
A provision for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon Healthdyne's evaluation of
current industry conditions, historical collection experience, and other
relevant factors which, in the opinion of management, deserve recognition in
estimating the allowance for uncollectible accounts.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest bearing deposits.
For purposes of the statements of cash flows, Healthdyne considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(e) Short-Term Investments
Short-term investments at December 31, 1994 consist of United States
Government and municipal bonds. Healthdyne adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," on January 1, 1994. Under that statement,
Healthdyne classifies its short-term investments as trading securities with
unrealized gains and
F-35
<PAGE> 171
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses included in earnings. Unrealized losses of $588 are included in the
consolidated statements of earnings (loss) for the year ended December 31, 1994.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(g) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided primarily on the straight-line method
over the estimated useful lives of the assets ranging from 2 to 10 years.
Amortization of leasehold improvements and leased equipment is recorded over the
shorter of the lives of the related assets or the lease terms.
(h) Excess of Cost Over Net Assets of Businesses Acquired
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized using the straight-line method over periods ranging from 30 to
40 years. At each balance sheet date, Healthdyne assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based upon projected discounted future operating cash flows using a
discount rate reflecting Healthdyne's average cost of funds.
(i) Income Taxes
Healthdyne accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109). Under SFAS 109, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Additionally, the effect on deferred taxes of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
Investment and research and experimental tax credits are accounted for on
the flow-through method.
(j) Sales of Subsidiary Stock
Healthdyne has elected to record gains and losses from sales of subsidiary
stock as a component of earnings.
(k) Earnings Per Share of Common Stock
Primary earnings per common share and common share equivalent are based on
the weighted average number of shares outstanding, common share equivalents
derived from dilutive stock options and warrants, and an adjustment, if any, to
reflect the dilutive stock options of HNS, HMM, and Technologies. Fully diluted
earnings per share are calculated taking into consideration the effect of
convertible subordinated debentures and an adjustment, if any, to reflect the
dilutive stock options of HNS, HMM, and Technologies on a fully diluted basis.
Fully diluted earnings per share are not significantly different from primary
earnings per share.
(l) Reclassifications
Certain amounts in the 1992 and 1993 consolidated financial statements have
been reclassified to conform to presentations adopted in 1994.
F-36
<PAGE> 172
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS, DIVESTITURES, AND DISCONTINUED OPERATIONS
In August 1992, HMM purchased the minority interest in a partnership from
the other partner for $1,128 in cash and a $1,000 promissory note. This
transaction resulted in excess of cost over net assets acquired of approximately
$2,000.
During 1993, HMM purchased the minority interest from other partners in
three separate partnerships. The total cash paid to the other partners was $857
plus additional consideration based upon future cash receipts of the acquired
partnerships through June 30, 1995. The acquisition resulted in excess of cost
over net assets acquired of approximately $571. In 1994, in accordance with the
terms of the purchase agreements, and based upon cash receipts of the
partnerships, additional consideration of $265 was earned and paid, which was
recorded as additional excess of cost over net assets acquired. Additional
consideration to be paid in 1995, if any, will be recorded as additional excess
of cost over net assets acquired.
In March 1994, HNS entered into an Agreement and plan of merger and
Healthdyne entered into a Stock Purchase Agreement with W.R. Grace & Co.
pursuant to which a subsidiary of W.R. Grace & Co. purchased all of the
outstanding shares of common stock of HNS for $7.85 per share in cash.
Healthdyne sold its 7,800,000 shares of HNS in the transaction. The sale
resulted in cash proceeds to Healthdyne of approximately $61,000 and an
after-tax gain of approximately $17,330. As a result of this transaction,
Healthdyne has reclassified the results of operations of HNS for the years ended
December 31, 1992, 1993, and 1994 as earnings from discontinued operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
<S> <C> <C>
Rental assets.................................................. $ 13,297 $ 16,334
Machinery, equipment, and fixtures............................. 12,154 12,877
Equipment under capital leases................................. 541 --
Leasehold improvements......................................... 759 781
-------- --------
26,751 29,992
Less accumulated depreciation and amortization................. (13,454) (17,543)
-------- --------
$ 13,297 $ 12,449
======== ========
</TABLE>
F-37
<PAGE> 173
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1993 1994
------- ------
<S> <C> <C>
Payable to banks under revolving credit agreement
(see description following)....................................... $11,000 $ --
Convertible subordinated debentures and note (net of discount of
$278 and $261 at December 31, 1993 and 1994, respectively);
interest at 8% payable annually; maturing on December 31, 2001;
convertible into Healthdyne's common stock at $4.90 per share;
redeemable by Healthdyne at face value............................ 2,012 2,029
Unsecured promissory note issued in connection with buyout of
minority partnership interest; interest at 9% payable annually;
principal payable in five annual installments beginning August
1993.............................................................. 800 600
Other debt; interest ranging from approximately 5% to 10%; a portion
secured by rental assets and other property; payable in monthly
installments through 1999......................................... 423 1,299
Obligations under capital leases -- equipment leases................ 89 --
------- ------
Total long-term debt and obligations under capital
leases.................................................. 14,324 3,928
Less current installments........................................... 712 715
------- ------
Long-term debt and obligations under capital leases,
excluding current installments.......................... $13,612 $3,213
======= ======
</TABLE>
Approximate aggregate minimum annual payments due on long-term debt for the
five years subsequent to December 31, 1994 are as follows: 1995, $715; 1996,
$360; 1997, $376; 1998, $195; 1999, $253; and thereafter $2,029.
In August 1992, HMM entered into a revolving credit agreement with two
banks. The balance outstanding under HMM's credit agreement was repaid in full
during 1994 using a portion of the proceeds from the sale of HNS and was then
terminated.
(5) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
------- -------
<S> <C> <C>
Accrued salaries, wages, and incentives.......................... $ 3,384 $ 3,683
Deferred rent expense............................................ 1,039 956
Reserve for deferred tax asset................................... -- 1,027
Other............................................................ 8,212 7,136
------- -------
$12,635 $12,802
======= =======
</TABLE>
(6) SALE OF COMMON STOCK OF SUBSIDIARY
In June 1993, Technologies, a wholly owned subsidiary of Healthdyne, sold
1,753,750 shares of its unissued common stock in an initial public offering.
Proceeds from the offering, net of underwriters' commissions and other expenses,
were approximately $14,715 to Technologies. As a result of the offering,
Healthdyne's ownership percentage of Technologies was reduced to 81%. This
transaction resulted in a gain of $9,550 before deferred income taxes of $4,070.
F-38
<PAGE> 174
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
The components of income tax benefit relating to continuing operations are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Current expense (benefit):
Federal............................................. $(2,581) $(2,867) $(2,178)
State............................................... -- 77 --
------- ------- -------
Total income tax benefit.................... (2,581) (2,790) (2,178)
------- ------- -------
</TABLE>
Prior years' net operating losses in the amount of approximately $19,381
were utilized in 1994 to offset taxable income from discontinued operations for
financial reporting purposes.
Below is a reconciliation of the expected income tax benefit -- (based on
the U.S. Federal statutory income tax rate of 34% in 1992 and 35% in 1993 and
1994) to the actual income tax benefit from continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Computed expected income tax benefit...................... $(2,799) $(3,655) $(1,395)
State income taxes, net of Federal income tax effect.... 16 -- --
Losses in excess of allowable carrybacks................ -- 838 --
Nontaxable municipal interest income.................... -- -- (420)
Nondeductible expenses.................................. 74 138 250
Prior years' tax loss carryover utilized................ -- -- (585)
Other, net.............................................. 128 (111) (28)
------- ------- -------
Income tax benefit...................................... $(2,581) $(2,790) $(2,178)
======= ======= =======
</TABLE>
At December 31, 1994, Healthdyne had the following estimated credit and
operating loss carryforwards available for Federal income tax reporting purposes
to be applied against future taxable income and tax liabilities:
<TABLE>
<CAPTION>
NET
YEAR OF INVESTMENT R&E OPERATING
EXPIRATION TAX CREDIT CREDIT LOSS
- ---------- ---------- ------ ---------
<S> <C> <C> <C> <C>
1995........................................................... $ -- $ 78 $ --
1997........................................................... 76 260 --
1998........................................................... 54 230 --
1999........................................................... 113 -- --
2005........................................................... -- -- 1,465
2006........................................................... -- -- 4,591
2007........................................................... -- -- 3,273
---------- ------ ---------
$243 $ 568 $ 9,329
======== ==== =======
</TABLE>
The net operating loss carryforward of $9,329 includes deductions of
approximately $4,475 related to the exercise of stock options which will be
credited to additional paid-in capital when recognized. Healthdyne also has
available alternative minimum tax (AMT) credit carryforwards of approximately
$1,027 available to offset regular income tax, if any, in future years. The AMT
credit carryforwards do not expire.
At December 31, 1993 and 1994, Healthdyne had deferred tax assets of
approximately $23,091 and $8,034, respectively, before valuation allowances of
approximately $22,907 and $7,007, respectively. The
F-39
<PAGE> 175
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
valuation allowance is based on the likelihood that a substantial portion of the
deferred tax asset will not be realized. The decrease in the valuation allowance
of $15,900 during 1994 was primarily the result of the use of prior years' net
operating losses to offset the gain on the sale of HNS.
At December 31, 1993 and 1994 current deferred income taxes consist of
future tax benefits attributable to:
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Assets (liabilities):
Allowance for doubtful accounts.................................. $ 1,804 $ 2,333
Accruals and reserves not deducted for tax purposes.............. 2,710 2,276
Depreciation..................................................... (1,170) (1,893)
Net operating loss carryforwards................................. 18,805 3,541
Credit carryforwards............................................. 942 1,777
------- -------
Total.................................................... 23,091 8,034
Less valuation allowance........................................... 22,907 7,007
------- -------
Net deferred tax asset................................... $ 184 $ 1,027
======= =======
</TABLE>
The net deferred tax asset at December 31, 1993 and 1994 relates primarily
to Healthdyne's AMT credit carryforward. Management believes that the deferred
tax asset will be realized by the reduction of future years' income tax for tax
reporting purposes as the temporary differences reverse.
The AMT net operating loss carryforward approximates the regular tax net
operating loss carryforward.
(8) SHAREHOLDERS' EQUITY
Stock Option Plans
Healthdyne maintains six stock option plans for the benefit of key
employees and nonemployee directors. Terms of options granted under the plans
are determined by the Stock Option Committee of the Board of Directors, subject
to the terms of the respective plans. A summary of stock option transactions
under these plans is shown below:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Options outstanding at December 31, 1991....................... 958,064
Granted...................................................... 195,035 $ 2.41-7.30
Exercised.................................................... (113,084) .71-4.40
Canceled or expired.......................................... (28,737) .71-4.47
---------
Options outstanding at December 31, 1992....................... 1,011,278
Granted...................................................... 741,250 1.93-2.20
Exercised.................................................... (13,748) .87-1.79
Canceled or expired.......................................... (68,338) 1.42-6.24
---------
Options outstanding at December 31, 1993....................... 1,670,442
Granted...................................................... 808,000 1.65-2.36
Exercised.................................................... (49,304) 1.41-2.16
Canceled or expired.......................................... (278,354) 1.42-7.30
---------
Options outstanding at December 31, 1994....................... 2,150,784
========
</TABLE>
Stock options exercisable pursuant to these plans were for approximately
472,000 shares, 690,000 shares and 1,036,000 shares at December 31, 1992, 1993,
and 1994, respectively.
F-40
<PAGE> 176
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
In connection with a 1984 restructure of a revolving credit agreement,
Healthdyne issued warrants to purchase 210,000 shares of Healthdyne's common
stock at $1.70 per share (exercisable on March 1, 1986 and expiring on March 1,
1995) to certain lenders. During 1992, 120,000 of these warrants were exercised.
As of December 31, 1994, 90,000 of such warrants remain outstanding.
In order to take advantage of certain changes in Georgia Corporation Code,
in January 1993, Healthdyne's Board of Directors approved a revised Rights
Agreement dated February 26, 1993 pursuant to which a dividend distribution of
one purchase right for each share of Healthdyne's common stock outstanding as of
March 1, 1993 was declared. If a person or group acquires beneficial ownership
of 15% or more of Healthdyne's outstanding common stock or announces a tender
offer or exchange that would result in the acquisition of a beneficial ownership
of 20% or more of Healthdyne's outstanding common stock, the rights detach from
the common stock and are distributed to shareholders as separate securities.
Each right entitles its holder to purchase one one-hundredth of a share (a unit)
of Series C Cumulative Preferred Stock, at a purchase price of $61 per unit. The
rights, which do not have voting power, expire on March 1, 2003 unless
previously distributed and may be redeemed by Healthdyne in whole at a price of
$.01 per right any time before and within 10 days after their distribution. If
Healthdyne is acquired in a merger or other business combination transaction, or
50% of its assets or earnings power are sold at any time after the rights become
exercisable, the rights entitle a holder to buy a number of common shares of the
acquiring company having a market value of twice the exercise price of the
right. If a person acquires 20% of Healthdyne's common stock or if a 15% or
larger holder merges with Healthdyne and the common stock is not changed or
exchanged in such merger, or engages in self-dealing transactions with
Healthdyne, each right not owned by such holder becomes exercisable for the
number of common shares of Healthdyne having a market value of twice the
exercise price of the right.
(9) EMPLOYEE BENEFIT PLANS
Healthdyne maintains a 401(k) defined contribution plan for the benefit of
its employees. Healthdyne's obligation for contributions under the 401(k) plan
is limited to the lesser of (i) one-half of each participant's contributions but
not more than 2.5% of the participant's salary or (ii) 20% of Healthdyne's
pretax earnings before consideration of this contribution. Discretionary Company
contributions are allowed under the plan. Contributions to the plan for the
years ended December 31, 1992, 1993, and 1994 were approximately $196, $205, and
$194, respectively.
Healthdyne maintains an Employee Stock Purchase Plan (the "Purchase Plan")
to encourage ownership of its common stock by employees. The Purchase Plan
provides for the purchase of up to 500,000 shares of Healthdyne's common stock
by eligible employees of Healthdyne and its subsidiaries. Under the Purchase
Plan, Healthdyne may conduct an offering each fiscal quarter of its common stock
to eligible employees. The participants in the Purchase Plan can elect to
purchase common stock at the lower of 85% of the fair market value per share on
either the first or last business day of the quarter, limited to 10% of the
employee's compensation. A participant immediately ceases to be a participant in
the Purchase Plan upon termination of his or her employment for any reason.
During 1992, 1993, and 1994, respectively, 32,163, 55,409, and 35,426 shares of
common stock were issued under the Purchase Plan.
F-41
<PAGE> 177
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that Healthdyne
disclose estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for Healthdyne's
financial instruments.
(a) Cash and Cash Equivalents and Short-Term Investments
The carrying amount approximates fair value because of the short maturity
of these instruments or because they are marked to market.
(b) Long-Term Debt
The fair value of Healthdyne's long-term debt is estimated based on the
current rates offered to Healthdyne for debt of the same remaining maturities.
The estimated fair values of Healthdyne's financial instruments at December
31, 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
1993 1994
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 3,615 $ 3,615 $ 14,700 $14,700
Short-term investments.......................... -- -- 29,816 29,816
Long-term debt:
Revolving credit agreement.................... (11,000) (11,000) -- --
Subordinated debentures....................... (2,012) (2,740) (2,029) (2,367)
Promissory notes.............................. (800) (904) (600) (635)
Other long-term borrowings.................... (512) (498) (1,299) (1,263)
</TABLE>
(11) COMMITMENTS
Healthdyne is committed under noncancelable operating lease agreements for
facilities and equipment. The future minimum annual lease payments under these
leases for the next five years and in the aggregate are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ------------------------------------------------------------------------------------
<S> <C>
1995...................................................................... $3,217
1996...................................................................... 2,728
1997...................................................................... 659
1998...................................................................... 23
1999 and thereafter....................................................... --
------
$6,627
======
</TABLE>
Rental expense for cancelable and noncancelable leases was approximately
$1,752, $2,452, and $2,551 for the years ended December 31, 1992, 1993, and
1994, respectively.
(12) CONTINGENCIES
Healthdyne and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, based in part on the advice of counsel, the ultimate disposition of
these matters will not have a material adverse effect on Healthdyne's
consolidated balance sheet, results of operations, or liquidity.
F-42
<PAGE> 178
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
Eastern District of Missouri against Healthdyne and its former subsidiary HNS
alleging that The Lindner Fund would not have sold its investment in HNS on
February 8, 1994 had Healthdyne and HNS disclosed the potential sale of HNS.
Damages have been requested in the amount of $1,051, representing the aggregate
difference between the price received upon the sale of such stock by The Lindner
Fund and the $7.85 per share price paid by W.R. Grace & Co. on April 6, 1994 for
HNS. Healthdyne has denied the allegations set forth in the complaint and is
currently defending the matter vigorously.
HMM has entered into several partnership agreements which contain
provisions which would require them to purchase the other partners' interest
upon the occurrence of certain events, principally a change in law that
prohibits the type of structure that these partnerships utilize. These buyout
provisions generally provide for a predetermined formula to establish the
purchase price, with payout of the purchase price over a period of five years.
If all of these buyouts had been required at December 31, 1994, Healthdyne's
liability would have been approximately $2,400.
(13) RESTRUCTURING EXPENSES AND OTHER CHARGES
During 1992, HMM incurred restructuring charges of $3,800 relating to a
realignment of the field organizational structure, including the closing of
certain facilities, and a reserve for inventory of rental equipment.
A summary of the components of the 1992 restructuring charges follows:
<TABLE>
<S> <C>
Estimated losses to be incurred by certain facilities prior to closing...... $2,043
Employee severance.......................................................... 398
Training and process improvement............................................ 450
Write-off of excess inventory............................................... 418
Other....................................................................... 491
------
$3,800
======
</TABLE>
The following restructuring costs were included in accrued liabilities at
December 31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
------ ----
<S> <C> <C>
Estimated losses to be incurred by certain facilities prior to
closing........................................................... $1,267 $447
Employee severance.................................................. 42 --
------ ----
$1,309 $447
====== ====
</TABLE>
F-43
<PAGE> 179
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1993:
Revenues................................................ $15,567 $17,265 $17,533 $17,190
Gross profit............................................ 8,697 10,203 10,552 10,112
Loss from continuing operations......................... (2,662) (2,939) (784) (1,267)
Earnings from discontinued operations................... 1,983 6,571 1,246 6,474*
Net earnings (loss) per common share and common share
equivalent:
Loss from continuing operations...................... (.17) (.20) (.05) (.08)
Earnings from discontinued operations................ .13 .43 .08 .43*
1994:
Revenues................................................ $15,433 $16,486 $17,183 $17,305
Gross profit............................................ 8,846 9,923 9,956 10,064
Earnings (loss) from continuing operations.............. (1,178) (659) 42 (13)
Earnings (loss) from discontinued operations............ (777) 18,721 688 (655)
Net earnings (loss) per common share and common share
equivalent:
Earnings (loss) from continuing operations........... (.08) (.04) .00 .00
Earnings (loss) from discontinued operations......... (.05) 1.22 .05 (.04)
</TABLE>
- ---------------
* The fourth quarter of 1993 includes an adjustment to reduce the deferred
income tax liability due to the implementation of certain tax planning
strategies.
(15) SUBSEQUENT EVENTS
On May 22, 1995, Healthdyne distributed its 81% ownership of its
subsidiary, Technologies, to the shareholders of record of Healthdyne on May 5,
1995 in a tax free distribution. On November 6, 1995, Healthdyne completed its
distribution of its wholly-owned subsidiary HIE to its shareholders of record on
October 30, 1995, in a taxable distribution. As a result of these spin-off
transactions, Healthdyne's consolidated financial statements reflect the results
of operations of Technologies and HIE as discontinued operations.
On October 2, 1995, Healthdyne and Tokos Medical Corporation (Delaware)
("Tokos") entered into an Agreement and Plan of Merger providing for a merger
(the "Merger") of Healthdyne and Tokos. The Merger is expected to be a tax free
transaction with each Healthdyne and each Tokos share to be exchanged for one
share of the new company, Matria Healthcare, Inc. It is anticipated the
transaction will be completed in early 1996, subject to certain conditions and
shareholder approval of each company.
F-44
<PAGE> 180
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 14,700 $ 83
Short-term investments............................................. 29,816 29,867
Trade accounts receivable, less allowances of $6,146 at December
31, 1994 and $7,856 at September 30, 1995....................... 14,483 12,767
Inventories........................................................ 532 1,015
Deferred income taxes.............................................. 1,027 1,100
Prepaid expenses and other current assets.......................... 4,279 5,740
Net assets of discontinued operations.............................. 33,785 17,809
------------ -------------
Total current assets....................................... 98,622 68,381
------------ -------------
Property and equipment............................................... 21,609 21,440
Less accumulated depreciation and amortization..................... (9,160) (8,524)
------------ -------------
Property and equipment, net..................................... 12,449 12,916
------------ -------------
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $187 at December 31, 1994 and
$285 at September 30, 1995......................................... 3,260 5,004
Other assets......................................................... 2,604 3,381
------------ -------------
$116,935 $89,682
========== ==========
</TABLE>
F-45
<PAGE> 181
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations under
capital leases.................................................. $ 715 $ 1,082
Accounts payable, principally trade................................ 2,225 1,826
Accrued liabilities................................................ 12,802 13,441
------------ -------------
Total current liabilities.................................. 15,742 16,349
Long-term debt and obligations under capital leases, excluding
current installments............................................... 3,213 3,335
Other long-term liabilities.......................................... 4,158 4,043
------------ -------------
Total liabilities.......................................... 23,113 23,727
------------ -------------
Minority interest in partnerships.................................... 558 570
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 2,250 shares; issued
none
Common stock, $.01 par value. Authorized 25,000 shares; issued
15,277 shares at December 31, 1994 and 15,636 shares at
September 30, 1995.............................................. 153 156
Additional paid-in capital......................................... 111,059 86,994
Accumulated deficit................................................ (17,948) (21,765)
------------ -------------
Total shareholders' equity................................. 93,264 65,385
------------ -------------
$116,935 $89,682
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-46
<PAGE> 182
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1994 1995
------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues............................................................. $49,102 $51,935
Cost of revenues..................................................... 20,377 21,280
------- -------
Gross profit....................................................... 28,725 30,655
Selling and administrative expenses.................................. 27,374 28,549
Provision for doubtful accounts...................................... 4,480 3,123
Research and development expenses.................................... 470 243
------- -------
Operating loss..................................................... (3,599) (1,260)
Interest income...................................................... 890 1,672
Interest expense..................................................... (499) (249)
Other income (expense), net.......................................... (48) 5
Minority interest in net earnings of partnerships.................... (520) (581)
------- -------
Loss from continuing operations before income taxes................ (3,776) (413)
Income tax benefit................................................... (2,567) (863)
------- -------
Earnings (loss) from continuing operations........................... (1,209) 450
Earnings (loss) from discontinued operations:
Operating earnings (loss), net of income tax expense of $1,736 and
$736 for the nine months ended September 30, 1994 and 1995,
respectively.................................................... 716 (1,730)
Gain (loss) on disposal of subsidiaries............................ 17,330 (2,537)
------- -------
Earnings (loss) from discontinued operations, net of taxes......... 18,046 (4,267)
------- -------
Net earnings (loss)........................................ $16,837 $(3,817)
======= =======
Net earnings (loss) per common share and common share equivalent:
Earnings (loss) from continuing operations......................... $ (.08) $ .03
Earnings (loss) from discontinued operations....................... 1.18 (.28)
------- -------
Net earnings (loss)........................................ $ 1.10 $ (.25)
======= =======
Weighted average number of common shares and common share
equivalents........................................................ 15,298 15,348
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-47
<PAGE> 183
HEALTHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1994 1995
------- --------
(AMOUNTS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Earnings (loss) from continuing operations............................ $(1,209) $ 450
Adjustments to reconcile earnings (loss) from continuing operations to
net cash used in operating activities:
Depreciation and amortization...................................... 2,874 3,131
Provision for doubtful accounts.................................... 4,480 3,123
Minority interest in net earnings of partnerships.................. 520 581
Unrealized (gain) loss on short-term investments................... 249 (375)
Purchases of short-term investments................................ (97,882) (26,794)
Sales of short-term investments.................................... 67,663 27,118
(Increase) decrease in:
Trade accounts receivable.......................................... 252 (1,407)
Inventories........................................................ (319) (483)
Other assets....................................................... 1,105 (1,040)
Increase (decrease) in:
Accounts payable................................................... 898 (399)
Accrued liabilities and other...................................... (5,386) 510
Discontinued operations, net....................................... (4,388) (12,404)
------- --------
Net cash used in operating activities......................... (31,143) (7,989)
------- --------
Cash flows from investing activities:
Purchases of property and equipment................................... (1,816) (3,453)
Investments in equity of affiliates, net.............................. -- (1,316)
Purchases of minority interests of partnerships....................... (249) (1,844)
Proceeds from sale of subsidiary...................................... 61,230 --
Discontinued operations, net.......................................... (5,330) (4,853)
------- --------
Net cash provided by (used in) investing activities........... $53,835 $(11,466)
======= ========
</TABLE>
F-48
<PAGE> 184
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1994 1995
-------- --------
(AMOUNTS IN
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from financing activities:
Borrowings under revolving credit agreement.......................... $ 2,000 $ --
Repayments under revolving credit agreement.......................... (13,000) --
Proceeds from issuance of long-term debt............................. 860 503
Proceeds from issuance of common stock............................... 412 1,418
Distributions to minority interest in partnerships, net.............. (729) (569)
Discontinued operations, net......................................... 3,329 3,486
-------- --------
Net cash provided by (used in) financing activities.......... (7,128) 4,838
-------- --------
Increase (decrease) in cash and cash equivalents....................... 15,564 (14,617)
-------- --------
Cash and cash equivalents at beginning of period....................... 3,610 14,700
-------- --------
Cash and cash equivalents at end of period............................. $ 19,174 $ 83
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-49
<PAGE> 185
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. GENERAL
The consolidated condensed financial statements as of September 30, 1995
and for the nine months ended September 30, 1994 and 1995 are unaudited. Certain
reclassifications of prior period information have been made to conform to
current year presentation. In April 1994 Healthdyne sold its 68% ownership in
Home Nutritional Services, Inc., a New Jersey corporation ("HNS"), in May 1995
Healthdyne distributed to its shareholders, in the form of a tax-free dividend,
its 81% ownership in Healthdyne Technologies, Inc., a Georgia corporation
("Healthdyne Technologies"), and in October 1995 Healthdyne's Board of Directors
approved the spin-off of its wholly-owned subsidiary, Healthdyne Information
Enterprises, Inc. ("HIE"), in a taxable distribution. The accounts of HNS,
Healthdyne Technologies and HIE prior to sale or distribution have been
segregated and reflected as discontinued operations in the consolidated
condensed financial statements as of December 31, 1994 and September 30, 1995
and for the nine months ended September 30, 1994 and 1995 (See Notes 3 and 4).
The only remaining business of Healthdyne is the business of its Healthdyne
Maternity Management division (HMM). In the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for the fair
presentation of the consolidated financial position and results of operations
and cash flows for the periods presented have been included. The results for the
nine months ended September 30, 1995 are not necessarily indicative of the
results for the full year ending December 31, 1995.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related notes of
Healthdyne included in this Proxy Statement/Prospectus for the year ended
December 31, 1994.
2. EARNINGS PER SHARE OF COMMON STOCK
Primary earnings per common share and common share equivalent are based on
the weighted average number of shares outstanding and common share equivalents
derived from dilutive stock options and warrants. Fully diluted earnings per
share are calculated taking into consideration the effect of convertible
subordinated debentures. Fully diluted earnings per share are not significantly
different from primary earnings per share.
3. DISCONTINUED OPERATIONS
During the first quarter of 1994, Healthdyne decided to divest its 68%
ownership interest in HNS. The sale was consummated in April 1994 and resulted
in net proceeds to Healthdyne of approximately $61,000 and a gain, net of income
taxes, of $17,330. Accordingly, the operations of HNS for the nine months ended
September 30, 1994 have been presented as discontinued operations.
On May 22, 1995, Healthdyne distributed its 81% ownership in its
subsidiary, Healthdyne Technologies, to Healthdyne shareholders of record on May
5, 1995 in a tax-free distribution (the "Technologies Spin-off"). Healthdyne's
consolidated condensed financial statements reflect the results of operations of
Healthdyne Technologies included in the nine month period ended September 30,
1995 and all previously reported periods as discontinued operations. The
Technologies Spin-off resulted in a reduction of additional paid-in capital of
$25,480, representing 81% of the book value of assets of Healthdyne
Technologies.
4. SUBSEQUENT EVENTS
On October 20, 1995, Healthdyne's Board of Directors approved the
distribution of its wholly-owned subsidiary, HIE to Healthdyne shareholders of
record on October 30, 1995, in a taxable distribution (the "HIE Spin-off").
Healthdyne's consolidated condensed financial statements reflect the results of
operations of HIE included in the current periods and all previously reported
periods as discontinued operations. The HIE
F-50
<PAGE> 186
HEALTHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Spin-off will result in a reduction of additional paid-in capital in the amount
of $17,494 the net book value of the assets of HIE on the distribution date,
November 6, 1995.
On October 2, 1995, Healthdyne and Tokos Medical Corporation (Delaware)
("Tokos") entered into an Agreement and Plan of merger (the "Merger"). The
Merger is expected to be a tax-free transaction with each Healthdyne and each
Tokos share to be exchanged for one share of a new company, which has yet to be
named. The transaction is anticipated to be completed in early 1996, subject to
certain conditions and shareholder approval from both companies.
F-51
<PAGE> 187
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE> 188
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October
2, 1995, as amended as of December 4, 1995 and further amended as of January 31,
1996, by and among HEALTHDYNE, INC., a Georgia corporation ("HD"), TOKOS MEDICAL
CORPORATION (DELAWARE), a Delaware corporation ("TM"), and MATRIA HEALTHCARE,
INC., a Delaware corporation to be formed and organized pursuant to Article I
and thereafter to execute and become a party to this Agreement ("Newco");
WHEREAS, the Boards of Directors of TM and HD have determined that it is in
the best interests of their respective companies and stockholders to combine
their respective businesses in a "merger of equals" transaction to be effected
as set forth in this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
FORMATION AND ORGANIZATION OF NEWCO
1.1 Formation of Newco. Immediately following the execution of this
Agreement, HD and TM shall cause Newco to be formed as a corporation to be
organized under the General Corporation Law of the State of Delaware (the
"DGCL") by filing a Certificate of Incorporation with the Delaware Secretary of
State in substantially the form attached hereto as Exhibit A-1 (the "Initial
Certificate") and by taking such further actions as may be necessary in
connection with such incorporation and formation.
1.2 Organization of Newco. Upon formation of Newco, HD and TM shall cause
the initial board of directors of Newco elected by the incorporator of Newco to
hold a meeting (the "Initial Meeting") for the purposes of, inter alia, the
following:
(a) organizing Newco;
(b) electing the following individuals to serve as officers
(collectively, the "Initial Officers") of Newco in the capacity set forth
opposite such individuals' names:
Parker H. Petit -- Chairman of the Board
Robert F. Byrnes -- President, Chief Executive Officer and Secretary
(c) authorizing the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby on behalf of Newco;
and
(d) authorizing such other actions as may properly come before such
meetings.
1.3 Execution and Delivery of this Agreement by Newco. Immediately
following the Initial Meeting, the officers duly authorized to act on Newco's
behalf in the Initial Meeting shall execute and deliver this Agreement on behalf
of Newco, which shall be a party to this Agreement effective as of the date
first above written for all purposes and shall be fully bound by the provisions
set forth herein.
ARTICLE II
THE MERGER
2.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 2.2 hereof), HD and TM shall be merged
with and into Newco with Newco as the surviving
<PAGE> 189
corporation in the Merger (the "Surviving Corporation") and the separate
existence of HD and TM shall thereupon cease. The Merger shall have the effects
set forth in Section 252 of the DGCL.
2.2 Effective Time of the Merger. The Merger shall become effective upon
the later to occur of (a) when a properly executed Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware in accordance with
the DGCL, and (b) when a properly executed Certificate of Merger is duly filed
with the Secretary of State of the State of Georgia in accordance with the
Georgia Business Corporation Code ("GBCC"), each of which filings shall be made
substantially simultaneously with the other and as soon as practicable after the
closing of the transactions contemplated by this Agreement in accordance with
Section 4.6 hereof upon satisfaction of the conditions set forth in Article IX.
When used in this Agreement, the term "Effective Time" shall mean the date and
time at which the later of such Certificates of Merger is so filed.
ARTICLE III
THE SURVIVING CORPORATION
3.1 Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation as of the Effective Time shall consist of the Initial
Certificate as amended as set forth in Exhibit A-2 attached hereto.
3.2 Bylaws. The Bylaws of the Surviving Corporation as of the Effective
Time shall consist of the Bylaws attached hereto as Exhibit B.
3.3 Directors. The directors of the Surviving Corporation as of the
Effective Time shall be selected pursuant to Section 8.13.
3.4 Officers. The principal executive officers of the Surviving
Corporation as of the Effective Time shall be as specified in Section 8.13(f).
ARTICLE IV
CONVERSION OF SHARES
4.1 Exchange Ratio. At the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof:
(a) Each share of Common Stock, par value $.001 per share, of TM ("TM
Common Stock"), issued and outstanding immediately prior to the Effective
Time, together with any associated TM Rights as defined in Section 5.2
below, shall be cancelled and extinguished and converted into the right to
receive one share of Common Stock, par value $.01 per share, of Newco
("Newco Common Stock"). All such shares of TM Common Stock shall no longer
be deemed outstanding, shall be cancelled and retired and shall cease to
exist. Each holder of a certificate representing any such TM Common Stock
shall thereafter cease to have any rights with respect to such TM Common
Stock, other than the right to receive a number of shares of Newco Common
Stock equal to the number of shares of TM Common Stock previously evidenced
by such certificate upon the surrender of such certificate in accordance
with, and subject to adjustment as provided in, Section 4.1(c). Each share
of TM Common Stock then held in the treasury of TM ("TM Treasury Shares")
and each share ("TM Preferred Shares") of Preferred Stock, par value $.001
per share ("TM Preferred Stock"), shall be cancelled and retired, and no
payment shall be made with respect thereto.
(b) Each share of Common Stock, par value $.01 per share, of HD ("HD
Common Stock" and collectively with the TM Common Stock, the "Shares")
issued and outstanding immediately prior to the Effective Time, together
with any associated HD Rights as defined in Section 6.2 below, shall be
cancelled and extinguished and converted into the right to receive one
share of Newco Common Stock. All such shares of HD Common Stock (by virtue
of the Merger and without any action on the part of the holders thereof)
shall no longer be deemed outstanding, shall be cancelled and retired and
shall cease to exist. Each holder of a certificate representing any such
shares of HD Common Stock shall thereafter
2
<PAGE> 190
cease to have any rights with respect to such shares of HD Common Stock,
other than the right to receive a number of shares of Newco Common Stock
equal to the number of shares of HD Common Stock previously evidenced by
such certificate upon the surrender of such certificate in accordance with,
and subject to adjustment as provided in, Section 4.1(c). Each share of HD
Common Stock then held in the treasury of HD ("HD Treasury Shares") and
each share ("HD Preferred Shares") of Preferred Stock, par value $.01 per
share ("HD Preferred Stock") shall be cancelled and retired, and no payment
shall be made with respect thereto.
(c) At the Effective Time, all shares of TM Common Stock (the "TM
Shares") and all shares of HD Common Stock (the "HD Shares") shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each certificate previously representing any such
Shares shall thereafter represent shares of Newco Common Stock (the "Newco
Shares") into which such Shares have been converted. Certificates
representing Shares shall be exchanged for certificates representing whole
Newco Shares issued in consideration therefor upon the surrender of such
certificate in accordance with the provisions hereof. If prior to the
Effective Time TM or HD should split or combine the TM Shares or HD Shares,
as applicable, or pay a stock dividend or other stock distribution in TM
Shares or HD Shares (except for the "HIE Spinoff" (as defined in Schedule
7.1)), as applicable, then the number of Newco Shares to be issued in
exchange for each share of TM Common Stock or HD Common Stock, as the case
may be, will be appropriately adjusted to reflect such split, combination,
dividend or other distribution.
(d) Newco may adopt a Stockholders Rights Plan ("Newco Rights Plan")
prior to the Effective Time. In that event, all references in this
Agreement to Newco Shares shall be deemed to include the associated common
stock purchase rights under the Newco Rights Plan except where the context
otherwise clearly requires.
(e) At the Effective Time, all shares of Newco capital stock issued to
TM and HD in connection with the organization of Newco shall no longer be
outstanding and shall automatically be cancelled and retired and shall
cease to exist.
4.2 Exchange of Shares. (a) Prior to the Effective Time, Newco shall
select and enter into an agreement (in form and substance reasonably
satisfactory to HD and TM) with a bank or trust company to act as Exchange Agent
hereunder (the "Exchange Agent"). No later than the Effective Time, Newco shall
make available, and each holder of Shares will be entitled to receive, upon
surrender to the Exchange Agent of one or more certificates representing such
Shares for cancellation, certificates representing the number of Newco Shares
into which such Shares are converted in the Merger. The Newco Shares into which
the Shares shall be converted in the Merger shall be deemed to have been issued
at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates") whose Shares were converted into Newco
Shares pursuant to Section 4.1, (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as TM and HD may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing Newco Shares. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing that
number of whole Newco Shares which such holder has the right to receive in
respect of the Certificates surrendered pursuant to the provisions of this
Article IV.
(c) In the event that any stock certificate representing Shares shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such certificate to be lost, stolen or destroyed, Newco will
issue or cause to be issued in exchange for such lost, stolen or destroyed
certificate the number of Newco Shares into which such Shares are converted in
the Merger in accordance with this Article IV. When authorizing such issuance in
exchange therefor, the Board of Directors of Newco may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or
3
<PAGE> 191
destroyed certificate to give Newco a bond in such sum as it may direct as
indemnity, or such other form of indemnity, as it shall direct, against any
claim that may be made against Newco with respect to the certificate alleged to
have been lost, stolen or destroyed.
4.3 Dividends; Transfer Taxes. No dividends that are declared on Newco
Shares will be paid to persons entitled to receive certificates representing
Newco Shares until such persons surrender their certificates representing
Shares. Upon such surrender, there shall be paid to the person in whose name the
certificates representing such Newco Shares shall be issued, any dividends which
shall have become payable with respect to such Newco Shares between the
Effective Time and the time of such surrender. In no event shall the person
entitled to receive such dividends be entitled to receive interest on such
dividends. If any certificates for any Newco Shares are to be issued in a name
other than that in which the certificate representing Shares surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the person requesting such exchange shall pay to the Exchange Agent any transfer
or other taxes required by reason of the issuance of certificates for such Newco
Shares in a name other than that of the registered holder of the certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
Shares for any Newco Shares or dividends thereon or, in accordance with Section
4.4 hereof, the cash payment for fractional interests, delivered to a public
official pursuant to applicable escheat laws.
4.4 No Fractional Securities. No certificates or scrip representing
fractional Newco Shares shall be issued upon the surrender for exchange of
certificates representing Shares pursuant to this Article IV and no dividend,
stock split-up or other change in the capital structure of Newco shall relate to
any fractional security, and such fractional interests shall not entitle the
owner thereof to vote or to any rights of a security holder. In lieu of any such
fractional securities, each holder of Shares who would otherwise have been
entitled to a fraction of a Newco Share upon surrender of stock certificates for
exchange pursuant to this Article IV will be paid cash upon such surrender in an
amount equal to the product of such fraction multiplied by the Average Price of
a Newco Share. As used herein, the "Average Price" of a Newco Share shall mean
the average of the closing prices of a share of Newco Common Stock as reported
by The Wall Street Journal over the five trading days commencing on the third
trading day following the Closing.
4.5 Closing of Transfer Books. At the Effective Time, the stock transfer
books of HD and TM shall be closed and no transfer of Shares shall thereafter be
made. If, after the Effective Time, certificates representing Shares are
presented to the Surviving Corporation, they shall be cancelled and exchanged
for certificates representing Newco Shares in accordance with the terms hereof.
At and after the Effective Time, the holders of Shares to be exchanged for Newco
Shares pursuant to this Agreement shall cease to have any rights as stockholders
of HD or TM, as applicable, except for the right to surrender such stock
certificates in exchange for Newco Shares as provided hereunder.
4.6 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Troutman Sanders
LLP, 600 Peachtree Street, N.E., 5200 NationsBank Plaza, Atlanta, Georgia
30308-2216 at 9:00 a.m., local time, on the day after the later of (a) the date
on which the later to occur of HD's and TM's stockholders' meetings referred to
in Section 8.4 hereof shall have occurred or (b) the day on which all of the
conditions set forth in Article IX hereof are satisfied or waived, or at such
other date, time and place as TM and HD shall agree.
4.7 Supplementary Action. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of HD or TM, or otherwise to
carry out the provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered on behalf of HD and
TM, in the name of and on behalf of HD and TM, to execute and deliver any and
all things necessary or proper to vest or to perfect or confirm title to such
property or rights in the Surviving Corporation, and otherwise to carry out the
purposes and provisions of this Agreement.
4
<PAGE> 192
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TM
As used in this Agreement, (i) the word "subsidiary" when used with respect
to any party means any corporation or other organization, whether incorporated
or unincorporated, of which such party or any other subsidiary of such party is
a general partner (excluding general partnerships and limited partnerships the
general partnership interests of which held by such party or any subsidiary of
such party do not have a majority of the voting interests in such partnership)
or of which at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the Board of Directors
or others performing similar functions with respect to such corporations or
other organizations is directly or indirectly owned or controlled by such party
and/or by any one or more of the subsidiaries (excluding for this purpose,
however, Healthdyne Technologies, Inc., a Georgia corporation, and its direct
and indirect subsidiaries (collectively, "HTI") from and after the date of the
May 22, 1995 spinoff of HTI's common stock to HD stockholders and Healthdyne
Information Enterprises, Inc., a Georgia corporation, and its direct and
indirect subsidiaries (collectively, "HIE") from and after the date of the HIE
Spinoff) and (ii) the term "Material Adverse Effect" means, with respect to HD
and TM, as the case may be, a material adverse effect on the business, assets,
revenues, expenses or financial condition of such party and its subsidiaries
(excluding, for purposes of HD, HTI and HIE) taken as a whole or in the ability
of such party to perform its obligations hereunder.
Each of the following representations and warranties is qualified by the
disclosure letter (the "TM Disclosure Letter") delivered to HD immediately prior
to the execution hereof, whether or not reference is made to the TM Disclosure
Letter in such representation or warranty. Except as set forth in the TM
Disclosure Letter or in the "TM SEC Reports" (as hereinafter defined) filed
prior to the execution of this Agreement, TM represents and warrants to HD as
follows:
5.1 Organization. TM is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has the corporate
power to carry on its business as it is now being conducted or presently
proposed to be conducted. TM is duly qualified as a foreign corporation to do
business, and is in good standing (to the extent the concept of good standing
exists), in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a Material
Adverse Effect. Each subsidiary of TM which is incorporated is a corporation
duly organized, validly existing and in good standing (to the extent the concept
of good standing exists) under the laws of its jurisdiction of incorporation or
organization, has the corporate power to carry on its business as it is now
being conducted and is duly qualified to do business, and is in good standing
(to the extent the concept of good standing exists), in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
duly organized, validly existing and in good standing, to have such corporate
power or to be so qualified will not have a Material Adverse Effect. TM has
delivered to HD or its counsel complete and correct copies of its, and its
subsidiaries, Certificate of Incorporation and Bylaws or other organizational
documents.
5.2 Capitalization. The authorized capital stock of TM consists of
60,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000
shares of TM Preferred Stock. As of the date hereof, 17,478,851 TM Shares were
issued and outstanding, options to acquire 2,150,960 TM Shares ("TM Stock
Options") were outstanding under all stock option plans of TM ("TM Stock Option
Plans") and no warrants to acquire TM Shares were outstanding, and no shares of
TM Preferred Stock were issued and outstanding. All of the issued and
outstanding TM Shares are validly issued, fully paid and nonassessable and free
of preemptive rights or similar rights created by statute, the Certificate of
Incorporation or Bylaws of TM or any agreement to which TM or any of its
subsidiaries is a party or by which it is bound. Since December 31, 1994, TM has
not issued any shares of its capital stock, except upon the exercise of stock
options previously granted under TM Stock Option Plans and pursuant to TM's
Employee Stock Purchase Plan. Except as set forth above and pursuant to TM's
employee benefit plans and as otherwise provided in this Agreement and that
certain Stockholder Rights Plan, dated March 19, 1993, between TM and U.S. Stock
Transfer Corporation, as rights agent ("TM Rights Agreement"), pursuant to which
TM Rights Agreement certain rights
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("TM Rights") to purchase TM Shares were issued, there are not as of the date of
this Agreement any shares of capital stock of TM issued or outstanding or any
options, warrants, subscriptions, calls, rights, convertible securities or other
agreements or commitments obligating TM to issue, transfer or sell any shares of
its capital stock. As of the date hereof, no bonds, debentures, notes or other
indebtedness having the right to vote (or convertible into or exercisable for
securities having the right to vote) on any matters on which stockholders may
vote ("Voting Debt") of TM were issued and outstanding. All outstanding shares
of the capital stock of TM's subsidiaries have been validly issued and fully
paid, and are non-assessable and are owned by TM or one of its subsidiaries free
and clear of any liens, security interest, pledges, agreements, claims, charges,
or encumbrances of any nature whatsoever. There are no voting trusts or other
agreements or understandings to which TM is a party with respect to the voting
of the capital stock of TM or any of its subsidiaries. None of TM or its
subsidiaries is required to redeem, repurchase or otherwise acquire shares of
capital stock of TM, or any of its subsidiaries, respectively, as a result of
the transactions contemplated by this Agreement. All of the outstanding TM
Shares are duly and validly issued, fully paid and nonassessable. None of the TM
Shares or TM Preferred Stock have been issued in violation of any preemptive or
other rights of TM's shareholders.
5.3 Authority Relative to this Agreement. TM has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by TM and the consummation by TM of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of TM, and, except for approval by TM's stockholders at the meeting
provided for in Section 8.4 (provided that the total vote cast at such meeting
in favor of the Merger represents over fifty percent (50%) of the outstanding TM
Shares), no other corporate proceedings on the part of TM are necessary to
approve this Agreement or the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by TM and constitutes a valid
and binding agreement of TM, enforceable against TM in accordance with its
terms.
5.4 Consents and Approvals; No Violations. Except for applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
state securities or blue sky laws, and the filing and recordation of a
Certificate of Merger as required by the DGCL and a Certificate of Merger as
required by the GBCC, no filing with, and no permit, authorization, consent or
approval of, any public or governmental body or authority is necessary for the
consummation by TM of the transactions contemplated by this Agreement. Neither
the execution and delivery of this Agreement by TM, nor the consummation by TM
of the transactions contemplated hereby, nor compliance by TM with any of the
provisions hereof, will (a) conflict with or result in any breach of the
Certificate of Incorporation or Bylaws of TM or any of its subsidiaries, (b)
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration) under, or give rise to the creation of any lien,
charge, security interest or encumbrance upon the respective properties or
assets of TM or any of its subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract, agreement
or other instrument or obligation to which TM or any of its subsidiaries is a
party or by which any of them or any of their properties or assets may be bound
or affected or (c) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to TM, any of its subsidiaries or any of their properties
or assets, except in the case of clauses (b) and (c) for violations, breaches or
defaults which would not have a Material Adverse Effect.
5.5 Reports and Financial Statements. TM has filed all reports required to
be filed with the Securities and Exchange Commission (the "SEC") pursuant to the
Exchange Act since January 1, 1993 including, without limitation, an Annual
Report on Form 10-K for the year ended December 31, 1994 (collectively, the "TM
SEC Reports"), and has previously furnished or made available to HD true and
complete copies of all such TM SEC Reports (including any amendments thereto),
and will promptly deliver to HD any TM SEC Reports (including any amendments
thereto) filed between the date hereof and the Effective Time. None of such TM
SEC Reports, as of their respective dates (as amended through the date hereof),
contained or with respect to TM SEC Reports filed after the date hereof, will
contain, any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in
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light of the circumstances under which they were made, not misleading. The
consolidated financial statements included in the TM SEC Reports, in all
material respects, present fairly the consolidated financial position of TM and
its subsidiaries as of the respective dates thereof, and the results of
operations and cash flow of TM and its subsidiaries for the respective periods
or as of the respective dates set forth therein, all in conformity with
generally accepted accounting principles consistently applied during the periods
involved, except as otherwise noted therein and subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments and any
other adjustments described therein.
5.6 Absence of Certain Changes or Events. Since December 31, 1994, neither
TM nor any of its subsidiaries has: (a) taken any of the actions set forth in
Sections 7.1(b), 7.1(c) or 7.1(e) hereof; (b) incurred any material liability,
except in the ordinary course of their business, consistent with past practices;
(c) suffered a change, or any event involving a prospective change, in the
business, assets, financial condition or results of operations of TM or any of
its subsidiaries which has had, or is reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect (other than as a result of changes
or proposed changes in federal or state health care (including health care
reimbursement) laws or regulations of general applicability or interpretations
thereof and changes in generally accepted accounting principles or changes after
the date hereof that reasonably should have been anticipated in light of
specific disclosures in the TM Disclosure Letter); (d) suffered a material
adverse change, or any event involving a prospective material adverse change in
TM's marketing rights to the Fetal Fibronectin Enzyme Immunoassay Test (the
"ELISA Test"), the Fetal Fibronectin Membrane Immunoassay Test (the "Membrane
Test") or the Fetal Fibronectin Dipstick Immunoassay Test (the "Rapid Assay
Test") for detecting preterm labor and membrane ruptures granted by Adeza
Biomedical Corporation ("Adeza"); or (e) subsequent to the date hereof, except
as permitted by Section 7.1 hereof, conducted its business and operations other
than in the ordinary course of business and consistent with past practices.
5.7 Information in Disclosure Documents and Registration Statement. None
of the information to be supplied by TM to be included in (a) the Registration
Statement on Form S-4 to be filed with the SEC by Newco under the Securities Act
for the purpose of registering the Newco Shares to be issued in the Merger or
pursuant to this Agreement (the "Registration Statement") or (b) the joint proxy
statement to be distributed in connection with TM's and HD's meetings of
stockholders to vote upon this Agreement (the "Proxy Statement"), will, in the
case of the Registration Statement, at the time it becomes effective and at the
Effective Time, or, in the case of the Proxy Statement or any amendments thereof
or supplements thereto, at the time of the mailing of the Proxy Statement and
any amendments or supplements thereto, and at the time of each of the meetings
of stockholders of TM and HD to be held in connection with the Merger, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement (except for such portions thereof that relate
only to HD) will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations promulgated thereunder.
5.8 Litigation. As of the date of this Agreement, except to the extent
that individually and in the aggregate they would not reasonably be expected to
have a Material Adverse Effect: (i) there is no action, suit, judicial or
administrative proceeding, arbitration or investigation pending or, to the best
knowledge of TM, threatened against or involving TM or any of its subsidiaries,
or any of their respective properties or rights, before any court, arbitrator,
or administrative or governmental body; (ii) there is no judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against TM or any of its
subsidiaries; and (iii) TM and its subsidiaries are not in violation of any term
of any judgments, decrees, injunctions or orders outstanding against them. The
TM Disclosure Letter contains a description of all actions, suits, proceedings,
arbitrations, investigations, judgments, decrees, injunctions or orders pending,
or to the best knowledge, threatened against or involving TM or any of its
subsidiaries, or any of their respective properties or rights.
5.9 Contracts. (a) Each of the material contracts, instruments, mortgages,
notes, security agreements, leases, agreements or understandings, whether
written or oral, to which TM or any of its subsidiaries is a party that relates
to or affects the assets or operations of TM or any of its subsidiaries or to
which TM or any of its
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subsidiaries or their respective assets or operations may be bound or subject is
a valid and binding obligation of TM or such subsidiary and in full force and
effect (with respect to TM or such subsidiary), except for where the failure to
be in full force and effect would not individually or in the aggregate, have a
Material Adverse Effect. Except to the extent that the consummation of the
transactions contemplated by this Agreement may require the consent of third
parties, as disclosed in the TM Disclosure Letter, there are no existing
defaults by TM or any of its subsidiaries thereunder or, to the knowledge of TM,
by any other party thereto, which defaults, individually or in the aggregate,
would have a Material Adverse Effect; and no event of default has occurred, and
no event, condition or occurrence exists, that (whether with or without notice,
lapse of time or the happening or occurrence of any other event) would
constitute a default by TM or any of its subsidiaries thereunder which default
would, individually or in the aggregate, have a Material Adverse Effect.
(b) As of the date of this Agreement neither TM nor any of its subsidiaries
is a party to any oral or written (i) consulting agreement not terminable on 60
days or less notice involving the payment of more than $100,000 per annum, (ii)
joint venture, (iii) noncompetition or similar agreement that restricts TM or
its subsidiaries from engaging in a line of business, (iv) agreement with any
executive officer or other employee of TM or any subsidiary the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving TM of the nature contemplated by this
Agreement and which provides for the payment of in excess of $10,000, (v)
agreement with respect to any executive officer of TM or any subsidiary
providing any term of employment or compensation guaranty, or (vi) agreement or
plan, including any stock option plan, stock appreciation rights plan,
restricted stock plan or stock purchase plan, any of the benefits of which will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
5.10 Employee Benefit Plans. (a) TM has previously delivered to HD a true
and complete list of each written or formal employee benefit plan (including,
without limitation, any "employee benefit plan" as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
policy or agreement that is maintained (all of the foregoing, the "TM Plans"),
or is or was contributed to by TM or pursuant to which TM is still potentially
liable for payments, benefits or claims. A copy of each TM Plan as currently in
effect and, if applicable, the most recent Annual Report, Actuarial Report or
Valuation, Summary Plan Description, Trust Agreement and any Determination
Letter issued by the IRS with respect thereto have heretofore been delivered to
HD or its counsel. Neither TM nor any trade or business, whether or not
incorporated (an "ERISA Affiliate"), which together with TM would be deemed a
"single employer" within the meaning of Section 4001 of ERISA, has maintained or
contributed to any plan subject to Title IV of ERISA or Section 412 of the Code
(including any "multiemployer plan," as defined in Section 3(37) of ERISA)
during the six calendar years preceding the date of this Agreement.
(b) Each of the TM Plans that are subject to ERISA is in substantial
compliance with ERISA; each of the TM Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code is so qualified; and no event has
occurred, and to TM's knowledge, there exists no condition or set of
circumstances, in connection with which TM or any ERISA Affiliate is subject to
liability (except liability for claims and funding obligations payable in the
ordinary course) under ERISA, the Code, or any other applicable law.
(c) All contributions or other amounts payable by TM or its subsidiaries as
of the Effective Time with respect to each TM Plan in respect of current or
prior plan years have been or will be (prior to the Effective Time) either paid
or accrued on the Financial Statements of TM. There are no pending, or, to the
best knowledge of TM threatened or anticipated claims (other than routine claim
for benefits) by or on behalf of or against any of the TM Plans or any trusts
related thereto.
(d) No TM Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination of
service (other than (i) coverage mandated by applicable law, (ii) death benefits
or retirement benefits under any "employee pension plan," as that term is
defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued
as liabilities on the books of TM or the ERISA Affiliates, or (iv) benefits the
full cost of which is borne by the current or former employee (or his or her
beneficiary)).
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5.11 Taxes. For the purposes of this section and Section 6.11, the term
"tax" shall include all taxes charges, withholdings, fees, levies, penalties,
additions, interest or other assessments imposed by any United States federal,
state or local authority or any other taxing authority on TM or HD or any of
their respective Tax Affiliates as to their respective income, profit,
franchise, gross receipts, payroll, sales, employment, worker's compensation,
use, property, withholding, excise, occupancy, environmental and other taxes,
duties or assessments of any nature, whatsoever. TM has filed or caused to be
filed timely all material federal, state, local and foreign tax returns required
to be filed by each of it, any partnership or joint venture in which it holds a
majority interest or for which it is responsible for filing tax returns, and any
member of its consolidated, combined, unitary or similar group (each such member
a "Tax Affiliate"). Such returns, reports and other information are accurate and
complete in all material respects. TM has paid or caused to be paid or has made
adequate provision or set up an adequate accrual or reserve for the payment of,
all taxes shown to be due in respect of the periods for which returns are due,
and has established (or will establish at least quarterly) an adequate accrual
or reserve for the payment of all taxes payable in respect of the period
subsequent to the last of said periods required to be so accrued or reserved.
Neither TM nor any of its Tax Affiliates has any material liability for taxes in
excess of the amount so paid or accruals or reserves so established. Neither TM
nor any of its Tax Affiliates is delinquent in the payment of any material
amount of tax in excess of the amount reserved or provided therefor, and no
deficiencies for any tax, assessment or governmental charge in excess of the
amount reserved or provided therefor have been threatened, claimed, proposed or
assessed. No waiver or extension of time to assess any taxes has been given or
requested and remains in effect on the date hereof. TM's federal and state
income tax returns for all years ending on or prior to December 31, 1991 have
been audited (and such audits have been completed) or are no longer subject to
audit by reason of the applicable statute of limitations. All years ended
subsequent to such date have never been audited by the Internal Revenue Service
or comparable state agencies.
5.12 Compliance With Applicable Law. TM and each of its subsidiaries holds
all licenses, franchises, permits, variances, exemptions, orders, approvals and
authorizations necessary for the lawful conduct of its business under and
pursuant to, and the business of each of TM and its subsidiaries is not being
conducted in violation of, any provision of any federal, state, local or foreign
statute, law, ordinance, rule, regulation, judgment, decree, order, concession,
grant, franchise, permit or license or other governmental authorization or
approval applicable to TM or any of its subsidiaries, except to the extent that
the failure to hold any such licenses, franchises, permits or authorizations, or
any such violation, would not, individually or in the aggregate, have a Material
Adverse Effect.
5.13 Subsidiaries. Exhibit 21.1 to TM's most recent Form 10-K included in
the TM SEC Reports lists all the subsidiaries of TM as of the date of this
Agreement and it indicates for each such subsidiary as of such date the
jurisdiction of incorporation or organization. All of the outstanding shares of
capital stock or other equity interests of each of the subsidiaries (i) are held
by TM or one of such wholly-owned subsidiaries, (ii) are, in the case of
corporate subsidiaries, fully paid and nonassessable, and (iii) are owned by TM
or one of such wholly-owned subsidiaries free and clear of any claim, lien or
encumbrance.
5.14 Labor and Employment Matters. Except for instances which,
individually or in the aggregate, would not have a Material Adverse Effect: (a)
TM and its subsidiaries are and have been in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
the Immigration Reform and Control Act ("IRCA"), the Worker Adjustment and
Retraining Notification Act ("WARN"), and such laws respecting employment
discrimination, equal opportunity, affirmative action, worker's compensation,
occupational safety and health requirements and unemployment insurance and
related matters, and are not engaged in and have not engaged in any unfair labor
practice; (b) to the knowledge of TM, no investigation or review by or before
any governmental entity concerning any violations of any such applicable laws is
pending nor, to the knowledge of TM is any such investigation threatened or has
any such investigation occurred during the last three years, and no governmental
entity has provided any notice to TM or any of its subsidiaries or others
asserted an intention to conduct any such investigation; (c) there is no labor
strike, dispute, slowdown or stoppage actually pending or threatened against TM
or any of its subsidiaries; (d) no union representation question or union
organizational activity exists respecting the employees of TM or any of its
subsidiaries;
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(e) no collective bargaining agreement exists which is binding on TM or any of
its subsidiaries; (f) neither TM nor any of its subsidiaries has experienced any
material work stoppage or other material labor difficulty; (g) there are no
employees of TM who earned more than $100,000 in 1994 and no independent
contractors utilized by TM who earned more than $100,000 from TM in 1994; and
(h) in the event of termination of the employment of any of the current
officers, directors, employees or agents of TM or any of its subsidiaries,
neither TM, any of its subsidiaries, HD, any of its subsidiaries, the Surviving
Corporation, will pursuant to any agreement or by reason of anything done prior
to the Effective Time by TM or any of its subsidiaries be liable to any of said
officers, directors, employees or agents for so-called "severance pay" or any
other similar payments or benefits, including, without limitation,
postemployment healthcare (other than pursuant to COBRA) or insurance benefits.
5.15 Insurance. As of the date hereof, TM and each of its subsidiaries are
insured by insurers reasonably believed by TM to be of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which they are engaged. All material policies of
insurance and fidelity or surety bonds insuring TM or any of its subsidiaries or
their respective businesses, assets, employees, officers and directors are in
full force and effect. As of the date hereof, there are no material claims by TM
or any of its subsidiaries under any such policy or instrument as to which any
insurance company is denying liability or defending under a reservation of
rights clause.
5.16 Contracts with Physicians, Hospitals, HMOs and Third Party
Providers. TM has made available to representatives of HD copies (or in the
case where no written documentation exists, a summary of) all outstanding
contracts, partnerships, joint ventures and other arrangements or understandings
(written or oral) between (a) TM or any of its subsidiaries and (b) any
physician, hospital, HMO, other managed care organization, or other third-party
provider relating to the provision of medical or consulting services,
treatments, patient referrals or similar activities.
5.17 Section 203 of the DGCL Not Applicable. The provisions of Section 203
of the DGCL will not, prior to the termination of this Agreement, assuming the
accuracy of the representations contained in Section 6.18 (without giving effect
to the knowledge qualification thereof), apply to this Agreement, the Merger or
the transactions contemplated hereby and thereby.
5.18 Ownership of HD Shares. As of the date hereof, neither TM nor, to its
knowledge, any of its affiliates or associates (as such terms are defined under
the Exchange Act), (i) beneficially owns, directly or indirectly, or (ii) is a
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, HD Shares, which in
the aggregate, represent ten percent (10%) or more of the outstanding HD Shares.
5.19 TM Rights Plan. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will trigger the
exercisability of any TM Rights under the TM Rights Plan or otherwise affect any
TM Rights or obligations under the TM Rights Plan.
5.20 No Dissenter's Rights. No holder of TM Shares shall have any rights
to an appraisal or other remedy or any form of dissenter's rights under the DGCL
by reason of the Merger or the other transactions contemplated by this
Agreement.
5.21 Corporate Records. The minute books of TM, which have been made
available to HD or its representatives, fully and accurately show in all
material respects all corporate action taken by TM's Board of Directors, all
committees of TM's Board of Directors and TM's stockholders (including, without
limitation, actions taken by written consent without a meeting) and contain true
and complete copies or originals of the Certificate of Incorporation (and all
amendments thereto) of TM, the Bylaws (as amended) of TM and the minutes of all
meetings or consent actions of TM's Board of Directors, committees of TM's Board
of Directors and TM's stockholders. As of the date of this Agreement, no
resolutions material to TM or bylaws of TM have been passed, enacted, consented
to or adopted by TM's Board of Directors, committees of TM's Board of Directors
or TM's stockholders except as set forth in such minute books.
5.22 TM Intellectual Property. (a) TM has previously given to HD detailed
information (including, where applicable, federal registration numbers and dates
of registrations or applications for registration)
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concerning the following "TM Intellectual Property": (i) all of TM's trademarks,
service marks, trade names, and other trade rights, indicating which are
registered and which are not, including all pending applications for any
registrations thereof, and all patents and copyrights used or proposed to be
used by TM in its business and all pending applications therefor; (ii) all
computer software presently used by TM which has been purchased or licensed from
outside parties with a purchase price or license fee in excess of $5,000; and
(iii) all other trade secrets, designs, plans, specifications and other
intellectual property rights of TM (whether or not registered or registrable).
TM has also identified any of such TM Intellectual Property that any third party
owns and that TM uses or proposes to use in its business (including any
marketing rights granted to TM under patents owned or licensed by third parties)
and has specified whether such use is or will be pursuant to license,
sublicense, agreement or permission. Except for instances which, individually or
in the aggregate, would not have a Material Adverse Effect: (i) TM owns or
possesses the right to use all TM Intellectual Property now used or proposed to
be used in its business; (ii) TM has not received notice of nor has any reason
to believe that TM's use of any of the TM Intellectual Property is interfering
with, infringing upon or otherwise violating the rights of any third party in or
to such TM Intellectual Property or that any of such TM Intellectual Property
was misappropriated from a third party; and (iii) TM has not disclosed any of
the TM Intellectual Property other than in a manner reasonably that are in the
aggregate necessary in any material respect for the operation of its business.
TM has not granted any licenses of or other rights to use any of the TM
Intellectual Property to any third party. The TM Intellectual Property comprises
all of the intellectual property rights that are in the aggregate necessary for
the operation of its business as presently conducted.
(b) TM's existing agreement with Adeza grants to TM valid and exclusive
marketing rights in the United States, the territories and possessions of the
United States and Canada with respect to the ELISA Test, the Membrane Test and
the Rapid Assay Test.
5.23 Opinion of Financial Advisor. TM has received the opinion of
Robertson, Stephens & Company to the effect that, as of the date hereof, the
exchange ratio set forth in Section 4.1(a) is fair to the holders of TM Shares.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF HD
Each of the following representations and warranties is qualified by the
disclosure letter (the "HD Disclosure Letter") delivered to TM immediately prior
to the execution hereof, whether or not reference is made to the HD Disclosure
Letter in such representation or warranty. Except as set forth in the HD
Disclosure Letter or in the "HD SEC Reports" (as hereinafter defined) filed
prior to the execution of this Agreement, HD represents and warrants to TM as
follows:
6.1 Organization. HD is a corporation duly organized, validly existing and
in good standing under the laws of the State of Georgia and has the corporate
power to carry on its business as it is now being conducted or presently
proposed to be conducted. HD is duly qualified as a foreign corporation to do
business, and is in good standing (to the extent the concept of good standing
exists), in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary. Each current subsidiary of HD which is incorporated is a corporation
duly organized, validly existing and in good standing (to the extent the concept
of good standing exists) under the laws of its jurisdiction of incorporation or
organization, has the corporate power to carry on its business as it is now
being conducted and is duly qualified as a foreign corporation to do business,
and is in good standing (to the extent the concept of good standing exists), in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary. HD has
delivered to TM or its counsel complete and correct copies of its, and its
current subsidiaries', Articles of Incorporation and Bylaws or other
organizational documents.
6.2 Capitalization. The authorized capital stock of HD consists of
25,000,000 shares of HD Common Stock, par value $.01 per share, and 3,000,000
shares of HD Preferred Stock, 750,000 shares of which have been designated as
Series A Cumulative Convertible Preferred Stock and which have been redeemed,
250,000
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shares of which have been designated as Series B Cumulative Preferred Stock and
300,000 shares of which have been designated as Series C Cumulative Preferred
Stock (collectively, the "HD Preferred Stock"). As of the date hereof,
15,634,799 HD Shares were issued and outstanding and options to acquire
2,472,293 HD Shares (the "HD Stock Options") were outstanding under all stock
option plans of HD ("HD Stock Option Plans"). The TM Stock Options and HD Stock
Options are sometimes referred to collectively as the "Stock Options". There are
no shares of HD Preferred Stock outstanding and 550,000 shares of HD Preferred
Stock are reserved for issuance pursuant to rights ("HD Rights") granted under
HD's Shareholder Rights Agreements (collectively, the "HD Rights Plans"). All of
the issued and outstanding HD Shares are validly issued, fully paid,
nonassessable and free of preemptive rights or similar rights created by
statute, the Articles of Incorporation or Bylaws of HD or any agreement to which
HD or any of its subsidiaries is a party or by which it is bound. Since December
31, 1994, HD has not issued any shares of its capital stock, except upon the
exercise of certain warrants held by Mellon Bank, stock options previously
granted under HD Stock Option Plans or Stock Purchase Plan or upon conversion of
the "Convertible Debentures" (as hereinafter defined). HD has reserved for
issuance 272,576 HD Shares for issuance upon conversion of HD's 8% Convertible
Subordinated Debentures Due December 31, 2001 (the "Convertible Debentures").
Except as set forth above and pursuant to HD employee benefit plans and as
otherwise provided for in this Agreement and the Rights Plans, there are not
now, and at the Effective Time there will not be, any shares of capital stock of
HD issued or outstanding or any options, warrants, subscriptions, calls, rights,
convertible securities or other agreements or commitments obligating HD to
issue, transfer or sell any shares of its capital stock. As of the date hereof,
except for the Convertible Debentures, no Voting Debt of HD was issued or
outstanding, nor will there be any issued or outstanding at the Effective Time.
Except as provided in this Agreement, after the Effective Time, HD will have no
obligation to issue, transfer or sell any shares of its capital stock pursuant
to any employee benefit plan or otherwise. All outstanding shares of the capital
stock of HD's current subsidiaries have been validly issued and fully paid, and
are non-assessable and owned by HD or one of its current subsidiaries free and
clear of any liens, security interests, pledges, agreements, claims, charges, or
encumbrances of any nature whatsoever. There are no voting trusts or other
agreements or understandings to which HD is a party with respect to the voting
of the capital stock of HD or any of its current subsidiaries. Except for any
redemption of the Rights, none of HD or its subsidiaries is required to redeem,
repurchase or otherwise acquire shares of capital stock of HD, or any of its
current subsidiaries, respectively, as a result of the transactions contemplated
by this Agreement. All of the outstanding HD Shares are duly and validly issued,
fully paid and nonassessable. None of the HD Shares or HD Preferred Stock have
been issued in violation of any preemptive or other rights of HD's shareholders.
6.3 Authority Relative to this Agreement. HD has the corporate power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by HD and the consummation by HD of the
transactions contemplated hereby have been duly authorized by HD's Board of
Directors and, except for the approval of the holders of a majority of the
outstanding HD Shares, no other corporate proceedings on the part of HD are
necessary to approve this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by HD and
constitutes a valid and binding agreement of HD, enforceable against HD in
accordance with its terms.
6.4 Consents and Approvals; No Violations. Except for applicable
requirements of the HSR Act, the Securities Act, the Exchange Act, state
securities or blue sky laws, and the filing and recordation of a Certificate of
Merger as required by the DGCL and a Certificate of Merger as required by the
GBCC, no filing with, and no permit, authorization, consent or approval of, any
public or governmental body or authority is necessary for the consummation by HD
of the transactions contemplated by this Agreement except where a failure to
make such filing or to obtain such permit, registration, authorization, consent
or approval will not, individually or in the aggregate, have a Material Adverse
Effect. Neither the execution and delivery of this Agreement by HD, nor the
consummation by HD of the transactions contemplated hereby, nor compliance by HD
with any of the provisions hereof, will (a) conflict with or result in any
breach of any provisions of the Articles of Incorporation or Bylaws of HD or any
of its current subsidiaries, (b) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, or
give rise to creation of any lien, charge, security interest or encumbrance
upon, any of the respective properties or assets of HD or any of its
subsidiaries under, any of the
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terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, contract, lease, agreement or other instrument or obligation to
which HD or any of its subsidiaries is a party or by which any of them or any of
their properties or assets may be bound or affected or (c) violate any order,
writ, injunction, decree, statute, rule or regulation of any court or government
authority applicable to HD, any of its subsidiaries, or any of their properties
or assets, except in the case of clauses (b) and (c) for violations, breaches or
defaults which would not have a Material Adverse Effect.
6.5 Reports and Financial Statements. HD has filed all reports required to
be filed with the SEC pursuant to the Exchange Act since January 1, 1993
including, without limitation, an Annual Report on Form 10-K for the year ended
December 31, 1994 (collectively, the "HD SEC Reports"), and has previously
furnished or made available to TM true and complete copies of all such HD SEC
Reports (including any amendments thereto) and will promptly deliver to TM any
HD SEC Reports (including any amendments thereto) filed between the date hereof
and the Effective Time. None of such HD SEC Reports, as of their respective
dates (as amended through the date hereof), contained or with respect to HD SEC
Reports filed after the date hereof, will contain, any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements
included in the HD SEC Reports, in all material respects, present fairly the
consolidated financial position of HD and its subsidiaries as of the respective
dates thereof, and the results of operations and the cash flow of HD and its
subsidiaries for the respective periods or as of the respective dates set forth
therein, all in conformity with generally accepted accounting principles
consistently applied during the periods involved, except as otherwise noted
therein and subject, in the case of the unaudited interim financial statements,
to normal year-end adjustments and any other adjustments described therein.
6.6 Absence of Certain Changes or Events. Since December 31, 1994, neither
HD nor any of its current subsidiaries has: (a) taken any of the actions set
forth in Sections 7.1(b), 7.1(c) or 7.1(e) hereof; (b) incurred any material
liability, except in the ordinary course of their business, consistent with past
practices; (c) suffered changes, or any event involving a prospective change in
the business, assets, financial condition or results of operations of HD or any
of its current subsidiaries which has had, or is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect (other than as a
result of changes or proposed changes in federal or state health care (including
health care reimbursement) laws or regulations of general applicability or
interpretations thereof, changes in generally accepted accounting principles or
changes after the date hereof that reasonably should have been anticipated in
light of specific disclosures in the HD Disclosure Letter); or (d) subsequent to
the date hereof, except as permitted by Section 7.1 hereof, conducted its
business and operations other than in the ordinary course of business and
consistent with past practices.
6.7 Information in Disclosure Documents and Registration Statement. None
of the information to be supplied by HD to be included in the Proxy Statement or
the Registration Statement will, in the case of the Registration Statement, at
the time it becomes effective and at the Effective Time, or, in the case of the
Proxy Statement or any amendments thereof or supplements thereto, at the time of
the mailing of the Proxy Statement and any amendments or supplements thereto,
and at the time of the meetings of stockholders of HD and TM to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement (except for such portions
thereof that relate only to TM) will comply as to form in all material respects
with the provisions of the Exchange Act, and the rules and regulations
promulgated thereunder.
6.8 Litigation. As of the date of this Agreement, except to the extent
that individually and in the aggregate they would not reasonably be expected to
have a Material Adverse Effect: (i) there is no action, suit, judicial or
administrative proceeding, arbitration or investigation pending or, to the best
knowledge of HD, threatened against or involving HD and any of its subsidiaries,
or any of their respective properties or rights, before any court, arbitrator,
or administrative or governmental body; (ii) there is no judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against HD and any of its
subsidiaries; and (iii) HD and its subsidiaries are not in
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violation of any term of any judgments, decrees, injunctions or orders
outstanding against them. The HD Disclosure Letter contains a description of all
actions, suits, proceedings, arbitrations, investigations, judgements, decrees,
injunctions or orders pending, or to the best knowledge, threatened against or
involving HD or any of its subsidiaries, or any of their respective properties
or rights.
6.9 Contracts. (a) Each of the material contracts, instruments, mortgages,
notes, security agreements, leases, agreements or understandings, whether
written or oral, to which HD or any of its current subsidiaries is a party that
relates to or affects the assets or operations of HD or any of its subsidiaries
or to which HD or any of its subsidiaries or their respective assets or
operations may be bound or subject is a valid and binding obligation of HD or
such subsidiary and in full force and effect (with respect to HD or such
subsidiary), except for where the failure to be in full force and effect would
not, individually or in the aggregate, have a Material Adverse Effect. Except to
the extent that the consummation of the transactions contemplated by this
Agreement may require the consent of third parties, as disclosed in the HD
Disclosure Letter, there are no existing defaults by HD or any of its
subsidiaries thereunder or, to the knowledge of HD, by any other party thereto,
which defaults, individually or in the aggregate, would have a Material Adverse
Effect; and no event of default has occurred, and no event, condition or
occurrence exists, that (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default by HD or
any of its subsidiaries thereunder which default would, individually or in the
aggregate, have a Material Adverse Effect.
(b) As of the date of this Agreement neither HD nor any of its current
subsidiaries is a party to any oral or written (i) consulting agreement not
terminable on 60 days or less notice involving the payment of more than $100,000
per annum, (ii) joint venture, (iii) noncompetition or similar agreement that
restricts HD or its current subsidiaries, other than HIE, from engaging in a
line of business, (iv) agreement with any executive officer or other employee of
HD or any subsidiary the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving HD of the
nature contemplated by this Agreement and which provides for the payment of in
excess of $10,000, (v) agreement with respect to any executive officer of HD or
any subsidiary providing any term of employment or compensation guaranty, or
(vi) agreement or plan, including any stock option plan, stock appreciation
rights plan, restricted stock plan or stock purchase plan, any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement.
6.10 Employee Benefit Plans. (a) HD has previously delivered to TM a true
and complete list of each written or formal employee benefit plan (including,
without limitation, any "employee benefit plan" as defined in Section 3(3) of
ERISA), policy or agreement that is maintained (all of the foregoing, the "HD
Plans"), or is or was contributed to by HD or pursuant to which HD is still
potentially liable for payments, benefits or claims. A copy of each HD Plan as
currently in effect and, if applicable, the most recent Annual Report, Actuarial
Report or Valuation, Summary Plan Description, Trust Agreement and any
Determination Letter issued by the IRS with respect thereto have heretofore been
delivered to TM or its counsel. Neither HD nor any ERISA Affiliate, which
together with HD would be deemed a "single employer" within the meaning of
Section 4001 of ERISA, has maintained or contributed to any plan subject to
Title IV of ERISA or Section 412 of the Code (including any "multiemployer
plan," as defined in Section 3(37) of ERISA) during the six calendar years
preceding the date of this Agreement.
(b) Each of HD Plans that are subject to ERISA is in substantial compliance
with ERISA; each of HD Plans intended to be "qualified" within the meaning of
Section 401(a) of the Code is so qualified; and no event has occurred, and to
HD's knowledge, there exists no condition or set of circumstances, in connection
with which HD or any ERISA Affiliate is subject to liability (except liability
for claims and funding obligations payable in the ordinary course) under ERISA,
the Code or any other applicable law.
(c) All contributions or other amounts payable by HD or its subsidiaries,
other than HIE and HTI, as of the Effective Time with respect to each HD Plan in
respect of current or prior plan years have been or will be (prior to the
Effective Time) either paid or accrued on the Financial Statements of HD. There
are no pending,
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or, to the best knowledge of HD, threatened or anticipated claims (other than
routine claims for benefits) by or on behalf of or against any of HD Plans or
any trusts related thereto.
(d) No HD Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination of
service (other than (i) coverage mandated by applicable law, (ii) death benefits
or retirement benefits under any "employee pension plan," as that term is
defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued
as liabilities on the books of HD or the ERISA Affiliates, or (iv) benefits the
full cost of which is borne by the current or former employee (or his or her
beneficiary)).
6.11 Taxes. HD has filed or caused to be filed timely all material
federal, state, local and foreign tax returns required to be filed by each of it
and its Tax Affiliates. Such returns reports and other information are accurate
and complete in all material respects. HD has paid or caused to be paid or has
made adequate provision or set up an adequate accrual or reserve for the payment
of, all taxes shown to be due in respect of the periods for which returns are
due, and has established (or will establish at least quarterly) an adequate
accrual or reserve for the payment of all taxes payable in respect of the period
subsequent to the last of said periods required to be so accrued or reserved.
Neither HD nor any of its Tax Affiliates has any material liability for taxes in
excess of the amount so paid or accruals or reserves so established. Neither HD
nor any of its Tax Affiliates is delinquent in the payment of any material
amount of tax in excess of the amount reserved or provided therefor, and no
deficiencies for any tax, assessment or governmental charge in excess of the
amount reserved or provided therefor have been threatened, claimed, proposed or
assessed. No waiver or extension of time to assess any taxes has been given or
requested and remains in effect on the date hereof. HD's federal and state
income tax returns for all years ending on or prior to December 31, 1991 have
been audited (and such audits have been completed) or are no longer subject to
audit by reason of the applicable statute of limitations. All years ended
subsequent to such date have never been audited by the Internal Revenue Service
or comparable state agencies.
6.12 Compliance With Applicable Law. HD and each of its subsidiaries holds
all licenses, franchises, permits, variances, exemptions, orders, approvals and
authorizations necessary for the lawful conduct of its business under and
pursuant to, and the business of each of HD and its subsidiaries is not being
conducted in violation of, any provision of any federal, state, local or foreign
statute, law, ordinance, rule, regulation, judgment, decree, order, concession,
grant, franchise, permit or license or other governmental authorization or
approval applicable to HD or any of its subsidiaries, except to the extent that
the failure to hold any such licenses, franchises, permits or authorizations, or
any such violation, would not, individually or in the aggregate, have a Material
Adverse Effect.
6.13 Subsidiaries. Exhibit 21.1 to HD's most recent Form 10-K included in
HD SEC Reports lists all the current corporate subsidiaries of HD as of the date
of this Agreement (except that HTI is no longer a subsidiary) and it indicates
for each such subsidiary as of such date the jurisdiction of incorporation or
organization. All of the shares of capital stock or other equity interests of
each of the corporate subsidiaries, other than HTI as of the date hereof and HIE
as of the Effective Time, (i) are held by HD or one of such wholly-owned
subsidiaries, (ii) are, in the case of corporate subsidiaries, fully paid and
nonassessable, and (iii) are owned by HD or one of such wholly-owned
subsidiaries free and clear of any claim, lien or encumbrance.
6.14 Labor and Employment Matters. Except for instances which,
individually or in the aggregate, would not have a Material Adverse Effect: (a)
HD and its subsidiaries are and have been in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
IRCA, WARN, and such laws respecting employment discrimination, equal
opportunity, affirmative action, worker's compensation, occupational safety and
health requirements and unemployment insurance and related matters, and are not
engaged in and have not engaged in any unfair labor practice; (b) to the
knowledge of HD, no investigation or review by or before any governmental entity
concerning any violations of any such applicable laws is pending nor, to the
knowledge of HD is any such investigation threatened or has any such
investigation occurred during the last three years, and no governmental entity
has provided any notice to HD or any of its subsidiaries or others
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asserted an intention to conduct any such investigation; (c) there is no labor
strike, dispute, slowdown or stoppage actually pending or threatened against HD
or any of its subsidiaries; (d) no union representation question or union
organizational activity exists respecting the employees of HD or any of its
subsidiaries; (e) no collective bargaining agreement exists which is binding on
HD or any of its subsidiaries; (f) neither HD nor any of its subsidiaries has
experienced any material work stoppage or other material labor difficulty; (g)
there are no employees of HD who earned more than $100,000 in 1994, and no
independent contractors utilized by HD who earned more than $100,000 in 1994;
and (h) in the event of termination of the employment of any officers,
directors, employees or agents of HD or any of its subsidiaries, neither HD, any
of its subsidiaries, TM, any of its subsidiaries, the Surviving Corporation,
will pursuant to any agreement or by reason of anything done prior to the
Effective Time by HD or any of its subsidiaries be liable to any of said
officers, directors, employees or agents for so-called "severance pay" or any
other similar payments or benefits, including, without limitation,
postemployment healthcare (other than pursuant to COBRA) or insurance benefits.
6.15 Insurance. As of the date hereof, HD and each of its current
corporate subsidiaries are insured by insurers reasonably believed by HD to be
of recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged. All
material policies of insurance and fidelity or surety bonds insuring HD or any
of its current subsidiaries or their respective businesses, assets, employees,
officers and directors are in full force and effect. As of the date hereof,
there are no material claims by HD or any of its current subsidiaries under any
such policy or instrument as to which any insurance company is denying liability
or defending under a reservation of rights clause.
6.16 Contracts with Physicians, Hospitals, HMOs and Third Party
Providers. HD has made available to representatives of TM copies (or in the
case where no written documentation exists, a summary of) all outstanding
contracts, partnerships, joint ventures and other arrangements or understandings
(written or oral) between (a) HD or any of its current subsidiaries, and (b) any
physician, hospital, HMO, other managed care organization, or other third-party
provider relating to the provision of medical or consulting services,
treatments, patient referrals or similar activities.
6.17 Section 14-2-1110 of the GBCC Not Applicable. The provisions of
Section 14-2-1110 of the GBCC will not, prior to the termination of this
Agreement and the transactions contemplated hereby, assuming the accuracy of the
representations contained in Section 5.18 (without giving effect to the
knowledge qualification thereof), apply to this Agreement, the Merger or the
transactions contemplated hereby.
6.18 Ownership of TM Shares. As of the date hereof, neither HD nor, to its
knowledge, any of its affiliates or associates (as such terms are defined under
the Exchange Act), (a) beneficially owns, directly or indirectly, or (b) is a
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, TM Shares, which in
the aggregate, represent ten percent (10%) or more of the outstanding TM Shares.
6.19 HD Rights Plans. Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will trigger the
exercisability of any HD Rights under the HD Rights Plans or otherwise affect
any HD Rights or obligations under the HD Rights Plans.
6.20 No Dissenter's Rights. No holder of HD Shares shall have any rights
to an appraisal or other remedy or any form of dissenter's rights under the GBCC
by reason of the Merger or the other transactions contemplated by this
Agreement.
6.21 Corporate Records. The minute books of HD, which have been made
available to TM or its representatives, fully and accurately show in all
material respects all corporate action taken by HD's Board of Directors, all
committees of HD's Board of Directors and HD's shareholders (including, without
limitation, actions taken by written consent without a meeting) and contain true
and complete copies or originals of the Articles of Incorporation (and all
amendments thereto) of HD, the Bylaws (as amended) of HD and the minutes of all
meetings or consent actions of HD's Board of Directors, committees of HD's Board
of Directors and HD's shareholders. As of the date of this Agreement, no
resolutions material to HD or bylaws of HD have
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been passed, enacted, consented to or adopted by HD's Board of Directors,
committees of HD's Board of Directors or HD's shareholders except as set forth
in such minute books.
6.22 HD Intellectual Property. HD has previously given to TM detailed
information (including, where applicable, federal registration numbers and dates
of registrations or applications for registration) concerning the following "HD
Intellectual Property": (a) all of HD's trademarks, service marks, trade names,
and other trade rights, indicating which are registered and which are not,
including all pending applications for any registrations thereof, and all
patents and copyrights used or proposed to be used by HD in its business and all
pending applications therefor; (b) all computer software presently used by HD
which has been purchased or licensed from outside parties with a purchase price
or license fee in excess of $5,000; and (c) all other trade secrets, designs,
plans, specifications and other intellectual property rights of HD (whether or
not registered or registrable). HD has also identified any of such HD
Intellectual Property that any third party owns and that HD uses or proposes to
use in its business (including any marketing rights granted to HD under patents
owned or licensed by third parties) and has specified whether such use is or
will be pursuant to license, sublicense, agreement or permission. Except for
instances which, individually or in the aggregate, would not have a Material
Adverse Effect: (i) HD owns or possesses the right to use all HD Intellectual
Property now used or proposed to be used in its business; (ii) HD has not
received notice of nor has any reason to believe that HD's use of any of HD
Intellectual Property is interfering with, infringing upon or otherwise
violating the rights of any third party in or to such HD Intellectual Property
or that any of such HD Intellectual Property was misappropriated from a third
party; and (iii) HD has not disclosed any of HD Intellectual Property other than
in a manner reasonably necessary for the operation of its business. HD has not
granted any licenses of or other rights to use any of HD Intellectual Property
to any third party. HD Intellectual Property comprises all of the intellectual
property rights that are in the aggregate necessary in any material respect for
the operation of its business as it is presently conducted.
6.23 Opinion of Financial Advisor. HD has received the opinion of Needham
& Company, Inc. to the effect that, as of the date hereof, the exchange ratio
set forth in Section 4.1(b) is fair to the holders of HD Shares.
6.24 HIE Spinoff Registration Statement. The registration statement filed
with the SEC relating to the HIE Spinoff will not, at the time it becomes
effective and on the effective date of the HIE Spinoff, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
7.1 Conduct of Business by HD and TM Pending the Merger. Except as set
forth on Schedule 7.1 hereto and except as consented to in writing by the other
party after the date hereof, during the period from the date of this Agreement
and continuing until the Effective Time:
(a) The respective businesses of HD and its subsidiaries and TM and
its subsidiaries shall be conducted only in the ordinary course of business
and consistent with past practices.
(b) Neither HD nor TM or their respective subsidiaries shall (i) sell
or pledge or agree to sell or pledge any stock owned by it in any of its
subsidiaries; (ii) amend its Certificate or Articles of Incorporation or
Bylaws; or (iii) split, combine or reclassify any shares of its outstanding
capital stock or declare, set aside or pay any dividend or other
distribution payable in cash, stock or property in respect of its capital
stock, or directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or other securities or shares of the capital
stock or other securities of any of its subsidiaries.
(c) Neither HD or any of its subsidiaries nor TM or any of its
subsidiaries shall (i) authorize for issuance, issue, sell, pledge, dispose
of, encumber, deliver or agree or commit to issue, sell, pledge, or deliver
any additional shares of, or rights of any kind to acquire any shares of,
its capital stock of any class
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or exchangeable into shares of stock of any class or any Voting Debt
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise), except for
unissued shares of HD Common Stock or TM Common Stock, as the case may be,
reserved for issuance upon the exercise of the stock options, stock
purchase plans, the Convertible Debentures or warrants described in Section
5.2 or Section 6.2 hereof; (ii) acquire, dispose of, transfer, lease,
license, mortgage, pledge or encumber any fixed or other substantial assets
other than in the ordinary course of business and consistent with past
practices; (iii) incur, assume or prepay any material indebtedness,
liability or obligation or any other material liabilities or issue any debt
securities other than in the ordinary course of business and consistent
with past practices; (iv) assume, guarantee, endorse or otherwise, become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person (other than a wholly owned subsidiary) in a
material amount other than in the ordinary course of business and
consistent with past practices; (v) make any material loans, advances or
capital contributions to, or investments in, any other person, other than
to wholly owned subsidiaries, other than in the ordinary course of business
and consistent with past practices; or (vi) fail to maintain adequate
insurance consistent with past practices for their businesses and
properties.
(d) Each of HD and TM shall use its best efforts to preserve intact
the business organization of HD and its subsidiaries on the one hand and TM
and its subsidiaries on the other hand to keep available the services of
its and their present officers and key employees, and to preserve the
goodwill of those having business relationships with it and their
respective subsidiaries; provided, however, that no breach of this
representation shall be deemed to have occurred if a failure to comply with
this Section 7.1(d) occurs as a result of any matter arising out of the
transactions contemplated by this Agreement or any "Acquisition Proposals"
(as defined in Section 8.2 below) made to HD or TM or the public
announcement thereof or, to the extent set forth on Schedule 7.1, as a
result of the purchase of any unincorporated subsidiary of HD or S
corporation or unincorporated subsidiary of TM or any equity interest
therein.
(e) Neither HD, TM nor any of their respective subsidiaries shall
knowingly take or allow to be taken or fail to take any action which act or
omission would jeopardize qualification of the merger as a reorganization
within the meaning of Section 368(a) of the Code.
(f) Neither HD, TM nor any of their respective subsidiaries shall fail
to use all reasonable efforts to take or omit to take any action or agree,
in writing or otherwise, to take or omit to take any action which would
make any representation or warranty of HD or TM, as applicable, herein
untrue or incorrect in any material respect.
7.2 Compensation Plans. Except as set forth in Schedule 7.2 hereto, during
the period from the date of this Agreement and continuing until the Effective
Time, each of HD and TM agrees as to itself and its subsidiaries that it will
not, without the prior written consent of the other party hereto (except as
otherwise required by applicable law or pursuant to existing contractual
arrangements) (a) enter into, adopt or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment, severance or other employee benefit plan, agreement, trust, plan,
fund or other arrangement between HD or TM, as applicable, and one or more of
its officers, directors or employees, in each case so as to materially increase
benefits thereunder (collectively, "Compensation Plans"), (b) grant or become
obligated to grant any increase in the compensation or fringe benefits of
directors, officers or employees (including any such increase pursuant to any
Compensation Plan) or any increase in the compensation payable or to become
payable to any officer, except, with respect to employees other than officers,
for increases in compensation in the ordinary course of business consistent with
past practice, or enter into any contract, commitment or arrangement to do any
of the foregoing, except for normal increases and non-stock benefit changes in
the ordinary course of business consistent with past practice, (c) institute any
new employee benefit, welfare program or Compensation Plan, (d) make any change
in any Compensation Plan or other employee welfare or benefit arrangement or
enter into any employment or similar agreement or arrangement with any employee,
or (e) enter into or renew any contract, agreement, commitment or arrangement
providing for the payment to any director, officer or employee of compensation
or benefits contingent, or the terms of which are materially altered in favor of
such individual, upon the occurrence of any of the transactions contemplated by
this Agreement.
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7.3 Current Information. From the date of this Agreement to the Effective
Time, each of HD and TM will cause one or more of its designated representatives
to confer on a regular and frequent basis (not less frequently than semimonthly)
with representatives of the other and to report the general status of its
ongoing operations and to deliver to the other (not less frequently than
monthly) unaudited consolidated balance sheets and related consolidated
statements of income, changes in stockholders equity and cash flow for the
period since the last such report. Each of HD and TM will promptly notify the
other of any material change in the normal course of business or in its or its
subsidiaries' properties.
7.4 Legal Conditions to Merger. Each of HD and TM shall, and shall cause
its subsidiaries to, use all reasonable efforts (a) to take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements
which may be imposed on such party or its subsidiaries with respect to the
Merger and to consummate the transactions contemplated by this Agreement,
subject to the appropriate vote or consent of stockholders and (b) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any governmental entity and or any
other public or private third party which is required to be obtained or made by
such party or any of its subsidiaries in connection with the Merger and the
transactions contemplated by this Agreement; provided, however, that a party
shall not be obligated to take any action pursuant to the foregoing if the
taking of such action or such compliance or the obtaining of such consent,
authorization, order, approval or exemption would, in such party's reasonable
opinion, (i) be materially burdensome to such party and its subsidiaries taken
as a whole or impact in such a materially adverse manner the economic or
business benefits of the transactions contemplated by this Agreement as to
render inadvisable the consummation of the Merger or (ii) to result in the
imposition of a condition or restriction on such party or on the Surviving
Corporation of the type referred to in Section 9.1(e). Each of HD and TM will
promptly cooperate with and furnish information to the other in connection with
any such burden suffered by, or requirement imposed upon, any of them or any of
their subsidiaries in connection with the foregoing.
7.5 Affiliates. (a) At least 15 days prior to the mailing of the Proxy
Statement to stockholders of HD and TM, HD shall deliver to Newco a letter
identifying all persons who are, at the time this Agreement is submitted for
approval to the stockholders of HD and TM, "affiliates" of HD for purposes of
Rule 145 under the Securities Act. HD shall use all reasonable efforts to cause
each person named in the letter delivered by it to deliver to Newco by the time
of the mailing of the Proxy Statement a written "affiliates" agreement, in
customary form, restricting the disposition by such person of the Newco Shares
to be received by such person in the Merger to dispositions permitted by Rule
145. Certificates surrendered for exchange by any person constituting an
"affiliate" of HD within the meaning of Rule 145 under the Securities Act shall
not be exchanged by the Exchange Agent for Newco Shares pursuant to Section 4.2
until Newco has received such agreement described in the preceding sentence.
(b) At least 15 days prior to the mailing of the Proxy Statement to
stockholders of HD and TM, TM shall deliver to Newco a letter identifying all
persons who are, at the time this Agreement is submitted for approval to the
stockholders of HD and TM, "affiliates" of TM for purposes of Rule 145 under the
Securities Act. TM shall use all reasonable efforts to cause each person named
in the letter delivered by it to deliver to Newco by the time of the mailing of
the Proxy Statement a written "affiliates" agreement, in customary form,
restricting the disposition by such person of the Newco Shares to be received by
such person in the Merger to dispositions permitted by Rule 145. Certificates
surrendered for exchange by any person constituting an "affiliate" of TM within
the meaning of Rule 145 under the Securities Act shall not be exchanged by the
Exchange Agent for Newco Shares pursuant to Section 4.2 until Newco has received
such agreement described in the preceding sentence.
(c) The affiliates agreements referred to in this Section 7.5 shall also
provide for certain demand registration or piggy back registration rights in
favor of such affiliates as described on Exhibit C hereto.
7.6 Advice of Changes; Government Filings. Each party shall confer on a
regular and frequent basis with the other, report on operational matters and
promptly advise the other orally and in writing of any change or event having,
or which, insofar as can reasonably be foreseen, could have, a Material Adverse
Effect on such party or which would cause or constitute a material breach of any
of the representations, warranties or
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covenants of such party contained herein. TM and HD shall file all reports
required to be filed by each of them with the SEC between the date of this
Agreement and the Effective Time and shall deliver to the other party copies of
all such reports promptly after the same are filed. Except where prohibited by
applicable statutes and regulations, each party shall promptly provide the other
(or its counsel) with copies of all other filings made by such party with any
state of federal government entity in connection with this Agreement or the
transactions contemplated hereby.
7.7 Accounting Methods. Neither TM nor HD shall change its methods of
accounting in effect at December 31, 1994, except as required by changes in
generally accepted accounting principles as concurred in by such party's
independent auditors. Neither TM nor HD shall change its fiscal year.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Access and Information. (a) HD and TM and their respective
subsidiaries shall each afford to the other and to the other's financial
advisors, legal counsel, accountants, consultants and other representatives
access during normal business hours throughout the period from the date hereof
to the Effective Time to all of its books, records, properties, facilities,
personnel commitments and records (including but not limited to tax returns)
and, during such period, each shall furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request. No investigation pursuant to this Section 8.1
shall affect any representations or warranties made herein or the conditions to
the obligations of the respective parties to consummate the Merger.
(b) All information furnished by HD to TM or furnished by TM to HD pursuant
hereto shall be treated as the sole property of the party furnishing the
information until consummation of the Merger contemplated hereby. The parties
will hold any such information which is nonpublic in confidence to the extent
required by, and in accordance with the Confidentiality Agreement dated as of
February 11, 1994, between HD and TM (the "Confidentiality Agreement") and the
confidentiality provisions contained in such Confidentiality Agreement shall
survive the termination of this Agreement.
8.2 Acquisition Proposals. Each of HD and TM and their respective
subsidiaries will not, and will use their best efforts to cause their respective
directors, officers, employees, financial advisors, legal counsel, accountants
and other agents and representatives ("affiliates") not to, initiate, solicit or
encourage, directly or indirectly, or take any other action to facilitate any
inquiries or the making of any proposal with respect to, or except to the extent
required in the exercise of the fiduciary duties of its Board of Directors under
applicable law as advised by independent counsel, engage or participate in
negotiations concerning, provide any nonpublic information or data to or have
any discussions with any person other than a party hereto or their affiliates
relating to, any acquisition, tender offer (including a self-tender offer),
exchange offer, merger, consolidation, acquisition of beneficial ownership of or
the right to vote securities representing ten percent (10%) or more of the total
voting power of such entity or any of its subsidiaries, dissolution, business
combination, purchase of all or any significant portion of the assets or any
division of, or any equity interest in, such entity or any subsidiary, or
similar transaction other than the Merger (such proposals, announcements, or
transactions being referred to as "Acquisition Proposals"). Each of HD and TM
will notify the other promptly orally and in writing if any such Acquisition
Proposals (including the terms thereof and identity of the persons making such
proposals) are received and furnish to the other party hereto a copy of any
written proposal.
8.3 Registration Statement. As promptly as practicable, Newco shall
prepare and file with the SEC the Registration Statement and use its best
efforts to have the Registration Statement declared effective. Newco shall also
use its best efforts to take any action required to be taken under state
securities or blue sky laws in connection with the issuance of the Newco Shares
pursuant hereto. HD and TM shall each furnish Newco with all information
concerning HD and TM, as the case may be, and their respective stockholders and
shall take such other action as Newco may reasonably request in connection with
such Registration Statement and issuance of Newco Shares.
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8.4 Proxy Statements; Stockholder Approvals. TM and HD, acting through
their respective Boards of Directors, shall, in accordance with applicable law
and their Certificate or Articles of Incorporation and Bylaws:
(a) promptly and duly call, give notice of, convene and hold as soon
as practicable following the date upon which the Registration Statement
becomes effective a meeting of their respective stockholders for the
purpose of voting to approve and adopt this Agreement and shall use their
respective best efforts, except to the extent the Board of Directors
reasonably believe is otherwise required by its fiduciary duty, to obtain
such stockholders approval;
(b) except to the extent the Board of Directors reasonably believes is
otherwise required by its fiduciary duty, recommend approval and adoption
of this Agreement by the stockholders of the TM, on the one hand, and of HD
on the other hand, and include in the Proxy Statement such recommendations,
and take all lawful action to solicit such approvals; and
(c) as promptly as practicable, prepare and file with the SEC a
preliminary Proxy Statement and, after consultation with each other,
respond to any comments of the SEC with respect to the preliminary Proxy
Statement and cause the definitive Proxy Statement to be mailed to their
respective stockholders. At the stockholders' meeting of HD, TM shall vote
or cause to be voted in favor of approval and adoption of this Agreement
all HD Shares which it beneficially owns at such time. At the stockholders'
meeting of TM, HD shall vote or cause to be voted in favor of approval and
adoption of this Agreement all TM Shares which it beneficially owns at such
time. Whenever any event occurs which should be set forth in an amendment
or a supplement to the Proxy Statement or any filing required to be made
with the SEC, each party will promptly inform the other and will cooperate
in filing with the SEC and/or mailing to stockholders such amendment or
supplement. The Proxy Statement, and all amendments and supplements
thereto, shall comply with applicable law and be in form and substance
satisfactory to TM and HD.
8.5 NASDAQ/NM. Newco shall take such action to apply for listing of the
Newco Shares to be issued pursuant to the Merger on the Nasdaq National Market
and shall use its best efforts to obtain prior to the Effective Time approval
for the listing of the Newco Shares subject to official notice of issuance.
8.6 Antitrust Laws. As promptly as practicable, HD and TM shall make all
filings and submissions under the HSR Act as may be required to be made in
connection with this Agreement and the transactions contemplated hereby. Subject
to Section 8.1 hereof, HD will furnish to TM, and TM will furnish to HD, such
information and assistance as the other may reasonably request in connection
with the preparation of any such filings or submissions. Subject to Section 8.1
hereof, HD will provide to TM's designated outside counsel, as reasonably
requested, and TM will provide to HD's designated outside counsel, as reasonably
requested, copies of all correspondence, filings or communications (or memoranda
setting forth the substance thereof) between such party or any of its
representatives, on the one hand, and any governmental agency or authority or
members of their respective staffs, on the other hand, with respect to this
Agreement and the transactions contemplated hereby.
8.7 Employee Benefit Plans. Each of HD and TM hereby confirms to Newco
that all Stock Options which are not fully vested as of the date of this
Agreement provide for acceleration of vesting or exercisability upon the Merger,
and TM and HD agree not to take any action to prevent such acceleration of
vesting pursuant to the terms of such Stock Options.
8.8 Stock Options. As of the Effective Time, Newco shall assume the
Options Plans of each of TM and HD and the Stock Options outstanding under such
plans as of the Effective Time (the "Assumed Option"). Each Assumed Option shall
be exercisable for the number of Newco Shares equal to the number of TM or HD
shares subject to such option prior to the Effective Time, at the exercise price
per Newco Share equal to the exercise price per TM or HD share applicable to
such Assumed Option immediately prior to the Effective Time (without taking into
account any anti-dilution formula); provided, however, that in the case of any
Employee Stock Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the conversion formula shall be
adjusted, if necessary, to comply with Sec-
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tion 424(a) of the Code. Except as provided above, each Assumed Option shall
continue to have and be subject to the same terms and conditions as were
applicable to such option immediately prior to the Effective Time except that
each such Assumed Option held by an optionee who continues his service with TM
or HD up to the Effective Time shall be exercisable for all of shares subject to
such option as fully-vested Newco Shares. Any repurchase rights of TM and HD
with respect to (y) unvested TM and HD shares previously issued upon exercise of
options granted under the Option Plans or (z) unvested Newco Shares issuable
upon exercise of the Assumed Options, shall not be assigned to Newco. Newco
agrees that as soon as reasonably practicable after the Effective Time it will
cause to be filed one or more registration statements on Form S-8 under the
Securities Act, or amendments to any registration statements on Form S-8
covering its stock options to register the Newco Shares issuable upon exercise
of the Assumed Options, and at or prior the Effective Time, Newco shall take all
corporate action necessary to reserve for issuance a sufficient number of Newco
Shares for delivery upon exercise of the Assumed Options. The consummation of
the Merger shall not of itself be treated as a termination of an optionee's
service with TM or HD for purposes of the Assumed Options or the Option Plans.
8.9 Convertible Debentures. As of the Effective Time, each of the
Convertible Debentures which is outstanding both as of the date hereof and at
the Effective Time shall be assumed by Newco by execution and delivery of a
supplemental indenture, pursuant to which Newco shall agree to issue Newco
Shares upon conversion of the Convertible Debentures in accordance with the
terms hereof.
8.10 Indemnification and Insurance. (a) From and after the Effective Time,
the Surviving Corporation shall indemnify, defend and hold harmless to the
fullest extent permitted under applicable law each person who is now, or has
been at any time prior to the date hereof, an officer, director, employee,
trustee or agent of TM or HD (or any subsidiary or division thereof), including,
without limitation, each person controlling any of the foregoing persons
(individually, an "Indemnified Party" and collectively the "Indemnified
Parties"), against all losses, claims, damages, liabilities, costs or expenses
(including attorneys' fees), judgments, fines, penalties and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Time, arising under the Securities Act,
the Exchange Act and state corporation laws in connection with the Merger. In
the event of any such claim, action, suit, proceeding or investigation (an
"Action"), (i) the Surviving Corporation shall pay the reasonable fees and
expenses of counsel selected by the Indemnified Party, which counsel shall be
reasonably acceptable to the Surviving Corporation, in advance of the final
disposition of any such action to the fullest extent permitted by applicable
law, upon receipt of any undertaking required by applicable law, and (ii) the
Surviving Corporation shall cooperate in the defense of any such matter;
provided, however, that the Surviving Corporation shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld) and provided, further, that the Surviving Corporation
shall not be obligated pursuant to this Section 8.10 to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any single
Action except to the extent that in the opinion of counsel for the Indemnified
Parties two or more of such Indemnified Parties have conflicting interest in the
outcome of such action.
(b) The Surviving Corporation shall keep in effect provisions in its
Certificate of Incorporation and Bylaws providing for exculpation of director
and officer liability and indemnification of the Indemnified Parties to the
fullest extent permitted under the DGCL, which provisions shall not be amended
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties' right of indemnification.
(c) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained officers' and directors' liability
insurance covering the Indemnified Parties (who are currently covered in their
capacities as officers and directors by the existing officers' and directors'
liability insurance policies of TM or HD) with respect to Claims arising from
facts or which occurred on or before the Effective Time on terms substantially
no less advantageous to the Indemnified Parties than such existing insurance;
provided, however, that the Surviving Corporation shall not be required in order
to maintain or procure such coverage to pay an annual premium in excess of three
times the larger of the current annual premium paid by
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TM and HD, respectively, for its coverage (the "Cap"); and provided, further,
that if equivalent coverage cannot be obtained, or can be obtained only by
paying an annual premium in excess of the Cap, the Surviving Corporation shall
only be required to obtain as much coverage as can be obtained by paying an
annual premium equal to the Cap.
(d) The Surviving Corporation shall pay all expenses, including attorneys'
fees, that may be incurred by any Indemnified Parties in enforcing the indemnity
and other obligations provided for in Section 8.10(a).
(e) The rights of each Indemnified Party hereunder shall be in addition to
any other rights such Indemnified Party may have under the Certificate of
Incorporation or Bylaws of the Surviving Corporation, under the DGCL or
otherwise. The Provisions of this Section 8.10 shall survive the consummation of
the Merger and expressly are intended to benefit each of the Indemnified
Parties.
8.11 Public Announcements. So long as this Agreement is in effect, TM, on
the one hand, and HD, on the other hand, agree that they will each obtain the
approval of the other party prior to issuing any press release and that they
will use their best efforts to consult with one another before otherwise making
any public statement or responding to any press inquiry with respect to this
Agreement or the transactions contemplated hereby, except as may be required by
law or any governmental agency if required by such agency or the rules of the
National Association of Securities Dealers, Inc.
8.12 Expenses. In the event the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be assumed and paid by the Surviving Corporation. In
the event the Merger is not consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expenses, except as provided by Article X and
except that TM and HD shall share equally: (i) the expenses incurred in
connection with filing, printing and mailing the Proxy Statement and the
Registration Statement; and (ii) all organizational costs and expenses incurred
by Newco in connection with the transactions contemplated hereunder.
8.13 Governance. (a) Immediately prior to the Effective Time, the Board of
Directors of Newco shall take all actions necessary to implement the provisions
of this Section 8.13 and to cause the full Board of Directors of the Surviving
Corporation as and immediately after the Effective Time to consist of ten
members including (i) Parker H. Petit and four additional directors who shall be
designated by HD (together with any replacement directors appointed by the Board
of Directors of HD pursuant to Section 8.13(c) hereof, the "HD Directors"); and
(ii) Robert F. Byrnes and four additional directors who shall be designated by
TM (together with any replacement directors appointed by the Board of Directors
of TM pursuant to Section 8.13(c) hereof, the "TM Directors").
(b) The terms of the Original Directors shall expire as follows: (i) the
terms of a HD Director other than Parker H. Petit and a TM Director other than
Robert F. Byrnes, shall expire at the 1996 Annual Meeting; (ii) the terms of two
HD Directors other than Parker H. Petit and two TM Directors other than Robert
F. Byrnes, shall expire at the 1997 Annual Meeting; and (iii) the terms of
Parker H. Petit, Robert F. Byrnes, and each of the remaining two (2) Original
Directors shall expire at the 1998 Annual Meeting. Consistent with the
foregoing, the Board of Directors of HD shall designate the term of each HD
Director and the Board of Directors of TM shall designate the term of each TM
Director.
(c) If any of the TM Directors are unable or unwilling to serve as a
director of the Surviving Corporation, such individual or individuals shall be
replaced by an individual or individuals designated by the Board of Directors of
TM. If any of the HD Directors are unable or unwilling to serve as a director of
the Surviving Corporation, such individual or individuals shall be replaced by
an individual or individuals designated by the Board of Directors of HD. Each of
the directors of each of the constituent corporations has agreed to take such
individual action as may be necessary on such director's part, including
resignation, to cause compliance with the provisions of this Section 8.13.
(d) For a period of three years following the Effective Time and continuing
through the 1998 Annual Meeting of Stockholders of the Surviving Corporation,
any vacancy on the Board of Directors of the Surviving Corporation arising among
the TM Directors shall be filled or selected by a majority vote of the remaining
TM
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Directors, and any vacancy arising among the HD Directors shall be filled or
selected by a majority vote of the remaining HD Directors.
(e) Immediately prior to the Effective Time, the Board of Directors of
Newco shall take all action necessary to establish four committees of the Board
of Directors of the Surviving Corporation, which committees shall consist of an
executive committee (the "Executive Committee"), an audit committee (the "Audit
Committee"), a compensation and stock option committee (the "Compensation
Committee") and a nominating committee (the "Nominating Committee").
(i) The Executive Committee shall consist of six members. In addition
to such powers as may be delegated to it from time to time by the Surviving
Corporation's Board of Directors, the Executive Committee shall: resolve
any differences, disagreements or issues presented to the Executive
Committee for consideration by the "Transition Committee" (as hereinafter
defined); act in the absence of the full Board of Directors of the
Surviving Corporation as deemed necessary and appropriate and as permitted
by applicable law; keep the full Board of Directors of the Surviving
Corporation apprised of Executive Committee activities and decisions; and
conduct detailed review and evaluation of the annual budget prior to
submission to the full Board of Directors of the Surviving Corporation. The
Executive Committee shall meet no less frequently than monthly for the
first six months following the Effective Time to review progress, issues
and problems in-depth, and thereafter as specified in the Bylaws of the
Surviving Corporation, with special meetings to be called at the direction
of the Chairman of the Board, Chief Executive Officer or any member of the
Executive Committee. The initial Chairman of the Executive Committee shall
be Parker H. Petit, and the other initial members of the Executive
Committee shall be Robert F. Byrnes, two HD Directors designated by the
Board of Directors of HD and two TM Directors designated by the Board of
Directors of TM. In all matters brought before the Executive Committee by
the Transition Committee for resolution by the Executive Committee, Parker
H. Petit and Robert F. Byrnes shall act as ex officio non-voting members.
(ii) The Audit Committee shall consist of four members. In addition to
such powers as may be delegated to it from time to time by the Surviving
Corporation's Board of Directors, the Audit Committee shall: recommend
outside accountants for approval by the full Board of Directors and the
stockholders of the Surviving Corporation; meet with the Surviving
Corporation's outside auditors and the Surviving Corporation's Chief
Financial Officer and their respective staffs to review and evaluate
accounting and control systems, issues and related matters; meet
independently with the Surviving Corporation's auditors and Chief Financial
Officer to discuss the accuracy and integrity of the Surviving
Corporation's financial reporting management information and control
systems, and any other appropriate issues; and address any other matters
which are appropriate for the Audit Committee's review or involvement. The
Audit Committee shall meet no less frequently than twice per year, with
special meetings to be called at the direction of the Chairman of the
Board, Chief Executive Officer, Chief Financial Officer, outside auditors,
any member of the Audit Committee or any member of the Surviving
Corporation's Board of Directors. The initial members of the Audit
Committee shall be two non-employee TM Directors designated by the Board of
Directors of TM and two non-employee HD Directors designated by the Board
of Directors of HD. The Chairman of the Audit Committee shall be selected
by a majority vote of the committee.
(iii) The Compensation Committee shall consist of six members. In
addition to such powers as may be delegated to it from time to time by the
Surviving Corporation's Board of Directors, the Compensation Committee
shall: review and approve salaries for all corporate officers; review and
approve all incentive and special compensation plans and programs,
including stock options and related longer term incentive compensation
programs; review and approve management succession planning; conduct
special competitive compensation studies and retain compensation
consultants as deemed necessary and appropriate; and recommend appropriate
programs and actions on any of the above matters to the full Board of
Directors of the Surviving Corporation for their review and approval. The
Compensation Committee shall meet no less frequently than twice per year,
with special meetings to be called at the direction of the Chairman of the
Board, Chief Executive Officer, or any member of the Compensation
Committee. The initial members of the Compensation Committee shall be two
non-employee HD Directors designated by the
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Board of Directors of HD and two non-employee TM Directors designated by
the Board of Directors of TM. Parker H. Petit and Robert F. Byrnes shall
serve as ex officio non-voting members of the Compensation Committee. The
Chairman of the Compensation Committee shall be selected by a majority vote
of the committee.
(iv) The Nominating Committee shall consist of four members. In
addition to such powers as may be delegated to it from time to time by the
Surviving Corporation's Board of Directors, the Nominating Committee shall
to the extent not inconsistent with Section 8.13(c) or (d): identify,
screen and recommend candidates for appointment to the Board of Directors
of the Surviving Corporation, for consideration by the full Board of
Directors of the Surviving Corporation and by the stockholders of the
Surviving Corporation; and establish compensation and retirement policies
for members of the Board of Directors of the Surviving Corporation. The
Nominating Committee shall meet no less frequently than once per year, with
special meetings to be called at the direction of any member of the
Nominating Committee. The initial Chairman of the Nominating Committee
shall be Robert F. Byrnes. The other initial members shall be Parker H.
Petit, a TM Director designated by the Board of Directors of TM and a HD
Director designated by the Board of Directors of HD.
For a period of three years following the Effective Time, any vacancies on a
committee of the Surviving Corporation's Board of Directors shall be filled in
accordance with Section 8.13(d) as if such Section referenced such committee
instead of the Surviving Corporation's Board of Directors. In accordance with
the Surviving Corporation's Bylaws, each of the committees named herein may act
only by affirmative vote of a majority of the authorized number of members of
such committee.
(f) Immediately prior to the Effective Time, the Board of Directors of
Newco shall take all actions necessary to cause the principal executive officers
of the Surviving Corporation to be as follows:
<TABLE>
<CAPTION>
NAME OFFICE
- ---------------------- ----------------------------------------------------------
<S> <C>
Parker H. Petit....... Chairman of the Board
Robert F. Byrnes...... President and Chief Executive Officer
Frank Powers.......... Executive Vice President -- Provider Operations
Terry P. Bayer........ Executive Vice President -- Managed Care Operations
Donald R. Millard..... Senior Vice President and Chief Financial Officer
J. Brent Burkey....... Senior Vice President and General Counsel
</TABLE>
8.14 Name Change. The Boards of Directors of TM and HD shall use their
best efforts prior to the Effective Time to agree upon a new name for the
Surviving Corporation. If the Boards of Directors of TM and HD have not agreed
on a new name for the Surviving Corporation prior to the Effective Time, the
Board of Directors of the Surviving Corporation shall select a new name
following the Merger and the name change of the Surviving Corporation shall be
effected by forming a wholly owned subsidiary of the Surviving Corporation,
having the new name and no significant operations, assets or liabilities, and
causing such subsidiary to be merged with and into the Surviving Corporation in
accordance with Section 253(b) of the DGCL.
8.15 Certain Benefits. (a) From and after the Effective Time, the
Surviving Corporation shall honor in accordance with their terms all benefits
accrued at the Effective Time under the TM Plans and HD Plans, including any
rights to payments and benefits under the agreements and arrangements listed on
Schedule 8.15 attached hereto and shall grant all TM and HD employees from and
after the Effective Time credit for all service with TM and/or HD and their
respective affiliates and predecessors prior to the Effective Time for all
purposes for which such service was recognized under the benefit plan in
question; provided, however, that the granting of such services shall not result
in a duplication of benefits provided to employees who become employees of the
Surviving Corporation. To the extent any such benefit plans provide medical or
dental welfare benefits after the Effective Time, such benefit plans shall waive
any preexisting condition exclusions and waiting periods for plan participation
unless the employee was subject to one or more preexisting condition exclusions
in the TM or HD Plan, and shall provide that any expenses incurred on or before
the Effective
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Time shall be taken into account under the benefit plans of the Surviving
Corporation for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions.
(b) Except as provided in the next sentence, TM and HD intend that the
obligations and rights created hereunder (including, without limitation, any
rights or obligations created by Section 8.15(a)) are only for the benefit of TM
and HD. This Agreement shall not be construed to create any rights or benefits
for any third party beneficiaries and shall not in any event create any rights
or benefits for employees or former employees of HD or TM) except as referenced
in Section 11.7, and except that the parties to the agreements and arrangements
listed on Schedule 8.15 shall be entitled to enforce such agreements against the
Surviving Corporation.
8.16 Transition Committee. Upon the execution and delivery of this
Agreement, HD and TM will establish a committee (the "Transition Committee") for
the purposes of and with the membership outlined in Schedule 8.16 attached
hereto. A consultant (the "Consultant") shall serve as the consultant to HD, TM
and the Transition Committee following the execution hereof and thereafter until
the conclusion of the "Transition Period" (as hereinafter defined). The
Consultant shall be designated by agreement of HD and TM. If HD and TM do not
reach agreement on selection of the Consultant on or before October 17, 1995,
the Consultant shall be selected by a committee (the "Designation Committee")
consisting of a non-employee director of HD designated by HD and a non-employee
director of TM designated by TM. On or before October 17, 1995, each of HD and
TM shall nominate an individual and the Designation Committee shall interview
each of the nominees in person or by telephone and shall then make its decision
on or before October 23, 1995. Prior to the Effective Time the Transition
Committee shall deliver a written report to the Boards of Directors of HD and TM
that specifically identifies savings to be achieved by the Surviving Corporation
in the one-year period following the Effective Time (the "Transition Period").
The Transition Committee shall survive the Merger and will thereafter continue
as a committee of the Surviving Corporation to report directly to the Board of
Directors of the Surviving Corporation at each regular or special meeting
thereof for a period of nine months following the date hereof, unless extended
or earlier terminated by the Board of Directors of the Surviving Corporation.
8.17 Amendment of HD Rights Plans. HD shall authorize and execute
appropriate amendments to the HD Rights Plans so that neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will trigger the exercise of any HD Rights under the HD Rights Plans or
otherwise affect any HD Rights or obligations under the HD Rights Plans except
as provided in Section 4.1(b) hereof.
8.18 HIE Spinoff. HD shall use its reasonable best efforts to consummate
the HIE Spinoff prior to the scheduled closing of the Merger.
ARTICLE IX
CONDITIONS TO CONSUMMATION OF THE MERGER
9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any one of which may be waived by both HD and TM:
(a) Any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(b) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act.
(c) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the stockholders of TM
and the stockholders of HD in accordance with applicable law.
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(d) No preliminary or permanent injunction or other order by any
federal, state or foreign court of competent jurisdiction which prohibits
the consummation of the Merger shall have been issued and remain in effect.
No statute, rule, regulation, executive order, stay, decree or judgment
shall have been enacted, entered, issued, promulgated or enforced by any
court or governmental authority which prohibits or restricts the
consummation of the Merger. Other than the filing of the Certificate of
Merger with the Secretary of State of Delaware and the filing of the
Certificate of Merger with the Secretary of State of Georgia, all
authorizations, consents, orders or approvals of, or declarations or
filings with, and all expirations of waiting periods imposed by, any
governmental entity (all of the foregoing, "Consents") which are necessary
for the consummation of the Merger, other than Consents the failure to
obtain which would have no material adverse effect on the consummation of
the Merger or on the Surviving Corporation and its subsidiaries (including
any licensing or nursing certificates required to do business in one or
more states or local jurisdictions), taken as a whole, shall have been
filed, occurred or been obtained (all such permits, approvals, filings and
consents and the lapse of all such waiting periods being referred to as the
"Requisite Regulatory Approvals") and all such Requisite Regulatory
Approvals shall be in full force and effect. Newco shall have received all
state securities or blue sky permits and other authorizations necessary to
issue the Newco Shares in exchange for the Shares and to consummate the
Merger.
(e) There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any federal or state governmental entity which, in connection
with the grant of a Requisite Regulatory Approval, imposes any condition or
restriction upon the Surviving Corporation or its subsidiaries (or, in the
case of any disposition of assets required in connection with such
Requisite Regulatory Approval, upon TM or its subsidiaries or HD or its
subsidiaries), including, without limitation, requirements relating to the
disposition of assets, which in any such case would so materially adversely
impact the economic or business benefits of the transactions contemplated
by this Agreement as to render inadvisable the consummation of the Merger.
(f) Newco shall have caused the Board of Directors and committees of
Newco to be selected pursuant to, and the officers of Newco to be as set
forth in, Section 8.13.
(g) The Newco Shares to be issued in the Merger shall have been
approved for listing on the Nasdaq National Market subject to official
notice of issuance.
(h) Tokos Medical Corporation, a California corporation, shall have
been merged into TM.
(i) At least twenty (20) days prior to the Effective Time, HD shall
have consummated the HIE Spinoff in all material respects in conformity
with the description thereof contained in the preliminary prospectus
contained in the registration statement filed with the SEC on September 1,
1995.
9.2 Conditions to Obligations of HD to Effect the Merger. The obligation
of HD to effect the Merger shall be further subject to the satisfaction at or
prior to the Effective Time of the following additional conditions, which may be
waived by HD:
(a) TM shall have performed in all material respects its obligations
under this Agreement required to be performed by it at or prior to the
Effective Time and the representations and warranties of TM contained in
this Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such time, except as
contemplated by this Agreement, and HD shall have received a certificate of
the Chairman of the Board, the President or an Executive Vice President of
TM as to the satisfaction of this condition.
(b) HD shall have received an opinion of Troutman Sanders LLP, counsel
to HD, dated as of the Effective Time, substantially to the effect that, on
the basis of facts, representations, and assumptions set forth in such
opinion which are consistent with the state of facts existing at the
Effective Time, the merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code and
that TM and HD will each be a party to the reorganization within the
meaning of Section 368(b) of the Code. In addition, HD shall have received
the opinion, dated the Closing Date, of Morrison & Foerster, counsel for
TM, covering the matters set forth in Schedule 9.2(b).
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(c) TM shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument,
except those for which failure to obtain such consents and approvals would
not, individually or in the aggregate, have a material adverse effect on
the Surviving Corporation and its subsidiaries taken as a whole or upon the
consummation of the transactions contemplated hereby.
(d) HD shall have received from Ernst & Young, LLP, letters dated (i)
the date of the Proxy Statement and (ii) the Effective Time, with respect
to certain financial information regarding TM, in each case in form and
substance customary in transactions of the nature of the Merger and
reasonably satisfactory to HD.
9.3 Conditions to Obligations of TM to Effect the Merger. The obligations
of TM to effect the Merger shall be further subject to the satisfaction at or
prior to the Effective Time of the following additional conditions, which may be
waived by TM:
(a) HD shall have performed in all material respects its obligations
under this Agreement required to be performed and complied with by it at or
prior to the Effective Time and the representations and warranties of HD
contained in this Agreement shall be true and correct in all material
respects at and as of the Effective Time as if made at and as of such time,
except as contemplated by this Agreement, and TM shall have received a
Certificate of the Chairman of the Board, the President or a Senior Vice
President of HD as to the satisfaction of this condition.
(b) HD shall have obtained the consent or approval of each person
whose consent or approval shall be required in order to permit the
succession by the Surviving Corporation pursuant to the Merger to any
obligation, right or interest of HD or any subsidiary under any loan or
credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument, except those for which failure to obtain such
consents and approvals would not, individually or in the aggregate, have a
material adverse effect on the Surviving Corporation and its subsidiaries
taken as a whole or upon the consummation of the transactions contemplated
hereby.
(c) TM shall have received the opinion of Morrison & Foerster, counsel
to TM, dated the Closing Date and addressed to TM, to the effect that, on
the basis of facts, representations, and assumptions set forth in such
opinion which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and
that TM and HD will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. In addition, TM shall have received
the opinion, dated the Closing Date, of Troutman Sanders LLP, counsel for
HD, covering the matters set forth in Schedule 9.3(c).
(d) TM shall have received from KPMG Peat Marwick, LLP, letters dated
(i) the date of the Proxy Statement and (ii) the Effective Time, with
respect to certain financial information regarding HD, in each case in form
and substance customary in transactions of the nature of the Merger and
reasonably satisfactory to TM.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby abandoned at any time prior to the Effective Time, whether
before or after approval by the stockholders of HD or TM:
(a) By mutual written consent of TM and HD;
(b) By TM or HD if the Merger shall not have been consummated on or
before May 1, 1996;
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(c) By HD, upon a breach by TM of (i) any representation or warranty
which would have or would be reasonably likely to have a Material Adverse
Effect on TM or (ii) any material covenant or agreement set forth in this
Agreement, which breach is not curable or, if curable, is not cured within
the earlier to occur of twenty (20) days after written notice of such
breach is given by HD to TM or the Closing;
(d) By TM, upon a breach by HD of (i) any representation or warranty
which would have or would be reasonably likely to have a Material Adverse
Effect on HD or (ii) any material covenant or agreement set forth in this
Agreement, which breach is not curable or, if curable, is not cured within
the earlier to occur of twenty (20) days after written notice of such
breach is given by TM to HD or the Closing;
(e) By TM if the Board of Directors of HD shall have withdrawn or
modified in a manner adverse to TM its approval or recommendation of this
Agreement or the Merger, or shall have resolved to do the same, provided
however that TM may not terminate this Agreement pursuant to this clause
(e), if, as a result of HD's receipt of an Acquisition Proposal from a
third party, HD withdraws, modifies or amends its approval or
recommendation of the transactions contemplated hereby and if HD publicly
reconfirms its recommendation of the transactions contemplated hereby and
notifies TM of such reconfirmation prior to termination of this Agreement
by TM pursuant to this clause;
(f) By HD if the Board of Directors of TM shall have withdrawn or
modified in a manner adverse to HD its approval or recommendation of this
Agreement or the Merger, or shall have resolved to do the same, provided
however that HD may not terminate this Agreement pursuant to this clause
(f), if, as a result of TM's receipt of an Acquisition Proposal from a
third party, TM withdraws, modifies or amends its approval or
recommendation of the transactions contemplated hereby and if TM publicly
reconfirms its recommendation of the transactions contemplated hereby and
notifies HD of such reconfirmation prior to termination of this Agreement
by HD pursuant to this clause;
(g) By either TM or HD if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or take any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or any
other action shall have become final and nonappealable;
(h) By either TM or HD upon written notice to the other party if any
approval of the stockholders of TM or of HD required for the consummation
of the Merger shall not have been obtained by reason of the failure to
obtain the required vote at a duly held meeting of stockholders or at any
adjournment thereof;
(i) By HD, if it shall receive any Acquisition Proposal after the date
hereof from a third party or parties and the Board of Directors of HD shall
have determined in good faith that in the exercise of its fiduciary duties
to the shareholders of HD that HD must recommend or approve such
Acquisition Proposal; provided that HD may only terminate this Agreement
pursuant to this clause if it is not then otherwise in breach of this
Agreement and provided further that HD may only terminate this Agreement
pursuant to this clause if it simultaneously with such termination delivers
to TM the termination fee provided for in Section 10.3; or
(j) By TM, if it shall receive any Acquisition Proposal after the date
hereof from a third party or parties and the Board of Directors of TM shall
have determined in good faith that in the exercise of its fiduciary duties
to the stockholders of TM that TM must recommend or approve such
Acquisition Proposal; provided that TM may only terminate this Agreement
pursuant to this clause if it is not then otherwise in breach of this
Agreement and provided further that TM may only terminate this Agreement
pursuant to this clause if it simultaneously with such termination delivers
to HD the termination fee provided for in Section 10.3.
10.2 Effect of Termination. In the event of termination of this Agreement
as provided above, this Agreement shall forthwith become of no further effect
and there shall be no liability or obligation on the part of either TM or HD or
their respective officers or directors (except as set forth in Section 8.1
hereof and except for Sections 8.12 and 10.3 hereof which shall survive the
termination). Except as otherwise provided in Section 10.3(c), nothing contained
in this Section 10.2 shall relieve any party from liability for willful breach
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of this Agreement that results in termination of this Agreement. Upon request
therefor, each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether obtained before or after the execution hereof, to the party furnishing
same.
10.3 Cancellation Fee; Expenses. (a) If with respect to either TM or HD
(each a "Subject Company"), (i) after the date hereof any third party shall have
become the beneficial owner of ten percent (10%) or more of the shares of Common
Stock of the Subject Company outstanding at the time of such acquisition (other
than acquisitions for bona fide arbitrage purposes only); (ii) the Subject
Company shall have entered into an agreement, including without limitation an
agreement in principle, with respect to an Acquisition Proposal, other than the
acquisition contemplated by this Agreement; (iii) any third party shall solicit
and obtain proxies or consents from the Subject Company's stockholders
representing a majority of the outstanding shares of Common Stock of the Subject
Company with respect to an acquisition of control of the Subject Company (other
than solicitations relating to this Agreement) or with respect to a stockholder
proposal aimed at preventing or recommending against consummation of this
Agreement or any related transaction and such third party shall successfully use
such proxies or consents to acquire control of the Subject Company or to defeat
the Merger and the Subject Company shall enter into an agreement, including
without limitation, an agreement in principle with respect to an Acquisition
Proposal within six months thereafter; or (iv) the Subject Company shall breach
any of the provisions of Section 8.2 above or shall recommend or approve an
Acquisition Proposal pursuant to Section 8.2 and, in either case, this Agreement
is terminated pursuant to Section 10.1(c), Section 10.1(d), Section 10.1(e),
Section 10.1(f), Section 10.1(i) or Section 10.1(j); then such Subject Company
("Payor Company") shall pay to the other Subject Company ("Receiving Company") a
fee in cash or immediately available funds of Five Million Five Hundred Thousand
Dollars ($5,500,000) (the "Cancellation Fee"); provided, however, that no such
Cancellation Fee shall be payable with respect to clauses (i) through (iii)
above if the applicable event otherwise triggering the Cancellation Fee occurs
after this Agreement has been terminated pursuant to Section 10.1(a), Section
10.1(b), Section 10.1(c), Section 10.1(d), Section 10.1(g) or Section 10.1(h)
hereof.
(b) The Payor Company shall pay to the Receiving Company the Cancellation
Fee provided in Section 10.3(a) above within ten (10) days of written demand
therefor by the Receiving Company. The payment of the Cancellation Fee shall be
conditioned on there being no material breach of the obligations of the
Receiving Company hereunder. If the Payor Company fails to pay any amount due
the Receiving Company pursuant to this Section 10.3 when due, the Payor Company
shall pay interest thereon, from the date due until the date paid in full, at
the Prime Rate as announced from time to time by Bank of America or any
successor thereto (the "Prime Rate") and shall reimburse the Receiving Company
for all reasonable attorneys' fees and other costs and expenses incurred by the
Receiving Company in collecting such amount from the Payor Company.
(c) Notwithstanding anything herein to the contrary, payment of the
Cancellation Fee as provided in subsections (a) and (b) of this Section 10.3 and
payment of the Expense Reimbursement Payment as provided in Section 10.3(d),
when required, shall constitute full settlement of any and all liabilities and
obligations of the Payor Company under this Agreement, except for liabilities
arising from the fraud or willful misconduct of the Payor Company.
(d) In the event that either HD or TM terminates this Agreement pursuant
to, respectively, Section 10.1(c) or Section 10.1(d) hereof, then the
nonterminating party shall pay to the terminating party One Million Dollars
($1,000,000) representing full payment of the terminating party's reasonable
out-of-pocket expenses incurred in connection with the negotiation, execution
and performance of this Agreement ("Expense Reimbursement Payment"); provided,
however, that the terminating party shall not be entitled to any Expense
Reimbursement Payment pursuant to this Section 10.3(d) if at the time of
termination the nonterminating party also would have been entitled to terminate
this Agreement pursuant to Section 10.1(c) or Section 10.1(d), as applicable. In
addition, if the stockholders of TM or HD fail to approve the merger and this
Agreement is terminated by HD or TM pursuant to Section 10.1(h), then the party
whose stockholders have so failed to approve the Merger shall pay to the other
party hereto the Expense Reimbursement Payment; provided, however, that no such
Expense Reimbursement Payment shall be due under this sentence if the
stockholders of the party which would have otherwise been entitled to such
Expense
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Reimbursement Payment have previously failed to approve the Merger at the
stockholders meeting called for that purpose.
10.4 Amendment. This Agreement may be amended by action taken by TM and HD
at any time before or after approval hereof by the stockholders of HD and TM,
but, after any such approval, no amendment shall be made which alters the number
of Newco Shares to be exchanged for each Share of TM or HD or which in any way
materially adversely affects the rights of such stockholders, without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
10.5 Waiver. At any time prior to the Effective Time, the parties hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties,contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Such waiver shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
ARTICLE XI
GENERAL PROVISIONS
11.1 Survival of Representations, Warranties and Agreements. No
representations, warranties or agreements contained herein shall survive beyond
the Effective Time except that the agreements contained in Sections 3.3, 3.4,
4.1, 4.2, 4.3, 4.4, 4.5, 4.7, 8.8, 8.9, 8.10, 8.12, 8.13, 8.14, 8.15, 8.16,
10.3, 11.1, 11.3, 11.6 and 11.7 hereof shall survive beyond the Effective Time.
11.2 Brokers. HD represents and warrants to TM that, except for its
financial advisors, Colman Furlong & Co. and Needham & Company, Inc., no broker,
finder or financial advisor is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement (other than the HIE Spinoff) based upon arrangements made by or
on behalf of HD and that a true and complete copy of each of the engagement
letters between HD and Colman Furlong & Co. and HD and Needham & Company, Inc.
has previously been delivered to TM. TM represents and warrants to HD that,
except for its financial advisors, Robertson, Stephens & Company, no broker,
finder or financial advisor is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of TM and that a
true and complete copy of the engagement letter among TM and Robertson, Stephens
& Company has previously been delivered to HD.
11.3 Notices. All notices, claims, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or by telex or telecopy or mailed by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to TM, to:
Tokos Medical Corporation
1821 East Dyer Road
Santa Ana, California 92705
Attention: Robert F. Byrnes
Telecopy: (714) 474-7506
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with a copy to:
Morrison & Foerster
19900 MacArthur Boulevard, Ste. 1200
Irvine, California 92715
Attention: Robert M. Mattson, Jr., Esq.
Telecopy: (714) 251-7500
(b) If to HD, to:
Healthdyne, Inc.
1850 Parkway Place
Marietta, Georgia 30067
Attention: Parker H. Petit
Telecopy: (770) 423-7769
with a copy to:
Troutman Sanders LLP
600 Peachtree Street, N.E., Ste. 5200
Atlanta, Georgia 30308
Attention: James L. Smith, III, Esq.
Telecopy: (404) 885-3900
(c) If to Newco, then to TM and HD, with copies to their respective
counsel, as set forth above.
11.4 Descriptive Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.5 Entire Agreement; Assignment. This Agreement (including the Exhibits
and other documents and instruments referred to herein) and the Confidentiality
Agreement (a) constitute the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties or any
of them, with respect to the subject matter hereof; and (b) shall not be
assigned by operation of law or otherwise, provided that TM may assign its
rights and obligations hereunder to a direct or indirect subsidiary of TM, but
no such assignment shall relieve TM of its obligations hereunder.
11.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
provisions thereof relating to conflicts of law.
11.7 Parties in Interest. Except for Sections 8.8, 8.9, 8.10, 8.12, 8.13
and 8.15 hereof, nothing in this Agreement, express or implied, is intended to
or shall confer upon any other person any rights, benefit or remedies of any
nature whatsoever or by reason of this Agreement.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
11.9 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
11.10 Jurisdiction and Venue. Each party hereto hereby agrees that any
proceeding relating to this Agreement and the Merger shall be brought in a state
court of Delaware. Each party hereto hereby consents to personal jurisdiction in
any such action brought in any such Delaware court, consents to service of
process by registered mail made upon such party and such party's agent and
waives any objection to venue in any such Delaware court or to any claim that
such Delaware court is an inconvenient form.
11.11 Investigation. The respective representations and warranties of TM
and HD contained herein or in the certificates or other documents delivered
prior to the Closing shall not be deemed waived or otherwise affected by any
investigation made by any party hereto.
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11.12 Consents. For purposes of any provision of this Agreement requiring,
permitting or providing for the consent of TM or HD, the written consent of the
Chief Executive Officer of TM or HD, as the case may be shall be sufficient to
constitute such consent.
IN WITNESS WHEREOF, each of TM and HD has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
"TM"
TOKOS MEDICAL CORPORATION
(DELAWARE)
By: /s/ ROBERT F. BYRNES
--------------------------------------
Name: Robert F. Byrnes
Title: Chairman of the Board and Chief
Executive Officer
"HD"
HEALTHDYNE, INC.
By: /s/ PARKER H. PETIT
--------------------------------------
Name: Parker H. Petit
Title: Chairman of the Board and Chief
Executive Officer
"NEWCO"
TOKOS/HEALTHDYNE ACQUISITION
COMPANY, INC.
By: /s/ PARKER H. PETIT
--------------------------------------
Name: Parker H. Petit
Title: Chairman of the Board
33
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APPENDIX B
FAIRNESS OPINION OF NEEDHAM & COMPANY, INC.
<PAGE> 222
[NEEDHAM LOGO]
NEEDHAM & COMPANY, INC. 400 PARK AVENUE, NEW YORK, NY 10022-4406 (212) 371-8300
October 2, 1995
Board of Directors
Healthdyne, Inc.
1850 Parkway Place
Marietta, Georgia 30067
Gentlemen:
It has been proposed that Healthdyne, Inc. ("Healthdyne"), Tokos Medical
Corporation ("Tokos") and Newco ("Newco"), a corporation to be formed and
organized, enter into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which Healthdyne and Tokos will be merged with and into Newco with
Newco as the surviving corporation in the merger (the "Merger") and the separate
existence of Healthdyne and Tokos shall thereupon cease. The terms of the Merger
will be set forth more fully in the Merger Agreement. For the purposes of this
letter, we have assumed that the terms and conditions of the Merger and the
Merger Agreement will be as set forth in the Draft of the Merger Agreement dated
September 28, 1995.
Pursuant to the Merger Agreement, we understand that at the Effective Time
(as defined in the Merger Agreement), each share of common stock, par value
$.001 per share of Tokos shall be canceled and extinguished and converted into
the right to receive one share of common stock of Newco ("Newco Common Stock")
and each share of common stock, par value $.01 per share, of Healthdyne issued
and outstanding immediately prior to the Effective Time shall be canceled and
extinguished and converted into the right to receive one share (the "Exchange
Ratio") of Newco Common Stock.
You have asked us to advise you as to the fairness, from a financial point
of view, of the Exchange Ratio to the stockholders of Healthdyne. Needham &
Company, Inc. as part of its investment banking business is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. We are acting as financial advisor to
Healthdyne in connection with the spinoff of Healthdyne Information Enterprises,
Inc. Needham & Company will receive a fee for rendering this opinion and
Healthdyne has agreed to indemnify Needham & Company for certain liabilities
arising out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed the
Draft of the Merger Agreement; (ii) reviewed certain other documents related to
the Merger; (iii) reviewed certain publicly available information concerning
Healthdyne and Tokos and certain other relevant financial and operating data of
Healthdyne and Tokos made available from the internal records of Healthdyne and
Tokos; (iv) visited Healthdyne's and Tokos' facilities and held discussions with
members of senior management of Healthdyne and Tokos concerning their current
and future business prospects; (v) reviewed certain financial forecasts and
projections prepared by Healthdyne's and Tokos' respective managements; (vi)
reviewed the historical stock prices and trading volumes of the Healthdyne
Common Stock and Tokos Common Stock; (vii) reviewed the financial terms of
certain other business combinations that we deemed generally relevant; and
(viii) performed and/or considered such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In connection with our review and in arriving at our opinion, we have not
assumed any responsibility to independently verify and of the foregoing
information, have relied on such information, and have assumed that all such
information is complete and accurate in all material respects. With respect to
Healthdyne's and Tokos' financial forecasts provided to us by their respective
managements, we have assumed for purposes of our opinion that such forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of such managements, at the time of preparation, of the
future operating and
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financial performance of Healthdyne and Tokos. We have not assumed any
responsibility for or made or obtained an independent evaluation, appraisal or
physical inspection of the assets or liabilities of Healthdyne or Tokos.
Further, our opinion is based on economic, monetary and market conditions
existing as of the date hereof, and in rendering this opinion, we have relied
without independent verification on the accuracy, completeness and fairness of
all historical financial and other information which was either publicly
available or furnished to us by Healthdyne and Tokos. Our opinion as expressed
herein is limited to the fairness, from a financial point of view, of the
Exchange Ratio to the stockholders of Healthdyne and does not address
Healthdyne's underlying business decision to engage in the Merger.
In the ordinary course of our business, we may actively trade the equity
securities of Healthdyne and Tokos for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position is
such securities.
This letter and the opinion expressed herein are solely for the benefit of
the Board of Directors of Healthdyne and may not be quoted or referred to or
used for any other purpose without prior written consent, except that this
letter may be disclosed in connection with any registration statement or proxy
statement used in connection with the Merger so long as this letter is quoted in
full in such registration statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the stockholders of Healthdyne from a
financial point of view.
Very truly yours,
/s/ NEEDHAM & COMPANY, INC.
NEEDHAM & COMPANY, INC.
JCM:RLE
<PAGE> 224
APPENDIX C
FAIRNESS OPINION OF ROBERTSON, STEPHENS & COMPANY
<PAGE> 225
ROBERTSON STEPHENS & COMPANY
OCTOBER 2, 1995
PRIVILEGED AND CONFIDENTIAL
Board of Directors
Tokos Medical Corporation
1821 E. Dyer Road
Santa Ana, CA 92705
Members of the Board:
You have asked our opinion with respect to the fairness to the stockholders
of Tokos Medical Corporation ("Tokos"), from a financial point of view and as of
the date hereof, of the Tokos Exchange Ratio (as defined below), in the proposed
merger between Healthdyne, Inc. ("Healthdyne") and Tokos, pursuant to the draft
Agreement and Plan of Merger, dated as of September 28, 1995 (the "Agreement").
Under the terms of the Agreement, Tokos and Healthdyne will cause a new Delaware
corporation ("Newco") to be formed. Tokos and Healthdyne will both merge with
and into Newco, with Newco as the surviving corporation in the merger, and the
separate corporate existence of Healthdyne and Tokos will cease (the "Merger").
In the Merger, each outstanding share of common stock of Healthdyne will be
converted into the right to receive one share of common stock of Newco (the
"Healthdyne Exchange Ratio"), and each outstanding share of common stock of
Tokos will be converted into the right to receive one share of common stock of
Newco (the "Tokos Exchange Ratio"). Outstanding options to acquire shares of
Healthdyne and outstanding options to acquire shares of Tokos will be converted
into options to acquire shares of Newco on similar terms. The Merger is intended
to qualify as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended. The terms and conditions of the
Merger are set out more fully in the Agreement.
For purposes of this opinion we have: (i) reviewed financial information on
Tokos and Healthdyne furnished to us by both companies, including certain
internal financial analyses and forecasts prepared by the management of Tokos
and Healthdyne; (ii) reviewed publicly available information; (iii) held
discussions with the management of Tokos and Healthdyne concerning the
businesses, past and current business operations, financial condition and future
prospects of both companies, independently and combined, including certain
information prepared by the management of Tokos and Healthdyne concerning
potential cost savings and synergies that could result from this Merger; (iv)
reviewed the Agreement; (v) reviewed the stock price and trading histories of
both companies; (vi) reviewed the exchange ratio implied by historical stock
prices of the two companies; (vii) reviewed the contribution by each company to
pro forma combined revenue, gross income, operating income, and selected balance
sheet categories; (viii) reviewed the valuations of publicly traded companies
which we deemed comparable to Tokos and Healthdyne; (ix) compared the financial
terms of the Merger with other transactions which we deemed relevant; (x)
analyzed the pro forma earnings per share of the combined company; and (xi) made
such other studies and inquiries, and reviewed such other data, as we deemed
relevant.
In connection with our opinion, we have not however independently verified
any of the foregoing information and have relied on all such information being
complete and accurate in all material respects. Furthermore, we did not obtain
any independent appraisal of the properties or assets and liabilities of Tokos
or Healthdyne or of any of their subsidiaries. With respect to the financial and
operating forecasts (and the assumptions and bases therefor) of Tokos and
Healthdyne which we have reviewed, we have assumed that such forecasts have been
reasonably prepared and reflect the best available estimates and judgments of
such respective managements and that such projections and forecasts will be
realized in the amounts and in the
555 CALIFORNIA STREET SAN FRANCISCO 94104 415-781-9700
INVESTMENT BANKERS MEMBER OF ALL MAJOR EXCHANGES
A CALIFORNIA LIMITED PARTNERSHIP
<PAGE> 226
time periods currently estimated by the managements of Tokos and Healthdyne. In
addition, we have relied upon estimates and judgments of Tokos and Healthdyne
managements as to the future financial performance of both companies, including
the possible cost savings and synergies resulting from the Merger. While we
believe that our review, as described within, is an adequate basis for the
opinion that we express, this opinion is necessarily based upon market,
economic, and other conditions that exist and can be evaluated as of the date of
this letter, and on information available to us as of the date hereof.
Robertson, Stephens & Company is the investment manager of investment
entities that invested in the purchase of Tokos preferred stock, and a
representative of Robertson, Stephens & Company sits on the Board of Directors
of Tokos. Robertson, Stephens & Company has also provided certain investment
banking services to Tokos from time to time, including acting as the managing
underwriter for the initial public offering of shares of the common stock of
Tokos on March 26, 1990 and acting as financial advisor to Tokos in several of
its acquisitions. In addition, Robertson, Stephens & Company also maintains a
market in shares of the common stock of Tokos. Furthermore, Robertson, Stephens
& Company has acted as financial advisor to Tokos in connection with the Merger
for which fees are due and payable contingent upon the closing of the Merger.
Our opinion is directed to the Board of Directors of the Company and is not
intended to be and does not constitute a recommendation to any stockholder of
the Company as to how such stockholder should vote on the proposed Merger. We
hereby consent, however, to the inclusion of this opinion as an exhibit to any
proxy or registration statement distributed in connection with the Merger.
Based upon and subject to the foregoing considerations, it is our opinion,
as investment bankers, that, as of the date hereof, the Tokos Exchange Ratio,
after giving effect to the Healthdyne Exchange Ratio in the Merger, is fair to
the stockholders of Tokos from a financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY, L.P.
By: Robertson, Stephens & Company, Inc.
/s/ Edwin David
--------------------------------------
Authorized Signatory
<PAGE> 227
APPENDIX D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MATRIA HEALTHCARE, INC.
<PAGE> 228
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MATRIA HEALTHCARE, INC.
ARTICLE I
The name of the Corporation is Matria Healthcare, Inc. (the "Corporation").
ARTICLE II
The name and address of the registered agent of the Corporation in the
State of Delaware are:
The Corporation Trust Company
1209 Orange Street
Wilmington, New Castle County, Delaware 19801
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The Corporation shall have authority to issue 150,000,000 shares of stock,
consisting of 100,000,000 shares of Common Stock, par value $0.01 per share, and
50,000,000 shares of Preferred Stock, par value $0.01 per share.
ARTICLE V
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix by resolution the
designations, powers, preferences and relative, participating, optional or other
special rights (including voting rights, if any, and conversation rights, if
any), and qualifications, limitations or restrictions thereof, of any such
series of Preferred Stock, and the number of shares constituting any such
series, or all or any of them; and to increase or decrease the number of shares
of any series subsequent to the issue of shares of that series, but not below
the number of such shares then outstanding. Except as otherwise provided (i) by
law, (ii) by this Certificate of Incorporation as amended from time to time, or
(iii) by resolutions of the Board of Directors fixing the powers and preferences
of any class or series of shares as to which the Board of Directors has been
expressly vested with authority to fix the powers and preferences, (a) the
Common Stock shall possess the full voting power of the Corporation and (b) the
number of authorized shares of any class or classes of stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote.
ARTICLE VI
The business and affairs of the Corporation shall be managed and controlled
by a Board of Directors. The number of directors constituting the Board of
Directors shall be fixed, initially, by the Bylaws of the Corporation;
thereafter the number of directors shall be fixed or altered exclusively by
resolutions adopted by the Board of Directors. The directors shall be divided
into three classes as nearly equal in number as possible, designated Class I,
Class II and Class III. The initial term of office of Class I directors shall
expire at the 1996 annual meeting of stockholders; of Class II directors at the
1997 annual meeting of stockholders; and of
<PAGE> 229
Class III directors at the 1998 annual meeting of stockholders. At each annual
meeting of stockholders, successors to the class of directors whose terms of
office expire in that year shall be elected to hold office for a term of three
years. Each director shall hold office until his successor is elected and
qualified or until his earlier resignation. No decrease in the number of
directors shall shorten the term of any incumbent director. Elections of
directors need not be by ballot unless the Bylaws so provide.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by law, the
Board of Directors is authorized to adopt, amend or repeal the Bylaws of the
Corporation, subject to the restrictions, if any, contained in the Bylaws of the
Corporation, and subject to the further restriction that, until three years from
the Effective Time, Sections 3.2, 3.14 and 3.15 of the Bylaws can only be
amended by the affirmative vote of the holders of at least 66 2/3% of the Common
Stock of the Corporation.
ARTICLE VIII
To the fullest extent permitted by the General Corporation Law of the State
of Delaware, as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages shall be eliminated to the fullest extent permissible under applicable
law in the event it is determined that Delaware law does not apply. The
Corporation shall, to the fullest extent permitted by law, indemnify its
directors and officers against any liabilities, losses or related expenses which
they may incur by reason of serving or having served as directors or officers of
the Corporation, or serving or having served at the request of the Corporation
as directors, officers, trustees, partners, employees or agents of any entity in
which the Corporation has an interest. The Corporation is authorized to provide
by Bylaw, agreement or otherwise for indemnification of directors, officers,
employees and agents in excess of the indemnification otherwise permitted by
applicable law. Any repeal or modification of this Article shall not result in
any liability of a director, or any change or reduction in the indemnification
to which a director, officer, employee or agent would otherwise be entitled,
with respect to any action or omission occurring prior to such repeal or
modification.
ARTICLE IX
Any action required or permitted to be the taken by holders of stock of the
Corporation must be taken at a meeting of such holders and may not be taken by
consent in writing, except (i) as permitted by resolutions of the Board of
Directors fixing the powers and preferences of any class or series of shares as
to which the Board of Directors has been expressly vested with authority to fix
the powers and preferences, or (ii) for the purposes of approving, authorizing
or adopting any action or proposal theretofore approved, authorized or adopted
by the Board of Directors.
IN WITNESS WHEREOF, the undersigned has executed this Amended and Restated
Certificate of Incorporation this day of , 1995.
--------------------------------------
, Secretary
2
<PAGE> 230
APPENDIX E
BYLAWS
OF
MATRIA HEALTHCARE, INC.,
A DELAWARE CORPORATION
<PAGE> 231
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
Offices.............................................................................. 1
Section 1.1 Registered Office................................................... 1
Section 1.2 Principal Office.................................................... 1
Section 1.3 Other Offices....................................................... 1
ARTICLE II
Meetings of Stockholders............................................................. 1
Section 2.1 Time and Place of Meetings.......................................... 1
Section 2.2 Annual Meetings of Stockholders..................................... 1
Section 2.3 Special Meetings.................................................... 2
Section 2.4 Stockholder Lists................................................... 2
Section 2.5 Notice of Meetings.................................................. 2
Section 2.6 Quorum and Adjournment.............................................. 2
Section 2.7 Voting.............................................................. 3
Section 2.8 Proxies............................................................. 3
Section 2.9 Inspectors of Election.............................................. 3
ARTICLE III
Directors............................................................................ 4
Section 3.1 Powers.............................................................. 4
Section 3.2 Number, Election and Tenure......................................... 4
Section 3.3 Vacancies and Newly Created Directorships........................... 4
Section 3.4 Meetings............................................................ 4
Section 3.5 Annual Meeting...................................................... 4
Section 3.6 Regular Meetings.................................................... 4
Section 3.7 Special Meetings.................................................... 4
Section 3.8 Notices of Meetings................................................. 4
Section 3.9 Quorum.............................................................. 4
Section 3.10 Fees and Compensation............................................... 5
Section 3.11 Meetings by Telephonic Communication................................ 5
Section 3.12 Committees.......................................................... 5
Section 3.13 Action Without Meetings............................................. 5
Section 3.14 Filling of Certain Vacancies; Nomination for Additional Terms....... 5
Section 3.15 Initial Committees.................................................. 6
ARTICLE IV
Officers............................................................................. 7
Section 4.1 Appointment and Salaries............................................ 7
Section 4.2 Removal and Resignation............................................. 7
Section 4.3 Chairman............................................................ 7
Section 4.4 President/CEO....................................................... 7
Section 4.5 Vice President...................................................... 7
Section 4.6 Secretary and Assistant Secretary................................... 7
Section 4.7 Chief Financial Officer............................................. 8
Section 4.8 Treasurer........................................................... 8
Section 4.9 Assistant Officers.................................................. 8
ARTICLE V
Seal................................................................................. 8
ARTICLE VI
Form of Stock Certificate............................................................ 8
</TABLE>
i
<PAGE> 232
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII
Representation of Shares of Other Corporation........................................ 9
ARTICLE VIII
Transfers of Stock................................................................... 9
ARTICLE IX
Lost, Stolen or Destroyed Certificates............................................... 9
ARTICLE X
Record Date.......................................................................... 9
ARTICLE XI
Registered Stockholders.............................................................. 10
ARTICLE XII
Fiscal Year.......................................................................... 10
ARTICLE XIII
Amendments........................................................................... 10
ARTICLE XIV
Dividends............................................................................ 10
Section 14.1 Declaration......................................................... 10
Section 14.2 Set Aside Funds..................................................... 10
ARTICLE XV
Indemnification and Insurance........................................................ 10
Section 15.1 Right to Indemnification............................................ 10
Section 15.2 Right of Claimant to Bring Suit..................................... 11
Section 15.3 Non-Exclusivity of Rights........................................... 11
Section 15.4 Insurance........................................................... 11
Section 15.5 Expenses as a Witness............................................... 11
Section 15.6 Indemnity Agreements................................................ 11
Section 15.7 Settlement of Claims................................................ 11
Section 15.8 Effect of Amendment................................................. 12
Section 15.9 Subrogation......................................................... 12
Section No Duplication of Payments..........................................
15.10 12
</TABLE>
ii
<PAGE> 233
BYLAWS
OF
MATRIA HEALTHCARE, INC.,
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1.1 Registered Office. The registered office of MATRIA HEALTHCARE,
INC. (the "Corporation") shall be in the City of Wilmington, County of New
Castle, Delaware and the name of the resident agent in charge thereof is the
agent named in the Certificate of Incorporation until changed by the Board of
Directors (the "Board").
SECTION 1.2 Principal Office. The principal office for the transaction of
the business of the Corporation shall be at such place as may be established by
the Board. The Board is granted full power and authority to change said
principal office from one location to another.
SECTION 1.3 Other Offices. The Corporation may also have an office or
offices at such other places, either within or without the State of Delaware, as
the Board may from time to time designate or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 Time and Place of Meetings. Meetings of stockholders shall be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2.2 Annual Meetings of Stockholders. The annual meeting of
stockholders shall be held on such date and at such time and place as may be
fixed by the Board and stated in the notice of the meeting, for the purpose of
electing directors and for the transaction of such other business as is properly
brought before the meeting in accordance with these Bylaws. To be properly
brought before the annual meeting, business must be either (i) specified in the
notice of annual meeting (or any supplement or amendment thereto) given by or at
the direction of the Board, (ii) otherwise brought before the annual meeting by
or at the direction of the Board, (iii) brought before the meeting in accordance
with Rule 14a-8 under the Securities Exchange Act of 1934, or (iv) otherwise
properly brought before the annual meeting by a stockholder. The nomination by a
stockholder of any person for election as a director, other than the persons
nominated by the Board of Directors or any duly authorized committee thereof,
shall be considered business for purposes of this Article II and shall be
permitted only upon compliance with the requirements of this Section 2.2. In
addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the meeting; provided, however, that in
the event that less than forty (40) days' notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders, notice by a
stockholder, to be timely, must be received no later than the close of business
on the tenth (10th) day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made, whichever
first occurs. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting,
(ii) the name and record address of the stockholder proposing such business,
(iii) the class, series and number of shares of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business. No business shall be conducted at the annual
meeting except in accordance with the procedures set forth in this Section 2.2.
The officer of the Corporation presiding at an annual meeting shall, if the
facts warrant, determine and declare to the annual meeting that business was not
properly brought before the annual meeting in accordance with the provisions of
this Section 2.2, and if he should so determine,
<PAGE> 234
he shall so declare to the annual meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 2.3 Special Meetings. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time by the Board,
or by a committee of the Board that has been duly designated by the Board and
whose powers and authority, as provided in a resolution of the Board or in these
Bylaws, include the power to call such meetings, and shall be called by the
president or secretary at the request in writing of a majority of the Board, or
at the request in writing of stockholders owning a majority in amount of the
entire capital stock of the Corporation issued and outstanding and entitled to
vote, but such special meetings may not be called by any other person or
persons; provided, however, that if and to the extent that any special meeting
of stockholders may be called by any other person or persons specified in any
provisions of the Certificate of Incorporation or any amendment thereto, or any
certificate filed under Section 151(g) of the Delaware General Corporation Law
(or its successor statute as in effect from time to time hereafter), then such
special meeting may also be called by the person or persons in the manner, at
the times and for the purposes so specified. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
SECTION 2.4 Stockholder Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or at the place of the meeting, and the list shall also be available at
the meeting during the duration thereof, and may be inspected by any stockholder
who is present.
SECTION 2.5 Notice of Meetings. Notice of each meeting of stockholders,
whether annual or special, stating the place, date and hour of the meeting and,
in the case of a special meeting, the purpose or purposes for which such meeting
has been called, shall be given to each stockholder of record entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting, except that where the matter to be acted on is a merger or
consolidation of the Corporation or a sale, lease or exchange of all or
substantially all of its assets, such notice shall be given not less than twenty
(20) nor more than sixty (60) days prior to such meeting. Except as otherwise
expressly required by law, notice of any adjourned meeting of the stockholders
need not be given if the time and place thereof are announced at the meeting at
which the adjournment is taken.
Whenever any notice is required to be given under the provisions of
applicable law or of the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice,whether before or after the time stated therein, shall be deemed
equivalent thereto. Notice of any meeting of stockholders shall be deemed waived
by any stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 2.6 Quorum and Adjournment. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum for holding all meetings of
stockholders, except as otherwise provided by applicable law or by the
Certificate of Incorporation; provided, however, that the stockholders present
at a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. If it shall appear that such quorum is not present or
represented at any meeting of stockholders, the Chairman of the meeting shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or
2
<PAGE> 235
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. The Chairman of the
meeting may determine that a quorum is present based upon any reasonable
evidence of the presence in person or by proxy of stockholders holding a
majority of the outstanding votes, including without limitation, evidence from
any record of stockholders who have signed a register indicating their presence
at the meeting.
SECTION 2.7 Voting. In all matters, when a quorum is present at any
meeting, the vote of the holders of a majority of the capital stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of applicable law or of the Certificate of Incorporation, a different
vote is required in which case such express provision shall govern and control
the decision of such question. Such vote may be by voice or by written ballot;
provided, however, that the Board may, in its discretion, require a written
ballot for any vote, and further provided that all elections for directors must
be by written ballot upon demand made by a stockholder at any election and
before the voting begins.
Unless otherwise provided in the Certificate of Incorporation each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder.
SECTION 2.8 Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize in writing another person or persons to act for such
holder by proxy, but no proxy shall be voted or acted upon after three years
from its date, unless the person executing the proxy specifies therein the
period of time for which it is to continue in force. A duly executed proxy shall
be irrevocable if it states that it is irrevocable and if, and only as long as,
it is coupled with an interest sufficient in law to support an irrevocable
power. A stockholder may revoke any proxy which is not irrevocable by attending
the meeting and voting in person or by filing an instrument in writing revoking
the proxy or another duly executed proxy bearing a later date with the Secretary
of the Corporation.
SECTION 2.9 Inspectors of Election. The Corporation shall, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation or the Chairman of
the meeting shall appoint one or more alternate inspectors to replace any
inspector who fails to act. Each inspector, before undertaking his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of the proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. Each inspector shall perform his or her duties and shall make all
determinations in accordance with the Delaware General Corporation Law
including, without limitation, Section 231 of the Delaware General Corporation
Law.
The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at a meeting shall be announced at the
meeting. No ballot, proxies or votes, nor revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a stockholder shall determine
otherwise.
The appointment of inspectors of election shall be in the discretion of the
Board except that as long as the Corporation has a class of voting stock that is
(i) listed on a national securities exchange, (ii) authorized for quotation on
an interdealer quotation system of a registered national securities association,
or (iii) held of record by more than 2,000 stockholders, appointment of
inspectors shall be obligatory.
3
<PAGE> 236
ARTICLE III
DIRECTORS
SECTION 3.1 Powers. The Board shall have the power to manage or direct the
management of the property, business and affairs of the Corporation, and except
as expressly limited by law, to exercise all of its corporate powers. The Board
may establish procedures and rules, for the fair and orderly conduct of any
meeting including, without limitation, registration of the stockholders
attending the meeting, adoption of an agency, establishing the order of business
at the meeting, recessing and adjourning the meeting for the purposes of
tabulating any votes and receiving the results thereof, the time of the opening
and closing of the polls, and the physical layout of the facilities for the
meeting.
SECTION 3.2 Number, Election and Tenure. The Board shall initially consist
of ten (10) members. Thereafter, the number of directors shall be fixed or
altered exclusively by resolutions adopted by the Board. The directors shall be
divided into three classes of two directors, four directors and four directors,
designated Class I, Class II and Class III, respectively. The initial term of
office of Class I directors shall expire at the 1996 annual meeting of
stockholders; of Class II directors at the 1997 annual meeting of stockholders;
and of Class III directors at the 1998 annual meeting stockholders. At each
annual meeting of stockholders, successors to the class of directors whose terms
of office expire in that year shall be elected to hold office for a term of
three (3) years. Each director shall hold office until his successor is elected
and qualified or until his earlier resignation. No decrease in the number of
directors shall shorten the term of any incumbent director.
SECTION 3.3 Vacancies and Newly Created Directorships. Subject to Section
3.14 for as long as such Section remains in effect, any vacancy on the Board,
including any newly created directorship resulting from an increase in the
number of directors, may be filled by a majority of the Board then in office,
provided that a quorum is present.
SECTION 3.4 Meetings. The Board may hold meetings, both regular and
special, either within or outside the State of Delaware.
SECTION 3.5 Annual Meeting. The Board shall meet as soon as practicable
after each annual election of directors.
SECTION 3.6 Regular Meetings. Regular meetings of the Board shall be held
without call or notice at such time and place as shall from time to time be
determined by resolution of the Board.
SECTION 3.7 Special Meetings. Special meetings of the Board may be called
at any time, and for any purpose permitted by law, by the Chairman of the Board,
or by the Secretary on the written request of any two members of the Board
unless the Board consists of only one director in which case the special meeting
shall be called on the written request of the sole director, which meetings
shall be held at the time and place designated by the person or persons calling
the meeting. Notice of the time, place and purpose of any such meeting shall be
given to the directors by the Secretary, or in case of the Secretary's absence,
refusal or inability to act, by any other officer. Not less than three (3) days
notice of all special meetings of the Board of Directors shall be given to each
director.
SECTION 3.8 Notices of Meetings. All notices of meetings shall be in
writing and shall be deemed effectively given upon personal delivery or
twenty-four hours after delivery to a courier service which guarantees overnight
delivery or five days after deposit with the U.S. Post Office, by registered or
certified mail, return receipt requested, postage prepaid, and, in the case of
courier or mail delivery, addressed to such director at his or her last known
address as furnished by such director to the Company.
SECTION 3.9 Quorum. At all meetings of the Board, the vote of a majority
of the whole Board shall be necessary to constitute the act of the Board,
regardless of the number of directors present at the meeting at which such
matter is voted upon. For all purposes hereof, the phrase "whole Board" and
phrase "total number of directors" shall mean the total number of directors that
the Corporation would have if there were no vacancies. Any meeting of the Board
may be adjourned to meet again at a stated day and hour. Even though a quorum is
not present, as required in this Section, a majority of the directors present at
any meeting of the
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Board, either regular or special, may adjourn from time to time until a quorum
is present. Notice of any adjourned meeting need not be given.
SECTION 3.10 Fees and Compensation. Each director and each member of a
committee of the Board shall receive such fees and reimbursement of expenses
incurred on behalf of the Corporation or in attending meetings as the Board may
from time to time determine. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
SECTION 3.11 Meetings by Telephonic Communication. Members of the Board or
any committee thereof may participate in a regular or special meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this Section shall constitute
presence in person at such meeting.
SECTION 3.12 Committees. The Board may designate committees, each
committee to consist of one or more of the directors of the Corporation. The
initial committees of the Board of Directors shall be as set forth in Section
3.15. Any such committee, to the extent provided in the resolution of the Board,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it.
Notwithstanding the foregoing, no committee of the Board shall have the power or
authority in reference to: (a) amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board as provided
in Section 151(a) of the Delaware General Corporation Law fix the designation
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series); (b) adopting an
agreement of merger or consolidation under Section 251 or 252 of the Delaware
General Corporation Law; (c) recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets;
(d) recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution; or (e) amending the Bylaws of the Corporation.
Unless the resolution appointing such committee or the Certificate of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law. Each committee shall have such name as may be
determined from time to time by resolution adopted by the Board. Each committee
shall keep minutes of its meetings and report to the Board when required.
SECTION 3.13 Action Without Meetings. Unless otherwise restricted by
applicable law or by the Certificate of Incorporation or by these Bylaws, any
action required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting if all members of the Board or
of such committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of the Board
or committee.
SECTION 3.14 Filling of Certain Vacancies; Nomination for Additional
Terms. For a period of three years commencing at the effective time ("Effective
Time") of the merger of Healthdyne, Inc. ("HD") and Tokos Medical Corporation
(Delaware) ("TM") with and into the Corporation and continuing through the 1998
annual meeting of stockholders of the Corporation, any vacancy on the Board
arising among Parker H. Petit and the other initial members of the Board
designated by HD (or any other individual or individuals selected (i) as a
replacement director for the foregoing individuals or (ii) by the foregoing
individuals or their successors) and any nominee selected to fill a director
position occupied by any of the foregoing individuals (the "HD Directors") will
be filled or selected by a majority vote of the remaining HD Directors, and any
vacancy arising among Robert F. Byrnes and the other initial members of the
Board designated by TM (or any other individual or individuals selected (i) as a
replacement director for the foregoing individuals or (ii) by the foregoing
individuals or their successors) and any nominee selected to fill a director
position occupied by any of the foregoing individuals (the "TM Directors") will
be filled or selected by a majority vote of the remaining
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TM Directors. Any HD Director or TM Director whose term expires at the 1996,
1997 or 1998 annual meeting of the stockholders of the Corporation shall
automatically be nominated to serve an additional three (3) year term expiring
at the 1999, 2000 and 2001 annual meetings of the stockholders of the
Corporation, as applicable.
SECTION 3.15 Initial Committees. The Corporation shall initially have four
(4) committees of the Board of Directors of the Corporation, which committees
shall consist of an executive committee (the "Executive Committee"), an audit
committee (the "Audit Committee"), a compensation and stock option committee
(the "Compensation Committee") and a nominating committee (the "Nominating
Committee").
(a) The Executive Committee shall consist of six (6) members. In
addition to such powers as may be delegated to it from time to time by the
Corporation's Board of Directors, the Executive Committee shall: resolve
any differences, disagreements or issues presented to the Executive
Committee for consideration by the "Transition Committee" (as hereinafter
defined); act in the absence of the full Board of Directors of the
Corporation as deemed necessary and appropriate and as permitted by
applicable law; keep the full Board of Directors of the Corporation
apprised of Executive Committee activities and decisions; and conduct
detailed review and evaluation of the annual budget prior to submission to
the full Board of Directors of the Corporation. The Executive Committee
shall meet no less frequently than monthly for the first six months
following the Effective Time to review progress, issues and problems
in-depth, with special meetings to be called at the direction of the
Chairman of the Board, the "President/CEO" (as hereinafter defined) or any
member of the Executive Committee. The initial Chairman of the Executive
Committee shall be Parker H. Petit (an HD Director), and the other initial
members of the Executive Committee shall be Robert F. Byrnes (a TM
Director), two HD Directors designated by the Board of Directors of HD and
two TM Directors designated by the Board of Directors of TM. In all matters
brought before the Executive Committee by the Transition Committee for
resolution by the Executive Committee, Parker H. Petit and Robert F. Byrnes
shall act as ex officio non-voting members.
(b) The Audit Committee shall consist of four (4) members. In addition
to such powers as may be delegated to it from time to time by the
Corporation's Board of Directors, the Audit Committee shall: recommend
outside accountants for approval by the full Board of Directors and the
stockholders of the Corporation; meet with the Corporation's outside
auditors and the Corporation's Chief Financial Officer and their respective
staffs to review and evaluate accounting and control systems, issues and
related matters; meet independently with the Corporation's auditors and
Chief Financial Officer to discuss the accuracy and integrity of the
Corporation's financial reporting, management information and control
systems, and any other appropriate issues; and address any other matters
which are appropriate for the Audit Committee's review or involvement. The
Audit Committee shall meet no less frequently than twice per year, with
special meetings to be called at the direction of the Chairman of the
Board, President/CEO, Chief Financial Officer, outside auditors, any member
of the Audit Committee or any member of the Corporation's Board of
Directors. The initial members of the Audit Committee shall be two
non-employee TM Directors designated by the Board of Directors of TM and
two non-employee HD Directors designated by the Board of Directors of HD.
The Chairman of the Audit Committee shall be selected by a majority vote of
the Committee.
(c) The Compensation Committee shall consist of six (6) members. In
addition to such powers as may be delegated to it from time to time by the
Corporation's Board of Directors, the Compensation Committee shall: review
and approve salaries for all corporate officers; review and approve all
incentive and special compensation plans and programs, including stock
options and related longer term incentive compensation programs; review and
approve management succession planning; conduct special competitive
compensation studies and retain compensation consultants as deemed
necessary and appropriate; and recommend appropriate programs and actions
on any of the above matters to the full Board of Directors of the
Corporation for their review and approval. The Compensation Committee shall
meet no less frequently than twice per year, with special meetings to be
called at the direction of the Chairman of the Board, President/CEO, or any
member of the Compensation Committee. The initial members of the
Compensation Committee shall be two non-employee HD Directors designated by
the Board of Directors
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of HD and two non-employee TM Directors designated by the Board of
Directors of TM. Parker H. Petit and Robert F. Byrnes shall serve as ex
officio non-voting members of the Compensation Committee. The Chairman of
the Compensation Committee shall be selected by a majority vote of the
Committee.
(d) The Nominating Committee shall consist of four members. In
addition to such powers as may be delegated to it from time to time by the
Corporation's Board of Directors, the Nominating Committee shall: identify,
screen and recommend candidates for appointment to the Board of Directors
of the Corporation, for consideration by the full Board of Directors of the
Corporation and by the stockholders of the Corporation; and establish
compensation and retirement policies for members of the Board of Directors
of the Corporation. The Nominating Committee shall meet no less frequently
than once per year, with special meetings to be called at the direction of
any member of the Nominating Committee. The initial Chairman of the
Nominating Committee shall be Robert F. Byrnes. The other initial members
shall be Parker H. Petit, a TM Director designated by the Board of
Directors of TM and a HD Director designated by the Board of Directors of
HD. For a period of three years following the Effective Time, any vacancies
on a committee of the Corporation's Board of Directors shall be filled in
accordance with Section 3.14, as if such Section referenced such committee
instead of the Corporation's Board of Directors. Each of the Executive
Committee, the Audit Committee, the Compensation Committee and the
Nominating Committee may act only by affirmative vote of a majority of the
authorized number of members of such committee.
ARTICLE IV
OFFICERS
SECTION 4.1 Appointment and Salaries. The senior officers of the
Corporation shall be appointed by the Board and shall be a Chairman of the Board
("Chairman"), a President and Chief Executive Officer ("President/CEO"), a
Secretary, a Treasurer and a Chief Financial Officer. The Board may also appoint
such other officers as it deems necessary or appropriate. The senior officers
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board. Each
other officer appointed by the Board shall hold office for such term and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board. The Board shall, upon the recommendation of the Compensation
Committee, fix the salaries of all officers appointed by it. Unless prohibited
by applicable law or by the Certificate of Incorporation or by these Bylaws, one
person may be elected or appointed to serve in more than one official capacity.
Any vacancy occurring in any senior office of the Corporation may be filled only
by the Board.
SECTION 4.2 Removal and Resignation. Any officer may be removed, either
with or without cause, by the Board. Any officer may resign at any time by
giving notice to the Board, the President/CEO or the Secretary. Any such
resignation shall take effect at the date of receipt of such notice or at any
later time specified therein and, unless otherwise specified in such notice, the
acceptance of the resignation shall not be necessary to make it effective.
SECTION 4.3 Chairman. The Chairman shall preside at all meetings of the
stockholders and of the Board and shall have such other powers and duties as may
from time to time be assigned to him or her by the Board.
SECTION 4.4 President/CEO. The President/CEO shall be the chief executive
officer of the Corporation and shall have such other powers and duties as may
from time to time be assigned to him or her by the Board.
SECTION 4.5 Vice President. The rank of Vice Presidents in descending
order shall be Executive Vice President, Senior Vice President and Vice
President. The Vice Presidents shall perform such duties and have such other
powers as the Board may from time to time prescribe.
SECTION 4.6 Secretary and Assistant Secretary. The Secretary shall attend
all meetings of the Board (unless the Board shall otherwise determine) and all
meetings of the stockholders and record all the
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proceedings of the meetings of the Board and of the stockholders in a book to be
kept for that purpose and shall perform like duties for the committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of stockholders and special meetings of the Board. The Secretary shall have
custody of the corporate seal of the Corporation and shall (as well as any
Assistant Secretary) have authority to affix the same to any instrument
requiring it and to attest it. The Secretary shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
SECTION 4.7 Chief Financial Officer. Subject to the powers of the Chairman
and the President/CEO, the Chief Financial Officer shall be the principal
officer in charge of the financial affairs of the Corporation and shall perform
such other duties and have such other powers as the Board may from time to time
prescribe.
SECTION 4.8 Treasurer. Subject to the powers of the Chief Financial
Officer, the Treasurer shall have custody of the corporate funds and securities
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board. Subject to the powers of the Chief Financial
Officer, the Treasurer may disburse the funds of the Corporation as may be
ordered by the Board, taking proper vouchers for such disbursements, and shall
render to the Board at its regular meetings, or when the Board so requires, an
account of the transactions and of the financial condition of the Corporation.
The Treasurer shall perform such other duties and have such other powers as the
Board may from time to time prescribe.
If required by the Board and at the expense of the Corporation, the Chief
Financial Officer, the Treasurer, and the Assistant Treasurer, if any, shall
give the Corporation a bond (which shall be renewed at such times as specified
by the Board) in such sum and with such surety or sureties as shall be
satisfactory to the Board for the faithful performance of the duties of such
person's office and for the restoration to the Corporation, in case of such
person's death, resignation retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in such person's
possession or under such person's control belonging to the Corporation.
SECTION 4.9 Assistant Officers. An assistant officer shall, in the absence
of the officer to whom such person is an assistant officer or in the event of
such officer's inability or refusal to act, perform the duties of such officer
and when so acting, shall have all the powers of and be subject to all the
restrictions upon such officer. An assistant officer shall perform such other
duties and have such other powers as the Board or the officer appointing any
such assistant officer may from time to time prescribe.
ARTICLE V
SEAL
It shall not be necessary to the validity of any instrument executed by any
authorized officer or officers of the Corporation that the execution of such
instrument be evidenced by the corporate seal, and all documents, instruments,
contracts and writings of all kinds signed on behalf of the Corporation by any
authorized officer or officers shall be as effectual and binding on the
Corporation without the corporate seal, as if the execution of the same had been
evidenced by affixing the corporate seal thereto. The Board may give general
authority to any officer to affix the seal of the Corporation and to attest the
affixing by signature.
ARTICLE VI
FORM OF STOCK CERTIFICATE
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of, the Corporation by the Chairman or
Vice Chairman of the Board, if any, or by the President/CEO or a Vice President,
and by the Treasurer or Chief Financial Officer, or the Secretary or an
Assistant Secretary certifying the number of shares owned the Corporation. Any
or all of the signatures on the certificate may be a facsimile signature. If any
officer, transfer agent or registrar who has signed or whose facsimile signature
has
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been placed upon a certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of the issuance.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock. Except as otherwise provided
in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
or rights.
ARTICLE VII
REPRESENTATION OF SHARES OF OTHER CORPORATION
Any and all shares of any other corporation or corporations standing in the
name of the Corporation shall be voted, and all rights incident thereto shall be
represented and exercised on behalf of the Corporation by the Board, Chairman or
President/CEO. The foregoing authority may be exercised either by the
President/CEO in person or by any other person authorized so to do by proxy or
power of attorney duly executed by said office.
ARTICLE VIII
TRANSFERS OF STOCK
Upon surrender of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
ARTICLE IX
LOST, STOLEN OR DESTROYED CERTIFICATES
The Board may direct a new certificate or certificates be issued in place
of any certificate theretofore issued alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of the fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing such issue of
a new certificate, the Board may, in its discretion and as a condition precedent
to the issuance, require the owner of such certificate or certificates, or such
person's legal representative, to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the lost, stolen or destroyed certificate.
ARTICLE X
RECORD DATE
The Board may fix in advance a date, which shall not be more than sixty
(60) days nor less than ten (10) days preceding the date of any meeting of
stockholders, nor more than sixty (60) days prior to any other action, as a
record date for the determination of stockholders entitled to notice of or to
vote at any such meeting and any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise the rights in respect of any change, conversion or exchange of stock,
and in such case such stockholders, and only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to such notice of,
and to vote at, such meeting and any adjournment thereof, or to receive payment
of
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such dividend, or to receive such allotment of rights, or to exercise such
rights, or to give such consent, as the case may be, notwithstanding any
transfer of any stock on the books of the Corporation after any such record date
fixed as aforesaid.
ARTICLE XI
REGISTERED STOCKHOLDERS
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock of the Corporation as the holder in fact thereof and
shall not be bound to recognize any equitable or other claim to or interest in
such share on the part of any other person, whether or not it shall have express
or other notice thereof, except as expressly provided by applicable law.
ARTICLE XII
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board.
ARTICLE XIII
AMENDMENTS
Subject to any contrary or limiting provisions contained in the Certificate
of Incorporation, these Bylaws may be amended or repealed, or new Bylaws may be
adopted (a) by the affirmative vote of the holders of at least a majority of the
Common Stock of the Corporation, or (b) by the affirmative vote of the majority
of the whole Board at any regular or special meeting. Any Bylaws adopted or
amended by the stockholders may be amended or repealed by the Board or the
stockholders.
ARTICLE XIV
DIVIDENDS
SECTION 14.1 Declaration. Dividends on the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board at any regular or special meeting, pursuant to
law, and may be paid in cash, in property or in shares of capital stock.
SECTION 14.2 Set Aside Funds. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such sums
as the directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall determine to be in the best interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE XV
INDEMNIFICATION AND INSURANCE
SECTION 15.1 Right to Indemnification. Each person who was or is a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
or inaction in an official capacity or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest
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extent permitted by the laws of the State of Delaware, as the same exist or may
hereafter be amended, against all costs, charges, expenses, liabilities and
losses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board. The right to indemnification conferred in this Article
shall be a contract right and shall include the right to be paid by the
Corporation the expense incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may, by action of the Board, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
SECTION 15.2 Right of Claimant to Bring Suit. If a claim under Section
15.1 is not paid in full by the Corporation within thirty (30) days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has failed to meet a standard of conduct which
makes it permissible under Delaware law for the Corporation to indemnify the
claimant for the amount claimed. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is permissible in the circumstances because he
or she has met such standard of conduct, nor an actual determination by the
Corporation (including its Board, independent legal counsel, or its
stockholders) that the claimant has not met such standard of conduct, shall be a
defense to the action or create a presumption that the claimant has failed to
meet such standard of conduct.
SECTION 15.3 Non-Exclusivity of Rights. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
SECTION 15.4 Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Delaware law.
SECTION 15.5 Expenses as a Witness. To the extent that any director,
officer, employee or agent of the Corporation, is by reason of such position, or
a position with another entity at the request of the Corporation, a witness in
any action, suit or proceeding, he or she shall be indemnified against all costs
and expenses actually and reasonably incurred by him or her or on his or her
behalf in connection therewith.
SECTION 15.6 Indemnity Agreements. The Corporation may enter into
agreements with any director, officer, employee or agent of the Corporation
providing for indemnification to the fullest extent permitted by Delaware law.
SECTION 15.7 Settlement of Claims. The Corporation shall not be liable to
indemnify any director, officer, employee or agent under this Article (a) for
any amounts paid in settlement of any action or claim effected without the
Corporation's written consent, which consent shall not be unreasonably withheld;
or
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(b) for any judicial award if the Corporation was not given a reasonable and
timely opportunity at its expense, to participate in the defense of such action.
SECTION 15.8 Effect of Amendment. Any amendment, repeal, or modification
of this Article shall not adversely affect any right or protection of any
director, officer, employee or agent existing at the time of such amendment,
repeal or modification.
SECTION 15.9 Subrogation. In the event of payment under this Article, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the director, officer, employee or agent, who shall
execute all papers required and shall do everything that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the Corporation effectively to bring suit to enforce such rights.
SECTION 15.10 No Duplication of Payments. The Corporation shall not be
liable under this Article to make any payment in connection with any claim made
against the director, officer, employee or agent to the extent the director,
officer, employee or agent has otherwise actually received payment (under any
insurance policy, agreement, vote, or otherwise) of the amounts otherwise
indemnifiable hereunder.
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APPENDIX F-I
STOCK OPTION PLANS
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MATRIA HEALTHCARE, INC.
1996 STOCK INCENTIVE PLAN
1. Establishment, Purpose, and Definitions. (a) Matria Healthcare, Inc.
(the "Company") hereby adopts the Matria Healthcare, Inc. 1996 Stock Incentive
Plan (the "Plan").
(b) The purpose of the Plan is to allow the Company to attract and retain
eligible individuals (as defined in Section 5, below) and to provide incentives
to such individuals for their services, increased efforts and successful
achievements on behalf of or in the interests of the Company and its Affiliates
and to maximize the rewards due them for those efforts and achievements. The
Plan provides employees (including officers and directors who are employees) of
the Company and of its Affiliates an opportunity to purchase shares of common
stock $0.01 par value per share, of the Company ("Stock") pursuant to options
which may qualify as incentive stock options (referred to as "incentive stock
options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and employees, officers, independent contractors, and consultants
of the Company and of its Affiliates an opportunity to purchase shares of Stock
pursuant to options which are not described in Sections 422 or 423 of the Code
(referred to as "nonqualified stock options"). The Plan also provides for the
sale or bonus grant of Stock to eligible individuals in connection with the
performance of services for the Company or its Affiliates. Finally, the Plan
authorizes the grant of stock appreciation rights ("SARs"), either separately or
in tandem with stock options, entitling holders to cash compensation measured by
appreciation in the value of the Stock.
(c) The term "Affiliate" as used in the Plan means parent or subsidiary
corporations of the Company, as defined in Sections 424(e) and (f) of the Code
(but substituting "the Company" for "employer corporation"), including parents
or subsidiaries of the Company that become such after adoption of the Plan.
2. Administration of the Plan. (a) The Plan shall be administered by the
Board of Directors of the Company (the "Board"). Subject to Section 2(f) below,
the Board may delegate the responsibility for administering the Plan to a
committee, under such terms and conditions as the Board shall determine (the
"Committee"). If required by Rule 16b-3 (or any successor thereto) promulgated
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"): (i) the
Committee shall consist of two or more members of the Board or such lesser
number of members of the Board as permitted by Rule 16b-3; and (ii) none of the
members of the Committee shall receive, while serving on the Committee, or
during the one-year period preceding appointment to the Committee, a grant or
award of equity securities under the Plan or under any other plan of the Company
or its Affiliates under which the participants are entitled to acquire Stock
(including restricted stock), stock options, stock bonuses, related rights or
stock appreciation rights of the Company or any of its Affiliates, other than
pursuant to transactions in any such other plan which do not disqualify a
director from being a disinterested person under Rule 16b-3. Members of the
Committee shall serve at the pleasure of the Board. The Committee shall select
one of its members as chair of the Committee and shall hold meetings at such
times and places as it may determine. A majority of the Committee shall
constitute a quorum, and acts of the Committee at which a quorum is present, or
acts reduced to or approved in writing by all the members of the Committee,
shall be the valid acts of the Committee. If the Board does not delegate
administration of the Plan to the Committee, then each reference in this Plan to
the "Committee" shall be construed to refer to the Board.
(b) The Committee shall determine which eligible individuals (as defined in
Section 5 below) shall be granted options under the Plan, the timing of such
grants, the terms thereof (including any restrictions on the Stock), and the
number of shares subject to such options.
(c) The Committee shall also determine which eligible individuals (as
defined in Section 5 below) shall be granted or issued SARs or Stock (other than
pursuant to the exercise of options) under the Plan, the timing of such grants
or issuances, the terms thereof (including any restrictions and the
consideration, if any, to be paid therefor) and the number of shares or SARs to
be granted.
(d) The Committee may amend the terms of any outstanding option or SAR
granted under this Plan, but any amendment that would adversely affect the
holder's rights under an outstanding option or SAR shall not be made without the
holder's written consent. The Committee may, with the holder's written consent,
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cancel any outstanding option or SAR or accept any outstanding option or SAR in
exchange for a new option, SAR, or Stock under the Plan on such terms determined
by the Committee. The Committee also may amend any stock purchase agreement or
stock bonus agreement relating to sales or bonuses of Stock under the Plan, but
any amendment that would adversely affect the individual's rights to the Stock
shall not be made without his or her written consent.
(e) The Committee shall have the sole authority, in its absolute
discretion, to adopt, amend, and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan, to construe and
interpret the Plan, the rules and the regulations, and the instruments
evidencing options, SARs or Stock granted or issued under the Plan and to make
all other determinations deemed necessary or advisable for the administration of
the Plan. All decisions, determinations, and interpretations of the Committee
shall be binding on all participants.
(f) Notwithstanding the foregoing provisions of this Section 2, grants of
options or SARs or Stock to any "Covered Employee," as such term is defined by
Section 162(m) of the Code, shall be made only by a subcommittee of the
Committee which, in addition to meeting other applicable requirements of this
Section 2, is composed solely of two or more outside directors within the
meaning of Section 162(m) of the Code and the regulations thereunder (the
"Subcommittee") to the extent necessary to qualify such grants as
"performance-based compensation" under Section 162(m) of the Code and the
regulations thereunder. In the case of grants to Covered Employees, references
to the "Committee" shall be deemed to be references to the Subcommittee as
specified above.
3. Fair Market Value. Where this Plan uses the term "fair market value" in
connection with the Stock, such fair market value shall be determined by the
Committee as follows:
(a) If the Stock is listed on any established stock exchange or a
national market system, including, without limitation, the Nasdaq National
Market, its fair market value shall be the closing selling price for such
stock on the principal securities exchange or national market system on
which the Stock is at the time listed for trading. If there are no sales of
Stock on that date, then the closing selling price for the Stock on the
next preceding day for which such closing selling price is quoted shall be
determinative of fair market value; or,
(b) If the Stock is not traded on an exchange or a national market
system, its fair market value shall be determined in good faith by the
Committee, and such determination shall be conclusive and binding on all
persons.
4. Stock Subject to the Plan. (a) Subject to adjustment pursuant to
Section 4(c) below, the maximum aggregate number of shares of Stock available
for issuance under the Plan and during the life of the Plan shall be 1,000,000
shares of Stock.
(b) If an option is surrendered or for any other reason ceases to be
exercisable in whole or in part, the shares of Stock that were subject to such
option, but as to which the option had not been exercised, shall continue to be
available under the Plan. Any shares of Stock forfeited to the Company pursuant
to the terms of agreements evidencing sales or bonus grants of Stock under the
Plan shall continue to be available under the Plan.
(c) If there is any change in the Stock through merger, consolidation,
reorganization, recapitalization, reincorporation, stock split, stock dividend
(in excess of 2%), or other change in the corporate structure of the Company,
appropriate adjustments shall be made by the Committee in order to preserve but
not to increase the benefits to the outstanding options, SARs and stock purchase
or stock bonus awards under the Plan, including adjustments to the aggregate
number and kind of shares subject to the Plan, or to outstanding stock purchase
or stock bonus agreements, or SAR agreements, and the number and kind of shares
and the price per share subject to outstanding options.
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5. Eligible Individuals. Individuals who shall be eligible to have granted
to them options, SARs or Stock under the Plan shall be such employees, officers,
independent contractors, and consultants of the Company or an Affiliate as the
Committee, in its discretion, shall designate from time to time. Notwithstanding
the foregoing, only employees of the Company or an Affiliate (including officers
and directors who are bona fide employees) shall be eligible to receive
incentive stock options.
6. Terms and Conditions of Options and SARs. (a) Each option granted
pursuant to the Plan will be evidenced by a written stock option agreement
executed by the Company and the person to whom such option is granted.
(b) The Committee shall determine the term of each option granted under the
Plan; provided, however, that the term of an incentive stock option shall not be
for more than ten years and that, in the case of an incentive stock option
granted to a person possessing more than ten percent (10%) of the combined
voting power of the Company or an Affiliate, the term of each incentive stock
option shall be no more than five years.
(c) In the case of incentive stock options, the aggregate fair market value
(determined as of the time such option is granted) of the Stock with respect to
which incentive stock options are exercisable for the first time by an eligible
employee in any calendar year (under this Plan and any other plans of the
Company or its Affiliates) shall not exceed $100,000. If the aggregate fair
market value of stock with respect to which incentive stock options are
exercisable by an optionee for the first time during any calendar year exceeds
$100,000, such options shall be treated as nonqualified options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted.
(d) The exercise price of each incentive stock option shall be not less
than the per share fair market value of the Stock subject to such option on the
date the option is granted. The exercise price of each nonqualified stock option
shall be as determined by the Committee. Notwithstanding the foregoing, (i) in
the case of an incentive stock option granted to a person possessing more than
10% of the combined voting power of the Company or an Affiliate, the exercise
price shall be not less than 110% of the fair market value of the Stock on the
date the option is granted, and (ii) in the case of an option granted to a
Covered Employee, the exercise price shall be not less than the per share fair
market value of the Stock subject to such option on the date the option is
granted. The exercise price of an option or SAR shall be subject to adjustment
to the extent provided in Section 4(c), above, but, in the case of a grant to a
Covered Employee, only to the extent such adjustment does not cause the grant to
fail to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code and the regulations thereunder.
(e) The Committee may, under such terms and conditions as it deems
appropriate, authorize the issuance of SARs evidenced by a written SAR agreement
(which, in the case of tandem options, may be part of the option agreement to
which the SAR relates) executed by the Company and the person to whom the SARs
are granted. The SAR agreement shall specify the term for the SARs covered
thereby, the cash amount payable or securities issuable upon exercise of the
SAR, and contain such other terms, provisions and conditions consistent with
this Plan as may be determined by the Committee.
(f) Payment of the purchase price upon exercise of any option granted under
this Plan shall be made in cash or by optionee's personal check, a certified
check, a bank draft, or a postal or express money order payable to the order of
the Company in lawful money of the United States; provided, however, that the
Committee, in its sole discretion, may permit an optionee to pay the option
price in whole or in part (i) with shares of Stock owned by the optionee or with
shares of Stock withheld from the shares otherwise deliverable to the optionee
upon exercise of an option (in each case only to the extent that such an
exercise of the option would not result in an accounting compensation charge
with respect to the shares used to pay the option price); (ii) by delivery on a
form prescribed by the Committee of an irrevocable direction to a securities
broker approved by the Committee to sell shares of Stock and deliver all or a
portion of the proceeds to the Company in payment for the Stock; (iii) by
delivery of the optionee's promissory note with such recourse, interest,
security, and redemption provisions as the Committee in its discretion
determines appropriate; or (iv) in any combination of the foregoing. Any Stock
used to exercise options shall be valued at its fair market value on the date of
the exercise of the option.
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(g) In the event that the exercise price is satisfied by shares withheld
from the shares of Stock otherwise deliverable to the optionee, the Committee
may issue the optionee an additional option, with terms identical to the option
agreement under which the option was exercised, entitling the optionee to
purchase additional shares of Stock equal to the number of shares so withheld
but at an exercise price equal to the fair market value of the Stock on the
grant date of the new option. Such additional option shall be subject to the
provisions of Section 6(i) below.
(h) The stock option agreement or SAR Agreement may contain such other
terms, provisions, and conditions consistent with this Plan as may be determined
by the Committee. If an option, or any part thereof is intended to qualify as an
incentive stock option, the stock option agreement shall contain those terms and
conditions which are necessary to so qualify it.
(i) The maximum number of shares of Stock with respect to which SARs or
options to acquire Stock may be granted, or sales or bonus grants of Stock may
be made, to any individual per calendar year under this Plan shall not exceed
500,000 shares (which number may be increased without shareholder approval to
reflect adjustments under Section 4(c), above, to the extent such adjustment, in
the case of a grant to a Covered Employee, does not cause the grant to fail to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code and the regulations thereunder). To the extent required to cause
options granted to Covered Employees to qualify as "performance-based
compensation" under Section 162(m) of the Code and the regulations thereunder,
in applying the foregoing limitation with respect to an employee, if any option
is canceled, the canceled option shall continue to count against the maximum
number of shares for which options may be granted to the employee under this
Section 6(i). For this purpose, the repricing of an option shall be treated as a
cancellation of the existing option and the grant of a new option to the extent
required by Section 162(m) of the Code or the regulations thereunder. The
preceding sentence shall also apply in the case of a SAR, if, after the award is
made, the base amount on which stock appreciation is calculated is reduced to
reflect a reduction in the fair market value of the Stock.
7. Terms and Conditions of Stock Purchases and Bonuses. (a) Each sale or
bonus grant of Stock pursuant to the Plan will be evidenced by a written stock
purchase or stock bonus agreement, as applicable, executed by the Company and
the person to whom such stock is sold or granted.
(b) The stock purchase agreement or stock bonus agreement may contain such
other terms, provisions, and conditions consistent with this Plan as may be
determined by the Committee, including not by way of limitation, the
consideration, if any, to be paid for the Stock, restrictions on transfer,
forfeiture provisions, repurchase provisions, and vesting provisions.
8. Use of Proceeds. Cash proceeds realized from the exercise of options
granted under the Plan or from other sales of Stock under the Plan shall
constitute general funds of the Company.
9. Amendment, Suspension, or Termination of the Plan. (a) The Board may at
any time amend, suspend or terminate the Plan as it deems advisable; provided
that such amendment, suspension or termination complies with all applicable
requirements of state and federal law, including any applicable requirement that
the Plan or an amendment to the Plan be approved by the shareholders, and
provided further that, except as provided in Section 4(c) above and Section 15
below, the Board shall in no event amend the Plan in the following respects
without the approval of shareholders then sufficient to approve the Plan in the
first instance:
(i) To increase the maximum number of shares of Stock provided in
Section 6(i) above, with respect to which restricted stock, SARs or options
to acquire Stock may be granted to any Covered Employee per calendar year
under the Plan;
(ii) To materially increase the number of shares of Stock available
under the Plan or to increase the number of shares of Stock available for
grant of incentive stock options under the Plan; or
(iii) To materially modify the eligibility requirements for
participation in the Plan or the class of employees eligible to receive
options under the Plan or to change the designation or class of persons
eligible to receive incentive stock options under the Plan.
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(b) No option or SAR may be granted nor may any Stock be issued (other than
upon exercise of outstanding options) under the Plan during any suspension or
after the termination of the Plan, and no amendment, suspension, or termination
of the Plan shall, without the affected individual's consent, alter or impair
any rights or obligations under any option or SAR previously granted under the
Plan. The Plan shall terminate with respect to the grant of incentive stock
options on the tenth anniversary of the date of adoption of the Plan, unless
previously terminated by the Board pursuant to this Section 9.
10. Assignability. To the extent required by Rule 16b-3, no option or SAR
granted pursuant to this Plan shall be transferable by the holder except by
operation of law or by will or the laws of descent and distribution; provided
that, if Rule 16b-3 is amended after the date of the Board's adoption the Plan
to permit broader transferability of options or SARs under that Rule, (i) any
option or SAR granted after such amendment shall be transferable to the extent
provided in the option agreement or SAR agreement covering the option or SAR,
and (ii) outstanding options and SARs may, in the Committee's discretion, be
amended to provide for broader transferability of those options and SARs as the
Committee may authorize within the limitations of Rule 16b-3. Stock subject to a
stock purchase agreement or a stock bonus agreement shall be transferable only
as provided in such agreement. Notwithstanding the foregoing, if required by the
Code, each incentive stock option under the Plan shall be transferable by the
optionee only by will or the laws of descent and distribution, and, during the
optionee's lifetime, be exercisable only by the optionee.
11. Withholding Taxes. (a) No Stock shall be granted or sold under the
Plan to any individual, and no option or SAR may be exercised, until the
individual has made arrangements acceptable to the Committee for the
satisfaction of federal, state, and local income and employment tax withholding
obligations, including without limitation obligations incident to the receipt of
Stock under the Plan, the lapsing of restrictions applicable to such Stock, the
failure to satisfy the conditions for treatment as incentive stock options under
applicable tax law, or the receipt of cash payments. Upon the exercise of a
stock option or the lapsing of a restriction on Stock issued under the Plan, the
Company (or the optionee's or shareholder's employer) may withhold from the
shares otherwise deliverable to the optionee upon such exercise, or require the
shareholder to surrender shares of Stock as to which the restriction has lapsed,
such number of shares having a fair market value sufficient to satisfy federal,
state and local income and employment tax withholding obligations.
(b) In the event that such tax withholding is satisfied by the Company or
the optionee's employer withholding shares of Stock otherwise deliverable to the
optionee, the Committee may issue the optionee an additional option, with terms
identical to the option agreement under which the option was exercised,
entitling the optionee to purchase additional shares of Stock equal to the
number of shares so withheld but at an exercise price equal to the fair market
value of the Stock on the grant date of the new option. Such additional option
shall be subject to the provisions of Section 6(i) above.
12. Restrictions on Transfer of Shares. The Committee may require that the
Stock acquired pursuant to the Plan be subject to such restrictions and
agreements regarding sale, assignment, encumbrances, or other transfer as are in
effect among the shareholders of the Company at the time such Stock is acquired,
as well as to such other restrictions as the Committee shall deem appropriate.
13. Change in Control. (a) For purposes of this Section 13, a "Change in
Control" shall be deemed to occur upon:
(i) the direct or indirect acquisition by any person or related group
of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan) of beneficial ownership (within
the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding Stock;
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership or by one or more actions by
written consent of shareholders, to be comprised of individuals who either
(A) have been Board members continuously since the beginning of such period
or (B) have been elected or nominated for election as Board members
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during such period by at least a majority of the Board members described in
clause (A) who were still in office at the time such election or nomination
was approved by the Board.
(b) For purposes of this Section 13, a "Corporate Transaction" shall be
deemed to occur upon any of the following transactions to which the Company is a
party:
(i) approval by the Company's shareholders of a merger or
consolidation in which the Company is not the surviving entity, except for
a transaction the principal purpose of which is to change the state in
which the Company is incorporated;
(ii) approval by the Company's shareholders of the sale, transfer or
other disposition of all or substantially all of the assets of the Company
(including the capital stock of the Company's subsidiary corporations) in
connection with a complete liquidation or dissolution of the Company; or
(iii) approval by the Company's shareholders of any reverse merger in
which the Company is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Company's outstanding securities are transferred to a person or
persons different from those who held such securities immediately prior to
such merger.
(c) In its discretion, the Committee may provide in any stock option, SAR,
Stock bonus or Stock purchase agreement (or in an amendment thereto) evidencing
an option, SAR, Stock bonus or Stock purchase hereunder that, in the event of
any Corporate Transaction or an event giving rise to a Change in Control, any
outstanding options or SARs covered by such an agreement shall be fully vested,
nonforfeitable and become exercisable, and that any restricted Stock covered by
such an agreement shall be released from restrictions on transfer and repurchase
or forfeiture rights, as of the date of the Change in Control or Corporate
Transaction. However, the Committee may provide in any such agreement that, in
the case of a Corporation Transaction, the Committee may determine that an
outstanding option will not be so accelerated if and to the extent (i) such
option is either to be assumed by the successor or parent thereof or to be
replaced with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, or (ii) such option is to be replaced
with a cash incentive program of the successor corporation that preserves the
option spread existing at the time of the Corporate Transaction and provides for
subsequent payment in accordance with the same vesting schedule applicable to
such option.
(d) If the Committee determines to incorporate a Change in Control or
Corporate Transaction acceleration provision in any option or SAR agreement
hereunder, the agreement shall provide that, (i) in the event of a Change in
Control or Corporate Transaction described in clauses (a)(i), (a)(ii) and
(b)(iii) of Section 13 above, the Option or SAR shall remain exercisable for the
remaining term of the option or SAR and (ii) in the event of a Corporate
Transaction described in clauses (i) or (ii) of Section 13(b) above, the option
or SAR shall terminate as of the effective date of the Corporate Transaction
described therein. In no event shall any option or SAR under the Plan be
exercised after the expiration of the term provided for in the related stock
option agreement or SAR agreement pursuant to Section 6(b) or (e).
(e) The Committee may provide in any option or SAR agreement hereunder
that, should the Company dispose of its equity holding in any subsidiary
corporation effected by (i) merger or consolidation involving that subsidiary;
(ii) the sale of all or distribution of substantially all of the assets of that
subsidiary; or (iii) the Company's sale of or distribution to shareholders of
substantially all of the outstanding capital stock of such subsidiary
("Subsidiary Disposition") while a holder of the option or SAR is engaged in the
performance of services for the affected subsidiary corporation, then such
option or SAR shall, immediately prior to the effective date of such Subsidiary
Disposition, become fully exercisable with respect to all of the shares at the
time represented by such option or SAR and may be exercised with respect to any
or all of such shares. Any such option or SAR shall remain so exercisable until
the expiration or sooner termination of the term of the option or SAR.
14. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company and the shareholders of each of its
predecessor companies, Healthdyne, Inc. and Tokos Medical Corporation within
twelve (12) months before or after the date the Plan is adopted. Any incentive
stock options granted hereunder and any options, SARs or Stock granted to
Covered Employees hereunder shall
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become effective only upon such shareholder approval. The Committee may grant
incentive stock options or may grant options, SARs or Stock to Covered Employees
under the Plan prior to such shareholder approval, but until shareholder
approval is obtained, no such option or SAR shall be exercisable and no such
Stock grant shall be effective. In the event that such shareholder approval is
not obtained within the period provided above, all options, SARS or Stock grants
previously granted above, shall terminate. If such shareholder approval is
obtained at a duly held shareholders' meeting, the Plan must be approved by a
majority of the votes cast at such shareholders' meeting at which a quorum
representing a majority of all outstanding voting stock of the Company is,
either in person or by proxy, present and voting on the Plan. If such
shareholder approval is obtained by written consent, it must be obtained by the
written consent of the holders of a majority of all outstanding voting stock of
the Company. However, approval at a meeting or by written consent may be
obtained by a lesser degree of shareholder approval if the Board determines, in
its discretion after consultation with the Company's legal counsel, that such a
lesser degree of shareholder approval will comply with all applicable laws and
will not adversely affect the qualification of the Plan under either Section
162(m) or 422 of the Code.
15. Rule 16b-3 Compliance. (a) With respect to persons subject to Section
16 of the Exchange Act ("Insiders"), transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3. To the extent any provision
of the Plan or action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee. Moreover, in the event the Plan does not include a provision required
by Rule 16b-3 to be stated therein, such provision (other than one relating to
eligibility requirements or the price and amount of awards) shall be deemed
automatically to be incorporated by reference into the Plan insofar as Insiders
are concerned.
(b) If, subsequent to the Board's adoption of the Plan, Rule 16b-3 is
amended to delete any of the Rule 16b-3 requirements addressed by the provisions
of the Plan governing grants or awards to Insiders, the Board may amend the Plan
without shareholder approval (unless such approval is required by Rule 16b-3 as
so amended) to delete or otherwise amend any such provisions no longer required
for grants of options, SARs and Stock under the Plan to Insiders to be exempt
from Section 16(b) liability under the Exchange Act.
16. The Right of the Company to Terminate Employment. No provision in the
Plan or any Option shall confer upon any Optionee any right to continue in the
employment of the Company or an Affiliate or to interfere in any way with the
right of the Company or an Affiliate to terminate his employment at any time.
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APPENDIX F-II
DIRECTOR'S PLAN
<PAGE> 254
MATRIA HEALTHCARE, INC.
1996 DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
1. Establishment and Purpose. (a) Matria Healthcare, Inc., a Delaware
corporation (the "Company"), hereby adopts its 1996 Directors' Non-Qualified
Stock Option Plan. The Plan is intended to provide a means whereby eligible
members of the Board may be given an opportunity to purchase shares of Stock
pursuant to options which are not intended to qualify as incentive stock options
under Section 422 of the Code.
(b) The purpose of the Plan is to enable the Company to attract qualified
individuals to serve as members of the Board, to provide additional performance
incentives to such individuals while serving as directors, and to encourage
their continued service on the Board.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Affiliate" shall mean any parent or subsidiary corporations of
the Company, as defined in Sections 424(e) and (f) of the Code (but
substituting "the Company" for "employer corporation"), including parents
or subsidiaries of the Company that become such after adoption of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" shall mean a change in ownership or control of
the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by
a Company-sponsored employee benefit plan) of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding Stock;
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership or by one or more actions by
written consent of shareholders, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time such
election or nomination was approved by the Board.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Company" shall mean Matria Healthcare, Inc., a Delaware
corporation.
(f) "Continuous Status as a Director" shall mean the absence of any
interruption or termination of service as a Director.
(g) "Corporate Transaction" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(i) approval by the Company's shareholders of a merger or
consolidation in which the Company is not the surviving entity, except
for a transaction the principal purpose of which is to change the state
in which the Company is incorporated;
(ii) approval by the Company's shareholders of the sale, transfer
or other disposition of all or substantially all of the assets of the
Company (including the capital stock of the Company's subsidiary
corporations) in connection with a complete liquidation or dissolution
of the Company; or
(iii) approval by the Company's shareholders of any reverse merger
in which the Company is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities are transferred to a
person or persons different from those who held such securities
immediately prior to such merger.
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(h) "Director" shall mean a member of the Board.
(i) "Effective Date" shall mean the date this Plan is adopted by the
Board.
(j) "Employee" shall mean any person who is an employee of the
Company, or any Affiliate of the Company, for purposes of tax withholding
under the Code. The payment of a director's fee by the Company shall not be
sufficient to render the recipient of such fee an Employee.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" shall mean, as of any date, the value of a
share of Stock determined as follows:
(i) If the Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National
Market, its Fair Market Value shall be the closing selling price for
such stock on the principal securities exchange or national market
system on which the Common Stock is at the time listed for trading. If
there are no sales of Common Stock on that date, then the closing
selling price for the Common Stock on the next preceding day for which
such closing selling price is quoted shall be determinative of Fair
Market Value; or
(ii) If the Stock is not traded on any exchange or a national
market system, its Fair Market Value shall be determined in good faith
by the Board, and such determination shall be conclusive and binding on
all persons.
(m) "Option" shall mean an option to purchase shares of Stock granted
pursuant to the Plan.
(n) "Option Agreement" shall mean the written agreement setting forth
the terms of an Option in the form attached as Exhibit A hereto.
(o) "Optionee" shall mean an Outside Director who receives an Option.
(p) "Outside Director" shall mean a Director who is not an Employee.
(q) "Person" shall mean a natural person, corporation, partnership,
limited liability company, joint venture, trust, or any other entity and
any government or instrumentality of a government.
(r) "Plan" shall mean this Matria Healthcare, Inc. 1996 Directors'
Non-Qualified Stock Option Plan.
(s) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(t) "Stock" shall mean the common stock, $0.01 par value per share, of
the Company.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum number of shares of Stock which may be made subject to
Options and sold under the Plan is 250,000 shares of Stock. If an Option expires
or becomes unexercisable for any reason and has not been exercised in full, the
Stock subject to such Option shall be available for future grant under the Plan.
If Stock which was acquired upon exercise of an Option is subsequently
repurchased by the Company, such Stock shall not be available for future grants
under the Plan.
4. Interpretation and Administration of the Plan. (a) The Plan is intended
to be self-executing pursuant to the terms hereof. However, any questions
concerning interpretation or execution of the Plan or grants hereunder shall be
decided by the Board. All decisions, determinations and interpretations of the
Board shall be final and binding on all holders of any Options granted under the
Plan.
(b) Subject to the provisions and restrictions of the Plan, the Board shall
have the authority to: (i) authorize any person to execute on behalf of the
Company any agreements or other documents in connection with the grant of an
Option under the Plan; (ii) approve forms of agreement for use under the Plan
consistent with the terms of the Plan; and (iii) make all other determinations
deemed necessary or advisable for the implementation of the Plan.
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5. Option Grants. (a) All grants of Options hereunder shall be automatic
and nondiscretionary and shall be made strictly in accordance with the
provisions of this Section 5. Neither the Board nor any person shall have any
discretion to select which Outside Directors shall be granted Options, or to
determine the number of shares of Stock to be covered by Options granted to
Outside Directors, the timing of such Option grants or the exercise price
thereof.
(b) An option to purchase 5,000 shares of Stock shall be granted ("Initial
Grant") to each Outside Director, such Initial Grant to be made (i) to the then
existing Outside Directors upon effective date of the merger of Tokos Medical
Corporation ("Tokos") and Healthdyne, Inc. ("Healthdyne") into the Company
("Initial Grant Date") and (ii) to other Outside Directors elected or appointed
to the Board after the Initial Grant Date upon the date each such Outside
Director becomes an Outside Director of the Company; provided that the number of
shares constituting an Initial Grant to any Outside Director who received any
option grant from Tokos or Healthdyne within the twelve months preceding the
Initial Grant Date shall be reduced on a share for share basis by the number of
Tokos or Healthdyne shares covered by such option grant. Beginning with the
first annual meeting of the Company's stockholders following the Initial Grant
Date and thereafter at each subsequent annual meeting of the Company's
stockholders, each Outside Director who continues as an Outside Director
immediately following each such annual meeting shall be granted an option to
purchase 5,000 shares of Stock ("Subsequent Grant"); provided that no Subsequent
Grant shall be made to any Outside Director who has not served as an Outside
Director of the Company, as of the time of such annual meeting, for at least one
year. Each Subsequent Grant shall be made on the date of the annual
stockholders' meeting in question. If any Option ceases to be exercisable in
whole or in part, the shares which were subject to such Option but as to which
the Option had not been exercised shall continue to be available under the Plan.
6. Terms and Conditions of Options. (a) Each Option granted pursuant to
the Plan shall be evidenced by an Option Agreement executed by the Company and
the Optionee.
(b) The exercise price per share of Options granted under the Plan shall be
100% of the Fair Market Value per share of Stock on the date of grant of the
Option, subject to adjustment to the extent provided in Section 12 hereof.
(c) Subject to the provisions in the Option Agreement and Sections 10(e)
and 10(f) hereof, each Option shall vest and become exercisable in twelve (12)
equal monthly installments after the date of grant.
(d) The term of each Option shall be ten (10) years from the date of grant,
unless a shorter period is required to comply with any applicable law, in which
case such shorter period shall apply.
7. Eligibility. Options may be granted only to Outside Directors. No
Optionee shall have any rights as a stockholder of the Company as a result of
the grant of an Option under the Plan or his or her exercise of such Option
pending the actual issuance by the Company of the Stock subject to such Option.
The Plan shall not confer upon any Outside Director any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights that the Director or the Company
may have to terminate his or her directorship at any time.
8. Term of Plan; Effective Date. The Plan shall become effective on the
Effective Date, subject to approval of the Plan by the stockholders of the
Company and by the stockholders of each of Tokos and Healthdyne. If the
Effective Date precedes such stockholder approval, any Option granted under the
Plan prior to such approval shall be conditioned upon approval by stockholders
of the Plan. Options may be granted under the Plan at any time on or before the
tenth anniversary of the date of adoption of the Plan.
9. Payment Upon Exercise. Payment of the exercise price upon exercise of
any Option shall be made in cash, by optionee's personal check, a certified
check, bank draft, or postal or express money order payable to the order of the
Company in lawful money of the United States; provided, however, that the
Committee, in its sole discretion, may permit an optionee to pay the option
price in whole or in part (i) with shares of Stock owned by the optionee or with
shares of Stock withheld from the shares otherwise deliverable to the optionee
upon exercise of an option (in each case only to the extent that such an
exercise of the option would not result in an accounting compensation charge
with respect to the shares used to pay the option price); (ii) by delivery
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on a form prescribed by the Committee of an irrevocable direction to a
securities broker approved by the Committee to sell shares of Stock and deliver
all or a portion of the proceeds to the Company in payment for the Stock; (iii)
by delivery of the optionee's promissory note with such recourse, interest,
security, and redemption provisions as the Committee in its discretion
determines appropriate; or (iv) in any combination of the foregoing. Any Stock
used to exercise options shall be valued at its fair market value on the date of
the exercise of the option.
10. Exercise of Option. (a) An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option Agreement by the person entitled to exercise the Option
and full payment for the Stock has been received by the Company in accordance
with Section 9 hereof. An Option may not be exercised for a fraction of a share
of Stock.
(b) If an Optionee ceases to serve as a Director (other than as a result of
disability or death, or following a Change in Control), he or she may, but only
within three (3) months after the date he or she ceases to be a Director,
exercise his or her then outstanding Options to the extent that he or she was
entitled to exercise them at the date of such termination. To the extent that
the Optionee was not entitled to exercise an Option at the date of such
termination, or does not exercise such Option (that he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Notwithstanding the provisions of Section 9(b) above, in the event an
Optionee is unable to continue his or her service as a Director as a result of
his or her total and permanent disability (as defined in Section 22(e)(3) of the
Code), he or she may, within twelve (12) months from the date of such
termination, exercise his or her then outstanding Options to the extent he or
she was entitled to exercise them at the date of such termination. To the extent
that the Optionee was not entitled to exercise an Option at the date of such
termination, or does not exercise such Option (that he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) If during the term of his or her Option, an Optionee (A) dies and had
been in Continuous Status as a Director at the time of his or her death, or (B)
dies within three (3) months after termination of Continuous Status as a
Director, at any time within twelve (12) months following the date of the
Optionee's death the Option may be exercised by the Optionee's personal
representative or by a person who acquired the right to exercise the Option by
bequest or intestate succession, but only to the extent the Optionee was
entitled to exercise the Option at the time of his or her termination of
Continuous Status as a Director. Notwithstanding the foregoing, in no event may
the Option be exercised after the expiration of the term set forth in Section 6.
(e) Should any Corporate Transaction occur while an Optionee remains in
Continuous Status as a Director, then each outstanding Option held by such
Optionee shall become fully exercisable, immediately prior to the specified
effective date of such Corporate Transaction, for all or any portion of the
shares at the time represented by such Option and may be exercised with respect
to any or all of such shares represented by the Option immediately prior to the
specified effective date of such Corporate Transaction. Immediately following
the consummation of the Corporate Transaction, each such option shall terminate
unless assumed by the successor company or its parent, in which case the Option
shall remain so exercisable until the expiration or sooner termination of the
Option term.
(f) Should a Change in Control occur while an Optionee remains in
Continuous Status as a Director, then each outstanding Option held by such
Optionee shall become fully exercisable, immediately prior to the effective date
of such Change in Control, for all of the shares at the time subject to such
Option and may be exercised with respect to any or all of such shares
represented by the Option. The Option shall remain so exercisable until the
expiration or sooner termination of the Option term.
(g) Notwithstanding the provisions of Sections 10(b) through 10(f) above,
in no event may any Option be exercised after expiration of its term set forth
in Section 6.
11. Nontransferability of Options. To the extent required by Rule 16b-3 of
the Exchange Act, no Option shall be transferable by an Optionee other than by
operation of law or by will or by the laws of descent or distribution; provided
that, if Rule 16b-3 is amended after the Board's adoption of the Plan to permit
greater transferability of an Option hereunder, all Options hereunder shall be
transferable to the fullest extent
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provided by Rule 16b-3 as so amended. In the event of any Rule 16b-3 permitted
transfer of an Option, the transferee shall be entitled to exercise the Option
in the same manner and only to the same extent as the Optionee (or his personal
representative or the person who would have acquired the right to exercise the
Option by bequest or intestate succession) would have been entitled to exercise
the Option under Sections 9 and 10 had the Option not been transferred.
12. Adjustment Upon Changes in Capitalization. In the event that the
number of outstanding shares of Stock of the Company is changed through merger,
consolidation, reorganization, recapitalization, reincorporation, stock split,
stock dividend (in excess of 2%) or other change in the capital structure of the
Company without consideration, the number of shares of Stock available under the
Plan, the number of shares of Stock deliverable in connection with any Option
and the exercise price per share of such Option shall be proportionately
adjusted; provided, however, that no certificate or scrip representing
fractional shares shall be issued and any resulting fractions of a share shall
be ignored.
13. Amendment and Termination of the Plan. (a) The Board may amend the
Plan from time to time in such respects as the Board may deem advisable;
provided, however, that to the extent necessary to comply with Rule 16b-3 under
the Exchange Act (or any other applicable law or regulation), the Company shall
obtain approval by the Company's stockholders to amend the Plan to the extent
and in the manner required by such law or regulation. Notwithstanding the
foregoing, the provisions set forth in Sections 5 and 6 of the Plan (and any
other Sections of the Plan that affect the formula award terms required to be
specified in the Plan by Rule 16b-3 of the Exchange Act and any successor to
such Rule) shall not be amended periodically and in no event more than once
every six (6) months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or any applicable
rules and regulations thereunder.
(b) The Board, without further approval of the stockholders, may at any
time terminate or suspend the Plan. Except as otherwise provided herein, any
such termination or suspension of the Plan shall not affect Options already
granted hereunder, and such Options shall remain in full force and effect as if
the Plan had not been terminated or suspended.
(c) Except as otherwise provided herein, rights and obligations under any
outstanding Option shall not be adversely altered or impaired by amendment,
suspension or termination of the Plan, except with the consent of the person to
whom the Option was granted or transferred.
14. Conditions Upon Issuance of Stock. (a) Stock shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Stock pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act,
the Exchange Act, the rules and regulations promulgated thereunder, state
securities laws, and the requirements of any stock exchange or national market
system upon which the Stock may then be listed, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) Inability of the Company to obtain authority from any regulatory body
having jurisdictional authority deemed by the Company's counsel to be necessary
for the lawful issuance and sale of any Stock hereunder shall relieve the
Company of any liability for failure to issue or sell such Stock.
15. Reservation of Stock. The Company, during the term of the Plan, will
at all times reserve and keep available such number of shares of Stock as shall
be sufficient to satisfy the requirements of the Plan.
16. Rule 16b-3. (a) Transactions under the Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the Board
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Board. Moreover, in the event the Plan does not
include a provision required by Rule 16b-3 to be stated therein in order to
qualify the Plan as a formula plan, such provision (other than one relating to
eligibility requirements, or the price and amount of awards) shall be deemed
automatically to be incorporated by reference into the Plan.
(b) If, subsequent to adoption of the Plan, Rule 16b-3 is amended to delete
any of the Rule 16b-3 requirements addressed by the provisions of the Plan
governing grants or awards to persons subject to
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Section 16(b) of the Exchange Act ("Insiders"), the Board may amend the Plan
without stockholder approval (unless such approval is required by Rule 16b-3 as
so amended) to delete or otherwise amend any such provisions no longer required
for grants of Options under the Plan to be exempt from Section 16(b) liability
under the Exchange Act or for Outside Directors to be able to make exempt Rule
16b-3 grants of stock options or other stock awards to Insiders under other
stock option or stock incentive plans of the Company.
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APPENDIX F-III
EMPLOYEE STOCK PURCHASE PLAN
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MATRIA HEALTHCARE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of Matria Healthcare, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Code. The provisions of the Plan, accordingly, shall be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the common stock, $0.01 par value per
share, of the Company.
(d) "Company" shall mean Matria Healthcare, Inc., a Delaware
corporation.
(e) "Compensation" shall mean an Employee's base salary, including
commissions, from the Company or one or more Designated Subsidiaries,
including such amounts of base salary as are deferred by the Employee (i)
under a qualified cash or deferred arrangement described in Section 401(k)
of the Code, or (ii) to a plan qualified under Section 125 of the Code.
Compensation does not include overtime, bonuses, reimbursements or other
expense allowances, fringe benefits (cash or noncash), moving expenses,
deferred compensation, and contributions (other than contributions
described in the first sentence) made on the Employee's behalf by the
Company or one or more Designated Subsidiaries under any employee benefit
or welfare plan now or hereafter established.
(f) "Designated Subsidiaries" shall mean the Subsidiaries which have
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Effective Date" shall mean April 1, 1996. However, should any
Designated Subsidiary become a Participating Company in the Plan after such
date, then such entity shall designate a separate Effective Date with
respect to its employee-participants.
(h) "Employee" shall mean any individual who is engaged in the
rendition of personal services to the Company or a Designated Subsidiary
for Compensation. For purposes of the Plan, the employment relationship
shall be treated as continuing intact while the individual is on sick leave
or other leave of absence approved by the Company. Where the period of
leave exceeds 90 days and the individual's right to reemployment is not
guaranteed either by statute or by contract, the employment relationship
will be deemed to have terminated on the 91st day of such leave.
(i) "Enrollment Date" shall mean the first day of each Purchase
Period.
(j) "Exercise Date" shall mean the last day of each Purchase Period.
(k) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market, its Fair Market Value shall be the closing selling
price for such stock on the principal securities exchange or national
market system on which the Common Stock is at the time listed for
trading. If there are no sales of Common Stock on that date, then the
closing selling price for the Common Stock on the next preceding day for
which such closing selling price is quoted shall be determinative of
Fair Market Value; or,
<PAGE> 262
(2) If the Common Stock is not traded on an exchange or a national
market system, its Fair Market Value shall be determined in good faith
by the Board, and such determination shall be conclusive and binding on
all persons.
(l) "Participant" means an Employee of the Company or Designated
Subsidiary who is actively participating in the Plan.
(m) "Plan" shall mean this Employee Stock Purchase Plan.
(n) "Plan Administrator" shall mean either the Board or a committee of
the Board that is responsible for the administration of the Plan.
(o) "Purchase Period" shall mean a period of approximately three
months, commencing on January 1, April 1, July 1 and October 1 of each year
and terminating on the next following March 31, June 30, September 30 or
December 31, respectively; provided, however, that the first Purchase
Period shall commence on the Effective Date and shall end on June 30, 1996.
(p) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(q) "Reserves" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under option.
(r) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
3. Eligibility.
(a) General. Any Employee who is employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan for the
Purchase Period commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan to
the contrary notwithstanding, no Employee shall be granted an option under
the Plan (i) if, immediately after the grant, such Employee (taking into
account stock owned by any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock
and/or hold outstanding options to purchase stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of
stock of the Company or of any Subsidiary of the Company, or (ii) which
permits his or her rights to purchase stock under all employee stock
purchase plans of the Company and its Subsidiaries to accrue at a rate
which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock
(determined at the Fair Market Value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at
any time. The determination of the accrual of the right to purchase stock
shall be made in accordance with Section 423(b)(8) of the Code and the
regulations thereunder.
(c) Other Limits on Eligibility. Notwithstanding paragraph (a) above,
the following Employees, as defined in paragraph 2, shall not be eligible
to participate in the Plan for any relevant Purchase Period: (i) employees
whose customary employment is 20 hours or less per week; (ii) employees
whose customary employment is for not more than 5 months in any calendar
year; and (iii) employees who have been continuously employed for less than
one year.
4. Purchase Periods. (a) The Plan shall be implemented through consecutive
Purchase Periods until such time as (i) the maximum number of shares of Stock
available for issuance under the Plan shall have been purchased or (ii) the Plan
shall have been sooner terminated in accordance with paragraph 19 hereof.
(b) A Participant shall be granted a separate purchase right for each
Purchase Period in which he/she participates. The purchase right shall be
granted on the first day of the Purchase Period and shall be automatically
exercised on the last day of the Purchase Period.
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(c) Except as specifically provided herein, the acquisition of Common Stock
through participation in the Plan for any Purchase Period shall neither limit
nor require the acquisition of Common Stock by a Participant in any subsequent
Purchase Period.
5. Participation. (a) An eligible Employee may become a Participant in the
Plan by completing a subscription agreement authorizing payroll deductions in
the form of Exhibit A to this Plan and filing it with the Company's payroll
office at least fifteen (15) business days prior to the Enrollment Date for the
Purchase Period in which such participation will commence, unless a later time
for filing the subscription agreement is set by the Board for all eligible
Employees with respect to a given Purchase Period.
(b) Payroll deductions for a Participant shall commence with the first
period payroll following the Enrollment Date and shall end on the last complete
payroll period during the Purchase Period, unless sooner terminated by the
Participant as provided in paragraph 10.
6. Payroll Deductions. (a) At the time a Participant files his/her
subscription agreement, he/she shall elect to have payroll deductions made on
each pay day during the Purchase Period in an amount not exceeding ten percent
(10%) of the Compensation which he/she receives on each payday during the
Purchase Period.
(b) All payroll deductions made for a Participant shall be credited to
his/her account under the Plan and will be withheld in whole percentages only. A
Participant may not make any additional payments into such account.
(c) A Participant may discontinue his or her participation in the Plan as
provided in paragraph 10, or may decrease the rate of his/her payroll deductions
during the Purchase Period by completing or filing with the Company a new
subscription agreement authorizing a decrease in payroll deduction rate. The
decrease in rate shall be effective with the first full payroll period following
ten (10) business days after the Company's receipt of the new subscription
agreement unless the Company elects to process a given change in participation
more quickly. A Participant may increase the rate of his/her payroll deductions
for a future Purchase Period by filing with the Company a new subscription
agreement authorizing an increase in payroll deduction rate within ten (10)
business days (unless the Company elects to process a given change in
participation more quickly) before the commencement of the upcoming Purchase
Period. A Participant's subscription agreement shall remain in effect for
successive Purchase Periods unless terminated as provided in paragraph 10. The
Board shall be authorized to limit the number of participation rate changes
during any Purchase Period.
(d) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and paragraph 3(b) herein, a Participant's payroll
deductions may be decreased to 0% at such time during any Purchase Period which
is scheduled to end during the current calendar year (the "Current Purchase
Period") that the aggregate of all payroll deductions which were previously used
to purchase stock under the Plan in a prior Purchase Period which ended during
that calendar year plus all payroll deductions accumulated with respect to the
Current Purchase Period equals $21,250. Payroll deductions shall recommence at
the rate provided in such Participant's subscription agreement at the beginning
of the first Purchase Period which is scheduled to end in the following calendar
year, unless terminated by the Participant as provided in paragraph 10.
7. Grant of Option. On the first day of each Purchase Period, each
eligible Employee participating in such Purchase Period shall be granted an
option to purchase on the Exercise Date for such Purchase Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided (i) that such purchase
shall be subject to the limitations set forth in paragraphs 3(b) and 12 hereof,
and (ii) the maximum number of shares of Common Stock an Employee shall be
permitted to purchase in any Purchase Period shall be 1,000 shares, subject to
adjustment as provided in paragraph 18 hereof. Exercise of the option shall
occur as provided in paragraph 8, unless the Participant has withdrawn pursuant
to paragraph 10, and the option, to the extent not exercised, shall expire on
the last day of the Purchase Period.
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8. Exercise of Option. Unless a Participant withdraws from the Plan as
provided in paragraph 10 below, his/her option for the purchase of shares will
be exercised automatically on each Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such Participant at the
applicable Purchase Price with the accumulated payroll deductions in his/her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a Participant's account which are not sufficient to purchase a
full share shall be carried over to the next Purchase Period, if the Participant
elects to participate in the next Purchase Period, or returned to the
Participant. Any amount remaining in a Participant's account following the
purchase of shares on the Exercise Date, other than the amounts described in the
preceding sentence, shall be returned to the Participant and shall not be
carried over to the next Purchase Period. During a Participant's lifetime, a
Participant's option to purchase shares hereunder is exercisable only by
him/her.
9. Delivery. Upon receipt of a request from a Participant after each
Exercise Date on which a purchase of shares occurs, the Company shall arrange
the delivery to such Participant, as appropriate, of a certificate representing
the shares purchased upon exercise of his/her option.
10. Withdrawal; Termination of Employment. (a) A Participant may withdraw
all but not less than all the payroll deductions credited to his/her account and
not yet used to exercise his/her option under the Plan at any time by giving
written notice to the Company in the form of Exhibit B to this Plan. All of the
Participant's payroll deductions credited to his/her account will be paid to
such Participant promptly after receipt of notice of withdrawal, such
Participant's option for the Purchase Period will be automatically terminated,
and no further payroll deductions for the purchase of shares will be made during
the Purchase Period. If a Participant withdraws from a Purchase Period, payroll
deductions will not resume at the beginning of the succeeding Purchase Period
unless the Participant delivers to the Company a new subscription agreement.
(b) Upon a Participant's ceasing to be an Employee for any reason or upon
termination of a Participant's employment relationship (as described in
paragraph 2(h)), the payroll deductions credited to such Participant's account
during the Purchase Period but not yet used to exercise the option will be
returned to such Participant or, in the case of his/her death, to the person or
persons entitled thereto under paragraph 14, and such Participant's option will
be automatically terminated.
11. Interest. No interest shall accrue on the payroll deductions of a
Participant in the Plan.
12. Stock. (a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 500,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in paragraph 18. If on a given Exercise Date the number of shares with respect
to which options are to be exercised exceeds the number of shares then available
under the Plan, the Company shall make a pro rata allocation of the shares
remaining available for purchase in as uniform a manner as shall be practicable
and as it shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares covered
by his/her option until such shares are actually purchased on the Participant's
behalf in accordance with the applicable provisions of the Plan. No adjustment
shall be made for dividends, distributions or other rights for which the record
date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the Participant and
his/her spouse.
13. Administration.
(a) Administrative Body. The Plan shall be administered by the Board
of the Company or a committee of members of the Board appointed by the
Board. The Board or its committee shall have full and exclusive
discretionary authority to construe, interpret and apply the terms of the
Plan, to determine eligibility and to adjudicate all disputed claims filed
under the Plan. Every finding, decision and determination made by the Board
or its committee shall, to the full extent permitted by law, be final and
binding upon all parties. Members of the Board who are eligible Employees
are permitted to participate in the Plan except to the extent limited by
subparagraph (b) of this paragraph 13.
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(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
subparagraph (a) of this paragraph 13, in the event that Rule 16b-3
promulgated under The Securities Exchange Act of 1934, as amended, or any
successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be only administered
by such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee
or person that is not "disinterested" as that term is used in Rule 16b-3.
14. Designation of Beneficiary. (a) Each Participant will file a written
designation of a beneficiary who is to receive any shares and cash, if any, from
the Participant's account under the Plan in the event of such Participant's
death subsequent to an Exercise Date on which the option is exercised but prior
to delivery to such Participant of such shares and cash. In addition, a
Participant may file a written designation of a beneficiary who is to receive
any cash from the Participant's account under the Plan in the event of such
Participant's death prior to exercise of the option. If a Participant is married
and the designated beneficiary is not the spouse, spousal consent shall be
required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the Participant (and
his or her spouse, if any) at any time by written notice. In the event of the
death of a Participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such Participant's death, the
Company shall deliver such shares and/or cash to the executor or administrator
of the estate of the Participant, or if no such executor or administrator has
been appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares and/or cash to the spouse or to any one or
more dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
15. Transferability. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from a Purchase Period in accordance with paragraph 10.
16. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each Participant
in the Plan. Statements of account will be given to Participants at least
annually, which statements will set forth the amounts of payroll deductions, the
Purchase Price, the number of shares purchased and the remaining cash balance,
if any.
18. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the Reserves, as well as the price per share
of Common Stock covered by each option under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an option. The Board may, if it so determines in the exercise of
its sole discretion, make provision for adjusting the Reserves, as well as
the price per share of Common Stock covered by each outstanding option, in
the event the Company effects one or more reorganizations,
5
<PAGE> 266
recapitalizations, rights offerings or other increases or reductions of
shares of its outstanding Common Stock.
(b) Change in Ownership, Dissolution or Liquidation. In the event of
a proposed sale of all or substantially all of the assets of the Company,
the merger of the Company with or into another corporation, in which merger
the Company will not be the surviving corporation (other than a
reorganization effectuated primarily to change the state in which the
Company is incorporated), or a reverse merger in which the Company is the
surviving corporation but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different
from the person or persons holding those securities immediately prior to
the transfer, each option under the Plan shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the Board determines, in
the exercise of its sole discretion and in lieu of such assumption or
substitution, to shorten the Purchase Period then in progress by setting a
new Exercise Date (the "New Exercise Date"). If the Board shortens the
Purchase Period then in progress in lieu of assumption or substitution in
the event of a merger or sale of assets, the Board shall notify each
Participant in writing, at least ten (10) days prior to the New Exercise
Date, that the Exercise Date for his/her option has been changed to the New
Exercise Date and that his/her option will be exercised automatically on
the New Exercise Date, unless prior to such date he/she has withdrawn from
the Purchase Period as provided in paragraph 10. For purposes of this
paragraph, an option granted under the Plan shall be deemed to be assumed
if, following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately
prior to the sale of assets or merger, the consideration (whether stock,
cash or other securities or property) received in the sale of assets or
merger by holders of Common Stock for each share of Common stock held on
the effective date of the transaction (and if such holders were offered a
choice of consideration, the type of consideration chosen by the holders of
a majority of the outstanding shares of Common Stock); provided, however,
that if such consideration received in the sale of assets or merger was not
solely common stock of the successor corporation or its parent (as defined
in Section 424(e) of the Code), the Board may, with the consent of the
successor corporation and the Participant, provide for the consideration to
be received upon exercise of the option to be solely common stock of the
successor corporation or its parent equal in fair market value to the per
share consideration received by holders of Common Stock in the sale of
assets or merger.
19. Amendment or Termination. (a) The Board of Directors of the Company
may at any time and for any reason terminate or amend the Plan. Except as
provided in paragraph 18, no such termination can affect options previously
granted, provided that a Purchase Period may be terminated by the Board of
Directors on any Exercise Date if the Board determines that the termination of
the Plan is in the best interests of the Company and its shareholders. Except as
provided in paragraph 18, no amendment may make any change in any option
theretofore granted which amendment adversely affects the rights of any
Participant. To the extent necessary to comply with Rule 16b-3 or Section 423 of
the Code (or any successor rule or provision or any other applicable law or
regulation), the Company shall obtain shareholder approval in such a manner and
to such a degree as required.
(b) Without shareholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Purchase Periods, limit
the frequency and/or number of changes in the amounts withheld during Purchase
Periods, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a Participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each Participant properly correspond with amounts withheld from the
Participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
6
<PAGE> 267
20. Notices. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance. As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law. In addition, no purchase rights
shall be exercised or shares issued hereunder before the Plan shall have been
approved by shareholders of the Company as provided in paragraph 24.
22. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under paragraph 19.
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, such options shall contain,
and the shares issued upon exercise thereof shall be subject to, such additional
conditions and restrictions as may be required by Rule 16b-3 to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
24. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company and the shareholders of each of its
predecessor companies, Healthdyne, Inc. and Tokos Medical Corporation within
twelve (12) months before or after the date the Plan is adopted. If such
shareholder approval is obtained at a duly held shareholders' meeting, the Plan
must be approved by a majority of the votes cast at such shareholders' meeting
at which a quorum representing a majority of all outstanding voting stock of the
Company is, either in person or by proxy, present and voting on the Plan. If
such shareholder approval is obtained by written consent, it must be obtained by
the written consent of the holders of a majority of all outstanding voting stock
of the Company. However, approval at a meeting or by written consent may be
obtained by a lesser degree of shareholder approval if the Board determines, in
its discretion after consultation with the Company's legal counsel, that such a
lesser degree of shareholder approval will comply with all applicable laws and
will not adversely affect the qualification of the Plan under Section 423 of the
Code.
25. No Employment Rights. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
26. Effect of Plan. The provisions of the Plan shall, in accordance with
its terms, be binding upon, and inure to the benefit of, all successors of each
employee participating in the Plan, including, without limitation, such
employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
7
<PAGE> 268
EXHIBIT A
MATRIA HEALTHCARE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
______ Original Application Enrollment Date: _______________
______ Change in Payroll Deduction Rate
______ Change of Beneficiary(ies)
1. I, ____________________________________, hereby elect to participate in
the Matria Healthcare, Inc. 1996 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribe to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of (______)% of my Compensation on each payday (not to exceed 10%) during the
Purchase Period in accordance with the Employee Stock Purchase Plan. (Please
note that no fractional percentages are permitted.)
3. I understand that the payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price determined
in accordance with the Employee Stock Purchase Plan. I understand that if I do
not withdraw from a Purchase Period, any accumulated payroll deductions will be
used to automatically exercise my option.
4. I have received a copy of the complete "Matria Healthcare, Inc. 1996
Employee Stock Purchase Plan." I understand that my participation in the
Employee Stock Purchase Plan is in all respects subject to the terms of the
Plan. I understand that the grant of the option by the Company under this
Subscription Agreement is subject to obtaining shareholder approval of the
Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of:
---------------------------------------------------------------------
---------------------------------------------------------------------
6. I understand that if I dispose of any shares received by me pursuant to
this Plan within 2 years after the Enrollment Date (the first day of the
Purchase Period during which I purchased such shares) or within 1 year after the
Exercise Date (the date I purchased such shares), I will be treated for federal
income tax purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value of the
shares at the time such shares were delivered to me over the price which I paid
for the shares. I hereby agree to notify the Company in writing within 30 days
after the date of any such disposition and I will make adequate provision for
Federal, State or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time after
the expiration of the 2-year and 1-year holding periods described above, I
understand that I will be treated for federal income tax purposes as having
received income only at the time of such disposition, and that such income will
be taxed as ordinary income only to the extent of an amount equal to the lesser
of (1) the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15% of
the fair market value of the shares on the first day of the Purchase Period. The
remainder of the gain, if any, recognized on such disposition will be taxed as
capital gain. I also understand that the foregoing income tax consequences are
based on current federal income tax law and that the Company is not responsible
for advising me of any changes in the applicable tax rules.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
<PAGE> 269
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan.
NAME:(Please print)
----------------------------------------------------------
(First) (Middle) (Last)
Relationship:
----------------------------------------------------------
Address:
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
Employee's Social
Security Number:
----------------------------------------------------------
Employee's Address:
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE PURCHASE PERIODS UNLESS TERMINATED BY ME.
Employee Signature:
----------------------------------------------------------
Dated:
----------------------------------------------------------
Signature of spouse
if beneficiary is
other than spouse:
----------------------------------------------------------
Dated:
----------------------------------------------------------
A-2
<PAGE> 270
EXHIBIT B
MATRIA HEALTHCARE, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NOTICE OF WITHDRAWAL
The undersigned participant in the Purchase Period of the Matria
Healthcare, Inc. 1996 Employee Stock Purchase Plan which began on ,
19 , (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Purchase Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Purchase Period. The
undersigned understands and agrees that his or her option for such Purchase
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Purchase Period and the undersigned shall be eligible to participate
in succeeding Purchase Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address
of Participant:
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
Signature:
---------------------------------------------------------
Date:
---------------------------------------------------------
<PAGE> 271
HEALTHTDYNE, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 6, 1996
The undersigned hereby appoints Parker H. Petit and J. Brent Burkey, and
each of them, as proxies, each with the power to appoint his substitute, and
hereby authorizes either of them to act and to vote at the special meeting of
shareholders of Healthdyne, Inc. ("Healthdyne") to be held on March 6, 1996, and
at any adjournments or postponements thereof, as indicated upon all matters
referred to on this proxy card and described in the Joint Proxy
Statement/Prospectus for the meeting, and, in their discretion, upon any other
matters which may properly come before the meeting.
1. Approval and adoption of the Agreement and Plan of Merger dated as of
October 2, 1995, as amended, among Healthdyne, Tokos Medical Corporation
(Delaware), a Delaware corporation ("Tokos"), and Matria Healthcare, Inc., a
Delaware corporation ("Newco"), providing for the merger (the "Merger") of
Healthdyne and Tokos with and into Newco, with Newco continuing as the surviving
corporation, and the transactions contemplated thereby.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval and adoption of the Newco 1996 Stock Incentive Plan, the Newco
1996 Directors' Non-Qualified Stock Option Plan and the Newco 1996 Employee
Stock Purchase Plan.
/ / FOR / / AGAINST / / ABSTAIN
(Continued on reverse side)
Shares represented by all properly executed proxies will be voted in
accordance with instructions appearing on this proxy card and in the discretion
of the proxy holders as to any other matter that may properly come before the
meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE VOTED FOR
PROPOSALS 1 AND 2.
Dated: , 1996
-------------------
-------------------------(SEAL)
(SIGNATURE)
-------------------------(SEAL)
(SIGNATURE)
NOTE: Please sign above exactly
as name appears on Stock
Certificate. If stock is held
in the name of two or more
persons, all must sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership name
by authorized person.
<PAGE> 272
PROXY TOKOS MEDICAL CORPORATION (DELAWARE)
SPECIAL MEETING OF STOCKHOLDERS MARCH 6, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the
notice of special stockholders meeting to be held March 6, 1996, and the Joint
Proxy Statement/Prospectus and appoints Robert F. Byrnes and Nicholas A. Mione,
or either of them, the proxy of the undersigned, with full power of
substitution, to vote all shares of Common Stock of Tokos Medical Corporation
(Delaware) ("Tokos") which the undersigned is entitled to vote, either on his or
her own behalf or on behalf of an entity or entities, at the Special Meeting of
Stockholders of Tokos to be held at the Windsor/Embassy Suites Hotel, 1325 East
Dyer Road, Santa Ana, California on Wednesday, March 6, 1996 at 10:00 a.m., and
at any adjournment or postponement thereof, with the same force and effect as
the undersigned might or could do if personally present thereat. The shares
represented by this proxy shall be voted as indicated upon all matters referred
to in this proxy card and described in the Joint Proxy Statement/Prospectus for
the meeting. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
1. Approval and adoption of the Agreement and Plan of Merger dated as of
October 2, 1995, as amended, among Tokos, Healthdyne, Inc., a Georgia
corporation ("Healthdyne"), and Matria Healthcare, Inc., a Delaware corporation
("Newco"), providing for the merger (the "Merger") of Healthdyne and Tokos with
and into Newco, with Newco continuing as the surviving corporation, and the
transactions contemplated thereby.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval and adoption of the Newco 1996 Stock Incentive Plan, the Newco
1996 Directors' Non-Qualified Stock Option Plan and the Newco 1996 Employee
Stock Purchase Plan.
/ / FOR / / AGAINST / / ABSTAIN
(Continued on reverse side)
The Board of Directors recommends a vote FOR each of Proposals 1 and 2. This
proxy, when properly executed, will be voted as specified above, and in the
discretion of the proxy holders as to any other matter that may properly come
before the meeting. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE
VOTED FOR PROPOSALS 1 AND 2.
Dated: 1996
--------------------
-------------------------(SEAL)
(SIGNATURE)
-------------------------(SEAL)
(SIGNATURE)
NOTE: Please sign above exactly
as name appears on Stock
Certificate. If stock is held
in the name of two or more
persons, all must sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full
title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership name
by authorized person.
PLEASE RETURN YOUR EXECUTED PROXY TO U.S. STOCK TRANSFER CORPORATION IN THE
ENCLOSED ENVELOPE.
<PAGE> 273
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Statutory Provisions
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") permits
a corporation in its certificate of incorporation to eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for violations of a director's fiduciary duty as a director.
Registrant's Certificate of Incorporation includes such a provision. Such a
provision would have no effect on the availability of equitable remedies, such
as an injunction or rescission, for breach of fiduciary duty. In addition, no
such provision may eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for paying an unlawful dividend
or approving an illegal stock repurchase or redemption; or (iv) for any
transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a director, officer, employee or agent of the corporation, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. No indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Additionally, a
corporation is required to indemnify its directors and officers against expenses
to the extent that such directors or officers have been successful on the merits
or otherwise in any action, suit or proceeding or in defense of any claim, issue
or matter therein.
Indemnification can be made by the corporation only upon a determination
that indemnification is proper in the circumstances because the party seeking
indemnification has met the applicable standard of conduct as set forth in the
DGCL. The indemnification provided by the DGCL shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors, or
otherwise. A corporation also has the power to purchase and maintain insurance
on behalf of any person, whether or not the corporation would have the power to
indemnify him or her against such liability. The indemnification provided by the
DGCL, shall, unless otherwise provided when authorized or ratified, continue as
to a person who ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Certificate of Incorporation and Bylaws
The registrant's Certificate of Incorporation limits registrant's
directors' liability for monetary damages to registrant and its stockholders for
breaches of fiduciary duty to the fullest extent permitted under the DGCL. In
addition, the registrant's Certificate of Incorporation provides that registrant
shall, to the fullest extent permitted by law, indemnify its directors and
officers against any liability, losses or related expenses which they may incur
by reason of serving or having served as directors and officers of registrant.
The registrant's Bylaws provide that each person who is involved in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of registrant, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan, will be
indemnified by the corporation to
II-1
<PAGE> 274
the fullest extent permitted by the DGCL, as the same exists or may hereafter be
amended, against all costs, charges, expenses, liabilities and losses reasonably
incurred or suffered by such person in connection therewith, and such
indemnification will continue as to a person who has ceased to be a director,
officer, employee or agent and will inure to the benefit of his or her heirs,
executors and administrators; provided, however, that registrant will indemnify
any such person seeking indemnification in connection with a proceeding
initiated by such person only if such proceeding was authorized by registrant's
Board of Directors. The right to indemnification will be a contract right and
will include the right to be paid by registrant the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that if the DGCL so requires, the payment of such expenses incurred by
a director or officer in advance of the final disposition of a proceeding will
be made only upon delivery to registrant of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it will ultimately
be determined that such director or officer is not entitled to be indemnified.
Registrant may provide indemnification to employees and agents of registrant
with the same scope and effect as the foregoing indemnification of directors and
officers.
The indemnification rights conferred by the registrant's Certificate of
Incorporation are not exclusive of any other right to which a person seeking
indemnification may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Registrant may maintain
insurance on behalf of its directors, officers, employees and agents.
Contractual and Other Provisions
Under the terms of the Merger Agreement, registrant is required to
indemnify and advance expenses to the current and former officers, directors,
employees and agents of Tokos and Healthdyne (the "Tokos and Healthdyne
Indemnified Parties"), to the fullest extent permitted under applicable law,
against all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising out
of or pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or after
the effective time of the Merger arising under the Securities Act, the Exchange
Act or state corporation laws in connection with the Merger. In addition,
registrant is obligated not to amend the provisions of its Certificate of
Incorporation and Bylaws providing for exculpation of director and officer
liability and indemnification, except as required by applicable law or except to
make changes permitted by law that would enlarge the Tokos and Healthdyne
Indemnified Parties' right of indemnification.
For a period of six years after the Effective Time, registrant is obligated
to maintain in effect policies of directors' and officers' liability insurance
covering the Tokos and Healthdyne Indemnified Parties, who are presently covered
by Healthdyne or Tokos insurance policies, on terms that are substantially no
less advantageous to such Tokos and Healthdyne Indemnified Parties than such
existing insurance; provided, that registrant will not be required, in order to
maintain or procure such coverage, to pay an annual premium in excess of an
agreed upon amount (the "Cap") and provided further that if equivalent coverage
cannot be obtained, or can be obtained only by paying an annual premium in
excess of the Cap, registrant will only be required to obtain as much coverage
as can be obtained by paying an annual premium equal to the Cap. At the present
time, registrant maintains an aggregate of $10,000,000 of directors' and
officers' liability insurance.
ITEM 21. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S> <C>
2 -- Agreement and Plan of Merger dated October 2, 1995, as amended, between Healthdyne,
Tokos and Registrant (included as Appendix A to the Registrant's Joint Proxy
Statement/Prospectus).
3.1 -- Amended and Restated Certificate of Incorporation (included as Appendix D to the
Registrant's Joint Proxy Statement/Prospectus).
3.2 -- Bylaws (included as Appendix E to the Registrant's Joint Proxy
Statement/Prospectus).
</TABLE>
II-2
<PAGE> 275
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S> <C>
4.1 -- Indenture dated as of December 1, 1986, between Healthdyne and National Bank of
Georgia, trustee, for 8% Convertible Subordinated Indentures due December 31, 2001
filed as an exhibit to the Healthdyne Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
4.2 -- Form of Supplemental Indenture between Registrant and Southtrust Estate & Trust
Company of Georgia, N.A., trustee, to Indenture dated as of December 1, 1986, for 8%
Convertible Subordinated Indentures due December 31, 2001.
5 -- Opinion of Troutman Sanders LLP.
8.1 -- Opinion of Troutman Sanders LLP regarding certain tax matters.
8.2 -- Opinion of Morrison & Foerster LLP regarding certain tax matters.
10.1 -- Form of Rights Agreement between Registrant and SunTrust Bank, Atlanta.
10.2 -- 1996 Stock Incentive Plan (included as Appendix F-I to the Registrant's Joint Proxy
Statement/Prospectus).
10.3 -- 1996 Directors' Non-Qualified Stock Option Plan (included as Appendix F-II to the
Registrant's Joint Proxy Statement/Prospectus).
10.4 -- 1996 Employee Stock Purchase Plan (included as Appendix F-III to the Registrant's
Joint Proxy Statement/Prospectus).
10.5 -- Distribution Agreement dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies filed as an exhibit to the Healthdyne Technologies (Commission File No.
0-21776) Current Report on Form 8-K dated May 1, 1995 and incorporated herein by
reference.
10.6 -- Amendment to Distribution Agreement dated as of May 4, 1995, between Healthdyne and
Healthdyne Technologies filed as an exhibit to the Healthdyne Quarterly Report on
Form 10-Q for the period ended March 31, 1995 and incorporated herein by reference.
10.7 -- Corporate Services Agreement dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies filed as an exhibit to the Healthdyne Technologies Current
Report on Form 8-K dated May 1, 1995 and incorporated herein by reference.
10.8 -- Tax Indemnification Agreement dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies filed as an exhibit to the Healthdyne Technologies Current
Report on Form 8-K dated May 1, 1995 and incorporated herein by reference.
10.9 -- Tax Sharing Agreement dated as of March 31, 1993, between Healthdyne and Healthdyne
Technologies filed as an exhibit to the Registration Statement on Form S-1 of
Healthdyne Technologies (Registration No. 33-60708) dated April 6, 1993 and
incorporated herein by reference.
10.10 -- Agreement Concerning Taxes dated as of April 21, 1995, between Healthdyne,
Healthdyne Technologies and Health Scan Products, Inc. filed as an exhibit to the
Healthdyne Technologies Current Report on Form 8-K dated May 1, 1995 and
incorporated herein by reference.
10.11 -- Trademark License Agreement dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies filed as an exhibit to the Healthdyne Technologies Current
Report on Form 8-K dated May 1, 1995 and incorporated herein by reference.
10.12 -- OEM Design and Manufacturing Agreement dated as of April 21, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the Healthdyne
Technologies Current Report on Form 8-K dated May 1, 1995 and incorporated herein by
reference.
10.13 -- Management and Transition Agreement dated as of July, 1, 1995, between Healthdyne
and Healthdyne Technologies filed as an exhibit to the Healthdyne Technologies
Current Report on Form 10-Q dated June 30, 1995 and incorporated herein by
reference.
10.14 -- Distribution Agreement dated as of October 20, 1995, between Healthdyne and HIE
filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1 of
HIE (Registration No. 33-96478) dated October 24, 1995 and incorporated herein by
reference.
10.15 -- Tax Indemnity Agreement dated as of October 20, 1995, between Healthdyne and HIE
filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1 of
HIE dated October 24, 1995 and incorporated herein by reference.
10.16 -- Tax Disaffiliation Agreement dated as of October 20, 1995, between Healthdyne and
HIE filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1
of HIE dated October 24, 1995 and incorporated herein by reference.
</TABLE>
II-3
<PAGE> 276
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S> <C>
10.17 -- Corporate Services Agreement dated as of October 20, 1995, between Healthdyne and
HIE filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1
of HIE dated October 24, 1995 and incorporated herein by reference.
10.18 -- License Agreement dated October 20, 1995, between Healthdyne and HIE filed as an
exhibit to Amendment No. 1 to the Registration Statement on Form S-1 of HIE dated
October 24, 1995 and incorporated herein by reference.
10.19 -- Secured Note Collateral Agreement, Restricted Stock Purchase Agreement and Secured
Promissory Note, each dated as of July 1, 1981, between Healthdyne and Parker H.
Petit, filed as exhibits to Registration Statement No. 2-74494 and incorporated
herein by reference.
10.20 -- Amendment to Secured Promissory Note dated as of July 1, 1981, between Healthdyne
and Parker H. Petit filed as an exhibit to the Healthdyne Annual Report on 10-K for
the year ended December 31, 1985 and incorporated herein by reference.
10.21 -- Amendments to Secured Promissory Note and Secured Note Collateral Agreement, dated
as of July 1, 1981, between Healthdyne and Parker H. Petit filed as exhibits to the
Healthdyne Annual Report on 10-K for the year ended December 31, 1986 and
incorporated herein by reference.
10.22 -- Severance Compensation and Restrictive Covenant Agreement dated October 2, 1995,
between Healthdyne and Frank D. Powers.
10.23 -- Form of Healthdyne Executive Non-qualified Retirement Plan and Trust filed as an
exhibit to the Healthdyne Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference.
10.24 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995, between Tokos
and Robert F. Byrnes.
10.25 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995, between Tokos
and Nicholas A. Mione.
10.26 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995, between Tokos
and Terry Bayer.
10.27 -- Memorandum of Understanding dated July 31, 1995, between Tokos, Tokos Medical
Corporation (California), Robert F. Byrnes, Craig T. Davenport and Nicholas A.
Mione, and plaintiffs in the Tokos Medical Corporation Securities Litigation.
10.28 -- Exclusive Marketing Agreement dated December 31, 1991, between Tokos and Adeza
Biomedical Corporation filed as an exhibit to the Tokos Annual Report on Form 10-K
dated March 27, 1992 with those portions omitted for confidentiality reasons filed
separately with the Commission and incorporated herein by reference.
10.29 -- Form of Tokos Executive Non-qualified Retirement Plan and Trust.
10.30 -- Employment Agreement dated as of June 1, 1995, between Tokos and Nicholas A. Mione.
10.31 -- Employment Agreement dated as of May 1, 1995, between Tokos and Robert F. Byrnes.
10.32 -- Employment Agreement dated as of January 1, 1995, between Tokos and Terry P. Bayer.
10.33 -- Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and Parker H. Petit filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995 and
incorporated herein by reference.
10.34 -- Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and J. Brent Burkey filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995 and
incorporated herein by reference.
10.35 -- Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and Donald R. Millard filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995 and
incorporated herein by reference.
10.36 -- Form of Promissory Note with Tokos officers and related Security Agreement filed as
an exhibit to the Tokos Registration Statement on Form S-1 (Registration No.
33-33340) and incorporated herein by reference.
</TABLE>
II-4
<PAGE> 277
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S> <C>
10.37 -- Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and J. Terry Dewberry filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995 and
incorporated herein by reference.
10.38 -- Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and J. Paul Yokubinas filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995 and
incorporated herein by reference.
23.1 -- Consent of Troutman Sanders LLP (to be contained in Exhibit 5).
23.2 -- Consent of Troutman Sanders LLP (to be contained in Exhibit 8.1).
23.3 -- Consent of Morrison & Foerster LLP (to be contained in Exhibit 8.2).
23.4 -- Consent of KPMG Peat Marwick LLP.
23.5 -- Consent of Ernst & Young LLP.
99.1 -- Consent of Robert F. Byrnes.
99.2 -- Consent of Craig T. Davenport.
99.3 -- Consent of Thomas W. Erickson.
99.4 -- Consent of David L. Goldsmith.
99.5 -- Consent of Gene P. Guselli.
99.6 -- Consent of Parker H. Petit.
99.7 -- Consent of Carl E. Sanders.
99.8 -- Consent of Jackie M. Ward.
99.9 -- Consent of Morris S. Weeden.
99.10 -- Consent of Frederick P. Zuspan, M.D.
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) to remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or any
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration
II-5
<PAGE> 278
form with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time will be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suite or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 279
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on February 7, 1996.
MATRIA HEALTHCARE, INC.
(Registrant)
By: /s/ PARKER H. PETIT
------------------------------------
Parker H. Petit
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated below on February 7, 1996.
<TABLE>
<C> <S>
/s/ PARKER H. PETIT Director and Chairman of the Board
- --------------------------------------------
Parker H. Petit
/s/ ROBERT F. BYRNES Director and President, Chief Executive
- -------------------------------------------- Officer and Secretary (Principal Executive
Robert F. Byrnes Officer)
/s/ DONALD R. MILLARD Senior Vice President and Chief Financial
- -------------------------------------------- Officer (Principal Financial Officer and
Donald R. Millard Principal Accounting Officer)
</TABLE>
II-7
<PAGE> 280
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ -------------------------------------------------------------------- -------------
<C> <C> <S> <C>
2 -- Agreement and Plan of Merger dated October 2, 1995, as amended,
between Healthdyne, Tokos and Registrant (included as Appendix A to
the Registrant's Joint Proxy Statement/Prospectus).
3.1 -- Amended and Restated Certificate of Incorporation (included as
Appendix D to the Registrant's Joint Proxy Statement/Prospectus).
3.2 -- Bylaws (included as Appendix E to the Registrant's Joint Proxy
Statement/Prospectus).
4.1 -- Indenture dated as of December 1, 1986, between Healthdyne and
National Bank of Georgia, trustee, for 8% Convertible Subordinated
Indentures due December 31, 2001 filed as an exhibit to the
Healthdyne Annual Report on Form 10-K for the year ended December
31, 1986 and incorporated herein by reference.
4.2 -- Form of Supplemental Indenture between Registrant and Southtrust
Estate & Trust Company of Georgia, N.A., trustee, to Indenture dated
as of December 1, 1986, for 8% Convertible Subordinated Indentures
due December 31, 2001.
5 -- Opinion of Troutman Sanders LLP.
8.1 -- Opinion of Troutman Sanders LLP regarding certain tax matters.
8.2 -- Opinion of Morrison & Foerster LLP regarding certain tax matters.
10.1 -- Form of Rights Agreement between Registrant and SunTrust Bank,
Atlanta.
10.2 -- 1996 Stock Incentive Plan (included as Appendix F-I to the
Registrant's Joint Proxy Statement/Prospectus).
10.3 -- 1996 Directors' Non-Qualified Stock Option Plan (included as
Appendix F-II to the Registrant's Joint Proxy Statement/Prospectus).
10.4 -- 1996 Employee Stock Purchase Plan (included as Appendix F-III to the
Registrant's Joint Proxy Statement/Prospectus).
10.5 -- Distribution Agreement dated as of April 21, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the
Healthdyne Technologies (Commission File No. 0-21776) Current Report
on Form 8-K dated May 1, 1995 and incorporated herein by reference.
10.6 -- Amendment to Distribution Agreement dated as of May 4, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the
Healthdyne Quarterly Report on Form 10-Q for the period ended March
31, 1995 and incorporated herein by reference.
10.7 -- Corporate Services Agreement dated as of April 21, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the
Healthdyne Technologies Current Report on Form 8-K dated May 1, 1995
and incorporated herein by reference.
10.8 -- Tax Indemnification Agreement dated as of April 21, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the
Healthdyne Technologies Current Report on Form 8-K dated May 1, 1995
and incorporated herein by reference.
</TABLE>
<PAGE> 281
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ -------------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.9 -- Tax Sharing Agreement dated as of March 31, 1993, between Healthdyne
and Healthdyne Technologies filed as an exhibit to the Registration
Statement on Form S-1 of Healthdyne Technologies (Registration No.
33-60708) dated April 6, 1993 and incorporated herein by reference.
10.10 -- Agreement Concerning Taxes dated as of April 21, 1995, between
Healthdyne, Healthdyne Technologies and Health Scan Products, Inc.
filed as an exhibit to the Healthdyne Technologies Current Report on
Form 8-K dated May 1, 1995 and incorporated herein by reference.
10.11 -- Trademark License Agreement dated as of April 21, 1995, between
Healthdyne and Healthdyne Technologies filed as an exhibit to the
Healthdyne Technologies Current Report on Form 8-K dated May 1, 1995
and incorporated herein by reference.
10.12 -- OEM Design and Manufacturing Agreement dated as of April 21, 1995,
between Healthdyne and Healthdyne Technologies filed as an exhibit
to the Healthdyne Technologies Current Report on Form 8-K dated May
1, 1995 and incorporated herein by reference.
10.13 -- Management and Transition Agreement dated as of July 1, 1995,
between Healthdyne and Healthdyne Technologies filed as an exhibit
to the Healthdyne Technologies Current Report on Form 10-Q dated
June 30, 1995 and incorporated herein by reference.
10.14 -- Distribution Agreement dated as of October 20, 1995, between
Healthdyne and HIE filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 of HIE (Registration No.
33-96478) dated October 24, 1995 and incorporated herein by
reference.
10.15 -- Tax Indemnity Agreement dated as of October 20, 1995, between
Healthdyne and HIE filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 of HIE dated October 24, 1995 and
incorporated herein by reference.
10.16 -- Tax Disaffiliation Agreement dated as of October 20, 1995, between
Healthdyne and HIE filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 of HIE dated October 24, 1995 and
incorporated herein by reference.
10.17 -- Corporate Services Agreement dated as of October 20, 1995, between
Healthdyne and HIE filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 of HIE dated October 24, 1995 and
incorporated herein by reference.
10.18 -- License Agreement dated October 20, 1995, between Healthdyne and HIE
filed as an exhibit to Amendment No. 1 to the Registration Statement
on Form S-1 of HIE dated October 24, 1995 and incorporated herein by
reference.
10.19 -- Secured Note Collateral Agreement, Restricted Stock Purchase
Agreement and Secured Promissory Note, each dated as of July 1,
1981, between Healthdyne and Parker H. Petit, filed as exhibits to
Registration Statement No. 2-74494 and incorporated herein by
reference.
10.20 -- Amendment to Secured Promissory Note dated as of July 1, 1981,
between Healthdyne and Parker H. Petit filed as an exhibit to the
Healthdyne Annual Report on 10-K for the year ended December 31,
1985 and incorporated herein by reference.
</TABLE>
<PAGE> 282
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ -------------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.21 -- Amendments to Secured Promissory Note and Secured Note Collateral
Agreement, dated as of July 1, 1981, between Healthdyne and Parker
H. Petit filed as exhibits to the Healthdyne Annual Report on 10-K
for the year ended December 31, 1986 and incorporated herein by
reference.
10.22 -- Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and Frank D. Powers.
10.23 -- Form of Healthdyne Executive Non-qualified Retirement Plan and Trust
filed as an exhibit to the Healthdyne Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
10.24 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995,
between Tokos and Robert F. Byrnes.
10.25 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995,
between Tokos and Nicholas A. Mione.
10.26 -- Amendment No. 1 to Employment Agreement dated as of October 2, 1995,
between Tokos and Terry P. Bayer.
10.27 -- Memorandum of Understanding dated July 31, 1995, between Tokos,
Tokos Medical Corporation (California), Robert F. Byrnes, Craig T.
Davenport and Nicholas A. Mione, and plaintiffs in the Tokos Medical
Corporation Securities Litigation.
10.28 -- Exclusive Marketing Agreement dated December 31, 1991, between Tokos
and Adeza Biomedical Corporation filed as an exhibit to the Tokos
Annual Report on Form 10-K dated March 27, 1992 with those portions
omitted for confidentiality reasons filed separately with the
Commission and incorporated herein by reference.
10.29 -- Form of Tokos Executive Non-qualified Retirement Plan and Trust.
10.30 -- Employment Agreement dated as of June 1, 1995, between Tokos and
Nicholas A. Mione.
10.31 -- Employment Agreement dated as of May 1, 1995, between Tokos and
Robert F. Byrnes.
10.32 -- Employment Agreement dated as of January 1, 1995, between Tokos and
Terry P. Bayer.
10.33 -- Amended and Restated Severance Compensation and Restrictive Covenant
Agreement dated October 2, 1995, between Healthdyne and Parker H.
Petit filed as an exhibit to the Healthdyne Quarterly Report on Form
10-Q for the period ended September 30, 1995 and incorporated herein
by reference.
</TABLE>
<PAGE> 283
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ -------------------------------------------------------------------- -------------
<C> <C> <S> <C>
10.34 -- Amended and Restated Severance Compensation and Restrictive Covenant
Agreement dated October 2, 1995, between Healthdyne and J. Brent
Burkey filed as an exhibit to the Healthdyne Quarterly Report on
Form 10-Q for the period ended September 30, 1995 and incorporated
herein by reference.
10.35 -- Amended and Restated Severance Compensation and Restrictive Covenant
Agreement dated October 2, 1995, between Healthdyne and Donald R.
Millard filed as an exhibit to the Healthdyne Quarterly Report on
Form 10-Q for the period ended September 30, 1995 and incorporated
herein by reference.
10.36 -- Form of Promissory Note with Tokos officers and related Security
Agreement filed as an exhibit to the Tokos Registration Statement on
Form S-1 (Registration No. 33-33340) and incorporated herein by
reference.
10.37 -- Amended and Restated Severance Compensation and Restrictive Covenant
Agreement dated October 2, 1995, between Healthdyne and J. Terry
Dewberry filed as an exhibit to the Healthdyne Quarterly Report on
Form 10-Q for the period ended September 30, 1995 and incorporated
herein by reference.
10.38 -- Amended and Restated Severance Compensation and Restrictive Covenant
Agreement dated October 2, 1995, between Healthdyne and J. Paul
Yokubinas filed as an exhibit to the Healthdyne Quarterly Report on
Form 10-Q for the period ended September 30, 1995 and incorporated
herein by reference.
23.1 -- Consent of Troutman Sanders LLP (to be contained in Exhibit 5).
23.2 -- Consent of Troutman Sanders LLP (to be contained in Exhibit 8.1).
23.3 -- Consent of Morrison & Foerster LLP (to be contained in Exhibit 8.2).
23.4 -- Consent of KPMG Peat Marwick LLP.
23.5 -- Consent of Ernst & Young LLP.
99.1 -- Consent of Robert F. Byrnes.
99.2 -- Consent of Craig T. Davenport.
99.3 -- Consent of Thomas W. Erickson.
99.4 -- Consent of David L. Goldsmith.
99.5 -- Consent of Gene P. Guselli.
99.6 -- Consent of Parker H. Petit.
99.7 -- Consent of Carl E. Sanders.
99.8 -- Consent of Jackie M. Ward.
99.9 -- Consent of Morris S. Weeden.
99.10 -- Consent of Frederick P. Zuspan, M.D.
</TABLE>
<PAGE> 1
Exhibit 4.2
MATRIA HEALTHCARE, INC.
AND
SOUTHTRUST ESTATE & TRUST COMPANY OF GEORGIA, N.A.,
TRUSTEE
-----------------------------
SUPPLEMENTAL INDENTURE
DATED AS OF JANUARY , 1996
---
TO
INDENTURE
DATED AS OF DECEMBER 1, 1986
8% CONVERTIBLE SUBORDINATED DEBENTURES
DUE DECEMBER 31, 2001
-----------------------------
<PAGE> 2
Supplemental Indenture (the "Supplemental Indenture"), dated as of
January __, 1996, made by and between MATRIA HEALTHCARE, INC., a Delaware
corporation ("Matria"), and SOUTHTRUST ESTATE & TRUST COMPANY OF GEORGIA, N.A.,
a national banking association, successor to National Bank of Georgia, as
Trustee (the "Trustee"), under the Indenture dated as of December 1, 1986,
hereinafter mentioned (the "Indenture").
WHEREAS, HEALTHDYNE, INC., a Georgia corporation ("Healthdyne"), and
the Trustee entered into the Indenture in connection with the issuance of
Healthdyne's 8% Convertible Subordinated Debentures due December 31, 2001 (the
"Debentures"); and
WHEREAS, $3,500,000 principal amount of Debentures was issued under
the Indenture and [$2,125,540] is outstanding on the date of the execution and
delivery of this Supplemental Indenture; and
WHEREAS, Healthdyne, Matria and Tokos Medical Corporation ("Tokos")
have entered into that certain Agreement and Plan of Merger, dated as of
October 2, 1995, as amended by that certain First Amendment to Agreement and
Plan of Merger, dated as of December 4, 1995, and by that certain Second
Amendment to Agreement and Plan of Merger, dated as of January __, 1996, under
which on the date hereof Healthdyne and Tokos will merge with and into Matria
(the "Merger"); and
WHEREAS, in connection with the Merger, the parties hereto desire to
amend the Indenture, without the consent of any Debentureholder, to have Matria
assume Healthdyne's obligations under the Indenture (as provided in Section
11.01 of the Indenture) and for the purpose of evidencing certain adjustments
to the conversion rights of the Debenture in connection with the assumption by
Matria of Healthdyne's obligations under the Indenture (as provided in Section
16.05 of the Indenture); and
WHEREAS, Matria has delivered to the Trustee the Board Resolution and
Opinion of Counsel required by Sections 11.01, 11.06 and 12.03 of the
Indenture; and
WHEREAS, all the requirements of law and the Certificate of
Incorporation and Bylaws of Matria have been fully complied with; and all
conditions and requirements necessary to authorize the execution,
acknowledgement and delivery of this Supplemental Indenture and to make the
Indenture, as supplemented by this Supplemental Indenture, a valid, binding and
legal instrument for the benefit of the Debentureholders, have been complied
with or have been done and performed;
NOW, THEREFORE, in consideration of the premises and for good and
valuable consideration, the sufficiency of which is hereby acknowledged, Matria
and the Trustee agree as follows:
SECTION 1. Definitions. For purposes of this Supplemental Indenture,
all terms used herein, unless otherwise defined herein, shall have the meaning
assigned to them in the Indenture, except that references to the "Company" in
the Indenture, as amended and supplemented by this Supplemental Indenture,
shall mean Matria Healthcare, Inc.
<PAGE> 3
SECTION 2. Succession of Matria to Healthdyne under the Indenture.
Upon the effectiveness of the Merger, and pursuant to the requirements of
Section 11.01 of the Indenture, the due and punctual payment of the principal
of, and premium, if any, and interest on all of the Debentures, according to
their tenor, and the due and punctual performance and observance of all the
covenants and conditions of the Indenture to be kept or performed by Healthdyne
prior to the effectiveness of the Merger, are hereby expressly assumed by
Matria.
SECTION 3. Adjustment of Conversion Rights. Upon the effectiveness
of the Merger, and pursuant to the requirements of Section 16.05 of the
Indenture, holders of each Debenture then outstanding shall have, in lieu of
the right to convert such Debenture into Common Stock of Healthdyne, the right
to convert such Debenture into the number of shares of Common Stock of Matria
receivable upon such Merger by the number of shares of Common Stock of
Healthdyne into which such Debenture might have been converted immediately
prior to the Merger. As provided in Section 12.02 of the Indenture, upon
execution and delivery of this Supplemental Indenture, Matria shall succeed to
and be substituted for Healthdyne with the same effect as if it had been named
in the Indenture as the Company. Accordingly, this Supplemental Indenture does
not amend or supplement the provisions regarding adjustment of the conversion
price; such provisions are subject to the terms and conditions set forth in the
Indenture, taking into account the succession, and substitution as the Company,
of Matria.
SECTION 4. Governing Law, Etc. This Supplemental Indenture shall be
deemed to be a contract made under the laws of the State of Georgia, and for
all purposes shall be construed in accordance with the laws of the State of
Georgia (without regard to principles of conflicts of laws). The terms and
conditions of this Supplemental Indenture shall be, and be deemed to be, part
of the terms and conditions of the Indenture for any and all purposes
applicable to the Debentures. Other than as amended and supplemented by this
Supplemental Indenture, the Indenture is in all respects ratified and
confirmed.
SECTION 5. Acceptance by Trustee. The Trustee hereby accepts this
Supplemental Indenture and agrees to perform the same upon the terms and
conditions set forth in the Indenture.
SECTION 6. The Indenture As Supplemented. From and after the date of
this Supplemental Indenture, all references in the Indenture to this
"Indenture" shall refer to the Indenture as supplemented hereby.
[SIGNATURES ON FOLLOWING PAGE.]
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed all as of the day and year first above written.
MATRIA HEALTHCARE, INC.
By:
----------------------------------------
Name:
Title:
SOUTHTRUST ESTATE & TRUST COMPANY,
as Trustee
By:
----------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 5
TROUTMAN SANDERS LLP
ATTORNEYS AT LAW
A LIMITED LIABILITY PARTNERSHIP
<TABLE>
<S> <C> <C>
NATIONSBANK PLAZA
999 PEACHTREE STREET, N.E. - SUITE 750 600 PEACHTREE STREET, N.E. SUITE 5200 601 PENNSYLVANIA AVENUE, N.W.
ATLANTA, GEORGIA 30309-3964 ATLANTA, GEORGIA 30308-2216 SUITE 640
TELEPHONE: 404-885-3651 TELEPHONE: 404-885-3000 NORTH BUILDING
FACSIMILE: 404-885-3652 FACSIMILE: 404-885-3900 WASHINGTON, D.C. 20004
TELEPHONE: 202-274-2950
FACSIMILE: 202-274-2994
</TABLE>
February 7, 1996
Matria Healthcare, Inc.
1850 Parkway Place
12th Floor
Marietta, Georgia 30067
Ladies and Gentlemen:
We have examined a copy of the registration statement on Form S-4 (the
"Registration Statement") filed by Matria Healthcare, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission on
February 6, 1996, relating to the registration pursuant to the provisions of
the Securities Act of 1933, as amended (the "Act"), of 37,682,286 shares of
common stock, par value $0.01 per share (the "Common Stock"), of the Company,
including associated common stock purchase rights as described in the
Registration Statement (the "Shares"). The Shares are to be issued in
connection with the proposed merger of Tokos Medical Corporation (Delaware), a
Delaware corporation ("Tokos"), and Healthdyne, Inc., a Georgia corporation
("Healthdyne"), with and into the Company (the "Merger") pursuant to the terms
of the Agreement and Plan of Merger, dated as of October 2, 1995, as amended as
of December 4, 1995 and January 31, 1996 (the "Merger Agreement"), by and among
Tokos, Healthdyne and the Company.
This opinion letter is limited by, and is in accordance with, the
January 1, 1992 edition of the Interpretive Standards applicable to Legal
Opinions to Third Parties in Corporate Transactions adopted by the Legal
Opinion Committee of the Corporate and Banking Law Section of the State Bar of
Georgia, which Interpretive Standards are incorporated in this opinion letter
by this reference. Capitalized terms used in this opinion letter and not
otherwise defined herein shall have the meanings assigned to such terms in the
Interpretive Standards.
We have examined originals (or copies certified or otherwise
identified to our satisfaction) of the Registration Statement, the form of
Common Stock certificate, the Merger Agreement, the Certificate of
Incorporation and Bylaws of the Company as in effect on the date hereof,
corporate and other documents, records and papers and certificates of public
officials. In giving this opinion, we assume that the certificates
representing the Shares conform to the specimen examined by us. In such
examination we have also assumed the genuineness of all signatures, the
authenticity of all documents submitted to us and the genuineness and
conformity to original documents of documents submitted to us as certified or
photostatic copies.
<PAGE> 2
Matria Healthcare, Inc.
February 7, 1996
Page 2
On the basis of such examination, it is our opinion that, assuming (i)
the Merger shall have been consummated in accordance with the Merger Agreement
and the applicable provisions of the Business Corporation Code of the State of
Georgia and the General Corporation Law of the State of Delaware; (ii) the
pertinent provisions of the Act and the Securities Exchange Act of 1934, as
amended, shall have been complied with; and (iii) the applicable provisions of
the securities or "blue sky" laws of various states shall have been complied
with:
When certificates evidencing the Shares have been duly
executed, countersigned, registered, issued and delivered by
the proper officers of the Company in compliance with the
Merger Agreement, the Shares will be duly and validly issued
and outstanding, fully paid and non-assessable shares of
Common Stock of the Company.
We are members of the Bar of the State of Georgia. In expressing the
opinions set forth above, we are not passing on the laws of any jurisdiction
other than the laws of the State of Georgia, the General Corporation Law of the
State of Delaware and the Federal law of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the related prospectus.
Very truly yours,
/s/ Troutman Sanders LLP
<PAGE> 1
Exhibit 8.1
TROUTMAN SANDERS LLP
ATTORNEYS AT LAW
A LIMITED LIABILITY PARTNERSHIP
<TABLE>
<S> <C> <C>
NATIONSBANK PLAZA
999 PEACHTREE STREET, N.E. - SUITE 750 600 PEACHTREE STREET, N.E. SUITE 5200 601 PENNSYLVANIA AVENUE, N.W.
ATLANTA, GEORGIA 30309-3964 ATLANTA, GEORGIA 30308-2216 SUITE 640
TELEPHONE: 404-885-3651 TELEPHONE: 404-885-3000 NORTH BUILDING
FACSIMILE: 404-885-3652 FACSIMILE: 404-885-3900 WASHINGTON, D.C. 20004
TELEPHONE: 202-274-2950
FACSIMILE: 202-274-2994
</TABLE>
February 7, 1996
Healthdyne, Inc.
1850 Parkway Place
Marietta, Georgia 30067
Re: Matria Healthcare, Inc. Proxy Statement and Registration
Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to Healthdyne, Inc., a Georgia corporation
("HD"), in connection with the Agreement and Plan Merger, dated as of October
2, 1995, as amended as of December 4, 1995 and January 31, 1996 (the "Merger
Agreement"), by and among HD, Tokos Medical Corporation (Delaware), a Delaware
corporation ("TM"), and Tokos/Healthdyne Acquisition Company, Inc., a Delaware
corporation ("Newco").
Pursuant to the Merger Agreement, HD and TM will merge with and into
Newco, with Newco being the surviving corporation. As a result of the Merger,
the separate existence of HD and TM will cease and the former stockholders of
HD and TM will receive shares of Newco's common stock, all on the terms set
forth in the Merger Agreement.
The Merger Agreement and certain proposed transactions incident
thereto are described in the Registration Statement on Form S-4 filed by HD and
TM with the Securities and Exchange Commission (the "Registration Statement").
This opinion is being rendered pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933, as amended.
In connection with this opinion, we have examined and are familiar
with the Merger Agreement, the Registration Statement, and such other presently
existing documents, records and matters of law as we have deemed necessary and
appropriate in connection with rendering this opinion.
In rendering this opinion, we assume the following:
1. The authenticity of original documents submitted to us, the
conformity to original documents of all documents submitted
<PAGE> 2
Healthdyne, Inc.
February 7, 1996
Page 2
to us as photostatic copies, the authenticity of the originals of such copies,
the genuineness of all signatures, and the due execution and delivery of all
documents.
2. The truth and accuracy of the representations, warranties and
statements of fact made or to be made by HD, TM and Newco in connection with
the Merger, including those representations set forth in the Merger Agreement
and in certificates of representations provided or to be provided to us by HD,
TM and Newco.
Based upon and subject to the foregoing, the discussion contained in
the prospectus included as part of the Registration Statement (the
"Prospectus") under the caption "Certain Federal Income Tax Consequences," to
the extent it applies to HD and HD stockholders, expresses our opinion as to
the material Federal income tax consequences if the Merger is effected
according to the terms of the Merger Agreement. Because this opinion is being
delivered prior to the Effective Time of the Merger, it must be considered
prospective and dependent upon future events. In addition, you should be aware
that the discussion under the caption "Certain Federal Income Tax Consequences"
in the Prospectus represents our conclusions as to the application of existing
law to the instant transactions and may not be applicable to certain classes of
HD stockholders, including securities dealers, foreign persons and persons who
acquired their HD Common Stock pursuant to the exercise of employee stock
options or rights or otherwise as compensation. There can be no assurance that
changes in the law will not take place which could affect the Federal income
tax consequences of the Merger or that contrary positions may not be taken by
the Internal Revenue Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the references to
our firm name wherever appearing in the Registration Statement with respect to
the discussion of the Federal income tax consequences of the Merger, including
the Prospectus constituting a part thereof, and any amendments thereto.
Very truly yours,
/s/ Troutman Sanders LLP
<PAGE> 1
Exhibit 8.2
Morrison & Foerster LLP
19900 MacArthur Boulevard
Irvine, CA 92715-2445
February 7, 1996
Tokos Medical Corporation
1821 East Dyer Road
Santa Ana, California 92705
Re: Matria Healthcare, Inc. Proxy Statement and Registration
Statement on Form S-4.
Ladies and Gentlemen:
We have acted as counsel to Tokos Medical Corporation
(Delaware), a Delaware corporation ("TM"), in connection with the Agreement and
Plan of Merger, dated as of October 2, 1995, as amended as of December 4, 1995
and January 31, 1996 (the "Merger Agreement"), by and among TM, Healthdyne,
Inc., a Georgia Corporation ("HD") and Matria Healthcare, Inc., a Delaware
corporation ("Newco")).
Pursuant to the Merger Agreement, HD and TM will merge with
and into Newco, with Newco being the surviving corporation. As a result of the
Merger, the separate existence of HD and TM will cease and the former
stockholders of HD and TM will receive shares of Newco's common stock, all on
the terms set forth in the Merger Agreement.
The Merger Agreement and certain proposed transactions
incident thereto are described in the Registration Statement on Form S-4 filed
by HD and TM with the Securities and Exchange Commission (the "Registration
Statement"). This opinion is being rendered pursuant to the requirements of
Item 21(a) of Form S-4 under the Securities Act of 1933, as amended.
In connection with this opinion, we have examined and are
familiar with the Merger Agreement, the Registration Statement, and such other
presently existing documents, records and matters of law as we have deemed
necessary and appropriate in connection with rendering this opinion.
In rendering this opinion, we assume the following:
<PAGE> 2
Tokos Medical Corporation
February 7, 1996
Page Two
1. The authenticity of original documents submitted to us, the
conformity to original documents of all documents submitted to us as
photostatic copies and the authenticity of the originals of such copies, and
the genuineness of all signatures and the due execution and delivery of all
documents.
2. The truth and accuracy of the representations, warranties and
statements of fact made or to be made by HD, TM and Newco in connection with
the Merger, including those representations set forth in the Merger Agreement
and in certificates of representations provided or to be provided to us by HD,
TM and Newco.
Based upon and subject to the foregoing, the discussion
contained in the prospectus included as part of the registration Statement (the
"Prospectus") under the caption "Certain Federal Income Tax Consequences," to
the extent it applies to TM and TM stockholders, expresses our opinion as to
the material Federal income tax consequences if the Merger is effected
according to the terms of the Merger Agreement. Because this opinion is being
delivered prior to the Effective Time of the Merger, it must be considered
prospective and dependent upon future events. In addition, you should be aware
that the discussion under the caption "Certain Federal Income Tax Consequences"
in the Prospectus represents our conclusions as to the application of existing
law to the instant transactions and may not be applicable to certain classes of
TM stockholders, including securities dealers, foreign persons and persons who
acquired their TM Common Stock pursuant to the exercise of employee stock
options or rights or otherwise as compensation. There can be no assurance that
changes in the law will not take place which could affect the Federal income
tax consequences of the Merger or that contrary positions may not be taken by
the Internal Revenue Service.
This opinion is furnished to you solely for use in connection
with the Registration Statement. We hereby consent to the filing of this
opinion as an exhibit to the Registration Statement. We also consent to the
references to our firm name wherever appearing in the Registration Statement
with respect to the discussion of the Federal income tax consequences of the
Merger, including the Prospectus constituting a part thereof, and any
amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 10.1
MATRIA HEALTHCARE, INC.
and
SunTrust Bank, Atlanta
Rights Agent
Rights Agreement
Dated as of January 30, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Issue of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7. Exercise of Rights; Purchase Price; Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10. Common Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights . . . . . . . . . . . . . . . . . . 20
12. Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . . . . . . . . . . . . . . . . . . . . . . 38
14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
15. All Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
17. Rights Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
23. Redemption and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
24. Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
25. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
27. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
28. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
29. Determinations and Actions by the Board of Directors, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
30. Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
31. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
33. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
34. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Exhibit A -- Form of Rights Certificate
</TABLE>
-ii-
<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of January 30, 1996 (the "Agreement"), between
MATRIA HEALTHCARE, INC., a Delaware corporation (the "Company"), and SunTrust
Bank, Atlanta, a Georgia banking corporation (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on January 30, 1996, the Board of Directors of the Company
authorized the issuance of one Right for each share of common stock, par value
$0.01 per share, of the Company (the "Common Stock") issued pursuant to the
Agreement and Plan of Merger dated as of October 2, 1995, as amended as of
December 4, 1995, by and among the Company, Healthdyne, Inc. and Tokos Medical
Corporation (Delaware) (the "Merger Agreement"), and has authorized the
issuance of one Right (as such number may hereinafter be adjusted pursuant to
the provisions of Section 11(p) hereof) for each share of Common Stock of the
Company issued between the Effective Time (as defined in the Merger Agreement)
(whether originally issued or delivered from the Company's treasury) and the
Distribution Date, each Right initially representing the right to purchase one
one-hundredth of a share of Common Stock of the Company, upon the terms and
subject to the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
<PAGE> 5
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding,
but shall not include the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan. Notwithstanding the foregoing, no Person shall be
deemed to be an "Acquiring Person" either (i) as a result of the acquisition of
Common Stock by the Company which, by reducing the number of shares of Common
Stock outstanding, increases the proportional number of shares beneficially
owned by such Person together with all Affiliates and Associates of such
Person; except that if (A) a Person would become an Acquiring Person but for
the operation of this subclause (i)) as a result of the acquisition of Common
Stock by the Company, and (B) after such share acquisition by the Company, such
Person or an Affiliate or Associate of such Person, becomes the Beneficial
Owner of any additional Common Stock, then such Person shall be deemed an
Acquiring Person unless, upon becoming the Beneficial Owner of such additional
shares of Common Stock, such Person of less than 15% of the then outstanding
shares of Common Stock, or (ii) if (A) within 8 days after such Person would
otherwise have become an Acquiring Person (but for the operation of this
subclause (ii)), such Person notifies the Board of Directors that such Person
did so inadvertently and (B) within 2 days after such notification, such Person
is the Beneficial Owner of less than 5% of the outstanding shares of Common
Stock.
-2-
<PAGE> 6
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended and in effect on the date of
this Agreement (the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner" of, and shall
be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to acquire
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities
issuable upon exercise of Rights at any time prior to the occurrence
of a Triggering Event, or (B) securities issuable upon exercise of
Rights from and after the occurrence of a Triggering Event which
Rights were acquired by such Person or any of such Person's Affiliates
or Associates prior to the Distribution Date or pursuant to Section
3(a) or Section 22 hereof (the "Original Rights") or pursuant to
Section 11(i) hereof in connection with an adjustment made with
respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined pursuant to
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a
Person shall not be deemed the
-3-
<PAGE> 7
"Beneficial Owner" of, or to "beneficially own," any security under
this subparagraph (ii) as a result of an agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding: (A) arises solely from a revocable proxy given in
response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable provisions of the General Rules
and Regulations under the Exchange Act, and (B) is not also then
reportable by such Person on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing),
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in the proviso to subparagraph (ii) of
this paragraph (c)) or disposing of any voting securities of the
Company.
Notwithstanding anything in this definition of Beneficial Owner to the
contrary, a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," (A) securities acquired by participation in good faith in a
firm commitment underwriting by a Person engaged in business as an underwriter
of securities until the expiration of forty days after the date of such
acquisition; (B) securities which such Person or any of such Person's
Affiliates or Associates may acquire, does or do acquire or may be deemed to
have the right to acquire, pursuant to any merger or other acquisition
agreement between the Company and such Person (or one or more of his Affiliates
or Associates) if such agreement has been approved by a majority of the
Continuing Directors of the Company prior to such Person's becoming an
Acquiring Person; and (C)
-4-
<PAGE> 8
securities tendered pursuant to a tender or exchange offer made by such Person
or any of such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; nor shall any officer, director or
employee of the Company or a subsidiary of the Company be deemed, solely by
reason of such Person's status or authority as such, to be the "Beneficial
Owner" of any securities that are "beneficially owned" including, without
limitation, in a fiduciary capacity, by the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any Subsidiary of the
Company or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of such plan or by any other such officer,
director or employee of the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or any Subsidiary of the Company or any
Person or entity organized, appointed or established by the Company for or
pursuant to the terms of such plan.
(d) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of Georgia are
authorized or obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M.,
Atlanta time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Atlanta time, on the next succeeding
Business Day.
(f) "Common Stock" shall mean the common stock, par value $0.01
per share, of the Company, except that "Common Stock" when used with reference
to any Person other than the Company shall mean the capital stock of such
Person with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management of such Person.
-5-
<PAGE> 9
(g) "Continuing Director" shall mean (i) any member of the Board
of Directors of the Company, while such Person is a member of the Board, who is
not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person,
or a representative of an Acquiring Person or of any such Affiliate or
Associate, and was a member of the Board prior to the earlier to occur of (x) a
Triggering Event and (y) a Person becoming an Acquiring Person, or (ii) any
Person who subsequently becomes a member of the Board, while such Person is a
member of the Board, who is not an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, or a representative of an Acquiring Person or
of any such Affiliate or Associate, if such Person's nomination for election or
election to the Board is recommended or approved by a majority of the
Continuing Directors.
(h) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(i) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) (A), (B) or (C) hereof.
(j) "Section 13 Event" shall mean any event described in clauses
(x), (y) or (z) of Section 13(a) hereof.
(k) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed under the Exchange Act) by the Company or an
Acquiring Person that an Acquiring Person has become such.
(l) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at
least a majority of the directors of such corporation is beneficially owned,
directly or indirectly, by such Person, or otherwise controlled by such Person.
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(m) "Triggering Event" shall mean any Section 11(a)(ii) Event or
any Section 13 Event.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Stock) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
SECTION 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i)
the close of business on the tenth day after the Stock Acquisition Date or (ii)
the close of business on the tenth Business Day after the date that a tender or
exchange offer by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by the
Company for or pursuant to the terms of any such plan) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act, if upon consummation thereof, such Person
would be the Beneficial Owner of 20% or more of the shares of Common Stock then
outstanding (the earlier of (i) and (ii), as either of such periods may be
extended pursuant to the provisions of Section 27 hereof, being herein referred
to as the "Distribution Date"), (x) the Rights will be evidenced (subject to
the provisions of paragraph (b) of this Section 3) by the certificates for the
Common Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer
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to the Company). As soon as practicable after the Distribution Date, the
Rights Agent will send by first-class, insured, postage prepaid mail, to each
record holder of the Common Stock as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Company, one or more right certificates, in substantially the form of Exhibit B
hereto (the "Rights Certificates"), evidencing one Right for each share of
Common Stock so held, subject to adjustment as provided herein. In the event
that an adjustment in the number of Rights per share of Common Stock has been
made pursuant to Section 11(p) hereof, at the time of distribution of the
Rights Certificates, the Company may make the necessary and appropriate
rounding adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Distribution
Date, the Rights will be evidenced solely by such Rights Certificates.
(b) With respect to certificates for the Common Stock outstanding
as of the Effective Time, until the Distribution Date, the Rights will be
evidenced by such certificates for the Common Stock and the registered holders
of the Common Stock shall also be the registered holders of the associated
Rights. Until the earlier of the Distribution Date or the Expiration Date (as
such term is defined in Section 7 hereof), the transfer of any certificates
representing shares of Common Stock in respect of which Rights have been issued
shall also constitute the transfer of the Rights associated with such shares of
Common Stock.
(c) Rights shall be issued in respect of all shares of Common
Stock which are issued after the Effective Time but prior to the earlier of the
Distribution Date or the Expiration Date. Certificates representing such
shares of Common Stock shall also be deemed to be certificates for Rights, and
shall bear the following legend:
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This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between Matria
Healthcare, Inc. (the "Company") and ________________________ (the "Rights
Agent") dated as of _________________, 1996, as amended from time to time
(the "Rights Agreement"), the terms of which are hereby incorporated herein
by reference and a copy of which is on file at the principal offices of the
Company. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will
no longer be evidenced by this certificate. The Company will mail to the
holder of this certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt of a written
request therefor. UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES
AN ACQUIRING PERSON OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS
ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON
BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME NULL AND
VOID.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
SECTION 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and
the forms of election to purchase and of assignment to be printed on the
reverse thereof) shall each be substantially in the form set forth in Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof,
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the Rights Certificates, whenever distributed, shall be dated as of the
Effective Time and on their face shall entitle the holders thereof to purchase
such number of one one-hundredths of a share of Common Stock as shall be set
forth therein at the price set forth therein (such exercise price per one
one-hundredth of a share, the "Purchase Price"), but the amount and type of
securities purchasable upon the exercise of each Right and the Purchase Price
thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by: (i) an
Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person
becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect avoidance of Section 7(e) hereof, and
any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon
transfer, exchange, replacement or adjustment of any other Rights Certificate
referred to in this sentence, shall contain (to the extent feasible) the
following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement). Accordingly, this
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<PAGE> 14
Rights Certificate and the Rights represented hereby may become null and
void in the circumstances specified in Section 7(e) of such Agreement.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or any Vice President, either manually or by facsimile
signature, and shall have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary or an Assistant Secretary of
the Company, either manually or by facsimile signature. The Rights
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the
Company with the same force and effect as though the person who signed such
Rights Certificates had not ceased to be such officer of the Company, and any
Rights Certificates may be signed on behalf of the Company by any person who,
at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Rights Agreement any such person was not such an
officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
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SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a)
Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof,
at any time after the close of business on the Distribution Date, and at or
prior to the close of business on the Expiration Date, any Rights Certificate
or Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Certificates, entitling the registered holder to purchase
a like number of one one-hundredths of a share of Common Stock (or, following a
Triggering Event, full Common Stock, or other securities, cash or other assets,
as the case may be) as the Rights Certificate or Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.
Any registered holder desiring to transfer, split up, combine or exchange any
Rights Certificate or Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Rights Certificate or Certificates
to be transferred, split up, combined or exchanged at the principal office or
offices of the Rights Agent designated for such purpose. Neither the Rights
Agent nor the Company shall be obligated to take any action whatsoever with
respect to the transfer of any such surrendered Rights Certificate until the
registered holder shall have completed and signed the Certificate contained in
the form of assignment on the reverse side of such Rights Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to Section
4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person
entitled thereto a Rights Certificate or Rights Certificates, as the case may
be, as so requested. The Company may require payment
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of a sum sufficient to cover any tax or governmental charge that may be imposed
in connection with any transfer, split up, combination or exchange of Rights
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Rights Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to the
Company and the Rights Agent of all reasonable expenses incidental thereto, and
upon surrender to the Rights Agent and cancellation of the Rights Certificate
if mutilated, the Company will execute and deliver a new Rights Certificate of
like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of one one-hundredths of a share (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) the close of business on
_________________, 2006 (the "Final Expiration Date"), (ii) the time at which
the Rights are redeemed as provided in Section 23 hereof or (iii) the time at
which the Rights are
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<PAGE> 17
exchanged as provided in Section 24 hereof (the earlier of (i), (ii) and (iii)
being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one one-hundredth of a share of
Common Stock pursuant to the exercise of a Right shall initially be $.61, and
shall be subject to adjustment from time to time as provided in Sections 11 and
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly
executed, accompanied by payment, with respect to each Right so exercised, of
the Purchase Price per one one-hundredth of a share of Common Stock (or other
shares, securities, cash or other assets, as the case may be) to be purchased
as set forth below and an amount equal to any applicable transfer tax, the
Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A)
requisition from any transfer agent of the shares of Common Stock (or make
available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one one-hundredths of a share of Common
Stock to be Purchased, and the Company hereby irrevocably authorizes its
transfer agent to comply with all such requests, or (B) if the Company shall
have elected to deposit the total number of shares of Common Stock issuable
upon exercise of the Rights hereunder with a depositary agent, requisition from
the depositary agent depositary receipts representing such number of one
one-hundredths of a share of Common Stock as are to be purchased (in which case
certificates for the shares of Common Stock represented by such receipts shall
be deposited by the transfer agent with the depositary agent) and the Company
will direct the depositary agent to comply with such request, (ii) requisition
from the Company the amount of cash, if any, to be paid in lieu of fractional
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shares in accordance with Section 14 hereof, (iii) after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder, and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made in
cash or by certified bank check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue other securities
(including Common Stock) of the Company, pay cash and/or distribute other
property pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities, cash and/or other
property are available for distribution by the Rights Agent, if and when
appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Triggering Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and
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receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
insure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Rights Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall
have (i) completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Rights Certificate surrendered
for such exercise, and (ii) provided such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if
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surrendered to the Company or any of its agents, be delivered to the Rights
Agent for cancellation or in cancelled form, or, if surrendered to the Rights
Agent, shall be cancelled by it, and no Rights Certificates shall be issued in
lieu thereof except as expressly permitted by any of the provisions of this
Agreement. The Company shall deliver to the Rights Agent for cancellation and
retirement, and the Rights Agent shall so cancel and retire, any other Rights
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Rights Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued shares of Common Stock (and,
following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities or out of its
authorized and issued shares held in its treasury), the number of shares of
Common Stock (and/or other securities) that, as provided in this Agreement
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) So long as the shares of Common Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange or automated quotation system, the Company shall
use its best efforts to cause, from and after such time as the Rights become
exercisable, all shares reserved for such issuance to be listed on such
exchange or system upon official notice of issuance upon such exercise.
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(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section
11(a)(iii) hereof, or as soon as is required by law following the Distribution
Date, as the case may be, a registration statement under the Securities Act of
1933 (the "Act"), with respect to the securities purchasable upon exercise of
the Rights on an appropriate form, (ii) cause such registration statement to
become effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the
date of the expiration of the Rights. The Company will also take such action
as may be appropriate under, or to ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the exercisability of
the Rights. The Company may temporarily suspend, for a period of time not to
exceed ninety (90) days after the date set forth in clause (i) of the first
sentence of this Section 9(c), the exercisability of the Rights in order to
prepare and file such registration statement and permit it to become effective.
Upon any such suspension, the Company shall issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as well
as a public announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all one one-hundredths of a share of
Common Stock (and, following the
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occurrence of a Triggering Event, Common Stock and/or other securities)
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such shares (subject to payment of the Purchase Price), be
duly and validly authorized and issued and fully paid and non-assessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one one-hundredths of a
share of Common Stock (or Common Stock and/or other securities, as the case may
be) upon the exercise of Rights. The Company shall not, however, be required
to pay any transfer tax which may be payable in respect of any transfer or
delivery of Rights Certificates to a Person other than, or the issuance or
delivery of a number of one one-hundredths of a share of Common Stock (or
Common Stock and/or other securities, as the case may be) in respect of a name
other than that of, the registered holder of the Rights Certificates evidencing
Rights surrendered for exercise, or to issue or deliver any certificates for a
number of one one-hundredths of a share of Common Stock (or Common Stock and/or
other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have
been paid (any such tax being payable by the holder of such Rights Certificate
at the time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
SECTION 10. COMMON STOCK RECORD DATE. Each person in whose name any
certificate for a number of one one-hundredths of a share of Common Stock (or
full shares of Common Stock and/or other securities, as the case may be) is
issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of such fractional shares of Common
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Stock (or Common Stock and/or other securities, as the case may be) represented
thereby on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and all applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon which the Common
Stock (or Common Stock and/or other securities, as the case may be) transfer
books of the Company are closed, such Person shall be deemed to have become the
record holder of such shares (fractional or otherwise) on, and such certificate
shall be dated, the next succeeding Business Day on which the Common Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a
stockholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and
shall not be entitled to receive any notice of any proceedings of the Company,
except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Common Stock
payable in shares of Common Stock, (B) subdivide the outstanding
Common Stock, (C) combine the outstanding Common Stock into a smaller
number of shares, or (D) issue any shares of its capital stock in a
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reclassification of the Common Stock (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), except as otherwise provided in this
Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the
time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of
shares of Common Stock or capital stock, as the case may be, issuable on
such date, shall be proportionately adjusted so that the holder of any
Right exercised after such time shall be entitled to receive, upon payment
of the Purchase Price then in effect, the aggregate number and kind of
shares of Common Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time when
the Common Stock transfer books of the Company were open, he would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided, however,
that in no event shall the consideration to be paid upon the exercise of
one Right be less than the aggregate par value of the shares of Common
Stock of the Company issuable upon the exercise of one Right. If an event
occurs which would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior to, any
adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event:
(A) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date
of this Agreement, directly or indirectly, (1) shall merge
into the Company or otherwise combine with the Company and the
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Company shall be the continuing or surviving corporation of
such merger or combination and the Common Stock of the
Company shall remain outstanding and unchanged, (2)
shall, in one transaction or a series of transactions,
transfer any assets to the Company or to any of its
Subsidiaries in exchange (in whole or in part) for shares of
Common Stock, for shares of other equity securities of the
Company, or for securities exercisable for or convertible
into shares of equity securities of the Company (Common Stock
or otherwise) or otherwise obtain from the Company, with or
without consideration, any additional shares of such equity
securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a
pro rata distribution to all holders of Common Stock), (3)
shall sell, purchase, lease, exchange, mortgage, pledge,
transfer or otherwise acquire or dispose of, in one
transaction or a series of transactions, to, from or with (as
the case may be) the Company or any of its Subsidiaries,
assets on terms and conditions less favorable to the Company
than the Company would be able to obtain in arm's length
negotiation with an unaffiliated third party, other than
pursuant to a transaction set forth in Section 13(a) hereof,
(4) shall sell, purchase, lease, exchange, mortgage, pledge,
transfer or otherwise acquire or dispose of in one
transaction or a series of transactions, to, from or with (as
the case may be) the Company or any of the Company's
Subsidiaries (other than incidental to the lines of business,
if any, engaged in as of the date hereof between the Company
and such Acquiring Person or Associate or Affiliate) assets
having an aggregate fair market value of more than
$3,000,000, other than pursuant to a
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transaction set forth in Section 13(a) hereof, (5) shall
receive any compensation from the Company or any of the
Company's Subsidiaries other than compensation for
full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (6) shall receive the benefit, directly or
indirectly (except proportionately as a stockholder and
except if resulting from a requirement of law or governmental
regulation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantage provided by the Company or any of its Subsidiaries,
or
(B) any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of
any Subsidiary of the Company, or any Person or entity
organized, appointed or established by the Company for or
pursuant to the terms of any such plan), alone or together
with its Affiliates and Associates, shall, at any time after
the Effective Time, become the Beneficial Owner of 20% or
more of the shares of Common Stock then outstanding, other
than pursuant to any transaction set forth in Section 13(a)
hereof, or pursuant to a tender offer or an exchange offer
for all outstanding shares of Common Stock at a price and on
terms determined by the Board of Directors (including,
following the earlier of (x) a Triggering Event and (y) the
date on which a Person Becomes an Acquiring Person, at least
a majority of the Continuing Directors) to be (a) at a price
which is fair to stockholders (taking into account all
factors which such members of the Board deem relevant
including, without limitation, prices which could reasonably
be achieved if the Company or its assets were sold on an
orderly
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basis designed to realize maximum value) and (b) otherwise in
the best interests of the Company and its stockholders, or
(C) during such time as there is an Acquiring Person,
there shall be any reclassification of securities (including
any reverse stock split), or recapitalization of the Company,
or any merger or consolidation of the Company with any of its
Subsidiaries or any other transaction or series of
transactions involving the Company or any of its Subsidiaries,
other than a transaction or transactions to which the
provisions of Section 13(a) apply (whether or not with or into
or otherwise involving an Acquiring Person) which has the
effect, directly or indirectly, of increasing by more than 1%
the proportionate share of the outstanding shares of any class
of equity securities of the Company or any of its Subsidiaries
which is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any
Acquiring Person,
then, promptly following five (5) days after the date of the occurrence
of an event described in Section 11(a)(ii)(B) hereof and promptly following the
occurrence of any event described in Section 11(a)(ii)(A) or (C) hereof, proper
provision shall be made so that each holder of a Right (except as provided
below and in Section 7(e) hereof) shall thereafter have the right to receive,
upon exercise of a Right at one hundred times the then current Purchase Price
in accordance with the terms of this Agreement, in lieu of a number of one
one-hundredths of a share of Common Stock, such number of full shares of Common
Stock of the Company as shall equal the result obtained by (x) multiplying (1)
one hundred times the then current Purchase Price by (2) the then number of one
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one-hundredths of a share of Common Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event, and
(y) dividing that product (which, following such first occurrence, shall
thereafter be referred to as the "Purchase Price" for each Right and for
all purposes of this Agreement) by 50% of the current market price
(determined pursuant to Section 11(d) hereof) per share of Common Stock on
the date of such first occurrence (such number of shares, the "Adjustment
Shares"),
(iii) In the event that the number of shares of Common Stock which are
authorized by the Company's articles of incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the
Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall: (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (2)
the Purchase Price (such excess, the "Spread"), and (B) with respect to
each Right, make adequate provision to substitute for the Adjustment
Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units
of shares, of preferred stock which the Board of Directors of the Company
has deemed to have the same value as shares of Common Stock (such shares of
preferred stock, "common stock equivalents")), (4) debt securities of the
Company, (5) other assets, or (6) any combination of the foregoing, having
an aggregate value equal to the Current Value, where such aggregate value
has been determined by the Board of Directors of the Company
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<PAGE> 29
(including, following the earlier of (x) a Triggering Event and (y) the
date on which a Person becomes an Acquiring Person, at least a majority of
the Continuing Directors) based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors of the Company;
provided, however, if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days
following the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company's right of redemption pursuant
to Section 23 expires (the later of (x) and (y) being referred to herein as
the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated
to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares and/or cash
have an aggregate value equal to the Spread. If the Board of Directors of
the Company (including, following the earlier of (x) a Triggering Event and
(y) the date on which a Person becomes an Acquiring person, at least a
majority of the Continuing Directors) shall determine in good faith that it
is likely that sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the Rights, the thirty
(30) day period set forth above may be extended to the extent necessary,
but not more than ninety (90) days after the Section 11(a)(ii) Trigger
Date, in order that the Company may seek shareholder approval for the
authorization of such additional shares (such period, as it may be
extended, the "Substitution Period"). To the extent that the Company
determines that some action need be taken pursuant to the first and/or
second sentences of this Section 11(a)(iii), the Company (x) shall provide,
subject to Section 7(e) hereof, that such action shall apply
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uniformly to all outstanding Rights, and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution Period in order to
seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence
and to determine the value thereof. In the event of any such suspension,
the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
For purposes of this Section 11(a)(iii), the value of the Common Stock
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of the Common Stock on the Section 11(a)(ii) Trigger Date
and the value of any "common stock equivalent" shall be deemed to have the
same value as the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Common Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45)
calendar days after such record date) Common Stock (or shares having the same
rights, privileges and preferences as the shares of Common Stock ("equivalent
common stock")) or securities convertible into Common Stock or equivalent
common stock at a price per share of Common Stock or per share of equivalent
common stock (or having a conversion price per share, if a security convertible
into Common Stock or equivalent common stock) less than the current market
price (as determined pursuant to Section 11(d) hereof) per share of Common
Stock on such record date, the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of shares of Common Stock
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outstanding on such record date, plus the number of shares of Common Stock
which the aggregate offering price of the total number of shares of Common
Stock and/or equivalent common stock so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price, and the denominator of which shall be
the number of shares of Common Stock outstanding on such record date, plus the
number of additional shares of Common Stock and/or equivalent common stock to
be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right
be less than the aggregate par value of the shares of capital stock of the
Company issuable upon the exercise of one Right. In case such subscription
price may be paid by delivery of consideration part or all of which may be in a
form other than cash, the value of such consideration shall be as determined in
good faith by the Board of Directors of the Company, whose determination shall
be described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and the holders of the Rights. Shares of Common Stock owned
by or held for the account of the Company shall not be deemed outstanding for
the purpose of any such computation. Such adjustment shall be made
successively whenever such a record date is fixed, and in the event that such
rights or warrants are not so issued, the Purchase Price shall be adjusted to
be the Purchase Price which would then be in effect if such record date had not
been fixed.
(c) In case the Company shall fix a record date for a distribution
to all holders of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of
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indebtedness, cash (other than a regular quarterly cash dividend out of the
earnings or retained earnings of the Company), assets (other than a dividend
payable in Common Stock, but including any dividend payable in stock other than
Common Stock) or subscription rights or warrants (excluding those referred to
in Section 11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of Common Stock on such record date, less the fair market
value (as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to a share of
Common Stock and the denominator of which shall be such current market price
(as determined pursuant to Section 11(d) hereof) per share of Common Stock;
provided, however, that in no event shall the consideration to be paid upon the
exercise of one Right be less than the aggregate par value of the shares of
capital stock of the Company issuable upon the exercise of one Right. Such
adjustments shall be made successively whenever such a record date is fixed,
and in the event that such distribution is not so made, the Purchase Price
shall be adjusted to be the Purchase Price which would have been in effect if
such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other
than computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the thirty (30) consecutive Trading Days (as such
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term is hereinafter defined) immediately prior to such date, and for
purposes of computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the ten (10) consecutive Trading Days immediately
following such date; provided, however, that in the event that the current
market price per share of the Common Stock is determined during a period
following the announcement by the issuer of such Common Stock of (A) a
dividend or distribution on such Common Stock payable in shares of such
Common Stock or securities convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or
reclassification of such Common Stock, and prior to the expiration of the
requisite thirty (30) Trading Day or ten (10) Trading Day period, as set
forth above, after the ex-dividend date for such dividend or distribution,
or the record date for such subdivision, combination or reclassification,
then, and in each such case, the "current market price" shall be properly
adjusted to take into account ex-dividend trading. The closing price for
each day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed
or admitted to trading on the New York Stock Exchange or, if the shares of
Common Stock are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national
securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if the shares of Common Stock are
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<PAGE> 34
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other
system then in use, or, if on any such date the shares of Common Stock are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Common Stock selected by the Board of Directors of the Company. If on any such
date no market maker is making a market in the Common Stock, the fair value of
such shares on such date as determined in good faith by the Board of Directors
of the Company shall be used. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading is open for the transaction of business or,
if the shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, "current market price" per share
shall mean the fair value per share as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes. For all
purposes of this Agreement, the "current market price" of one one-hundredth of
a share of Common Stock shall be equal to the "current market price" of one
share of Common Stock divided by 100.
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(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least one
percent (1%) in the Purchase Price; provided, however, that any
adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be
made to the nearest cent or to the nearest ten-thousandth of a share of
Common Stock. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three (3) years from the date of the transaction
which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than Common
Stock, thereafter the number of such other shares so receivable upon exercise
of any Right and the Purchase Price thereof shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Common Stock contained in Sections 11(a),
(b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections
7, 9, 10, 13 and 14 hereof with respect to the Common Stock shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
share of Common Stock purchasable from time to time hereunder upon exercise of
the Rights, all subject to further adjustment as provided herein.
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(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a share of Common Stock (calculated to the nearest
ten-thousandth) obtained by (i) multiplying (x) the number of one
one-hundredths of a share covered by a Right immediately prior to this
adjustment, by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in lieu of any adjustment
in the number of one one-hundredths of a share of Common Stock purchasable upon
the exercise of a Right. Each of the Rights outstanding after the adjustment
in the number of Rights shall be exercisable for the number of one
one-hundredths of a share of Common Stock for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be
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at least ten (10) days later than the date of the public announcement. If
Rights Certificates have been issued, upon each adjustment of the number of
Rights pursuant to this Section 11(i), the Company shall, as promptly as
practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates to be so distributed shall
be issued, executed and countersigned in the manner provided for herein (and
may bear, at the option of the Company, the adjusted Purchase Price) and shall
be registered in the names of the holders of record of Rights Certificates on
the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price
or the number of one one-hundredths of a share of Common Stock issuable upon
the exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-hundredth of a
share and the number of one one-hundredths of a share which were expressed in
the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated value, if any, of the number
of one one-hundredths of a share of Common Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Company may validly and
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legally issue fully paid and non-assessable such number of one one-hundredths
of a share of Common Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Common Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise over
and above the number of one one-hundredths of a share of Common Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence
of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Common Stock, (ii) issuance wholly for cash of any shares of
Common Stock at less than the current market price, (iii) issuance wholly for
cash of shares of Common Stock or securities which by their terms are
convertible into or exchangeable for shares of Common Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Common Stock shall
not be taxable to such stockholders.
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(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof and has been approved by the Board of Directors (including,
following the earlier of (x) a Triggering Event and (y) the date on which a
Person becomes an Acquiring Person, at least a majority of the Continuing
Directors)), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof and
has been approved by the Board of Directors (including, following the earlier
of (x) a Triggering Event and (y) the date on which a Person becomes an
Acquiring Person, at least a majority of the Continuing Directors)), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of
which complies with Section 11(o) hereof and has been approved by the Board of
Directors (including, following the earlier of (x) a Triggering Event and (y)
the date on which a Person becomes an Acquiring Person, at least a majority of
the Continuing Directors)), if (x) at the time of or immediately after such
consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately
after such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
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(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23, Section 24 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by
the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in
the event that the Company shall at any time after the Effective Time and prior
to the Distribution Date (i) declare a dividend on the outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, or (iii) combine the outstanding shares of Common Stock
into a smaller number of shares, the number of Rights associated with each
share of Common Stock then outstanding, or issued or delivered thereafter but
prior to the Distribution Date or in accordance with Section 22 hereof, shall
be proportionately adjusted so that the number of Rights thereafter associated
with each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer
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<PAGE> 41
agent for the Common Stock and the Common Stock, a copy of such certificate,
and (c) mail a brief summary thereof to each holder of a Rights Certificate
(or, if prior to the Distribution Date, to each holder of a certificate
representing shares of Common Stock) in accordance with Section 26 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained and shall not be deemed to have knowledge of
any adjustment unless and until it shall have received such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING
POWER. (a) In the event that, during such time as there is an Acquiring
Person, directly or indirectly, (x) the Company shall consolidate with, or
merge with and into, any other Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof and has been approved
by the Board of Directors (including, following the earlier of (x) a Triggering
Event and (y) the date on which a Person becomes an Acquiring Person, at least
a majority of the Continuing Directors)), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any
Person (other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof and has been approved by the Board of Directors
(including, following the earlier of (x) a Triggering Event and (y) the date on
which a Person becomes an Acquiring Person, at least a majority of the
Continuing Directors)) shall consolidate with, or merge with or into, the
Company, and the Company shall be the continuing or surviving corporation of
such consolidation or merger and, in connection with such consolidation or
merger, all or part of the outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other Person or cash or
any other property, or (z) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell
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<PAGE> 42
or otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating 50% or more of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof and has been
approved by the Board of Directors (including, following the earlier of (x) a
Triggering Event and (y) the date on which a Person becomes an Acquiring
Person, at least a majority of the Continuing Directors)), then, and in each
such case, proper provision shall be made so that: (i) each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter have the right to
receive, upon the exercise thereof at one hundred times the then current
Purchase Price in accordance with the terms of this Agreement, such number of
validly authorized and issued, fully paid, non-assessable and freely tradable
full shares of Common Stock of the Principal Party (as such term is hereinafter
defined), not subject to any liens, encumbrances, rights of first refusal or
other adverse claims, as shall be equal to the result obtained by (1)
multiplying by one hundred the then current Purchase Price by the number of
one-hundredths of a share of Common Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section
13 Event, multiplying the number of such one-hundredths of a share for which a
Right was exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event by one hundred times the Purchase Price in effect immediately
prior to such first occurrence), and dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by (2)
50% of the current market price (determined pursuant to Section 11(d)(i)
hereof) per share of the Common Stock of
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<PAGE> 43
such Principal Party on the date of consummation of such Section 13 Event; (ii)
such Principal Party shall thereafter be liable for, and shall assume, by
virtue of such Section 13 Event, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed
to refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof shall apply only to such Principal Party
following the first occurrence of a Section 13 Event; (iv) such Principal Party
shall take such steps (including, but not limited to, the reservation of a
sufficient number of shares of its Common Stock) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof
shall be of no effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of Section 13(a), the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in clause (z)
of the first sentence of Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions; provided,
however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has
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not been continuously over the preceding twelve (12) month period
registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the Common Stock of
which is and has been so registered, "Principal Party" shall refer to
such other Person; and (2) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common Stocks of
two or more of which are and have been so registered, "Principal
Party" shall refer to whichever of such Persons is the issuer of the
Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective
as soon as practicable after such filing and (B) remain effective
(with a prospectus at all times meeting the requirements of the Act)
until the Expiration Date;
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(ii) use its best efforts to qualify or register the Rights
and the securities purchasable upon exercise of the Rights under the
blue sky laws of such jurisdictions as may be necessary or
appropriate; and
(iii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its
Affiliates which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction has been approved by the
Board of Directors of the Company; provided, however, if the Board of Directors
of the Company approves such transaction, then there must be Continuing
Directors then in office and such authorization shall require the concurrence
of a majority of such Continuing Directors or (ii)(A) such transaction is
consummated with a Person or Persons who acquired shares of Common Stock
pursuant to a tender offer or exchange offer for all outstanding shares of
Common Stock which complies with the provisions of Section 11(a)(ii)(B) hereof
(or a wholly owned subsidiary of any such Person or Persons), (B) the price per
share of Common Stock offered in such transaction is not less than the price
per share of Common Stock paid to all holders of shares of Common Stock whose
shares were purchased pursuant to such tender offer or exchange offer, and (C)
the form of consideration being offered to the remaining holders of
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shares of Common Stock pursuant to such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
Rights hereunder shall expire.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company
shall not be required to issue fractions of Rights, except prior to the
Distribution Date as provided in Section 11(p) hereof, or to distribute Rights
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting System
with respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading, or
if the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and
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asked prices as furnished by a professional market maker making a market in the
Rights selected by the Board of Directors of the Company. If on any such date
no such market maker is making a market in the Rights the fair value of the
Rights on such date as determined in good faith by the Board of Directors of
the Company shall be used.
(b) The Company shall not be required to issue fractions of shares
of Common Stock (other than fractions which are integral multiples of one
one-hundredth of a share of Common Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Common Stock (other
than fractions which are integral multiples of one one-hundredth of a share of
Common Stock); provided, however, that in lieu of fractions of shares of Common
Stock which are integral multiples of one one-hundredth of a share of Common
Stock, the Company may provide for the issuance of depositary receipts pursuant
to Section 7(c) hereof. In lieu of fractional shares of Common Stock that are
not integral multiples of one one-hundredth of a share of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one one-hundredth of a share of
Common Stock. For purposes of this Section 14(b), the current market value of
one one-hundredth of a share of Common Stock shall be one one-hundredth of the
closing price of a share of Common Stock (as determined pursuant to Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
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SECTION 15. ALL RIGHTS OF ACTION. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), without
the consent of the Rights Agent or of the holder of any other Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), may, in
his own behalf and for his own benefit, enforce, and may institute and maintain
any Suit, action or proceeding against the Company to enforce, or otherwise act
in respect of, his right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
SECTION 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights
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Agent designated for such purposes, duly endorsed or accompanied by a proper
instrument of transfer and with the appropriate forms and certificates fully
executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
one-hundredths of a share of Common Stock or any other
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securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof. This Section 17 shall also apply to holders, as such, of
Rights prior to the issuance of Rights Certificates.
SECTION 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and disbursements and other disbursements incurred in
the administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Company also agrees to indemnify the
Rights Agent for, and to hold it harmless against, any losses, expenses,
claims, damages or liabilities, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement and performance hereunder, including, without
limitation, the costs and expenses of defending against any claim of liability
arising therefrom, directly or indirectly, and will promptly reimburse the
Rights Agent for any legal or other expenses
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reasonably incurred in investigating or defending any such loss, expense,
claim, damage or liability.
(b) The Rights Agent shall be protected by the indemnity provided
by this Section 18 and shall incur no liability for or in respect of any action
taken, suffered or omitted by it in connection with its administration of this
Agreement in reliance upon any Rights Certificate or certificate for Common
Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to
be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have
been countersigned but not delivered, any such successor Rights Agent may adopt
the countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights
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Agent may countersign such Rights Certificates either in the name of the
predecessor or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be
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conclusively proved and established by a certificate signed by the Chairman of
the Board, the President, any Vice President, the Treasurer, any Assistant
Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(d) The Rights Agent shall not be under any responsibility in
respect of the validity or legality of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or legality or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any adjustment
required under the provisions of Section 11 or Section 13 hereof or responsible
for the manner, method or amount of any such adjustment or the ascertaining of
the existence of facts that would require any such adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after actual
notice of any such adjustment); nor shall it by any act hereunder be deemed to
make any representation or warranty as to the authorization or reservation of
any shares of Common Stock to be issued pursuant to this Agreement or any
Rights Certificate or as to whether any shares of Common Stock will, when so
issued, be validly authorized and issued, fully paid and non-assessable.
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(e) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(f) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable to the Company or the holder of any Rights
Certificate or any shareholder of the Company for any action taken or suffered
to be taken by it in good faith in accordance with instructions of any such
officer.
(g) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(h) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company resulting from any
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such act, default, neglect or misconduct; provided, however, reasonable care
was exercised in the selection and continued employment thereof.
(i) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if there shall be, in the sole judgment of the Rights Agent, reasonable grounds
for believing that repayment of such funds or adequate indemnification against
such risk or liability is not reasonably assured to it.
(j) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first consulting with the Company.
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates by first-class mail. If
the Rights Agent shall resign or be removed or shall otherwise become incapable
of acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after giving
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notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then any registered holder
of any Rights Certificate may apply to any court of competent jurisdiction for
the appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of the State of
Georgia or of the State of New York (or of any other state of the United States
so long as such corporation is authorized to do business as a banking
institution in either the State of Georgia or the State of New York), in good
standing, having a principal office in either the State of Georgia or the State
of New York, which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50,000,000. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and
transfer to the successor Rights Agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Not later than the effective date of any such
appointment, the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock and the
Common Stock, and mail a notice thereof in writing to the registered holders of
the Rights Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect
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therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon
the exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustments shall otherwise have been made in lieu of the issuance
thereof.
SECTION 23. REDEMPTION AND TERMINATION. (a) The Board of Directors of
the Company may, at its option, at any time prior to the earlier of (i) the
close of business on the tenth day (as
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such period may be extended pursuant to the provisions of Section 27 hereof)
following the Stock Acquisition Date, or (ii) the Final Expiration Date, redeem
all but not less than all of the then outstanding Rights at a redemption price
of $.01 per Right, as such amount may be appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"), such Redemption Price to be payable in cash, shares of Common Stock
(based on the "current market price," as defined in Section 11(d) hereof, of
the Common Stock at the time of redemption) or such other form of consideration
as may be deemed appropriate by the Board of Directors of the Company;
provided, however, if the Board of Directors of the Company authorizes
redemption of the Rights in either of the circumstances set forth in clauses
(i) and (ii) below, then there must be Continuing Directors then in office and
such authorization shall require the concurrence of a majority of such
Continuing Directors: (i) such authorization occurs on or after the time a
Person becomes an Acquiring Person, or (ii) such authorization occurs on or
after the date of a change (resulting from a proxy or consent solicitation) in
a majority of the directors in office at the commencement of such solicitation
if any Person who is a participant in such solicitation has stated (or, if upon
the commencement of such solicitation, a majority of the Board of Directors of
the Company has determined in good faith) that such Person (or any of its
Affiliates or Associates) intends to take, or may consider taking, any action
which would result in such Person becoming an Acquiring Person or which would
cause the occurrence of a Triggering Event unless, concurrent with such
solicitation, such Person (or one or more of its Affiliates or Associates) is
making a tender offer or exchange offer in compliance with Section
11(a)(ii)(B); provided further, however, that if following the occurrence of a
Stock Acquisition Date and following the expiration
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of the right of redemption hereunder but prior to any Triggering Event, (i) a
Person who is an Acquiring Person shall have transferred or otherwise disposed
of a number of shares of Common Stock in one transaction or series of
transactions, not directly or indirectly involving the Company or any of its
Subsidiaries, which did not result in the occurrence of a Triggering Event such
that such Person is thereafter a Beneficial Owner of 5% or less of the
outstanding shares of Common Stock, and (ii) there are no other Persons,
immediately following the occurrence of the event described in clause (i), who
are Acquiring Persons, then the right of redemption shall be reinstated and
thereafter be subject to the provisions of this Section 23. Notwithstanding
anything contained in this Agreement to the contrary, the Rights shall not be
exercisable after the first occurrence of a Section 11(a)(ii) Event until such
time as the Company's right of redemption hereunder and under subsection (b) of
this Section 23 has expired.
(b) During the period commencing at the close of business on the
tenth day following the Stock Acquisition Date and terminating on the earlier
of (i) the occurrence of a Triggering Event and (ii) the Final Expiration Date,
the Board of Directors of the Company may, at its option, redeem all but not
less than all of the then outstanding Rights at the Redemption Price
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), provided that such redemption is
incidental to a merger, consolidation or other business combination involving
the Company or a reorganization or restructuring of the Company which a
majority of the Continuing Directors shall determine to be in the best
interests of the Company and its stockholders.
(c) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and
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without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. Promptly
after the action of the Board of Directors ordering the redemption of the
Rights, the Company shall give notice of such redemption to the Rights Agent
and the holders of the then outstanding Rights by mailing such notice to all
such holders at each holder's last address as it appears upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the Transfer Agent for the Common Stock. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of redemption will state the method by
which the payment of the Redemption Price will be made.
SECTION 24. EXCHANGE. (a) The Board of Directors of the Company may, at
its option and with the approval of at least a majority of the Continuing
Directors, at any time after the occurrence of a Triggering Event, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 7(e) hereof)
for shares of Common Stock at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the
foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan of the Company or any such
Subsidiary, or any entity holding shares of Common Stock for or pursuant to
the terms of any such plan), together with all Affiliates and
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Associates of such Person, becomes the Beneficial Owner of 50% or more of the
shares of Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock equal
to the number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice
shall not affect the validity of such exchange. The Company promptly shall
mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the shares of Common
Stock for Rights will be effected and, in the event of any partial exchange,
the number of Rights which will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights which have
become void pursuant to the provisions of Section 7(e) hereof) held by each
holder of Rights.
(c) In the event that there shall not be sufficient shares of Common
Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
shares of Common Stock for issuance upon exchange of the Rights. In the event
the Company shall, after good faith effort, be unable to take all such action
as may be
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necessary to authorize such additional shares of Common Stock, the Company
shall substitute, for each Common Share that would otherwise be issuable upon
exchange of a Right, a number of shares of Common Stock or fraction thereof
such that the current per share market price of one Common Share multiplied by
such number or fraction is equal to the current per share market price of one
Common Share as of the date of issuance of such shares of Common Stock or
fraction thereof.
(d) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to the registered holders of the Right Certificates with regard to
which such fractional shares of Common Stock would otherwise be issuable an
amount in cash equal to the same fraction of the current market value of a
whole Common Share. For the purposes of this paragraph (d), the current market
value of a whole Common Share shall be the closing price of a Common Share (as
determined pursuant to Section 11(d) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
SECTION 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Common Stock or to make any
other distribution to the holders of Common Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company),
or (ii) to offer to the holders of Common Stock rights or warrants to subscribe
for or to purchase any additional shares of Common Stock or shares of stock of
any class or any other securities, rights or options, or (iii) to effect any
reclassification of its Common Stock (other than a reclassification
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involving only the subdivision of outstanding shares of Common Stock), or (iv)
to effect any consolidation or merger into or with any other Person (other than
a Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof and has been approved by the Board of Directors (including, following
the earlier of (x) a Triggering Event and (y) the date on which a Person
becomes an Acquiring Person, at least a majority of the Continuing Directors)),
or to effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one transaction or a
series of related transactions, of 50% or more of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof and has been
approved by the Board of Directors (including, following the earlier of (x) a
Triggering Event and (y) the date on which a Person becomes an Acquiring
Person, at least a majority of the Continuing Directors)), or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case,
the Company shall give to each holder of a Rights Certificate, to the extent
feasible and in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Common Stock, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered by
clause (i) or (ii) above at least twenty (20) days prior to the record date for
determining holders of the shares of Common Stock for purposes of such action,
and in the case of any such other action, at least twenty (20) days prior to
the date of the taking of such proposed action or
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the date of participation therein by the holders of the shares of Common Stock,
whichever shall be the earlier.
(b) In case any Triggering Event shall occur, then, in any such
case, (i) the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 11(a)(ii) or Section 13 hereof as applicable, and (ii) all references
in the preceding paragraph to Common Stock shall be deemed thereafter to refer
to Common Stock and/or, if appropriate, other securities.
SECTION 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:
Matria Healthcare, Inc.
[ADDRESS OF MATRIA HEALTHCARE]
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by
this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
[NAME OF RIGHTS AGENT]
[ADDRESS OF RIGHTS AGENT]
Attention: Manager, Corporate Trust Department
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<PAGE> 65
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. Subject to the penultimate
sentence of this Section 27 and with the consent of the Rights Agent, this
Agreement may be supplemented or amended at the times and for the purposes set
forth below; provided, however, that no proposed supplement or amendment to
this Agreement shall be effective unless (i) there are Continuing Directors and
(ii) a majority of such Continuing Directors, at a meeting of Directors duly
called and held, votes in favor of the adoption of such proposed supplement or
amendment. Prior to the Distribution Date and subject to the first and
penultimate sentences of this Section 27, the Company and the Rights Agent
shall, if the Company so directs, supplement or amend any provision of this
Agreement without the approval of any holders of certificates representing
shares of Common Stock. From and after the Distribution Date and subject to
the first and penultimate sentences of this Section 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, (iii) to shorten or lengthen any time period hereunder, or
(iv) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect
the interests of the holders of Rights Certificates (other than an Acquiring
Person or an
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<PAGE> 66
Affiliate or Associate of an Acquiring Person); provided, this Agreement may
not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) subject to Section 31, a time period relating to when the Rights
may be redeemed at such time as the Rights are not then redeemable, or (B) any
other time period unless such lengthening is for the purpose of protecting,
enhancing or clarifying the rights of, and/or the benefits to, the holders of
the common equity of the Company, including the holders of Rights. Upon the
delivery of a certificate that is signed by a Continuing Director and which
states that the proposed supplement or amendment is in compliance with the
terms of this Section 27, the Rights Agent shall execute such supplement or
amendment. Notwithstanding anything contained in this Agreement to the
contrary, no supplement or amendment shall be made which changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of one
one-hundredths of a share of Common Stock or other securities or assets for
which a Right is exercisable. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock.
SECTION 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC.
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common
Stock of which any Person is the Beneficial Owner, shall be made in accordance
with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and
Regulations
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<PAGE> 67
under the Exchange Act. The Board of Directors of the Company (with, where
specifically provided for herein, the concurrence of the Continuing Directors)
shall have the exclusive power and authority to administer this Agreement and
to exercise all rights and powers specifically granted to the Board (with,
where specifically provided for herein, the concurrence of the Continuing
Directors) or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board (with, where
specifically provided for herein, the concurrence of the Continuing Directors)
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board or the Continuing Directors to any liability to the holders
of the Rights.
SECTION 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
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<PAGE> 68
SECTION 31. SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23
hereof shall be reinstated and shall not expire until the close of business on
the tenth day following the date of such determination by the Board of
Directors.
SECTION 32. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Georgia and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and to be performed entirely within such State.
SECTION 33. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE> 69
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the date and year first above written.
Attest: MATRIA HEALTHCARE, INC.
_____________________________ By:___________________________
Name: Name:
Title: Title:
Attest: [RIGHTS AGENT]
_____________________________ By:___________________________
Name: Name:
Title: Title:
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<PAGE> 70
Exhibit A
[Form of Rights Certificate]
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER _________________, 2006 OR EARLIER IF REDEEMED OR
EXCHANGED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION
OF THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH
AGREEMENT.]*
Rights Certificate
MATRIA HEALTHCARE, INC.
This certifies that ___________________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of __________________, 1996, as amended from
time to time (the "Rights Agreement"), between Matria Healthcare, Inc., a
Delaware corporation (the "Company"), and ______________________, a [GEORGIA]
banking
__________________________________
*The portion of the legend in brackets shall be included only if
applicable and shall replace the preceding sentence.
<PAGE> 71
corporation (the "Rights Agent"), to purchase from the Company at any time
prior to 5:00 PM (Eastern Standard Time) on ___________________, 2006 (unless
earlier redeemed by the Company as provided in the Rights Agreement) at the
office or offices of the Rights Agent designated for such purpose, or its
successors as Rights Agent, one one-hundredth of a fully paid, non-assessable
share of Common Stock (the "Common Stock") of the Company, at a purchase price
of $.61 per one one- hundredth of a share (the "Purchase Price"), upon
presentation and surrender of this Rights Certificate with the Form of Election
to Purchase and related Certificate duly executed. The Purchase Price shall be
paid in cash. The number of Rights evidenced by this Rights Certificate (and
the number of shares which may be purchased upon exercise thereof) set forth
above, and the Purchase Price per share set forth above, are the number and
Purchase Price as of _________________ ___, 19___, based on the Common Stock as
constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate
or Associate of any such Acquiring Person (as such terms are defined in the
Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person, or an Affiliate or Associate of an Acquiring Person, such
Rights shall become null and void and no holder hereof shall have any right
with respect to such Rights from and after the occurrence of such Section
11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Common Stock or other securities which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are
subject to modification and adjustment upon the
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<PAGE> 72
happening of certain events, including Triggering Events (as such term is
defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent
designated for such purpose, may be exchanged for another Rights Certificate or
Rights Certificates of like tenor and date evidencing Rights entitling the
holder to purchase a like aggregate number of one one-hundredths of a share of
Common Stock as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase. If this
Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right at any time prior to the earlier of the
close of business on (i) the tenth day following the Stock
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<PAGE> 73
Acquisition Date (as such time period may be extended pursuant to the Rights
Agreement), and (ii) the Final Expiration Date. After the Expiration of the
redemption period, the Company's right of redemption may be reinstated if an
Acquiring Person reduces his beneficial ownership to 5% or less of the
outstanding shares of Common Stock in a transaction or series of transactions
not involving the Company. In addition, the Company may redeem the Right's
after the above ten day period and prior to a Triggering Event, incidental to a
merger or other business combination involving the Company or reorganization or
restructuring of the Company which the majority of "Continuing Directors" (as
defined in the Rights Agreement) concurs is in the best interest of
stockholders.
No fractional shares of Common Stock will be issued upon the exercise
of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-hundredth of a share of Common Stock, which may,
at the election of the Company, be evidenced by depositary receipts), but in
lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Common
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or
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<PAGE> 74
otherwise, until the Right or Rights evidenced by this Rights Certificate shall
have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officer of the Company and
its corporate seal.
Dated as of _____________________, 1996
ATTEST: MATRIA HEALTHCARE, INC.
______________________________ By:_________________________
Secretary Title:___________________
Countersigned:
[RIGHTS AGENT]
By:___________________________
Authorized Signature
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<PAGE> 75
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
the Rights Certificate.)
FOR VALUE
RECEIVED_____________________________________________________________________
hereby sells, assigns and transfers unto ____________________________________
_____________________________________________________________________________
(Please print name and address of transferee)
_____________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated:__________________________, 19___.
______________________________
Signature
Signature Guaranteed:
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<PAGE> 76
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Affiliate or
Associate of an Acquiring Person.
Dated:___________________,19__
__________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 77
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
To: MATRIA HEALTHCARE, INC:
The undersigned hereby irrevocably elects to exercise __________ Rights
represented by this Rights Certificate to purchase the shares of Common Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of
and delivered to:
Please insert social security
or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
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<PAGE> 78
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be, registered in the name of and delivered to:
Please insert social security
or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated:__________________, 19___
____________________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
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<PAGE> 79
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated:__________________, 19___ ___________________________________
Signature
Signature Guaranteed:
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<PAGE> 80
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change
whatsoever.
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<PAGE> 1
Exhibit 10.22
SEVERANCE COMPENSATION
AND
RESTRICTIVE COVENANT AGREEMENT
This Severance Compensation and Restrictive Covenant Agreement
("Agreement") is dated as of October 2, 1995 and is effective as of the date
provided in Section 1(a) below between Healthdyne, Inc., a Georgia corporation
(the "Company"), and Frank D. Powers (the "Executive").
WHEREAS, simultaneously with its execution of this Agreement, the
Company is entering into an Agreement and Plan of Merger (the "Merger
Agreement") with Tokos/Healthdyne Acquisition Company, Inc. ("Newco") and Tokos
Medical Corporation (Delaware) ("TM"), pursuant to which the Company and TM
will merge with and into Newco (the "Surviving Company") (such transaction
shall hereafter be referred to as the "Merger"), and such Merger will
constitute a Change in Control as defined herein; and
WHEREAS, TM's willingness to execute the Merger Agreement is
conditioned on Executive entering into the restrictive covenants contained in
this Agreement, and the parties hereto acknowledge the reasonableness of such
covenants, given the significant value that Executive will receive, directly
and indirectly, as a result of the Merger and given the payments to be made to
Executive pursuant to this Agreement in consideration of these covenants; and
WHEREAS, the Board of Directors of the Company has determined that it
is appropriate to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Executive, to
their assigned duties without distraction in potentially disturbing
circumstances arising from the Merger or any subsequent Change in Control; and
WHEREAS, the severance benefits payable by the Company to Executive as
provided herein are in part intended to ensure that Executive receives
reasonable compensation given the specific circumstances of Executive's
employment history with the Company;
NOW, THEREFORE, in consideration of their respective obligations to
one another set forth in this Agreement, and other good and valuable
consideration, the receipt, sufficiency and adequacy of which the parties
hereby acknowledge, the parties to this Agreement, intending to be legally
bound, hereby agree as follows:
<PAGE> 2
1. Term.
(a) This Agreement shall become effective immediately prior
to the Effective Time of the Merger (as defined in Section 2.2 of the Merger
Agreement), provided that the Executive is still employed by the Company at
such time. If the Merger does not become effective on or before May 31, 1996
or the Executive is not employed by the Company at the Effective Time, then
this Agreement shall be deemed never to have been in effect.
(b) This Agreement shall terminate, except to the extent that
any obligation of the Company hereunder remains unpaid as of such time, upon
the earliest of (i) three years after the Effective Time if a Change in Control
(other than the Merger) has not occurred after the Effective Time; (ii) the
Date of Termination of the Executive based on death, Disability (as defined in
Section 3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined in
Section 3(d)) or by the Executive other than for Good Reason (as defined in
Section 3(e)); or (iii) three years from the date of a Change in Control (as
defined in Section 2) occurring after the Merger if the Executive's employment
with the Company has not terminated as of such time.
2. Change in Control. For purposes of this Agreement, a Change
in Control shall be deemed to have occurred if (a) there shall be consummated
(i) any consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the
Company's common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger, or (ii) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company, or (b) the stockholders of the
Company approve any plan or proposal for the liquidation or dissolution of the
Company, or (c) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall
become the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of 30% of the Company's outstanding Common Stock, or (d) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors of the Company shall cease for
any reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period; provided, however, that, in
the absence of a majority vote of the directors specified in subsection (d) of
this Section 2 to the contrary, the sale, lease, exchange or other disposition
(in one transaction or a series of related transactions) of less than 70%
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<PAGE> 3
of the total fair market value of all of the assets of the Company immediately
prior to such transaction or transactions shall not be deemed to be a Change in
Control and provided further that the transaction or transactions which involve
the sale, lease, exchange or other disposition of 70% or more of the total fair
market value of all of the assets of the Company immediately prior to such
transaction or transactions shall be deemed to be a Change in Control even if
approved by the Board of Directors of the Company.
3. Termination Following Change in Control.
(a) If the Executive is still an employee of the Company
at the Effective Time or at the time of any other Change in Control, the
Executive shall be entitled to the compensation and benefits provided in
Section 4 upon the subsequent termination of the Executive's employment with
the Company by the Executive or by the Company during the term of this
Agreement, unless such termination is as a result of (i) the Executive's death;
(ii) the Executive's Disability; (iii) the Executive's Retirement; (iv) the
Executive's termination by the Company for Cause; or (v) the Executive's
decision to terminate employment other than for Good Reason.
(b) Disability. The term "Disability" as used in this
Agreement shall mean termination of the Executive's employment by the Company
as a result of the Executive's incapacity due to physical or mental illness,
provided that the Executive shall have been absent from his duties with the
Company on a full-time basis for six consecutive months and such absence shall
have continued unabated for 30 days after Notice of Termination as described in
Section 3(f) is thereafter given to the Executive by the Company.
(c) Retirement. The term "Retirement" as used in this
Agreement shall mean termination of the Executive's employment by the Company
based on the Executive's having attained age 65 or such later retirement age as
shall have been established pursuant to a written agreement between the Company
and the Executive. Termination of Executive's employment at a time when
Executive is eligible to receive benefits under the Company's Retirement
Benefit Award or the Company's Protective Umbrella for Lifelong Security of
Employees Program shall not constitute Retirement unless Executive shall have
attained such age.
(d) Cause. The term "Cause" for purposes of this
Agreement shall mean the Company's termination of the Executive's employment on
the basis of criminal or civil fraud on the part of the Executive involving a
material amount of funds of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to the
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Executive a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Company's Board of
Directors at a meeting of the Board called and held for such purpose (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that in the good faith opinion of the Board the Executive was guilty of conduct
set forth in the first sentence of this Section 3(d) and specifying the
particulars thereof in detail. For purposes of this Agreement only, the
preparation and filing of fictitious, false or misleading claims in connection
with any federal, state or other third party medical reimbursement program, or
any other violation of any rule or regulation in respect of any federal, state
or other third party medical reimbursement program by the Company or any
subsidiary of the Company shall not be deemed to constitute "criminal fraud" or
"civil fraud".
(e) Good Reason. For purposes of this Agreement, "Good
Reason" shall mean any of the following actions taken by the Company without
the Executive's express written consent:
(i) The assignment to the Executive by the Company of
duties inconsistent with, or the reduction of the powers and functions
associated with, the Executive's position, duties, responsibilities and status
with the Company prior to a Change in Control, or an adverse change in the
Executive's titles or offices as in effect prior to a Change in Control, or any
removal of the Executive from or any failure to re-elect the Executive to any
of such positions, except in connection with the termination of his employment
for Disability, Retirement or Cause or as a result of the Executive's death or
by the Executive other than for Good Reason;
(ii) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may be increased
from time to time during the term of this Agreement or the Company's failure to
increase (within 12 months of the Executive's last increase in base salary) the
Executive's base salary after a Change in Control in an amount which at least
equals, on a percentage basis, the average annual percentage increase in base
salary for all corporate officers of the Company effected in the preceding 36
months;
(iii) Any failure by the Company to continue in
effect any benefit plan, program or arrangement (including, without limitation,
any profit sharing plan, group annuity contract, group life insurance
supplement, or medical, dental, accident and disability plans) in which the
Executive was eligible to participate at the time of a Change in Control (or
any other plans providing the Executive with substantially similar benefits)
(hereinafter referred to as "Benefit Plans"), or the taking of any action by
the Company which would adversely affect the Executive's participation in or
materially reduce the
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Executive's benefits under any such Benefit Plan or deprive the Executive of
any fringe benefit enjoyed by the Executive at the time of a Change in Control;
(iv) Any failure by the Company to continue in effect
any incentive plan or arrangement (including, without limitations, any bonus or
contingent bonus arrangements and credits and the right to receive performance
awards and similar incentive compensation benefits) in which the Executive is
participating at the time of a Change in Control (or any other plans or
arrangements providing him with substantially similar benefits) (hereinafter
referred to as "Incentive Plans") or the taking of any action by the Company
which would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such Incentive
Plan, expressed as a percentage of his base salary, by more than five
percentage points in any fiscal year as compared to the immediately preceding
fiscal year, or any action to reduce Executive's bonuses under any Incentive
Plan by more than 20% of the average annual bonus previously paid to Executive
with respect to the preceding three fiscal years;
(v) Any failure by the Company to continue in effect
any plan or arrangement to receive securities of the Company (including,
without limitation, the Company's 1981 Incentive Stock Option Plan, 1983
Incentive Stock Option Plan, 1984 Nonqualified Stock Option Plan, 1985
Nonqualified Stock Option Plan, 1991 Stock Option Plan and 1993 Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to receive
and exercise stock options, stock appreciation rights, restricted stock or
grants thereof) in which the Executive is participating or has the right to
participate in prior to a Change in Control (or plans or arrangements providing
him with substantially similar benefits) (hereinafter referred to as
"Securities Plans") or the taking of any action by the Company which would
adversely affect the Executive's participation in or materially reduce the
Executive's benefits under any such Securities Plan;
(vi) A relocation of the Company's principal
executive offices to a location outside of Marietta, Georgia, or the
Executive's relocation to any place other than the location at which the
Executive performed the Executive's duties prior to a Change in Control, except
for required travel by the Executive on the Company's business to an extent
substantially consistent with the Executive's business travel obligations
immediately prior to a Change in Control;
(vii) Any failure by the Company to provide the
Executive with the number of paid vacation days (or compensation therefor at
termination of employment) accrued to the Executive through the date of a
Change in Control, together with any earned but unused vacation days for the
vacation year in question;
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(viii) Any material breach by the Company of any
provision of this Agreement;
(ix) Any failure by the Company to obtain the
assumption of this Agreement by any successor or assign of the Company effected
in accordance with the provisions of Section 7(a) hereof;
(x) Any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 3(f), and for purposes of this Agreement, no such
purported termination shall be effective; or
(xi) Any proposal or request by the Company after the
Effective Date to require that the Executive enter into a non-competition
agreement with the Company where the terms of such agreement as to its scope or
duration are greater than the terms set forth in Section 5 hereof .
(f) Notice of Termination. Any termination of the
Executive's employment by the Company for a reason specified in Section 3(b),
3(c) or 3(d) shall be communicated to the Executive by a Notice of Termination
prior to the effective date of the termination. For purposes of this
Agreement, a "Notice of Termination" shall mean a written notice which shall
indicate whether such termination is for the reason set forth in Section 3(b),
3(c) or 3(d) and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement,
no termination of the Executive's employment by the Company shall constitute a
termination for Disability, Retirement or Cause unless such termination is
preceded by a Notice of Termination.
(g) Date of Termination. "Date of Termination" shall
mean (a) if the Executive's employment is terminated by the Company for
Disability, 30 days after a Notice of Termination is given to the Executive
(provided that the Executive shall not have returned to the performance of the
Executive's duties on a full-time basis during such 30-day period) or (b) if the
Executive's employment is terminated by the Company or the Executive for any
other reason, the date on which the Executive's termination is effective;
provided that, if within 30 days after any Notice of Termination is given to
the Executive by the Company the Executive notifies the Company that a dispute
exists concerning the termination, the Date of Termination shall be the date
the dispute is finally determined whether by mutual agreement by the parties or
upon final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected).
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4. Compensation and Benefits upon Termination of Employment.
(a) If the Company shall terminate the Executive's
employment after a Change in Control other than pursuant to Section 3(b), 3(c)
or 3(d) and Section 3(f), or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive, as severance
compensation and in consideration of the Executive's adherence to the terms of
Section 5 hereof, the following:
(1) On the Date of Termination, the Company shall
become liable to the Executive for an amount equal to three times the
Executive's average annual compensation from the Company (as reported on Form
W-2 pursuant to applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code")) for the five years ending prior to the Date of
Termination, which amount shall be paid to the Executive in cash on or before
the fifth day following the Date of Termination.
(2) For a period of three years following the
Date of Termination, the Executive and anyone entitled to claim under or
through the Executive shall be entitled to all benefits under the group
hospitalization plan, health care plan, dental care plan, life or other
insurance or death benefit plan, or other present or future similar group
employee benefit plan or program of the Company for which key executives are
eligible at the date of a Change in Control, to the same extent as if the
Executive had continued to be an employee of the Company during such period and
such benefits shall, to the extent not fully paid under any such plan or
program, be paid by the Company.
(3) For a period of three years after the Date of
Termination, the Company shall allow the Executive to utilize for his business
and personal use any Company leased automobile previously furnished to him or
an equivalent type and style of automobile and shall reimburse the Executive
for the maintenance and repair costs of such automobile and extend full
insurance coverage relating to such automobile in favor of the Executive, as
additional named insured, during such three-year period. In addition, the
Executive shall be entitled, at the Executive's sole discretion, to exercise
any option to acquire such automobile pursuant to the terms which may be
provided in the lease agreement for the automobile in question.
(b) The parties hereto agree that the payments provided
in Section 4(a) hereof are reasonable compensation in light of the Executive's
services rendered to the Company and in consideration of the Executive's
adherence to the terms of Section 5 hereof. Neither party shall contest the
payment of such benefits as constituting an "excess parachute payment" within
the meaning of Section 280G(b)(1) of the Code. In the event that the Executive
becomes entitled to the compensation and benefits described in Section 4(a)
hereof (the "Compensation Payments") and the Company has determined,
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<PAGE> 8
based upon the advise of tax counsel selected by the Company's independent
auditors and acceptable to the Executive, that, as a result of such
Compensation Payments and any other benefits or payments required to be taken
into account under Code Section 280G(b)(2) ("Parachute Payments"), any of such
Parachute Payments must be reported by the Company as "excess parachute
payments" and are therefore not deductible by the Company, the Company shall
pay to the Executive at the time specified in Section 4(a) above an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any of the tax imposed on the Executive by
Section 4999 of the Code (the "Excise Tax") and any Federal, state and local
income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the
Parachute Payments determined prior to the application of this paragraph. The
value of any non-cash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors. For purposes of determining
the amount of the Gross-Up Payment, the Executive shall be deemed to pay
Federal income taxes at the highest marginal rate of Federal income taxation in
the calendar year in which the Gross-Up Payment is to be made and state and
local income taxes at the highest marginal rates of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
maximum reduction in Federal income taxes which could be obtained from
deduction of such state and local taxes. In the event that the Excise Tax
payable by the Executive is subsequently determined to be less than the amount,
if any, taken into account hereunder at the time of termination of the
Executive's employment, the Executive shall repay to the Company at the time
that the amount of such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such reduction plus interest on
the amount of such repayment at the rate provided for in Section 1274(b)(2)(B)
of the Code ("Repayment Amount"). In the event that the Excise Tax payable by
the Executive is determined to exceed the amount, if any, taken into account
hereunder at the time of the termination of the Executive's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional Gross-Up Payment in respect of such excess (plus any interest and
penalty payable with respect to such excess) immediately prior to the time that
the amount of such excess is required to be paid by Executive ("Additional
Gross-up"), such that the net amount retained by the Executive, after deduction
of any Excise Tax on the Parachute Payments and any Federal, state and local
income tax and Excise Tax upon the Additional Gross-Up Payment, shall be equal
to the Parachute Payments determined prior to the application of this
paragraph. The obligation to pay any Repayment Amount or Additional Gross-up
shall remain in effect under this Agreement for the entire period during which
the Executive remains liable for the Excise Tax, including the period during
which any applicable statute of limitation remains open.
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(c) The payments provided in Section 4(a) above shall be
in lieu of any other severance compensation otherwise payable to Executive
under the Company's established severance compensation policies; provided,
however, that nothing in this Agreement shall affect or impair Executive's
vested rights under any other employee benefit plan or policy of the Company.
(d) Unless the Company determines that any Parachute
Payments made hereunder must be reported as "excess parachute payments" in
accordance with the third sentence of Section 4(b) above, neither party shall
file any return taking the position that the payment of such benefits
constitutes an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code. If the Internal Revenue Service proposes an assessment
of Excise Tax against the Executive in excess of the amount, if any, taken into
account at the time specified in Section 4(a), then, if the Company notifies
Executive in writing that the Company elects to contest such assessment at its
expense, unless the Executive waives the right to an Additional Gross-Up
Payment, the Executive (i) shall in good faith cooperate with the Company in
contesting such proposed assessment; and (ii) such Executive shall not settle
such contest without the written consent of the Company. Any such contest
shall be controlled by the Company, provided, however, that the Executive may
participate in such contest.
5. Protective Covenants
(a) Definitions
This Subsection sets forth the definition of certain
capitalized terms used in Subsections (a) through (f) of this Section 5.
(i) "Competing Business" shall mean a business
(other than the Company) that, directly or through a controlled subsidiary or
through an affiliate, (a) develops, markets and/or sells products for uterine
contraction monitoring in the home or products that would be used in lieu of or
in competition with uterine contraction monitoring products ("Competing
Products"), and/or (b) provides obstetrical home care services, including,
without limitation, programs for monitoring patients who are at risk of preterm
delivery, programs for managing patients suffering from obstetrical
hypertension or diabetes, infusion therapy services involving drugs to control
preterm labor, nursing services and maternity management services for both low
and high risk pregnancies ("Competing Services"). Notwithstanding the
foregoing, no business shall be deemed a "Competing Business" unless, within at
least one of the business's three most recently concluded fiscal years, that
business, or a division of that business, derived more than twenty percent
(20%) of its gross revenues or more than $2,000,000 in gross
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<PAGE> 10
revenues from the development, marketing or sale of Competing Products and/or
the provision of Competing Services; provided, however, that neither Healthdyne
Technologies, Inc., a Georgia corporation and the manufacturer of medical
devices utilized by the Company ("HTI"), nor Healthdyne Information
Enterprises, Inc., a Georgia corporation engaged in healthcare information
services ("HIE"), shall constitute a Competing Business unless it provides
patient care services to obstetrical patients in the home.
(ii) "Competitive Position" shall mean: (A) the
Executive's direct or indirect equity ownership (excluding ownership of less
than one percent (1%) of the outstanding common stock of any publicly held
corporation) or control of any portion of any Competing Business; or (B) any
employment, consulting, partnership, advisory, directorship, agency,
promotional or independent contractor arrangement between the Executive and any
Competing Business where the Executive performs services for the Competing
Business substantially similar to those the Executive performed for the
Company, provided, however that Executive shall not be deemed to have a
Competitive Position solely because of (y) Executive's position as a director
or holder of more than one percent (1%) of the outstanding stock of HTI or HIE,
if Executive had such position at the Effective Time or (z) Executive's
services for a Competing Business that are not directly related to the sale of
Competing Products or the provision of Competing Services, unless more than
thirty-five percent (35%) of the gross revenues of the Competing Business are
derived from the sale of Competing Products and/or the provision of Competing
Services.
(iii) "Covenant Payments" shall mean the payments
and benefits under this Agreement that are made or provided to the Executive
under Section 4 of this Agreement in exchange for the Executive's agreeing to
the covenants in Subsections (b) through (e) (collectively, the "Protective
Covenants"). The parties hereby stipulate that the value of the Covenant
Payments is Four Hundred Thousand Dollars ($400,000).
(iv) "Covenant Period" shall mean the period of time
from the Effective Date to the date that is three (3) years after the later of
(A) the Effective Date or (B) the effective date of any Change in Control that
occurs within three years after the Effective Date where the Executive's
employment with the Company has not terminated as of the effective date of such
subsequent Change in Control.
(v) "Customers" shall mean actual customers,
clients, referral sources or managed care organizations or actively sought
prospective customers, clients, referral sources or managed care organizations
of the Company (A) during the two (2) years prior to the Effective Date and (B)
during the Covenant Period.
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(vi) "Restricted Territory" shall mean a one hundred
fifty (150) mile radius of the currently existing Company locations listed on
Schedule A, all of which are locations from which the Company Products are
developed, produced, marketed, sold or distributed. The Executive agrees to
sign any amendment to Schedule A proposed by the Company, which amendment adds
or deletes Company locations so that Schedule A accurately reflects all then
current Company locations from which the Company's products or services are
developed, marketed, sold or provided.
(b) Limitation on Competition Ancillary to and as a
condition precedent to the Merger, in connection with which the Executive will
receive, both directly and indirectly, significant benefits and value, and in
consideration of the Covenant Payments payable by the Company to the Executive
under this Agreement, the Executive agrees that during the Covenant Period, the
Executive will not, without the prior written consent of the Company, anywhere
within the Restricted Territory, either directly or indirectly, alone or in
conjunction with any other party, accept, enter into or take any action in
conjunction with or in furtherance of a Competitive Position (other than action
to reject an unsolicited offer of a Competitive Position).
(c) Limitation on Soliciting Customers Ancillary to and
as a condition precedent to the Merger, in connection with which the Executive
will receive, both directly and indirectly, significant benefits and value, and
in consideration of the Covenant Payments payable by the Company to the
Executive under this Agreement, the Executive agrees that during the Covenant
Period, the Executive will not, without the prior written consent of the
Company, alone or in conjunction with any other party, solicit, divert or
appropriate or attempt to solicit, divert or appropriate on behalf of a
Competing Business with which Executive has a Competitive Position any Customer
located in the Restricted Territory (or any other Customer with which the
Executive had any direct contact on behalf of the Company) for the purpose of
providing the Customer or having the Customer provided with a Competing Product
or Competing Service.
(d) Limitation on Soliciting Personnel or Other Parties
Ancillary to and as a condition precedent to the Merger, in connection with
which the Executive will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments payable by
the Company to the Executive under this Agreement, the Executive hereby agrees
that he will not, without the prior written consent of the Company, alone or in
conjunction with any other party, solicit or attempt to solicit any employee,
consultant, contractor, independent broker or other personnel of the Company to
terminate, alter or lessen that party's affiliation with the Company or to
violate the terms of any agreement or understanding between such employee,
consultant, contractor or other person and the Company.
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(e) Acknowledgement The parties acknowledge and agree
that the covenants of the Executive in Subsection (b) through (d) are and shall
be treated, under law, as "ancillary to the sale of the Company's business."
The parties acknowledge and agree that the Protective Covenants are reasonable
as to time, scope and territory given the Company's need to protect its trade
secrets and confidential business information and given the substantial
payments and benefits to which the Executive is entitled in connection with the
Merger and otherwise pursuant to this Agreement.
(f) Remedies The parties acknowledge that any breach or
threatened breach of a Protective Covenant by the Executive is reasonably
likely to result in irreparable injury to the Company, and therefore, in
addition to all remedies provided at law or in equity, the Executive agrees
that the Company shall be entitled to a temporary restraining order and a
permanent injunction to prevent a breach or contemplated breach of the
Protective Covenant. If the Company seeks an injunction, the Executive waives
any requirement that the Company post a bond or any other security.
6. No Obligation to Mitigate Damages; No Effect on Other
Contractual Rights.
(a) All compensation and benefits provided to the
Executive under this Agreement are in consideration of the Executive's services
rendered to the Company and of the Executive's adhering to the terms set forth
in Section 5 hereof and the Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any Benefit Plan, Incentive
Plan or Securities Plan, employment agreement or other contract, plan or
arrangement.
7. Successor to the Company.
(a) The Company will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the
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<PAGE> 13
Company would be required to perform it if no such succession or assignment had
taken place. Any failure of the Company to obtain such agreement prior to the
effectiveness of any such succession or assignment shall be a material breach
of this Agreement and shall entitle the Executive to terminate the Executive's
employment for Good Reason. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor or assign to its business
and/or assets as aforesaid, including without limitation, the Surviving Company
in the Merger. If at any time during the term of this Agreement the Executive
is employed by any corporation a majority of the voting securities of which is
then owned by the Company, "Company" as used in Sections 3, 4, 12 and 14 hereof
shall in addition include such employer. In such event, the Company agrees
that it shall pay or shall cause such employer to pay any amounts owed to the
Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him or her
hereunder, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee,
legatee, or the designee or, if there be no such designee, to the Executive's
estate.
8. Notice. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt required, postage prepaid, as follows:
If to Company:
Healthdyne, Inc.
1850 Parkway Place, 12th Floor
Marietta, Georgia 30067
If to Executive:
Frank D. Powers
3630 North Berkeley Lake Road
Duluth, Georgia 30136
or such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
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9. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of Georgia.
10. Validity. The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
12. Legal Fees and Expenses. The Company shall pay all legal
fees, expenses and damages which the Executive may incur as a result of the
Executive's instituting legal action to enforce his rights hereunder, or in the
event the Company contests the validity, enforceability or the Executive's
interpretation of, or determinations under, this Agreement. If the Executive
is the prevailing party or recovers any damages in such legal action, the
Executive shall be entitled to receive in addition thereto pre-judgment and
post-judgment interest on the amount of such damages.
13. Severability, Modification. All provisions of this Agreement
are severable from one another, and the unenforceability or invalidity of any
provision of this Agreement shall not affect the validity or enforceability of
the remaining provisions of this Agreement, but such remaining provisions shall
be interpreted and construed in such a manner as to carry out fully the
intention of the parties. Should any judicial body interpreting this Agreement
deem any provision of this Agreement to be unreasonably broad in time,
territory, scope or otherwise, it is the intent and desire of the parties that
such judicial body, to the greatest extent possible, reduce the breadth of such
provision to the maximum legally allowable parameters rather than deeming such
provision totally unenforceable or invalid.
14. Confidentiality. The Executive acknowledges that he or she
has previously entered into, and continues to be bound by the terms of, a
Confidentiality Agreement with the Company.
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15. Agreement Not an Employment Contract. This Agreement shall
not be deemed to constitute or be deemed ancillary to an employment contract
between the Company and the Executive, and nothing herein shall be deemed to
give the Executive the right to continue in the employ of the Company or to
eliminate the right of the Company to discharge the Executive at any time.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date first above written.
HEALTHDYNE, INC.
By /s/ Parker H. Petit
----------------------------------
/s/ Frank D. Powers
------------------------------------
Frank D. Powers
Executive
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<PAGE> 1
Exhibit 10.24
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (this "Amendment") is made
and entered into as of October 2, 1995 (the "Effective Time") by and between
Tokos Medical Corporation (Delaware), a Delaware corporation (the "Company")
and Robert F. Byrnes ("Employee") and amends that certain Employment Agreement
between the parties dated May 1, 1995 (the "Employment Agreement").
RECITAL
WHEREAS, employee and the Company are parties to the Employment Agreement
which provides that Employee shall not compete with the Company for up to
eighteen (18) months following Employee's termination from the Company; and
WHEREAS, the Company desires to amend the Employment Agreement(s) to: (i)
include a revised three (3) year Covenant Not to Compete that is not invalid
under Section 16600 of the California Business and Professional Code; (ii)
provide for the imposition of other restrictions described below; and (iii) in
consideration of the foregoing, increase the compensation available to Employee
under the Employment Agreement; and
WHEREAS, concurrent with the execution of this Amendment the Company is
entering into an Agreement and Plan of Merger with Tokos/Healthdyne Acquisition
Company, Inc. and Healthdyne, Inc. (the "Merger Agreement") which triggers the
change in control provisions in the Employment Agreement (hereinafter referred
to as the "Merger"); and
WHEREAS, the parties intend for this Amendment to become effective
immediately prior to Effective Time of the Merger (as that term is defined in
the Merger Agreement).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereto hereby agree to amend the
Employment Agreement as follows:
1. The paragraph under Section 5.4 "Severance Compensation in the Event of
a Termination Upon a Change In Control" shall be deleted in its entirety and
replaced with the following:
In the event of a Termination upon a Change In Control, the Company shall
pay Employee in cash an amount equal to three (3) times the Employee's
average annual compensation from the Company (as reported on Form W-2
pursuant to applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code")) for the five (5) years ending prior to the date
of termination. Such payment shall be made in equal
Page 1
<PAGE> 2
increments over a three (3) year period. Employee shall also be entitled
to accelerated vesting of any awards granted to Employee under Tokos'
Incentive Stock Option Plan with no acceleration, however, of Employee's
obligation to exercise such awards. Employee, shall be entitled, at no
cost to Employee, to participate in the full Employee program of any
outplacement firm, acceptable to both Employee and Tokos, until
Employee's reemployment by another employer. In addition to the cost of
such outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
he may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisite provided under this
Agreement for a three (3) year period from the effective date of such
termination; provided, however, that the benefits under any such plans of
Tokos (other than Tokos' Incentive Stock Option Plan) in which Employee
is a participant, including any such perquisite, shall cease upon
Employee's re-employment by another employer.
2. The paragraph under Section 5.5 Severance Compensation in the Event of
A Failure to Renew This Agreement shall be deleted in its entirety and replaced
with the following language:
In the event Tokos fails or otherwise refuses for any reason to renew
this Agreement beyond the Basic term and any extension thereof (except
pursuant to Section 3.1 hereof) the Company shall pay Employee in cash an
amount equal to three (3) times the Employee's average annual
compensation from the Company (as reported on Form W-2 pursuant to
applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code")) for the five (5) years ending prior to the date of
termination. Such payment shall be made in equal increments over a three
(3) year period. Such payment shall be make in equal increments over a
three (3) year period. Employee shall also be entitled to accelerated
vesting of any awards granted to Employee under Tokos' Incentive Stock
Option Plan with no acceleration, however, of Employee's obligation to
exercise any such awards. Employee shall be entitled, at no cost to
Employee, to participate in the full Employee program of any outplacement
firm, acceptable to both Employee and Tokos, until Employee's
reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
she may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, for a three (3) year period from the effective date of such
termination; provided, however, that the benefits under any such plans of
Tokos (other than Tokos' Incentive Stock Option Plan) in which Employee
is a participant, including any such perquisites, shall cease upon
Employee's reemployment by another employer.
Page 2
<PAGE> 3
3. The entire Section 8 "Protection of Company Assets and Dispute
Resolution" of the Agreement shall be deleted and replaced with the following
(except that the entire Subsection 8.2 "Arbitration" shall be moved in to the
"Miscellaneous" Section and renumbered as Subsection 11.12, and Subsection 8.4
"Confidential Information and Trade Secrets" shall survive in the new Section
8, renumbered as Subsection 8.7):
8. Protective Covenants
8.1 Definitions
This Subsection Subsections 8.1 through 8.6 of this Section 8.
sets forth the definition of certain capitalized terms used in
Subsections 8.1 through 8.6 of this Section 8.
8.1.1 "Competing Business" shall mean a business (other than
the Company) that, directly or through a controlled subsidiary or
through an affiliate, (a) develops, markets and/or sells products
for uterine contraction monitoring in the home or products that
would be used in lieu of or in competition with uterine contraction
monitoring products ("Competing Products"), and/or (b) provides
obstetrical home care services, including, without limitation,
programs for monitoring patients who are at risk of preterm
delivery, programs for managing patients suffering from obstetrical
hypertension or diabetes, infusion therapy services involving drugs
to control preterm labor, nursing services and maternity management
services for both low and high risk pregnancies ("Competing
Services"). Notwithstanding the foregoing, no business shall be
deemed a "Competing Business" unless, within at least one of the
business's three most recently concluded fiscal years, that
business, or a division of that business, derived more than twenty
(20%) percent of its gross revenues or more than $2,000,000 in
gross revenues from the development, marketing or sale of Competing
Products and/or the provision of Competing Services.
8.1.2 "Competitive Position" shall mean: (a) the Employee's
direct or indirect equity ownership (excluding ownership of less
than one (1%) percent of the outstanding common stock of any
publicly held corporation) or control of any portion of any
Competing Business; or (b) any employment, consulting, partnership,
advisory, directorship, agency, promotional or independent
contractor arrangement between the Employee and any Competing
Business where the Employee performs services for the Competing
Business substantially similar to those the Employee performed for
the Company; provided, however that Employee shall not be deemed to
have a Competitive Position solely because of Employee's services
for a Competing Business that are not directly related to
the sale of Competing Products or the provision of Competing
Services, unless more than thirty-five percent (35%) of the gross
revenues of the Competing Business are derived from the sale of
Competing Products and/or the provision of Competing Services.
Page 3
<PAGE> 4
8.1.3 "Covenant Payments" shall mean the payments and benefits
under this Agreement that are made or provided to the Employee
under Section 4 of this Agreement in exchange for the Employee's
agreeing to the covenants in Subsections 8.2 through 8.7
(collectively, the "Protective Covenants"). The parties hereby
stipulate that the value of the Covenant Payment is One Million One
Hundred Ninety-Eight Thousand Six Hundred Fifty-Nine Dollars
($1,198,659.00).
8.1.4 "Covenant Period" shall mean the period of time from the
date of this Amendment to the date that is three (3) years after
the effective date of any termination in the case of a Termination
upon a Change in Control, a Termination Upon a Failure to Renew or
a Termination for Cause, and the date that is one (1) year after
any termination in the case of a Termination Other Than For Cause.
8.1.5 "Customers" shall mean actual customers, clients,
referral sources or managed care organizations or actively sought
prospective customers, clients, referral sources or managed care
organizations of the Company (a) during the two (2) years prior to
the effective date of the termination, and (b) during the Covenant
Period.
8.1.6 "Restricted Territory" shall mean a one hundred-fifty
(150) mile radius of the currently existing Company locations.
8.2 Limitation on Competition. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, anywhere
within the Restricted Territory, either directly or indirectly,
alone or in conjunction with any other party, accept, enter into or
take any action in conjunction with or in furtherance of a
Competitive Position (other than action to reject an unsolicited
offer of a Competitive Position).
Page 4
<PAGE> 5
8.3 Limitation on Soliciting Customers. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, alone or in
conjunction with any other party, solicit, divert or appropriate or
attempt to solicit, divert or appropriate on behalf of a Competing
Business with which Employee has a Competitive Position any
Customer located in the Restricted Territory (or any other Customer
with which the Employee had any direct contact on behalf of the
Company) for the purpose of providing the Customer or having the
Customer provided with a Competing Product or Competing Service.
8.4 Limitation on Soliciting Personnel or Other Parties.
Ancillary to and as a condition precedent to the merger, in
connection with which the Employee will receive, both directly and
indirectly, significant benefits and value, and in consideration of
the Covenant Payments payable to the Company to the Employee under
this Agreement, the Employee hereby agrees that he will not,
without the prior written consent of the Company, alone or in
conjunction with any other party, solicit or attempt to solicit any
employee, consultant, contractor, independent broker or other
personnel of the Company to terminate, alter or lessen that party's
affiliation with the Company or to violate the terms of any
agreement or understanding between such employee, consultant,
contractor or other person and the Company.
8.5 Acknowledgment. The parties acknowledge and agree that
the covenants of the Employee in Subsection 8.2 through 8.7 are
and shall be treated, under law, as "ancillary to the sale of the
Company's business." The parties acknowledge and agree that the
protective Covenants are reasonable as to time, scope and territory
given the Company's need to protect its trade secrets and
confidential business information and given the substantial
payments and benefits to which the Employee is entitled in
connection with the Merger and otherwise pursuant to this
Agreement.
8.6 Remedies. The parties acknowledge that any breach or
threatened breach of a Protective Covenant by the Employee is
reasonably likely to result in irreparable injury to the Company,
and therefore, in addition to all remedies provided at law or in
equity, the Employee agrees that the Company shall be entitled to a
temporary restraining order and a permanent injunction to prevent a
breach or contemplated breach of the Protective Covenant. If the
Company seeks an injunction, the Employee waives any requirement
that the Company post a bond or any other security.
4. This Amendment shall become null and void if the Effective Date, as
defined in the Merger Agreement, does not occur in accordance with the terms
set forth in the Merger Agreement.
Page 5
<PAGE> 6
5. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
it to be effective as of the day and year first written above.
COMPANY
By: /s/ Thomas W. Erickson
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Signature: /s/ Robert F. Byrnes
-----------------------------------
Employee
Page 6
<PAGE> 1
Exhibit 10.25
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (this "Amendment") is made
and entered into as of October 2, 1995 (the "Effective Time") by and between
Tokos Medical Corporation (Delaware), a Delaware corporation (the "Company")
and Nicholas A. Mione ("Employee") and amends that certain Employment Agreement
between the parties dated June 1, 1995 (the "Employment Agreement").
RECITAL
WHEREAS, employee and the Company are parties to the Employment Agreement
which provides that Employee shall not compete with the Company for up to
eighteen (18) months following Employee's termination from the Company; and
WHEREAS, the Company desires to amend the Employment Agreement(s) to: (i)
include a revised three (3) year Covenant Not to Compete that is not invalid
under Section 16600 of the California Business and Professional Code; (ii)
provide for the imposition of other restrictions described below; and (iii) in
consideration of the foregoing, increase the compensation available to Employee
under the Employment Agreement; and
WHEREAS, concurrent with the execution of this Amendment the Company is
entering into an Agreement and Plan of Merger with Tokos/Healthdyne Acquisition
Company, Inc. and Healthdyne, Inc. (the "Merger Agreement") which triggers the
change in control provisions in the Employment Agreement (hereinafter referred
to as the "Merger"); and
WHEREAS, the parties intend for this Amendment to become effective
immediately prior to Effective Time of the Merger (as that term is defined in
the Merger Agreement).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereto hereby agree to amend the
Employment Agreement as follows:
1. The paragraph under Section 5.4 "Severance Compensation in the Event of
a Termination Upon a Change In Control" shall be deleted in its entirety and
replaced with the following:
In the event of a Termination upon a Change In Control, the Company shall
pay Employee in cash an amount equal to three (3) times the Employee's
average annual compensation from the Company (as reported on Form W-2
pursuant to applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code")) for the five (5) years ending prior to the date
of termination. Such payment shall be made in equal increments over a
Page 1
<PAGE> 2
three (3) year period. Employee shall also be entitled to accelerated
vesting of any awards granted to Employee under Tokos' Incentive Stock
Option Plan with no acceleration, however, of Employee's obligation to
exercise such awards. Employee, shall be entitled, at no cost to
Employee, to participate in the full Employee program of any
outplacement firm, acceptable to both Employee and Tokos, until
Employee's reemployment by another employer. In addition to the cost of
such outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
he may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisite provided under this
Agreement for a three (3) year period from the effective date of such
termination; provided, however, that the benefits under any such plans of
Tokos (other than Tokos' Incentive Stock Option Plan) in which Employee
is a participant, including any such perquisite, shall cease upon
Employee's re-employment by another employer.
2. The paragraph under Section 5.5 Severance Compensation in the Event of
A Failure to Renew This Agreement shall be deleted in its entirety and replaced
with the following language:
In the event Tokos fails or otherwise refuses for any reason to renew
this Agreement beyond the Basic term and any extension thereof (except
pursuant to Section 3.1 hereof) the Company shall pay Employee in cash an
amount equal to three (3) times the Employee's average annual
compensation from the Company (as reported on Form W-2 pursuant to
applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code")) for the five (5) years ending prior to the date of
termination. Such payment shall be made in equal increments over a three
(3) year period. Such payment shall be make in equal increments over a
three (3) year period. Employee shall also be entitled to accelerated
vesting of any awards granted to Employee under Tokos' Incentive Stock
Option Plan with no acceleration, however, of Employee's obligation to
exercise any such awards. Employee shall be entitled, at no cost to
Employee, to participate in the full Employee program of any outplacement
firm, acceptable to both Employee and Tokos, until Employee's
reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
she may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, for a three (3) year period from the effective date of such
termination; provided, however, that the Option Plan) in which Employee
is a participant, including any such perquisites, shall cease upon
Employee's reemployment by another employer.
Page 2
<PAGE> 3
3. The entire Section 8 "Protection of Company Assets and Dispute
Resolution" of the Agreement shall be deleted and replaced with the following
(except that the entire Subsection 8.2 "Arbitration" shall be moved in to the
"Miscellaneous" Section and renumbered as Subsection 11.12, and Subsection 8.4
"Confidential Information and Trade Secrets" shall survive in the new Section
8, renumbered as Subsection 8.7):
8. Protective Covenants
8.1 Definitions
This Subsection Subsections 8.1 through 8.6 of this Section
8. sets forth the definition of certain capitalized terms used in
8.1.1 "Competing Business" shall mean a business (other than
the Company) that, directly or through a controlled subsidiary or
through an affiliate, (a) develops, markets and/or sells products
for uterine contraction monitoring in the home or products that
would be used in lieu of or in competition with uterine contraction
monitoring products ("Competing Products"), and/or (b) provides
obstetrical home care services, including, without limitation,
programs for monitoring patients who are at risk of preterm
delivery, programs for managing patients suffering from obstetrical
hypertension or diabetes, infusion therapy services involving drugs
to control preterm labor, nursing services and maternity management
services for both low and high risk pregnancies ("Competing
Services"). Notwithstanding the foregoing, no business shall be
deemed a "Competing Business" unless, within at least one of the
business's three most recently concluded fiscal years, that
business, or a division of that business, derived more than twenty
(20%) percent of its gross revenues or more than $2,000,000 in
gross revenues from the development, marketing or sale of Competing
Products and/or the provision of Competing Services.
8.1.2 "Competitive Position" shall mean: (a) the Employee's
direct or indirect equity ownership (excluding ownership of less
than one (1%) percent of the outstanding common stock of any
publicly held corporation) or control of any portion of any
Competing Business; or (b) any employment, consulting, partnership,
advisory, directorship, agency, promotional or independent
contractor arrangement between the Employee and any Competing
Business where the Employee performs services for the Competing
Business substantially similar to those the Employee performed for
the Company; provided, however that Employee shall not be deemed to
have a Competitive Position solely because of Employee's services
for a Competing Business that are not directly related to the sale
of Competing Products or the provision of Competing Services,
unless more than thirty-five percent (35%) of the gross revenues of
the Competing Business are derived from the sale of Competing
Products and/or the provision of Competing Services.
Page 3
<PAGE> 4
8.1.3 "Covenant Payments" shall mean the payments and benefits
under this Agreement that are made or provided to the Employee
under Section 4 of this Agreement in exchange for the Employee's
agreeing to the covenants in Subsections 8.2 through 8.7
(collectively, the "Protective Covenants"). The parties hereby
stipulate that the value of the Covenant Payment is One Hundred
Eighty-Nine Thousand Three Hundred Fifty-Four Dollars
($189,354.00).
8.1.4 "Covenant Period" shall mean the period of time from the
date of this Amendment to the date that is three (3) years after
the effective date of any termination in the case of a Termination
upon a Change in Control, a Termination Upon a Failure to Renew or
a Termination for Cause, and the date that is one (1) year after
any termination in the case of a Termination Other Than For Cause.
8.1.5 "Customers" shall mean actual customers, clients,
referral sources or managed care organizations or actively sought
prospective customers, clients, referral sources or managed care
organizations of the Company (a) during the two (2) years prior to
the effective date of the termination, and (b) during the Covenant
Period.
8.1.6 "Restricted Territory" shall mean a one hundred-fifty
(150) mile radius of the currently existing Company locations.
8.2 Limitation on Competition. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, anywhere
within the Restricted Territory, either directly or indirectly,
alone or in conjunction with any other party, accept, enter into or
take any action in conjunction with or in furtherance of a
Competitive Position (other than action to reject an unsolicited
offer of a Competitive Position).
8.3 Limitation on Soliciting Customers. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, alone or in
conjunction with any other party, solicit, divert or appropriate or
attempt to solicit, divert or appropriate on behalf of a Competing
Business with which Employee has a Competitive Position any
Customer located in the Restricted Territory (or any other
Customer with which the Employee had any direct contact on behalf
of the Company) for the purpose of providing the Customer or having
the Customer provided with a Competing Product or Competing Service.
Page 4
<PAGE> 5
8.4 Limitation on Soliciting Personnel or Other Parties.
Ancillary to and as a condition precedent to the merger, in
connection with which the Employee will receive, both directly and
indirectly, significant benefits and value, and in consideration of
the Covenant Payments payable to the Company to the Employee under
this Agreement, the Employee hereby agrees that he will not,
without the prior written consent of the Company, alone or in
conjunction with any other party, solicit or attempt to solicit any
employee, consultant, contractor, independent broker or other
personnel of the Company to terminate, alter or lessen that party's
affiliation with the Company or to violate the terms of any
agreement or understanding between such employee, consultant,
contractor or other person and the Company.
8.5 Acknowledgment. The parties acknowledge and agree that
the covenants of the Employee in Subsection 8.2 through 8.7 are
and shall be treated, under law, as "ancillary to the sale of the
Company's business." The parties acknowledge and agree that the
protective Covenants are reasonable as to time, scope and territory
given the Company's need to protect its trade secrets and
confidential business information and given the substantial
payments and benefits to which the Employee is entitled in
connection with the Merger and otherwise pursuant to this
Agreement.
8.6 Remedies. The parties acknowledge that any breach or
threatened breach of a Protective Covenant by the Employee is
reasonably likely to result in irreparable injury to the Company,
and therefore, in addition to all remedies provided at law or in
equity, the Employee agrees that the Company shall be entitled to a
temporary restraining order and a permanent injunction to prevent a
breach or contemplated breach of the Protective Covenant. If the
Company seeks an injunction, the Employee waives any requirement
that the Company post a bond or any other security.
4. This Amendment shall become null and void if the Effective Date, as
defined in the Merger Agreement, does not occur in accordance with the terms
set forth in the Merger Agreement.
Page 5
<PAGE> 6
5. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
it to be effective as of the day and year first written above.
COMPANY
By: /s/ Thomas W. Erickson
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
Signature: /s/ Nicholas A. Mione
-----------------------------
Employee
Page 6
<PAGE> 1
Exhibit 10.26
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement (this "Amendment") is made
and entered into as of October 2, 1995 (the "Effective Time") by and between
Tokos Medical Corporation (Delaware), a Delaware corporation (the "Company")
and Terry Bayer ("Employee") and amends that certain Employment Agreement
between the parties dated January 1, 1995 (the "Employment Agreement").
RECITAL
WHEREAS, employee and the Company are parties to the Employment Agreement
which provides that Employee shall not compete with the Company for up to
eighteen (18) months following Employee's termination from the Company; and
WHEREAS, the Company desires to amend the Employment Agreement(s) to: (i)
include a revised three (3) year Covenant Not to Compete that is not invalid
under Section 16600 of the California Business and Professional Code; (ii)
provide for the imposition of other restrictions described below; and (iii) in
consideration of the foregoing, increase the compensation available to Employee
under the Employment Agreement; and
WHEREAS, concurrent with the execution of this Amendment the Company is
entering into an Agreement and Plan of Merger with Tokos/Healthdyne Acquisition
Company, Inc. and Healthdyne, Inc. (the "Merger Agreement") which triggers the
change in control provisions in the Employment Agreement (hereinafter referred
to as the "Merger"); and
WHEREAS, the parties intend for this Amendment to become effective
immediately prior to Effective Time of the Merger (as that term is defined in
the Merger Agreement).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereto hereby agree to amend the
Employment Agreement as follows:
1. The paragraph under Section 5.4 "Severance Compensation in the Event of
a Termination Upon a Change In Control" shall be deleted in its entirety and
replaced with the following:
In the event of a Termination upon a Change In Control, the Company shall
pay Employee in cash an amount equal to three (3) times the Employee's
average annual compensation from the Company (as reported on Form W-2
pursuant to applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code")) for the five (5) years ending prior to the date
of termination. Such payment shall be made in equal increments over a
Page 1
<PAGE> 2
three (3) year period. Employee shall also be entitled to accelerated
vesting of any awards granted to Employee under Tokos' Incentive Stock
Option Plan with no acceleration, however, of Employee's obligation to
exercise such awards. Employee, shall be entitled, at no cost to
Employee, to participate in the full Employee program of any outplacement
firm, acceptable to both Employee and Tokos, until Employee's
reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
he may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisite provided under this
Agreement for a three (3) year period from the effective date of such
termination; provided, however, that the benefits under any such plans of
Tokos (other than Tokos' Incentive Stock Option Plan) in which Employee
is a participant, including any such perquisite, shall cease upon
Employee's re-employment by another employer.
2. The paragraph under Section 5.5 Severance Compensation in the Event of
A Failure to Renew This Agreement shall be deleted in its entirety and replaced
with the following language:
In the event Tokos fails or otherwise refuses for any reason to renew
this Agreement beyond the Basic term and any extension thereof (except
pursuant to Section 3.1 hereof) the Company shall pay Employee in cash an
amount equal to three (3) times the Employee's average annual
compensation from the Company (as reported on Form W-2 pursuant to
applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code")) for the five (5) years ending prior to the date of
termination. Such payment shall be made in equal increments over a three
(3) year period. Such payment shall be make in equal increments over a
three (3) year period. Employee shall also be entitled to accelerated
vesting of any awards granted to Employee under Tokos' Incentive Stock
Option Plan with no acceleration, however, of Employee's obligation to
exercise any such awards. Employee shall be entitled, at no cost to
Employee, to participate in the full Employee program of any outplacement
firm, acceptable to both Employee and Tokos, until Employee's
reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost
constitutes income to Employee for state or federal income tax purposes,
Tokos shall "gross-up" such amount to compensate Employee for all taxes
she may be required to pay. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of
Tokos in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, for a three (3) year period from the effective date of such
termination; provided, however, that the benefits under any such plans of
Tokos (other than Tokos' Incentive Stock Option Plan) in which Employee
is a participant, including any such perquisites, shall cease upon
Employee's reemployment by another employer.
Page 2
<PAGE> 3
3. The entire Section 8 "Protection of Company Assets and Dispute
Resolution" of the Agreement shall be deleted and replaced with the following
(except that the entire Subsection 8.2 "Arbitration" shall be moved in to the
"Miscellaneous" Section and renumbered as Subsection 11.12, and Subsection 8.4
"Confidential Information and Trade Secrets" shall survive in the new Section
8, renumbered as Subsection 8.7):
8. Protective Covenants
8.1 Definitions
This Subsection Subsections 8.1 through 8.6 of this Section 8.
sets forth the definition of certain capitalized terms used in
8.1.1 "Competing Business" shall mean a business (other than
the Company) that, directly or through a controlled subsidiary or
through an affiliate, (a) develops, markets and/or sells products
for uterine contraction monitoring in the home or products that
would be used in lieu of or in competition with uterine contraction
monitoring products ("Competing Products"), and/or (b) provides
obstetrical home care services, including, without limitation,
programs for monitoring patients who are at risk of preterm
delivery, programs for managing patients suffering from obstetrical
hypertension or diabetes, infusion therapy services involving drugs
to control preterm labor, nursing services and maternity management
services for both low and high risk pregnancies ("Competing
Services"). Notwithstanding the foregoing, no business shall be
deemed a "Competing Business" unless, within at least one of the
business's three most recently concluded fiscal years, that
business, or a division of that business, derived more than twenty
(20%) percent of its gross revenues or more than $2,000,000 in
gross revenues from the development, marketing or sale of Competing
Products and/or the provision of Competing Services.
8.1.2 "Competitive Position" shall mean: (a) the Employee's
direct or indirect equity ownership (excluding ownership of less
than one (1%) percent of the outstanding common stock of any
publicly held corporation) or control of any portion of any
Competing Business; or (b) any employment, consulting, partnership,
advisory, directorship, agency, promotional or independent
contractor arrangement between the Employee and any Competing
Business where the Employee performs services for the Competing
Business substantially similar to those the Employee performed for
the Company; provided, however that Employee shall not be deemed to
have a Competitive Position solely because of Employee's services
for a Competing Business that are not directly related to the sale
of Competing Products or the provision of Competing Services,
unless more than thirty-five percent (35%) of the gross revenues of
the Competing Business are derived from the sale of Competing
Products and/or the provision of Competing Services.
Page 3
<PAGE> 4
8.1.3 "Covenant Payments" shall mean the payments and benefits
under this Agreement that are made or provided to the Employee
under Section 4 of this Agreement in exchange for the Employee's
agreeing to the covenants in Subsections 8.2 through 8.7
(collectively, the "Protective Covenants"). The parties hereby
stipulate that the value of the Covenant Payment is Two Hundred
Eighteen Thousand Ninety-Seven Dollars ($218,097.00).
8.1.4 "Covenant Period" shall mean the period of time from the
date of this Amendment to the date that is three (3) years after
the effective date of any termination in the case of a Termination
upon a Change in Control, a Termination Upon a Failure to Renew or
a Termination for Cause, and the date that is one (1) year after
any termination in the case of a Termination Other Than For Cause.
8.1.5 "Customers" shall mean actual customers, clients,
referral sources or managed care organizations or actively sought
prospective customers, clients, referral sources or managed care
organizations of the Company (a) during the two (2) years prior to
the effective date of the termination, and (b) during the Covenant
Period.
8.1.6 "Restricted Territory" shall mean a one hundred-fifty
(150) mile radius of the currently existing Company locations.
8.2 Limitation on Competition. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenant Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, anywhere
within the Restricted Territory, either directly or indirectly,
alone or in conjunction with any other party, accept, enter into or
take any action in conjunction with or in furtherance of a
Competitive Position (other than action to reject an unsolicited
offer of a Competitive Position).
8.3 Limitation on Soliciting Customers. Ancillary to and as a
condition precedent to the Merger, in connection with which the
Employee will receive, both directly and indirectly, significant
benefits and value, and in consideration of the Covenants Payments
payable by the Company to the Employee under this Agreement, the
Employee agrees that during the Covenant Period, the Employee will
not, without the prior written consent of the Company, alone or in
conjunction with any other party, solicit, divert or appropriate or
attempt to solicit, divert or appropriate on behalf of a Competing
Business with which Employee has a Competitive Position any
Customer located in the Restricted Territory (or any other
Customer with which the Employee had any direct contact on behalf
of the Company) for the purpose of providing the Customer or having
the Customer provided with a Competing Product or Competing Service.
Page 4
<PAGE> 5
8.4 Limitation on Soliciting Personnel or Other Parties.
Ancillary to and as a condition precedent to the merger, in
connection with which the Employee will receive, both directly and
indirectly, significant benefits and value, and in consideration of
the Covenant Payments payable to the Company to the Employee under
this Agreement, the Employee hereby agrees that he will not,
without the prior written consent of the Company, alone or in
conjunction with any other party, solicit or attempt to solicit any
employee, consultant, contractor, independent broker or other
personnel of the Company to terminate, alter or lessen that party's
affiliation with the Company or to violate the terms of any
agreement or understanding between such employee, consultant,
contractor or other person and the Company.
8.5 Acknowledgment. The parties acknowledge and agree that
the covenants of the Employee in Subsection 8.2 through 8.7 are
and shall be treated, under law, as "ancillary to the sale of the
Company's business." The parties acknowledge and agree that the
protective Covenants are reasonable as to time, scope and territory
given the Company's need to protect its trade secrets and
confidential business information and given the substantial
payments and benefits to which the Employee is entitled in
connection with the Merger and otherwise pursuant to this
Agreement.
8.6 Remedies. The parties acknowledge that any breach or
threatened breach of a Protective Covenant by the Employee is
reasonably likely to result in irreparable injury to the Company,
and therefore, in addition to all remedies provided at law or in
equity, the Employee agrees that the Company shall be entitled to a
temporary restraining order and a permanent injunction to prevent a
breach or contemplated breach of the Protective Covenant. If the
Company seeks an injunction, the Employee waives any requirement
that the Company post a bond or any other security.
4. This Amendment shall become null and void if the Effective Date, as
defined in the Merger Agreement, does not occur in accordance with the terms
set forth in the Merger Agreement.
Page 5
<PAGE> 6
5. All other terms and conditions of the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
it to be effective as of the day and year first written above.
COMPANY
By: /s/ Robert F. Byrnes
----------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Signature: /s/ Terry Bayer
----------------------------------
Employee
Page 6
<PAGE> 1
EXHIBIT 10.27
IN RE TOKOS MEDICAL CORPORATION SECURITIES LITIGATION
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding ("MOU") contains the principal terms
of a settlement (the "Settlement") between Tokos Medical Corporation
(Delaware), its wholly-owned subsidiary Tokos Medical Corporation, a California
corporation, Robert F. Byrnes, Craig T. Davenport, and Nicholas A. Mione
(collectively, "Defendants") and plaintiffs in the Tokos Medical Corporation
Securities Litigation, United States District Court for the Central District of
California (Santa Ana), Master File No. SACV-92-791-GLT ("the Action").
1. This Settlement is conditioned upon the approval by the Tokos
Board of Directors, which approval or lack thereof will be determined on or
before July 26, 1995.
2. On or before August 10, 1995, Defendants will pay or cause to
be paid $5.0 million into an escrow account established by Milberg, Weiss,
Bershad, Hynes & Lerach (the "Fund"), and subject to the jurisdiction of the
Court. If the amount is not deposited into the Fund by August 10, 1995, then
the $5.0 million will bear interest from July 26, 1995 at the rate of 7.25% per
annum until the date deposited. All interest accruing on the Fund shall become
part of the Fund from which the plaintiffs' and class claims, costs and
attorneys' fees are to be paid and shall enure to the benefit of plaintiffs,
the class and their counsel. The Settlement proceeds shall be allocated among
plaintiffs and the class pursuant to a plan of allocation determined by
plaintiffs' co-lead counsel, subject to the approval of the Court.
3. Additionally, except as otherwise provided below, Defendants
shall cause to be distributed, through Tokos' Transfer Agent, to plaintiffs and
the class at a date to be determined by the parties (the "Date of
Distribution") 689,655 shares of Tokos common stock. These shares shall have a
minimum trading value of $7.25 per share (the "Value")
-1-
<PAGE> 2
calculated as the average closing price of Tokos common stock for the twenty
(20) trading days immediately prior to the 10th day preceding the Date of
Distribution. In the event that the Value is less than $7.25, Defendants shall
contribute additional shares such that the aggregate Value is $5,000,000. If
the Value is between $7.25 and $9.25, Defendants shall distribute to plaintiffs
and the class 689,655 shares. If the Value exceeds $9.25, then the number of
shares will be reduced so that the number of shares multiplied by the Value
equals $6,379,308.75. Notwithstanding anything else set forth herein, in lieu
of the shares to be contributed by Defendants under this paragraph, Defendants
may at their sole discretion choose to contribute to the Fund $5.0 million plus
interest calculated at 7.25% per annum from July 26, 1995 to the date of
payment of this amount.
The costs associated with the printing and mailing of share
certificates by Tokos' Transfer Agent (but not including costs of its labor)
shall be "costs" within the meaning of paragraph 2 hereof and shall, therefore,
be paid out of the Fund.
4. Any attorneys' fees and costs awarded plaintiffs' counsel by
the Court shall be paid to plaintiffs' counsel immediately upon award,
notwithstanding the existence of any timely filed objection thereto, or
potential for appeal therefrom, or collateral attack on the Settlement or any
part thereof, subject to plaintiffs' counsel's several obligation to make
appropriate refunds or repayments to the Settlement Fund plus interest at a
rate to be agreed upon between the parties if, and when, as a result of any
appeal and/or further proceedings on remand, or successful collateral attack,
the fee or cost award is lowered.
5. In consideration for the payments and/or contributed shares to
the Fund described in paragraphs 2 and 3 above plaintiffs agree to the full and
complete settlement of the Action, dismissal of the Action with prejudice and
release of all claims against all Defendants in the Action (or their current
and former employees, agents, attorneys,
-2-
<PAGE> 3
accountants, officers, directors, affiliates, insurers, or any of them) arising
out of or relating in any way to the Action or any matter which could have been
raised therein, including without limitation, claims under any federal
securities laws, state securities laws and common law claims, known and
unknown, that have been or could have been made in the Action based on or
related to both (i) the purchase of Tokos common stock during the Class Period
and (ii) any statements, actions or omissions of Defendants (or their current
and former employees, agents, attorneys, accountants, officers, directors,
affiliates, insurers or any of them) occurring during the Class Period. The
release contemplated hereunder shall expressly waive and relinquish all rights
and benefits afforded by Section 1542 of the California Civil Code or other
statutes or common law principles of similar effect. The Defendants will
provide a release of all class members and their counsel. Despite the fact
that there has been extensive discovery in the Action, each party to this
Settlement understands that the actual facts pertaining to the events alleged
in the Action or otherwise relevant to the making of this Settlement may be
different from what each Party believes to be true, and each Party hereby
accepts and assumes the risk of the facts and assumptions turning out to be
different and agrees that this Settlement shall be and remain in all respects
effective and not subject to termination or rescission by virtue of any such
difference.
6. The Settlement will not be conditioned upon the obtaining of
or any judicial approval of any releases between or among the Defendants and/or
any third parties. No such releases will be contained in the Stipulation or
referred to in the Final Judgment approving the Settlement, provided, however,
that the Stipulation of Settlement shall require that the parties obtain an
order barring claims for contribution or indemnity by or among all or any of
the Defendants to the full extent permitted by the law including, without
limitation, the
-3-
<PAGE> 4
decision in Franklin v. Kaypro, 884 F.2d 1222 (9th Cir. 1989), cert. denied,
498 U.S. 890 (1990).
7. While retaining their right to deny liability, Defendants
agree they will not assert in any public forum that the litigation was brought
in bad faith. Similarly, plaintiffs agree not to assert in any public forum
that any defense raised by the Defendants was raised in bad faith. The
settling parties agree that the settlement payments (both cash and stock) and
other terms of the Settlement were negotiated in good faith by the settling
parties and reflect a Settlement that was reached voluntarily after
consultation with experienced legal counsel.
A breach of this paragraph 7 shall not be a material breach
for the purposes of paragraph 8.
8. The Settlement will be non-recapture, i.e., it is not a
claims-made settlement; provided, however, if class members holding more than
10% of the settlement eligible shares opt out of the Settlement, Defendants
shall have the unilateral right to rescind the Settlement. The parties will
execute a Supplemental Agreement (separate from the Stipulation of Settlement
to be negotiated) providing this right to rescind to the Defendants. The
Supplemental Agreement will not be filed with the Court unless a dispute arises
concerning its interpretation and, in that event, it shall be filed and
maintained with the Court under seal. The defendants have no ability to get
back any of the settlement monies, except in the event the Court fails to
approve the Settlement or the Defendants choose to rescind the Settlement as
set forth above. In either event, the settlement funds plus interest accrued
shall be returned to the respective payors of those funds, less the reasonable
administrative costs incurred in sending notices to class members. Conversely,
plaintiffs will have no right to withdraw from the Settlement, unless the
Defendants (or any of them) breach a material term
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<PAGE> 5
of the Settlement. The settlement claims process will be administered by
Gilardi and Company and the defendants will have no involvement in reviewing or
challenging claims.
9. The parties will promptly memorialize the Settlement in a
Stipulation of Settlement, and will jointly seek preliminary approval of the
Settlement and approval of notice as soon as practicable.
10. All costs of notice and expenses related to printing and
mailing of all required notices to the members of the Class will be paid from
the cash portion of the Settlement Fund.
11. This MOU may be executed in separate counterparts.
AGREED TO ON THIS __ DAY OF JULY, 1995.
Dated: July 31, 1995 /s/ Anita Meley Laing
-------------------------- ----------------------------------
ALAN SCHULMAN
MILBERG WEISS BERSHAD
HYNES & LERACH
Dated: July 31, 1995 /s/ Steven J. Toll
-------------------------- ----------------------------------
STEVEN J. TOLL
COHEN, MILSTEIN, HAUSFELD
& TOLL
Co-Lead Counsel for Plaintiffs
Dated: July 31, 1995 /s/ Glenda Sanders
-------------------------- ----------------------------------
ROBERT E. CURRIE
LATHAM & WATKINS
Counsel for the Defendants
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<PAGE> 1
EXHIBIT 10.29
TOKOS MEDICAL CORPORATION (DELAWARE)
RETIREMENT BENEFIT AWARD FOR ________________
Section 1.
PURPOSE
The purpose of this award is to recognize the valuable services of ____________
("Executive") to Tokos Medical Corporation (Delaware), a Delaware corporation
(the "Company"), and to provide a targeted level of monthly retirement income
to Executive.
Section 2.
BENEFITS
2.1 Timing and Amount
a. General. If Executive has completed 10 years of Service when Executive's
employment with the Company (and any related entity described in Section
2.1(d)(8)) terminates, Executive will be entitled to receive a monthly
Retirement Benefit beginning when he reaches age 65 or terminates employment,
whichever occurs later. This Retirement Benefit for any month will equal the
amount which when added to Executive's Social Security Benefit (SSB), Other
Retirement Benefit (ORB) and Disability Benefit (DB) for such month will equal
the Executive's Target Retirement Income (TRI) for such month.
Thus, for any month, Executive's
Retirement Benefit + SSB + ORB + DB = TRI
The amount of the Retirement Benefit may vary from month to month depending on
the amount of Executive's SSB, ORB and DB for such month.
b. Early Retirement. If Executive has completed 10 Years of Service when
Executive's employment with the Company (and any related entity described in
Section 2.1(d)(8)) terminates and such termination occurs before Executive
reaches age 65, he can elect to receive an Early Retirement Benefit at anytime
after the later of his fifty fifth birthday or his termination of employment
with the Company.
Election for Early Retirement must be made in writing at least 60 days prior to
the commencement of benefits. If Executive elects Early Retirement, the amount
of his benefit will be reduced (relative to the benefit which would have been
payable at age 65) to reflect its early commencement. His Early Retirement
Benefit for any month will equal the amount which when added to Executive's
Social Security Benefit, Other Retirement Benefit and Disability Benefit for
such month equals his Target Retirement Income for such month multiplied by the
applicable Early Retirement Factor ("ERF") in Section 2.2.
<PAGE> 2
Thus, for any month, Executive's
Early Retirement Benefit + SSB + ORB + DB = TRI x ERF
The amount of this Early Retirement Benefit may vary from month to month
depending on the amount of Executive's SSB, ORB and DB for such month.
c. Payment Form. If Executive does not elect an optional form of payment his
monthly benefit will be paid to him for his life only based on a TRI determined
under Section 2.1(d)(7) or, in the case of an Early Retirement Benefit, a
reduced TRI. If Executive has a Spouse on the date his Retirement Benefit or
Early Retirement Benefit commences, he may elect a reduced monthly benefit for
the duration of his lifetime and then a monthly benefit will be paid to his
surviving Spouse for her life in an amount equal to 50% of the monthly benefit
which was payable to Executive. The reduced monthly benefit and surviving
spouse benefit will be determined by an actuary chosen by the Company and the
resulting benefit will be equivalent in value to the monthly benefit otherwise
due the Executive using the actuarial assumptions listed in Section 4. An
election for reduced monthly benefit and 50% surviving spouse benefit must be
made in writing at least 60 days prior to the commencement of benefits in
accordance with such administrative procedures as the Company establishes for
this purpose. Any such election shall become irrevocable at the time so made,
except that the election shall become void if the Spouse dies prior to the
payment of the first monthly payment to the Executive.
d. Definitions. The following definitions apply for purposes of determining
Executive's benefit under this Section 2:
(1) Accrual Fraction - means a fraction, the numerator of which is the
lesser of 20 or Executive's actual Years of Service and the denominator
of which is the lesser of 20 or the number of Years of Service Executive
would complete if Executive continued employment with the Company until
Executive reached age 65. The Accrual Fraction cannot exceed one.
(2) Average Compensation - means the lesser of (i) the arithmetic average
of Executive's annual base salary from the Company for the three calendar
years for which Executive's base salary is the highest, including (if
applicable) the calendar year in which Executive terminates employment or
(ii) Executive's base salary in effect during the year immediately
preceding the first year in which this Agreement is effective compounded
at the rate of One Hundred Three Percent (103%) per each Year of Service
thereafter.
(3) Disability Benefit ("DB") - means for any month the monthly
disability benefit, if any, actually paid to Executive under any
long-term disability plan maintained by the Company.
(4) Other Retirement Benefit ("ORB") - means for any month an amount
determined by the Company which is attributable to the benefit, if any,
provided to Executive under any defined benefit pension plan maintained
by the Company or any related entity for the
<PAGE> 3
benefit of Executive with respect to employment services prior to the
termination of employment with the Company.
(5) Social Security Benefit ("SSB") - means zero for any month beginning
before Executive's Social Security retirement age, and thereafter means
the maximum monthly Social Security benefit that Executive would be (or,
in the event of Executive's death, is deemed by the Company to have been)
eligible to receive at such age determined without regard to whether
Executive commenced receiving Social Security benefits earlier.
(6) Spouse - means the spouse to whom Executive has been legally married
in a civil or religious ceremony throughout the one year period ending on
the earlier of the date Executive's Retirement Benefit commences or his
date of death.
(7) Target Retirement Income ("TRI") - means for any Retirement Benefit
payable for Executive's life only, the monthly benefit beginning when
Executive reaches age 65 or terminates employment, whichever occurs last,
determined in accordance with the following formula based on Executive's
Average Compensation and Years of Service as of the date Executive's
employment with the Company terminates:
(60% x Average Compensation x Accrual Fraction) x 1/12
(8) Year of Service - means each calendar year in which Executive
completes at least 1000 hours of employment with the Company, plus, in
the event that Executive is entitled to compensation under the Severance
Compensation Agreement, dated ___________, 199__, as amended or extended
or any successor or replacement agreement or arrangements with respect to
such matters, three (3) years. Employment with any direct or indirect
corporation or entity in which the Company owns in excess of 50% of the
outstanding voting stock shall for all purposes under this Agreement be
deemed to constitute employment with the Company.
With respect to calendar years which predate the date of this Agreement,
the parties agree that Executive completed 1,000 hours of employment with
respect to all calendar years set forth on Exhibit A hereto.
2.2 Early Retirement Factor. The early retirement factors set forth below are
applied to determine the Early Retirement Benefit under Section 2.1(b) and any
survivor benefit which commences early under Section 2.3 based on Executive's
age when he begins receiving his Early Retirement Benefit (or, if payments
begin after Executive's death, the age Executive would have been when
Executive's Spouse begins receiving the survivor benefit):
<TABLE>
<S> <C>
.55 at age 55 .75 at age 60
.59 at age 56 .80 at age 61
.63 at age 57 .85 at age 62
.67 at age 58 .90 at age 63
.71 at age 59 .95 at age 64
</TABLE>
<PAGE> 4
2.3. Survivor Benefit. If benefits under this Agreement are payable in a joint
and survivor form and Executive dies while receiving benefits under this
Agreement, payments will begin to his surviving Spouse following Executive's
death in an amount each month equal to 50% of the monthly benefit which would
have been payable to Executive if he had survived. If Executive's dies after
completing 10 Years of Service but before receiving any benefits under this
Agreement, his Spouse shall be entitled to receive the monthly survivor benefit
which would have been payable to her if Executive had terminated his employment
with the Company on the earlier of (a) his date of death or (b) the date his
employment terminated, then survived to age 65 and died after beginning to
receive benefits in the joint and survivor form. Payment of this monthly
survivor benefit will begin when Executive would have reached age 65 or his
date of death, whichever occurs later, unless his surviving Spouse elects to
begin receiving the survivor benefit when Executive would have reached age 55
or Executive's date of death, whichever occurs later. An election for early
commencement must be made in writing within the 6-month period beginning on
Executive's date of death in accordance with such administrative procedures as
the Company establishes for this purpose. The Company will reduce the amount
of the survivor benefit to reflect its early commencement using the Early
Retirement Factors in Section 2.2.
2.4. Less Than 10 Years of Service. No benefit shall be paid to Executive or
on his behalf if Executive's employment with the Company and any related entity
described in Section 2.1(d)(8) terminates before Executive has completed 10
Years of Service.
Section 3.
The Company in its discretion exercised in good faith may suspend Executive's
benefit upon Executive's reemployment by the Company following a termination of
employment for a period of time not to exceed the period of such reemployment
with Company and upon Executive's termination thereafter shall recalculate his
retirement benefit based upon Executive's aggregate Years of Service with
Company. The Company in its discretion exercised in good faith may forfeit
Executive's benefit entirely if (a) Executive breaches any material term of any
applicable invention, confidentiality or non-competition agreement in a manner
which directly results in an economic loss to the Company in an amount that is
material to its financial condition, (b) Executive intentionally and in bad
faith fails to provide information regarding Other Retirement Benefits, or (c)
Executive institutes any legal action against the Company or any related
corporation or entity for which Years of Service are included under this
Agreement other than (i) an action by or on behalf of Executive to enforce the
terms and conditions of this Agreement or of any other Severance Compensation
Agreement or arrangement with the Company or any related corporation or entity,
(ii) an action for recovery or protection under the corporate indemnification
provided to Executive in the course of performing his duties on behalf of
Company or any related corporation or entity, including, without limitation, an
action under any applicable director and officer liability insurance available,
or (iii) as a counterclaim or defense to any claim asserted by Company or any
related corporation or entity against Executive.
4
<PAGE> 5
Section 4.
SOURCE OF BENEFIT PAYMENTS
Unless there is a Change in Control of the Company, this benefit shall be paid
by the Company from its general assets or by a trust established for the
specific purpose of paying such benefit. No person shall have any right,
interest or claim whatsoever to the payment of this benefit from any person
whomsoever other than the Company or such trust established for such purpose,
and no person shall have any right, interest or claim whatsoever to the payment
of this benefit which is superior in any manner to the right, interest, or
claim of any other general and unsecured creditor of the Company.
If a "Change of Control" does occur, all benefits accrued to date become
immediately vested and Executive in his discretion exercised at any time
thereafter may require the Company on behalf of Executive to place in a grantor
trust, of the type and with the terms and conditions of the Trust attached as
Exhibit B hereto, an amount of money which is equal to the present value of
Executive's benefits accrued to date and, on an annual basis thereafter, shall
make additional contributions for any additional benefit accruals of Executive.
The value is to be determined by an actuary (qualified to function as an
actuary under the Employee Retirement Income Security Act (ERISA)) using the
following assumptions:
<TABLE>
<S> <C>
Interest Discount 7%
Mortality 1983 GAM
Cost of Living Increase for Social
Security Benefits 3%
</TABLE>
A delay by Executive in the making of a request for a trust shall in no way
compromise or invalidate Executive's rights with respect thereto, and Company
shall promptly honor such request once made.
Any assets transferred to a trust pursuant to a Change of Control will be
irrevocably committed to paying benefits under this Agreement and, in no event,
can any assets of such trust revert to the Company. The Executive can request
immediate payment from the trustee of any amounts necessary to cover the
payment of taxes which are due from the Executive as a result of the transfer
of asset to the trust or as a result of investment income earned by such trust.
For purposes of this Agreement, "Change in Control" shall mean changes in the
ownership of a corporation, changes in the effective control of a corporation
and changes in ownership of a substantial portion of a corporation's assets all
as defined, discussed and illustrated in Section 280G of the Internal Revenue
Code and the duly promulgated Treasury Regulations thereunder, and the
disposition of a substantial portion of the corporation's assets as defined in
(D) below. Without limiting the foregoing and by way of example:
(A) A change in the ownership of a corporation occurs on the date that
any one person, or more than one person acting as a group, acquires ownership
of stock of that corporation that,
5
<PAGE> 6
together with stock held by such person or group, possess more than fifty
percent (50%) of the total fair market value or total voting power of the stock
of such corporation. An increase in the percentage of stock owned by any one
person, or persons acting as a group, as a result of a transaction in which the
corporation acquires its stock in exchange for property will be treated as an
acquisition of stock.
(B) A change in the effective control of a corporation occurs on the date
that either: any one person, or more than one person acting as a group,
acquires (or has acquired during the twelve (12) month period ending on the
date of the most recent acquisition by such person or persons) ownership of
stock of the corporation any possessing twenty percent (20%) or more of the
total voting power of the stock of such corporation; or a majority of members
of the corporation's Board of Directors is replaced during any twelve (12)
month period by directors whose appointment or election is not endorsed by a
majority of the members of the corporation's board of directors who were
directors prior to the date of the appointment or election of the first of such
new directors.
(C) A change in the ownership of a substantial portion of a corporation's
assets occurs on the date that any one person, or more than one person acting
as a group, acquires (or has acquired during the twelve (12) month period
ending on the date of the most recent acquisition by such person or persons)
assets from the corporation that have a total fair market value equal to or
more than one-third of the total fair market value of all of the assets of the
corporation immediately prior to such acquisition or acquisitions. The
transfer of assets by a corporation is not treated as a change in the ownership
of such assets if the assets are transferred: to a shareholder of the
corporation (immediately before the asset transfer) in exchange for such
shareholder's capital stock of the corporation having a fair market value
approximately equal to the fair market value of such assets; or to an entity,
fifty percent (50%) or more of the total value or voting power of which is
owned, directly or indirectly, by the corporation.
(D) A disposition of a substantial portion of a corporation's assets
occurs on the date that the corporation transfers assets by sale, distribution
to shareholders, assignment to creditors, foreclosure or otherwise, in a
transaction or transactions not in the ordinary course of the corporation's
business (or has made such transfers during the twelve (12) month period ending
on the date of the most recent such transfer of assets) that have a total fair
market value equal to or more than one-third of the total fair market value of
all of the assets of the corporation as of the date immediately prior to the
first such transfer or transfers. The transfer of assets by a corporation is
not treated as a disposition of a substantial portion of the corporation's
assets if the assets are transferred to an entity, fifty percent (50%) or more
of the total value or voting power of which is owned, directly or indirectly,
by the corporation.
For purposes of the provisions of this Agreement defining "Change in Control,"
(i) references to the Company in this Agreement include the Delaware
corporation known as Tokos Medical Corporation (Delaware) as of the date of
execution of this Agreement, and any corporation which is the legal successor
to such corporation by virtue of merger or share exchange; and (ii) the terms
"person," "acting as a group" and "ownership" shall have the meanings
prescribed in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as amended, and Rule 13d-
6
<PAGE> 7
3 promulgated thereunder provided; however, that in any merger, consolidation
or share exchange in which less than fifty percent (50%) of the outstanding
voting securities of the Company or its successor corporation are held by the
former shareholders of the Company, the shareholders of the corporation or
corporations who acquired ownership of fifty percent (50%) or more of the
surviving corporations shall be deemed to have acted as a group, resulting in a
change in ownership under (A) above.
Section 5.
NOT A CONTRACT OF EMPLOYMENT
This benefit does not grant Executive the right to remain an employee of the
Company for any specific term of employment or in any specific capacity or at
any specific rate of compensation.
Section 6.
NO ALIENATION OR ASSIGNMENT
Neither Executive nor his Spouse shall have any right or power whatsoever to
alienate, commute, anticipate or otherwise assign at law or equity all or any
portion of this benefit, and the Company shall have the right, in the event of
any such action, to suspend temporarily or terminate permanently the payment of
this benefit to, or on behalf of, Executive or his Spouse if Executive or his
Spouse attempt to do so.
Section 7.
ERISA
The Company intends that this award come within the various exceptions and
exemptions to ERISA for a plan maintained for a "select group of management or
highly compensated employees" as described in ERISA Section Section 201(2),
301(a)(3), and 401(a)(1), and any ambiguities in this document shall be
construed to effect that intent.
Section 8.
ADMINISTRATION, AMENDMENT AND TERMINATION
The Board of Directors of the Company shall have all powers necessary to
interpret and administer this award, to amend this award (and any related
exhibits) in writing from time to time in any respect whatsoever and to
terminate this award in writing at any time; provided, however, that any such
amendment or termination shall not be applied retroactively to deprive
Executive of all or any part of the benefits which have accrued to the date of
such amendment or termination. The Board of Directors also shall have the
power to delegate the exercise of all or any part of its powers to such other
person or persons as the Board deems
7
<PAGE> 8
appropriate under the circumstances. Reference to the Company herein shall
include any successor in interest to the Company or of all or a substantial
part of its business or assets (whether by merger, sale of stock, sale of
assets or otherwise) and this document shall be binding upon any such successor
and of any successor thereto.
Section 9.
CONSTRUCTION
The headings and subheadings set forth in this document are intended for
convenience only and have no substantive meaning whatsoever. In the
construction of this document, the masculine shall include the feminine and the
singular shall include the plural. This document will be construed in
accordance with the laws of the State of Delaware to the extent not preempted
by ERISA.
Section 10.
EFFECTIVE DATE
This Agreement shall become effective on the last to occur of (i) the
acceptance of this Agreement by Executive or (ii) October 2, 1995.
TOKOS MEDICAL CORPORATION (DELAWARE)
By:_____________________________________
Title:__________________________________
Date:___________________________________
(SEAL)
Accepted this _____________ day of
________________________, 19__
________________________________
8
<PAGE> 9
TRUST UNDER TOKOS MEDICAL CORPORATION (DELAWARE)
NONQUALIFIED RETIREMENT PLANS
This Agreement made this ____ day of _____________, 19__ by and
between Tokos Medical Corporation (Delaware) (Company) and
____________________________, a commercial bank or trust company acceptable to
a majority of all participants and beneficiaries entitled to benefit payments
under the Plan(s), (Trustee);
WHEREAS, Company has adopted the nonqualified deferred compensation
Plan(s) as listed in Appendix A.
WHEREAS, Company has incurred or expects to incur liability under the
terms of such Plan(s) with respect to the individuals participating in such
Plan(s);
WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan(s);
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST
(a) Company hereby deposits with Trustee in trust _________
[insert amount deposited], which shall become the principal of the Trust to be
held, administered and disposed of by Trustee as provided in this Trust
Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
<PAGE> 10
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries shall
have no preferred claim on, or any beneficial ownership interest in, any assets
of the Trust. Any rights created under the Plan(s) and this Trust Agreement
shall be mere unsecured contractual rights of Plan participants and their
beneficiaries against Company. Any assets held by the Trust will be subject to
the claims of Company's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time
to time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan
participant or beneficiary shall have any right to compel such additional
deposits.
(f) Company shall, as soon as possible, but in no event longer
than 90 days following the establishment of this Trust, make an irrevocable
contribution to the Trust in an amount that is sufficient to pay each Plan
participant or beneficiary the benefits to which Plan participants or their
beneficiaries would be entitled pursuant to the terms of the Plan(s) as of the
date on which this Trust is established.
(g) Within 90 days following the end of each Plan year(s) after
the Trust is established, Company shall be required to irrevocably deposit
additional cash or other property to the Trust in an amount sufficient to pay
each Plan participant or beneficiary the benefits payable pursuant to the terms
of the Plan(s) as of the close of the Plan year(s).
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR
BENEFICIARIES.
(a) Company shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or other
instructions acceptable to Trustee for determining the amounts so payable, the
form in which such amount is to be paid (as provided for or available under the
Plan(s), and the time of commencement for payment of such amounts. Except as
otherwise provided herein or in the Plan(s), Trustee shall make payments to the
Plan participants and their beneficiaries in accordance with such Payment
Schedule. The Trustee shall make provision for the reporting and withholding
of any federal, state or local taxes that may be required to be withheld with
respect to the payment of
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<PAGE> 11
benefits pursuant to the terms of the Plan(s) and shall pay amounts withheld to
the appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by Company.
(b) The entitlement of a Plan participant or his or her
beneficiaries to benefits under the Plan(s) shall be determined in good faith
by Company or such party as it shall designate under the Plan(s), and any claim
for such benefits shall be considered and reviewed under the procedures set out
in the Plan(s).
(c) Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan(s). Company shall notify Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants or
their beneficiaries. In addition, if the principal of the Trust, and any
earnings thereon, are not sufficient to make payments of benefits in accordance
with the terms of the Plan(s), Company shall make the balance of each such
payment as it falls due. Trustee shall notify Company where principal and
earnings are not sufficient.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST
BENEFICIARY WHEN COMPANY IS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) Company is
unable to pay its debts as they become due, or (ii) Company is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive
Officer of Company shall have the duty to inform Trustee in writing of
Company's Insolvency. If a person claiming to be a creditor of
Company alleges in writing to Trustee that Company has become
Insolvent, Trustee shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue payment of
benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's
Insolvency, or has received notice from Company or a person claiming
to be a creditor alleging that Company is Insolvent, Trustee shall
have no duty to inquire whether Company is Insolvent. Trustee may in
all events rely on such evidence concerning Company's solvency as may
be furnished to Trustee
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<PAGE> 12
and that provides Trustee with a reasonable basis for making a
determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or
their beneficiaries and shall hold the assets of the Trust for the
benefit of Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Plan participants or
their beneficiaries to pursue their rights as general creditors of
Company with respect to benefits due under the Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of
this Trust Agreement only after Trustee has determined that Company is
not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made
to Plan participants or their beneficiaries by Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
SECTION 4. PAYMENTS TO COMPANY.
Except as provided in Section 3 hereof, Company shall have no right or
power to direct Trustee to return to Company or to divert to others any of the
Trust assets before all payment of benefits have been made to Plan participants
and their beneficiaries pursuant to the terms of the Plan(s).
SECTION 5. INVESTMENT AUTHORITY.
(a) In no event may Trustee invest in securities (including stock
or rights to acquire stock) or obligations issued by Company, other than a de
minimis amount held in common investment vehicles in which Trustee invests.
All rights associated with assets of the Trust shall be exercised by Trustee or
the person designated by Trustee, and shall in no event be exercisable by or
rest with Plan participants.
[(B) THE TRUSTEE AND COMPANY SHALL AGREE TO SUCH OTHER INVESTMENT
POWERS OF THE TRUSTEE AS ARE NECESSARY FOR THE ESTABLISHMENT AND PROPER
ADMINISTRATION OF THE TRUST; PROVIDED,
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<PAGE> 13
HOWEVER, THAT SUCH INVESTMENT POWERS ARE STANDARD AMONG THE INDUSTRY AND DO NOT
CONFLICT WITH THE TERMS OF THE TRUST AS SET FORTH HEREIN.]
SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 120 days following the close of each calendar year
and within 30 days after the removal or resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the Trust during
such year or during the period from the close of the last preceding year to the
date of such removal or resignation, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all securities and investments purchased and sold with the cost or net proceeds
of such purchases or sales (accrued interest paid or receivable being shown
separately), and showing all cash, securities and other property held in the
Trust at the end of such year or as of the date of such removal or resignation,
as the case may be.
SECTION 8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by Company which is contemplated by, and
in conformity with, the terms of the Plan(s) or this Trust and is given in
writing by Company. In the event of a dispute between Company and a party,
Trustee may apply to a court of competent jurisdiction to resolve the dispute.
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<PAGE> 14
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If Company does not pay such costs, expenses and liabilities in
a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be
counsel for Company generally) with respect to any of its duties or obligations
hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the
Trust, Trustee shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from conversion of the policy
to a different form) other than to a successor Trustee, or to loan to any
person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue code.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
Company shall pay all administrative and Trustee's fees and expenses.
If not so paid, the fees and expenses shall be paid from the Trust.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Company,
which shall be effective 45 days after receipt of such notice unless Company
and Trustee agree otherwise.
(b) Trustee may be removed by Company on 45 days notice or upon
shorter notice accepted by Trustee.
(c) If Trustee resigns or is removed within 5 years after this
Trust is established, Company shall apply to a court of
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<PAGE> 15
competent jurisdiction for the appointment of a successor Trustee or for
instructions.
(d) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 45 days after
receipt of notice of resignation, removal or transfer, unless Company extends
the time limit.
(e) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses
of Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
If Trustee resigns or is removed in accordance with Section 10(a) or
(b) hereof, Company may appoint any unaffiliated third party, such as a bank
trust department or other party that may be granted corporate trustee powers
under state law, as a successor to replace Trustee upon resignation or removal.
The Company must obtain the prior written approval of a majority of the
participants and beneficiaries entitled to benefit payments under the Plan(s)
for the appointment of the successor Trustee, unless such appointment has been
made by a court of competent jurisdiction. The appointment shall be effective
when accepted in writing by the new Trustee, who shall have all of the rights
and powers of the former Trustee, (including ownership rights in the Trust
assets. The former Trustee shall execute any instrument necessary or
reasonably requested by Company or the successor Trustee to evidence the
transfer.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company with the prior written approval of all
participants and beneficiaries entitled to benefit payments pursuant to the
terms of the Plan(s). Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s), shall infringe on the benefits intended
to be provided under the Plan(s), reduce or restrict the assets which are the
subject of the Trust other than as required by Section 3, or shall make the
Trust revocable.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to
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<PAGE> 16
benefits pursuant to the terms of the Plan(s). Upon termination of the Trust
any assets remaining in the Trust shall be returned to Company.
(c) Upon prior written approval of all participants or
beneficiaries entitled to payment of benefits pursuant to the terms of the
Plan(s), Company may terminate this Trust prior to the time all benefit
payments under the Plan(s) have been made. All assets in the Trust at
termination shall be returned to Company.
SECTION 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or
in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the state of _______________ [TO BE DETERMINED BY
THE TRUSTEE].
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be _______________,
19__.
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<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of June 1, 1995 ("Effective Date") by and between TOKOS MEDICAL CORPORATION
(DELAWARE), a Delaware corporation ("TOKOS"), and NICHOLAS A. MIONE
("EMPLOYEE").
RECITAL
TOKOS desires to employ EMPLOYEE as its Executive Vice President,
Finance and Administration, and Chief Financial Officer, and EMPLOYEE is
willing to accept such employment by TOKOS, on the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT
THE PARTIES AGREE AS FOLLOWS:
1. Duties. During the term of this Agreement, EMPLOYEE agrees to
be employed by and to serve TOKOS as its Executive Vice President, Finance and
Administration, and Chief Financial Officer and TOKOS agrees to employ and
retain EMPLOYEE in such capacities. EMPLOYEE shall devote substantially all of
his business time, energy, and skill to the business of TOKOS and the duties of
his position. EMPLOYEE shall report only to TOKOS' Chief Executive Officer;
shall observe and abide by all policies of TOKOS and all directives of the
Chief Executive Officer and the Board of Directors consistent with his
position; and, at all times during the term of this Agreement, shall have
powers and duties at least commensurate with his position as an Executive Vice
President, Finance and Administration, and Chief Financial Officer of TOKOS.
EMPLOYEE's principal place of business with respect to his services to TOKOS
shall be in Orange County, California.
2. Term of Employment.
2.1 Definitions. For purposes of this Agreement the
following terms shall have the following meanings:
2.1.1 "Termination For Cause" shall mean the
termination by TOKOS of EMPLOYEE's employment with TOKOS as the result of
EMPLOYEE's willful misconduct or dishonesty towards, fraud upon, or deliberate
injury or attempted injury to TOKOS; EMPLOYEE's willful and continued material
breach of this Agreement, or; EMPLOYEE's gross negligence or malfeasance in the
performance of his duties and responsibilities, as determined by the good faith
decision of the Chief Executive Officer. Notwithstanding the foregoing,
EMPLOYEE shall be entitled to appeal the termination and request confirmation
thereof from the Board of Directors in the form of a resolution duly adopted by
the affirmative vote of not less
2/5/96
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<PAGE> 2
than a simple majority of the outside directors, provided the outside directors
voting constitute a majority of the entire membership of the Board of
Directors, at a meeting of the Board of Directors duly noticed and held within
45 days of EMPLOYEE's request (after reasonable notice to EMPLOYEE, and
opportunity for EMPLOYEE, together with counsel if desired, to be heard before
the Board of Directors), which resolution shall state that in the good faith
opinion of the Board of Directors, Cause for termination exists, and which
shall enumerate with particularity the specific conduct which constitutes
Cause. In the event the Board of Directors does not adopt a resolution
confirming the termination, then EMPLOYEE shall be reinstated as Executive Vice
President, Finance and Administration, and Chief Financial Officer with back
pay as the Board of Directors may direct. An act, or a failure to act, shall
not be considered "willful" if, in the good faith determination of the Board of
Directors, it was performed, or omitted, in good faith and with reasonable
grounds for belief that the action or omission was in the interest of TOKOS.
The EMPLOYEE shall not be deemed to be grossly negligent or malfeasant unless
the EMPLOYEE's act or failure to act, in the good faith determination of the
Board of Directors was inappropriate and results in a material injury to TOKOS.
The Chief Executive Officer may effect a Termination For Cause at any time by
providing EMPLOYEE with written notice of such termination. The termination
shall be effective as of the date of the notice.
2.1.2 "Termination Based on Performance" shall mean
termination by TOKOS of EMPLOYEE's employment with TOKOS for performance as
noted by the Chief Executive Officer provided that the Chief Executive Officer
has communicated the specific performance related issues to EMPLOYEE in a
written notice and given EMPLOYEE at least 30 days thereafter to correct or
cure such deficiencies. Notwithstanding the foregoing, in the event of a
Termination Based on Performance, EMPLOYEE shall be entitled to appeal the
termination and request confirmation thereof from the Board of Directors in the
form of a resolution duly adopted by the affirmative vote of note less than a
simple majority of the outside directors, provided the outside directors voting
constitute a majority of the entire membership of the Board of Directors at a
meeting of the Board of Directors duly noticed and held within 45 days of
EMPLOYEE's request (after reasonable notice to EMPLOYEE and the opportunity for
EMPLOYEE, together with counsel if desired, to be heard before the Board of
Directors), which resolution shall state that in the good faith opinion of the
Board of Directors, EMPLOYEE should be terminated for the reasons articulated
by the Chief Executive Officer. In the event the Board of Directors does not
adopt a resolution confirming the termination, the EMPLOYEE shall be reinstated
as Executive Vice President, Finance and Administration, and Chief Financial
Officer with back pay as the Board of Directors may direct. The Chief
Executive Officer may effect a Termination Based on Performance at any time
after the 30 day correction/cure period has expired by providing EMPLOYEE with
written notice of such termination. The termination shall be effective as of
the date of the notice.
2.1.3 "Constructive Termination" shall mean
termination by EMPLOYEE of EMPLOYEE's employment with TOKOS within 60 days of
one of the following events: (i) a reduction in EMPLOYEE's Base Salary of 10%
or more, unless such reduction is part of a cost-savings or similar plan that
equally impacts all other similarly situated officers, (ii) a requirement that
EMPLOYEE change his principal place of business to a location that is more than
50 miles from his current principal place of business, or (iii) a material
reduction in
2/5/96
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<PAGE> 3
EMPLOYEE's role, responsibilities or title from the highest level currently or
hereafter achieved, without the express concurrence of EMPLOYEE. A "reduction"
shall not be considered "material" if it is in conjunction with an internal
reorganization affecting multiple departments and employees and does not result
in a reduction of EMPLOYEE's overall status or position with the Company.
EMPLOYEE may effect a Constructive Termination at any time within 60 days of
the occurrence of one of the above three events by providing the Chief
Executive Officer with written notice and appropriate substantiation of the
event(s). The termination shall be effective as of the date of the notice.
2.1.4 "Actual Voluntary Termination" shall mean
termination by EMPLOYEE of EMPLOYEE's employment with TOKOS other than (i)
"Termination For Cause," (ii) "Termination Based on Performance," (iii)
"Termination by Reason of Incapacity" or "Termination by Reason of Death" and
(v) "Termination Upon a Change in Control" as described in this Agreement.
2.1.5 "Termination Upon a Change in Control" shall
mean (i) the termination by TOKOS of EMPLOYEE within 1 year after, or during
the 3 months immediately prior to, a "Change in Control," or (ii) the
termination by EMPLOYEE of this Agreement with TOKOS within 1 year after a
"Change in Control." Either TOKOS or EMPLOYEE may effect a Termination Upon a
Change in Control once a "Change in Control" has occurred by providing the
other party with written notice of such termination. The termination shall be
effective as of the date of such notice.
2.1.6 "Change in Control" shall mean (i) the time
that TOKOS first determines that any person and all other persons who
constitute a group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 ("Exchange Act")) have acquired direct or indirect
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of 20% or more of TOKOS' outstanding securities; (ii) the merger, consolidation
or reorganization of TOKOS with one or more corporations as a result of which
TOKOS is merged out of existence or becomes a subsidiary of another
corporation, the sale of all or substantially all of the assets of TOKOS; or
(iii) as a result of any tender or exchange offer, merger, consolidation or
other business combination, or any combination of any of the foregoing
transactions, the persons who were directors of TOKOS before such transaction
cease to constitute a majority of the Board of Directors of TOKOS or of any
successor to TOKOS.
2.2 Basic Term. The term of employment of EMPLOYEE by
TOKOS shall be nineteen months commencing June 1, 1995 through December 31,
1996 unless terminated earlier pursuant to Section 3, which term is subject to
renewal upon at least 90 days notice prior to the expiration of the initial or
any renewal periods. Therefore, at any time before October 1, 1996, TOKOS and
EMPLOYEE may by mutual written agreement renew this Agreement and, thereby,
extend EMPLOYEE's employment under the terms of this Agreement for such
additional periods as they may agree.
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<PAGE> 4
3. Termination of Employment.
3.1 Termination For Cause. Upon any Termination For
Cause, EMPLOYEE shall immediately be paid all accrued salary, bonus
compensation to the extent fully earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued paid time off ("PTO") pay and any appropriate business
expenses incurred by EMPLOYEE in connection with his duties hereunder, all to
the date of termination. EMPLOYEE shall not be paid any other compensation or
reimbursement of any kind including, without limitation, severance
compensation, continued vesting or extended rights to exercise beyond the
minimum required by the applicable plan.
3.2 Termination Based on Performance. Upon any
Termination Based on Performance, EMPLOYEE shall immediately be paid all
accrued salary, bonus compensation to the extent fully earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which
will be paid in accordance with the applicable plan), any benefits under any
plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued paid time off ("PTO") pay and any
appropriate business expenses incurred by EMPLOYEE in connection with her
duties hereunder, all to the date of termination and all severance compensation
provided in Section 5. 1, but no other compensation or reimbursement of any
kind.
3.3 Constructive Termination. Upon any Constructive
Termination, EMPLOYEE shall immediately be paid all accrued salary, bonus,
compensation to the extent fully earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5.2, but no
other compensation or reimbursement of any kind.
3.4 Termination by Reason of Incapacity. If, during the
term of this Agreement, EMPLOYEE, in the reasonable judgment of the Chief
Executive Officer of TOKOS, has failed to perform his duties under this
Agreement on account of illness or physical or mental incapacity, and such
illness or incapacity continues for a period of more than 6 weeks, TOKOS shall
have the right to terminate EMPLOYEE's employment hereunder, such termination
to be effective retroactive to the first day of such illness or incapacity, by
written notification to EMPLOYEE and payment to EMPLOYEE of all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan used for other similarly situated officers
for that year as though the year ended on the date of termination, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued
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PTO pay and any appropriate business expenses incurred by EMPLOYEE in
connection with his duties hereunder, all to the date of termination, with the
exception of medical and dental benefits which shall continue through the
expiration of the Agreement and all severance compensation provided in Section
5.3, but no other compensation or reimbursement of any kind.
3.5 Termination by Reason of Death. In the event of
EMPLOYEE's death during the term of this Agreement, EMPLOYEE's employment shall
be deemed to have terminated as of the last day of the month during which his
death occurs and TOKOS shall pay to his estate or such beneficiaries as
EMPLOYEE may from time to time designate all accrued salary, bonus compensation
calculated by pro-rating all achievement and other measuring numbers set forth
in the bonus plan used for other similarly situated officers for that year as
though the year ended on the date of termination, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5.4, but no
other compensation or reimbursement of any kind.
3.6 Termination Upon a Change in Control. Upon the
occurrence of a Termination Upon a Change in Control, EMPLOYEE shall
immediately be paid all accrued salary, bonus compensation calculated by
pro-rating all achievement and other measuring numbers set forth in the bonus
plan used for other similarly situated officers for that year as though the
year ended on the date of the termination, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with his duties hereunder, all to the date of the
termination and all severance compensation provided in Section 5.5, but no
other compensation or reimbursement of any kind.
3.7 Termination Upon Expiration of Agreement. In the
event that TOKOS fails or otherwise refuses for any reason (except as otherwise
provided herein) to extend this Agreement at least 90 days prior to the initial
or any renewal period, EMPLOYEE shall immediately be paid all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan for other similarly situated officers as
though the year ended on the date of the failure to extend the Agreement,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of TOKOS in which EMPLOYEE is a participant to the
full extent of EMPLOYEE's rights under such plans, accrued PTO pay and any
appropriate business expenses incurred by EMPLOYEE in connection with his
duties hereunder, all to the date of termination and all severance compensation
provided in Section 5.6, but no other compensation or reimbursement of any
kind.
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3.8 Actual Voluntary Termination. In the event of an
Actual Voluntary Termination, EMPLOYEE shall immediately be paid all accrued
salary, bonus compensation to the extent fully earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which
will be paid in accordance with the applicable plan), any benefits under any
plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued PTO pay and any appropriate
business expenses incurred by EMPLOYEE in connection with his duties hereunder,
all to the date of termination. EMPLOYEE shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
4. Salary, Benefits and Bonus Compensation.
4.1 Base Salary. As payment for the services to be
rendered by EMPLOYEE as provided in Section 1 and subject to the terms and
conditions of Sections 2 and 3, TOKOS agrees to pay to EMPLOYEE a "Base Salary"
of $165,375 per annum payable in equal semi-monthly installments. The Base
Salary for each year (or portion thereof) beginning January 1, 1996 shall be
determined by the Board of Directors. EMPLOYEE's Base Salary shall be reviewed
at least annually by the Compensation Committee of the Board of Directors (the
"Compensation Committee").
4.2 Bonuses. EMPLOYEE shall be eligible to receive a
bonus each year (or portion thereof) during the Base Term and any extensions
thereof, with the actual amount of any such bonus to be determined in the sole
discretion of the Board of Directors in accordance with the Plan adopted for
Corporate Officers. All such bonuses shall be payable within 60 days after the
end of the year to which such bonus relates. All such bonuses shall be
reviewed annually by the Compensation Committee of the Board of Directors.
4.3 Additional Benefits. During the term of this
Agreement, EMPLOYEE shall be entitled to the following fringe benefits:
4.3.1 Benefits. EMPLOYEE shall be eligible to
participate in such of TOKOS' benefits and deferred compensation plans as are
now generally available or later made generally available to officers of TOKOS,
including, without limitation, Tokos' Incentive Stock Option Plan, 401K, dental
and medical plans, PTO, life insurance, personal catastrophe and disability
insurance. For purposes of establishing the length of service under any
benefit plans or programs of TOKOS, EMPLOYEE's employment with TOKOS will be
deemed to have commenced on the date EMPLOYEE commenced services as an employee
of TOKOS, to the extent permitted under applicable law and the terms of such
plans or programs.
4.3.2 Reimbursement for Expenses. During the term
of this Agreement, TOKOS shall reimburse EMPLOYEE for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
EMPLOYEE in connection with his duties under this Agreement. Any such expenses
shall be submitted by EMPLOYEE to TOKOS on a periodic basis, as determined by
the Chief Executive Officer, and all such expenses are subject to approval of
the Chief Executive Officer.
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5. Severance Compensation.
5.1 Severance Compensation For a Termination Based on
Performance. In the event EMPLOYEE's employment is terminated as a result of a
Termination Based on Performance, EMPLOYEE's Base Salary (at the rate payable
at the time of such termination) shall be continued in semi-monthly
installments for a period equal to 9 months, plus 2 weeks for each year (or
part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12 months
from the effective date of such termination. Notwithstanding anything in this
Section 5.1 to the contrary, EMPLOYEE may, anytime following notification of a
Termination Based on Performance, submit to the Chief Executive Officer a
written request for a lump sum severance payment equal to the total of all
unpaid cash payments that would otherwise be paid to EMPLOYEE pursuant to this
Section 5.1. If the Chief Executive Officer elects to grant the request for a
lump sum severance payment, TOKOS shall make such payment to EMPLOYEE within 20
days following the date on which EMPLOYEE requests a lump sum severance payment
or the effective date of such termination, whichever occurs earlier. In the
event that the Chief Executive Officer elects to deny such request, TOKOS shall
provide security, satisfactory to EMPLOYEE, which approval shall not be
unreasonably withheld, to ensure payment of all amounts owing to EMPLOYEE when
due. EMPLOYEE, shall be entitled, at no cost to EMPLOYEE to participate in the
full executive program of any outplacement firm, acceptable to both EMPLOYEE
and TOKOS, until EMPLOYEE's reemployment by another employer. In addition to
the cost of such outplacement program, to the extent that any part of such cost
constitutes income to EMPLOYEE for state or federal income tax purposes, TOKOS
shall "gross-up" such amount to compensate EMPLOYEE for all taxes hi may be
required to pay. EMPLOYEE shall be entitled to all COBRA benefits for the 9 to
12 month period from the effective date of such termination but shall not
otherwise continue to accrue retirement benefits or continue to enjoy any other
benefits under any plans of TOKOS in which EMPLOYEE is a participant. Any
awards granted to EMPLOYEE under Tokos' Incentive Stock Option Plan that are
vested as of the date of termination shall expire 60 days after the termination
date.
5.2 Severance Compensation In The Event of a Constructive
Termination. In the event of a Constructive Termination of EMPLOYEE's
employment with TOKOS, EMPLOYEE's Base Salary (at the rate payable at the time
of such termination) shall be continued in semi-monthly installments for a
period of 18 months from the effective date of such termination.
Notwithstanding anything in this Section 5.2 to the contrary, EMPLOYEE may,
anytime following notification of a Constructive Termination Agreement, submit
to the Chief Executive Officer a written request for a lump sum severance
payment equal to the total of all unpaid cash payments that would otherwise be
paid to EMPLOYEE pursuant to this Section 5.2. If the Chief Executive Officer
elects to grant the request for a lump sum severance payment, TOKOS shall make
such payment to EMPLOYEE within 20 days following the date on which EMPLOYEE
requests a lump sum severance payment or the effective date of such
termination, whichever occurs earlier. In the event that the Chief Executive
Officer elects to deny such request, TOKOS shall provide security, satisfactory
to EMPLOYEE, which approval shall not be unreasonably withheld, to ensure
payment of all amounts owing to EMPLOYEE when due. EMPLOYEE shall also be
entitled to accelerated vesting of any awards granted to EMPLOYEE under Tokos'
Incentive Stock Option Plan with no acceleration, however, of EMPLOYEE's right
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to exercise any such awards. EMPLOYEE, shall be entitled, at no cost to
EMPLOYEE to participate in the full executive program of any outplacement firm
acceptable to both EMPLOYEE and TOKOS, until EMPLOYEE's reemployment by another
employer. In addition to the cost of such outplacement program, to the extent
that any part of such cost constitutes income to EMPLOYEE for state or federal
income tax purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE
for all taxes he may be required to pay. EMPLOYEE shall continue to accrue
retirement benefits and shall continue to enjoy any benefits under any plan of
TOKOS in which EMPLOYEE is a participant to the full extent of EMPLOYEE's right
under such plans, including any perquisites provided under this Agreement, for
the 18 months from the effective date of such termination; provided, however,
that the benefits under any such plans of TOKOS (other than Tokos' Incentive
Stock Option Plan) in which EMPLOYEE is a participant, including any such
perquisites, shall cease upon EMPLOYEE's reemployment by another employer.
5.3 Severance Compensation for Termination by Reason of
Incapacity. In the event EMPLOYEE's employment is terminated as a result of a
Termination by Reason of Incapacity, EMPLOYEE's Base Salary (at the rate
payable as of the effective date of the termination) shall be continued in
semi-monthly installments for a period equal to 9 months plus 2 weeks for each
year (or part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12
months from the effective date of such termination. Notwithstanding anything
in this Section 5.3 to the contrary, EMPLOYEE may, anytime following
notification of a Termination by Reason of Incapacity, submit to the Chief
Executive Officer a written request for a lump sum severance payment equal to
the total of all unpaid cash payments that would otherwise be paid to EMPLOYEE
pursuant to this Section 5.3, which request shall not be unreasonably denied.
If the Chief Executive Officer elects to grant the request for a lump sum
severance payment, TOKOS shall make such payment to EMPLOYEE within 20 days
following the date on which EMPLOYEE requests a lump sum severance payment or
the effective date of such termination, whichever occurs earlier. In the event
that the Chief Executive Officer elects to deny such request, TOKOS shall
provide security, satisfactory to EMPLOYEE, which approval shall not be
unreasonably withheld, to ensure payment of all amounts owing to EMPLOYEE when
due. EMPLOYEE shall continue to accrue retirement benefits and shall continue
to enjoy any other benefits under any plans of TOKOS in which EMPLOYEE is a
participant for the 9 to 12 month period from the effective date of the
Termination except that any awards granted to EMPLOYEE under Tokos' Incentive
Stock Option Plan shall cease to vest as of the termination date and EMPLOYEE's
rights to exercise any awards vested as of the termination date shall be
extended (but not beyond their original term) to the date of EMPLOYEE's
re-employment with another employer or 60 days after the end of the 9 to 12
month period, whichever occurs first.
5.4 Severance Compensation for Termination by Reason of
Death. In the event EMPLOYEE's employment is terminated as a result of
EMPLOYEE's death, EMPLOYEE's Base Salary (at the rate payable as of the
effective date of the termination) shall be continued in semi-monthly
installments for a period of 3 months. TOKOS shall also continue to fund
dental and medical coverage for EMPLOYEE's spouse and dependents for the 3
month period from the effective date of the termination. Any awards granted to
the EMPLOYEE under
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Tokos' Incentive Stock Option Plan shall cease to vest as of the termination
date and EMPLOYEE's rights to exercise any awards vested as of the termination
date shall be extended (but not beyond their original term) to the date
EMPLOYEE's estate is closed or 2 years from the date of his death, whichever
occurs first.
5.5 Severance Compensation in the Event of a Termination
Upon A Change In Control. In the event EMPLOYEE elects to terminate this
Agreement as a result of a Termination Upon A Change In Control, EMPLOYEE's
Base Salary (at the rate payable at the time of such termination) shall be
continued in semi-monthly installments for a period of 18 months from the
effective date of such termination. Notwithstanding anything in this Section
5.5 to the contrary, EMPLOYEE may, anytime following notification of a
Termination Upon A Change In Control, submit to the Chief Executive Officer a
written request for a lump sum severance payment equal to the total of all
unpaid cash payments that would otherwise be paid to EMPLOYEE pursuant to this
Section 5.5, which request shall not be unreasonably denied. If the Chief
Executive Officer elects to grant the request for a lump sum severance payment,
TOKOS shall make such payment to EMPLOYEE within 20 days following the date on
which EMPLOYEE requests a lump sum severance payment or the effective date of
such termination, whichever occurs earlier. In the event that the Chief
Executive Officer elects to deny such request, TOKOS shall provide security,
satisfactory to EMPLOYEE, which approval shall not be unreasonably withheld, to
ensure payment of all amounts owing to EMPLOYEE when due. In addition to the
severance payment payable under this Section 5.5, EMPLOYEE shall be paid an
amount equal to 1.5 times the highest bonus earned by EMPLOYEE as an employee
of TOKOS. EMPLOYEE shall also be entitled to accelerated vesting of any awards
granted to EMPLOYEE under Tokos' Incentive Stock Option Plan with no
acceleration, however, of EMPLOYEE's rights to exercise such awards. EMPLOYEE,
shall be entitled, at no cost to EMPLOYEE, to participate in the full executive
program of any outplacement firm, acceptable to both EMPLOYEE and TOKOS, until
EMPLOYEE's reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost constitutes
income to EMPLOYEE for state or federal income tax purposes, TOKOS shall
"gross-up" such amount to compensate EMPLOYEE for all taxes hi may be required
to pay. EMPLOYEE shall continue to accrue retirement benefits and shall
continue to enjoy any benefits under any plans of TOKOS in which EMPLOYEE is a
participant to the full extent of EMPLOYEE's rights under such plans, including
any perquisites provided under this Agreement, for the 18 month period from the
effective date of such termination; provided, however, that the benefits under
any such plans of TOKOS (other than Tokos' Incentive Stock Option Plan) in
which EMPLOYEE is a participant, including any such prerequisites, shall cease
upon EMPLOYEE's re-employment by another employer.
5.6 Severance Compensation In The Event Of A Failure Of
TOKOS To Renew This Agreement. In the event TOKOS fails or otherwise refuses
for any reason (except pursuant to Section 3.1 hereof) to extend this Agreement
beyond the Basic Term and any extensions thereof, EMPLOYEE's Base Salary (at
the rate payable at the time of such termination) shall be continued in
semi-monthly installments for a period of 18 months from the effective date of
such termination. Notwithstanding anything in this Section 5.6 to the
contrary, EMPLOYEE may, anytime following expiration of this Agreement, submit
to the Chief
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Executive Officer a written request for a lump sum severance payment equal to
the total of all unpaid cash payments that would otherwise be paid to EMPLOYEE
pursuant to this Section 5.6. If the Chief Executive Officer elects to grant
the request for a lump sum severance payment, TOKOS shall make such payment to
EMPLOYEE within 20 days following the date on which EMPLOYEE requests a lump
sum severance payment or the effective date of such termination, whichever
occurs earlier. In the event that the Chief Executive Officer elects to deny
such request, TOKOS shall provide security, satisfactory to EMPLOYEE, which
approval shall not be unreasonably withheld, to ensure payment of all amounts
owing to EMPLOYEE when due. In addition to the severance payment payable,
under this Section 5.6, EMPLOYEE shall be paid an amount equal to 1.5 times the
highest bonus earned by EMPLOYEE as an employee of TOKOS. EMPLOYEE shall also
be entitled to accelerated vesting of any awards granted to EMPLOYEE under
Tokos' Incentive Stock Option Plan with no acceleration, however, of EMPLOYEE's
right to exercise any such awards. EMPLOYEE, shall be entitled, at no cost to
EMPLOYEE to participate in the full executive program of any outplacement firm,
acceptable to both EMPLOYEE and TOKOS, until EMPLOYEE's reemployment by another
employer. In addition to the cost of such outplacement program, to the extent
that any part of such cost constitutes income to EMPLOYEE for state or federal
income tax purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE
for all taxes he may be required to pay. EMPLOYEE shall continue to accrue
retirement benefits and shall continue to enjoy any benefits under any plans of
TOKOS in which EMPLOYEE is a participant to the full extent of EMPLOYEE's
rights under such plans, including any perquisites provided under this
Agreement, for the 18 months from the effective date of such termination;
provided, however, that the benefits under any such plans of TOKOS (other than
Tokos' Incentive Stock Option Plan) in which EMPLOYEE is a participant,
including any such perquisites, shall cease upon EMPLOYEE's reemployment by
another employer.
5.7 No Severance Compensation Upon Other Termination. In
the event of an Actual Voluntary Termination or Termination For Cause, EMPLOYEE
shall not be paid any severance compensation.
5.8 Limit on Aggregate Compensation Upon A Change In
Control. Notwithstanding anything to the contrary in this Agreement, solely in
the event of a Termination Upon A Change In Control pursuant to Section 3.5,
the amount of severance compensation paid to EMPLOYEE under Sections 3 and 5 or
otherwise shall not include any amount that TOKOS is prohibited from deducting
for federal income tax purposes by virtue of Section 28OG of the Internal
Revenue Code or any successor provision.
6. Loans to TOKOS. Any loans which may, on the effective date of
termination, be owed by EMPLOYEE to TOKOS, shall be due and payable 2 years
after the effective date of termination or, if applicable, 1 year after
EMPLOYEE becomes reemployed by another employer, whichever is sooner; provided,
however, that the proceeds from the sale of any stock of TOKOS held by EMPLOYEE
shall be applied first to pay taxes, if any, resulting from the sale of such
stock; second to any reduction in EMPLOYEE's margin debt necessitated by the
sale of such stock, which margin debt to the extent secured by stock in TOKOS
shall not be increased by EMPLOYEE after the effective date of any termination
of EMPLOYEE, without the consent
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of TOKOS; and then to repay any loans owed by EMPLOYEE to TOKOS. In order to
be eligible for the deferred repayment of any loans owed by EMPLOYEE to TOKOS
at the time of termination, EMPLOYEE shall, within thirty days of a request by
TOKOS, provide TOKOS with security equal, in then current value, to 1 1/2 times
the amount of such loan(s).
7. Consulting Responsibilities. In addition to all other
responsibilities of EMPLOYEE hereunder, in the event of a Termination of
Agreement Upon a change in control, Termination Based on Failure to Renew, a
Constructive Termination or an Actual Voluntary Termination, EMPLOYEE shall
make himself available at the request of TOKOS, upon reasonable notice and at
mutually convenient times and places as shall not unreasonably interfere with
EMPLOYEE's other responsibilities, to assist TOKOS in preparing for, managing
and conducting any litigation involving TOKOS (including by way of example and
not as limitation, giving testimony), and to otherwise consult with TOKOS with
respect to any matters consistent with his duties prior to termination; for
which EMPLOYEE shall be compensated at the rate of $150.00 per hour for the
first 100 hours and $300.00 per hour for each additional hour; provided,
however, in no event shall EMPLOYEE be obligated to provide any services to
TOKOS after 18 months from the effective date of termination.
8. Protection of Company Assets and Dispute Resolution.
8.1 Non-Competition. During the term of this Agreement,
including the period, if any, during which EMPLOYEE shall be entitled to
severance compensation hereunder, EMPLOYEE shall not engage in any activity,
business or transactions in competition with TOKOS. In furtherance of this
prohibition, EMPLOYEE shall notify TOKOS, in written detail, of all business
activity which, to the best of EMPLOYEE's knowledge, could be perceived by
TOKOS as violating this provision. In the event that EMPLOYEE fails to provide
such notice, TOKOS may avail itself of whatever remedies may exist, and
EMPLOYEE hereby consents to TOKOS' obtaining injunctive relief. In the
alternative event that EMPLOYEE provides such notice, TOKOS must, within 20
days of actual receipt of such notice, consent to EMPLOYEE's involvement in the
business activity described, or notify EMPLOYEE, in written detail, of all
reasons TOKOS believes the business activity described violates this provision.
If TOKOS consents or fails to timely provide such written response, such
failure shall constitute consent by TOKOS thereby, in either case, enabling
EMPLOYEE to engage in such business activity to the extent described in
EMPLOYEE's written notice to TOKOS. In no event, however, shall EMPLOYEE be
relieved of responsibility to provide TOKOS with notice, in written detail, of
any other business activity which EMPLOYEE, to the best of his knowledge,
believes TOKOS would perceive to be violative of this provision. If EMPLOYEE
challenges TOKOS' decision to not consent, EMPLOYEE shall, within 10 days of
actual receipt of TOKOS' objections, so notify TOKOS in writing by providing
TOKOS with his response, in detail, to TOKOS' objections, and both EMPLOYEE and
TOKOS hereby agree that such dispute shall be finally settled by arbitration in
accordance with Section 8.2 below.
8.2 Arbitration. TOKOS and EMPLOYEE agree that any
controversy, claim or dispute of any kind arising out of or relating to this
Agreement, the interpretation of this Agreement, EMPLOYEE's employment with
TOKOS or the termination thereof, or the course of
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dealing by the parties hereunder (including any claim based on contract, tort
or statute) whether for damages or for provisional or permanent equitable
relief, shall be finally settled by arbitration administered by the American
Arbitration Association ("AAA") in accordance with its then-existing commercial
Arbitration rules ("Rules") in Irvine, California before an arbitrator who
shall be a retired or former judge of the California Superior Court and who
shall be selected from those former or retired judges affiliated with the
Judicial Arbitration and Mediation Service ("JAMS") located in the City of
Orange, California who are willing and able to comply with the time constraints
and other procedures herein agreed to. The party initiating the claim shall
obtain from JAMS a current list of available judges and shall immediately mail
such list to the other party. Each party to the dispute shall have 10 days
from the mailing date in which to cross off any names objected to, number the
remaining names in order of preference, and return the list to the AAA. If
either party fails to return the list within the time specified, all persons
named therein shall be deemed acceptable. From among the persons who have been
approved on both lists, and in accordance with the designated order of mutual
preference, the AAA shall invite the acceptance of an arbitrator to serve. If
the parties fail to agree on any of the persons named, or if acceptable
arbitrators are unable to act, or if for any other reason the appointment
cannot be made from the submitted lists, the AAA shall have the power to make
the appointment from among other California Superior Court judges who are
willing and able to comply with the time constraints and other procedures
herein agreed to. Both parties shall share equally the payment of the
arbitrator's fee, though the arbitrator, in his or his sole discretion, may
order the non-prevailing party to pay the prevailing party's share of the
arbitrator's fee. Any controversy regarding whether a dispute is an
arbitratable dispute hereunder shall be determined by the arbitrator. The
designation of a situs or a governing law for this Agreement or arbitrations
hereunder shall not be deemed an election to preclude application of the U.S.
Arbitration Act, if it would be applicable. Judgment upon the award rendered
by the arbitrator may be entered and enforced in any court having proper
jurisdiction. At the request of either party, arbitration proceedings will be
conducted in secrecy; in such case all documents, testimony and records will be
received, heard and maintained by the arbitrator in secrecy under seal,
available for inspection only by the parties and their respective attorneys and
experts, who will agree, in advance and in writing, to receive all such
information confidentially and to maintain such information in secrecy until
such information becomes generally known.
It is the intention of both parties that any dispute arising in connection with
this Agreement or EMPLOYEE's employment shall be resolved expeditiously.
Therefore, all discovery must be completed and the hearing commenced within 30
days of the arbitrator's appointment. The award must be reasoned and must be
issued within 30 days of commencement of the hearing and will not be subject to
judicial review in whole or in part.
8.3 No Solicitation/Raiding of Employees. EMPLOYEE
acknowledges and agrees that TOKOS has invested substantial time and effort in
assembling its present staff. Accordingly, EMPLOYEE agrees and covenants that
during the term of this Agreement, including the period, if any, during which
EMPLOYEE shall be entitled to severance compensation hereunder, but in no event
for a period less than one year after the termination of his employment with
TOKOS, EMPLOYEE will not directly or indirectly, induce or solicit any employee
to leave employment with TOKOS.
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8.4 Confidential Information and Trade Secrets. EMPLOYEE
acknowledges and agrees that in the course of employment with TOKOS, he has
been granted access to and become acquainted with information of a
confidential, proprietary or secret nature which is or may be either applicable
to or related in any way to the present or future business of TOKOS. Such
"confidential information" includes but is not limited to business strategies,
financial results, pricing, marketing strategies, sales techniques, etc.
EMPLOYEE acknowledges and agrees that such confidential information constitutes
"trade secret" information within the meaning of the Uniform Trade Secret Act
(California Civil Code section 3426 set seq.)" In addition to such confidential
information, "trade secrets" include but are not limited to various devices,
secret inventions, processes, compilation of information, records,
specifications, etc. EMPLOYEE acknowledges and agrees that such confidential
information and trade secrets have independent economic value, are not
generally known to the public and/or other persons who can obtain economic
value from the disclosure or use thereof, and that such confidential
information and trade secrets have remained confidential due to the
extraordinary precautions, safeguards and efforts of TOKOS and its employees to
maintain the secrecy and confidential thereof. EMPLOYEE covenants and agrees
not to disclose to any person, company or entity other than TOKOS any trade
secrets, confidential or proprietary information, directly or indirectly, or to
use them in any way, for his own benefit or for the benefit of any other person
or entity other than TOKOS, except as required in the course of employment with
TOKOS. EMPLOYEE agrees to abide by the policies and procedures of TOKOS, as
established from time-to-time, for the protection of trade secrets,
confidential and proprietary information.
8.5 Conflicts of Interest. EMPLOYEE acknowledges and
agrees that during the term of this Agreement, including the period, if any,
during which EMPLOYEE shall be entitled to severance compensation hereunder,
EMPLOYEE will not, without the prior written consent of the Chief Executive
Officer of TOKOS, directly or indirectly engage in any employment, consulting,
or other activity which would conflict with the business of TOKOS or the duties
of EMPLOYEE.
8.6 Injunctive Relief. In the event of any breach of the
provisions of this Agreement, TOKOS and EMPLOYEE respectively agree that an
injunction may issue from any court of competent jurisdiction to enforce these
provisions, including the terms of this paragraph. These provisions shall not
in any way limit the right of either party to bring an action for other
injunctive or other equitable relief and for damages occasioned by any breach
of this Agreement by the other party.
8.7 Preservation of Company Property. EMPLOYEE
acknowledges that from time-to-time in the course of employment with TOKOS,
EMPLOYEE has had the opportunity to inspect and use certain property of TOKOS,
both tangible and intangible, including but not limited to files, records,
documents, drawings, specifications, lists, equipment, graphics, designs and
similar items relating to the business of TOKOS. EMPLOYEE acknowledges and
agrees that all such property, including but not limited to any and all copies
thereof, whether prepared by EMPLOYEE or otherwise in the possession of
EMPLOYEE, are and shall remain the exclusive property of TOKOS, that EMPLOYEE
shall have no right or proprietary interest in such property, that EMPLOYEE
will safeguard and return to TOKOS all such property, and that
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EMPLOYEE has not and will not take, remove, duplicate or otherwise remove any
such property from the business premises of TOKOS at any time without the
consent of the Chief Executive Officer.
8.8 No Solicitation of Customers. Because of the
sensitive and unique nature of the business of TOKOS, EMPLOYEE acknowledges and
agrees that the solicitation of a past, current or potential customer of TOKOS
with whom EMPLOYEE has had a business contact on behalf of TOKOS of necessity
requires the use of confidential information, and that the use and application
of such confidential information by EMPLOYEE would be unfair and cause
irreparable injury to TOKOS. EMPLOYEE further acknowledges and agrees that the
identity of the customers of TOKOS are not generally known to the public or the
competitors of TOKOS and that EMPLOYEE has had access to the identity of such
customers solely as a result of this employment with TOKOS. Therefore,
EMPLOYEE covenants and agrees that during the term of this Agreement, including
the period, if any, during which EMPLOYEE shall be entitled to severance
compensation hereunder, but in no event for a period less than one year
following the effective date of the termination of his employment with TOKOS,
EMPLOYEE shall not, directly or indirectly, for himself or for any person,
company or entity, attempt to divert, solicit or take away any business or
patronage of any customer of TOKOS with whom EMPLOYEE has had business contact
or about which EMPLOYEE has had access to confidential information, and that
EMPLOYEE also will not, directly or indirectly, for himself or any other
person, company or employer, contact any such customer of TOKOS for the purpose
of soliciting or diverting the business or patronage of any such customer.
8.9 Inventions. EMPLOYEE agrees to promptly disclose to
TOKOS any and all inventions, discoveries, improvements, trade secrets,
formulas, techniques and processes, whether or not patentable and whether or
not reduced to practice, made or conceived by EMPLOYEE, either solely or in
conjunction with others, during the period of his employment with the Company,
which relate to or result from the actual anticipated business, work or
research for TOKOS and which result, to any extent, from the use of the
premises or property of TOKOS, or are suggested by any tasks assigned to
EMPLOYEE or any work performed by EMPLOYEE for or on behalf of TOKOS. EMPLOYEE
agrees to and hereby does grant and assign to TOKOS all rights which EMPLOYEE
may have or acquire in any such invention. EMPLOYEE acknowledges and agrees
that all such inventions shall be the sole property of TOKOS and EMPLOYEE
hereby assigns to TOKOS his entire right, title and interest in and to such
inventions; provided, however, that such assignment does not apply to any
invention which qualifies fully under the provisions of Section 2870 of the
California Labor Code, the provisions of which are incorporated herein by
reference.
9. Release. It is understood and agreed by and between EMPLOYEE
and TOKOS that in consideration of each party entering into this Agreement,
each party is hereby respectively discharging and releasing the other party
from any and all claims which such party may have or may have had against the
other relating, arising out of or in connection with EMPLOYEE's employment by
TOKOS, including the termination of such employment as provided herein, other
than for purposes of enforcement of this Agreement. In addition, by entering
into this
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Agreement, each party is hereby waiving, as to the other party, Section 1542 of
the California Civil Code.
10. Disclosure of Investments. Simultaneously with EMPLOYEE's
execution of this Agreement and upon each anniversary of the Effective Date,
EMPLOYEE shall notify the Chairman of the Compensation Committee of the nature
and extent of EMPLOYEE's investments, stock holdings, employment as an
employee, director, consultant, partner or any similar interest in any business
or enterprise other than TOKOS; provided, however, that EMPLOYEE shall have no
obligation to disclose any investment under $100,000 in current market value or
any holdings of publicly traded securities which are not in excess of one
percent of the outstanding class of such securities.
11. Miscellaneous.
11.1 Payment Obligations. TOKOS' obligation to pay
EMPLOYEE the compensation and to make the arrangements provided herein shall be
unconditional, and EMPLOYEE shall have no obligation whatsoever to mitigate
damages hereunder. If litigation or arbitration is required after a Change in
Control to enforce or interpret any provision contained herein, TOKOS, to the
extent permitted by applicable law and TOKOS' Certificate of Incorporation and
Bylaws, hereby indemnities EMPLOYEE for EMPLOYEE's reasonable attorneys' fees
and disbursements incurred in such proceeding.
11.2 Waiver. The waiver of the breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach of the same or other provision hereof.
11.3 Entire Agreement; Modifications. Except as otherwise
provided herein, this Agreement represents the sole, entire and complete
understanding among the parties with respect to the subject matter hereof, and
this Agreement supersedes any and all prior understandings, agreements, plans
and negotiations, whether written or oral, with respect to the subject matter
hereof, including without limitation, any understandings, agreements or
obligations respecting any past or future compensation, bonuses, reimbursements
or other payments to EMPLOYEE from TOKOS. All modifications to the Agreement
must be in writing and signed by both EMPLOYEE and TOKOS.
11.4 Notices. All notices and other communications under
this Agreement shall be in writing and shall be given by facsimile or first
class mail, certified or registered with return receipt requested, and shall be
deemed to have been duly given three days after mailing or 12 hours after
transmission of a facsimile to the respective persons named below:
If to TOKOS: Robert F. Byrnes
Chairman and Chief Executive Officer
TOKOS MEDICAL CORPORATION (Delaware)
1821 East Dyer Road
Santa Ana, CA 92705
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If to EMPLOYEE: Nicholas A. Mione
Executive Vice President, Finance and Administration,
and Chief Financial Officer
TOKOS MEDICAL CORPORATION (California)
1821 East Dyer Road
Santa Ana, CA 92705
Any party may change such party's address for notices by notice duly given
pursuant to this Section 11.4.
11.5 Headings. The Section headings herein are intended
for reference and shall not by themselves determine the construction or
interpretation of this Agreement.
11.6 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California applicable
to contracts entered into and wholly to be performed within the State of
California by California residents.
11.7 Severability. Should any court of competent
jurisdiction determine that any provision of this Agreement is illegal or
unenforceable to any extent, such provision shall be nforced to the extent
permissible and all other provisions of this Agreement shall continue to be
enforceable to the extent possible.
11.8 Survival of TOKOS' Obligations. TOKOS' obligations
hereunder shall not be terminated by reason of any liquidation, dissolution,
bankruptcy, cessation of business, or similar event relating to TOKOS. This
Agreement shall not be terminated by any merger or consolidation or other
reorganization of TOKOS. In the event any such merger, consolidation or
reorganization shall be accomplished by transfer of stock or by transfer of
assets or otherwise, the provisions of this Agreement shall be binding upon and
inure to the benefit of the surviving or resulting TOKOS or person. This
Agreement shall be binding upon and inure to the benefit of the executors,
administrators, heirs, successors and assigns of the parties; provided,
however, that except as herein expressly provided, this Agreement shall not be
assignable either by TOKOS (except to an affiliate of TOKOS in which event
TOKOS shall remain liable if the affiliate fails to meet any obligations to
make payments or provide benefits or otherwise) or by EMPLOYEE.
11.9 Counterparts. This Agreement may be executed in one
or more counterparts, all of which taken together shall constitute one and the
same Agreement.
11.10 Withholdings. All compensation and benefits payable
to EMPLOYEE hereunder and shall be reduced by all federal, state, local and
other withholdings and similar taxes and payments required by applicable law.
11.11 Indemnification. In addition to any rights to
indemnification to which EMPLOYEE is entitled to under TOKOS' Certificate of
Incorporation, Bylaws, any policy of insurance or other agreement, TOKOS shall
indemnify EMPLOYEE at all times during and after
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the term of this Agreement to the maximum extent permitted under Section 145 of
the General Corporation Law of the State of Delaware or any successor provision
thereof and any other applicable state law, and shall pay EMPLOYEE's expenses
in defending any civil or criminal action, suit, or proceeding brought by any
third party against EMPLOYEE as a result of EMPLOYEE's relationship with TOKOS
or against TOKOS in advance of the final disposition of such action, suit, or
proceeding, to the maximum extent permitted under such applicable state laws.
Unless otherwise provided herein, this indemnification shall not apply to and
TOKOS shall not indemnify EMPLOYEE with respect to any disputes arising under
this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TOKOS MEDICAL CORPORATION (DELAWARE)
By: /s/ Robert F. Byrnes
-----------------------------------
Chief Executive Officer
Signature: /s/ Nicholas A. Mione
--------------------------
Nicholas A. Mione
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<PAGE> 1
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of May 1, 1995 ("Effective Date") by and between TOKOS MEDICAL CORPORATION
(DELAWARE), a Delaware corporation ("TOKOS"), and ROBERT F. BYRNES
("EMPLOYEE").
RECITAL
TOKOS desires to employ EMPLOYEE as its Chief Executive Officer, and
EMPLOYEE is willing to accept such employment by TOKOS, on the terms and
subject to the conditions set forth in this Agreement.
AGREEMENT
THE PARTIES AGREE AS FOLLOWS:
1. Duties. During the term of this Agreement, EMPLOYEE agrees to
be employed by and to serve TOKOS as its Chief Executive Officer and in such
other executive capacities as the Board of Directors may direct, and TOKOS
agrees to employ and retain EMPLOYEE in such capacities. EMPLOYEE shall devote
substantially all of his business time, energy, and skill to the business of
TOKOS and the duties of his position. EMPLOYEE shall report only to TOKOS'
Board of Directors; shall observe and abide by all policies of TOKOS and all
directives of the Board of Directors consistent with his position; and, at all
times during the term of this Agreement, shall have powers and duties at least
commensurate with his position as Chief Executive Officer at TOKOS. EMPLOYEE's
principal place of business with respect to his services to TOKOS shall be in
Orange County, California.
2. Term of Employment.
2.1 Definitions. For purposes of this Agreement the
following terms shall have the following meanings:
2.1.1 "Termination For Cause" shall mean the
termination by TOKOS of EMPLOYEE's employment with TOKOS as the result of
EMPLOYEE's willful misconduct or dishonesty towards, fraud upon, or deliberate
injury or attempted injury to TOKOS; EMPLOYEE's willful and continued material
breach of this Agreement, or; EMPLOYEE's gross negligence or malfeasance in the
performance of his duties and responsibilities, as determined by the good faith
decision of The Compensation Committee of the Board of Directors (the
"Compensation Committee"). Notwithstanding the foregoing, EMPLOYEE shall be
entitled to appeal the termination and request confirmation thereof from the
Board of Directors in the form of a resolution duly adopted by the affirmative
vote of not less than a simple majority of the outside directors, provided the
outside directors voting constitute a majority of the entire membership of the
Board of
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Directors, at a meeting of the Board of Directors duly noticed and held within
45 days of EMPLOYEE's request (after reasonable notice to EMPLOYEE, and
opportunity for EMPLOYEE, together with counsel if desired, to be heard before
the Board of Directors), which resolution shall state that in the good faith
opinion of the Board of Directors, Cause for termination exists, and which
shall enumerate with particularity the specific conduct which constitutes
Cause. In the event the Board of Directors does not adopt a resolution
confirming the termination, then EMPLOYEE shall be reinstated with back pay in
such capacities as the Board of Directors may direct. An act, or a failure to
act, shall not be considered "willful" if, in the good faith determination of
the Board of Directors, it was performed, or omitted, in good faith and with
reasonable grounds for belief that the action or omission was in the interest
of TOKOS. The EMPLOYEE shall not be deemed to be grossly negligent or
malfeasant unless the EMPLOYEE's act or failure to act, in the good faith
determination of the Board of Directors was inappropriate and results in a
material injury to TOKOS. The Compensation Committee may effect a Termination
For Cause at any time by providing EMPLOYEE with written notice of such
termination. The termination shall be effective as of the date of the notice.
2.1.2 "Termination Other Than For Cause" shall mean
termination by TOKOS of EMPLOYEE's employment with TOKOS and shall include (i)
termination for performance, incompatibility with TOKOS, other deficiencies or
any other reason (other than Cause, a Change in Control, Death or Incapacity)
as determined by the Chief Executive Officer, and (ii) constructive termination
of EMPLOYEE's employment by reason of (a) a reduction in EMPLOYEE's Base Salary
of 10% or more, unless such reduction is part of a cost-savings or similar plan
that equally impacts all other similarly situated officers, or (b) a
requirement that EMPLOYEE change his principal place of business to a location
that is more than 50 miles from his current principal place of business.
Notwithstanding the foregoing, in the event of a Termination Other Than For
Cause which is initiated by the Compensation Committee, EMPLOYEE shall be
entitled to appeal the termination and request confirmation thereof from the
Board of Directors in the form of a resolution duly adopted by the affirmative
vote of not less than a simple majority of the outside directors, provided the
outside directors voting constitute a majority of the entire membership of the
Board of Directors at a meeting of the Board of Directors duly noticed and held
within 45 days of EMPLOYEE's request (after reasonable notice to EMPLOYEE and
the opportunity for EMPLOYEE to be heard before the Board of Directors), which
resolution shall state that in the good faith opinion of the Board of
Directors, EMPLOYEE should be terminated for the reasons articulated by the
Compensation Committee. In the event the Board of Directors does not adopt a
resolution confirming the termination, then EMPLOYEE shall be reinstated in
such capacities as the Board of Directors may direct. The Compensation
Committee may effect a Termination Other Than For Cause at any time by
providing EMPLOYEE with written notice of such termination. The EMPLOYEE may
also effect a Termination Other Than For Cause at any time one of the above two
conditions for constructive termination have been met. The termination shall
be effective as of the date of the notice.
2.1.3 "Actual Voluntary Termination" shall mean
termination by EMPLOYEE of EMPLOYEE's employment with TOKOS other than (i)
"Termination For Cause," (ii) "Termination Other Than For Cause," (iii)
"Termination by Reason of Incapacity" or
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"Termination by Reason of Death" and (v) "Termination Upon a Change in Control"
as described in this Agreement.
2.1.4 "Termination Upon a Change in Control" shall
mean (i) the termination by TOKOS of EMPLOYEE within 1 year after, or during
the 3 months immediately prior to, a "Change in Control," or (ii) the
termination by EMPLOYEE of this Agreement with TOKOS within 1 year after a
"Change in Control." Either TOKOS or EMPLOYEE may effect a Termination Upon a
Change in Control once a "Change in Control" has occurred by providing the
other party with written notice of such termination. The termination shall be
effective as of the date of such notice.
2.1.5 "Change in Control" shall mean (i) the time
that TOKOS first determines that any person and all other persons who
constitute a group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 ("Exchange Act")) have acquired direct or indirect
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of 20% or more of TOKOS' outstanding securities; (ii) the merger, consolidation
or reorganization of TOKOS with one or more corporations as a result of which
TOKOS is merged out of existence or becomes a subsidiary of another
corporation, the sale of all or substantially all of the assets of TOKOS; or
(iii) as a result of any tender or exchange offer, merger, consolidation or
other business combination, or any combination of any of the foregoing
transactions, the persons who were directors of TOKOS before such transaction
cease to constitute a majority of the Board of Directors of TOKOS or of any
successor to TOKOS.
2.2 Basic Term. The term of employment of EMPLOYEE by
TOKOS shall be twenty (20) months commencing May 1, 1995 through December 31,
1996 unless terminated earlier pursuant to Section 3, which term is subject to
renewal upon at least 90 days notice prior to the expiration of the initial or
any renewal periods. Therefore, at any time before October 1, 1996, TOKOS and
EMPLOYEE may by mutual written agreement renew this Agreement and, thereby,
extend EMPLOYEE's employment under the terms of this Agreement for such
additional periods as they may agree.
3. Termination of Employment.
3.1 Termination For Cause. Upon any Termination For
Cause, EMPLOYEE shall immediately be paid all accrued salary, bonus
compensation to the extent fully earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued paid time off ("PTO") pay and any appropriate business
expenses incurred by EMPLOYEE in connection with his duties hereunder, all to
the date of termination. EMPLOYEE shall not be paid any other compensation or
reimbursement of any kind including, without limitation, severance
compensation, continued vesting or extended rights to exercise beyond the
minimum required by the applicable plan.
3.2 Termination Other Than For Cause. Upon any
Termination Other Than For Cause, EMPLOYEE shall immediately be paid all
accrued salary, bonus compensation calculated
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by pro-rating all achievements and other measuring numbers set forth in the
bonus plan for other similarly situated officers as though the year and date
ended on the date of termination, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of TOKOS in which
EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under such
plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5. 1, but no
other compensation or reimbursement of any kind.
3.3 Termination by Reason of Incapacity. If, during the
term of this Agreement, EMPLOYEE, in the reasonable judgment of the Board of
Directors of TOKOS, has failed to perform his duties under this Agreement on
account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than 6 weeks, TOKOS shall have the
right to terminate EMPLOYEE's employment hereunder, such termination to be
effective retroactive to the first day of such illness or incapacity, by
written notification to EMPLOYEE and payment to EMPLOYEE of all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan used for other similarly situated officers
for that year as though the year ended on the date of termination, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued PTO pay and any appropriate
business expenses incurred by EMPLOYEE in connection with his duties hereunder,
all to the date of termination, with the exception of medical and dental
benefits which shall continue through the expiration of the Agreement and all
severance compensation provided in Section 5.2, but no other compensation or
reimbursement of any kind.
3.4 Termination by Reason of Death. In the event of
EMPLOYEE's death during the term of this Agreement, EMPLOYEE's employment shall
be deemed to have terminated as of the last day of the month during which his
death occurs and TOKOS shall pay to his estate or such beneficiaries as
EMPLOYEE may from time to time designate all accrued salary, bonus compensation
calculated by pro-rating all achievement and other measuring numbers set forth
in the bonus plan used for other similarly situated officers for that year as
though the year ended on the date of termination, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5.3, but no
other compensation or reimbursement of any kind.
3.5 Termination Upon a Change in Control. Upon the
occurrence of a Termination Upon a Change in Control, EMPLOYEE shall
immediately be paid all accrued salary, bonus compensation calculated by
pro-rating all achievement and other measuring numbers set forth in the bonus
plan used for other similarly situated officers for that year as though the
year ended on the date of the termination, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans
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of TOKOS in which EMPLOYEE is a participant to the full extent of EMPLOYEE's
rights under such plans, accrued PTO pay and any appropriate business expenses
incurred by EMPLOYEE in connection with his duties hereunder, all to the date
of the termination and all severance compensation provided in Section 5.4, but
no other compensation or reimbursement of any kind.
3.6 Termination Upon Expiration of Agreement. In the
event that TOKOS fails or otherwise refuses for any reason (except as otherwise
provided herein) to extend this Agreement at least 90 days prior to the initial
or any renewal period, EMPLOYEE shall immediately be paid all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan for other similarly situated officers as
though the year ended on the date of the failure to extend the Agreement,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of TOKOS in which EMPLOYEE is a participant to the
full extent of EMPLOYEE's rights under such plans, accrued PTO pay and any
appropriate business expenses incurred by EMPLOYEE in connection with his
duties hereunder, all to the date of termination and all severance compensation
provided in Section 5.5, but no other compensation or reimbursement of any
kind.
3.7 Actual Voluntary Termination. In the event of an
Actual Voluntary Termination, EMPLOYEE shall immediately be paid all accrued
salary, bonus compensation to the extent fully earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which
will be paid in accordance with the applicable plan), any benefits under any
plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued PTO pay and any appropriate
business expenses incurred by EMPLOYEE in connection with his duties hereunder,
all to the date of termination. EMPLOYEE shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
4. Salary, Benefits and Bonus Compensation.
4.1 Base Salary. As payment for the services to be
rendered by EMPLOYEE as provided in Section 1 and subject to the terms and
conditions of Sections 2 and 3, TOKOS agrees to pay to EMPLOYEE a "Base Salary"
of $264,000 per annum, which amount is payable in equal semi-monthly
installments. The Base Salary for each year (or portion thereof) beginning
January 1, 1996 shall be determined by the Board of Directors. EMPLOYEE's Base
Salary shall be reviewed at least annually by the Compensation Committee of the
Board of Directors (the "Compensation Committee").
4.2 Bonuses. EMPLOYEE shall be eligible to receive a
bonus each year (or portion thereof) during the Base Term and any extensions
thereof, with the actual amount of any such bonus to be determined in the sole
discretion of the Board of Directors in accordance with the Plan adopted for
Corporate Officers. All such bonuses shall be payable within 60 days after the
end of the year to which such bonus relates. All such bonuses shall be
reviewed annually by the Compensation Committee of the Board of Directors.
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4.3 Additional Benefits. During the term of this
Agreement, EMPLOYEE shall be entitled to the following fringe benefits:
4.3.1 Benefits. EMPLOYEE shall be eligible to
participate in such of TOKOS' benefits and deferred compensation plans as are
now generally available or later made generally available to officers of TOKOS,
including, without limitation, Tokos' Incentive Stock Option Plan, 401K, dental
and medical plans, PTO, life insurance, personal catastrophe and disability
insurance. For purposes of establishing the length of service under any
benefit plans or programs of TOKOS, EMPLOYEE's employment with TOKOS will be
deemed to have commenced on the date EMPLOYEE commenced services as an employee
of TOKOS, to the extent permitted under applicable law and the terms of such
plans or programs.
4.3.2 Reimbursement for Expenses. During the term
of this Agreement, TOKOS shall reimburse EMPLOYEE for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
EMPLOYEE in connection with his duties under this Agreement. Any such expenses
shall be submitted by EMPLOYEE to TOKOS on a periodic basis, and are subject to
approval by the Chief Financial Officer.
5. Severance Compensation.
5.1 Severance Compensation in the Event of a Termination
Other Than for Cause. In the event EMPLOYEE's employment is terminated as a
result of a Termination Other Than for Cause, EMPLOYEE's Base Salary (at the
rate payable at the time of such termination) shall be continued in
semi-monthly installments for a period equal to 9 months, plus 2 weeks for each
year (or part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12
months from the effective date of such termination. Notwithstanding anything
in this Section 5.1 to the contrary, EMPLOYEE may, anytime following
notification of a Termination Other Than For Cause, submit to the Board of
Directors a written request for a lump sum severance payment equal to the total
of all unpaid cash payments that would otherwise be paid to EMPLOYEE pursuant
to this Section 5.1. If the Board of Directors elects to grant the request for
a lump sum severance payment, TOKOS shall make such payment to EMPLOYEE within
20 days following the date on which EMPLOYEE requests a lump sum severance
payment or the effective date of such termination, whichever occurs earlier.
In the event that the Board of Directors elects to deny such request, TOKOS
shall provide security, satisfactory to EMPLOYEE, which approval shall not be
unreasonably withheld, to ensure payment of all amounts owing to EMPLOYEE when
due. EMPLOYEE, shall be entitled, at no cost to EMPLOYEE to participate in the
full executive program of any outplacement firm, acceptable to both EMPLOYEE
and TOKOS, until EMPLOYEE's reemployment by another employer. In addition to
the cost of such outplacement program, to the extent that any part of such cost
constitutes income to EMPLOYEE for state or federal income tax purposes, TOKOS
shall "gross-up" such amount to compensate EMPLOYEE for all taxes hi may be
required to pay. EMPLOYEE shall be entitled to all COBRA benefits for the 9 to
12 month period from the effective date of such termination but shall not
otherwise continue to accrue retirement benefits or continue to enjoy any other
benefits under any plans of TOKOS in which EMPLOYEE is a participant. Any
awards
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granted to EMPLOYEE under Tokos' Incentive Stock Option Plan that are vested as
of the date of termination shall expire 60 days after the termination date.
5.2 Severance Compensation for Termination by Reason of
Incapacity. In the event EMPLOYEE's employment is terminated as a result of a
Termination by Reason of Incapacity, EMPLOYEE's Base Salary (at the rate
payable as of the effective date of the termination) shall be continued in
semi-monthly installments for a period equal to 9 months plus 2 weeks for each
year (or part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12
months from the effective date of such termination. Notwithstanding anything
in this Section 5.2 to the contrary, EMPLOYEE may, anytime following
notification of a Termination by Reason of Incapacity, submit to the Board of
Directors a written request for a lump sum severance payment equal to the total
of all unpaid cash payments that would otherwise be paid to EMPLOYEE pursuant
to this Section 5.2, which request shall not be unreasonably denied. If the
Chief Executive Officer elects to grant the request for a lump sum severance
payment, TOKOS shall make such payment to EMPLOYEE within 20 days following the
date on which EMPLOYEE requests a lump sum severance payment or the effective
date of such termination, whichever occurs earlier. In the event that the
Board of Directors elects to deny such request, TOKOS shall provide security,
satisfactory to EMPLOYEE, which approval shall not be unreasonably withheld, to
ensure payment of all amounts owing to EMPLOYEE when due. EMPLOYEE shall
continue to accrue retirement benefits and shall continue to enjoy any other
benefits under any plans of TOKOS in which EMPLOYEE is a participant for the 9
to 12 month period from the effective date of the Termination except that any
awards granted to EMPLOYEE under Tokos' Incentive Stock Option Plan shall cease
to vest as of the termination date and EMPLOYEE's rights to exercise any awards
vested as of the termination date shall be extended (but not beyond their
original term) to the date of EMPLOYEE's re-employment with another employer or
60 days after the end of the 9 to 12 month period, whichever occurs first.
5.3 Severance Compensation for Termination by Reason of
Death. In the event EMPLOYEE's employment is terminated as a result of
EMPLOYEE's death, EMPLOYEE's Base Salary (at the rate payable as of the
effective date of the termination) shall be continued in semi-monthly
installments for a period of 3 months. TOKOS shall also continue to fund
dental and medical coverage for EMPLOYEE's spouse and dependents for the 3
month period from the effective date of the termination. Any awards granted to
the EMPLOYEE under Tokos' Incentive Stock Option Plan shall cease to vest as of
the termination date and EMPLOYEE's rights to exercise any awards vested as of
the termination date shall be extended (but not beyond their original term) to
the date EMPLOYEE's estate is closed or 2 years from the date of his death,
whichever occurs first.
5.4 Severance Compensation in the Event of a Termination
Upon A Change In Control. In the event EMPLOYEE elects to terminate this
Agreement as a result of a Termination Upon A Change In Control, EMPLOYEE's
Base Salary (at the rate payable at the time of such termination) shall be
continued in semi-monthly installments for a period of 18 months from the
effective date of such termination. Notwithstanding anything in this Section
5.4 to the contrary, EMPLOYEE may, anytime following notification of a
Termination Upon A Change In Control, submit to the Board of Directors a
written request for a lump sum severance payment equal to the total of all
unpaid cash payments that would otherwise be paid to EMPLOYEE pursuant to this
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Section 5.4, which request shall not be unreasonably denied. If the Board of
Directors elects to grant the request for a lump sum severance payment, TOKOS
shall make such payment to EMPLOYEE within 20 days following the date on which
EMPLOYEE requests a lump sum severance payment or the effective date of such
termination, whichever occurs earlier. In the event that the Board of
Directors elects to deny such request, TOKOS shall provide security,
satisfactory to EMPLOYEE, which approval shall not be unreasonably withheld, to
ensure payment of all amounts owing to EMPLOYEE when due. In addition to the
severance payment payable under this Section 5.4, EMPLOYEE shall be paid an
amount equal to 1.5 times the highest bonus earned by EMPLOYEE as an employee
of TOKOS. EMPLOYEE shall also be entitled to accelerated vesting of any awards
granted to EMPLOYEE under Tokos' Incentive Stock Option Plan with no
acceleration, however, of EMPLOYEE's rights to exercise such awards. EMPLOYEE,
shall be entitled, at no cost to EMPLOYEE, to participate in the full executive
program of any outplacement firm, acceptable to both EMPLOYEE and TOKOS, until
EMPLOYEE's reemployment by another employer. In addition to the cost of such
outplacement program, to the extent that any part of such cost constitutes
income to EMPLOYEE for state or federal income tax purposes, TOKOS shall
"gross-up" such amount to compensate EMPLOYEE for all taxes hi may be required
to pay. EMPLOYEE shall continue to accrue retirement benefits and shall
continue to enjoy any benefits under any plans of TOKOS in which EMPLOYEE is a
participant to the full extent of EMPLOYEE's rights under such plans, including
any perquisites provided under this Agreement, for the 18 month period from the
effective date of such termination; provided, however, that the benefits under
any such plans of TOKOS (other than Tokos' Incentive Stock Option Plan) in
which EMPLOYEE is a participant, including any such prerequisites, shall cease
upon EMPLOYEE's re-employment by another employer.
5.5 Severance Compensation In The Event Of A Failure Of
TOKOS To Renew This Agreement. In the event TOKOS fails or otherwise refuses
for any reason (except pursuant to Section 3.1 hereof) to extend this Agreement
beyond the Basic Term and any extensions thereof, EMPLOYEE's Base Salary (at
the rate payable at the time of such termination) shall be continued in
semi-monthly installments for a period of 18 months from the effective date of
such termination. Notwithstanding anything in this Section 5.5 to the
contrary, EMPLOYEE may, anytime following expiration of this Agreement, submit
to the Board of Directors a written request for a lump sum severance payment
equal to the total of all unpaid cash payments that would otherwise be paid to
EMPLOYEE pursuant to this Section 5.5. If the Board of Directors elects to
grant the request for a lump sum severance payment, TOKOS shall make such
payment to EMPLOYEE within 20 days following the date on which EMPLOYEE
requests a lump sum severance payment or the effective date of such
termination, whichever occurs earlier. In the event that the Board of
Directors elects to deny such request, TOKOS shall provide security,
satisfactory to EMPLOYEE, which approval shall not be unreasonably withheld, to
ensure payment of all amounts owing to EMPLOYEE when due. In addition to the
severance payment payable, under this Section 5.5, EMPLOYEE shall be paid an
amount equal to 1.5 times the highest bonus earned by EMPLOYEE as an employee
of TOKOS. EMPLOYEE shall also be entitled to accelerated vesting of any awards
granted to EMPLOYEE under Tokos' Incentive Stock Option Plan with no
acceleration, however, of EMPLOYEE's right to exercise any such awards.
EMPLOYEE, shall be entitled, at no cost to EMPLOYEE to participate in the full
executive program of any outplacement firm, acceptable to both EMPLOYEE and
TOKOS, until EMPLOYEE's reemployment by another employer. In
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addition to the cost of such outplacement program, to the extent that any part
of such cost constitutes income to EMPLOYEE for state or federal income tax
purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE for all
taxes he may be required to pay. EMPLOYEE shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, including any perquisites provided under this Agreement, for the 18
months from the effective date of such termination; provided, however, that the
benefits under any such plans of TOKOS (other than Tokos' Incentive Stock
Option Plan) in which EMPLOYEE is a participant, including any such
perquisites, shall cease upon EMPLOYEE's reemployment by another employer.
5.6 No Severance Compensation Upon Other Termination. In
the event of an Actual Voluntary Termination or Termination For Cause, EMPLOYEE
shall not be paid any severance compensation.
5.7 Limit on Aggregate Compensation Upon A Change In
Control. Notwithstanding anything to the contrary in this Agreement, solely in
the event of a Termination Upon A Change In Control pursuant to Section 3.5,
the amount of severance compensation paid to EMPLOYEE under Sections 3 and 5 or
otherwise shall not include any amount that TOKOS is prohibited from deducting
for federal income tax purposes by virtue of Section 28OG of the Internal
Revenue Code or any successor provision.
6. Loans to TOKOS. Any loans which may, on the effective date of
termination, be owed by EMPLOYEE to TOKOS, shall be due and payable 2 years
after the effective date of termination or, if applicable, 1 year after
EMPLOYEE becomes reemployed by another employer, whichever is sooner; provided,
however, that the proceeds from the sale of any stock of TOKOS held by EMPLOYEE
shall be applied first to pay taxes, if any, resulting from the sale of such
stock; second to any reduction in EMPLOYEE's margin debt necessitated by the
sale of such stock, which margin debt to the extent secured by stock in TOKOS
shall not be increased by EMPLOYEE after the effective date of any termination
of EMPLOYEE, without the consent of TOKOS; and then to repay any loans owed by
EMPLOYEE to TOKOS. In order to be eligible for the deferred repayment of any
loans owed by EMPLOYEE to TOKOS at the time of termination, EMPLOYEE shall,
within thirty days of a request by TOKOS, provide TOKOS with security equal, in
then current value, to 1 1/2 times the amount of such loan(s).
7. Consulting Responsibilities. In addition to all other
responsibilities of EMPLOYEE hereunder, in the event of a Termination of
Agreement Upon a Change in Control, a Termination Other Than For Cause or an
Actual Voluntary Termination, EMPLOYEE shall make himself available at the
request of TOKOS, upon reasonable notice and at mutually convenient times and
places as shall not unreasonably interfere with EMPLOYEE's other
responsibilities, to assist TOKOS in preparing for, managing and conducting any
litigation involving TOKOS (including by way of example and not as limitation,
giving testimony), and to otherwise consult with TOKOS with respect to any
matters consistent with his duties prior to termination; for which EMPLOYEE
shall be compensated at the rate of $150.00 per hour for the first 100 hours
and $300.00 per hour for each additional hour; provided, however, in no event
shall EMPLOYEE be obligated to provide any services to TOKOS after 18 months
from the effective date of termination.
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8. Protection of Company Assets and Dispute Resolution.
8.1 Non-Competition. During the term of this Agreement,
including the period, if any, during which EMPLOYEE shall be entitled to
severance compensation hereunder, EMPLOYEE shall not engage in any activity,
business or transactions in competition with TOKOS. In furtherance of this
prohibition, EMPLOYEE shall notify TOKOS, in written detail, of all business
activity which, to the best of EMPLOYEE's knowledge, could be perceived by
TOKOS as violating this provision. In the event that EMPLOYEE fails to provide
such notice, TOKOS may avail itself of whatever remedies may exist, and
EMPLOYEE hereby consents to TOKOS' obtaining injunctive relief. In the
alternative event that EMPLOYEE provides such notice, TOKOS must, within 20
days of actual receipt of such notice, consent to EMPLOYEE's involvement in the
business activity described, or notify EMPLOYEE, in written detail, of all
reasons TOKOS believes the business activity described violates this provision.
If TOKOS consents or fails to timely provide such written response, such
failure shall constitute consent by TOKOS thereby, in either case, enabling
EMPLOYEE to engage in such business activity to the extent described in
EMPLOYEE's written notice to TOKOS. In no event, however, shall EMPLOYEE be
relieved of responsibility to provide TOKOS with notice, in written detail, of
any other business activity which EMPLOYEE, to the best of his knowledge,
believes TOKOS would perceive to be violative of this provision. If EMPLOYEE
challenges TOKOS' decision to not consent, EMPLOYEE shall, within 10 days of
actual receipt of TOKOS' objections, so notify TOKOS in writing by providing
TOKOS with his response, in detail, to TOKOS' objections, and both EMPLOYEE and
TOKOS hereby agree that such dispute shall be finally settled by arbitration in
accordance with Section 8.2 below.
8.2 Arbitration. TOKOS and EMPLOYEE agree that any
controversy, claim or dispute of any kind arising out of or relating to this
Agreement, the interpretation of this Agreement, EMPLOYEE's employment with
TOKOS or the termination thereof, or the course of dealing by the parties
hereunder (including any claim based on contract, tort or statute) whether for
damages or for provisional or permanent equitable relief, shall be finally
settled by arbitration administered by the American Arbitration Association
("AAA") in accordance with its then-existing commercial Arbitration rules
("Rules") in Irvine, California before an arbitrator who shall be a retired or
former judge of the California Superior Court and who shall be selected from
those former or retired judges affiliated with the Judicial Arbitration and
Mediation Service ("JAMS") located in the City of Orange, California who are
willing and able to comply with the time constraints and other procedures
herein agreed to. The party initiating the claim shall obtain from JAMS a
current list of available judges and shall immediately mail such list to the
other party. Each party to the dispute shall have 10 days from the mailing
date in which to cross off any names objected to, number the remaining names in
order of preference, and return the list to the AAA. If either party fails to
return the list within the time specified, all persons named therein shall be
deemed acceptable. From among the persons who have been approved on both
lists, and in accordance with the designated order of mutual preference, the
AAA shall invite the acceptance of an arbitrator to serve. If the parties fail
to agree on any of the persons named, or if acceptable arbitrators are unable
to act, or if for any other reason the appointment cannot be made from the
submitted lists, the AAA shall have the power to make the appointment from
among other California Superior Court judges who are willing and able to comply
with the time constraints and other procedures herein agreed to. Both parties
shall share equally the payment of the arbitrator's fee, though the arbitrator,
in his or his sole discretion, may order the
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non-prevailing party to pay the prevailing party's share of the arbitrator's
fee. Any controversy regarding whether a dispute is an arbitratable dispute
hereunder shall be determined by the arbitrator. The designation of a situs or
a governing law for this Agreement or arbitrations hereunder shall not be
deemed an election to preclude application of the U.S. Arbitration Act, if it
would be applicable. Judgment upon the award rendered by the arbitrator may be
entered and enforced in any court having proper jurisdiction. At the request
of either party, arbitration proceedings will be conducted in secrecy; in such
case all documents, testimony and records will be received, heard and
maintained by the arbitrator in secrecy under seal, available for inspection
only by the parties and their respective attorneys and experts, who will agree,
in advance and in writing, to receive all such information confidentially and
to maintain such information in secrecy until such information becomes
generally known.
It is the intention of both parties that any dispute arising in connection with
this Agreement or EMPLOYEE's employment shall be resolved expeditiously.
Therefore, all discovery must be completed and the hearing commenced within 30
days of the arbitrator's appointment. The award must be reasoned and must be
issued within 30 days of commencement of the hearing and will not be subject to
judicial review in whole or in part.
8.3 No Solicitation/Raiding of Employees. EMPLOYEE
acknowledges and agrees that TOKOS has invested substantial time and effort in
assembling its present staff. Accordingly, EMPLOYEE agrees and covenants that
during the term of this Agreement, including the period, if any, during which
EMPLOYEE shall be entitled to severance compensation hereunder, but in no event
for a period less than one year after the termination of his employment with
TOKOS, EMPLOYEE will not directly or indirectly, induce or solicit any employee
to leave employment with TOKOS.
8.4 Confidential Information and Trade Secrets. EMPLOYEE
acknowledges and agrees that in the course of employment with TOKOS, he has
been granted access to and become acquainted with information of a
confidential, proprietary or secret nature which is or may be either applicable
to or related in any way to the present or future business of TOKOS. Such
"confidential information" includes but is not limited to business strategies,
financial results, pricing, marketing strategies, sales techniques, etc.
EMPLOYEE acknowledges and agrees that such confidential information constitutes
"trade secret" information within the meaning of the Uniform Trade Secret Act
(California Civil Code section 3426 set seq.)" In addition to such confidential
information, "trade secrets" include but are not limited to various devices,
secret inventions, processes, compilation of information, records,
specifications, etc. EMPLOYEE acknowledges and agrees that such confidential
information and trade secrets have independent economic value, are not
generally known to the public and/or other persons who can obtain economic
value from the disclosure or use thereof, and that such confidential
information and trade secrets have remained confidential due to the
extraordinary precautions, safeguards and efforts of TOKOS and its employees to
maintain the secrecy and confidential thereof. EMPLOYEE covenants and agrees
not to disclose to any person, company or entity other than TOKOS any trade
secrets, confidential or proprietary information, directly or indirectly, or to
use them in any way, for his own benefit or for the benefit of any other person
or entity other than TOKOS, except as required in the course of employment with
TOKOS.
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EMPLOYEE agrees to abide by the policies and procedures of TOKOS, as
established from time-to-time, for the protection of trade secrets,
confidential and proprietary information.
8.5 Conflicts of Interest. EMPLOYEE acknowledges and
agrees that during the term of this Agreement, including the period, if any,
during which EMPLOYEE shall be entitled to severance compensation hereunder,
EMPLOYEE will not, without the prior written consent of the Board of Directors
of TOKOS, directly or indirectly engage in any employment, consulting, or other
activity which would conflict with the business of TOKOS or the duties of
EMPLOYEE.
8.6 Injunctive Relief. In the event of any breach of the
provisions of this Agreement, TOKOS and EMPLOYEE respectively agree that an
injunction may issue from any court of competent jurisdiction to enforce these
provisions, including the terms of this paragraph. These provisions shall not
in any way limit the right of either party to bring an action for other
injunctive or other equitable relief and for damages occasioned by any breach
of this Agreement by the other party.
8.7 Preservation of Company Property. EMPLOYEE
acknowledges that from time-to-time in the course of employment with TOKOS,
EMPLOYEE has had the opportunity to inspect and use certain property of TOKOS,
both tangible and intangible, including but not limited to files, records,
documents, drawings, specifications, lists, equipment, graphics, designs and
similar items relating to the business of TOKOS. EMPLOYEE acknowledges and
agrees that all such property, including but not limited to any and all copies
thereof, whether prepared by EMPLOYEE or otherwise in the possession of
EMPLOYEE, are and shall remain the exclusive property of TOKOS, that EMPLOYEE
shall have no right or proprietary interest in such property, that EMPLOYEE
will safeguard and return to TOKOS all such property, and that EMPLOYEE has not
and will not take, remove, duplicate or otherwise remove any such property from
the business premises of TOKOS at any time without the consent of the Chief
Executive Officer.
8.8 No Solicitation of Customers. Because of the
sensitive and unique nature of the business of TOKOS, EMPLOYEE acknowledges and
agrees that the solicitation of a past, current or potential customer of TOKOS
with whom EMPLOYEE has had a business contact on behalf of TOKOS of necessity
requires the use of confidential information, and that the use and application
of such confidential information by EMPLOYEE would be unfair and cause
irreparable injury to TOKOS.
EMPLOYEE further acknowledges and agrees that the identity of the customers of
TOKOS are not generally known to the public or the competitors of TOKOS and
that EMPLOYEE has had access to the identity of such customers solely as a
result of this employment with TOKOS. Therefore, EMPLOYEE covenants and agrees
that during the term of this Agreement, including the period, if any, during
which EMPLOYEE shall be entitled to severance compensation hereunder, but in no
event for a period less than one year following the effective date of the
termination of his employment with TOKOS, EMPLOYEE shall not, directly or
indirectly, for himself or for any person, company or entity, attempt to
divert, solicit or take away any business or patronage of any customer of TOKOS
with whom EMPLOYEE has had business contact or about which EMPLOYEE has had
access to confidential information, and that EMPLOYEE also will not, directly
or indirectly,
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for himself or any other person, company or employer, contact any such customer
of TOKOS for the purpose of soliciting or diverting the business or patronage
of any such customer.
8.9 Inventions. EMPLOYEE agrees to promptly disclose to
TOKOS any and all inventions, discoveries, improvements, trade secrets,
formulas, techniques and processes, whether or not patentable and whether or
not reduced to practice, made or conceived by EMPLOYEE, either solely or in
conjunction with others, during the period of his employment with the Company,
which relate to or result from the actual anticipated business, work or
research for TOKOS and which result, to any extent, from the use of the
premises or property of TOKOS, or are suggested by any tasks assigned to
EMPLOYEE or any work performed by EMPLOYEE for or on behalf of TOKOS. EMPLOYEE
agrees to and hereby does grant and assign to TOKOS all rights which EMPLOYEE
may have or acquire in any such invention. EMPLOYEE acknowledges and agrees
that all such inventions shall be the sole property of TOKOS and EMPLOYEE
hereby assigns to TOKOS his entire right, title and interest in and to such
inventions; provided, however, that such assignment does not apply to any
invention which qualifies fully under the provisions of Section 2870 of the
California Labor Code, the provisions of which are incorporated herein by
reference.
9. Release. It is understood and agreed by and between EMPLOYEE
and TOKOS that in consideration of each party entering into this Agreement,
each party is hereby respectively discharging and releasing the other party
from any and all claims which such party may have or may have had against the
other relating, arising out of or in connection with EMPLOYEE's employment by
TOKOS, including the termination of such employment as provided herein, other
than for purposes of enforcement of this Agreement. In addition, by entering
into this Agreement, each party is hereby waiving, as to the other party,
Section 1542 of the California Civil Code.
10. Disclosure of Investments. Simultaneously with EMPLOYEE's
execution of this Agreement and upon each anniversary of the Effective Date,
EMPLOYEE shall notify the Chairman of the Compensation Committee of the nature
and extent of EMPLOYEE's investments, stock holdings, employment as an
employee, director, consultant, partner or any similar interest in any business
or enterprise other than TOKOS; provided, however, that EMPLOYEE shall have no
obligation to disclose any investment under $100,000 in current market value or
any holdings of publicly traded securities which are not in excess of one
percent of the outstanding class of such securities.
11. Miscellaneous.
11.1 Payment Obligations. TOKOS' obligation to pay
EMPLOYEE the compensation and to make the arrangements provided herein shall be
unconditional, and EMPLOYEE shall have no obligation whatsoever to mitigate
damages hereunder. If litigation or arbitration is required after a Change in
Control to enforce or interpret any provision contained herein, TOKOS, to the
extent permitted by applicable law and TOKOS' Certificate of Incorporation and
Bylaws, hereby indemnities EMPLOYEE for EMPLOYEE's reasonable attorneys' fees
and disbursements incurred in such proceeding.
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11.2 Waiver. The waiver of the breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach of the same or other provision hereof.
11.3 Entire Agreement; Modifications. Except as otherwise
provided herein, this Agreement represents the sole, entire and complete
understanding among the parties with respect to the subject matter hereof, and
this Agreement supersedes any and all prior understandings, agreements, plans
and negotiations, whether written or oral, with respect to the subject matter
hereof, including without limitation, any understandings, agreements or
obligations respecting any past or future compensation, bonuses, reimbursements
or other payments to EMPLOYEE from TOKOS. All modifications to the Agreement
must be in writing and signed by both EMPLOYEE and TOKOS.
11.4 Notices. All notices and other communications under
this Agreement shall be in writing and shall be given by facsimile or first
class mail, certified or registered with return receipt requested, and shall be
deemed to have been duly given three days after mailing or 12 hours after
transmission of a facsimile to the respective persons named below:
If to TOKOS: Chairman of the Compensation Committee of
The Board of Directors
TOKOS MEDICAL CORPORATION (Delaware)
1821 East Dyer Road
Santa Ana, CA 92705
If to EMPLOYEE: Robert F. Byrnes
Chief Executive Officer
TOKOS MEDICAL CORPORATION (California)
1821 East Dyer Road
Santa Ana, CA 92705
Any party may change such party's address for notices by notice duly given
pursuant to this Section 11.4.
11.5 Headings. The Section headings herein are intended
for reference and shall not by themselves determine the construction or
interpretation of this Agreement.
11.6 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California applicable
to contracts entered into and wholly to be performed within the State of
California by California residents.
11.7 Severability. Should any court of competent
jurisdiction determine that any provision of this Agreement is illegal or
unenforceable to any extent, such provision shall be enforced to the extent
permissible and all other provisions of this Agreement shall continue to be
enforceable to the extent possible.
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11.8 Survival of TOKOS' Obligations. TOKOS' obligations
hereunder shall not be terminated by reason of any liquidation, dissolution,
bankruptcy, cessation of business, or similar event relating to TOKOS. This
Agreement shall not be terminated by any merger or consolidation or other
reorganization of TOKOS. In the event any such merger, consolidation or
reorganization shall be accomplished by transfer of stock or by transfer of
assets or otherwise, the provisions of this Agreement shall be binding upon and
inure to the benefit of the surviving or resulting TOKOS or person. This
Agreement shall be binding upon and inure to the benefit of the executors,
administrators, heirs, successors and assigns of the parties; provided,
however, that except as herein expressly provided, this Agreement shall not be
assignable either by TOKOS (except to an affiliate of TOKOS in which event
TOKOS shall remain liable if the affiliate fails to meet any obligations to
make payments or provide benefits or otherwise) or by EMPLOYEE.
11.9 Counterparts. This Agreement may be executed in one
or more counterparts, all of which taken together shall constitute one and the
same Agreement.
11.10 Withholdings. All compensation and benefits payable
to EMPLOYEE hereunder and shall be reduced by all federal, state, local and
other withholdings and similar taxes and payments required by applicable law.
11.11 Indemnification. In addition to any rights to
indemnification to which EMPLOYEE is entitled to under TOKOS' Certificate of
Incorporation, Bylaws, any policy of insurance or other agreement, TOKOS shall
indemnify EMPLOYEE at all times during and after the term of this Agreement to
the maximum extent permitted under Section 145 of the General Corporation Law
of the State of Delaware or any successor provision thereof and any other
applicable state law, and shall pay EMPLOYEE's expenses in defending any civil
or criminal action, suit, or proceeding brought by any third party against
EMPLOYEE as a result of EMPLOYEE's relationship with TOKOS or against TOKOS in
advance of the final disposition of such action, suit, or proceeding, to the
maximum extent permitted under such applicable state laws. Unless otherwise
provided herein, this indemnification shall not apply to and TOKOS shall not
indemnify EMPLOYEE with respect to any disputes arising under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TOKOS MEDICAL CORPORATION (DELAWARE)
By: /s/ Thomas Erickson
------------------------------------
Thomas Erickson
Chairman, Compensation Committee
Signature: /s/ Robert F. Byrnes
-----------------------------
Robert F. Byrnes
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EXHIBIT 10.32
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of January 1, 1995 ("Effective Date") by and between TOKOS MEDICAL
CORPORATION (DELAWARE), a Delaware corporation ("TOKOS"), and TERRY P. BAYER
("EMPLOYEE").
RECITAL
TOKOS desires to employ EMPLOYEE as the President of Tokos Medical
Corporation, a California corporation and the principal operating subsidiary
for TOKOS ("Tokos (California)"), and EMPLOYEE is willing to accept such
employment by TOKOS, on the terms and subject to the conditions set forth in
this Agreement.
AGREEMENT
THE PARTIES AGREE AS FOLLOWS:
1. Duties. During the term of this Agreement, EMPLOYEE agrees to
be employed by and to serve TOKOS as the President of Tokos (California) and
TOKOS agrees to employ and retain EMPLOYEE in such capacities. EMPLOYEE shall
devote substantially all of her business time, energy, and skill to the
business of Tokos (California) and TOKOS and the duties of her position.
EMPLOYEE shall report only to TOKOS' Chief Executive Officer; shall observe and
abide by all policies of TOKOS and all directives of the Chief Executive
Officer and the Board of Directors consistent with her position; and, at all
times during the term of this Agreement, shall have powers and duties at least
commensurate with her position as the President of Tokos (California).
EMPLOYEE's principal place of business with respect to her services to TOKOS
shall be in Orange County, California.
2. Term of Employment.
2.1 Definitions. For purposes of this Agreement the
following terms shall have the following meanings:
2.1.1 "Termination For Cause" shall mean the
termination by TOKOS of EMPLOYEE's employment with TOKOS as the result of
EMPLOYEE's willful misconduct or dishonesty towards, fraud upon, or deliberate
injury or attempted injury to TOKOS; EMPLOYEE's willful and continued material
breach of this Agreement, or; EMPLOYEE's gross negligence or malfeasance in the
performance of her duties and responsibilities, as determined by the good faith
decision of the Chief Executive Officer. Notwithstanding the foregoing,
EMPLOYEE shall be entitled to appeal the termination and request confirmation
thereof from the Board of Directors in the form of a resolution duly adopted by
the affirmative vote of not less than a simple majority of the outside
directors, provided the outside directors voting constitute a majority of the
entire
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membership of the Board of Directors, at a meeting of the Board of Directors
duly noticed and held within 45 days of EMPLOYEE's request (after reasonable
notice to EMPLOYEE, and opportunity for EMPLOYEE, together with counsel if
desired, to be heard before the Board of Directors), which resolution shall
state that in the good faith opinion of the Board of Directors, Cause for
termination exists, and which shall enumerate with particularity the specific
conduct which constitutes Cause. In the event the Board of Directors does not
adopt a resolution confirming the termination, then EMPLOYEE shall be
reinstated with back pay in such capacities as the Board of Directors may
direct. An act, or a failure to act, shall not be considered "willful" if, in
the good faith determination of the Board of Directors, it was performed, or
omitted, in good faith and with reasonable grounds for belief that the action
or omission was in the interest of TOKOS. The EMPLOYEE shall not be deemed to
be grossly negligent or malfeasant unless the EMPLOYEE's act or failure to act,
in the good faith determination of the Board of Directors was inappropriate and
results in a material injury to TOKOS. The Chief Executive Officer may effect
a Termination For Cause at any time by providing EMPLOYEE with written notice
of such termination. The termination shall be effective as of the date of the
notice.
2.1.2 "Termination Other Than For Cause" shall mean
termination by TOKOS of EMPLOYEE's employment with TOKOS and shall include (i)
termination for performance, incompatibility with TOKOS, other deficiencies or
any other reason (other than Cause, a Change in Control, Death or Incapacity)
as determined by the Chief Executive Officer, and (ii) constructive termination
of EMPLOYEE's employment by reason of (a) a reduction in EMPLOYEE's Base Salary
of 10% or more, unless such reduction is part of a cost-savings or similar plan
that equally impacts all other similarly situated officers, or (b) a
requirement that EMPLOYEE change her principal place of business to a location
that is more than 50 miles from her current principal place of business.
Notwithstanding the foregoing, in the event of a Termination Other Than For
Cause which is initiated by the Chief Executive Officer, EMPLOYEE shall be
entitled to appeal the termination and request confirmation thereof from the
Board of Directors in the form of a resolution duly adopted by the affirmative
vote of not less than a simple majority of the outside directors, provided the
outside directors voting constitute a majority of the entire membership of the
Board of Directors at a meeting of the Board of Directors duly noticed and held
within 45 days of EMPLOYEE's request (after reasonable notice to EMPLOYEE and
the opportunity for EMPLOYEE to be heard before the Board of Directors), which
resolution shall state that in the good faith opinion of the Board of
Directors, EMPLOYEE should be terminated for the reasons articulated by the
Chief Executive Officer. In the event the Board of Directors does not adopt a
resolution confirming the termination, then EMPLOYEE shall be reinstated in
such capacities as the Board of Directors may direct. The Chief Executive
Officer may effect a Termination Other Than For Cause at any time by providing
EMPLOYEE with written notice of such termination. The EMPLOYEE may also effect
a Termination Other Than For Cause at any time one of the above two conditions
for constructive termination have been met. The termination shall be effective
as of the date of the notice.
2.1.3 "Actual Voluntary Termination" shall mean
termination by EMPLOYEE of EMPLOYEE's employment with TOKOS other than (i)
"Termination For Cause," (ii) "Termination Other Than For Cause," (iii)
"Termination by Reason of Incapacity" or
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"Termination by Reason of Death" and (v) "Termination Upon a Change in Control"
as described in this Agreement.
2.1.4 "Termination Upon a Change in Control" shall
mean (i) the termination by TOKOS of EMPLOYEE within 1 year after, or during
the 3 months immediately prior to, a "Change in Control," or (ii) the
termination by EMPLOYEE of this Agreement with TOKOS within 1 year after a
"Change in Control." Either TOKOS or EMPLOYEE may effect a Termination Upon a
Change in Control once a "Change in Control" has occurred by providing the
other party with written notice of such termination. The termination shall be
effective as of the date of such notice.
2.1.5 "Change in Control" shall mean (i) the time
that TOKOS first determines that any person and all other persons who
constitute a group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 ("Exchange Act")) have acquired direct or indirect
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of 20% or more of TOKOS' outstanding securities; (ii) the merger, consolidation
or reorganization of TOKOS with one or more corporations as a result of which
TOKOS is merged out of existence or becomes a subsidiary of another
corporation, the sale of all or substantially all of the assets of TOKOS; or
(iii) as a result of any tender or exchange offer, merger, consolidation or
other business combination, or any combination of any of the foregoing
transactions, the persons who were directors of TOKOS before such transaction
cease to constitute a majority of the Board of Directors of TOKOS or of any
successor to TOKOS.
2.2 Basic Term. The term of employment of EMPLOYEE by
TOKOS shall be two (2) years commencing January 1, 1995 through December 31,
1996 unless terminated earlier pursuant to Section 3, which term is subject to
renewal upon at least 90 days notice prior to the expiration of the initial or
any renewal periods. Therefore, at any time before October 1, 1996, TOKOS and
EMPLOYEE may by mutual written agreement renew this Agreement and, thereby,
extend EMPLOYEE's employment under the terms of this Agreement for such
additional periods as they may agree.
3. Termination of Employment.
3.1 Termination For Cause. Upon any Termination For
Cause, EMPLOYEE shall immediately be paid all accrued salary, bonus
compensation to the extent fully earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued paid time off ("PTO") pay and any appropriate business
expenses incurred by EMPLOYEE in connection with her duties hereunder, all to
the date of termination. EMPLOYEE shall not be paid any other compensation or
reimbursement of any kind including, without limitation, severance
compensation, continued vesting or extended rights to exercise beyond the
minimum required by the applicable plan.
3.2 Termination Other Than For Cause. Upon any
Termination Other Than For Cause, EMPLOYEE shall immediately be paid all
accrued salary, bonus compensation calculated
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by pro-rating all achievements and other measuring numbers set forth in the
bonus plan for other similarly situated officers as though the year and date
ended on the date of termination, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of TOKOS in which
EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under such
plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with her duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5.1, but no
other compensation or reimbursement of any kind.
3.3 Termination by Reason of Incapacity. If, during the
term of this Agreement, EMPLOYEE, in the reasonable judgment of the Chief
Executive Officer of TOKOS, has failed to perform her duties under this
Agreement on account of illness or physical or mental incapacity, and such
illness or incapacity continues for a period of more than 6 weeks, TOKOS shall
have the right to terminate EMPLOYEE's employment hereunder, such termination
to be effective retroactive to the first day of such illness or incapacity, by
written notification to EMPLOYEE and payment to EMPLOYEE of all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan used for other similarly situated officers
for that year as though the year ended on the date of termination, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued PTO pay and any appropriate
business expenses incurred by EMPLOYEE in connection with her duties hereunder,
all to the date of termination, with the exception of medical and dental
benefits which shall continue through the expiration of the Agreement and all
severance compensation provided in Section 5.2, but no other compensation or
reimbursement of any kind.
3.4 Termination by Reason of Death. In the event of
EMPLOYEE's death during the term of this Agreement, EMPLOYEE's employment shall
be deemed to have terminated as of the last day of the month during which her
death occurs and TOKOS shall pay to her estate or such beneficiaries as
EMPLOYEE may from time to time designate all accrued salary, bonus compensation
calculated by pro-rating all achievement and other measuring numbers set forth
in the bonus plan used for other similarly situated officers for that year as
though the year ended on the date of termination, vested deferred compensation
(other than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, accrued PTO pay and any appropriate business expenses incurred by
EMPLOYEE in connection with her duties hereunder, all to the date of
termination, and all severance compensation provided in Section 5.3, but no
other compensation or reimbursement of any kind.
3.5 Termination Upon a Change in Control. Upon the
occurrence of a Termination Upon a Change in Control, EMPLOYEE shall
immediately be paid all accrued salary, bonus compensation calculated by
pro-rating all achievement and other measuring numbers set forth in the bonus
plan used for other similarly situated officers for that year as though the
year ended on the date of the termination, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans
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of TOKOS in which EMPLOYEE is a participant to the full extent of EMPLOYEE's
rights under such plans, accrued PTO pay and any appropriate business expenses
incurred by EMPLOYEE in connection with her duties hereunder, all to the date
of the termination and all severance compensation provided in Section 5.4, but
no other compensation or reimbursement of any kind.
3.6 Termination Upon Expiration of Agreement. In the
event that TOKOS fails or otherwise refuses for any reason (except as otherwise
provided herein) to extend this Agreement at least 90 days prior to the initial
or any renewal period, EMPLOYEE shall immediately be paid all accrued salary,
bonus compensation calculated by pro-rating all achievement and other measuring
numbers set forth in the bonus plan for other similarly situated officers as
though the year ended on the date of the failure to extend the Agreement,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of TOKOS in which EMPLOYEE is a participant to the
full extent of EMPLOYEE's rights under such plans, accrued PTO pay and any
appropriate business expenses incurred by EMPLOYEE in connection with her
duties hereunder, all to the date of termination and all severance compensation
provided in Section 5.5, but no other compensation or reimbursement of any
kind.
3.7 Actual Voluntary Termination. In the event of an
Actual Voluntary Termination, EMPLOYEE shall immediately be paid all accrued
salary, bonus compensation to the extent fully earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which
will be paid in accordance with the applicable plan), any benefits under any
plans of TOKOS in which EMPLOYEE is a participant to the full extent of
EMPLOYEE's rights under such plans, accrued PTO pay and any appropriate
business expenses incurred by EMPLOYEE in connection with her duties hereunder,
all to the date of termination. EMPLOYEE shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
4. Salary, Benefits and Bonus Compensation.
4.1 Base Salary. As payment for the services to be
rendered by EMPLOYEE as provided in Section 1 and subject to the terms and
conditions of Sections 2 and 3, TOKOS agrees to pay to EMPLOYEE a "Base Salary"
for the twelve calendar months beginning January 1, 1995 at the rate of
$228,000 per annum payable in equal semi-monthly installments. The Base Salary
for each year (or portion thereof) beginning January 1, 1996 shall be
determined by the Board of Directors. EMPLOYEE's Base Salary shall be reviewed
at least annually by the Compensation Committee of the Board of Directors (the
"Compensation Committee").
4.2 Bonuses. EMPLOYEE shall be eligible to receive a
bonus each year (or portion thereof) during the Base Term and any extensions
thereof, with the actual amount of any such bonus to be determined in the sole
discretion of the Board of Directors in accordance with the Plan adopted for
Corporate Officers. All such bonuses shall be payable within 60 days after the
end of the year to which such bonus relates. All such bonuses shall be
reviewed annually by the Compensation Committee of the Board of Directors.
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4.3 Additional Benefits. During the term of this
Agreement, EMPLOYEE shall be entitled to the following fringe benefits:
4.3.1 Benefits. EMPLOYEE shall be eligible to
participate in such of TOKOS' benefits and deferred compensation plans as are
now generally available or later made generally available to officers of TOKOS,
including, without limitation, Tokos' Incentive Stock Option Plan, 401K, dental
and medical plans, PTO, life insurance, personal catastrophe and disability
insurance. For purposes of establishing the length of service under any
benefit plans or programs of TOKOS, EMPLOYEE's employment with TOKOS will be
deemed to have commenced on the date EMPLOYEE commenced services as an employee
of TOKOS, to the extent permitted under applicable law and the terms of such
plans or programs.
4.3.2 Reimbursement for Expenses. During the term
of this Agreement, TOKOS shall reimburse EMPLOYEE for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
EMPLOYEE in connection with her duties under this Agreement. Any such expenses
shall be submitted by EMPLOYEE to TOKOS on a periodic basis, as determined by
the Chief Executive Officer, and all such expenses are subject to approval of
the Chief Executive Officer.
5. Severance Compensation.
5.1 Severance Compensation in the Event of a Termination
Other Than for Cause. In the event EMPLOYEE's employment is terminated as a
result of a Termination Other Than for Cause, EMPLOYEE's Base Salary (at the
rate payable at the time of such termination) shall be continued in
semi-monthly installments for a period equal to 9 months, plus 2 weeks for each
year (or part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12
months from the effective date of such termination. Notwithstanding anything
in this Section 5.1 to the contrary, EMPLOYEE may, anytime following
notification of a Termination Other Than For Cause, submit to the Chief
Executive Officer a written request for a lump sum severance payment equal to
the total of all unpaid cash payments that would otherwise be paid to EMPLOYEE
pursuant to this Section 5.1. If the Chief Executive Officer elects to grant
the request for a lump sum severance payment, TOKOS shall make such payment to
EMPLOYEE within 20 days following the date on which EMPLOYEE requests a lump
sum severance payment or the effective date of such termination, whichever
occurs earlier. In the event that the Chief Executive Officer elects to deny
such request, TOKOS shall provide security, satisfactory to EMPLOYEE, which
approval shall not be unreasonably withheld, to ensure payment of all amounts
owing to EMPLOYEE when due. EMPLOYEE, shall be entitled, at no cost to
EMPLOYEE to participate in the full executive program of any outplacement firm,
acceptable to both EMPLOYEE and TOKOS, until EMPLOYEE's reemployment by another
employer. In addition to the cost of such outplacement program, to the extent
that any part of such cost constitutes income to EMPLOYEE for state or federal
income tax purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE
for all taxes she may be required to pay. EMPLOYEE shall be entitled to all
COBRA benefits for the 9 to 12 month period from the effective date of such
termination but shall not otherwise continue to accrue retirement benefits or
continue to enjoy any other benefits under any plans of TOKOS in which EMPLOYEE
is a participant. Any awards granted to EMPLOYEE under Tokos' Incentive Stock
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Option Plan that are vested as of the date of termination shall expire 60 days
after the termination date.
5.2 Severance Compensation for Termination by Reason of
Incapacity. In the event EMPLOYEE's employment is terminated as a result of a
Termination by Reason of Incapacity, EMPLOYEE's Base Salary (at the rate
payable as of the effective date of the termination) shall be continued in
semi-monthly installments for a period equal to 9 months plus 2 weeks for each
year (or part thereof) of EMPLOYEE's employment by TOKOS up to a maximum of 12
months from the effective date of such termination. Notwithstanding anything
in this Section 5.2 to the contrary, EMPLOYEE may, anytime following
notification of a Termination by Reason of Incapacity, submit to the Chief
Executive Officer a written request for a lump sum severance payment equal to
the total of all unpaid cash payments that would otherwise be paid to EMPLOYEE
pursuant to this Section 5.2, which request shall not be unreasonably denied.
If the Chief Executive Officer elects to grant the request for a lump sum
severance payment, TOKOS shall make such payment to EMPLOYEE within 20 days
following the date on which EMPLOYEE requests a lump sum severance payment or
the effective date of such termination, whichever occurs earlier. In the event
that the Chief Executive Officer elects to deny such request, TOKOS shall
provide security, satisfactory to EMPLOYEE, which approval shall not be
unreasonably withheld, to ensure payment of all amounts owing to EMPLOYEE when
due. EMPLOYEE shall continue to accrue retirement benefits and shall continue
to enjoy any other benefits under any plans of TOKOS in which EMPLOYEE is a
participant for the 9 to 12 month period from the effective date of the
Termination except that any awards granted to EMPLOYEE under Tokos' Incentive
Stock Option Plan shall cease to vest as of the termination date and EMPLOYEE's
rights to exercise any awards vested as of the termination date shall be
extended (but not beyond their original term) to the date of EMPLOYEE's
re-employment with another employer or 60 days after the end of the 9 to 12
month period, whichever occurs first.
5.3 Severance Compensation for Termination by Reason of
Death. In the event EMPLOYEE's employment is terminated as a result of
EMPLOYEE's death, EMPLOYEE's Base Salary (at the rate payable as of the
effective date of the termination) shall be continued in semi-monthly
installments for a period of 3 months. TOKOS shall also continue to fund
dental and medical coverage for EMPLOYEE's spouse and dependents for the 3
month period from the effective date of the termination. Any awards granted to
the EMPLOYEE under Tokos' Incentive Stock Option Plan shall cease to vest as of
the termination date and EMPLOYEE's rights to exercise any awards vested as of
the termination date shall be extended (but not beyond their original term) to
the date EMPLOYEE's estate is closed or 2 years from the date of her death,
whichever occurs first.
5.4 Severance Compensation in the Event of a Termination
Upon A Change In Control. In the event EMPLOYEE elects to terminate this
Agreement as a result of a Termination Upon A Change In Control, EMPLOYEE's
Base Salary (at the rate payable at the time of such termination) shall be
continued in semi-monthly installments for a period of 18 months from the
effective date of such termination. Notwithstanding anything in this Section
5.4 to the contrary, EMPLOYEE may, anytime following notification of a
Termination Upon A Change In Control, submit to the Chief Executive Officer a
written request for a lump sum severance payment equal to
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the total of all unpaid cash payments that would otherwise be paid to EMPLOYEE
pursuant to this Section 5.4, which request shall not be unreasonably denied.
If the Chief Executive Officer elects to grant the request for a lump sum
severance payment, TOKOS shall make such payment to EMPLOYEE within 20 days
following the date on which EMPLOYEE requests a lump sum severance payment or
the effective date of such termination, whichever occurs earlier. In the event
that the Chief Executive Officer elects to deny such request, TOKOS shall
provide security, satisfactory to EMPLOYEE, which approval shall not be
unreasonably withheld, to ensure payment of all amounts owing to EMPLOYEE when
due. In addition to the severance payment payable under this Section 5.4,
EMPLOYEE shall be paid an amount equal to 1.5 times the highest bonus earned by
EMPLOYEE as an employee of TOKOS. EMPLOYEE shall also be entitled to
accelerated vesting of any awards granted to EMPLOYEE under Tokos' Incentive
Stock Option Plan with no acceleration, however, of EMPLOYEE's rights to
exercise such awards. EMPLOYEE, shall be entitled, at no cost to EMPLOYEE, to
participate in the full executive program of any outplacement firm, acceptable
to both EMPLOYEE and TOKOS, until EMPLOYEE's reemployment by another employer.
In addition to the cost of such outplacement program, to the extent that any
part of such cost constitutes income to EMPLOYEE for state or federal income
tax purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE for all
taxes she may be required to pay. EMPLOYEE shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, including any perquisites provided under this Agreement, for the 18
month period from the effective date of such termination; provided, however,
that the benefits under any such plans of TOKOS (other than Tokos' Incentive
Stock Option Plan) in which EMPLOYEE is a participant, including any such
prerequisites, shall cease upon EMPLOYEE's re-employment by another employer.
5.5 Severance Compensation In The Event Of A Failure Of
TOKOS To Renew This Agreement. In the event TOKOS fails or otherwise refuses
for any reason (except pursuant to Section 3.1 hereof) to extend this Agreement
beyond the Basic Term and any extensions thereof, EMPLOYEE's Base Salary (at
the rate payable at the time of such termination) shall be continued in
semi-monthly installments for a period of 18 months from the effective date of
such termination. Notwithstanding anything in this Section 5.5 to the
contrary, EMPLOYEE may, anytime following expiration of this Agreement, submit
to the Chief Executive Officer a written request for a lump sum severance
payment equal to the total of all unpaid cash payments that would otherwise be
paid to EMPLOYEE pursuant to this Section 5.5. If the Chief Executive Officer
elects to grant the request for a lump sum severance payment, TOKOS shall make
such payment to EMPLOYEE within 20 days following the date on which EMPLOYEE
requests a lump sum severance payment or the effective date of such
termination, whichever occurs earlier. In the event that the Chief Executive
Officer elects to deny such request, TOKOS shall provide security, satisfactory
to EMPLOYEE, which approval shall not be unreasonably withheld, to ensure
payment of all amounts owing to EMPLOYEE when due. In addition to the
severance payment payable, under this Section 5.5, EMPLOYEE shall be paid an
amount equal to 1.5 times the highest bonus earned by EMPLOYEE as an employee
of TOKOS. EMPLOYEE shall also be entitled to accelerated vesting of any awards
granted to EMPLOYEE under Tokos' Incentive Stock Option Plan with no
acceleration, however, of EMPLOYEE's right to exercise any such awards.
EMPLOYEE, shall be entitled, at no cost to EMPLOYEE to participate in the full
executive program of any outplacement firm, acceptable to
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both EMPLOYEE and TOKOS, until EMPLOYEE's reemployment by another employer. In
addition to the cost of such outplacement program, to the extent that any part
of such cost constitutes income to EMPLOYEE for state or federal income tax
purposes, TOKOS shall "gross-up" such amount to compensate EMPLOYEE for all
taxes she may be required to pay. EMPLOYEE shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of TOKOS in
which EMPLOYEE is a participant to the full extent of EMPLOYEE's rights under
such plans, including any perquisites provided under this Agreement, for the 18
months from the effective date of such termination; provided, however, that the
benefits under any such plans of TOKOS (other than Tokos' Incentive Stock
Option Plan) in which EMPLOYEE is a participant, including any such
perquisites, shall cease upon EMPLOYEE's reemployment by another employer.
5.6 No Severance Compensation Upon Other Termination. In
the event of an Actual Voluntary Termination or Termination For Cause, EMPLOYEE
shall not be paid any severance compensation.
5.7 Limit on Aggregate Compensation Upon A Change In
Control. Notwithstanding anything to the contrary in this Agreement, solely in
the event of a Termination Upon A Change In Control pursuant to Section 3.5,
the amount of severance compensation paid to EMPLOYEE under Sections 3 and 5 or
otherwise shall not include any amount that TOKOS is prohibited from deducting
for federal income tax purposes by virtue of Section 28OG of the Internal
Revenue Code or any successor provision.
6. Loans to TOKOS. Any loans which may, on the effective date of
termination, be owed by EMPLOYEE to TOKOS, shall be due and payable 2 years
after the effective date of termination or, if applicable, 1 year after
EMPLOYEE becomes reemployed by another employer, whichever is sooner; provided,
however, that the proceeds from the sale of any stock of TOKOS held by EMPLOYEE
shall be applied first to pay taxes, if any, resulting from the sale of such
stock; second to any reduction in EMPLOYEE's margin debt necessitated by the
sale of such stock, which margin debt to the extent secured by stock in TOKOS
shall not be increased by EMPLOYEE after the effective date of any termination
of EMPLOYEE, without the consent of TOKOS; and then to repay any loans owed by
EMPLOYEE to TOKOS. In order to be eligible for the deferred repayment of any
loans owed by EMPLOYEE to TOKOS at the time of termination, EMPLOYEE shall,
within thirty days of a request by TOKOS, provide TOKOS with security equal, in
then current value, to 1 1/2 times the amount of such loan(s).
7. Consulting Responsibilities. In addition to all other
responsibilities of EMPLOYEE hereunder, in the event of a Termination of
Agreement Upon a Change in Control, a Termination Other Than For Cause or an
Actual Voluntary Termination, EMPLOYEE shall make himself available at the
request of TOKOS, upon reasonable notice and at mutually convenient times and
places as shall not unreasonably interfere with EMPLOYEE's other
responsibilities, to assist TOKOS in preparing for, managing and conducting any
litigation involving TOKOS (including by way of example and not as limitation,
giving testimony), and to otherwise consult with TOKOS with respect to any
matters consistent with her duties prior to termination; for which EMPLOYEE
shall be compensated at the rate of $150.00 per hour for the first 100 hours
and $300.00 per hour for each
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additional hour; provided, however, in no event shall EMPLOYEE be obligated to
provide any services to TOKOS after 18 months from the effective date of
termination.
8. Protection of Company Assets and Dispute Resolution.
8.1 Non-Competition. During the term of this Agreement,
including the period, if any, during which EMPLOYEE shall be entitled to
severance compensation hereunder, EMPLOYEE shall not engage in any activity,
business or transactions in competition with TOKOS. In furtherance of this
prohibition, EMPLOYEE shall notify TOKOS, in written detail, of all business
activity which, to the best of EMPLOYEE's knowledge, could be perceived by
TOKOS as violating this provision. In the event that EMPLOYEE fails to provide
such notice, TOKOS may avail itself of whatever remedies may exist, and
EMPLOYEE hereby consents to TOKOS' obtaining injunctive relief. In the
alternative event that EMPLOYEE provides such notice, TOKOS must, within 20
days of actual receipt of such notice, consent to EMPLOYEE's involvement in the
business activity described, or notify EMPLOYEE, in written detail, of all
reasons TOKOS believes the business activity described violates this provision.
If TOKOS consents or fails to timely provide such written response, such
failure shall constitute consent by TOKOS thereby, in either case, enabling
EMPLOYEE to engage in such business activity to the extent described in
EMPLOYEE's written notice to TOKOS. In no event, however, shall EMPLOYEE be
relieved of responsibility to provide TOKOS with notice, in written detail, of
any other business activity which EMPLOYEE, to the best of her knowledge,
believes TOKOS would perceive to be violative of this provision. If EMPLOYEE
challenges TOKOS' decision to not consent, EMPLOYEE shall, within 10 days of
actual receipt of TOKOS' objections, so notify TOKOS in writing by providing
TOKOS with her response, in detail, to TOKOS' objections, and both EMPLOYEE and
TOKOS hereby agree that such dispute shall be finally settled by arbitration in
accordance with Section 8.2 below.
8.2 Arbitration. TOKOS and EMPLOYEE agree that any
controversy, claim or dispute of any kind arising out of or relating to this
Agreement, the interpretation of this Agreement, EMPLOYEE's employment with
TOKOS or the termination thereof, or the course of dealing by the parties
hereunder (including any claim based on contract, tort or statute) whether for
damages or for provisional or permanent equitable relief, shall be finally
settled by arbitration administered by the American Arbitration Association
("AAA") in accordance with its then-existing commercial Arbitration rules
("Rules") in Irvine, California before an arbitrator who shall be a retired or
former judge of the California Superior Court and who shall be selected from
those former or retired judges affiliated with the Judicial Arbitration and
Mediation Service ("JAMS") located in the City of Orange, California who are
willing and able to comply with the time constraints and other procedures
herein agreed to. The party initiating the claim shall obtain from JAMS a
current list of available judges and shall immediately mail such list to the
other party. Each party to the dispute shall have 10 days from the mailing
date in which to cross off any names objected to, number the remaining names in
order of preference, and return the list to the AAA. If either party fails to
return the list within the time specified, all persons named therein shall be
deemed acceptable. From among the persons who have been approved on both
lists, and in accordance with the designated order of mutual preference, the
AAA shall invite the acceptance of an arbitrator to serve. If the parties fail
to agree on any of the persons named, or if acceptable arbitrators are unable
to act, or if for any other reason the appointment cannot be made from the
submitted lists, the AAA shall have the power to make the
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appointment from among other California Superior Court judges who are willing
and able to comply with the time constraints and other procedures herein agreed
to. Both parties shall share equally the payment of the arbitrator's fee,
though the arbitrator, in her or her sole discretion, may order the
non-prevailing party to pay the prevailing party's share of the arbitrator's
fee. Any controversy regarding whether a dispute is an arbitratable dispute
hereunder shall be determined by the arbitrator. The designation of a situs or
a governing law for this Agreement or arbitrations hereunder shall not be
deemed an election to preclude application of the U.S. Arbitration Act, if it
would be applicable. Judgment upon the award rendered by the arbitrator may be
entered and enforced in any court having proper jurisdiction. At the request
of either party, arbitration proceedings will be conducted in secrecy; in such
case all documents, testimony and records will be received, heard and
maintained by the arbitrator in secrecy under seal, available for inspection
only by the parties and their respective attorneys and experts, who will agree,
in advance and in writing, to receive all such information confidentially and
to maintain such information in secrecy until such information becomes
generally known.
It is the intention of both parties that any dispute arising in connection with
this Agreement or EMPLOYEE's employment shall be resolved expeditiously.
Therefore, all discovery must be completed and the hearing commenced within 30
days of the arbitrator's appointment. The award must be reasoned and must be
issued within 30 days of commencement of the hearing and will not be subject to
judicial review in whole or in part.
8.3 No Solicitation/Raiding of Employees. EMPLOYEE
acknowledges and agrees that TOKOS has invested substantial time and effort in
assembling its present staff. Accordingly, EMPLOYEE agrees and covenants that
during the term of this Agreement, including the period, if any, during which
EMPLOYEE shall be entitled to severance compensation hereunder, but in no event
for a period less than one year after the termination of her employment with
TOKOS, EMPLOYEE will not directly or indirectly, induce or solicit any employee
to leave employment with TOKOS.
8.4 Confidential Information and Trade Secrets. EMPLOYEE
acknowledges and agrees that in the course of employment with TOKOS, she has
been granted access to and become acquainted with information of a
confidential, proprietary or secret nature which is or may be either applicable
to or related in any way to the present or future business of TOKOS. Such
"confidential information" includes but is not limited to business strategies,
financial results, pricing, marketing strategies, sales techniques, etc.
EMPLOYEE acknowledges and agrees that such confidential information constitutes
"trade secret" information within the meaning of the Uniform Trade Secret Act
(California Civil Code section 3426 set seq.)" In addition to such confidential
information, "trade secrets" include but are not limited to various devices,
secret inventions, processes, compilation of information, records,
specifications, etc. EMPLOYEE acknowledges and agrees that such confidential
information and trade secrets have independent economic value, are not
generally known to the public and/or other persons who can obtain economic
value from the disclosure or use thereof, and that such confidential
information and trade secrets have remained confidential due to the
extraordinary precautions, safeguards and efforts of TOKOS and its employees to
maintain the secrecy and confidential thereof. EMPLOYEE covenants and agrees
not to disclose to any person, company or entity other than TOKOS any trade
secrets, confidential or proprietary information,
2/5/96
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<PAGE> 12
directly or indirectly, or to use them in any way, for her own benefit or for
the benefit of any other person or entity other than TOKOS, except as required
in the course of employment with TOKOS. EMPLOYEE agrees to abide by the
policies and procedures of TOKOS, as established from time-to-time, for the
protection of trade secrets, confidential and proprietary information.
8.5 Conflicts of Interest. EMPLOYEE acknowledges and
agrees that during the term of this Agreement, including the period, if any,
during which EMPLOYEE shall be entitled to severance compensation hereunder,
EMPLOYEE will not, without the prior written consent of the Chief Executive
Officer of TOKOS, directly or indirectly engage in any employment, consulting,
or other activity which would conflict with the business of TOKOS or the duties
of EMPLOYEE.
8.6 Injunctive Relief. In the event of any breach of the
provisions of this Agreement, TOKOS and EMPLOYEE respectively agree that an
injunction may issue from any court of competent jurisdiction to enforce these
provisions, including the terms of this paragraph. These provisions shall not
in any way limit the right of either party to bring an action for other
injunctive or other equitable relief and for damages occasioned by any breach
of this Agreement by the other party.
8.7 Preservation of Company Property. EMPLOYEE
acknowledges that from time-to-time in the course of employment with TOKOS,
EMPLOYEE has had the opportunity to inspect and use certain property of TOKOS,
both tangible and intangible, including but not limited to files, records,
documents, drawings, specifications, lists, equipment, graphics, designs and
similar items relating to the business of TOKOS. EMPLOYEE acknowledges and
agrees that all such property, including but not limited to any and all copies
thereof, whether prepared by EMPLOYEE or otherwise in the possession of
EMPLOYEE, are and shall remain the exclusive property of TOKOS, that EMPLOYEE
shall have no right or proprietary interest in such property, that EMPLOYEE
will safeguard and return to TOKOS all such property, and that EMPLOYEE has not
and will not take, remove, duplicate or otherwise remove any such property from
the business premises of TOKOS at any time without the consent of the Chief
Executive Officer.
8.8 No Solicitation of Customers. Because of the
sensitive and unique nature of the business of TOKOS, EMPLOYEE acknowledges and
agrees that the solicitation of a past, current or potential customer of TOKOS
with whom EMPLOYEE has had a business contact on behalf of TOKOS of necessity
requires the use of confidential information, and that the use and application
of such confidential information by EMPLOYEE would be unfair and cause
irreparable injury to TOKOS.
EMPLOYEE further acknowledges and agrees that the identity of the customers of
TOKOS are not generally known to the public or the competitors of TOKOS and
that EMPLOYEE has had access to the identity of such customers solely as a
result of this employment with TOKOS. Therefore, EMPLOYEE covenants and agrees
that during the term of this Agreement, including the period, if any, during
which EMPLOYEE shall be entitled to severance compensation hereunder, but in no
event for a period less than one year following the effective date of the
termination of her employment with TOKOS, EMPLOYEE shall not, directly or
indirectly, for himself or for any person, company or entity, attempt to
divert, solicit or take away any business or patronage of any
2/5/96
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<PAGE> 13
customer of TOKOS with whom EMPLOYEE has had business contact or about which
EMPLOYEE has had access to confidential information, and that EMPLOYEE also
will not, directly or indirectly, for himself or any other person, company or
employer, contact any such customer of TOKOS for the purpose of soliciting or
diverting the business or patronage of any such customer.
8.9 Inventions. EMPLOYEE agrees to promptly disclose to
TOKOS any and all inventions, discoveries, improvements, trade secrets,
formulas, techniques and processes, whether or not patentable and whether or
not reduced to practice, made or conceived by EMPLOYEE, either solely or in
conjunction with others, during the period of her employment with the Company,
which relate to or result from the actual anticipated business, work or
research for TOKOS and which result, to any extent, from the use of the
premises or property of TOKOS, or are suggested by any tasks assigned to
EMPLOYEE or any work performed by EMPLOYEE for or on behalf of TOKOS. EMPLOYEE
agrees to and hereby does grant and assign to TOKOS all rights which EMPLOYEE
may have or acquire in any such invention. EMPLOYEE acknowledges and agrees
that all such inventions shall be the sole property of TOKOS and EMPLOYEE
hereby assigns to TOKOS her entire right, title and interest in and to such
inventions; provided, however, that such assignment does not apply to any
invention which qualifies fully under the provisions of Section 2870 of the
California Labor Code, the provisions of which are incorporated herein by
reference.
9. Release. It is understood and agreed by and between EMPLOYEE
and TOKOS that in consideration of each party entering into this Agreement,
each party is hereby respectively discharging and releasing the other party
from any and all claims which such party may have or may have had against the
other relating, arising out of or in connection with EMPLOYEE's employment by
TOKOS, including the termination of such employment as provided herein, other
than for purposes of enforcement of this Agreement. In addition, by entering
into this Agreement, each party is hereby waiving, as to the other party,
Section 1542 of the California Civil Code.
10. Disclosure of Investments. Simultaneously with EMPLOYEE's
execution of this Agreement and upon each anniversary of the Effective Date,
EMPLOYEE shall notify the Chairman of the Compensation Committee of the nature
and extent of EMPLOYEE's investments, stock holdings, employment as an
employee, director, consultant, partner or any similar interest in any business
or enterprise other than TOKOS; provided, however, that EMPLOYEE shall have no
obligation to disclose any investment under $100,000 in current market value or
any holdings of publicly traded securities which are not in excess of one
percent of the outstanding class of such securities.
11. Miscellaneous.
11.1 Payment Obligations. TOKOS' obligation to pay
EMPLOYEE the compensation and to make the arrangements provided herein shall be
unconditional, and EMPLOYEE shall have no obligation whatsoever to mitigate
damages hereunder. If litigation or arbitration is required after a Change in
Control to enforce or interpret any provision contained herein, TOKOS, to the
extent permitted by applicable law and TOKOS' Certificate of Incorporation and
Bylaws, hereby indemnities EMPLOYEE for EMPLOYEE's reasonable attorneys' fees
and disbursements incurred in such proceeding.
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11.2 Waiver. The waiver of the breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach of the same or other provision hereof.
11.3 Entire Agreement; Modifications. Except as otherwise
provided herein, this Agreement represents the sole, entire and complete
understanding among the parties with respect to the subject matter hereof, and
this Agreement supersedes any and all prior understandings, agreements, plans
and negotiations, whether written or oral, with respect to the subject matter
hereof, including without limitation, any understandings, agreements or
obligations respecting any past or future compensation, bonuses, reimbursements
or other payments to EMPLOYEE from TOKOS. All modifications to the Agreement
must be in writing and signed by both EMPLOYEE and TOKOS.
11.4 Notices. All notices and other communications under
this Agreement shall be in writing and shall be given by facsimile or first
class mail, certified or registered with return receipt requested, and shall be
deemed to have been duly given three days after mailing or 12 hours after
transmission of a facsimile to the respective persons named below:
If to TOKOS: Robert F. Byrnes
Chairman and Chief Executive Officer
TOKOS MEDICAL CORPORATION (Delaware)
1821 East Dyer Road
Santa Ana, CA 92705
If to EMPLOYEE: Terry P. Bayer
President
TOKOS MEDICAL CORPORATION (California)
1821 East Dyer Road
Santa Ana, CA 92705
Any party may change such party's address for notices by notice duly given
pursuant to this Section 11.4.
11.5 Headings. The Section headings herein are intended
for reference and shall not by themselves determine the construction or
interpretation of this Agreement.
11.6 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California applicable
to contracts entered into and wholly to be performed within the State of
California by California residents.
11.7 Severability. Should any court of competent
jurisdiction determine that any provision of this Agreement is illegal or
unenforceable to any extent, such provision shall be enforced to the extent
permissible and all other provisions of this Agreement shall continue to be
enforceable to the extent possible.
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<PAGE> 15
11.8 Survival of TOKOS' Obligations. TOKOS' obligations
hereunder shall not be terminated by reason of any liquidation, dissolution,
bankruptcy, cessation of business, or similar event relating to TOKOS. This
Agreement shall not be terminated by any merger or consolidation or other
reorganization of TOKOS. In the event any such merger, consolidation or
reorganization shall be accomplished by transfer of stock or by transfer of
assets or otherwise, the provisions of this Agreement shall be binding upon and
inure to the benefit of the surviving or resulting TOKOS or person. This
Agreement shall be binding upon and inure to the benefit of the executors,
administrators, heirs, successors and assigns of the parties; provided,
however, that except as herein expressly provided, this Agreement shall not be
assignable either by TOKOS (except to an affiliate of TOKOS in which event
TOKOS shall remain liable if the affiliate fails to meet any obligations to
make payments or provide benefits or otherwise) or by EMPLOYEE.
11.9 Counterparts. This Agreement may be executed in one
or more counterparts, all of which taken together shall constitute one and the
same Agreement.
11.10 Withholdings. All compensation and benefits payable
to EMPLOYEE hereunder and shall be reduced by all federal, state, local and
other withholdings and similar taxes and payments required by applicable law.
11.11 Indemnification. In addition to any rights to
indemnification to which EMPLOYEE is entitled to under TOKOS' Certificate of
Incorporation, Bylaws, any policy of insurance or other agreement, TOKOS shall
indemnify EMPLOYEE at all times during and after the term of this Agreement to
the maximum extent permitted under Section 145 of the General Corporation Law
of the State of Delaware or any successor provision thereof and any other
applicable state law, and shall pay EMPLOYEE's expenses in defending any civil
or criminal action, suit, or proceeding brought by any third party against
EMPLOYEE as a result of EMPLOYEE's relationship with TOKOS or against TOKOS in
advance of the final disposition of such action, suit, or proceeding, to the
maximum extent permitted under such applicable state laws. Unless otherwise
provided herein, this indemnification shall not apply to and TOKOS shall not
indemnify EMPLOYEE with respect to any disputes arising under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TOKOS MEDICAL CORPORATION (DELAWARE)
By: /s/ Robert F. Byrnes
------------------------------------
Robert F. Byrnes
Chief Executive Officer
Signature: /s/ Terry P. Bayer
----------------------------
Terry P. Bayer
President
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<PAGE> 1
EXHIBIT 23.4
The Board of Directors
Healthdyne, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 7, 1996
<PAGE> 1
Exhibit 23.5
Consent
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 21, 1995 in the Registration Statement
Form S-4 and related Prospectus of Tokos Medical Corporation.
/s/ Ernst & Young LLP
-2-
<PAGE> 1
Exhibit 99.1
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Robert F. Byrnes
---------------------------
Robert F. Byrnes
<PAGE> 1
Exhibit 99.2
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Craig T. Davenport
-------------------------------
Craig T. Davenport
<PAGE> 1
Exhibit 99.3
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Thomas W. Erickson
--------------------------------
Thomas W. Erickson
<PAGE> 1
Exhibit 99.4
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ David L. Goldsmith
------------------------------------
David L. Goldsmith
<PAGE> 1
Exhibit 99.5
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Gene P. Guselli
-----------------------------
Gene P. Guselli
<PAGE> 1
Exhibit 99.6
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Parker H. Petit
--------------------------------
Parker H. Petit
<PAGE> 1
Exhibit 99.7
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Carl E. Sanders
------------------------------
Carl E. Sanders
<PAGE> 1
Exhibit 99.8
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Jackie M. Ward
-----------------------------------
Jackie M. Ward
<PAGE> 1
Exhibit 99.9
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Morris S. Weeden
----------------------------------
Morris S. Weeden
<PAGE> 1
Exhibit 99.10
CONSENT OF PROSPECTIVE DIRECTOR
OF MATRIA HEALTHCARE, INC.
Pursuant to Rule 438 under the Securities Act of 1933, as amended, the
undersigned hereby consents to being named in the Registration Statement on
Form S-4 (the "Registration Statement") of Matria Healthcare, Inc. ("Matria")
filed on the date hereof with the Securities and Exchange Commission as a
person who would become a director of Matria at the Effective Time of the
Merger (as defined and described in the Registration Statement).
Date: February 7, 1996 /s/ Frederick P. Zuspan, M.D.
---------------------------------------
Frederick P. Zuspan, M.D.
